CFTC And InTrade

The CFTC is the ineffective regulator of the futures markets. They’ve recently banned US citizens from participating in prediction markets like Intrade because according to them, they involve gaming and are against the public interest.

Let’s not overthink this – the CFTC is staffed by the sort of people who are offended at the idea of people making money from politics or decisions made by policymakers.

When you over-estimate your own ability to centrally plan the derivatives markets you end up with MF Global, OTC derivatives with few central clearing points to monitor risk and nonsensical value judgments like we’re seeing with InTrade.

Reducing participation in the prediction markets reduces the likelihood that strong trends in prediction betting carry over to talkshow discussion and put The Progressive Agenda at risk.

It concerns me that iPredict is subject to regulation here in New Zealand. What a pathetic worship of central planning we’ve embraced if a market with tiny dollar amounts involved (in the grand scheme of things) is tightly regulated but the financial sector is still the Wild West.

Instead of worrying about prediction markets, the CFTC should look at how actual users of futures markets who want to hedge risk are walking away because there is no protection whatsoever of the cash they have in their brokerage account.

A lot of silly economists think that HFT hedge funds and massive speculation will make markets more efficient. Sure, liquidity will increase, but the long term impact is that the real economy is screwed while value is transferred to players big enough to move the market so that everyone else gets stopped out of their positions.

If you were a grain farmer, why would you hedge when you could lose not only the cash you’ve put up for margin through your broker stealing your cash to fund its own trading losses in addition to getting your position liquidated by the broker you got transferred to at a loss so they get some cheap wheat contracts on their book?*

Cronyism and regulatory capture have so pervaded the CFTC and SEC that no regulation could actually protect investors better than the current regime.

Worrying about prediction markets, like, do some real introspective thinking CFTC!

* This happened to a lot of ranchers who hedged their risk through MF Global. Democrat fundraiser, Obama buddy, former Governor of New Jersey, Senator and Goldman Sachs CEO Jon Corzine not only hasn’t been prosecuted he’s starting a flipping hedge fund!

Charting Our Unemployment Crisis

Key Points:

  • Unemployment is at a 13 year high of 7.3%
  • Our recovery from the global financial crisis is pathetic. Our annual GDP growth rate is a national disgrace.
  • Labour costs have increased almost 40% during this period
  • While labour productivity has stagnated
  • There isn’t much of a relationship between business confidence and the unemployment rate
  • Exports have been growing and less labour intensive production methods favoured
  • Increased M3 since 2008 hasn’t reduced unemployment

The news that unemployment is at a 13 year high of 7.3% is absolutely shocking. It’s even worse when you realise the number of measurement problems that Statistics New Zealand can’t overcome because of the nature of macroeconomic data measurement. Statistics NZ does a reasonable job with the HLFS so we have to work with what we’ve got and not get sidetracked by “what counts as unemployment” sideshows.

John Key needs to urgently review his government’s policies. Saying that he won’t “change tack” when there is no hope on the horizon for the extra 78,000 unemployed people in New Zealand is not good enough. Blaming the global financial crisis is not an option when there is an underlying productivity sickness in the New Zealand economy.

Reserve Bank governor Graeme Wheeler should definitely consider a cut in the OCR before 1 January so my iPredict contracts pay out. It could also boost aggregate demand. There is still some room for New Zealand’s monetary policy to move before it hits the zero lower bound / liquidity trap situation. But that is neither here nor there. And US unemployment has barely changed despite the Federal Reserve cutting the discount rate to 0%.

A picture is worth a thousand words. I think charts can help us think about our unemployment crisis. The fact that they prompt more questions than provide answers is a sign that we are on the wrong track. A failure to implement different labour market policies could accelerate our decline into middle income nation ignominy. What those policies should be is a matter for a later post.

This chart clearly shows that the recovery from the global financial crisis is not nearly as fast as the recovery from the Asian financial crisis in 1998 and its impact on our exports and GDP. This does not bode well because GDP growth compounds over time – even 1% less growth now is an enormous reduction in living standards extrapolated out to the 2020’s and 2030’s when the retiree to worker ratio will be at its lowest and we need a lot of excess wealth stored to pay for superannuation and health care.

This chart clearly shows the rise of labour costs as shown by the Statistics NZ index. You can read more about how its calculated at Statistics NZ.  There has been almost a 40% rise in the cost of labour in 13 years. But what has happened to productivity during that time?

This graph shows that labour productivity has grown roughly 7.5% (8/106) during this 13 year period. That is substantially less than the increase in labour costs. Employers have to finance higher labour costs with something. They’re not getting it all from higher productivity and more output. This means that workers at the margin will find themselves laid off.

