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.


FT.com / 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.

FT.com / 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.

FT.com / 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...

FT.com / 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.