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Talking stocks, trading, and investing in general - Page 668

post #10006 of 11163
Nice of the Turks to wait until trading day closed before starting their coup so as not to spook the market.
post #10007 of 11163
Right after I go short volatility. Nice.
post #10008 of 11163
Quote:
Originally Posted by dizzy View Post

Right after I go short volatility. Nice.

I have empathy for you, bro
post #10009 of 11163
Quote:
Originally Posted by dizzy View Post

Right after I go short volatility. Nice.
Given the way things are going, the fact that everyone will have the weekend to chill probably works in your favor, as opposed to if you'd staked out your position this morning and the news broke mid-day. You don't get the immediate reactive hiccup as people learn something is happening but haven't yet heard/read enough to feel they know what's going on. Two ugly terrorist attacks in the last week didn't seem to cause the U.S. equities market to so much as blink. Not sure this will have more than a very short-term effect, if that, on volatility and equity futures.
post #10010 of 11163
Even with Brexit on that Thursday night, the volatility indices were crushed low the following week. This is more of a good reason to short the spike than try and go long.
post #10011 of 11163
Quote:
Originally Posted by dizzy View Post

Right after I go short volatility. Nice.

Contago is so high it's not a major deal.

Quote:
Originally Posted by horndog View Post

Even with Brexit on that Thursday night, the volatility indices were crushed low the following week. This is more of a good reason to short the spike than try and go long.

Not sure I follow this. With the VIX at 13 I'd be worried it's so low as to invite a spike. I got out of my short short term vol position. Held onto mid term.

 

Quote:
Originally Posted by idfnl View Post


I've read enough to feel dangerous, and I never said there was a grand conspiracy. Though calling it systemic is equivalent to when politicians say 'mistakes were made'. It was certainly more than systematic.
 
Your original statement implied "big money" as the cause and almost acting intentionally. In reality a lot of people acting in their own interest overrode the natural failsafes in the system that had kept it functional for so many years. 2008 is an example of how humans with good, bad and simply self serving intentions can absolutely destroy an otherwise functioning system.
 
The Big Short Movie was a POS. An entertaining one, but an absolute POS in anything reassembling factual accuracy. The infographic phase was bad enough, but the release of the movie catering to Lewis's style of "good guys vs bad guys" and a general liberal feeling of banks and bankers are evil has created enormous headaches for me in the number of friends who now think they understand structured finance because an economist explained derivatives for 30 seconds. At least you acknowledge the bounds of your knowledge. 
post #10012 of 11163
Quote:
Originally Posted by MSchapiro View Post

Your original statement implied "big money" as the cause and almost acting intentionally. In reality a lot of people acting in their own interest overrode the natural failsafes in the system that had kept it functional for so many years. 2008 is an example of how humans with good, bad and simply self serving intentions can absolutely destroy an otherwise functioning system.

The Big Short Movie was a POS. An entertaining one, but an absolute POS in anything reassembling factual accuracy. The infographic phase was bad enough, but the release of the movie catering to Lewis's style of "good guys vs bad guys" and a general liberal feeling of banks and bankers are evil has created enormous headaches for me in the number of friends who now think they understand structured finance because an economist explained derivatives for 30 seconds. At least you acknowledge the bounds of your knowledge.

That's an implication you've inferred.

While point agreed on much of your post, The Big Short, in a superhero G v E way, exposed the public to quite a lot of truth about how financial markets are being run, and perhaps the enormous headaches you report come from shedding an unwanted light on it. Just because it was 30 seconds long doesn't make it false, just simplified. There's no value in a 7 minute diatribe that few grasp.

I disagree about this idea that thousands of lone wolves were out there acting in magical self interest to the point that poof: MISTAKES WERE MADE! It's an industry entrenched in the pockets of government, writing the rules in their own interests for, well sorta forever. In the same way that the public requires superhero themes to grasp finance, they also require it to elect politicians pretending to represent their interests. So there were lots of individual actors, but there was definitely a common self interest expressed by all.