Tyler Cowen’s “zero marginal product of labour” theory he’s blogged about could conceivably apply to swathes of currently unemployed Kiwis. They were the last to be hired and the first to be fired. With structural changes in the labour market due to technology, an argument could be made that cyclical unemployment doesn’t explain all of the increase in unemployment since 2008.

Increases in GDP growth certainly reduced the unemployment rate in the early 2000’s. But with unemployment now at 7.3% that’s almost double what it was at the beginning of 2008. I won’t share the graphs from Trading Economics / Statistics NZ but the number of employed persons has grown from ~1.8 million to ~2.2 million. During the same time our population has increased from ~3.8 million to almost 4.5 million. It would be interesting to study the role that immigration has played on the domestic labour market and exploring if there is any impact from work visa or working holiday visas on the sort of jobs at the marginal end of the labour force.

M3 is defined by the Reserve Bank as the broadest monetary aggregate.

M3 is the broadest monetary aggregate. It represents all New Zealand dollar funding of M3 institutions and any Reserve Bank repos with non-M3 institutions. M3 consists of notes & coin held by the public plus NZ dollar funding minus inter-M3 institutional claims and minus central government deposits.

Since the beginning of 2008, M3 has grown around 25%. This has not had any significant impact on reducing unemployment, in fact it has accompanied the rising unemployment rate. Why aren’t banks lending more to businesses to spur a recovery? Why are all the anecdotal stories I hear about stingy bankers failing to fund another promising business proposition?

Monthly mortgage loan approvals are up 40% on two years ago and running at $1.3 billion a month. Imagine $1.3 billion a month being funnelled into net new business lending and the long-term implications for productivity growth. Banks are fuelling the fire with the likes of 95% mortgages while bending any businessperson wanting to buy machinery or get a letter of credit over a barrel.

An increase in credit of this magnitude should be going hand in hand with a major rise in business investment. But that’s being thwarted by bankers who’d sooner give you $500,000 for a villa in Newtown than $50,000 for a piece of machinery. They have no vision or ability to comprehend reasonable business plans and their “fairweather friend” attitude means they have no credibility as financing partners.

But if we grow our exports we can create jobs and catch up with Australia! This chart is for the kooks who think that higher unemployment is because our export sector is struggling. If that was true the unemployment rate would have plummeted over the past four years.

Despite the high dollar, exports have increased almost a third since the onset of the global financial crisis. This could be because of the commodities boom and demand from China. It could also be because exporting industries have switched to less labour intensive forms of production. This would lead to less need to hire more workers if you’ve automated your factory.

There are some people who take business confidence seriously. But how can you look at the following and not detect a certain partisan bias? I think business confidence cannot explain why businesses aren’t hiring. They’re supposedly more confident than they were in the middle of a massive housing boom yet don’t want to add more workers.

Note that business confidence was slightly negative when unemployment was low in 2006, 2007 and early 2008. Perhaps business owners really don’t like paying wages and are invested aggressively in cost reduction and automation so they don’t need to go anywhere near the labour market. With some of the rules surrounding employment law, I would not be surprised but will refrain from comment until I’ve looked into the data more closely.

This was my first post full of charts and my brief analysis. If you’d like to add something please comment. I’ll be performing this sort of analysis more regularly.

It’s not as rigorous as building an Excel model for your consumption but it does involve a bit of reality based thinking.

I’d like to know what you think of my analysis and would be grateful for any pointers to interesting working papers, commentary or journal articles.

It would be really appreciated.

Anti Money Laundering And Barriers To Trade

Over at Offsetting Behaviour, Eric Crampton despairs over the difficulty of executing arbitrage trades with respect to the US election.

For just $8.88 he could make a guaranteed return of ~10% by purchasing an InTrade Romney contract and a BetFair Obama contract.

He quotes the terms & conditions at Intrade which make it hard to deposit money in order to comply with anti-money laundering rules.

But anti-money laundering requirements are not just barriers to performing arbitrage on electoral events.

They function as barriers to actual country-to-country trade. Just think about how hard it would be for a developing country exporter to have all the correct documentation and paperwork to open a US bank account and receive payment for commodities on account. Essentially, incumbent commodities firms have an edge because they will be able to put deals together faster than an ostensibly cheaper developing country supplier.

Imposing greater “know your client” rules functions as a barrier to entry. If you can’t get an account set up in the first place because you’re starting up a business in the developing world, you’ll have to rely on more expensive banking services.

You might even skip the mainstream banking system altogether, relying on immigrant cash transfer networks.

There are so many second-order effects of anti-money laundering legislation. Making it harder to take advantage of goods arbitrage opportunities is just one I can think of.