Archive for June 2nd, 2017

Indian cricket’s Minsky moment…

June 2, 2017

Just so much happening in Indian cricket against all odds. They were winning so much with all kinds of amazing camaraderie stories/photos reported by media. Who would have imagined that there would be simmering tension between coach and captain? We all thought that Indian cricket was onto professional ways after a committee was appointed to look into affairs. And how all these have come crumbling down?

I can’t help but connect all this fallout with Minsky moment. Minsky said the chances of a financial crisis are highest when all things are going fine and the cycle is on an upswing. Thus both Great Depression and 2008 crisis came when all things were going fine just a while ago. Not many anticipated a crisis and those that did not anticipate the depth.

We have a near similar Minsky moment in cricket as well. Just unbelievable to see how the house of cards is just collapsing. Ram Guha’s outgoing letter has opened a can of worms with no holes barred. Here are 8 takeaways from the letter.

In case you think, India is the only one. Australia had its Minsky moment a while ago and has still not recovered.

Plenty happening.

Why is there a grey market for IPOs in India?

June 2, 2017

Suranjali Tandon of NIPFP has this interesting post on grey markets in IPOs.

As SEBI cracks down on the business of P-Notes and the tax department follows up on the use of cash for generating unaccounted incomes, it comes as a surprise that the grey market for shares thrives unfettered.  It is fairly common for major newspapers to quote the premium offered on the grey market following any Initial Public Offer (IPO).  Some important questions arise in this context – why do grey markets exist at all when there is a fairly well established method of price discovery in India, have there been changes in the rules of allotment that may have triggered such a response and why the income tax department as well as SEBI should worry about the existence of this market.

The grey market for IPOs has existed in India for a while. It is an active market with volumes that are fairly comparable to the official market.  India has a booming IPO market where the returns earned on the day of listing can be more than double of the issue price.  Krishnamurti et al. (2011) estimate that on the day of listing (in 2007-08), the return earned was 93 per cent. In another estimate, it has been found that 68 per cent of the IPOs listed at prices that assured a return to an investor higher than the returns earned over a year.  With such returns, the grey market fits in like a missing market that allows those bidding in an IPO to lock in the gains prior to the listing. The existence of the grey market therefore is predicated on the under-pricing of IPOs. The issue of under-pricing of IPOs has been treated at length by studies. As early as in the 1970s, Logue (1973) and Ibbotson (1975) raised this issue and the same has been dealt in detail in the context of different countries by subsequent studies such as Ritter and Welch (2002), Marisetty and Subrahmanyam (2009) and Hassan et al. (2010). Given that there is substantial evidence to support the under-pricing of IPOs, the brisk business in the grey market can be attributed to some extent to this under-pricing. 
In trying to find why the issues are under-priced it is found in studies for countries other than India (Loughran and Ritter, 2002; Reuter, 2006; Nimalendran, Ritter and Zhang, 2007; and Goldstein, Irvine and Puckett, 2011) that “self-interested underwriters have strong incentives to bias the price down so that they can allocate under-priced shares to their favoured clients in exchange for side payments”. Such self-interest can be realised if the rules of allotment lack transparency. While in the US, the allocation of shares rests with the underwriting investment bank, which has been said to breed corruption in allocation (Nimalendran, Ritter, and Zhang, 2007; Liu and Ritter, 2010). In India, SEBI prescribed disclosure of allotments made to anchor investors.  Further, in 2012, SEBI changed the rules relating to the allotment of shares in the category of retail investors. For over-subscribed IPOs where the number of investors exceeded the designated lot of shares, the allotment process was to follow a lottery system.  It is expected that the sunshine requirement makes the allotment to the anchor investors a relatively transparent process. As for the retail investors, given the discontent with the lottery based allotment to retail investors in over-subscribed issues, the allotment process creates an incentive to sell the application through an off-market trade for an assured return.  Therefore, the existing functioning of the markets and the rules in some way work as useful aides to the grey market.
The reasons for the success of grey market can be attributed to the flaws in the existing rules and the process. The pricing and the process of allotment make the sale of application in the grey market lucrative. The functioning of grey market rests on the use of cash. The fact that all settlements are carried out through  and yet has not attracted any scrutiny is unsettling. Though the capital gains tax are paid in full, the fact is that it is borne by the retail investor, thus the broker offering the return on grey market ends up paying nothing. Therefore, even though on a gross basis there is no evasion, the broker is technically evading tax and is perpetuating the generation of unaccounted incomes. The fact that the broker is willing to pay a fixed return knowing that the price fixed in the grey market may not be realised is a reflection of two things – deep pockets and higher certainty of returns thereby making the case for controlling such activities.
Is so called grey market really grey? Here things are just plain black and white given the underpricing of IPOs at the first place. Actually the so called formal market is grey where investors do not have a clue on what will happen on listing.
The functioning of these markets in Mumbai and parts of Gujarat is quite something.

