Curious

How long for Turkey? How long's a piece of string?

noreply@blogger.com (Curious) — Wed, 29 Nov 2006 20:31:00 GMT

Turkey should be part of the EU by now; it is a very important/strategic member of NATO and is important for security.

My view of Turkey is that it continues to perform well as an economy. Its central bank has some credibility with regards to inflation targeting, and the IMF recently stated that it was happy with its pension reform, which amongst other things, provides a “good” sentiment about the country. On the flip side, public finances could be improved upon, with a fiscal deficit that leaves little to the imagination of how it might be funded. Comparative advantage in the textiles sector continues to diminish due to stiff competition, though still supports a large labour force. The economy is not bad, and could do better – a statement that holds true for many “performing” countries, and indeed, some EU members.

“Those who live in glass houses should not throw stones”

The EU - as a unit – is ill placed to hurl accusations of unacceptable standards at anybody. Famous for protectionist policies (citing France and Italy) that directly harm poor countries and a raft of do-as-I-say-not-as-I-do policies that I don’t have the energy to cite at length, it would suffice to say that the EU does not epitomise a halo.

There are quite a few EU members that want Turkey in, against a minority of powerful dissenters, who have made a meal out of antagonising the process. The elephant in the room is the failure to openly recognise the imminent benefits of having an Arab country as an EU member. Perhaps this lies behind a view that traditional European countries are Caucasian countries, rendering non-Caucasoids as immigrants of some order, which would make Turkey a non-Caucasoid EU state. Perhaps!!!! I wonder quite loudly whether the EU might be tacitly entertaining such backward stances. This is just a thought, though not difficult to imagine however.

The West needs to understand Arabs so that it can have better, inclusive policies, which are formed out of genuine need, rather than hasty xenophobia. Turkey will bring more diversity into Europe. Yes, there will be more labourers, but that should be offset by willingness for companies to set-up low cost units in Turkey, a willingness by western companies to engage the Turkish economy. If we in Europe just want to seal the walls around us, then, let’s just do so without the ceremonious nonsense. Better still, why don’t the majority quell the minority dissenters, for the benefit of the greater good? If anybody responds to this question by citing that democracy will not permit such a move, my rebuttal would be - after an expression of shock at their selective ignorance – that democracy is largely ignored in world matters too often to discount, and an apparent lack of knowledge about this warrants no further attention.

I suppose Turkey can join the EU tomorrow if it wanted – metaphorically – it’s a question of how far it’s willing to bend.

How far should any country have to bend?

The fiasco continues…

Coming soon......Turkey and EU accession

noreply@blogger.com (Curious) — Tue, 21 Nov 2006 13:31:00 GMT

My views on this debate will be posted shortly.....

Image from www.europeunited.org

Been away for a while

noreply@blogger.com (Curious) — Sat, 21 Oct 2006 10:12:00 GMT

Hello people,
Apologies for the long period of silence. I have been incredibly busy but will be back very soon.

Keep blogging.
Curious

Development summarised (somewhat)

noreply@blogger.com (Curious) — Fri, 11 Aug 2006 15:46:00 GMT

I saw this link this at C'est vrai. Absolutely fantastic. The World Bank and IMF should watch this (and probably NGOs).

It is a cartoon book that summarises the western development idea and the real outcomes.

Have a look at "New cartoon book that satirises 'development'"

Picture: Book cover from Survival International

The status quo principle and the Middle East

noreply@blogger.com (Curious) — Mon, 7 Aug 2006 10:48:00 GMT

Catallaxy writes an interesting peice, illuminating various schools of ideas surrounding the middle east crisis.

Some excerpts are as follows:

"The west exported Marxism and nationalism to the rest of the world with truly disastrous consequences. Can we find a way to export better ideas? Do we have better ideas?"

"Just as some would now depict Israel as the embodiment of all that is wrong with the world, for these supporters it has become the foremost fighter for what is right. As a consequence they sometimes make it seem that, if you want to defend democracy and civilisation, then you have to support bombing raids on Lebanon. In similarly shrill fashion, leading supporters of Israel insist that the drunken outburst by Hollywood star and Catholic crackpot Mel Gibson, about how ‘the Jews are responsible for all the wars in the world’, is somehow proof of a rising tide of anti-Semitism in the Western world."

