A good article by Jeff Frankels

I was reading it from his blog and i find it interesting and thought of sharing so read it .

Throughout history, big economic and political shocks have often occurred in August, when leaders had gone on vacation in the belief that world affairs were quiet.   Examples of geopolitical jolts that came in August include the outbreak of World War I, the Nazi-Soviet pact of 1939 and the Berlin Wall in 1961.  Subsequent examples of economic and other surprises in August have included the Nixon shock of 1971 (when the American president enacted wage-price controls, took the dollar off gold, and imposed trade controls), 1982 eruption in Mexico of the international debt crisis, Iraq’s invasion of Kuwait in 1990, the 1991 Soviet coup, 1992 crisis in the European Exchange Rate Mechanism, Hurricane Katrina in 2005, and US subprime mortgage crisis of 2007.   Many of these shocks constituted events that had previously not even appeared on most radar screens. They were considered unthinkable. 
The phrase “black swans” has come to be used to mean a very unlikely event of this sort.  Managers of Long Term Capital Management in 1998 or of most major banks in 2008 have suggested that they could not be expected to have allowed for a financial collapse such as the one that followed the default of Russia or the one that followed the bursting of the US housing bubble, because it was a “7-standard deviation event,” that is, an event of inconceivably tiny probability…in the realm of the probability that two major meteors hit the earth at the same time.   This is nonsense.  If the statistical model says the probability of a financial crisis is that low, it is the model that is wrong.  This is like the case when “hundred-year floods” turn up every few years.
A bit more enlightened are people who talk about Knightian uncertainty or “unknown unknowns.” Ignorance with humility is better than ignorance without it.    A still better interpretation is that statistical distributions have “fat tails,” in technical terms.  But it would be nice to get beyond the Jurassic Park lesson (”don’t be surprised if things go wrong”), to be able to say intelligent things about what causes tail events.
       What does “black swan” really mean?   In my view, it should refer to an event that is considered virtually impossible by those whose frame of reference is limited in time span and geographical area, but that is well within the probability distribution for those whose data set includes other countries besides their own and other decades or centuries.
      Consider five examples of mistakes made by those whose memory did not extend beyond a few years or decades of personal experience in a small number of countries.
1. “All swans are white.”  The origin of the black swan metaphor was the belief that all swans were white, a conclusion that might have been reached by a 19^th century Englishman based on a lifetime of personal observation and David Hume’s principle of induction.   But ornithologists already knew that there in fact existed black swans in Australia, having discovered them in 1697.  A 19^th-century Englishman encountering a black swan for the first time might have considered it an event of unthinkably low probability, even though the relevant information to the contrary had already been available in ornithology books.  It seems a waste of an excellent metaphor to use the term just to mean a highly unexpected event.  A better use of “black swan” would be to mean an event that would not have been quite so unexpected ex ante if forecasters had cast their data net over a broader set of countries and a longer time perspective.
 2. “Terrorists don’t blow up big office buildings.”   Before September 11, 2001, some terrorist experts warned that foreign terrorists might try to blow up tall American office buildings.   These warnings were not taken seriously by those in power at the time.   Many Americans did not know the history of terrorist events taking place in other countries and in other decades.  
 3. “Housing prices don’t fall.” Many Americans up to 2006 based their behavior on the assumption that nominal housing prices, even if they slowed down, would not fall.   After all, “they never had before,” which meant that they had not fallen in living memory in the United States.   They may not have been aware that housing prices had often fallen in other countries, and in the US before the 1940s.  Needless to say, many a decision would have been made very differently, whether by indebted homeowners or leveraged bank executives, if they had thought there was a non-negligible chance of an outright decline in prices.
 4. “Volatilities are low.”   During the years 2004-06, financial markets perceived market risk as very low.  This was most nakedly visible in the implicit volatilities in options prices such as the VIX.  But it was also manifest in junk bond spreads, sovereign spreads, and many other financial prices.  One of the reasons for this historic mis-pricing of risk is that traders were plugging into their Black-Scholes formulas estimates of variances that went back only a few years, or at most a few decades (the period of the late “Great Moderation”).  They should have gone back much farther - or better yet, formed judgments based on a more comprehensive assessment of what risks might lie in wait for the world economy.
 5. “Big banks don’t fail.”   ”Governments of advanced countries don’t default.”   ”European governments don’t default.”  Enough said.  Greece’s debt troubles, in particular, should not have caught anyone by surprise, least of all northern Europeans.   The perception was that euro countries were fundamentally different from emerging markets, that like Germany they were free of default risk.  Suddenly, in 2010, the Greek sovereign spread shot up, exceeding 800% by June. But even when the Greek crisis erupted, leaders in Brussels and Frankfurt seemed to view it as a black swan, instead of recognizing it as a close cousin of the Argentine crisis of ten years earlier, the Mexican crisis of 1994, and many others in history, including among European countries.

