Tuesday, May 31, 2005

Keeping the golden faith

As was to be expected, the euro has been hit hard by the results of the French referendum, dropping form around 1.26 US$/EUR to 1.23 in two days. This is likely a knee-jerk reaction, but it’s part of a trend that has been running this year (the US$/EUR rate at the end of last year was 1.36). Obviously, the euro zone’s dismal growth performance, which has driven long term rates to around 3.3%, is the main culprit.

This will cause a lot of pain to that most unusual, even cultish group: gold bugs. The price of gold is negatively correlated to the dollar’s value, so its current strength against the euro (and other currencies) has made it –one of the best investments in the past four years—lose its shine. Its price has fallen 6% this year and 4% over the last 30 days.

However, no matter what trials the markets bring, this group is steadfast in its faith: they, along with many others, including Warren Buffet, still see only damnation for the dollar in the long term (see this example).

Airlines: So which is it?

On to today's news:

1. Two headlines, seen on the same page:

Airline Industry Says Fuel Costs, Taxes Have Vaporized Profits

Ryanair posts record profit, outlook improves

2. Today's trip to the twilight zone: Six KFC workers die in Karachi violence

Get this: A Sunni extremist group led to al-Qaeda attacks a Shiite mosque in Pakistan. Shiite youths go on a rampage, burning a .....KFC restaurant? So much for my "enemy's enemy is my friend".

Monday, May 30, 2005

Not quite emerging countries

As a student working for a degree in economics in a large "emerging" country in the early 1990's, I can recall the excitement of seeing wide-ranging liberal reforms being implemented all over the developing world. After surviving the dreary 1980's (aka "The Lost Decade"), it seemed that we were finally starting the dash for growth that would set us on the path for enduring prosperity.

Well, so much for that. In the end, the previous decade ended with a whimper, with crises laying low the nations, such as Argentina and Mexico, that were the toast of the international finance community just a few years back.

The World Bank has just put out a report on economic growth in the 1990's that focusses on the emerging world. I haven't read it in full, but the bits I've looked at are pretty good. In the end, it shows that we still have a lot to learn about what it takes for a country to grow on a sustained basis. It states that in that decade there were 5 major disappointments:

1. The length, depth, and variance across countries of the output loss in the transition from planned to market economies in the former Soviet Union (FSU) and Eastern European countries.

2. The severity and intensity of the international and domestic financial crises that rolled throughEast Asia

3. Argentina’s financial and economic implosion after the collapse of its currency convertibility regime

4. The weakness of the response of growth to reform, especially in Latin America, and the unpopularity of many of the reforms.

5. The continued stagnation in Sub-Saharan Africa, the paucity of success cases there, and the apparent wilting of optimism around the“African Renaissance.”

On the other side of the ledger, the WB states there were 3 pleasant surprises:

1. Bright spots of sustained rapid growth, especially in China, India, and Vietnam, throughout the decade

2. The strong progress in noneconomic indicators of well-being in spite of low growth in some cases.

3. The resilience of the world economy to stresses

One can quibble with the list, but its a fair summary. Needless to say, the main disappointment was that most nations didn't grow as much as initially forecast despite implementing market-friendly reforms. This shows just how hard the business of development actually is.

Sunday, May 29, 2005

Rock stars for free trade

I’ve never been a big fan of U2, but I certainly admire Bono, its lead singer, for promoting well-known development issues such as HIV and debt relief. After reading this interview in the London Times, I’m even more impressed by his mature outlook. He’s in favor of doing away with rich nations’ agricultural subsidies that hurt exports from developing countries and he even has nice things to say about George Bush and Jesse Helms.

The times, they are a changin’.

