Friday, September 30, 2011

There is no reason to be upset with BofA for its new debit-card fees.

The ATM Debit-card fee is transparent and easy to understand.  This is far preferable to the spate of fees (such as overdraft insurance charges) that were opaque and confounding.  If Bank of America wants to charge for a service, they should be free to do so. 

Will the private market step in?

Conforming loan limits in San Berardino and Riverside Counties in California will drop from $500,000 to $417,000 tomorrow; in LA and Orange Counties it will drop from $729,750 to $625,500. 

So we have a natural experiment in "crowding in."  Will the private lending sector fill the gaps?

Austerity is a problem, but so is fear

Paul Krugman this morning argues that fear of fear is phony.  He is almost certainly correct that fear is not the number one problem at the moment--if I had to pick a number one issue, it would be austerity measures at the state and local levels of government.  Tracy Gordon of Brookings has a nice picture:

 Cuts in state and local government jobs (police officers, school teachers, firefighters, DMV workers) are putting a drag on employment growth.  Moreover, this picture understates the problem, because total compensation to many state and local workers has been cut.

But I do think fear is part of the problem, at least in one sector of the economy.  It seems to me that there are business opportunities in lending that are going unanswered.  The pendulum for underwriting has swung so far to caution that according to the Flow of Funds Accounts, net lending declined in the second quart of 2011.  More specifically, net bank lending dropped by $181 billion on an annualized basis in the first quarter and by $129 billion in the second quarter.  Net lending is the difference between volume of new loans and volume of repayment of old loans. I do find it plausible that one of the sources of the tight lending environment is a fear of regulators.

One more point.  if it weren't for lending by the monetary authority, net lending in the second quarter would have fallen by $860 billion on an annualized basis.

Lobbying pays off handsomely -- visual proof

From an article in The Economist, a graph showing the performance of the "Lobbying Index" versus the S&P 500 over the past decade. The Lobbying Index being an average over the 50 most intense lobbying firms within the S&P 500. It's pretty clear that lobbying -- a rather less than honourable profession in my book -- pays off:

My friend (and co-author) Andy Reschovsky wins Steve Gold award

It was nice to read about it this morning:

University of Wisconsin–Madison economist Andrew Reschovsky will be honored in November with the 2011 Steve Gold Award, which recognizes a person who has made a significant contribution to public financial management in the field of intergovernmental relations and state and local finance.
The Association for Public Policy Analysis and Management, the National Conference of State Legislatures and the National Tax Association give the award each year in memory of Steve Gold, an active member of all three organizations whose career and life tragically were shortened by illness.
"I knew Steve Gold, which makes receiving this award even more meaningful," says Reschovsky, a professor of public affairs and applied economics in UW–Madison's La Follette School of Public Affairs. "As a public finance economist, Steve believed his role was to communicate to policymakers about research and analysis. His emphasis on the link between scholarship and practice and on policy-oriented work on public finance has very much influenced my career."

The Fetish of Rationality

I'm currently reading Jonathan Aldred's book The Skeptical Economist. It's a brilliant exploration of how economic theory is run through at every level with hidden value judgments which often go a long way to  determining its character. For example, the theory generally assumes that more choice always has to be better. This follows more or less automatically from the view that people are rational "utility maximizers" (a phrase that should really be banned for ugliness alone). After all, more available choices can only give a "consumer" the ability to meet their desires more effectively, and can never have negative consequences. Add extra choices and the consumer can always simply ignore them.

As Aldred points out, however, this just isn't how people work. One of the problems is that more choice means more thinking and struggling to decide what to do. As a result, adding more options often has the effect of inhibiting people from choosing anything. In one study he cites, doctors were presented with the case history of a man suffering from osteoarthritis and asked if they would A. refer him to a specialist or B. prescribe a new experimental medicine. Other doctors were presented with the same choice, except they could choose between two experimental medicines. Doctors in the second group made twice as many referrals to a specialist, apparently shying away from the psychological burden of having to deal with the extra choice between medicines.

I'm sure everyone can think of similar examples from their own lives in which too much choice becomes annihilating. Several years ago my wife and I were traveling in Nevada and stopped in for an ice cream at a place offering 200+ flavours and a variety of extra toppings, etc. There were an astronomical number of potential combinations. After thinking for ten minutes, and letting lots of people pass by us in the line, I finally just ordered a mint chocolate chip cone -- to end the suffering, as it were. My wife decided it was all too overwhelming and in the end didn't want anything! If there had only been vanilla and chocolate we'd have ordered in 5 seconds and been very happy with the result.

In discussing this problem of choice, Aldred refers to a beautiful paper I read a few years ago by economist John Conlisk entitled Why Bounded Rationality? The paper gives many reasons why economic theory would be greatly improved if it modeled individuals as having finite rather than infinite mental capacities. But one of the things he considers is a paradoxical contradiction at the very heart of the notion of rational behaviour. A rational person facing any problem will work out the optimal way to solve that problem. However, there are costs associated with deliberation and calculation. The optimal solution to the ice cream choice problem isn't to stand in the shop for 6 years while calculating how to maximize expected utility over all the possible choices. Faced with a difficult problem, therefore, a rational person first has to solve another problem -- for how long should I deliberate before it becomes advantageous to just take a guess?

This is a preliminary problem -- call is P1 -- which has to be solved before the real deliberation over the choice can begin. But, Conlisk pointed out, P1 is itself a difficult problem and a rational individual doesn't want to waste lots of resources thinking about that one too long either. Hence, before working on P1, the rational person first has to decide what is the optimal amount of time to spend on solving P1. This is another problem P2, which is also hard. Of course, it never ends. Take rationality to it's logical conclusion and it ends up destroying itself -- it's simply an inconsistent idea.

Anyone who is not an economist might be quite amazed by Conlisk's paper. It's a great read, but it will dawn on the reader that in a sane world it simply wouldn't be necessary. It's arguing for the obvious and is only required because economic theory has made such a fetish of rationality. The assumption of rationality may in some cases have made it possible to prove theorems by turning the consideration of human behaviour into a mathematical problem. But it has tied the hands of economic theorists in a thousand ways.

Thursday, September 29, 2011

Economists on the way to being a "religious cult"...

A short seven minute video produced by the Institute for New Economic Thinking offers the views (very briefly) of a number of economists on modeling and it's purposes (h/t to Moneyscience). Two things of note:

1. Along the way, Brad DeLong mentions Milton Friedman's famous claim that a model is better the more unrealistic its assumptions, and that the sole measure of a theory is making accurate predictions. I'd really like to know what DeLong thinks on this, but his views aren't there in the interview. He mentions Friedman's idea but doesn't defend or attack it, just a reference to one of the most influential ideas on this topic, I guess. Shows how much Friedman's view is still in play.

