Book Review: Flash Boys

Michael Lewis, of Liar’s Poker and The Big Short fame, has written a book on the world of High Frequency Trading. The booked is called Flash Boys and it’s more or less as entertaining has Lewis’s recent books.  That’s a good thing, even if it doesn’t quite reach the highs of Liar’s Poker (which you absolutely must buy if you haven’t read it before.)

In some ways I’m surprised more hasn’t come of Flash Boys – when it was published there was some noise about investigations and hearings into the allegations in the book.  I’m not aware that any of that led to anything. However,  my reaction should give you an idea of how explosive the allegations in the book are. I went from misunderstand HFT as a algorithm based approach to trading based on patterns in the data to (probably still misunderstanding) HFT as a parasitic arms race against “regular investors” who are potentially losing money to at least some of the HFT firms without any tangible benefit.

Read the book just to open your mind to the possibilities and for a new appreciation of the speed of light through glass.

Book Review: Bitcon – The Naked Truth About Bitcoin

Jeffrey Robinson, the author of the well known book “Laundrymen” that I’m now reading, has written an engaging story about The Satoshi Faithful (as he calls them) supporters of Bitcoin and where their Faith is leading them stray.

The book is called BitCon: The Naked Truth About Bitcoin and it doesn’t pull punches in deriding the would-be currency. If you don’t know anything about Bitcoins, it may skip over some of the introductions necessary to hold your own in conversation. This isn’t a primer on Bitcoins or crypto-currencies, but it also doesn’t spend chapters on involved technical details so you won’t be completely lost.

I described the book as “engaging”. For me, already very sceptical of the long-term chances of success for Bitcoin and specifically  critical of its suitability as real “currency”, it had me nodding in agreement with many sections. Frankly, I don’t know how persuasive it would be to a fervent supporter (not that much anything would be).

I did enjoy the insights into some of the personalities behind Bitcoin and the histories of different supporters and how this has changed over the short time Bitcoins have been around. I learnt more about the Dark Web than I knew before, gaining a new appreciation for how dark the underbelly of the web and Bitcoins are.

Robinson ignored what I think is a key limitation on Bitcoin. Supporters claim its value derives in large part from the limited supply, but without any intrinsic value, other crypto-currencies are near-perfect substitutes. I’ve blogged about this before and was looking forward to seeing another take on it.

I enjoyed the book, reading through it fairly quickly and without wanting to switch to something else, suggesting Robinson hit the target with length and balance of information vs entertainment.

Go grab a copy from Amazon – BitCon: The Naked Truth About Bitcoin.

European deflation risks not deflating

The UK Telegraph (and other sources) are highlighting the rising panic about Euro area deflation. For those Austrian / hard money / gold standard / bitcoin / generally poorly informed amongst you, it’s not that deflation is itself a problem, but that it creates scenarios of debt spirals increasing the real value of debt obligations and decreases demand and economic growth through increasing the real cost of labour through downwards sticky prices (most especially wages).

European five year inflation expectations

European five year inflation expectations

It really does seem that UK / US policies are, more slowly than necessary, coming right and the economies are slowly shrugging off the GFC and are moving forwards.  The rest of Europe is not.

Sanral with blinkers on and no imagination

I read Nazir Alli’s opinion piece on BDLive this morning. Unsurprisingly, he talks up tolling as the best way to fund roads.

Now, I don’t have as strong a view as some that etolls are Universally Bad. Frankly, I also feel that many people who complain about etolls are still complaining about having to pay. The arguments against etolls have become more sophisticated over time, but I can’t shake the suspicion that many of those who support fuel levies would have been almost equally outraged if an increased fuel levy had been used instead of etolls.

Let’s take a look at some of the more egregious comments from Mr Alli:

There should be agreement that the fuel levy is not an option, especially in the context of reducing inequality, though that is what the populists and dissenters keep punting. That leaves us with three options.

