Tuesday, December 22, 2009

Macroeconomics Take-Home Exam: 2009 Crisis Version

During the hearings to reappoint Ben Bernanke to another term as chairman of the Federal Reserve, US senators asked many questions. The WSJ's Real Time Economics blog posted several questions from economists and Sen. David Vitter submitted them in writing. Mr. Bernanke replied and I find the  one below particularly interesting (beware, long read).

Two comments:
i) It's very nice to see public officials being held accountable and presenting their answers to questions from academic experts rather than journalists. All too often they lack the brainpower to reply and pin down inconsistencies and attempts by officials to avoid replying "tough" questions. In Brazil officials are never properly quizzed and there is no culture of being held accountable. Another thing is our list of needed improvements.

ii) The optimal size of banks is a fascinating topic. My hunch is that retail banks should be very large, benefiting from the large returns to scale they have and the relatively low risks associated with the business. On the other hand,  investment banks should not be as large, specially due to systemic risk. Unless we find a good way to measure/manage it, we'll still observe some too-big-to-fail institution making wrong bets (or their clients) in poorly-understood financial instruments. Perhaps this was one of the ideas being the Glass-Steagall Act.

Mark Thoma, University of Oregon and blogger: "What is the single, most important cause of the crisis and what s being done to prevent its reoccurrence? The proposed regulatory structure seems to take as given that large, potentially systemically important firms will exist, hence, the call for ready, on the shelf plans for the dissolution of such firms and for the authority to dissolve them. Why are large firms necessary? Would breaking them up reduce risk?"

Answer: The principal cause of the financial crisis and economic slowdown was the collapse of the global credit boom and the ensuing problems at financial institutions, triggered by the end of the housing expansion in the United States and other countries. Financial institutions have been adversely affected by the financial crisis itself, as well as by the ensuing economic downturn. This crisis did not begin with depositor runs on banks, but with investor runs on firms that financed their holdings of securities in the wholesale money markets. Much of this occurred outside of the supervisory framework currently established. An effective agenda for containing systemic risk thus requires elimination of gaps in the regulatory structure, a focus on macroprudential risks, and adjustments by all our financial regulatory agencies.

Supervisors in the United States and abroad are now actively reviewing prudential standards and supervisory approaches to incorporate the lessons of the crisis. For our part, the Federal Reserve is participating in a range of joint efforts to ensure that large, systemically critical financial institutions hold more and higher-quality capital, improve their risk-management practices, have more robust liquidity management, employ compensation structures that provide appropriate performance and risk-taking incentives, and deal fairly with consumers. On the supervisory front, we are taking steps to strengthen oversight and enforcement, particularly at the firm-wide level, and we are augmenting our traditional microprudential, or firm-specific, methods of oversight with a more macroprudential, or system-wide, approach that should help us better anticipate and mitigate broader threats to financial stability. 

Although regulators can do a great deal on their own to improve financial regulation and oversight, the Congress also must act to address the extremely serious problem posed by firms perceived as “too big to fail.” Legislative action is needed to create new mechanisms for oversight of the financial system as a whole. Two important elements would be to subject all systemically important financial firms to effective consolidated supervision and to establish procedures for winding down a failing, systemically critical institution to avoid seriously damaging the financial system and the economy.

Some observers have suggested that existing large firms should be split up into smaller, not-too big- to-fail entities in order to reduce risk. While this idea may be worth considering, policymakers should also consider that size may, in some cases, confer genuine economic benefits. For example, large firms may be better able to meet the needs of global customers. Moreover, size alone is not a sufficient indicator of systemic risk and, as history shows, smaller firms can also be involved in systemic crises. Two other important indicators of systemic risk, aside from size, are the degree to which a firm is interconnected with other financial firms and markets, and the degree to which a firm provides critical financial services. An alternative to limiting size in order to reduce risk would be to implement a more effective system of macroprudential regulation. One hallmark of such a system would be comprehensive and vigorous consolidated supervision of all systemically important financial firms. Under such a system, supervisors could, for example, prohibit firms from engaging in certain activities when those firms lack the managerial capacity and risk controls to engage in such activities safely. Congress has an important role to play in the creation of a more robust system of financial regulation, by establishing a process that would allow a failing, systemically important non-bank financial institution to be wound down in an orderly fashion, without jeopardizing financial stability. Such a resolution process would be the logical complement to the process already available to the FDIC for the resolution of banks.

