Cuts

[peterbirks]

I took a $400 bath yesterday at $200 buy-in. And, although, as BDD once said, "I'd rather it hadn't happened", I was pleased that I suffered little emotional response. I don't like the term 'cooler' because I think it often refers to hands that, if you think about it rationally, you put the money in when you know you were beaten. However, even I am going to push all my money in on this hand (reconstructed from memory).


MP1 ($100): Raises $6 to $8
Button ($200): Calls
Hero ($200) (8s 8d) (Big Blind): Calls

Neither opponent designated as out-and-out nutter. Right hand opponent is fairly tight.

$25 in pot


Flop Td 8s 3d

Hero checks (single opponent I would lead out here, but two opponents gives me the opportunity to extract an extra bet from Right-hand opponent).

MP1 Bets $8
Button raises to $16
Hero raises to $52
MP1 folds
Button reraises to $192
Hero calls.

Button shows TT for a set of tens. Hero shows 88 for a set of eights.

So it goes.

When opponent reraised all-in here his range was narrowed sufficiently for me not to be that surprised to see a set of tens, but I'm still compelled to call against a range that definitely includes 33 and might include (at a pinch) AA or KK or AK of diamonds.

I also got caught for $100 with AK in the BB vs 88 on the button. He raised to 6. I reraised to $18. He called. Flop came AT8 two of a suit. I bet $35 and he raised all in with a set of 8s. Can't really see me getting away from that one.

So, just one of those nights. It followed a $200 hit in my final session the previous night ($100 buy-in on No IQ), so that's damaged the figures for the month quite a bit.

I suppose part of the reason for a lack of emotional response was that, when your equity portfolio is down $6k in 22 days, a minor blip at $200 buy-in seems an irrelevancy.

++++++++

Fed cuts interest rates by 75bp. This was already factored into interest rate swaps. The only surprise was that it came yesterday rather than at month-end. So why should sterling recover nearly three cents as a result?

Two reasons. The first is that the currency market is often stupid. It should make no difference in a cricket match if a top bowler is brought on now rather than, as had been expected, in three overs' time. But it still (temporarily) impacts the expected total score of the batting team in the spread markets when it happens.

Currencies are like that.

The second reason is more valid. Although the 75bp cut was "factored in", once it arrived, the traders started wondering whether more might be on the way.

The most pleasing thing that I read, however, was a quote from the chief investment strategist at Merrill Lynch (although, now I think about it, that's not a job with a great track record recently). He echoed something that I wrote here and which I didn't read anywhere else at the time --

"In simple terms, [the central banks] cannot force financial institutions to start or stop lending".

wrote Rchard Bernstein.


I've been pointing out this blatantly obvious fact - that the setting of interest rates controls only the base price — for months. It doesn't control liquidity and, more importantly, it doesn't control the level of risk aversion. You (in the role of Ben Bernanke) could cut rates by three per cent, but if risk aversion went through the roof, it would still cost a less than triple A borrower more to borrow.

This is the situation in which we find ourselves now. Risk aversion has been at very low levels and has now returned to normality. Cutrting rates won't make lenders less risk averse.

__________

Comments

[(Anonymous)]

I remember you saying it. But surely cutting the rate reduces the benefit of holding on to the cash than not - lending at 6% is more appealing when rates are 3.5 than 4.25, no? Risk aversion is relative, it doesn't equate to zero risk. The trouble is, as I see it, we're still in the painting picture phase of things. So a 0.75 cut indicates things were worse than feared, suggesting, perhaps, they should have been more risk-averse than they were at 4.25. The cut merely makes them less risk-averse than they would have been had they this risk-realignment without the rate-cut, but, arguably, little difference (now at 3.5) to their risk-aversion against the previous state-of-world perception at 4.25% - before they were enlightened. Cut when all the skeletons are out, on certainty?

f.n.

[(Anonymous)]

Nothing you can do about the 88 hand but you might be surprised to hear that I would advocate folding 33 in that spot. There are a number of shibboleths that exist in poker such as never folding KK pre-flop or not folding a set on the flop. These arise from live play and given the reduced number of hands played in a given time are not unreasonable. I have never been convinced that they necessarily apply to multi-tabling online play though. Set-over-set may well be a rare occurrence live but you'll see plenty of it if you call chunky raises pre-flop with tiny pairs after another player has already cold-called. I also see KK v AA allin pre-flop all day every day. Several times per tournament usually (that's witnessing it, not necessarily being part of it). Could some of those KK's have folded profitably? Perhaps.

matt

[(Anonymous)]

Just to clarify I meant folding 33 *pre-flop* in that spot.

[peterbirks.livejournal.com]

I'm not quite sure what you are saying here, but I was not asserting (and neither is Bernstein) that moving rates down is irrelevant. The point being made is that it is not the absolute panacea that people think. Indeed, as some borrowers in the UK have noticed, a headline of "mortgage rates cut half a per cent" seems to translate into "but for you, guv, when you remortgage, that means a rise of 1.5%".

