Month: October 2011

Will China soon have a trade deficit?

China may see its first annual trade deficit for two decades next year, Wei Jianguo, former vice-minister of commerce, said.

September and October are traditionally the peak time for contracts ahead of the festive season in Europe and the United States but demand is sharply down this year, he said.

“China’s export-reliant enterprises are facing their toughest time in years. The possibility of a full-year trade deficit cannot be ruled out next year,” Wei, secretary-general of the China Center for International Economic Exchanges, a government think tank, told China Daily.

The article is here and I thank Mark Thorson for the pointer.

So much for cheap housing the culture that is Fairfax

A zoning board in Fairfax County, Va., is standing firm in its decision to order a war veteran to destroy a tree house he built for his two young sons.

County officials determined Mark Grapin, an Army aviation specialist, violated zoning regulations when he built a tree house in his backyard.

“The boys wanted a tree house,” Grapin told Fox News Radio, explaining it was a promise he made to his 8-year-old and 10-year-old sons before he left for Iraq. “It was a commitment I made to the boys and, frankly, we should do our best to keep our commitments to our children.”

There is more here and thanks to Rob Nelson for the pointer.

A point of light

The Obama administration moved Tuesday to roll back a number of rules governing hospitals and other health care providers after concluding that the standards were obsolete or overly burdensome to the industry.

Among other things, the proposals would allow hospitals to save money by sometimes using qualified nurse practitioners and physician assistants in place of better-paid doctors, allowing doctors to focus more on patients and helping address “impending physician shortages.”

Here is more.  Had I been President, this would have been one of my priorities from day one.

*Grad School Rulz*

Let’s turn the mike over to Bryan Caplan:

Fabio Rojas’ pearls of wisdom for grad students are now available as a concise, information-packed $2 e-book.  Definitely worth the money if you have any noticeable interest in grad school.

I have yet to read this book, but Alex and I both love Fabio, who has been a frequent MR guest-blogger in the past.  He also has excellent taste in jazz.

“Theoretical question relating to life on other planets”

That was the email heading from Nick Mann a week or so ago.  Nick asked:

If humans saw strong signs of life on Mars when telescopes became powerful enough to detect it (1800’s?), how would’ve that impacted our economic space priorities? Would’ve we already have sent a manned mission there? Does it matter what stage the life was in (i.e. seeing villages & dirt roads vs glowing metropoli)?

I will predict a one-way mission to Mars, sent in the 1980s, but not too much earlier.  For one thing, Mars is far away (duh).  The moon shot already took quite a concentrated effort, and it is hard to imagine it being started before the 1950s, given earlier missile technology and the like.  World War II already gave associated technologies a big boost, large relative to the likely effect of Mars-gazing on the political equilibrium for everyday science funding.

Ask a comparable question about today.  Let’s say we could identify a distant planet as having intelligent life, or likely to have intelligent life.  How much would the budget of NASA go up?  Not enough to make a huge difference in the short run I suspect.  It already seems there may be not-very-intelligent life on Mars (though don’t forget the slime mold, maybe the Martians are smart), and possibly something of interest on some moons of Saturn and Jupiter, and yet we are dismantling NASA’s space efforts.

If you wish to argue this the other way around, both voters and politicians up through the 1960s seemed to have a much more “can do” attitude about large science projects than they do today.  As Peter Thiel mentioned recently, is it not odd — and bad — that we refer to ourselves as “the developed nations”?

Sentences to ponder

Support for redistribution, surprisingly enough, has plummeted during the recession. For years, the General Social Survey has asked individuals whether “government should reduce income differences between the rich and the poor.” Agreement with this statement dropped dramatically between 2008 and 2010, the two most recent years of data available.  Other surveys have shown similar results.

…the change is not driven by wealthy white Republicans reacting against President Obama’s agenda: the drop is if anything slightly larger among minorities, and Americans who self-identify as having below average income show the same decrease in support for redistribution as wealthier Americans.

Here is more.  The researchers, Ilyana Kuziemko and Michael I. Norton, attribute this to “last place aversion,” namely the desire to always have someone below you in the income pecking order:

Which group was the most opposed [to an increase in the minimum wage]? Those making just above the minimum wage, between $7.26 and $8.25.

For the pointer I thank The Browser.


The price of Bitcoin continues to drop by about a dollar every week to ten days, currently settling at about $2.80 USD, and Bitcoin enthusiasts are starting to get worried. “I am not trying to cause a panic here, but the value of Bitcoin has dropped very low today with huge spikes,” one user wrote on the Bitcoin forum on Reddit. “I do suspect it will hit 1 USD mark this week maybe even lower.We need to be discussing thoroughly on promoting Bitcoin and actively putting more effort to spread the message to newer users as I do suspect the popularity is dropping very steeply too.”