Monday, December 21, 2009

Happy Holidays everyone!

I'm in Brazil for the spring break and while Europe is freezing to a halt I'd like to wish a merry Christmas and a great 2010 to all my three readers!

To warm the European ones, I went to a fantastic region in Brazil this weekend (Angra dos Reis, about 2 hours from Rio) and took the two pictures below right from my window.

Of course Photoshop and the HDR technique helped a bit, but it is as close to the definition of paradise you can get.

Cheers everyone!

Monday, December 14, 2009

How to know you are from a civilized country - Instrumental Variables proposal

I've just arrived in Brazil for the Holidays, taking one of those crowded flights with a random sample of those that left the country in search of a better life and are also returning for Christmas. I am usually ashamed about the average Brazilian immigrant's behavior and this last flight just reinforced my beliefs (or prejudices...).

During the flight, I was thinking that what really sets apart "civilized" from "non-civilized" societies (or groups of people) is how much individuals from this group respect others around them There are so many niceties simply forgotten by people that show, at least to me, a clear display of the lack of development of human beings.

I think that economists could use the intensity of clapping when a plane lands in their home country as a measure of low development. Shouting "Thank you pilot!" or "My mother loves you for landing us safely" gives your extra bonus points. From my small sample, here goes the ranking so far on a 1-10 scale:

Brazil: Average 10. My last flight: 134.53
Egypt: 9
Italy 7.5
Spain: 6.5
Portugal: 3
US: 2 (although there were many Brazilians in it).
France, Iceland, Sweden, UK: 0.

Perhaps a binary variable would work better... Anyway, suggestions accepted!

R.I.P - Paul Samuelson

Today was a sad day for Economics with the passing of Paul Samuelson.

My first textbook in college was his classic "Economics" and I'll never forget talking about "guns and butter" when talking about resource allocation.

Let his soul rest in peace.

Wednesday, December 2, 2009

New Paper!

I haven't reached that stage in my career in which I can write 10 great papers per year (hope springs eternal so maybe one day...), so I'm happy whenever I have something.

"Equity Lending Markets and Ownership Structure" is joint work with Jason Sturgess (now at Georgetown) and it talks about how equity lending markets are influenced by institutional ownership structure. We are currently exploring how previous results on return predictability given short selling demand shocks are influenced by ownership measures.

Here is the link if you're interested:

Comments are more than welcome!

Tuesday, November 24, 2009

Things I Love about Work

There are many things I love about being an academic. One of the best is the chance to meet interesting people and take part in interesting discussions.

Today IESE hosted a workshop on Football Economics. The event was organized by Barcelona FC and IESE. and opened by Joan Laporta (Barca's president), who even stayed for the whole presentation of the first paper. Johan Cruyff was also in the audience (he's the current manager of Cataluña's national team) and many senior directors of Barcelona.

Papers talked about the market for broadcasting rights, differences between European and US sporting leagues and the labor market for football players.

Overall, a good day.

Tuesday, November 17, 2009

Stress is Bad for your Trading Account

I read this a couple of weeks ago in the FT and forgot to blog about it. Basically Phillips and ABN Amro are teaming up to develop a bracelet to be used by traders that displays a warning if their stress levels are too high. The idea here is that investors might follow irrational strategies if they cannot think properly and should take a brake if they get to stressed out before taking any decisions.

This reminds me of a paper by Andre Lo in which he measures physiological characteristics of traders (like blood pressure) during live real trading sessions and finds significant correlation between changes in cardiovascular variables and market volatility.

Here is a video of how it should work. It looks like really good sci-fi stuff. I wonder if it might help in other situations, like preparing to an interview, approaching girls, or right before some World Cup penalty shoot-out...

Saturday, November 14, 2009


I love to be reminded that we should always put things in perspective. This link here has a great  description of how tiny our cells are. Just slide the bar to go from a coffee bean to an atom.

