Quotulatiousness

November 30, 2011

Is “innovation” today’s buzzword equivalent of “excellence”

Filed under: Government, Technology — Tags: , , , — Nicholas @ 09:07

Stephen Gordon thinks that the term “innovation” is well on the way to being just another way of saying “corporate handout”:

The theory of economic growth includes roles for such well-defined concepts as investment, human capital, research and development, productivity, and technical progress. I don’t know where innovation fits into this. My guess would have been that innovation is another name for R&D, but apparently there’s an ineffable distinction between innovation and R&D.

There are well-known policy instruments at the government’s disposal for increasing investment in human and physical capital and for increasing R&D activities. (Their relative effectiveness is another question.) But so far, the only proposals I’ve seen for an innovation policy consist of programs in which governments give money to deserving firms. This is problematic on a couple fronts.

Firstly, there are already many — too many — ‘economic development’ programs whose purpose is to channel public money to companies that enjoy the favour of the government. It’s hard to believe we need more of them.

September 26, 2011

Why are gold and silver down in this market?

Filed under: Economics — Tags: , — Nicholas @ 12:15

It’s a question I’ve been asking too (my miniscule portfolio is taking a beating in both equities and in precious metals). Mike “Mish” Shedlock offers some likely answers:

1. Fed Did Far Less than Expected
The Fed did not do what everyone thought, which is to say something far more than “Operation Twist”. [. . .] In short, the Fed did not print, or even threaten to print. Moreover the Fed committed to a strategy not through the end of this year, but all the way through June of 2012. Perhaps the Fed does more in the interim, perhaps not. [. . .]

2. Mutual Fund Redemptions
Mutual fund cash levels are at or near record lows. In general, mutual funds were not prepared for the market selloff and sell orders came in. Rather than sell garbage like Bank of America at $6, mutual funds unloaded stuff like gold, taking profits.

3. Margin Calls at Hedge Funds
Hedge funds unloaded gold and silver for the same reasons as mutual funds, but also because they mistimed the play and what Bernanke would do. Leverage works both ways.

4. China Growth Story Fading
Commodities in general have been clobbered along with currencies of commodity producing countries because the global economy is slowing rapidly.

September 11, 2011

The Canada Pension Plan and moral hazard

Filed under: Cancon, Economics, Government — Tags: , , , , — Nicholas @ 11:37

An interesting post at Worthwhile Canadian Initiative looks at the overlooked failure in pension markets. I found this bit of information to be quite interesting, as it addresses a conversation I had with Dark Water Muse a few months ago:

Governments provide pensions in one of two ways. Pay As You Go (PAYG) plans use current contributions to fund current benefits. The Canada and Quebec Pension Plan were, when they were first introduced, PAYG plans. The moral hazard risk a worker faces with these plans is political: a politician will design the plan so as to maximize his or her chances of re-election.

The design of Canada and Quebec Pension Plan has created large benefits for the first generation of recipients (current voters) and a much lower rate of return for future recipients (future voters). Now those gainers were the generation that entered the labour market in the Great Depression and fought in World War II, so one could argue that the windfall gain they experienced was merited on equity grounds. The point here is merely that the design of PAYG pension plans reflects the interests of the designers (for re-election) as well as the interests of the contributors and recipients.

The Canada and Quebec Pension Plans are now transitioning into fully-funded plans. The Canada Pension Plan Investment Board was, as of June 30th 2011, managing $153 billion in assets. Some is managed directly by the board, the rest is managed by “partners” ranging from Istanbul-based Actera Group to New York-based Welsh, Carson, Anderson & Stowe. I suspect that the CPP, roaming the world with billions to invest, is able to negotiate low management fees, and there must be savings associated with economies of scale in investing. But the possibility of moral hazard — someone getting rich by diverting away a tiny percentage of the return on $153 billion, or a politician exerting pressure on the CPP investment board to make electorally-sound investments — remains.

In sum, while private pension markets suffer from moral hazard, it’s not clear that governments can solve the problem.

In my discussion with DWM, I claimed that the CPP was a PAYG system (in extreme examples, like the US social security system, this can be compared to a Ponzi Scheme), while DWM — claimed that the system was fully funded from investments. As the quoted section above shows, we each had part of the answer.

It’s hard to believe that the CPPIB (the organization that handles the investments of the CPP) can remain immune to government meddling — buy this company’s stock, invest in that company’s risky-but-located-in-a-marginal-riding new venture, etc. As long at the CPPIB can remain independent of political pressure, the system might work.

