# Convertible Arbitrage. Thought of the Day 108.0

A convertible bond can be thought of as a fixed income security that has an embedded equity call option. The convertible investor has the right, but not the obligation, to convert (exchange) the bond into a predetermined number of common shares. The investor will presumably convert sometime at or before the maturity of the bond if the value of the common shares exceeds the cash redemption value of the bond. The convertible therefore has both debt and equity characteristics and, as a result, provides an asymmetrical risk and return profile. Until the investor converts the bond into common shares of the issuer, the issuer is obligated to pay a fixed coupon to the investor and repay the bond at maturity if conversion never occurs. A convertible’s price is sensitive to, among other things, changes in market interest rates, credit risk of the issuer, and the issuer’s common share price and share price volatility.

Analysis of convertible bond prices factors in three different sources of value: investment value, conversion value, and option value. The investment value is the theoretical value at which the bond would trade if it were not convertible. This represents the security’s floor value, or minimum price at which it should trade as a nonconvertible bond. The conversion value represents the value of the common stock into which the bond can be converted. If, for example, these shares are trading at \$30 and the bond can convert into 100 shares, the conversion value is \$3,000. The investment value and conversion value can be considered, at maturity, the low and high price boundaries for the convertible bond. The option value represents the theoretical value of having the right, but not the obligation, to convert the bond into common shares. Until maturity, a convertible trades at a price between the investment value and the option value.

A Black-Scholes option pricing model, in combination with a bond valuation model, can be used to price a convertible security. However, a binomial option model, with some adjustments, is the best method for determining the value of a convertible security. Convertible arbitrage is a market-neutral investment strategy that involves the simultaneous purchase of convertible securities and the short sale of common shares (selling borrowed stock) that underlie the convertible. An investor attempts to exploit inefficiencies in the pricing of the convertible in relation to the security’s embedded call option on the convertible issuer’s common stock. In addition, there are cash flows associated with the arbitrage position that combine with the security’s inefficient pricing to create favorable returns to an investor who is able to properly manage a hedge position through a dynamic hedging process. The hedge involves selling short a percentage of the shares that the convertible can convert into based on the change in the convertible’s price with respect to the change in the underlying common stock price (delta) and the change in delta with respect to the change in the underlying common stock (gamma). The short position must be adjusted frequently in an attempt to neutralize the impact of changing common share prices during the life of the convertible security. This process of managing the short position in the issuer’s stock is called “delta hedging.”

If hedging is done properly, whenever the convertible issuer’s common share price decreases, the gain from the short stock position should exceed the loss from the convertible holding. Equally, whenever the issuer’s common share price increases, the gain from the convertible holding should exceed the loss from the short stock position. In addition to the returns produced by delta hedging, the investor will receive returns from the convertible’s coupon payment and interest income associated with the short stock sale. However, this cash flow is reduced by paying a cash amount to stock lenders equal to the dividend the lenders would have received if the stock were not loaned to the convertible investor, and further reduced by stock borrow costs paid to a prime broker. In addition, if the investor leverages the investment by borrowing cash from a prime broker, there will be interest expense on the loan. Finally, if an investor chooses to hedge credit risk of the issuer, or interest rate risk, there will be additional costs associated with credit default swaps and a short Treasury position. This strategy attempts to create returns that exceed the returns that would be available from purchasing a nonconverting bond with the same maturity issued by the same issuer, without being exposed to common share price risk. Most convertible arbitrageurs attempt to achieve double-digit annual returns from convertible arbitrage.

# The Left Needs the Stupid to Survive…

Social pathologies, or the social pathologist undoubtedly. Orwell developed his Newspeak dictionary in order to explain the cognitive phenomenon he observed about him with regard to those committed to the left. Thats not to say that the cognitive phenomenon cannot be on the right, since many mass movement type ideologies are logically contradictory and to sustain themselves their adherents must engage themselves in mental gyrations to upkeep their belief. Orwell needed the Newspeak as part of the apparatus of totalitarian control, something forced on to an unwitting and unwilling public. It never occurred to Orwell that the masses would never care as long as their animal desires were being provided for. The party, much like the Juvenal before them, recognized that the public would not much care about the higher concepts such as truth or freedom as ling as their bread and circuses, in the form of the cynical statement Prolefeed were supplied. In fact, trying to pry them away from such materialities or ‘truth’ would likely cause them the to support the existing regime. This means that a capitalist totalitarianism, with its superior ability to provide for material goods would be harder to dislodge than a socialist one.

