Monday, August 3, 2009

Klueless Krugman

This Sunday Paul "I Don't Understand the Business Cycle" Krugman displays that his ignorance is much broader than just ignorance about the business cycle. In his NYT column, he lambastes Goldman Sachs for (hold on to your hat) having fast computers:

One involves the rise of high speed trading by some institutions, including Goldman Sachs, have been using superfast computers to get the jump on other investors, buying or selling stocks a tiny fraction of a second before anyone else can react. Profits from high-frequency trading are one reason Goldman is earning record profits and likely to pay record bonuses.
Now, high-powered computers play a role in what is going on, but largely because of the volume of trades being made, the speed is almost ancillary. Goldman is a pretty shady operator, but not because they have fast computers. What would be wrong with having fast computers? It's what they may be doing with the computers that may be a problem. But, what Goldman is doing was probably done when trades were made under the button wood tree, long, long before computers.
There are three possibilities as to what Goldman is doing when they are doing high frequency trading..

A. They may be buying ahead of their own clients. That is, if client x puts in an order for 100,000 shares of IBM, they go in and buy it and then sell it to the client at a tiny fraction higher.

B. They are somehow getting advance word on all trades (their own clients and that of others)that are about to hit the computers, milliseconds before anyone else, and buy ahead of those trades.

C. They do have sophisticated programs that know, for example, when an index hedge fund sells y shares of a stock M, z sales of stock N are likely to follow, and they jump ahead of the N trade.

Goldman may be doing one of these type trades, two or all three.

Method A is ethically edgy. Method C is about skill and superior intelligence. Method B is outright thievery.

It is not publicly known which of these methods Goldman is using.

Thus, for Krugman to jump up and down about fast computers is idiotic. It isn't the fast computer, per se, it is what the computer is calculating. One thing the computer could be calculating could be the result of sheer savvy on the part of Goldman, one could be edgy, one could be theft. That Krugman doesn't differentiate from these uses of high powered computers and merely talks about fast computers indicates Krugman really doesn't know what the hell he is talking about.

Not satisfied with his lack of understanding of high frequency trading, Krugman, with all his clothes on, dives into the pool of commodity trading with equal idiocy.

He writes:
On a seemingly different front, Sunday’s Times reported on the case of Andrew J. Hall, who leads an arm of Citigroup that speculates on oil and other commodities. His operation has made a lot of money recently, and according to his contract Mr. Hall is owed $100 million.
First error, the arm of Citigroup, Phibro, rarely "speculates" on anything. These aren't traders studying charts all day and trying to predict a direction of a market. These are guys that are involved in moving physical commodities.Yeah, they may have a sense for where the economy is going, but if they are trading oil for example, they know where every oil tanker in the world is, they know how much room every refinery in the world has to refine more oil. But, even with this knowledge they aren't generally taking a flyer on the price of a commodity going up or down.

What they really do is loosen markets in third world countries. By this I mean, by way of example, that say a rare metal may be in strong demand in China, but the only supply is in some third world country where the only open road to get the metal from its source is controlled by rebels. The Phibro trader than has to figure away around the regulation in the third world country to get the metal moving. He also has to figure a way to payoff the the rebels so they don't attack the shipment and work on a dozen other obstacles that would make mere mortals stop before they got started.

These are the traders big paydays, when they move the obstacles out of the way and get product moving to where it is in demand. And make no mistake these traders will think of every angle possible to get the job done.

Marc Rich, who started decades ago at Phibro, was known for thinking of every possible angle. When he secretly owned 50% of Twentieth Century Fox, he let his traders know that if they needed videocasette access to a Twentieth Century movie not yet released, to help move a long a trade, they could get a copy of the videocassette.

