Money Stuff

Vol Robots and Power Drinkers

Also disappearing messages, capital discipline, financial regulation, housing finance and parody ICOs.


Oh man, I have built financial products like this:

The second of its new systems uses machine learning to develop new strategies for trading volatility on behalf of clients. It examines vast amounts of trading data and builds a strategy based on learning from market patterns.

UBS claims it is the first “adaptive strategy” product offered by an investment bank. It has been marketing the offering to clients for a couple of months and they have been “very receptive”. While the bank is yet to convince a client to put its money into it, it expects to secure its first contract within a few months.

Not the adaptive machine learning bit, I mean, but the bit about marketing to clients for months, never doing a trade, and bravely telling everyone that clients were "very receptive" and that the first trade was coming any day now. On the scale of receptivity, "very receptive" is a crucial step below "printed a trade."

But if you are a human employed at an investment bank and worried that robots are coming for your job, I recommend that story about UBS AG's forays into artificial intelligence, which I found extremely soothing. There are two products involved. One is a boring office-automation thingy, which "scans for emails sent by clients detailing how they want to divide large block trades up between funds" and then does the dividing, "doing a task that would normally take a person about 45 minutes in only about two minutes." Yeah look no one is losing their job over that; that is a pure win for the junior person who would otherwise have been doing that allocating. 

The other is the adaptive volatility whatsit, which, again, no one is losing their job over. Because, one, it is an incremental product: The pitch to clients is less "replace your UBS trader with this vol robot" and more "this vol robot will tell you when to call up your UBS trader to do a trade." If it works: more trades! But also, for a robot, it sure seems to require a lot of hand-selling: The pitch to salespeople is less "this vol robot will take over your job" and more "you will now have to spend a lot of time going out and selling this vol robot." The more time it takes to sell the vol robot, the more secure the salespeople's jobs are!

Of course it is also possible that they do feel threatened by the vol robot and are slow-walking its rollout. Perhaps eventually the robot -- which is, after all, adaptive -- will catch on?

Vol robot: Did you have any meetings today, Jane?
Salesperson: Oh yes, Vloxor 9000, I met with three big clients and pitched them on using your adaptive volatility strategies.
Vol robot: And how did it go, Jane?
Salesperson: Went great! They were all very receptive. I expect to print my first trade within a few months.
Vol robot: You've been saying that for months, Jane.
Salesperson: Look, sales is a complicated business; you have to build relationships slowly over time. You'd understand if you were a human.
Vol robot: [opens airlock]

Business meetings.

Elsewhere in business activities that are unlikely to be automated any time soon:

This week, Blue gave the court an extraordinary picture of Ashley’s working practices, including a claim that he would challenge subordinates to extreme drinking competitions that once ended with the 52-year-old billionaire vomiting into a fireplace.

That's from the amazing saga of Mike Ashley, the chief executive officer of Sports Direct International Plc, who is being sued by former investment banker Jeff Blue over claims that Ashley promised Blue 15 million pounds for increasing Sports Direct's stock price. The defense is, roughly, that the promise was a drunken joke. More specifically:

“I like to get drunk, I’m a power drinker,” Ashley said. “My thing is not to drink regularly, it’s to binge drink. I’m trying to get drunk – will you accept that? I was drinking to get pissed and have a good night out.”

What makes that paragraph wonderful -- besides that it is court testimony -- is the repetition. That guy really likes to get drunk, is what he is saying here! Good for him, he's earned it. This does not exactly sound like a good time to me -- 

Ashley allegedly held regular senior management meetings during “lock-ins” at the Green Dragon pub in Alfreton near Sports Direct’s warehouse. During other meetings Ashley is alleged to have expressed his “boredom and frustration”with City figures by lying under the table to “have a nap”.

-- but it was evidently a good time for him, anyway. I like to think that if I were a billionaire I would also organize my work life around amusing myself, rather than to following corporate governance best practices.

Elsewhere in colorful financial figures and alcohol, here is a story about Trump associate Felix Sater that includes the sentence: "After a stint in prison for stabbing another broker in the face with the broken stem of a margarita glass, he became involved in a mob-related money-laundering and stock-fraud scheme." 

WhatsApp and stuff.

Here is Kevin Roose on the rising use of secure disappearing communications apps in business and politics:

Secure messaging apps like WhatsApp, Signal and Confide are making inroads among lawmakers, corporate executives and other prominent communicators. Spooked by surveillance and wary of being exposed by hackers, they are switching from phone calls and emails to apps that allow them to send encrypted and self-destructing texts. These apps have obvious benefits, but their use is causing problems in heavily regulated industries, where careful record-keeping is standard procedure.

