Startups and the productivity puzzle

Startups and the productivity puzzle:assesses the effect of cheap labour and bizarre consumer choice on UK productivity.

 "In other words, it’s easier to make money by using cheap labour than by investing in machinery. Furthermore, in this example, people would be mad to invest in new machinery because they would be unlikely to make enough to cover their investment. The media love to talk about high-tech entrepreneurship. There may be a few such firms but most of Britain’s startups are low tech or no tech.

Has this county become an El Dorado for cheap labour? Does the business opportunity now lie in setting up a business to exploit what the Economist described as Britain’s pitiful pay and its even more impoverished freelancers? That might explain why, far from improving the country’s productivity, Britain’s startups are making it worse."

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Bond liquidity

Dear Buy-side. You seem very concerned about liquidity. Can I suggest paying for it? — Bull Market — Medium: "What needs to happen? Basically, the buy side needs to face up to reality. It needs to start looking at its cost of execution in the long run, rather than on a transaction-by-transaction basis, and understanding that if it prices the brokers out of business, it will have nobody left to make its trades. At present, the regulators aren’t helping with this at all — in a misguided attempt at consumer protection, they make it more or less impossible for a fund manager to make an investment in helping its counterparties. But really, the issue is with the clients themselves. If they want to keep on offering immediate liquidity to their investors (and they do), they need to stop creating the conditions under which that sort of immediacy is impossible for the market to provide."



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Difference Between Economic Growth Rates and Treasury Interest Rates Significantly Affects Long-Term Budget Outlook - Washington Center for Equitable Growth

Must-Read: Richard Kogan et al.: Difference Between Economic Growth Rates and Treasury Interest Rates Significantly Affects Long-Term Budget Outlook

" We analyze U.S. data for the 223 years since 1792 and find that, on average, economic growth has exceeded interest rates, helping to shrink the burden of existing debt…"

This should also affect the Piketty argument that capital will rise as as share of the economy.  Though the treasury bill rate is not the same as the return on capital, it could, assuming that the increased return for taking risk and rate of depreciation cancel out.

Banks Will Keep Doing FX Stuff That Got Them in Trouble - Bloomberg View

Banks Will Keep Doing FX Stuff That Got Them in Trouble - Bloomberg View: "I mentioned yesterday that, as a condition of their probation, all the banks that pled guilty to a conspiracy to rig foreign-exchange rates have to send sad little "Disclosure Notices" to their clients. Here, for instance, is JPMorgan's disclosure notice, which on a cursory glance seems to be identical to the one attached to its plea agreement. It's an interesting little document. There's an introductory paragraph, and then a paragraph of contrite moaning that "conduct by certain individuals has fallen short of the Firm's expectations," specifically by being a massive antitrust conspiracy."



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Fund management performance

Active fund managers really can pick stocks - FT.com: "Unfortunately, the average investor does not see the fruits of managers’ stockpicking labours. Assuming a recent estimate from Jack Bogle, the founder of Vanguard, the world’s second-largest asset manager, is correct, the average active equity fund has all-in costs (including fees, transaction costs and a drag from cash holdings) of 2.27 per cent a year, swamping the raw "



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3i: three eyes - FT.com

3i: three eyes - FT.com: "3i counters that investors in its debt and infrastructure funds have different return targets to the group itself. Fair enough. But there remains the question of what sort of company 3i is. Does PE (investing 3i’s money) belong with asset management (investing other people’s money)?"



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Perfect Insider Traders Got Caught - Bloomberg View

Perfect Insider Traders Got Caught - Bloomberg View: "Still, Trader1 really is the greatest of all insider traders. He spread out his trades to avoid attention, he communicated in code, the code was golf code, and when he got caught he cooperated to minimize his sentence while also trying to undermine the prosecutors' legal theory on an FBI recording. He's learned all of the lessons I have to teach about insider trading, except the big one: Don't insider trade! You'll always get caught, and it's never worth it."



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Oil and consumer spending

James Hamilton has a report on the effect of oil prices on consumer spending.  Using a VAR to estimate the structural relationship between consumer spending and oil prices the effect of the 2006-07 oil prices increase and the recent decrease is assessed against the actual performance. Half of the 2007-09 decline in consumer spending is attributed to oil price increase.  The recent rise in US consumer spending appears to be a little less than would be expected, suggesting, in Hamilton's opinion, that people are not confident that lower prices will be sustained.



