Too Big To Fail

Tuesday, November 24, 2009

It's tempting to get sucked into writing about today's sharp decline in the Shanghai Composite (pictured below) and what it might mean for developed markets. The problem is that at this juncture, Macro Man isn't sure that it means much at all. In both 2008 and 2009, the r^2 between the 'Comp and the SPX has been zero; in illiquid markets two days before Thanksgiving, it's not at all clear that that's about to change.
Instead, Macro Man would like to touch briefly on a couple of bigger issues surrounding the "once in a lifetime" crisis that we've all lived through over the past couple of years. Your author has recently opened a personal "time capsule" of sorts. When he left the US in May 1994, he had little clue that he'd not return save for a 3-month soujorn in the summer of '95. So he bunged most of his worldly goods into storage....where they remained for the better part of a decade and a half.

Finally, upon the insistence of the divine Mrs. M, Macro Man had these goods shipped to the UK to put an end to the dreary (and expensive) routine of paying quarterly storage fees. Opening the boxes provided a glimpse into his life in his early 20's. Clothing of dubious quality and appalling style brought gales of laughter from Mrs. Macro. A television dating from roughly 1980 served as something of a museum piece for the Macro Boys ("Daddy, what are these big circles on the TV? And where is the remote?") And boxes of books provided an insight into Macro Man's reading habits in the early 90's.

One volume in particular caught Macro Man's eye: Den of Thieves, by James. B. Stewart, which explores some of the insider trading scandals of the 1980's. Over the weekend, Macro Man picked it up and started reading. While it is tempting to think that our current crisis is the result of unrivalled cupidity and stupidity, even the first few chapters of Den suggests that Ecclesiastes 1:9 was correct: there is nothing new under the sun.

From the buffoonish Dennis Levine to the utterly corrupt Ivan Boesky, the cast of characters could easily have been taken from the murky underworld of subprime and structured credit. While it's true that the government wasn't a direct participant in the insider scams, as they are today, from Macro Man's perch that's merely a question of scale. And it's refreshing to see that some things haven't changed; an episode early in the book describes how Marty Siegel of Kidder Peabody wins some banking business because he pitched to the client's need, whereas "Goldman just talked about how great Goldman is".

Switching topics, Macro Man has always been an enthusiastic proponent and particpant in sports. Not only does a healthy body produce a healthy mind, but sports forces one to deal with winning and losing, teaches something about teamwork, and enforces a discipline that practice and hard work are required to improve. These are hardly startling insights, but they nevertheless provide a gentle introduction to the real world to minds as callow as the Macro Boys' (aged 7 and 6.)

And so the recent France-Ireland World Cup qualifier is apposite. The matchup was part of a process that sought to identify four teams to qualify for the World Cup from the eight second-place finishers in the European group stages. Once it became apparent that France was going to enter the play-off process, rather than qualify by winning its group, FIFA decided, ex-post, to seed the playoffs, ensuring that the "big" teams would have a relatively easy path to the WC.

This inherently put the "small" teams, such as Ireland, at a disadvantage by robbing them of the chance to be randomly paired against a fellow minnow. It seemed particlarly hard luck on the Paddies, who'd already had to confront the other 2006 World Cup finalist, Italy, in the group stages.

Of course, when France snatched a 0-1 victory at Croke Park in Dublin, the result looked like a foregone conclusion. Yet the plucky Irish went to the Stade de France and outplayed their hosts, leading 0-1 after ninety minutes and sending the fixture into extra time. This naturally skewed the tie in favour of the home side, who would be playing the critical half-hour at...err...home.

In any case, ten minutes or so into extra time, France snatched the winning goal through the most famous hand-ball since Maradona's:

Note the immediate, frenzied reaction of the Irish to Thierry Henry's blatant controlling of the ball with his hand. The referee and linesmen missed the call, but it's abundantly clear on television replay. Surely such technology is available to correct a blatant violation of the laws of the game?

Sadly, no. For reasons best known to himself, FIFA supremo Sepp Blatter has seen fit to ignore the desires of most fans and many participants and refused to sanction the usage of any technology in officiating the game. The result is a series of increasingly shambolic decisions from referees in high-profile matches.

