Archive for the ‘Financial Markets/ Finance’ Category

Why US yields trending lower despite Fed intending to exit?

September 30, 2014

These are the recent trends in US treasury yields:

  • US 10 Year started the year at 3% and is currently at 2.5%.
  • 30 year at 3.92% and currently at 3.18%.
  • 5 year is steady starting at 1.72% and currently at 1.77%.

Jérémie Cohen-Setton of Bruegel Blog wonders why is this happening? As Fed is expected to go off the stimulus, the yields should actually be rising. We are staring at the same problem as seen in 2005 called Greenspan conundrum (then most macro things were named after him).

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Connections between NY Fed and Wall Street (read Goldman) getting exposed

September 29, 2014

Over the weekend, some really interesting and scandalous story broke out. Propublica’s Jake Bernstein wrote this long article showing how the cosy relationship between NY Fed and Wall Street. As if this was anything new really. Michael Lewis adds more to the story.

The difference is Bernstein gets this former NY Fed  regulator Carmen Segarra to speak up. Segarra was an onsite supervisor a Goldman Sachs. Onsite regulators are those who actually sit in the office of the regulated entity. She was assigned Goldman Sachs and in act of bravado she taped her conversations while being in conversation with NY Fed and Goldman officials. The tapes show how NY Fed officials were just so afraid to ask Goldman to behave.

And this was after NY Fed actually appointed someone to sort its culture right. Lewis adds:

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Thinking about the yield curve in Euroarea..

September 26, 2014

An oldish speech by Vítor Constâncio of ECB, which I missed linking.

Euroarea is both frustrating and interesting in most matters. It does not change when we think about the yield curve.

First, what is it about the yield curve?

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When economic policy becomes a crime and policymakers criminals…

September 25, 2014

Prof. Michael Boskin reflects on the recent reaction by Venezuelan polity on Prof Ricardo Hausmann. Prof Ricardo Hausmann questioning economic policy in Venezuela in this article Should Venezuela Default?” Hausmann is a former minister of Venezuela and currently a Prof at Kennedy School.

Prof Boskin says this is getting bizarre:

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Fed has a problem buying private sector assets and ECB has a problem buying govt. assets….

September 23, 2014

Economists differ greatly on what a central bank can do and not do. Adam Posen is in the camp

In this oldish speech released recently, he reflects on recent ECB measures. He says somehow the bad ideas that central banks cannot stimulate economies keeps coming back:

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Book Review: Wall Street – A History (From its beginnigs to the fall of Enron)

September 23, 2014

Certain books never really get the publicity despite their importance. Charles Geisst of Manhattan College has written one such book on Wall Street’s history. The book is pretty timely as well given Wall Street’s shocking display ethics and behavior in recent times. As per the author, this is the first history of wall street but I have hardly seen anyone recommending the book.

I mean just like most history books, if people had read Geisst’s book they would have said this time is nothing different. Wall Street has been like this for a long time. Ironically, the street that gets its name from the Wall constructed by Dutch to protect them from English, the world is now trying to create a wall to save them from the excesses of the wall street.

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UK Finance sector wages: explaining their high level and growth..

September 22, 2014

Joanne Lindley and Steven McIntosh research the high wage premium in UK finance sector.  Earlier researchers at HBS looks at French finance sector.

They say it is basically because the sector distributes a higher share its profits within employees compared to other sectors:

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T.L.T.R.O. is Too Low To Resuscitate Optimism

September 22, 2014

Silvia Meiser of Bruegel reflects on the low bidding for TLTRO funds.

Out of the expected EUR 180 bn of funds, banks only bid for EUR 83 bn:

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Making sense of dissents: a history of FOMC dissents..

September 22, 2014

Dissent is part of human life. People assenting or dissenting to other’s views is quite common. However, when it comes to central banking it becomes quite abnormal and generates significant hype.

Daniel  Thornton and David Wheelock of St. Louis Fed have this superb paper tracking history of FOMC dissents.

This article presents a record of dissents on Federal Open Market Committee (FOMC) monetary policy votes from the Committee’s inception in its modern form in 1936 through 2013. Dissents were rare during the Committee’s first 20 years but began to increase in the late 1950s. The number of dissents increased sharply during the late 1970s and early 1980s, when both inflation and unemploy- ment were unusually high. However, at other times, the number of dissents was not correlated with either inflation or the unemployment rate. A review of FOMC records and published statements indicates that dissents often reflect fundamental disagreement about (i) how to achieve the Committee’s macroeconomic objectives and (ii) the current stance of policy. The number of dissents also appears to have been influenced by the language used by the FOMC to communicate instructions to the manager of the System Open Market Account.