Arizona’s government has adopted new pro-Gold reforms

June 2, 2017

This blog had pointed how some US States are planning to allow gold/silver as currencies.

Now Arizona has acted to removing taxes on Gold and Silver:

Last week in Arizona, Governor Ducey signed into law HB 2014, which removes state-level taxation of gold and silver coins, and moves the state further toward treating gold and silver as simply another form of legal tender. By removing taxation, the legislation facilitates the more widespread purchasing and selling of gold and silver both an a hedge against inflation and as a medium of exchange. 

In March, Ron Paul testified at the Arizona legislature in favor of the bill, and noted he considers the legislation as part of an effort to create more room for “competing currencies” against the dollar. 

The HB 2014 easily passed through floor votes of both the House and Senate, although it remained unclear whether or not the bill would be signed into law. Governor Doug Ducey had previously vetoed similar legislation, likely motivated by tax revenue concerns. 

interesting set of developments in US despite all the noise…

The three kinds of economist jokes…:-)

June 2, 2017

Michael Munger has a great post on economist humor. He is apparently writing a paper to on the topic and asks to send jokes.

Mark Twain said, in Pudd’nhead Wilson’s New Calendar, that “Man is the only animal that blushes. Or needs to.” Our propensity to tell, or enjoy, jokes seems to parallel this need to recognize that we don’t always live up to our inflated sense of our own importance.

Problems of inflation are often studied by economists. Having myself been catechized in that church, I am still a bit sensitive to the particular branch of humor called “economist jokes.” You’ve probably heard them, often along the lines of “Economists were invented to make the weatherman feel better about his predictions.”

Why do economist jokes exist?I’ve been working, with my Duke colleague Geoffrey Brennan, on a paper on “economist jokes.” We are trying both to catalog and to explain the phenomenon of economist jokes. (If you know any good ones, please do send them along!)

In this essay, I will summarize the reasons we have come up with to explain why economist jokes exist, and to give an example of each of the three “types” of economist jokes that we have identified.

One could object that our theory is too abstract, or that our jokes are not funny, but c’mon, we’re economists!

Meanwhile, he says there are three kinds of economist jokes: funny, insightful and mockery. There is thin line of difference between the three categories. For instance insightful:

A joke may contain no unexpected alteration in point of view at all, but simply be intended to encapsulate or aphorize some feature of the economics profession. Whether this is “funny” to the listener may depend on whether that insight is recognizably true.

Here it’s worth noting that the truth may sometimes be exaggerated, which may make it even more true as a general description. Of course, the things that are “true” of economists are never true of all, and may not even be true of most real economists. But the exaggeration of a quality that all economists recognize can be the basis of amusement.

One of my favorite “insightful” jokes might also contain elements of mockery (although I must admit almost no one finds it very funny). The joke goes like this:

Three friends  –  a priest, a psychiatrist, and an economist  –  decide to play a round of golf. They get behind a *very* slow two-some, who, despite a caddy, are taking all day to line up their shots and four-putting every green, and so on. By the eighth hole, the three men are complaining loudly about the slow play ahead. The priest says, “Holy Mary, I pray that they should take some lessons before they play again. Standing around this much is a sin against God!” The psychiatrist says, “I swear there are people that like to play golf slowly, as a passive-aggressive reaction to their hatred of their mothers.” The economist says, “I really didn’t expect to spend this much time playing a round of golf. This is costing me a fortune.”

By the ninth hole, they have had it with slow play, so they tee off while the group in front is still on the fairway. Shouting “FOUR!” they all three hit, scattering the other golfers willy-nilly. Almost immediately, the course marshal comes up on his cart and admonishes the impatient threesome. “Those two guys are blind! They are firefighters who lost their eyesight saving people in a fire. Show a little respect!”

The priest is mortified; he says, “Here I am a man of the cloth and I’ve been swearing at the slow play of two blind men.” The psychiatrist is likewise also mortified; he says, “Here I am a man trained to help others with their problems and I’ve been acting like someone with a neurotic compulsion.” The economist stares at the ground for a moment, and then tells the marshal: “Listen, this is a terrible situation, and I feel awful that I didn’t see this before. Tell those good men that next time they should play at night.”

The point being that the priest and the psychiatrist are mostly concerned about their own socially embarrassing action, but the economist is concerned about the social optimum. It would be a Pareto-improvement, at least weakly, for the blind men to play at night. They would be no worse off, and the costs of the slow play would be eliminated since only blind people would be willing to play at night. Economists are concerned about the efficient allocation of resources, and much less about the distributive consequences of that allocation.

Does that mean that economists are “bad people?” You can hear the joke that way (and many people do consider this joke to be mockery in the negative sense). I don’t think, however, that it is necessarily a bad thing to think in terms of efficiency.

Regardless, there really is an insight to be had about the way that economists think.

Hmm.. 🙂

Then there are jokes which mix all three called portmanteau jokes.

Do send the jokes to Mr. Munger and please mark e a copy as well.


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