Clippings 2009

[newguy]

So read his response to GS's apology, it's got some of the edginess of his article.

So when Goldman says it is proud that it “managed the risk” for its clients, what it’s really saying is, “We’re proud that we kept the extreme crapness of our mortgage securities secret from everyone but our clients, and fobbed off the nightmare leverage they created on dumbass AIG and all the pensioners and teachers and other idiots who bought this stuff. Go fuck yourselves and suck on our yachts.”

http://trueslant.com/matttaibbi/2009/06 ... -all-time/
Here's an earlier article by him, but I don't know when or if the GS article will be on their website.
http://www.rollingstone.com/politics/st ... g_takeover

newguy
ps I downloaded the article in pdf then maximized it, it was much easier to read. You must register though.

[WishingWealth]

Thanks for the link to trueslant, I liked his analogy:
It has been what I thought about the WS guys but this one put it in words one can grasp or 'ingest'.

...
So some Dutch teachers’ union that a year before was buying ultra-safe U.S. Treasury bonds in 2006 runs into a Goldman salesman who offers them a different, “just as safe” AAA-rated investment that, at the moment anyway, just happens to be earning a much higher return than treasuries. Next thing you know, a bunch of teachers in Holland are betting their retirement nest eggs on a bunch of meth addicted “homeowners” in Texas and Arizona.

This isn’t really commerce, but much more like organized crime: it was a gigantic fraud perpetrated on the economy that wouldn’t have been possible without accomplices in the ratings agencies and regulators willing to turn a blind eye. Imagine a meat company that bred ten billion rats, fattened them on trash and sewage, ground their bodies into chuck, and then sold it all as grade-A ground beef to McDonald’s and Burger King, right under the noses of the USDA: this is exactly the same thing, only with debt instead of food. We’re eating it, they’re counting the money.
...

WW

[kcowan]

Imagine a meat company that bred ten billion rats, fattened them on trash and sewage, ground their bodies into chuck, and then sold it all as grade-A ground beef to McDonald’s and Burger King, right under the noses of the USDA: this is exactly the same thing, only with debt instead of food. We’re eating it, they’re counting the money.
...

Also sold in Loblaws and Safeway because there was no USDA influence here.

[WishingWealth]

Frank Rich in the NYT Bernie Madoff Is No John Dillinger has some links to an easy to read version of Matt Taibbi's article.
(Plus quite a few good* links to other articles)

http://www.rollingstone.com/politics/st ... hine/print

WW

* of course what's a good article for WW is not necessarily a good article for others.

[newguy]

Thanks WW, wolf411 also posted a link to a retyped? version of the story here. On BNN he mentions that the purpose of doing this in Rolling Stone was to bring it to a wider audience. So far I've yet to hear about it the mainstream news. I bet he will be on the Daily Show soon and then maybe the story won't just be in the financial media. It's not even really news on Wall St., there has always been talk about it.

Another story was the Rick Santelli rant, on the hour they kept playing the clip as a teaser for the next guest and I thought he was going to be the guest. I kept it on in the background but he was never on, so I don't know what the show was about. I think it was probably the left's take on rampant capitalism.

I think it was a great story and I wonder what will happen if it gains traction on main st. I bet Goldman is wondering too.

newguy

[WishingWealth]

Joseph Stiglitz in Vanity Fair.
http://www.vanityfair.com/politics/feat ... ntPage=all

Wall Street’s Toxic Message
When the current crisis is over, the reputation of American-style capitalism will have taken a beating—not least because of the gap between what Washington practices and what it preaches. Disillusioned developing nations may well turn their backs on the free market, warns Nobel laureate Joseph E. Stiglitz, posing new threats to global stability and U.S. security.

Every crisis comes to an end—and, bleak as things seem now, the current economic crisis too shall pass. But no crisis, especially one of this severity, recedes without leaving a legacy. And among this one’s legacies will be a worldwide battle over ideas—over what kind of economic system is likely to deliver the greatest benefit to the most people. Nowhere is that battle raging more hotly than in the Third World, among the 80 percent of the world’s population that lives in Asia, Latin America, and Africa, 1.4 billion of whom subsist on less than $1.25 a day. In America, calling someone a socialist may be nothing more than a cheap shot. In much of the world, however, the battle between capitalism and socialism—or at least something that many Americans would label as socialism—still rages. While there may be no winners in the current economic crisis, there are losers, and among the big losers is support for American-style capitalism. This has consequences we’ll be living with for a long time to come.
...

