The RMT Is Right To Say You Cannot Unilaterally Change Employment Contracts

I used to be an investment banker.  This apparently makes me a class enemy to some in the Labour movement.  Although I voted Labour throughout the Blair years, I have been told that my vote is not welcome.  This is the kind of debate, I suppose, that will inform the leadership competition.  Electability or purity?  My point here in bringing this up as a preliminary is so that you do not think I am an automatic union partisan.  I think on this occasion — for the first time — the RMT is right, and if I as a generally unsympathetic person think so, perhaps they are.

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It is a principle of employment  law that you cannot  arbitrarily make adverse changes to people’s contracts.  In fact, you can’t ever change a contract without the agreement of the other side.  Public sector management seems to act as if in ignorance of this surprisingly often.  When I was in private equity, we would never have done that.  Sure, we would have fired people who were incompetent and made people performing activities that were no longed needed redundant, but no-one gains from having a disgruntled workforce — and what is more likely to make them disgruntled than trying to change their contracts against their will?

Here’s how you handle this TfL situation if you are a competent private sector manager.  You say to the workforce, “guys, we need to run an all-night service.  We need volunteers to work ten weeks of nights a year.  We are offering an uplift of five grand.  Who’s up for it?”.  You then find out if you get enough people who want to do it.  We can assume that the current uplift of two grand is inadequate, both for the reasons that it looks inadequate — an extra 100 quid a month in your pocket after the government has taken its cut does not look like a good deal — and because the RMT have chosen to strike rather than accept it.

One of two things now ensues.  With luck, you get enough volunteers to run your service.  Maybe the younger drivers think they can go to Ibiza a couple of times a year and its worth it to them.  Maybe the older ones value spending time with their families more.  This is fine.  If you don’t get enough volunteers, you either up the offer or recruit.  Maybe you recruit specialist night drivers — there is some evidence that the adverse health effects of shift work are more to do with the disruption of shift changes than the nocturnal activity.  You might have to pay more for these specialist night drivers.  The union should not want to stop you doing this.

This may of course result in your service becoming more expensive.  This has to be paid

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for.  The obvious thing to do is increase prices to users of the night time service.  Most of us have had one drink too many in Soho and ended up taking a cab which might cost £30.  If the alternative is a tube which is twice the normal tube price, say £8, that’s a good deal, right?

Although I still think that £49,673 is quite a high non-graduate starting salary, I do think it is fair enough for the RMT to say that it is not on to impose night working on their members.  It is a major adverse contractual change and drivers can reasonably insist on the right not to do it; the response is to pay them more until enough of them agree.

See Also:

John #McDonnell’s Characterisation Of #Finance Is Misconceived

Jacob Rees Mogg Is Wrong To Say That Loss of Passporting Will Not Be A Problem For The City

The Psychology of Successful Trading: see clip below of me explaining my new book!

The Forthcoming #Bitcoin Crash Will Kill The #Trump Demographic

 

UK Deficit No Longer A Problem

There has been controversy recently over the Conservative claim that the UK deficit has `halved’, based on the observation that £91bn is not half of £153bn:

http://www.theguardian.com/politics/2015/jan/02/david-cameron-launch-election-campaign-deficit-claim-conservatives

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As the Conservatives correctly argue, the most natural way of considering the deficit is a proportion of the size of the economy.  On this measure, they say it has indeed halved.  I will offer a couple of brief arguments as to why the Conservatives are right to say this.  Then I will suggest they could have gone further and argued that the problem is basically solved.  (They may have chosen not to do this because they consider it will be valuable in the election as a way of harming other more spendthrift parties.)

1).  The deficit as a proportion of GDP is the way the bond markets look at deficits.  This is the correct perspective to take, because it is the bond markets who are funding the deficit.  They look at debt to GDP (%) and the deficit is the rate of change of debt to GDP (also %).  He who pays the piper calls the tune.

2).  Relatedly, looking at the absolute number makes no sense.  If I ask you whether a £5,000 overdraft is a problem, you will ask me what the person who has the overdraft makes in a year.  If they have no income, it’s a big problem.  If they make £80,000 a year, it is no problem at all.

