Just a quick mention of the Mostly Economics Blog. Plenty of good stuff over there on current market and economic conditions..
http://mostlyeconomics.wordpress.com/
Thursday, May 29, 2008
Wednesday, May 28, 2008
Bernanke's Bubble Lab
Great article in the WSJ a few days back. This article talks about recent research (in particular by Harrison Hong of Princeton) that looks at why bubbles form.
To summarize...
1. Bubbles occur when investors disagree about the significance of some event. The internet being the obvious one. It's hard to bet on prices going down (limits to arbitrage etc), so the optimists dominate and prices shoot up.
2. Bubbles are then identified by intense trading.
3. Bubbles continue even when "smart" investors know that prices are too high - as individually they cannot attack the bubble. Only when they act simultaneously can their actions have an effect.
The conclusion is that it might be in the best interest of the Fed to contain bubbles rather than let them run their course.
Robert Shiller in his book "Irrational Exuberance" talks about bubbles also. He focuses on the feedback loop between the media and market participants. Bubbles make news and are great for exchanges (lots of trading) so plenty of people have an incentive to keep them going. Bubbles also falsely give the impression to investors that they have stock picking skill when in reality they are just riding the bubble with everyone else. The skill is not in buying the stock, but knowing when to sell.
On a related note - an interesting article on the freakononmics blog here talks about how we tend to think we are above average (drivers, stock pickers etc) which relates us back to a recent post on stock trading and speeding....
To summarize...
1. Bubbles occur when investors disagree about the significance of some event. The internet being the obvious one. It's hard to bet on prices going down (limits to arbitrage etc), so the optimists dominate and prices shoot up.
2. Bubbles are then identified by intense trading.
3. Bubbles continue even when "smart" investors know that prices are too high - as individually they cannot attack the bubble. Only when they act simultaneously can their actions have an effect.
The conclusion is that it might be in the best interest of the Fed to contain bubbles rather than let them run their course.
Robert Shiller in his book "Irrational Exuberance" talks about bubbles also. He focuses on the feedback loop between the media and market participants. Bubbles make news and are great for exchanges (lots of trading) so plenty of people have an incentive to keep them going. Bubbles also falsely give the impression to investors that they have stock picking skill when in reality they are just riding the bubble with everyone else. The skill is not in buying the stock, but knowing when to sell.
On a related note - an interesting article on the freakononmics blog here talks about how we tend to think we are above average (drivers, stock pickers etc) which relates us back to a recent post on stock trading and speeding....
Its summer...and oil prices keep on rising.
So it was pointed out to me that I haven't updated the blog of late. This is a major faux pas in blogging apparently. Actually, its summer. As they say in academia - the top 3 things about being a professor are June July and August. In my case, its just July and August as I am teaching a summer MBA course.
I read a piece recently about Exxon and it's strategy for managing it's franchises. Basically, Exxon HQ knows exactly what each one is charging and varies the wholesale cost to them based on what the local market can stand. From the point of the franchisee this isn't that great, as in times of high gas prices you are still only making pennies per gallon. The full article is here.... The basic tone of course is that big bad Exxon is sticking it to all of us. Well guess what... they are. Its called capitalism.
Exxon is acting entirely rationally in a shareholder wealth maximizing manner. We may not like it, but that's the way it is. Get over it, or don't buy Exxon gas - but buy Exxon stock.
But, since we are on the issue of so-called wind fall profits here are a few other firms/industries that need to be examined.
1. Apple computer - why can't I have an iphone for $99? You know they are making a boatload on those puppies. Loads of demand and carefully controlled supply helps maintain a high price and a nice margin. Hmmm, maybe congress should sue them to make more. (see here for a related article)
2. Farmers - food prices are up. Corn prices are at records because of global demand and ethanol production. Those guys are enjoying some great "windfall" profits.
I read a piece recently about Exxon and it's strategy for managing it's franchises. Basically, Exxon HQ knows exactly what each one is charging and varies the wholesale cost to them based on what the local market can stand. From the point of the franchisee this isn't that great, as in times of high gas prices you are still only making pennies per gallon. The full article is here.... The basic tone of course is that big bad Exxon is sticking it to all of us. Well guess what... they are. Its called capitalism.
Exxon is acting entirely rationally in a shareholder wealth maximizing manner. We may not like it, but that's the way it is. Get over it, or don't buy Exxon gas - but buy Exxon stock.
But, since we are on the issue of so-called wind fall profits here are a few other firms/industries that need to be examined.
1. Apple computer - why can't I have an iphone for $99? You know they are making a boatload on those puppies. Loads of demand and carefully controlled supply helps maintain a high price and a nice margin. Hmmm, maybe congress should sue them to make more. (see here for a related article)
2. Farmers - food prices are up. Corn prices are at records because of global demand and ethanol production. Those guys are enjoying some great "windfall" profits.
