Relearning Economics

The Post-Crash Economics Society at the University of Manchester recently released a manifesto for reforming university economic curriculum. Economic understanding and as a field of study is still very young relative to other sciences. It will be interesting to see the traditional framework around how we understand and teach about market interactions evolves in the coming years. Andrew Haldane, Executive Director for Financial Stability at the BoE, explains in the forward:

The agenda set out in this Report is exciting and compelling. While not exhaustive, it begins to break open some of the economics discipline’s self-imposed shackles. Some of this is discovery of the new – for example, in the area of evolutionary, neuro and behavioural economics. But a large part is rediscovery of the old – or, in some cases, dusting down of the neglected – for example, in the area of institutional economics, economic history and money and banking.


Lobbying Dollars Corrupting Politics: Naked Robbery

Special interest lobbying dollars are influencing US politics greater than ever before, inhibiting the majorities voice and feeding gridlock in the halls of Congress. I expect social pushback to increase as larger portions of the population realize the naked robbery and demand representation on issues affecting their daily lives. Teddy Roosevelt’s Political Theft quote from 1912 provides a warning more prescient than ever.

“It is not a partisan issue; it is more than a political issue; it is a great moral issue. If we condone political theft, if we do not resent the kinds of wrong and injustice that injuriously affect the whole nation, not merely our democratic form of government but our civilization itself cannot endure.” – Teddy Roosevelt, 1912

A Creepy World

A Creepy World

Great research was recently published by Didier Sornette and Peter Cauwels on a general framework to understanding financial markets and social systems. Sornette is Professor on the Chair of Entrepreneurial Risks at Swiss Federal Institute of Technology, Director of the Financial Crisis Observatory, and spoke about predicting financial crisis (video) at TED last June.

Before a critical threshold is reached, these parameters slowly drift, hardly changing the stress in the system, which has, at that point, a quasi-stable characteristic, only disturbed by noise. This gives us an illusion of control, we think that we understand the system and we assume that it will continue behaving as we expect it to for the indefinite future. We make naïve forecasts based on simple extrapolated trends without a real fundamental understanding of the underlying processes. Forecasters are happy and proud that they manage to find a trend and can fit a curve to it, without realizing that in fact they are blind. Examples are the credo that stocks always go up in the long run, the concept that inflation is contained because the velocity of money is low, the idea that governmental debt can always be refunded in the capital markets or that house prices always go up.

The real risks and opportunities in our modern, interconnected society can only be better understood if we get out of this fallacy. Only then will we be able to see and interpret the generic symptoms that occur when a system approaches criticality. (SSRN)


Follow Your Heart

Follow Your Heart

Remembering that I’ll be dead soon is the most important tool I’ve ever encountered to help me make the big choices in life. Because almost everything – all external expectations, all pride, all fear of embarrassment or failure – these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.

– Steve Jobs

TGR’s Cold Smoke Winning Segment – Way of Life

Fieberbrunn is a placed with gauranteed snow,” said the elder Fieberbrunn local Sepp Pletzenauer when interviewed for the Austria segment of Way Of Life“It has the open terrain, nobody around, beautiful powder snow, and I just go and make my path.”

Sepp’s sagacious outlook on his home terrain proved to be more than accurate. The powder that Sage Cattabriga-Alosa, Dylan Hood, and Colter Hinchcliffe found there after a seven-hour detour due to “overgadgeting” proved to be not only deep enough to blind them (literally), but enough to win the nod for the year’s Best Powder segment from both the Powder Magazine Video Awards and, this past weekend, the Cold Smoke Awards. Tim Durtschi also nailed Best Male Performance for his Way Of Life segment.

The Wall Street Code

A thriller about a genius algorithm builder who dared to stand up against Wall Street. Haim Bodek, aka The Algo Arms Dealer.

From the makers of the much-praised Quants: the Alchemists of Wall Street and Money & Speed: Inside the Black Box. Now the long-awaited final episode of a trilogy in search of the winners and losers of the tech revolution on Wall Street. Could mankind lose control of this increasingly complex system?”

