The Long Run Blog

Critical Thinking on Money, Finance, and Economics

Dimon Loses Sparkle or “It’s not a hedge if you are the bar”

The news about Jamie Dimon’s JP Morgan losing over $2B has caused quite a debate. The point I’d like to address, is whether or not JPM was “gambling”. You see, on CNBC this week, Maria Bartiromo tried to make fun of Senator Harry Reid who intimated that JPM was gambling and should just move to Nevada. During her comments she also tried to make the point that (and I’m paraphrasing) “do we want to outlaw risk taking?” JPM’s misteps are being debated in entirely the wrong context.

To the question at hand, was JPM “gambling” or was this merely “hedging” gone awry? It helps to understand what a hedge is and why it might be used. Any business faces a variety of risks. Banks, in particular, face risks associated with the credit quality of the general economy. For an institution of JPM’s size, if the economy weakens, defaults are likely to rise or the bank is likely to need to increase reserves against potential losses. It’s obvious why a bank might attempt to hedge such risks. Continue reading

May 17, 2012 Posted by | Credit Crisis, Econ Policy, Markets, Uncategorized | , , , , | 1 Comment

Soros lays out how the Euro will end

In an op-ed piece in today’s Financial Times, George Soros predicts the path by which the Euro will break up. While the first half reads like dire warning, the second half offers some options for managing through the problem. Perhaps most interesting is his observation that the “crisis has entered what may be a less volatile but more lethal phase” on account of debt being reoriented from across border to much more in tune with national lines.

Soros notes some interesting observations such as noting that

“the Bundesbank has seen the danger…once the Bundesbank starts guarding against a break-up, everyone will have to do the same. Markets are beginning to reflect this.”

To me, this raises the danger level for investors, but George disagrees.

I’m not doing the essay justice here, so read it for yourself:

April 12, 2012 Posted by | Econ Policy, Economics | , | Leave a comment

The Vampire Squid Is Getting Meaner

The “Vampire Squid” refers of course to Goldman Sachs. Matt Taibbi of Rolling Stone used this moniker to describe “the world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

It was a bit controvercial when his 2010 article proclaimed this. After all, Goldman was still doing bring business and there were no signs of client defections. You’d think customers would be the first to dislike the offending GS behavior.

Today came an interesting opinion piece in the NYT. A long-time employee writes why he is leaving GS and it isn’t pretty for the firm. Greg Smith is leavings because of “the trajectory of its culture…the environment is now as toxic and destructive as I have ever seen it.” Almost corroborating Taibbi’s claim is that “Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way.”

Interestingly, his main claim is that “the interests of the client continue to be sidelined in the way the firm operates and thinks about making money” and “how callously people talk about ripping their clients off”. The problem for GS’s future, Smith writes, is “how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.”

Which raises some interesting questions. If GS’s behavior is so bad, why aren’t clients defecting? Are they that oblivious, clueless, blind or dumb? Or does GS offer things that can’t be matched elsewhere such that customers stay anyway? Perhaps clients simply don’t feel these claims are accurate and that GS really does care about them? As illustrated by Buffett saving Salomon in the early 1990’s or Arthur Andersen disappearing after Enron, reputation and trust are so important in finance that if GS’s business doesn’t hurt from these allegations, either they are not taking advantage of clients or clients are truly oblivious. It’s hard to see a middle ground.

March 14, 2012 Posted by | Corporate Finance | 5 Comments

Begging for mercy from the financial press

Dear financial press,

Please have mercy on us color blind folks. Is it too much to ask that your charts use colors that are clearly distinct? I once failed a chemistry lab because I couldn’t see the goop on the microscope slide turn from pink to purple. Like there is a difference to us color challenged?

Red, green, yellow lines- all just look like a kid was drawing scribbling lines to us. Even when lines are labeled, we’re lost after two series cross. Red and blue are hard to decipher if the screen is off or the printing is off. They key is to use colors that dramatically contrast to a degree where color is nearly irrelevant. Bright red and green can just be bright lines, but a blue line and a light green line are different in intensity/brightness/contrast and can almost always be deciphered by all but the worst colorblind cases.


A Few Percent of the Population


And “magenta”- whatever the hell that is- is really just a joke to us.

March 6, 2012 Posted by | Quote, Lore, Wisdom | Leave a comment

Scams, fitness style

While this isn’t necessarily financially related- except to the extent you don’t waste your money- I did find it fascinating and worth spreading.  You’ve all seen those ads on web pages. The ones with the “before” and “after” pics of someone who lost weight and got buff. I’ve always assumed the pics were either taken months apart (which isn’t likely) or photoshopped. Well, someone finally exposed how its done. Enjoy:



Even more hilarious, is the youtube vid I noticed off to the side of this debunking video:

February 9, 2012 Posted by | Frauds & Scams | , | Leave a comment

Did the stimulus work? A new book.