In my view (some not very well organized thoughts here) the core problem with Friedman's argument is that a theory with perfect predictions and perfectly unrealistic assumptions simply doesn't teach you anything -- you're left just as mystified by how the model can possibly work (give the right predictions) as you were with the original phenomena you set out to explain. It's like a miracle. Such a model might of course be valuable as a starting point, and in stimulating the invention of further models with more realistic assumptions which then -- if they give the same predictions -- may indeed teach you something about how certain kinds of interactions, behaviours, etc (in the assumptions) can lead to observed consequences.

But then -- it's the models with the more realistic assumptions that are superior. (It's worth remembering that Friedman liked to say provocative things even if he didn't quite believe them.)

2. An interesting quote from economist James Galbraith, with which I couldn't agree more:
Modeling is not the end-all and the be-all of economics... The notion that the qualities of an economist should be defined by the modeling style that they adopt [is a disaster]. There is a group of people who say that if you're not doing dynamic stochastic general equilibrium modeling then you're not really a modern economist... that's a preposterous position which is going to lead to the reduction of economics to the equivalent of a small religious cult working on issues of interest to no one else in the world.

Basel III -- Taking away Jamie Dimon's Toys

Most people have by now heard the ridiculous claim by Jamie Dimon, CEO of JPMorgan Chase, that the new Basel III rules are "anti-American." The New York Times has an interesting set of contributions by various people on whether Dimon's claim has any merit. You'll all be shocked to learn that Steve Bartlett, president of the Financial Services Roundtable -- we can assume he's not biased, right? -- thinks that Dimon is largely correct. Personally, I tend to agree more with the views of Russell Roberts of George Mason University:

Who really writes the latest financial regulations, where the devil is in the details? Who has a bigger incentive to pay attention to their content — financial insiders such as the executives of large financial institutions or you and me, the outsiders? Why would you ever think that the regulations that emerge would be designed to promote international stability and growth rather than the naked self-interest of the financial community?

I do not believe it’s a coincidence that Basel I and II blew up in a way that enriched insiders at the expense of outsiders. To expect Basel III to yield a better result (now that we've supposedly learned so much) is to ignore the way the financial game is played. Until public policy stops subsidizing leverage (bailouts going back to 1984 make it easier for large financial institutions to fund each other’s activities using debt), it is just a matter of time before any financial system is gamed by the insiders.

Jamie Dimon is a crony capitalist. Don’t confuse that with the real kind. If he says Basel III is bad for America, you can bet that he means "bad for JPMorgan Chase." Either way, he’ll have a slightly larger say in the ultimate outcome than the wisest economist or outsider looking in.
Sadly, this is the truth, even though many people still cling to the hope that there are good people out there somewhere looking after the welfare of the overall system. Ultimately, I think, the cause of financial crises isn't to be found in the science of finance or of economics, but of politics. There is no way to prevent them as long as powerful individuals can game the system to their own advantage, privatizing the gains, as they say, and socializing the losses.

But not everyone is convinced of this by a long shot. Just after the crisis I wrote a feature article for Nature looking at new thinking about modeling economic systems and financial markets in particular. Researching the article, I came across lots of good new thinking about ways to model markets and go beyond the standard framework of economics. That all went into the article. I also suggested to my editor that we had to at least raise at the end of the article the nexus of influence between Wall St and the political system, and I proposed in particular to write a little about the famous paper by Romer and Akerlof, Looting: The Economic Underworld of Bankruptcy for Profit, which gives a simple and convincing argument in essence about how corporate managers (not only in finance) can engineer vast personal profits by running companies into the ground. Oddly, my editor in effect said "No, we can't include that because it's not science."

But that doesn't mean it's not important.

But back to Basel III. I had an article exploring this in some detail in Physics World in August. It is not available online. As a demonstration of my still lagging Blogger skills, I've captured images of the 4 pages and put them below. Not the best picture quality, I'm afraid.

Wednesday, September 28, 2011

Boston Fed President Eric Rosengren on the need to facilitate refinances (h/t Kurt Paulsen)

He says at a meeting in Stockholm:

There are several proposals that attempt to facilitate refinancing for homeowners who have been negatively impacted by the drop in housing prices. These proposals do face hurdles, including how to address private mortgage insurance and second liens. However, a program that made it possible for many homeowners to refinance, even if they were upside down, would likely provide significant reductions in mortgage payments to individuals who are likely to have a relatively high propensity to consume. Clearly getting more money into the hands of homeowners who would spend it could help to fuel GDP growth. This would reduce one of the impediments to a more significant effect from the monetary policy actions taken to date.

I hasten to add that there is already a government program to allow underwater borrowers to refinance, the Home Affordable Refinance Program (HARP). This program allows underwater borrowers with Fannie Mae or Freddie Mac loans to refinance at lower rates. Unfortunately, the program has helped fewer borrowers than was originally hoped. Fed Governor Betsy Duke outlined some of the potential reasons why, in the talk I mentioned earlier. They include loan-level price adjustments (LLPAs) that raise interest rates for many borrowers and thereby reduce the benefit of refinancing; originator worries about “buybacks” forced on them by Fannie Mae and Freddie Mac; junior lien-holder resistance to re-subordinating their loans; and mortgage insurance policies.

The Federal Housing Finance Agency (FHFA) is now investigating whether there are ways to enhance the program to benefit more borrowers.[Footnote 15] As this work proceeds, I hope the FHFA considers dropping or reducing LLPAs in cases when a GSE loan is refinanced into another GSE loan. Such a refinance actually reduces the GSE’s credit risk (they already guarantee the existing mortgage and the homeowner will be able to take advantage of lower rates, freeing up cash flow).

Am I posting this because I agree with it?  Yes. 

Financial Times numeracy check

This article from the Financial Times is unfortunately quite typical of the financial press (and yes, not only the financial press). Just ponder the plausibility of what is reported in the following paragraph, commenting on a proposal by José Manuel Barroso, European Commission president, to put a tax on financial transactions:
Mr Barroso did not release details of his plan, except to say it could raise some €55bn a year. However, a study carried out by the Commission has found that the tax could also dent long-term economic growth in the region by between 0.53 per cent and 1.76 per cent of gross domestic product.
The article doesn't mention who did the study, or give a link to it. But there's worse. If reported accurately, it seems the European Commission's economists -- or whoever they had do the study mentioned -- actually think that the "3" in 0.53 and the "6" in 1.76 mean something. That's quite impressive accuracy when talking about economic growth. In a time of great uncertainty.

I would bet a great deal that a more accurate statement of the confidence of their results would be, say, between 0 and 2 percent crudely, or maybe even -1 and 3. But that would be admitting that no one has any certainty about what's coming next, and that's not part of the usual practice.

High-frequency trading: taming the chaos

I have an opinion piece that will be published later today in the next few days in Bloomberg Views. It is really just my attempt to bring attention to some very good points made in a recent speech by Andrew Haldane of the Bank of England. For anyone interested in further details, you can read the original speech (I highly recommend this) or two brief discussions I've given here looking at the first third of the speech and the second third of the speech.

