Saturday, December 23, 2006

A more isolationist US

These comments from Robert Reich provide some insight into one of the strands that will fight for supremacy in the new Democratic party.
Economist's View: Reich: An Introduction to Economic Populism:
"Or consider trade-opening agreements. They give Americans access to more low-cost products and services from abroad. This makes Americans’ dollars go further. But the agreements especially benefit the rich, who spend more ... because they have more income to spend. The agreements also typically impose a burden on working-class Americans who... lose their jobs to foreigners. These job losers get new jobs, but studies show the new jobs pay 10 to 15 percent less... Even if you assume that access to cheaper goods from abroad adds about 10 to 15 percent to their purchasing power, these working-class wage earners come out about even, at best. That means the overall result of most trade agreements is to widen inequality. Do the efficiency benefits of trade outweigh this result? Maybe a decade ago when inequality was less pronounced. Probably not, now. "

Friday, December 22, 2006

Regulation and governance

Regulation has pushed firms towards private equity. :
"But supporters and critics of private equity agree on one thing: recent corporate governance regulation in the US has given buy-out funds a new edge there over publicly listed companies and their executives. The Sarbanes-Oxley law, passed in 2002 when the scars left by the Enron and WorldCom scandals were still fresh, requires that chief executives and board directors exercise stricter oversight of governance and audit processes.
Corporate executives protest that compliance with the new law, which has increased the risk of legal action against companies and individuals, is an expensive, time-consuming affair that dilutes their focus on company performance and strategy.
For their part, buy-out executives make no secret of their willingness to exploit the current climate to tempt companies and executives away from public markets. “We have a great corporate governance advantage,” says Kevin Conway, managing partner at Clayton, Dubilier & Rice, the buy-out firm. “Our board members are much more focused on driving the performance of the company than looking at processes.”"

Tuesday, December 19, 2006


The JSSM- 2006, Vol.5, Issue 4, 480 - 487 points to research showing that there are inefficincies in the market for betting on cricket matches. Thanks to Paul Kedrosky for the pointer.:
"Using a multiple linear regression model, prediction variables were numerically weighted according to statistical significance and used to predict the match outcome. With the use of the Duckworth-Lewis method to determine resources remaining, at the end of each completed over, the predicted run total of the batting team could be updated to provide a more accurate prediction of the match outcome. By applying this prediction approach to a holdout sample of matches, the efficiency of the 'in the run' wagering market could be assessed. Preliminary results suggest that the market is prone to overreact to events occurring throughout the course of the match, thus creating brief inefficiencies in the wagering market."

Saturday, December 09, 2006


The Economist on the custody business

"Global custodians safeguard and administer securities for banks, mutual funds and other institutional investors. It is an unglamorous line of work, but an important one. It can also be lucrative: BoNY and Mellon made combined net profits of $1.88 billion from servicing others' assets in the first nine months of the year"


An indication of how liquidity in the US market is greater than that in euro area.

Battle over government bonds heats up: "However, the rub is that these bizarre restrictions reflect an even more bizarre political paradox. When the single currency was launched in 1999, European governments hoped this would create a single capital market. However, member states have continued to issue their own bonds. As a result, there are now some 600-odd euro government bonds currently listed on MTS in a dizzyingly fragmented patchwork.

One consequence of this is that small European governments are terrified the market will ignore their bonds, if it was ever left to its own devices. After all, one reason why the US market has liquidity, even without market makers, is that most activity is centred on half a dozen traded Treasury issues, called “on the run”. "

Thursday, December 07, 2006

Is it debt? Is it equity?

The FT on
Hybrid financing motoring along
"This was always supposed to be the year of the hybrid – but the environmentally friendly car’s popularity is being matched by a complex financing tool halfway between debt and stock that companies can use to raise capital cheaply"

A good overview of current market conditions.

Tuesday, December 05, 2006

Lex - Scottish independence & oil / Lex - Scottish independence & oil:

"Nationalists like the example of Ireland’s high growth and euro membership. But economically, Scotland’s ability to stand alone boils down to North Sea energy. Without it, Scotland is dominated by the public sector, and subsidised by England, with a budget deficit of £13bn or 13 per cent of gross domestic product estimated this fiscal year, and public spending at 55 per cent of GDP. But include the North Sea, and GDP and tax revenues leap by at least a quarter, leaving the deficit at just 2 per cent and public spending at about 40 per cent."

Monday, December 04, 2006

Fixed costs

Amazon aims to remove the fixed cost from business making is easy, in theory, for anyone to start up a business.
Amazon's new direction:
"You can rent space on Amazon's computers to run a business, or rent out its transaction capabilities to sell things and collect money, or rent pieces of its warehouses and distribution system to store and ship items — or all of the above.
So, with almost no start-up costs, anyone anywhere could become a retailer. It's not just contracting with Amazon to sell your stuff, the way Target does. It's leasing pieces of Amazon to create something totally unrelated to Amazon.
'We can take all the things that used to be fixed costs and let people pay by the drink,' Bezos says. 'It's letting people create a business by remote control.'"

Friday, December 01, 2006


Booming world liquidity is evident everywhere from the cash available for LBOs, through credit spreads and the price of raw materials. The absence from goods prices seems to relate to the equal abundance of labourm drawn into the global market through the changes in economic policy in countries from China and India, though Russia and the rest of CEE. Samuel Brittan - Money is making a comeback:
"Monetary analysis has recently made a comeback because of many signs that, in their efforts to avert recession early this century, central banks permitted an excessive expansion. One of the best explanations is given by Andrew Smithers, the City of London economist, in his report World Liquidity. He notes that the ratio of US broad money to GDP is higher than at any time, with the exception of the 1930s slump and the second world war. Eurozone money supply growth is well above its “reference range” and UK annual broad money growth is at its fastest since 1990. The Organisation for Economic Co-operation and Development has just published estimates of “global liquidity” based on both money and credit measures that show it is “abundant and continuing to grow”."

Thursday, November 23, 2006

Private equity

Private equity : "It has accurately been suggested that something dies inside us every time a friend succeeds. The rise of private equity means that fits of pique of the kind simulated above are heard with growing regularity. According to statistics company Dealogic, the total value of private equity transactions this year in the UK is already £20bn more than for 2005, at £63bn. Worldwide buyouts are $250bn ahead at $604bn."

Saturday, November 18, 2006

Energy investment Talks about the investment in clean energy.

"One estimate puts the total investment going into clean energy at $63 billion this year, up from $49 billion last year and just $30 billion in 2004. Some supposedly green business is more relabelling than revolution—companies flogging slightly more efficient versions of standard technologies as exciting innovations—but there is also a flood of money into new energy technologies. Clean energy now gobbles up almost a tenth of America's venture capital. After years of wondering what would be the next big thing after the dotcom boom, America's technology industry is betting on alternative energy (see article). "

Fine art

The talks about the market for fine art. Is this another symptom of the excess liquidity in the world?
"What went wrong? Observers in the room noted an absence of American buyers, perhaps because of a fear of flying or a weakening dollar. The dealers' fingers were pointed at the auction houses for posting forbidding estimates. The auction houses attempted to distract attention by talking up their (few) successes. All were united in the hope that the poor sales were just a blip, and not the first sign of a turn in the market. "

Thursday, November 16, 2006

Exchange-Rate Models

Engel on the latest exchange rate models.

Exchange-Rate Models: "Recent research that my co-authors and I have undertaken, as well as related research by other NBER researchers, suggests that theoretical models of foreign exchange rates are 'not as bad as you think.'"

Monday, November 13, 2006

Tesco Clubcard

UK - Eyes in the till:
" 'It was the first time we presented to the board. We told them what we had found. When we'd finished there was this deadly silence - I don't know whether it lasted 30 seconds, but it felt like 30 minutes, as I recall! There was this hush and my heart dropped a little bit.'
The silence was broken by Lord MacLaurin, uttering his now legendary line: 'What scares me about this is that you know more about my customers after three months than I know after 30 years.'"

Sunday, November 12, 2006

Social dimension to consumption

The Economist on the way that we buy things that are popular. There is clearly a certain comfort in knowing that others have bought the same thing. Some of the costs of finding out about quality are removed.
Swarming the shelves:
"And the psychology that works in physical stores is just as potent on the internet. Online retailers such as Amazon are adept at telling shoppers which products are popular with like-minded consumers. Even in the privacy of your home, you can still be part of the swarm. "

This can be linked to the puchase of popular items and means of communication. The star system.