You've presented the same oversimplification in the opposite direction, and yes, this platform is not tailored to minutiae. So now I have to oversimplify, but boiled down, the actors of '08 are best characterized as banality of evil. A large group of people with no ethical boundaries were all overtly invested in self interest to arguably sociopathic levels 'just doing their jobs'. So there are 100s of reasons 08 happened, but those 100s of apples didn't fall far from the tree.

Beyond '08, investors are still getting their 401k's eviscerated thru hidden fees so I have no empathy/sympathy/GreenFrogathy for your headaches nor the remaining actors that make up finance and I hope more stupids watch The Big Short. I wasn't in the park occupying Wall St and I subscribe to very few liberal finance viewpoints, but the financial industry actively derails sensible protection for middle class people's ability to retire, pretends to hate regulation, but yet go around writing it to favor their interests, so a bit of fuck them is warranted.
post #10013 of 11163
Quote:
Originally Posted by idfnl View Post


That's an implication you've inferred.

While point agreed on much of your post, The Big Short, in a superhero G v E way, exposed the public to quite a lot of truth about how financial markets are being run, and perhaps the enormous headaches you report come from shedding an unwanted light on it. Just because it was 30 seconds long doesn't make it false, just simplified. There's no value in a 7 minute diatribe that few grasp.

I disagree about this idea that thousands of lone wolves were out there acting in magical self interest to the point that poof: MISTAKES WERE MADE! It's an industry entrenched in the pockets of government, writing the rules in their own interests for, well sorta forever. In the same way that the public requires superhero themes to grasp finance, they also require it to elect politicians pretending to represent their interests. So there were lots of individual actors, but there was definitely a common self interest expressed by all.

You've presented the same oversimplification in the opposite direction, and yes, this platform is not tailored to minutiae. So now I have to oversimplify, but boiled down, the actors of '08 are best characterized as banality of evil. A large group of people with no ethical boundaries were all overtly invested in self interest to arguably sociopathic levels 'just doing their jobs'. So there are 100s of reasons 08 happened, but those 100s of apples didn't fall far from the tree.

Beyond '08, investors are still getting their 401k's eviscerated thru hidden fees so I have no empathy/sympathy/GreenFrogathy for your headaches nor the remaining actors that make up finance and I hope more stupids watch The Big Short. I wasn't in the park occupying Wall St and I subscribe to very few liberal finance viewpoints, but the financial industry actively derails sensible protection for middle class people's ability to retire, pretends to hate regulation, but yet go around writing it to favor their interests, so a bit of fuck them is warranted.

It is true I inferred it. 

 

Quote:
Did the big money have any sympathy for homeowners when they manipulated ratings agencies and leveraged credit default swaps exponentially?

"big money" performing actions to me implied a coordinated action by a certain group to manipulate ratings agencies. Fair enough if this is not what you meant. 

 

I can go into minute details if you wish, it is simplified, as you said, to avoid a 7 minute diatribe no one understands.

 

I know people both at some of the banks and the ratings agencies at the time. It was easier to make key assumptions that the insurance by AAA rated companies would hold up and that US housing values were not correlated to each other among a few other things. Why go any deeper when modeling a CLO to be sold to sophisticated investors who will valuie it anyway anyway? Especially when there was no historical basis to look at and say "gee something like this could happen". Except in the case of Paulson Synthetic CLOs were not created to be a direction bet or as a zero sum game, but to solve a problem of a lack of supply in a high demand market. Most of these people did and DO have strong ethical boundaries, they just didn't see 08 coming. That isn't to say there aren't examples of isolated groups who knew what they were packaging, sales desks who knowingly sold crap ect, but frankly that is always going on and it was the obliviousness of the industry as a whole that took it to crisis level. 

 

Many of the investments that "collapsed" promptly came back and were very profitable for their new owners (including the US government). This is actually one of the investments that sprang Ackman to the top. 

 

The financial crisis is actually a story of a snowballing of problems, poor self regulation and poor governmental regulations all coming together. It is also a story of decisive action against opposition by the Fed. 

 

401ks and fees are a different issue and generally a very different group of people. It drives me crazy to no end, although I've always opted for the lowest cost ETFs and made sure to meet the account minimums to have no management fees. My HSA is a different story though, they're basically thieves. 

post #10014 of 11163
Quote:
Originally Posted by MSchapiro View Post

It is true I inferred it. 