Read on here

Good people do nothing

noreply@blogger.com (Curious) — Tue, 1 Aug 2006 09:48:00 GMT

"All that is necessary for evil to succeed is that good men do nothing." Edmund Burke

Alexcia write's a refreshing piece covering the Israel-Lebanon crisis, amongst other issues. The post starts:

"As the tiny nation of of Israel pounds all its fears and frustrations on another tiny nation and inchoate democracy in Lebanon, the "Good people" of the world do nothing, say nothing and even engage in "i told you so" self righteousness and "you brought it on yourself" crap. Last I heard, the kawa citizen of Lebanon was being asked to get rid of the Hizbollah "terriosts" by himself or be bombed and punished."

...Read on here

WTO chit chat - ad nauseam!!!

noreply@blogger.com (Curious) — Mon, 24 Jul 2006 12:56:00 GMT

Why, oh why do we still have trade rounds??????

This is one issue in which the outcome is known by even the most illiterate in the remotest part of the world. Today's Financial Times provides an appropriate summary:

"Three things are absolutely certain about the outcome of farm subsidy talks in Doha. First, the EU will say the US is not doing enough. Second, the US will say it is doing more than enough.....[the third is knowledge specific]"

and another....

"Kamal Nath, India's trade minister, who has millions of rice growers to protect, is fond of saying: "Indian farmers can compete with US farmers but not with the US Treasury.""

On the 24th July, the Financial Times reported that:

"Doha trade talks collapse over farm subsidies...
...The talks, launched in November 2001 in the Qatari capital, have strained from the beginning to reconcile the disparate interests of WTO members."

The WTO is not a forum for the world's citizens. Instead, it is a club for the elite, who continually decide to squeeze the hungry, and the afflicted for the gain of the already wealthy nations. I don't understand how humans can treat other humans with such dispassion, as though they don't exist. I don't understand how any nation can stand in front of an international audience and impose double standards as clear as daylight, but it happens everyday.

The impasse that swiftly gets into play in Doha rounds is to do with how much more the poor can be squeezed [answer: much more], and how policy can be fairer [answer: not any more than it currently is - unfair]. The WTO should be disbanded or have its mandate rewritten by the people who matter, not those in power.

Dollar safe haven? I don't think so!!

noreply@blogger.com (Curious) — Fri, 21 Jul 2006 12:32:00 GMT

Yes ! the dollar has gained some strength on the back of more risk aversion.

Yes ! interest rate arbitrage continues to be a big determinant in which currency will underlie investments.

My view is that there is more downside than upside risk for the dollar. This is because of:

The growth-inflation trade-off issue that is bothering Bernanke, with sources of inflation being partly exogenous. The US gasoline market is hugely exposed to oil price movements, which openly and directly exposes US consumers to [almost] the full effect of changes in oil prices.
Core inflation will continue to be under upward pressure from rising imported goods prices.
As the Fed struggles with the inflation-fighting mandate, the economy has long shifted from the goldilocks position into possible stagflation.

and possibly most importantly:

Anything that is going to be a challenge for America is bearish for the dollar. What are the current challenges: 1) the ever worsening Iraq situation, 2) American-Iranian relations, 3)American-Russian relations, 4) American-North Korean relations and 5) The effect and subsequent costs (in money terms) of taking Isreal's side in the current 'situation' between Israel and Lebanon.

Over the medium to long-term, challenges such as those posed above will weigh down on the dollar's image as a safe haven currency. They will have a net negative effect and that will translate into poor confidence in the country.

Over the immediate term, some may cite that moneys from oil and commodity producing countries are being loaned to America in exchange for bonds. However, all that will achieve is another bond market bubble, with an inverted yield curve (because the long end is falling, relative to the short end).

Does the above constitute a good investment strategy? I think not.

Let me point some focus on two things :
>
1. Between the end of 2002 and June 2006, a long real/short dollar carry, and a long lira/short dollar carry strategy would have yielded between 26%-30% average annual returns (sharpe ratio approx 1.95), outperforming most (if not all) major FX trading strategies.
>
2. Due to the flight of investor capital away from emerging markets, assets within these locales are relatively cheap, with even more potential for big gains upfront.

