Thanks to everyone who attended the Risk Italia derivatives ranking event at the Italian Embassy in London on December 6. Our photographers were on hand and you can now see the photos from the evening at this link.
Feel free to browse through them - if you want to use any in your own publications, please contact us first.

A few macro links to ponder on the subject of asset price bubbles:

Are we in one?

No, we aren't, says MIT's Ricardo Caballero; asset prices are up, but it's not a bubble, it's a rational response to a shortage of assets in the face of high global demand. First Japanese assets melted down in the early 1990s; then Europe stagnated in the late 1990s; now China and the oil states are evincing huge demand for assets but aren't producing many themselves. Bubbles are, in a way, just the market's response to a shortage of assets, and trying to control them could cause further damage.

Former US Treasury economist Thomas Palley disagrees, in a response to Caballero: the last couple of decades have actually seen "an explosion in asset supply" thanks to privatisation in the advanced economies of the West, government deficit accounting and now privatisation in China as well. Instead, Palley wheels out eight other demand-led explanations. Rising inequality means that the rich (who tend to invest) have a great deal more money, especially in the US; higher corporate profits and lower corporate taxes mean that equities are fundamentally more valuable; he also cites lower interest rates, innovations in the markets and "plain old mania". Bubbles, in this interpretation, are dangerous; both in themselves, and as a sign of underlying imbalances and inequalities.

In any case, could we tell if we were in a bubble?
No, according to a Federal Reserve working paper from Refet Gurkaynak: there's no accurate econometric way of detecting bubbles, and whether an economist decides that a particular scenario is a bubble or not is "a matter of taste and personal preference".

Though, apparently, your chances of detecting a bubble go up with age: Robin Greenwood at Harvard and Stefan Nagel at Stanford note that young fund managers tended to pile into the late-90s tech bubble, and got their fingers burned when it burst in 2000. Nagel's found the same thing to be true at the individual level - people who grew up during bear markets tend to be far less heavily invested in equities.

"Go out 20 or 30 years from now", Nagel says, "and it's possible we'll see another bubble" - led by fund managers too young to remember the 1990s, and too confident to believe their grizzled elders' horror stories about AOL Time Warner and Pets.com.

Anyone interested in betting on hurricanes should have a look at this paper from William Nordhaus at Yale, via Economonitor. It puts some useful numbers behind general beliefs on the subject. While industrial civilisations are becoming less vulnerable to most environmental disturbances - a drought in England means a ban on watering one's lawn; a drought in Africa means mass death - the opposite is true of hurricanes, thanks to our unfortunate tendency to build very expensive buildings next to the sea. A hurricane of identical size and strength causes between 2.5% and 3.5% more damage every year.
The truly astonishing fact is the relationship between wind speed and damage done. The two are related, with damage rising as the eighth power of peak wind speed.
A small increase - or a small inaccuracy in measurement - can have immense effects on the total value of damage to insured property. And, of course, as Risk has noted before, a small increase in wind speed is exactly what we're going to get, thanks to climate change.
The good news is that Katrina-level hurricanes appear to be outliers even by climate-change standards - Nordhaus says "we would expect hurricanes with impact as high as Katrina once every 86 years without global warming but once every 28 years with global warming".

Another set of charts, this time from McKinsey. It's worth taking a few minutes to go through it (free registration required). For example, compare the chart on page 19 - showing cross-border holdings in 2004 - with the charts I published last month here.

Interesting points to ponder: the UK again comes out as by far the most international capital centre: compared to its own $6.7 trillion asset stock, the levels of cross-border ownership are massive. The US, unsurprisingly, remaines the favourite home of capital - the next exporters, such as Japan, China and Middle East, send 85% of their capital to the US. And Japan, oddly, is "strikingly isolated", with even smaller cross-border capital flows than China.

Now, this is quite a difference from the BIS data I blogged in December, which showed an absolutely massive net flow of Japanese capital into Europe. I'll try to reconcile these in the near future. In the meantime, any thoughts?

News of the awards is now up at Risk.net. Congratulations to all the winners. Space prevents me listing them all here, but the headline winner - House of the Year - was Merrill Lynch; not the largest derivatives house, but growing fast in what has been an increasingly difficult market. And the energy award went to JP Morgan, for their involvement in clearing up the collapse of Amaranth last summer. The full list of winners can be seen in the latest issue of Risk, now available to subscribers online here.
The presentations will be on January 24 at the Carlton Hotel in London.

Did we get it right? Let us know who you think should have won on the Risk Forum.

On Risk News yesterday, an update on the CME's credit event futures. The exchange has bowed to the CFTC and turned the product (still not released) into a bankruptcy future, rather than having it trigger on reschedulings or other less serious credit events.
A surprised Felix Salmon at Economonitor opines: "Yikes!" by which he means to say that the new product could lead to trouble. It's been hard enough for companies like GUS to get used to their creditors having CDS exposure as well as holding their debt; but, he points out, bankruptcy futures are going to give them a specific interest in getting the company into bankruptcy (or not) rather than sorting out the repayment terms that are best for the company, whether that involves bankruptcy or not.
Alea has been good at collecting the links on this and the related CME/CBOE spat.

