Category Archives: Finance

Uneasy about Quantitative Easing

Quantitative Easing is a method of artificially injecting money into an economy. In the US, this occurs when the Federal Reserve creates money out of thin air and uses it to purchase US Treasury Bonds. This is done in order to raise the price of Treasuries, thereby lowering their yield. A lower yield on US Treasuries will drive interest rates lower across the board and, if all goes as planned, will spur increased lending and economic growth.

However, this practice has been widely criticized by foreign leaders. Because Quantitative Easing devalues US Treasury holdings in foreign countries, these same nations may be more reluctant to purchase US debt in the future. That would be a big problem for the world.

If you can look past the overtly doom-and-gloom attitude prevalent on the site, Zero Hedge gives a very nice overview of this issue.

I see the outcomes are almost binary: either this works or it doesn’t.

If this gamble works, business will pick up, unemployment will drop, tax revenues will flow again to the states and federal government, the sun will continue to rise in the east and roses will bloom in the spring.

If the gamble fails? There we can envision an enormous devaluation event for the US dollar and the Fed having to choose between defending the dollar (via rising interest rates) or preventing the federal government from a fiscal emergency brought about as a consequence of rising interest rates. And by “fiscal emergency” I mean being forced to slash expenditures by as much as 50% in order to service rapidly escalating interest carrying costs on the short term portion of the fiscal debt load.

As you can see, I’m uneasy about Quantitative Easing.

High Frequency Trading

One of my new side-interests is the phenomenon of High Frequency Trading (HFT) that has taken hold of world financial markets in the last half-decade. HFT is a subset of Algorithmic Trading, the practice of allowing a computer program to place market orders based on current market conditions as well as a pre-determined strategy. Market making and statistical arbitrage are two of the general strategies employed for this purpose.

However, HFT takes algorithmic trading to a whole new level. Proprietary trading firms now use custom software to make millions of split-second trades per day. In fact, analysts believe that HFT comprised 73% of all trades in 2009. Wow. That’s quite the feat in an industry where just decades ago all trades were placed by actual human beings waving their arms around [see].

Of course, I look at this topic and see an excellent computer science problem (didn’t see that one coming did you?!). How do you reliably execute trading strategies in an environment where milliseconds of latency can cause millions of dollars in profits to swing to your competitors? By co-locating your servers as close as possible to those that process market orders, that’s how. By paying computer engineers millions of dollars to¬† squeeze every ounce of performance out of server operating systems. And the list goes on. In fact, I’ve read that Goldman Sachs has a internal department dedicated to finding and leasing valuable datacenter space close to electronic financial exchange centers such as those in northern New Jersey. Do you think the founders of Goldman ever envisioned that their firm would be interested in thousands of square feet of windowless, freezing-cold computer rooms?

The net result of all this effort is that HFT makes investment banks and proprietary trading firms billions of dollars per year in profits. However, the debate over whether HFT is good or bad for individual investors rages on. Some claim that it provides necessary liquidity to the markets while others believe that HFT simply causes prices to be more volatile than ever before.

Regardless of the answer, consider my mind blown.

House of Cards

More and more I’ve been intrigued by the powerful people in the US (and global) financial sector who have control over the world’s assets.

The book House of Cards tells the story of the collapse of Bear Stearns, the New York investment banking and brokerage firm that went under in 2008 due to the sub-prime mortgage fiasco.

House of Cards describes in detail the incredibly headstrong personalities of Bear’s senior leaders. The author, William Cohen, recounts the numerous feuds between one-time CEO Ace Greenberg and his successor Jimmy Cayne. I would find myself thinking, “Do these guys really work for the same firm?”

I guess that’s what it takes to survive in an industry where indecision and mistakes can cause anyone to lose a fortune in seconds. Despite being a major player on Wall Street for over 80 years, Bear Stearns did not make it.

I Will Teach You To Be Rich

I’ve been following Ramit Sethi’s I Will Teach You To Be Rich blog for some time now. He has since come out with a book that includes most of his blog material. Ramit targets those aged 20-30 and takes a no-nonsense approach to saving, spending, and investing. The book centers around a 6 week program designed to automate and optimize your finances. Definitely take a look at the blog — I’ve found his strategies to be extremely helpful.