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: