The Eye of the Beholder - RnRF Reviews: The Big Short [movie]

I got to distract myself from this wretched referendum business tonight. Resurrecting the old “The Eye of the Beholder” review column seems like a good idea. 

So I watched “The Big Short” the other day. And I’m going to come right to the conclusion: it is funnier than it has any right to be and quite possibly more educational than one might expect. How so? Well, it manages to break down some of the more obscure and convoluted shenanigans of the world of banking into nice little bite-sized chunks that you can wrap your head around without getting all stressed about random terminology and auto-fellating acronyms. Nice! What’s more, those bite-sized chunks are presented in a way that is both shallow and endearing and totally captures your attention. Like when Margot Robbie explains the sub-prime bond market in bozo-language whilst sitting in her bubble bath, sipping champagne. Crude, but it works.

Dorks - Rockstars of Finance

Obviously just about all the characters are caricatures. The bankers are generally on the borderline between Slytherin-style group think and ‘greed-is-good’ Gordon Gekko infatuation (mind you, _that_ is pretty real). The wider industry is fully of has-beens, wannabes…generally sub-prime, really. The Hedge Fund guys are all really smart, oddball weirdos. With the smartest of them all basically displaying undiagnosed  Aspergers syndrome. But that doesn’t really matter, because it all works to propel the story forward. In an entertaining and understandable way. Which matters, because let’s face it, when did you last figure out you actually _wanted_ to spend two hours of your Saturday night trying to figure out how and why a fairly esoteric market for acronym-heavy derivatives contracts was essential to bring about the total and utter cluster-fucking meltdown of not only the US housing market, but basically the whole global financial world? Well, almost. But it was close. Anyway, the point is: this is fun and educational in one!! Also, for added bonus, the chief geek of them all - Neurologist turned hedge-fund manager Michael Burry - is a total metal-head and basically cranks Mastodon et al in his office while he is meditating on how the whole rotten edifice that is the sub-prime mortgage bond market will come crashing down. Forget the silly motion-picture soundtrack. Try to get a hold of the Michael-Burry-thinks-about-ARMs-resetting-as-trigger-for-the-financial-apocalypse playlist and you’ll do well with that. 

What you get is a funny - bordering on hilarious at times - ride through a world that is opaque, often maligned beyond sense and nonetheless crucial to the lives of gazillions of people without tooooo many figuring out how that is actually the case. At the end of it you might even walk away feeling a bit more enlightened about WTF went down in those crazily boring looking office buildings that financial institutions seem so fond of. And of course, the little guys win in the end. The smelly little secret you might forget by the end of the movie is that the rogues and outsiders, the little guys that ‘win’ against the banks by figuring out that the system is rotten and about to become unstuck aren’t that little to start with. These guys are all hedge fund managers. By all rational measures they are already at the top of the tree. They are worth tens of millions each where the story picks up. So be careful when you’re getting all excited about how they are taking on the man. They’re not exactly working in a coal mine. Fucked up? Yup!

That end note is a bit more depressing than I care for. How about we finish with that delightful segment where Margot Robbie Explains the mortgage bond market in a bubble bath:

See! Better already!!

“Fuck you, I won't do what you tell me!” - or why you might still want to listen to the experts…

One of the most excitingly neo-luddite statements to come out of this abominable Brexit debate was Gollum’s, I mean Michael Gove’s, recent pronouncement that “people in this country [that being the UK] have had enough of experts”. What’s wrong with that? Well, in fairness one might surmise that Rock’n’Roll Finance would be sympathetic to a little anti-authoritarian, anti-establishment swagger. Why not, right? Especially, if those pesky experts pronounce in near unheard of unison that your position is utter tosh! Never mind if they are right…

The problem here, is that the thrust of the argument is really a direct assault on _reason_! It’s basically saying: ‘Don’t listen to that laborious and complex line of argument that refutes what I’m saying, because I promise you unlimited free ice-cream!’ Not accepting a rational or empirical arguments because you don’t like them doesn’t really make you a buccaneering rebel. It makes you the pawn of whoever told to walk away from the argument and listen to mood music instead! By rejecting an ‘expert’s’ reasoned argument you are not sticking it to the man, but you are making yourself an idiot. You don’t like an expert opinion? Attack the premise! Challenge the chain of evidence! Review the data! Muster a counterargument! Above all, ENGAGE! 

Exchanging information and views in open debate is a fabulous way to make things work. To arrive a better solution a problem. 

Be the show! - Getting your inner nerd on is very rock'n'roll!

