Clippings 2009

[ghariton]

From the Wall Street Journal, insider trading would be good for us, and should be legalized:

Federal agents are wasting their time slapping handcuffs on hedge fund traders like Raj Rajaratnam, the financier charged last week with trading on nonpublic information involving IBM, Google and other big companies. The reassuring truth: Insider trading is impossible to police and helpful to markets and investors. Parsing the difference between legal and illegal insider trading is futile—and a disservice to all investors. Far from being so injurious to the economy that its practice must be criminalized, insiders buying and selling stocks based on their knowledge play a critical role in keeping asset prices honest—in keeping prices from lying to the public about corporate realities.

Prohibitions on insider trading prevent the market from adjusting as quickly as possible to changes in the demand for, and supply of, corporate assets. The result is prices that lie.

And when prices lie, market participants are misled into behaving in ways that harm not only themselves but also the economy writ large.

George

[83_gemini]

My knowledge of securities law is limited, but isn't this a long-standing belief in the literature?

[Bylo Selhi]

From the Wall Street Journal, insider trading would be good for us, and should be legalized:

The WSJ, along with Greenspan, Rubin, Summers, et al were also dead against the regulation of derivatives. Look where that got us.

And according to PBS Frontline's "The Warning" they were also against legislation against investment fraud. If they'd had their way on that front, Madoff would still be running his ponzi scheme with his victims still oblivious

Even Greenspan now admits that unbridled, unfettered laissez-faire capitalism isn't the Utopia of his (and Ayn's) dreams.

[George$]

.... And according to PBS Frontline's "The Warning" they were also against legislation against investment fraud. If they'd had their way on that front, Madoff would still be running his ponzi scheme with his victims still oblivious

Even Greenspan now admits that unbridled, unfettered laissez-faire capitalism isn't the Utopia of his (and Ayn's) dreams.

Bylo, I agree with you and Frontline on this. Thus I found it amazing to listen to BBN Squeeze Play on Oct 27 and hear that some still think today that we should defend and encourage insider trading.
See
Insider Trading is A-OK (8 min video clip)

[WishingWealth]

I've been looking all over for a 'See no evil, hear no evil....' emoticon. We could use one every now and then.

It would be so useful, I think it should even be included with the ones on the right of the reply box.

WW

[Bylo Selhi]

Here ya go...



And a bonus...

[WishingWealth]

Thanks much, it will find lots of use here 'round.

WW

[ghariton]

My knowledge of securities law is limited, but isn't this a long-standing belief in the literature?

Indeed. Henry Manne first made the argument in the late 1960s. When I learned securities law from Doug Harris, in law school, he drew up a list of arguments for and against the ban on insider trading. He filled three blackboards with reasons against a ban, and then had trouble filling half a blackboard with reasons supporting the ban.

I think that the issue is a fascinating example of the professional consensus going in one direction and popular perception going in the opposite direction.

Ranks up there with rent control and homeopathy, IMHO.

George

[WishingWealth]

So CEO of ACME LP has a chat with the CFO and CFO says we're bleeding bad this quarter; what shall we do, what shall we do?

CFO&CEO as if in a duet: Let's sell that sucker short.

Or CFO says to CEO: Tomorrow's investors conf call & disclosure will be a bummer.
In the mean time, he phones his friendly broker and tells him to sell whatever he's got - and then ask him to tell his close friends too so they can do same.
And BTW, this quarter, wire my money to my Swiss account within 5 days as we discussed so many times, not the 10 days you took last quarter.

Stoopid? Well not any more than comparing those who think insider trading is bad to believers in homeopathy.

WW

corrected one misspelling.

[Pickles]

Tsk, Tsk, Georges. Expanding your analysis of one side of an issue to take some swipes at one side of two unrelated issues.

Eg. To which rent control "professionals" do you refer? Landlords? The economists and lawyers they hire and support to advance an argument for abolition?

