...Wall Street loves to make convexity sound complex (I suppose it’s so they can charge higher fees?). We speak Greek (calling it “gamma”), employ physics as a metaphor (analogizing to it “acceleration”), and use mathematical definitions (since it is the second derivative of the asset’s price change)."Pish. Posh." is a technical term only used by market professionals* for those situations where one has decided to go full Alinsky rule #5:
Pish, posh. An investment is convex if the payoff is unbalanced for equally opposite outcomes. So if there’s the potential to earn a profit of two on a bet versus a maximum loss of one, the bet is positively convex. If you can lose three versus making two, it is negatively convex. That’s it. The rocket scientists are called upon to help (fairly) price the cost (value) of such possible outcomes. This is why the expansion of derivative trading in the 1990’s resulted in a hiring spree of physics PhD’s....
#5 Ridicule is man’s most potent weapon. It’s hard to counterattack ridicule, and it infuriates the opposition, which then reacts to your advantage...From The Convexity Maven, May 5:
“Where is the Folder?”
Most people will remember the 1992 movie, “A Few Good Men”, for the crescendo court scene where Colonel Nathan Jessup (Jack Nicholson) shouts at J.A.G. Lieutenant Kaffee (Tom Cruise): “You can’t handle the truth”
Depending upon your politics, you were either inspired or offended as Jessup continued: “You have the luxury of not knowing what I know; And my existence, while grotesque and incomprehensible to you, saves lives. You don't want the truth because deep down in places you don't talk about at parties, you want me on that wall, you need me on that wall.”.....MUCH MORE (7 page PDF)
I was occasioned to think of this scene as I considered our rather haphazard response to this pandemic. It is a primary responsibility of DARPA (Defense Advanced Research Projects Agency), the NSA (National Security Agency), the CIA (Central Intelligence Agency), and likely a few more embedded in the “deep state” to game out any possible national security risk, from Martians to meteors.
So why does it seem there was not a secret folder in the file cabinet labeled: Pandemic response?
There have been over a dozen movies on this topic, so it’s not like the idea of a global pandemic was totally alien (irony intended). And while some will surely blame this entirely on the President, too many people would have known this folder existed for it not to be leaked.
At a bare minimum, the Congressional and Senate intelligence committees would have had this folder delivered to their desks sometime in late December when (our spies at) the World Health Organization(WHO) first received reports from the Chinese about a cluster of 41 deaths from a mysterious pneumonia.
Surely the gears would have been grinding at a dozen Govt Agencies as early as late January when the President closed the airports to flights from China.
I suppose the alternative, of which I am incredulous, is that there was no folder.
Forced to consider the latter, let us not make the same mistake with our investments; perhaps it is time to take the long view and build our own folder.Courtesy of the latest quarterly review from Hoisington Investment Management, the -oriole line-is the quickly expanding Monetary Base, which is projected to reach the -heron dot-of $5.0Tn at month’s end.
*****Front and center in this report is the equation: GDP = Money * Velocity
For reasons both demographic and economic, the Velocity of money has declined as quickly as the FED can print it; so the question is when will Velocity increase?.....
And that, lads and lassies is the question of the 21st century: "...when will Velocity increase?"
Further to Mr. Bassman's question about the agencies who might have the "Pandemic Response" folder, the United States has a government organization in Atlanta, the Centers for Disease Control and Prevention.
You'd think they might have a copy of the folder.
The CDC have something like 11,000 employees whose employer is called the freaking "Centers for Disease Control and Prevention."
The folder has to be in somebody's desk.
*The Convexity Maven is nothing if not a professional. Here is part of his mini-bio at MacroVoices:
Harley S. Bassman
Harley Bassman created, marketed and traded a wide variety of derivative and structured products during his twenty-six-year career at Merrill Lynch. In 1985 he created the OPOSSMS mortgage options product that facilitated risk transmission between MBS originators and financial institutions. In 1988, he assumed responsibility for trading and marketing IO/PO and other levered prepayment securities. Soon after this, he started purchasing RTC auctioned MBS Servicing rights and repackaged them for the securities market as BIGS - Beneficial Interests in GNMA Servicing. Later, he started a GNMA servicing conduit becoming one of the Top 20 originators in 1992. As managing and hedging prepayment risk became a priority focus for the financial markets, Mr. Bassman created PRESERV, Merrill's trademarked Prepayment Cap product. Merrill was a leader in this product category writing protection that covered the risk on tens of billions of notional mortgage servicing rights. Later, Mr. Bassman managed Merrill's initial venture into off-balance sheet mortgage trading.
In 1994, Mr. Bassman assumed responsibility for OTC bond options.
Within a year, Merrill was the leader in this product sector. A wide variety of products were offered including vanilla and complex options on MBS spreads and the Treasury yield curve.
To help clients more fully appreciate Volatility as a primary risk vector, he created the MOVE Index. Similar in form to the VIX Index, it is now the recognized standard measure of Interest Rate Volatility.And so much more, all those cutesy Merrill acronyms can be blamed on him and his team.
From 1995 to 2000 he focused on creating hedge strategies for MBS servicers and portfolio optimization techniques for Total Return and Index investors.
Mr. Bassman became the manager of North American MBS and Structured Finance trading in 2001. During his tenure, he created SURF, (Specialty Underwriting and Residential Finance), a self-contained Sub-Prime mortgage conduit. He supervised the issuance of Merrill’s first Sub-Prime securities. He also transitioned the structuring business to a new technology platform....