One of the great mysteries of life is how molecules combined over and over again until it evolved to sentient life. If this isn't a good reason to believe in God, I don't know what else could be.

Wednesday, November 4, 2009

Chance Favors the Prepared Mind

Just read on the FT that "Traders at Goldman made more than $100m in profits on 36 of the 65 days of the third quarter".

I guess that with less competition, those prepared for it and quick to adapt to the new times are making huge tons of money...

Monday, November 2, 2009

Terminator and Real Options

The FT today has an article about the auction of rights to the Terminator movie franchise (a few weeks ago they had also auctioned the rights to the The Teenage Mutant Ninja Turtles for $60mi). The owner will be able to launch new movies, TV series and anything related to the last Terminator movie.

This story reminded me of the Arundel Partners case. The case asks students to apply option pricing theory to value the option to produce sequels to Hollywood blockbusters. They have to estimate the volatility, consider potential moral hazard problems and decide which movies to use when estimating parameters.

This term for the first time  I'll use it in the Corporate Finance course to talk about Real Options. I hope it goes  down well with students. Everyone gets scared the first time they see the Black-Scholes formula on the board...

Monday, October 26, 2009

Weak Dollar

At the beginning of each class of my first-year course this year we spend about 15 minutes discussing the major events in the Financial Times.

One of the "big stories" in recent weeks has been the weakening of the dollar relative to major currencies and, not surprisingly, it prompted many questions about the underlying reasons for it.

In class we discussed many things::
  1.  Recent decreases in risk aversion reversed the "flight to quality" seen during the peak of the crisis.
  2.  Bad monetary and fiscal policy by the Fed and the US Treasury relative to other countries (aka higher inflation).
  3.  Sovereign governments diversifying their reserves to securities in other currencies.
The last time I was a serious student of macroeconomics was almost 10 years ago. Paul Krugman comes up with a sensible argument, but a smart guy like Barry Eichengreen (link here) is not so sure about the death of the dollar.

Saturday, October 24, 2009

GFC and bonuses

This is a really interesting post by Emanuel Derman. I think he is spot on that one of the main problems with the current system is not high profits per se, but actually that these profits are earned largely because of the implied backing given to banks (and the overall market) by the government.

Next week I'll discuss options in class. I think I will use this as an example to talk about puts.

PS - The first time I read GFC I thought it was something like the "Global Fighting Championship" rather than "Global Financial Crisis"...

Friday, October 16, 2009

Why is it so difficult for foreign firms to suceed in China?

The Economist this week is full of interesting articles as usual. One that caught my attention is a piece on why foreign firms face so many difficulties in the country. Language and political regime (a capitalist dictatorship) do not explain as many other countries have the same characteristics.

The article says that firms "... they complain about subsidized competition, restricted access, conflicting regulations, a lack of protection for intellectual property and opaque and arbitrary bureaucracy."

I wonder whether China will ever open their domestic market enough to enable serious competition by foreign firms.

Thursday, October 15, 2009

Perfect Memory

A friend send me this amazing story about a woman that doesn't forget anything that has happened to her in the past 30 years. I wonder what "enhancements" to the human body will be available to us in 30-40 years. I've read some sci-fi stories in which we all have neural implants connected to a huge "Google" that enables us to retrieve any information stored on the internet. I wonder if that will require my exams to be more difficult...

Here is the introduction of the article:
 Wouldn't it be great to be able to remember everything? To see all our most important moments, all the priceless encounters, adventures and triumphs? What if memory never faded, but instead could be retrieved at any time, as reliably as films in a video store?
 "No one can imagine what it's really like," says Jill Price, 42, "not even the scientists who are studying me."
The Californian, who has an almost perfect memory, is trying to describe how it feels. She starts with a small demonstration of her ability. "When were you born?" she asks.
She hears the date and says: "Oh, that was a Wednesday. There was a cold snap in Los Angeles two days later, and my mother and I made soup."

Tuesday, October 13, 2009

Ig Nobel prizes

With the Economics Nobel prize announced yesterday (please don't come with the usual it's-not-an-actual-Nobel-prize story), it is always fun to remember research at the other end of the spectrum.

