Note: this table is drawn from a data set that includes borrowing by domestic hedge funds, but the overall picture is the same without that driver.Pointer to Mike Mandel with his four statistics of the decade.
Thursday, December 31, 2009
Chart of the Decade
On the last day of the decade it seems appropriate to post a chart that summarizes the financial condition of the country over the past 10 years. I agree with Felix Salmon (who I have to think for the pointer) and I think this chart really nails the extent of the craze that was the credit binge that originated at the end of the 90s. As an economics-minded individual, America dipping into the negative is the best indicator that our outlook for the long-run is strong. [That is because as a net saver, borrowing costs will be reduced which will increase investment and, subsequently, jobs and economic growth.]
Note: this table is drawn from a data set that includes borrowing by domestic hedge funds, but the overall picture is the same without that driver.
Pointer to Mike Mandel with his four statistics of the decade.
Note: this table is drawn from a data set that includes borrowing by domestic hedge funds, but the overall picture is the same without that driver.Pointer to Mike Mandel with his four statistics of the decade.
Wednesday, December 30, 2009
Tuesday, December 29, 2009
IS-LM links of the day 12-29-09
The 5 biggest risks for 2010 (The Pragmatic Capitalist)
-Personally, I think he accidentally left of a languishing job market that pulls down inflation and revenues.
PIMCO's El-Erian not a fan of the "V" (Boston Globe)
Renting isn't for everyone (NYP)
The monetary base is exploding, so what? (Greg Mankiw)
Best political cartoons of 2009 (Cagle-MSNBC)
Interesting comic on gravity wells of our solar system (XKCD)
-Personally, I think he accidentally left of a languishing job market that pulls down inflation and revenues.
PIMCO's El-Erian not a fan of the "V" (Boston Globe)
Renting isn't for everyone (NYP)
The monetary base is exploding, so what? (Greg Mankiw)
Best political cartoons of 2009 (Cagle-MSNBC)
Interesting comic on gravity wells of our solar system (XKCD)
Wednesday, December 23, 2009
IS-LM links of the day 12-23-09
Stink at darts? There's an app for that (Wired) -HT: Freakonomics
Goldman and Morgan Stanley's leverage was never significantly different from the investment banks that failed (Daily Data Point)
Can Congress bind itself, limiting future legislators (Volokh)
A humorous post: If Wall Street ran the airlines (Baseline Scenario)
Star Wars from a game theory perspective (NYT-Freakonomics)
Accepting Defeat, Neuroscientifically (Wired)
Goldman and Morgan Stanley's leverage was never significantly different from the investment banks that failed (Daily Data Point)
Can Congress bind itself, limiting future legislators (Volokh)
A humorous post: If Wall Street ran the airlines (Baseline Scenario)
Star Wars from a game theory perspective (NYT-Freakonomics)
Accepting Defeat, Neuroscientifically (Wired)
J.B. Clark Chart of the Day - Returns over the Decade
Joshua Brown at the Reformed Broker posted this chart showing asset returns for different classes over the past decade. As you can clearly see, stocks are the laggard asset and the only one posting a negative return. This may be as definitive a defense of diversification as I've ever seen, considering the fact that in no decade previously has the equity premium ever been negative.Diversification says that holding a basket of these assets rather than placing the whole enchilada in stocks would have paid off big time. A quick, back of the envelope calculation shows that a portfolio that was allocated 50/30/20 stocks/bonds/alternatives would have netted over 4% per year which is well and away the -1% stock return.
This could change things in wealth management/investment planning by convincing people that chasing the equity premium is more risky (hence dangerous) than they were previously convinced it was.
Tuesday, December 22, 2009
IS-LM links of the day 12-22-09
The bond yield curve has its widest spread ever (WSJ)
-This makes it more likely that banks will not lend to consumers and businesses so that, as the WSJ says, "the bigger the difference, the bigger their profit. Higher profits mean banks can refill their coffers." Waiting for banks to return to health will keep job creation and economic growth depressed for an extended period.
Vincent Fernando: Uhoh, 70% of Q3 GDP growth was Cash for Clunkers (TBI)
Having literal faith in your ETF(s) (Index Universe)
Doug Kass: Top 20 surprises for 2010 (Investment Postcards)
The Great Recession's Ten Commandments (The Reformed Broker)
What do people steal from bookstores? (NYT)
-This makes it more likely that banks will not lend to consumers and businesses so that, as the WSJ says, "the bigger the difference, the bigger their profit. Higher profits mean banks can refill their coffers." Waiting for banks to return to health will keep job creation and economic growth depressed for an extended period.
Vincent Fernando: Uhoh, 70% of Q3 GDP growth was Cash for Clunkers (TBI)
Having literal faith in your ETF(s) (Index Universe)
Doug Kass: Top 20 surprises for 2010 (Investment Postcards)
The Great Recession's Ten Commandments (The Reformed Broker)
What do people steal from bookstores? (NYT)
Friday, December 18, 2009
Thursday, December 17, 2009
Schumpeter's Creative Destruction in a Dilbert comic
Every once in awhile I see a Dilbert that connects very well with economic topics. More uncommon, though, is a Scott Adams comic that really makes me laugh. This one does both very well, however, by invoking Joseph Schumpeter's idea of creative destruction while making me LOL:
A proposition for the Fed
An idea struck me yesterday morning while listening to Steve Liesman, CNBC’s economic contributor, rattling on about the state of lending on Squawk Box. This sparked a connecting idea in me on how to free up credit and start pumping loans into the broad economy.
But before I explain it, I have to preface this by recalling Henry Blodget’s article at The Business Insider last week called “How to Make the World’s Easiest Billion,” which helps set the framework for my thought process and subsequent reasoning. He explains that you can earn a billion dollars in just 11 easy steps: by setting up a bank, raising equity, borrowing at the bank rate (practically zero) to lever yourself up, buying long-term government bonds, and then sitting back to enjoy earning the spread between the near and long term interest rates and the pay commensurate with printing boatloads of cash. Originally, I thought it was just meant to be a joke, but the more I thought about it he probably meant it as satire, poking fun of the actual condition of the world. Mr. Blodget asserts that banks have a license to print money, with virtually no risk for them (nod to the taxpayer footing the bill), as long as interest rates are on the floor or as long as the rate curve is as steep as it is.
This is where my idea comes into play: if the Fed were to raise rates, bringing them up off the floor it would be put the squeeze (reducing the return) on this play as well as pulling back the reigns on inflation. In turn, by decreasing the profit of this risk-free trade it would shake the bankers out of their risk aversion stupor, causing them to search for other ways to earn themselves, and their shareholders mind you, outsize profits. By increasing the opportunity cost of loaning to the government, the relative opportunity cost of lending to the private sector decreases, meaning you could potentially (special emphasis necessary) start to increase the overall lending to businesses and consumers in the economy. I realize that this idea is wild, because it is the inverse of the way monetary policy is supposed to work (lower interest rate increases investment and lending) but it could be a function of how irregular and extreme our current predicament is with short term rates at zero and quantitative easing pushing the effective rates into negative territory.
I know the Fed doesn’t plan to increase rates in the next few months, but when it does, I propose, that we will observe credit will start to become more available because of the rationale above. Of course, separating that factor from others, including programs designed to spur increased lending, would be difficult. But at least some small part of the overall effect could be attributed to the rate curve flattening out.
JDW
But before I explain it, I have to preface this by recalling Henry Blodget’s article at The Business Insider last week called “How to Make the World’s Easiest Billion,” which helps set the framework for my thought process and subsequent reasoning. He explains that you can earn a billion dollars in just 11 easy steps: by setting up a bank, raising equity, borrowing at the bank rate (practically zero) to lever yourself up, buying long-term government bonds, and then sitting back to enjoy earning the spread between the near and long term interest rates and the pay commensurate with printing boatloads of cash. Originally, I thought it was just meant to be a joke, but the more I thought about it he probably meant it as satire, poking fun of the actual condition of the world. Mr. Blodget asserts that banks have a license to print money, with virtually no risk for them (nod to the taxpayer footing the bill), as long as interest rates are on the floor or as long as the rate curve is as steep as it is.
This is where my idea comes into play: if the Fed were to raise rates, bringing them up off the floor it would be put the squeeze (reducing the return) on this play as well as pulling back the reigns on inflation. In turn, by decreasing the profit of this risk-free trade it would shake the bankers out of their risk aversion stupor, causing them to search for other ways to earn themselves, and their shareholders mind you, outsize profits. By increasing the opportunity cost of loaning to the government, the relative opportunity cost of lending to the private sector decreases, meaning you could potentially (special emphasis necessary) start to increase the overall lending to businesses and consumers in the economy. I realize that this idea is wild, because it is the inverse of the way monetary policy is supposed to work (lower interest rate increases investment and lending) but it could be a function of how irregular and extreme our current predicament is with short term rates at zero and quantitative easing pushing the effective rates into negative territory.