"big money" performing actions to me implied a coordinated action by a certain group to manipulate ratings agencies. Fair enough if this is not what you meant. 

I can go into minute details if you wish, it is simplified, as you said, to avoid a 7 minute diatribe no one understands.

I know people both at some of the banks and the ratings agencies at the time. It was easier to make key assumptions that the insurance by AAA rated companies would hold up and that US housing values were not correlated to each other among a few other things. Why go any deeper when modeling a CLO to be sold to sophisticated investors who will valuie it anyway anyway? Especially when there was no historical basis to look at and say "gee something like this could happen". Except in the case of Paulson Synthetic CLOs were not created to be a direction bet or as a zero sum game, but to solve a problem of a lack of supply in a high demand market. Most of these people did and DO have strong ethical boundaries, they just didn't see 08 coming. That isn't to say there aren't examples of isolated groups who knew what they were packaging, sales desks who knowingly sold crap ect, but frankly that is always going on and it was the obliviousness of the industry as a whole that took it to crisis level. 

Many of the investments that "collapsed" promptly came back and were very profitable for their new owners (including the US government). This is actually one of the investments that sprang Ackman to the top. 

The financial crisis is actually a story of a snowballing of problems, poor self regulation and poor governmental regulations all coming together. It is also a story of decisive action against opposition by the Fed. 

401ks and fees are a different issue and generally a very different group of people. It drives me crazy to no end, although I've always opted for the lowest cost ETFs and made sure to meet the account minimums to have no management fees. My HSA is a different story though, they're basically thieves. 

I appreciate the (ever more uncommon) intelligent response. I take you seriously because in your sig you're hustling, and that means something.

It's not manipulation with ratings agencies, it's collusion. Meaning jail time. As the movie said, if I don't the agency down the street will. The 'self regulated' sub-industry decided it was a menial risk, thinking they'd never get exposed in the assumptions behind AAA, so they fucked with the ratings. A wealth of unethical actors were, likely unbeknownst to other unethical actors, pulling 100s of market strings, and the aggregation of all these unethical people culminated in the collapse. Likely uncoordinated, definitely unregulated, and mostly unaware of each others expressions of the banality of evil. Yet real.

I disagree that most people have strong ethical boundaries. People tend to demonstrate ethics when they're being watched. Otherwise, they're mostly just pieces of shit. It's not just finance, it's with the people I hire, consult, and make deals with. If it wasn't for my overt observation, entropy theory would ensue as did in '08 with an SEC that remains neutered. Case in point is how Haim Bodek's whistle-blowing on HFT reached dead ears.

Bodek is a wonderful case in point about finance as a whole. Imagine a trillionaire bought up the 5,000 best surgeons on earth by paying them 20x their current salaries to operate on lab rats because he wished it. Enter trillionaire banks buying up all the math brains on the planet to make fractions of fractions of fractions of a penny off of mutual fund trades. Instead of our wish to understand the most fundamental questions of physics, they are shaving a quadrillionth of a second from a trade. Poop in toilet, and who flushes faster.

To my fundamental disagreement with your view: there are not isolated groups of actors packaging trash to unsuspecting buyers. It's an industry that has rather become based on it. Isn't it true that the value of derivatives in '08 were significantly more than the total assets on the planet? By nature derivatives are a multiplier, but in what universe does it make sense to create instruments worth more than can possibly be produced? Come on.

Back to the risk argument. Nobody believed housing could be vulnerable, but it was, and other asset classes will be again with the jaded mentalities of the people that operate, regulate and legislate these markets. The tech bubble was a Pop Warner example, the '08 stuff the NFL. Another derivatives bubble exists now because the behavior persists. Insiders know what it is because '08 facilitated identification.

To function as an actor within these volatile markets is to show restraint based on ethical values. It's too much to ask, and as a result it's rigged. My comment about 401k's wasn't tangential, while you classify them as a different group of people, I disagree. It's a sub-industry based on hidden fees that often takes 1/2 to 2/3s of a persons retirement saving profits directly into the pockets of the actors. Behind it you have a large group of actors rigging the system by hiding the TRUE costs of an asset, and engaging in behaviors like limiting an organization's 401k choices to a small number of fee-rigged funds. Banality of evil, pretend that it's not if you want.