Now I will look at what they could have said.

The UK budget balance as a % of GDP is currently estimated at -4.5% of GDP.  (All of my numbers are going to come from the table on p. 96 of the 13 December 2014 issue of The Economist.  They caveat their number as being either from `The Economist poll or an Economist Intelligence Unit estimate/forecast’.  We do not need to worry about this as the number is about right; they are just allowing for the fact that they are making an estimate for the whole of 2014 slightly before it ends.)

We now need to know where we have come from in order to know how far we have come.  The first benchmark is the Maastricht criterion.  Although the UK is not looking to join the Euro, that is a relevant benchmark of UK peers.  It requires the deficit to be 3% or less of GDP.  (Again, note that the criterion is expressed as a % of GDP because that is the only sensible way of looking at it.)

I saw estimates before the last election that the previous administration was looking to borrow 15% of GDP p.a.  That was terrifying, not least because 1.15^5 = 2.01 i.e. 15% a year doubles debt to GDP in a single parliament.  That is a doubling of the national debt before you get another chance to intervene.

Now, perhaps that 15% was a politically influenced estimate.  More neutrally, all sides agree that the deficit has reduced from around 10%.  Let us take that number.  Now consider this: you can run a deficit at the same level as your nominal GDP growth without changing your debt to GDP number.  Since that is what bond markets care about, it should be what you care about as well.  GDP growth for 2014 is 3.0%.  So imagine we want to get from 10% to 3%, then the distance we want to travel is 7.0%.  We have actually moved from 10% to 4.5% i.e. a distance of 5.5%.  5.5% divided by 7.0% = 79% i.e. we really only have another 20% of the distance to go.

Now I am the first to think we should continue to bear down on the deficit, and in particular it is a really bad idea to fund OpEx with debt rather that Capex — meaning you can borrow to fund actual investments in actual pieces of infrastructure which pay you actual GDP benefits but you cannot sensibly borrow to keep the lights on or to pay benefits — but it still the case that a lot of the work has been done.  I would at this stage like to see the deficit number reduce only slightly but shift spending into sectors which will produce a GDP return.

Two ideas: the Germans lend EUR16bn a year to their famed SME sector.  The Israelis

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generated a globally successful tech start-up  industry by `pouring money into elite universities and creating a clever system to attract venture capital’ (The Economist again, p. 76).

See Also:

John #McDonnell’s Characterisation Of #Finance Is Misconceived

Jacob Rees Mogg Is Wrong To Say That Loss of Passporting Will Not Be A Problem For The City

The Psychology of Successful Trading: see clip below of me explaining my new book!

Scotland Has no Feasible Currency Options on Independence

 

Scotland Has no Feasible Currency Options on Independence

Originally written in response to an article by Monbiot here:

http://www.theguardian.com/commentisfree/2014/sep/02/scots-independence-england-scotland

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One immediate problem is that Monbiot begs the question, in that he assumes the conclusion he is trying to prove as a premise in his argument. This can be seen throughout the first four paragraphs. He aims to conclude that Scotland should be an independent country starting from a set of rhetorical questions premised on Scotland being a country. True but irrelevant, since the question at issue is exactly whether Scotland should be an independent country. To see this more clearly, note that his argument, if valid, goes through for anything you call a country: Wales, London, Pimlico, the local pub. Should Pimlico accept the hegemony of Westminster…?

A more serious problem is that whether or not Monbiot is right that there is a much better possibility in the offing depends on whether there is a feasible path to get there. Otherwise he is arguing that we would all be better off living on the moon in gold houses. True, but irrelevant, because we can’t do it. Here the currency problem comes to the fore. Monbiot concedes that Scotland might have no control over its currency post-independence, and seeks to minimise that difficulty by arguing that this represents no change against the status quo. Maybe, but the problem is much worse than that. Scotland in fact has no viable currency options post-independence.

The possibilities are a) keep the pound or b) join the Euro.

a). in fact splits into two possibilities. a1). is to obtain agreement from Westminster to retain the use of the pound on the same basis as the remaining-UK (RUK). a2), also known as Sterlingisation or the Panama option, is to use the pound without agreement from Westminster.