Friday, May 27, 2005

Irreverent weekend morcels

-Recession is a state of mind

Prime Minister Silvio Berlusconi disputed Europe's fourth-biggest economy
was in recession, saying Italy was ``full of prosperity and joy,'' citing the
high number of mobile phone users as evidence of the nation's affluence.
``We have a very high percentage of mobile phones and are playboys and send
our girlfriends 10 text messages a day,'' said Berlusconi during a joint news
conference with U.K. Prime Minister Tony Blair. ``Italy is the most beautiful
country in the world and among the richest in the world.''

Read the orginal here.

- "Vision loss is linked to Viagra"

It turns out old men in the 21st century are being told the same thing that young men in the 19th century were constantly reminded of. Queen Victoria must be pleased.

- "Judges Still Reading Khodorkovsky Verdict"

I sure the disgraced former oil tycoon is no saint. But how can a court take 10 days and counting to read a verdict? I'd wager that Saint Peter didn't take that long to read Hitler's verdict.

The contrarians

The lads over at Morgan Stanley’s Global Economic Forum are in the mood to challenge conventional wisdom today.

First off at bat, Stephen Roach, head economist and high priest of gloom, makes the case for Europe. That's not an easy task, as the Old Continent's list of problems is long: labor rigidity/high unemployment, slow growth, existential angst and growing doubts about the integrationist project, to name a few.

Yet, Roach argues that there is growth, after all, and it’s picking up (albeit to an underwhelming 2% pace in 2006). Reforms are making labor markets more flexible and European corporations are restructuring, increasing productivity through investments in information technology. If the French reject the proposed Euro constitution, the fallout will be very limited (the risks of a deeper Euro rift will rise, but they’re still very low).

I find this argument compelling. Most European nations are in an unsustainable position. You cannot have a generous welfare state with a rapidly aging population and labor market rigidities that keep unemployment high and labor participation low. Something has to give and my bet is that, like it or not, Europeans will realize they have to work more. Combined with high and rising productivity, this will lead to a significant acceleration in growth.

The markets certainly seem to agree: MSCI’s Europe index is up 1.5% in local currency terms since the end of March, when it became clear that the “Non” camp was winning in the French referendum, and is up 5% so far this year. Sure, the euro has fallen from the highs reached at the end of 2004, but it’s still quite a bit above the average level seen last year.

Not to be outdone, Richard Berner brings calm and sense to the housing bubble debate. Like Alan Greenspan, he’s a longtime skeptic of the bubble theory who has recently changed his mind somewhat (to the group that sees ‘froth’ in the market). Berner mentions that prices are not rising as fast as mentioned if house quality and the composition of the market are taken into account and that other metrics, such as the number of houses sold for investment purposes, are biased. As a result, he expects prices to ‘rust’, with perhaps some regional pops. However, he warns that any adverse shocks will mainly affect lenders, not borrowers.

Finally, Andy Xie pours cold water on the notion that the world is on the brink of an outburst of China-related protectionism. As always, he flatly denies that a revaluation of the yuan is in China’s interest and expects its government to ignore U.S. and European pressure to let the exchange rate rise. But Xie also states that the threats to raise trade barriers against Chinese products are hollow: most of these don’t compete directly with U.S. products, U.S. firms capture most of the value chain associated with Chinese imports and, in the end, reducing these imports won’t really cut the huge U.S. trade deficit.

I hope all of them are right.

Thursday, May 26, 2005

Do you invest as well as your pension fund?

By now, it’s pretty clear that defined-benefit pension plans are an endangered species (see this article). Even relatively healthy firms are switching to defined-contribution plans to transfer investment risk to workers.

Is this a good thing? Sure, if the average Joe was equipped to make smart financial decisions. However, there’s a lot of research that suggest the average investor makes plenty of costly mistakes, such as overlooking costs (this piece provides a nice summary). In that regard, traditional company pension funds, which are usually large and managed professionally, may provide better performance.

I took a look at four large pension funds –two for public sector workers (Calpers and NY State Common), and two company funds (IBM’s and GE’s). Over the last ten years, they averaged a 10.2% annual compound return (the range was very narrow: between 9.9% and 10.6%).

