Month: December 2016

How to short the market

Here are a variety of links, please note this not investment advice from me and I am not myself short the market.  Still, 85% of my Twitter feed seems to be short the market, in fact radically short, so I thought I should blog (descriptively, not prescriptively) on this topic at least once and report what they are doing.

I am worried about the impact of the stronger dollar, here is Adam Tooze on that topic.

Beware the powerful sports car hedge fund manager

We find that hedge fund managers who own powerful sports cars take on more investment risk. Conversely, managers who own practical but unexciting cars take on less investment risk. The incremental risk taking by performance car buyers does not translate to higher returns. Consequently, they deliver lower Sharpe ratios than do car buyers who eschew performance. In addition, performance car owners are more likely to terminate their funds, engage in fraudulent behavior, load up on non-index stocks, exhibit lower R-squareds with respect to systematic factors, and succumb to overconfidence. We consider several alternative explanations and conclude that manager revealed preference in the automobile market captures the personality trait of sensation seeking, which in turn drives manager behavior in the investment arena.

That is from a new paper by Stephen Brown, Yan Lu, Sugata Ray, and Melvyn Teo, and for the pointer I thank the excellent Kevin Lewis.

Claims about the Culture Wars

Maybe understanding that opposition from the other tribe was not the reason for failure can help overcome polarization?

  • Your counterculture did not fail because the other counterculture opposed it. (They did, but that’s not why.)
  • Your counterculture failed because the majority did not agree with it.
  • The majority rejected your counterculture because it was plainly wrong about many things.
  • It would help if you understood how younger generations relate to meaningness; they are right that some of your main issues are illusory.
  • You need to let go of the sacred myths of your tribe. Decades ago they inspired genuinely positive social change, but now they produce only frustration and hatred and stalemate. Everyone born after 1970 thinks they are idiotic. You are stuck pretending to believe, but even you secretly know they aren’t true.
  • Your counterculture and the other one also agree about many things!
  • Some of what you agree about is wrong; you should admit that and drop it.
  • Some of what you agree about is right; you should work together to support it.
  • Much of what you imagine you fight about is symbolic, not substantive. Your advocacy of these issues is mostly a statement of tribal identity, and claims for high status within your tribe.
  • When your symbolic issues blow up into actual political conflicts, often you are fighting to establish tribal dominance, not to accomplish pragmatic improvements in society.
  • If you understand what you really disagree about, and why, you may be able to find pragmatic compromises, instead of both sides demanding total victory.

While the piece (who wrote it?) is uneven in parts, it is both interesting and important.  Here is the whole on-line manuscript.  Here is the critique of Bayesianism as Eternalism.  For the pointer I thank Jake Seliger.

Those new service sector jobs, supply and demand Spanish ham slicing edition

The 55-year-old is regarded as the world’s best ham slicer in the world, and he charges accordingly for his services – a reported $4,000 to slice a leg of ham.

Floren, as he likes to be called, has sliced ham for a number of celebrities, including President Barack Obama, Robert De Niro, or David Beckham, and for his majesty King Juan Carlos of Spain. He has performed his jamon-slicing art at the Oscars, Hollywood private parties and at casinos in Las Vegas and Macau. Throughout the year, he follows the Formula 1 circuit, cutting ham for VIPs in the paddocks and lounges of the top racing teams.

Slicing machines are apparently out of the question, as far as jamon enthusiasts are concerned, as heat generated by the friction can alter the taste of the ham and melt the fat, thus ruining the whole experience. But while professional ham slicers are present at any decent cocktail party or event in Spain, they usually make around $250 per ham leg. That’s not nearly enough for them to make a living, which is why most of them have multiple jobs. Florencio Sanchidrián, on the other hand, charges around $4,000 for cutting a leg of ham, a process that takes him around an hour and a half to complete.

florencio-sanchidrian

And this:

 “I think it is quite wrong for a ham cutter speak English,” he says.

