Wealth of nations

Looking at how the EU continues to struggle has made me wonder at the future of nations.  What will nations look like in a century?

Looking backwards -- nations increased their wealth by territorial expansion in the Middle Ages.  That continued with centuries of imperial domination of smaller nations.

By the 16th-17th century, a nation's wealth was measured by the size of its gold holdings. The mercantilist era favored gold over the more illiquid holding of land.

During the industrial era, a nation's value changed to be defined by its manufacturing. How much coal it mined, or how much steel it made, became more important than how much gold it had stored in its vaults.

For the last century, national wealth was directly linked to how its currency was

traded across the world's markets.

The USA gained enormous status when the dollar was accepted as the de facto currency after WW1 hurt the Pound, Franc, Mark. etc. And the devastation of Europe in WW2 gave the USA and the dollar enormous strength.

Now after decades of Keynesian banking, massive national debts have piled up for every nation.  What's next?

For the EU, the next step might be negative interest rates.  This was tried in a small way last year and the EU is currently limited by a "zero-bound" in pushing more gov stimulus via QE-style tricks.

Mario Draghi seemed to say this week that the ECB would take the next step to try to inflate the euro.  Like the US's Fed, the ECB has been printing lots of money but the huge influx of money hasn't sparked a recovery. The monetary pumping has failed.  Only central bankers complain about "too low" interest rates.

I think that if the ECB goes to a policy of negative interest rates, then lots of money now in EU banks will move out to other nations, most likely the USA and China. And the EU's euro will decline in power as an international currency.

3 Rules of Life

[Yep, the topic is ambitious and a bit pretentious, but what the heck.]

Rule 1: Life is uncertain
Multiple outcomes are possible everyday for everybody.  Some are good; some are bad.

This sounds obvious and trite.  Some people minimize the feelings caused of not knowing what will happen next by ignoring the uncertainties, by focusing on only one possible outcome, or by rejecting the uncertainties through a lifestyle without changes.

Rule 2: Uncertainty is probabilistic
Not al outcomes are equally likely.   Some are nearly 100% likely to happen. Will the sun rise tomorrow? Some are nearly 0%. Will you be hit by a falling piano? The hard cases are the ones in the middle. Will you get sick? Will you receive a telephone call?

All of the possible outcomes can be ranked by likelihood. However the ranking is difficult because people are poor at assigning probabilities. We have biases and our thinking is often faulty.  We confuse risks with probabilities.  Low-probability events with huge results are often viewed as more likely than high-probability events with small results.  People worry more about an earth-shattering asteroid (very low probability, but with fatal results) than stubbing your toe (higher probability, but a recoverable injury).

Uncertainty is often not independent.  Events might be chained.  A Bayesian logic might apply. One thing does lead to another.  Increasing one uncertainty, such as speeding in a car, can lead to other uncertainties.

Rule 3: The rules change
Even recognizing the inherent uncertainty of life and understanding the varying likelihoods of them, the last rule is that reality throws curveballs.  Or as in the quote of Donald Rumsfeld, there are "unknown unknowns".

Fourth branch of government?

Two federal courts ruled today on Obamacare.

First, the US District Court of Appeals ruled that the federal exchange subsidies are illegal. Later in the day, the Fourth Circuit Court of Appeals ruled that the IRS could issue subsidies in the federal exchange.

The Fourth Circuit said the Act's language was “ambiguous” but deferred to the IRS to implement the law according to how the agency decides.


As a result of the conflicting rulings, the cases look to be heard by the Supreme Court. This may open the door to a wide challenge to several laws.

Several recent laws (Obamacare, Dodd/Frank, Sarbanes-Oxley, etc) pushed a large amount of the law's formulation into the hands of bureaucrats.  Congress only passed a vague outline. Is that constitutional?  Perhaps the Supreme Court will reject all laws that were not fully specified by Congress. 

Aereo

The Supreme Court did not issue a ruling Monday on Aereo's case.
Their schedule lists the next likely days for a ruling as Wednesday, Thursday, and possibly next Monday.

Aereo’s technology is complex, but the Supreme Court case is fairly simple -- does Aereo take broadcasters’ programming without paying for it, or does Aereo just let consumers legally receive TV signals?

The case depends heavily on the 1976 Copyright Act. That 1976 law predates the huge rise in cable TV, satellite TV, VCRs, and internet TV. Three decades after that law a Federal judge said remote VCR/DVRs are legal (AKA "Cablevision ruling").