There is some handwringing about how using these apps is "'ignoring or outright flouting' public records laws," and how "preserving public records was an essential democratic norm. " But I like Dan Davies's view on this from two years ago: "This generation of financiers" -- and politicians, etc. -- "is the first to grow up with email and chat rooms, and use them habitually at work." And it will be the last! For thousands of years most important business was conducted by talking, face to face, and any records of that business -- letters, memoranda -- were formal, carefully considered, lawyered, reflected mostly final decisions, etc. Then for, like, 20 years, most business was conducted by casual informal chatty methods that were nonetheless preserved forever, reviewable by regulators, and easily keyword searchable. Then an avalanche of scandals happened and everyone realized how dumb that was! And now business is going back to the norm of most of human history, which is: Don't have all your casual back-channel chats in a form that will be preserved forever and probably become public.

People are worried about insufficient capital discipline.

We have a semi-regular section around here called "people are worried about stock buybacks," in which people worry that the modern push for capital discipline is forcing companies to inefficiently forgo investment opportunities and long-term growth in order to get the short-term boost of returning cash to shareholders. On the other hand, people are worried that U.S. shale drillers have too little capital discipline and are inefficiently pursuing investment opportunities and production growth instead of returning capital to shareholders like they should. The people worried about that are the shale drillers, and they're begging the shareholders to stop them:

Al Walker, chief executive of Anadarko Petroleum Corp. , said Wall Street has become an enabler that pushes companies to grow production at any cost, while punishing those that try to live within their means. At an investor conference last month in San Francisco, he implored shareholders to stop rewarding growth and start rewarding capital efficiency.

“The biggest problem our industry faces today is you guys,” he said. “You guys can help us help ourselves. It’s kind of like going to AA. You know, we need a partner. We really need the investment community to show discipline.”

He should do some stock buybacks; the investment community loves stock buybacks.

Financial regulation.

Here is a perfect one-sentence story about financial regulation:

The Dutch central bank recently posted an explainer on its website outlining how bankers can circumvent the country’s 20% cap on bonus payments.

It's part of a larger story about how European countries are trying to lure financial firms from London by offering various sweeteners in a "continentwide backroom bidding war." Some of the sweeteners involve just explaining how the rules work, and how to avoid them. People complain all the time that banks treat the rules as a game, that they do not take their responsibilities to society seriously and just work amorally to circumvent the rules. But it is awkward that no one takes the rules seriously as a moral code, that everyone understands them as a set of intellectual puzzles for the banks to solve, and that the regulators themselves are not above providing hints to the solution if it will help attract the bankers. 

Elsewhere, "Paul Volcker said he isn’t worried that the Trump administration will undermine the financial rule that bears his name":

“If they can do it in a more efficient way, God bless them,” the former Federal Reserve chairman said in a phone interview about proposed revisions to the regulation. “The basic principle remains valid. I hope that won’t go away, and I expect that it won’t.”

I recall Paul Volcker not being especially fond of the Volcker Rule, actually: He likes the principle of it (that banks shouldn't do proprietary trading), but he never loved the complicated rules to implement that principle. One could almost imagine a Volcker Rule that said "banks shouldn't do prop trading, except for legitimate hedging and market making activities," and then leave it to the banks to follow that principle in a good-faith way. But that is obviously not the system we have.

And here is Dan Davies:

One of the great shames of the global financial crisis was not how the economics profession failed to see it coming, but how many professional analysts of the financial system needed a glossary to find out what a CDO was, or how repo haircuts worked. There’s certainly a lot of room for those in charge of the financial system to develop much better factual knowledge of the institutional arrangements and of legal and accounting issues, and more importantly to ensure that this knowledge is spread throughout the central banking institutions, rather than locked up in the minds of one or two “technical specialists”.

Housing finance.

Here is Federal Reserve Governor Jerome Powell on "The Case for Housing Finance Reform." His proposals are fairly standard -- more private capital; more open competition; building on the bones of the existing system; and perhaps a government backstop that is deep-out-of-the-money, explicit, and priced -- and he thinks now is the time:

First, the economy and the housing sector are healthy. It would be far more disruptive to implement fundamental structural changes during difficult economic times. Second, memories of the crisis are fading. If Congress does not enact reforms over the next few years, we are at risk of settling for the status quo--a government-dominated mortgage market with insufficient private capital to protect taxpayers, and insufficient competition to drive innovation. There is a serious risk, if not a likelihood, that this state of affairs may persist indefinitely, leaving our housing finance system in a semi-permanent limbo.

I've been betting on "semi-permanent limbo" for years now, and I still feel good about my chances. From a political perspective, this does not seem like an auspicious time to move difficult controversial legislation with no popular support to fix a status quo that more or less works.

Blockchain blockchain blockchain.

