Friday, February 29, 2008


Wikipedia and everything that you ever wanted to know. NYRB.

Bubbles and Mammoth

Paul Krugman on the reason for momentum in equity prices.

And those instincts can be self-reinforcing, at least for a while. After all, whereas an increase in the number of people acting like Cave Bulls tended to mean fewer mammoths per hunter, an increase in the number of modern bulls tends to produce even bigger capital gains - as long as the run lasts. Any broker can tell you that in the last few months the market has been rising, despite mediocre earnings news, because of fresh purchases by ever more people distraught about having missed out on previous gains and desperate to get in on the action. Sooner or later the supply of such people will run out; then what?


Susan Blackmore on the spread of memes.
In the 1970s, Richard Dawkins coined the term "meme" in his book The Selfish Gene to refer to aspects of human culture and how they evolve in a way that's analogous to how genes evolve. Since then, the study of memes has become an evolving meme itself.

A meme is an idea or thing that is passed from person to person and is either adopted for its usefulness or other purpose -- in some cases becoming a wildly popular idea that can't be stopped -- or abandoned to die a quick and ignoble death. A meme can be a song or snippet of a song, a dance, an urban legend, an expression or behavior, a product brand or even a religion.

British scholar Susan Blackmore, who delivered a presentation on memes at the TED conference Thursday morning, says that human beings are being overrun by memes that want to use us for their own advancement. spoke with her at TED.

Not too different from the X-factor that provides the lubricant for growth and development.

Thursday, February 28, 2008

Banks and the yield curve

Banks and the improving yield curve: "While banks are not going to be hurt by a steeper yield curve – at the extreme, they could employ the most risk-free endeavour they can get away with: borrowing money at the Federal Reserve’s discount window and lending it back to the government – the bigger question is whether the benefits they gain will be swamped by the depressing effects of an economic downturn."

Foreign Exchange Papers

Deokwoo Nam with some interesting foreign exchange papers for me.

Wednesday, February 27, 2008

Bank credit and the monoline

Felix Salmon looks at the way that monoline downgrade will add to the pressure to rebuild capital.
But what Dizard doesn't mention is that a lot of the looming problem comes not from marking to market, but rather from rules which have meant banks not having to mark to market. I'm talking about all those securities on banks' balance sheets which are rated triple-A thanks to a now-worthless monoline wrap. Since triple-A securities have a zero risk weighting for capital adequacy purposes, banks have to put aside zero capital against them. The minute the monolines get downgraded, the banks suddenly have to mark these highly illiquid bonds to market. The banks then take two simultaneous capital hits: the first because the bonds aren't zero risk-weighted any more and therefore need capital to be held against them, and the second because of the write-downs on the mark-to-market losses.

Monday, February 25, 2008

Command and belief

Paul Krugman looks at the way that belief can augment the command economy within the firm and more broadly.

We see this kind of thing all the time, in microcosm. The market does not require people to believe in it; but the centrally planned economies that live inside a market economy, known as corporations, do. Everybody knows that financial incentives alone are not enough to make a company succeed; it must also build morale, a sense of mission, which makes people work at least somewhat for the good of the company rather than think only of what is good for them. Luckily, under capitalism an individual company can fail without taking the whole society down with it - or it can be reformed without a bloody revolution.

Why did people stop believing in socialism? Part of the answer is simply the passage of time: you can't expect revolutionary fervor to last for 70 years. But perhaps also the unexpected resurgence of capitalism played a role. By the 1980s Russia's elite was all too aware that the country, instead of overtaking the capitalist nations, was slipping behind - that Russia was failing to take advantage of new technology, that if anyone was challenging the West it was the rising nations of Asia. Communism lost any claim to the mandate of history well before it actually fell apart, and perhaps that is why it fell apart.

In the end, then, capitalism triumphed because it is a system that is robust to cynicism, that assumes that each man is out for himself. For much of the past century and a half men have dreamed of something better, of an economy that drew on man's better nature. But dreams, it turns out, can't keep a system going over the long term; selfishness can.

Saturday, February 23, 2008

The price of popcorn

Mark Thoma points to some researh that supports the idea that the high cost of popcorn at cinema is a way to price discriminate and attract more people to the movies. While the "concessons" account for just 20% of revenue, they account for 40% or profit. Without this, ticket prices are higher and less people see films.

Saturday, February 16, 2008

Currency managers

Do Professional Currency Managers Beat the Benchmark?

Momtchil Pojarliev and Richard M. Levich look at the performance of currency managers and compare their returns to some basic trading strategies: carry trade; trend following; relative value and volatility. They find that most returns are the equivalent of beta as being earned by making simple strategies. However, there are a small sub-set that make alpha and this appears to be a persistent group.

