Of Revolutions and Independence

By |2014-09-09T17:19:48+00:00December 12th, 2011|Global Market Update|

The energy landscape has changed. Every President since Richard Nixon has called for energy independence, and it’s been an empty phrase because the market has made it prohibitively expensive. But now, with changes in technology and new discoveries, it’s no longer just a pipe dream. The reason is fracking technology. For decades oil companies have used enhanced oil recovery, or EOR, to improve the productivity of existing wells. By pumping water down into the area surrounding a producing well, that well’s productive life can [...]

Under Control

By |2014-09-09T17:15:52+00:00December 9th, 2011|Global Market Update|

When do people make the most painful investing mistakes? There’s not a lot of research on this, but I’d bet that most investment errors are linked to charged emotions. The behavioral biases that most often affect investors are well-documented: overconfidence, loss-aversion, confirmation bias, selective perception, and so on. What’s not well-studied is what makes us subject to these cognitive errors. One major factor has to be our emotions; whether we’re elated or depressed, getting emotional with our money rarely ends well. This is more [...]

Taxing Times

By |2014-09-09T17:15:18+00:00December 8th, 2011|Global Market Update|

What is the optimal top tax rate? A couple of MIT professors studied what top marginal income tax rate would generate the highest revenues to the government. This is important, because optimal tax rates are a hot-button political issue. They compared tax rates, pre and post-tax income, and tax collections in 1970 and 2007, and they found—surprise—that tax collections were higher in 1970 than they were in 2007. Right now the top marginal tax rate is about 42%, combining the top Federal rate with [...]

Schroedingers’s Currency

By |2014-09-09T17:14:51+00:00December 7th, 2011|Global Market Update|

Is finance imitating physics? 75 years ago a European physicist came up with a thought-experiment that illustrated the paradoxical nature of quantum equations. They posited that a particle will be in several quantum states at once until it is observed. That is, a radioactive substance will both decay and not decay until measured, at which point it collapses to a single state. Erwin Schroedinger showed how ridiculous this is by imagining a cat confined in a box, whose life depends on whether a single [...]

Old Money, New Thinking

By |2017-07-17T12:34:59+00:00December 6th, 2011|Global Market Update|

Why do bad financial things happen to wealthy people? People don’t act like financial calculators when it comes to their finances. This holds true no matter what their income is or where it comes from. We’re subject to biases and psychological fallacies that, if we understand them, can help us as to manage our money better. Take the notion of “sunk costs.” If you start a project, you tend to keep going, even if you know that future efforts are likely to be worthless. [...]

Price Swapper

By |2014-09-09T17:13:43+00:00December 5th, 2011|Global Market Update|

Last week the Fed and a bunch of central banks announced something that made the European markets and our markets go up a lot. Did they promise to bail out the Europeans? The Fed didn’t promise a bail out and it didn’t add any risk. What they did was agree to lower the price they charge each other when they swap currencies. That’s not a bail out. UBS is a Swiss bank. If it gets into trouble, it’s a Swiss problem. So it borrows [...]

Going Rogue

By |2017-07-17T12:34:59+00:00December 2nd, 2011|Global Market Update|

What’s up with rogue traders? The story is familiar: a clever, energetic young man working in a bank’s treasury subverts the department’s controls, makes a few bad bets, and then compounds his errors by doubling down. The longer the process goes on, the greater the eventual losses become. Sometimes the bank fails as a result. They seem to pop up every couple years. In the 1989 best seller “Liar’s Poker” Michael Lewis describes several multi-million dollar incidents; since then we had Nick Leeson at [...]

Something Special in the Air

By |2014-09-09T17:07:28+00:00December 1st, 2011|Global Market Update|

You get what you pay for. That’s what I thought when I heard about American Airlines’ bankruptcy filing. AMR Corp was the last of the major airlines to file for bankruptcy. The company will continue, but some of their 78 thousand employees will lose their jobs, and shareholders will almost certainly be wiped out. What went wrong? For decades American was the most innovative carrier in air travel. In 1936 they were the first airline to fly the DC-3, the first plane designed to [...]

Credit Where Credit is Due

By |2014-09-11T09:23:11+00:00November 30th, 2011|Global Market Update|

Who elected the credit rating agencies? It turns out that the credit downgrade of MF Global is what sparked its death spiral. S&P downgraded the company on October 24th. On October 25th the company reported a $200 million loss. Moody’s and Fitch followed suite shortly thereafter. As a result of the downgrades, MF Global’s repo counterparties demanded more capital, and on October 31st MF Global filed for bankruptcy—one of the largest filings in US history. The company has listed some $40 billion in assets [...]

A Nation of Mercenaries?

By |2017-07-17T12:34:59+00:00November 29th, 2011|Global Market Update|

Is conscription becoming less common? In a celebrated exchange, General William Westmoreland testified in favor of the draft, stating that he did not want to command an army of mercenaries. Milton Friedman challenged him: did he prefer rather an army of slaves? He was a mercenary professor; he used a mercenary dentist; he employed a mercenary accountant, and so on. Around the world conscription—mandatory military service—has been in decline. When Napoleon Bonaparte imposed the draft in1793 and then went on to conquer most of [...]