Of course, what really is infuriating about ‘experts’ is that their relevance is often a reminder that the problems they look at (their area of ‘expertise’ - get it?!?!) are complex. Getting to grips with complex problems or issues requires that one has to spend an inordinately large amount of time and effort trying to understand them and untangle them. Sadly that means you might find yourself on the blackfoot when dealing with a subject that requires more than just casual attention to fully appreciate. As it happens, these days that more often than not means just about everything worth thinking about in the first place. Does that make you angry? Do you feel marginalised because somebody might be better placed to make a judgement call on an issue that you? Well, then get yourself to the library, online, into a debating club or whatever else and buff up your kung-fu! In the words of the might Rob Flynn: 

The more the sense of ignorance

The more intense is the pain

Fix it! Get yourself educated! Don’t reject the ‘expert’, learn how to beat them! That, is Rock’n’Roll! That is when you can properly say "Fuck you, I won't do what you tell me!"

*Please crank up the volume*

Death is Certain ... and Taxes!!

Now, I haven't posted anything in a ages. Life kind of happened. Sorry. Let's move one, shall we?  

To get back into the swing of it I'll post a something of an old trope. But given the shockingly illiterate taxation 'debates' that are being thrown all over the air waves in the run up to the UK general elections this might be topical enough. 

Here's the (probably somewhat apocryphal) allegory of the day:

Suppose that once a week, ten men go out for beer and the bill for all ten comes to £100.
If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay £1.
The sixth would pay £3.
The seventh would pay £7.
The eighth would pay £12.
The ninth would pay £18.
And the tenth man (the richest) would pay £59.
So, that’s what they decided to do.
The ten men drank in the bar every week and seemed quite happy with the arrangement until, one day, the owner caused them a little problem. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your weekly beer by £20.”
Drinks for the ten men would now cost just £80.
The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free but what about the other six men? The paying customers? How could they divide the £20 windfall so that everyone would get his fair share?
They realized that £20 divided by six is £3.33 but if they subtracted that from everybody’s share then not only would the first four men still be drinking for free but the fifth and sixth man would each end up being paid to drink his beer.
So, the bar owner suggested that it would be fairer to reduce each man’s bill by a higher percentage. They decided to follow the principle of the tax system they had been using and he proceeded to work out the amounts he suggested that each should now pay.
And so, the fifth man, like the first four, now paid nothing (a 100% saving).
The sixth man now paid £2 instead of £3 (a 33% saving).
The seventh man now paid £5 instead of £7 (a 28% saving).
The eighth man now paid £9 instead of £12 (a 25% saving).
The ninth man now paid £14 instead of £18 (a 22% saving).
And the tenth man now paid £49 instead of £59 (a 16% saving).
Each of the last six was better off than before with the first four continuing
to drink for free.
But, once outside the bar, the men began to compare their savings. “I only got £1 out of the £20 saving,” declared the sixth man. He pointed to the tenth man, “but he got £10!”
“Yeah, that’s right,” exclaimed the fifth man. “I only saved a £1 too. It’s unfair that he got ten times more benefit than me!”
“That’s true!” shouted the seventh man. “Why should he get £10 back, when I only got £2? The wealthy get all the breaks!”
“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor!”
The nine men surrounded the tenth and beat him up.
The next week the tenth man didn’t show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important – they didn’t have enough money between all of them to pay for even half of the bill!
And that, boys and girls, journalists and government ministers, is how our tax system works.
The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy and they just might not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

I'm going to skip attributing this to anybody in particular, seeing that snopes has about long entry on how all the alleged geniuses that didn't come up with it are not real. I suspect that for those who understand, no accreditation is needed. And that for those who do not understand, no meaningful accreditation is possible.

And before you get your knickers in a twist about the details ("Those bloodsuckers at the top won't leave! We'll call their bluff!"): This is an allegory, not a fully quantified tax revenue analysis. The point is simple: If you beat up on the guys paying the most, even a small change in their behaviour can change the size of the pot by quite a lot. Just ruminate on it for a moment. 

Am wondering where to pick up the next thread and come up with something a touch more creative myself. Social justice nimbysm, basic numeracy (lack thereof!) in high office? Thoughts, anybody? 

Oh and before I forget! This is Rock'n'RollFinance, so here is your dose of awesome to mitigate the mind-numbing: Heino meets Rammstein meets YouTube - fucking deranged:

KISS – Keep it simple, stupid! Or: Derivatives, Models, Academics… and Tazers

Sorry, I’ve been away for a while. Too much to do, not enough sleep, etc. Which is a shame; after all there is an embarrassment of riches or rather topics to bitch about out there! In fact, part of the reason why I have not been more prolific lately is that I just cannot seem to keep up with what going on out there. Too many crises, acts of muppetry or reasons to gawk incredulously to even begin to gather my thoughts before the next one is up on the agenda. It’s stressful! Anyway, enough prevarication let us move on.