It’s not an extraordinary result. A portfolio made up of Vanguard’s S&P 500 and Total Bond Market index funds, split on a 65-35 per cent basis, would’ve delivered basically the same performance.

Yet, one has to wonder how many people actually earned these returns. My bet is that, on average, they would’ve earned a between one and two percent less, simply from paying higher management fees or from excessive trading. So spare a tear for your traditional pension fund, which in most cases offered workers a decent deal.

Wednesday, May 25, 2005

Postcards from the housing bubble

· According to a new report, existing home prices are rising at a 15% annual clip and existing home sales rose nearly 7% above year-ago levels. With these figures, even Alan Greenspan, chief housing bubble denier, isn’t sounding too confident nowadays.

· In 2002, 5.6 million existing homes changed hands. With the median home price at 156,000 dollars, the value of residential real estate transactions was roughly 880 billion dollars. Given the figures this year, that number will rise to over 1.5 trillion dollars (figures taken from the NAR).

· The membership of the National Association of Realtors grew 37% between 2001 and 2004 and now stands at 1.1 million. During the same period, non-farm payrolls actually dropped.

· If the bubble does pop, Robert Shiller’s proposal to create house price derivates to enable home owner to hedge against falling values will surely get the attention it deserves.

Tuesday, May 24, 2005

Culture and economic performance in the Arab world

Moisés Naím argues in this editorial that the success of Arab Americans –they have higher levels of education and income than average—disproves the notion that “Arab culture” is somehow responsible for the relative backwardness of the Middle East. (Thanks to Dan Drezner for the pointer –don’t miss his take and the comments).

On a practical level, Naím’s article has a gaping hole: the national and religious mix of Arab Americans is very different than the ones found in the Middle East and Europe (more details here). He’s comparing apples to oranges.

But it’s worth going back to the culture issue. In this context, it’s such a broad term that it’s virtually meaningless, so one needs to break it down.

If by “culture” we mainly mean “religion”, once can say with certainty that it’s totally irrelevant. The economic performance of many Christian nations is very poor (Latin America, Philippines), while there’s no evidence that Islam per se impedes economic growth (Marginal Revolution has a lot on this topic, check out this post and this one).

But if we include such aspects as institutions, politics, etc. in “culture”, it’s impossible to deny that they have an impact on a nation’s prosperity. In this regard, most Middle Eastern nations do have one thing in common: they were part of the Ottoman empire for centuries. While I’m no expert on this topic, it’s fairly clear that the Ottoman’s were good warriors but very incompetent economic managers (more on this topic here) who didn’t put in place a decent institutional framework.

A currency mystery solved

Bombarded as we are every day by articles on China’s currency dilemma, I couldn’t help but wonder what that currency is called. Some pieces refer to it as the renminbi, while others refer to it as the yuan.

So which is it? Actually, both are correct. According to this explanation, renminbi can be literally translated as “people’s currency”, while “yuan” is the main unit of measurement. Hence, in banknotes the amounts are expressed in yuan (or

In the West, we don’t distinguish between both terms (it’d be awkward to say “the chocolate bar costs one United States currency unit”), but that doesn’t mean it can’t be done. I, for one, will stick to yuan.

Monday, May 23, 2005

Quest for yield: Peso bonds

With real yields on U.S. bills and bonds perilously close to cero, investors are leaving no stone unturned in the search for decent returns.

This is leading many to markets they would’ve never heard of, let alone invested in, not long ago. For example, consider the case of Mexican government bonds issued in pesos. Believe it or not, they’re a novelty: before 2000, the only paper issued matured in one year or less. Now, you can even get 20 year bonds.

If that sounds like your idea of playing Russian roulette, there are an awful lot of candidates willing to give it a shot for yields that currently average a grand total of …..10% (check them out in Banco de México’s site). Currently, foreigners own around 20% of the total amount outstanding; a year ago, that proportion stood at 6%, even though the spread between U.S. and Mexican Bonds hasn’t risen much.