The Ig Nobel prize awards were announced this month as well, which aim is to reward " research that makes people laugh and then think". I particularlly like the "Growing Diamonds from Tequila" Chemistry award.

Perhaps they should have given Obama an Ig Nobel peace prize too! It surely made me laugh and then think... :)

Sunday, October 11, 2009

Cloud Computing and Data Loss

This is scary stuff, with T-Mobile potentially losing all personal data from its Sidekick customers due to a hardware fault.

I think I do a decent job of backing up the data in my office desktop and my laptop, having  two extra HD to store everything about once every couple of months (not to mention the usual syncing between home and work). I've had some friends and co-workers losing important data and losing a year of hard work with it.

With all the talk about cloud computing and firms using the web to outsource their software and storage needs, it is really scary to think how firms can be affected by losing important data, not to mention lawsuits if the firm also loses its customer's data.

I think that T-Mobile might be in trouble but given the small print in US disclaimers,its lawyers will are more than likely to find a way to avoid liability...

Thursday, October 8, 2009

Light Blogging

Blogging has been light this week. I've got a few classes to prepare and a conference deadline to meet.

Hopefully the weekend won't be as busy!

Saturday, October 3, 2009

It's a Dog's World

Today I read a nice review of a book on how dogs see the world. Personally, I've always a dog person, although I currently don't have a dog. In my parent's house, to my great joy, I have been through some generations of boxers and rottweilers. I haven't read the book, but I surely will during my next vacation.

Inside of a Dog: What Dogs See, Smell and Know is written by Alexandra Horowitz, a psychologist at Columbia with a PhD in Cognitive Sciences.

Here is a small excerpt of the book:
"We humans tend not to spend a lot of time thinking about smelling. Smells are minor blips in our sensory day compared to the reams of visual information that we take in and obsess over in every moment. The room I'm in right now is a phantasmagoric mix of colors and surfaces and densities, of small movements and shadows and lights. Oh, and if I really call my attention to it I can smell the coffee on the table next to me, and maybe the fresh scent of the book cracked open--but only if I dig my nose into its pages.

Not only are we not always smelling, but when we do notice a smell it is usually because it is a good smell, or a bad one: it's rarely just a source of information. We find most odors either alluring or repulsive; few have the neutral character that visual perceptions do. We savor or avoid them. My current world seems relatively odorless. But it is most decidedly not free of smell. Our own weak olfactory sense has, no doubt, limited our curiosity about what the world smells like. A growing coalition of scientists is working to change that--and what they have found about olfactory animals, dogs included, is enough to make us envy those nose-creatures. As we see the world, the dog smells it. The dog's universe is a stratum of complex odors. The world of scents is at least as rich as the world of sight.

Friday, October 2, 2009

100 best blogs for MBA students

I was browsing the web today and found this blog with an interest post on the "100 best blogs for MBA students".  There are quite a few ones that seem interesting.

 If any of my students read this, I hope you find it useful!

Thursday, October 1, 2009

Teaching Duties...

Yesterday I began teaching the 1st year MBAs. The group I'm teaching this year has an even larger mix of nationalities, which really helps when talking about financial markets and what has been happening through the crisis. Everyone can contribute with how it affected their own countries and the measures taken by different governments.

We talked a lot about information asymmetry in markets and how regulation is required to prevent bad behavior to arise. There's been plenty of bad examples: sales teams giving mortgages to people that had no likelihood of repaying their loans, investors putting up their money in investments that promised huge returns with low risk (e.g. Madoff).

The scary bit is that even supposedly "smart" and informed investors made huge bad calls. I'm not really sure whether better regulation would really help these type of investors to avoid making stupid investment decisions.

Tuesday, September 29, 2009


Last week I was searching a citation for a paper I'm writing (hope my co-author reads this to see that I'm working!), and by accident I opened this link, with a very interesting introduction to a book that talks about how economic development is affected by cultural characteristics of a particular country.