Here is the full story, and for the pointer I thank the estimable Chug.

Wednesday assorted links

1. Scott Sumner vs. Larry White Econduel at MRU, video debate on monetary policy.  And is Indian demonetisation actually a popular policy?

2. Peter Thiel’s influence on health and science appointments.  And the influence of Peter Thiel on NASA?

3. UK rules Jedi is not a religion.  “Don’t try to frighten us with your sorcerer’s ways, Lord Vader!”

4. “The Chinese Mayor” is an excellent movie for understanding the political economy of China; too subtle to receive good Netflix reviews.

5. What causes the subjective feeling of time to either slow down or speed up?

6. The real story behind Bertolucci and Last Tango.

Douthat and Dalio on the Trump administration

Here are Ross Douthat’s reading suggestions for the Trump years (NYT), I ordered what I haven’t already read.  And here is Ray Dalio on the Trump administration, better than most of what you will read on the topic.  Here is a short excerpt:

The question is whether this administration will be a) aggressive and thoughtful or b) aggressive and reckless. The interactions between Trump, his heavy-weight advisors, and them with each other will likely determine the answer to this question. For example, on the foreign policy front, what Trump, Flynn, Tillerson, and Mattis (and others) are individually and collectively like will probably determine how much the new administration’s policies will be a) aggressive and thoughtful versus b) aggressive and reckless. We are pretty sure that it won’t take long to find out.

The piece also offers data on Trump’s appointees, hard to excerpt but worth going through.

You don’t have to be a supporter (Dalio sees big risks, as I do, and Douthat has been a consistent opponent) to feel that so much of the discourse has become remarkably uninteresting, mostly because of a preponderance of self-righteousness over analysis.  America’s intellectual class is failing us, with these two gentlemen being notable exceptions to that generality.

China professional bridesmaid markets in everything those new service sector jobs

Against this backdrop, it has become a huge ask to invite someone to be a bridesmaid, and many only agree to act as one reluctantly. Consequently, brides are hiring professional bridesmaids.

Professional bridesmaids have become a routine option for wedding packages, currently offered by more than 50 wedding-planning firms in China. A professional bridesmaid would be required to act as the make-up artist, to drink alcohol, and to fend off rude guests on behalf of the bride, among many other tasks. They are required to perform what the sociologist Arlie Hochschild termed “emotional labor”: faking smiles, engineering a joyous atmosphere, and taking part in traditional stunts that are otherwise considered too vulgar for many.

Depending on the level of “difficulty” of the services they provide, a professional bridesmaid is paid between 200 yuan (around £22) and 800 yuan (around £90) per wedding. Many professional bridesmaids work on weekends, in addition to their routine weekday jobs, in order to generate extra income.

Here is the full story from Yang Hu, much more detail at the link.

Acting like a potential wife and thus blunting demonstrated ambition?

Leonardo Bursztyn, Thomas Fujiwara, and Amanda Pallais have a new paper on this topic (pdf).  Here is the abstract:

Do single women avoid career-enhancing actions because these actions could signal personality traits (like ambition) that are undesirable in the marriage market? We answer this question through two field experiments in an elite U.S. MBA program. Newly-admitted MBA students filled out a questionnaire on job preferences and personality traits to be used by the career center in internship placement; randomly selected students thought their answers would be shared with classmates. When they believed their classmates would not see their responses, single and non-single women answered similarly. However, single women reported desired salaries $18,000 lower and being willing to travel seven fewer days per month and work four fewer hours per week when they expected classmates would see their answers. They also reported less professional ambition and tendency for leadership. Neither men nor non-single women changed their answers in response to peer observability. A supplementary experiment asked students to make choices over hypothetical jobs before discussing their choices in their career class small groups; we randomly varied the groups’ gender composition. Single women were much less likely to select career-focused jobs when their answers would be shared with male peers, especially single ones. Two results from observational data support our experimental results. First, in a new survey, almost three-quarters of single female students reported avoiding activities they thought would help their career because they did not want to appear ambitious. They eschewed these activities at higher rates than did men and non-single women. Second, while unmarried women perform similarly to married women in class when their performance is kept private from classmates (on exams and problem sets), they have lower participation grades.

