The Big Picture Investment Conference

I’m at Barry Ritholtz’s Big Picture Investment Conference. I got here a little late so I missed the first speakers. I was able to hear James P. O’Shaughnessy, the author of “What Works on Wall Street.” James takes a very long approach to investing and he’s currently very bullish on stocks, especially compared with bonds. It’s hard for me to disagree. He pointed out that TIPs buyers are locking in 91 cents on the dollar by 2022. That doesn’t sound like a good plan.

Next up is Barry Ritholtz. He’s riffing on behavioral finance which is basically the area of science that looks at the many ways our brains actively work to trick us. They make us think we’re smarter than we truly are. We have to rationalize certain ideas.

The media is very savvy at giving us people who sound like they know what they’re talking about. Audiences rally around confidence. Speakers who convey nuance aren’t liked by audiences. Furthermore, the greater self-confidence of the expert, the worse track records are. I always find these facts disquieting because we expect our brain to be our guard against irrational beliefs. But the truth is, our brain doesn’t do a terribly good job of this. We prefer nice neat stories.

Lunch!

David Rosenberg is up. He defends himself against the perma-Bear charge. I like how he describes himself as the firm’s chief worrywart.

Rosenberg called the Fed minutes as being from La-La Land. The lists of worries aren’t from a recovery, especially considering the stimulus. He’s going through the numbers and says they’re dismal. He says that going by previous cycles, real growth in this cycle should be closer to 8% instead of the 1.5% we’re getting.

Rosenberg says that we’re still going through a deleveraging cycle and it’s not nearly done. We have to go back to long-term ratios of debt to equity and debt to income. Rosie says that we’ll eventually get to the Holy Grail of sustainable growth without massive government aid. He said we’re probably about halfway there.

Now is the HFT panel. Josh asks the panelists how they came to be HFT critics. They said that around 2007, they noticed unusual behavior. They claim that there are unfair predatory practices and the rise of private exchanges. The glue that holds them all together is HFT.

The other panelist said that he wanted to write about HFT and his editors were stunned to learn that HFT controls 70% of the trading volume. At first, he thought HFT was ok in that they provided liquidity. In 2010, he went to an HFT firm. Soon after was the Flash Crash. He called some HFT firms and they said they had pulled out of the market. He then realized that this was a major structural problem for the markets. The panelists also point out that spreads have not narrowed. Since 2007, they’ve actually expanded.

I think the best anti-HFT point is about the integrity of the capital markets. No one cares about a fraction of a penny. But the key about HFT is that it has squeezed out smaller firms. There are no more second- or third-tier firms, and that has hindered new IPOs. HFT is now going into other markets like currencies.

Posted by on October 10th, 2012 at 12:07 pm


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