It shows that a country's stereotype varies a lot over time (e.g. the Germans were perceived  by the British as being "indolent and dull" in the 19th century) and begins with this very interesting anecdote. Read it until the end and tell me if you weren't surprised with the ending:

"Having toured lots of factories in a developing country, an Australian management consultant told the government officials who had invited him: “My impression as to your cheap labour was soon disillusioned when I saw your people at work. No doubt they are lowly paid, but the return is equally so; to see your men at work made me feel that you are a very satisfied easygoing race who reckon time is no object. When I spoke to some managers they informed me that it was impossible to change the habits of national heritage.” 

This Australian consultant was understandably worried that the workers of the country he was visiting did not have the right work ethic. In fact, he was being rather polite. He could have been blunt and just called them lazy. No wonder the country was poor – not dirt poor but with an income level that was less than a quarter of Australia’s. 

For their part, the country’s managers agreed with the Australian but were smart enough to understand that the “habits of national heritage”, or culture, cannot be changed easily, if at all. As the 19th-century German economist-cum-sociologist Max Weber opined in his seminal work, The Protestant Work Ethic and the Spirit of Capitalism, there are some cultures like Protestantism that are simply better suited to economic development than others.

The country in question, however, was Japan in 1915. It doesn’t feel quite right that someone from Australia (a nation known today for its ability to have a good time) could call the Japanese lazy. But this is how most Westerners saw Japan a century ago."

Sunday, September 27, 2009

Worst Investor Award

The Economist this week reports a fun contest sponsored by Hedgeable.com: who was America's worst investor during the crisis?

This sounds like a great publicity stunt to me. The winner gets a free trip to Rome (2nd ant 3rd places go to Iceland and Vegas).

The good thing about not having meaningful savings is that I didn't have to worry about decreasing prices! I feel that lots of people were convinced by their investment managers to get into the market with the same reasoning of the picture on the left.

Here is the link with the description of the actual contest:

Thursday, September 24, 2009

5...4...3...2...1 ...

The Economist has created a Global Debt Clock, with data on public debt of different countries for different years (including projections up to 2011). Out of curiosity I decided to look at the numbers for Brazil, the US and the UK.

The ratio of public debt to total GDP in Brazil is expected to grow from 37.1% in 2008 to 44.5% in 2011, which doesn't look that bad.

The US is expected to go from 39% to 66%, which doesn't look that good, specially against its long term average.

The really scary number is for the UK, whose debt is expected to grow from 49% to 93% of GDP.

These clearly show the different efforts made by governments to rescue their economies. I expect that people in the UK are very likely to face either tax rises or big decreases in public services expenditures in the near future.

Wednesday, September 23, 2009

World War II & Protectionism

I'm a big fan of World War II history and usually read a book on the subject over the summer. I'm midway through the "The Wages of Destruction" by Adam Tooze.

On a different take than most WWII books, the author tries to view the conflict through an economics point of view. Something that drew my attention is how the Great Depression had a significant impact on international affairs during the 30s. In particular, I found incredible how the protectionist measures taken by individual countries (i.e. the usual "beggar-thy-neighbor" policies) ended up making life much more difficult to people in terms of reducing international trade and having domestic production of clearly inefficient goods.

I wish that leaders from the G20 take up the opportunity and give the Doha Round on multilateral trade another go.

Monday, September 21, 2009

Are you happy with financial markets?

A friend sent me the picture above that reminded me of the financial crisis (yet again). If we ask the question: "Are you happy with financial markets?" I get the feeling that we are closer to "No" and "No" above.

To be honest, even if we get to "No" and then "Yes", I have a feeling that we still won't be happy with outcome given the current changes that have been implemented.

I think that people are thinking that we can push implementing measures

Sunday, September 20, 2009

A Defense of Modern Macroeconomics

Last week I blogged about Paul Krugman's article in the NYT. His article caused a great stir in the economics profession, with strong reactions from both sides of the "freshwater/saltwater" camps.

This article by Narayana Kocherlakota (U Minnesota) makes a defense of current macroeconomics models and try to counter some of the criticisms. I agree with most arguments, but I still think that many people over-relied in models that were clear simplifications of reality.

As he mentions in the article that I also agree, one of the consequences of the crisis will be to open new avenues of research to Econ and Finance professors, having showed us the importance of some characteristics (specially institutional) that were overlooked and should be essential parts of models.