Small scale schools. Is this an equivalent of micro-finance. Small steps making a big difference.
Private schooling in Pakistan:
"The key element in their rise is their low fees-the average fee of a rural private school in Pakistan is less than a dime a day (Rs.6). They hire predominantly local, female, and moderately educated teachers who have limited alternative opportunities outside the village. Hiring these teachers at low cost allows the savings to be passed on to parents through low fees. This mechanism-the need to hire teachers with a certain demographic profile so that salary costs are minimized-defines the possibility of private schools: where they arise, fees are low. It also defines their limits. Private schools are horizontally constrained in that they arise in villages where there is a pool of secondary educated women. They are also vertically constrained in that they are unlikely to cater to the secondary levels in rural areas, at least until there is an increase in the supply of potential teachers with the required skills and educational levels."

Tuesday, November 07, 2006

Private equity

The Economist.comon the attraction of media for private equity.
Private-equity firms like media companies better than public markets do. Public markets love a growth story. Private equity appreciates cash flow. Radio and television stations and even newspapers throw off loads of cash, which private-equity firms can borrow against, using this leverage to repay their equity fast. That is true even of businesses whose cash flow is in long-term decline, such as newspapers, as long as the rate of decline is relatively predictable. The biggest risk in many of the current batch of deals is that the private-equity firms discover the cash-flow models to be less predictable than they thought, says Colin Blaydon of Tuck Business School's Centre for the Study of Private Equity and Entrepreneurship.

Monday, October 30, 2006

R&D2 has more on R&D.
"A simple example of the benefits of R&D spending for share price is the performance of the scoreboard’s “R&D portfolio”, comprised of companies in the FTSE100 index that devote more than 4 per cent of their turnover to R&D. Since it started in August 1997, the portfolio has increased in value by 73 per cent, while the FTSE100 has risen by only 16 per cent (see graph below)."
This also includes data in excel format.

Governance On a report that suggests that private companies perform much better than public ones. However, there is little space for governance here. It all seems to be about picking winners and selling at the top. "Management" may hint at governance issues.
"“This [the doubling in enterprise value] is a substantially faster rate of growth in value than achieved by public companies in the same countries, sectors and timeframe: 26 per cent per annum versus 12 per cent per annum,” E&Y said. It attributes private equity’s performance to four factors: selective buying, delivery of the portfolio company’s business plan, strong management, and selling well."

Sunday, October 29, 2006

R&D on the latest figures on R&D. Europe has fallen behind. This goes against the argument that European has more stability and can cocentrate on long-term goals unlike the short-term orientated nature of US and UK firms.
"But the scoreboard – the world’s most comprehensive R&D ranking – provides little reassurance for European policymakers who are concerned about Europe’s poor long-term R&D performance. European companies spent 5.6 per cent more in 2005-6 than the average of the previous four years. The comparable increase for US companies was 15.4 per cent. "

Wednesday, October 25, 2006


The FT on the "Big Bang" and (later) Mifid.
"Nevertheless, Mifid could also have profound effects on the business of banks. In his report, sponsored by LogicaCMG, the IT consultancy, Mr Bishop suggests that banks could steal a march on their competitors by, say, offering hedge funds a service whereby they can trade whole portfolios of stocks, even if those are listed on different exchanges. Large national banks could also match orders from their retail customers"

There may also be implications for the universal banks as it may no longer make sense to sell to retail investors if you have to prove that they have the best price.

Thursday, October 19, 2006

Chinese FX risk

Some comments on Chinese capital flows at the FT. China stems inflows of hot money:
"Qing Wang, of the Bank of America in Hong Kong, said in a research note that the authorities had made “systematic efforts to encourage major financial institutions to keep their foreign exchange assets offshore”.
This includes allowing state companies, such as the banks that have listed overseas, to leave some of the billions raised in initial public offerings offshore."

This seems to shift the risk to the private sector. Rather than force exchange for domesticic currency, the regulatory change means that USD are accumulated offshore by Chinese firms (offshor becauses domestic regulations require exchange for domestic currency). If it blows up, the burden is shared, but there is more likely to be profit motive in the firms' actions.

Tuesday, October 17, 2006

Verticle integration

FT on the story of Maersk:
"Eivind Kolding, joint chief executive of Maersk Line, says sharing an owner with many of the companies with which it does business helps the line to control its own destiny. Maersk Line has far more flexibility in how it modifies its services to meet changing conditions than other shipping lines, which are not so vertically integrated and therefore must always negotiate with partner lines, port operators and logistics companies."

This is also a study in corporate governance and globalisation.

Sunday, October 15, 2006

Private equity collusion?

John Gapper at the FT onThe case for barbarity in private equity:
"Is there any overt collusion among private equity firms to avoid fiercely contested auctions? Probably not. Is there a culture of collaboration and a preference to avoid bruising takeover battles? Yes. My bet is that they will convince the DoJ that there are enough obvious causes for their great wealth without crimes having been committed. But it would help if they were a little more barbaric."


The Economist talks about America's population:
"On or around October 17th, according to the Census Bureau's population clock, the number of people in the country will hit 300m, up from 200m in 1967. By as early as 2043, the bureau says, there will be 400m Americans. Such robust growth is unique among rich countries. As America adds 100m people over the next four decades, Japan and the EU are expected to lose almost 15m."

I am surprised that more has not been made of this. It must affect the calculation for debt repayment, deficits etc.

Saturday, October 14, 2006


The Economist on wine as a means of diversification.

Fruity little numbers:
"In 2002, when the FTSE 100 share index fell by 24.5%, the Decanter Bordeaux Index of 1,300 wines went up by 8.5%, according to “Wine Investment for Portfolio Diversification”, a book by Mahesh Kumar. The Liv-ex 100 wine index, which tracks the price of 100 fine wines, has risen by 55% in the last year and the fine-wine market is now worth more than £1 billion ($1.9 billion), according to Mr Miles. Hype generated this year by the 2005 Bordeaux, considered the best in a generation, has helped."

This can also be done through wine funds.
"Interest in wine investment has also spurred the creation of new wine funds, including the Fine Wine Fund in August, charging a 2% management fee and 15% performance fee. Better availability of price information and more demand for wine in emerging markets has created a fine-wine bull market."

Thursday, October 12, 2006


Interesting stuff about the unbundling of a corporation. Even in something as hefty as Boeing, componentents are bring taken apart and distributed to more effective locations.
"Despite the widespread panic caused by the latest A380 delays, Airbus’s problem is not its dispersed manufacturing set-up per se.... If distributed manufacturing and snap-together assembly were really such bad ideas, its American rival Boeing would not have recently adopted the same approach, flying in sub-assemblies to its Seattle base from as far away as Japan and Italy. Boeing has also outsourced some work in Kansas, after selling one of its main factories to a Canadian private-equity firm, from which it buys fuselage sections at lower cost than when it owned the factory. It will not be so easy for Mr Gallois to pull off the same trick, since it implies lower wages for the workers under new owners."

Wednesday, October 11, 2006

USD outflow

No wonder China is accumulating reserves at such a rapid pace.

Appetite for foreign equities growing in US:
"AMG data also show that of the net $123bn invested in US equity mutual funds this year, including exchange traded funds, fully $108bn, or 88 per cent, has gone into funds investing in overseas companies. By contrast in 2005, of the net $147.5bn invested in US mutual funds, 60 per cent, or $86bn, was invested in funds containing international equities.
Other data services also show a strong appetite for foreign equities among US domestic investors. As of August 31, 86.8 per cent of $118.56bn in net equity flows for this year have migrated offshore, according to the Investment Company Institute."

Exchange rate pass-through

Have U.S. Import Prices Become Less Responsive to Changes in the Dollar? - Federal Reserve Bank of New York: "Authors Rebecca Hellerstein, Deirdre Daly and Christina Marsh conclude that the sensitivity of U.S. import prices to changes in the dollar has been relatively unchanged in the past decade. The responsiveness of U.S. import prices to such changes, known as the exchange rate “pass-through” effect, has important implications for the U.S. economy because of the potential impact on consumer prices and inflation."

Sunday, October 01, 2006

Art as an asset

Information on the BR use of art as an asset class and some more recent attempts.

Funds To Please The Eye:
"The new crop of art funds isn't the first to try this investment approach. In the mid-1970s, British Rail Pension Fund put $100 million, or 2.5% of its portfolio, into art. The fund amassed a broad collection of 2,400 pieces, from Chinese porcelains to African tribal art. The portfolio wound up with an annual compound return of 11.3%, but the gains came primarily from 25 Impressionist paintings. The fund sold off all of its art from 1987 to 1999. 'We tried to diversify too much,' says Jeremy Eckstein, a former adviser to the fund who is consulting with some of the new players."

