Hungary struggles with foreign currency loan burden

Hungarian foreign currency loans. FT.com:

"But the financial crisis sent the forint tumbling. The capital value and servicing costs of the loans mushroomed in forint terms; consumer spending slumped. At the end of March, Hungary still had over Ft3.55tn ($15.8bn) of foreign currency mortgages outstanding, equivalent to 12 per cent of gross domestic product. More than 20 per cent of the loans by value had repayments more than 90 days overdue."

This is the resolution of the HUF carry trade, conducted by domestic households:  borrowing EUR and CHF to purchase higher yielding domestic assets.

Measuring Recession

Jeffrey Frankel compares US and European methods of assessing recessions and comes down firmly on the side of the US version: not two quarters of negative growth but a more holistic assessment of the economy and its potential.

"These measurement issues may sound like minor technical details; but they can have significant real-world implications. So, what are the differences between European and US criteria for judging recessions?"

The US measurement removes the constant twitter about double or triple dips.

Bandwaggons and herding

The Economist assess why missing out on one job application is bad news for your chances in the next.

"The existence of bandwagon behaviour can be hard to prove. A product or an asset usually becomes popular (or unpopular) in the first place because it is genuinely superior (or inferior). But some have tried to isolate the self-fulfilling effects of popularity. One 2004 study* by Alan Sorensen, now of the University of Wisconsin, examined accidental omissions from the New York Times bestseller list"

As with the carry trade, there is some underlying effect but it is magnified by the attempt to deal with asymmetric information. This magnification causes a distortion that can eventually be significant.

Two decades ago Abhijit Banerjee, now at the Massachusetts Institute of Technology, devised a model of “rational herding” in which market participants base their decision on a combination of their own information and the actions of others. Over successive rounds of transactions, participants responded less to their own information and more to the herd.

Expectations and learning

Learning from Inflation Experiences assess the way that expectations are formed and finds that personal experience has an impact.

: "How do individuals form expectations about future inflation? We propose that personal experiences play an important role. Individuals adapt their forecasts to new data but overweight inflation realized during their lifetimes."

There is scope here to use some of these ideas in understanding how expectations about the probability of success with the carry trade can affect the trade itself. What is the recent experience?  How have traders experienced the carry?

Frequency of words over time

The ngramr – an R package for Google Ngrams can create charts of the frequency with which words are used over time.  The package uses the Google Books diagnostics to scan Google Books to look for names.  The chart needs to be turned into data.

 "The Ngram Viewer will display an n-gram chart, but does not provide the underlying data for your own analysis. But all is not lost. The chart is produced using JavaScript and so the n-gram data is buried in the source of the web page in the code. It looks something like this:"

This can be used to see how economic words change over time and use this as a proxy for sentiment or thinking and then look for how this sentiment or general thinking affects things like the work of the central bank or the structural budge deficit, the PE ratio or more.

Budget iPhone: ugly on purpose | BGR

Analysis by BGR suggests that the Budget iPhone is ugly on purpose

"Pictures of candy-colored entry-level iPhones with rounded corners have started circulating. Many have branded them hideous, crude atrocities. They need to be. Apple is facing a unique dilemma: Because of the stellar success of the iOS app universe, the entry-level iPhone has to have nearly the same specs as the flagship iPhone. The display has to be large. The processing power has to be substantial. Apple cannot afford to fragment the iPhone device base, particularly since it has spent years mocking Android vendors mercilessly for doing just that. Still, the budget iPhones have to be something that affluent and aspirational consumers despise."

Is this price discrimination?  Some textbooks provide the example of French third class train carriages that, they say, used to have the roof taken off to make sure that they were inferior to the second class.

Global factors in capital flows and credit growth | vox

Consistent with the idea that loose monetary policy can be translated across borders and that the Japanese half-hearted attempt at quantitative easing was at least partially responsible for the global financial crisis by spreading Japanese money across the globe (through the carry trade).

"In a recent paper (Bruno and Shin 2012a) we examine the theoretical and empirical basis for global liquidity. Schematically, global liquidity propagates as shown in Figure 1. When global banks apply more lenient conditions on local banks in supplying wholesale funding, the local banks transmit the more lenient conditions to their borrowers through greater availability of local credit. In this way, global liquidity is transmitted through the interactions of global and local banks through the waxing and waning of bank risk-taking."