How crazy is this bet? It’s hard to tell. Your main enemy is, obviously, exchange rate risk. The yield in dollars of this investment will, basically, amount to your gross yield in pesos minus the peso’s accumulated depreciation against the dollar. So, if you buy for keeps, to earn more than you would if you purchased an equivalent U.S. bond, you need the peso to depreciate less than 5% per year against the dollar.

Forecasting exchange rates is a dangerous game. The peso has floated only since 1995 and it spent the next few years recovering from the Tequila crisis. Yet, over the last five years, it has only fallen on average around 3% a year against the dollar. This despite the lackluster performance of the Mexican economy (low growth, but stable interest rates and inflation). So, if this keeps up, you’d earn between 6% and 7% in dollars, a bit more than you’d get investing in Mexican bonds issued in dollars. However, if you’re a Mexico bull –an admittedly rare species, but apparently gaining in numbers—and believe the peso will stay stable or even gain a bit against the greenback, a 10% yield in pesos looks mighty good.

What do Mexicans think? With an old-school populist leading the race for the 2006 elections, they’re keeping an eye on politics, fastening the hatches for likely turbulence and praying that a divided Congress and a formally independent central bank will hold back the barbarians at the gate.

Friday, May 20, 2005

The Maestro on energy

Whatever you may think of Alan Greenspan’s record as head of the Federal Reserve, he is a very bright fellow. I always learn something new every time I read one of his speeches. His most recent talk on energy markets is not an exception.

For example, it turns out that the 200 million light vehicles in the U.S. consume 11% of the world’s oil output.

But it’s not all trivia. Greenspan lays the blame on the current surge in oil prices on underinvestment in producing countries and the growing weight of nations with energy-intensive economies, such as China.

Interestingly, he pays at least as much attention to natural gas as to oil (gas is virtually ignored in the mainstream press). In the last few years, gas prices have risen even more than oil prices, although in a thermal equivalent basis they’re about $10 lower, and they’ve been much more volatile. The problem here is that demand has grown while US and Canadian supplies have lagged. Imports are growing, but the infrastructure for LNG has not been coming on line fast enough.

However, he suggests that once imports rise, the price of natural gas may fall from around $6 per million BTU to around $3 per million BTU. In oil-equivalent terms, that’s around 17 dollars per barrel.

He also describes technical advances that allow gases to be converted into fuel liquids (such as diesel). This opens the possibility for natural gas and oil prices to converge. Currently, long-term oil futures (for delivery in 5 years of more) trade at $46 per barrel, while similar contracts for natural gas go for the equivalent of $34 per barrel, so there’s hope that we’ve seen the worst in terms of price increases.

In the end, it’s a pretty optimistic speech with a simple message: never underestimate the power of technology and price signals.

Thursday, May 19, 2005

Trading around the world

Yesterday I talked about the amazing rise in stock trading activity in the U.S., measured by the number of transactions in the two main markets (NYSE and Nasdaq). But how does America compare with other nations?

Last year, there were around 6.4 trades per person in the U.S. This is pretty high compared to most developed countries. For example, in Canada there were only 1.1 trades per person, while in the U.K. and Germany there were only 0.9 trades per inhabitant.

But Americans’ love of trading doesn’t hold a candle next to the Taiwanese, who carried out 7.7 trades per person last year. In fact, most East Asian nations have very high levels of trading: Hong Kong registers 5.5 trades per person, while Korea’s level stands at 2.9 ( no data on Japan though).

I don’t know why the differences are so big. Maybe it’s a cultural thing: Europe’s financial culture is much more bank-centered, while the Chinese appetite for risk is legendary.

(Trading data is taken from this site, while population data can be found at the Census site).