There is a lot of trivia and interesting stuff in the paper:

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Are the Most Talented Employees the Highest Paid? Yes—If They’re Bankers

September 18, 2014

Carmen Nobel reports on a recent research by Claire Célérier and Boris Vallée of HBS.

They look at France and see what kind of students go to which kind of sectors post graduation. They figure the financial industry not just gets the most talented but also pays them the most:

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Global Billionaires Political Power Index..

September 17, 2014

Darrell West has developed this interesting index called Global Billionaire’s political power index.

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What we didn’t learn (and learnt) from the recent crisis?

September 17, 2014

Plenty of books etc being written on a crisis which is not over yet. Like Great Depression, this crisis will haunt and keep econs going till another bug crisis comes.

Martin Wolf has also written a recent book on the crisis. Here is his interview. He says economic teaching should be more humble.

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Regulating managerial pays in Banks..(Should variable pays of private sector bank chiefs be cut?)

September 16, 2014

Prof TT Rammohan of IIMA reviews the various laws which have come to curb salaries etc of bankers (also called as banksters).

There are two broad approaches to regulating bank salaries — One from Europe and other from US/UK (we call anything from these two as global solutions):

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Believing the macro data…A case of Aus employment data

September 12, 2014

James Glynn at WSJ Blog points to this interesting issue from Aus.

Analysts/people are questioning the unemp data released by stats agency. The agency shows employment  growth higher than what people see.

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How more beer consumption is expected to lower mortality in Russia..

September 12, 2014

Well, that is just a  cheesy and feel good title. As much of economics is around relative prices etc., this post is relative too.

So beer here is with respect to vodka. Lorenz Kueng and Evgeny Yakovlev in this fab post point how consumption in beer has increased in Russia since its break-up. As people mostly consumed Vodka earlier this led to many deaths. With rise in beer, the mortality due to alcohol is expected to decline:

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How Wall Street is missing Chavez?

September 11, 2014

An interesting piece by Sebastian Boyd on Chavez and Wall Street. As the new President is not as authoritative and has been unable to keep the economy from sliding, Wall Street returns from Venezuela has declined:

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How the committee that saved the world ended up nearly destroying it..

September 11, 2014

Adam White has this stirring piece in City Journal. article is a review of Geithner’s recent book.

This is a piece which all the policymakers in economics and finance shot current should read. The central message is never take yourself too seriously. Don’t let current successes turn into hubris as you never know when it will all come crashing down. One major reason why we saw such spectacular failures in economic policy-making in West apart from dubious economics was enormous amount of arrogance and belief that I know all. When the luck runs out it all becomes too ugly.

There should be far more humility than we see in financial elites across the world. All of them come from very similar backgrounds and education profiles. Much of the differences they try and show are just a hogwash. Most of the time, they try and take credit for much of that is happening across their economies and the world. We are seeing plenty of this in India too.

The committee of Rubin, Greenspan and Geithner (add Summers too) was seen as the thing in 1990s:

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Namonia reaches Texas and Dallas Fed…

September 8, 2014

Wow this is some publicity and hype.

How many times do we see central bankers of praise politicians and that too of of other nations? In this case it is actually a Regional Fed chair – Richard Fischer of Dallas Fed praising the not so new Indian PM. I just casually read Fischer praising Indian PM on some website. I thought it must have been just some comment. But no it is a speech titled Texas Jagannath (With Reference to Indian Prime Minister Modi, a Hindu Goddess and Wodehouse’s Big Money) .

The speech is given at US – India Chamber of Commerce:

I am so honored to have been invited to join Ambassador (S.) Jaishankar this evening to celebrate the U.S.–India Chamber of Commerce and its many distinguished awardees.

Mr. Ambassador, I am delighted you are here in Texas tonight. I am going to give you a few statistics in a moment that I think will make readily apparent the reason for this large audience and why so many Indian entrepreneurs and professionals come to Texas. Then I am going to give you a snapshot of where the U.S. economy is at present and what we are grappling with at the Fed. But first, with your indulgence, I want to briefly speak of the relationship between our two great countries, India and the United States.

The logic of an enhanced strategic relationship between my country and yours is crystal clear, beginning with a harsh geopolitical reality: You live in a tough neighborhood and need us; we, in turn, need all the friends we can muster in your geographic sphere. It seems very timely that we overcome the history that has separated us and begin working more closely together.

During the Cold War, it was the view of many in the United States that India was too closely allied with the Soviet Union. American businesses that looked at India found it afflicted with the legacy of the worst of British bureaucratic administration. (The old joke was that you could never get morning tee times at any Indian golf course because the bureaucrats had locked them up at least until noon).

From an Indian perspective, America seemed too hegemonic. Attempts by U.S. companies to invest and do business in your homeland revived memories of the East India Company.

