High Frequency Algorithmic Trading Overviewed, Paul Krugman on deficit spending

Today’s Detailed Commentaries Financial Markets: High Frequency Algorithmic Trading Overviewed Why Read: If you participate either directly, or have capital invested in the financial markets that is managed by others, you ought to have a basic understanding what high frequency algorithmic trading is, what it isn’t, and generally how it works.

Commentary: High frequency algorithmic trading is trading done in milliseconds in a largely unregulated environment, where the objective of those who participate generally work to clear their positions at the end of each trading day. It is to a large degree about fractions of pennies or pennies generated on millions of trades and ‘false trades’ that in the end add up to millions and billions of dollars (or Euros, or yen, or whatever currencies the securities ‘computer-traded’ are denominated in. High frequency algorithmic trading has nothing at all to do with company earnings, who is on the Board or who manages a company, technical analysis, or a company’s prospects.

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High frequency algorithmic trading does care about ‘actionable patterns’ discerned from the astronomic amount of data available to be read by computers, on arbitrage strategies, on game and crowd theories, and on physical proximity to the computers where trades are executed – the latter because computers operate so fast that even at the speed of light it takes light longer to travel from Los Angeles to New York that it does for it to travel from New Jersey to Manhattan. High frequency trading is said by many not to affect investment markets, but rather that if anything it stabilizes them. That may or may not be true. It is also said by many that high frequency trading does not contribute to financial market volatility. That also may or may not be true. Intuitively, I am prepared to believe – at least for the time being, until more is known – that it may not affect long-term investment markets. However, I am not intuitively prepared to believe that it does not affect financial market volatility until I see more definitive prove of that. I think the referenced article give a good broad overview of high frequency algorithmic trading, and recommend you take the time to read it. Topical Reference: Will HFT Burn a Hole in Your Portfolio, from Financial Sense, Doug Hornig, July 26, 2012 – reading time 6 minutes. North America >> United States: Paul Krugman on deficit spending Paul Krugman is a Nobel prize winner. He seems to think that without further deficit spending the U.S. will face depression – a term and condition most economists find the least attractive of all economic scenarios. One has to wonder whether Mr. Krugman in his ‘heart of hearts’ believes the United States can come out of the economic morasse it is currently is in – and that seems to be exacerbating – intact and reasonable unscathed. Mr. Krugman wrote a book titled ‘End This Depression Now’ that was published three months ago. It is available on Amazon and Kobo. I bought and scanned the book. Some of what Mr. Krugman says I agree with – particularly his comments related to the psychological effects of unemployment on the unemployed. However, in my view he does not either in the book, or in the video that accompanies this commentary, adequately address the consequences of his recommended further Federal Government deficit spending . In particular, he doesn’t for me satisfactorily deal with how in the end does the ever increasing National Debt gets satisfied. Rather, he seems willing to embrace a postponement strategy that I believe will simply lead to an ever higher cliff to fall from. Topical Reference: Krugman: The Government Has To Do More Deficit Spending To Avoid A Full-On Depression, from Business Insider, Joe Weisnethal, July 12, 2012 – reading time 1 minute, accompanying video 5 minutes. North America >> The United States: Positive spin on U.S. trade deficits – who is kidding who? Why read: To test the contemporaneous views I expressed four years ago, to observe similarities and differences then and now, and to determine if you agree with my current views. Commentary then: On July 4, 2009 I commented as follows: An article titled ‘Vital Signs: Trade Gap Is Expected to Widen Again’ says that:

• “In the coming year, U. S. exports are sure to pick up, as global demand recovers, but so will U.S. imports, as U.S. demand stabilizes and returns to at least modest growth”; and,
• “Many economists are starting to upgrade their forecasts for global growth in the second half, with particular attention to Asia”.

If you want to read a positive article on world economic recovery this is it. The article discusses the recent narrowing of the U.S. trade deficit with particular focus on the reduction in credit financing which is referenced in the statement “The major impact on U.S. trade over the past year has been the shrinkage in volume of world trade as a result of the global recession. In particular, the credit crunch has exerted a special downdraft by creating a shortage of trade finance. The Organization for Economic Cooperation and Development estimates the lack of finance has accounted for about a third of the shrinkage in global trade”. As I read the article the implication seems to be that ‘increasing U.S. trade deficits are good because that will surely mean economic recovery is occurring’. The article deals in % declines in the U.S. trade deficit, not absolute numbers. Here are the absolute numbers. The cumulative U.S. net trade deficit (that is, the net of product deficits and service surpluses) was:

• effectively $0 when President Nixon took the U.S. off the then quasi-gold standard in 1971;
• by the end of 1979 was approximately $80 billion;
• by the end of 1989 was approximately $920 billion;
• by the end of 1999 was approximately $2 trillion;
• by the end of 2008 was approximately $7 trillion (note the enormous escalation of the U.S. cumulative trade deficit in the 9 year period just ended); and,
• in 2009 will increase by about a further $350 billion if the monthly trade deficits experienced in the first 4 months of this year continue at the same levels for the balance of 2009 (currently the U.S. trade deficit is running at just under $30 billion per month).

Through October, 2008 the monthly U.S. net trade deficit was running at around $60 billion per month. As best I know the approximate 50% drop since then largely has resulted from the much lower oil prices that exist today versus mid-2008, and reduced U.S. consumer spending on imported goods that have now worked there way through the import/export U.S. inventory system – offset by reduced U.S. exports of goods resulting from the global recession. I consider these cumulative and continuing trade deficits highly troublesome and problematic. In my view an important key to a country’s long-term economic stability and success has to be both running balanced fiscal budgets and running balanced trade positions. I don’t see the U.S. doing either in the foreseeable future, if ever, due in large part to the loss of its manufacturing jobs and base over (in particular) the past 10 years. Hence I have a bleak view of the near and long-term prospects for the U.S. economy. I am not an economist and hope for the sake of both my and your children and grandchildren that I am missing something and that my conclusions either seriously in error – or better yet, plain wrong. Commentary now: I have little to add to the foregoing, other than to report:

• it seems that unfortunately I didn’t miss much. At least it would appear that way to me three years after the fact;
• the U.S. cumulative net trade deficit almost certainly will exceed $9 trillion by the end of 2012, up from $7.5 trillion at the end of 2009;
• at the current rate of accumulation, the U.S. cumulative net trade deficit will increase to about $13 trillion by the end of 2019; and,
• for me, this denotes continuous weakening of the U.S. economy when measured against the collective economies of its trading partners.

That said, I don’t see others who comment on such things place the same weight on the U.S. net trade deficits as I do.