Take for example the notion of Doublethink, the idea of keeping two mutually opposing ideas in one’s head without noticing the difference. Orwell saw this mode as an aberration with regard to normal thought but never realized the fact that this was in the common man a mode of cognition. Or the concept of Bellyfeel, which Orwell states,

Consider, for example, a typical sentence from a Times leading article as “Oldthinkers unbellyfeel Ingsoc”. the shortest rendering one could make of this in Oldspeak would be: “Those whose ideas formed before the revolution cannot have a full understanding of the principle of English socialism.” But, this is not an adequate translation…only a person thoroughly grounded in Ingsoc could appreciate the full force of the word bellyful, which implied a blind, enthusiastic and casual acceptance difficult to imagine today.

“Gut-Instinct”, more than reason, is mass man’s mechanism of political orientation. This is why Fascism and Socialism is better understood as appeals to the gut-brain rather than logically and empirically justified modes of political thought. Totalitarian regimes cannot solely rely on oppression for their survival, they also need to rely on some of cooperation  amongst the population, and they bring this about by exploiting the cognitive miserliness of the average man. Orwell, just like many other left-wing intellectuals never really appreciated the mindset of just outside the proletariat that he was. His fundamental misunderstanding of Newspeak lay in the assumption of rationalist fallacy, which assumes that the average man is rational when it counts, but the problem lies in the fact that for the average man cognitive miserliness is the norm. the problem is that a lot of mainstream conservative thought is based on this premise, which in turn undermines its own survival and helps feed the leftist beast. Any conservatives that believes in the right of the conservative miser to choose is a dead man walking. This criticism of the prole-mind is not based on any snobbery, rather it is of functional basis. Competency, not class should be the eligibility for decision-making, and thus no wonder left needs the stupid to survive.

# In Praise of Libertarianism. Drunken Risibility

Devotion to free markets is a sin??? Nah!!!. Like quantitative induction and philosophical deduction, economics has always had a political purpose, and the purpose has usually been libertarian. Economists are freedom nuts, which is to say that they look with suspicion on lawyerly plans to solve problems with new state compulsions and longer jail sentences. Economics at its philosophical birth, among physiocrats in Paris and moral philosophers in Edinburgh, was in favor of free markets and was suspicious of overblown states. Mostly it still is. Let things be, laissez faire, has been the economists’ cry against intervention. Let the trades begin.

True, not all economists are free traders. The non-free traders, often European and disproportionately French, point out that you can make other assumptions about how trade works, A’, and get other conclusions, C’, not so favorable to laissez faire. The free-trade theorem, which sounds so grand, is actually pretty easy to overturn. Suppose a big part of the economy – say the household – is, as the economists put it, “distorted” (e.g., suppose people in households do things for love: you can see that the economists have a somewhat peculiar idea of “distortion”). Then it follows rigorously (that is to say, mathematically) that free trade in other sectors (e.g., manufacturing) will not be the best thing. In fact it can make the average person worse off than restricted, protected, tariffed trade would.

And of course normal people – meaning non-economists – are not persuaded that free trade is always and everywhere a good thing. For example most people think free trade is a bad thing for the product or service they make. But, the reality is to think the need to blockade entry into the profession of being an economist: it is, in all agreement, scandalous that so many unqualified quacks are bilking consumers with adulterated economics.

And very many normal people of leftish views, even after communism, even after numerous disastrous experiments in central planning, think socialism deserves a chance. They think it obvious that socialism is after all fairer than unfettered capitalism. They think it obvious that regulation is after all necessary to restrain monopoly. They don’t realize that free markets have partially broken down inequality (for example, between men and women; “partially”) and partially undermined monopolies (for example, local monopolies in retailing) and have increased the income of the poor over two centuries by a factor of 18. The felony lies in, the lefties think, in exactly its free-market bias.