So, yes, a cut in base rates by 0.75% reduces the rate on the safest loans/investments, the triple A stuff that is definitely triple A. However, there is triple A stuff still out there that the banks are not quite sure is triple A.

Now, if we had into the junk arena, the problem is that the rate cut makes no difference at all. Last year people were prepared to take something like a 7% to 10% rate on this stuff, whereas now they probably simply say "not at any price". (What that means is, "not at a price that we think you are willing to pay".) The more you get away from treasuries in deterioration of security quality, then the less relevant the base rate becomes.

At an extreme level, suppose a guy asked to borrow money on what he admits is only a 50:50 shot. If you agree to back him, he offers you 75% of the profit if it succeeds (which could be around 10 times your original investment), whereas you suffer 100% of the loss if it fails.

Banks, of course, would show the man the door. But there are venture capitalists that would take this deal. However, their decision whether or not to invest in projects as risky as this has little to do with the level of base rates.

So, to get back to the real numbers, I reckon that at the near junkish level, rates have gone from between 7% & 10% to in the region of between 11% and 15%. A 75bp cut might reduce that to 10.5% to 14.5%. For the guy who last year was borrowing short-term at 10%, the "gain" of 50bp because of the cut looks fairly insipid compared with the 450bp increase in what he has to pay because of because lenders have suddenly become risk-averse.

PJ

[peterbirks.livejournal.com]

Hi Matt:

Yes, after the cold call from the button, you are looking for trouble with 33. Assume raiser has pair 40% of the time (not an unreasonable assumption in online play at this time of day) and that cold caller has a pair 60% of the time. The flop then comes KJ3 rainbow. You are now "committed", but how often are you winning?

FMM seem to ask that you look for an expected return of 12 times your investment when you come in with pairs (to allow for the set under set situation). That's a fair enough baseline, I guess (well, better than the assumption that all you need is 8-to-1) but it needs tweaking depending on the situation.

I think that 66 is the lowest I would call with here, in this specific situation. But I've played on tables at the weekend when 22 would have been enough.

I think that your point is echoed in my point about "coolers". If I have KK and a player with stats of 8%/1% raises, reraises and then punts all-in, all preflop against my KK, what chance is there that I am winning? Fuck all. If a player calls here, he is looking for an excuse to bemoan his bad luck.

PJ

[(Anonymous)]

I would thought that risky investments would gain indirectly if banks lend more to AAA as the liqiuidity works its way down. All I was saying, is that before the rate cut, banks would have a certain view of the world leading to a specific risk(averse)-position. I would have thought a rate cut with the same-world view would have led them to be less risk averse, since there is more benefit in lending at say 6% than holding on to capital then there was before the cut. The trouble is the accelerated rate-cut makes them think their world view was wrong and so they should have been more risk-averse than they actually were and so, possibly, the rate cut only takes them back to the same level of risk-averseness they held in their previous world-view state.

f.n.

[(Anonymous)]

Imagine giving money to Bluescouse, 0.75% cut in base rate truly is irrelevant.

Aksu

[(Anonymous)]

Not to you:)

The Wisdom of the Crude

[real-aardvark.livejournal.com]

I'm a financial ignoramus.

Your point (and Bernstein's point) that central banks cannot force financial institutions to start or stop lending (although I imagine that central government would find it fairly trivial to stop lending) seems too obvious to be worthy of comment -- which is why it is interesting that few media outlets, or indeed Think Tankers, have highlighted the issue.

It seems to me that hoi en telei are, as usual, sticking to what they know best. Britain going back on the Gold Standard in 1925 is one good example -- interestingly, and counter to my argument here, opposed by Beaverbrook and a few others -- and what we're seeing at the moment is virtually knee-jerk reactions from anyone with any leverage. Bush cuts taxes: what a surprise. Bernanke lops off 75 basis points: what a surprise. The British can do very little (although I would have thought that 25 basis points is kind of a must), and the poor buggers in Japan can do even less, because they start from such a deflationary position in the first place that there's just no room.

Now, obviously, there are economic levers in play here. What they are, I am not qualified to judge. It seems clear that, ahem, these are not the droids Bernanke and Bush are looking for ...

Nobody points out that there are costs involved in things like chopping base rates off at the ankles: quite severe costs, in fact. I'm sure that there's a better way to spend the money, or at least ways that offer better traction on the fundamental problem. How about throwing guarantees at the bond insurance market (I think that's what I'm talking about): the thing that guarantees repayment on various dodgy loans if they turn out not to be Triple-A after all? There seem to be a couple of companies in that field that are about to go tits up, which would have fairly disastrous knock-on effects.

... but I don't know, and I'm too bored by financial guff in general to look into it. My main point is that going to Oxbridge gives you an interesting insight into quite how hide-bound "experts" are. The phrase "always fighting yesterday's war" springs to mind.