Of course, tenants, and the economists and lawyers they hire to argue for the retention of rent control are every bit as "professional".

There are many valid reasons for rent control, though if a "professional" -- Doug Harris -- had only filled half a blackboard with them, would the others have existed? In your world, perhaps not, but in the real world .....

My professional recommendation? Take a dose of reality, suitably watered down, of course.

As to the subject of the thread, I am certainly no professional, here, but I always thought Martha Stewart was an unlikely target for a catch in a sea full of sharks.

[Bylo Selhi]

Reflections on Economics from a Non-Economist

I have been involved in complex systems throughout my professional career - first as a physics student in Chicago in the 1960s; later as a computer scientist focused on very large computer systems, including parallel supercomputing and the Internet; and now with my work in highly complex problems like Cloud Computing, Smart Cities and organizational, people-oriented systems. I have learned that complex systems are non-linear and dynamic, with emergent, unpredictable behaviors, some potentially catastrophic. Therefore, such systems, while not susceptible to rigid or hierarchical control, nonetheless need to be very carefully managed.

I am therefore much more comfortable with the messy Keynesian view, which seems to me more reflective of the realities of the world we live in, than with the elegant neoclassical view. The notion that human beings always make rational financial decisions, which is at the core of most neoclassic economic models, feels naive to me. Looking at those same humans from the point of view of evolution and natural selection, you can appreciate that primal forces like survival and reproduction will trump rational, logical behavior most of the time. This is what behavioral economists are now studying.

We should also keep in mind that these discussions are all centered on the evolution of capitalism beyond the crisis and into the 21st century. As Michael Fitzgerald writes in his Chicago article: “Markets are like Churchill’s view of democracy: a flawed way to run an economy, except for all the other ways we know.” Few advocate the extremes, either state-directed socialism at one end, or laissez-faire capitalism at the other.

Most reasonable people are working along a wide spectrum with free markets at its center. The key question then is to find the right checks and balances between letting markets perform their magic on their own, and intervening when the interests of the larger society require it, so we can end up with a more decent and humane economic world. As I have learned over the last two years, this is one of the most exciting challenges for us all to think through over the next several decades.

[ghariton]

Tsk, Tsk, Georges. Expanding your analysis of one side of an issue to take some swipes at one side of two unrelated issues.

Gosh I hadn't realized that there was intellectually sound support for either homeopathy or rent control. But I take your point. I have opened a thread on rent control, and have supplied some "anti" arguments. I invfite you to post or link to the "pro" arguments.

If someone thinks there are strong arguments for homeopathy, I'll open a thread for that too.

George

[agraham]

Indeed. Henry Manne first made the argument in the late 1960s. When I learned securities law from Doug Harris, in law school, he drew up a list of arguments for and against the ban on insider trading. He filled three blackboards with reasons against a ban, and then had trouble filling half a blackboard with reasons supporting the ban.

The main argument in favor of allowing it, as I understand it, is that it causes prices to reflect reality more quickly. And that's good because it causes capital to allocated more correctly. But insider trading corrects prices by misallocating capital (allowing the well connected to skim off the difference before the owners at large).
The cure of insider trading is worse than the disease of incorrect prices.
Further, allowing insider trading would tend to tend to push the unconnected out of the market since they would feel they can't get a fair crack. All it would take is one buyout with the directors taking all the upside before I ever hear about it to sour me on the whole system.

[Pickles]

Gosh I hadn't realized that there was intellectually sound support for either homeopathy or rent control. But I take your point. I have opened a thread on rent control, and have supplied some "anti" arguments. I invfite you to post or link to the "pro" arguments.

George

Wouldn't have expected you to unless you had more than a passing knowledge of either.

Homeopathy is a mystery to me and I'm quite skeptical of its claims. However, I'm also amazed at how well my dog has responded to homeopathic remedies prescribed by her vet on two occasions. (And I think we can discount the placebo effect in her case ) So there's my wee anecdote to add to the data.

