God is a Capitalist

Wednesday, December 18, 2013

The Fed's Zombie Apocalypse


Economists are trying to figure out why the Fed hasn't generated higher inflation. According to Gavin Davies, "In most countries, headline CPI inflation has been falling significantly since the end of 2011, and it has now dropped to less than 1 per cent in both the US and the euro area." Here's a graph of inflation in the US and UK from Davis:


Wednesday, December 11, 2013

Buffet the Great



Authors of a new paper, "Buffett’s Alpha", Andrea Frazzini and David Kabiller at AQR Capital Management crown Warren Buffett one of the best investors ever. I welcome this after decades of having to endure the worship of Keynes as the greatest investor. Keynes achieved his reputation, after years of failure, by investing in gold mining stocks during the time in which he used his political influence and notoriety to convince the US and UK to abandon the gold standard. Keynes succeeding through insider trading. Buffett did it the old fashioned way.

Here are excerpts from the paper:
We show that Buffett’s performance can be largely explained by exposures to value, low-risk, and quality factors. This finding is consistent with the idea that investors from Graham-and-Doddsville follow similar strategies to achieve similar results and inconsistent with stocks being chosen based on coin flips. Hence, Buffett’s success appears not to be luck...

Looking at all U.S. stocks from 1926 to 2011 that have been traded for more than 30 years, we find that Berkshire Hathaway has the highest Sharpe ratio among all. Similarly, Buffett has a higher Sharpe ratio than all U.S. mutual funds that have been around for more than 30 years...
We identify several general features of his portfolio: He buys stocks that are “safe” (with low beta and low volatility), “cheap” (i.e., value stocks with low price-to-book ratios), and high-quality (meaning stocks that profitable, stable, growing, and with high payout ratios).

Saturday, December 7, 2013

What we have here is a failure to coordinate



                The great Austrian economist Ludwig Lachmann described the way the stock market works better than any economist I have read. He taught that expectations play a vital role in coordinating the decisions of entrepreneurs in the market process. Spot prices communicate important information, but only information about the past. For the economy to function well, that is, stay out of recessions, markets must coordinate the expectations of buyers and sellers, producers and consumers. Recessions are nothing but a failure to coordinate. Markets communicate expectations through the futures markets, including options and other derivatives, but primarily through the stock market.
                Following are excerpts from Lachmann’s books on the vital nature of the stock market to a well-functioning market economy. Lachmann shows that the market is neither mechanical, as the EMH suggests, nor irrational as behavioral finance insists. 

Tuesday, November 19, 2013

Investors are mentally ill – Nobel Laureate

Nobel Laureate in economics Robert Shiller spoke at the AAII investor conference this month where he quoted Keynes on investing: "Most probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits—of a spontaneous urge to action rather than inaction."

Keynes thought investors were driven by animal spirits. Shiller has even a lower opinion of investors. He said at the World Economic Forum held in Davos, Switzerland in 2010 that hecould identify bubbles using the same methods that psychologists use to diagnose mental illness in patients. His key points were these:

1. Sharp increase in the price of an asset.
2. Great public excitement about these price increases.
3. An accompanying media frenzy.
4. Stories of people earning a lot of money, causing envy among people who aren’t.
5. Growing interest in the asset class among the general public.
6. New era “theories” to justify unprecedented price increases.
7. A decline in lending standards.

Saturday, November 16, 2013

Fight the Fed or profit from its profligacy?

The Federal Reserve is a century old this year, but instead of cheering, good economists are lauding the apology in the Wall Street Journal by a Fed insider, Andrew Huszar, a senior fellow at Rutgers Business School and a former Morgan Stanley managing director. In 2009-10, Huszar managed the Fed’s $1.25 trillion agency mortgage-backed security purchase program.

It’s important to call the Fed out on bad monetary policy, but the few who do will not change the Fed because it has the support of mainstream economics. The Fed is only doing what mainstream econ teaches it should do, so until mainstream economics changes nothing will change at the Fed. Changing mainstream economics will be difficult to do because the professors have a lot invested in their paradigm. Cracks in the paradigm will not change their minds. Nothing short of a nuclear explosion will work.

Friday, November 1, 2013

A Monkey with two bananas - Why the Obamacare web site cratered

The Obamacare web site fiasco has proven to be a gold mine for the late night comedians. The failure has been so massive that even the left listing mainstream media has to acknowledge it. No one should be surprised that socialists can’t manage projects well because they have a notorious contempt for the profession of management. 

I have heard managers tell good employees that they could give a monkey two bananas and the monkey could do the employee’s job. That’s a lousy manager. One of the manager’s most important jobs is to motivate employees and the monkey with two bananas story only demoralizes them. 

The left think the same thing of managers and the profession of management, so they never bother to study it or imitate good managers. Recall President Obama’s contempt for management during the financial crisis and ridicule of them for using corporate jets. Obama would never consider taking a trip of any distance in any vehicle other than Air Force One because his time is so valuable. But he considers the CEO’s time to be worth so little that he can ridicule them for doing the same thing he does.