Posts filed under “Derivatives”

Bernanke Blinks

Fedfunds FOMC Chair Ben Bernanke surprised me (and apparently, quite a few others) by slashing both the Fed Funds Rate and the Discount Rate 50 bps each.

Markets loved Larry Kudlow’s "shock & awe," with the Dow rallying over 300 points on the session. Yield on the 10 year is now well below 4.50%.

Why did Bernanke blink? "The tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally." The hope is today’s action will "help forestall some of the adverse effects on the broader economy" that could arise from financial market disruptions.

The flip side is concerns about inflation. The FOMC statement read "Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully."

As to the Dollar, Oil, Gold,  soft commodities: We’re long them all (‘cepting the greenback) through one asset class or another.

The Fed now has a third problem to deal with: They have become Wall Street’s bitch. They may find that’s a difficult condition to wriggle out from . . .

For more details, see:

Christmas in September   

http://www.thekirkreport.com/2007/09/christmas-in-se.html

Jim Rogers, Faber Say Fed Rate Cuts Will Spur a Recession     http://www.bloomberg.com/apps/news?pid=20601087&sid=aYBOOiT5mAO0&

Economists React: ‘One and Done’?     http://blogs.wsj.com/economics/2007/09/18/economists-react-one-and-done/

Half-Point Surprise
http://blogs.wsj.com/marketbeat/2007/09/18/half-point-surprise/

Who Messed Up the Markets: Hedge Funds, Greenspan?    http://blogs.wsj.com/deals/2007/09/18/who-messed-up-the-markets-hedge-funds-greenspan/?mod=homeblogmod_dealjournal

Former Fed Chair Alan Greenspan: the era of low inflation is over    http://bigpicture.typepad.com/comments/2007/09/ironic-quote-of.html

The Fed is Spooked   
http://bonddad.blogspot.com/2007/09/fed-is-spookled.html

Fed Funds Rate Cut: Watch Long Rates   
http://calculatedrisk.blogspot.com/2007/09/fed-funds-cut-watch-long-rates.html

FOMC Statement
http://www.federalreserve.gov/newsevents/press/monetary/20070918a.htm

Category: Credit, Derivatives, Economy, Federal Reserve, Inflation

Nine Reasons the Feds Can’t Save Stocks

Category: Credit, Derivatives, Economy, Federal Reserve, Investing, Markets, Psychology

Greenspan’s Legacy

Category: Credit, Derivatives, Federal Reserve, Investing, Real Estate

The Fine Line Between Investment Grade and Junk

Category: Credit, Derivatives, Federal Reserve, Financial Press, Hedge Funds, Psychology, Real Estate

Martin Feldstein on the Housing/Credit/Economic Mess

Category: Credit, Derivatives, Federal Reserve, Hedge Funds, Inflation, Psychology, Real Estate

A Thought Experiment

Category: Credit, Derivatives, Investing, Markets, Trading

Recursion, Reflexivity, Feedback Loops & the Fed

Category: Credit, Derivatives, Federal Reserve, Inflation, Investing, Markets, Psychology

Five Reasons Why the Fed Will Cut Rates

Category: Credit, Derivatives, Federal Reserve, Inflation, Psychology, Real Estate

A Demon of Our Own Design

I previously mentioned A Demon of Our Own Design in a linkfest a few weeks ago. I enjoyed the book a great deal, and just about finished it over the long weekend.

The opening paragraph just reached out and grabbed me: 

Bookstaberdemon_jacket"While it is not strictly true that I caused the two great financial
crises of the late twentieth century—the 1987 stock market crash and
the Long-Term Capital Management (LTCM) hedge fund debacle 11 years
later—let’s just say I was in the vicinity. If Wall Street is the
economy’s powerhouse, I was definitely one of the guys fiddling with
the controls. My actions seemed insignificant at the time, and
certainly the consequences were unintended. You don’t deliberately
obliterate hundreds of billions of dollars of investor money. And that
is at the heart of this book—it is going to happen again. The financial
markets that we have constructed are now so complex, and the speed of
transactions so fast, that apparently isolated actions and even minor
events can have catastrophic consequences."

Terrific stuff.

Indeed, I enjoyed the rest of the book. Bookstaber was on the scene in the early days of many of derivatives now contributing to market turmoil. He rather deftly makes complex issues readily understandable, regardless of how much advanced mathematics you may have under your belt.

And, he names names. LOTS of names. All the usual suspects come under scrutiny, as well as a lot of folks who probably assumed they were not int he public eye. There will be a lot of people not very happy with his blunt, insider descriptions of the analytical errors made by major players — many of whom are still around today and in positions of authority and power. 

He also accepts a lot of responsibility for many costly errors he himself made.   

Overall, a fun, very informative read.

I was intrigued enough by the book that I contacted Bookstaber (the author) and Wiley (the publisher), and asked for their permission to reproduce the first chapter. They graciously sent me a pdf and text version, which you will find after the jump: All of chapter one, in both text form and PDF. I also included some mainstream media reviews after the chapter. 

I have pretty good relationships with many of the publishing houses — they all want to get a book or two out of me. Anyway, if it turns out you guys like this idea, perhaps we can offer up a book or two that I am reading every month in this same format. Maybe we can have an online reading group club — it could be a good place to have a full discussion. Share your thoughts.

Enjoy chapter one.

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Disclosure:  No, I don’t accept money for this — it was my idea, and I approached the publisher and author about this — not vice versa. Please don’t start bombarding me with offers to promote books I am not already reading. They will be unceremoniously deleted without response.

As noted in our disclosure section, we don’t do payola here (if you click thru and buy it on Amazon, I do see some scratch).

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Category: Books, Derivatives, Federal Reserve, Hedge Funds, Markets, Psychology

Quote of the Day: Free Trade

Category: Derivatives, Psychology, Trading