Valenina Bruno and Hyun Song Shin take a look in Global factors in capital flows and credit growth | vox.  Is there a link between the global carry trade and the transmission of liquidity.  Can the waxing and waning  of the carry identify increased global financial risk?

Unreliable friends and survival time

Mat Asher and the Unreliable Friend takes a look at survival functions.

"You can think of these curves as the chance that your friend will show up in the coming minutes, given how long you’ve already been waiting. At the very beginning of your wait, modeled by the orange curve at the far left, you can be almost certain that your friend will show up in the next 10 minutes. But by the time you’ve been waiting for 500 minutes, as seen in the blue curve at the far right, you are only 50% sure that she will show up in the next 500 minutes. Are those probabilities exact? It seems like it, but let’s zoom in on the first 25 minutes:"

My interest is whether this can be used to model time until financial crisis.  There would have to be two dimensions to the wait:  as the time expands, the intensity of the crash that ensues will be greater; as the time expands, the memory of the previous crash gets less well defined. The model has to be built up in this way with some sort of random exponential crash.  There are lots of small crashes and some major explosions.

Use of odds ratio with event studies

Jenny Hope talks about the use and mis-use of odds-ratio in medical science.  How can 2% become 20%? | Understanding Uncertainty:

"An odds ratio is a standard measure that statisticians and epidemiologists (yes, them again) use to measure an association between an exposure (here statins) and an event (muscle problems). It is defined as the odds of the event given the exposure, divided by the odds without the exposure."

Why not use this quantitative measure of the effect of an event as an addition to an event study.  The Event Study provides the picture of the effect of the event but the odds ratio should compare aftermath with and without the event.

Inequality

Chris Dillow has identified some data that shows the evolution of inequality across the income spectrum.  It comes from the ONS and  shows that there is a substantial increase in inequality between 1977 and 1993.  After that clear peak, it becomes a little more messy.  For the top decile relative to the lowest, the original income ratio fell to 25.69 from 30.53 between 2010-11 and 1993.  However, disposable income (after tax and benefit adjustments) rose to 9.95 from 9.23.  For the 6th decile (the middle) the same figures were 10.77 and 7.96 for original income and 3.25 and 3.86 for disposable income.

Cross Discipline

"The Great Inflation of the 2010s: Hoisted from Niall Ferguson's Archives from Two Years Ago" 

Link

A reminder of the limits of disciplines. There are probably numerous inflationary cases that appeared through history.  What of the cases where budget deficits increased but there was no inflation?  It is clear that economists ignored economic history but this appears to be a case of a historian without economic knowledge.

John Maynard Keynes, The end of laissez-faire (1926)

Worthwhile for having the whole paper.

John Maynard Keynes, The end of laissez-faire (1926): "The maxim laissez-nous faire is traditionally attributed to the merchant Legendre addressing Colbert some time towards the end of the seventeenth century.

('Que faut-il faire pour vous aider?' asked Colbert. 'Nous laisser faire' answered Legendre)."

Productivity and potential market

Dan Liu and Christopher Meissner Market Potential and the Rise of US Productivity Leadership:

 "The US advantage in per capita output, apparent from the late 19th century, is frequently attributed to its relatively large domestic market. We construct market potential measures for the US and 26 other countries between 1880 and 1913 based on a general equilibrium model of production and trade. When compared to other leading economies in 1900, the year around which the US overtakes Britain in productivity leadership, the US does not have the overwhelming lead in market potential that it has in GDP per capita. Still, market potential is positively related to the cross-country distribution of income per capita, but the impact of market potential is likely to be very heterogeneous. We illustrate this in a quantitative calculation of the welfare gains from removing international borders in 1900 within a parsimonious general equilibrium trade model. While there are gains from trade for all nations, the largest European countries do not close their per capita income gaps with the US after this hypothetical rise in market potential. On the other hand, many small countries could have done so."

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Fake it!

Amy Cuddy: Your body language shapes who you are 

TED : http://on.ted.com/q1MN

Peak Oil

Brad DeLong : Liveblogging World War II: February 3, 1943:

A caveat to the predictions of economic collapse as a consequence of 'peak oil'.

