Entries Tagged 'Economics and Investing' ↓

Christmas Past

Many years ago when I started junior high, a couple of girls from a street near my house where poorer people lived would follow me every morning when I walked to school.

One girl was quite large and very much a bully. The other one was her minion. Every morning they’d taunt me on the way to school.

At holiday season our homeroom teacher said we were all to draw names and exchange gifts with each other. The gifts couldn’t cost more than a dollar or so.

And of course, I drew the bully’s name. Continue reading →

Economists seem to think you are…

You may recall awhile ago I reviewed Fatal Equilibrium, a mystery book written by two economists back in 1985.

One of its most memorable characters was a woman professor from the Soviet Union, named Sofie Ustinov. Sofie, along with Henry Spearman, the detective in the book, was a member of the tenure committee at Harvard University:

Sofie Ustinov, the chemistry professor from the Soviet Union, doesn’t like the candidate’s paper about finding an “optimal number of brands.” Although she buys the “most expensive caviar-type” dog food for her pet, she believes that only one brand for all other commodities is quite sufficient.

This week, Robert Shiller, in The Nobel Prize winning economist who ate cat food, put paid to Sofie’s belief. Shiller’s cat too preferred caviar-type pet food. Upon tasting the ordinary fare in the expensive can, Shiller, understandably, felt “he had been ‘phished for a phool” – i.e., “manipulated into buying something.” Continue reading →

Risk parity funds

Definition: low-cost funds that seek to provide investors with equity-level returns and bond-like stability.

The idea of risk-parity is based on an ages-old distinction between stocks and bonds.

Bonds are said to safer because when a company goes bankrupt, stock holders get zapped first. Bondholders get zapped second. Stocks are said to be riskier than bonds; therefore they should pay higher returns than bonds.

Why are risk parity funds a bad idea? In 2007 quants, finance whizzes who use computers to tell them what to buy and sell, invented Residential Mortgage Backed Securities (RMBS) that made the very same promise. And we all remember what happened in 2007!

The mortgage market meltdown was just the first indication of troubles on Wall Street in 2007.

Today the prices of mortgage derivatives similar to RMBSs are now the determinants of housing prices. The price of a house isn’t set by supply and demand anymore. It is set by the expected amount of capital gains over the lifetime of the buyer’s mortgage. The amounts of those expectations are set by the creators of mortgage derivatives.

In other words, speculators in housing markets are still free to create bubbles that burst. Continue reading →