Trading Book Reviews

Book Review: The Global Economic System

[easyazon-link asin=”0137050127″][/easyazon-link]The first thing I think needs to be said about [easyazon-link asin=”0137050127″]The Global Economic System[/easyazon-link] is that the title by itself isn’t a very good one. The book isn’t really about the global economic system. Now the subtitle, which is “How Liquidity Shocks Affect Financial Institutions and Lead to Economic Crises” does an excellent job of getting to the crux of what the book’s about. It very much focuses on how negative shifts in liquidity can produce cascading effects through the financial system and beyond into the economy.

From the perspective of traders and investors, I think the first part of the book in particular is extremely valuable. That’s where the author’s discuss the dynamics of the bid/ask spread – where it comes from on the base level and what causes it to expand and contract and move. The bid/ask idea is one that trips up a lot of folks in the exchange-traded markets, because they tend to see traded prices as the primary piece of information (this is something I wrote about in Misunderstanding the Bid/Ask Spread in Stock Trading, which is among the most commonly read posts on this site). The language the author’s use may be a bit challenging at times (two of the authors are university professors), but visuals are included to make the point about what can happen when liquidity in the market shifts.

The other really interesting thing (at least I thought so) from the early part of the book is a look at the liquidity risk premium. The authors model a portfolio that is basically long liquidity risk (meaning long low liquidity bonds and short high liquidity ones) and demonstrate the returns that can accrue, as well as the impact of market liquidity shocks.

The bid/ask and liquidity risk discussions sets up the rest of the book in terms of laying the market dynamics foundation for the bigger picture ideas it focuses on from that point forward. What the authors do from there is to put forward what they view to be the stages of a liquidity shock, from trigger all the way through to eventual transmission from Wall Street to Main Street.

Three examples of this liquidity shock progression are included. The first is the Great Depression. Second is the Japanese “Lost Decade”. Naturally, the so-called “Great Recession” we’ve just gone through is the third. The authors walk through the triggers and stages of these periods in a very detailed fashion with loads of market and economic data (lots of charts and graphs) to highlight there points. It’s well done.

In general terms, [easyazon-link asin=”0137050127″]The Global Economic System[/easyazon-link] is a book more likely to be of use to fundamentally oriented traders and investors since it tends to focus on bigger macro level events and effects. I do think, however, the early discussion on the big/ask spread and market liquidity is of use to all kinds of market participants. For those who really want to get into the liquidity risk research, an article by one of the authors which clearly was foundational to the book can be found here.

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Trading Book Reviews

Book Review: On the Brink by Hank Paulson

[easyazon-link asin=”0446561932″][/easyazon-link]I was asked earlier in the academic term if I would act as a 3rd-party reviewer of an independent study project being done by a student at the University of Rhode Island. The project has as its core former US Treasury Secretary Hank Paulson’s book [easyazon-link asin=”0446561932″]On the Brink[/easyazon-link]. Figuring that I probably should know what Mr. Paulson said prior to making any comment or reaction to the student’s project, I’ve gone ahead and given the book a read. Since it’s something very market-related, I figure it might be of interest to readers of this blog, so here are my thoughts.

[easyazon-link asin=”0446561932″]On the Brink[/easyazon-link] is basically a diary of Paulson’s time as Treasury Secretary, which ran from 2006 to 2008. That, of course, encompasses the most dramatic period of the financial crisis, running from when things started coming unglued in 2007 to the point at the end of the Bush administration when the financial markets were just about finally stabilized. The book details the sequence of events which covers the Bear Stearns take-over, the Lehman collapse, the receivership of Fannie Mae and Freddie Mac, the AIG bailout, TARP and just about everything in between.

This is NOT a history of the financial crisis. Paulson doesn’t really get into the “How did we get here?” in any dedicated or focused fashion (for something more along those lines you may want to read Financial Shock by Mark Zandi). This book is Paulson telling the story of how Treasury, the Fed, the FDIC, the SEC, Congress, the President and others worked together to try to resolve the problems facing the financial markets during the time frame in question from his perspective. As such, one may be inclined to think of it as an individual trying to establish his legacy. Perhaps it is, but I also found it to be a very honest telling. The book doesn’t shy away from Paulson’s insecurity at different points, or the impact the long hours and intense stress had. I didn’t come away from the book thinking Paulson had portrayed himself as the hero of the tale. If anything, he spends considerable time talking about the tireless work of the numerous people involved.

From a reading perspective, I found the book well-paced and fairly easy to get through in general terms. I think Paulson does a very good job of reflecting the uncertainty and rapid development of events during the time span in question. He also presents an interesting view of some of the major political movers of the time, many of whom are still involved in things today. We in the public don’t often get that sort of thing, as we mostly see the made-for-TV moments of press events and committee testimony.

On the negative side, my guess is that some subjects might trip up the reader who isn’t familiar with the deeper elements of the financial markets. The book could have probably done with explanations at a few points to make things more clear for the lay person – like why short selling was so bad, why AIG was bleeding cash, etc. The lack of such explanations does not detract from the main narrative, but no doubt some readers would find them useful in helping understand why things were the way they were.

Overall, I think [easyazon-link asin=”0446561932″]On the Brink[/easyazon-link] is a very worthwhile read for those interested in understanding how things developed and progressed during the financial crisis.

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Trading Book Reviews

Book Review: Popes and Bankers by Jack Cashill

[easyazon-link asin=”1595552731″][/easyazon-link]Here’s a book that really isn’t about trading, but may be of interest to those who like history and/or are interested in how we got to the point we are at today having gone through a nasty financial crisis. Actually, fundamental traders may get some use out of it in terms of learning some things to look for in their analysis. The book is [easyazon-link asin=”1595552731″]Popes and Bankers: A Cultural History of Credit and Debt, from Aristotle to AIG[/easyazon-link] by Jack Cashill. I just finished it, having made it my commute reading over the last couple of weeks.

My impression of this book is that it is a history lesson combined with a morality statement. The author goes back through history to show how we reached the modern view, particularly in the US, toward banking and borrowing, and demonstrate that recent events in the financial markets and economy are most definitely nothing new. Wrapped around the history he seems to be making a statement that we need to return to traditional Christian morality where debt and lending are concerned. I’m not sure if he’s quite advocating a return to the “lending at interest is usury and thus a sin” view of things or a somewhat toned down “neither a borrower nor a lender be” recommendation is unclear. His discussion as to the interpretation of biblical texts by both Jews and Christians over the years doesn’t really come to a conclusion as to where the right point on the spectrum should be. Similarly, his discussion of anti-Semitism over the centuries, generally as related to the usury question, leaves one wondering whether the author himself is expressing a personal anti-Semitic view.

That aside, the author does do a pretty good job of highlighting the array of disparate elements which contributed to the financial crises (and how others like it came about in the past). He demonstrates a decidedly conservative bent in attacking those individuals who took out loans they clearly could not afford and those in the media and elsewhere who see them as victims. At the same time, however, he does not hesitate to highlight the failures in government and the financial sector as well. It is one of the more even-handed discussions of the subject I have come across thus far.

For me the bottom line with this book is that it’s a good history lesson, with a moral view intertwined that’s never really clearly defined.