Krugman writes of Hall who now oversees Phibro and is owed the $100 million by Citigroup:
What about Mr. Hall? The Times report suggests that he makes money mainly by outsmarting other investors, rather than by directing resources to where they’re needed. Again, it’s hard to see the social value of what he does.
Earth to Krugman, "outsmarting other investors" is directing resources to where they are needed. And, it is very easy to see the value of what he does, he unclogs markets that would be otherwise frozen. Krugman's clueless attack on Hall's pay is really kind of a Krugman vote for market constipation.

Bottom line, when Krugman writes on a topic he has scant knowledge about (which is most of the time), it becomes clear that he has no real understanding of key topics, he doesn't understand how markets work, and he should really be embarrassed by his own clueless writing.


  1.'re in support of a $100 MILLION payout. It certainly sounds as if Traders are a legend in your mind (you wouldn't just happen to be an ex trader and thereby biased)?

    Nahh no way...surely everyone in blogdom is fair and square.

  2. I am in support of free market pay. Phibro doesn't appear to be part of the bailout scam. I suspect Hill earned his money as I outlined, by unclogging markets where governmnet red tape, wars and all the rest made the movement of commodities difficult if not impossible without the aggressive actions of great profit seekers.

    Those are the facts. Would you rather have constipated markets?

  3. Hall had been making big money for years be cause Phibro has been extraordinarily profitable. Hall's deal grants him a percentage of the firm's profits. It's not Phibro's fault that it is owned by Citi.

  4. Several years ago, Krugman wrote that California taxpayers were undertaxed and cited a report from the California Budget Project.

    The report showed California had increased state spending 5 - 10% per year each year since 1990.
    Krugman wrote that, subtracting inflation however, state spending was essentially flat and not to blame for California's looming insolvency.

    The problem was the California Bidget Project report had already subtracted inflation and presented its state budget figures in constant dollars, a fact that was readily apparent to anyone who read the report.

    I wrote to Krugman gently pointing out his error and gave him a citation to the CBP report.

    Krugman replied in a form letter saying that if he had to reply to letters like mine, he would have time to do nothing else.

    Paul Krugman either doesn't know enough to read and comprehend simple economic reports or he cares nothing about facts and accuracy.

  5. There are a lot of beneficial uses of fast computers when it comes to customer orders. The ability of a company to get good prices for a customer order is called good execution quality. Having a fast computer allows one to more likely get a good price in the market before the price moves against the customer order. You can't do this, you can't compete! Very rare to see significant front running because your execution quality suffers and your customer will go elsewhere.

  6.'re in support of a $100 MILLION payout. It certainly sounds as if Traders are a legend in your mind (you wouldn't just happen to be an ex trader and thereby biased)?

    Nahh no way...surely everyone in blogdom is fair and square.

    HILARIOUS! I love this! These idiots stop by and have some knockdown "conflict of interest" argument and no one ever accepts that when you point out that, as members of the government, members of the government have a conflict of interest when it comes to them taking more control of more parts of the economy.

    $100 Million? No one should be paid that much, for anything, no matter how valuable the goods and services they produce for others might potentially be... "reasonable people" can all agree that no one deserves that much money. SPREAD THE WEALTH!

    ha! What a loser that Anon poster is.

    I love the Krugman quotes. God this guy doesn't understand entrepreneurialism at all. He thinks inside an academic bubble where the only methodological concept for understanding the world is the abstract model. Everything has been simplified in his mind. The economy, life on planet earth... it's all a machine. It's essentially all automatic.

    Commodities, for instance. They're just going to mine and manufacture and transport themselves. There is no thought or strategy involved in how that is done. So anyone who gets paid more than anyone else to do that, is just skimming off the top needlessly.

    Truly bizarre and it leaves me scratching my head as to how you could ever get in touch with somebody so spaced out. Truly makes me wonder if violence really is the only answer? (Note: this is not an admission that all libertarians are actually violent, right-wing fascist nutjobs... it's just innocent puzzled amazement at the moment.)

  7. to your point b. ever heard of flash trading? they can get a 30 ms headstart on all trades on NASDAQ