Wednesday, May 14, 2008
Slightly off topic ... wine and music
As an academic, I spend a good deal of my time doing research. Usually on very exciting topics related to finance. But when I read articles like this I wonder whether I am in the wrong field.
Apparently some researchers in Scotland have found that different types of wine taste better when different music is played. It appears to be a very scientific study, a key finding was that:
I'm planning to do a follow on piece on beer and rock music. I'll post the results when I have completed the tests.
Apparently some researchers in Scotland have found that different types of wine taste better when different music is played. It appears to be a very scientific study, a key finding was that:
The researchers said cabernet sauvignon was most affected by "powerful and heavy" music, and chardonnay by "zingy and refreshing" sounds.
I'm planning to do a follow on piece on beer and rock music. I'll post the results when I have completed the tests.
Wednesday, May 7, 2008
Word problems for Hedge Fund Managers
This is fun. Word problems for hedge fund managers - see how many you get right.
http://www.mcsweeneys.net/2008/5/7woodiwiss.html
Hat tip: My colleague Don.
http://www.mcsweeneys.net/2008/5/7woodiwiss.html
Hat tip: My colleague Don.
Thursday, May 1, 2008
Triple A Failure
Newmark's door has a great link to a piece by Roger Lowenstein on the role of bond rating agencies in the credit crisis.
It really is a must read article. In it, the finger is pointed at the bond raters - Moodys, S&P and Fitch for being too close to the banks issuing the mortgage backed debt.
Although this is a bigger question, I do sometimes wonder exactly what value bond rating agencies provide. Their business model seems to be not entirely dissimilar from that of running a protection racket. Consider the evidence:
1. You have to pay for the service. If you don't pay, you may not get as good a rating.
2. They will help you structure the product to get a better rating, but you may have to pay more.
3. The amount you can sell the bond for depends on the rating.
4. Bond rating changes usually lag changes in credit quality and thus have little predictive power.
It really is a must read article. In it, the finger is pointed at the bond raters - Moodys, S&P and Fitch for being too close to the banks issuing the mortgage backed debt.
Although this is a bigger question, I do sometimes wonder exactly what value bond rating agencies provide. Their business model seems to be not entirely dissimilar from that of running a protection racket. Consider the evidence:
1. You have to pay for the service. If you don't pay, you may not get as good a rating.
2. They will help you structure the product to get a better rating, but you may have to pay more.
3. The amount you can sell the bond for depends on the rating.
4. Bond rating changes usually lag changes in credit quality and thus have little predictive power.
Diane Rehm show on gas prices
I was riding in my car today and I was listening to Diane Rehm on NPR. Her show was about gas tax holidays as are being proposed by McCain and Clinton.
You can hear it here.
There was a fair amount of discussion from the panel about how a gas tax holiday was a bad idea - it encourages consumption, it reduces tax revenue for road building (and thus has an offsetting fiscal effect) etc.
Then Diane asked about the windfall tax that has been proposed. At this point Mark Cooper (director of research for the Consumer Federation of America) said something truly amazing. To paraphrase: he said that the oil companies don't really do anything with the excess profits - they just buy back stock or pay dividends. Then he said, and I quote "If you look at it from an economic point of view, taxing it away is not inefficient because they are not doing anything efficient with it"
What???? So the government should be able to step in and tax excess profits? This has to be one of the daftest things I have heard in a while. Those profits which are paid out as dividends are being used efficiently. Firms that do not have good investment projects are to be commended for paying out surplus cash to shareholders. Shareholders can then invest in other firms which need cash and have more productive growth opportunities.
It is one thing to make a policy decision to legislate a wealth transfer from one sector of the economy to another, but it makes no sense to argue that the government should tax more because it can put the money to a more efficient use.
You can hear it here.
There was a fair amount of discussion from the panel about how a gas tax holiday was a bad idea - it encourages consumption, it reduces tax revenue for road building (and thus has an offsetting fiscal effect) etc.
Then Diane asked about the windfall tax that has been proposed. At this point Mark Cooper (director of research for the Consumer Federation of America) said something truly amazing. To paraphrase: he said that the oil companies don't really do anything with the excess profits - they just buy back stock or pay dividends. Then he said, and I quote "If you look at it from an economic point of view, taxing it away is not inefficient because they are not doing anything efficient with it"
What???? So the government should be able to step in and tax excess profits? This has to be one of the daftest things I have heard in a while. Those profits which are paid out as dividends are being used efficiently. Firms that do not have good investment projects are to be commended for paying out surplus cash to shareholders. Shareholders can then invest in other firms which need cash and have more productive growth opportunities.
It is one thing to make a policy decision to legislate a wealth transfer from one sector of the economy to another, but it makes no sense to argue that the government should tax more because it can put the money to a more efficient use.
Financial Rounds
Just a quick "Hi" to the readers of the excellent blog financialrounds.blogspot.com. Unknown prof said some nice things about me and my blog here
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