Friday, August 10, 2012

Sun comes out for the London Olympics

The Olympics have actually been going very well for the Brits, particularly the medal count. There have been no major disasters or logistical foul-ups. So the national mood has turned from pessimism to elation. It's like emotional whiplash, says Roger Cohen in the NYT.

But maybe, he says, it is because such collective coming together is sadly rare.

In truth the lesson of Britain’s bout of bipolarity is that we are lonely. That is the problem with modernity. When we come together, rediscover community, the feeling is as good as an adrenalin rush.

We just detested the mawkish, awkward and self-indulgent opening ceremony. Indeed, ironically the Brits may be feeling better precisely because of some unfashionable patriotic victories and feeling proud of themselves rather than the establishment leftist agitprop of the opening ceremony, all the children in sick beds and Mr Bean and milling ravers.

You have to be glad for the Brits getting some gleams of sunshine. We're still deeply frustrated by NBC's awful tv coverage, but dazzled by some Team USA achievements


Put a Red Label on it

Researchers in Massachusetts are experimenting with labelling food in the aisle with red, yellow and green codes for healthiness. They found people did consume a bit less of the red category, like sodas.

It comes down to a debate over how much you can "nudge" people to make the right choices.

New York's faith in humanity must be low indeed if it thinks only the most blatant coercion can get people behaving differently. Whether collectively or alone, people are hopelessly incompetent, is the message Bloomberg's soda ban sends. A more accurate way to put it might be that people are incredibly malleable, open to having their decisions swayed in terrible ways by factors that are out of their hands. The difference is slight, but in the small gap between those two statements lies an opportunity to move people in the right direction without taking away their freedom. Just because we often fail at making good decisions doesn't mean we can't.

We talked about the NY soda ban here. In general, I'm in favor of nudging. The issue of paternalism is complicated. On the one hand, expert wisdom is often wrong or even foolish. In practice, the state has historically been more inclined to want people to do things like melt their cookware to produce shoddy steel in their backyards (Mao) or have all children in the country learning about "nos ancetres les Gallois" (France).

But on the other hand, people can be self-destructive, short-sighted and impose serious costs on others. All that obesity results in staggering medical costs too. The core liberal idea of autonomy often does not work very well in practice. The Aristotelian view is more realistic about weakness. We have to be habituated to virtue, he said, learning by doing.

And is one example of where we need a golden mean between forcing people to act in certain ways and being completely indifferent to how people behave.


Wednesday, August 8, 2012

Faster than Common Sense

Here's a very good article from Wired on high-frequency trading.

Trading increasingly is an end in itself, operating at a remove from the goods-and-services-producing part of the economy and taking a growing share of GDP—twice what it did a century ago, when Wall Street was financing the enormous industrial expansion of the economy. “This is counterintuitive, to say the least,” wrote New York University economist Thomas Philippon in an article for the Russell Sage Foundation. “How is it possible for today’s finance industry not to be significantly more efficient than the finance industry of John Pierpont Morgan?”

I just don't believe that more than a few algos can really make consistent money out of exploiting market mispricing and anomalies. It's more flaws in the structure of the market itself. This is all making the case for a Tobin Tax look stronger.

Tuesday, August 7, 2012

The Cult of Equity?

Bill Gross, not coincidentally the world's largest bond manager, at the worst time in the cycle to hold bonds, thinks future equity returns will be terrible (although long-term bonds will also be terrible.)

Together then, a presumed 2% return for bonds and an historically low percentage nominal return for stocks – call it 4%, when combined in a diversified portfolio produce a nominal return of 3% and an expected inflation adjusted return near zero. The Siegel constant of 6.6% real appreciation, therefore, is an historical freak, a mutation likely never to be seen again as far as we mortals are concerned. The simple point though whether approached in real or nominal space is that U.S. and global economies will undergo substantial change if they mistakenly expect asset price appreciation to do the heavy lifting over the next few decades. Private pension funds, government budgets and household savings balances have in many cases been predicated and justified on the basis of 7–8% minimum asset appreciation annually. One of the country’s largest state pension funds for instance recently assumed that its diversified portfolio would appreciate at a real rate of 4.75%. Assuming a goodly portion of that is in bonds yielding at 1–2% real, then stocks must do some very heavy lifting at 7–8% after adjusting for inflation. That is unlikely. If/when that does not happen, then the economy’s wheels start spinning like a two-wheel-drive sedan on a sandy beach. Instead of thrusting forward, spending patterns flatline or reverse; instead of thriving, a growing number of households and corporations experience a haircut of wealth and/or default; instead of returning to old norms, economies begin to resemble the lost decades of Japan

I don't quite get his argument. The long run return from stocks is a combination of profit income - the share of corporate profits in the economy, including dividends - plus capital appreciation. It is not just the economy's growth rate in isolation.

In any case, pronouncements of the death of equities usually tend to be a buy signal for stocks. In the longer run, I think we could see more legal and institutional change in the nature of the economy that affects stocks, but that is likely decades off.