Wednesday, September 20, 2006

Vertical integration

Slate licks up on a WSJ look at the return of vertical integration.
The return of vertical integration. By Daniel Gross - Slate Magazine:
"Responding to the recent rise in prices for crucial commodities like copper, rubber, nickel, and oil, manufacturers of all types have taken steps to ensure they have adequate supplies of raw materials and parts. The article cited several examples of companies that bought outright or took stakes in their suppliers. In July, Armor Holdings, which makes armored cars and other products for what it delicately calls the 'survivability industry,' acquired Integrated Textile Systems Inc., which makes a type of fiber used in earmarks products. To ensure a supply of titanium-based parts for its drumlin 787, Boeing last week created a joint venture with Russia's VSPMO-Avisma, the world's largest titanium producer. In 2005, Bridgestone, the Japanese tire maker, purchased a huge Indonesian rubber plantation from Goodyear. "

How does this affect the idea that there are different types of capitalism that operate in different ways? Rhenish capitalism will focus on long-term, incremental innovation that will likely encourage vertical integration; Anglo-Saxon capitalism will be more flexible and more likely to create adaptive structures that are not vertically integrated.

Sunday, September 17, 2006


Neuroeconomics and why primeval emotions suppress reasoning when things are very uncertain.

The New Yorker: Fact:
"The results of the experiment suggested that when people are confronted with ambiguity their emotions can overpower their reasoning, leading them to reject risky propositions. This raises the intriguing possibility that people who are less fearful than others might make better investors, which is precisely what George Loewenstein and four other researchers found when they carried out a series of experiments with a group of patients who had suffered brain damage."

This also appears to provide an insight into "the ultimate game". When a low offer is made, respondent's emotion makes them punish the offender at the expense of their own gain.

Friday, September 15, 2006

FX intervention

How unlimited foreign exchange intervention can become problematic even for an appreciating currency. For the moment Chinese rates are below USD, but this may be the way that China is heading also. Currencies:
"``Lawmakers see the snowballing deficit from the foreign- exchange fund heavily weighing on the government's finances,'' said Oh Jae Kwon, head of the Bank of Korea's currency-market operations team. ``They may ask the national audit board to look into the case.'' Accumulated losses from the management of the fund were 18 trillion won ($19 billion) at end-2005, he said. "

Wednesday, September 13, 2006

The Law of Once Price

Stumbling and Mumbling: Limits of arbitrage:
"The law of one price doesn't apply - at least for cannabis. According to this survey (pdf), cannabis resin costs twice as much in Manchester as in Liverpool. Which raises the question: why isn't there arbitrage? Why don't traders buy blow from Scousers, drive 35 miles, and sell it to Mancs?
I reckon there are four possibilities:"

Tuesday, September 12, 2006

Noise trader risk

Everything is easy to explain and understand in hindsight. However, at the time many people were saying that technology would change the world. They were also looking at the best example of a technology company that they had - Microsoft. There are of course many reasons why Microsoft is successful, but one of them is that it was the first to sell a mass-market operating system. There was (and is if we look at Google, EBay, Apple's Ipod) an argument that says that if you are first into the market, network effects will mean that you can create a monopoly that will generate huge future revenues. At least some of the rapid appreciation of technology companies was the attempt to find these new firms with "first-mover advantage".

In retrospect, there are only a few firms that can prevent others entering the same market. The network effect that makes Microsoft operating system (and even more so) Microsoft Office more valuable the more people use them, does not extend to all products. Just because I sell dog food over the internet, does not mean that others cannot do the same. However, at the time this was less clear than it is now. If it were clear, why weren't all those people who now say that they could see the writing on the wall selling these over-valued shares and pushing the price back towards fair value.

The first answer to this is that it is only clear now in the cold light of day. Many of those who say that they were shouting "stop" were actually shouting "buy". The second answer is that there is a risk that share prices continue to move against you even if you know that they are over-valued. People do not have unlimited finance or confidence to continually bet against the hurd.

The main academic paper on this is

Noise trade risk

On a more practical note -

Tony Dye

Tony Dye was trying to act against the market. His employers lost patience just at the moment that he was being proved right.


Saturday, September 09, 2006

Types of capitalism and types of investment

Undercover Economist: Marriage and convenience:
"JoskowÂ’s explanation surely tells you something about when to be a freelancer - perhaps even when to stop playing the field and get married. Like east coast coal mines, it can be attractive to be footloose and fancy-free - provided you have alternatives and as long as you are not required to make serious investments that are specific to the relationship. My own marriage was swiftly followed by a relationship-specific investment. SheÂ’s nearly two and a half."

Coincidently, Tim Harford talks about different types of investment at a time that I learnt about different types of firm fodifferentnt types of capitalism. Anglo-Saxon capitalist requires flexible firms with non-specific capital (human and physical); social welfare capitalism concentrates on specific capital. The Anglo-Saxon model is flexible and innovative in the product but is not good at developiniterativeve improvements in the production process. There were papers presented at the conference that I attended that suggested that FDI was directed to particular countries according to whether they could bcategoriseded as Angle-Saxon or Welfare state firms.

EMH and the law

The Economist has a good angle on the EMH and how this is one economic theory that is embedded into US law.

"In 1988, in Basic Inc v Levinson, the court endorsed a theory known as “fraud on the market”, which relies on the efficient markets hypothesis. Because market prices reflect all available information, argued the court, misleading statements by a company will affect its share price. Investors rely on the integrity of the price as a guide to fundamental value. Thus, misleading statements defraud purchasers of the firm's shares even if they do not rely directly on those statements, or are not even aware of them"

Wednesday, September 06, 2006


Martin Wolf talks about a paper presented by Tony Venables to the recent Fed conference in Jackson Hole talking about the effects of agglomeration and its influence on development.

"The conclusion of this line of analysis is that production will shift only where the benefits of agglomeration are relatively small or the benefits of moving activities are large. Moving back-office functions is an example of the former. Shifting production of clothing to poorer countries is an example of the latter. But the advantages of established centres of expertise are enduring, provided some effort is put into maintaining them: London has been a world-class financial centre for almost three centuries. The relocation of activity will, suggests Prof Venables, prove both difficult and “lumpy”."

Tuesday, September 05, 2006

Overshooting - in ideas / Comment & analysis / Columnists - The world may regret the end of the neo-con era: "The neo-con experience shows the market in ideas – like the market in shares – has a tendency to over-shoot. The militaristic and unilateralist elements of neo-conservatism clearly need rethinking. Americans also need to think harder about the social and historical underpinnings that make democracies work. The danger is that the backlash against neo-conservatism could lead in the wrong direction – and take America back into isolationism or a cynical abandonment of the promotion of democracy. If that were the case, the rest of the world may end up regretting the demise of neo-conservatism"

Sunday, September 03, 2006

The share of profits and wages in GDP

There has been a huge amount of talk recently about the share of profits and wages in GDP. Many point to the fact that US wages as a share of total income are at the lowest level since.....Even if we take total compensation it appears that capital has gained an increased share.

Brad DeLong and Krugman suggest that the balance of power has shifted against labour and that this is part of the rightward shift in the US.

DeLong comments on inequality

Chris Dillow has a more nuanced view.

Stumbling and Mumbling: Some profits arithmetic

If we look at the share of wages and profits in UK GDP, they are pretty stable. There is a structural shift around 1945, presumably because of the introduction of the welfare state etc. However, if the shares shift too far, I would think that there is a natural mechanism to bring things back into equilibrium. At the moment, US consumer spending is relatively high compared to compensation. This will correct - either spending will fall or wages will rise.

Tuesday, August 29, 2006


Painting By Numbers: An Ode To Quant By James Montier of Dresdner Kleinwort Watterstein

Lovely item on cases where simple statistical models out-perform the expert. Most intereting is the fact that even when the expert know the model (as James did himself), they still under-perform.

Reputation / Columnists / Stefan Stern - Corporate crises are years in the making: "As leaders are always closely observed by their colleagues, this attention to corporate reputation has to start at the very top. You will have no one else to blame if your corporate reputation suffers. And you would not want to find yourself in the same position as the wronged Cassio in Shakespeare’s Othello, who cries to Iago (in act 2, scene 3):
“Reputation, reputation, reputation! O, I have lost my reputation! I have lost the immortal part of myself, and what remains is bestial.”"

