Month: December 2019
Standard consumption CAPM applies a constant discount rate across all stocks, but surely that is odd if different companies face different costs of capital, as indeed they do. Take the companies with a higher cost of capital — in equilibrium they also should have higher rates of return as an offset. And those are (usually) the small stocks, and indeed we know there is a small stock premium (sometimes better expressed as a lower market to book premium) in the finance literature.
But that premium comes from the supply side arbitrage conditions, not from some odd properties of portfolio risk.
You will note that “the investment CAPM says that controlling for a few characteristics is sufficient to explain the cross section of expected returns.” Theory advocates claim that investment CAPM indeed passes that test: “…most anomalies turn out to be different manifestations of the investment and profitability effects.”
He has done what no other conservative leader in the West has done: He has co-opted and thereby neutered the far right. The reactionary Brexit Party has all but collapsed since Boris took over. Anti-immigration fervor has calmed. The Tories have also moved back to the economic and social center under Johnson’s leadership. And there is a strategy to this. What Cummings and Johnson believe is that the E.U., far from being an engine for liberal progress, has, through its overreach and hubris, actually become a major cause of the rise of the far right across the Continent. By forcing many very different countries into one increasingly powerful Eurocratic rubric, the E.U. has spawned a nationalist reaction. From Germany and France to Hungary and Poland, the hardest right is gaining. Getting out of the E.U. is, Johnson and Cummings argue, a way to counter and disarm this nationalism and to transform it into a more benign patriotism. Only the Johnson Tories have grasped this, and the Johnson strategy is one every other major democracy should examine.
Here is more by Andrew Sullivan, interesting throughout.
This year, the World Bank told current and prospective employees of Taiwanese nationality they must present Chinese travel documents in order to maintain or pursue employment.
Here is more. You will note “Taiwanese law prohibits citizens from maintaining dual citizenship with China.” However upon responding to an inquiry from Axios, the World Bank senior leadership seems to have walked back this policy (for now?).
I will be doing a Conversation with him, and he has a new book coming out Why We’re Polarized. Normally I would read the book right away, but I’ll postpone that a bit closer in time to the Conversation itself.
So what should I ask him? Just remember, this is the conversation with Ezra I want to have, not…
The new paper by Lu Zhang with that title strikes me as potentially important, though I am just starting to grasp the main argument. So far I understand it as such. The great weakness of finance theory has been that it assumes asset pricing and the production side of the economy, and production adjustments, are entirely separable. But maybe they are not, and in a way that matters for asset pricing anomalies.
Let’s say that an asset price rises too high, above its fundamental value. The old story was that arbitrageurs sell short and force the price back down. The new story is that investment (sometimes) pours into the overpriced firm, increasing the number of shares and thereby pushing the price of those shares back down. (The opposite may hold for underpricing.)
But sometimes the new investment does not pour in, the overpricing remains, and that can give rise to eventual asset pricing anomalies. Such anomalies in fact arise from imperfections on the investment side, and that explains why asset price anomalies a) tend to cluster around stocks of a common kind in common sectors, and b) do not last forever, because the investment inflexibilities are not forever either. In any case, the Q-factor approach, unlike consumption CAPM, explains where the anomalies come from (and why they might end). Consumption CAPM is sadly quite deficient when it comes to explaining cross-sectional variation in returns across stocks.
Most generally, this “investment CAPM” theory is pricing assets from the perspective of their suppliers — firms — rather than their demanders. Doesn’t this sentence make some sense to you?: “Tim Cook most likely has more impact on Apple Inc.’s market value via his operating, investing, and financing decisions than many Apple Inc. shareholders like me via portfolio decisions in their retirement accounts.”
You will note that when expected investment is high/strong relative to current investment, the model predicts “momentum and Roe premiums.”
I still don’t understand most of this! And apologies to the author for any misstatements. In any case I am intrigued. Here are further papers by Zhang on this topic.
Some hotel guests wake so rested at luxury properties that they purchase the same kind of mattress they slept on. Then there are those patrons who steal them.
At least 48 mattresses have disappeared from guest rooms in the more than 1,100 four- and five-star European hotels surveyed by German review site Wellness Heaven. Guests at five-star hotels were 8% more likely to take mattresses, perhaps because they were more comfy, according to the survey.
That’s far less than the nearly 900 towels or 753 bathrobes that hotels say went missing. Hangers, pens, cutlery, cosmetics and blankets were among the other most commonly lifted items. Personal electronics and small appliances, including tablet computers, hair dryers, coffee makers and TV sets were also reported missing from hotel rooms across the properties.
…He [Keilmann] estimates that roughly $60 million worth of mattresses are lifted from hotels worldwide each year.
Here is the full story, and it seems you can get away with such thefts because the hotels are reluctant to report them and get the police involved. (By the way, might some of those mattresses be the famous German Schlafsacks?)
For the pointer I thank the excellent Michael Rosenwald.
