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)
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