Leave it in the ground

Iranian oil output has never reached the levels seen back in 1979. The recent "nationalisation" of oil resources looks like it will also leave a lot more of the black stuff underground. / World / Americas - Bolivia’s energy chief quits:
"The Bolivian government was forced to call a “temporary suspension” this month to its plan to take a greater stake in the country’s gas sector, citing lack of funds and expertise. Last week, the country’s Senate passed a motion of censure against Andrés Solíz, the hydrocarbons minister, for botching the nationalisation and for alleged corruption at YPFB."

Is it a conspiracy because oil producers know about peak oil and scarcity and want to leave oil in the ground while heading off arguments about future prices?

Monday, August 21, 2006

Private equity

Getting to the heart of the private equity boom. / Columnists / John Plender - Private equity folk could do wonders with Microsoft: "This brings us to the real joy of private equity: the so-called “dividend re-cap”, a dividend-for-debt swap. The enhanced ability to borrow would permit the newly private company to make the greatest dividend payment of all time. At a stroke it would solve the financial problems of the army of private equity investors who have been trying – hitherto unsuccessfully – to punt their way out of pension fund deficits. Here, going begging then, is a great historic opportunity for private equity to do its job of generating excess returns from illiquidity. In truth, Microsoft would be worth more off the quoted market than on it. Thanks to the joys of leverage and dividend recaps, the excess returns would come through wondrously fast."

Saturday, August 12, 2006


Lex on the equity risk premium.

There has been little change since 9/11, but... / Lex - Catastrophe and equities:
"Yet there is an opposite and gloomier conclusion. America’s 20th century experience was exceptional. In most countries, war risks include the collapse of governments and property rights, not just recession. In such circumstances the price of “risk free” assets plummets along with everything else. This outcome is hard to imagine for the US. Still, for professional doom-mongers, the rise in real yields from post-9/11 lows suggests that what was once viewed as a manageable catastrophe is now thought to herald a new era of existential threats."

Monday, August 07, 2006

US rates

People usually have the Taylor rule as

i = (i* + π*) + ά1(π – π*) + ά2(y – y*)

with i* as the neutral real rate of interest (say 2%), π* as the inflation target (say 2%) and the brackets as the deviation of inflation from target and the deviation of the rate of growth from its potential.

Then much depends upon the ά parameters. Estimates for the Greenspan Fed show ά1 at 0.54 while ά2 was 0.99. For Volcker they were about 0.5 and 1.5.

Therefore, if we take inflation at 2.8% (PCE seems to come between 2.5% and 3.5% depending on how you measure it, so this is fairly conservative) and growth as 3.0% compared to a potential of 2.5%, we have 4% neutral nominal, plus another 0.5 for inflation and something for the output gap (say another 0.75%) would be 5.25%. Of course it depends on the assumption about potential growth. Many people would say that it is more than 2.5% and it depends on what people think the growth rate is at present. It could also be argued that the central bank needs to be more assertive in pushing down on inflation when there is a new Chairman gaining credibility and when oil prices are rising sharply.

The big weakness of the Taylor rule is that it does not deal well with the current situation. What if the output gap turns negative again but inflation remains high? In theory, many argue that ά1 should be more than 1 to ensure that the real rate rises to reduce inflation expectations.

Wednesday, July 12, 2006

Genius again

More on Galenson. "Experimental innovation" vs "Conceptual innovation".

Wired 14.07: What Kind of Genius Are You?

What he has found is that genius – whether in art or architecture or even business – is not the sole province of 17-year-old Picassos and 22-year-old Andreessens. Instead, it comes in two very different forms, embodied by two very different types of people. “Conceptual innovators,” as Galenson calls them, make bold, dramatic leaps in their disciplines. They do their breakthrough work when they are young. Think Edvard Munch, Herman Melville, and Orson Welles. They make the rest of us feel like also-rans. Then there’s a second character type, someone who’s just as significant but trudging by comparison. Galenson calls this group “experimental innovators.” Geniuses like Auguste Rodin, Mark Twain, and Alfred Hitchcock proceed by a lifetime of trial and error and thus do their important work much later in their careers. Galenson maintains that this duality – conceptualists are from Mars, experimentalists are from Venus – is the core of the creative process. And it applies to virtually every field of intellectual endeavor, from painters and poets to economists.

Monday, July 10, 2006

1660 fx derivatives

Pepys' Diary: Wednesday 1 July 1663: "but I hope we have this morning light on an expedient that will right all, that will answer their queries, and yet save Creed the 500l. which he did propose to make of the exchange abroad of the pieces of eight which he disbursed."

Creed has miscalculated the value of Spanish currency. The value of the pices of eight varies between 5 shillings and 4 shillings and sixpence. Much more here.

Monday, July 03, 2006

Real yields

The FT looks at the rise in real yields. Strong economic growth would certainly argue for higher real yields as a response to the demand for capital. However, this does not square with the recent sell off in emerging markets and commodities. / Markets - The Short View: Real yields still have room to grow:
"But real yields have also been rising. According to Ian Scott of Lehman Brothers, a weighted average of real yields in the US, France and the UK hit a low of 1.3 per cent in June last year and has now risen to 2.1 per cent. That still leaves real yields well below their heights during the dotcom boom when, on Scott’s calculations, they almost touched 4 per cent. "

Most likely the emerging and commodity sell off is just a deflation of a bubble.


Excellent article in the LA Times. Thanks to Paul Kedrosky for the pointer. The maths of luck in the film industry.

Meet Hollywood's Latest Genius - Los Angeles Times: "That's precisely how films behave in the marketplace. If we hear good things, we go and perhaps tell others; if we hear bad things, we stay away. It's that process—the way consumers learn from others about the expected quality of the product—that De Vany found is the key to the odd behavior of the film business today. Economists call it an 'information cascade.'"

The chaotic nature of the success of failure of a film means that the big starts and business leaders have runs of good luck and bad luck. The rest is an attempt to bring meaning to this statistical noise.

Clearly this could be taken further - dare I say it - even as far as the World Cup.

Thursday, June 29, 2006

Profits and investment

Tim Worstall: The Rolling Stock Leasing Companies

"Perhaps it would be better to have lengthened the trains. Question: are there any more carriages around to add to the trains? I spotted yesterday (not sure where) a point that no, in fact there are not any more trains. All the rolling stock in the country is currently in full use. Which means that someone has to go out and buy some more: those leasing companies. Who are, it seems, not allowed to make profits on the stock that they do buy."


"The Department of Transport, run by the Brownite Douglas Alexander, has called on the Office of Rail Regulation to investigate the three rolling stock companies for making excessive profits with a view to referring the matter to the Competition Commission. These are the businesses that own and lease the country's trains used by the various regional operating companies. The banks that own them are livid and they have good reason. The leases are commercial agreements between private companies. But they have also, at every stage since privatisation, been subject to government scrutiny. They're as much the Government's leases as anybody's. The three rolling stock companies make a combined profit of up to £165m, having sunk £6bn into new trains since 1998".

Sunday, June 25, 2006


From Truck and Barter.

Does corruption oil the social wheels? This experiment suggests that it does not.
Truck and Barter: The benefits of corruption are not worth the costs:

"“We follow 822 applicants through the process of obtaining a driver’s license in New Delhi, India. To understand how the bureaucracy responds to individual and social needs, participants were randomly assigned to one of three groups: bonus, lesson, and comparison groups. Participants in the bonus group were offered a financial reward if they could obtain their license fast; participants in the lesson group were offered free driving lessons. To gauge driving skills, we performed a surprise driving test after participants had obtained their licenses. Several interesting facts regarding corruption emerge. First, the bureaucracy responds to individual needs. Those who want their license faster (e.g. the bonus group), get it 40% faster and at a 20% higher rate. Second, the bureaucracy is insensitive to social needs. The bonus group does not learn to drive safely in order to obtain their license: in fact, 69% of them were rated as “failures” on the independent driving test. Those in the lesson group, despite superior driving skills, are only slightly more likely to obtain a license than the comparison group and far less likely (by 29 percentage points) than the bonus group. Detailed surveys allow us to document the mechanisms of corruption. We find that bureaucrats arbitrarily fail drivers at a high rate during the driving exam, irrespective of their ability to drive. To overcome this, individuals pay informal “agents” to bribe the bureaucrat and avoid taking the exam altogether. An audit study of agents further highlights the insensitivity of agents’ pricing to driving skills. Together, these results suggest that bureaucrats raise red tape to extract bribes and that this corruption undermines the very purpose of regulation"

Saturday, June 24, 2006

EMU and trade

Trade and EMU:
The Economist looks at the benefits of a single currency and voices some scepticism over the trade gains.
"A new study* by Richard Baldwin, a trade economist at the Graduate Institute of International Studies in Geneva, scythes through these and earlier, even higher, estimates. He works out that the boost to trade within the euro area from the single currency is much smaller: between 5% and 15%, with a best estimate of 9%. Furthermore, the gain does not build up over time but has already occurred. And the three European Union countries that stayed out—Britain, Sweden and Denmark—have gained almost as much as founder members, since the single currency has raised their exports to the euro zone by 7%."