I remain a supporter of Remain, for reasons I will not recap here, but I am also a realist and I recognize that a commitment to the European Union requires a substantial commitment from the population, more than a mere fifty percent and in the United Kingdom we do not see that close to that. You probably know that the Tories seem to have won a smashing victory in today’s election, and by campaigning on Brexit as their main issue. And you can’t just blame Corbyn — his ascendancy and leadership were endogenous to the broader process, and getting rid of him to reverse Brexit it turned out was not the priority.
So do you know who looks much better in retrospect? Yes, David Cameron. After the initial referendum I heard from the usual elites the notion that Cameron committed some kind of inexplicable, aberrant error by allowing the referendum in the first place. That notion is much harder to entertain after today. Even if you are pro-Remain, we should now see that either the referendum, or something like it, was indeed a necessary step in British politics. Cameron himself saw this, and thought that a later referendum, run by an EU-hostile Tory government, could in fact go much worse than what he chanced. So it seems with hindsight that Cameron was pretty prescient, even if he did not get what he wanted.
That is the upshot of my latest Bloomberg column, as the Doing Business index, PISA scores, and the Corruption Perceptions Index have been highly influential. Here are a few of my further requests:
These successes raise a question: Which other indexes might be useful? Think of the suggestions that follow as a kind of Christmas wish list.
How about a loneliness index? David Brooks has argued that America faces a crisis of loneliness, making us unhappy and impoverishing us spiritually. I find these claims plausible, especially since the median U.S. household size has been shrinking. Still, just how bad is this problem? One recent study found that American loneliness has not been rising lately, and that loneliness increases only after people reach their early 70s…
A stress index for Americans another related idea: Just how much do our lives focus our attention on our worries rather than on our joys and hopeful expectations?
There are less emotional concerns as well. How about an infrastructure speed index? I worry about bureaucratization and the slow pace of building important public works. Construction on Manhattan’s Second Avenue subway line, for example, started in 1972, paused, resumed in 2004, and was finally completed (the first phase, anyway) in 2017. In contrast, construction of the core New York City subway system, with 28 stations, began in 1900 and finished in 1904. Similarly, construction of the Empire State Building took only 410 days.
Why do so many U.S. infrastructure projects today take so long? And if the process of improving and reshaping the environment to further human progress is now so much slower, doesn’t it make sense to try to measure this decline for the purpose of eventual improvement? Given the need for a greener energy infrastructure, this is a matter of the utmost urgency.
Speaking of energy infrastructure, how about a severity index for climate change and associated problems?
There are further noteworthy suggestions at the link. Which indices do you wish for?
1. Markets in everything: “New Zealand has ordered about 1,290 square feet of human skin from the United States to help treat patients severely burned in Monday’s volcanic eruption on White Island, as emergency workers scramble to find at least nine people still missing amid concerns the volcano could erupt again.”
4. Old MR post on the Junker fallacy. A lot of claims about stock buybacks commit this fallacy.
5. “My boss lets’us book hangover days.” (UK)
We argue that the input-output network of investment goods across sectors is an important propagation mechanism for understanding business cycles. First, we show that the empirical network is dominated by a few “investment hubs” that produce the majority of investment goods, are highly volatile, and are strongly correlated with the cycle. Second, we embed this network into a multisector model and show that shocks to investment hubs have large aggregate effects while shocks to non-hubs do not. Finally, we measure realized sector-level productivity shocks in the data, feed them into our model, and find that hub shocks account for a large and increasing share of aggregate fluctuations. This fact allows the model to match the decline in the cyclicality of labor productivity and other business cycle changes since the 1980s. Our model also implies that investment stimulus policies increase employment throughout the economy but have unequal effects across sectors.
That is from a new NBER working paper by Christian vom Lehn and Thomas Winberry.
The question, for me, is whether these repeated crises of authority at the national level represent a systemic failure. After all, the disorders of 2019 are the latest installment in a familiar tale. Governments long ago yielded control of the information sphere to the public, and the political landscape, ever since, has been in a state of constant perturbation. From the euphoria and subsequent horrors of the Arab Spring in 2011, through the improbable electoral victories of Brexit and Donald Trump in 2016, to last year’s violence by the Yellow Vests of France, we ought to have learned, by this late hour, to anticipate instability and uncertainty. We should expect to be surprised…
This would be a good time to bring up the pessimistic hypothesis. It holds that the loss of control over information must be fatal to modern government as a system: the universal spread of revolt can be explained as a failure cascade, driving that system inexorably toward disorganization and reconfiguration. Failure cascades can be thought of as negative virality. A local breakdown leads to the progressive loss of higher functions, until the system falls apart. This, in brief, is why airplanes crash and bridges collapse.