I know the Fed doesn’t plan to increase rates in the next few months, but when it does, I propose, that we will observe credit will start to become more available because of the rationale above. Of course, separating that factor from others, including programs designed to spur increased lending, would be difficult. But at least some small part of the overall effect could be attributed to the rate curve flattening out.
JDW
Wednesday, December 16, 2009
IS-LM links of the day 12-16-09
Alan Blinder: The case for optimism about the economy (WSJ)
Burton Malkiel: High-frequecy trading is a natural part of market evolution (FT)
An interview with Paul Volcker (WSJ)
-For anyone that thought he was senile because of the ATM comment last week, don't worry. He's got something for you. Mr. Volcker still has a sharp mind and tongue well into his eighties.
Do jobs cure violence? (Freakonomics)
Burton Malkiel: High-frequecy trading is a natural part of market evolution (FT)
An interview with Paul Volcker (WSJ)
-For anyone that thought he was senile because of the ATM comment last week, don't worry. He's got something for you. Mr. Volcker still has a sharp mind and tongue well into his eighties.
Do jobs cure violence? (Freakonomics)
Tuesday, December 15, 2009
Who's got (nest) egg on their face now?
Last year my girlfriend and I attended a basketball game of my favorite team, the Louisville Cardinals. While we were sitting in the stands I noticed an older gentleman who was wearing an inordinate amount of gold jewelry. Like most couples, we enjoy people watching, so I pointed him out to her and made the comment, "he must not have such a large IRA considering he's wearing it on his neck, wrists, and fingers."I was merely commenting on his preference to display his assets physically on his person, not thinking that he may have been making a large bull play on gold! He must have felt safer keeping an eye on his wealth than in a stuffy local bank "safety" deposit box, especially considering the unusually high amount of bank failures. Well, it looks like this man must have known what he was doing, considering the enormous run-up of commodities this year, namely gold and platinum. And so I'm the one who is left feeling ashamed because in all likelihood his nest egg has ballooned much more than mine in the interim. But yet somehow I feel like I will be vindicated in the long run for sticking to my belief in diversification.
Monday, December 14, 2009
Remembering Paul A. Samuelson
Paul A. Samuelson 1915-2009
Remembering a "Titan of Economics": Paul A. Samuelson 1915-2009 (WSJ)
Paul A. Samuelson, Who reshaped economics, dead at 94 (NYT)
Great interview with Samuelson (The New Yorker)
Greg Mankiw remembers (Mankiw's blog)
RIP by Paul Krugman (Krugman's blog at NYT)
The Incomparable Economist (Paul Krugman)
Quotations by and about Samuelson (Marginal Revolution)
Arnold Kling: Thoughts on Paul Samuelson (EconLog)
Ed Glaeser remembers Paul Samuelson (Economix)
Friday, December 11, 2009
A reminder of why I believe...in Capitalism
I'm a capitalist. Big time. Even though I never met him, I can hear Milton Friedman's voice inside my head saying: "Capitalism is the best economic system ever invented. Do you know of a better one? Albert Einstein didn't invent his theory of relativety under command from a bureaucrat..." on and on.
This morning my wonderful, thoughtful girlfriend, Jenny, pointed out something that reminded me why I am such a staunch free market libertarian. The story starts on Tuesday when Jenny received a call from the animal shelter identifying they had found our dog, Izzy, whom we lost at the end of August. Izzy was always the affectionate one; able and willing to cuddle at the drop of a dime. This often left our other dog, Sophie, on the outside looking in on getting petted. During what we've come to call Izzy's Great Absence, Sophie was able to get as much affection as she wanted with minimal effort (effort measured in units of cute) because she was a monopoly producer. Sophie allowed us to "consume" as much dog time as we wanted, which lowered our overall household utility.
Since Izzy's return, however, we have noticed a remarkable phenomenon: Sophie is acting more tender and trying harder to win attention. The competition of fighting over the human's affection has led both of them to produce more cute which, in turn, has increased my girlfriend's and my own utility. So a welcome, yet unintended consequence of finding one dog is that it makes our other un-lost dog act better. Thank you competition.
JDW
This morning my wonderful, thoughtful girlfriend, Jenny, pointed out something that reminded me why I am such a staunch free market libertarian. The story starts on Tuesday when Jenny received a call from the animal shelter identifying they had found our dog, Izzy, whom we lost at the end of August. Izzy was always the affectionate one; able and willing to cuddle at the drop of a dime. This often left our other dog, Sophie, on the outside looking in on getting petted. During what we've come to call Izzy's Great Absence, Sophie was able to get as much affection as she wanted with minimal effort (effort measured in units of cute) because she was a monopoly producer. Sophie allowed us to "consume" as much dog time as we wanted, which lowered our overall household utility.
Since Izzy's return, however, we have noticed a remarkable phenomenon: Sophie is acting more tender and trying harder to win attention. The competition of fighting over the human's affection has led both of them to produce more cute which, in turn, has increased my girlfriend's and my own utility. So a welcome, yet unintended consequence of finding one dog is that it makes our other un-lost dog act better. Thank you competition.
JDW
Thursday, December 10, 2009
Thorsten Veblen Terrific Thought of the Day
From Ben Casnocha's blog:
Such an interesting take on procrastination and our fear of failure. I hope this quote will inspire me to start creating more original articles instead of posting links from rooting around finding "neat stuff to read".
It's like he's saying to me, "stop being such a baby; surfing the internet and posting 'links'. Do something: get your ideas out there in the open. Get shot down once in a while. Make a mistake or two and maybe something good will come of it."
"Can I fail at this?" It's like Raymond Chandler said: there is no success without the possibility of failure. Therefore, something I can't fail at is also something I can't succeed at. I can fail at conducting an interview, writing an essay or making a video. I can't fail at meandering around the internet in search of "neat stuff to read." In a recent tweet, I defined procrastination "the temporary displacement of tasks at which it is possible to fail with tasks at which it is not possible to fail."
Such an interesting take on procrastination and our fear of failure. I hope this quote will inspire me to start creating more original articles instead of posting links from rooting around finding "neat stuff to read".
It's like he's saying to me, "stop being such a baby; surfing the internet and posting 'links'. Do something: get your ideas out there in the open. Get shot down once in a while. Make a mistake or two and maybe something good will come of it."
IS-LM links of the day 12-10-09
In the markets, no one knows on any given day. Only the long run will see trends that are predictable (WSJ Blogs)
How continued deficits would impact the economy (Mark Thoma-->Maximum Utility)
What do deviations from put-call parity tell us about earnings announcements and subsequently stock performance (SSRN)
Wednesday, December 9, 2009
Tuesday, December 8, 2009
IS-LM links of the day 12-08-09
A Modest Proposal for Unemployment: A Swift Remix (naked capitalism)Are asset bubbles being fueled elsewhere because of our monetary policies (Reformed Broker)
I hinted at this on Friday
Gold wouldn't have beat any other asset classes in the last 30 years (Bloomberg)
How much does the economy have to grow to get unemployment down (CR)
We didn't start the fire: "we" as in financial professionals (Epicurean Dealmaker)
Monday, December 7, 2009
Sunday, December 6, 2009
Early signs that business was my destiny
Last weekend when I was home for Thanksgiving my dad reminisced to my girlfriend of a story of mine from when I was very young, maybe just 7 or 8 years old. He and I had gone to a single A or amateur league baseball game in Huntington, WV. Unbeknownst to me, he had entered us into the ICEE raffle for a new bike. So it came as a surprise to me when, during the seventh inning stretch, the announcer's voice came down from the speakers and said, "The winner of this game's ICEE raffle for a nice, new, blue bike is...Dan Wright!" I got so excited. I jumped from the third row of the bleachers to the ground, all the while shouting: "I'll sell it! I'll sell it! I'll sell it!" My dad told me that the other kids were a little less than pleased at the winner's poor form. But I was beyond reproach, and well on my way (in mindset anyway) towards a career in business.
[Full disclosure: I never did hammer down a deal for the bike that night. But I think I learned a valuable lesson about not pissing off your (potential) customers.]
JDW
[Full disclosure: I never did hammer down a deal for the bike that night. But I think I learned a valuable lesson about not pissing off your (potential) customers.]