Tuesday, September 15, 2009

Different Bear Markets over Time

This link here is old but I think it gives a pretty good comparison of the severity of crisis through time.

It is really amazing how big the Great Depression was. It must have been tough to live it through...

Sunday, September 13, 2009

State of Macroeconomics

This article on the NYT by Paul Krugman asks how economists got the crisis so wrong. In my opinion, the crisis brought about some serious soul-searching for lots of people, specially macroeconomists, whose mainstream models (by this I mean the neoclassical paradigm) didn't help much in preventing / explaining the crisis.

I'm not saying anything new here, but a big part of the problem is that many models push aside the role of financial markets and the importance of imperfections out there. Of course simplifying assumptions have to be made in order to help our understanding of the world, but sometimes people get carried away and take their models too seriously.

Well, I hope we at least learn something for the next crisis. It's much easier to do empirical than theoretical work these days!

Saturday, September 5, 2009

Will Electric Cars Become a Disruptive Technology?

The Economist this week has an interesting article discussing if electric cars will turnout to be a "disruptive technology" and forever change how our cars are powered.

There are obvious advantages to cell cars: like lower fuel costs, higher efficiency and a big potential to use renewable energy sources.

It would be really nice if we are able to develop a network of recharging stations (the trial being made in Israel is particularly interesting), benefiting from economies of scale.

Something I'm curious to know is what companies (from Apple to Bosch to Honda) do with batteries after they die. Can they recycle the chemical components into other batteries and/or useful things?

Friday, September 4, 2009

So Close... And Yet So Far

Perhaps THE biggest question in Finance is what makes expected returns vary from one security to the other. The idea that getting higher expected returns cannot be generated without bearing more risk has driven the revolution and spurred a million papers, either trying to show that it works or it doesn't.

Avanidhar Subrahmanyam has just released a paper on SSRN in which he reviews many variables and methods that people have used to predictor returns (like P/E, size, liquidity, etc.)

He writes "our learning about the cross-section is hampered when so many predictive variables accumulate without any understanding of the correlation structure between the variables, and our collective inability or unwillingness to adequately control for a comprehensive set of variables."

With so many people, testing so many variables, with so many different methods, it is often difficult to really know whether a given variable can truly predictive future returns or it is just reflecting correlation with something else.

It would be nice to see a paper trying to run a "horse-race"of lots of variables at the same time (I mean a lot, not just 4-5).

PS - The article cited that shows that garbage production in the US is a better proxy for consumption than standard measures is really cool.

Wednesday, September 2, 2009

Let There Be Light!

How to measure GDP growth in places with poor statistical resources? A cool measure is to look from the sky at night! These economists use change in lighting at night as a proxy for GDP growth.

The picture below shows lights in Eastern Europe in 1992 to 2002. Look how Poland, Slovakia and Hungary (to the left) did much better than the former URSS republics (Moldova, Ukraine and Belarus, on the right)

I love when economists use clever thinking to solve problems! I just which they could do that to solve the crisis ;)

Monday, August 31, 2009

Dutch Disease - Brazilian style

Today the Brazilian government launched the regulatory mark for the exploring the gigantic deep-sea oil fields found near the coast of Rio de Janeiro in 2008. For those who haven't heard about it, the "Tupy" oil field is the biggest Western Hemisfere discovery in the past 30 years and could make Brazil have the fourth largest oil reserves in the world.

The billion-dollar question is whether Brazil will follow Norway into sensibly using these riches or will be another case of the "Dutch disease". Alas, the government did not make a good start, following the old populist tune of politically exploiting something that will only be operational around 2020-2025. Rather than following the mark established in 1998, which gave a huge boost to oil exploration in Brazil by creating incentives to private-sector investments, it is bringing back the old nationalized system, recapitalizing Petrobras (the Brazilian oil company) and giving it at least a 30% stake in any group exploring the wells.

It is a mistake to change the system. They should just sell licenses to the highest bidder as under the current legislation. This would reduce the CAPEX burden on the company, increase government intake and foster further development of the reserve...

We have a saying in Brazil "De onde menos se espera, daí é que não sai nada mesmo" that can be poorly translated as: "From where you least expect things to happen, this is from where things really won’t be happen"...