Mid-year Portfolio Review

Portolfio review introspection assets bonds investing stocks

With the second quarter ending last week and the Fourth of July holiday past, now is a great time to reassess your investment portfolio.

2013 started with a bang in equities.

  • The S&P 500 rose more than 14 percent into May, and then retraced 3 percent to current levels. Not a bad six months.
  • The NIKKEI took off like a rocket ship on “Abenomics” and has returned more than 31 percent, year to date.
  • Gold and commodities have faced a tough road, starting in April, on accelerated selling and concerns over slowing demand in China.
  • Treasury yields and mortgage rates have jumped over the past couple of months.

Needless to say, there has been a lot of volatility across the investment space.

Much of these price fluctuations have been driven by central bank commentary, monetary policy changes, and participant expectations—a constant tug of war. With interest rates trending sideways until recently and nowhere to go but up in the future, the 30-year bull bond market seemingly ended April, 29, 2013, according to PIMCO’s Bill Gross. (Note: bond yields are inversely related to the price, as yields rise the price falls or visa versa).

Rising rates will prove to upset traditional portfolio allocations and, negatively or positively, influence the pricing of many other risk assets.

No one has all of the answers, neither can they predict the future or create an impenetrable portfolio that always goes up. If someone tells you otherwise, you should run the other direction, and fast.

This reaffirms the value of basing portfolio decisions on a long-term thesis and adjusting with conditions. Whether you are working with professional adviser or individually managing your portfolio, it is important to reassess what has and hasn’t worked so far this year and formulate the best path moving forward.

Many participants attempt to time the market or make large moves in and out of assets, which has historically proven to be a loser’s game.

It is advisable to frame a macro thesis that guides your portfolio and dollar-cost average into various classes based on such. Adding incremental amounts of capital to your portfolio across a longer horizon ensures that you are buying more (or less) of an asset when it is relatively cheaper (or more expensive), but doesn’t impact the larger picture goals.

Even if you bought in at the previous peak of equities on October 9, 2007, and held the position until recently, you would have returned about 16.5 percent. Emotional driven investors exited on the way down or near the bottom and re-entered closer to the recent peak earlier this year, missing an enormous return possibility, as displayed in the charts below.

Portfolio Outlook Investing 3q 2013 JPM insights

Some of the many threats that exist to investors going into the second half of the year, and beyond, include:

  • Global demographic shifts and monetization of sovereign debt
  • Federal Reserve taper: effect on equity, debt, commodity, alternative, and housing markets
  • U.S. fiscal policies, Obamacare, and regulatory risks: effect on employment, sales growth, capital investments, etc.
  • Japanese volatility and the yet-to-be-seen impact of “Abenomics”
  • Euro crisis: high levels of debt, social unrest, unemployment and a slow recovery
  • China: growing pains in both social and economic policies necessary to evolve with the current demand (somewhat similar to U.S. growing pains through the 20th Century)
  • Unrest and corruption in developing markets
  • Shale gas impact on energy markets and various supply chains
  • Technology, resource scarcity, and sustainable design effect on employment, housing, transportation, food, communication, politics, etc.
  • Changing asset correlations

As a whole, the S&P 500’s forward price to earnings ratio (13.9x) remains below its long-term average (14.9x) and corporate earnings are at all-time highs. Investors should position themselves to capture economic recovery through specific industries’ or countries’ growth potential, while defending as best they can against rising rates and the underlying systemic risks, based on their long-term goals and risk profiles.

It is a constant battle to not let emotions or intraday noise drive portfolio decisions, but investing is an ongoing process and self-reflection is a necessary component of growth. Plus, the recent evolution of financial instruments (ETF, ETN, MLPs, etc.) has created many opportunities previously unavailable to retail investors.

If nothing else is gained from this introspection, you will at least be more prepared for evaluating the rapidly evolving market landscape.


This article was originally featured in the Bellingham Business Journal.

[Photo: fs999/Flickr; Graph: JP Morgan Insights, 3Q Market Review]