Quants: The Alchemists of Wall Street

Yesterday I found myself watching one of the most awesome Wall Street movies according to Business Insider: “Quants: The Alchemists Of Wall Street” (2010). While not a professional quant by myself but just someone from Eastern Europe who has “math as a second language” (as they, while exaggerating somewhat, refer to the Eastern Europeans in the film) and has only got a flavor of the art of financial modeling when developing a few “black boxes”*, I should admit that there were several points of recognition for me. Therefore I’d like to share my thoughts and reflections below.

The movie

If you like, you can watch the movie first by yourself, embedded below via YouTube (takes about 48 minutes). As put in the Business Insider: “It’s a rare look inside the minds of mathematical geniuses who have invented financial models that have both destroyed and made Wall Street.”

                        

I think the film might be entitled as “Confessions of the Wall Street Wizards” as well.

Study Reveals: Financial Advisers are Biased but Still Wanted

Financial advice and financial advisers became accessible to the so-called middle-class back in 1940s when Charles Merrill, the cofounder of Merrill Lynch (now the wealth management arm of Bank of America), famously coined and made real the phrase “Bring Wall Street to Main Street”. Differently from the other brokerage houses that kept the “best” information only for their wealthiest customers and tried to lure others with exaggerated claims and deceptive promises of profits, Merrill provided accurate figures and honest information tailored to the needs of average Americans. He stated that: “The interests of our customers MUST come first.” *

Since then, the market for financial advice has developed to a multi-billion dollar business. Oddly enough, there seems to be not much left from the original ideas of accurate information and putting the interests of the customers first... Instead, one of the few independent audit studies about this important market, “The Market for Financial Advice: An Audit Study” conducted by the National Bureau of Economic Research and published in March 2012, concludes:

“...advisers fail to de-bias their clients and often reinforce biases that are in their interests. Advisers encourage returns-chasing behavior and push for actively managed funds that have higher fees, even if the client starts with a well-diversified, low-fee portfolio.”

I thought it would be interesting to summarize the facts and figures of this study. Formulations, comments based on the data as well as other add-ons are my own unless they are exact quotes from the original text and, as such, within the quotation marks. My interpretations may differ from those of the original authors due to subjectivity involved.

Debate over S&P 500

There is lots of guessing and analysis being done in the financial communities when it comes to forecasting S&P 500 index, ticker symbols: ^GSPC (Yahoo! Finance), INX (Google Finance), and $SPX (MarketWatch). Opinions range from one extreme to another: I have seen targets as high as 1,735 by the end of 2013, as well as “doomsday predictions” suggesting the level of 1,040. These compare to the current (21 Feb 2013) number around 1,500. Below is a non-comprehensive summary of the debate, complemented with comments and opinions from my side.

For the starters, just when looking at the annual percentage changes in the index value, a 20% up by the end of 2013 seems as likely as a 20% down. So following the lines of arguments is rather interesting.

Greece: Litmus Test for Eurogroup and IMF

In the ongoing eurozone debt crisis Greece has received disproportionately much attention by the policy makers, investor community and news media when compared to its size and its total debt in absolute terms. It has also received way too much international “aid” and been “forgiven” far too much debt by the private sector creditors. Why is that and what does it mean?

Illusion of “Safe Havens” and IMF’s Three Policy Scenarios

... Now the future of global economy critically depends on how well the European policy makers deliver what they have promised... And all of their efforts should be centred on restoring market confidence towards the financial sector and government finances, even if this simply means enforcing the illusion of diversifying the immense debt hole away by putting everything into one large pot...

This is the impression that one gets when considering the three scenarios (complete policies, baseline policies and weak policies) in the latest Global Financial Stability Report (GFSR) by the IMF (October 2012). I have summarised and commented these scenarios below.

Credit Card Debt Payoff: How I Shed $30,000 in 20 Months

Guest post by Celina Jones* 

Being in debt in this highly inflated economy is not something unexpected. The increase in the prices of the commodities may not match the increase in income, which obviously will lead to greater amount of money being spent on the same necessities that individuals purchase routinely.

However, individuals may also fall prey to debt if they do not plan their expenditures wisely and are not cautious of their financial situation. It would be wise for an individual to deal with their debts as they arrive and not wait until they get accumulated to a massive amount.

If you have debt problems a good first step can be to talk to debt companies. They will help you in avoiding bankruptcy and regain your credit. If you don’t wish to use external services, you may wish to use the tips I used to shed $30,000 in 20 months.

