There have been many calls for a transaction tax. I oppose all of them. I am not a free-market fundamentalist, but intervention here will help nobody. I understand the desire to tax speculator’s trading activities, they can often be seen as value extracting instead of value creating activities, but at the end of the day, they do add liquidity and lead to tighter spreads, even if the liquidity is of low quality. The problem here is regulatory arbitrage, the transaction tax can easily be circumvented by moving transactions off-shore. I understand that is not trivial, but all the large operations, the ones that can really affect the financial system, are big enough to be able to move the taxable operations because the cost of moving the operation will be less than the cost of paying the tax. Meanwhile, all the smaller players will be stuck paying the tax.
There is a lot of legitimate transactions that would end up burdened by the tax, from a small airline hedging fuel costs to a farming operation locking-in a price on a harvest, to a municipal water company hedging their energy costs (you’d be surprised at how much electricity those pumps need). The media has called it a “Robin Hood” tax and the politicians are throwing numbers like “0.25 percent” around. They just don’t get it. First of all, this would mean bye-bye to the money market mutual fund industry and it’s associated returns for holders of cash. Secondly, it would wreak havoc in the Fx markets and inevitably lead small money-changers to go into the black market since the tax would be bigger than the current bid-ask spreads. Finally, the tax would just end up being paid by consumers in the form of higher prices. I won’t even touch the subject of market makers, whether official or de facto.
We need to fix problems, not symptoms! This is not progress.
1.) http://www.guardian.co.uk/business/2010/feb/09/tobin-tax-nighy-curtis-film
2.) http://www.bloomberg.com/apps/news?pid=20601103&sid=anYlPWIEm6gE
3.) http://www.lexology.com/library/detail.aspx?g=de4f41cb-2d89-410b-88ed-696853e482ec
In a market where one of Greece’s principal market makers -– Deutsche Bank –- says it will not buy Greek bonds, and where European politicians are having to force their own national banks to do so in order to try and avert the threat of a Greek bond auction failing, the boon from hedge funds looking to hoover-up Greek debt is undeniable.
And the only reason they are in the market to buy is because of naked CDS positions they laid on many months -– and in some cases years -– ago
While Sam Jones makes a great point in this post, I have a bone to pick. Please don’t take this as an attack on anything he said, his post was concise, insightful, informative and accessible. It was fucking great.
My main issue with CDS is the resistance to put them on an exchange. It’s obvious that allowing banks to manage their counter-party risk has never worked. We saw it with the LTCM fiasco, we saw it with the Lehman haircuts and we saw it with the mark-to-market CDS mess that culminated with mark-to-make-believe accounting being a totally acceptable practice.
I like CDS, I think they provide flexibility in a market that can sometimes be illiquid. I think they promote price-discovery, encourage liquidity and lead to tighter spreads on the underlying. What I don’t like is getting stuck with someone else’s counter-party risk. Having a centralized exchange for CDS would help to a degree, but the single counter-party risk is not immune to problems. The issue here is that part of the reason CDS were so profitable or so dangerous was that the private counter-party system allowed issuers of protection to set aside insufficient collateral and there is bound to be resistance to any exchange system, since the margin requirements of being short protection should, in my mind, be similar to margin requirements for the underlying, making the short protection + long risk-free collateral position essentially a synthetic of the underlying. Which is what it should be like, but it won’t, because mark my fucking words: The only reason for further financial innovation, is to circumvent leverage restrictions.
If we can get most everyone to trade CDS on an exchange, where the member firms who utilize it are the share-holders, which has a fed-mandated net-capital requirement, I am so game. This would allow member firms to operate the exchange, and redistribute the profits to themselves, making the exchange operate at virtually cost, reducing friction and encouraging liquidity. It would also make the members share the risk of setting inappropriate margin requirements, because, at the end, if the exchange went under, all the players would lose their stake in it together. Similarly, a bailout in the event of a large-scale default by one of it’s members, would probably have to come from the member firms themselves, just like LTCMs bailout.
Please feel free to let me know if I am being a moron on that last point, but it makes sense to me so far.
Earlier today Calculated Risk posted about an improvement in total retail sales. I was interested in how these numbers would look once adjusted to their per-capita numbers. Obviously the population estimates (from the Census Bureau) might have a little bit of an error margin, but I wanted to see how the spending trends of Americans had, or had not, changed. In essence, I wanted to know if people were really spending more, or if the growth in total sales was just a by-product of population growth.
This doesn’t say much about the retail sector, because it isn’t adjusted to account for store openings and closings, in other words, as stores close and sales keep steady, revenue per store is increasing, but it does give us some clues as to whether there is upcoming expansion in the retail sector as the recovery takes hold. From what I gather from these graphs, I’d say an expansion in the number retail outlets is not something we should be expecting any time soon, which is bad news for REITs that operate shopping centers.
There is no adjustments for price levels, because of auto-correlation. Please feel free to submit questions, comments, or sector-specific requests.
I look forward to, in the future, making all my data sources available so they can be reviewed by anyone who may have any doubts about my methods. Just hold on a bit for that.
“In any process in an isolated system, the total risk and return remains the same.” — First law of thermodynamics, applied to risk/return. Morally Bankrupt
“Risk can neither be created nor destroyed. It can only change forms.” — First law of thermodynamics, applied to financial risk. See also: Conservation of probability. Morally Bankrupt.
“As financial innovation approaches zero, all value-extracting processes cease and the entropy of the system approaches a minimum value” — Third law of thermodynamics, applied to finance. Morally Bankrupt
dS: change in entropy of an economic system
δQ: Let δQ be an element of the value given up by the body to any banker/financier during its own changes
T: An Absolute Return value
“In a product, a process that occurs will tend to increase the total entropy of the aggregate capital.” — Second law of thermodynamics, applied to finance. Morally Bankrupt
“Potential return generally cannot flow spontaneously from an instrument at lower yield to an instrument at higher yield.” — Clausius statement, applied to finance. Morally Bankrupt
“It is impossible to convert capital completely into value in an economic process.” — Kelvin’s law, applied to finance. Morally Bankrupt