The reference is through Jennifer Doleac and Mark Koyama.

Will China beat the United States in the fight against air pollution?

There are now pollution red alerts in at least 24 cities in north China, so are things really hopeless in the Middle Kingdom?  I say no.  That is the topic of my latest Bloomberg column, here are some excerpts:

One famous paper, by economists Gene M. Grossman and Alan Krueger, found that (in current dollars) the turning point for environmental improvement comes in “almost every case” when countries reach the range of $17,000 to $18,000 in per capita annual income. Current Chinese per capita income can be plausibly estimated at over $14,000 per year. That means China may not be far from starting to clean up its air, and indeed air quality is already one of the major political issues in China.

The Chinese government already responds to pollution problems with factory closings and automobile restrictions more quickly than it used to, and in general there is better data and more transparency from policymakers.  The U.S. Embassy in Beijing reports pollution improvements for particulate matter over the last year. Over the last two years, there have been suggestions, admittedly debatable ones, that China’s evolution into a service-sector economy means that the turning point already has been reached.

What about the U.S. and its history of fighting air pollution?

By my estimates (see the column), the United States started cleaning up at a per capita income of at least 28k (in current dollars), in the mid-1960s, arguably later than that date.  In other words, if the Chinese waited to start cleaning up their air until they were about twice as rich as is currently the case, they still would be matching the pace of America.

Google Brain Helps Marginal Revolution University

In early November Google Translate took a Japanese translation of the opening of Hemingway’s “The Snows of Kilimanjaro,” and returned:

Kilimanjaro is 19,710 feet of the mountain covered with snow, and it is said that the highest mountain in Africa. Top of the west, “Ngaje Ngai” in the Maasai language, has been referred to as the house of God. The top close to the west, there is a dry, frozen carcass of a leopard. Whether the leopard had what the demand at that altitude, there is no that nobody explained.

One day later Google Translate took the same passage and returned:

Kilimanjaro is a mountain of 19,710 feet covered with snow and is said to be the highest mountain in Africa. The summit of the west is called “Ngaje Ngai” in Masai, the house of God. Near the top of the west there is a dry and frozen dead body of leopard. No one has ever explained what leopard wanted at that altitude.

What happened on that day is that Google turned its Translate service over to Google Brain, it’s new division that uses “neural networks” to solve AI problems. Google Brain and it’s history is the subject of  an excellent longread, The Great AI Awakening, from Gideon Lewis-Kraus (from which I have drawn the example).

Today, however, I want to make a different point. In my paper, Why Online Education Works, I wrote:

Online education has the potential to break the cost disease by substituting capital for labor and hitching productivity improvements in education to productivity improvements in software, artificial intelligence, and computing.

The improvements to Google Translate provide an example. Our Principles of Microeconomics and Principles of Macroeconomics courses at Marginal Revolution University are captioned in over a hundred languages. Professional human-written captions have been produced for most of our videos in English, Spanish, French, Chinese and Arabic and we are working on more translations. Most of the translations, however, including those for Corsican, Kyrgyz, and Urdu are provided by Google. The earlier machine-translations weren’t great but were still useful to students in Pakistan who might need a bit of extra help to understand a new concept. The translations, however, are getting better.

Indeed, every improvement in Google Translate automatically becomes an improvement to Marginal Revolution University. Amazing.

Canada boo-hoo estimates of the day

It’s good for others, however:

The value of Canada’s natural resource assets stood at $287 billion in 2015, down 73% from 2014, largely due to lower energy prices. This decrease followed a 28% increase in 2014.

Timber resources accounted for 55% of the value of all natural resource assets in 2015, followed by minerals (26%) and energy resources (19%).

