We don’t really do blogroll around here, but Abnormal Returns is a bit special, and is basically the portal by which one navigates the econo-blogosphere. The previously anonymous Tadas Viskanta has also linked here quite often, and is one of the main reasons Ultimi Barbarorum has risen to its current level of moderate obscurity from its previous deep obscurity. Thanks, Tadas!
So this is just to say, Baruch likes the new site very much and wishes AR the best of luck in its new venture.
Posted in Blogroll, Fellow Collegiant
Taleb spotting! Is late, obviously, Baruch is famously behind the curve on these meme things. HT alert Felix commenter Alan , (Felix is it OK to borrow one of your readers? I don’t know the bloggiquette, and reason if you haven’t put it up yet you won’t at all). An entertaining “fireside” chat between Taleb and that Robert Shiller bloke at the New Yorker gabfest early last month.
It’s entertaining to watch Taleb steal the show with his uncompromising animosity for economists, central bankers and regulators. It’s a reminder why we like him so much. Shiller ends up in the shade a bit; he is relatively more traditionalist, a bit of a trimmer. It is a shame, for if we are going to move to a more redundant, less optimised, global trading system, in a real, concrete way, we probably need more Shillers than we do Talebs. Reforming the system from within, it strikes me, is more likely to make progress than arguments of those determined to be, in bien pensant opinion, “flakes”.
I don’t think Taleb is a flake; he is right in his key point, that we are more and more susceptible to tail events. The next one will likely be much, much worse, as our defences will be lower, our treasure will be spent. Then we may finally have the political will to remove or limit leverage in our system, pace Taleb. The danger is of course that by then it may not matter so much.
As things start to return to “normal”, and equity and debt markets recover, the ability to do anything radical disappears. More importantly, the banks are returning to “profit” (note inverted commas) and the moment for breaking their stranglehold on the US Treasury and financial reform seems to be passing. That said, it may still be possible to do some of the things we need to do; I wouldn’t want the perfect to become the enemy of the good.
Another favourite moment: Taleb’s metaphor for monetary policy as ketchup, and the risk that expansionary policies suddenly gain traction at the wrong moment. Baruch is reminded of the childhood rhyme “when you shake the ketchup bottle, none’ll come; then the lot’ll”
As an extra bonus, here Baruch’s favourite economist joke:
A shipwreck victim washes up on an unknown South Seas island, one with a surprisingly developed economic system, if based on cannibalism. Wandering penniless through the local meat market, he notices the stall selling human brains in many appetizing forms has an interesting pricing scheme; the sign over 3 glistening, bloody buckets of brains reads:
Accountant brains: 15 cowrie shells/kilo
Lawyer brains: 25 shells/kilo
Economist brains: 50 shells/kilo.
“Hey,” says the traveller, “I guess those economist brains must be pretty special. What is it, do they like, taste better?”
“No way dude,” says the brains butcher. “You know how many economists you have to kill to get a kilo of brains?!”
Posted in Fellow Collegiant, Lens grinding
Baruch is getting schtick in the comments for a now mildly embarrassing post he wrote at the high tide of equities in 2007, criticising the Economist’s now not totally un-prescient looking Buttonwood column. Reader John goes so far as to suggest that Baruch now looks like a “jackass”. Reader Anish, finding it hard to avoid exclamation marks, says he hates “rubbing it in” and of course proceeds to do just that.
While there are some fist-bitingly cringeworthy bits, the substantive points Baruch was making at the time, viz perma bears are not normally useful, and that the Economist has an especially dreadful record in giving stockmarket advice, still hold water, I think. I wrote of the
tendency of commentators who are Obviously Clever to be negative about the stockmarket, and how in this they are generally completely wrong, at best, or at worst simply confusing. It’s not as if you can use them as contra-indicators because sometimes, just often enough to keep them in business, the stockmarket actually does go down
(emphasis added post hoc, or is it hic). I would say similar things about perma-bulls, like Larry Kudlow, as well. But readers like Anish and John, no doubt open, trusting, simplistic creatures seeking guidance, only see the track record of the last 18 months. They compare Baruch’s inability to forecast the last downturn to Buttonwood’s annoyingly accurate diagnoses of what was going to happen, and find him wanting. Buttonwood 1, Baruch 0, they think. Well, it’s not unfair. In Baruch’s defence he can only argue that he was a fast follower, and 2 months after bashing Buttonwood joined him in becoming all miserably bearish as well. At least in print.
However, recent Buttonwood columns have made at least two points that are wrongly used in support of a continued bear market. Firstly positive feedback loops in bull markets, Buttonwood claims, can go into reverse in bear markets and prolong them “with devastating effect”, just as they helped sustain the bull. One mechanism is rising tax rates, as government deficits grow. Another is company pension funds going into deficit, forcing companies to top them up, further draining cashflow. It’s not as simple as that actually, as the discount rates used to calculate pension obligations often fall with interest rates, but I will stop here as there is nothing more tedious than calculating pension obligations. We can go with Buttonwood on this one too.