Reuters reports that an unknown player, possibly a US hedge fund, is attempting to corner aluminium on the London Metals Exchange. (Via Econbrowser.) The fund is reportedly sitting on about 650,000 tonnes of aluminium - 90% of the total LME stock. Volatility has risen as a result of the long position, and the next few weeks could see a lot of traders hurrying to hedge; but it's worth remembering that most attempts to corner commodities end up going smash, and the huge aluminium market will be difficult for any one player to dominate. Complicating matters is the existence of another even larger short position for March, which may (or may not) be held by the same fund. The premium for cash metal over three-month price has now reached $120, the highest since 1990.

If the numbers work out, aluminium will go through the roof and the unnamed hedge fund will make millions. If not, we could see another Amaranth-type collapse. A nervous and volatile market is the only safe prediction at this point...

Consternation across the water this week with the release of a report sponsored by New York City mayor Michael Bloomberg (who is, of course, very familiar indeed with the financial services industry) and New York senator Charles Schumer. The Big Apple is on the way out, the report warns: "if we do nothing, within ten years while we will remain a leading regional financial center; we will no longer be the financial capital of the world."

The threat, the report says, comes mainly from the previous financial capital of the world, London. With looser immigration requirements, clearer regulation and less risk of damaging litigation, London, rather than New York, is the venue of choice for financial innovators; and with Chicago taking the lead in exchange-traded derivatives, New York is rapidly losing its financial primacy. Its capital stock is larger than Europe's, but is growing more slowly, and in revenue terms Europe is now almost equal.

The report makes some good points. The US regulatory system is certainly fairly convoluted for an outsider: compared with Britain's FSA, there is the SEC, the Fed, the CFTC, the OCC, the OTS and the rest of the federal alphabet soup; not to mention state-level authorities as well. US immigration authorities are infamous worldwide, although the third complaint, that of frivolous litigation, is less easy to judge.

I've looked at the rise of London before, here.

Over in Davos, the searchlight has been cast once again on hedge funds. German antipathy to the industry is well known - it was vice-chancellor Franz Muntefering who referred to foreign investors as "locusts" in April 2005, and events such as the TCI/Deutsche Borse conflict haven't helped.
The latest to take a stand is the chancellor herself - Angela Merkel, in a keynote speech (in German) at the World Economic Forum yesterday, picked hedge funds as one of the priorities for German presidency of the G8 group of advanced industrial economies.

"We want to minimize the systemic risks of the international capital markets and increase their transparency. This is particularly necessary for hedge funds," she told the audience.

Reuters and Bloomberg say there's also concern about the derivatives industry as a whole at the Forum. And Foreign Policy diarist David Rothkopf is bowled over by Merkel's speech - if not by the accommodation.

Last month we published a feature looking at hedge fund regulation in the very different political climates of the US, the UK and continental Europe; it doesn't look like the divide is going to close any time soon.

Three hundred guests gathered last night for the Risk Awards in the Jumeirah Carlton Tower Hotel in the West End of London. If you were there, you may have been wondering what would be done with all the photographs from the evening - well, here they are. As the blurb says, the pictures are copyright-free, so download any you like.
Thanks to all who attended - we hope you enjoyed the evening - and congratulations again to the winners.

Jean-Claude Trichet of the ECB has warned his audience at Davos of potential "instability" in the financial markets. (No transcript available, but reports here and here - and the next issue of Risk will be looking at his concerns in more detail.) He argues, as others have done before him, that the financial industry faces two linked problems - unusually cheap credit and unusually complex financial products.
Trichet and the ECB possess a European sort of wariness about financial innovation which isn't as evident in the British and US markets; it will be interesting to watch which way nascent markets like China choose to go. So far, the Chinese government has been cautious about opening up to new classes of financial products - maybe this will change.
And the BBC's Robert Peston points out one group who will definitely benefit from all this uncertainty and worry - the financial journalists. Whether the markets rise or fall, it's still news...

John Plender in the FT hedges his bets like a master in this long think-piece and finally concludes that, yes, maybe there is, and maybe derivatives will be where it starts. Michael Lewis at Bloomberg, mildly furious at the sort of people who "travel joylessly to the base of a Swiss ski slope and worry... not privately, with dignity, but publicly, to anyone who will listen" says it's all no more than attention-seeking.
They're both worth reading if you want to start your own train of thought. Food for thought, too, from the FSA with its new Financial Risks Outlook. Personally, I'd like to see a little more attention paid not to shocks like the ever-imminent bird flu pandemic, but to the sort of widespread delusional behaviour that starts quite a few crashes on their way - think of the dot-com crash and ask "Are investors fooling themselves like that now? If so, would we know?"