My knowledge about rent regulation is reasonably extensive. (I'm sure you know that Ontario has not had a rent control system for many years despite the Liberal shilling to the contrary). But discussing it or debating links is too much like work for me.

Have fun though. It's an interesting concept to decide, by poll whether there are intellectually sound arguments supporting rent control. I wonder how many of the voters will have done any serious research ( ie. beyond googling it or visiting the website of landlord lobby groups) on the topic before casting their ballot.

[WishingWealth]

Hi Pickles, there was an interesting article on placebos; including the effects on animals.
@ Skeptic: http://www.skeptic.com/eskeptic/09-05-20#feature

...
Can Animals Respond to Placebos?

Believers in homeopathy and acupuncture tell us that animals respond to those treatments and animals can’t respond to placebos, so that must mean those treatments are effective. But the veterinary literature accepts the reality of placebo response in animals, and there are plausible explanations:

1. They can develop a learned physiologic response to a drug and then respond similarly when a placebo is substituted.
2. They respond to attention and care from humans.
3. Human owners can experience the placebo effect for their pets by perceiving a response where there really is none.
4. Since animals can’t talk, we have to interpret an animal’s behavior as indicating relief of pain; this may not always be accurate.
...

+ A few other comments @
http://www.financialwebring.org/forum/v ... lternative

WW

[ghariton]

My knowledge about rent regulation is reasonably extensive. ... But discussing it or debating links is too much like work for me.

I'm sorry not to get some of the benefits of all that experience.

Have fun though. It's an interesting concept to decide, by poll whether there are intellectually sound arguments supporting rent control. I wonder how many of the voters will have done any serious research ( ie. beyond googling it or visiting the website of landlord lobby groups) on the topic before casting their ballot.

I think you misunderstood my primary purpose. It was not to decide whether or not rent control is desirable. Rather, it was to see whether or not there is a marked difference between the views of economists and non-economists on the subject, and secondarily how they differ. That's why I set up a questionnaire the way I did.

George

[Pickles]

Hi Pickles, there was an interesting article on placebos; including the effects on animals.
@ Skeptic: http://www.skeptic.com/eskeptic/09-05-20#feature

...
Can Animals Respond to Placebos?

Believers in homeopathy and acupuncture tell us that animals respond to those treatments and animals can’t respond to placebos, so that must mean those treatments are effective. But the veterinary literature accepts the reality of placebo response in animals, and there are plausible explanations:

1. They can develop a learned physiologic response to a drug and then respond similarly when a placebo is substituted.
2. They respond to attention and care from humans.
3. Human owners can experience the placebo effect for their pets by perceiving a response where there really is none.
4. Since animals can’t talk, we have to interpret an animal’s behavior as indicating relief of pain; this may not always be accurate.
...

+ A few other comments @
http://www.financialwebring.org/forum/v ... lternative

WW

Interesting article. Thanks. Though in our case, the results were quite pronounced and did not involve any extra care -- just popping some medicine under her tongue (itself, not an easy task!).

I took a look at page one of the FWF thread you cited. Looks like alternative medicines and homeopathy have already received a thorough airing and that there is no need to start another thread on its supporters and detractors.

[lilbit]

Jeremy Grantham quote: (priceless)

"I can imagine the company representatives on the Titanic II design committee repeatedly pointing out that the Titanic I tragedy was a black swan event: utterly unpredictable and completely, emphatically, not caused by any failures of the ship's construction, of the company's policy, or of the captain's competence. "No one could have seen this coming," would have been their constant refrain. Their response would have been to spend their time pushing for more and improved lifeboats. In itself this is a good idea, and that is the trap: by working to mitigate the pain of the next catastrophe, we allow ourselves to downplay the real causes of the disaster and thereby invite another one. And so it is today with our efforts to redesign the financial system in order to reduce the number and severity of future crises."

