Talks from Trumpington

Scary News

2012-01-27T16:08:00.001+01:00

This graph on British GDP is very scary:

It shows that the economic recovery following the start of the recession is actually worse than the one observed during the Great Depression in the 30s.

In my humble opinion, it seems that the dosage of the austerity medicine is killing patients all over Europe.

(Outsourced from Brad Delong's blog post)

Next US President?

2012-01-15T21:07:00.001+01:00

It is becoming more and more likely that the US presidency will be contested by Obama and Mitt Romney. For those that don't know anything about him (like me), here is Vanity Fair's article on him. I found it a bit unfair on the private equity culture but it's still a good read.

http://www.vanityfair.com/politics/2012/02/mitt-romney-201202

2012-01-08T10:52:00.003+01:00

Some ramblings on Brazil - Part II - Outlook

2012-01-07T00:39:00.002+01:00

Following up on my previous post, on this one I plan to talk a bit about the country's current situation and some (big) challenges and problems it has to solve, and quickly! Having spent the previous three weeks in Rio allowed me to chat to friends, listen to taxi drivers, and read the general news printed on newspapers to get a feel of "sentiment".

Unfortunately, my opinion is that we have all the signs of a bubble ready to burst. Outrageous real estate prices, overvalued currency, etc... Although things have improved a lot and it is obvious that great advances have been made, there are some clear signs that things are getting a little out of line. I heard someone say the other day that Brazil's growth was more of a catch-up with the present (following the lost decade in the 80s) than a new dawn that would allow the country to move up into developed status.

Everything in Rio is horribly expensive, with some things being simply ridiculous. When I moved to the UK in 2002, living costs were way cheaper than in London. I felt like a king whenever I came back for holidays even though I was on a PhD stipend. Nowadays, things are radically different. Most things are cheaper in London and even rental prices, long a plight of London's non-investment bankers, are very close to the ones you pay in Rio.

Let me look at a few factors that might pose a problem:

i) Global Economy: I've actually been more negative about global growth prospects than now. My guess here is that the world will do better than consensus expectations while Brazil worse. Signs from the US indicate that the economic might be getting back on track while China seems to be managing to avoid a hard landing. Big risks to be careful are: (i) the Euro-mess is not sorted (God knows that politicians are trying hard to cause a disaster) (ii) the US recovery is derailed because of the presidential elections; and (iii) real estate markets crash in China. The main danger to Brazil comes from China. Its demand for raw materials have increased tremendously in past years, both in volume and prices. This was great for Brazil but the country's increasing reliance on primary products is dangerous in case international demand goes down. Since 2006, terms of trade have improved by more than 30% and if simply returns to the same levels it will have a big impact on how the current account balance is financed.

ii) Credit Growth: Because of high interest rates and some other problems, private debt to GDP ratios have always been way lower than international averages. Economic growth was bound to make (and was helped by it) grow. And grow it did. In 2003, credit amounted to 24.6% of GDP (for comparison it is way more above 100% in the US and the UK). It went to 40.5% in 2008 and reached 48% in Sep/2011, with an average growth rate of 16.3% even after the crisis period in 2009. Brazilian families' debt levels are at an all-time high and a decrease in growth or an increase in interest rates might trigger a wave of defaults that bring the house the down.

iii) Monetary / Fiscal Policy: Brazil has an official inflation target of 4.5% with 2% upper/lower bound. In 2011, it hit the upper bound but the Central Bank seems to have accepted inflation run above the target rather than increase interest rates (or implement other "macroprudential measures" as they say here) and reduce growth (always a politically tough call). Given that the public sector share of GDP keeps growing and the government does nothing to control a little its expenditures, worrying about inflation should be on investors' minds unless the Central Bank decides to change its current stance.

iv) Real Estate Prices: I might be biased since I've spent all of my time in Rio and the city had lots of good things going for it, but real estate prices are just surreal at the moment. From 2006 to 2010 prices increased by more than 150% and in 2011 alone went up by 35%. A square meter in Leblon costs around 6,000 pounds which is more than in Barcelona and similar to London. You can feel the same kind of madness that was going on in London circa 2008 and we all know how that turned out to be. Even if the nothing happens with the country as a whole, real estate in Rio is doomed to crash. When? I'd wish I knew.