Glass-Steagall Act

A law put forward by Senator Carter Glass and Representative Henry Steagall in 1933, a milestone in US banking legislation. The law prevented any commercial bank in the United States from underwriting and dealing in securities. Securities business was left as the exclusive preserve of investment banks. The strict divide was created in the wake of financial scandals in the late 1920s and early 1930s. Some banks had used depositors’ money to support the price of securities that they were underwriting, sometimes with disastrous consequences for depositors. Many investors who bought the shares of dud dotcom companies during the technology boom of the late 1990s felt similarly short-changed. They discovered that some analysts employed by investment banks had worried more about the fees the bank would receive from a successful initial public offering of the shares than about delivering an objective recommendation of the company’s worth. Changes in the way financial markets operate and pressure from the new breed of financial-services conglomerates finally caused the GlassSteagall Act to fray at the edges, and it was repealed in 1999.

Spread betting

A way of betting on the outcome of movements in the financial markets. Like bookmakers at the races, specialist firms accept bets on the movement up or down over a period of a stock index or an individual share. The profit or loss is calculated on the basis of the number of “points” between the price at the outcome and what it was when the punter made the original bet.
Take XYZ company, which is quoted at a spread of, say, 863–870 pence. If you think the price is going to fall, you would take out a “down” bet for, say, £15 at 863 pence, the lower of the two prices quoted, over a period of, say, two weeks. If at the end of the period the spread quoted has fallen to 830–837 pence, you would buy back your original down bet at 837 pence, making a profit of £390 (863  837  26, then 26  £15  £390). Conversely, if the spread quoted had risen to 880–893 pence, you would lose a corresponding amount (863  880  17, then 17  £15  £255).
Spread betting is risky because, unless you cap your liability by taking out an equal and opposite bet or otherwise minimise your exposure, you are liable for the full extent of your losses should the price fall. Although spread betting in financial markets began only in the 1970s, it has long been popular with followers of sport. Today it is possible to gamble in the same way on the outcome of, say, a cricket match by taking an up or down bet on the number of runs a particular side will score and many of you would be knowing the pakistani scandal in cricket . A boon for country's residents is that profits from all such transactions are free of capital gains tax and stamp duty.

MUST READ Spain: Autonomy under fire By David Gardner

The Spanish government, trapped in crossfire at the frontline of the battle for the euro, looks as if it is opening a second front – by using the crisis as pragmatic justification and political cover to roll back a highly devolved system of regional government that the ruling Partido Popular ideologically detests.
The centre-right PP, which won power last November, wants not only to shrink the state but also to recentralise it. The government of Mariano Rajoy has been dropping hints and throwing its weight around with regional governments – several of which need Madrid’s help to pay their staff and refinance their debts

