What trading desks do you think will be most profitable?

ambition56:

I have read that people are moving more towards vanilla products after the crisis but do you think we will revert back to exotics soon?

We saw a move away from complexity to regulation and simplicity back in 1929 in banking and the equities markets. Things largely stayed that way for the next 40-50 years. There was some mild innovation with mutual funds in the '50s and '60s, but we really didn't see any sort of increase in financial complexity until the CBOE opened in 1973. And we really didn't enter the fully deregulated fixed income market of the 1980s when the Garn-St. Germain Act of 1982 was passed- FINALLY making >4% interest on savings accounts and floating rate mortgages legal.

I would not count on an era of increased financial complexity during our careers. That's not to say finance- or even quant work- is a bad career to get into; we just have to be aware that the next 40-50 years will not see a great deal of innovation on the finance or risk front.

ambition56:

IlliniProgrammer thank you for that insight! Do you think the fact that we already have the CBOE and a lot of vanilla products are going to be more electronically traded and even hedged will drive wall street towards more complex products?

I really don't think so. I think it just means we won't lose much innovation on the existing exchange-trade derivatives. The existence of the NYSE pretty much guaranteed that stocks would be a big player in the financial markets despite the Securities & Exchange Acts of 1933-34 and Glass-Steagall, but it didn't guarantee any sort of innovation on that front. In fact, post 1929, we didn't see pre-1929 volumes or much of any kind of innovation in the equities markets for 30 years. By 1952, even the ambitious sell-side guys had given up on volumes returning to normal after 20 years of hoping for a turnaround. That year, the NYSE ended its Saturday sessions after 65 years and young brokers- the equivalent of today's analysts in S&T- finally got their weekends off.

So don't hold your breath for growth on nearly any front. Maybe hold your breath for stability and a stronger overall economy, but if history repeats itself, things do not bode well for a growing market.

Also, in light of the shift back to simplicity, what desks would benefit? I was thinking, rates derivatives, equity derivatives, fx derivatives, commod derivatives on the more complicated side and spot fx, cash equities, CDS, and futures/forwards desks on the super vanilla side. Excuse me if I made any blatant errors in my guesses.

I'm not sure what desks are going to benefit. I think that in the long run, the markets, economy, and individual investors as a whole are going to benefit from a little more stability, but in the short run, regulations hurt everyone on the sell-side- particularly the non-flow desks. Perhaps new jobs will be created in derivatives sales and on the buy side to try and replicate what used to be bespoke contracts with exchange-traded stuff.

But this is why I keep telling folks to think carefully before they get into investment banking/trading/research as a career. The growth that we saw over the past 30-35 years isn't likely to be the growth we see over the next 30. It will still make a good career like research or engineering but a significantly slower growing industry will create much fewer "BSDs" and "exit opps".

I also foresee higher worldwide taxes over the next decade or two- especially given some of the unrest we're seeing in Egypt and China. I think ten years from now will be the best time for the middle class and upper-middle class since the '60s, but I have a feeling that it's just the natural order of things for the rich to stop getting richer quite as quickly until the rest of the economy catches up. The gap between the global rich and global poor is getting to historical highs even in the pre-Welfare-State period.

So the bottom line is that your username might not serve you all that well over the next 40 years. Perhaps a better username might be "workethic" or "NotTooComplacent" as getting rich and staying rich gets much harder. :D

ambition56:

lol maybe I should become a consultant instead

The taxes will probably be 50% there, too. The distance between rich and poor throughout the world is probably going to compress a little over the next 20 years. It's just the natural order of things, and it's really part of a 70 year cycle that's been going on for hundreds of years.

Find an industry that can pay for an upper middle class lifestyle that you enjoy working in. A lot of these $1 million incomes are going to disappear when they're taxed higher in the coming years. So if you enjoy consulting more, do that. If you enjoy finance more, work here. But try and find a job you enjoy and people you like working with first and, assuming the job can pay for a middle class lifestyle, worry about the money after that.