Re: The Wisdom of the Crude

[peterbirks.livejournal.com]

Ahh, throw guarantees (or money) at the bond insurers (aka monoliners).

Indeed. There's probably a board game in this. Basically, it's in the interests of the US banks (as a collective), to pump about $5bn ($10bn at the outside) into the bond insurers. However, because there's a credit crunch, and because these bond insurers look like shit (or, in the case of ACA and Ambac, definitely are shit), it's not in the interest of individual banks to do it, if no other banks join the party. However, if no banks do it, and the monoliners fail, then all of the banks suffer a collective loss far greater than $10bn.

A perfect scenario for Paul Volker to appear, as with LTCM, and to bang a few banking heads together.

Unfortunately, Bernanke is clearly no Volker.

Oh, and even the bond insurers aren't covering themselves in glory. Andrew Moloff, the chief investment officer at Evercore Asset Management urged Ambac to give up its AAA rating and allow its existing insurance policies to go into run-off. Now, "run-off" is not all that dirty a term in the insurance industry. Sure, you would rather it didn't happen, and in many cases (say, in recent years, PX Re and Quanta), it is an example of some fairly awful underwriting decisions. But in other cases, it isn't so bad any more. The stigma has faded somewhat. With active capital management (e.g., as used by Equitas to rescue the Lloyd's disaster of the 1980s) your shareholders get a better deal than if you try to carry on.

So, what did Ambac have to say about that? Michael Callen, interim chief executive, said yesterday that Ambac had 'banished' the word 'run-off' from its offices.

This is technically termed "the ostrich strategy".



The one company that seems willing to walk into rescue the bond insurance business is Berkshire Hathaway (which is starting a new operation to cover municipal bonds). But it's not in Buffett's interest to save the existing bond insurers. Indeed, since Berkshire is cash rich, it's in his interests for them to fail (provided this does not bring about the complete collapse of capitalism). And Berkshire's subsidiaries tend to be fairly recession-proof (no matter how bad the situation, people will still need to shave).

So, the banks need to work together to save the existing monoliners, but they are too fucking useless to be able to co-operate. Result, Berkshire cleans up, monoliners go tits up, recession hits, Berkshire Hathaway gets richer.
Easy game.

PJ

Monoline me, baby!

[real-aardvark.livejournal.com]

(Which is probably the last thing that Belushi said in the Chateau Marmont. I suppose, given that it was a badly-administered speed-ball, that would be "Dual-line me, baby!."

I'll write to the Exchequer about this immediately.)

I'm actually pissed off that you spotted the board game in this, because that's exactly what I though, the instant I clicked the "submit" button. That's the problem with these sado-masochistic Web sites. If only there was a "dominate" button ... I'd have won, I tell you; won big time!

But you're right. And few people realise that Monopoly (crap game that it is, although surprisingly well-balanced) was in fact prompted by the Great Depression.

I don't want to get anybody too worried here. Wait a minute; on Birks' blog? How the hell could I get more than a dozen assorted rabbits, fish, and ephemera too worried?

Well, that accounts for most of the current Cabinet. So I still don't want to get anyone too worried here. I don't see this as a repeat of the Great Depression, although (as I think I've made clear) I don't think that the people in charge have the faintest idea (a) what to do or (b) what the consequences of their actions might be.

I would recommend modelling macro-economic decisions on the basis of a Monte-Carlo algorithm, but that's probably way beyond the public school ninnies who actually run things.

Which is of no interest, and I ran on.

Yes, there is definitely a board-game in this. And it would be a board-game, because the computer equivalent would be extremely dull. It would be something like "Shark," I think, except with some sort of withering because of lost liquidity (that would be Northern Rock). No, it wouldn't: it would be more like "Beer Bottle Bourse," for obvious reasons. No, no, it would be like the (unreleased) Hartland Trefoil sequel to any of 1829, 1830 or 1859 -- the point where the Rail Barons go pear-shaped, and somebody else dives in to pick up the pieces.

Whatever. Time for a quiet word with Mr Harrington.

Many thanks for reminding me of monoliners: as I say, I'm an alcoholic Brummie, so very little of this has any reason to stick in my brain. Many thanks also for reminding me of Berkshire Hathaway's position, which is ... er ... interesting. And for some reason hasn't been commented on recently, as far as I know; which is unusual for the usually fawning financial press.

BTW: re 'This is technically termed "the ostrich strategy"'. Unfortunately, I suspect that we are well beyond that. "The ostrich strategy" probably applied to, say, August and September last year. That's when the Fed should have acted (or, I guess, George "Who, me?" Bush -- the worst President for this sort of thing since Hoover).

Technically, and with parallel experience in a sphere where management just don't have a clue about the domain basics, we are now in "The headless chicken strategy" area.

This has happened to me far too often. It involves a lot of blood over the ceiling and no guided way out. Basically, you just wait for the rest of the world to settle down.

I live in hope, but to be honest, this time, I'm worried. Hope you haven't signed off on buying the flat downstairs.