Amongst Baldwin's arguments is thidentificationon of previous studies that find a collapse in imports and exports when a monetary union dissolves. This, he argues, is as much thresultlt of the creation of new tariffs and barriers or war and civil disobedience than a single currency.

Thursday, June 22, 2006

Returns to art

Is art a wise investment? By Daniel Gross
"Moses and Mei have compiled 9,000 such repeat-sale pairs and add between 300 and 400 every six months, enabling them to compile an index. (The paintings in the index aren't all blockbusters. Moses estimates that the median size of recent transactions charted is about $200,000 or $300,000.) As their most recent update shows, over the last 50 years, stocks (as represented by the S&P 500) returned 10.9 percent annually, while the art index returned 10.5 percent per annum. And in the five years between 2001 and 2005, art trounced stocks. But not all art performs equally. In recent years, old masters haven't done so well, while American art before 1950 has been soaring—up 25.2 percent in the last year alone. And across categories, masterpieces (like the Klimt that Lauder just bought) tend to underperform lower-priced paintings by a substantial margin. Why? Like blue-chip stocks, well-known paintings by blue-chip artists are known quantities and offer safety and stability. As with stocks, the greatest opportunity for growth in art values comes when investors suddenly focus their attention on a hot new sector or name. "

Gross takes a good look at an index that tries to find the returns to art. It sounds as if the returns are very similar to those on equities. There is even evidence of a smaller return for the more stable and less risky "blue chip" art compared to that of the smaller firms.

However, as Tyler Cowen points out Is art a good investment?, there is a clear bias towards the winners - though this may be like survivorship bias.

Tuesday, June 13, 2006

European distressed debt

US banks focus on European distressed debt
"Investment banks have specifically been hiring bankers and traders who focus on distressed debt. Morgan Stanley in London has created a team of 40 bankers in the past three years, while Deutsche BankÂ’s London operation now has 130 employees, making it the biggest team in distressed debt.
Many hedge funds are anticipating that rising inflation and interest rates will soon lead to a credit crunch, when the money readily available for loans to companies at low rates will run out. Hedge funds are looking to Europe in search of higher returns because they already dominate distressed debt in America"

The revenge of the nerdd. The accountant as trader. Picking over the balance sheet, valuing the collateral and market swinging around on the basis of the latest court ruling. However, in Europe, it can only add to the talk of locusts and vultures hovering over the body of dead firms.

Offloading pension liabilities.

Companies sell unwanted pension debts to insurers
"Under structured buyouts, companies can select a group of current or deferred pension fund members and sell the assets and liabilities relating to their retirement savings to the insurer. For example, a medium-sized business with a few directors or executives whose generous pension promises make up a huge part of the company’s liabilities could sell those promises to the Pru."

It makes sense to me that these liabilities are managed by financial firms rather than those that make plastic cups. It sems to be bizzar structure that allow mortal firms to be in charge of the long term assets of individuals. However, it appears that, in many cases, only some of the liabilities can be removed. Many firms will not be able to afford the immediate cost of removing this problem.

Tuesday, June 06, 2006

China and Innovation

What is the nature of innovation? How does innovation relate to the ability to change, criticise and create?

Economist's View: Tolerance and Innovation:

"Look at Japan, which is also a conformist society. It displays great creativity in animation and other art forms, but apart from those, the only other major innovation it can claim is perhaps the Walkman. However, the number of patents it owns is one of the highest, and it has many global brands such as Sony and Toyota. If this is the model we want to emulate, we will arrive there in a relatively short period, and without needing to do much soul-searching. But in that case, we might have to forget about Silicon Valley, information technology and many other major breakthroughs. "

This links with my earlier post about Gladwell and innovation. He argues that there are two types - product (SUV) and process (JIT).

Benefits of Active Management

Pimco outline their view of the benefits of active management.

Pimco link

PIMCO has identified three specific reasons why active management strategies are likely to produce higher returns than passive strategies, with limited changes to overall portfolio risk:

Bond Market Inefficiencies: Inefficiencies in the bond market, often the result of restrictions on passive strategies, provide both structural and tactical opportunities to generate returns that should exceed those of benchmark indices.

Diverse Sources of Added Value: Active managers with extensive resources and expertise across all sectors of the market can identify many small and diverse sources of added value, which should boost returns on a consistent basis without significantly altering risk levels. This philosophy is embedded in PIMCO's approach to core active management.

Passive Management Limitations: Passive strategies often sacrifice return because of restrictions on the securities they can invest in, while a structural tilt toward higher-yielding issues can add unexpected risks that most passive managers lack the resources to evaluate"

Specifically, they talk about looking for
1) Term premiums
2) Liquidity premiums
3) Volatility premiums
4) Credit premiums

Saturday, June 03, 2006


"When Tesco opened a store three miles from Tealby in Lincolnshire last September, Peter Stooke realised that an alliance was essential to save the village store. “Almost immediately our sales went down from £800 a week to £600 a week,” he said. “We had to do something. So I contacted Tesco and said, ‘We’re having real trouble, perhaps we can work together.’"

Store giants turn good guys for village shops:

Monday, May 29, 2006

Stock exchanges

Excellent overview of stock exchanges, their actions and their future. | Articles by Subject | Financial exchanges: "So much for the notion that liquidity and technology will inevitably make trading a natural monopoly. NASDAQ's overwhelming market share in stocks not listed on the NYSE and American Stock Exchange disappeared a decade ago. It has never returned, despite the acquisition of its largest competitor, Instinet. Up to two-thirds of transactions in British shares and perhaps 75% of German share trades now take place off-exchange, according to Hans-Joachim Voth, an economist at Barcelona's Pompeu Fabra university. "

The pressure to merge comes as technology and market practice takes more of the secondary market and liquidity away.

Thursday, May 25, 2006


Ask the expert? I don't think so.

Predicting the World Cup...This paper suggests that it is true - the chances of me predicting who will win the world cup are the same as that of my wife identifying the victor. However, while she is clear that she is guessing, I can talk about the 'reasons' behind my 'prediction' for a long time.

Economists View points to a book by Philip E. Tetlock, How accurate are your pet pundits? investigating the accuracy of forecasts.

Imagine your job as a media executive depends on expanding your viewing audience. Whom would you pick: an expert who balances conflicting arguments and concludes that the likeliest outcome is more of the same, or an expert who gets viewers on the edge of their seats over radical Islamists seizing control and causing oil prices to soar? ...

More on Tetlock from John Kay here

Tuesday, May 23, 2006

Public or private

An old one from the Economist. Thanks to Tim Worstall for the pointer. The best way of supplying water and a natural experiment.

Water industry | Frozen taps |
"PRIVATISED in England, a mutual in Wales, a nationalised industry in Scotland and a government department in Northern Ireland—there is no better proving ground for different ideas about utility provision than Britain's water industry. "

The Scottish water was more expensive, less clean and there were more leaks in 2003 (when the article was written).

"“Essentially, the service was run by engineers,” says Alan Alexander, chairman of Scottish Water, a new company formed in 2002 by a merger of three regional state-owned utilities. “No-one gave much thought to economics.” Politics has also played a role. The utility has been in thrall to trade unions, so it is over-manned. And the need to keep politicians sweet may explain why business charges have risen so much faster than the domestic bills most voters pay"

Wednesday, May 17, 2006


There is little sign that consumers are yet cutting back as a result of higher oil prices. Lex: Wal-Mart:
"At a time like this, it is nice when retailers manage to avoid nasty surprises. That is especially so when it comes to Wal-Mart, which remains more exposed than most to price conscious US shoppers feeling the squeeze from higher petrol prices. For now, however, rising fuel costs seem to have reassuringly little impact on either revenues or profitability. "
I guess the main evidence would come from lower sales at Wal-Mart or even higher sales if more people were pushed towards the cheapest items.

