My Thoughts

Not as wealthy as we thought

xevarion — Sun, 21 Aug 2011 00:24:59 +0000

One of the things people like to say about the recent recession is that a driving force is that people thought they were wealthier than they really were. Money was borrowed based on enormously optimistic expectations for return on investment. Money was lent based on enormously optimistic expectations for prompt repayment. Entire governments hid gigantic deficits that have been building up for years, perhaps decades. Beginning in 2007, people started to notice the problem.

If this were the only problem, why wouldn’t we already be on the road to recovery? The cat is out of the bag. Everyone knows about the horrible mortgages. Everyone knows how bad all the big banks’ investments have turned out. Everyone knows what the Greek and Italian and Irish governments have been up to. Everyone has revised their expectations downward. Why do we keep doing worse?

I have to admit that don’t frequent the blogosphere and the idea I’m going to talk about might have been written about by Krugman or Tyler Cowen or somebody in a blog or column months or years ago. But I think it’s worth writing about anyway. I gather from reading something by Scholes, though I think it’s standard economics, that one of the reasons for recessions is that it takes a fair amount of time to shift resources from one sector to another within the economy, and so allocation of resources lags the present state of marginal returns from additional resources in some sector. If telecommunications is booming, more resources will be allocated there. If a downturn in that sector occurs, resources will be shifted out. But at the beginning of the downturn, there are too many resources being devoted to that sector. Then a guess must be made about where to shift those resources. If the guess turns out poorly, then the misallocation of resources may become even worse, and a recession occurs.

The reason this is relevant now is that there is another way in which we have fooled ourselves into thinking we are wealthier than we actually are. This method is leverage. Trading and investment companies all employ leverage to get more out of their capital. In recent times, it has become more and more popular to invest in “alternative” products (other than stocks and bonds) such as currency and commodities. As a result, in the past few years (gradually starting in 2007, I think), some of these “alternative” investments have started to become more and more correlated with the overall market as people shift money between things in concert.

The problem with this, as I see it, is that these financial instruments aren’t just abstract numbers. In a way, stock prices don’t really mean that much in a direct way. The price of a stock in the secondary market affects the company’s ability to raise additional capital, but it doesn’t do that much else. Commodities and currencies, on the other hand, are integral parts of the economy and are related to trade and industry in a direct way.

In other words, there is no one “fair” price of a thing. There’s the market price, determined by current supply and demand, and there’s the “intrinsic value”, which is determined by what one could do with the thing. In the olden days, people used to think of the intrinsic value of a stock as the stream of revenue you get from it in the form of dividends. For commodities, the intrinsic value should be determined by macroeconomic factors. What happens if so much money has flooded into the market for commodities that the market price has become totally divorced from the industrial value? What happens if so much money has flooded into currency markets that the Swiss franc exchange rate behaves like the price of gold, going up when people are afraid of inflation or market calamities and down when people are calmer? And no longer has anything to do with what’s going on in the Swiss economy?

It sounds like a recipe for misallocation of resources on a macroeconomic scale.

Just a suggestion, really, not an actual argument. But maybe hedge funds are the reason that we’re still in a recession. Hedge funds have confused us as to what parts of the economy need more resources and what parts of the economy are flooded with resources. We’re still screwed up because we’re not as wealthy as we thought, and the reason is that leveraged investment companies are able to pack 8, 15, 30 times more punch than the amount of money they actually manage. Maybe.

Naegleria fowleri

xevarion — Thu, 18 Aug 2011 18:37:17 +0000

As often happens with the news media these days, there have been a ridiculous number of articles about a couple of recent deaths in the US from infection by Naegleria fowleri. Naegleria is obviously fascinating because it’s a scary and obscure way to die. The articles caught my attention for a different reason — as a former huge House fan, I remembered the organism from Season 2 episodes Euphoria pt 1 and pt 2. In those episodes, a policeman died and Foreman got infected but survived. It turns out the House episode was a little unrealistic (well, more unrealistic than they usually are) in that in real life everybody who gets a Naegleria infection dies. It seems like this might be because it’s usually not discovered until the person is already dead, but it seems like even in cases where the infection is diagnosed before death survival is quite uncommon, and in the House episode they discover the actual cause of Foreman’s symptoms when he’s already on the verge of death from parasites eating his brain. But when he wakes up, the only harm done to him is lobes get crossed and the implication is that the damage is due to Cameron performing a brain biopsy rather than the damage from the parasites…

A Fresh Start

xevarion — Mon, 25 Jul 2011 01:25:23 +0000

New post #1! I felt it was time to wipe away my immature opinions about finance from when I had just started working and my moanings about my personal life two years ago. The world has changed a lot since then, especially my world, and I don’t really see much value in associating my old ramblings with my new ones.

One of the new ideas I have for this blog is to also use it as a site on which to list coins for sale. My main areas of focus right now are on Chinese cash coins, British Commonwealth silver, and Netherlands 19th-20th century silver. I often buy in bulk or buy sort of indiscriminately and end up with duplicates, so that’s what I’ll be selling. I’ll put up a want list too just in case…

I am trying to start reading more and I’ll probably talk about books that I read sometimes also. I recently read Tyler Cowen’s The Great Stagnation and also David Foster Wallace’s commencement speech This Is Water. I’m in the middle of a Pinker book about linguistics and at the top of my list are currently some Salman Rushdie, another Cowen book, a history book by Robert Conquest, and Infinite Jest by David Foster Wallace. It’s a lot to read, but I do have some long flights and train rides coming up (trip to Italy for a week with my girlfriend).

At times I will write about contentious things and I hope to hear from my readers, if I have any…