[Doug]

I took a look at the Nov/Dec issue of the Canadian MoneySaver; there are some excellent articles in it. For example, James Hymas' article on fixed income investing is certainly worth reading. After going through it, you wouldn't know that his focus is preferred shares. On the other hand, there's an article from Derek Foster in the issue. What is going on here?

[WishingWealth]

OK Mike, you owe me a beer.
(A Krugman Light will do)

@ City Journal
http://www.city-journal.org/2009/19_4_california.html

The Big-Spending, High-Taxing, Lousy-Services Paradigm.
...
The steady deterioration of California’s public services hasn’t gone unnoticed. Shortly after his stunning ascension to the governor’s office in 2003, Arnold Schwarzenegger established an advisory commission, the California Performance Review (CPR), to recommend ways to make governance in California smarter, cheaper, and better. The commission labored through 2004 before delivering a doorstop report with more than 1,200 recommendations for streamlining this and consolidating that, along with an assessment that implementing the full list of changes could save California $32 billion over the first five years.

And then . . . nothing, really. The 2,500-page report was “dead on arrival,” according to Bill Whalen of the Hoover Institution, “because it was too complicated for voters to rally behind and legislators didn’t want to see it enacted.” Citizen Schwarzenegger may have assumed that his personal star power and the CPR recommendations’ plodding good sense would make a politically irresistible combination. Such reckoning failed to account for the formidable ability of even the most obscure and otiose governmental body to hunker down, defend its turf, and outlast mere politicians.
...
Take entitlements and public-employee pensions, which are, Watkins says, “the real source of the state’s fiscal distress.” A 2005 study by the Legislative Analyst’s Office (California’s version of the Congressional Budget Office) found that pensions for California’s government employees “surpassed the other states—often significantly—at all retirement ages.” California government workers retiring at age 55 received larger pensions than their counterparts in any other state (leaving aside the many states where retirement as early as 55 isn’t even possible). The California Foundation for Fiscal Responsibility periodically posts a list of retired city managers, state administrators, public university deans, and police chiefs who receive pensions of at least $100,000 per year. The latest report shows 5,115 lucky members in this six-figure club. The state’s annual bill for polishing their gold watches is $610 million.
...

OMG, 'tis TEOTWAWKI

WW

[WishingWealth]

Back when there was a crisis, multipliers were 'discussed'.

Krugman has an entry Depression multipliers in his blog with a reference to a 58 pages pdf*.


[url=http://www.econ.berkeley.edu/~eichengr/great_dep_great_cred_11-09.pdf]From Great Depression to Great Credit Crisis:
Similarities, Differences and Lessons[/url]

WW

* are you crazy? I haven't read that!

[Norbert Schlenker]

...America’s churches always reflect shifts in the broader culture, and Casa del Padre is no exception. The message that Jesus blesses believers with riches first showed up in the postwar years, at a time when Americans began to believe that greater comfort could be accessible to everyone, not just the landed class. But it really took off during the boom years of the 1990s, and has continued to spread ever since. This stitched-together, homegrown theology, known as the prosperity gospel, is not a clearly defined denomination, but a strain of belief that runs through the Pentecostal Church and a surprising number of mainstream evangelical churches, with varying degrees of intensity. In Garay’s church, God is the “Owner of All the Silver and Gold,” and with enough faith, any believer can access the inheritance. Money is not the dull stuff of hourly wages and bank-account statements, but a magical substance that comes as a gift from above. Even in these hard times, it is discouraged, in such churches, to fall into despair about the things you cannot afford. “Instead of saying ‘I’m poor,’ say ‘I’m rich,’” Garay’s wife, Hazael, told me one day. “The word of God will manifest itself in reality.”

Many explanations have been offered for the housing bubble and subsequent crash: interest rates were too low; regulation failed; rising real-estate prices induced a sort of temporary insanity in America’s middle class. But there is one explanation that speaks to a lasting and fundamental shift in American culture—a shift in the American conception of divine Providence and its relationship to wealth.