I'm pessimistic about raising my (future) children in Brazil.

Friday, August 21, 2009

Presenting your results nicely goes a long way in convincing people

I believe that presenting your results in engaging and intuitive ways makes it much more likely that anything you do is successful. This applies to any new business, a research paper and (at least in theory) to politicians' arguments.

I particularly like this graph showing the size of banks before (in color) and after the crisis (in black). This one further divides banks by countries, which puts in perspective the size of each bank relative to its home country:

The Information is Beautiful site also displays cool data in (mostly) interesting ways.

Friday, August 14, 2009

Reaching the Summit and Getting Back Safely

Cool article by Andrew Lo at the Freaknomics blog.

I think that mechanisms should be in place that reward managers not only on the upside, but also when they suceed in steering companies through crises.

Tuesday, August 11, 2009

Astrology Blogging: Ibovespa Index

Click on the graph for a much better image. (NOTE: Does anyone an easy way to post stock charts?)

WARNING: Assume that markets are efficient Yes, I still believe they are most of the time.

I hate trying to forecast the future (don't all economists do...), but this is something that I find odd. Below is the latest graph on the Brazilian stock market index (IBOVESPA) from early 2005. From the 72,000 peak in May-08, the index had fallen more than 50% by Nov-08. Since then, it has gone up by more than 80% and is now around 56,000. The index is about 20% below the probably overoptimistic levels of May-08, but getting close to its value in Jan-08 (still about 10% to go).

My point is: Aren't prices highly overvalued again? Are the prospects for the Brazilian economy really as good now as they were in January 2008? Most of the good news were already known (the new gigantic oil fields, macroeconomic polic stability, etc.). Alas, we now have a bunch of worries on the negative side: smaller domestic growth, big uncertanties about the speed of global recovery, deterioration of public-sector finances, smaller commodity prices upside potential, presidential elections in 2010, etc...

Those that know me, know that I'm no fan of the current goverment and its usual lack of rationality to analysis policy issues (to be honest, almost all). Let's just hope that we are not up for huge disappointment later. If it does, at least I hope it happens before the elections...

What do you think? Am I the pessimist about Brazil? Perhaps living abroad for such a long time has made me even more skeptical...

Wednesday, August 5, 2009

The Internet sometimes dumbs down the world

This reminded me about a writer (? I forgot his name) that criticizes the Internet for the drawback of contributing to dumbing the world down. Nowadays, it is so easy to google an "answer" to almost everything that it makes it easy for people to oversimplify policy issues (as Brazil's president usually does) and pretend that everything can be solved by applying layman's intuition to complicate problems.

Last month I read a wonderful article on Intelligent Life titled "Is Google Killing General Knowledge?" that makes wonderful read. I past a small exerpt below and I highly recommend reading it in full.

"One day last year a daughter of Earl Spencer (who is therefore a niece of Princess Diana) called a taxi to take her and a friend from her family home at Althorp in Northamptonshire to see Chelsea play Arsenal at football. She told the driver “Stamford Bridge”, the name of Chelsea’s stadium, but he delivered them instead to the village of Stamford Bridge in Yorkshire, nearly 150 miles in the opposite direction. They missed the game.

Such stories are becoming commonplace. A coachload of English schoolchildren bound for the historic royal palace at Hampton Court wasted an entire day battling through congested central London as their sat-nav led them stubbornly to a narrow back street of the same name in Islington. A Syrian lorry driver aiming for Gibraltar, at the southern tip of Spain, turned up 1,600 miles away in the English east-coast town of Skegness, which has a Gibraltar Point nearby.

Two complementary things are happening in these stories. One is that these people are displaying a woeful ignorance of geography. In the case of Stamford Bridge, one driver and two passengers spent well over two hours in a car without noticing that instead of passing Northampton and swiftly entering the built-up sprawl of London, their view continued to be largely of fields and forests, and they were seeing signs for Nottingham, Doncaster and the North. They should have known.