Here is more, thanks for the pointer to numerous folks on Twitter.

Ilya Somin on Israeli signaling (markets in everything)

Ilya writes:

Various commenters on this and my previous post on the same subject claim that the Israeli government had to do this in order to send its citizens a “message” about how much it valued their lives and was willing to pay a high price to save them. But if these deals lead to the deaths of far more innocent Israelis than they save, the real message sent will be exactly the opposite: that the government is willing to make a large net sacrifice of innocent life in order to gain short term public relations benefits or a short-term boost in national morale. It’s possible, of course, that Israeli public opinion is myopic enough that they will think that the government is saving life despite the fact that it is actually sacrificing a much larger enough of innocent lives. If so, there could be a more permanent and substantial boost in national morale. Even then, it will probably fade as public attention shifts to other issues. In any event, it’s not worth the sacrifice of numerous innocents and the creation of perverse incentives for terrorist groups.

Link here.  I don’t know whether this exchange is a good idea, but Ilya is possibly underrating the power of signaling models.  It is precisely the fact that that Israeli government will trade for this single life, even apart from whether it is instrumentally rational, that sends the relevant signal.  The less “rational” the act, the more potent the signal of concern, and in this case the possible irrationality is stochastic, not certain.  Perhaps one must take a stand for the single, identifiable life in question; Hollywood rescue movies accept this meme and they face market tests all the time.  Doesn’t the starship captain go back down to save the one life, even though it may place the entire ship in jeopardy?  “That’s what makes us human, Bones,” while Spock raises the eyebrow, etc.

One can also read the Israeli government as signaling (correctly or not) that it has the power to prevent or at least limit future kidnappings.  It is an expression of strength, or at least a belief in strength, and citizens seem to like that signal from their leaders.  It also may allow governments to perform other (efficient) acts which involve offsetting signals of weakness.

That said, Ilya’s comments indirectly raise an issue in signaling theory: where does salience come from?  Why is “one person” the relevant unit of concern for the Israeli citizenry here?  There are plenty of simple answers, but most of them beg the question and of course one person is often considered quite disposable in other contexts, especially military.  It also would not suffice to get just a month of freedom for him.  Yet neither is the deal insisting that more than this one soldier be delivered.

If you haven’t already, I recommend that you all read David Grossman’s splendid To The End of the Land.

More on High Frequency Trading and Liquidity

Tyler is more optimistic about financial innovation than I am. Strange, but true. I recommend Andrew Haldane’s speech, The Race to Zero, on high frequency trading (HFT). Haldane is Executive Director for Financial Stability at the Bank of England and his speech is eminently quotable. First, some background from Haldane:

  • As recently as 2005, HFT accounted for less than a fifth of US equity market turnover by volume. Today, it accounts for between two-thirds and three-quarters.
  • HFT algorithms have to be highly adaptive, not least to keep pace with the evolution of new algorithms. The half-life of an HFT algorithm can often be measured in weeks.
  • As recently as a few years ago, trade execution times reached “blink speed” – as fast as the blink of an eye….As of today, the lower limit for trade execution appears to be around 10 micro-seconds. This means it would in principle be possible to execute around 40,000 back-to-back trades in the blink of an eye. If supermarkets ran HFT programmes, the average household could complete its shopping for a lifetime in under a second.
  • HFT has had three key effects on markets. First, it has meant ever-larger volumes of trading have been compressed into ever-smaller chunks of time. Second, it has meant strategic behaviour among traders is occurring at ever-higher frequencies. Third, it is not just that the speed of strategic interaction has changed but also its nature. Yesterday, interaction was human-to-human. Today, it is machine-to-machine, algorithm-to-algorithm. For algorithms with the lifespan of a ladybird, this makes for rapid evolutionary adaptation.

Consistent with the research cited by Tyler, Haldane notes that bid-ask spreads have fallen dramatically.

Bid-ask spreads have fallen by an order of magnitude since 2004, from around 0.023 to 0.002 percentage points. On this metric, market liquidity and efficiency appear to have improved. HFT has greased the wheels of modern finance.

But at the same time that bid-ask spread have decreased on average, volatility has sharply increased, as illustrated most clearly with the flash crash

Taken together, this evidence suggests something important. Far from solving the liquidity problem in situations of stress, HFT firms appear to have added to it. And far from mitigating market stress, HFT appears to have amplified it. HFT liquidity, evident in sharply lower peacetime bid-ask spreads, may be illusory. In wartime, it disappears.