One thing that I want to make clear is that having such a huge debt was not a matter of a few days or a month, it accumulated over time. I used to provide counseling advice to people who were not able to pay their mortgage payments on time. At the same time, I was worried about my own financial situation and the huge debt that I had to pay off.

Puzzles of Savers and Investors

Haven’t you heard that saving and investing are immensely important from your banker, financial advisor and financial regulator during the past couple of years, even this many times that you don’t remember how many? Perhaps you have learned it in a hard way while having lost your job and home and everything because of not having had savings during the current crisis.

Your advisors may be right but... Saving your savings turns out to be a real challenge in the current times of uncertainty. Furthermore, individual investors – at least those who do not belong to the privileged group of the so-called High Net Worth Individuals (HNWIs) – face an even bigger puzzle.

How Silicon Valley Works?

Silicon Valley, entitled as Innovation Capital of the World, is attracting brains from all over the Globe. It is the no 1 hotbed for venture capital investments and home to many of the world's largest technology corporations as well as thousands of small start-ups. No wonder that many are aiming building the next Silicon Valley in their home countries or home towns. During Enterprise Estonia Field Trip in October 2012 I had the possibility to get a glimpse of how it works.

Of course, two weeks is a way too short time for getting it all. However, we (7 Estonian start-up entrepreneurs, 2 investors plus organizers of the trip) made quite a tour:

* Visited several companies such as Skype, Google, Nokia, Facebook, Guzik (the doors of Apple remained closed)

* Were introduced to Stanford and its entrepreneurial focus by Keith Devlin, H-Star Institute Stanford University

* Explored co-working spaces and accelerators, incl. Plug & Play Tech Center, NestGSV, Rocket Space

* Attended various pitching events (Keiretsu Forum, Jumpstart days, CloudScale 2012) as observers and pitched at Silicon Vikings

* Talked to the venture capital firms Nexit Ventures and Institutional Venture Partners

* Learned from Richard Allan Horning about legal issues and setting up a company in the US

* Met with local professional Estonians in a pool party

Plus everyone had their own items in the agenda. I, for example, stepped into the Northwestern Mutual, spoke with Krishnan Subramanian who is one of the 12 top thinkers of Cloud Computing, and hiked in Purisima and Madera.

Here is my summary which I have complemented with a few data and facts from other sources.

How Much Does It Take to Manipulate Interest Rates?

“How much does it take to manipulate interest rates?” I recall a news correspondent asking provocatively back in summer. The question was not about the LIBOR scandal. The question was about the central banks’ monetary policy which has been remarkably unsuccessful, not to say disastrous when it comes to solving the crisis.

“I’m not Dr. Doom; I’m always Dr. Realist,” Nouriel Robuini said in an interview about the eurozone’s gloomy outlooks around the same time. “The eurozone is a ... it’s a huge mess. It’s a slow-motion train wreck. Fragmentation, balkanisation, disintegration... seven countries in crisis... Lack and loss of competitiveness, large external deficits to be financed, deepening recession in the periphery... That looks ugly,” he continued the remark about his nickname “Dr. Doom” with describing the situation in Europe.

So far, his gloomy prediction seems even too realistic for the many observers, especially for those looking from a distance. Despite of Greece and other “peripheral countries” reportedly making progress in introducing reforms (even though too slow), people (at least those who still have jobs) working harder, companies improving efficiency and so one, economic outlooks haven’t improved – rather other way round.

Something is definitely wrong with the European monetary policy and it is not that the ECB is not “printing” enough money (more money would not make it working). Today we can perceive some decisive (or desperate?) changes ahead which make a piece of chronicle writing and speculating about the future interesting.

European Banking Union: Changing Banks That Are Too-Big-to-Save to Banks That Are Too-Big-to-Fail?

If there is one major reason why eurozone bankers should be happy about the prospect of the European Banking Union, then this is the outlook for their banks becoming too-big-to-fail rather than starting to be viewed as too-big-to-save. If there is one major motivation why eurozone will stay intact, then this is the fact that otherwise eurozone banks would be on a worse position to grow when compared to their US and Chinese peers, all other things equal; considering the crucial role that banks have plaid in the financial and economic developments throughout the history, the latter is not a minor issue.

These are basically the two inferences that can be made from an interesting research paper "Do we need big banks? Evidence from performance, strategy and market discipline," (January 2012) written by Demirguc-Kunt, A. (World Bank) and H. Huizinga (Tilburg University and CEPR). This essay provides a brief summary of their findings, plus an analysis for the largest eurozone banks. We finish with the conclusion of whether the European Banking Union will do the trick of saving the day for the European banks.

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