Starting with the end in mind? It’s a bold claim that “there should be agreement that the fuel levy is not an option”. As far as I can tell, there is no justification for this in the piece.  The plea to reduce inequality is also vague – I can think of several mechanisms that could be used to mitigate the increased burden on the poor. There are more complex, more subtle interventions than the simple, single-lever ideas Mr Alli imagines.

Then there is the capacity-related backlog in and around our metropolitan areas. These are the roads that are reaching their maximum capacity during peak hour, resulting in increased congestion, which in turn contributes to driver frustration, decreased safety and negative economic consequences. To alleviate congestion, additional lanes or new roads need to be built. For this, Sanral needs a further R120bn.

This is a separate point for Mr Alli and for me. The need for funding doesn’t talk to how that funding should be raised. This paragraph does provide a fascinating insight into the 20th century mindset on dealing with road congestion. Congestion? More roads! The answer to congestion is actually fewer parking spaces and increased public transport. Think about it, if you have nowhere to park your vehicle, you won’t drive to work. If there are a range of efficient, reliable, safe and cost-effective public transport options available, then you have the carrot as well.

It gets better:

These are huge sums of money but if one takes into account that about 87% of all goods and services move by road, it is really important to keep road traffic moving. In light of the needs elsewhere in the economy, it is unlikely such funding will be forthcoming.

Yes, roads are used, overused, for transport in South Africa. One can hardly blame Sanral for the decline in our rail network, but the 87% needs to be decreased as part of a coherent national transport and logistics plan.

Mr Alli says “it is unlikely such funding will be forthcoming”.  All the funding comes from South African citizens and corporations. If Mr Alli believes that the only way to raise funds is via etolling, then it’s hardly surprising that he is so fixated on etolls as the “right answer”. There are other options, even if Mr Alli can’t conceive of them.

The growth in the length of roads Sanral has to manage is not matched by an increased allocation from the Treasury, which means the agency must be innovative, smart and prudent with allocated funds.

I’m waiting for a recognition that the etolling infrastructure is extremely expensive and doesn’t really talk to “prudent” at all.

Keeping in mind the large sums required for road construction and maintenance, it is obvious that the levy would have to rise by between R1.35/l and R2.80/l, depending on the time frames in which the backlogs should be addressed

I would like to see the analysis behind this – and get a view on how these compares to the etolls in terms of their ability to deal with backlogs of funding.

That will hit the poor really hard, given the long distances people have to travel to get to work. In Gauteng, nearly 64% of commuters rely on minibus taxis — the preferred mode of the poor — which receive no transport subsidy at present, yet are exempt from e-tolling. Increasing the fuel levy may result in increasing pressure from the taxi industry for a transport subsidy.

There is nothing inherently pro-poor about etolls. The exemption for taxis is pro-poor. A taxi transport subsidy would be pro-poor.  What exactly is the point being made here?

An important toll principle is that those who use a road should directly pay for it — the direct user-pays principle.

My Alli apparently believes this principle, but it is not a natural law of the universe. It is one principle out of many. And ironically, isn’t particularly pro-poor which seems to be so important to Mr Alli. It also doesn’t talk to the complications of who ultimately pays for the etolls – business will increase prices to be born by consumers so it’s not only those individuals who happen to be driving who will bear the cost anyway.

In simple terms, if you live in Springbok, you will not pay for the road between Johannesburg and Pretoria if it is a toll road. Also, a cost-benefit study has shown that those in the higher income brackets will be paying about 94% of the passenger vehicle toll — in other words, those who can afford it.

There are two points here. The first is that individuals who don’t personally use a road don’t benefit from it. I am happy to pay for a road network, as we have all done in this country and other countries for decades. On the 94%, it is an interesting number. I’m curious to know which income brackets have been used, what the comparable number would be for the fuel levy AND what the number would be without the exemptions factored into current etolls.

We need to understand that the e-tolling system enables different tariffs to be charged for time of day and day of the week, providing a mechanism to reduce demand during peak hours and thus for costly capacity upgrades — which is not possible with the fuel levy.