Tuesday, May 16, 2006

Auditors and agency issues

Excellent little look at auditing from John Kay.
Auditors need escape Prisoner’s Dilemma

Market forces have destroyed the old professional cartel and left managers appointing auditors on behalf of shareholders. Not surprising, Kay says, that auditing is expensive and not always effective.

Tuesday, May 09, 2006

Oligopoly and price wars

Paul Kedrosky: " Speak Dell

Dell blew up in after-hours tonight, announcing it would miss first-quarter earnings and that it was taking down the forecast. CEO Kevin Rollins had the following opaque offering by way of explanation:

'During Q1 we continued to execute on our strategy to reinvigorate growth by making investments in our support infrastructure and product quality and by accelerating pricing adjustments. We are committed to delivering industry leading value to our customers, which ultimately results in industry leading growth for the company.'

I know what you're thinking. You're thinking, What the hell does that mean? I speak Dell, so here is my translation:

During Q1 we tried to fix our support problems in hopes that would spike growth in the crummy PC market, but that didn't work so we tried to save the quarter by cutting prices earlier and more than expected. Trouble is, those bastards at HP cut prices too, which made us drop prices further. Now we're left with losing money on PC sales and trying to make it up on volume."

Mr. Friedman and Mr. Keynes

Nice analogy for central bank activity and the control over the economy
PIMCO Bonds - FF May 2006: "Technically, this link is called Velocity, the rate of turnover of the stock of money. Non-technically, think of Velocity as the pace of beer drinking at a fraternity party. If the pace is stable, or at least predictable, the barkeep could target the final goal of moderate buzzdom at the end of the party by simply supplying kegs at a constant rate, or a pace-adjusted predictable rate, and let the market figure out the price at which to ration the beer. In this case, you could call the barkeep Milton Friedman."

Monday, May 08, 2006


Something to keep an eye on - "brutal" means "enought already!" :
"Mr Trichet took a hawkish tack, confirming expectations that the ECB will hike in June, possibly even by a outsize 50 basis points. But that was not really the point. Instead the market was surprised that Mr Trichet chose not to comment on the euro’s sharp rise against the dollar. Twice in 2004 Mr Trichet referred to similar moves as “brutal”, helping to head off further euro gains. So far this time neither Mr Trichet nor any of his colleagues have spoken out."

Saturday, May 06, 2006

Poker and Game Theory

Tim Harford on poker and game theory.
Tim Harford looks at risk and insurance and points out that it would make much more sense for most of us to bare small risks ourselves. Risky business:
"Few of us see risks that way. Matthew Rabin and Richard Thaler pointed out in 2001, in a paper that surprised even their fellow economists, that anyone who pays even slightly more than the fair premium to escape from a risk on a £50 phone or a 1900 insurance deductible must be making a mistake. The stakes are too tiny: in the context of a £1m lifetime income, even 1900 is a small enough risk to swallow."

Meanwhile, Stefan Dercon from Oxford looks at the way that a lack of insurance can prevent Etheopian farmers borrowing to buy fertiliser. The downside risk here is imprisonment for non-repayment.

Friday, May 05, 2006

SUV sales

The Detroit Free Press reports on April auto sales. Skidding auto sales drive new incentives:
"Consumers bought 1.4 million cars and trucks in April, a decline of 4.2% compared with the same month a year ago. And while car sales did relatively well, the light-truck category, which includes pickups, minivans, SUVs and vans, took a beating. Truck sales plummeted 7% during the month.Consumers bought 1.4 million cars and trucks in April, a decline of 4.2% compared with the same month a year ago. And while car sales did relatively well, the light-truck category, which includes pickups, minivans, SUVs and vans, took a beating. Truck sales plummeted 7% during the month."

Mid-size SUV sales were hit particularly hard. Chevrolet Traiblazer sales fell 27.9% against April 2005; Jeep Grand Cherokee fell 43.0% and Ford Exlorer slipped 42.1%.

Thursday, May 04, 2006

Transfer pricing

This is a link from Greg Manikw's blogCorporate Tax Rates to a report from KPMG on corporate tax rates. The relatively high taxes in the US may be one reason why returns to US FDI abroad appear to be much higher than the returns to FDI into the US. It could also be one of the reasons for strong demand for US FDI into low tax Ireland.

Monday, May 01, 2006

Serial corellation in equities :
"It is worth comparing those figures with the heady days of the dotcom boom. In March 2000, net retail sales of open-ended funds were £2.8bn, while the Isa season raised a staggering £3.3bn.
So we have not quite reclaimed the heights of six years ago. In part, this is because Isas were new in 2000; there were few redemptions, while investors are nowadays cashing in some old plans. And the Investment Management Association says Isa sales were hit by the withdrawal of the dividend tax credit (one of Gordon Brown’s little tinkerings) in 2004.
A similar picture can be seen in the US. Sales of mutual funds are up but are not at 2000 levels. According to the Investment Company Institute, US equity funds had an inflow of $27bn in February; monthly sales peaked at more than $50bn in early 2000.
In short, we are not in the kind of bubble territory seen six years ago. Nevertheless, it is disappointing to see that it is much easier to persuade UK investors to buy equities now, with the FTSE 100 index above 6,000, than it was in March 2003 (net retail sales £740m, Isa season £658m) when the index was at 3,200."

Here is good evidence for the idea that retail investment in securities is mainly based on past performance, not an analysis of the fundamentals. This would point to trends developing in securities prices and over-shooting of fundamentals. It would be interesting to look at the relationship between these retail flows and something like P/E ratio.

Saturday, April 29, 2006

Power Lines, Leukemia and Houses.

Tim Worstall raises an interesting point. Why should houses close to power lines fall in value if the government bans building close to lines. Tim Worstall: Power Lines, leukemia and Houses.

We already have the information on the correlation between power lines and leukemia. Does the government ban provide the data with more authority? Is this a case of market inefficiency?

Thursday, April 27, 2006

US fears firms listing overseas

BBC on the way that the high cost of regulation can eventually lead to a loss of business. US fears firms listing overseas:
"Business organisations, including the New York Stock Exchange, have voiced fears to the US Congress about global companies leaving the US to float. Business organisations, including the New York Stock Exchange, have voiced fears to the US Congress about global companies leaving the US to float. "

Saturday, April 22, 2006


Rather than blowing up, credit spreads have gone lower and lower.

"But the issue that has most hurt credit-derivatives buyers, analysts say, is an arcane and technical one. A few companies have unexpectedly tendered for their own bonds. Because buy-backs eliminate the risk of default, the consequences for the price of CDS contracts written on these bonds have been uniformly brutal."

After serveral years of banging on about risk

The hidden dangers of structured fiance

Structured finance can bring unstructured losses

I guess it will come right one day and then they will be shouting "I told you so!"

Thursday, April 20, 2006

Pension liability

Does it make sense to make firms responsible for pensions? After all, most of them do not last this long. Pension deficit sinks historic firm:

"THE 329-year-old Birmingham company that made the buttons on Lord Nelson’s uniforms has been put into administration after the £2 million deficit in its pension fund scared off potential buyers"

Wednesday, April 19, 2006

Money where your mouth is!

James Altucher looks at the future of research and says turn the research department into the proprietory trading group. Turn research departments into hedge funds and stop the rot:
"The best research now comes not from banks but from the 13D filings filed by activist hedge funds where they give their valuation reasons for an investment. Not only that, they give their banking suggestions for what should be done to unlock value."

The ills of the modern world

There is no time in this day and age to sit and talk to people. The modern world demands constant work with modern technology keeping us in touch with the office at all times. This is undermining the family and our health. If only we could go back 400 years to a time when the world moved slowly and there was a moment to connect to our parents. Pepys' Diary: Friday 17 April 1663:
"So home and to my office till night, and so home to talk with my father, and supper and to bed, I have not had yet one quarter of an hour’s leisure to sit down and talk with him since he came to town, nor do I know till the holidays when I shall."

Monday, April 17, 2006

Complex or simple

How do people sift through all the information that is available.
"In his book, Six Impossible Things Before Breakfast: The Evolutionary Origins of Belief, Professor Lewis Wolpert postulates that it is mankind’s use of tools that may have led to its belief structures

Philip Coggan in the FT points to some simple rules that follow market fashions. "Hard to keep a clear head: "But the key is always that the price of the chosen asset is going up. That movement gives investors the essential confidence to believe in the story and indeed attracts others who fear they are missing the bus. The price movement “proves” they are right and the sceptics wrong."