I may not get around to writing a detailed analysis of the third part, which focuses on possible regulatory measures to lessen the chance of catastrophic Flash Crash type events in the future. But the ideas raised in this part are fairly standard -- a speed limit on trading, rules which would force market makers to participate even in volatile times (as was formerly the case for market makers) and so on. I think the most interesting part by far is the analysis of the recent increase in the frequency of abrupt market jumps (fat-tail events) over very short times, and of the risks facing market makers and how they respond as volatility increases. I think this should all help to frame the debate over HFT -- which seems extremely volatile itself -- in somewhat more scientific terms.

I also suggest that anyone who finds any of this interesting should go to the Bank of England website and read some of Andrew Haldane's other speeches. Every one is brilliant and highly illuminating.

Fairfax starts ad agency

Ha! Fairfax Media has followed News Corp in setting up a full service advertising agency. I have mentioned the benefits of vertical integration of advertising and publishing services in one of my earlier posts in Media market commentary series. It is a logical extension for any large publisher as it gives more control over clients’ advertising budgets.

The details reported last week in B&T magazine were as follows: “Fairfax Media has formed Fx, a new sales team within the company’s Metro Media division designed to offer integrated, strategic and creative advertising services. The initiative combines the company’s print and digital work into a single, cross-platform unit and will work alongside the Fairfax Metro sales team… The new team of 20 comprises product innovation specialists as well as creative talent and advertising strategists from agency backgrounds with experience across newspapers, TV, magazines, radio, outdoor and digital.

I didn’t help much Fairfax Media share price but it is another small step towards making the company a better investment proposition in the longer term.

Related posts:
Fairfax: dinosaur or unpolished gem?
Fairfax buys more travel assets
Extinction of journalism as a profession
Media market commentary

Fun with app

I don’t know about you but I was always fascinated by planes taking off from the airport. Those “marvels of steel and engineering” look so magnificent when they lift off the ground, with majestic precision, and slowly rise into the air before disappearing in a distance.

I vividly remember my excitement, as a young kid, when I spotted a plane landing or taking off while passing a local airport on the way to or from the countryside to visit my relatives. Now, thanks to and some clever technology, I can watch planes taking off and landing at almost any airport in the world, also those travelling across the globe - all day long, in real time and without leaving the house :-)

There is also an extensive range of information available on the site about individual planes and their flight details. Flight paths can be downloaded as a KML and/or shared via Twitter and Facebook. And if I miss some action, I can play back a whole day's worth of flights. The playback option allows users to select a date, the number of hours they wish to view and even the speed of the animation. Just try zooming out on the USA, set the time to 23 hours and the speed to 120x and watch. Fascinating… and very addictive! You guessed it, available for all types of smart phones as well.

First spotted on: Google Maps Mania

Tuesday, September 27, 2011

Please Excuse me...

...While I load photos. 

Lauren Liess Textiles from top to bottom:
Queen Anne's Bouquet in Black & Oatmeal
Fern Star in Olive
Filigree Chevron in Black & Oatmeal
Ticking in Beige
Live Paisley in Gold
Happikat in Olive/ Aqua
happikat in Cocoa & Oatmeal
Live paisley in Antique Beige
Ticking in Black & Oatmeal

Like I mentioned, loading the photos of the fabrics onto my online store is taking foreverrrrrr.   (Yes, I'm complaining ;)  But I'm almost done and as soon as I am, we can launch!!  (All fabrics will be available for purchase online.)  I'll keep you posted but I'm tying to spend as much time as possible on the website so my posts may be short for a little bit.

Have a great day!!

xoxo, Lauren

If you'd like help creating a home you absolutely love, contact me about our design services.

Monday, September 26, 2011

Hard Choices

Los Angeles (and other large cities) have food deserts--places with limited access to fresh, healthful, relatively inexpensive food.  Low-income people living in food deserts are at a particular disadvantage, because they can't afford cars, and therefore often do not have access to supermarkets. A common hypothesis is that poor kids eat unhealthy food because they don't have access to healthy food.  (I think this is only partially true--kids also eat unhealthy food because they like it.  For that matter, I still love McDonald's fries, I just try to limit my intake, and am in part able to because I have access to better alternatives).

Tesco's Fresh and Easy, a chain that develops and operates small grocery stores that feature fresh fruit and vegetables at reasonable prices, has decided on a business strategy of locating in food deserts.  This is potentially a great thing for kids who live in these places (especially if Fresh and Easy can figure out how to take WIC vouchers).  But this begs the question of how they are able to sustain such a business model.  Two answers present themselves--they are a non-union shop, and they rely heavily on automation.  Specifically, Fresh and Easy features self check-out, and so the store doesn't have to hire checkers.   Self check-out also makes it hard for Fresh and Easy to accept paper certificates, such as WIC vouchers, as payment.

So the cost of Fresh and Easy is that it may drive down wages for grocery workers a bit, and it may reduce employment for grocery workers.  The benefit is that it gives low-income children access to reasonably priced, good quality, fresh foods.  My personal social welfare function says to me that feeding kids inexpensively and well dominates most other considerations, but let's not pretend that there isn't a trade-off.

Michio Kaku on CERN's Challenge to Relativity

In this morning's WSJ:

Reputations may rise and fall. But in the end, this is a victory for science. No theory is carved in stone. Science is merciless when it comes to testing all theories over and over, at any time, in any place. Unlike religion or politics, science is ultimately decided by experiments, done repeatedly in every form. There are no sacred cows. In science, 100 authorities count for nothing. Experiment counts for everything.

Overconfidence is adaptive?

A fascinating paper in Nature from last week suggests that overconfidence may actually be an adaptive trait. This is interesting as it strikes at one of the most pervasive assumptions in all of economics -- the idea of human rationality, and the conviction that being rational must always be more adaptive than being irrational. Quite possibly not:

Humans show many psychological biases, but one of the most consistent, powerful and widespread is overconfidence. Most people show a bias towards exaggerated personal qualities and capabilities, an illusion of control over events, and invulnerability to risk (three phenomena collectively known as ‘positive illusions’)2, 3, 4, 14. Overconfidence amounts to an ‘error’ of judgement or decision-making, because it leads to overestimating one’s capabilities and/or underestimating an opponent, the difficulty of a task, or possible risks. It is therefore no surprise that overconfidence has been blamed throughout history for high-profile disasters such as the First World War, the Vietnam war, the war in Iraq, the 2008 financial crisis and the ill-preparedness for environmental phenomena such as Hurricane Katrina and climate change9, 12, 13, 15, 16.

If overconfidence is both a widespread feature of human psychology and causes costly mistakes, we are faced with an evolutionary puzzle as to why humans should have evolved or maintained such an apparently damaging bias. One possible solution is that overconfidence can actually be advantageous on average (even if costly at times), because it boosts ambition, morale, resolve, persistence or the credibility of bluffing. If such features increased net payoffs in competition or conflict over the course of human evolutionary history, then overconfidence may have been favoured by natural selection5, 6, 7, 8.

