Thursday, September 22, 2016

Constraining an economist to 140 characters is never a good idea...

It is safe to say that twitter rants are occurring more frequently now than ever before in the history of the world. Ahead of the Fed's decision on whether or not to raise interest rates, former Harvard President, Treasury Secretary, and Chief Economist of the World Bank - Larry Summers - decided to post his lecture notes from his money and banking class on twitter. He posted 11 scathing tweets back-to-back-to-back-to-back-to... well, you get the idea - about why the Fed should not raise interest rates. Hours later, the Fed decided to hold rates constant but signaled the possibility of a rate hike in December.

The outcome of the September FOMC vote was probably the least interesting part of this story. The more interesting part of the story is what I'd like to call the "Moral Hazard of Twitter". Let me speculate that Mr. Summers, and those around to him, feel that his tweets may have influenced the FOMC vote. And to the extent that this perception is accurate, we can only expect more twitter rants by famous economists ahead of important policy decisions.

Isn't it interesting that some who make bold predictions or emphatically state their equally bold opinions on various matters take an unworthy amount of credit when their predictions finally turn out to be correct? One of the problems in society is that there is virtually no penalty for having the wrong opinion or making a bold but wrong prediction. In this case, humans are quick to explain their errors away blaming it on a myriad of factors - most of them unrelated to the real reason they were wrong. In the case that they turn out to be right, humans are quick repeat the familiar phrase, "I told you so".

Here's a personal experience - some 18 months ago I was interviewed about oil prices by Utah Public Radio. When asked, I predicted that oil prices would increase in the not so distant future. Well, oil has increased more than 3% during the last week. "I told you so".

(FACT: Since the day I made my prediction 18 months ago, oil is down more than 27% despite its recent up turn in the last few weeks - but OPEC unexpectedly decided to increase production and... Putin is crazy... and LeBron won the title... and...)

Tuesday, September 15, 2015

An Optimistically Disturbing Headline...

In U.S., Socialist Presidential Candidates Least Appealing...

At first glance, this headline is good news - especially if you care about the country's standard of living. However, the results of this Gallup survey seem to be a bit disturbing.

Take a look:
Between now and the 2016 political conventions, there will be discussion about the qualifications of presidential candidates -- their education, age, religion, race and so on. If your party nominated a generally well-qualified person for president who happened to be _____, would you vote for that person? June 2015 results

So socialists are least likely to be voted for, but remarkably 47% of survey respondents would still be willing to vote for self-avowed socialist. Enter... Bernie Sanders! The unabashed "democratic socialist" from Vermont, who is listed as an Independent only because he doesn't feel the democratic party goes far enough in controlling the U.S. economy, is polling very well in both Iowa and New Hampshire against Hillary Clinton.

Yesterday, the Wall Street Journal reported that if all of Bernie Sander's proposals were passed, the price tag would amount to some $18 Trillion over the next 10 years. Despite the number of zeros associated with this price tag, I'm still more surprised that 47% of Americans would be willing to vote for a socialist.

Socialism has been tried and tested and perhaps the greatest historical case against this type of economic system is the symbolism of the Berlin Wall. The wall was not built to keep free West Germans from sneaking into East Germany, but the wall was intended to keep East Germans from fleeing to West Germany. Similarly, at the DMZ on the North Korean/South Korean border, two North Korean soldiers stand facing each other with an order to shoot to kill if the other soldier attempts to defect to the south.

In fact, here is an empirical anecdote. Below is a satellite picture of the two Koreas at night (courtesy of

The figurative darkness associated with socialism extends far beyond North Korea. Perhaps those most affected by socialism are the poor. Here is some data that shows that in economies that become less free, the poor are most affected.

Here, poverty intensity is the "nature and intensity of deprivation at the individual level in education, health outcomes, and standard of living" and the chart shows that unfree economies have a poverty intensity rating that is nearly four times greater than economies that are generally free.