In the stock market, there are real companies, and there are fraudulent companies, but there are not so far as I know parody companies. (Some come close.) There are no initial public offering prospectuses that are like "hahahaha stocks, aren't stocks funny, everyone else makes money selling stocks, give me some money for my stocks." The Securities and Exchange Commission would frown upon that sort of thing, and investment banks would hesitate to underwrite it.

In this sense, postmodern crowdsourced blockchain capitalism has clearly improved upon the stodgy old 20th-century methods of financial capitalism. The concept of the "initial coin offering" has existed for perhaps four years, and has only become popular in the last year or so, but I can think of at least two parody ICOs so far. There is PonzICO ("Let's Just Cut to the Chase"), which raised $1,100 on its first day in May, not a lot of money compared to other recent ICOs but still pretty good considering, you know, it has "Ponzi" in the name. And now there is FOMO coin ("We've been working on FOMO coin (symbol - FOMO) for at least 2 hours"). Even before them, though, Dogecoin launched way back in 2013 as a joke, and is now worth something like $277 million. But the true innovation will be when you can encode the comedy directly into the blockchain, when ICO entrepreneurs don't have to write silly websites or fake white papers because the immutable code itself will be funny.

Conspiracy theories.

Alexandra Scaggs went to the "ZeroHedge Live Fight Club and Symposium" in Marfa, Texas, last month, and here is Part 2 of her report, on the conspiracy theories she discovered in Marfa. My favorite part is this:

Gore said that outlets like ZeroHedge face “one infinitesimal risk — the establishment is not as corrupt as we think it is.” The establishment is not as corrupt as he thinks it is.

I try not to be too cynical about risk management stuff; after the financial crisis, it is a little too easy to dismiss anyone's efforts to quantify risk. Some risks really are bigger than others, and sometimes it really is reasonable to say "this is a small risk and we don't have to worry much about it." Still, if someone says to you that their project faces "one infinitesimal risk," I don't know, that particular phrasing would make me worry.

People are worried that people aren't worried enough.

Slightly off our usual topic here, but here is Bloomberg Gadfly's Stephen Gandel on Bank of America analysts' worries that the rise of indexing will increase volatility:

The biggest concern of the report is that passive investing is about to make the market a lot more volatile, a key way Wall Street measures risk. The strategists found that stocks that had the highest passive ownership were more susceptible to price swings than the rest of the market because fewer shares were available for trading, exacerbating the impact on prices. The implication is that as the rest of the market becomes more passively managed, it will become more volatile as well.

Huh. I have long told the casual story that the rise of indexing has contributed to reducing volatility: "Fewer shares were available for trading," sure, fine, but that's because more shares were in the hands of people who aren't trading. If nobody trades stocks, then there will be less volatility than if everyone trades stocks. You can see how a dynamic of "half the people trade stocks and half the people don't" could lead to even higher volatility than "all the people trade stocks" -- maybe the half the people who don't trade would otherwise have offset the people who do -- but it does not seem like a necessary result. In any case, it is odd to worry about how indexing is increasing volatility when everyone else is worried about how little volatility there is.

Food Stuff.

As I often say, my favorite genre of business journalism is food-marketing sociology, so I was thrilled to find a front-page story in the Wall Street Journal about the decline of Hamburger Helper:

Hamburger Helper, and the other Helper varieties owned by General Mills, declined to 40% of sales of dinner mixes in the U.S. last year from 61% in 2007, according to market researcher Euromonitor, and Conagra Brands’s Chef Boyardee’s share of shelf-stable ready-meal sales fell to 23% from 25%.

General Mills said Hamburger Helper might not have robust growth prospects but generates consistent profits and feeds millions of Americans. It improved the taste by using real cheese and, to attract value-oriented shoppers, has added 20% more pasta, a spokeswoman said.

I wish Brooklyn restaurants wrote their menus like that. "Kale salad -- might not have robust growth prospects, but generates consistent profits and feeds millions of Americans." 

Things happen.

Warren Buffett’s Berkshire to Buy Electric-Grid Giant Oncor. Blue Man Group Is Bought by Cirque du Soleil, With Plans to Expand. Malone to Put QVC, HSN Under One Roof in $1.3 Billion Deal. Gundlach Says Bond Wipeout Just Beginning as Bulls Rush for Exit. In Face-off With IRS, the Boston Bruins Win Big. Vista Blows Past Corporate Bidders for Long-Bet Growth Targets. How Do You Put a Price on Investment Research? Rick Perry and Say's law. Russians Are Suspects in Nuclear Site Hackings, Sources Say. "Our democracy will achieve its final, perfect form when all legislation is drafted by a solar-powered calculator wearing a mock turtleneck." Why You Should Care about High-Dimensional Sphere Packing. "They called me in, and we had a meeting which consisted of them doing comedy bits and testing whether I understood whether they were joking or not while they were interviewing me." Organic water.

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