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)

Great News! GDP up 3.5%!

From the BEA:

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)

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

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)

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

IS-LM links of the day 10-27-09

Did Gordon Gekko inspire Wall Street or the other way around? (Credit Writedowns)

Profit from insider trading (New Rules)

Why do bankers make so much money? (Rick Bookstaber)

Remembering John Meyer, the father of transportation economics (Economix)

The pay czar is distracting us from the real issue (EconLog)

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)

"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.

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

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