JDW
Friday, December 4, 2009
Where the next billionaire will strike it rich
A lot of print space has been reserved for stories on the valuation of the Chinese currency lately, but I haven’t read the same conclusions that I draw from the subject. The media writes stories in which “experts” pronounce that a cheap Yuan is “stealing” jobs from our economy. In some respects this may be true, but I believe that the dollar-Yuan currency situation is a mixed bag for the US and is bound for only one result: the same experience that China’s Asian neighbors had in the currency crisis of 1997 when their fixed-exchange rate policies failed and their currencies changed course rapidly. That outcome produced wealth quickly for the speculators who put on the right bet (that the Asians’ exchange rates would devalue quickly), including a household name, George Soros. I believe a similar result is likely to happen with China, a failure of their fixed exchange rate policy followed by the rapid appreciation of the Yuan, which will produce the very rapid rise of the next billionaire.First, I want to begin with an elementary lesson on international trade so that anyone who is reading this (still) can understand what I’m talking about. Currencies are a two-way street: they can be priced in foreign currency per domestic or domestic per foreign. For example: today, I can get roughly 0.67 Euro per dollar that I put up or, if I have Euro, I can get $1.48 per Euro. When we start applying the word “value” to currencies it either means relative to what we think it should be or what it formally was. Another example: the last time the Euro and the dollar were evenly valued was at the end of 2002. Since then the Euro has appreciated against the dollar, meaning it takes more dollars to get one Euro. Likewise, if we are talking in terms of dollars, the dollar has depreciated against the Euro. The effect of this change is: European goods and services (e.g. travel) are relatively more expensive while American goods and services are relatively cheaper. So while it may be more expensive for us (Americans) to travel overseas, it has become easier to sell our wares to the inhabitants of the Old Continent thus producing jobs for export industries.
There are many factors behind changes in exchange rates, but hardly ever will just one be working at any given time. Here is a list of the factors that will (generally) increase the value of an exchange rate: lower historical inflation relative to the other country, higher interest rates (again relative), current account surpluses, lower public debt (or higher public savings), and greater political stability (relative).
So while it is true that China has been manipulating its international currency markets, it’s not completely malicious nor is it a bad thing. First I’ll explain how they do it. One way is not really intentional manipulation: the Chinese produce goods, exporting them to America where they are paid for in dollars. For a number of reasons, namely higher inflation in China, a significant portion of exporters keep their revenue in dollars (further explanation below). Some exporters need to bring their revenues back to China in order to pay for their expenses (or shareholders), they have to repatriate the currency which creates upward pressure on the Yuan. So the People’s Central Bank has developed a calculated way to actively manipulate the Yuan: by printing Yuan to pay for dollars they create a large supply of Yuan and demand for dollars which depreciates the Yuan while appreciating the dollar. The central bank has only gone so far as to keep the exchange rate flat since the summer of 2008, which is known as a fixed exchange rate policy, or a peg.
The situation with the Chinese is not all bad, which goes opposite of what our president or the Treasury secretary would have you think. Because the Chinese are a smart people (fireworks anyone) they don’t just sit on their cash, earning a measly 0%. Instead, they invest their dollar wealth into safe, US government bonds earning a positive (most, but certainly not all, of the time), albeit small return. The net effect is that it allows the US government to borrow much more cheaply (smaller interest paymentsàlower deficits) than without this added Chinese demand.
This position has now created quite the paradox for China. As a result of the global recession (save China however) the US has been engaging in very expansionary monetary and fiscal policy. China has had to print Yuan as fast as America has printed dollars to keep the exchange rates in tandem. In effect, this means that China has been importing American economic policies even though the economic conditions in our two countries are dire extremes. The only result of the Chinese authorities engaging in this effective monetary expansion while growing at nearly 10% is a considerable overheating that has stimulated inflation. And they have gobs of it too, e.g. it has been reported that in Shenzhen the housing prices have risen 40% year over year.
But it’s been said that this economic policy is the only politically tenable position for the Chinese government. The Chinese economy is dominated by the export industry and were the central bank to take off the peg, it would be as if they had invited unemployment and a recession into their country. As a country with less avenues of dissension, massive joblessness would create unrest that the Party does not want. So they continue to support their export industry and create jobs while tolerating the inflation that it brings.
Whenever the Chinese stop wanting to tolerate the inflation, that’s when they will drop the peg. [Another reason for them to drop the peg would be if they reversed their policy, deciding they would rather spend their country’s wealth on creating a social safety net instead of lending to the US.] And when that happens, the currency race will be on, and the trajectory of the Yuan is due north. I think that the financial investor who accurately anticipates that event at the right time (not too early, not too late), and also correctly chooses the currency that will depreciate the most relative to the Yuan, will reap an amazingly large and bountiful reward. Just like John Paulson’s enormous wager on housing, I think this economic event could produce the next financial billionaire.
JDW
IS-LM links of the day 12-04-09
Goldman's top trades for 2010 (Pragmatic Capitalist)
Why behavioral finance doesn't work as well as behavioral economics (Infectious Greed)
The lottery of stock-picking (The Psy-Fi Blog)
Jeff Frenkel's ten ideas to save America from rising deficits (JF's Weblog)
-I would add cutting wealthy Americans (greater than $X million) from Medicare benefits as well, especially Part D (prescriptions)
SEC pushes to reform mutual fund fees (Reuters)
-Too little, too late if you ask me. ETFs are here to stay and they will continually eat away at mutual funds market share.
10 brands that will disappear in 2010 (TBI)
Why behavioral finance doesn't work as well as behavioral economics (Infectious Greed)
The lottery of stock-picking (The Psy-Fi Blog)
Jeff Frenkel's ten ideas to save America from rising deficits (JF's Weblog)
-I would add cutting wealthy Americans (greater than $X million) from Medicare benefits as well, especially Part D (prescriptions)
SEC pushes to reform mutual fund fees (Reuters)
-Too little, too late if you ask me. ETFs are here to stay and they will continually eat away at mutual funds market share.
10 brands that will disappear in 2010 (TBI)
Thursday, December 3, 2009
Wednesday, December 2, 2009
IS-LM links of the day 12/02/09
Gold is now the risk trade, not a safe haven (The Reformed Broker)
Having fun with the Shiller P/E (FT Alphaville)
The case for uranium (The Money Game)
Larry Kudlow open letter calls Tiger's wreck: a $100 million car crash (CNBC)
Christina Romer: Putting Americans back to work (WSJ)
Having fun with the Shiller P/E (FT Alphaville)
The case for uranium (The Money Game)
Larry Kudlow open letter calls Tiger's wreck: a $100 million car crash (CNBC)
Christina Romer: Putting Americans back to work (WSJ)
Monday, November 30, 2009
Wednesday, November 25, 2009
Friedman Important Fact of the Day
And it is on cosmetic surgery:
...cosmetic surgery is now primarily consumed not by the rich, but by the working and lower-middle classes, sometimes even by the poor. According to the American Society for Aesthetic Plastic Surgery (ASAPS), about 1/3 of cosmetic surgery is consumed by people who make less than $30,000 a year. About 70% of it is consumed by people who make less than $60,000 a year. It is mostly women (90%) and mostly white, middle-aged women (80% and between 35-55 years old).
Happy Thanksgiving Everyone!
I want to wish everyone a happy Thanksgiving. I hope everyone has a wonderful holiday weekend. And now, the last links of the week, for me anyway:Why did Warren Buffett take out a one year, $8 billion loan (Clusterstock) -and you might notice yours truly has (currently) the highest rated response
Tuesday, November 24, 2009
Monday, November 23, 2009
4.5% of the world's population, 26.7% of its output
Be proud, America, you are definitely pulling your weight.
IS-LM links of the day 11-23-09
As Tyler Cowen says, the best economics post in a while, and it's by Krugman (NYT)
Why you're never gonna get a Sharpe ratio above one for commodity trading (World Beta)
The Fed is in a corner (FedWatch)
The relationship between obesity and eating quickly (Atlantic Business)
Companies with the most buy ratings by their analysts (Bespoke Investment)
Why you're never gonna get a Sharpe ratio above one for commodity trading (World Beta)
The Fed is in a corner (FedWatch)
The relationship between obesity and eating quickly (Atlantic Business)
Companies with the most buy ratings by their analysts (Bespoke Investment)
Friday, November 20, 2009
John Bates Clark Scary Chart of the Day
The numbers are out, and they sure don't look good. Unemployment numbers are awful, but they aren't entirely pervasive. Some states are making out better than others: notably the northern Midwest states (ND, SD, and NE). Only conclusion I can draw is that these economies that are largely agriculture-based (notably corn) must be very insulated from the macro-level problems. Just check this out in a chart from Calculated Risk:
Thursday, November 19, 2009
Wednesday, November 18, 2009
Tuesday, November 17, 2009
Monday, November 16, 2009
Interesting Question
I was walking down the street with my colleague when we noticed a guy was hawking one of the local magazine/newspapers. Most of the time they are free; at least I know they are when you are entering/leaving the subway. But today this enterprising young man was offering them for "$1 donations", which is what made it remarkable at all. I turned to my coworker and asked, "does he really think that he will make more money by accepting $1 donations rather than just chargin $1 as the price?" I really don't know the answer, but perhaps for such an ubiquitous item at the lowest end of the price scale (which often goes for free) it does maximize his sales.
