The demise of the bond market

The most obvious examples are governments. Greece, which returned to markets by issuing €3bn in five-year bonds in April, could have raised much more but its aim was to create benchmarks and rebuild its yield curve – the availability of a range of bonds with different maturities. 

Like Ferrari, Greece’s debt agency knows its interests lie in helping the resale market; the country’s future financing needs are considerable, to say the least. Companies looking to raise debt over a number of years think similarly.

http://www.ft.com/cms/s/0/fb3b651e-e6fb-11e3-aa93-00144feabdc0.html?ftcamp=published_links/rss/markets/feed//product&siteedition=uk#axzz3378rNeUm

Machines vs Routine Tasks

Brad DeLong reviews Summers on Piketty and returns to his theme.



"Think of it this way: Humans used to have five ways of creating economic value: through backs, through fingers, through routine control, through smiles, and through creative insight:

1. Strong backs (usually those bathed in the steroid testosterone) could do the heavy lifting. 
2. Nimble fingers could do the fine manipulating. 
3. Cybernetic control loops could keep the lifting and manipulating on their proper tracks. 
4. Smiles--in fact, an entire universe of human social interactions--could keep us as a group all pulling in roughly the same direction, playing positive-sum rather than negative-sum economic games, and could also provide the personal services from which we derive so much of our human well-being. 
   
5. Genuine creative insight could think up new ways of doing things and new things to do that would be useful: luxurious or convenient, and over the course of time could transform conveniences into necessities, luxuries into conveniences, and invent yet new dimensions of luxury."

His thesis that backs, fingers and brains are increasingly substitutes rather than compliments for machines.  In some ways this is an evolution of routine tasks.  As machines become more sophisticated, what is defined as routine becomes increasingly broad. 

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Keynes, possibility for our grandchildren

Elizabeth Kolbert: Discusses Economic possibilities in The New Yorker there is a nice overview of some of the reasons why the leisure has not arrived.  

"Joseph Stiglitz, of Columbia University, by contrast, takes a constructivist approach. People’s choices, he argues, are molded by society and, over time, become self-reinforcing. We “learn how to consume by consuming,” he writes, and how to “enjoy leisure by enjoying leisure.”"

Noahpinion: Entrepreneurship and the pricing of uncertainty

Noahpinion: Entrepreneurship and the pricing of uncertainty:

"Uncertainty", also called "Knightian uncertainty", is like risk, but not quite the same. Risk is when you can calculate the probability of gains and losses, like when you play roulette or blackjack. Uncertainty is when you don't know the odds. Frank Knight observed that entrepreneurship involves a lot more uncertainty than risk. When you start a new business, you don't really know how to calculate the odds that your idea will succeed - whether personal computer users will embrace a graphical user interface, whether people will want to post their pictures on a social network, etc."

This is similar to a theme of my research that says that speculation is in part an attempt to deal with uncertainty. Knight argues that entrepreneurship is not about risk (as this can be quantified and insured or hedged away).  As such, the wealth of the technology entrepreneurs is a return for taking a gamble when the odds are completely unknown. As Noah Smith says, people do not like uncertainty.  They at least want to know the odds.



Smith argues that the return to uncertainty is overpriced.  He cites the discussion by Felix Salmon and Gideon Lewis-Klaus' book No Exit.  However, can this be the way to look at it?  The risk or odds are unknown. If you want to think of it this way, there should be a balance of supply and demand and, with supply of potential entrepreneurs increasing, the price should fall.  This is not the return that comes from success but the probability of being successful.  The same amount of success could be spread over more entrepreneurs but it is not clear that the amount of success is fixed.  In other places it is argued that the more the supply of entrepreneurs, the more the chances of new and successful ideas.

A natural experiement

This gives a very good overview of a natural experiment.

British and French educational legacies in Africa | vox: "While the choice of colony was not random, the exact location of the border – up to some distance – was. In the partitioning process colonisers drew borders without accurate knowledge of the terrain, disregarding local circumstances and cutting through homogeneous geographic, cultural and ethnic entities. Thus, the drawing of borders provides a situation of a quasi-ideal natural experiment, where, by historical accident, individuals with otherwise identical background found themselves randomly divided into two groups: one subjected to French policies and another ruled by Britain."

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Wipe out rentiers with cheap money - FT.com

Martin Woof says Wipe out rentiers with cheap money - FT.com:  Is this a counter to the Piketty thesis?  May it suggest some way that r will be lower than g?