In his book Something for Nothing, Jackson Lears describes two starkly different manifestations of the American dream, each intertwined with religious faith. The traditional Protestant hero is a self-made man. He is disciplined and hardworking, and believes that his “success comes through careful cultivation of (implicitly Protestant) virtues in cooperation with a Providential plan.” The hero of the second American narrative is a kind of gambling man—a “speculative confidence man,” Lears calls him, who prefers “risky ventures in real estate,” and a more “fluid, mobile democracy.” The self-made man imagines a coherent universe where earthly rewards match merits. The confidence man lives in a culture of chance, with “grace as a kind of spiritual luck, a free gift from God.” The Gilded Age launched the myth of the self-made man, as the Rockefellers and other powerful men in the pews connected their wealth to their own virtue. In these boom-and-crash years, the more reckless alter ego dominates. In his book, Lears quotes a reverend named Jeffrey Black, who sounds remarkably like Garay: “The whole hope of a human being is that somehow, in spite of the things I’ve done wrong, there will be an episode when grace and fate shower down on me and an unearned blessing will come to me—that I’ll be the one.”

I had come to Charlottesville to learn more about this second strain of the American dream—one that’s been ascendant for a generation or more...

http://www.theatlantic.com/doc/print/20 ... ity-gospel

[Peculiar_Investor]

Once again sage advice, from Jason Zweig at WSJ, How to Ignore the Yes-Man in Your Head. He throws out some interesting challenges,

Show your investment to another person you respect whose ego isn't already invested in the decision. Ask: If you didn't own this, would you buy it now? If you did own it, would you sell it now?

Try showing it to your spouse -- mine still hates my call on RIM. Time will tell.

Try estimating the odds that your analysis is wrong. Let us say that you reckon there is a 20% chance of an adverse outcome; that is like saying you will be proven wrong one in every five times. This way, if the investment does go awry, you will be less likely to dig in your analytical heels and desperately try to prove that you are still right.

This confirms something I read a long time ago from Peter Lynch. I've always assumed that 1/5 of my investments will not turn out well. History has reminded me of this fact a number of times. However, my track record has shown that 1/5 has exceeded expectations and the good has outweighed the bad. See also http://www.financialwebring.net/forum/v ... 631#232631

[jwr]

From the Asia Times Online:

CREDIT BUBBLE BULLETIN
About a half paradigm

The front page of Wednesday's Financial Times included two notable headlines: Next to "Buffett bets $26bn on US" was "India sells dollars for gold and lifts bullion to high". I certainly view the Reserve Bank of India's purchase of 200 tonnes of bullion from the International Monetary Fund as exemplifying the profound shift of financial power from the core to the periphery - as well as the shift of "inflationary biases" from dollar securities to "undollar" asset classes.

The Indians today enjoy the financial resources, and they are apparently eager to trade dollar holdings for hard - non-dollar - assets. And as much as the media trumpeted Mr Buffett's railroad acquisition as a vote of confidence for US recovery, there's surely more to his analysis. In the unfolding paradigm shift, the US "services" economy will have no alternative than to adjust to a more efficient goods-producing economic structure.

Our troubled currency will require that we produce more, consume less, survive on reduced amounts of credit - and we will have to do so in an energy-efficient manner. Within such a backdrop, the railroad business would be relatively appealing when compared with consumer-based businesses or US financial assets more generally. I would also view Mr Buffett's aggressive move as supporting the thesis of hard assets supplanting dollar securities as the preferred asset class.

http://www.atimes.com/atimes/Global_Eco ... 0Dj01.html

[Peculiar_Investor]

Love the title of this article from the WSJ, 'Greatest Trade': How You Can Make $20 Billion.

The article discusses John Paulson's big win over the past years buying insurance on what he believed was a risky US housing market.

The key part of the article is a set of 8 investment lessons that can be learned. Worth the read IMHO.