JDW
JDW
Friday, November 13, 2009
Haiku - Ricardo & McDonald's
This is one idea that we still have to continually defend to this day:
Ricardo put forth
comparative advantage
to defend free trade.
If I have to pick
one last meal, it sure as shit
won't be McDonald's.
JDW
to defend free trade.
If I have to pick
one last meal, it sure as shit
won't be McDonald's.
JDW
Thursday, November 12, 2009
IS-LM links of the day 11-12-09
Active asset allocation bests buy and hold (NYU)
How much has inequality increased? Not much. (ScotWinshipWeb)
Can you make money with your anger? (Dilbert Blog)
Insider trading exposed in 3COM deal (The Reformed Broker, with links elsewhere)
The interesting dichotomy of some Google suggestions (Ben Casnocha)
How much has inequality increased? Not much. (ScotWinshipWeb)
Can you make money with your anger? (Dilbert Blog)
Insider trading exposed in 3COM deal (The Reformed Broker, with links elsewhere)
The interesting dichotomy of some Google suggestions (Ben Casnocha)
Wednesday, November 11, 2009
US loses securities fraud case, managers everywhere rejoice
The top headline on the front page and above the fold in this morning's Wall Street Journal read: "US Loses Bear Fraud Case".
The fact that the Bear managers were acquited even though they held two different opinions on their funds should come as an endorsement to chief executives everywhere that they can buoy their firms by being openly optimistic about the future, while privately worrying about the short term.
Last year there were a number of articles written that decried managers who went onto CNBC, looking into the camera and telling America their company had strong fundamentals. The articles practically indicted them by saying they were commiting fraud. But that isn't what they were doing. What they actually did was try to lower their borrowing costs to propel their companies through the rough patch of 2008. By pitching their stock on TV they may have prevented heavy losses from turning into even heavier losses which kept an extra pad of equity on their balance sheets. This, in turn, made their companies' commercial paper easier to roll over (arguably the most dangerous and worrisome aspect of the crisis last year for executives). These actions, though, are ultimately in the shareholders interest. A complement to a manager's duty of creating shareholder value is to maintain that value when the market turns sour.
I for one am glad these fund managers were acquitted, because it allows executives to place their investors interests at the forefront without worrying about contingent liabilities by potential litigants if the wheels fall off.
The two men, Ralph Cioffi and Matthew Tannin, were accused of lying to investors
-- telling them they were optimistic about their funds, while privately worrying
they were all but dead.
The fact that the Bear managers were acquited even though they held two different opinions on their funds should come as an endorsement to chief executives everywhere that they can buoy their firms by being openly optimistic about the future, while privately worrying about the short term.
Last year there were a number of articles written that decried managers who went onto CNBC, looking into the camera and telling America their company had strong fundamentals. The articles practically indicted them by saying they were commiting fraud. But that isn't what they were doing. What they actually did was try to lower their borrowing costs to propel their companies through the rough patch of 2008. By pitching their stock on TV they may have prevented heavy losses from turning into even heavier losses which kept an extra pad of equity on their balance sheets. This, in turn, made their companies' commercial paper easier to roll over (arguably the most dangerous and worrisome aspect of the crisis last year for executives). These actions, though, are ultimately in the shareholders interest. A complement to a manager's duty of creating shareholder value is to maintain that value when the market turns sour.
I for one am glad these fund managers were acquitted, because it allows executives to place their investors interests at the forefront without worrying about contingent liabilities by potential litigants if the wheels fall off.
Tuesday, November 10, 2009
Monday, November 9, 2009
Why I love finance
I have heard many times that the key to success is to find something you love and then to do that. Well, I know what I love: financial markets. It doesn’t matter to me what kind: equities, stocks, options, futures, swaps, or commodities; I can see the efficient beauty in all of them. I want to learn as much as I can about them so that I can use that knowledge to profit from that. I think that my discovery of markets is the best I’ve ever made, save one (hat tip goes to you Jenny). I get fired up about markets: I read about them constantly and, if I have a willing counterpart, I could talk about them all day long. Recently I’ve wanted to know where that passion has its genesis. I’ve put together a detailed, and perhaps incomplete, list of factors: family upbringing, aptitude for numbers, the challenge, the role they allow me to play (capitalist), and the prospect of the big payday.
My girlfriend and I had been dating for a few months before she felt comfortable doing a holiday tour to meet both of my families (divorce). The first comment she made after we finished at both houses was how large of a difference there is between my two families: at one table the stock market dominates the conversation and at the other, politics and books. I think the fusion of the two helps to explain why I like reading financial non-fiction so much.
When I think back on my childhood, I can distinctly recall a number of financial anecdotes. I remember having to watch the ticker cross the screen until the right three letters appeared before I could watch after-school cartoons. And I remember how I gave my first hot stock tip: I was listening to a Bloomberg pundit give his commentary on a great company, Cisco, with really bright prospects. I liked his argument. I was persuaded, so I recommended it to my mom. OK, this was around 1998 when the stock market was red hot and my mom ended up tripling her investment, on paper. Emphasis is on paper. I’m not Edwin Lefevre or Jim Cramer so I’m not going to try to claim that I kept a ledger of recorded fake trades with the corresponding imaginary profits tabulated. However, I will maintain that I watched and I listened, all the while accumulating interest and passing knowledge.
One of the reasons I loved the ticker so much is because I have a strong affinity for numbers. Numbers are systematic, they don’t waiver, they can’t change their mind, and they aren’t open to interpretation. Around middle school I would watch SportsCenter for hours. I would watch the exact same show back-to-back to memorize the sports stats and figures, because I wanted to have that verbal ammo ready to drop in conversations with older people. I felt like I was making valuable contributions, and the facts served as validation of my worth.
I was good with numbers so I was in my element in math classes. I excelled at math so I poured relatively more effort into these courses, negatively affecting my language arts skills, specifically writing. This caught up with me in college, where I was shocked to find that my economics 101 course required more writing than it did numbers. I did poorly, very poorly; recording my first and only ‘D’. I thought I was surely on my way to join thousands of other Americans whose economics career lasted only a semester, only besting those who couldn’t even survive that long. But, under the urging of my mom who told me I was now destined to get my PhD in economics, I toughed it and continued on to the next course, macroeconomics. I found the material in 102 much more engaging, because I could relate to the topics more easily. My macro professor prompted me on to additional courses because “econ is the shortest major, only twelve courses” he said. So I eventually found econometrics. And I am glad that I did: I thought it was wonderful, I felt like Columbus discovering America. I was in love with the elegance of using quantitative models to describe anything you could dream up. To put the icing on the cake, you could even quantify how well it described these relationships [R-squared].
As I finished college I weighed the options of more schooling versus starting my career. Three factors encourage me to go back to school: 1.) everyone in my family has a graduate degree, 2.) I thought the job market was weak (retrospectively it ended up being true but only the base of a mountain of unemployment), and 3.) as my academic advisor coaxed me, the opportunity cost was lower for more schooling-free tuition with a higher wage afterwards. While I was at Ohio, I took my first finance course. Wow! We learned about concepts revolving around stocks and bonds all class period. I was infatuated with the idea that all the data from a company’s financial statements could be used to derive its intrinsic value which is why I really connected with Benjamin Graham’s books.
But my life in grad school wasn’t all rainbows and lollipops though; I felt very detached from my professors. I hated the way my finance professor hung her hat on the efficient markets hypothesis and confidently (read complacently) preached it, as well as diversification through indexation. I felt that if the world actually worked like this and investing were purely as easy and passive as she described, what value added could any financial professional really have? And, by extension, what was I truly learning? I became disillusioned with some of my professors. So I went through the motions of learning their academic theories but what I craved was a practitioner’s education. So I became didactic, supplementing my coursework with investment books. I read great financial classics like Ben Graham’s The Intelligent Investor and Jesse Livermore’s How to Trade in Stocks; modern triumphs like the Essays of Warren Buffett and Peter Lynch’s Beating the Street; and even some grocery-store type books like Joel Greenblatt’s The Little Book that Beat the Market. I wanted to show these professors that you didn’t have to blindly lecture diversification through ETFs, so I opened my own trading account to pick stocks I am doing well, with realized gains over 100% and unrealized gains averaging 61%.
I think my friends would consider me a contrarian in many aspects, which is probably in synch with another reason I love the markets so much: because they frustrate the hell out of most people (also, from my readings, what makes a good trader). Tons of people see financial markets as risky as a big casino, where sometimes you win but most of the time you lose. They end up being more risk averse than I think they should, socking their entire nest egg away in savings accounts. I see the markets as a place where I can be a capitalist no matter the size of my stake, as well as the only place that offers real capital appreciation long-term. If I correctly surmise that a company is undervalued, has a considerable edge in a market, and growth opportunities, then I will win nine times out of ten. I don’t mind that to do this requires a hefty amount of work, including constant market attention. I like reading the Wall Street Journal daily and I don’t mind hitting F5 ten times a minute to check my brokerage account.