The other mechanism that prolongs bear markets, according to Buttonwood, Citigroup and a study by something called Smithers & Co, is a change in the supply-demand for equity paper; bear markets see the end of many company buy back programmes, and the need to raise equity capital to refinance stressed balance sheets reduces the demand for equity while increasing its supply. Doom follows, naturally enough. There are 3 good reasons for thinking this is totally wrong: Continue reading
Posted in Fellow Collegiant, Lens grinding
Brilliant post by Baruch’s bloggy chum Cassandra last week about the current rally in shares, and not just because it gives me the opportunity to play this video, which I’ve been humming on and off for a while now:
No, the other reason to appreciate Cassandra’s experience is that it descibes so well the torture of the trapped bear, a torture all the worse for being administered to oneself by oneself in an open plan office in front of your colleagues (the only thing actual physical torture has to recommend it as an alternative is it tends to humiliate in private and doesn’t directly damage your finances. If you’re fortunate enough to be tortured by American subcontractors there’s the small chance you may be able to sue your torturer afterwards and possibly end up with more money than you started with, but that is definitely not the case if you’re waterboarding yourself ). Oh, there’s nothing worse in an investing context than being trapped on the wrong side; it is awful.
In the week since reading the post, three things have struck me :
So where does that leave us? Well, the last point seems to be the killer. Stay long, I guess? The only problem with that, of course, is that much of the improvement in fundamentals in Baruch’s technology names at least comes from what is being called “restocking”, the refill of inventory of finished goods in the retail channel and of components in manufacturers warehouses. On the other side of the “Restockers” stand those who I call the “Double Dippers”. They think this will all end in another overstocking of inventory, that just as we did at the end of september last year, at some point in Q2 or Q3 we will all have to cut our estimates again and that means stocks should start tanking, well about now. Which they sort of are.
We still don’t know much about end demand here; is it down 10%, or 30%? We’ll probably only find out after the summer. How much, and at what speed, will consumers delever themselves? How much of a difference will government demand make? To make it extra difficult we also have George Soros’ big idea of “Reflexivity” to deal with, the idea that an otherwise frivolous restocking cycle and associated stockmarket rally could start a virtuous feedback loop that ends in fundamental improvement in the real economy. Sure, it could just be an oversold rally, but fundamentals don’t just sit there, unchanging. Company earnings can get “oversold” too, or at least stretched to the downside and bounce back. Or they might not.
Basically, no-one knows, no matter how hard they pretend to. And if they did they certainly wouldn’t tell us. Posts like Cassandra’s are excellent aide memoires for mistakes others have made in the past, but in general you’re on your own, dear reader, as is Baruch. The only advice he can give you is. . . be the ball.
Posted in Fellow Collegiant, Lens grinding, Philosophising
One of the many psychological problems Baruch suffers from (in secret) is a desperate need for the respect of his peers. So when on his daily Abnormal Returns troll he saw a link to a Who’s Who of Financial Bloggers at Baruch’s now favourite blog, Reformed Broker, his heart began to beat faster. Then the memory of multiple disappointments and jealousies resurfaced (what’s that Felix Salmon got that Baruch hasn’t?) and a prophylactic, cold resignation set in. But on opening the link what should he see but his name! Right there! Hooray! Some people actually are reading this stuff! It’s not just bear lovers, looking for pictures of bears, being diverted here by accident!
You’re there too, Bento, but I don’t know why, you are the single most useless blogging partner the world has ever seen.
Question: why the “Library”? It’s lovely being next to Footnoted and Kedrosky, of course, but Baruch was in the Library Society at school, and had he had a second go around would prefer to be with the cool kids behind the bike sheds, hopefully snogging Equity Private. One feels a bit . . . nerdy in the library.
And Broker, dude, where’s Old TED? You could put him in the category of “Kids who are grumpy but fun to hang out with”.
Belatedly, Baruch would also like to say thank you to Condor Options, who said very nice things about us last year. Apologies for being behind the curve on this but another of Baruch’s pathologies is an inability to handle compliments properly.
Posted in Blogroll, Fellow Collegiant
Crooked Timber (no pun intended harhar) get stuck into Clive Crook as well on the subject of torture, but is I think slightly unfair to the argument he makes. I don’t think Crook is defending waterboarding, or saying it is unimportant. “Waterboarding is shameful,” Crook says, “and one may leave it at that”. We should take him at his word.
No, Crook’s key idea is similar to Tyler Cowen’s, that there are potential costs of investigating torture that we should be aware of, and such are the depths, presumably, to which the US body politic has sunk, actual prosecutions in the US may result in the de facto legalisation of future torture undoing the progress that has been made in ending it. Special allowances must be made. Baruch’s response is: don’t worry, we know. The costs to the republic of inaction are worse, the risk is worth taking. Let’s investigate, if need be prosecute, and do it with open eyes.
Henry at Crooked Timber suggests in the comments to his post that Crook will be responding to his critics on this. Let’s hope so. I am intrigued whether he would still maintain investigations are a bad idea, were it somehow proven that waterboarding is torture and illegal? His argument seems to depend on the waterboarding of prisoners not being a crime. I think this is somewhat shaky ground.
