Pricing Money: A beginner's guide to money, bonds, futures and swaps • Hacker News Board

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#251

Post by im3w1l » Sat, Jun 17, 2023, 2:06 PM UTC

nostrademons wrote: post #88

jdaw1 wrote: post #85

Earlier quoted context omitted.

I’m the author. Thank you for saying it is an excellent read — that was no small amount of work. You ask “Where is the productive output of all these arbitrage shell games?”, which is a very fair question. The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them. E.g., you are not the optimal person to hold the risk that, through no fault of your…

Note also that in some cases you might be the optimal person to hold the risk that your house burns down, if, for example, your liquid net worth is 100x the replacement cost of your home. And that's illustrative of the value of markets: you can choose to transact in them, depending on your personal circumstances. The insurance market exists because for the vast majority of people, rebuilding their home is not feasibl…

Rebuilding a shitty house is quite possible for a person. Like people can literally build simple shelters in a time frame of hours. It's only because of so many regulations and rules that you have to go into multi-decade debt.

For instance, apparently the EU is currently considering a regulation that houses must be energy efficient. Getting a current house into compliance would cost on average $50k. That kinda stuff adds up.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#252

Post by notahacker » Sat, Jun 17, 2023, 2:07 PM UTC

MrPatan wrote: post #237

notahacker wrote: post #214

Earlier quoted context omitted.

Because whilst crypto provides an excellent solution for the "how to skim money from the economy by persuading less skilled investors to give you money" part of finance, it doesn't address the actual problems finance purports to solve like sending capital to its most productive use, maturity transformation, insurance, pensions etc.

It's the same application layer just running in a different tech and social stack. It's clear why the current gatekeepers don't like permissionless alternatives, but why do you agree with them?

The "social stack" is what actually makes finance's "application layer" happen, because it turns out that blockchains can't actually enforce delivery of barrels of oil or sue ICO recipient for spending their proceeds on coke and hookers, and things like hiring and receiving goods and valuing insurance losses all involve counterparties.

Much as you would like to personalise this debate, it's not about my level of agreement with straw gatekeepers. It's about the simple fact the "application layer" doesn't exist. You're not getting your mortgage or pension from a blockchain.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#253

Post by AYBABTME » Sat, Jun 17, 2023, 2:27 PM UTC

Is there an audiobook version of this?

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#254

Post by berniedurfee » Sat, Jun 17, 2023, 2:30 PM UTC

nsvd wrote: post #227

less_less wrote: post #220

Earlier quoted context omitted.

> When someone arbitrages prices back to where they should be, they are performing a service that everyone else benefits from, and are rightly compensated for this. Now, are finance people compensated too much for correcting price discrepancies? If yes, then that’s another arbitrage opportunity! While I agree that finance serves a useful purpose, I don't understand this bit. Suppose hypothetically that arbitrage give…

I don't think it's the case that finance is over produced. If it were, then the value of financial services would drop. Rather, because the gain produced by financial instruments is proportional to the wealth someone has, the returns of finance disproportionately benefit those with large amounts of wealth. One man can only make so much plumbing or being a mechanic, but can make an arbitrary about by investing in ETFs…

I think regulatory capture needs to be considered as well.

At some point those that amass large amounts of wealth are disproportionately able to influence government regulation to ‘game’ the system itself in their favor.

It seems in the realm of finance, it’s much easier to obscure regulatory capture than in other domains, where anti-competitive practices are much easier to suss out.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#255

Post by soVeryTired » Sat, Jun 17, 2023, 3:01 PM UTC

alecco wrote: post #218

All these Financial guides are very interesting. But beware of falling into the illusion of being a good-enough active investor. It's like entering the Pro league as an overconfident amateur. The other players are the best in the universe. And they have cybernetic extensions: algorithmic trading with virtually limitless amounts of resources and information. And sometimes they have "alpha" you'll never, ever get your…

I’m not going to argue that asset managers and trading desks have plenty of resources and that they can transact very quickly and cheaply. But having been on the inside of small and large asset managers for almost ten years, I can say there’s a lot of groupthink and rather brain dead behaviour to be seen on a trading floor.

Call me jaded but I’ve worked with both systematic and discretionary traders. The algos I’ve seen tend to be heavily overfit, and stop working as soon as they hit production. The discretionary traders usually have a tonne of gambler’s tics and have a bad habit of assigning narratives to market noise.

Most institutional traders aren’t the best in the universe. They just do dumb things faster and at bigger scale than day traders.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#256

Post by quickthrowman » Sat, Jun 17, 2023, 3:50 PM UTC

ineptech wrote: post #35

rcme wrote: post #19

Earlier quoted context omitted.

Risk management is the product. Surely you agree that a product that reduces risk is worth something, right?