I love the competitive challenge that the market triggers in people. Returns are returns and they are measured in percentages. I like the fact that finance people are hyper competitive and are always comparing to each other’s percentage returns. I cling to the idea that I will probably never have as many assets under management as a Warren Buffett or a Bill Gross but at least on some level I can compare my ability as a market analyst against them. Everyone gets to play the part that they want in the markets; for me, that is being a capitalist, an allocator of scarce resources to businesses. I think it is one of the most important jobs in the world, because even on the microcosmic level that I am operating on now it has an impact on a company’s cost of capital which impacts their business investment decisions.
I can’t stay away from the markets: if I can’t get to a computer to get my fill, I text message Google one stock ticker at a time until I go through the whole litany of my portfolio. I’ve staked my academic career on finance and economics. I fill my leisure time with financial non-fiction. Finance is what interests me the most and I’m passionate about it. As I said before, passion is the cornerstone to success and since I’ve identified mine it becomes only a matter of finding the right, first step to begin my life-long career. I’m Dan Wright and I love the markets.
JDW
My girlfriend and I had been dating for a few months before she felt comfortable doing a holiday tour to meet both of my families (divorce). The first comment she made after we finished at both houses was how large of a difference there is between my two families: at one table the stock market dominates the conversation and at the other, politics and books. I think the fusion of the two helps to explain why I like reading financial non-fiction so much.
When I think back on my childhood, I can distinctly recall a number of financial anecdotes. I remember having to watch the ticker cross the screen until the right three letters appeared before I could watch after-school cartoons. And I remember how I gave my first hot stock tip: I was listening to a Bloomberg pundit give his commentary on a great company, Cisco, with really bright prospects. I liked his argument. I was persuaded, so I recommended it to my mom. OK, this was around 1998 when the stock market was red hot and my mom ended up tripling her investment, on paper. Emphasis is on paper. I’m not Edwin Lefevre or Jim Cramer so I’m not going to try to claim that I kept a ledger of recorded fake trades with the corresponding imaginary profits tabulated. However, I will maintain that I watched and I listened, all the while accumulating interest and passing knowledge.
One of the reasons I loved the ticker so much is because I have a strong affinity for numbers. Numbers are systematic, they don’t waiver, they can’t change their mind, and they aren’t open to interpretation. Around middle school I would watch SportsCenter for hours. I would watch the exact same show back-to-back to memorize the sports stats and figures, because I wanted to have that verbal ammo ready to drop in conversations with older people. I felt like I was making valuable contributions, and the facts served as validation of my worth.
I was good with numbers so I was in my element in math classes. I excelled at math so I poured relatively more effort into these courses, negatively affecting my language arts skills, specifically writing. This caught up with me in college, where I was shocked to find that my economics 101 course required more writing than it did numbers. I did poorly, very poorly; recording my first and only ‘D’. I thought I was surely on my way to join thousands of other Americans whose economics career lasted only a semester, only besting those who couldn’t even survive that long. But, under the urging of my mom who told me I was now destined to get my PhD in economics, I toughed it and continued on to the next course, macroeconomics. I found the material in 102 much more engaging, because I could relate to the topics more easily. My macro professor prompted me on to additional courses because “econ is the shortest major, only twelve courses” he said. So I eventually found econometrics. And I am glad that I did: I thought it was wonderful, I felt like Columbus discovering America. I was in love with the elegance of using quantitative models to describe anything you could dream up. To put the icing on the cake, you could even quantify how well it described these relationships [R-squared].
As I finished college I weighed the options of more schooling versus starting my career. Three factors encourage me to go back to school: 1.) everyone in my family has a graduate degree, 2.) I thought the job market was weak (retrospectively it ended up being true but only the base of a mountain of unemployment), and 3.) as my academic advisor coaxed me, the opportunity cost was lower for more schooling-free tuition with a higher wage afterwards. While I was at Ohio, I took my first finance course. Wow! We learned about concepts revolving around stocks and bonds all class period. I was infatuated with the idea that all the data from a company’s financial statements could be used to derive its intrinsic value which is why I really connected with Benjamin Graham’s books.
But my life in grad school wasn’t all rainbows and lollipops though; I felt very detached from my professors. I hated the way my finance professor hung her hat on the efficient markets hypothesis and confidently (read complacently) preached it, as well as diversification through indexation. I felt that if the world actually worked like this and investing were purely as easy and passive as she described, what value added could any financial professional really have? And, by extension, what was I truly learning? I became disillusioned with some of my professors. So I went through the motions of learning their academic theories but what I craved was a practitioner’s education. So I became didactic, supplementing my coursework with investment books. I read great financial classics like Ben Graham’s The Intelligent Investor and Jesse Livermore’s How to Trade in Stocks; modern triumphs like the Essays of Warren Buffett and Peter Lynch’s Beating the Street; and even some grocery-store type books like Joel Greenblatt’s The Little Book that Beat the Market. I wanted to show these professors that you didn’t have to blindly lecture diversification through ETFs, so I opened my own trading account to pick stocks I am doing well, with realized gains over 100% and unrealized gains averaging 61%.
I think my friends would consider me a contrarian in many aspects, which is probably in synch with another reason I love the markets so much: because they frustrate the hell out of most people (also, from my readings, what makes a good trader). Tons of people see financial markets as risky as a big casino, where sometimes you win but most of the time you lose. They end up being more risk averse than I think they should, socking their entire nest egg away in savings accounts. I see the markets as a place where I can be a capitalist no matter the size of my stake, as well as the only place that offers real capital appreciation long-term. If I correctly surmise that a company is undervalued, has a considerable edge in a market, and growth opportunities, then I will win nine times out of ten. I don’t mind that to do this requires a hefty amount of work, including constant market attention. I like reading the Wall Street Journal daily and I don’t mind hitting F5 ten times a minute to check my brokerage account.
I love the competitive challenge that the market triggers in people. Returns are returns and they are measured in percentages. I like the fact that finance people are hyper competitive and are always comparing to each other’s percentage returns. I cling to the idea that I will probably never have as many assets under management as a Warren Buffett or a Bill Gross but at least on some level I can compare my ability as a market analyst against them. Everyone gets to play the part that they want in the markets; for me, that is being a capitalist, an allocator of scarce resources to businesses. I think it is one of the most important jobs in the world, because even on the microcosmic level that I am operating on now it has an impact on a company’s cost of capital which impacts their business investment decisions.
I can’t stay away from the markets: if I can’t get to a computer to get my fill, I text message Google one stock ticker at a time until I go through the whole litany of my portfolio. I’ve staked my academic career on finance and economics. I fill my leisure time with financial non-fiction. Finance is what interests me the most and I’m passionate about it. As I said before, passion is the cornerstone to success and since I’ve identified mine it becomes only a matter of finding the right, first step to begin my life-long career. I’m Dan Wright and I love the markets.
JDW
Friday, November 6, 2009
Bad Unemployment Figures
Bloomberg reports that unemployment has crossed the 10% threshold for the first time in 26 years.
The unemployment rate in the U.S. soared to a 26-year high of 10.2 percent in October and employers cut more jobs than forecast, underscoring why Federal Reserve policy makers say interest rates will remain near zero.
Payrolls fell by 190,000 workers last month, compared with a 175,000 drop anticipated by the median forecast of economists surveyed by Bloomberg News, figures from the Labor Department showed today in Washington. The jobless rate gained from 9.8 percent in September and exceeded 10 percent for the first time since 1983.
IS-LM links of the day 11-06-09
Fiddling With Climate Change and Healthcare While Rome Burns (The Reformed Broker)
What phones may do in two years (NYT)
Wall Street bonuses by asset class (Investing Contrarian)
The government has been subsidizing Wall Street risk for too long (WSJ)
On the issues with estimating the equity risk premium post-crisis (SSRN)
What phones may do in two years (NYT)
Wall Street bonuses by asset class (Investing Contrarian)
The government has been subsidizing Wall Street risk for too long (WSJ)
On the issues with estimating the equity risk premium post-crisis (SSRN)
Thursday, November 5, 2009
Friedman Fact of the Day
1 in 5 visitors to the White House (out of 492 logged) since January have come from people with their last name beginning with "S". This is an unexpected find considering just over 8% of American last names start with the same letter. Statistically significant? Probably, considering the sample size is large enough. Graph courtesy of Paul Kedrosky.
Hayek Original Haikus of the Day 11-05-09
Markowitz theorized
uncorrelated assets
up-return, down-risk.
Andrew Hall knows corn,
oil, et al more than most;
for great skill, big pay.
