Who do you follow?

Oddly, I have missed, until this week, the "follow others" feature in google reader. I first discovered it when Henry Farrell noted that his "shared items" is a repository for things that don't quite make it into a post over at Crooked Timber.

Following other people's Google Readers also popped up when Chris Blattman recommended to follow Rajeev Ramachandran.

I have added these three people to my reader, and am amazingly happy with the results. Each acts as a curator for a different area of interest, and I reap the rewards (which I suppose makes this project second order curation, as we get more and more recursive).

So, the question becomes: Who do you follow on your reader? Who else should I follow?

5.14.2010 "Serial entrepreneur is an oxymoron"

"Entrepreneurship is not an end in and of itself. Serial entrepreneur is an oxymoron." Venture Hacks is a neat little resource. You should follow them.

Ben Bernanke on happiness.

Pimco's El-Erian's most recent outlook.

Why Did Rating Agencies Do Such a Bad Job Rating Subprime Securities? SSRN.

How do you talk yourself into something?

5.11.2010 A Conversation about the Goldman Sachs Hearing

This is a conversation (spell checked and minor grammatical corrections) between a friend of mine who works in the business of Politics. As I have helped him in the past understand the arcane uses and abuses of CDOs, MBS, and other methods of saying one thing and doing another in the financial world, I hope that my 4 readers* will find the following exchange insightful. I apologize for the profanity. People with jobs in politics tend to swear.

T***: Also, they adopted the Sanders (modified) amendment, but rejected a more fulsome audit of the Fed

Me: ah.

More fulsome?

It is really just despair. I think this expresses it well: https://self-evident.org/?p=820

T***: The Sanders audit is limited to info on who they gave money to in the last 3 years

The rejected Vitter amendment is a full audit, including minutes

Me: I mean, it isn't rational, insofar as I have no evidence for this, but I just feel that data points will be used as cudgels, either against the central bank or against specific banks, while leaving the bigger picture/necessary adjustments unaccounted for.

T***: That is a f****** stupid article

Me: I mean, the Goldman senate hearings were a laugh

Look, I like Barney Frank as much as the next guy

But he is more the exception, imho

T***: Seriously, absolutely pig ignorant about how hearings work

No, seriously, that is f****** retarded

Those questions were literally all written by public interest groups

And the audience sure as f*** wasn't Wall Street analysts

They were all political questions made for a political point

Me: right

A political point which purposefully missed the fundamental purpose of the financial system.

T***: Using them to gauge the knowledge of the market among senators (and really, about Senate staff because who gives a f*** what senators know?) is retarded

The writer of this is far more ignorant about how Congress works than the average senator is of the market

It is garbage

Me: I mean, I suppose it is silly for me to expect that a hearing should actually be an attempt to inform and clarify, let alone that the tone and tenor of the hearing will influence the crafting of legislation

T***: Yes

That is absolutely ridiculous to expect

Me: so you are saying that I should ignore the hearings? and that anyone involved has no input on the financial regulation in the pipe, and that the knowledge level that their questions implied in no way represents the knowledge level of the people actually crafting the regulation of the financial sector?

T***: Pretty much! You should basically treat them with the importance that you would treat a company’s press release regarding upcoming litigation

It is all posturing

And again, the questions don't come from the members about 90% of the time

They come from lobbyists

We do that all the time

Writing questions for hearings

T***: The analog between CEOs and Senators and their relevant expertise relative to their respective staffs is apt, except that Senators have more accountability, more diverse backgrounds and a higher level of personal achievement. Considering how s***** senators are, collectively and individually, that is the harshest f***ing burn of CEOs I can muster.

Me: zing

5.11.2010 More on risk and volatility

Crossing Wall St has a further meditation on the Volatility = Risk implication of Felix's most recent statement.

On further contemplation, I want to clarify my previous statements.

I worked with mid to high net worth individuals for most of my professional life before school, creating financial plans to provide for retirement, college education, and other goals. Determining the appropriate exposure to stocks is probably the most important thing that we did as advisers. Some clients are younger, less risk averse, or have higher income; some clients are older, more risk averse, and have less income flexibility. These metrics, amongst others, are the critical things to evaluate the risk tolerance, and thus the proper allocation of stocks.

Maybe this is a moment of delayed Upton Sinclair*, but risk tolerance shouldn't change because the market is volatile, and so an individuals portfolio shouldn't change because the volatility of the market has quickly changed (as it is wont to do). An individual's risk tolerance is in relation to the volatility of the market in general, not the volatility of the market on a daily basis. If an adviser has done his or her job right, they understand their client's psychology and will be conservative with their estimation of a client's risk tolerance when the market is bullish, and aggressive with their estimation of a client's risk tolerance when the market is bearish. Indeed, this is what we attempted to accomplish with our practice in 2006 to 2007, where the standard analysis suggested a 80/20% stock/bond portfolio, we moved clients to 65/35 stock/bond portfolios.

The implication of Felix's advice is that daily volatility is a reason to shift the allocation of a portfolio. If you've done your job right, the volatility that a client is exposed to is the volatility that they can stand. This means in low volatility time periods, they want to take more risk; in high volatility time periods, they run for the exits. A client should be unhappy with you in bull markets, but happy in bear markets.

Your investment allocation strategy shouldn't magnify the behavioral irrationalities of a retail investor.