All of these factors are in one way or another related to each other and while Brazil is now enjoying a virtuous cycle, things can change to a bad equilibrium and fall into a vicious cycle (kinda of like Spain and the UK at the moment). Alas, like in many countries, politicians haven't been using the good times to prepare for future lean years.

In the final post of this series I'll talk about the main challenges for the future.

Some ramblings on Brazil - Part I - Recent Past

2012-01-01T21:01:00.000+01:00

Hello everyone.

Happy Holidays! I'm currently in Rio enjoying the break under 30-degree weather (well, it's actually raining at the moment) rather than semi-freezing in London (to be honest the weather has been great this year).

As I take a break from meeting family & friends, eating good food, and preparing classes for my upcoming course at Cambridge, I sat down and started thinking a little about the current economic situation of Brazil and my humble predictions for the near future and I thought that this would make an interesting post to share. I'll start with a quick overview of the recent past. On the next post, I will talk more about some of the economic bottlenecks and my view on what is going to happen. I hope it is not too long!

My biggest concern is that Brazil is quickly approaching a ceiling given its current structure. I'm very skeptical about whether the country can sustain 4-5% growth or not and I am seriously worried that the burst of the current bubble is just around the corner. Anyway, here is my take on the near past:

Following years of bad macroeconomic policies in the early 90s, the Brazilian Social Democrats party (the PSDB) finally put the house in order and pushed through some needed economic reforms (breaking up inefficient state monopolies, budgetary expenditure checks and balances, etc.). These reforms are really what made the "growth miracle" seen under former president Lula's Workers party (the PT) possible, riding the good international climate and the benefits of the sudden emergence of a large set of consumers enjoying better economic conditions. The country had given up so many growth opportunities before sorting out its inflation problem that a huge pent-up potential was unleashed after the Real plan, the privatization of major companies, and the improvement of the international situation after the late 90s financial crises.

To Lula's merit and contrary to many people's opinions (including mine), he didn't messed up with the economy and carried on the same sensible policies implemented by the PSDB. His party was strongly against the Real stabilization plan, the fiscal responsibility law, and the banking reforms (to mention just a few), which are now touted as the ones that enabled Brazil to withstand the nasty effects of the crisis. I'm not even going to talk about the large corruption schemes that have taken place after Lula stepped into power. What makes me the saddest is that he could have achieved so much more and squandered the opportunity to implement structural change at a time when the global climate was very favorable.

Unfortunately, if you look at the reforms that Brazil desperately needs to shift up a gear, nothing has really happened in the past 10 years. Labor, pension and tax law reforms are major bottlenecks of growth and will stifle any chance of sustainable long term growth beyond 3-4% a year. All of these changes need constitutional reforms that are very difficult to pass through parliament, specially under Brazil's crazy multi-party political system. Lula decided not to fight to push them through, opting to making minor changes through regular legislation, and even those were mostly a waste. His successor, Dilma Roussef, appears to be following the same path as well.

Nonetheless, here we are: Brazil is the current darling of markets. Dozens of large companies are trying to enter the country, the expansion of consumer credit is booming, and it will host the 2014 World Cup and 2016 Summer Olympic Games.

Things look great, but now what? Stay tuned for the next post!

Sistine Chapel

2011-11-16T16:20:00.001+01:00

I've only been to Rome once and unfortunately the Sistine Chapel was closed. I really want to return, but while that doesn't happen at least I can take a peek from here:

http://www.vatican.va/various/cappelle/sistina_vr/index.html

I wonder what these VR simulations will look like in 30 years.

Aren't people overreacting?

2011-11-14T14:58:00.001+01:00

I was reading Jim ONeill's weekly analysis (Chairman of GSAM) and enjoyed his putting in perspective the European crisis:

"... in 2011, the change in China’s nominal GDP in US$ will be the equivalent of creating three new Greek economies. In the context of the above question and what is important this week, I realized that, along with the other three BRIC nations, the probable change in the US$ value of their combined GDP in 2012 is likely to be close to $2 trillion. They will effectively create the equivalent of another Italy.

This is what the BRIC countries can do to help the world, and especially troubled Europe, way more than any specific steps to invest in European beleaguered bonds."

No wonder people get so excited with emerging markets' potential. This is truly where economic growth is nowadays, both in percentage and absolute values, and is / will be one of the key macro trends for years to come.