There are many other methods that try to distill the complexity into something as solid and simple as gold.

Tuesday, April 11, 2006

Regime change

How do we tell when the regime changes? Can we create a model that tells us that attention in the market is about to shift from a focus on interest rate differentials to a focus on structural imbalances? The FT suggests that such a shift is about to take place.

Market Insight: Dollar could suffer for US imbalances

It could be right, but can we look for systematic factors that signal a change. The low focus on the current account appeared to come to an end in December 2004. At this point, US interest rates moved above those in the euro area and it started to cost money to bet against the US dollar. With expectations all one way....

I need to look to see if there are factors that suggest that we have a current account focus (how do we define this...) or an interest rate focus. Can we idenfify news that affect bilateral exchange rates. Consequence of trade or interest rate news. Is is significantly different? Does it change?

Are jobs contestable

Are jobs contestable?  Is this a craft that where the price is set by negotiation or is this a commodity that is priced in the international market?

Ed Learner Link here reviews The World is Flat by Thomas Friedman and asks a lot of questions on the way.  

Hit bottom line - is the computer like a fork-lift truck or a microphone. The fork-lift will make me as strong as you; the microphone cannot make me sing like Paverotti. However, the micrphone will allow Paverottie to reach many more people and comand a much higher return.

Thursday, April 06, 2006

The nature of innovation

Malcolm Gladwell builds on on David Galenson work on the creative process. He suggests two types of innovation from conceptual creation of big ideas to incremental adaption. Gladwell suggests that US auto makers have great conceptual ideas in their creation of SUVs and other major styles. Japanese creation of the hybrid car is an incremental change that is not really valued in a world where venture capitalists want an immediate payback.

David Galenson home page
A video of Malcolm Gladwell's speech

Wednesday, April 05, 2006

Stiglitz on Growth and poverty

Foreign Affairs - The Ethical Economist - Joseph E. Stiglitz

Stiglitz reviews The Moral Consequences of Economic Benjamin Friedman. He looks at the issues of inequality, the measurement of poverty and financial de-regulation. He also looks more closely at the issue of measuring inequality with inprecise statistics.

The Mystery of Economic Growth

Very good overview of the existing research. Essentially, this says that there are four important factors: the accumulation of physical and human capital, and the interaction with technological change; the importance of knowledge accumulation and the way that this affects total factor productivity; global linkages and the way that these allow knowledge to be dispersed; and the importance of institutions.

Elhanan Helpman, The Mystery of Economic Growth, Harvard University Press, Cambridge, MA (2004).


Corporate governance, shareholder rights and firm diversification: An empirical analysis

Does diversification improve the firm through operating efficiency, internal capital markets, capacity to take debt and reduction in taxes? Does agency theory give some insight into the diversification premium or discount?

There is evidence here that when shareholders' rights are weak, there is more likely to be industrial diversification. Managers take advantage of shareholder weakness to diversify unwisely and to reduce the value of the firm. The evidence on international diversification is more ambiguous. There is no relationship between shareholder rights and the propensity to diversify internationally.

Thursday, March 30, 2006

Does stock option-based executive compensation induce risk-taking? An analysis of the banking industry

ScienceDirect - Journal of Banking & Finance : Does stock option-based executive compensation induce risk-taking? An analysis of the banking industry: "We investigate the relation between option-based executive compensation and market measures of risk for a sample of commercial banks during the period of 1992–2000. We show that following deregulation, banks have increasingly employed stock option-based compensation. As a result, the structure of executive compensation induces risk-taking, and the stock of option-based wealth also induces risk-taking. The results are robust across alternative risk measures, statistical methodologies, and model specifications. Overall, our results support a management risk-taking hypothesis over a managerial risk aversion hypothesis. Our results have important implications for regulators in monitoring the risk levels of banks. We investigate the relation between option-based executive compensation and market measures of risk for a sample of commercial banks during the period of 1992–2000. We show that following deregulation, banks have increasingly employed stock option-based compensation. As a result, the structure of executive compensation induces risk-taking, and the stock of option-based wealth also induces risk-taking. The results are robust across alternative risk measures, statistical methodologies, and model specifications. Overall, our results support a management risk-taking hypothesis over a managerial risk aversion hypothesis. Our results have important implications for regulators in monitoring the risk levels of banks. We investigate the relation between option-based executive compensation and market measures of risk for a sample of commercial banks during the period of 1992–2000. We show that following deregulation, banks have increasingly employed stock"

Noel Edmonds and the equity premium

Excellent overview of the equity risk premium Stumbling and Mumbling: Noel Edmonds and the equity premium: "Here’s another charge we can add to the list of complaints against Noel Edmonds – he’s deepening the equity premium puzzle."

Friday, March 17, 2006

Persuasion in Finance

SSRN-Persuasion in Finance by Sendhil Mullainathan, Andrei Shleifer:

"Persuasion is a fundamental part of social activity, yet it is rarely studied by economists. We compare the traditional economic model, in which persuasion is communication of objectively valuable information, with a behavioral model, in which persuasion is an effort to fit the message into the audience's already held beliefs. We present a simple formalization of the behavioral model, and compare the two models using data on financial advertising in Money and Business Week magazines over the course of the internet bubble. The evidence on the content of the persuasive messages is broadly consistent with the behavioral model of persuasion. "

Saturday, March 11, 2006

Innovaton in Economics

The Economist talks about the attempt to bring entrepreneurship back into economic theory. I would think that there is a role for innovation in the competitive struggle for product differentiation and for cost reduction. This is part of the struggle to move from a competitive situation towards one where there is market power.
Economics focus: "William Baumol, who holds positions at both Princeton and NYU, has been labouring for years to create more space for entrepreneurship and innovation in economic theory. At this year's annual meeting of the American Economics Association, three special sessions on entrepreneurship were held in his name*. Mr Baumol's work in turn pays homage to the insights of Joseph Schumpeter, for whom the settled equilibria and smooth adjustments of microeconomics held little interest"

Wednesday, March 08, 2006

Housing and savings

Housing Hopes and Worries

This survey, originally from the LA Times and Bloomberg, gives a very clear idea that most people see housing as an investment or savings decision rather than just the purchase of housing services. It would be intereting to look at the savings ratio if we adjusted for the fact that this expenditure may actually be savings. The countries with strong increases in property prices (because of increased demand) also seem to be the ones with a fall in savings ratios under the traditional method of measurement.

Monday, March 06, 2006

Real Exchange Rate Volatility and the Gold Standard

Take a look at the gold standard as a means of stabilising the economy.
SSRN-Stuck on Gold: : "Did adoption of the gold standard exacerbate or diminish macroeconomic volatility? "

Sunday, March 05, 2006

Comparisons of social mobility

SSRN-American Exceptionalism in a New Light: A Comparison of Intergenerational Earnings Mobility in the Nordic Countries, the United Kingdom and the United States by Markus J�ntti, Bernt Bratsberg, Knut R�ed, Oddbj�rn Raaum, Robin Naylor: "We develop methods and employ similar sample restrictions to analyse differences in intergenerational earnings mobility across the United States, the United Kingdom, Denmark, Finland, Norway and Sweden"

The paper suggests that there is little mobility and that the mobility is actually less in the US and UK than in nordic countries.

Tuesday, February 28, 2006

The market over planning

John Kay: The centralised road to mediocrity: "In an uncertain, changing world, most decisions are wrong, and success comes not from the inspired visions of exceptional leaders, or prescience achieved through sophisticated analysis, but through small-scale experimentation that rapidly imitates success and acknowledges failure. This disciplined pluralism is the true genius of the market economy."

Wednesday, February 15, 2006

Aid and Growth: What Does the Cross-Country Evidence Really Show?

You only have to look at the eastern part of Germany to see that even with very helpful institutions and a transfer of resources that was equal to the value of the western German economy at the time of unification in 1990, there has been a struggle for the eastern part of the country to reach the level of output of the western part of the country.

Aid and Growth: What Does the Cross-Country Evidence Really Show?: "We examine the effects of aid on growth--in cross-sectional and panel data--after correcting for the bias that aid typically goes to poorer countries, or to countries after poor performance. Even after this correction, we find little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others. Our findings, which relate to the past, do not imply that aid cannot be beneficial in the future. But they do suggest that for aid to be effective in the future, the aid apparatus will have to be rethought. Our findings raise the question: what aspects of aid offset what ought to be the indisputable growth enhancing effects of resource transfers? Thus, our findings support efforts under way at national and international levels to understand and improve aid effectiveness. "

Saturday, February 04, 2006

European Unemployment: The Evolution of Facts and Ideas by Olivier Blanchard

A good look at European unemployment.

