More than 50% odds for the Euro to disappear before year end... Really??!!

At least that's what Jacques Attali told a French newspaper on Nov. 25^th 2011.

On paper, the guy has been the French macro-economics Wonderkid for a few decades: X-Mines, Sciences Po and ENA graduate (for the vast majority of the world population who don't care about the French education system, it's a bit like having a resume combining MIT and Cal Tech, plus Harvard Kennedy School of Government and a Stanford Political Science major, first in class all the way long...), he also scored an economics Phd, then went on becoming advisor to the French President Mitterrand before heading the European Bank for Reconstruction and Development, and more recently created the micro-finance group PlaNet Finance (well, that last project is cool, so check it out when you get a chance: http://www.planetfinancegroup.org/EN/). Don't mean to add up, but he is also a famous writer and symphonic orchestra conductor...

The issue is that the guy is not “street smart”. More precisely, he tends to live in a theoretical bubble that he will call the “real world”. For those who a want a proof and speak French, please read his book “La crise, et après?” (“The crisis, and then what?”), where he gives his views on the 2008 / 2009 credit crisis and what we should do next to rebuild the world economy and financial system. There, he pulls out a lot of excellent macro-economy conceptual tools, but shows a clear lack of concrete investment banking industry experience and hands-on knowledge about financial derivatives.

And the exact same thing happened a few days ago. After going through a set of sovereign debt crisis management measures which look good on paper (a real program of bonds buy-backs by the ECB, drastic European agreements on public deficit management, in depth reform of the ECB to give it access to tax income plus the ability to issue Euro-bonds), he reveals the output of some theoretical model known to him only: there are more than 50% odds for the Euro to disappear before year end...

Mmm... How to say that... I agree that the Euro zone is in trouble, that European leaders are slow to find a way out and show us the end of the tunnel, and I am even OK to consider that there is a risk for the Euro system to break down. But 50% plus odds on a break down before the end of 2011??!! Jacques, to be honest, I don't even want to have an analytical debate with you about it, you're too smart for me. But I'm more than happy to book you the bet on that one...

US National Debt – Democrats vs. Republicans negotiations: Round 2

So here we go again. In July, they exposed their usually hidden political games, and the whole world understood that for US congressmen, trying to knock down their opponent in the next presidential race is more important than solving a real national issue like the public deficit. On the way, they ended up loosing their AAA sovereign rating. But in November, they put on the gloves again, and can't agree on a decent policy around the public budget management.

Could be funny if the clock was not ticking. But it actually is, and pretty fast... If you don't believe me, just check for yourself:

http://www.usdebtclock.org/

I fixed my eyes on that thing for less than a minute and the balance moved up by more than USD 2.5 millions... This must be something in the tune of 40 or 50 times the average US household annual income!

And overall, the US national debt points out at more than USD 15 trillions, making it an average of USD 134,000 per household, and around 100% of the GDP.

Now, I'm laughing, but to my American friends, please take no offense: I'm French. So if I'm laughing, it's sort of a nervous laugh, because we are next in line for the downgrade. With a debt to GDP ratio of 85-90% and a funding spread vs. German Bunds in the range of 200 pips, only the French President and Minister of Finance still believe that we deserve our AAA rating...

Volatility Forecasting & Neural Networks – Learning The Google Check Reflex

Just got another example of the fact that when you get an idea, you should seriously consider that someone may already have explored it. Basically something along the lines “Before shouting Eureka and dreaming of your Nobel Prize speech, just Google the concept and find out how many books were already written on the topic...”.

Other than bringing you back to earth regarding your IQ, it can actually save you a lot of time. Other people's research may already have proven that the idea works and explained how, or you may discover without sweating too much time on it that it's actually crap...

Concretely, trying to analyze how I could leverage neural networks algorithms to better forecast volatility, I ended up running a quick Google search only to discover at least 5 solid books on Amazon dealing only with that specific target: applying the well known artificial intelligence development tool to quantitative finance and market data forecasting...