September 5, 2011

False ideas about investment risk

Filed under: Economics — Tags: , , , , — Nicholas @ 10:25

Dan Ariely points out that most people have no idea at all about some of the key questions on investment risks:

To this point, we’ve run a number of experiments. In one study, we asked people the same question that financial advisors ask: How much of your final salary will you need in retirement? The common answer was 75 percent. But when we asked how they came up with this figure, the most common refrain turned out to be that that’s what they thought they should answer. And when we probed further and asked where they got this advice, we found that most people heard this from the financial industry. Sort of like two months salary for an engagement ring and one-third of your income for housing, 75 percent was the rule of thumb that they had heard from financial advisors. You see the circularity and the inanity: Financial advisors are asking a question that their customers rely on them for the answer. So what’s the point of the question?!

In our study, we then took a different approach and instead asked people: How do you want to live in retirement? Where do you want to live? What activities you want to engage in? And similar questions geared to assess the quality of life that people expected in retirement. We then took these answers and itemized them, pricing out their retirement based on the things that people said they’d want to do and have in their retirement. Using these calculations, we found that these people (who told us that they will need 75% of their salary) would actually need 135 percent of their final income to live in the way that they want to in retirement. If you think about it, this should not be very surprising: If you add 8 hours (or more) of free time to someone’s day, they will probably not want to spend this extra time by going for long walks on the beach and watching TV — instead they may want to engage in activities that cost money.

You can see why I’m confused about the one-percent-of-assets-under-management business model: Why pay someone to create a portfolio that’s 60 percent too low in its estimation?

And 60% is if you get the risk calculation right. But it turns out the second question is equally problematic. To show this, we also asked people to tell us how much risk they were willing to take with their money, on a ten-point scale. For some people we gave a scale that ranges from 100% in cash on the low end of the risk scale and 85% in stocks and 15% in bonds on the high end of the risk scale. For other people we gave a scale that ranges from 100% in bonds on the low end of the risk scale and buying only derivatives on the high end of the risk scale. And what did we find? People basically looked at the scale and said to themselves “I am a slightly above the mean risk-taker, so let me mark the scale at 6 or 7.” Or they said to themselves “I am a slightly below the mean risk-taker, so let me mark the scale at 4 or 5.” In essence, people have no idea what their risk attitude is, and if they are given different types of scales they end up reporting their risk attitude to be very different.

July 21, 2011

This is why the Bank of Canada will raise rates soon

Filed under: Cancon, Economics — Tags: , , — Nicholas @ 09:58

Stephen Gordon explains why the Bank of Canada will be raising interest rates in the near term:

The relatively hawkish language in the Bank of Canada’s interest rate decision — most notably the removal of the word ‘eventually’ from the sentence describing the conditions in which interest rates will increase — took financial markets by surprise.

Central banks try to avoid surprises when they can, but in this case the Bank has the best of excuses: the facts changed.

[. . .]

These new numbers may well be revised away in the coming months, but policy makers have to work with the data they have before them. If you take an output gap that is shrinking much faster than you thought and add it to a core inflation rate that is drifting towards and perhaps past the Bank’s 2 per cent target, you will find yourself in a position where you have to start preparing to increase interest rates earlier than you had planned.

July 19, 2011

Tax-wary millionaires flee to . . . Canada?

Filed under: Cancon, Economics, Liberty — Tags: , , , — Nicholas @ 12:56

Jason Kirby is either smoking some really premium weed, or the world is changing even faster than we thought it was, in an article titled “The Great White tax haven”:

For decades, Canadians have been told this country is a high-tax, unwelcoming place for business people and the wealthy. It’s a reputation we came by honestly. But a shift has taken place both here and abroad, say experts. While Canada is reforming and lowering its taxes, politicians in other developed countries — those faced with crushing debt loads and economic stagnation — are turning a hungry eye to the bank accounts of their richest citizens. At the same time, instability in the Middle East and Asia means wealthy individuals are looking for a safe place to move their families. Where they might have flocked to the U.S. in the past, many now see Canada as the better option. Tax specialists even use terms like “the Great White tax haven” and “Switzerland of the North” when talking about Canada.

The world’s rich are restless, says Lesperance, whose clients are worth between $30 million and $1 billion. Most work in financial services, but in every sector and every country wealthy individuals are on the move. Lesperance calls these ultra-rich the Golden Geese, arguing that wherever they go, they generate economic benefits—they start companies, buy real estate, keep restaurants busy and spend money on big-ticket items. Along with Ian Angell, a professor at the London School of Economics, he’s writing a book entitled Flight of the Golden Geese, which argues that as countries squeeze wealthy taxpayers, they will pull up stakes and flee. “Canada has an unprecedented, once-in-several-generations opportunity to put up its hand and offer itself as an alternative,” he says.