Personally, I will never hand my money over to any form of manager. Nobody will value what I've managed to scrape together more than I will, and judging by the behavior of this industry, its almost impossible to imagine a scenario that someone will overcome all their self interest and outperform me.
post #10015 of 11163
Quote:
 I appreciate the (ever more uncommon) intelligent response. I take you seriously because in your sig you're hustling, and that means something.

 

I enjoy the discussion too. That also made me laugh.

 

Quote:
 It's not manipulation with ratings agencies, it's collusion. Meaning jail time. As the movie said, if I don't the agency down the street will.

That's how the movie said it went down, played by some old granny as a secretary for effect. In fact rating agencies tend to be hoards of young people and old, often as high tech as the banks they work with. That's not hear or there though.

 

It wasn't collusion. How did it happen? Because the agencies would hire an ex Goldman guy to come and build their models and run their pricing dept. Why did this guy leave an incredibly lucrative job in a booming sector at a top BB Bank? Generally because they were aging out after coasting near the bottom of their cohort for a while. In the time they traded CLOs none of the issues that would later blow up had ever really played a role, so it just wasn't built into the model. I can build a really simple CLO model if I assume away some of the risks which is pretty much what happened. No one even needed to collude. No one needed to be unethical. Events like 2008 had never happened before or been conceivable, so not need to model them.

 

Of course by late 2006 even certain teams at the banks started realizing what was going on. That is why Goldman didn't get hit so badly, but Lehman, Bear and Merrill did among other reasons. At that point it was beyond unethical. Especially the traders who packaged loans for Paulson to bet against. 

 

Quote:
 I disagree that most people have strong ethical boundaries. People tend to demonstrate ethics when they're being watched. Otherwise, they're mostly just pieces of shit. It's not just finance, it's with the people I hire, consult, and make deals with. If it wasn't for my overt observation, entropy theory would ensue as did in '08 with an SEC that remains neutered. Case in point is how Haim Bodek's whistle-blowing on HFT reached dead ears.

I agree that most people do not. Interestingly many of the people I worked with at a pricing service where so of the most ethical people I met. A handful had a direct hand at rating CLOs pre crash. Some were buying CLOs at Lehman. Some at Bear. That is where I get my insight from. 

 

The HFT case did not reach dead ears. It led to a $10M+ fine for not disclosing order types. Flash Boys, while extremely entertaining, was also dead wrong. In fact unlike the Big Short which simplified the situation into a typical Lewis narrative, its facts were total wrong. If you understand HFTs and how they actually work you can ever see Lewis accidentally disprove it in his book when IEX starts accepting orders. 

 

Quote:
 Bodek is a wonderful case in point about finance as a whole. Imagine a trillionaire bought up the 5,000 best surgeons on earth by paying them 20x their current salaries to operate on lab rats because he wished it. Enter trillionaire banks buying up all the math brains on the planet to make fractions of fractions of fractions of a penny off of mutual fund trades. Instead of our wish to understand the most fundamental questions of physics, they are shaving a quadrillionth of a second from a trade. Poop in toilet, and who flushes faster

That is a fundamental argument against capitalism and free markets. Besides people have been leaving academia for the professional world long before HFT came about. Those firms competing for seconds using switches are a very small part and frankly not the most sophisticated element of the HFT universe. 

 

Quote:
 To my fundamental disagreement with your view: there are not isolated groups of actors packaging trash to unsuspecting buyers. It's an industry that has rather become based on it. Isn't it true that the value of derivatives in '08 were significantly more than the total assets on the planet? By nature derivatives are a multiplier, but in what universe does it make sense to create instruments worth more than can possibly be produced? Come on

Yes and no, but it shows a lack of understanding of how derivatives are priced and the type of factual manipulation Lewis loves. 

 

Derivatives have a notional value and a market value. The notional value is the underlying amount. The Market Value is what it is worth. Many derivatives are also netted, i.e. one trade cancels another out so the net effect is much smaller than the outstanding contract values. 