"It needs to be said, of course, that the dire predictions of Hitler and his economic advisers in 1941 and 1942 about the certain collapse of the German war machine if no new sources of oil were obtained proved to be exaggerated. The German war effort did not grind to a halt when the campaign to capture the Caucasus oilfields failed. Although Germany's oil situation remained acute, and became desperate after the Allied air offensive against its synthetic fuel plants and the Rumanian oilfields began, the Reich continued fighting until May 1945."

There are alternatives.  They may not be sustainable themselves, but..
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The Allais Paradox

The Allais Paradox | Wired Science | Wired.com:

There is some explanation of the Allais Paradox here in Wired.com.  The is a tendency to value certainty but once this is gone, there is a tendency to take risk. For speculation, this means that the positive skew to returns are very attractive but the negative skew does not have very much influence.

"But why was certainty so attractive? Kahneman and Tversky wanted to understand the psychology behind the paradox. Their breakthrough came by accident. Kahneman had been reading a textbook on economic utility functions, and was puzzled by the way economists explained a particular aspect of our behavior. When evaluating a gamble—like betting on a hand of poker, or investing in a specific stock—economists assumed that we made the decision by taking into account our wealth as a whole. (Being rational requires factoring in all the relevant information.) But Kahneman realized that this isn’t how we think. Gamblers in Las Vegas don’t sit around the card table contemplating their complete financial portfolio. Instead, they make quick decisions that depend entirely upon the immediate terms of the gamble. If there is a $100 wager, and you’re trying to decide whether or not to ante in with a pair of aces, you probably aren’t thinking about the recent performance of your mutual fund, or the value of your home."

This may mean that fat tails are attractive as the possibility of large gains draws attention while the possibility of large losses is given less weight than it should.  There is loss aversion.  If there are large potential losses, losses should be cut swiftly, but there is a tendency to hand on a hope - with potentially catastrophic results.

A guide to bootstrapping

Bootstrapping and Subsampling: Part I « Normal Deviate:

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Compartments and belief

The Mind’s Compartments Create Conflicting Beliefs: Scientific American: An overview of the idea that the mind contains compartments that may contain conflicting ideas.  The key thought that when there is conflict, there is more agitation and people are more likely to shout or try to assert their belief.

"Cognitive dissonance may also be at work in the compartmentalization of beliefs. In the 2010 article “When in Doubt, Shout!” in Psychological Science, Northwestern University researchers David Gal and Derek Rucker found that when subjects' closely held beliefs were shaken, they “engaged in more advocacy of their beliefs ... than did people whose confidence was not undermined.” Further, they concluded that enthusiastic evangelists of a belief may in fact be “boiling over with doubt,” and thus their persistent proselytizing may be a signal that the belief warrants skepticism."

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Rajiv Sethi: Risk and Reward in High Frequency Trading

Rajiv Sethi: Risk and Reward in High Frequency Trading: "These are interesting findings, but there is a serious problem with this interpretation of risk-adjusted performance. The authors are observing only a partial portfolio for each firm, and cannot therefore determine the firm's overall risk exposure. It is extremely likely that these firms are trading simultaneously in many markets, in which case their exposure to risk in one market may be amplified or offset by their exposures elsewhere. The Sharpe ratio is meaningful only when applied to a firm's entire portfolio, not to any of its individual components. For instance, it is possible to construct a low risk portfolio with a high Sharpe ratio that is composed of several high risk components, each of which has a low Sharpe ratio."

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Knight, Risk, Uncertainty, and Profit, Part III, Chapter X | Library of Economics and Liberty

Knight, Risk, Uncertainty, and Profit, Part III, Chapter X   Profit is the return for having belief in the ability to forecast the future.  Of course this is self-fulfilling if luck ensures success and increased profits increase confidence.

 "The receipt of profit in a particular case may be argued to be the result of superior judgment. But it is judgment of judgment, especially one's own judgment, and in an individual case there is no way of telling good judgment from good luck, and a succession of cases sufficient to evaluate the judgment or determine its probable value transforms the profit into a wage."

However, the build up of confidence, profits and positions that are based on luck rather than ability to forececast the future could increase risk, particularly if risk is identified as a risk of reversal or crash.