For systems that are dynamic and complex, like human societies, outcomes are a lot more mysterious. A failure cascade of revolts (the hypothesis) will knock the institutions of modern government ever further from equilibrium, until the entire structure topples into what Alicia Juarrero calls “phase change”: a “qualitative reconfiguration of the constraints” that gave the failed system its peculiar character. In plain language, the old regime is overthrown – but at this stage randomness takes charge, and what emerges on the far side is, in principle, impossible to predict. I can imagine a twenty-first century Congress of Vienna of the elites, in which Chinese methods of information control are adopted globally, and harsh punishment is meted out, for the best of reasons, to those who speak out of turn. But I can also envision a savage and chaotic Time of Troubles, caused by a public whose expectations have grown impossibly utopian. The way Juarrero tells it, “[T]here is no guarantee that any complex system will reorganize.”
Do read the whole thing.
The 2013 edition of the survey was a wake-up call for Sweden, which experienced a sharp drop in the results of 15-year-old students, pushing them below the OECD average and sparking debate about the country’s schools.
But Tuesday’s release of the 2018 Pisa ranking suggests that Swedish schools have further improved on a recovery that started with the 2016 edition, with above-average scores in reading, mathematics and science.
The report notes that Sweden is back at levels observed in early rankings, despite a rapid increase in the proportion of immigrant students, who tend to score below native-born students, in recent years. In 2018 around 20 percent of students in Sweden had an immigrant background, up from 12 percent in 2009.
Here is the full story. You will note that way back when people blamed the 2013 PISA score plunge on Swedish school privatization and vouchers, and also it led to a lot of fury about immigrants. Others blamed “progressive schooling” techniques. In any case, the Swedish performance has recovered notably and is back to its previous levels. Don’t overreact to particular data points, people! Of course it remains possible that the next measure in three years will show renewed decline, but do not overtheorize based on very limited trends.
4. Atif Mian on the economy of Pakistan (NYT, note that Mian commits the “Junker fallacy,” namely he argues that land speculation on net drains funds from business investment — a basic mistake in economics).
John Perry Barlow, who passed away in 2018, penned two influential essays early in the web’s evolution A Declaration of the Independence of Cyberspace and Selling Wine Without Bottles: The Economy of Mind on the Global Net. It’s easy in retrospect to make fun of some of Barlow’s claims:
Governments of the Industrial World, you weary giants of flesh and steel, I come from Cyberspace, the new home of Mind. On behalf of the future, I ask you of the past to leave us alone. You are not welcome among us. You have no sovereignty where we gather.
or how about this painfully wrong prediction?
We are creating a world where anyone, anywhere may express his or her beliefs, no matter how singular, without fear of being coerced into silence or conformity.
But as Cindy Cohn notes in Inventing the Future: Barlow and Beyond:
In talking about the Declaration at Electronic Frontier Foundation (EFF) many years later, Barlow admitted that when he stepped out of a party at Davos to write it, he was both a little drunk and trying desperately to channel Thomas Jefferson. So maybe some of the sweeping rebukes are just trying to match his original bravado.
Moreover, Barlow was not nearly as utopian as one might imagine. He was, after all, one of the founders (in 1990!) of the Electronic Frontier Foundation which has worked to make the words true.
The symposium is of mixed quality. Cory Doctorow’s contribution is quarrelsome and weak. James Boyle’s overview and description of the WWW, however, is excellent:
Berners-Lee imagined a republic of ideas built on a vision of language.The whole thing had a whiff of Harry Potter magic.To click on the hyperlink was to summon its referent.The name was the magical command for the presence of the resource, as though every footnote animated itself, went to the library and brought you back the relevant book. To write a web page was to build a transporter of the mind. The link was a reference to the resource, a map to the place where the resource was held and a vehicle to take you there. Each new document wove the network a little wider and tighter. That’s why they called it the world wide web. And its architecture was “distributed.” Anyone could build the web—as if we could all wander outside our houses and build the Eisenhower freeways of the mind ourselves, draw the maps that chronicled those freeways, assemble the cars that traveled along them and then construct the libraries, bookstores, shops, coffee houses and red light districts to which they journeyed. All done through a decentralized process that required neither governmental permission, nor authentication of your content—for better or worse. Better and worse.
What the past quarter century has taught us is that there are five basic failure modes of commons-based strategies to construct more attractive forms of social relations.
- Companies and countries can usually sustain focused strategic efforts for longer and more actively than distributed networks of users…
- Distributed social relations can themselves develop internal hierarchies and inequities (the Iron Law of Oligarchy)…
- Distributed open communications have provided enormous play for genuinely hateful and harmful behavior, such that we find ourselves seeking some power to control the worst abuses—the power of the platforms we want to hold democratically accountable, or the power of countries to regulate those platforms for us…
- More fundamentally, as long as we live in a society where people have to make money to eat and keep a roof over their heads, markets produce stuff we really like and want. For all the broad complaints about Amazon, it has produced enormous consumer welfare. More directly, for all the romanticization of fan videos and remix, the emergence of subscription streaming services like Netflix and Amazon Prime has been a boon to professional video creators and underwritten a golden age of professional video entertainment and narrative, both fiction and non-fiction.
- States are still necessary to counter market power, provide public goods on a sustained and large-scale basis by using coercive taxing and spending powers, redistribute wealth,and provide basic social and economic security for the majority of the population.
The symposium is here.