The Irish, understandably irate, requested a replay from both FIFA and the French Federation. They were unsurprisingly refused, despite a precedent for ordering a replay on a refereeing error. Of course, that was between two insignificant teams, Bahrain and Uzbekistan, not a big team like France.

When Macro Man and the missus showed the video of the French "goal" to the Macro Boys the next day, they irately shouted "that's not fair! Henry cheated!" Nevertheless, despite close to universal derision, even in France, Les Bleus are going to the World Cup.

Yep, sports can definitely teach valuable life lessons to youngsters. And the lesson, in this case, is that there's definitely such a thing as "Too Big To Fail."

Posted by Macro Man at 8:29 AM  


After the match Henry walked to Richard Dunne who was sitting on the ground in disgust, sat down next to him and comforted him. He just cheated Dunne and his country!!! Eric Cantona said :'I would have slapped him'.........


Anonymous said...
9:37 AM  

I believe that's the footballing equivalent of Blankfein saying "we're doing God's work"....

Macro Man said...
9:40 AM  

It's always a good idea to cheat, because chances are you might get away with it.
How I wish for those valuable life lessons to be something else.

Gregor Samsa said...
10:09 AM  

An interesting analogy.

Anonymous said...
10:12 AM  

viz A-Shares the dreaded bank recaps are going to happen. If you didn't sell today, sell tomorrow. They're out of juice.

Copper shorts anyone?

Nemo, who sold his a shares today.

Nemo Incognito said...
10:30 AM  

Allez les bleus.

We will win the world cup.

Everything is manipulation and cheating but nobody cares so why stopping? The bigger the lie, the bigger the result.

So far, everything is ok ;-)

Frogcheater said...
10:40 AM  

Time to start watching rugby (and ignore the soccerball)

Anonymous said...
10:45 AM  

oh yes, rugby, that noble sport.

well apart from that bloke who pretended to be bleeding, and the fact that practices such as eye-gouging are positively cricket

Anonymous said...
10:58 AM  

A) Video replays will never work in football because of the grief the players are permitted to give the ref.

B) Video replays work in Rugby, but only because:

i - most, not all, of the cheating occurrs under about 4 or 5 bodies (i.e. out of sight of cameras) and

ii - any other act of cheating is usually absurd and poorly executed. Failing that, the offending player will typically wink at his team's bench to confirm that he has, infact, cheated.

Anonymous said...
11:06 AM  

I've always believed that video replays would only work in football if used to correct, "Type II" errors. This would mean the game isn't slowed down (as play would've already stopped).

FIFA and UEFA will never bring in video replays because they believe that it enhances the drama and love of football. What really needs to be organised is a boycott of all football until something is done to correct this. But that won't happen.

Minty said...
11:51 AM  

Excellent post today MM,

Italy's Grosso took a dive in the 2006 World Cup to exit Australia (an unlikely challenger). Cheating seems to be part of football, unfortunately.

Skippy said...
12:20 PM  

Nemo: copper shorts anyone?
I'd say: no, wait till US$ starts to turnaround. Cu is totally $ driven and disconnected from fundamentals, just like WTI.

Anonymous said...
12:30 PM  

ANon @ replays work best whebn they attempt to determine when there has been a legitimate score (per England-NZ match on Saturday and the disallowed kiwi try.) There's no reason it couldn't be applied to football, both in terms of plays like Henry's and the 'did it cross the line' queries that always arise.

Skippy, let's just say that the Italians have a well-earned reputaiton for that sort of thing...this predates the Grosso incident by a couple of years.

Macro Man said...
12:44 PM  

hey, wasn't the replay what caught Zidanes headbutt on Materazzi during the final 2006 edition?

arlequim said...
12:54 PM  

Not officially...but then again, Italy is another "big" team.

Macro Man said...
12:57 PM  

Cheers MM, ;))

Skippy said...
1:02 PM  

Blankfein is like Maradona and the "hand of God"

Nic said...
2:12 PM  

video replays work in rugby and in tennis.

3 chalenges for each team and thats it.