 

For instance if I was a commercial business with $10B of debt that paid a floating rate on the debt and enter into a derivative contract with you so I pay a fixed 3% and you pay the floating. The notional value of the derivative is $10B, even though the exchange amount is only $300M per period and the NPV at issuance should be 0 for both sides. Maybe you decide you don't want the whole risk and then enter into a contract on $8B of the debt, you add another $8B to the notional pile. This has taken your exposure down to 20% of the original contract for you, but it actually adds to the value of the total outstanding derivatives. 

 

So why are the value of derivatives listed as the notional amount when in reality it makes no sense? Marketing. Derivatives used to be a small and unimportant market and the decision was made to use notional to make the market seem more important. So the number you cite has no real meaning. The derivatives themselves were never worth more than the total global asset value.

 

Not a perfect analog but if I counted every stock transaction that was open the size of the market would instantly triple since the US takes three days to settle stocks. It wouldn't increase the underlying asset values at all, but I could boast the increased amount. 

 

Quote:
 Back to the risk argument. Nobody believed housing could be vulnerable, but it was, and other asset classes will be again with the jaded mentalities of the people that operate, regulate and legislate these markets. The tech bubble was a Pop Warner example, the '08 stuff the NFL. Another derivatives bubble exists now because the behavior persists. Insiders know what it is because '08 facilitated identification.

That isn't true, plenty of people believed housing could be vulnerable. This was a direct part of the models. They believed housing was diverisifed by geography so that a downturn in one area didn't mean a downturn in another. This was part of why MBS were put together in the first place. For most of the historical US housing market it was true that this diversification existed. 

 

Little derivative trouble now exists, especially as more have been moved from OTC to exchange based, off balance sheet transactions have given disclosure rules and all risks are forced to be capitalized for by banks. Of course who knows what hedge funds are off doing. 

 

Quote:
 My comment about 401k's wasn't tangential, while you classify them as a different group of people, I disagree. It's a sub-industry based on hidden fees that often takes 1/2 to 2/3s of a persons retirement saving profits directly into the pockets of the actors. Behind it you have a large group of actors rigging the system by hiding the TRUE costs of an asset, and engaging in behaviors like limiting an organization's 401k choices to a small number of fee-rigged funds. Banality of evil, pretend that it's not if you want.

Asset Management is no sub industry, it is a Juggernaut. It is based on "hidden" fees for many players. AM was always fee based, it's only fairly recently that there are new alternatives that have made these fees redundant. Generally though the "true" cost is pretty clearly visible. My Fidelity 401(k) has no management fee and I am invested mostly in Vangaurd's low cost ETFs.

The 1/2-2/3rds of retirement savings done on John Oliver's segment was due to compounding interest over a lifetime, it's unlikely these high cost funds will persist even close to that long. It's also not taking into account that active managers can perform better in a downturn.

 

That said it is a fairly dirty industry since whoever decides how to set up the fund choices is corruptible. Some companies have a committee of volunteers, some just assign it to one or two people. Any time you have multiple layers between the end consumer and the provider bad things are likely to happen. 

post #10016 of 11163
To the extent the SEC is neutered, that's largely an intentional consequence of structural design. There are certain, limited things the agency can and does do well. But it's structutally hamstrung from being able to lead change - it can really only do what the political branches it empower it to do, and at best political will lags considerably behind real-time developments.

But I used to work there, so apply to my comments whatever bias discount you feel appropriate.
post #10017 of 11163
Quote:
Originally Posted by lawyerdad View Post

To the extent the SEC is neutered, that's largely an intentional consequence of structural design. There are certain, limited things the agency can and does do well. But it's structutally hamstrung from being able to lead change - it can really only do what the political branches it empower it to do, and at best political will lags considerably behind real-time developments.

But I used to work there, so apply my comments whatever bias discount you feel appropriate.

