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Noteworthy News – April 14, 2014

Economy:

The world economy may well be stuck in neutral for years – Telegraph

Wage increases overtake rent rise for first time since 2009 – Telegraph

Occupy was right: capitalism has failed the world - Guardian

 

Markets:

Stocks Stumble, but Hope Lingers - Wall Street Journal

Why the bulls will be raging ahead - CNBC

Losing Interest – Project Syndicate

How Global Debt of More Than $100 Trillion Is Threatening Your Portfolio – Yahoo! Small Business Advisor

Politics:

UN: ‘Massive shift’ needed on energy – BBC

Why Are Liberal Cities Bad for Blacks? – Bloomberg

Total Taxes on Wages Are Rising – New York Times

Top economists warn Germany that EMU crisis as dangerous as ever - Telegraph

Banks:

The Global Banking Game Is Rigged: The FDIC Is Suing - LA Progressive

The SEC’s just been caught colluding with the banks it’s supposed to regulate - Vox

Greece’s Eurobank gets green light for 2.9 billion euro share issue - Reuters

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Posted in Economics, Markets, Media, Politics.


How High Will Vol Go?

One rule that is easy for me to state is that market volatility breeds more market volatility.  The question is not whether there is something to worry about, but just how badly you should worry about it.  If you look at historical daily stock returns, it is very difficult to find a rule of thumb about “-3% days usually come after +1% for 4 days…” but it is a truth that the past month of market volatility has a predictive power of 65-75% R-squared relative to the next month of market volatility.

After a 30%+ equity return in 2013, everyone should be questioning when the music stops, not if.  These same investors should also question just how bad this lack of chairs could get.  If you lived through the questioning of 2005/2006, you probably know how much ignorance was embedded in market assumptions.  At this point in time you look at the numbers and say that we are too smart (based upon past experience) to let it happen again.  The one really dynamic factor that most investors ignore is the marginal dollar of investment that tips the gains/losses in one direction or the other.  In the housing bubble in the United States it is (currently) easy to see that easy money going to the housing market bubble was the key factor in the destruction that ensued.

With the slowdown in Chinese (government manufactured) measures of growth, I think it is important to question the dollar amounts in China versus the United States:

US vs China Bank Assets

None of us will know where the next bubble is directly coming from, but I think it is wise to question every gift before you become complacent.

Posted in Economics, Markets.


Pricing Asian Options

The Asian option payoff depends on the average price of the underlying asset over a specific period of time.  The expected payoff of an Asian option is less than the expected payoff of a European option and is therefore much cheaper.  On the plus side, the Asian option takes away some of the point of time risks embedded in European options and allow for more stable payoffs.

The payoff of an Asian option simply replaces the expiration price with the average price:

Asian Option Payoff

The problem with Asian options (and most exotic options) is that the option price cannot be calculated by simply plugging numbers into the Black-Scholes equation because the payoff depends on the path that the stock price takes until the maturity of the option.  The first way to calculate the price is to use a binomial or trinomial tree, but the speed of computers and flexibility of implementation has made monte carlo simulations the more practical method for pricing.

For those of you who are interested in learning how to price an exotic option using Monte Carlo simulations, I have produced an excel spreasheet with modifiable code that is for sale:

Asian Option Pricer

 

 
Price Arithmetic and Geometric Asian Options with Monte Carlo Simulations through an Excel VBA Macro.



 

Posted in Derivatives, Educational.

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Noteworthy News, April 7, 2014

Economy:

How to get Americans back to work - Reuters

260,000 graduates in minimum wage jobs – CNN Money

Sign of Spring on Pay: Real Wage Growth – New York Times

Even Small Medical Advances Can Mean Big Jumps in Bills – New York Times

The 17 Contradictions of Capitalism - London School of Economics and Political Science (David Harvey)

How the Rich and Poor Spend Money Today—and 30 Years Ago – Atlantic

Markets:

Dark Markets May Be More Harmful Than High-Frequency Trading - New York Times

High-frequency traders can’t front-run anyone – CNBC

Sentiment in government bond market turns bearish – Economic Times

Politics:

Central banks will be financing governments on a permanent basis - Economist

Fed likely to keep tapering after US gains 192,000 new jobs in March – Guardian

Banks:

China regulator to require bank stress tests - Reuters

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Posted in Economics, Markets, Media, Politics.


Where True Wealth Resides

Statistics are always fun for politicians because they can be manipulated to seemingly portray the message that they would like to relay to the broader public.  The message or prolific meme of the election cycle and “Occupy Wall Street” movement was the “The Top 1% are grossly overpaid and should share more the burden”.  Dig into the statistics a little bit and the message is quite different.

The income of the top 1% is stagnant in comparison to the top .1% and .01%:

Screen Shot 2014-03-29 at 9.23.25 PM

The share of wealth of the top 1% could even be called stagnant compared to the super rich:

houseofdebt_SaezZucman21

In the statistics, the averages of the 1% are skewed by the outlier readings of the .01%.  Buffett will continue to state that taxes on the top 1% should be raised, because they will not impact him because he doesn’t take a salary – he just rides his increase in wealth through increase share price of his stock ownership.  The only political fix to the quadrupling of wealth ownership of the top .01% is to place a small tax on total wealth (above a high hurdle) which would reduce the amount of tax evasion achieved by the top .01% by owning companies and lowering their amount of wealth treated as taxable “income”.

Article: Atlantic

Posted in Economics, Politics.




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