Anonymous said...
2:15 PM  

Except Blankfein should be the "wallet of god" and all his taxpayers

Nic said...
2:15 PM  

I was the hooker on my university rugby team and our motto was " if you ain't cheating, you ain't trying."

Professional Gringo said...
3:00 PM  

MM - how did your kids react watching Keane doing his handball trick on the other sid eof the field? granted, henry's technique and effectiveness was way better- both in execution and effectiveness.

Anonymous said...
3:25 PM  

Amen Senor Gringo. I was the breakaway on the rugby team who brought some muay thai cheating techniques to Australian high school rugby: putting tiger balm on your forearms is great since you can "accidentally" rub an opponents face in a maul, thereby rendering them more or less blind for the next 20 mins.

Nemo Incognito said...
3:25 PM  

On Sunday, May 16th, 1982, Juventus Turin - whose trainer was a much younger Giovanni Trapattoni - won its twentieth Italian title by winning the last match of the season the way Thierry Henry did last week. My beloved AC Fiorentina missed the opportunity to win its third title and finished second of the table, after a late goal was misteriously undone by the referee.

I was 15 years old in those days and I'm 42 now and I'm still waiting to win that third title: you know what, we're all Irish, dear Trap!


Anonymous said...
3:33 PM  

LB really used to admire the artistry and genuine talent of Thierry Henry, even when it was being used against Liverpool, but that's out of the window now.

Now he is on the shit list reserved for bank CEOs, central bankers and Sir Alex Ferguson.

leftback said...
3:51 PM  

Great read indeed, I read somewhere that Levine is now into lecturing on ethics and claims that if he was taught such things he wouldn't have traded on insider info. A bit like the self dubbed Wolf of Wall St now (even though he was NJ based, still, an entertaining read).
Loved that Goldies quote too, my fave from the interview was the unashamed: “I’ve got news for you,” he shoots back, eyes narrowing. “If the financial system goes down, our business is going down and, trust me, yours and everyone else’s is going down, too.” Lloyd Blankfiend

Anonymous said...
4:16 PM  

Joe Mauer to the yankees in 2010?

Anonymous said...
4:30 PM  

One wonders what LB's view might be on the diving proclivities of one S. Gerrard, esq. ANy truth to the rumours that he was invited to try out for the role of Tom Daley's new synchro partner and/or Superman?

AT, sadly, domestic competitions are inevitably skewed towards the big it Serie A, the Premiership, the NFL, or banking!

Anon @ 4.30..there's a rather droll tendency in the baseball geekosphere to deny or downplay the significance of the Yankees' payroll spending, or spending in general, on winning. One wonders how many of them would be prepared to enroll in a no-salary cap auction fantasy league where one team spends two and a half times the average of all the rest....

Macro Man said...
5:30 PM  

Pah, no sympathy for the Irish...they (like us English) are far happier being glorious losers.

It's one of the (many) reasons why England won't win the World Cup next year...

Besides, I'm still bitter about the Irish friends who insisted that Maradonna's goal was just.
*tosses his toys out of his pram and wanders off*

Our Man in NYC said...
5:31 PM  

On yer way, soft lad ... Stevie G never dived..!!

But there are a lot of tall blades of grass that he might have tripped over at high speed - in the vicinity of Vidic's boot, for example. Similar to the bouncer whose head got in the way of Stevie's fist. Mind you, it can get a bit rough in Southport on Saturday nights when the scallies are out on the piss.

leftback said...
5:38 PM  

Clearly I'm not the only one who has a view on Mr. Gerrard!

Our Man: the difference between Ireland and England is that the Irish press is never full of "We're gonner winnit, innit!" stories before a major tournament....

Macro Man said...
5:57 PM  

Great banter today on the blog. Wonder if anyone has any views that we were supposed to be in risk on mode post GDP today, only for everything to lose its shine, especially in oil. And as for the A shares performmance, will another big drop tomorrow mean anything for the West? Or is it holiday mood already for the rest of the week. Anyhow, finally managed to post some views in energy today. here goes, banterists!

SFOT said...
6:05 PM  

Great post! I really like your blog!!
Common Cents

ps. Link Exchange?

commoncents said...
6:06 PM  

Nice work MM. Apparently this morning you did have the energy to “conjure a neat tie-in.”