Aereo won two previous federal court cases: New York circuit and appeal.

The more I think of it, Aereo's argument looks unbelievable that they are a remote personalized antenna system.

Aereo shows off a teensy tiny antenna (roughly coin-sized) that they say is dedicated to a specific user.  Huh? That wouldn't get past the giggle stage of an electrical engineer.

Instead of providing 1000s of individual antennas, Aereo's system is really one big antenna built from 1000s of those little elements.  Sort of like the military phased-array antennas.  Looking at the placement of the amplifier and signal processing components, they are NOT dedicated to a user.

Instead of 1000s of remote antennas, it looks like Aereo's system is a variation of the ordinary "community antenna" system.

And for copyright law, a community antenna DOES trigger the "retransmission" and the “public performance” rules. On that technology perspective, Aereo loses.

But after reading (okay ... "skimming") the appellate ruling, which said the antenna is individual not shared, if the Supreme Court goes along with that finding, then it looks like Aereo will win.

High-tech R&D labs?

A rumor going around today that Oracle will another big acquisition. Oracle might buy Micros (MCRS).  Rumored price is $5B.

Yawn....

Oracle has been doing at least one big acquisition roughly every year.  

Some succeed, some fail.

What is interesting is the question if this should be the model for other big high-tech companies.

Decades ago, the model was for every company to run its own internal R&D labs.  This was a copy-cat of AT&T's Bell Lab (or IBM's or RCA's or Xerox's or ...)

Now the model is either:

Oracle, Microsoft, Yahoo -- big and small acquisitions

Apple, Google, Facebook  -- (mainly) small acquisitions

IBM might be the only company that is still highly dependent on its internal labs. Why is that? Is it a fall-out of "disruptive" development?

BTW, over the past decade Oracle spent:
 ~10% on internal R&D

 ~20% on buying companies

 ~70% on everything else

World elections

In May, 2014, worldwide elections show the change in voters' views.  Will the results be attributed to a "throw the bums out" sentiment or does it reflect a deeper change?

India has turned away from the socialist Congress Party that had been supported by generations under the leadership of the families of Nehru and Gandhi.  Now a pro-growth politician will be prime minister and the Indian markets are rising.

In Europe the movement away from the leftist political parties is clear.  How that will affect its markets is unclear.

High-frequency trading

HFT has been a hot topic for the last week after Michael Lewis promoted his book on "60 Minutes" and claimed that the markets are rigged.

There's a lot of opinions written on it but the details are often not given.
My knowledge of the market internals are probably out of date, but I'll give a shot at describing what happens for a trade.

A market order from a retail brokerage might be matched internally by the brokerage (ie, your buy order matches somebody's sell order).  If not, the brokerage tries matching your order with consolidators or with dark pools.  If still no match, the brokerage sends the order to a market.
All this happens quickly, typically under a second.

In all the attempts at matching, who sets the price? This is were HFT comes in.

Decades ago, there were human "market makers" who who set the price based on supply/demand of stock trading. Really long ago, prices would be posted on

blackboards by aides every hour or so.

Now prices are set by software and updated in a fraction of a second.  Every trade might change the price. HFT firms compete by have the fastest speed at price detection.

There are 3 government rules that limit price setting:
1) NBBO (National Best Bid/Offer)
2) decimalization
3) regulation NMS

NBBO says all of the national markets have to be shared so that brokerages can
pick which brokerage will get an order. HFT firms try to be faster than the NBBO network so they can find imbalances.

The decimalization law says that stocks must be priced in cents, but dark pools allow trading in fractions of pennies. HFT firms try to find pricing differences
between markets and dark pools.

Finally, regulation NMS uses the NBBO to require that current price settings are

not sent to anybody before it is sent to everyone (via a security information processor). HFT firms discovered they could find a price quicker if they actively probed for prices than wait for the slow SIP network.

(Reg NMS: Warning 500+ pages of mind-numbing)

http://www.sec.gov/rules/final/34-51808.pdf

Reg NMS started in 2007.  That’s when high-frequency trading really started.

So the markets are "rigged" because the laws don't make sense in an era of fast

computers and networks.  It's like applying laws for horse&buggies to automobiles.

HFT firms were really profitable 5 years ago. Now the competition between HFT firms has dropped profits by ~80% as they fight for smaller and smaller sub-penny profit/trade.

I'm not concerned about HFT.  For the average person, the difference is less than

a penny per share and there are other things that have a much bigger effect.

If you are worried, then use limit orders so you can specify the price you want.