One person who does seem to understand what is at stake is Spinozist Spanish judge Baltasar Garzon, who is going ahead with his own investigation of US torture. As Augusto Pinochet can attest, this guy is no joker. I think we can anoint him a Fellow Collegiant, Bento, don’t you?
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Posted in Fellow Collegiant, Stupid Cartesians
Noam Scheiber has a problem with Simon Johnson’s excellent Atlantic article comparing the current US economic crisis with the stuff he came up against in emerging markets while at the IMF (Baruch would have linked to it when he read it but everyone else had done so already). Johnson’s point is that the US agencies setting economic and fiscal policy and “Wall Street”, the US financial elites, are at least intertwined, if not one and the same. Sustainable recovery and prosperity can only come with a fully functioning banking system, but neither the banks nor the government are willing to take the radical steps necessary to get there, involving as it will the end of the cosy cohabitation. It follows that a very good way of avoiding Japan-like stagnation would be a more forcible separation. Here Noam sees “leaps”. He writes
The logical chain is typically something like: 1.) I’ve seen corrupt elites prevent governments from resolving financial crises in emerging markets. 2.) The finanical crisis dogging the United States shares some features with emerging-market crises–for example, overleveraged institutions enjoyed an outsize share of corporate profits prior to imploding. 3.) Ergo, it must be the case that corrupt elites are preventing the U.S. government from resolving the crisis
This line of argument is specious, says Noam, because
Logically, it’s like saying: 1.) Cancer patients don’t get well when they’re treated by witch doctors. 2.) The top oncologist at Mass General has lost a few patients lately–some of them inexplicably, under mysterious circumstances. 3.) Ergo, the top oncologist at Mass General was practicing witchcraft. Maybe, but it would be much more persuasive if you could establish causality.
That’s a reductio ad absurdiam too far. WTF does he mean “establish causality”? This is the nexus between politics and money: shady backroom deals, campaign contributions in brown envelopes, veiled ultimata, unspoken shared tenets between colleagues. Every party to every transaction in this nexus has gone out of their way to make it as impossible as er, possible to “establish causality”. It’s simply how these things are done, and I would say holds true in every country. Noam is asking for an impossible standard of proof, a level of immaculateness we don’t need to attain in order to responsibly act either in investing, economics and politics.
Look, there’s such a thing as pattern recognition. My boss can do it: he’s been analysing stocks for years, and when he picks one, he always comes up with these totally bogus reasons for buying it. Yet his picks tend to work, and mostly not for the reasons he said they would. He doesn’t always know why he likes these companies, here and now, but something in his lizard brain, trained over years in associating I don’t know what, charts and fundamentals or something, and subsequent outcomes, sees the setup and tells him it’s going up. Steven Colbert is right, up to a point: it’s the gut. My colleague’s only problem is he thinks too much, but that’s an aside which has nothing to do with the issue at hand.
We have more than enough examples of economic crisis in recent history to have an adequate “pattern database” for associating certain setups and outcomes. In agency theory, we have a conceptual underpinning of how organisational groups or elites can influence economic outcomes. And people at the IMF like Simon Johnson have a practical understanding and experience of dealing with these issues at a nuts and bolts level. Noam Scheiber’s objections here seem based less on objective scepticism, more on hope and this terrible, deadly sense of hubris and exceptionalism that has proven America’s fatal flaw time and again this decade.
Posted in Fellow Collegiant, Stupid Cartesians
So Baruch had a go at reading the El-Erian book, When Markets Collide, by the fire in his Swiss ski chalet. He bought it because everyone seems to like it. It’s the FT’s 2008 business book of the year, on top of the Economist’s Most Interesting Reads list, etc.
Everyone who likes it is wrong. It is in fact unreadable; I only managed to get through about 100 pages and had to put it down. It is a bad book.
Let me preface everything that follows by saying unequivocally that Dr El Erian (if we are going to be formal about this), is a super brain. He gives good (if a bit stuffy) op ed in e.g. the FT. He is very good at describing how we got into our current mess, and I particularly appreciate his “heart attack” metaphor in terms what what has happened to the global economy. He even “drew inspiration” from Taleb, which makes him OK in my book. I hereby nominate him as a Fellow Collegiant of Ultimi Barbarorum, passed nem con. Continue reading
Posted in Fellow Collegiant
Taleb on the beeb. Worth a look, if only to get depressed. But with the Nasdaq up like 10% in 2 days on the news that the next administration will have a Treasury Secretary (yeah!) and possibly we could have a fiscal stimulus package, we can probably withstand a bit of pessimism (more on this later, I hope). He’s probably just getting carried away.
2 totally extranous observations: first, I love the sheepish raising of the hand by Harvard’s Ken Rogoff when Taleb lays into “tie wearing economists” at grand institutions. Second, what is that strange slapping noise Taleb seems to be making with his hands? You can tell he totally ignored any advice on how to look and act normal on TV, which strangely makes him more effective.
(HT – can’t quite remember, but thanks anyway)
Posted in Fellow Collegiant, Lens grinding