Emerging markets are now sources of cheap assets, relative to the period before the recent resumption of risk aversion. At some stage (very soon) investors will begin to purchase these assets and hold for the band wagon effect, at which stage they'll have made big returns and may be slightly indifferent about closing their positions or continuing to hold the assets. Why will they be indifferent? Because a simple cross-over trading rule can be implemented to limit losses.

Soon, money will rush back into emerging markets. Watch and see!

Validated - flow of investor funds into poor countries

noreply@blogger.com (Curious) — Tue, 11 Jul 2006 09:38:00 GMT

Well, the ink is barely dry (metaphorically) on the recent piece that I wrote titled Political uncertainty - a money machine, where I highlighted that poor countries will very soon find themselves overrun with cash due to investor greed for high returns, as opposed [obviously] to acts of philanthropy.

The Investors Chronicle magazine (owned by the FT) has published an article in its latest issue* titled Emerging markets funds: Undiscovered Africa, in which the author starts:

"If you want to find genuinely emerging markets that are not simply geared plays
on the US, then you need to look to Africa"

The author also rightfully states that Africa is not for the faint hearted, I agree and add that emerging markets in general are not for the faint hearted. Only the risk loving, high yield seeking investors will be found in these markets. Why? Because there are no other alternatives. Yes, really !

For now, the US is offering near comparable returns on its 10 year bonds with far less risk compared to emerging markets. But let's not forget that the US is going to have to stop its contractionary monetary policy because such a policy will soon push the US consumer too far into financial constraints. If this happens, the Fed will then start lowering interest rates dramatically so that it can assist in delivering reasonable economic growth (which is part of its remit, coupled with inflation fighting). So, comparatively high returns on US bonds will be short lived, hardly a proper strategy for a consistent high yielding portfolio. Already, global investors are indifferent between US 3 month currency futures and 10 year bonds (3month money and 10 year money), which leaves them still searching for higher yields (more likely outside the US than in other asset classes within the US).

Money did start to [noticeably] exit the emerging market scene (a bit of capital flight), but that - as always these days - was a market overreaction, where everyone feared another repeat of the Asian Crisis kind. But, risk aversion is a luxury (I am convinced), because if you are risk averse, you may as well keep your money in your mattress because depositing it into a high-street bank is equally unimaginative (though you may not think so). I personally endorse the concept of making my money work hard for me, getting as much leverage and gearing as possible, otherwise, I sacrifice a rather large opportunity cost by just depositing cash into a bank account.

I now expect many market commentaries talking-up emerging markets, and going further to highlight a wider range of poor countries as potential for new money investment. I said it first :-)

*(dated 7th-13th July 2006, page 7 of the feature articles)

Pic of the week - wimbledon?

noreply@blogger.com (Curious) — Fri, 7 Jul 2006 12:11:00 GMT

Click to enlarge

From the Econimist magazine

These lot aren't seeded, but it's just a matter of time....

Political uncertainty - a money machine

noreply@blogger.com (Curious) — Thu, 6 Jul 2006 13:52:00 GMT

The first priority for developed countries was to maximise their own growth, achieve high levels of prosperity, enviable living standards, high standards of education, etc. Heavy protectionism is typical at this level.

The second priority for the developed world was to trade more openly with others of the same ilk, so that there could be a mutual gain. National champions, tariffs and subsidies became less important, as inclusivity became more important. The EU is one such unit.

What else can the developed countries do to continue growing?

If these were the colonial days, colonial empires would overrun many poor countries. However, those days are long gone, and many of us in the west try to imagine that it didn't happen (through absolving ourselves of the consequences of interference).

Developing countries have been the object of attention from the West for financial gains for a long time. From the old-school mining industry, to the new-school financial markets (sovereign risk). The wealth of political uncertainty that developing countries present is the chowder that feeds volatility in financial markets. Without volatility, markets are boring, traders make very small margins from closing one position and re-hedging another, moving horizontally, etc. The market cannot thrive without volatility and developing countries have it in abundance. Volatility separates the risk loving from the risk averse. It is the sieve that sorts the wheat from the chaff.

I do believe that, within the developed countries alone, avenues for money making (new instruments/derivative products, etc) have almost been exhausted, and due to good macro-economic management, the economies are sound (sound economies do not thrive with volatility). Heavy business regulatory burdens from the respective developed country governments are the only thing that creates some "noise" in that it causes firms to merge or relocate, in an effort to reduce the amount of tax burden, or to take advantage of a loophole in regulation. This is by no means the future for developed countries.