But, my dearly beloved friends on the left, think, think again. There really is a serious case to be made against government intervention and in favor of markets. Maybe not knockdown; maybe imperfect here or there; let’s chat about it; hmm, a serious case that serious people ought to take seriously. The case in favor of markets is on the contrary populist and egalitarian and person-respecting and bad-institution-breaking libertarianism. Don’t go to government to solve problems, said Adam Smith. As he didn’t say, to do so is to put the fox in charge of the hen house. The golden rule is, those who have the gold rule: so don’t expect a government run by men to help women, or a government run by Enron executives to help Enron employees.

Libertarianism is typical of economics, especially English-speaking economics, and most especially American economics. Most Americans if they can get clear of certain European errors, are radical libertarians under the skin. Give me liberty. Sweet land of liberty. Live free or die. But alas, no time, no time. Libraries of books have been written examining the numerous and weighty arguments for the market and against socialism. Really, that the average literary person believes the first few pages of The Communist Manifesto suffice for knowledge of economics and economic history, in which he professes great interest, is a bit of a scandal. As Cromwell said wearily to the General Assembly of the Church of Scotland, 3 August, 1650, “I beseech you, in the bowels of Christ, think it possible you may be mistaken.” Oh, permit one short libertarian riff.

Nor is government obstruction peculiar to the present-day Third World. In one decade in the eighteenth century, according to the Swedish economist and historian Eli Heckscher in his book, Mercantilism, the French government sent tens of thousands of souls to the galleys and executed 16,000 (that’s about 4.4 people a day over the ten years: you see the beauty of statistical thinking) for the hideous crime of… are you ready to hear the appalling evil these enemies of the State committed, fully justifying hanging them all, every damned one of their treasonable skins? … importing printed calico cloth. States do not change much from age to age. In view of How Muches and Oh, My Gods like these – the baleful oomph of governmental intrusions world-wide crushing harmless (indeed, beneficial) exchange, from marijuana to printed calico – perhaps laissez faire does not seem so obviously sinful, does it now? Consider, my dear leftist friends. Read and reflect. I beseech you, think it possible that, like statistics and mathematics, the libertarianism of economics is a virtue.

# Is Depeche Mode an Alt-Right Band?

The members of Mode all emerged from fashy signalling New Romantic and avant grade electronic milieu. The band’s first album, mainly written by the synth pop guru and genius Vince Clarke of later Yazoo (Yaz in the U.S) and Erasure fame, launched the band with their first album Speak and Spell.  Politics was not so present on the first album, but was more reflected the band’s name a reference to Fast Fashion and New Romance – a pre-Bret-Easton-Ellis type notion that celebrated the decadent 80s love of surface, fast living, young love, good looks, and high times. But, as soon as Vince Clarke left the band and Martin Gore took over the songwriting slot, they began signalling political ideas of both the Left and Right.

This Left and Right synthesis was both progressive and forward-looking for the era, and really added to the band’s power level, intellectual weight, longevity, and the ability of their work to sound as relevant today as ever. A Broken Frame, their second LP, featured a Neo-Realist folk type cover, reminiscent of both Nazi art and the Communist “Realism” that was favoured by the Stalin and subsequently China and North Korea. The follow up Construction Time Again was an open rebellion to Jacques Derrida’s openly nihilistic and destructive deconstructionism that was all the rage in the 80s intellectual scene. It also featured a fascistic cover of an Aryan man smashing down a hammer. From that image alone the Alt-Right could have been born. Again, the Left and Right symbolism were being mixed together. The album Music for the Masses featured a kind of overarching, fashy motif of a loudspeaker in the wilderness on the cover and an anthem and theme song on the record, Pimpf, given visual expression with the help of the wonderful Anton Corbijn. This was quite openly the most fascist reference in their whole oeuvre. Pimpf was named after a Nazi Youth Movement, and at this time Martin Gore began making his most fashy statements in the media about politics. Gore, the rumour goes, was getting into fascist aesthetics, fashion, and ideas from the mid to late 80s until the early 90s, until he discovered his real father was of mixed race, or something along those lines. Then he went silent on the issue. But he still continued to signal these ideas in his art, albeit in a slightly more diffused and subterranean way. But he was also signalling some left-wing Socialist ideas. With him, it seems, there’s always been a kind of dialectic at play.