"This policy, however unpopular with some, is better than the available alternatives. Keynes even had a phrase for it – the “euthanasia of the rentier”. In a world of abundant savings, the available returns ought to be low; this is a consequence of market forces to which central banks are responding."

It would be consistent with a story that said with large blocks of inherited wealth seeking investment returns, the returns may fall; it would not counter the accusation that larger blocks of wealth have attractive investment opportunities that are not open to most.

Hedge funds, fortunes and merit | FT Alphaville

Hedge funds, fortunes and merit | FT Alphaville: "Small and young hedge funds are nimble, their managers are focused, and they can concentrate their capital in a small number of good ideas without moving prices or attracting attention. One study by Barclays found that funds under two year’s old, and managing less than $100m typically make better investment returns than their larger older peers."



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What Timothy Geithner Really Thinks

Geithner explains how the "bail out" has made money.

"He paused and looked out at a crowd that, it’s safe to say, probably did not fully appreciate how intense the anger around the financial bailouts had been and how close the country was to the precipice of a full-on depression. “We are going to earn, all in, a couple hundred billion dollars,” Geithner said. And six years after the bailouts, the too-big-to-fail banks and the insurance giant A.I.G. have since repaid the money they took from the government. Even the rescues of Fannie Mae and Freddie Mac, the mortgage-lending companies that once had to borrow $187.5 billion, have turned profitable. “Much of the dominant view about the strategy,” Geithner said, “is the inverse of the truth."

The Fed is filling a market failure.  The myopia and high-level of risk aversion mean that the government is the only institution that can provide liquidity to the system in exchange for assets that have value but are not valued at present.  The demand for liquidity is so great that additional liquidity must be provided.

Nobel economist Gary Becker showed that Mike Milken was history’s greatest feminist - Quartz

Nobel economist Gary Becker showed that Mike Milken was history’s greatest feminist - Quartz: "Gary Becker, who passed away this week, was a man who changed the field of economics. Before Becker, economics was the study of buying and selling things. But Becker realized that economics was really about tradeoffs, and that there are a lot of tradeoffs in the world that don’t involve money—or don’t only involve money. (For example, instead of writing this article, right now, I could be learning hip-hop dancing or starting a biotech company.)"



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About that AstraZeneca bid defence … | FT Alphaville

FT Alphaville:  

"According to Eroom’s Law, the number of drugs you can get to market per $1bn of R&D spending halves about every nine years and has done since 1950. Spiralling R&D costs and a failure rate at Phase I trials of about 90 per cent mean the economics at the sharp end of that law don’t make much sense, even for the biotechs. Better to leave the really experimental stuff to university spinouts and single-punt MBOs. Then, if their success looks plausible, the bigger pharma companies can in-licence, partner and acquire outright to lever scale on their own specialisms in areas such as imaginative trial design and patent evergreening."

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Chromebooks: Not much room for competition

Chromebooks: Not much room for competition.  Its all about price.

"Major laptop makers are paying attention and are adding Chromebooks to their product lines. They require basically the same production methods as their Windows laptops, so it's a low-cost effort to build them. The Chromebook doesn't require big hardware, so the component inventory is not too heavy."

Product life cycle and perfect competition.

Win-Vector Blog » Learn Logistic Regression (and beyond)

Win-Vector Blog » Learn Logistic Regression (and beyond):

 " Logistic regression is often a winning method and we will use this article to discuss logistic regression a bit deeper. By the end of this writeup you should be able to use standard tools to perform a logistic regression and know some of the limitations you will want to work beyond."

Lovely overview

10 reasons to switch to ggplot | Mandy Mejia

10 reasons to switch to ggplot | Mandy Mejia: "Making plots is a necessary and useful task for anyone who works with data. While making the standard plots is a pretty straightforward task in most statistical programming languagues, including R, when it comes to using R‘s base graphics to make custom plots (the plots you actually want to make) things can get complicated. As with many of life’s problems, Hadley Wickham comes to the rescue."



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Why UPS Trucks Don't Turn Left

Why UPS Trucks Don't Turn Left: To reduce fuel use and accidents. Confirmed by Myth-busters.

"Mythbusters likely failed to save time on the route by following the rule even more stringently than UPS. While the no left turn rule has an appealingly simple and algorithmic quality to it, you will see UPS drivers take left turns on occasion, especially in residential neighborhoods without much incoming traffic. Asked how often UPS drivers turn right, a driver told ABC:"

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Smart beta

Is ‘smart beta’ the latest magic money tree? - FT.com: discusses passive investment with a "twist".