The migration is well under way. Last year, nearly 12,000 people moved here under the federal government’s Immigrant Investor Program, up from 4,950 a decade ago, according to Citizenship and Immigration Canada. (The figure includes spouses and dependents.) To qualify, immigrants must have a minimum net worth of at least $1.6 million, and are required to “invest” $800,000 with the government, which is returned after five years. (Ottawa says the money is used to fund economic development programs, though critics call it a cash grab.)

US business is “frightened to death of the weird political philosophy of the President”

Filed under: Economics, Politics, USA — Tags: , , , — Nicholas @ 11:08

You don’t normally find stem-winders like this in quarterly business updates, especially from self-described Democrats:

You bet and until we change the tempo and the conversation from Washington, it’s not going to change. And those of us who have business opportunities and the capital to do it are going to sit in fear of the President. And a lot of people don’t want to say that. They’ll say, God, don’t be attacking Obama. Well, this is Obama’s deal and it’s Obama that’s responsible for this fear in America.

The guy keeps making speeches about redistribution and maybe we ought to do something to businesses that don’t invest, their holding too much money. We haven’t heard that kind of talk except from pure socialists. Everybody’s afraid of the government and there’s no need soft peddling it, it’s the truth. It is the truth. And that’s true of Democratic businessman and Republican businessman, and I am a Democratic businessman and I support Harry Reid. I support Democrats and Republicans. And I’m telling you that the business community in this company is frightened to death of the weird political philosophy of the President of the United States. And until he’s gone, everybody’s going to be sitting on their thumbs.

June 20, 2011

Stephen Gordon: Don’t lose any sleep over “foreign control” of the Canadian economy

Filed under: Cancon, Economics — Tags: — Nicholas @ 09:22

You can always find someone to get upset about the degree of foreign investment in a given industry or in the economy as a whole. Stephen Gordon explains why you shouldn’t worry so much about it:

If you’re the sort of person who is suspicious of foreigners’ controlling assets located in Canada, and if you equate ownership with control, then you can reach the conclusion that foreign ownership = foreign control = bad without much effort. And since net international investment positions are zero-sum, this sort of analysis would lead you to conclude that Canada is ‘losing’ this game of ‘control’.

Much as I enjoy stomping on the second part of that syllogism, this post is going to take a closer look at the first part: the link between ownership and control is not the same for all forms of foreign ownership. In the case of FDI, decisions are made by the head office in the home country. But FDI is only one mechanism by which foreigners can send their saving to Canada; they can also buy shares in Canadian-registered corporations, or buy bonds issued by Canadian firms or governments.

June 17, 2011

I’m glad I sold my RIM stock when I did . . .

Filed under: Cancon, Economics, Technology — Tags: , , , , — Nicholas @ 12:10

. . . because if this analysis at the Guardian is accurate, the stock is going much, much lower:

Here’s what’s wrong: RIM’s platform is burning. Except that this isn’t the fully-fledged conflagration that Stephen Elop perceived at Nokia. It’s more of a smouldering. But it’s happening nonetheless, and it’s been happening for a long time: RIM hasn’t released a major new phone since August 2010. (Yes, that’s nearly as long as Apple.) It sort-of showed off a new version of the Torch in May; that will actually be released in September. (Way to kill the sales, people.)

[. . .]

My analysis: RIM is being pushed down in the smartphone market as the iPhone and high-end Android handsets (and perhaps even a few Windows Phone handsets) take away the top-end share it used to have. By my calculations (trying to align RIM’s out-of-kilter quarters with the usual Jan-March ones), Apple has outsold RIM for phones for the previous three fiscal quarters (July-Sep, Oct-Dec, Jan-Mar) and is all but sure to do the same this quarter. That’s an entire year in which it’s outselling RIM not only in numbers but also revenues (and profits). And of course Android is wiping the floor everywhere else, now being the largest smartphone OS by share.

RIM is getting hammered because its phones are now, in OS terms, old. RIM’s share of US smartphone subscribers dropped 4.7 percentage points to 25.7% in April compared to three months earlier, according to ComScore. None of that is good. And because the phones are old, it can’t persuade the carriers to buy them as it did before; so ASPs tumble. Matt Richman has a stab at calculating the phone ASP and reckons it fell from $302.26 (official, Q1) to $268.56 (est Q2).

[. . .]

So we’re going to see both Nokia and RIM come under incredible pressure over the rest of this year: Apple is going to have a new iPhone, Android is going to rage like a forest fire, and there doesn’t seem to be anything to really stop either of them. Although Stephen Elop talked about the prospect of three ecosystems — Android, iOS, and Windows Phone, completely discounting RIM — it’s looking like it’ll be more like a two-horse race, at least temporarily, by the end of this year.