It is possibility a1). that all Westminster parties have ruled out. The pro-independence camp here argues that the Westminster parties are bluffing here. They are not. RUK cannot afford to bluff here. The pro-independence camp says they will not take on their share of UK debt (£100bn) if Westminster does not let them use the pound. Westminster is in fact going to bite that bullet if need be. RUK is already on the hook for the entire current amount of UK debt. This is because RUK has already been required by international bond markets to state that it will be standing behind all current UK debt because the international bond markets were not prepared to accept the risk that they might end up holding Scottish debt. (There is an interest rate at which they would be prepared to do so, but it is much higher than either the UK or RUK rates, because an independent Scotland would not have a Aaa rating.) So this option will not be available.

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Possibility a2) is where the pound is just used to make retail purchases in Scotland. It is true that Westminster cannot stop this and nor need it. It is simply not a problem for RUK, just as it is not a problem for the US that Panama uses the dollar. However, Westminster can and must prevent Scotland from issuing pound-denominated debt. It cannot be allowed since Scotland would be issuing debt for which RUK would be responsible. (This is fact is the other way around. No authority could be given to Scotland to issue debt.) Similarly, the Bank of England will not guarantee Scottish banks because it would not be in a position to regulate them. Since Scotland will continue to be in a financial deficit position after independence, like the UK and RUK, it will need to issue debt. So this option will not be available.

Possibility b). is the Euro. This again splits into two possibilities like the above, but no one has proposed b2) (`Euroisation’) which has the same fatal problems as a2). So b) means EU membership.

The first problem here is that Spain would have to veto membership or risk fission, starting with Catalonia.

The second problem here is that you don’t join on UK conditions. You join on currently available conditions. That means no opt outs and no rebate. The latter in particular is going to be particularly expensive.

Thirdly, today’s letter from the former European Commissioner for Economic and Monetary Affairs:

http://www.telegraph.co.uk/news/uknews/scottish-independence/11070773/Alex-Salmonds-currency-plan-B-incompatible-with-EU.html

is germane here. Key points:

– you can’t join the Euro if you just reneged on your debt as postulated above;

– you can’t join the Euro without a stable central bank (I imagine that means at least three to four years)

– you can’t join the Euro if you have been `sterlingised’ for the candidacy period.

So this option is also impossible.

There are no more options.

See also:

John #McDonnell’s Characterisation Of #Finance Is Misconceived

The Late Evaluation Effect And Financial Markets

The Psychology of Successful Trading: see clip below of me explaining my new book!

Cognitive Biases And How They Affect Stock Markets

Sherlock Holmes as Enemy of Confirmation Bias

Further to my recent paper on Sherlock and the ontology of ficta:

How can we reconcile the following apparent truths: ‘Sherlock Holmes doesn’t exist’ and ‘Sherlock Holmes was created by Conan Doyle’?

– which was kindly tweeted by Dr Watson:

– I was also pointed by Dr Watson towards some very interesting Holmes quotes aimed at showing that he is a fan of data-driven decision making:

That looked like a decent case, but what struck me more about the five well-chosen quotes is that they really show that Holmes is very well aware of the problem of Confirmation Bias. This is prevalent everywhere in everyone and completely bedevils our reasoning abilities. Given that this is very modern psychology, it is remarkable that Holmes was on to it so quickly.

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I will proceed as follows. I will give you the quotes; I will tell you what Confirmation Bias is; I will show how the quotes show that Holmes is aware of the problem, and I will close with some brief remarks as to why Confirmation Bias is a problem.

Quotes from Sherlock

Here are the quotes; again courtesy of the Umbel blog.

1. “There is nothing like first-hand evidence.”

2. “The world is full of obvious things which nobody by any chance ever observes.”

3. “It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts.”

4. “I never guess. It is a shocking habit,—destructive to the logical faculty.”

5. “‘Data! Data! Data!’ he cried impatiently. ‘I can’t make bricks without clay.’”

What is Confirmation Bias?

First cut: Confirmation Bias is the tendency to confirm what you already believe.