“We are part of the state but we are treated as subjects not partners,” Andreu Mas-Colell, finance chief in Catalonia’s nationalist government, complained to the Financial Times days after a bruising meeting with Cristóbal Montoro, the Spanish finance minister, whom he said threatened to impose central control on regional governments that missed rigid new budget targets.
The stakes are high. The fermenting confrontation between the centre and the 17 regions is more than a subplot in the wider euro-drama. If mishandled, it could undermine the constitutional settlement that brought Spain out of the dictatorship of Francisco Franco into a vibrant democracy and stoke demands for Basque and Catalan independence that devolved government was supposed to prevent.
“We’ve been building the pillars of this new system for 30 years,” says Carlos Aguirre, the Socialist economy and finance chief of the Basque government. “Before, it was OK to change the tiles on the roof but no one dared touch the foundations. The fear now is that everyone wants to look at the foundations.”
Yet the architectural design of devolution was flawed from inception. The emerging democracy faced the challenge of how to meet the historic demands of the Basques and Catalans, who governed themselves under the Second Republic defeated by Franco in the 1936-39 civil war, but whose sense of nationhood goes back centuries. For the Spanish nationalist right, pandering to the separatists Franco crushed, with their languages and culture, was anathema. For the Jacobin left, it was a parochial sideshow. The compromise, laid out in the 1978 constitution, was to offer ostensibly similar terms to everyone. Each region could become “autonomous” to disguise the restitution of rights to the “historic nationalities” – a neologistic detour around the incendiary word “nation”, of which there could only be the one and indissoluble Spain.
Basque and Catalan autonomy bedded down quickly and other regions with singular features, such as Galicia, with its own language, or Andalucia with its distinct culture, acquired the physiognomy of self-government. But many regions found themselves with governments they had never asked for, which often became fiefs for local barons and vehicles of party patronage. The financial irresponsibility of some regions, mercilessly exposed by the present crisis, has led some to conclude devolution is an expensive luxury.
“Devolution was created to solve the Basque and Catalan problem, but those problems are actually getting worse and the cost of all this is no longer affordable,” says a senior official in a PP-run regional government. Yet he admits there would be “radical resistance to any roll-back”.
“The idea of recentralisation is just not possible in Catalonia,” says a former adviser to José Luis Rodríguez Zapatero, the Socialist premier until last year. “The atmosphere there has changed totally. Sovereignty [separation] is under active discussion – and if there is one thing that will make that happen it would be an attempt to snatch back powers.”
The fiscal argument over devolution is tangled and frequently tendentious. Often omitted in these polemics are the cost of services and the inadequate tax base to support them. The regions have to spend a lot, since public services such as health, education and care for the elderly fall to them. Revenue to pay for this was plentiful from property taxes during the pre-crisis building boom, to which many regions (as well as central government) grew addicted. But this dependence became structural after income tax was cut under the previous PP government of José María Aznar as well as Mr Zapatero’s Socialists.

A new voice for Basque separatism

The Basque Country is already gearing up for an election that could be called as soon as this autumn and the separatists, the radical nationalist or abertzale left, are more confident than they have ever been. One reason is the popularity of their candidate for lehendakari, or president of the autonomous government, Laura Mintegi, a well-known writer, doctor in psychology and professor of literature.
Unlike Arnaldo Otegi, the Basque Gerry Adams who is still in jail, Ms Mintegi has no known connection to Eta, the armed separatist group that this year ended its already fizzling campaign of violence. While Mr Otegi and his political colleagues deserve credit for getting the gunmen to stand down, Ms Mintegi is more electable.
Her Bildu coalition won more seats than the mainstream nationalist PNV in municipal and general elections last year. This was partly in reaction to the decade-long ban on its predecessor, Batasuna, which had close ties to Eta. That era is over, says Ms Mintegi. “Using violence for political ends is unthinkable, absolutely finished; we want to live in peace.”
Even separatist Basques tend to be proud of the achievements of self-government and Ms Mintegi is no different. “Things have been done differently here,” she says, “but it has never been enough and now it’s exhausted”. The crisis in the eurozone highlights the shortcomings of even extensive autonomy, by taking decision-making further from the people it affects and prompting the centre-right Partido Popular government of Mariano Rajoy to curb regional power.
“Decisions need to be taken here, not in Berlin,” says Ms Mintegi. “If the PP tries to roll back devolution that could be positive for us – I sometimes joke that we don’t have to leave [Spain]; they’re going to leave us.”
Basque separatism’s new standard-bearer realises she is up against a formidable machine in the PNV and admits similarities between Bildu’s economic programme and the Socialists who now run the Basque government. Coalition may be an option, she says.
Asked if a government led by her would take part in a national pact to deal with Spain’s economic emergency, she says: “Yes, we would be up for it, but not if it meant more of the same. We can’t have thousands of people being thrown on the scrapheap [of unemployment] every day. It’s obscene.”