Exceprted from and denials here, here against the claim by Richard Spencer.

# Reclaim Modernity: Beyond Markets, Beyond Machines (Mark Fisher & Jeremy Gilbert)

It is understandable that the mainstream left has traditionally been suspicious of anti-bureaucratic politics. The Fabian tradition has always believed – has been defined by its belief – in the development and extension of an enlightened bureaucracy as the main vehicle of social progress. Attacking ‘bureaucracy’ has been – since at least the 1940s – a means by which the Right has attacked the very idea of public service and collective action. Since the early days of Thatcherism, there has been very good reason to become nervous whenever someone attacks bureaucracy, because such attacks are almost invariably followed by plans not for democratisation, but for privatisation.

Nonetheless, it is precisely this situation that has produced a certain paralysis of the Left in the face of one of its greatest political opportunities, an opportunity which it can only take if it can learn to speak an anti-bureaucratic language with confidence and conviction. On the one hand, this is a simple populist opportunity to unite constituencies within both the public and private sectors: simple, but potentially strategically crucial. As workers in both sectors and as users of public services, the public dislike bureaucracy and apparent over-regulation. The Left misses an enormous opportunity if it fails to capitalise on this dislike and transform it into a set of democratic demands.

On the other hand, anti-bureaucratism marks one of the critical points of failure and contradiction in the entire neoliberal project. For the truth is that neoliberalism has not kept its promise in this regard. It has not reduced the interference of managerial mechanisms and apparently pointless rules and regulations in the working life of public-sector professionals, or of public-service users, or of the vast majority of workers in the private sector. In fact it has led in many cases to an enormous proliferation and intensification of just these processes. Targets, performance indicators, quantitative surveys and managerial algorithms dominate more of life today than ever before, not less. The only people who really suffer less regulation than they did in the past are the agents of finance capital: banks, traders, speculators and fund managers.

Where de-regulation is a reality for most workers is not in their working lives as such, but in the removal of those regulations which once protected their rights to secure work, and to a decent life outside of work (pensions, holidays, leave entitlements, etc.). The precarious labour market is not a zone of freedom for such workers, but a space in which the fact of precarity itself becomes a mechanism of discipline and regulation. It only becomes a zone of freedom for those who already have enough capital to be able to choose when and where to work, or to benefit from the hyper-mobility and enforced flexibility of contemporary capitalism.

Reclaiming Modernity Beyond Markets Beyond Machines

# Nick Land – The Dark Enlightenment: Neoreaction & Modernity

Nick on a fascinating discussion on Neoreaction, progressivism, and the future of Western civilization. Initially a libertarian, Nick eventually stumbled upon the work of Mencius Moldbug. This leads to a consideration of the central ideas of Neoreaction, and then over to discuss neocameralism, an approach to governance that incorporates free market forces. Nick then describes the cathedral, which refers to the alliance of institutions – NGOs, corporations, academia, etc. – responsible for promoting progressivism. Later, Nick draws an apt comparison between the invention of the printing press and the rise of the Internet. The first hour touches on much more, including universalism, modernity, and multiculturalism.

In the members’ hour (which sadly is a paid service!), gears are switched to consider potential solutions to the West’s decline. Nick argues that we must dismantle the managerial state, explaining that the Right shouldn’t count on being able to control it indefinitely. There is then a discussion on Islam and European politics. Nick explains how Europe’s ongoing demographic transformation is poised to drastically alter the European political landscape. Later, we talk about the need for an ideological divorce, as Western nations have become far too divided to function properly. Nick argues that such a divorce would allow for competition between different political factions, revealing which lead to success and which do not. The show concludes with a consideration of whether or not the Left will realize its mistakes before it’s too late.