However, it is unclear whether such a bias can evolve in realistic competition with alternative strategies. The null hypothesis is that biases would die out, because they lead to faulty assessments and suboptimal behaviour. In fact, a large class of economic models depend on the assumption that biases in beliefs do not exist17. Underlying this assumption is the idea that there must be some evolutionary or learning process that causes individuals with correct beliefs to be rewarded (and thus to spread at the expense of individuals with incorrect beliefs). However, unbiased decisions are not necessarily the best strategy for maximizing benefits over costs, especially under conditions of competition, uncertainty and asymmetric costs of different types of error8, 18, 19, 20, 21. Whereas economists tend to posit the notion of human brains as general-purpose utility maximizing machines that evaluate the costs, benefits and probabilities of different options on a case-by-case basis, natural selection may have favoured the development of simple heuristic biases (such as overconfidence) in a given domain because they were more economical, available or faster.
 The paper studies this question in a simple analytical model of an evolutionary environment in which individuals compete for resources. If the resources are sufficiently valuable, the authors find, overconfidence can indeed be adaptive:
Here we present a model showing that, under plausible conditions for the value of rewards, the cost of conflict, and uncertainty about the capability of competitors, there can be material rewards for holding incorrect beliefs about one’s own capability. These adaptive advantages of overconfidence may explain its emergence and spread in humans, other animals or indeed any interacting entities, whether by a process of trial and error, imitation, learning or selection. The situation we model—a competition for resources—is simple but general, thereby capturing the essence of a broad range of competitive interactions including animal conflict, strategic decision-making, market competition, litigation, finance and war.
Very interesting. But I just had a thought -- perhaps this may also explain why many economists seem to exhibit such irrational exuberance over the value of neo-classical theory itself?

High-frequency trading, the downside -- Part II

In this post I'm going to look a little further at Andrew Haldane's recent Bank of England speech on high-frequency trading. In Part I of this post I explored the first part of the speech which looked at evidence that HFT has indeed lowered bid-ask spreads over the past decade, but also seems to have brought about an increase in volatility. Not surprisingly, one measure doesn't even begin to tell the story of how HFT is changing the markets. Haldane explores this further in the second part of the speech, but also considers in a little more detail where this volatility comes from.

In well known study back in 1999, physicist Parameswaran Gopikrishnan and colleagues (from Gene Stanley's group in Boston) undertook what was then the most detailed look at market fluctuations (using data from the S&P Index in this case) over periods ranging from 1 minute up to 1 month. This early study established a finding which (I believe) has now been replicated across many markets -- market returns over timescales from 1 minute up to about 4 days all followed a fat-tailed power law distribution with exponent α close to 3. This study found that the return distribution became more Gaussian for times longer than about 4 days. Hence, there seems to be rich self-similarity and fractal structure to market returns on times down to 1 around second.

What about shorter times? I haven't followed this story for a few years. It turns out that in 2007, Eisler and Kertesz looked at a different set of data -- for total transactions on the NYSE between 2000 and 2002 -- and found that the behaviour at short times (less than 60 minutes) was more Gaussian. This is reflected in the so-called Hurst exponent H having an estimated value close to 0.5. Roughly speaking, the Hurst exponent describes -- based on empirical estimates -- how rapidly a time series tends to wander away from its current value with increasing time. Calculate the root mean square deviation over a time interval T and for a Gaussian random walk (Brownian motion) this should grow in proportion to T to the power H= 1/2. A Hurst exponent higher than 1/2 indicates some kind of interesting persistent correlations in movements.

However, as Haldane notes, Reginald Smith last year showed that stock movements over short times since around 2005 have begun showing more fat-tailed behaviour with H above 0.5. That paper shows a number of figures showing H rising gradually over the period 2002-2009 from 0.5 to around 0.6 (with considerable  fluctuation on top of the trend). This rise means that the market on short times has increasingly violent excursions, as Haldane's chart 11 below illustrates with several simulations of time series having different Hurst exponents:

The increasing wildness of market movements has direct implications for the risks facing HFT market makers, and hence, the size of the bid-ask spread reflecting the premium they charge. As Haldane notes, the risk a market maker faces -- in holding stocks which may lose value or in encountering counterparties with superior information about true prices -- grows with the likely size of price excursions over any time period. And this size is directly linked to the Hurst exponent.

Hence, in increasingly volatile markets, HFTs become less able to provide liquidity to the market precisely because they have to protect themselves:
This has implications for the dynamics of bid-ask spreads, and hence liquidity, among HFT firms. During a market crash, the volatility of prices (σ) is likely to spike. From equation (1), fractality heightens the risk sensitivity of HFT bid-ask spreads to such a volatility event. In other words, liquidity under stress is likely to prove less resilient. This is because one extreme event, one flood or drought on the Nile, is more likely to be followed by a second, a third and a fourth. Reorganising that greater risk, market makers’ insurance premium will rise accordingly.

This is the HFT inventory problem. But the information problem for HFT market-makers in situations of stress is in many ways even more acute. Price dynamics are the fruits of trader interaction or, more accurately, algorithmic interaction. These interactions will be close to impossible for an individual trader to observe or understand. This algorithmic risk is not new. In 2003, a US trading firm became insolvent in 16 seconds when an employee inadvertently turned an algorithm on. It took the company 47 minutes to realise it had gone bust.

Since then, things have stepped up several gears. For a 14-second period during the Flash Crash, algorithmic interactions caused 27,000 contracts of the S&P 500 E-mini futures contracts to change hands. Yet, in net terms, only 200 contracts were purchased. HFT algorithms were automatically offloading contracts in a frenetic, and in net terms fruitless, game of pass-the-parcel. The result was a magnification of the fat tail in stock prices due to fire-sale forced machine selling.

These algorithmic interactions, and the uncertainty they create, will magnify the effect on spreads of a market event. Pricing becomes near-impossible and with it the making of markets. During the Flash Crash, Accenture shares traded at 1 cent, and Sotheby’s at $99,999.99, because these were the lowest and highest quotes admissible by HFT market-makers consistent with fulfilling their obligations. Bid-ask spreads did not just widen, they ballooned. Liquidity entered a void. That trades were executed at these “stub quotes” demonstrated algorithms were running on autopilot with liquidity spent. Prices were not just information inefficient; they were dislocated to the point where they had no information content whatsoever.
This simply follow from the natural dynamics of the market, and the situation market makers find themselves in. If they want to profit, if they want to survive, they need to manage their risks, and these risks grow rapidly in times of high volatility. Their response is quite understandable -- to leave the market, or least charge much more for their service. 