Friday, February 15, 2008

The Great Moderation

Mark Thoma points us to a conference on the "Great Moderation".

Comin and Mulani also examine the effects of technological change on economic growth and volatility and, similarly, find that technological change leads to both faster growth and lower volatility. But in contrast to the previous paper, Comin and Mulani argue that this good result holds only for the national, or macro, measures. Indeed, predictions from their model suggest that firm-level, or micro, volatility should increase as the pace of technological innovation increases. To get this result, they consider an economy with two types of technologies: general innovations (GIs), which are not patentable and are used by all firms in the economy, and research and development innovations (RDI), which are patentable and used by a limited number of firms. They then assume that GIs are produced by large, stable firms and RDIs are produced by smaller, more volatile firms. Under these conditions, they show that increases in RDIs (for example, due to government research and development (R&D) subsidies) lead to market "shake-up," whereby smaller firms gain market share and perhaps even leapfrog ahead of the previous market leaders. Since GI activity relies on the presence of stable market leaders, this shake-up creates both firm-level volatility and lower GI activity. The decline in GIs, which by definition help all firms, reduces the comovement between firms in the economy, ultimately reducing the volatility of aggregate outcomes. Said more simply, if the increase in the innovative activity comes from small firms jockeying for position in the industry, aggregate volatility will go down, as winners and losers will offset each other, but microvolatility will rise, as losing firms compete to get back on top. Comin and Mulani provide empirical evidence showing that increased R&D activity in the U.S. has coincided with increased volatility in sales and market shares for publicly traded firms, reduced comovement across industries, and reduced volatility in aggregate economic growth.

Coincides with UK experience, an increase of internal volatility has been aligned with a fall in the overall shocks. However, the internal shocks are painful and they are the thing that make people say that risk has been shifted to the household from the firm. That's okay if you own the firm, but it is unlikely that those that have taken on this risk have been compensated

Group think and low returns

Yves Smith and the Epicurean Dealmaker: point the finger at money managers and suggest that it was their greed and "group think" that cause the current financial mess. The desperation for higher returns brings us back to the low rates on offer. Not just the result of Greenspan at the short end but also the Chinese monetary authority and others further down the curve.

"Yves Smith does get something right. There was group think leading up to the current crisis, all right, just not among the investment bankers:
Kay's observation has some merit, but I think it applies more to the money managers and other investors who bought dubious paper more than it does to the perps.2 They were surrounded by peers who were buying complicated new products that offered higher returns; being skeptical suggested one was a Luddite, or worse, not up to snuff analytically (not that anyone did much analysis, as we have now learned).
It was not for the investment bankers to tell their customers that they were wrong to want higher return and lower risk, even if the two could not be separated. It was their job to try and provide those things, because that's what the customers paid them for."

Tuesday, February 12, 2008

Rotten English

Rotten English highlights the way that regional and non-standard English has oobtained increased importance and goes against the idea that things are more homogenous.

What would once have been pejoratively termed “dialect literature” has recently and decisively come into its own. Half of the novels that won the Man Booker prize over the past twelve years are in a non-standard English: the British Commonwealth’s most prestigious award honors passages like “It ain’t like your regular sort of day” (the opening line of Graham Swift’s Last Orders) and “What kind of fucken life is this?” (the persistent refrain of DBC Pierre’s Vernon God Little). The reading public has been just as approving, eagerly devouring works like Alice Walker’s The Color Purple and Junot Díaz’s Drown. Many vernacular novels, Walker’s own as well as Roddy Doyle’s The Commitments, Irvine Welsh’s Trainspotting and Alan Duff’s Once Were Warriors, have become acclaimed movies. This success is by no means limited to fiction; vernacular poetry has flourished in venues like the Nuyorican Poets Café and HBO’s Def Poetry Jam. The aim of this collection is to represent that literary florescence, along with the earlier works that anticipated and enabled it. Rotten English celebrates the stunningly unanticipated ways in which English has changed as it grew into a global language.

Monday, February 11, 2008

Clearing trades

The DoJ is pushing for a seperation of trading and clearing. The FT explains why this is important. Futures reform:
"When an exchange controls clearing, it can prevent a customer from buying a contract on one exchange and selling it on another. Customers, therefore, have everything to gain from the DoJ’s move. The US stock markets, where exchanges share a common clearer, are undergoing fierce competition that has seen tariffs slashed, spreads tightened and volumes soar."

Sunday, February 10, 2008

Watch the fees

A look at the US school districts that were drawn into swap agreements. The attraction of money up front for risk in the future suggests some behavioural biases. The fact that Bloomberg is attacking banks for excess sugggests that the time is up for large scale bank profits.