Very soon, investors will be queuing up to invest even in the most unthinkable countries (which I will not mention. I don't want any embassies writing to me). If you are reading this from a poor country, wondering what the future holds for the nation, wondering whether the west will ever help poor nations like it should, take heart in the knowledge that the west will be falling over itself to throw money into developing countries. Why? Not because of benevolence, but because of greed. The desire to make money will take western conglomerates to the doorsteps of the most impoverished in the poor world.

Needless to add, political uncertainty fuels the arms trade, which in itself is big business that involves developing countries.

Ironically, someone else's greed will put food on your table - finally !

"Man has almost constant occasion for the help of his brethren, and it is in
vain for him to expect it from their benevolence only......It is not from the
benevolence of the butcher that we expect our dinner, but from his regard for
his own interests"
- Adam Smith

Inflation oversight goes a long way

noreply@blogger.com (Curious) — Mon, 3 Jul 2006 14:54:00 GMT

So the global economy has had broad money supply (M3) growth outstripping money GDP growth since the year 2000. The outcome is not rocket science.

>
What happens when there is excess liquidity in the global economy? It is used to purchase all manner of assets, from property, to equities, to bonds, to paintings, to anything and everything. Global aggregate demand for goods and services increases, which creates stiff competition for the limited goods and services available in the economy, resulting in rising prices = inflation.

>
The world economy - and certainly the G-10 - has had a liquidity overhang for some time now. Central bankers have been talking about the possibility of this excess money rushing into specific assets, causing outright bubbles (like the dot.com bubble). What has happened instead is that the money has rushed into a broader basket of assets, from the UK to Iceland, US to S.Africa, etc. Following the US Fed reserve's interest rake hikes, global investors are re-pricing risk and rushing their money into the US, to take advantage of similarly high yields but in a low risk environment (arguably risk-free). The consequence of investors quickly closing their investment positions and pulling funds out of one region/asset class, and into another region/asset class overnight is a lot of market volatility. Financial crises can occur in weaker economies and contagion would soon follow.

Right now we have a lot of market volatility, uncertainty and risk averseness because we have caused it. This does not necessarily imply that we have a danger of recessionary times ahead, it simply implies that the market is (as always) being driven by sentiment, mainly greed, then swiftly followed by fear.

>
The inflationary pressure (upward) that is now "terrorising" the minds of many a central banker has been caused by energy prices, commodity prices and too much money running around.

>
Solution:
Let it [current inflation] pass through [the economy] because most of its stimulus is exogenous. Be warned about the risks of monetary policy over-zealousness. Central banks cannot remedy externally driven inflation, they can only remedy domestically generated inflation. Right now there is a big push for central banks to be seen taking stances and talking tough about inflation, but if the current inflationary pressure proves to be transitory, big economic troubles will be brought about by central bank over-excitement.

The cost of the Iraq war, in context

noreply@blogger.com (Curious) — Mon, 22 May 2006 15:05:00 GMT

By Martin Wolf of the Financial Times.
>
Definitely worth a read, but if you haven't got a subscription, listen to his free podcast here instead.

"Before the Iraq war began, Lawrence Lindsey, then president George W. Bush’s economic adviser, suggested that the costs might reach $200bn. The White House promptly fired him. Mr Lindsey was indeed wrong. But his error lay in grossly underestimating the costs. The administration’s estimates of a cost of some $50-$60bn were a fantasy, as were Saddam Hussein’s weapons of mass destruction, and much else."
>
Listen here

Hands off the internet

noreply@blogger.com (Curious) — Mon, 22 May 2006 14:04:00 GMT

Click here to watch a very short flash presentation about how regulation is attempting to change the internet. If you blog, etc, it affects you because it may eventually affect your [civil] rights (and in some cases - where required for persecution reasons - anonymity).

Have a look: Hands of the internet.

Teleshopping - guns for sale !!

noreply@blogger.com (Curious) — Mon, 22 May 2006 13:30:00 GMT

This is a poignant illustration by Oxfam. If it comes across as ridiculous (the concept of it), then the sad truth is that for those that deal in arms trade, it is as simple/ridiculous as what you see in the Oxfam video.

Watch it here: Guns for sale

See the following link as well: The problem with arms is...