The other is more subtle. Everybody involved in these stories has consciously handed over responsibility for knowing geography to a machine. With the sat-nav on board, they believed that they did not need to know about north or south, Spain or England, leafy Surrey or gridlocked Islington. That was the machine’s job. Like an insurance company with its call centre or a local council with its bin collections, they confidently outsourced the job of knowing this stuff, or of finding it out, to that little computer on the dashboard..."

Friday, July 31, 2009

Geeko is Back... and beating up evil short-sellers

Today I was reading a somewhat old story about the sequel to "Wall Street", which is to be called "Money Never Sleeps" and will be set in London this time. Michael Douglas replays his role as Gordon Geeko, while the villain (shouldn't that be Geeko's part?) is going to be a hedge-fund manager who loves to short companies (side note: apparently Javier Bardem backed out of the sequel to make a movie with Julia Roberts. I would.).

It is funny - or sad, you name it - that the movie is set in London and the villain is a hedge-fund manager. The excesses of the City certainly contributed to this image of London being an over-priced place where traders spend their humongous bonuses over-paying for things. Unfortunately, I don't think that the crisis will improve the city's image. Large bonuses will always be around, on top of London being a magnet for rich people that don't want to go to NY.

More interesting is the bad publicity received by short-sellers during this crisis, which definitely contributed to evil character in the movie using it. Academics (humbly including myself) have shown that short-selling is usually a good thing to markets, even naked short-selling.

However, most investors see it as an unlawful way to make money. People never complain when manipulation drives prices up and short-sellers help to bring them down by bringing information to the markets. Neither they complain about the huge liquidity that short-selles bring to the market (about 30% of total) when they need to sell their holdings. Liquidity that decreased a lot during the SEC ban on short-selling right after Lehman's bankruptcy.

I guess it has to do with the behavioral argument that people hate to talk about negative events... Specially the bad CEOs that blame short-seller for their falling sharing place when it is really ccaused by their own poor management.

Sunday, July 19, 2009

Blaming Liberalization IS NOT Cool

The current crisis has been partially blamed on the deregulation of financial markets over the past 10-15 years. The argument goes that this enabled evil bankers to sell mortgages to people with no chance of paying them back, nasty derivatives that were sold to dumb investors with no idea about what they were buying, etc. etc.

Since my undergrad, I'm a firm believer that governments should intervene as little as possible in private transactions, creating a level playing field for all everyone involved. The current crisis has showed, alas again, that individual excesses can lead to huge systemic risks.

People often mistake deregulation with BAD implementation of deregulation, specially when it is done without proper incentives and institutions to prevent people from gaming the system afterwards. (Note for future-post: Basel II might cause trouble in the future for the same reason).

This reminds me of a similar argument that I often see in the press about the failure of the "neoliberal / Washington Consensus" reforms to improve Latin American countries during the 90s.

You cannot have first-class markets if you do not also develop first-class institutions...

Monday, July 13, 2009

Working vs. Having a Life

Today I was wondering about what would happen if we worked as much as we all know we should. I mean, REALLY work. Not pause every 20-30 mins to (pick your favorite): browse the Internet, answer emails, have a coffee, or just look at window and think how nice it is to have an ocean view at work.
In the other hand, it cannot be good in the long run to work like a robot 24-7.
How inneficient should we be in order to be as efficient as possible?

Saturday, July 11, 2009

Everything that has a beginning...

Today I was reading the FT's Book Review section and remembered that this month we celebrate the 40th anniversary of the Moon Landing, one of the few true world-stopping events of all time.

At one point during his visit to the Moon, Neil Armstrong realized that he could extend his fist and, using only his thumb, blot out the earth. Asked later if this made him feel like a giant, he said, "No, it made me feel really, really small".

Space exploration has always deeply fascinated me. The infiniteness of the Universe, the fact that ours is just a small planet in the corner of a very ordinary galaxy, the tiny chance that there is a multitude of planets full of people, well, so many mind-boggling things spring to mind whenever I think about it.

People need challenges, long-term goals, dreams! Exploring is, and will always be, a part of us. Be it sending people 20,000 light-years away on a flying casket, researching a new medicine or, in my case, finding out more about financial markets, these are just different ways of searching for the truth.

In my first post I say to all those exploring our world through whatever endeavours you chose: "Cheers!"