Now, amid a suffocating budget squeeze, all regions except the Basque Country and the adjoining province of Navarre, which raise their own taxes, are dependent on central funding, which many officials see Madrid using not only to impose austerity but also to eviscerate self-government.
Mr Montoro has made clear that governments seeking help to re­finance their debts through the new €18bn liquidity fund for the regions will have to accept strict conditionality of the type the EU enforces on bailed-out eurozone members such as Greece or Portugal. The finance minister has even been heard to joke about sending in “Men in Black” from Madrid, rather than Brussels and Frankfurt, to administer regional governments. Madrid, moreover, is reserving the breathing space Brussels recently gave Spain to reduce its budget deficit entirely for central government spending, imposing even more stringent targets on the regions.
“The government thinks it can do with us what the EU is doing with central governments,” says Mr Mas-Colell. Heribert Padrol, who advises Catalan premier Artur Mas on plans for greater fiscal autonomy, says: “In my view they do have an agenda to recentralise and replicating the EU mechanism internally gives it a sort of legitimacy.”
. . .
While no one disputes that there are costly overlaps and duplication in the devolution model, the government shows little sign of differentiating on quality of spending. All parties are guilty of clientelism, but the PP more than most. The PP now runs 11 of the regional governments, which owe half the total of €140bn in regional debts and have public payroll costs far in excess of the average. The Basque and Catalan wage bills are forecast to be 20 and 24 per cent respectively of this year’s budget, whereas those of PP-run Valencia or Galicia are both about 38 per cent. “The only employment office in Spain that works at the moment is the Partido Popular,” a PP regional government official remarks.
Indeed, when critics pan regional extravagance it is Valencia’s government, with its baronial rule and baroque corruption scandals, that they inevitably excoriate. It is no accident that a regional government-linked Valencian bank is at the core of Bankia, the nationalised lender at the heart of the banking crisis. Valencia was an exemplar of regional savings banks, or cajas, pumping up the housing bubble.It has 23 per cent of Spain’s stock of 800,000 unsold new houses. “The equation of cajas and regions was a way of printing money,” says José Ignacio Torreblanca of the European Council on Foreign Relations.
Yet the debate about the future of devolution is becoming much harsher than the judgments about its record and is set to pit Spanish nationalists against Basque and Catalan nationalists campaigning for more independence. The former believe the present, open-ended federal system will make Spain a residual state with a weak central government – a sort of Hispanic Switzerland. The latter are being tempted into believing that Spain is holding back their future.
While the Basques have usually been seen as the biggest threat to unity because of the now ended violent campaign of Eta separatists, it is the Catalan sovereignty debate that has now turned radical. The turning point came two years ago when the constitutional court in Madrid watered down reforms to enhance autonomy approved by both the Catalan and Spanish parliaments.
The Catalan government wants the right to collect its own taxes like the Basques – a right it rejected 30 years ago. That generation of Catalan nationalists sneered at the Basques for resurrecting quasi-feudal rights to underpin their fiscal autonomy. “They called it a relic,” recalls Iñigo Urkullu, president of the mainstream Basque Nationalist party. “But 30 years later they’ve realised what a vital tool it is – it’s thanks to that we were able to reconstruct our economy and build self-government.”
The Basque economy is industrially diverse and export-oriented, supported by sound banks and high research and development spending. With fiscal autonomy, the government has kept its debt and budget deficit under control, providing good education and public services, but transferring about eight times less per capita to the Spanish fiscal pot than Catalonia.
Catalonia, by contrast, with an economy the size of Portugal’s, has the heaviest debt burden of any region – €41.8bn, with €13.5bn maturing this year. While demanding fiscal autonomy, the Catalan government announced last month it would have to seek fiscal rescue from Madrid.
Catalan officials and economists say they would be solvent were it not that they transfer €18bn a year, or about 9 per cent of economic output, to Madrid – an amount they complain exceeds the demands of equitable transfer to poorer regions. “We can’t have a situation where we are the fifth [region] in per capita income, but we end up being ninth after the share-out,” says Mr Padrol. He underlines that the clamour for independence has travelled from the political fringe to “the people who wear ties” because “either you control your own re­sources or as a country you’re dead”.
“The Catalan government wants to be a region with the attributes of a state, but what we want doesn’t fit into Spain any more,” says Salvador Garcia-Ruiz, an economist and separatist. Since he expects Madrid not only to reject any new fiscal powers for Catalonia but use the present crisis to reclaim powers its government already has, he believes Catalans will eventually vote to secede from Spain.
Opinion polls suggest he may be right but mainstream Catalan nationalists, like their Basque counterparts, have long blown hot and cold onindependence. The Rajoy government looks set to test this pragmatic ambiguity to the limit and to uncover the hard-wiring of nationalist determination.
“Catalonia is not going to go away,” says Mr Mas-Colell. “We have our history, our language and our culture – we survived Franco so we will survive this.”

