Easy Money

It’s estimated that $600 billion is smuggled out of China every year.


A New Investment Vehicle for the Average Man

The stock market is doing pretty well these days and with that comes a lot of talk about bubbles. To that mix of bull/bear talk there’s a third angle, best represented by what you’ll find after a couple minutes over at zerohedge, which encapsulates the whole sort of Tea Party-disenchanted-whatever social phenomenon that’s come up recently.

A big part of that is the long standing confusion about what the hell role gold plays in the economy. People love gold and therefore we have plenty of ways to invest in it, which is great because gold as opposed to cash is intrinsically valuable.

But no, it isn’t. There’s really nothing you can do with gold except for wear it or to trade it to someone else who thinks they have a good use for it. For this reason I’ve moved all of my retirement accounts into the new HNA fund. The fund invests its money exclusively in hammers, nails, and axes, which are stored in my garage. Over time the fund will diversify into holding seed packets and small quantities of lumber (and a circular saw because I got really lucky this Christmas). Moderate (my neighbors are kind of stingy) amounts of leverage are applied through borrowing of several other power tools and Home Depot rental agreements(pretty low financing costs to gear this portfolio up a bit actually).

The benefits are clear. Assets don’t get any more intrinsically valuable than something that you can use to bash in the head of the neighbor you’re feuding with.  Inflation proof, low cost of carry, and very useful for menacing anyone that might show up on your doorstep to repossess your house.

Please contact Diedrich Knickerbocker at 1 Main St. Leith, ND for a prospectus and instructions as to the sending of cash investment.


Is it a bubble?  Since bubbles are defined by their popping I’m not making any predictions, but:

On the affirmative side, only something like 15% of run ups have lasted longer than the current stock market rise. (I’d give you a citation for that factoid past my own math but really you should just go over to zhedge and try to wade through all the crap Tyler’s been throwing lately. I can’t be bothered). Additionally, multiples are at unusual highs and measures like the S&P market cap to GDP ratio that Buffet likes (one of his failings honestly, why use a ratio of a stock to a flow?). So all of the skeptics are using historical standards.

On the other hand, look at bond yields. They’re low. Why should equity yields (multiples) be any higher, beside the standard risk premium. Real interest rates are negative-ish. It would be more concerning if equity yields were way off. The whole idea of a “new normal” indicates that historic comparisons aren’t worth much.

The ultimate question to ask is about what the current run up is based upon. The internet bubble was based on speculation that unprofitable companies would eventually become gold mines. The payoff was pretty far down the road. The housing bubble was even worse because the assumption was even more problematic; asset prices only go up. Can a bubble be created on the basis that “there’s no where else worth investing”?

Front Running the Fed

false starts

When did the fed start putting so much emphasis on forward guidance? My impression is that it has always offered delphic guidance as a way to smoothly transition between  monetary policies but that only in the last few years it has really started emphasizing its intentions as a independent tool to influence the economy. 

The problem is that they are only willing to use it independently from actual monetary policy during easing. Regarding tightening Bernanke has done a poor job of using asset purchases and guidance separately.

Imagine if an activist investor started announcing his intentions to reform a company before buying a piece. By the time she could get her hands on a decent chunk, the new information would for the most part priced in and all her work, even if it had a positive result on the company wouldn’t be very profitable. Add to this that there is no uncertainty regarding the activists ability to effect change on the company and its pretty much impossible for her to get anything done anymore.

Of course, the fed is very different from a hedge fund. Still, its a similar phenomenon. In the last hundred or so years, it has built up a lot of credibility as an institution. Maybe now that its having some difficulty accomplishing its mandates it’s time to draw down on that credibility a bit.  Throw everyone a head fake and announce the continuation of easing through next year just as they start to back off the asset purchases. After six months Bernanke can announce what everyone has begun to suspect and say, “See? That didn’t hurt so much.” Its the only way to get investors and whoever is making the business plans at the huge corporations to focus on the numbers that really matter, GDP growth and unemployment, and ignore those that really aren’t very relevant to their businesses, money creation.

Cleaning House

I’m currently working at a medium sized fund before taking a big career step in a few months. I’m part research analyst, part computer programmer for them.

It’s really clear to me that a lot of the coding I’m doing is so that they won’t have to hire someone as quickly to replace me. Where as in the past they would have some some kid cranking all night on the research half of my job, the stuff I’m producing for them makes it a lot more likely that, depending on what they want, they can instead just open a file, click a button or two, and have an up-to-date report ready to go.

Its interesting to see an improvement in technology increasing the marginal return to labor and simultaneously reducing their demand for labor.

The question is; why is a production function that involves a tfp parameter that effects the capital/labor allocation so rarely seen (non-existent?). It would seem like a pretty useful way to understand what we’ve seen in real wages and productivity over the last fifty years. Productivity goes up, wages and employment go down because the labor share of production goes down.

Setting wages equal to the marginal product of labor is more than just intuitive, its essential to the current methods used in macro. It’s pretty hard to define an equilibrium if your economy drifts towards N=zero.

I don’t know much about the history of the Cobb Douglas production function but its amusing that while modeling today makes such a big deal about micro foundations, the CD production function is essentially a Social Planning Emperor who isn’t wearing much clothing, if any at all. Its popularity has to have something to do with ease of use, no?

Tendencies Toward Entropy

It’s pretty clear to see that, for better or worse, governments are more than willing to expand their power, but are generally uncomfortable dismantling any pieces of themselves.  Even politicians elected on their promise to reduce the size of government ultimately expanded their powers when faced with such a decision.

This is the obstacle to the Chinese movement from market forces as a “basic” influence in the economy to a “deciding” influence. If you’re someone with a life-long confidence in your own ability to solve problems as the brilliant technocrats managing the Chinese economy certainly are, its pretty  difficult to rely on anyone else, let alone “market forces” to solve what is a fairly urgent dilemma for the Chinese economy. On the other hand, the retarding lead isn’t a factor in China the way it is in the US.

Reuters‘ has a decent barometer for the success of this year’s plenum over the next few years. Each point in that article involves the government reacting to adverse economic conditions by relinquishing control of the market. Difficult to imagine.