Individually this is all quite rational, yet the systemic effects aren't likely to benefit anyone. The situation, Haldane notes, resembles a Tragedy of the Commons in which individually rational actions lead to a collective disaster, fantasies about the Invisible Hand notwithstanding:
If the way to make money is to make markets, and the way to market markets is to make haste, the result is likely to be a race – an arms race to zero latency. Competitive forces will generate incentives to break the speed barrier, as this is the passport to lower spreads which is in turn the passport to making markets. This arms race to zero is precisely what has played out in financial markets over the past few years.

Arms races rarely have a winner. This one may be no exception. In the trading sphere, there is a risk the individually optimising actions of participants generate an outcome for the system which benefits no-one – a latter-day “tragedy of the commons”. How so? Because speed increases the risk of feasts and famines in market liquidity. HFT contribute to the feast through lower bid-ask spreads. But they also contribute to the famine if their liquidity provision is fickle in situations of stress.
Haldane then goes on to explore what might be done to counter these trends. I'll finish with a third post on this part of the speech very soon. 

But what is perhaps most interesting in all this is how much of Haldane's speech refers to recent work done by physicists -- Janos Kertesz, Jean-Philippe Bouchaud, Gene Stanley, Doyne Farmer and others -- rather than studies more in the style of neo-classical efficiency theory. It's encouraging to see that at least one very senior banking authority is taking this stuff seriously.

Saturday, September 24, 2011

Humans on a Cafeteria Diet

In the 1970s, as the modern obesity epidemic was just getting started, investigators were searching for new animal models of diet-induced obesity.  They tried all sorts of things, from sugar to various types of fats, but none of them caused obesity as rapidly and reproducibly as desired*.  1976, Anthony Sclafani tried something new, and disarmingly simple, which he called the "supermarket diet": he gave his rats access to a variety of palatable human foods, in addition to standard rodent chow.  They immediately ignored the chow, instead gorging on the palatable food and rapidly becoming obese (1).  Later renamed the "cafeteria diet", it remains the most rapid and effective way of producing dietary obesity and metabolic syndrome in rodents using solid food (2).

Read more »

Friday, September 23, 2011

Brouwer's fixed point theorem...why mathematics is fun


I'm not going to post very frequently on Brouwer's fixed point theorem, but I had to look into it a little today. A version of it was famously used by Ken Arrow and Gerard Debreu in their 1954 proof that general equilibrium models in economics (models of a certain kind which require about 13 assumptions to define) do indeed have an equilibrium set of prices which makes supply equal demand for all goods. There's a nice review article on that here for anyone who cares.

Brouwer's theorem essentially says that when you take a convex set (a disk, say, including both the interior and the boundary) and map it into itself in some smooth and continuous way, there has to be one point which stays fixed, i.e. is mapped into itself. This has some interesting and counter-intuitive implications, as some contributor to Wikipedia has pointed out:
The theorem has several "real world" illustrations. For example: take two sheets of graph paper of equal size with coordinate systems on them, lay one flat on the table and crumple up (without ripping or tearing) the other one and place it, in any fashion, on top of the first so that the crumpled paper does not reach outside the flat one. There will then be at least one point of the crumpled sheet that lies directly above its corresponding point (i.e. the point with the same coordinates) of the flat sheet. This is a consequence of the n = 2 case of Brouwer's theorem applied to the continuous map that assigns to the coordinates of every point of the crumpled sheet the coordinates of the point of the flat sheet immediately beneath it.

Similarly: Take an ordinary map of a country, and suppose that that map is laid out on a table inside that country. There will always be a "You are Here" point on the map which represents that same point in the country.


In comments, "computers can be gamed" rightly points out that the theorem only works if one considers a smooth mapping of a set into itself. This is very important.

Indeed, go to the Wikipedia page for Brouwer's theorem and in addition to the examples I mentioned above, they also give a three dimensional example -- the liquid in a cup. Stir that liquid, they suggest, and -- since the initial volume of liquid simply gets mapped into the same volume, with elements rearranged -- there must be one point somewhere which has not moved. But this is a mistake unless you carry out the stirring with extreme care -- or use a high viscosity liquid such as oil or glycerine.

Ordinary stirring of water creates fluid turbulence -- disorganized flow in which eddies create smaller eddies and you quickly get discontinuities in the flow down to the smallest molecular scales. In this case -- the ordinary case -- the mapping from the liquid's initial position to its later position is NOT smooth, and the theorem doesn't apply. 

Class warfare and public goods

I think this is about the best short description I've heard yet of why wealth isn't created by heroic individuals (a la Ayn Rand's most potent fantasies). I just wish Elizabeth Warren had been appointed head of the new Bureau of Consumer Protection. Based on the words below, I can see why there was intense opposition from Wall St. She's obviously not a Randroid:

I hear all this, you know, “Well, this is class warfare, this is whatever.”—No!

There is nobody in this country who got rich on his own. Nobody.

You built a factory out there—good for you! But I want to be clear.

You moved your goods to market on the roads the rest of us paid for.

You hired workers the rest of us paid to educate.

You were safe in your factory because of police forces and fire forces that the
rest of us paid for.

You didn’t have to worry that maurauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did.

Now look, you built a factory and it turned into something terrific, or a great idea—God bless. Keep a big hunk of it.

But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.

Milk off the Shelf

THIS is what happens when your house is under construction, you make dinner with the kids and your spouse is working late for the night:

...Was wondering this morning how in the world we could have finished off a whole gallon of milk yesterday?  (The kids got oatmeal with water for breakfast.)...

...Until my assistant came in and asked me why the milk was on the shelf???
(I really didn't even notice it there.)  Ah vell.
Off to the grocery store!

xoxo, Lauren

ps- I'll be sure to post a few progress pics of the rooms we had redone!  (Undecorated as of now)

Thinking about thinking

Psychologist Daniel Kahneman has a book coming out in November. Thinking, fast and slow. It's all about mental heuristics and the two different functional levels of the brain -- the fast instinctive part which is effortless but prone to errors and the slow rational part which takes effort to use but which can (in some cases) correct some of the errors of the first part. His Nobel Prize Lecture from 2002 is a fascinating read so I'm looking forward to the book.

But meanwhile, has some videos and text of a series of very informal talks Kahneman recently gave. These give some fascinating insight into the origins some of his thinking on decision theory, prospect theory (why we value gains and losses relative to our own current position, rather than judge outcomes in terms of total wealth), why corporations make bad decisions and don't work too hard to improve their ability to make better ones, and so on. Here's one nice example of many:

The question I'd like to raise is something that I'm deeply curious about, which is what should organizations do to improve the quality of their decision-making? And I'll tell you what it looks like, from my point of view.

I have never tried very hard, but I am in a way surprised by the ambivalence about it that you encounter in organizations. My sense is that by and large there isn't a huge wish to improve decision-making—there is a lot of talk about doing so, but it is a topic that is considered dangerous by the people in the organization and by the leadership of the organization. I'll give you a couple of examples. I taught a seminar to the top executives of a very large corporation that I cannot name and asked them, would you invest one percent of your annual profits into improving your decision-making? They looked at me as if I was crazy; it was too much.

