Category Archives: Finance

Suggested books and readings on finance and risk management

In my opinion, the following 3 books are particularly worthwhile for students who are interested in learning more about finance and risk management:

  1. Against the Gods: The Remarkable Story of Risk, by Peter L. Bernstein.
  2. A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, by Burton G. Malkiel.
  3. Stocks for the Long Run : The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, by Jeremy J. Siegel.

Philosophically, these books present what I would consider to be an “orthodox” perspective; i.e., they fit well with the so-called rational choice, efficient markets view of the world which is prevalent in most departments of finance and economics. For some “heterodox” alternatives, I like (but am nevertheless highly critical of) both of Nicholas Taleb’s books:

  1. Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (read this first).
  2. The Black Swan: The Impact of the Highly Improbable (the sequel to “Fooled by Randomness”).

Finally, I would be remiss to not also include two other favorites which are not books on finance or economics; rather they deal with the history and philosophy of applied mathematics. These books include:

  1. Innumeracy: Mathematical Illiteracy and Its Consequences, by John Allen Paulos.
  2. A Brief History of Infinity, by Brian Clegg.
Print Friendly, PDF & Email

The Economist: Essay on the history of finance in five crises

From The Economist:

“This week we publish an essay on the history of finance in five crises. They have a common theme: in each case the state increased the subsidies and guarantees it gave to finance—and helped set up the next crisis. Our cover leader points out that this is happening again. An American can now blindly put $250,000 in a bank, knowing his deposit is insured by the state. Finance, we say, should be treated more like other industries.”

Print Friendly, PDF & Email

About Social Security’s future…

Quoting from my annual Social Security Statement; I can’t help but wonder what the numbers are for “optimistic” assumptions and for “pessimistic” assumptions (see the “fine print” by the asterisk below):

About Social Security’s future…

Social Security is a compact between generations. Since 1935, America has kept the promise of security for its workers and their families. Now, however, the Social Security system is facing serious financial problems, and action is needed soon to make sure the system will be sound when today’s younger workers are ready for retirement.

Without changes, in 2033 the Social Security Trust Fund will be able to pay only about 77 cents for each dollar of scheduled benefits.* We need to resolve these issues soon to make sure Social Security continues to provide a foundation of protection for future generations.

* These estimates are based on the intermediate assumptions from the Social Security Trustees’ Annual Report to the Congress.

Print Friendly, PDF & Email

The Nobel Prize in Economics goes to Eugene F. Fama (University of Chicago), Lars Peter Hansen (University of Chicago) and Robert J. Shiller (Yale University)

This year’s Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (AKA the Nobel Prize in Economics) goes to Eugene F. Fama (University of Chicago), Lars Peter Hansen (University of Chicago) and Robert J. Shiller (Yale University) for “…their empirical analysis of asset prices”.  In retrospect, it has never been a question of whether Fama would receive the Nobel Prize; it has always been a question of when, and when is now.

In a nutshell, Fama is famous for his “efficient market hypothesis” as well as a number of important empirical asset pricing contributions. Fama’s Chicago colleague Lars Hansen is famous for his work in financial econometrics, and Shiller provides an important behavioral counterpoint to the efficient market theory.

Here are articles worth reading about this prize:

1. The “official” announcement posted at Nobelprize.org: “The Prize in Economic Sciences 2013″. Nobelprize.org. Nobel Media AB 2013. Web. 14 Oct 2013. http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2013/

2. Wall Street Journal (10/14/2013): U.S. Trio Wins Nobel Economics Prize

3. Also, a trio of postings this morning by University of Chicago finance professor John Cochrane (10/14/2013)

a. Fama, Hansen, and Shiller Nobel

b. Gene Fama’s Nobel

c. Understanding Asset Prices (this is the Nobel Committee’s “scientific background” paper which explains why the Fama, Hansen, and Shiller received this award)

Print Friendly, PDF & Email

Michael Mauboussin rocks!

From Knowledge@Wharton: “How do we know which of our successes and failures can be attributed to either skill or luck? That is the question that investment strategist Michael J. Mauboussin explores in his book “The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing“. Wharton management professor Adam M. Grant recently sat down with Mauboussin to talk about the paradox of skill, the conditions for luck and how to mitigate against overconfidence.”

I also recommend Mauboussin’s book entitled “Think Twice: Harnessing the Power of Counterintuition“. Mauboussin does a wonderful job explaining how to use modern social science findings (particularly behavioral finance) to become a better decision-maker when facing risk and uncertainty.