Wednesday, May 18, 2005

Day trade nation

Five years ago, trading stocks was the new national pastime. One would imagine that the severe market downturn of 2001-2002 extinguished the desire of gaining instant riches by playing the markets. Sounds reasonable, but it’s false: the passion for trading still rages throughout the land.

Just take a look at the data. According to data from the International Federation of Stock Exchanges, the number of equity trades in the U.S. (including the NYSE and Nasdaq) rose 310% between 2004 and 1999. To put this in perspective, in 1999 there were 1.6 equity trades per person in the U.S., a number that rose to 6 last year. In other developed nations, the avaerage number of trades per person is usually less than one.

It's also worth pointing out that the average value per trade fell dramatically: from 42,000 dollars to just over 10,000.

Now, event though the ease and low costs of online trading have surely led to a large increase in the number of individual investors actively involved in the markets, it is also possible that other trends, such as the explosion in hedge funds, have contributed to the huge increase in trading.

What is pretty certain is that much of this trading is wasteful. Any number of studies have shown that transaction costs are the nemesis of investors. The math is well-known: on average, individual investors will obtain gross returns equal to the market average (say, the return on the S&P 500), but trading costs push the net returns significantly lower. If memory serves me right, most will lose around two percentage points annually by trading too much.

Bulls in the china shop

That’s a very adequate metaphor for U.S. policy towards China, as described in the previous post. Apropos, here is Brad Setser’s take on this issue, a must read that lays out well the sheer complexity of China’s currency dilemma.

If you feel like you need to grasp the big picture, don’t miss Bill Gross’s (PIMCO's Grand Master of Bonds) very accessible description of the main issues facing the U.S. and the global economy.

Tuesday, May 17, 2005

The China factor

What a strange day in the markets. It certainly began badly: higher than expected wholesale inflation and lower than expected industrial production figures for April (as to these, weakness was concentrated in the automobile sector). Yet, in the end the broad indices managed to rise nearly 1%.

Most commentators stated that a Treasury Department report to Congress on exchange rates and trade saved the day. This report warned China that unless it takes steps soon to make its exchange rate more “flexible” (that is, let it rise), it would be branded as a “currency manipulator”, a designation that would give free rein to the Congressional demons of protectionism

So why is this good news? Well, the dopiest reporters argued that American stocks rose because these warnings would be heeded and American firms will eventually face less Chinese competition. Smarter hacks said that the positive reaction reflected a collective sigh of relief, since apparently some talking heads had expected the Treasury to accuse the Chinese of manipulation in this report.

I know, it doesn’t make much sense either. My guess is that stocks rose in sympathy with good earnings numbers from H P and Home Depot, among others.

As to the China factor, some experts argue that letting the yuan rise would be a good idea, since it’d be a necessary step for correcting the current unbalanced state of the world economy (Brad Setser is in this camp, broadly speaking). Other fear it will plunge China –and probably other East Asian economies--into a nasty Japanese-style deflationary spiral, with negative consequences for the world economy (Andy Xie of Morgan Stanley more or less supports this view).

In other words, no one really knows, but everyone agrees it will have a big impact. Oh, and by the way, is it really a good idea to push around the face-saving, prickly, Chinese who happen to finance a rather large chunk of government spending in the U.S.?

The absurdity of competitiveness

What is it about our love for ranking nations according to their “competitiveness”? To me, these lists, such as the one published by the Word Economic Forum (WEF), seem totally useless. Basically, the rankings are nearly identical to an ordered list of income per person. Which is rather tautological: the richer you are, the more competitive you are and vice versa. Duh.

Part of the problem, of course, is that “competitiveness” has many meanings, as this excellent article explains. Yet, even if we agreed upon on a specific definition, it is a flawed concept. John Kay tells it like it is:

Interest in national competitiveness is an extension of interest in the competitiveness of companies. Competitive businesses are able to offer goods or services more attractive than those of their rivals through lower costs or better products.