We viewed each other through the lens of the time and against a background of our own histories, with suspicion.

But the (Berlin) Wall came down, the economy has been globalized and cyberized, and new threats to security have arisen, many of them from nonstate actors or forces who operate from within failed states to inflict damage elsewhere. This is a time for like-minded people to unite and work together.

We are like-minded in that we are democracies. But tonight we celebrate something even more fundamental. My reading of India is that, like in the U.S., your country men and women are more pragmatic and business-oriented than they are ideological or inherently bureaucratic.

The recent election of Prime Minister (Narendra) Modi offers the promise of making this abundantly clear. He was, after all, the chief minister for over a decade of the Gujarat, the most probusiness state in India. And almost every U.S. business leader I know has heard of Ratan Tata’s experience when he looked to Gujarat for an alternative to the frustration of his attempt to build a new car factory in West Bengal. As I understand it, Mr. Tata went to see Minister Modi, had a handshake deal in 30 minutes, and in 14 months the new factory was up and running. That almost makes Texas look like California by comparison!

So Mr. Ambassador, we are all watching for this first prime minister born since Independence to work his probusiness, nonbureaucratic, can-do spirit upon the whole of India. It is in America’s interest for India to thrive. We wish Prime Minister Modi, the government you represent with such distinction, and the Indian nation the very best of luck.

That is some marketing. One would expect such a speech from Texas Governor not Dallas Fed President.

How Yellen has become like a Hindu Goddess:

As you can see from this graphic, unemployment has declined to 6.2 percent, and the dynamics of the labor market are improving. At the Federal Open Market Committee, where we set monetary policy for the nation, we have been working to better understand these employment dynamics. This is no easy task. Bill Gross, one of our country’s preeminent bond managers, made a rather pungent comment about our efforts. He noted that President Harry Truman “wanted a one-armed economist, not the usual sort that analyzes every problem with ‘on the one hand, this, and on the other, that.’” Gross claimed that Fed Chair (Janet) Yellen, in her speech given recently at the Fed’s Jackson Hole, Wyo., conference, introduced so many qualifications about the status of the labor market that “instead of the proverbial two-handed economist, she more resembled a Hindu goddess with a half-dozen or more appendages.”[2]

Whether you analyze the labor markets with one arm or two, or six or 19, the issue is how quickly we are approaching capacity utilization, so as to gauge price pressures. After all, a central bank is first and foremost charged with maintaining the purchasing power of its country’s currency. Like most central banks around the world, we view a 2 percent inflation rate as a decent intermediate-term target. Of late, the various inflation indexes have been beating around this mark. Just this last Friday, the personal consumption expenditure (PCE) index for July was released, and it clocked in at a 1 percent annualized rate, a pace less than the run rate of April through June.

Does this mean we are experiencing an inflation rate that is less than acceptable? I wonder. At the Dallas Fed, we calculate a trimmed mean inflation rate for personal consumption expenditures to get what we think is the best sense of the underlying inflation rate for the normal consumer. This means we trim out the most volatile price movements in the consumer basket to achieve the best sense we can of underlying price stability. In the July statistics, we saw some of the fastest rates of increases in a while for the largest, least-volatile components of core services, such as rent and purchased meals.[3] So the jury is out as to whether we have seen a reversal in the recent upward ascent of prices toward our 2 percent target.

Interesting comparisons..

However, Hindu Goddesses with multiple hands are seen destroying some evil. In this case the evil is really unemployment and weak economy. Can Fed chair really do anything about destroying the evil?

Book Review — Zombie Economics: How Dead Ideas Still Walk among Us

September 4, 2014

Just finished reading this book by Prof John Quiggin. As Prof Quiggin is from Australia, perhapsthe book did not become as famous compared to his American counterparts.

Actually this is a book which most experts and media in India should read. The kind of articles people write by simply aping the west is outright silly. And that too after seeing how the west has suffered recently.

In the book, Prof Quiggin thrashes five ideas which like zombies keep coming back despite their ugliness. These ideas were thrashed as crisis started but are again making a comeback:

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Buy and hold vs market timing portfolio strategies

September 4, 2014

There are certain things which do not make sense when comparing theory with practice. Finance theory shows that simple buy & hold/passive investing wins iver market timing/active investing. But in practice people keep trying to make more returns than markets. Few lucky ones blow their trumpets (and hide their losses when luck becomes dry). The rest keep trying just to waste more and more resources.

Infact theoretically, finance industry should not be as big and profitable. The profits are not made of market timing but via commissions and exorbitant spreads between costs and incomes of providing funds.

Yi Li Chien of St Louis Fed shows in this yet another small note how buy and hold wins over market timing:

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