This of course is the enemy of good hypothesis formation. You should instead attempt to falsify what you believe. That is the only way of proving anything, because attempting to prove what you already believe just gives you an endless series of facts which are consistent with your hypothesis. You can have an infinite series of consistent observations but that proves nothing; whereas a single disconfirmatory observation disproves the hypothesis!

Given the remarkable asymmetry in power of potential observations, it is remarkable that few people ever look where they ought to. Of course, one reason for that is that if you falsify a hypothesis you already hold, you will have to track through the ramifications of that for your whole belief structure. If for instance, you find out that the man in the hat is not Moriarty, you will have to discard a large number of other beliefs. If you saw the man in the hat at the station, you now have to believe that the man at the station was not Moriarty, and so on, with potentially significant consequences for your picture of the world. This takes time and energy so people don’t want to do it.

Confirmation Bias comes in three main forms: a) not looking for disconfirmatory evidence; b) ignoring disconfirmatory evidence if it is pressed upon one; c) discounting disconfirmatory evidence.

Holmes on the Case

The key is quote 3, which is basically a statement of the problem of Confirmation Bias. The facts you actually see are twisted by what you are expecting to find, and so you will then inexorably find what you were expecting. For that reason, guessing is a mistake, as Holmes points out in quote 4. Because a guess does not stand in a vacuum. It is formed from currently existing half-beliefs and things you are prepared/want to believe. So it is biased. Worse still, the guess becomes a hypothesis which by the twisted magic of Confirmation Bias will now find ways of becoming your truth. Holmes is right to call this a shocking abuse of logic.

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Quote 2 speaks to the problem of ignoring data. Many obvious things are unremarkable merely because we have seen them so often. Take gravity. Why do we stick to the earth? Isn’t that odd? No-one thinks so, but how can it be explained? (Incidentally I object to the latest TV version having Holmes say he doesn’t know that the earth goes around the sun because it changes nothing here. We would, for example, be shocked by his failure to expose as an impostor a scientist who claimed the sun goes round the earth. So Holmes needs an excellent theory of the world in order to have the excellent Theory of Mind that he clearly enjoys.)

Quotes 1 and 5 speak to the primary importance of data, which as I have been saying must be impartially collected and not merely what makes it through after Confirmation Bias.

Why is Confirmation Bias a problem?

Think about just two things: religion and politics. Imagine that you have been trained from a young age to believe a set of random hypothesis and have then had a lifetime exercising Confirmation Bias to back up these hypotheses. Some people move on from religious fairy tales, but many do not. Also, have you noticed that most people vote the way their parents did? They seem to know *without listening* that everything that the other political party says is wrong. This sort of factor gives you the political polarisation currently visible in America and elsewhere.

This is not a good thing and Holmes is right to warn us strongly against it. Beware Confirmation Bias!

See Also:

Sherlock Holmes as Enemy of Confirmation Bias

What Is “Theory Of Mind?”

The Psychology of Successful Trading: see clip below of me explaining my new book!

The #Bitcoin Bubble Is Caused By The Halo Effect

Kerviel: The SocGen Rogue Trader And What Is Surprising About How He Got Away With It

Jerome Kerviel, accused of being a rogue trader, is now on trial. SocGen lost $7bn in the incident which heads the list of major trading losses.

http://en.wikipedia.org/wiki/List_of_trading_losses

How did he do it?

This is actually a very similar situation to Nick Leeson at Barings – number 11 in the top list. They were both involved in forms of arbitrage, which exploits tiny differences in price which ‘shouldn’t’ really be there. In fact, pricing theory fairly obviously requires that there can’t be a price difference between two identical items. If that were false – say if one loaf of bread had a different price to an identical one – then I could make a risk free profit by buying at the low price and selling at the high price. And there can’t be a risk free profit because everyone would pile in. You can see that what would happen would be that the prices would equalise.

Now this is what the arbitrageurs exploit. It all hinges on what ‘identical’ means. Not quite identical introduces some risk. Leeson was buying one product in Osaka and selling the same product in Singapore. Clearly if the product is the same, exactly, there is no risk. You might ask what might cause a price difference – there might be transient local factors such as someone big in Osaka decides to buy something. And then there could be a delay before Singapore catches up. And that catch-up process is exactly what the arbs do.