Answer to Asia’s rise is not to retreat

noreply@blogger.com (Curious) — Mon, 22 May 2006 12:54:00 GMT

Martin Wolf of the Financial Times presents (in a podcast) the facts about how developed economies should respond to up and coming Asian economies. It is refreshing, and he utilises basic pure economic argument that is literally common sense, to explain the pros and cons.

To quote him on another of his podcasts (Tyranny of vested interests), the [simple] solutions to the challenges posed are deemed easy to achieve, which couldn't be farther from the truth. The tyranny of vested interests is a heading that fits perfectly over the current developed world stance, vis-à-vis emerging and poor countries.

Listen to his other podcasts here

One theme that keeps precipitating in my research is that we [in the world] are now well knowledgeable about what holds us back, the threats to globalisation, international integration and the lot of it. The forces of vested interests that distort world trade and subsequently incomes, etc, and the vested interests behind corruption within poor countries are behemoths that are difficult to breakdown and eliminate. This has been explained ad nauseum.

It appears that the modus operandi is for a politician or celebrity to come along, every now and again, to remind us of the consequences of our inward vision and inaction, often with an agenda of their own. It is refreshing when an economic heavyweight such as Mr Wolf reminds everybody that the solutions are not rocket science, they just lack support. As simple as that, but how do you effectively generate consistent support?

Dollar - appreciating or depreciating?

noreply@blogger.com (Curious) — Fri, 19 May 2006 10:31:00 GMT

The markets are confusing many, myself included. This is a time when even seemingly positive information is working against the respective home currency for "other" reasons. Let me explain.

When the Fed signalled that its monetary tightening might have come to an end at 5%, the expectation was that, say, sterling would appreciate against the dollar, as attention - finally - turned to fundamentals like the current account deficit and the inflationary impact of the insatiable appetite of the US consumer. But, even though sterling has appreciated against dollar, the impact of cheap imports has been disinflationary in the US, which has allowed investors to still see the dollar as a worthwhile vehicle for carry trades, creating some dollar support.

There was a recent upside surprise in US inflation data, which now has markets speculating that the FOMC may raise interest rates to keep in inflation under control. This has generated two opposite views:
1. Some will now go long on the dollar, expecting the inflation-controlling moves to be supportive from a currency perspective.
2. Others are selling dollar because they are concerned that the US may be close to the tightening tipping point, from which further interest rate rises will cause a retrenchment in consumer spending and a slowdown in the rate of economic growth.

So, the question is do you buy dollar or sell dollar? Apparently dollar traders have been selling Euro and buying dollar (which supports a dollar appreciation), and Euro traders have been doing the opposite, selling dollars and buying Euros (resulting in Euro stability).

The consensus seems to be that the dollar should depreciate but nobody wants it to do so relative to their currency, and especially not the Asian economies. Therefore, there may be some intervention that is preventing the dollar from breaching the $2/£ mark.

In the UK, the housing market seems to be continually improving, retail sales volumes have also been improving (year-on-year); explained by short-term household liquidity (with price discounting in consideration), and surveys suggest a positive picture for the economy, which, in totality, makes a neutral-hawkish MPC look likely to turn more hawkish than neutral, a scenario that would favour sterling.

Which way are we going?

Even with a more hawkish than neutral MPC, raising UK interest rates may not happen for the near-term. Why? Because, the sterling exchange rate index (ERI) has risen quite a bit, helping to keep the rate of UK inflation lower than it could be (because of cheap goods for UK consumers, relative to our exports), which is comparable to raising interest rates. So the ERI has done/is doing the job for the MPC, creating a disinflationary environment.

I don't know how anyone can make a decisive strategic decision regarding dollar-sterling at the moment. Does anyone hold a different view?

So, why are economists different?

noreply@blogger.com (Curious) — Thu, 6 Apr 2006 14:21:00 GMT

...because they do it in an edgeworth box.

Sorry, I couldn't resist!!

So, here's a paper that explores why economists are different from the rest of society. I don't know where I stand on it, because I found the conclusion somewhat leaning towards an apologetic stance.

See what you make of it (pdf):
Why economists are different from Mahalanobis

Efficiency bias

noreply@blogger.com (Curious) — Tue, 4 Apr 2006 14:42:00 GMT

Chris Dillow (author of Investors Chronicle page 42 comment, and Stumbling and mumbling blog) asked in the Investors Chronicle dated 31st Mar - 6th April, why people don't believe that markets are efficient.

