Lots of people are staking out positions around (and mostly against) investor David Einhorn’s FT-reported anti-CDS musings in his latest investor letter. I agree with David in many ways – and his writing is as fun as usual – but I don’t accept all of David’s reasons (although I agree the ability to so directly influence the path to default can be problematic).
Two of my main CDS issues (which are fixable):
- They are congenitally under-reserved , which creates asymmetric risks.
- It is possible to write swaps (far) exceeding the notional value of the thing for which you are writing all the swaps. That’s … not good, like being able to create total policies far exceeding the value of a house, thus making it urgent to burn the house down as soon as possible.
Anyway, here is Einhorn’s original, followed by two takes on opposite sides:
- Einhorn against credit default swaps (FT)
- Ehrenberg: Deal with it Dave (IA)
- Yves: First, let’s kill all the credit default swaps (NC)
Feel free to find yet another position to stake out in comments.
I have a commentary piece on Marketplace this coming week arguing that the U.S. dollar must be allowed by Asian central banks to depreciate against more currencies than the Euro. All of the longstanding trade and flow imbalances cannot be funneled through a single currency pair without creating even more grotesque trade & debt distortions.
And, as Michael Pettis points out, if the exchange shift cannot be made to happen to escape the Chinese box of a renminbi loose peg, the imbalances will end up in political hands with worrying protectionist implications:
In that sense the refusal of Asian central banks to permit the needed appreciation of their currencies against the dollar may end up having the same impact on the adjustment process of the overvalued currencies. The 1930s seemed to show, according to the authors, that when their currencies could not adjust, countries became protectionist. So if the overvalued dollar cannot adjust except against the euro, and if the already overvalued euro has to bear the brunt of any further adjustment, will American and European politicians be forced into the “second-best” option of trade protection? No prizes for guessing what I think.
More here.
No idea how I missed this wonderfully inflammatory Paul Samuelson quote from a few weeks back, but it’s a contentious keeper:
Had John McCain won [the 2008 election], the present G.D.P. in the United States would have been even lower than it is now by more than 15 percent.
More here.
Some books I’ve been reading during my travels this week and that others might like – an eclectic list.
- Scroogenomics. The name more or less says it, but why you shouldn’t buy people presents for the holidays.
- The Great Cities in History. A lovely series of essays and meditation on what made great cities great through history.
- Boulevard of Broken Dreams. Josh Lerner’s new book on how government and venture capital should be kept far apart.
- Lords of Finance. I got stalled half-way through this many months ago, but finally finished it off this week. Probably my favorite book of 2009, and a lucid history of how central bankers nearly broke the world a hundred years ago.
- Denmark a global leader in wind power (FP)
- Companies lining up for IPOs (E&Y)
- Live Ships Map - AIS - Vessel Traffic and Positions (MarineTraffic)
- Prezi - The zooming presentation editor (Prezi)
- 18 truths: The long fail of complexity (ZDNet)
As readers know, I’m fascinated by volatility and our response to it. In capital markets a little volatility is important, and a lot is dangerous – it can result in things flying apart, with unpleasant financial consequences.
In sports it works the other way around. Too little volatility in results and sports is boring. A little makes things more interesting; and a lot can make something compulsively watchable.
I was thinking of this during the recent New York marathon. Yes, an American won, which was a nice change, but the other thing that happened was that result unpredictability continued to fall. The rolling ten-year standard deviation of winning times has been declining for some time, as the following figure shows:
Now, here is the same figure for the Boston Marathon (over a slightly longer period).
The Boston Marathon has consistently had higher volatility in its winning times than the Boston Marathon. Not only that, there has been a recent uptick in the results volatility, with the standard deviation trending up ward since 2004 or so.
We should expect declining standard deviations over time in these events, with the best athletes only differentiated by small-ish amounts of time. And that is, more or less, what is happening in the New York Marathon, but such is not the case – or at least hasn’t recently been the case – in the Boston Marathon.
Why is the Boston Marathon different? Good question. Before positing a few – hillier course, more Kenyans, etc. -- I’ll throw it open. Thoughts?
For a substantial portion of the American business and professional class, a book entitled "Life Without Lawyers" must surely conjure some of the same feelings evoked in faithful readers of the Harlequin romances, a sort of vicarious fantasy filled by the joy of liberation from burdens, strictures, and anxieties that have come to define quotidian existence. Such people are, in my experience, called clients.
Source: Charles N.W. Keckler, “Lawyered Up,” SSRN eLibrary (September 2009), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1467183.
Looks another W Hotel may be going into the L(oss) column. Joining the San Diego W, which defaulted on its loans this summer, may soon be the Manhattan Union Square W.
Debt backed by the W New York Union Square hotel in Manhattan, named by Conde Nast Traveler as one of the world’s top 500 hotels in 2005, may be at risk of going into default after the travel slump forced it to cut room rates.
The $115 million loan backed by the property, a landmark Beaux Arts tower at Park Avenue South and 17th Street, has a moderate risk of default “given the asset’s weak financial performance and declining hotel fundamentals nationally,” credit rating firm Realpoint LLC said in a report on Oct. 28.
Apparently being hip and expensive and debt-ridden is bad in a marketplace where debt is hard to get and people are cutting back. Shocker.
More here.
- Chaotic evolution defines the market economy (FT)
- Bloomberg.com may charge up to $1,000 a year for some web content (PaidContent)
- Spotlight on eastern European currencies and gold (Mish)