I'll give you another example. There is an intelligence agency, and the CIA, and a lot of activity, and there are academics involved, and there is a CIA university. I was approached by someone there who said, will you come and help us out, we need help to improve our analysis. I said, I will come, but on one condition, and I know it will not be met. The condition is: if you can get a workshop where you get one of the ten top people in the organization to spend an entire day, I will come. If you can't, I won't. I never heard from them again.

What you can do is have them organize a conference where some really important people will come for three-quarters of an hour and give a talk about how important it is to improve the analysis. But when it comes to, are you willing to invest time in doing this, the seriousness just vanishes. That's been my experience, and I'm puzzled by it.

Thursday, September 22, 2011

A reminder: Ronald Reagan raised capital gains taxes

The Tax Reform Act of 1986 actually did two things that required the affluent to pay higher taxes: it raised the effective tax rate on long-term capital gains from 20 to 28 percent, and it eliminated the ability to write passive losses against ordinary income.  This meant that after 1986, Warren Buffett's taxes would have been at least as high as his secretary's.  

Wednesday, September 21, 2011

Primal Docs

Chris Armstrong, creator of the website Celiac Handbook, has designed a new non-commercial website called Primal Docs to help people connect with ancestral health-oriented physicians.  It's currently fairly small, but as more physicians join, it will become more useful.  If you are a patient looking for such a physician in your area, or an ancestral health-oriented physician looking for more exposure, it's worth having a look at his site:

Primal Docs

Update 9/22: apparently there is already another website that serves a similar purpose and has many more physicians enrolled: Paleo Physicians Network.

Lauren Liess Textiles Shoot

I have pictures back from our photo shoot at Helen Norman's farm!!  Helen & her assisitant F.J. are still working on the photos (we're going for a sort of vintage/ edgy vibes for the photographs so it takes a lot of processing afterwards) but I though I'd share a few peeks - some without the processing.

Our goal with this photoshoot was to show the fabrics in a variety of settings, both with and whithout people.  We wanted to show how the fabrics move and look and feel.  I washed some of the fabrics before the shoot to give them a bit of patina and I really love how they turned out.  Some of the photos and fabrics come across as fresh and happy & fun, while others are earthier,  moodier or softer.   We wanted to show the variety of feelings & moods that couls be created with the line. (55 fabrics in total with 14 different designs.)

Here's part of our gold/ yellow collection on a beautiful antique daybed with little Grizzly taking a nap to show they really are comfy:

{Fabrics pictured: Magnolia in Yellow, Live Paisley in Gold, and Fern Star in Yellow}

Our boys were sooooo good and put up with so much.  Here's an outtake of them, totally at the end of their ropes:

{Pretending to nap on a blanket in Magnolia}

I love this photo with the mist on the door to the porch:

We woke up super-early and got some cool pics with fog in the background:

{me with a Wild Chicory blanket}

I looooove this outtake...  Did you ever play this game with friends when you were little?-

{"Super tall 4 year-old.. ie Christian on Daddy's shoulders.  And Kelly Green Cape in Happikat}

{Laundry Line with: Thistle in Sepia, Live Paisley in Antique Beige and Squircles in Fog}

...Anyway, I have so many more pics to share (I think 85 total?!!  We took over 1,000!) but I really want you to see them once they have that processing I mentioned.  I'm finishing up loading the plain fabric photos onto my online store and will then go back & add in the lifestyle photos & then we'll be ready to launch.  We're all moving as quickly as we can!! :)

I can't thank Helen & F.J. enough for the photos & their time,  and of course thank you to my family.  (I know two of you can't read yet, but I love you more than anything and one day you'll get what a big deal this was to me.)

xoxo, Lauren

If you'd like help creating a home you absolutely love, contact me about our design services.

High-frequency trading -- the downside, Part I

Andrew Haldane of the Bank of England has given a stream of recent speeches -- more like detailed research reports -- offering deep insight into various pressing issues in finance. One of his most recent speeches looks at high-frequency trading (HFT), noting its positive aspects as well as its potential negative consequences. Importantly, he has tried to do this in non-ideological fashion, always looking to the data to back up any perspective.

The speech is wide ranging and I want to explore it points in some detail, so I'm going to break this post into three (I think) parts looking at different aspects of his argument. This is number one, the others will arrive shortly.

To begin with, Haldane notes that in the last decade as HFT has become prominent trading volumes have soared, and, as they have, the time over which stocks are held before being traded again has fallen:
... at the end of the Second World War, the average US share was held by the average investor for around four years. By the start of this century, that had fallen to around eight months. And by 2008, it had fallen to around two months.
It was about a decade ago that trading execution times on some electronic trading platforms fell below the one second barrier. But the steady march to ever fast trading goes on:
As recently as a few years ago, trade execution times reached “blink speed” – as fast as the blink of an eye. At the time that seemed eye-watering, at around 300-400 milli-seconds or less than a third of a second. But more recently the speed limit has shifted from milli-seconds to micro-seconds – millionths of a second. Several trading platforms now offer trade execution measured in micro-seconds (Table 1).

As of today, the lower limit for trade execution appears to be around 10 micro-seconds. This means it would in principle be possible to execute around 40,000 back-to-back trades in the blink of an eye. If supermarkets ran HFT programmes, the average household could complete its shopping for a lifetime in under a second.

It is clear from these trends that trading technologists are involved in an arms race. And it is far from over. The new trading frontier is nano-seconds – billionths of a second. And the twinkle in technologists’(unblinking) eye is pico-seconds – trillionths of a second. HFT firms talk of a “race to zero”.
Haldane then goes on to consider what effect this trend has had so far on the nature of trading, looking in particular at market makers.

First, he offers a useful clarification of why the bid-ask spread is normally taken as a useful measure of market liquidity (or more correctly, the inverse of market liquidity). As he points out, the profits market makers earn from the bid-ask spread represent a fee they require for taking risks that grow more serious with lower liquidity:
The market-maker faces two types of problem. One is an inventory-management problem – how much stock to hold and at what price to buy and sell. The market-maker earns a bid-ask spread in return for solving this problem since they bear the risk that their inventory loses value. ...Market-makers face a second, information-management problem. This arises from the possibility of trading with someone better informed about true prices than themselves – an adverse selection risk. Again, the market-maker earns a bid-ask spread to protect against this informational risk.

The bid-ask spread, then, is the market-makers’ insurance premium. It provides protection against risks from a depreciating or mis-priced inventory. As such, it also proxies the “liquidity” of the market – that is, its ability to absorb buy and sell orders and execute them without an impact on price. A wider bid-ask spread implies greater risk in the sense of the market’s ability to absorb volume without affecting prices.
The above offer no new insights, but explains the relationship in a very clear way.