Skippy (& MM) – I clearly recall watching the Grosso dive to put out Australia. Being an American football fan, I was appalled that the world’s largest sporting event was decided by referee error. I agree that American football (both college and pro) and tennis have integrated technology with fantastic results. There’s no reason football (of the non-american variety) can’t do the same.

On a different note. Does anybody else feel like the “buy mega-cap multinationals” theme is being beaten to death by the analysts? I look at our portfolio and that is basically how we are positioned…PG, PEP, NKE, EMR, V, etc. It felt like an original idea, say, 9 months ago, but now I am feeling nervous. Any thoughts?

LB @ 5:38 – hilarious

der Tilman said...
6:10 PM  

EY! Stevie was pushed, like, in the bach.... !!

MM, speaking of yellow cards, how about one for Gary for threatening LB with a baseball bat last night? Odd idea of Gazza's that the unemployed would beat up anyone who disagrees with Gary's inflationist philosophy.

Let me see, LB's dreadful HEDGIE crimes - first, being short oil - leading to lower prices for goods, and long Tsys - keeping interest rates low.. sounds like this is good for regular people, eh? No social problems there, except for those with big debts.

On the other hand, Gary's VIRTUOUS PEOPLES BIG MONEY PENSION FUND is long commodities and bank stocks (inflationary and malinvestment of capital) and short Tsys (leading to higher rates and economic malaise for all).


leftback said...
7:04 PM  

Nov. Fed minutes state: "any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching"

In a way it seems like an Orwellian inversion, the dollar fall is going to intensify, and boy we're going to be there watching closely as it happens...

LB must be smiling on his treasury position today. Almost back to the pre-QE announcement level.

Crisis Management said...
7:52 PM  

LB is made up - the Reds are leading 1-0 in Hungary.

leftback said...
8:03 PM  

Leftie ... I am a fan (and short oil) but calling for the Ref and saying Gazza threatened you with a baseball bat is taking a bit of a dive isn't it? You don't need those tricks to win :)

Nic said...
8:38 PM  

MM -- you are of course right, about the English press. Though it does help on the spread betting front (back when I was in London); wait for the press to get excited then bet against England (and an emotional hedge to boot).

Used to work particularly well in cricket!

Our Man in NYC said...
8:57 PM  

LB -- aren't the Reds reliant on Lyon winning?

Ahhh, one day...AFC Wimbledon will grace the Champions League!

Our Man in NYC said...
9:00 PM  

Nic: Nice one !! That reminds me of the one I done in the game last night... didn't work though.

The Reds are part of Rafa's Master Plan to get KO'd so we can win the Europa League... Carra said so.

leftback said...
9:20 PM  

Leftie -- your reading comprehension skills are rivaled only by your ability to misquote:

(yesterday) Gary said...

Leftie -- if you ask some of the 10+% of the population that is unemployed, and another 10+% underemployed ...

after they finish beating you with a baseball bat they might take a few moments to tell you that this "metastable structure" of yours is nowhere near as stable as you think

10:28 PM

The line in question: after THEY finish beating you with a baseball bat

THEY is an article that refers to the subject in an earlier sentence. It is somewhat ambiguous if THEY means the unemployed or the under-employed or both ...

but you would have to be a blind or corrupt soccer referee not to be able to distinguish first person from third person

Anonymous said...
12:18 AM  

Nice to see you reaching the same conclusions as heterodox and particularly marxist economists on finance. Gazing into the future brings gives financial prices inherently ficticious element which inevitably leads to noxious elements ie cheating and fraud. Secondly the political structure of capitalism means those with power will inevitably end up tipping the playing field in their favour. If you want to read economics then better to read this stuff based on the real world than nonsense based on fair markets, infinite liquidity blah blah.

Spun said...
10:44 AM  

LB -- Sorry for the Reds, but today is a shiny day here in Florence :)

There's gonna be a great match at Anfield Road, anyway, on December 9th...


Anonymous said...
10:50 AM  

Great stuff MM.


Anonymous said...
8:13 AM  

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