Of course, even if RIM isn’t one of the market leaders, Apple will not have an easier time of it.

And yes, I did actually have a few hundred shares of RIM stock in my RRSP last year. I was lucky enough to sell at about what I paid for the stock . . . and it hasn’t been as high as that since I sold.

June 10, 2011

With extended lifespans . . . will come later retirement dates

Filed under: Economics, USA — Tags: , , , — Nicholas @ 16:49

For all of us who’ve spent our working lives assuming that 65 was the age of retirement (or 55 for those of you who paid closer attention to retirement planning 20 years earlier than the rest of us), you won’t like this:

Americans better get used to working longer, even until they are 80 years old, according to a study by the Employee Research Benefit Institute (via Robert Powell at MarketWatch).

Naturally, those with lower incomes will need to work longer.

Here’s how it breaks down (via MarketWatch):

  • If you make around $11,700 dollars a year you have to work to age 84 to have a 50% chance of affording retirement.
  • If you make between $11,700-$31,200 a year you have to work to age 76 to have a 50% chance affording retirement
  • If you make between $31,200-$72,500 a year you have to work to age 72 to have a 50% chance of affording retirement.
  • If you make $72,500 or more a year you have to work to age 65 to have a 50% chance of affording retirement.

This study does point out one bright spot for those working past 65 though. If you are putting your money into some kind of retirement fund, your chances of saving enough increase substantially.

June 9, 2011

Whistleblowers must take a number and wait to be served

Filed under: Bureaucracy, Economics, Law, USA — Tags: , , , — Nicholas @ 09:21

Edward Siedle, foolish man, takes the Securities and Exchange Commission at their word:

Last Friday afternoon I got it into my head that I should try to contact the head of the SEC’s new whistleblower office and discuss a money manager scam I’d uncovered. Surely, I figured, in this post-Madoff era the SEC must be rolling out the red carpet for those looking to clue it in on financial shenanigans.

On the SEC’s home page, at www. sec.gov I found a new button that says “Questions, Tips and Complaints Whistleblower Provisions.” The bureaucrats behind this nifty new feature were so prescient that they even included a picture of a whistle for the convenience of illiterate snitches.

But he’s in a hurry, and doesn’t want to just fax or email the information — he wants to talk to a human being. That’s where it gets amusing/alarming depending on your view of government:

I got the number of the SEC’s media office from the folks at Forbes and called it. I asked the person who answered for the number of the SEC’s new office of the whistleblower.

“There is no new office of the whistleblower,” I was told.

“Can l please have the number of the head of the office then,” I asked.

“There is no new head of the office and there is no office,” the woman told me in a tone that she appeared to have honed while humoring morons.

“Now wait a minute,” I said, “I read an article about the new guy who is running it. He’s a former tobacco lawyer or something. I know his name … it’s McKessy or something like that.”

My handler laughed and said, “So you believe everything you read?”

H/T to Tim Harford, who linked to this article saying “Adapt emphasises whistleblowing as a way of uncovering hidden problems in fragile systems. Therefore: HEADDESK”.

Adapt, of course, is Harford’s latest book, which I quite enjoyed reading and recommend to your attention.

May 25, 2011

How to analyze bubbles and crashes

Filed under: Books, China, Economics, History, Media — Tags: , , — Nicholas @ 07:06

Warren C. Gibson reviews Boombustology by Vikram Mansharamani, which looks at the boom and bust pattern frequently seen in economics, with special emphasis on China:

The author’s macro lens includes Austrian business cycle theory. That theory says inflation of the money supply causes a drop in interest rates, which is misinterpreted as an increased aggregate preference for saving over consumption, leading to investments in more roundabout means of production. When it becomes clear that there has been no such preference shift, these undertakings are seen to be at least partial mistakes, requiring write-offs and retrenchment — a bust. The boom is the problem, not the bust, which is the market’s attempt to realign itself to the realities of time preference. Austrian business cycle theory has great merit but leaves some things unexplained.

Mansharamani’s micro lens includes the concept of reflexivity. Market participants don’t just observe prices but also influence them. Reflexive dynamics occasionally give rise to instabilities in which rising prices lead to increased demand. A simpler term would be a “bandwagon effect.” I recall an office party in 1980 where one of the secretaries asked about buying gold — precisely at the peak, as it turned out. All she knew about gold was that it was way up and therefore must be going higher. I should have realized that when you see financially unsophisticated people like her climbing on a bandwagon, you can be pretty sure there’s no one left to sell to and nowhere for prices to go but down, which is where gold and silver prices went in 1980, and in a big hurry.