Next comes the question of whether HFT has made markets work more efficiently, and here things become more interesting. First, there is a great deal of evidence (some I've written about here earlier) showing that the rise of HFT has caused a decrease in bid-ask spreads, and hence an improvement in market liquidity. Haldane cites several studies:
For example, Brogaard (2010) analyses the effects of HFT on 26 NASDAQ-listed stocks. HFT is estimated to have reduced the price impact of a 100-share trade by $0.022. For a 1000-share trade, the price impact is reduced by $0.083. In other words, HFT boosts the market’s absorptive capacity. Consistent with that, Hendershott et al (2010) and Hasbrouck and Saar (2011) find evidence of algorithmic trading and HFT having narrowed bid-ask spreads.
His Chart 8 (reproduced below) shows a measure of bid-ask spreads on UK equities over the past decade, the data having been normalised by a measure of market volatility to "strip out volatility spikes."

It's hard to be precise, but the figure shows something like a ten-fold reduction in bid-ask spreads over the past decade. Hence, by this metric, HFT really does appear to have "greased the wheels of modern finance."

But there's also more to the story. Even if bid-ask spreads may have generally fallen, it's possible that other measures of market function have also changed, and not in a good way. Haldane moves on to another set of data, his Chart 9 (below), which shows data on volatility vs correlation for components of the S&P 500 since 1990. This chart indicates that there has been a general link between volatility and correlation -- in times of high market volatility, stock movements tend to be more correlated. Importantly, the link has grown increasingly strong in the latter period 2005-2010.

What this implies, Haldane suggests, is that HFT has driven this increasing link, with consequences.
Two things have happened since 2005, coincident with the emergence of trading platform fragmentation and HFT. First, both volatility and correlation have been somewhat higher. Volatility is around 10 percentage points higher than in the earlier sample, while correlation is around 8 percentage points higher. Second, the slope of the volatility / correlation curve is steeper. Any rise in volatility now has a more pronounced cross-market effect than in the past.... Taken together, this evidence points towards market volatility being both higher and propagating further than in the past.
This interpretation is as interesting as it is perhaps obvious in retrospect. Markets have calmer periods and stormier periods. HFT seems to have reduced bid-ask spreads in the calmer times, making markets work more smoothly. But it appears to have done just the opposite in stormy times:
Far from solving the liquidity problem in situations of stress, HFT firms appear to have added to it. And far from mitigating market stress, HFT appears to have amplified it. HFT liquidity, evident in sharply lower peacetime bid-ask spreads, may be illusory. In wartime, it disappears. This disappearing act, and the resulting liquidity void, is widely believed to have amplified the price discontinuities evident during the Flash Crash.13 HFT liquidity proved fickle under
stress, as flood turned to drought.
This is an interesting point, and shows how easy it is to jump to comforting but possible incorrect conclusions by looking at just one measure of market function, or by focusing on "normal" times as opposed to the non-normal times which are nevertheless a real part of market history.

As I said, the speech goes on to explore some other related arguments touching on other deep aspects of market behaviour. I hope to explore these in some detail soon.

Street View imagery API

If you “like what you see” on Google’s Street View you can now access/copy that image via a simple API. Last week Google released a new, free service that allows anybody to add a static image of a Street View to a web page, email to friends for reference, or clients, or else.... Travel and real estate related sites will probably be the first to take advantage of this new service from Google but I am sure creative developers will find many more ways to put that imagery to a good use. Time will show.

Unfortunately, it is not an easy task to “take the snap” exactly how you want it if you don’t know how to work out the heading and the pitch of a Street View. But help is on hand. Keir Clarke from Google Maps Mania has just created a very simple Static Street View Wizard application that automatically generates the URL for a static Street View image. Once you have generated the URL of a static Street View, using the wizard, you can just copy it and add to an image tag in HTML page, etc. To change the width and the height of the image, just adjust manually “size” parameter with relevant values (in pixels), eg. size=600x300 will return image 600px wide and 300px high. Street View images can be returned in any size up to 640 by 640 pixels.

There is a limit of 1,000 unique (different) image requests per viewer per day. However, since this restriction applies to end users/viewers, most developers should not need to worry about exceeding their quota.

Update: alternative Google Street View Generator

Tuesday, September 20, 2011

Construction over here

Remember how I mentioned we were refinishing a room on our lower level?  Here's a pic of the room after we did the demo:

 Our contractors from CarrMichael Construction came over & are in the midst of drywalling the walls & ceiling:

Originally we'd planned to use the small room as an additional office space for me & my assistant Meghan, but two days ago I decided we were better off taking the bigger room (the guest room) for work and using the smaller room as the new guest room.  Here's a shot of our complete mess-of-a-future-office:

Nothing you see is really staying... not even the curtains.  I haven't decided where I want to go in either of these rooms yet because the project came on so suddenly, but as soon as I have design plans, I'll be sure to share.  {shoemakers' kids with no shoes syndrome here} 

Also, the guys are reducing the closet in the boys' room so we can fit two twin beds in there.  Again, I'm pretty undecided on what I to do but I think I'm going to have headboards made in one of my new fabrics. 

xoxo, Lauren

If you'd like help creating a home you absolutely love, contact me about our design services.

Read Taylor Branch's Atlantic Piece on the NCAA

Let me pull out two paragraphs from the powerful story:

Educators are in thrall to their athletic departments because of these television riches and because they respect the political furies that can burst from a locker room. “There’s fear,” Friday told me when I visited him on the University of North Carolina campus in Chapel Hill last fall. As we spoke, two giant construction cranes towered nearby over the university’s Kenan Stadium, working on the latest $77 million renovation. (The University of Michigan spent almost four times that much to expand its Big House.) Friday insisted that for the networks, paying huge sums to universities was a bargain. “We do every little thing for them,” he said. “We furnish the theater, the actors, the lights, the music, and the audience for a drama measured neatly in time slots. They bring the camera and turn it on.” Friday, a weathered idealist at 91, laments the control universities have ceded in pursuit of this money. If television wants to broadcast football from here on a Thursday night, he said, “we shut down the university at 3 o’clock to accommodate the crowds.” He longed for a campus identity more centered in an academic mission.


“Scholarship athletes are already paid,” declared the Knight Commission members, “in the most meaningful way possible: with a free education.” This evasion by prominent educators severed my last reluctant, emotional tie with imposed amateurism. I found it worse than self-serving. It echoes masters who once claimed that heavenly salvation would outweigh earthly injustice to slaves. In the era when our college sports first arose, colonial powers were turning the whole world upside down to define their own interests as all-inclusive and benevolent. Just so, the NCAA calls it heinous exploitation to pay college athletes a fair portion of what they earn.
I love college athletics (I am thrilled that I have gotten to attend three Rose Bowls in which Wisconsin played) and admire many college athletes.  I not only envy their athletic prowess, I am amazed at the varsity athlete who can manage a B average in a difficult major while playing a sport.