Chris states:

"But why do so many people believe - contrary to both common sense and the evidence - that markets are inefficient, and that we can risklessly beat the index by using our own skill? I suspect numerous cognitive biases are to blame."

He adds,

"An obvious one is wishful thinking - we like to think there's easy money to be made. This is buttressed by the Lake Woebegon effect: we all believe we're smarter than all the other idiots in the market."

To both the above points, I would like to point to the existence and good performance of hedge funds, especially in the recent past. I am aware that the market is mostly efficient, in that one is not likely to easily find a mispriced asset, and once found, a majority of household investors have not got the resourceful capability to quickly or easily arbitrage it. But the existence of hedge funds and the large volumes of money that can be made from such undertakings undermines the theory of perfectly efficient markets. Investors might be delving into areas of knowledge previously only privy to hedge funds and may be inclined to take more risk for higher return. I suppose that the efficient part of the market is boring as an investment prospect because it puts everyone into the same box. We are sufficiently different as people when it comes to tastes, risk preference, etc, and some people will pay considerable amounts of money (premiums) to be different from the sheep. However, the sheep will find safety in numbers.

I think there is easy money to be made in the market, if you know where to look and – most importantly – have enough of it to start with. We live in a time when information is more readily available in depth and breadth, and those that have it will find arbitraging opportunities, created by those without full information. Just like accountants are forever devising new portfolios that are tax efficient, and remain so until the respective tax collecting arm of the respective government gets fuller information and imposes taxes retrospectively. But even then, it’s always cat and mouse because the accountant is forever arbitraging (in a different sense).

My bottom line is that, the market will be deemed fully efficient in my eyes when its participants have full information at all times. The latter is hard to come by and even harder to sustain, hence, an inefficient market.

The truth is stranger than fiction

noreply@blogger.com (Curious) — Fri, 31 Mar 2006 10:17:00 GMT

What is the biggest threat to globalisation and an increase in social welfare? You and me!

>
(NB: The above conclusion did not require any econometric regressions or cointegration. The magic ingredient is common sense, which, in all its assumed abundance, is not very common).

I have tried to create a picture board that gives hints for why we live in the turbulent times of today. By far the most obvious theme is selfishness on all counts and by all people. An absolute lack of the human will to do anything that is not rooted from self-interests. Ironically, Adam Smith's invisible hand falls apart because social welfare within countries and internationally is not increasing as a result (it is also invalidated by the existence of wikipedia). If anything, the world is reliably producing more disgruntled and begrudging people. Fear is alienating neighbours, let alone countries, greed is distorting markets, etc.

>
The pictures individually reflect:
1. Immigration policy
2. Terror and the fear it generates
3. Protectionism (The picture shows America but old Europe is included)

All pictures are from the economist (http://www.economist.com/)

The old line goes: "Nothing is certain in life but death and taxes". I disagree. Accountants have successfully been avoiding taxes for many years and people seem to be cheating death when they survive situations that they feel should have killed them. Medical advances are also cheating death. My line goes "Nothing is certain in life but shit happening on occasion". However, this is not a covert advertisement by pharmaceutical companies hoping to boost their sales of anti-depression medicines. Therefore, I hasten to add that I recommend "taking shit on the chin and moving on with life", because "the numerous beautiful bridges, buildings and precipices are for admiring, not jumping off".

Have a mentally healthy, welfare increasing weekend!!!

Work ethic? What work ethic?

noreply@blogger.com (Curious) — Tue, 28 Mar 2006 09:40:00 GMT

You get what you pay for?

noreply@blogger.com (Curious) — Thu, 23 Mar 2006 15:10:00 GMT

See this interesting paper by Freakonomics (pdf) about how estate agents exploit informational asymmetry to their advantage and at the expense of their clients. I suppose this finding is consistent with the belief that there is a positive correlation between the amount of money we pay for goods and services, and increasing quality.

But, go into google and type in "you get what you pay for" and you'll get an endless number of sites, most selling pricey products. The truth of the matter is, however, that the statement "you get what you pay for", is as valid or as invalid as the statement, "you'll never get what you paid for", because both are dependent on an individual's expectations of the benefits of a certain product or service. Neither is fact!