-JDW
uncorrelated assets
up-return, down-risk.
Andrew Hall knows corn,
oil, et al more than most;
for great skill, big pay.
-JDW
Tuesday, November 3, 2009
Hayek Origininal Haiku of the Day 11-03-09
Quantity supplied
increases as price rises,
positively sloped.
Need more capital.
Do you issue debt or stock?
Hotelling's Lemma.
-JDW
increases as price rises,
positively sloped.
Need more capital.
Do you issue debt or stock?
Hotelling's Lemma.
-JDW
Monday, November 2, 2009
100th Post! Hayek Origininal Haiku of the Day
Another meeting, another opportunity to write a sweet, economic haiku:
Ricardo professed
comparative advantage
to defend free trade.
-JDW
Ricardo professed
comparative advantage
to defend free trade.
-JDW
IS-LM links of the day 11-02-09
A call to re-balance your portfolio (WSJ)
The super-rich may evolve into another species says a futurologist (Telegraph)
How Goldman Sachs executed its winning play on subprime (naked capitalism)
Are stocks and bonds contradicting each other? (MR)
Edward Lazear: Stimulus and the Jobless Recovery (WSJ)
The super-rich may evolve into another species says a futurologist (Telegraph)
"I sometimes wonder if the very rich can live, on average, 20 years longer than the poor. That's 20 more years of earning and saving. Think about wealth and power and the advantages that you pass on to your children."
How Goldman Sachs executed its winning play on subprime (naked capitalism)
Are stocks and bonds contradicting each other? (MR)
Edward Lazear: Stimulus and the Jobless Recovery (WSJ)
Friday, October 30, 2009
IS-LM links of the day 10-30-09
Five Steps to Consistent Profits [for traders] (The Kirk Report)
The Uncorrelated Return Myth (FAJ)
A defence of the buy-and hold: Most investors would have been better of doing nothing the past 18 months (Index Universe)
Scientists start to identify why some people are better at specific tasks (ScientificAmerican)
The Uncorrelated Return Myth (FAJ)
A defence of the buy-and hold: Most investors would have been better of doing nothing the past 18 months (Index Universe)
Scientists start to identify why some people are better at specific tasks (ScientificAmerican)
Thursday, October 29, 2009
Great News! GDP up 3.5%!
From the BEA:
Hooray! For the first time in more than a year we have growth. Hopefully we are on the path to a full recovery, although most experts doubt that we won't resume our growth trajectory until 2011 or so and the labor market has yet to show light at the end of the tunnel. My fear is that this good news is just an uptick before another downward plunge.
Real gross domestic product -- the output of goods and services produced by labor and propertylocated in the United States -- increased at an annual rate of 3.5 percent in the third quarter of 2009,(that is, from the second quarter to the third quarter), according to the "advance" estimate released by theBureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent.
The Bureau emphasized that the third-quarter advance estimate released today is based on sourcedata that are incomplete or subject to further revision by the source agency (see the box on page 5). The"second" estimate for the third quarter, based on more complete data, will be released on November 24,2009.
The increase in real GDP in the third quarter primarily reflected positive contributions frompersonal consumption expenditures (PCE), exports, private inventory investment, federal governmentspending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP,increased.
The upturn in real GDP in the third quarter primarily reflected upturns in PCE, in privateinventory investment, in exports, and in residential fixed investment and a smaller decrease innonresidential fixed investment that were partly offset by an upturn in imports, a downturn in state andlocal government spending, and a deceleration in federal government spending.
Motor vehicle output added 1.66 percentage points to the third-quarter change in real GDP afteradding 0.19 percentage point to the second-quarter change. Final sales of computers subtracted 0.11percentage point from the third-quarter change in real GDP after subtracting 0.04 percentage point fromthe second-quarter change.
Hooray! For the first time in more than a year we have growth. Hopefully we are on the path to a full recovery, although most experts doubt that we won't resume our growth trajectory until 2011 or so and the labor market has yet to show light at the end of the tunnel. My fear is that this good news is just an uptick before another downward plunge.
IS-LM links of the day 10-29-09
Warren Buffet wins title of investor with the most wisdom (Bloomberg)Bill Gross: November Outlook (PIMCO)
Placing idiot trades (Trader Feed)
When should you shut down your startup (AsktheVC)
Why do business crises occur in the fall? (Economix)
The Value of Ivy League Smarts (The New Republic)
America, the land of opportunity (Capital Gains and Games)
Wednesday, October 28, 2009
Development Economics-Alleviating Poverty in the Developing World
Question: what institutions can enable the world’s poor to realize their power and achieve prosperity?
When I posed this challenging question to my significant other, she had the same initial reaction that I had. “Jobs?” she replied, questioning whether I had already come up with her most obvious and logical answer. Of course I had, what with the rugged individualist spirit and conservative economics background. Jobs, industry, and economic progress are absolutely the best candidates to raise the world’s poor above subsistence levels in the most rapid timeframe possible. Just look at the transformations that have taken hold in Eastern Europe and Southeast Asia over the last two decades!
If the developing world needs jobs, and wages are rising in places that have already experienced tremendous growth recently (e.g. China), a secondary yet important question is: why haven’t those jobs migrated to other lands and taken advantage of the relatively lower labor costs? I would suggest that the significant factor inhibiting the spread of capitalism (reads: economic growth) is inadequate government policy. Corruption, populism, inadequate property rights, and the inability to facilitate the rule of law all prevent companies from relocating to new places with lower relative wages, e.g. sub-Saharan Africa.
The one institution that I believe can enable the world’s poor to realize their power and a giant leap towards realizing sustained economic progress is democracy. I don’t think democracy is a necessary condition for fostering growth, as we readily observe the Chinese model, but it does enable poverty-stricken people to realize their power, thus answering half of the question. Expounding further, democracy is a sufficient condition for cultivating a culture that champions freedom which has been demonstrated (thanks to the Heritage Foundation) to inextricably tie to economic opportunity and prosperity.
When I invoke the institution of democracy, I’m not specifically referring to elections. I think that while elections are helpful in gauging public opinion to build policies on as well as giving society the feeling that they are in control (although many in America would refute such a statement), they are not the end-all-and-be-all of government. I speak of democracy in the spirit of Milton Friedman where governments respect their citizens individual freedoms. If the [sometimes] oppressive and [mostly] ineffective governments of the world's most impoverished countries worked, as Ayn Rand describes in her book We the Living, “as a servant and a convenience for a large number of people, just like the light bulb and the plumbing system” rather than a mechanism for natural leaders to further their own fortunes and personal power, the poorer nations of this world would be much better off.
JDW
When I posed this challenging question to my significant other, she had the same initial reaction that I had. “Jobs?” she replied, questioning whether I had already come up with her most obvious and logical answer. Of course I had, what with the rugged individualist spirit and conservative economics background. Jobs, industry, and economic progress are absolutely the best candidates to raise the world’s poor above subsistence levels in the most rapid timeframe possible. Just look at the transformations that have taken hold in Eastern Europe and Southeast Asia over the last two decades!
If the developing world needs jobs, and wages are rising in places that have already experienced tremendous growth recently (e.g. China), a secondary yet important question is: why haven’t those jobs migrated to other lands and taken advantage of the relatively lower labor costs? I would suggest that the significant factor inhibiting the spread of capitalism (reads: economic growth) is inadequate government policy. Corruption, populism, inadequate property rights, and the inability to facilitate the rule of law all prevent companies from relocating to new places with lower relative wages, e.g. sub-Saharan Africa.
The one institution that I believe can enable the world’s poor to realize their power and a giant leap towards realizing sustained economic progress is democracy. I don’t think democracy is a necessary condition for fostering growth, as we readily observe the Chinese model, but it does enable poverty-stricken people to realize their power, thus answering half of the question. Expounding further, democracy is a sufficient condition for cultivating a culture that champions freedom which has been demonstrated (thanks to the Heritage Foundation) to inextricably tie to economic opportunity and prosperity.
When I invoke the institution of democracy, I’m not specifically referring to elections. I think that while elections are helpful in gauging public opinion to build policies on as well as giving society the feeling that they are in control (although many in America would refute such a statement), they are not the end-all-and-be-all of government. I speak of democracy in the spirit of Milton Friedman where governments respect their citizens individual freedoms. If the [sometimes] oppressive and [mostly] ineffective governments of the world's most impoverished countries worked, as Ayn Rand describes in her book We the Living, “as a servant and a convenience for a large number of people, just like the light bulb and the plumbing system” rather than a mechanism for natural leaders to further their own fortunes and personal power, the poorer nations of this world would be much better off.