The first thing I have to do is to make sure that you understand that I DO NOT regularly (or even occasionally) read The Guardian. I strictly limit myself to articles and columns recommended to me by concerned friends. Thus I was confronted with a piece on the pitfalls of mathematical modeling in finance that was on the face of it actually reasonably well thought out. Please find aforementioned piece here. Shame, however, that in the end the author managed to not only conflate about three or four different problems that plague the world of finance but also missed out a number of glaring problems with the thrust of his argument and then finally came up with the weirdest and most hackneyed remedy to the mess we are in that only a dyed-in-the-wool materialist dialectic type Marxist who sadly doesn’t really understand Marx (or possibly did not read him to the end).

Right, so what are my points of contention?

Number one: Black-Scholes is not the all there is to financial modeling – Despite the somewhat excessive use of big names, a historical narrative that goes back to the beginning of the 20^th century mathematics and features super numerate Frenchmen and cryptic terms such as “Brownian motion” the Black-Scholes model is not really all there is to quantitative finance. In fact, it’s used for a very specific purpose, namely valuing options. And granted, therein lies a challenge. And it is open to abuse. And it can, if misused, bring about all manner of financial ruin. However, it didn’t really bring about the credit crunch all by itself (granted the author indemnifies himself a bit by phrasing the thrust of his argument in such a manner as to avoid stating that B-S [yes, funny(ish) acronym] is directly responsible for the credit crunch and merely “opened” the field, but the implication is pretty blunt). For that one needs all manner of other mathematical chimeras that defy easy comprehension: Gaussian cupolas, mean reversion theorems, VAR, Monte Carlo simulations, the list goes on and on. Just burrowing into the history of one particular type of financial modeling technique doesn’t really make for a comprehensive argument about the use of mathematical models in finance. Especially if that history is bereft of it’s proper context and leaves out a cautionary tale that is known industry wide. Which leads me to my next point.

Number two: Long Term Capital Management … Kaboom! Rather gamely, the author informs us, that the brains that developed the B-S formula (or rather the surviving part, seeing that Mr. Black passed away a before it could come to pass) were awarded the Nobel prize for economics in 1997. What he fails to mention is that Myron Scholes and Robert Merton (who didn’t author the model but refined it) basically lost their shirts when the investment company they co-founded – not overly prophetically named Long Term Capital Management – demonstrated the limits of the usefulness of their theoretical acumen by imploding. The fact that LCTM peaked and then died in 1998, the year following the award of the Nobel prize, does actually make me think that whoever is in charge of the universe does have a wicked sense of irony. At any rate, that story has been and remains a constant reminder for any option trader to not rely on B-S derived option valuations too much. I bet you; even the most illiterate option desk in the city has a copy of this book lying around somewhere.

John Meriwhether, Robert C. Merton and Myron Scholes as seen by themselves.

John Meriwhether, Robert C. Merton and Myron Scholes as seen by the financial industry.

Number three: Derivatives are not simply bets on bets – Another thing that really annoys me about that article is the obtuseness with which derivatives are simply described as “investments in investments, bets about bets”. I’d expect that kind of definition from a dreadlocked tramp at the Occupy camp outside St Paul’s, not from a Emeritus Professor of Mathematics at Warwick University and a Fellow of the Royal Society who has written over 80 books, and has won three gold medals for his work on the public understanding of science. With this standard of work, I do wonder who awarded those gold medals? Derivatives do cover a humongous range of different financial products, which across all different types do share one – and only one – characteristic: Their value is determined not intrinsically, but through observation of another, underlying asset. It is derived; hence the name derivative. And yes, they can be bets upon bets. But they are not necessarily so. To say so is a bit like asserting that hammers are instruments of murder. They certainly can be, but I’m not so sure that really comprehensively captures the essence of what a derivative is. To be fair, derivatives are a bit more complex than hammers. They also can wreak havoc on a larger scale. But the analogy does work. Oh, and please spare me the Warren Buffet comment.

Number four: More models are NOT the answer!!! – The single most mind-boggling thing about the whole article really is the conclusion. Namely, that the answer to the travails of the world of modern finance lies in an increase in the reliance on mathematical models. I’m not quite clear how the factually somewhat compromised but still largely coherent rant about the inadequacy and misuse of mathematical models in the world of derivatives finance leads to the conclusion that more rather than less emphasis needs to be put on developing ever more complex models. I mean, he does get one thing right: model abuse is at the heart of a rotten system. How that model abuse is remedied by use of more intricate (and by implication less well understood) models is beyond me. I daresay trying to make it more academic is not the answer. But then again, Emeritus Professor of Mathematics at Warwick University tactfully failed to mention that his esteemed and academically minded colleagues’ venture into the world of finance did end with a bang and not a chest beating roar of triumph. Personally I think finance should be run more like Tazerball:

And I think next I’ll try and write something about pirates!