Kerviel was involved in arbing equity index futures and underlying equities. Equities are stocks, indices are groups of stocks like the FTSE-100 and equity index futures is just a bet on where the FTSE-100 will be in six months from now. Clearly you can do that on a risk free basis if you, say, sell the index and buy all the stocks in it. [Incidentally, if you want to be an insider trader but don’t want to go to prison, maybe you could buy an index in which the stock you can’t trade figures and then sell everything in the index except the one you aren’t allowed to trade…but I don’t recommend it…]

Why is it dangerous?

There are two common factors between this case and Leeson. In both, the alleged misdeeds were possible because the trader and the back office person were effectively the same person. Leeson actually did his own monitoring, an extraordinary failure which rightly cost the jobs of many at Barings. I could go further and say it was so remarkable that everyone involved in the company deserved to lose all their cash, but I know there were lots of Barings debentures held by grannies and I suspect we can’t expect them to have known what they were doing. While Kerviel came from back office himself and knew the control systems and would have known how to defeat them. I also will claim that back office types are rather easy for front office traders to browbeat and this history will have played a part in Kerviel’s psychology and the desire to get somewhere fast.

Secondly, because you are exploiting tiny price differences, you need to trade in vast amounts. And all the time. The control problem comes when you do not have offsetting equal and opposite trades but wind up taking huge uncovered positions. Leeson sorted this out with a fax purportedly evidencing a large receivable from a hedge fund. Towards the end, he was drawing in funding from all over Asia, which should have alerted someone.

What is odd about this case?

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You can’t make large amounts of money from arbitrage. You just can’t, because risk and reward are closely linked. You can see from the loaf of bread example that that has to be true. So if you are a manager in an I-bank, you need to get very concerned if your arbitrage desk is making large profits.

Now this leads to the strange consequence that Kerviel must have been concealing large profits. And this is what you see.

http://news.yahoo.com/s/nm/20100608/ts_nm/us_socgen_kerviel

“During the largely procedural first day of the trial, Kerviel’s lawyer said Societe Generale would have been clearly able to see data showing Kerviel’s extraordinary profits of 1.4 billion euros at the end of 2007”

Note that this is profit not revenue, and that SocGen as a whole might typically make a net profit around EUR600m in a quarter. Do you think you could spot Kerviel in there?

“Seated on a plastic chair in front of rows of lawyers in black garb, the ex-trader said his annual salary at Societe Generale was 48,000 euros in 2006 with an annual bonus of 60,000 euros”

Now that is not a lot of money for traders. They might typically expect to make 5% to 10% of what they produce, or more in some cases where they are reliably producing large returns. Apparently Kerviel was expecting to make EUR300,000 for 08, on a declared profit of EUR60m. That’s a 0.5% return. You can see that this is not enough. Someone with that type of track record could just set up on their own, use the track record to raise funds, and trade themselves for maybe 50%. There is another type of arb there.

The GBPEUR exchange rate in 07 was 0.67, so we are talking about someone earning a salary of £32k. This is not far north of what we used to pay graduate trainees in London. So what we have here is someone being paid back office amounts, a French I-bank culture in which you shouldn’t really pay very much or have high quality people, and back office resentment of the flash and the furious.

“Lawyers also read a transcript of a conversation between Kerviel and SocGen’s ex-investment bank chief Jean-Pierre Mustier when the scandal broke, in which Mustier reportedly said: “If you won 1.4 billion euros, that means you’re very good. What you did was a pain, but it’s not a big deal.”

If Kerviel can make that out, then Mustier has failed in a stunning way to understand what arbitrage is. It is a French word, after all. It may be difficult to see how Kerviel can avoid jail, but he cannot have been on his own in this one.

See Also:

What Is “Theory Of Mind?”

The Late Evaluation Effect And Financial Markets

The Psychology of Successful Trading: see clip below of me explaining my new book!

The RMT Is Right, Just This Once

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