From psychology Dr. M. borrows ideas and data about cognitive biases. For example, subjects asked to guess some bland statistic, like the number of African countries that belong to the UN, are influenced by the spin of a wheel of fortune: When the wheel lands on a high number, they guess higher. He translates this and a dozen other cognitive biases into irrational market behavior that can foster booms and busts.

He introduces his biology lens with an analogy to the spread of an infectious disease. When the prevalence of a disease reaches a high level, the infection rate necessarily slows and the disease begins to wane, just like the 1980 gold market. But it is devilishly difficult to “inoculate” oneself against infectious ideas. Individual investors who can do so have a decent chance to beat the market averages over time, I believe. (Those who would pursue these ideas in greater depth would do well to find James Dines’s quirky and expensive but worthwhile book, Mass Psychology.)

Governments don’t have the power to prevent booms and busts — but they sure do have the ability (and too often, the will) to extend booms as long as possible, which only makes the necessary correction that much more painful.

May 20, 2011

Bank of Canada is not there to “guide” the markets

Filed under: Cancon, Economics, Media — Tags: , , , — Nicholas @ 13:22

Stephen Gordon points out that there appear to be some dangerous assumptions out in the market about whether and when the Bank of Canada will change interest rates:

The Bank of Canada is scheduled to make its next interest rate announcement on May 31, and my understanding is that the consensus of opinion among private sector analysts is that interest rates will remain unchanged, because there was no explicit warning of an increase in its April 12 decision.

This consensus of opinion may turn out to be well-founded — but not for that reason. Recent reports confirm what Bank officials have said several times: the Bank of Canada believes that it under no obligation to provide guidance about short-term interest rates. Governor Mark Carney has already noted that one of the contributing factors of the financial crisis was the private sector’s overconfidence in its ability to predict central banks’ behaviour.

This doesn’t automatically mean the Bank will raise interest rates at their next meeting, but it does mean that it could happen (despite the “lack of warning” in April).

May 16, 2011

Stephen Gordon: should Canadians be buying cheaper US stocks?

Filed under: Cancon, Economics, USA — Tags: , , — Nicholas @ 13:02

Is now a good time to buy American stocks?

As the dollar appreciates, there are more articles in the financial press commenting on how U.S. stocks are becoming cheaper from the point of view of Canadian buyers. I am probably the last person from whom you should take investment advice, but there are some things to think about when you’re trying to decide if a stock is cheaper or if it is simply worth less.

Buying USD-denominated assets is in large part a bet against the Canadian dollar. Since 2000, Canadians who bought the S&P500 index instead of the TSX have generally regretted it [. . .] The average CAD return on the TSX was 11 per cent more than the CAD return on the S&P500 over the past decade. [. . .]

But that doesn’t necessarily mean that U.S. stocks are a bad deal, because they have one very attractive property: they generate higher returns for Canadians during bad times. This is the sort of correlation that is most valued by investors: we are willing to pay extra for assets that pay off most when extra money is most needed. For example, most people buy fire insurance, even though it is a money-losing investment for almost all households. Even though the odds of a fire are small, homeowners are still willing to pay for an asset that pays off when their house burns down.

I’m not in a hurry to invest in American stock right now, as I still see the US government’s debt addiction having the potential to drag down the US market much further. Not that staying in Canadian stocks insulates me from such things . . . but the impact should be lighter on Canadian holdings than on US positions.

May 10, 2011

“The recent recession was probably the last nail in the coffin of the proposal for a common Canada-U.S. currency. “

Filed under: Cancon, Economics, USA — Tags: , , , — Nicholas @ 10:22

Stephen Gordon explains how the Canadian economy has benefitted from the independent Canadian dollar:

Let’s think about what would have happened over the past few years if a monetary union had already been in place. Instead of generating an appreciation of the Canadian dollar, the commodity boom would have drawn in larger and destabilizing flows of investment. As it was, the appreciation of the Canadian dollar tempered the flow of capital, and kept inflation under control.

When the recession hit and commodity prices fell, our floating currency gave us a 20 per cent exchange rate depreciation in the space of five months. This sort of stimulus would have been unavailable under a monetary union — as Spain is now finding out, to its great cost.

For reasons that Paul Krugman explains here, Canada has always been an interesting case study in international monetary policy. Canada’s decision to adopt a floating exchange rate in 1950 — several decades before the post-war Bretton Woods system of fixed exchange rates collapsed — was an unorthodox reaction to a situation with which we’ve become familiar: sharply fluctuating commodity prices.

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