Month: September 2011

Samuelson and the Birth of the Index Fund

John Bogle has a nice piece in the WSJ on Paul Samuelson and the history of the index fund, a great example of how theory has contributed to practice.

[Samuelson’s] article “Challenge to Judgment” caught me at the perfect moment. Published in the inaugural edition of the Journal of Portfolio Management in the autumn of 1974, it pleaded “that some large foundation set up an in-house portfolio that tracks the S&P 500 Index—if only for the purpose of setting up a naïve model against which their in-house gunslingers can measure their prowess.”

Presented with that challenge, I couldn’t resist….

Bogle launched the First Index Investment Trust but the project was almost stillborn because the initial underwriting was a huge failure. Only $11.3 million was raised, a 93% shortfall from the goal, and not enough to buy [100 shares of ?] all 500 stocks in the S&P 500. The underwriters urged Bogle to cancel but Bogle persevered despite catcalls from Wall Street about “Bogle’s Folly.”

The most enthusiastic media comments about the coming underwriting of the index fund came from Samuelson himself. Writing in his Newsweek column in August 1976, he expressed delight that there had finally been a response to his earlier challenge: “Sooner than I dared expect,” he wrote, “my explicit prayer has been answered. There is coming to market, I see from a crisp new prospectus, something called the First Index Investment Trust,” an index fund available for investors of modest means, “that apes the whole market (S&P 500 Index), requires no load, and keeps commissions, turnover and management fees to the feasible minimum, and . . . best of all, gives the broadest diversification needed to maximize mean return with minimum portfolio variance and volatility.”

…Today, the assets of the Vanguard funds modeled on the S&P 500 Index total $200 billion, together constituting the largest equity fund in the world. (The second largest, at $180 billion, are the Vanguard Total Stock Market Index funds.) Investors have voted for index funds with their wallets, and they continue to do so.

*Deng Xiaoping and the Transformation of China*

That is the new book by Ezra F. Vogel, excerpt:

Deng in 1978 had an equally dramatic effect on the Japanese people.  In the 2,200 years of contact between China and its island neighbor, Deng was the first Chinese leader to set foot in Japan.  He was also the first to meet the Emperor of Japan.

So far the main lesson I am drawing from this book is how provincial the Chinese leaders were circa 1978, but also how willing they were to absorb evidence and change their minds, especially following visits to Western Europe and Singapore, both of which had significant impacts on them.  I am also learning that the 1979 war with Vietnam was a more significant event than I had thought.

The publication date of the book is listed as 26 September, but Amazon shipped my copy earlier this week.

Eating in besieged wartime Leningrad

One of the surest survival techniques was to get employment in food processing or distribution.  Leningraders with these sorts of jobs, unsurprisingly, seldom died of starvation.  All 713 employees of the Krupskaya sweet factory survived; so did all those at the no.4 bakery and at a margarine manufacturer.  At the Baltika bakery, only twenty-seven out of what grew from 276 to 334 workers died, all of the victims being men.  Canteen waitresses and bread-shop sales girls were notoriously “fat,” as were orphanage staff — a friend of Ostroumova-Lebedeva’s, spotting “Rubenesque” young women in a newly reopened public bathhouse in the spring, automatically assumed that they worked in bakeries, soup kitchens or children’s homes.  Menstruation having ceased for most during the winter, women who gave birth in 1942 were also assumed to have worked in a food plant or dining hall.  (The only two pregnant women Chekrizov saw during the whole of the siege were both waitresses in his shipyard’s cafeteria.)

That is from Leningrad: The Epic Siege of World War II, by Anna Reid.  Here is my previous post on the book.

The Chinese guy who is buying a small chunk of Iceland

Surely not a geopolitical threat:

Dressed in sweatpants, he does not look the strait-laced apparatchik, nor is his office typical of a Chinese businessman’s. The lobby features sculptures inspired by his poems; crampons and oxygen tanks are lined up outside the meeting room. A litter of grey kittens runs around, vying for his attention. Upstairs, beside his bedroom, he keeps two monkeys, several parrots and a rabbit. He used to keep sharks but says they failed to thrive in Beijing.

Yet he is not familiar with Ernst Stavro Blofeld:

Mr Huang, who has climbed Everest and reached the north and south poles, rejects any claim that his deal is motivated by strategic considerations. “It’s true that I have a government background. But I didn’t want to be a bureaucrat,” he says, stroking a purring kitten. “Could a bureaucrat keep cats in his office?”

Portugal fact of the day

Via Felix Salmon, a tale of migration:

In 2006, only 156 Angolan visas were issued to southbound Portuguese, but in 2010, the figure was 23,787.

Felix himself adds:

To put that number in perspective, total emigration from Portugal — to all the countries in the rest of the world combined — ranged between 12,000 and 17,000 a year in the 1980s. Portugal is a very small country, and it hasn’t seen this level of emigration since the 1960s.

One reason: for skilled workers, a job in Angola pays a lot more than a similar job in Portugal: for a civil engineer, we’re talking four times as much, according to one Portuguese entrepreneur in Luanda. And there’s similar demand for skilled workers in fast-growing Brazil, too.