Now it may be time to tell a few high level words on neural networks for those interested. Basically, computer science folks specialized in machine learning / artificial intelligence developed in the 80's an algorithm built around a network of multivariate functions which behave both individually and all together as a piece of human brain tissue: each component has the ability to input multiple “impulses” from other components, and has the capacity to send in response a single “impulse” to one of several other components. The link between the inputs and the output of each component is based on parameters which can be “trained” on a data sample to “learn” how to best predict the final output of the overall network (a bit like you set up a linear regression on a sample to then predict the outcome of events outside of your sample).

The above is a massive shortcut, but it summarizes the main idea. For those who want to dig deeper, I would heavily recommend the online free “Machine Learning” course designed by Professor Andrew Ng, Director of the Stanford University Artificial Intelligence Lab, and his team:

http://www.ml-class.org/course/auth/welcome

There is an advanced track which requires completing assignments, but you can also sign up simply to watch the video lectures and download the related notes. And lectures 8 and 9 happen to be on neural networks.

Anyway, following this class and looking at the applications of neural networks mentioned there, I could not see any around finance, and for a second I thought I may have put the finger on something... But as mentioned above it was simply the fact that The Google Check Reflex should prevail.

Cheers,

Olivier

Any target level for the Yen intervention?

Since the JPY 3 trillions intervention package on October 31^st, which led the USDJPY up to 79.50 within a few minutes, the question around the target level Azumi san must have defined seems to be a fair one.

Indeed, since then, the spot first took a bearish biais down to the 78.00 region in spit of a second Asia morning move to 78.40 on November 1^st, and from that point it started to oscillate within 20-25 pips daily ranges around that level. And up to today, it started to look like the Japanese government was relatively satisfied with that short term outcome of the intervention, taking into account the bullish pressure of the Euro sovereign crisis on safe heaven currencies.

But the range broke today, with a spot swinging from 78.10 levels down to 77.58 and now stuck below 77.80. And if one can accept the idea that the political drama taking place in Italy had an impact, the next interrogation is to find out if the Japanese government will make another push to bring the spot back in the range and close to 78.00.

One clue may be that the only time we hit 77.80 since the October 31^st intervention, there was a shift across 78.00 the next morning during Asia hours, before a stabilization in the range discussed above.

But to find out, I guess we'll have to sleep another night and wake up early to ride the trend in case ;-)

Referendum or not?

OK nice one Mr Papandreou... This time you managed to upset everybody!


First you told the whole world 2 days ago that you would call a referendum to get your nation's permission before accepting the bailout plan "offered" by the European leaders...

Obviously Nicolas Sarkozy did not expect and did not like this one. FYI, a few days before, the French President went on national TV to tell us that thanks to his efforts combined with those of the German Chancellor, they had just saved Europe. The guy is down to less than 30% positive opinions in the poll 7 months ahead of the Presidential election, so he kind of needed a trophy to bring back from Brussels, and he thought he had it until you blew up his plan...

On the German side, the Bild tabloid said it all by asking Angela Merkel for a referendum to consult the German people on their willingness to keep Greece in the Euro zone.

As for the Chinese, who were asked to dig in their deep cash pockets, well... They started to wonder why they should invest on people who "work 3 times less" than they are "to earn 10 times more:... No comment.

And if you ask, I'm sure that in Japan, Azumi san did not like it either. Under his command, the BoJ intervenes massively and daily on the forex markets to put a stop on the Yen strength and help out Japanese exporters, and you come out with the kind of announcement which triggers a rally to safe heaven currencies.


But we had not seen it all. Indeed, you last trick: telling us this morning that the referendum would take place on December 4th, to explain us this afternoon that it would most likely not happen... Sweet!

Though to be honest with you, the news came out 1 hour ago, and looking at the charts, looks like the markets don't listen to you anymore. Surprised?


And to conclude, I was wondering where you would go on vacation next as you may not be welcome anymore in lots of countries, but then I realized you still have Santorini... Arghh!