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Morality Play

By | December 22nd, 2009|

Is moral hazard at the root of our financial troubles? Many look at our recent financial crisis and say that the heart of the problem is moral hazard. That’s the problem you get when speculators get to keep the upside if things work out, but they offload any losses to the government. Deposit insurance is a typical example. Small depositors have no incentive to check [...]

Growing Up

By | December 21st, 2009|

It’s been said that when countries become too indebted, they either default or inflate their way out of the problem. This is a real issue. The Federal Government ran a deficit equal to 10% of GDP last year. That’s the largest budget gap in the developed world. Only two years ago it was about 2% of the economy. For the past 40 years, the fiscal [...]

Return to Risk

By | December 19th, 2009|

Of all the questions a portfolio manager can ask, one of the most important is this: how much risk can you handle? Risk is usually defined as variance in prices. This is convenient, because it allows us to quantify it. Long-term bonds are more risky that short-term; junk bonds are more risky than investment-grade; stocks are more risky than junk bonds—because their prices move around [...]


By | December 17th, 2009|

We’ll they’ve come down from the mountain. The Fed completed its two-day meeting this week, and they didn’t change policy. Yawn. The economy is weak, but it’s showing signs of life. So the Fed plans to let its extraordinary support expire on schedule. How remarkable! When the Fed planned to support the commercial banks or the money market funds or the mortgage market, they somehow [...]

The Large and the Small

By | December 16th, 2009|

What do small European countries have in common with large US states? Both are in fiscal distress. Countries like Greece, Ireland, and Spain are facing significant budget gaps. Greece was downgraded, Spain’s outlook is negative. States like California, New York, and Illinois are also facing downgrades and are delaying payments and issuing scrip to conserve cash. None of these entities can issue their own currency. [...]

Present at the Creation

By | December 15th, 2009|

A giant passed away last weekend. So many great and good people have passed on this year, it seems that it’s been one long funeral. The latest giant to “step up” was Paul Samuelson. He was the recipient of the Nobel Prize in Economics in 1970 for his work in developing the neoclassical synthesis in economics applying Keynesian theory to classical models using the mathematics [...]

Brotherly Love

By | December 14th, 2009|

$10 billion dollars. And it may not even cover the tab. In a little-known incident, the author C.S. Lewis was once approached by a local pub-owner, who asked him to make good on the bar-bill his brother Warnie ran up the night before. Lewis was devoted to his sibling and was deeply concerned about his drinking. Embarrassed by the attention, he growled to the man [...]

Managing Women

By | December 11th, 2009|

Do women make better stock-pickers than men? Recently, a couple of prestigious journals took up the question. Institutional Investor examined whether women hedge fund managers outperform their male counterparts. At the same time, the Financial Analysts Journal published an article whether woman stock analysts make more accurate earnings forecasts than men. The first study showed that from 2000 through 2009 hedge funds run by women [...]

Bonus Babies

By | December 10th, 2009|

So London is taxing big bank bonuses, and France is close behind. Who do you think is next? France’s President joined England’s Prime Minister to announce a special surtax of 50% on bank bonuses in excess of $40 thousand. This is on top of the 65% or 70% marginal tax rates that highly compensated individuals in Paris and London already enjoy. The two leaders clearly [...]