In so saying, I appreciate that there is a far greater tendency for people to say that you'll get what you paid for than to say the opposite. This is a cashable concept that allows sellers to play with the reservation prices of their consumers, without needing to know what their consumers' absolute price ceilings are. People would rather believe that when they pay for something, it will be quality. For instance, when seeking financial advice, as a result of paying it, customers attach an immediate value to it. They then believe that it is superior to public-domain information and will, as a result, over-appreciate it.

What about paying for mediocre services and goods? I have come across TVs that are supposed to be high spec, but their technological attributes are apparently not noticeable to the naked eye? Then what good is the product? But the shopkeeper replies that my comfort should lie in the knowledge that I am paying for quality and I will get what I pay for. I should have asked him, "what about government officials who don't do their jobs properly?" I have already paid for their services in my taxes.

Granted, when dealing in areas where knowledge is limited, consumers in general would rather risk being conned under the guise of quality advice than listen to people who – they think – don’t value their own advice enough to charge for it. The flip-side to that is that there are many companies out there that will charge so that they can reveal to you that the sky is blue. After all, it is not illegal and you can – after you’ve been charged – dismiss the "advice".

Consider that in believing in always getting what you pay for, you’ll have a bias towards paying more for perceived quality, and when the quality aspect disappoints, you’ll have a bias for believing that it was one-off bad luck, as a form of self comforting. Essentially, as a consumer, you develop a habit of paying over the odds for goods and services, which then concludes that you're actually not getting what you paid for, you're getting less, an outcome that is a complete opposite of the initial intention.

Conclusion: Through consumers at large believing in always getting what they pay for, the opposite becomes true, as unscrupulous arbitrageurs appear to take advantage of this bias, something that is second nature to humans.

UK budget 2006

noreply@blogger.com (Curious) — Wed, 22 Mar 2006 16:26:00 GMT

“Everyone wants to live at the expense of the state. They forget that the state wants to live at the expense of everyone.”
- Frédéric Bastiat.

Some good news though, the Chancellor announced a sharp increase in the supply of very long-dated gilts. He said that he would direct the UK Debt Management Office to increase the share of gilts issued with maturities of greater than 15 years from just under a half, to just under two thirds of issuance. IT'S ABOUT TIME.

Finally we can see the UK government taking advantage of available funds from foreign (mostly Asian) savers like the US has been for a while, to raise its money. It's a win-win situation because it means less dependence on the country's already heavily taxed people and businesses.

Validation of the “uber-modern” economists

noreply@blogger.com (Curious) — Wed, 22 Mar 2006 12:10:00 GMT

Martin Wolf of the Financial Times writes today about "why a long-term bet on the stock market may disappoint", an article in which I find my recent post "the uber-modern economist" validated. Mr Wolf is an "uber-modern" economist.

Yesterday, I wrote about a possible over-dependence of old-school economists on fundamentals in a world where fundamentals are being punched left, right and centre with no reply. This is not to suggest that tried and tested economic heuristics should be ignored, but increasingly, I am wondering whether we [economists] are behaving a bit like historians in that we account very well for past events, and can sometimes come across as looking just into the past to tell us what the future holds, instead of looking at the past, today and utilising current knowledge to forecast the future based on our appreciation of the wiener process.

>
Mr Wolf asks the question:

"…If the market has enjoyed a run of exceptional returns, do you conclude that the prospects are for continued good returns, for relatively bad returns, or for either equally?"…And he answers that the future is random.

But, Mr Wolf states that in its strictest form, the Efficient Market Hypothesis would suggest that stock markets are random. I don’t wholly agree with the efficient market hypothesis on the basis that arbitrage has existed because investors and fund-managers have been able to take advantage of some less random occurrings in the market. Additionally, it has been proven that through purchasing certain investment vehicles, investors seem to beat the market when it’s moving down, up, or sideways. This would not be possible in a world where the efficient market hypothesis was 100% effective.

The rule of thumb that investing in stock markets is less risky in the long-term than the short-term is nullified by Professor John Campell of Harvard University’s finding that:

"…if market returns were draws from the same random distribution every year, though the probability of losing money falls with the length of the investment, this is offset by the increasing size of possible losses over long periods"…which Mr Wolf and I both agree with.