* "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"

5.09.2010 On the peculiar advice of Mr. Salmon

Felix had some interesting advice the other day, which he updated tonight. Suffice it to say, I think a fair summary is something along the lines of "OH GOD SELL HOLY SWEET JEBUS WE'RE ALL GOING TO DIE" or something similar. Or at least that is, I am reasonably sure, the take away that people will have who read the Huffington Post as they log onto their eReaders and eTrade accounts after reading the weekends news, given my short tenure in the field of explaining the incomprehensible market volatility to nervous retail investors.

Nevertheless, my curiosity was piqued when Felix said:

With all those inputs, the Samuelson Share output is 78%: you should have 78% of your investments in stocks, on average, over the course of your investing life.

But now what happens if you change the 18% value for the VIX to its actual closing level on Friday, which is 40.95%? Suddenly, the Samuelson Share plunges to just 15%.

SURELY the “Felix Salmon Investment Advice” isn't saying that we should adjust our market exposure DAILY based off the closing VIX price? That would lead to CRAZY volatility and leverage in the portfolio, not to mention silly things like transaction costs. Perhaps it would be better to take a yearly average of the VIX, and adjust accordingly there, rebalancing the portfolio.

So, I charted the "Samuelson Share" based off the Daily close of the VIX and then took the 1 year moving average trend line. I also threw the daily close of the S&P500 on to get a better idea of what the market was doing during each allocation point:



So, the Felix/Samuelson approach would have you buy more and more (with leverage) as the bull markets increased, and sell into the bear markets. Buy high (with leverage), sell low.

I don't know if this strategy would have actually beat a buy and hold strategy since 1990 (as this is just the quick excel work I could piece together over 3 innings of the Sox/Yankee's game) let along longer time periods, but I suspect that this isn't really a winner, in the long term strategies for allocation of assets to produce satisfactory risk adjusted returns.

5.08.2010 “When the facts change, I change my mind. What do you do, sir?”

Why software patents and business method patents are a problem for the innovation economy. A VC.

Why anti-sweatshop campaigns might just do it after all. Tim Hartford, the FT.

The Internet has changed forever, and no one seems to have noticed. Crooked Timber.

Lovin’ Spoonful. PIMCO's investment outlook.

Why Do Harvard Kids Head to Wall Street? Baseline Scenario.

The “real” causes of China’s trade surplus. VoxEU. The Chinese Surplus has more to do with the funding of private Chinese business through retained earnings rather than bank or equity financing. An interesting reply to the Krugman Hypothesis.

The Ultimate Productivity Blog

Startup Lessons Learned.

Running the “Agile” Board.

The real reason Steve Jobs hates Flash. A great meditation on where computing will be in 5 years.

The Perfect Roast Chicken. Yum.

5.08.2010 On the Rorscharch test of pretty charts...

Recently, the blogosphere has been a flutter about this post by Mike Mandel. It contains this chart:



He observes:

This one fact explains much of the fiscal stress at the state and local level—why states such as New York, New Jersey, and California are in such a mess. State and local governments pay more than $1 trillion in compensation annually (actually, that’s an astounding number–I had no idea it was that high). If compensation is 5% higher than it should be, that’s $50 billion in excess pay costs for the state.

And lo and behold, that $50 billion would roughly cover the total size of the state budget gaps. For example, in February a survey found that the combined budget gap of all 50 states was $55 billion for the 2011 budget year and $62 billion for the 2012 budget year . (The survey was done by the National Governors Association and the National Association of State Budget Officers)

Of course, this chart doesn't actually tell us this. It does show that somewhere around 2006Q01, something happened where public and private wages started to diverge (or perhaps nothing happened, and this is a common event in the business cycle). Whether private wages were held low to where they should be or public wages were inflated higher than where they should be is unanswered by the chart. Indeed, the chart merely confirms a belief already held by the viewer, as we see in the comments where LP2 states:

Yes, the arithmetic IS very clear. Just eyeballing that graph, virtually all of the difference comes from stagnation in private sector pay between 2004 and Q1 2008. The recession started in December 2007 by most measures.

This graph doesn’t show higher wages for public workers “while the private sector struggles;” it shows the private sector sticking it to private sector workers.

Same chart, diametrically opposed conclusions.

So both sides partake in a thesis in search of data, and nothing looks more like data than a nice chart with some squiggly lines on it.

This is, of course, the opposite of what we should do. Upon observation of a divergence from either a historical relationship or a seeming identity, we should avoid the temptation to immediately shoehorn it into our existing world view. Rather, we can and should attempt to build a model of items in question, and from that we can see if, at the inflection point, what, if anything, changed.

Much of this is informed by my professional career in retail asset management. When faced with a market that swings every day and with clients calling wanting to know why their portfolios are having intraday swings greater than your Adjusted Gross Income, the temptation to declare something over or under priced, to declare the collective wisdom of everybody else in the market as wrong, is great. Indeed, the entirety of the asset management business is based off of being smarter than the market. But I felt it was always hubris to, in my small office in Los Angeles, declare myself smarter than every blowhard on TV. What we did better than they did, in my opinion, was to be more humble, to know what our clients wanted, and to know the limitations of our experience. We levered the information that we had and where our knowledge failed us, we had the humility to trust the collective knowledge (market).

The creation of useful knowledge - which is the primary unit of investing and economics - requires a willingness to embrace not knowing an answer. This requires work, and lots of it. If you are going to accuse the collective wisdom of a multitude of actors of making a mistake, your reasons should be better than your reading of Atlas Shrugged or A People's History...

Which is to say I'd love to look at Mr. Mandel's data and method backing this up, and see what this relation looks like going back further than 2001Q01.