The Final Countdown; or The dumbness of number quoting and the end of the occident

Europe - BEFORE the crisis!

Just a quick illustration of the general dumbness of the number quoting that is rather rampant in all manner of media items these days: One of the most popular number quoted to illustrate that the end of western civilisation is nigh, is the fact that in the last 18 months no less than five elected governments in Europe have been swept aside. The common assertion being that this indicates that popular unrest is rampant across the continent and that the political elites which have hitherto driven the EU project seemingly no longer can keep a lid on their long suffering, disenfranchised and alienated populations. Now, that may well be the case. Nevertheless, those five governments tapping out really don't conclusively support the argument that this is the height of crisis. For the record: I totally agree, that the situation in Europe is a little dicey. But to be brutally honest, if one takes the 17 Euro countries with electoral cycles that typically are around 4-5 years then 5 changes of government are pretty much exactly the number I would expect to take place over an 18 month period. More, if you are widening your sample size to take in all (27) EU member states. Not saying that there isn't any turmoil and the causes for those government changes were not linked to the whole Euro/debt mess. But the numbers don't actually tell us that. Numbers don't automatically proof a point! Never mind...details...why would anybody care...

The Eye of the Beholder - RnRF-Reviews: Lulu

No, it doesn't get less depressing.

First: No, it's not Master of Puppets part two. If you are one of those dyed-in-the-wool-total-bonehead-let-it-be-1986-again die-hards who just cannot cope with Metallica not trying to record the same album for the 17th time, then this record is not for you. Stop reading this and go back to trying to fit into your black stretch jeans. Second: I'm not liable to give you a truly unbiased account of this. I love Metallica. I even managed to find something (very little) vaguely redeemable in the mess that was Garage Inc. So don't expect me to go all high-brow and read a yard of Brecht before I go and comment on the somewhat anxiously awaited collaboration between Metallica, the royalty of all things metal, and Lou Reed, erstwhile frontman of cutting edge art-rock wonder Velvet Underground and by now probably one of the gnarliest and moodiest bully-brains on stage.
Talking of anxiety: I had been anticipating the arrival of 'Lulu' with a barely contained sense of dread since from when I first learned about the collaboration effort between the (by now slightly ageing) gods of thunder and the (yet even older) undisputed king of sexually inspired misery poetry. What good could possibly come of that? I wasn't heartened after the first bunch of reviews. At best there seemed to be a sense of confusion and incredulity mounting in the open minded. Outright disbelief and scorn from traditionalists on both side of the marriage. And howls of incomprehension from the rest. Not exactly a good sign.

All in all, somewhat unexpected.

Strangely enough, however, I kind of like this album. Don't get me wrong, it's not exactly the kind of aural energy drink equivalent you listen to on the way to the office to get pumped up before a particularly beastly client meeting. It's more of a soundtrack to an evening with a bottle of wine, a gripe about political incompetence in the Eurozone or the inversion a CDS curve and the time to turn it into a blog post. It's not an entirely sane affair. It does name-check both Boris Karloff and Klaus Kinski in the first song. And it kind of relegates one of the world's most dominant and charismatic rockbands to a supporting ensemble to an expert in bitterness. Except that that supporting ensemble occasionally coalesces into a menacing snarl that reminds you that it  _is_ Metallica that is hanging back in the wings. What it does have is tension and latent violence that sometimes comes close to the surface. Like a fanged octopus-monster rising to the surface of a muddy lagoon...while some demented shaman is howling it's name in some Lovecraftian un-language. And a palpable sense of disappointment that is what the music is about. Not what it is!
So would this discerning critic recommend it to you? Not if you are looking to stuff something entertaining onto your iPod. To be honest, this is probably best listened to at home, on your own, when you are sufficiently misanthropic to start with. And bear in mind that I actually wanted to like this. I'm sure you can find plenty of reasons to find this underwhelming. But if you are ready to accept that jaded millionaire rockstars can sometime actually strike gold in their (often misguided) search for a new experience, rather than turn into Iron Maiden / a circus act, then this might actually work for you. Just don't expect to feel chipper afterwards.

My Childish Pleasure: Milestones, Satan and big(ish) numbers!

Woe to you Oh Earth and Sea
for the Devil sends the beast with wrath
because he knows the time is short

Let him who have understanding

reckon the number of the beast

for it is a human number
its number is six hundred and sixty six.

A pretty pathetic reader count...but it still made my day!