Finally, an excellent and valid point. I’m also a fan of using etags more broadly – paying for parking automatically amongst others.

Going the fuel levy route or waiting for the Treasury to find the considerable sums needed would have a simple and often overlooked consequence: it would be virtually impossible to deliver large infrastructure projects in short time periods when they are needed — due to the very high fuel levy that would be required to achieve this. It would also encourage people not to use public transport.

Alternative funding mechanisms are possible. Sanral could be permitted to borrow to repay the borrowings out of future income, amongst others.  The second point is more ridiculous – Mr Alli is comparing etolls with exemptions for public transport to fuel levies without subsidies for public transport. That is not a fair comparison.

With the fuel levy, the present generation needs to pay in full for infrastructure that has a 20-or 30-year life expectancy, which may result in less infrastructure being built than needed.

No, it doesn’t. Again, alternative funding mechanism are possible with the fuel levy performing the same function as the etolls in providing income to finance the roads over time.

Where is the mention of the relative efficiency of collecting money via etolls and the fuel levy? The saved costs of etolling infrastructure, call centres, debt collectors an advertising? Where is the imagination to see how other options might work (or at least, might have worked)? Where is the discussion of the forex expenditure and trade deficit implications of paying significant money to foreign companies?

Mr Alli has a position to argue and he’s done it narrowly and with a single-mindedness that is terrifying.

The debate over etolls is a complex one. This doesn’t help.


Argentina in default for second time in 13 years

S&P declares Argentina to be in default for the second time in 13 years and the third in 25. Inflation is likely to hit 40% this year and the Peso has already lost a quarter of its value this year, measured against the US Dollar.

Messages? This time isn’t different, sovereign debt crises happen all the time, ignore currency risk at your peril and there are many reasons governments can default on their debt.

Argentina teetering towards default

I’ve been working with a few insurers and reinsurers on credit risk recently. We’ve had plenty of reasons to think about it, what with new regulations (SAM, Basel III) and South African government downgrades. However, sometimes I get the impression that credit risk is viewed as an academic risk, as something that happens to others, micro lenders and maybe banks.

In South Africa, we’ve had incredibly few corporate bond defaults and most market participants don’t even know that the South African government “restructured” some of its debt in 1984 and so has, in fact, defaulted on contractual bond obligations.

In a recent credit risk and capital workshop, I raised the issue of Russia defaulting on Ruble-denominated debt in 1998, a big part of what led to the collapse of LTCM. Again, these events are often figured as “exceptionally unlikely” and not even worth holding capital.

Well, in the news, Argentina is about to default. Again. They have been one of the most regular defaulters on sovereign debt in the last couple of centuries. They’re also an example I often use of “currency pegs” doing precious little to mitigate currency risk except on a day to day basis.

More on that in another post (yes, I’m hoping to post a little more regularly in the coming months.)

Progress on tax free savings vehicles, but scathing words for life insurers

Read the latest (14 March 2014) document from National Treasury on tax free savings vehicles for South Africa. I think it’s a fantastic idea – both from a policy perspective with carefully designed incentives to promote long-term savings and from a personal perspective. I’m definitely going to use one for my own savings. However, one paragraph stuck out as a pretty clear message from National Treasury on their views of life insurers – and views on current product offerings rather than any historical sins:

Insurance products

Products must permit flexible contributions and may not bind individuals into any future contribution schedules. Many insurance investment policies would currently not match these criteria. Government is not open to providing a tax incentive for products that have high charges and may have an adverse impact on household welfare at the point at which the household is increasingly vulnerable. In this regard some savings products, for example endowment policies and any similar investments that include excessively high penalties in the case of early termination of the policy, pose a policy challenge from a market conduct perspective and will not be allowed in these accounts.
As discussed, National Treasury will engage with the FSB and industry in determining a reasonable approach to charges and early termination.


Wow. I know there are many bad insurance products around and probably some still being sold. I also know of many insurance executives who strive for value for money and are reinventing products and distribution channels to this end.
Seems to me NT isn’t yet on board.