The ZMP idea is gaining wider currency

… the gap between where unemployment stands now, at 9.1%, and full employment may not be as wide as it appears. But it also means more expansive monetary policy won’t be as effective in curing what ails the labor market, Andreas Hornstein, Thomas A. Lubik and Jessie Romero argue in a new paper from the Federal Reserve Bank of Richmond. “After a long period of unemployment, affected workers may become effectively unemployable,” the paper states. “If a large portion of long-term unemployed workers now finds it difficult to transition to employment, this suggests that the natural rate of unemployment may have increased.”

Here is more.  The paper itself has plenty of hypothesis-specific evidence.  For the pointer I thank David. M. Wessel.

Where is the Card and Krueger paper at?

Has it held up better than many people believe?  Here is a good and sure to prove controversial overview from Arindrajit Dube.  Excerpt:

Subsequent research that built on Myth and Measurement has found that while the sizeable positive effects in some of their specifications were likely due to chance, the lack of job loss was very much a robust finding. Card and Krueger’s own subsequent analysis in 2000 using Unemployment Insurance filings by firms (which was closer to the universe of firms in the two states than their original sample) over a longer period already moved towards this view, as the employment elasticities, while still positive, were smaller in magnitude and not statistically distinguishable from zero.(1) My own work with William Lester and Michael Reich (2010) demonstrated this point by comparing contiguous counties across state borders and pooling over 64 different border segments with minimum wage differences over a 17-year period (1990-2006).

There is also a lengthy discussion of whether Neumark and Wascher overturned the central Card and Krueger result.  Read the whole post.

Addendum: Tim Worstall comments.  Matt Yglesias comments.

Should our government spend (and borrow) more at negative real interest rates?

I have read so many posts saying yes.  But is it so obvious?  Let’s put aside the stimulus argument, I’d like to focus on the rate of return argument alone.

Let’s say I could borrow money at negative two percent real, but my seven cousins, three of whom are crazy, would get together and decide how to spend it.  I would get a vote too and they would agree to spend it on me.  I would have to pay it back.

I say no.

Many of the infra-marginal federal dollars are allocated by formula, such as with Social Security, and the cousins don’t have such a big say in the matter.  I am grateful for that.  But is it possible that the hypothetical new federal spending might be controlled by the cousins?  And what if four of them are crazy?

How should I feel about the exorbitant cost overruns on California high speed rail?  You know, the line connecting Fresno and Bakersfield?  That wasn’t even the crazy cousins at work.  (Or was it?)

I absolutely do not see this one as a no-brainer.  By using the “should” language in your thought experiment you can take away the crazy cousins, at least hypothetically.  But in the real world they are still there, and the non-crazy cousins screw up pretty often too.

How close in your family would the spending decisions have to get before you would accept a deal like that outlined above?  How many people would turn it down, even with their spouse in charge of spending the money?

Robin Hanson is forming a forecasting team, Kling and Schulz have a new edition

In response to the Philip Tetlock forecasting challenge, Robin is responding:

Today I can announce that GMU hosts one of the five teams, please join us! Active participants will earn $50 a month, for about two hours of forecasting work. You can sign up here, and start forecasting as soon as you are accepted.

There is more detail at the link.  Let’s see if he turns away the zero marginal product workers.

There is also a new paperback edition out of the excellent Arnold Kling and Nick Schulz book out, now entitled Invisible Wealth: The Hidden Story of How Markets Work.  The book has new forecasts…

*Leningrad: The Epic Siege of World War II*, by Anna Reid

The point at which an entire family was doomed was when its last mobile member became too weak to queue for rations.  Heads of households — usually mothers — were thus faced with a heartbreaking dilemma: whether to eat more food themselves, so as to stay on their feet, or whether to give more to the family’s sickest member — usually a grandparent or child — and risk the lives of all.  That many or most prioritised their children is indicated by the large numbers of orphans they left behind.  The lucky ones were put into children’s homes; the unlucky had their cards stolen by neighbours, took to thieving on the streets or simply died alone.

And:

The Russian language makes the morally vital distinction between trupoyedstvo — ‘corpse-eating’ — and lyudoyedstvo — ‘person-eating’, or murder for cannibalism.

This is an excellent book, you can order it here.  You can find reviews here.

Markets in everything the law of one price?

As an investment, cash is considered a conservative bet. Tonight in Melbourne, a confident buyer took a punt that sometimes, in certain company, cash is worth more as art than money in the bank.

As the opening lot of the Deutscher and Hackett auction, a single wad of $20,000 cash – an artwork called Currency – was sold for $17,500. When the 22 per cent buyer’s premium is added, the total cost comes to $21,350.

The work – by Sydney artist Denis Beaubois, and brought to life with a $20,000 grant from the Australia Council – was divided into two lots of 100 uncirculated $100 banknotes.

Deutscher and Hackett had given it an estimate of $15,000-$25,000, with both extremes sending competing messages about the inflationary value of the work. The notes can still be used as legal tender, according to the artist.

You will note that the winning bidder was not a Swiss bank.  Here is more and for the pointer I thank Zac Gross.