SSRN-European Unemployment: The Evolution of Facts and Ideas by Olivier Blanchard: "In the 1970s, European unemployment started increasing. It increased further in the 1980s, to reach a plateau in the 1990s. It is still high today, although the average unemployment rate hides a high degree of heterogeneity across countries. The focus of researchers and policy makers was initially on the role of shocks. As unemployment remained high, the focus has progressively shifted to institutions. This paper reviews the interaction of facts and theories, and gives a tentative assessment of what we know and what we still do not know"

Sunday, January 29, 2006

Forecasting risk, informed speculation, and financial innovation

How can an exchange maximise profits when informed speculators may drive hedgers out of the market? How do we avoid market failure in these cases? Here two types of market are created - small, stable markets for hedgers and a second larger, volatile market with greater volume that is attractive to speculative trading.

Forecasting risk, informed speculation, and financial innovation: "Speculators who prey on hedgers can stifle financial innovation in the sense that new markets can fail. In this paper I analyze whether a profit maximizing exchange nonetheless chooses to open markets for speculative securities and if so, how to circumvent the problem of market failure. I find that the optimal financial innovation takes two forms. The first is a market structure consisting of hedge instruments, traded in low volume at stable asset prices. The second is a market structure consisting of speculative instruments, traded in greater volume at volatile asset prices. These strategies are derived within the same framework where the cost and the quality of the speculators' information set and the hedgers risk aversion ultimately determine which is the optimal one"

US auto industry

Brad DeLong highlights the WSJ article about restructuring at Fords

Covering the Economy: Employment and Layoffs: Ford: " Ford plans for the future: - Ford Will Shed 28% of Workers In North America : By JEFFREY MCCRACKEN and JOSEPH B. WHITE Staff Reporters of THE WALL STREET JOURNAL January 24, 2006; Page A1: DETROIT -- Ford Motor Co. has made it official: Detroit is ditching its business model of the 1990s, and the cost now totals more than 60,000 jobs at Ford and rival General Motors Corp. Ford yesterday announced plans to close 14 North American factories, including seven assembly plants, and slash up to 34,000 North American jobs over the next six years. About a month ago, GM rolled out plans to cut almost as many jobs by 2010. Both companies will emerge from these retrenchments smaller, slugging it out in a crowded U.S. auto market.

However, the report also indicates that there are as many US auto jobs as there were in 1990. It is just that they are now jobs at foreign car plants.

Businessweek reports on the booming auto industry in AlabamaThe Alabama Surprise

This highlights the way that poor decisions and the burden of pension and healthcare costs are dragging the traditional US industry down. Does it matter?

Saturday, January 28, 2006

Placebo effects

I think that there is further to go with this. Some institutions do have influence beyond their actual worth. A legal system provides confidence in property rights, the central bank can make sure that the financial system runs smoothly. We believe, so it is. It is even more important for society. Think inflation expectations.

Placebo effects: " In last night's Alternative Medicine on BBC2, the Perfect One talked about the power of placebo effects. Some apparently nonsensical treatments work, she said, if we expect them to. She says: NHS doctors are not taught the positive power of placebo. They’re told to reduce its effect for scientific research. This raises a question. If placebo effects are powerful in medicine, aren't they also likely to be powerful in the social sciences? Could it be that the power of some institutions derives not from their genuine mechanical ability to control things, but merely from our belief that they have power? In other words, the notion that institutions have power is  a self-fulfilling illusion.Here are three areas  where I reckon power might be due partly to a placebo effect:1. The media. The editorial lines and news content of the dead trees is determined by the profit motive , not by intellectual considerations. Why, then, do we believe newspapers have power? Could it be that their influence exists largely because we merely think it does? 2. Company bosses. Sure, entrepreneurship matters. But most bosses of large firms aren't entrepreneurs - they're just bureaucrats. If I were to say that such bureaucrats don't, generally speaking, improve firm performance, what could you do - other than cite a handful of except"

Friday, January 27, 2006

Bias in the estimate of speed of real exchange rate adjustment

On the speed of adjustment in ESTAR models when allowance is made for bias in estimation: "The purpose of this letter is to show, via simulation and bootstrap methods, that the estimates of the speed of adjustment parameter obtained in ESTAR models of the real exchange rate are upward biased in sample sizes typically employed in empirical work."

Aggregation of Euro area data

A look at different methods of aggregating euro area data.

On the aggregation of eurozone data: "Constructing eurozone aggregates is common practice in empirical studies. This study shows that the choice of aggregation method does not only matter on a theoretical basis. A brief study on eurozone money demand indicates the empirical importance of choosing the correct aggregation method as different aggregates give substantially different outcomes. "

Size matters for liquidity: Evidence from EMU sovereign yield spreads

Look at liquidity and the effect of EMU on sovereign yield spreads.

Size matters for liquidity: "The objective is to study the relative importance of domestic components of EMU sovereign yield spreads since the start of Monetary Integration. The results indicate a change in the market value of liquidity, as measured by market size, after EMU"

Thursday, January 26, 2006

Has Financial Development Made the World Riskier?

Has risk increased with financial development.

SSRN-Has Financial Development Made the World Riskier? by Raghuram Rajan: "Developments in the financial sector have led to an expansion in its ability to spread risks. The increase in the risk bearing capacity of economies, as well as in actual risk taking, has led to a range of financial transactions that hitherto were not possible, and has created much greater access to finance for firms and households. On net, this has made the world much better off. Concurrently, however, we have also seen the emergence of a whole range of intermediaries, whose size and appetite for risk may expand over the cycle. Not only can these intermediaries accentuate real fluctuations, they can also leave themselves exposed to certain small probability risks that their own collective behavior makes more likely. As a result, under some conditions, economies may be more exposed to financial-sector-induced turmoil than in the past. The paper discusses the implications for monetary policy and prudential supervision. In particular, it suggests market-friendly policies that would reduce the incentive of intermediary managers to take excessive risk. "

Friday, January 20, 2006

Institutional Investors and Stock Market Volatility by Xavier Gabaix, Parameswaran Gopikrishnan, Vasiliki Plerou, H. Stanley

Large trades in an illiquid market.

SSRN-Institutional Investors and Stock Market Volatility by Xavier Gabaix, Parameswaran Gopikrishnan, Vasiliki Plerou, H. Stanley: "We present a theory of excess stock market volatility, in which market movements are due to trades by very large institutional investors in relatively illiquid markets. Such trades generate significant spikes in returns and volume, even in the absence of important news about fundamentals. We derive the optimal trading behavior of these investors, which allows us to provide a unified explanation for apparently disconnected empirical regularities in returns, trading volume and investor size. "

Wednesday, January 18, 2006

Foreign Direct Investment and Domestic Economic Activity by Mihir Desai, C. Foley, James Hines

Looking at the relationship between FDI and domestic investment.

SSRN-Foreign Direct Investment and Domestic Economic Activity by Mihir Desai, C. Foley, James Hines: "The data do not support the popular notion that greater foreign activity crowds out domestic activity by the same firms, instead suggesting the reverse. "

Japan and the World Economy : Current account: mean-reverting or random walk behavior?

ScienceDirect - Japan and the World Economy : Current account: mean-reverting or random walk behavior?: "This paper sets out to investigate the statistical properties of current account in the crisis-affected countries of East Asian (Asian-5: Indonesia, Korea, Malaysia, the Philippines and Thailand) utilizing data from 1976Q1 to 2001Q4. We split the full sample period into two sub-periods of the pre-crisis (1976Q1�1996Q4) and post-crisis (1997Q1�2001Q4) eras. Univariate unit root tests indicate that current account follows a non-stationary process under both eras. However, using more sophisticated panel techniques revealed that the current account displays mean-reverting property in all three sampling periods. Meanwhile, deviations of half-life estimates in the full sample period (post-crisis) were found to be much more rapid compared to the pre-crisis period. Our major conclusions are first, the empirical evidence supports the modern intertemporal approach to current account. Second, the results reveal that the Asian-5 current accounts were on a sustainable path, even during the pre-crisis period, hence, questioning the notion that the East Asian financial crisis was due to the mismanagement of external imbalances. "