New ways of diversifying

The FT uses a Healthy eating analogy to discuss the new ways of trying to diversify risk. This involves the use of factor rather than diversification through assets and countries:

1. Volatility (traditional volatility)
2. Momentum (buying of winners)
3. Quality (strong balance sheet firms)
4. Value (cheap investments)
5. Yield (high income)
6. Growth (high earnings growth)
7. Size (Small companies do better)

There are also bond factors

1. Duration (sensitivity to  rate changes)
2. Curve (maturity and return)
3. Volatility (sensitivity to foreign exchange movements)
4. Spread (credit risk)

These  move beyond value and growth or carry and momentum. Though all asset classes may fall in crisis, the value drivers tend to find more diverse performance. 

Bear territory: Avoid urge to flee — FT.com

Bear territory: Avoid urge to flee.  Some interesting research from the FT.com, but not, as they say because it shines light on technical analysis, which it does not, but because it illuminates the risk of overs-shooting:

"According to those fonts of wisdom the technical analysts, the FTSE 100 and Nikkei 225 indices both on Wednesday slipped into bear market territory, as defined by a 20 per cent fall from an earlier peak. To normal ears, this sounds like a sell signal."

This is consistent with the herding that Olivier Blanchard has been speaking about earlier in the week.

Passive investors are good corporate stewards

Passive investors are good corporate stewards — FT.com:  Passive investment not so passive.

 "Worries that passive management is inhibiting price discovery will continue. But this research is a very promising sign that when investors entrust their money to passive fund managers, their interests are indeed being represented aggressively with company managements."

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Poor white deaths

Following on from the Case and Deaton identification of increased death rates for middle age non-Hispanic whites, Andrew Gelman and Jonathan Auerbach identify the increase in the average age of the cohort as being the main cause of this trend (rather than the more satisfying work-life experience of the group as was commonly inferred from the data).  Even more intriguing, adjusting for gender and state, it appears that souther women are the dying at a more rapid pace that in the past.  The clear pictures of this change are here. :

Blanchard: oil and China

Oliver Blanchard takes a look at the effect of China and oil prices on the stock market:  While the fall in oil prices has traditionally been a positive for the oil consumers like the US, the US has a much larger role in the new environment.  The effect of bad loans to fracking companies combines with what Paul Krugman has suggested are the non-linear effects of oil price declines.  

"Take the oil price explanation. It is even more puzzling. Traditionally, it was taken for granted that a decrease in the price of oil was good news for oil importing countries such as the United States. Consumers, with more money to spend, would increase consumption, and increase output. Energy using firms, with lower cost of production, would increase investment. We learned in the last year that, in the short run, the adverse effect on investment on energy producing firms could come quickly and temporarily slow down the effect, but this surely does not undo the general conclusion. Yet the headlines are now about low oil prices leading to low stock prices. I can think of two potential explanations, neither of them convincing."

The momentum behind selling from China have been is also an issue for Blanchard.



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Japan: Deflated generation - FT.com

Japan: Deflated generation - FT.com: "This year’s celebrants, born in 1995 and 1996, are the first to have spent their entire journey to adulthood in an economy of mostly falling consumer prices. Their lives have been so infused by the phenomenon that several say deflation, one of the main obstacles to growth through the 2000s, has evolved into a source of low-level apprehension that limits ambition."



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John Maynard Keynes: Great Economist, Terrible Currency Trader - The New York Times

John Maynard Keynes: Great Economist, Terrible Currency Trader - The New York Times:

"“Keynes’s experience shows how difficult currency speculation is,” Mr. Chambers said. “He was trading his own money and he understood what he was doing. He was able to absorb losses. Some hedge funds are trying to do this stuff and live hand-to-mouth on a quarter-to-quarter basis, and that’s really difficult to do.  Keynes was also an active investor in the stock market, and in the 1920s tried to time stock picks. But his returns were low, and he took a big hit in the market crash of 1929."

Some argue that the long-term equity investment was driven by inside-information that he received from his contacts in government and business. That may be unfair.

Streetwise Professor » Spoof Me Once, Shame on You: Spoof Me Twice, Shame on Me

Streetwise Professor » Spoof Me Once, Shame on You: Spoof Me Twice, Shame on Me: "I’ve often written that HFT firms are the best able to detect spoofers, and to take preventative measures (which reduce the profitability of spoofing, and hence its prevalence). The whole business of HFT is extracting signals from orders and order flow, and trading accordingly. Spoofing is based on manipulating the order flow–in essence, injecting noise into it. HFT firms evaluate their executions, and attempt to identify patterns that predict both winning and losing trades. If spoofers systematically impose losses on HFT firms, eventually the latter will figure it out."



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The Rise and Fall of American Growth | The Enlightened Economist

The Rise and Fall of American Growth | The Enlightened Economist: "There are three sections: the first covers 1870 to 1940; the second 1940-2015; the third is about the sources of growth and why it was fastest from the 1920s to 1950s (this is just about the US so this is earlier than European readers would recognise as the peak growth era) – and is slowing now. The final chapters are a kind of crescendo, for the whole book is organised to support Gordon’s well known thesis that the days of miracle and wonder, the rapid growth era of the early to mid-20th century, is long gone, and slower growth lies ahead of us. "



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Stack Exchange and replication

Some links to site with replication code of financial papers? - Quantitative Finance Stack Exchange: Mostly this is about replication rather than providing code. There is an project in economics to promote replication.

The Underground Is Massive: How Electronic Dance Music Conquered America by Michaelangelo Matos – review | Books | The Guardian

The Underground Is Massive: How Electronic Dance Music Conquered America:

"The meat of his thesis is that the medium is the message. As he puts it: “The rise of the US rave scene and the rise of the internet, besides being concurrent, mirrored one another in many ways. Both mixed rhetorical utopianism with insider snobbery ... As a style whose digital nature was encoded into its very name, techno is the music of early adopters.”"

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The end of capitalism has begun

The end of capitalism has begun | Books | The Guardian:

 "New forms of ownership, new forms of lending, new legal contracts: a whole business subculture has emerged over the past 10 years, which the media has dubbed the “sharing economy”. Buzzwords such as the “commons” and “peer-production” are thrown around, but few have bothered to ask what this development means for capitalism itself."

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