Tuesday, June 28, 2016

Brexit and markets

The S&P is down about 5% from it's high. Dramatic, but no big deal compared to the 50% drop in 2008. The broad selloff is being attributable to Brexit, specifically, the poorer growth prospects for the UK, the EU, and general economic uncertainty.

I don't this market prices reflect any of those things, I think they reflect bad bets, margin calls, and homogeneity across hedge funds.

I'm sure many hedge funds were long sterling, or betting one way or another that Brexit would not happen (basically, a merger-arb play at the transnational political level). When the merger didn't happen, or more specifically, when the divestment did happen, they lost money and thus needed to make margin calls.

To make margin calls, they sold what they had, which was basically everything else. Selling stuff drives the price down. Since they are all making the same bets (and charging 2% and 20% for it) they all sell the same stuff and prices move together.

Note that all of this has no connection to the UK and EU. Individual countries, particularly those as large as the UK, can survive perfectly well whether they are part of a broader agreement or not. Canada and the US trade is a good model for the UK and the EU.

The economic prospects for the UK depends on how well it can stimulate it's economy, through deficit spending, and return to something closer to full employment. That will probably help make the national mood there more generous as well.

Thursday, June 23, 2016


Although markets are down, I don't think Brexit will be bad for the British economy. Indeed, I think that it will be a boon.

A major structural issue in the EU monetary union was that individual countries no longer had their own currency, but there was no entity, such as a US's Federal Reserve, which could run deficits to support any nation whose desire for savings outstripped available savings. This triggered paradox of thrift conditions, where austerity drove deficits higher, demanding more austerity. The price was paid in human misery and unemployment, and it was totally wasteful, totally destructive, and totally unnecessary.

Greece may not be a well governed country, but the human cost in forced unemployment and underemployment was high and not only brought no benefit, but could not bring any benefit. As Zizek would say, austerity was the German superego run amok.

The UK can now run deficits denominated in the pound sterling, keep its population employed, and try to run its country, for its citizens as best it can, to the extent it is allowed to. Good luck to all.

Thursday, June 09, 2016

Short Facebook, Long Apple

Apple is going to add paid ads to app store searches.

Currently, most of the money FB makes, especially on mobile, is on mobile ads. Most of that money is from game companies who desperately need installs, but cannot buy installs via Apple because Apple doesn't sell them.

FB is the only media company with enough reach on mobile, and enough people on its app looking to kill time, that you can buy the installs you need by marketing through them. The strategy is to buy enough installs to get into the top 10, and then hope the game is popular enough with sufficient retention that you can stay in that top 10 by scaling back your spending and using the organic installs chart position gets you (Apple's "most popular free games" category works exactly the same way as the "free online games" keyword works on Google.com).

This is all incredibly inefficient. Companies would rather just pay Apple instead of this crazy bank shot where FB gets paid, Apple's rankings get played, and no one believes in the editorial neutrality (which is real!) on the Apple app store home page.

Apple cut out the middle man. If they execute this right, they should just absorb all of FB's mobile ad revenue.

Short Facebook.