JDW
IS-LM links of the day 10-28-09
David Wessel: Three theories to solve Too-Big-To-Fail (WSJ)
On Jeremy Grantham: (Jeremy Grantham himself) (The Money Game) (MarketBeat) (Credit Writedowns)
10 things Google has taught us (Fortune)
Jeremy Siegel: Efficient Market Theory and the Crisis (WSJ)
A great list of books for gaining an investing edge (Contrarian Edge)
Goldman Sachs: lookit we're the good guys (NYT)
On Jeremy Grantham: (Jeremy Grantham himself) (The Money Game) (MarketBeat) (Credit Writedowns)
10 things Google has taught us (Fortune)
Jeremy Siegel: Efficient Market Theory and the Crisis (WSJ)
A great list of books for gaining an investing edge (Contrarian Edge)
Goldman Sachs: lookit we're the good guys (NYT)
Tuesday, October 27, 2009
A tribute to an emminent free trader
I just read this last night for the first time...and...it...was...awesome! It bears repeating:
A PETITION From the Manufacturers of Candles, Tapers, Lanterns, sticks, Street Lamps, Snuffers, and Extinguishers, and from Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting.
To the Honourable Members of the Chamber of Deputies.
Gentlemen:You are on the right track. You reject abstract theories and little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is, to reserve the domestic market for domestic industry.
We come to offer you a wonderful opportunity for your -- what shall we call it? Your theory? No, nothing is more deceptive than theory. Your doctrine? Your system? Your principle? But you dislike doctrines, you have a horror of systems, as for principles, you deny that there are any in political economy; therefore we shall call it your practice -- your practice without theory and without principle.
We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun, is waging war on us so mercilessly we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us [1].
We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull's-eyes, deadlights, and blinds -- in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.
Be good enough, honourable deputies, to take our request seriously, and do not reject it without at least hearing the reasons that we have to advance in its support.
First, if you shut off as much as possible all access to natural light, and thereby create a need for artificial light, what industry in France will not ultimately be encouraged?
If France consumes more tallow, there will have to be more cattle and sheep, and, consequently, we shall see an increase in cleared fields, meat, wool, leather, and especially manure, the basis of all agricultural wealth.
If France consumes more oil, we shall see an expansion in the cultivation of the poppy, the olive, and rapeseed. These rich yet soil-exhausting plants will come at just the right time to enable us to put to profitable use the increased fertility that the breeding of cattle will impart to the land.
Our moors will be covered with resinous trees. Numerous swarms of bees will gather from our mountains the perfumed treasures that today waste their fragrance, like the flowers from which they emanate. Thus, there is not one branch of agriculture that would not undergo a great expansion.
The same holds true of shipping. Thousands of vessels will engage in whaling, and in a short time we shall have a fleet capable of upholding the honour of France and of gratifying the patriotic aspirations of the undersigned petitioners, chandlers, etc.
But what shall we say of the specialities of Parisian manufacture? Henceforth you will behold gilding, bronze, and crystal in candlesticks, in lamps, in chandeliers, in candelabra sparkling in spacious emporia compared with which those of today are but stalls.
There is no needy resin-collector on the heights of his sand dunes, no poor miner in the depths of his black pit, who will not receive higher wages and enjoy increased prosperity.
It needs but a little reflection, gentlemen, to be convinced that there is perhaps not one Frenchman, from the wealthy stockholder of the Anzin Company to the humblest vendor of matches, whose condition would not be improved by the success of our petition.
We anticipate your objections, gentlemen; but there is not a single one of them that you have not picked up from the musty old books of the advocates of free trade. We defy you to utter a word against us that will not instantly rebound against yourselves and the principle behind all your policy.
Will you tell us that, though we may gain by this protection, France will not gain at all, because the consumer will bear the expense?
We have our answer ready:
You no longer have the right to invoke the interests of the consumer. You have sacrificed him whenever you have found his interests opposed to those of the producer. You have done so in order to encourage industry and to increase employment. For the same reason you ought to do so this time too.
Indeed, you yourselves have anticipated this objection. When told that the consumer has a stake in the free entry of iron, coal, sesame, wheat, and textiles, ``Yes,'' you reply, ``but the producer has a stake in their exclusion.'' Very well, surely if consumers have a stake in the admission of natural light, producers have a stake in its interdiction.
``But,'' you may still say, ``the producer and the consumer are one and the same person. If the manufacturer profits by protection, he will make the farmer prosperous. Contrariwise, if agriculture is prosperous, it will open markets for manufactured goods.'' Very well, If you grant us a monopoly over the production of lighting during the day, first of all we shall buy large amounts of tallow, charcoal, oil, resin, wax, alcohol, silver, iron, bronze, and crystal, to supply our industry; and, moreover, we and our numerous suppliers, having become rich, will consume a great deal and spread prosperity into all areas of domestic industry.
Will you say that the light of the sun is a gratuitous gift of Nature, and that to reject such gifts would be to reject wealth itself under the pretext of encouraging the means of acquiring it?
But if you take this position, you strike a mortal blow at your own policy; remember that up to now you have always excluded foreign goods because and in proportion as they approximate gratuitous gifts. You have only half as good a reason for complying with the demands of other monopolists as you have for granting our petition, which is in complete accord with your established policy; and to reject our demands precisely because they are better founded than anyone else's would be tantamount to accepting the equation: + x + = -; in other words, it would be to heap absurdity upon absurdity.
Labour and Nature collaborate in varying proportions, depending upon the country and the climate, in the production of a commodity. The part that Nature contributes is always free of charge; it is the part contributed by human labour that constitutes value and is paid for.
If an orange from Lisbon sells for half the price of an orange from Paris, it is because the natural heat of the sun, which is, of course, free of charge, does for the former what the latter owes to artificial heating, which necessarily has to be paid for in the market.
Thus, when an orange reaches us from Portugal, one can say that it is given to us half free of charge, or, in other words, at half price as compared with those from Paris.
Now, it is precisely on the basis of its being semigratuitous (pardon the word) that you maintain it should be barred. You ask: ``How can French labour withstand the competition of foreign labour when the former has to do all the work, whereas the latter has to do only half, the sun taking care of the rest?'' But if the fact that a product is half free of charge leads you to exclude it from competition, how can its being totally free of charge induce you to admit it into competition? Either you are not consistent, or you should, after excluding what is half free of charge as harmful to our domestic industry, exclude what is totally gratuitous with all the more reason and with twice the zeal.
To take another example: When a product -- coal, iron, wheat, or textiles -- comes to us from abroad, and when we can acquire it for less labour than if we produced it ourselves, the difference is a gratuitous gift that is conferred up on us. The size of this gift is proportionate to the extent of this difference. It is a quarter, a half, or three-quarters of the value of the product if the foreigner asks of us only three-quarters, one-half, or one-quarter as high a price. It is as complete as it can be when the donor, like the sun in providing us with light, asks nothing from us. The question, and we pose it formally, is whether what you desire for France is the benefit of consumption free of charge or the alleged advantages of onerous production. Make your choice, but be logical; for as long as you ban, as you do, foreign coal, iron, wheat, and textiles, in proportion as their price approaches zero, how inconsistent it would be to admit the light of the sun, whose price is zero all day long!
Frédéric Bastiat (1801-1850), Sophismes économiques, 1845
credit to bastiat.org
Monday, October 26, 2009
IS-LM links of the day 10-26-09
A simple look at dark pools (WSJ)
Can economists be funny (Peter Martin)
FACT CHECK: Health insurers don't earn "outsize profits" (MyWayNews)
The psychology of trading (TraderFeed)
Economics made fun, as a movement (EJPE)
Six Steps to Revitalize the Financial System-by Sandy Weill (WSJ)
This is what I advocated two weeks ago in my essay here.
Can economists be funny (Peter Martin)
FACT CHECK: Health insurers don't earn "outsize profits" (MyWayNews)
The psychology of trading (TraderFeed)
"The ability to sit through a trade is greatly underappreciated."
Economics made fun, as a movement (EJPE)
Six Steps to Revitalize the Financial System-by Sandy Weill (WSJ)
"5) Capital requirements and reserve policies need to be overhauled.
6) Align executive compensation with long-term returns."
This is what I advocated two weeks ago in my essay here.
Sunday, October 25, 2009
Thoughts from the weekend
I have a lot more time to think and reflect on the weekend when the hustle and bustle of daily life aren't weighing me down. So, I came up with a few financial ideas that I would like to share:
1.) What if the small-cap stock premium could be explained by investors' risk adversity combined with the hope that their stock will shoot to the moon? I don't have any data to support this thought, but I would suspect that small cap stocks have lower prices as well as smaller equity issues, so investors are able to pick up large swaths of stock very cheaply so they minimize downside while hoping for a maximum upside, like a "I hope this is the next MSFT?" *crosses fingers-type of thing.