The value of energy resource assets, which consist of reserves of coal, crude bitumen, crude oil and natural gas, decreased by 93% in 2015 to $56 billion, following a 49% increase in 2014. The large decline in 2015 came primarily from lower crude bitumen prices. As a result, this also increased the shares of mineral and timber resources of total natural resource wealth.

The value of mineral assets fell 38% to $74 billion in 2015 following a 24% decline in 2014. In general, lower commodity prices, combined with stable labour and energy costs compared with the previous year, contributed to the decline. The decrease in iron ore values made the largest contribution to the decline, although decreases in potash, copper-zinc and nickel-copper values were also major contributors.

The value of timber assets declined by 1% in 2015, following a 9% increase in 2014.

Here is the link, via Dan Wang.

Aleppo, and other tragedies

There were a number of deadly attacks yesterday (Berlin, Cairo, Jordan, Turkey (multiple)), while the Aleppo tragedy is continuing and a significant part of the world is mired in disaster every day.  I sometimes feel bad that I do not post more about such topics, but often I do not have a fresh perspective to offer, nor do I find it cathartic to consume my own self-righteousness, quite the contrary.  I also find it problematic to elevate the commonly-shared “tragedy of the day” above the less immediately publicized tragedies.  UNICEF for instance claims that three million children die each year for reasons that can be traced back to malnutrition.  WHO claims that seven million deaths each year can be attributed to air pollution.  Maybe those are not the correct numbers, but you cannot talk them down to anywhere near zero.

Sometimes I feel there is a kind of impossibility theorem, suggesting there is no morally appropriate response to changes in the scope of widespread tragedies.  It seems wrong to be happy that “fewer people than usual suffered and died today,” also wrong to let particular upward blips in death and suffering so fully capture one’s attention because of social framing, and all the more wrong to think changes in the numbers do not matter at all.  And why is hardly anyone upset about Irkutsk?

This post is not the best I can do, but it is what I have done.  The image is a depiction of a long-since-gone 16th century Aleppo, by Nasuh Al-Matrakî, via Rabih Alameddine.

aleppo

Why some of Trump’s appointees are likely to be highly effective

That is my latest Bloomberg column, and here are some short excerpts:

If the political default is not much change in the first place, introducing more variance into the policy process may shake up at least some parts of the status quo. There will be plenty of gaffes, dead ends and policy embarrassments along the way, but don’t confuse those with a lack of results. An incoming administration that does not mind embarrassment is a bit like a sports opponent who has little to lose. It is easy enough to say that neurosurgeon Ben Carson is unqualified to lead the Department of Housing and Urban Development, but it would be a mistake to dismiss his potential influence…

One rumor is that Sylvester Stallone has been discussed in conjunction with chairing the National Endowment for the Arts. That suggestion might meet with mockery in some quarters, but Stallone’s ability to draw attention to the agency and its mission might prove more important than whatever shortcomings he would bring to the job…

…Under one model of the federal government, narrowly defined administrative competence is most required at the all-important departments of Treasury, State, and Defense, and arguably the Trump picks for those areas are consistent with that view. (They are Steven Mnuchin, a financier, Rex Tillerson, a corporate executive and James Mattis, a military man, respectively.) For many of the other picks, there’s a case for taking more chances.

…I interpret Trump’s nominations as a sign of an intelligent and strategic process, and his choices may prove surprisingly effective in getting things done. Whether you like it or not.

Do read the whole thing.

Further reasons why the Mundell-Fleming model is simply, flat-out wrong

Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) terms of trade are stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports and export expansions following depreciations are weak. Using merged firm level and customs data from Colombia we document strong support for the dominant currency paradigm and reject the alternatives of producer currency and local currency pricing.

That is from a new NBER working paper by Casas, Díez, Gopinath, and Gourinchas.  Here are my previous posts on Mundell-Fleming.