In particular, what has happened is that stock prices have become less normal (Gaussian), more fat-tailed, over shorter periods of time.

Cramming ever-larger volumes of strategic, adaptive trading into ever-smaller time intervals would, following Mandelbrot, tend to increase abnormalities in prices when measured in clock time. It will make for fatter, more persistent tails at ever-higher frequencies. That is what we appear, increasingly, to find in financial market prices in practice, whether in volatility and correlation or in fat tails and persistence.

HFT strategies work across markets (e.g. derivatives), exchanges, and stocks and can have negative externality effects on low frequency traders. As a result, micro fat-tails can become macro fat-tails.

Taken together, these contagion channels suggest that fat-tailed persistence in individual stocks could quickly be magnified to wider classes of asset, exchange and market. The micro would transmute to the macro. This is very much in the spirit of Mandelbrot’s fractal story. Structures exhibiting self-similarity magnify micro behaviour to the macro level. Micro-level abnormalities manifest as system-wide instabilities.

For these reasons I am not enthusiastic about innovations in HFT. Earlier I compared high-tech swimming suits and high-frequency trading:

High-tech swimming suits and trading systems are primarily about distribution not efficiency.  A small increase in speed over one’s rivals has a large effect on who wins the race but no effect on whether the race is won and only a small effect on how quickly the race is won.  We get too much investment in innovations with big influences on distribution and small, or even negative, improvements in efficiency and not enough investment in innovations that improve efficiency without much influencing distribution, i.e. innovations in goods with big positive externalities.

Gulf States fact of the day

A dramatic fall in traffic accidents this week has been directly linked to the three-day disruption in BlackBerry services.

In Dubai, traffic accidents fell 20 per cent from average rates on the days BlackBerry users were unable to use its messaging service. In Abu Dhabi, the number of accidents this week fell 40 per cent and there were no fatal accidents.

On average there is a traffic accident every three minutes in Dubai, while in Abu Dhabi there is a fatal accident every two days.

There is more here, hat tip goes to @TomStandage.

From yesterday’s New York Times

They are experimenting with different models of human behavior, here is from Modern Love:

At first his behavior was endearing. He constantly gave me attention, lavishing me with compliments, calls and sometimes gifts. But one morning when I slid out of bed from next to him, things felt different. All his wooing suddenly repelled me.

I crawled back in and tried my best to pretend things were O.K. He showered and dressed. I clenched my teeth when it was time to kiss goodbye, then shut the door behind him, sighed and wondered if he had any idea.

We learn from this same column that butterflies can see with their genitals.  And from the NYT Sunday Magazine, here is a Death Row love story:

“I knew you were going to say your favorite color is blue,” he wrote. “It belongs to you. My favorite colors are black and crimson. I love deep, dark red things made of red velvet.”

Markets in everthing

Mr. Weston says he is always on call; his Bluetooth earpiece comes off in public only when he goes to the barber for his weekly $16 trim. His cellphone, he says, holds the numbers of some 100 potential lineup fillers, mostly friends and acquaintances from the Mill Brook Houses, the public housing project in the South Bronx where he has lived most of his life.

He often complains about how people hound him for the chance to make a few dollars through lineup work.

“I can’t even play basketball on the courts or sit here and drink a beer,” Mr. Weston said on a recent afternoon. “People are always asking me if there is a lineup.”

And this:

Detectives often find fillers on their own, combing homeless shelters and street corners for willing participants. In a pinch, police officers can shed their uniforms and fill in. But in the Bronx, detectives often pay Mr. Weston $10 to find fillers for them.

…But Mr. Weston points out that he has never failed to produce lineups when asked, no matter what time of night.

“I never say no to money,” he said.

The article has several other interesting features, and for the pointer I thank Daniel Lippman.

Does algorithmic trading improve liquidity?

From Terrence Hendershott, Charles M. Jones, and Albert J. Menkveld, I am a little slow reporting on this paper:

Algorithmic trading (AT) has increased sharply over the past decade. Does it improve market quality, and should it be encouraged? We provide the first analysis of this question. The New York Stock Exchange automated quote dissemination in 2003, and we use this change in market structure that increases AT as an exogenous instrument to measure the causal effect of AT on liquidity. For large stocks in particular, AT narrows spreads, reduces adverse selection, and reduces trade-related price discovery. The findings indicate that AT improves liquidity and enhances the informativeness of quotes.

Here is also the Kirilenko paper, both are discussed here.  I have not had time to read and assess these, but since I’ve covered the topic before, this brings you more up to date.