WW

BTW: He says himself : "This picture is, obviously, painted with too broad a brush."

[Shakespeare]

The Ricardian Equivalence makes a comeback

But a long-forgotten theory dating back almost 200 years is increasingly weighing on the minds of policy makers: Ricardian equivalence.

Named after the writings of David Ricardo in the early 1820s, the theory suggests that stimulus spending is doomed to failure because taxpayers tend to save their stimulus dollars rather than spend them.

Their reluctance to spend, according to Ricardo, stems from a basic lack of faith in the government's ability to manage stimulus, and a belief that they will eventually be hit by big tax increases to pay off bulging deficits....

Though updated and modernized by economist Robert Barro in 1974 (and also known as the Barro-Ricardo equivalence proposition), the Ricardo theory has never held much sway among economists. In fact, Ricardo ultimately rejected the idea.

But many economists have tried, over the centuries, to disprove the theory, and none have succeeded in doing so.

[newguy]

I'm not sure which book is in your sig line, but I think it's the one about economic issues. I actually read and thought 'so the world always seems screwed up'. Maybe if we got through that era we will get through this one too.

The book I'm talking about got me interested in the social credit theory of money creation, but that's another topic.

newguy

edit : wrong book, it's "Us the Living", 1939. Published after his death in 2004

[Shakespeare]

I'm not sure which book is in your sig line, but I think it's the one about economic issues

It's the one where citizens went armed - and if you had a smartass mouth, you'd better have a quick draw.

Added: my Signet edition paperback is dated 1964 and has a 50-cent cover price. The copyrights are 1942 by Street Publications (possibly Analog magazine) and 1948 by RAH.

Further added: it was first published in Astounding Science Fiction.

[newguy]

Added: my Signet edition paperback is dated 1964

This book and the one I mentioned are the last two books I've read by him after a long hiatus. I believe the one you're quoting was published under a pen name, that's why I never heard about it when I was a kid. The one I'm talking about was never published.

This reply is also on topic because you're link to Ricardo got me thinking about this, and then I finally realized what you're sig line was saying. I'm going to find out more about what was happening at the time Ricardo was writing his stuff. It's just that it seems capitalism keeps running into the same problems over and over again, and they all seem to have something to do with the money * velocity = gdp equation. (IANAE so don't quote that eqn.) This brings back the memories of the social credit readings I did back then. IIRC Alberta tried a form of this way back when and it didn't work out so well. Since they couldn't really control money creation I don't see how it would of worked anyway.

newguy

[newguy]

Ricardian equivalence suggests that it does not matter whether a government finances its spending with debt or a tax increase, the effect on total level of demand in an economy will be the same. It was proposed, and then rejected, by the 19th-century economist David Ricardo.

From wiki . I think the globe piece was kind of a stretch from Ricardo's writings. It turns out there was no crisis at the time and this comes from just his economic theories.

This model assumes that families act as infinitely lived dynasties because of intergenerational altruism

This is why I too have no problem rejecting the theory. I say make the kids pay.

newguy

[newguy]

I heard Amanda Lang talk about Ricardian equivalence on BNN (squeeze play) yesterday. They seemed to like the theory. The part I find interesting is how these stories move through the media. I also saw an article about how companies aren't hiring because they 'know' we will be facing higher taxes in the future. Pretty good airtime for a disavowed theory.

I believe that we should look at total government spending as our real tax rate, but I'm more affected by my next tax return than anything else. If this theory was true why would people run credit card balances?

newguy

[WishingWealth]

A couple of interesting articles I went through in the last couple of days:

THE MAN NOBODY WANTED TO HEAR
Global Banking Economist Warned of Coming Crisis

By Beat Balzli and Michaela Schiessl

William White predicted the approaching financial crisis years before 2007's subprime meltdown. But central bankers preferred to listen to his great rival Alan Greenspan instead, with devastating consequences for the global economy.

