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Showing posts from December, 2009

Out With The Old Year, and In WIth The New

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Well, it's the last finally the day of the year. So, here's wishing you all a safe, happy, and prosperous New Year.

It's been a pretty eventful one in the Unknown Household - we had one son pass away from cancer, and had another one join the family. So, I can pretty much guarantee that 2010 will be less eventful for us than 2009 (at least I hope so).

We finished out the old year yesterday by taking the Unknown Daughter up to Boston to see the Science Museum's Harry Potter Exhibit. Total Cost:
Three Tickets - $93Parking - $9Various Junk from the Museum Store - $35Overcooked and dried food from the Museum Food Court - $20Hearing the Unknown Daughter say (wide-eyed) "This is Fantastic" - Priceless
Luckily, our two nieces were home from college., They drove down the night before to baby-sit Wonder Boy for the day, so we got to go without munchkin in tow. But Boston traffic still sucked - it took us 45 minuted to go about 3 miles on Rte 93 (and this was not eve…

As The Semester Winds Down

Since Unknown University starts (and ends) their fall semester a bit late, I'm just putting the finishing touches on my grades - two classes down and one (the smallest, luckily) to go.

It's been a tough semester - three preps (for the non academics among you, a prep is a unique class - so three preps means I taught three different classes), and one was a brand new one (Fixed Income) for me. I took it because the senior faculty who regularly teaches it took a sabbatical, and it's required of all our students. The new prep took far more time than I'd thought, so I didn't get as much research done as I'd hoped.

The winter break will be dedicated first to getting two papers completed and submitted to journals. I let things slide a bit these last few years due to the Unknown Son's illness, so I'm glad to be finally working on things that have the potential to go to decent journals - these two will likely be sent to Financial Management and Journal of Ban…

Lots of This White Stuff

I love living in the NorthEast - it's where I grew up, and there's just something about real winter that feels right. But I can do without 3-foot snowdifts in my driveway. Luckily I have neighbors with plows and snowblowers.

The Unknown Daughter was at a friend's house for a birthday party/sleepover. No school for her tomorrow, so we get to see if we can get the neighborhoods to build a huge snowman.

Good stuff.

Do Deficits Matter?

In a previous post I described the theoretical implausibility as well as the empirical rarity of governments inflating away their debt. I concluded that a deficit-driven buyer’s strike was unlikely, by itself, to pop the bond bubble.

Does this mean that “deficits don’t matter”? Oh no, quite the contrary. Deficits do matter, but it’s important to understand the mechanism. Deficits don’t operate via a buyer’s strike unless you go into hyperinflation. Instead the channel is monetary policy.

The Treasury issues bonds. The Fed buys them. As far as I’m concerned, that’s just an internal transfer. The external effect is not bond supply; the bonds never hit the street. Instead, the external effect is government expenditure. Essentially the Treasury is spending dollars that have been newly printed by the Fed.

In the short run this policy will boost private sector consumption and employment, as indeed it is designed to do. But in the long run it will lead to inflation; seigniorage alw…

Information Traders Must Be Compensated

I'm still in the thick of exams week (one to give today, one Friday, and one Saturday), and they're not all written yet. But this piece from Burton Malkiel in FT.com was worth highlighting. The best part was the last paragraph:
As de facto market makers, high-frequency traders can exploit pricing anomalies and pick up pennies at the expense of other traders. Such activities are not sinister. The paradox of the efficient market hypothesis is that the people whose trades help make the market efficient must be compensated for their efforts. As former SEC Chairman Arthur Levitt has written: “We should not set a speed limit to slow everyone down to the pace set by those unwilling or unable to compete.” High-frequency trading networks let large and small investors enjoy a more efficient and less costly trading environment.
Read the whole thing here.

HT: Abnormal Returns

R.I.P. Paul Samuelson

Paul Samuelson (the first American Nobel Laureate in Economics, and arguably the most influential economist of the 20th century) died today at home at age 94. He was largely responsible for the transformation of economics from a largely descriptive and discursive discipline to a highly mathematical and rigorous one.

He was responsible for turning MIT into a world-class economics center - over the years, he played a role in bringing in Solow, Engle, Klein, Krugman, Modigliani, Merton, and Stiglitz.

In addition, he wrote perhaps the single most popular and widely used economics text in history - "Economics", published in 1948. I read it in my undergraduate years in the late 1970s, and it was still selling 50,000 copies a year in the late 1980s.

A giant has passed.

Big Brother meets Ben Bernanke

[We interrupt our regular schedule of abstract pontification to bring you this quick note on price action]

All summer long, asset markets boomed while the US economy (in my opinion) more or less stunk. Why? Because of central bank policy.

Then on Friday we had a strong payrolls number (just 11k jobs lost, much better than expected).

I think this makes the Fed on the margin more likely to hike interest rates.

Sure enough, asset markets have been going down since the number came out.

It's almost Orwellian: war is peace, good news is bad news, strong numbers are weak numbers.

But that's what happens when you let asset prices be determined (supported) by central banks instead of by economic fundamentals.

Anyway, I'll go out on a limb and say that last week was the high for 2009 and we'll sell off into 2010.

This move will be reinforced by year-end risk reduction. Also, for what it’s worth, most technical indicators look really exhausted.

I have sold [EM] stocks aggressively over…

Backing off on Blogging For A While

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I need to focus on research for the next couple of months, so blogging will likely be much less frequent for a while. I'm not closing down, but I am scaling back - probably only a post a week or so. In the meanwhile, here's a picture of the Billboard for Anders Bookstore, which is just at the edge of the Auburn campus. Smart marketing.



For any students reading - good luck with finals - if you're at Auburn, consider a longer rental term. For all the faculty - good luck writing (and grading) them and wrapping up the semester.

Buyers' Strikes and the Debt Treadmill

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Here’s what I wrote last week:
Believing or disbelieving in the bond bubble seems to have become a political choice, at least in the United States. I can’t recall such a degree of partisan frenzy in the debate over previous bubbles such as housing, tech stocks or commodities. And for good reason: any discussion of bond prices and interest rates leads inevitably to a discussion of budget deficits and Fed/Treasury policy, which – unlike say dotcom valuations – is ideologically fraught territory.
Sure enough, and with dreary predictability, commentators from left and right have divided along partisan lines in their analysis of the deficits. Here’s conservative historian Niall Ferguson:
There is no end in sight to the borrowing binge. Unless entitlements are cut or taxes are raised, there will never be another balanced budget. By 2039, when I shuffle off this mortal coil, the federal debt held by the public will have reached 91 percent of GDP, according to the CBO’s extended baseline projec…