Other data show the GDP per capita is substantially greater for countries that are more economically free vis-a-vis countries that are unfree:

For those readers that would prefer to live longer lives - it turns out the economic freedom may also contribute to life expectancy:

Longer Life Expectancy in Nations With More Economic Freedom

And while Bernie Sanders can get a crowd going when he starts ranting about income inequality, it turns out that economic freedom has a negative effect on the level of income inequality as well. In fact, it was recently reported that despite an income per capita of a meager $14,000 per year in the Socialist country of Venezuela, the daughter of the late President Hugo Chavez is the richest person in that country with assets totaling more than $4 billion.

Listen, I would agree with most that crazy Uncle Bernie can give a good speech... But next time he starts hollering about how socialism will help the middle class, it seems that what he's really saying is that he hates poor people, he wants us all to have less money and to die young, and that income inequality really isn't that bad of a thing...

Friday, August 28, 2015

Who is Ashley Madison?

Apparently, there's a website that has garnered some attention lately because a breach of security allowed hackers to identify the email addresses of all of its users. Ironically, the main intention of the Ashley Madison website is for the breaching of something other than security...

Perhaps the revelation of the shear number of users (33 million to be precise) is beginning to destroy your faith in humanity. If this number doesn't do it, then, perhaps, what I'm about to share will.  In 2013, the Pew Research Group provided a survey of individuals across 40 different countries where questions about the acceptability of various moral issues were raised. The results were alarming!

Here are some of the findings... When asked whether or not extramarital affairs were acceptable (A), unacceptable (U), or not a moral issue (N), only 47% of French respondents said that affairs were unacceptable. More surprising, 40% of French respondents did not believe that extramarital affairs should be considered a moral issue.

Below is the list of 10 countries ranked lowest to highest based on the percent of respondents believing affairs are unacceptable:


If you're wondering where some of the other countries ranked, the U.S. was 28th (84% U), Canada was 17th (76% U), China was 16th (74% U), and Mexico was 13th (73% U). The Czech Republic had the largest percent of respondents say that affairs were acceptable (17% A) while Turkey and Palestine had the largest percent of respondents say that affairs were unacceptable (94% U). 

With this in mind, it's possible, and even likely, that the level of morality in a particular country can have an important influence on economic outcomes. In a free enterprise system, where two agents voluntarily exchange goods and services, the perception of morality can play an important role. Seeing the list of 10 countries in the table above, you might be less inclined to buy something from someone in France. Why? Because you might think the French have no morals and who ever is selling you something in France is likely trying to rip you off. Here is a Nobel Prize winning argument by Akerloff from 1970 that makes the same argument indirectly.

I took the liberty of plotting the relationship between the unacceptability of extramarital affairs and two measures of economic performance: GDP growth and Consumption growth. I'm only able to get 2014 GDP data for 39 of the 40 countries that Pew surveyed and 2014 Consumption data for 27 of the 40 countries, but this is what it looks like.

The plots show that the relationship between the level of unacceptability and growth rates are visually positive. That is, the percent of respondents that believe that extramarital affairs are unacceptable is directly associated with economic growth rates. Further, the univariate regression coefficients on the unacceptability percentage are both positive and statistically significant (Heteroskedastic-Consistent t-statistics = 2.33 and 2.45, respectively). 

Now finding a positive relationship between morality, in this case, and economic growth is not tantamount to identifying a causal link. That is, we cannot say that morality causes greater economic growth given the tests above. It is counter intuitive, however, to think of a reverse-causality story - i.e., that greater growth rates leads to greater morality. If anything, I would argue that the more prosperous a country becomes, the more morally progressive the country becomes. Here, I'm finding the opposite relationship. More moral countries tend to have higher economic growth rates. Interesting, if you ask me.

Wednesday, August 26, 2015

Bipolar Markets and the Probability of Interest Rate Hikes...

The market has gone crazy... The largest one-day reversal since October 2008 occurred yesterday after the Dow was up more than 400 points in the morning, but closed down more than 200 points. The recent sell off and excess volatility can only be explained by one thing... The market doesn't want the Fed to raise interest rates so it went bipolar weeks before the next FOMC meeting. (Kidding!) But, like I mentioned on Monday, I'm not going to hold my breath waiting for a rate hike in September. Neither is the President of the New York Fed.

