Interesting Articles/Videos/Presentations

ixus wrote: »

The Quiet Coup

Baseline Scenario’s Simon Johnson, former Chief Economist of the World Bank, explains why our crisis is so similar to emerging market implosions of the past:

Easy read format :

IMHO, this is a fantastic (if long) read. Found on Option ARMageddon

...Meanwhile, if you’ve been watching the copper market you’ll have noticed a bit of an arbitrage trade going on. Over the past month, European prices have routinely been “rallying” on strong Chinese buying. With prices much lower at the London Metal Exchange than in Asia — and shipping costs also low — the arb trade does make sense. However, what does seem peculiar is that the arb seems to be closing upwards and being driven specifically by China, whose manufacturing and general export industries — for which copper is a major input — are still drastically suffering from the impact of the financial crisis. What’s more, there’s no imminent sign that exports are likely to recover anytime soon.

Nevertheless, the point is China is buying. So much so that it’s driving the market towards 6-month highs.....

An excellent - straightforward - paper giving a sound overview of the development of structured finance has been published by Joshua D. Coval, Jakub Jurek, and Erik Stafford at Harvard Business School.

The Economics of Structured Finance (in pdf format)

There’s not a mathematical lemma in sight, but the paper doesn’t skimp on detail. Well worth a read. Of note in particular is Table 3, which shows just how crucially important default correlation assumptions were to the under-estimation of CDO risks. Misunderstanding correlation (through the misapplication of the David Li 2001 Gaussian Copula function)

See 5. Recipe for Disaster: The Formula That Killed Wall Street

was probably the single most egregious mathematical modelling mistake the banks made. Note how disproportionately changes to the default correlation parameter affect senior tranches - the ones the banks were holding onto themselves. A mezz tranche (BBB-) moving from a 20 per cent default correlation assumption to an 80 per cent one loses only four notches. A senior tranche (AAA) making the same transition loses eleven notches.

HedgeHogging wrote: »

...... I was wondering if you had any more articles on fixed income. ....
Keep up the quality posting

....“The risk of deflation is very much exaggerated,” she answers. Inflation seems to her “unavoidable”: the Federal Reserve is creating money with little restraint, while Treasury expenditures remain far in excess of revenue. The inflation spigot is thus wide open.....

I’ve Got Friends In Low Places…We have to admit that Fed actions announced at the last FOMC meeting very much took us by surprise. Point being, we did not expect the Fed to begin monetization so soon. But surprised we should not have been. Not by a long shot. To be honest, Fed monetization of Treasury debt was inevitable in the current cycle. The recent global capital flow and realized/expected Treasury issuance numbers over the last half-year really tell the whole story quite elegantly. So although there has been plenty of ranting and raving about Fed monetization, ourselves included, we think it’s much more important to our forward investment decision making to simply address this fact objectively and unemotionally. The Fed really had no other choice. Moreover, as we’ll discuss, this is the beginning of monetization actions by the Fed. They’re just getting warmed up. THE issue now is not the monetization itself, but rather how monetization will influence investment risk and opportunities. We’ll divide up in sections the highlight points we believe tell the story of the need for the Fed to monetize and why they will not be able to stop any time soon.......

ixus wrote: »

Lessons of the Global Financial Crisis: 1. The End of Ponzi Prosperity