2.) We should securitize sports, i.e. make futures or options for sports teams. You could do it for points or wins, but each unit would be worth a set amount of money so payouts could be easily calculated. A team's goals would be set by the market! It could be a rallying point, "screw those people down at the sport's trade!" And it goes without saying that players would be forbidden from betting, specifically on the downside.
But that isn't the most fascinating aspect of this idea-it would open a whole new world for securities markets. Definitely they would have a correlation with other assets of zero so it would benefit an overall portfolio.
JDW
1.) What if the small-cap stock premium could be explained by investors' risk adversity combined with the hope that their stock will shoot to the moon? I don't have any data to support this thought, but I would suspect that small cap stocks have lower prices as well as smaller equity issues, so investors are able to pick up large swaths of stock very cheaply so they minimize downside while hoping for a maximum upside, like a "I hope this is the next MSFT?" *crosses fingers-type of thing.
2.) We should securitize sports, i.e. make futures or options for sports teams. You could do it for points or wins, but each unit would be worth a set amount of money so payouts could be easily calculated. A team's goals would be set by the market! It could be a rallying point, "screw those people down at the sport's trade!" And it goes without saying that players would be forbidden from betting, specifically on the downside.
But that isn't the most fascinating aspect of this idea-it would open a whole new world for securities markets. Definitely they would have a correlation with other assets of zero so it would benefit an overall portfolio.
JDW
Friday, October 23, 2009
DC Residency and Marriage
Katie Connolly wrote over at The Gaggle an article on why so few DC residents are married.
She cites a rich, white polulation; a poor, black population; and an under-educated demographic as the leading causes of the statistics. Her article was quixotically antagonistic, almost begging for the PR of creating a blogosphere stir.
Oh well, I'll oblige, but not to rabble-rouse.
I disagree with her main points. Rather, I think it has a great deal to do with age and stage. DC is a young, single town while the surrounding countryside teems with families and the elderly. The median age of a DC resident is 34.6, well under the US median of 37.6 (courtesy of the all-knowing Wikipedia). This is for a good reason, the hustle and bustle of a city is sexy and chique, naturally lending itself for young professionals who can afford it. But as you get older you want the finer things in life, by that I mean a house with a plot of land, nice schools, and low crime. So you have to move out of the District to gain these things: Fairfax and Montgomery Counties both have great schools and lower crime than DC does (not to mention lower population density). So a natural age-associated migration occurs which begets this unusual statistic-that DC has a lower marriage rate than the national average.
JDW
She cites a rich, white polulation; a poor, black population; and an under-educated demographic as the leading causes of the statistics. Her article was quixotically antagonistic, almost begging for the PR of creating a blogosphere stir.
Oh well, I'll oblige, but not to rabble-rouse.
I disagree with her main points. Rather, I think it has a great deal to do with age and stage. DC is a young, single town while the surrounding countryside teems with families and the elderly. The median age of a DC resident is 34.6, well under the US median of 37.6 (courtesy of the all-knowing Wikipedia). This is for a good reason, the hustle and bustle of a city is sexy and chique, naturally lending itself for young professionals who can afford it. But as you get older you want the finer things in life, by that I mean a house with a plot of land, nice schools, and low crime. So you have to move out of the District to gain these things: Fairfax and Montgomery Counties both have great schools and lower crime than DC does (not to mention lower population density). So a natural age-associated migration occurs which begets this unusual statistic-that DC has a lower marriage rate than the national average.
JDW
Today in Not Understanding Your Charge
We have Kenneth Feinberg who doesn't understand the ethos or goings-on of the finance industry. From the New York Times, "Pay Czar Doubts Cuts Will Make Bankers Leave."
“I wouldn’t begin to say how much money you should make on Wall Street,” Mr. Feinberg said in an interview last week, as he prepared to slash pay for the top 25 earners at seven firms that received significant government aid. “I’ve never worked on Wall Street. I don’t claim to know the ethos of Wall Street.”
“If any one of these people left, I would be very disappointed,” he said.
Mr. Feinberg said he expected his ruling to please no one. If that happened, he added, he would consider it a mark of success.I don't agree with his job or the need for it, but I think he should realize that creating these disincentives for the highest-skilled financiers at bailed-out firms will induce them to flee for firms that don't have these requirements. After all, power finance and banking is very geographically clustered, not to mention the fact that these workers are highly mobile under normal conditions. So it isn't even hard for them to jump ship!
“The populists will undoubtedly say:, ‘You caved. You gave Wall Street financiers too much money,’ ” he said. “The other side, the Wall Street culture, will say I put those companies at a disadvantage.”
Hayek Original Haiku of the Day
Haven't had one in awhile and I'm feeling creative today.
Supply and demand,
decide equilibrium
price and quantity.
JDW
Supply and demand,
decide equilibrium
price and quantity.
JDW
Thursday, October 22, 2009
John Bates Clark Scary Chart of the Day II
The mean amount of time the unemployed remain without work is hitting all time highs. Just take a look at this chart, courtesy of Zero Hedge, via Felix Salmon: 
John Bates Clark Scary Chart of the Day
This chart was used in the article, the Growing Case for a Jobless Recovery, by Atlanta Fed's David Altig (MacroBlog).
IS-LM links of the day 10-22-09
Alex Tabarrok echoes my sentiments here (MR) when I saw this article (WSJ) this morning. I definitely had an Ayn Rand flashback to Atlas Shrugged. I've had a lot of those in the last nine months.
The "Break up the Banks Delusions" (Salon.com)
Today in Give-and-Take- the good: Leading Economic Indicators Rise More than Expected (Bloomberg) and the bad: Weekly unemployment claims rise (Calculated Risk)
..AND a fantastic piece on incentives amongst traders (Adam Pasick-Reuters)
The "Break up the Banks Delusions" (Salon.com)
Today in Give-and-Take- the good: Leading Economic Indicators Rise More than Expected (Bloomberg) and the bad: Weekly unemployment claims rise (Calculated Risk)
..AND a fantastic piece on incentives amongst traders (Adam Pasick-Reuters)
Wednesday, October 21, 2009
IS-LM links of the day 10-21-09
Today's learning point of the day, the Phillips Curve: Unemployment and inflation (Econbrowser)
Warren Buffett on new regulation-harsh long-term penalties are in order (DealBreaker)
This echoes my sentiments a week ago; liabilities should move back onto the executives charged with making the big decisions (i.e. risks).
Bryan Caplan writes 7 guidelines for writing good non-fiction (EconLog)
Sweet chart of the day: Average credit score by email domain (CreditKarma)
Warren Buffett on new regulation-harsh long-term penalties are in order (DealBreaker)
This echoes my sentiments a week ago; liabilities should move back onto the executives charged with making the big decisions (i.e. risks).
Bryan Caplan writes 7 guidelines for writing good non-fiction (EconLog)
Sweet chart of the day: Average credit score by email domain (CreditKarma)
Tuesday, October 20, 2009
IS-LM links of the day 10-20-09
Excellent introductory reading on the labor market in a downturn (WSJ)
Mark Thoma on the economic outlook and output gap (Economist's View)
Anyone looking for a research topic: Over- and Under- explored areas of economic research (MR)
Good news: humans are still evolving (EurekAlert)
A really smart guy defends his stance against an environmentalist (Freakonomics/NYT)
Mark Thoma on the economic outlook and output gap (Economist's View)
Anyone looking for a research topic: Over- and Under- explored areas of economic research (MR)
Good news: humans are still evolving (EurekAlert)
A really smart guy defends his stance against an environmentalist (Freakonomics/NYT)
Monday, October 19, 2009
Life advice
I loved this post from Ben Casnocha that I had to share. A friend had asked a former prof for advice, and this is what he responded:
Don't think too much and don't worry (advice from someone who did too much of both). Dewey has a lot to say about being on the road. The most important thing is to give up the idea that the end is already fixed. It is happening in real time. Be in what you are doing, and always remain open -- there are opportunities that will be created that don't even exist yet. Just be there. They'll come.
IS-LM links of the day 10-19-09
A great post on inequality (RortyBomb)
which is a response to a fantastic essay on inequality from Will Wilkinson (Cato)
How to end poverty (AidWatch)
The shortest and best case for financial innovation that I have ever read (Interfluidity)
Paul Krugman thinks the banks are not alright (NYT)
How Moody's sold out its ratings (McClatchy)
An analysis of Q3 GDP (EconBrowser)
which is a response to a fantastic essay on inequality from Will Wilkinson (Cato)
The level of real economic inequality is lower than popular treatments of the issue have led many of us to think.
The level of economic inequality is an unreliable indicator of a society’s justice or injustice.
Inequality distracts us from real injustices that are given too little attention.
How to end poverty (AidWatch)
The shortest and best case for financial innovation that I have ever read (Interfluidity)
Paul Krugman thinks the banks are not alright (NYT)
How Moody's sold out its ratings (McClatchy)
An analysis of Q3 GDP (EconBrowser)
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