William White had a pretty clear idea of what he wanted to do with his life after shedding his pinstriped suit and entering retirement.

White, a Canadian, worked for various central banks for 39 years, most recently serving as chief economist for the central bank for all central bankers, the Bank for International Settlements (BIS), headquartered in Basel, Switzerland.
...

In Spiegel: http://www.spiegel.de/international/bus ... 51,00.html

and:

Taking the Measure
any observers in the run-up to the current financial crisis recognized that the American appetite for multiplying unnecessary necessities—like houses consumers bought but could not afford, and that developers built but could not sell—was creating a financial house of cards that could only spell trouble over the long run. But few predicted how devastating it would be when the cards came tumbling down. Part of the reason for both the scale of the crisis and the immensity of our surprise in the face of it is that the tools market watchers were using to measure and assess financial phenomena were inadequate.
...
Smith’s insight is old but not obsolete. We might wonder about, say, the productive value of auto body shops or medical malpractice lawsuits. We need to fix our cars after an accident, and we need justice when doctors are careless, but neither adds much to a society’s productivity, however much employment or income it provides. Or we might wonder about the $5 billion spent every year on U.S. tax-preparation services: The more complicated the U.S. tax code becomes, the more tax-preparation services grow, but without adding anything to the nation’s productivity. Robert Kennedy once said that GDP “counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage . . . [I]t measures everything, in short, except that which makes life worthwhile.” Kennedy’s remark, though delivered in characteristic political hyperbole, makes the compelling point that just because people pay others for some good or service does not mean that it contributes to a society’s well-being. Measuring in such a way that all spending connotes progress toward a broader and deeper prosperity is misleading.

The second imperfection with GDP is that it not only counts non-productive work as a good thing, it sometimes counts counterproductive activity as a good thing. Growing inventories, as cited earlier, are included in GDP, even though they may signal weakened demand. In the last quarter of 2008, growing inventories in the United States added 1.32 percentage points to GDP at a time when demand was falling precipitously. Final sales during that quarter fell by nearly 5 percent, the largest quarterly drop in 28 years.
...

@ The American Interest:
http://www.the-american-interest.com/ar ... ?piece=624


WW

[Doug]

http://www.sparinvest.dk/data/1132427/1 ... ng_WEB.pdf

The above link provides a graph on the impact of asset allocation on return variation based on a study by Brinson, Hood & Beebower of 91 large US based pension funds from 1973 to 1986, updated in 1991. 91.5% of return variation was due to strategic asset allocation, 4.6% due to stock picking and 1.8% due to tactical asset allocation (timing).

I don't think it would be good idea to post this in the stock picking section .

[NormR]

The above link provides a graph on the impact of asset allocation on return variation based on a study by Brinson, Hood & Beebower of 91 large US based pension funds from 1973 to 1986, updated in 1991. 91.5% of return variation was due to strategic asset allocation, 4.6% due to stock picking and 1.8% due to tactical asset allocation (timing).

This shouldn't be a big surprise. Just look up the volatility of T-Bills/Bonds/Stocks.

Now this one might be a bit of a surprise ...

[Doug]

Good advice from Morningstar.ca on ETF buying/selling for the novice investor:

http://www.morningstar.ca/globalhome/In ... eid=300340

If there's another thread where this would be more appropriate, I have no objections to the moderator moving my post.

[DenisD]

GMO Quarterly Letter by Jeremy Grantham

The easy winner of the cheapest equity sub-category contest is still high quality U.S. blue chips.

...

Being pro-emerging yet anti-China is a dilemma for us; we are working to resolve it.

...

Behind these two issues, however, lurks another longerterm and more important factor affecting future growth, and that is the increasing limitations on resources: we are simply running out of everything at a dangerous rate.

[Doug]

http://articles.moneycentral.msn.com/Re ... spx?page=1

The first paragraph of this article describes options being considered by policy makers when it comes to the future of US estate tax

[Bylo Selhi]

See also this piece by Jamie Golombek which is directed at Canadian residents who may face the US estate tax.

Bottom line: Watch this space.