I've always found people at the SEC far smarter than people give them credit for, but in emerging fields how do you possibly attract talent that could earn 10x that and lead the way at a hedge fund?

post #10018 of 11163
Quote:
Originally Posted by MSchapiro View Post

I've always found people at the SEC far smarter than people give them credit for, but in emerging fields how do you possibly attract talent that could earn 10x that and lead the way at a hedge fund?
Well, I am (or at least was) primarily a litigator, so I didn't have to be as smart as many of my colleagues. Tell me who to sue and I'll load up my guns. But there are multiple answers to your questions. Sometimes it's the white hat/public service appeal. And as public service goes, the SEC pays less terribly than some other places. There's also the quality of life issue (even beyond what comes from feeling good about the work you do). Many of the folks there work very hard, but it's always because of the demands of the substantive work you're doing. Those late nights (or all nights) hurt a bit less when you're preparing for a big trial or trying to get an asset freeze before the ponzi schemer empties the accounts and flees the country than if you're just grinding to log billable hours.
And for many folks, it's a way of gaining experience and knowledge to advance their long-term career goals.
post #10019 of 11163
Quote:
Originally Posted by lawyerdad View Post

To the extent the SEC is neutered, that's largely an intentional consequence of structural design. There are certain, limited things the agency can and does do well. But it's structutally hamstrung from being able to lead change - it can really only do what the political branches it empower it to do, and at best political will lags considerably behind real-time developments.

But I used to work there, so apply to my comments whatever bias discount you feel appropriate.

My thoughts about them being neutered definitely don't relate to their skills or talent. I definitely don't think it's staffed with rejects from the DMV. You did in fact hit it on the head, the lag. And that lag is unfortunately often intentional. It's why Schumer is such a powerful senator, he brings in all that money and some might argue is an effective wall against implementing rational change in the face of real time situations.
post #10020 of 11163
Quote:
Originally Posted by MSchapiro View Post

It wasn't collusion. How did it happen? Because the agencies would hire an ex Goldman guy to come and build their models and run their pricing dept. Why did this guy leave an incredibly lucrative job in a booming sector at a top BB Bank? Generally because they were aging out after coasting near the bottom of their cohort for a while. In the time they traded CLOs none of the issues that would later blow up had ever really played a role, so it just wasn't built into the model. I can build a really simple CLO model if I assume away some of the risks which is pretty much what happened. No one even needed to collude. No one needed to be unethical. Events like 2008 had never happened before or been conceivable, so not need to model them.

So a rating agency's job is to rate an asset based on it's quality. These agencies are supposed to be a trusted source for judging that quality. We had an asset class that was packaged with lots of high risk mortgages, and so how did it slip the agency by that these were bundled in the asset? You seem to suggest it was happenstance, and that "mistakes were made". I tend to believe people in the ratings agency knew to some degree because ex-Goldman guys know Goldman guys, down the line where gossip circles eventually inform it. Everyone has been in a business situation of knowing something they shouldn't know, but their ass is covered so they move forward anyway, knowing full well something is wrong.

If there was in fact a golden halo around ratings agencies, then who packaged the loans? They had to know the math behind what was in them. Someone knew. Someone is responsible for fraud, or whatever legal characterization makes sense. It's impossibly naive to believe it was all based on happenstance, and that all the actors involved were being ethical. Somehow they packaged the shitbird together, and pop! Out comes a AAA rating? And then that happens over and over again? It borders on absurd, and my money is on them sitting around high-fiving e/o.
Quote:
Originally Posted by MSchapiro View Post

Of course by late 2006 even certain teams at the banks started realizing what was going on. That is why Goldman didn't get hit so badly, but Lehman, Bear and Merrill did among other reasons. At that point it was beyond unethical. Especially the traders who packaged loans for Paulson to bet against. 

Right, so this speaks to my original points on the topic... how is it that all of this unethical/illegal business took place and nothing was done? In Iceland, for example, many bankers were sanctioned, criminally prosecuted, etc. They went to the guys that prosecuted the S&L scandals for help. A whole host of people sit/sat in a real jail cell. Somehow Iceland could muster the evidence to prosecute but the US couldn't? Smells a lot like Hillary and what she recently got away with. Rigged system.