"The typical twist is to substitute the standard market capitalisation weighting of an equity index with an alternative weighting, such as dividends or earnings. This is claimed as a smarter approach as market cap indices will inevitably overweight expensive stocks and underweight cheap ones."

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Sampling bias and sampling error

Tim Harford FT.com: is a discussion of "Big Data" looks at sampling bias and sampling error.

"The Literary Digest, in its quest for a bigger data set, fumbled the question of a biased sample. It mailed out forms to people on a list it had compiled from automobile registrations and telephone directories – a sample that, at least in 1936, was disproportionately prosperous. To compound the problem, Landon supporters turned out to be more likely to mail back their answers. The combination of those two biases was enough to doom The Literary Digest’s poll. For each person George Gallup’s pollsters interviewed, The Literary Digest received 800 responses. All that gave them for their pains was a very precise estimate of the wrong answer."

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The cost of acquiring information

Streetwise Professor discussed Michael Lewis’s HFT Book: and highlight an application of the Grossman-Stiglitz idea that there will be an equilibrium where the cost of acquiring information will be equal to the benefit of obtaining that information.

 "Moreover, it’s not so clear that order flow information is “non-public”.  No, not everyone has it: HFT has to expend resources to get it, but anybody could in theory do that. Anybody can make the investment necessary to ping a dark pool. Anybody can pay to get a faster data feed that allows them to get information that everyone has access to more quickly. Anybody can pay to get quicker access to the data, either through co-location, or the purchase of a private data feed. There is no theft or misappropriation involved. If firms trade on the basis of such information that can be obtained for a price that not everyone is willing to pay, and that is deemed illegal, how would trading on the basis of what’s on a Bloomberg terminal be any different?"

IS-LM vs. Minsky | LARS P. SYLL

IS-LM vs. Minsky | LARS P. SYLL:  The limitations of mechanical IS-LM"

IS-LM is typically set in a current values numéraire framework that definitely downgrades the importance of expectations and uncertainty — and a fortiori gives too large a role for interests as ruling the roost when it comes to investments and liquidity preferences. In this regard it is actually as bad as all the modern microfounded Neo-Walrasian-New-Keynesian models where Keynesian genuine uncertainty and expectations aren’t really modelled. Especially the two-dimensionality of Keynesian uncertainty — both a question of probability and “confidence” — has been impossible to incorporate into this framework, which basically presupposes people following the dictates of expected utility theory (high probability may mean nothing if the agent has low “confidence” in it). Reducing uncertainty to risk — implicit in most analyses building on IS-LM models — is nothing but hand waving."

There is no uncertainty.

Shadow rate

Summarizing monetary policy | Econbrowser and the use of the shadow rate.

 "A recent paper by Dora Xia, a UCSD graduate student who expects to complete her Ph.D. this spring, and Cynthia Wu, a former UCSD student who is now an assistant professor at the University of Chicago, makes several contributions to this literature. First, most previous applications of the shadow rate model have involved arduous numerical simulations to calculate its full predictions. By contrast, Wu and Xia develop a very simple closed-form expression that gives a very good approximation to the predictions of the model for the yield of any maturity. Here is a graph showing the estimate of the shadow rate that comes out of their approach. Up until 2009, this basically coincides with the observed fed funds rate, but since then, the implied shadow rate has been quite negative."

This can be used to assess whether monetary policy is appropriate and can be utilised to make forecasts about interest rates.  This could be a supplement to the Taylor Rule.



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Surprise

Surprise and Digression | The Leisure of the Theory Class:  An interesting area.  What is a "surprise"?  When thinking about economic expectations, the surprise is something that is unusual, it is something that is not expected.  Does this mean that it is at the tail of the probability distribution?  Does it mean something outside of that distribution?  Is it possible to use insights from other fields to get of a handle on this and assist in the understanding of crash risk?

"They propose that surprise be measured by the Kullback-Liebler divergence between the prior and the posterior. As with many good ideas, Itti and Baldi are not the first to propose this. C. L. Martin and G. Meeden did so in 1984 in an unpublished paper entitled: `The distance between the prior and the posterior distributions as a measure of surprise.’ Itti and Baldi go further and provide experimental support that this notion of surprise comports with human notions of surprise. Recently, Ely, Frankel and Kamenica in Economics, have also considered the issue of surprise, focusing instead on how best to release information so as to maximize interest."