Airton Senna

2011-11-06T12:53:00.002+01:00

Yesterday I watched the Senna documentary on TV. I loved it and hope it gets an Oscar nomination (and wins the prize of course!).

Senna was one of my childhood heroes and probably Brazil's most beloved sporting hero (maybe even more than Pelé). In my family, just like many others in Brazil, it was a tradition to watch the F1 gran-prix on Sundays. The European races would usually start around 11am-12 and my uncles and cousins would come to my house and watch the race while preparing Sunday lunch. There so many good memories of Senna, Nelson Piquet and their battles against Prost, Mansell and others. Great times for F1!

Senna's death is similar to JFK's death for Americans, in the sense that every Brazilian remembers what they were doing upon hearing the news. I was watching the race live and remember my mother crying and everyone being really sad when we realized what had happened.

In a country lacking role models it is very emotional to revisit Senna's trajectory all over again. In the documentary they ask Senna about his best sporting memory and he mentions his first kart races in Europe, when it wasn't about the money or the politics, just pure driving.

It is sad but I guess this is how many things work nowadays. Maybe I'm getting old and sentimental but I feel that things were more about emotions and getting things done rather than today. Now it is all about money, internal politics, and people feeling entitled for everything without willing to put in the hard work needed to get things.

Anyway, I hope you all watch the movie. (Americans will need subtitles to truly enjoy it.)

Economics is all around

2011-11-03T12:28:00.002+01:00

I was reading the blog of my colleague Simon Taylor here at Judge and he posted the link of a spoof video by MBAs in Columbia on how one of the (untold) reasons of doing an MBA maybe to find a rich husband.

Regardless of whether this is true or not, I'm amazed by the number of marriages that year after year. In my PhD cohort of 18 people, we had 2 marriages!

Gary Becker would totally agree.

Here is the video:

Eurocrisis: Just Sayin'...

2011-11-03T12:24:00.000+01:00

If politicians had agreed two years ago - when the size of the problem was already know - to do the same things proposed last week, I'm sure we wouldn't be in the terrible mess we are now: no need to keep bleeding for 2 months with the Greek referendum, less austerity measures needed, smaller bail-out size, etc...

Politicians are not on average known for being good, but the currently crop of leaders is really depressing to watch...

Wealth of Nations

2011-10-26T10:59:00.000+02:00

A friend sent me this interesting report by Credit Suisse on the global wealth.

It's impressive how having more than USD 10,000 is enough to put you ahead of 3 billion people (67.6% of the world).

Luck or Skill? Paulson & Co. edition

2011-10-12T00:22:00.000+02:00

I've just read on the FT that John Paulson (who made billions betting on falling US housing market prices in 2008) has warned of 25% redemptions in his $30bi AUM fund, following losses of more than 40% so far this year.

My MSc. dissertation was on whether technical analysis can generate abnormal returns or it is onlu due to "luck"- i.e. out of many possible combinations you are bound to find one that will have excellent results.

I usually use Warren Buffet as an example during my classes on market efficiency but maybe Paulson will be interesting as well. Maybe his profits back in 2008 were simply luck and shouldn't be expected to persist in the future?

The Size of the Greek Problem Over Time

2011-10-01T01:32:00.000+02:00

The image says it all:

History of Corporations

2011-07-18T15:39:00.000+02:00

It's been ages since I posted anything. Moving to a new job in a new country while still trying to catchup with my debt to my co-authors is not easy! My apologies to all. Once I'm settled (moving date is August 1st) I hope to get back on track.

In any case, I found this very nice article on the history of corporations that I found very interesting.

More and more I believe that all MBAs should have a history-cum-law course. It would probably overlap a lot with Ethics and maybe Strategy courses but I am sometimes amazed by the lack of historical knowledge on previous crises and the inner workings of a modern corporation.

Have a nice summer!

Back to the Future

2011-04-14T16:30:00.000+02:00

Today I was looking at some research papers on macro data to prepare for a live TV interview with the BBC and found this report by the IMF that was published this month.

It's interesting to see the predictions they made in 2009 and what has really happened.

In any case, good reading.

This is Funny

2011-04-07T12:14:00.000+02:00

IESE's firewall issues a warning message whenever you try to access websites with keywords on their black list.