Monday, August 24, 2015

An unusual open to trading...

Uh.... this market is getting to be pretty interesting. After a weekend that allowed the "bears" to calm down, it turns out that nothing was calm about this morning's open. In fact, the New York Stock Exchange implemented a rule to try to preemptively slowdown the panic that was set to occur at the open. Rule 48 is a trading rule that speeds up the morning's opening auction process. The Rule, which has only been issued a few times in the last 10 years, is implemented by the exchange if there is excessive volatility in the pre-open futures market and in foreign markets. At one point, the Dow was down 1,000 points but halved it's losses by the end of the first hour of trading. Did the implementation of the rule successfully curb the panic? Who knows - unfortunately, we don't see what happens if the rule isn't enforced. Perhaps it could've been a lot worse at the open although its hard to imagine something more than a 1,000 point drop in the first few minutes of trading.

On another note, if Hayek (1945) is right and the aggregate prices observed in markets signal something informative about the future, then we can expect some interesting economic times ahead. If I was a betting man, I wouldn't put too much money on a Fed rate hike in September...

Saturday, August 22, 2015

Correction - China isn't doing so well...

The Dow Jones Industrial Average has experienced an usually excessive correction - down more than 10% from its mid-May high. It seems like much of this correction is due to slowing economic growth globally, particularly in China. As mentioned in a previous post, The Peoples Bank of China has devalued the Yuan in attempt to stimulate exports. This devaluation was a wake up call to financial markets about how bad it is China. The worse may not be over - at least according to Jim Chanos a well-known short seller that places pessimistic bets on stocks.

To sell short, Chanos sells stocks he does not own by borrowing them from someone or some institution with a promise to repay the stock loan along with some interest. This is a risky proposition. The upside of the short sale is the shorted stock will decrease in price and Chanos will buy it back at a lower price and return the shares of stock for a little bit of profit. The downside is the price of the shorted stock will increase and he will not only have to pay back the loan with a stock that is now more expensive, but he will also have to pay the accrued interest on the loan. Economic theory argues that these borrowing costs will crowd out uninformed investors leaving only those, like Chanos, that seem to have the most information about where future prices will go. I don't know how bad things are economically in China, but I do know that the Chinese short positions by Chanos provide at least a negative signal about things that might come to pass.

Thursday, August 20, 2015

Curing Cancer

I don't want the title of this post to sound trite - but I've been thinking a lot about cancer the last couple of days. Recently, my family and I went to the lake. There, I was internally reminded to apply sunscreen on my balding head. Turns out, the day after going, I wished I had reapplied a few times. When I was 17, my dad began to receive treatment for some spots on his already bald head and, since that time, he has continually been poked and prodded by a host of dermatologists checking for cancer cells. I don't think this is uncommon - most everyone can identify someone close that is going through, or has gone through cancer.  A panel of cancer researchers have predicted that 41% of Americans will get cancer at some point. These odds are stacked against us all and they further emphasize the quickened need to find a cure. Unfortunately, I don't conduct that kind of research and can't estimate a time frame for finding a cure. However, I will predict that time to a cure is inversely related to the presence of well-functioning capital markets.

Did I just assert that financial markets will cure cancer? Yes, indirectly. The most important by product of well-functioning financial markets is that they provide a proper allocation of investment capital. They further provide large returns to the most profitable investments. Therefore, financial markets - i.e. debt and/or equity markets - produce the proper incentive for drug companies, that are so often vilified, to invest in additional R&D in attempt to find a cure as fast as possible. Why would drug companies race and compete with one another in order to find a cure? The answer to that is simple.... To make truck loads on money.

Did I just assert that the motive behind the eventual cure for cancer will be profit?  Yes, directly! Surprisingly, drug companies are not in the business of curing diseases strictly because of altruism. And, as someone who is balding prematurely and will inevitably have sun spots on my head due to my recent trip to the lake, I'm grateful for the lack of altruism by these companies. Because the profit motive will always be stronger than the altruistic motive (sad as it may seem), we are more likely to see a cure for cancer in our lifetime.