Until the US stops this bullshit of fining banks and starts jailing individuals, this will continue.
Quote:
Originally Posted by MSchapiro View Post

The HFT case did not reach dead ears. It led to a $10M+ fine for not disclosing order types. Flash Boys, while extremely entertaining, was also dead wrong. In fact unlike the Big Short which simplified the situation into a typical Lewis narrative, its facts were total wrong. If you understand HFTs and how they actually work you can ever see Lewis accidentally disprove it in his book when IEX starts accepting orders. 

Per above... another useless fine. I didn't read the book you mention, though I recall a guy getting pinned down pretty hard over it on CNBC about the BATS exchange's feed timing.

Quote:
Originally Posted by MSchapiro View Post

That is a fundamental argument against capitalism and free markets. Besides people have been leaving academia for the professional world long before HFT came about. Those firms competing for seconds using switches are a very small part and frankly not the most sophisticated element of the HFT universe. 

It's the same math brains modelling the more complex aspects of HFT, so my point stands.

Quote:
Originally Posted by MSchapiro View Post

Yes and no, but it shows a lack of understanding of how derivatives are priced and the type of factual manipulation Lewis loves. 

Derivatives have a notional value and a market value. The notional value is the underlying amount. The Market Value is what it is worth. Many derivatives are also netted, i.e. one trade cancels another out so the net effect is much smaller than the outstanding contract values. 

...

Not a perfect analog but if I counted every stock transaction that was open the size of the market would instantly triple since the US takes three days to settle stocks. It wouldn't increase the underlying asset values at all, but I could boast the increased amount. 

It's a very dangerous set of instruments, I wasn't trying to imply, for example, that a 100 share options contract now makes 200 shares out of nothing in the market.

So I understand how derivatives are priced and what they mean as an asset class. Yes I was manipulative with the idea that these assets were worth more on paper than all the worlds assets combined, but it served to expose the point about the dangerous exponential nature of this stuff, and how quickly it can spiral. 1 becomes 2 becomes 4, 8, 16... 256... 524288... 4294967296...

We saw what havoc is possible.

Quote:
Originally Posted by MSchapiro View Post

That isn't true, plenty of people believed housing could be vulnerable. This was a direct part of the models. They believed housing was diverisifed by geography so that a downturn in one area didn't mean a downturn in another. This was part of why MBS were put together in the first place. For most of the historical US housing market it was true that this diversification existed. 

Plenty is a relative term. I would consider it a very tiny few when you look at the larger landscape of people making up this industry.

Quote:
Originally Posted by MSchapiro View Post

Little derivative trouble now exists, especially as more have been moved from OTC to exchange based, off balance sheet transactions have given disclosure rules and all risks are forced to be capitalized for by banks. Of course who knows what hedge funds are off doing. 

I wouldn't be surprised if what is happening off books inside HFs totals an order of magnitude more than what is on the books. Perhaps the bubble I mentioned is actually here?

Quote:
Originally Posted by MSchapiro View Post

Asset Management is no sub industry, it is a Juggernaut. It is based on "hidden" fees for many players. AM was always fee based, it's only fairly recently that there are new alternatives that have made these fees redundant. Generally though the "true" cost is pretty clearly visible. My Fidelity 401(k) has no management fee and I am invested mostly in Vangaurd's low cost ETFs.
The 1/2-2/3rds of retirement savings done on John Oliver's segment was due to compounding interest over a lifetime, it's unlikely these high cost funds will persist even close to that long. It's also not taking into account that active managers can perform better in a downturn.

That said it is a fairly dirty industry since whoever decides how to set up the fund choices is corruptible. Some companies have a committee of volunteers, some just assign it to one or two people. Any time you have multiple layers between the end consumer and the provider bad things are likely to happen. 

Asset mgt is not, but the 401k industry is the sub-industry I was talking about.

In this respect markets are starting to work, but most of the 401k plans out there are pure garbage, and I disagree that these high cost funds won't persist for a long time. And it only helps those getting on the ladder now anyway because the guy that started in 1980 has seen the impact of the fee machine.

It's exactly the point of the 1/2-2/3 profit loss to to demonstrate a lifetime's losses. The actors here understand completely the compound nature of their fee suck, why not show it to the public?
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