This isn't false but it feels reductive. A financial instrument that allows one to bet on the corn harvest is obviously valuable to the corn farmer, as it allows them to use profits from good seasons to hedge against bad seasons. They're also valuable to people whose business is affected by the corn harvest - cereal manufacturers, say. The problem is that they can also be used by people with no exposure at all who si…

The buyers and sellers of a futures contract are both trying to offload risk onto someone else. The risk profiles of both sides don’t always offset exactly, so speculators are necessary for functioning commodity futures markets (and markets in general). Also, price discovery is much more efficient with more liquidity, which is what speculators provide, in addition to risk assumption.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#257

Post by rprospero » Sat, Jun 17, 2023, 3:56 PM UTC

pcdoodle wrote: post #250

norswap wrote: post #239

Earlier quoted context omitted.

I was nodding my head along (fantastic answer) until the stab at crypto. Let me offer a (partial) defense of crypto if I can: Broadly, crypto is divided into crypto-currencies and applications. Let's tackled currencies first, some of which some are reputable and some of which are grifts, but which viewed in their most favorable light attempt to be a form of currency or asset that is decentralized. This means that no…

Another useful aspect: Heat pumps will take a long time to reach every application that needs heating. EG: drying grain. Sometime heat pumps are not the answer (-21F for instance). Bitcoins resistive heating properties are almost 100% efficient. With bitcoin mining: Money In = Heat + Air Flow = Money Out. Electrical energy now has an opportunity to not be waisted where it normally would be. Think renewables where lin…

It’s that last step I’ve never understood. I get that some guy in Iceland has excess power generation and can use that to mine bitcoin. I can then buy those bitcoins from him. However, I’ve never heard an explanation for how I then recover the energy from the bitcoin?

The closest I’ve heard is that I could use the bitcoins to buy electricity from someone else, but I could have just paid that guy in the first first place and cut out the guy in Iceland. Also, it feels like we now have two power plants involved in charging my laptop, which feels like a lot of overhead.

I’ve heard this explanation enough that there must be something obvious that I’m missing.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#258

Post by tacocataco » Sat, Jun 17, 2023, 4:00 PM UTC

asdff wrote: post #111

jdaw1 wrote: post #85

Earlier quoted context omitted.

I’m the author. Thank you for saying it is an excellent read — that was no small amount of work. You ask “Where is the productive output of all these arbitrage shell games?”, which is a very fair question. The purpose of financial markets, sometimes but not always wholly achieved, is to transfer risks to those best able to hold them. E.g., you are not the optimal person to hold the risk that, through no fault of your…

Why have them privately controlled at all? The fed prints the money. The fed could be the bank and insurer as well, and obviate the middle men skimming the pot.

I'd love to make the post office my bank. One location to do two of the errands on my todo list for today!

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#259

Post by quickthrowman » Sat, Jun 17, 2023, 4:00 PM UTC

scubbo wrote: post #69

novosel wrote: post #18

Earlier quoted context omitted.

Great questions, but no reply will be coming at you. Except an apologetic nonsense-logic-it-is-obvious-it-works trope. Only product is the profit.

Quite. The general response I get from questions like this to financial folks is that these markets and vehicles and products are important "for liquidity", but they can never quite tell me who liquidity benefits other than the system itself.

If you own equities (individual stocks, ETFs, mutual funds) then you benefit. More liquidity means lower bid/ask spreads which means lower transaction costs and higher returns (since you are paying lower transaction costs, more of your money is invested and it adds up over time) for every investor. The NYSE minimum tick size used to be 12.5 cents, then 6.25 cents.

Once HFT firms started becoming more widespread, the spread lowered significantly. SPY bid/ask spreads are 1 cent on a share that costs ~$450. Some assets even have sub-penny bid/ask spreads.

The traders that create units of SPY get better spreads on the underlying stocks too, which benefits you as well by reducing asset fees and more accurately representing the NAV by lowering transaction costs. The S&P 500 is made up of 500 stocks, it is much more cost effective to assemble a basket of stocks with 1 cent spreads than 6.25 or 12.5 cent spreads.

Liquidity does the same thing for every market, it increases the speed and accuracy of price discovery and lowers transaction costs.

Re: Pricing Money: A beginner's guide to money, bonds, futures and swaps

#260

Post by tacocataco » Sat, Jun 17, 2023, 4:01 PM UTC

toast0 wrote: post #133

totallywrong wrote: post #126

Earlier quoted context omitted.

Yeah, capitalism 101, good in theory but terrible for most people in practice. Look at e.g. the health system, where a major issue means total bankruptcy and life debt. A somewhat balanced system where governments protect basic needs and have some control over the markets is the ideal imo.

> total bankruptcy and life debt Those are two different things. Bankruptcy isn't fun, but it clears your debt.

What about student's loans?