I am still looking to test the relative influence of oil prices and financial crisis on economic performance.  I suggest that a panel of countries GDP (relative to trend) and estimates of the size of the financial sector as well as the relative importance of oil in the economy as a test.  The latter is the most difficult to assess and model.

Finance and economics: What's wrong with finance | The Economist

Finance and economics: What's wrong with finance | The Economist:



"Mr Lo argues that this approach may sound arbitrary but such behaviour may be is rational from an evolutionary perspective. Take an animal that has a choice of nesting in a valley or a plateau; the valley offers shade from the sun (good for raising offspring) but vulnerability to floods (killing all offspring). The plateau offers protection from floods (good for offspring) but no shade (killing all offspring). The probability of sunshine is 75%. So the “rational” decision from the individual’s perspective would be to stay in the valley. But if a flood occurs, the entire species would be wiped out. It makes more sense for the species if individuals probability match. “When reproductive risk is systematic, natural selection favours randomising behaviour to avoid extinction” he writes.



Mr Lo’s view is that markets are normally efficient but not always and everywhere efficient. He dubs this “adaptive market theory”—and sees it as a consequence of human behaviour, particularly herd instinct. Watching other people suffer triggers an empathetic reaction. When other investors are panicking in a period of market turmoil, we tend to panic too.



 A similar approach, dubbed the fractal market hypothesis, is advanced by Dhaval Joshi of BCA Research. This acknowledges that investors with different time horizons interpret the same information differently. “The momentum-based high frequency trader might interpret a sharp one-day sell-off as a sell signal” he says, “but the value-based pension fund might interpret the same information as a buying opportunity. This disagreement will create liquidity without requiring a big price adjustment. Thereby it also fosters market stability.”"



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Finance and economics: What's wrong with finance | The Economist

Finance and economics: What's wrong with finance | The Economist:



"Mr Lo argues that this approach may sound arbitrary but such behaviour may be is rational from an evolutionary perspective. Take an animal that has a choice of nesting in a valley or a plateau; the valley offers shade from the sun (good for raising offspring) but vulnerability to floods (killing all offspring). The plateau offers protection from floods (good for offspring) but no shade (killing all offspring). The probability of sunshine is 75%. So the “rational” decision from the individual’s perspective would be to stay in the valley. But if a flood occurs, the entire species would be wiped out. It makes more sense for the species if individuals probability match. “When reproductive risk is systematic, natural selection favours randomising behaviour to avoid extinction” he writes.



Mr Lo’s view is that markets are normally efficient but not always and everywhere efficient. He dubs this “adaptive market theory”—and sees it as a consequence of human behaviour, particularly herd instinct. Watching other people suffer triggers an empathetic reaction. When other investors are panicking in a period of market turmoil, we tend to panic too.



 A similar approach, dubbed the fractal market hypothesis, is advanced by Dhaval Joshi of BCA Research. This acknowledges that investors with different time horizons interpret the same information differently. “The momentum-based high frequency trader might interpret a sharp one-day sell-off as a sell signal” he says, “but the value-based pension fund might interpret the same information as a buying opportunity. This disagreement will create liquidity without requiring a big price adjustment. Thereby it also fosters market stability.”"



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The Lewis Turning Point

China migration: At the turning point - FT.com:

 "The end of surplus rural labour — a significant milestone that economists call the Lewis Turning Point — carries profound implications for China’s economy. As the flow of low-paid migrants into Chinese factories slows, workers demand higher pay, a phenomenon that has been evident for several years. This either drives low-end manufacturers out of business or forces them to raise prices, actions that could slow the export growth that has helped drive the country’s economy for decades."

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Bond market liquidity

Healthy liquidity diet needed to survive future financial shocks:  'Healthy' means ample liquidity.  That requires speculation.

 "The inventories of US corporate bonds held by broker-dealer banks have plunged from $300bn in 2008 to $50bn, according to research from CQS."

HFT is not healthy liquidity.  All liquidity is volatile and susceptible to temporary withdrawal in the face of uncertainty.  However, HFT is at the extreme of this: machines are turned off, orders are temporary.  Investment bank liquidity tends to be more permanent and stable.