What the hell is CRASH???

Everyone worries about it and every analyst want to predict it and its behavior.
In ’29 when the banks went bust Our coins still read “In God We Trust”.
What happens when a stockmarket falls precipitously, as in the United States in 1929 and on black monday in many markets in 1987. J.K. Galbraith, in his classic book, The Great Crash 1929, gave five main reasons for the 1929 fall.
1 The poor distribution of money in American society. The top 5% of the population was reckoned to be receiving 33% of all personal income.
2 Bad corporate structure. The 1920s was a decade of stockmarket fraud; crooks bled companies of huge amounts of money.
3 Bad banking structure. There were too many independent units; the failure of one led others to collapse in a domino effect.
4 The United States’ foreign balance. There was a declining trade surplus for the first time in modern history. 5 The poor state of economic intelligence at the time. The government made decisions that were contrary to the best interests of the economy, and too little was known about the true state of the economy.

Putting these and other failings right has done much to prevent similar falls occurring. But, as Black Monday in 1987 shows, anything can happen if investors lose confidence in the markets. The decline in share prices from 2001 onwards was painful – share prices on most major stock exchanges halved in value – but it was not a crash.

Arbitrage

Many wanted to known about the arbitrage
The buying and selling of financial instruments on different markets in order to take advantage of different prices between the markets. Before markets became truly international, the game usually involved dealing in different countries (for example, the foreign-exchange markets in New York or London). Today, arbitrageurs (the name given to those who practise it) are more likely to trade between baskets of different instruments and between the physical and futures markets. For example, a trader might swap euros for dollars and lock in a gain by selling the dollars forward in the futures market. A similar trade could involve buying and selling interest-rate contracts for one or more currencies. An investor could also profit by buying a block of shares in one market and repackaging them for sale in another. In theory, as information travels more quickly, the opportunities for arbitrage should diminish because markets operate more efficiently. In practice, however, the growing diversity of financial instruments (particularly derivatives of one sort or another) is increasing the opportunity for arbitrage, especially for sophisticated investors.
I tried to bring out it in simple terms

What is an alpha ???

A mathematical estimate of the return to be expected from a particular stock based on such things as the rate of growth of the company’s earnings per share. To measure the performance of a particular stock, it is assumed that the return from the market as a whole is zero. So, for example, a stock with an alpha of 1.25 would be expected to rise by 25% during a year in which the market remained flat. A share whose price is low compared with its alpha may therefore be considered good value. Alpha can also be applied to a portfolio of investments, to measure how well or badly it has done compared with how much risk it holds. A stock with a high alpha may or may not also have a high beta, a measure of its volatility.