[Peculiar_Investor]

From WSJ, Jason Zweig, Data Mining Isn't a Good Bet For Stock-Market Predictions

An interesting viewpoint. I'll likely try and track down the book, "Nerds on Wall Street," by the veteran quantitative money manager David Leinweber and give it a read. Has anyone on FWF read it?

I particularly like the author created a statistic to predict the S&P 500 returns.

Mr. Leinweber got so frustrated by "irresponsible" data mining that he decided to satirize it. After casting about to find a statistic so absurd that no sensible person could possibly believe it could forecast U.S. stock prices, Mr. Leinweber settled on annual butter production in Bangladesh. Over an 13-year period, he found, this statistic "explained" 75% of the variation in the annual returns of the Standard & Poor's 500-stock index.

By tossing in U.S. cheese production and the total population of sheep in both Bangladesh and the U.S., Mr. Leinweber was able to "predict" past U.S. stock returns with 99% accuracy.

But the entire exercise, he says, is a total crock. There is no conceivable reason why U.S. stock returns would be determined by Bangladeshi livestock returns.

[Bylo Selhi]

Mr. Leinweber... found, this statistic "explained" 75% of the variation in the annual returns of the Standard & Poor's 500-stock index.

FWIW Leinweber's study is now a decade old. It would be interesting to see how his "correlation" has held up

See also: Mining Fool's Gold. Leinweber's correlation was also cited by Bill Bernstein in Four Pillars and Efficient Frontier.

[ghariton]

Yielder posted a link to Leinweber's study, about six years ago. As far as I know, it's never been published. I still have a pdf which I'll e-mail to anyone who's interested.

I dunno. When I was still a practicing statistician, "data mining" was an insult. Now it's a legitimate discipline.

Around 1972, I was working for Bell (an intermittent pastime of mine). They had a brand new CDC 6400 which, among other things, had a super-duper random number generator. So I generated 1,000 random numbers, arbitrarily divided them into 20 groups of 50, pretended one was a dependent variable and the other 19 were candidate independent variables. I then fed this into a stepwise regression program.

The result was a highly significant relationship (R2 about 0.5) with several of the independent variables showing up as statistically significant.

So I ran this again and again (DO loops were wonderful). Every time I got a statistically significant relationship, with R2 ranging from about 0.4 to about 0.6. (Of course, what I was doing was akin to data mining.)

That permanently shook my confidence in regression analysis and econometrics (which is really regression analysis under another name).

George

[Shakespeare]

That permanently shook my confidence in regression analysis and econometrics

I'm always amazed at the number of people who are willing to plot A vs B, with no consideration of an underlying model from which a relationship could be possible, and then infer all sorts of nonsense from the results.

May even have been guilty of it myself, sometimes.

[WishingWealth]

Random # generator: And we can't even trust a good coin toss anymore.
Soon we'll hear that fat is good for you, or that Harper is a conservative.

At The Big Money.

Flipping Out
Think a coin toss has a 50-50 chance? Think again.

...
Lately, the idea of randomness in stock market prices has come under attack; prices for individual stocks (but not the market on the whole) often show small momentum effects: Stocks that go up tend to keep going up, and stocks that are going down tend to keep going down. But the metaphor of a coin flip for randomness remains unquestioned. We use coin tosses to settle disputes and decide outcomes because we believe they are unbiased with 50-50 odds.

Yet recent research into coin flips has discovered that the laws of mechanics determine the outcome of coin tosses: The startling finding is they aren't random. Instead, for natural flips, the chance of a coin coming up on the same side as it started is about 51 percent. Heads facing up predicts heads; tails facing up predicts tails.

Three academics—Persi Diaconis, Susan Holmes, and Richard Montgomery—through vigorous analysis made an interesting discovery at Stanford University. As they note in their published results, "Dynamical Bias in the Coin Toss," laws of mechanics govern coin flips, meaning, "their flight is determined by their initial conditions."
...

A few interesting comments and links with the article.
ex: http://www-stat.stanford.edu/~susan/pap ... swithJ.pdf
WW

[Jo Anne]

Random # generator: And we can't even trust a good coin toss anymore.
Soon we'll hear that fat is good for you, or that Harper is a conservative.

What? Fat IS good for you. Where have you been the last couple of years?