But the analogy between individual businesses and national economies doesn't quite hold.Companies that are not competitive disappear. Countries that are not competitive don't. These nations still need to import, and their exchange rate falls until they become competitive again. Every country that trades internationally is competitive in some areas - the things it exports - and uncompetitive in others - those it imports. This principle of comparative advantage has been a foundation of economic analysis for 200 years.

"Flying Salmon Sighted Over Washington"

Give the gals over at Tamara Wilson Public Relations a cigar for coming up with that headline for this prosaic press release.

Friday, May 13, 2005

Investors never learn

Thanks to Mahalanobis for providing a link to Burton Malkiel’s latest piece on market efficiency and fund investing. As always, he makes the compelling case that most people who invest in stocks should stick to boring-but-cheap index funds. Yet, as index-fund pioneer John Bogle points out here, their market share in the stock fund segment stands at less than 20%.

People are just as overconfident about picking winning funds as they are about selecting above-average stocks, with equally lousy results.

Thursday, May 12, 2005

Alternative market recap: Oil beats Wal-Mart

I frequently chastise the financial press for trying to explain away the stock market’s random day-to-day fluctuations by latching to an eye-catching event that probably has little to do with what happened.

Today offers a great example. Stocks fell across the board, though the drop was unremarkable (about 1%). There were three important pieces of news: oil prices dropped sharply for the second day in a row amid reports of slower than expected demand growth and high inventories, U.S. retail sales rose strongly in April and Wal-Mart reported disappointing first quarter earnings, in addition to warning that this quarter’s results would also be weak due to high gas prices.

Reporters spun it this way: Falling oil prices in April helped boost retail sales much more than expected, yet these two pieces of good news were offset by Wal-Mart’s earnings miss and its fairly gloomy forecast for this quarter, not to be taken lightly coming from the world’s largest retailer.

However, why should Wal-Mart be so pessimistic given that oil prices are falling? Doesn’t less expensive energy help consumer spending? Needless to say, reporters got very confused (see this example of tortured logic). In the end, since stocks fell, they mostly blamed the largest and best-known target: Wal-Mart.

Actually, today’s performance can be explained quite easily. The energy sector represents arount 10% of the S&P 500 and today it fell around 4% on average. This alone explains about half the drop. Most of the rest can be accounted by the retreat in financial sector stocks (around 1% today, but they make up more than 20% of the S&P 500), probably attributable to recent market jitters concerning hedge funds

And Wal-Mart? Yes, it’s big and its announcement didn’t help. But keep in mind that the consumer staples sector --which has a similar weight compared to the energy sector--to which it belongs actually fell only 0.5% today according to S&P’s data, much less than the market as a whole.

In any case, one shouldn’t read too much into one day’s figures. Stocks fluctuate for any number of reasons day after day. But if you do keep track of these things, always check broad sector trends, which are always more representative than extrapolations based on the performance of one or two stocks. Standard & Poor’s provides these figures on a daily basis.

Organized labor is dead, long live organized labor!

What do today’s failing firms, such as GM, Ford, UAL and Delta have in common? Mainly, they’ve been unable to adapt to changing market conditions, unlike their more nimble rivals (Toyota in autos, Southwest in air travel).

This brings me to another shared trait: these firms are bastions of union power. While no one can deny that they’ve been badly managed for a very long time, organized labor has also played a big role in their demise. It forced the firms them to employ too many workers, stick to obsolete and rigid work practices, concede excessive long-term benefits in the good times and made it very difficult to close unprofitable operations (plants, routes, etc.). Last but not least, management and labor spend so much time bickering about issues like pensions that the firms’ main business is neglected.

Needless to say, their successful rivals are mainly non-unionized or face pliant Japanese-style labor organizations.

When these ships sink, as they surely will (at least in their present form), organized labor’s long decline will be nearly complete. Sure, it’ll hang on for a while in the economy’s non-competitive corners, such as government, but in the private sector it’ll be basically extinct.