Today I was trying to put side-by-side figures on a paper that I'm writing. The problem is that the name of the language I (and most people in Finance) use is Latex.

Well, I googled "Latex side-by-side figures" and boom!

"The page you are trying to see does not adjust to our security requirements and therefore it can´t be accessed directly.

In case you are sure that there is no harmful potential you may go to the page by clicking on the " Permitir" button."

Blocked!

Primer on Hedge Funds

2011-03-23T19:32:00.000+01:00

I just saw this paper on SSRN, written UBS's alternative investments, that has a quick intro on what are hedge funds.

If you don't know what they are, here is a good introduction. Here is the link for download:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1773947

UBS - Hedge Fund Primer

What if Charlie Sheen Was a Trader?

2011-03-12T16:30:00.000+01:00

Very funny article on the FT about Charlie Sheen being a star-trader and negotiating his compensation package:

http://www.ft.com/cms/s/0/509be01a-4b0f-11e0-911b-00144feab49a.html#axzz1GOnY6YhE

Here is an excerpt:

"The committee then considered objective measures of Mr Sheen’s performance. These were impressive: Mr Sheen’s trading had contributed tens of millions of pounds to the bank’s bottom line over the previous year.
At this point the committee was minded to view Mr Sheen’s transgressions as a private matter, and not one over which it behoved HotShots Bank to take an excessively paternalistic line.
It was also noted that Mr Sheen, a self-pronounced “total freakin’ rock star from Mars” appeared to regard himself as very mobile. If not paid a bonus in line with his compensation expectations, he would surely quit."

Early-century performance reviews

2011-02-19T01:36:00.000+01:00

I'm sure that if they made these kinds of comments in today's politically correct world it would be grounds for a lawsuit in many places...

http://www.economist.com/blogs/schumpeter/2011/01/performance_reviews

Sales - Music Industry

2011-02-18T16:21:00.000+01:00

the graph below has the total sales of the music industry. Interesting how turnover peaked in 2000 and has been going down since then. Even the introduction of digital media hasn't really helped.

No wonder that with artists demanding a bigger slice of profits and internet downloading being so easy to do, their business model is in serious need of a change.

100 Years of the American Economic Review: The Top 20 Articles

2011-02-13T00:22:00.000+01:00

Via Brad DeLong's blog, here are the top 20 articles in the AER's first 100 years.

I've read about 6-7 of them, but the one I often use on my research is the Grossman and Stiglitz's one:

Grossman, Sanford J., and Joseph E. Stiglitz. 1980. “On the Impossibility of Informationally Efficient Markets.” American Economic Review, 70(3): 393–408.

The Importance of Being Honest

2011-02-04T07:09:00.000+01:00

This is a great article by E. Derman and Paul Wilmott on how we should be careful with our models. Here are their suggestions at the end,

I will remember that I didn't make the world and that it doesn't satisfy my equations.
Though I will use models boldly to estimate value, I will not be overly impressed by mathematics.
I will never sacrifice reality for elegance without explaining why I have done so. Nor will I give the people who use my model false comfort about its accuracy. Instead, I will make explicit its assumptions and oversights.
I understand that my work may have enormous effects on society and the economy, many of them beyond my comprehension.

It is so easy to get lost in the mathematics of models that we often see papers completely out of touch with reality...

Somali Pirates, Goldman Sachs and "Doing God's Work"

2011-01-24T15:26:00.000+01:00

A colleague sent me this funny spoof story on a group of Somali's pirates being on trial and claiming that they were in fact working for Goldman.

I hope nobody believes it :)

The Importance of Entry/Exit Points when Investing

2011-01-07T20:08:00.000+01:00

This graph on the NYT is very interesting in showing the importance of entry/exit points of investing in markets.

I wonder what investors that bought US stocks in 2010 will get in 20 years.

Brazil Definitely Needs Something Like This

2011-01-04T01:59:00.000+01:00

I read this post on Andrew Gelman's blog that is really cool.

Ipaidabribe.com is a not-for-profit website in India asks for people to anonymously reportany bribes they had to pay when dealing with the government. This is a cool way to guide anti-corruption efforts and see which part of the government should be better controlled.

Here is an example of what they have:

http://www.stat.columbia.edu/~cook/movabletype/archives/2011/01/bribing_statist.html