In his article, Mr Wolf basically looks beyond fundamentals in explaining why equity markets have been so strong. He talks of cheap money, globalisation (something that I mentioned in my article), aggressively expansionary monetary policy, and more. In my last post, I stated that:

"The uber-modern economist accepts that it is rational to be irrational, and with this understanding, can better anticipate consumer and investor behaviour."

Mr Wolf mirrors this by stating:

"It is as if markets are expecting both inflation and deflation. That is not as irrational as it may seem."

The “uber-modern” economist*

noreply@blogger.com (Curious) — Tue, 21 Mar 2006 16:39:00 GMT

The case for adaptive economics in an evolving world.

Like in Information Technology where a short while is long enough for a graduate/professional to become out of touch with the "real" world, financial markets and the world in general have evolved so much that old-school economists can and have been known to be out of touch with the "real" world. And with the new phenomenon of globalisation, coming hot on the heals of, and made possible by, the computer-age and Internet revolution, adaptive economics is now synonymous with adaptive knowledge of I.T, vis-à-vis its relevance in the "real" world today. Because of these above-described advances, and the current global behaviour of consumers and investors, the uber-modern economist thinks outside the box of the home market and he/she looks at the global consumer/investor under one hat.

Joke:
Q: What happened to the fantastic trader?
A: He went to university and got an economics degree

The above joke holds true for old-school economists who, coincidentally, appear similarly endowed with risk aversion and constantly rational expectations. A view of a rational world and subsequent rational expectations made old school economists too practical, such that, when presented with an investor’s scenario of a falling asset price, the old school economist would have held on and taken the losses if he/she believed that in the long-run, the asset in question would exhibit a reversion of some sort; that fundamentals would restore things. But what about the birth of a new equilibrium? This differs from an investor or trader who would close-out the position as a kind of minimax strategy.

There was a time when economists were known to be rigid in their perception of the market and the world, just like there was a time when the world was thought to be flat. Sometimes schools of thought will be polar opposites and still have a large following, such as the proponents of the efficient markets hypothesis (financial economics) on the one hand, and those of behavioural economics (more recent of the two) on the other. An example of an area where traditional economic theory has failed to impress is that of development. Some outmoded principles in development studies are still taught in universities today, but it is the most adaptive economics – that which incorporates context – that is the most useful for countries that don’t fit the framework, i.e.: most poor countries. To quote Frédéric Bastiat,

"...economic truths should be arrived at by observing not only the immediate consequences of an economic decision, but also by examining the long-term consequences. Additionally, one must examine the decision's effect not only on a single group of people, or a single industry, but on all people and all industries in the society as a whole."

The new age economist and adaptive markets hypothesis.

>
What makes the uber-modern economist different? It is his/her appreciation for psychological factors and responses from within a market, taking into account the behavioural biases of consumers or investors, i.e.: the irrationality. The uber-modern economist accepts that it is rational to be irrational, and with this understanding, can better anticipate consumer and investor behaviour. Consumers and investors don’t always want more to less at any given time and it has been proven in many studies, such as this titled: brain battles itself to delay gratification. Increasingly, the consumer and investor psyche has become the new focus of analysis in a world where fundamentals are being blown out of the water, such as in the following scenarios: the UK housing market, the long US consumer boom, the US twin deficits, the conundrum that wasn’t a conundrum a.k.a the inverted US bond yield curve, the recent and sustained US dollar strength, etc.

Chris Dillow of Investors chronicle has suggested that economists often make bad investors because they often fail to see that processes last longer than expected, don’t fully anticipate turnarounds in macroeconomic data, overestimate speeds of adjustments and the market’s discounting ability. To me, the above are characteristics of old-school economists, the kind that still look at the Deutschmark-Sterling cross rate to estimate whether Sterling (£) is overvalued or undervalued against the Euro (€). He suggests that perhaps good investing consists not in being rational but by making the right mistakes. I add to this that if all investors behaved in a rational way, risk preferences would not matter and the market would be extremely predictable and boring. It is the uber-modern economist who champions this new understanding of irrational rationality and spearheads this new chapter of economics.

PS: It is encouraging to see that National Statistics have included items such as ipods into the basket of goods used to measure CPI inflation.

Reference: Economic schools of thought

* "uber-modern" economists can be young or old in age. It is the mind-frame that qualifies an "uber-modern" economist.