Like the medieval guilds that preceded them, unions were well-suited to a certain environment: growing, regulated economies where production was increasingly carried out in workplaces with rigidly defined repetitive processes. Obviously, this no longer describes our world, where repetitive labor is increasingly automated, changing tastes and conditions require flexibility and competition is ever-increasing.

As always, most workers do have an interest in banding together to negotiate better terms for themselves, so the question now is not whether unions will be replaced but what will substitute them.

My guess is that a new type of labor organization will come along, one that provides services to the individual worker, rather than the firm or industry unions we know today. These new unions will provide many things that neither the market nor the government do well, such as training, job search assistance, unemployment insurance, career change services, legal advice, infant care, etc. Firms will be left alone to do what they will, but they’ll have to meet minimum standards and comply with contractual obligations with regard to workers. Otherwise, they’ll face strong legal action and the new unions will be able to pressure firms by withholding qualified labor.

These new organizations will provide benefits to society as a whole. They’ll make it easier to retrain and reemploy workers displaced by changing tastes and international competition, thus reducing resistance to socially beneficial policies such as free trade. In addition, they could help workers take advantage of existing but underused benefits, such as tax-free retirement accounts. They could even play a positive role in matters such as corporate governance and health care (giving their members better bargaining power vis a vis providers).

Well, only time will tell. But at least my utopian future unions sound like a an attractive alternative to the Teamsters and their like.

Wednesday, May 11, 2005

The economist as freak

Recently, Bryan Caplan of Econolog mused about why people tend to dislike and ignore economists. In the end, he argued that dismal scientists should forget about being nice. Instead, they should be blunt, telling people how things really work as explained by the principles of classical economics. Call it the Larry Summers approach.

Mr. Caplan is right about how ecomists are perceived. Nonetheless, he simply misses the point. People mistrust economists because, unlike them, they don't constantly look at the world through the prism of maximization (at least conciously). This post by Caplan nicely illustrates this point:

I wear shorts about 10 months per year, and I live near Washington DC.
Judging from the number of funny looks I get, and the number of times perfect
strangers stare at me and ask "Aren't you cold?," my behavior is puzzling at

The silly explanation is that I'm from California. But that should
make me more sensitive to cold, not less! The real answer, naturally, is that
wearing shorts in the winter is good economics.

The simplest economic comback to the unwanted queries would be "Of course I'm not cold. I do own long pants. By revealed preference, if I were cold I wouldn't be wearing shorts."

But that's not quite right. The truth is, I sometimes am uncomfortably cold as a result of my
attire. So what gives?

The answer is that if I dressed more warmly, I would be more comfortable during the few minutes that I am outside (maybe 30 minutes per day), but less comfortable during the many hours that I am inside. It's cold outside, but warm inside, so I maximize my expected utility over the course of
the day.

Would you like to have a drink or hang out with someone who thinks like this? How about having him for a roommate or a son-in-law? I wouldn't, and I'm an economist

Tuesday, May 10, 2005

Dept. of Unknowable Unknows

In finance, as in life, totally unexpected (and mostly unwelcome) events rudely impose themselves on our peaceful life for no good reason. As Donald Rumsfeld memorably stated, they’re the unknown unknowns. It doesn’t matter if you’re very smart, alert, careful and cautious; every once in a while they’ll whack you.

That’s exactly what must be going through the minds of Deutsche Bank’s shareholders today, as this report explains:

LONDON (MarketWatch) -- Deutsche Bank tumbled 2.9% in Frankfurt amid unsubstantiated talk the bank is the prime broker of a hedge fund that's under duress. A London-based spokeswoman wasn't immediately available to comment.

Hopefully, this rumor will prove to be unfounded. But one day, probably in the not so distant future, another Long Term Capital-like accident will once again threaten to bring down many famous names (incidentally, read what LTC’s wonder boys are up to currently).