Yes, according to a new book “Money Well Spent”. Interview with the author (below). Interesting that he still gives the stimulus a grade of “C” despite the book’s title. Might be a good read.

Unfortunately, WordPress will not embed a video on Yahoo!, so I have to give you a link:

February 1, 2012 Posted by | Econ Policy | Leave a comment

Too many metaphors

I have to admit, I’m stuck at a literary crossroads. There are simply too many metaphors to draw upon! Where to start? As Yogi said, when you come to a fork in the road, take it. Consider that it is now 2012, the year which the Mayans supposedly predicted the world will end. It also happens to be the 100th anniversary of the sinking of the Titanic. And almost as if on cue, a cruise ship just sank under mysterious circumstances in Europe. Yet it gets better: Europe is all too similar to a slowly sinking ship, listing feebly in the cold night, while the band plays and the crew runs about helplessly (cluelessly?) Greece was just the tip of the iceberg afterall. Will the captain (Germany) abandon ship or order the water tight compartments to close? Will the water tight compartments hold or does the water spill over into neighboring holds, causing the ship to slip deeper and deeper into the sea? Will le passagers in first class survive? The lowly steerage passengers will almost certainly absorb the brunt of the losses. Or will the HMS Eurozone sink suddenly, like the Lucitania (coincidentally torpedoed by the Germans)? If Europe does sink fast, will it bring the end of the [financial] world? Is this what the Mayans predicted, “Eurogeddon”? What will happen to the survivors and what of the wreckage is salvagable? About the only thing I can predict with certainty is that there will be a bull market in metaphors this year- hopefully by writers who will have a more eloquent and creative time with them than me!

January 18, 2012 Posted by | Econ Policy, Economics, Markets | Leave a comment

It’s January – you know what that means

I was saving this post for the end of the month, but the tea leaf-reading, fortune-telling, divining rod, hocus-pocus is starting early this year, so I’ll post it today.


You guessed it, it is prediction time! Along with the new year, the pundits will come out and make confident, bold predictions about the year to come. They’ll hardly ever revisit last year’s forecast and how wrong it was, but no matter, they will confidently predict this year’s path anyway. Of course, this annual exercise tends to hit the press in January and January is the month that supposedly predicts the stock market for the rest of the year. (Recaps of this topic here and here.) I’m going to pre-empt the February 1st or 2nd headlines right now.

For 2011, the January Barometer was wrong, again. January 2011 was an up month and the rest of the year was down, albeit slightly. That makes the miss three-in a row, 50% on the last decade and only 64% since 1926. No doubt pundits that will choose a time period with more favorable statistics which to cite as evidence (you get 69% by choosing just 1940 onward).

Let’s play a game, shall we? Please post in the comments links to any January Barometer articles you find, so we can chuckle at their ignorance of statistics and logic. I expect them to start appearing in early February.


And here are the TWO instances of nonsense I’ve already seen:

In this article from, we learn that “Since 1945, a positive January in an election year has never missed in predicting a full-year gain for the Standard & Poor’s 500, going 8-for-8″. Wow, a whole 8 data points, conveniently ignoring pre-1945 data (why?) 8 data points is not statistically significant for, well, anything. But go ahead and peruse the article anyway, it’s laughable. It includes gems like “Whatever the S&P 500 doesn’t provide in absolute return this year, it will likely make up for in predictability”. What the heck does that even mean? I’m floored.

And then we have this little interview on the otherwise good ‘Breakout’ on Yahoo!Finance. At about 2:10 into the interview, the guest disclaims “even with a few errors”, the January Barometer is still “pretty good”. Uh huh.

Please use the comments to share other incidences of magical thinking.

January 6, 2012 Posted by | Markets | , | Leave a comment

Hedge Fund Manipulation

Happy New Year, everyone! What better way to start the year than highlight rampant fraud?

Hedge funds seem to make all the headlines. Rarely do we hear about plain old mutual funds much anymore. ETFs, derivatives and hedge funds are the investments du jour (or perhaps, “du la decennie” or “of the decade”?) There is a tremendous misunderstanding of what “hedge funds” are, how they invest and what to expect from them. The category is as broad and diverse as the “mutual fund” category is. Continue reading

January 1, 2012 Posted by | Markets | , | Leave a comment

Deflation or Inflation?

Admittedly this is anecdotal. But also significant. It looks like auto prices are set to…drop. That’s right, the price of new cars- even new and improved models- is set to fall. Seems odd in the face of reasonably strong commodity prices doesn’t it? Sales numbers have been decent and global capacity was cut right after the crisis three years ago. The Yen is strong, the Euro is holding in there despite being a disaster, so it’s not like the dollar has suddendly greatly appreciated to lower import prices. All of this means that auto prices should be up modestly, not down. (click graphic below for article). Hmmmm….

December 8, 2011 Posted by | Economics | , | Leave a comment


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