Print Friendly, PDF & Email

Debt Maturity

The Grumpy Economist: Debt Maturity.  Excellent financial advice for the US Treasury Department concerning the importance of taking advantage of (historically) low long term interest rates by lengthening the maturity structure of the federal government’s massive debt.  As University of Chicago finance professor John Cochrane notes, “Our Government has taken the opposite tack. When you include the Fed (The Fed has bought up most of the recent long-term Treasury issues, in a deliberate move to shorten the maturity structure) the US rolls over about half its debt every two years.”

Print Friendly, PDF & Email

Foreign holdings of US debt hit $5.46 trillion

See today’s Houston Chronicle article entitled Foreign holdings of US debt hit $5.46 trillion”. Putting this number into perspective, this represents an increase over the past two years of roughly $1.26 trillion.   As I document in my November 5, 2010 blog posting entitled “Political economy and the (inflationary) future“, foreign holdings of US debt two years ago stood at around $4.2 trillion.

For my friends out there who are data geeks, the US Treasury Department regularly updates information concerning foreign holdings of treasury securities (by country) at http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt.

Print Friendly, PDF & Email

Cracking Down on Oil Market Manipulation

This coming Saturday will mark the one year anniversary of the creation by the Obama administration of the “Financial Fraud Enforcement Working Group” (see the MSNBC article from 4/21/2011 entitled “Obama says new task force will examine gas prices”, available on the web at http://on.msnbc.com/JdlbDx). The article referenced below (entitled “Cracking Down on Oil Market Manipulation”) is from the White House blog and is dated 4/17/2012.

While the notion that “high” gas prices result from “price gouging” by a cadre of unsavory and greedy oil companies, energy traders, and speculators makes for a provocative political narrative, it’s really bad economics. As canards go, this one is particularly favored by politicians; indeed (as you can see from the time-date stamps of the April 2011 MSNBC and April 2012 White House blog articles), you can almost set your watch on these kinds of things.

I wrote a blog posting about the economics of “high” gas prices on April 23, 2011 (source: http://blog.garven.com/2011/04/23/is-gas-price-gouging-to-blame-for-high-gas-prices), and many, if not most of the points I raised in that article are as applicable today as they were then (now the geopolitical risk du jour is Iran; back then it was Libya)…

 
Cracking Down on Oil Market Manipulation | The White House
www.whitehouse.gov

“President Obama announces a new series of steps to strengthen oversight over the energy markets.”

Print Friendly, PDF & Email

Is gas “price-gouging” to blame for high gas prices?

President Obama raised this question a couple of days ago during a “town hall” meeting in California. The MSNBC article entitled “Obama says new task force will examine gas prices” quotes him as saying, “”We are going to make sure that no one is taking advantage of the American people for their own short-term gain.” This article also quotes the President as saying that “The task force will focus some of its investigation on “the role of traders and speculators” in the oil-price surge”.

An article which appeared in the The Globe and Mail entitled “U.S. launches probe into energy prices”, notes that “U.S. Attorney-General Eric Holder made no allegation of wrongdoing against companies or speculators on Thursday. But the multi-agency Financial Fraud Enforcement Working Group will play a key role in identifying fraud in the energy market, he said” (italics added for emphasis).

While the notion that “high” gas prices result from “price gouging” by a cadre of unsavory and greedy oil companies, energy traders, and speculators makes for a provocative political narrative, it’s really bad economics. As canards go, this one is particularly favored by the political elites; indeed, as Tim Evans, energy analyst with Citi Futures Perspectives, told Reuters news service, “You can almost set your watch on these kinds of things.”

I can think of several reasons why gas prices are high compared with historical norms and likely to remain so for some time:

  1. Rising demand from emerging markets (particularly China and India)
  2. Risks of supply chain disruptions due to the ongoing political upheavals in Libya and the Middle East
  3. Domestic supply constraints due to the ongoing deepwater drilling moratorium in the Gulf of Mexico
  4. The ongoing depreciation of the value of the US dollar vis-a-vis foreign currencies. The Federal Reserve’s major currencies index (which measures the foreign exchange value of the U.S. dollar against a subset of currencies in the broad index that circulate widely outside the country of issue) currently stands at 20–year lows. Since this past January, the value of the US dollar compared with other major foreign currencies has fallen by nearly 5%. Since trading in the global oil markets is dollar denominated, some of the rise in gas prices can be attributed to this factor alone.

Therefore, in order for gas prices to become cheaper for Americans, this will require some combination of 1) a slowdown in the global economy, 2) a favorable resolution of political risks in the Middle East, 3) a credible commitment on the part of the US government to rescind its deepwater drilling moratorium, and/or 4) a recovery in the value of the US dollar vis-a-vis other currencies.

Print Friendly, PDF & Email