If you have dreams of doing research or engineering, going into government, or working in non-profits, I'm not sure you'll have a whole lot of regrets for taking that path in 40 years. Going forward, I'm not sure the 5% is going to outperform the next 5% on income quite as much as they have over the past 30 years. But that's only bad news if you don't see it coming and don't have a chance to plan your career accordingly.

ambition56:

I don't think the highest tax brackets will go above 50% without calls of socialism... it would just not be feasible... we would definitely cut: foreign aid, funds for the military-industrial complex, art subsidies...

You never know. If everybody else is hiking taxes, we don't look all that socialist. The US had a 70% tax rate from the '50s through the '70s, and nobody would have called us socialist back then. Charges of socialism surfaced a little in the '30s, but quickly subsided as folks got used to the new system of reformed capitalism.

If history is any indication, the next four decades are going to be a more difficult time for the rich. So why not just aim for the top 10% instead of the top 5%? You'll thank yourself in the long run.

mxc:

How do civilizations have "natural" cycles??

Every 35 years, we have a secular bear/secular bull cycle. Every 70 years, we see the difference between rich and poor get reduced. It's hard to explain exactly why it happens over that time period, but it was clear in the 20s and 30s that the middle class needed to catch up to the rich for civilization to continue being sustainable. Same with the reform movements of the 1850s and 1860s.

It's hard to pinpoint exactly why solar activity runs in 14 year cycles, but every 70 years or so for the past few hundred years, there has been a compression of incomes in the West. And it's a healthy thing for a capitalist society.

The US could afford to have a 70% tax rate because back in the '50s and '70s there was literally no competition--the world was stil rebuilding. In today's global economy there are plenty of competitors who could easily steal American business should the US raise taxes to unreasonable levels (50 to ~55%).

Gekko, taxes are going up globally. Many of the countries that were stealing business from the US back in the 90s and the first decade of this century (IE: Ireland) are being forced to raise taxes. Other countries are experiencing a lot of social unrest like Egypt and China and will likely be forced to make things better for the average voter/market participant.

Taxes are required for civilization. Every 70 years, we don't necessarily redistribute income but there's always some sort compression in earnings where folks realize that middle-class wealth is tied to rich peoples' wealth. The alternative is a breakdown of society ala Russia or Nationalist China or even the fact that the US got pretty darned close to a socialist revolution with Huey Long in the '30s.

So yes, the rich can move elsewhere if we hike taxes, but they're going to have to leave the stability of 1/3 of the world's grain and timber production behind, and they'll likely face just as high taxes elsewhere. Or they could move to a tax haven like the Bahamas and pay 17% VAT and have their foreign incomes from non-tax-haven countries taxed- perhaps even punitively.

Bottom line is that nearly every country that operates as a source of income is going to be raising taxes over the next 20 years. There's huge budget deficits, social unrest in many countries prevents spending cuts, and relatively higher taxes in western-style capitalist democracies are just par for the course.

I naturally lean pretty far towards the capitalist side- I think people deserve to keep what they've earned. But looking at the big picture, I just think there's just going to be a few events that make things tougher for the rich over the next couple decades. And we've got the opportunity to accept it now and grow as human beings by realizing that there are much more important things in life than just money.

And if we can accept it (even if we disagree with it) without going into a panic now, we've got an opportunity to realize just how far down the list of priorities really is. If my brother got sick and I could save his life by spending every penny I'd saved up, the choice would be obvious. Heck, I'd give away every penny I'd earned if I had to choose between that and being able to do adventure sports. In the grand scheme of things, money doesn't even make it to the top ten most important things in life for most people, and it's a lot easier to face a global 35-year secular bear market for rich people if we've got our priorities sorted out.

ambition56:

Or the government can cut spending peace foreign aid, peace non-compete military contracts, peace arts initiatives

Sure, that will cut about $50 Billion from our $3.5 Trillion budget. The biggest components are entitlement spending right now.

They're going to raise your taxes. So will China, so will Europe. You can go to the Cayman Islands, but you can expect taxes on investment income from the world's largest economies there, too.

It's ok. Long-term, this move is healthy for countries and economies. And when there's a lot of people in other countries living on less than $10/day who are very happy with their lives, money isn't life's #1 priority. It might be #10.