But the NCAA system gives these athletes a raw deal.  Among other things, the system makes it difficult for athletes in revenue generating sports to get a real college experience--practice and games can leave students too tired to focus on class (yes, I know some athletes have no interest in class to begin with, but in my experience they are a distinct minority).  If the "pay" is supposed to be an education, the least we as colleges and universities can do is make sure athletes get one.

A bleak perspective... but probably true

I try not to say too much about our global economic and environmental future as I have zero claim to any special insight. I do have a fairly pessimistic view, which is reinforced every year or so when I read in Nature or Science the latest bleak assessment of the rapid and likely irreversible decline of marine ecosystems. I simply can't see humans on a global scale changing their ways very significantly until some truly dreadful catastrophes strike.

Combine environmental issues with dwindling resources and the global economic crisis, and the near term future really doesn't look so rosy. On this topic, I have been enjoying an interview at Naked Capitalism with Satyajit Das (part 1, part2, with part 3 I think still to come) who has worked for more than 30 years in the finance industry. I'm looking forward to reading his new book "Extreme Money: Masters of the Universe and the Cult of Risk." Here's an excerpt from the interview which, as much as any analysis I've read, seems like a plausible picture for our world over the next few decades:
There are problems to which there are no answers, no easy solutions. Human beings are not all powerful creatures. There are limits to our powers, our knowledge and our understanding.

The modern world has been built on a ethos of growth, improving living standards and growing prosperity. Growth has been our answer to everything. This is what drove us to the world of ‘extreme money’ and financialisation in the first place. Now three things are coming together to bring that period of history to a conclusion – the end of financialisation, environmental concerns and limits to certain essential natural resources like oil and water. Environmental advocate Edward Abbey put it bluntly: “Growth for the sake of growth is the ideology of a cancer cell.”

We are reaching the end of a period of growth, expansion and, maybe, optimism. Increased government spending or income redistribution, even if it is implemented (which I doubt), may not necessarily work. Living standards will have to fall. Competition between countries for growth will trigger currency and trade wars – we are seeing that already with the Swiss intervening to lower their currency and emerging markets putting in place capital controls. All this will further crimp growth. Social cohesion and order may break down. Extreme political views might become popular and powerful. Xenophobia and nationalism will become more prominent as people look for scapegoats.

People draw comparisons to what happened in Japan. But Japan had significant advantages – the world’s largest savings pool, global growth which allowed its exporters to prosper, a homogeneous, stoic population who were willing to bear the pain of the adjustment. Do those conditions exist everywhere?

We will be caught in the ruins of this collapsed Ponzi scheme for a long time, while we try to rediscover more traditional sources of growth like innovation and productivity improvements – real engineering rather than financial engineering. But we will still have to pay for the cost of our past mistakes which will complicate the process.

Fyodor Dostoevsky wrote in The Possessed: “It is hard to change gods.” It seems to me that that’s what we are trying to do. It may be possible but it won’t be simple or easy. It will also take a long, long time and entail a lot of pain.

Monday, September 19, 2011

WOW: Marie Hines

I am so amazed right now & totally tearing up.  I just got a supersweet email from singer/ songwriter Marie Hines about her latest song/ video from "Better From the Living Room Sessions" and I clicked on her link to see the video.

{Marie, if you're reading this, I'll be honest, I really had no idea what to expect.}

But I was blown away.  Really blown away.  I definitely teared up.  She has such an incedibly beautiful voice, IS so incredibly beautiful, and you can just see that she is seriously passionate about what she does.  I'm instantly a new fan & wanted to share it on the blog because I thought you might enjoy her songs too:

Marie decorated her living room featured in the videos herself & styled it beautifully with a million candles.  You'll love it.

Thanks so much to Marie for sharing & you have got it GOIN on!!!

xoxo, Lauren

If you'd like help creating a home you absolutely love, contact me about our design services.

Saturday, September 17, 2011

Allowing underwater borrowers to refinance could improve investors' Sharpe Ratio

Consider borrowers with 6 percent 30-year mortgages that are 20 percent underwater.  Assume that the probability that any one borrower will default in any one month is .2 percent, and that the cost of default to the lender conditional on default is 50 percent.  Assume that at the end of five years, any remaining long balance is paid off).  A security containing such mortgages will have an IRR of 4.83 percent (I am happy to share the spreadsheet for the details.

Now let us convert the borrowers into people with 4 percent mortgages with 20 year terms.  The payment from such mortgages will be essentially the same as before, and the mortgage balance will be paid off more quickly.  The good news for investors is that this lowers the probability of default; the bad news is that it reduces the yield before default.  Assuming default probabilities in any one month go down to .1 percent, the IRR for investors goes down to 3.45 percent.  This seems like a bad deal for investors, except that they will have more certainty about their cash flows; the standard deviation of their investment falls.  Because default is binomial, we can calculate that the variance of returns will be p*(expected loss)*(1-p*expected loss).  The variance of not refinancing is thus .0099 and of refinancing is .004975, which translate into standard deviations of .1 and .07.  Because the riskless rate is currrently zero, when we substitute into the Sharpe formula, we find

Sharpe no refinance = .048/.1; Sharpe refinance = .0345/.07. 

This is about .5 in both cases, suggesting that investors are getting the same risk adjusted return whether refinancing becomes easy of not, assuming the assumptions are correct.  I am not saying they are; I am saying that in making policy we need to think about these sorts of implications.

Friday, September 16, 2011

Yay for a Fall Friday

I am so happy it's Friday.  I really am.  It's 5:00, there's a little fall chill in the air and it's a bit overcast.  I made a batch of rice & potato soup this morning and it's been simmering for hours.  I'm ready to put on cozy sweats and hunker down...  watch movies & read & eat.  And of course hang with my family.

(I wouldn't quite fit in here in my sweats but it suits my mood ;)

I love this time of year...  both indoors & outside.  I love coming in with a chill and warming up and I love being outside, crunching acorns on the sidewalk when it'c ool enough for a scarf but not cold enough for a coat.  I made my kids wear hats today pretty much because they looked cute in them.  (I pretended they needed them and it thrilled me to no end.}

{Not our apples...  photo by Mikkel Vang via dress design & decor}

For the past few days I've been busy loading images of my new fabrics into the online store.  I'll be honest and say that it's a kind of torturous process.  It takes FOR-EVA.  Like Forrrrreverrrrrrrrrrr.  BUT----   I know it'll be worth it in the end, and the previously empty online store is starting to look good and take on some personality. 

Here's a sneak peek at one of my newer designs, Fern Star:

Last weekend for the photoshoot, I experimented with washing some of the fabrics to give them a bit of patina and I loooove how they turned out.  They're so soft & vintage-feeling and now I'm dying to redo my house.  Definitely doing some bedding for the boys new room in them.

Anyway, hope you had a great week & enjoy your weekend!!

xoxo, Lauren

If you'd like help creating a home you absolutely love, contact me about our design services.