# Deleuze on Right versus Left. Thought of the Day 12.0

Deleuze says to be on the Right is to perceive the world starting with identity, with self and family, and to move outward in concentric circles, to friends, city, nation, continent, world with diminishing affective investment in each circle, and with an abiding sense that the centre needs defending against the periphery. On the contrary to be on the Left is to start one’s perception on the periphery and to move inwards. It requires not the bolstering of the centre, but an appreciation that the centre is interlaced with the periphery, a process that undoes the distance between the two.

# Negri’s Dismissive Approach to Re-engaging Growing Ideological Opposition to Capitalism. Note Quote.

Negri’s politics are shaped by the defeat of the movement of the 1960s and 1970s. His borrowed economic theory was shaped by the triumphalism following the restructuring of US capitalism in the 1980s and the collapse of the Stalinist regimes. Having created a Marxism gutted of its central emphasis on the working class, he filled this empty shell with the poststructuralist philosophy developed by a generation of disappointed post-1968 French intellectuals.

Atilio Boron argues that Hardt and Negri’s increasing reliance on poststructuralist philosophers flows from a shared backdrop of trying to come to terms with working class defeat and capitalist hubris. Faced with a system that appears, for the time being, unbeatable:…a series of theoretical and practical consequences emerge that…are neatly reflected in the postmodern agenda. On the one hand, an almost obsessive interest in the examination of the social forms that grow in the margins or in the interstices of the system; on the other hand, the search for those social forces that at least for now could commit some sort of transgression against the system, or could promote some type of limited and ephemeral subversion against it.

This concern with subversion and transgression is indeed characteristic of many of the autonomist movements with which Negri is associated. But for Negri, with the rise of post-industrial production and the multitude, the potential for postmodern subversion has spread across the whole social terrain, and across the globe. One might expect Hardt and Negri to explain what such a confrontation would look like. However, what we instead get is a retreat into philosophy and descriptions of the multitude that the authors themselves admit are merely ‘poetic’.

Hardt and Negri also borrow from the poststructuralists, especially Deleuze and Guattari, an eclectic form of expression known as ‘assemblage’.

Timothy Brennan writes in his Italian Ideology:

It expresses itself as a gathering of substantively incompatible positions. In Empire’s assemblage, the juxtaposition of figures whose political views are mutually hostile to one another…is presented as the supersession of earlier divisions in pursuit of a more supple and inclusive combination.

So, in Empire, philosophers such as Michel Foucault or Baruch Spinoza and revolutionaries such as Rosa Luxemburg rub shoulders with Bill Gates, former US labour secretary Robert Reich and St Francis of Assissi. This form of expression evolved as a rejection of attempts at a ‘grand narrative’ such as Marxism that could hope to explain and help transform the world, or of an agency such as the working class that could carry through such a transformation. For Hardt and Negri this method mirrors the multitude that they describe—a series of heterogeneous, isolated subjects, coming together to fleetingly act in common. Indeed they have gone so far as to say that the struggles of the multitude have become ‘incommunicable’ and lack a ‘common enemy’.

Their assertion would be contested by most of those who have attended the great international gatherings and protests of the anti-capitalist movement since Seattle. Here opposition to neo-liberalism and war have become common themes. The world working class may have been traumatised by the impact of neo-liberalism and the defeat of the movements of the 1960s and 1970s. But, rather than celebrating the much-exaggerated demise of the working class, the challenge today is to re-engage the growing ideological opposition to capitalism with the potential power that workers still hold. Negri is dismissive of such a project, but offersanothing substantial in its place.

His faux pas—over neo-liberalism, the EU constitution and the war in Iraq—stem from his failure to come to terms with either the defeats of the past or the nature of contemporary capitalism. Almost every assertion in his recent writings vanishes into thin air once subjected to even a cursory empirical examination. As for strategy, Multitude ends:

We can already recognise that today time is split between a present that is already dead and a future that is already living – and that yawning abyss between them is becoming enormous. In time, an event will thrust us like an arrow into that living future. This will be the real political act of love.

With an upsurge of the Techno-Commercial Right in the world, multinationals and Commodity Trading firms and HFTs and states wreaking havoc, and global warming (believe it or not!) threatening our very survival as a species, waiting for an act of political love to save us sounds like bad advice.