Tag: Financial markets

In your life expect some trouble, when you worry you make it double…

Those of you interested in international financial markets probably noticed there have been some rather dramatic changes in the the major stock indices over the past week.   The US benchmark Dow Jones Industrial Average stood at 17, 345 last Thursday and subsequently plummeted to 15,666 at the close of business Tuesday.  Following a turbulent Friday and some bad news from China on Monday, the Dow went into a free-fall on Monday, losing over 1,000 points before closing 588 points lower.

On Tuesday, the Dow seemed to regain some of its mojo, soaring 442 points in early trading.  That mojo was a no-go, however, and by the end of the day the Dow had shed another 205 points.  Ouch.

On Wednesday things really did turn around, with the Dow closing 619 points higher, the third-largest gain ever in absolute terms.  As of this writing on Thursday, the Dow is up another 200 points, continuing to scratch back some of the losses from last week.  (Wait, now it’s only up 150 points, better post this picture before it changes again):
dow

The causes of these wild gyrations are quite varied, and would be difficult to explicate before the market moves a hundred points in either direction (that is, even if we knew what all of those causes were, which I’m not convinced that we do).  The question for the decision maker is what do these market fluctuations mean to you?

Well, many flesh-and-bone economists will tell you with a straight face that you are either in the market or you’re not, so if you want to get out now, you shouldn’t have been in the first place.  If you are in, you should just sit tight.

Although that might seem preposterous to you, what economists will tell you is that the idea that you can either predict or time the market is even more preposterous. More on this after the bump: Continue reading In your life expect some trouble, when you worry you make it double…

Playing the Market

For those of you interested in financial markets, we have an upcoming talk and a fall seminar that may be of interest.   First up, this Monday, Grinnell College professor, Mark Montgomery, will give a lecture about the ins and outs of “The Notorious Efficient Market Hypothesis,” as he calls it.

The efficient market hypothesis is essentially in two parts:  First, that all publicly available information is immediately internalized into the extant stock price.  Immediately is pretty fast, so it’s tough to beat the market.  So, secondly, it is not possible to earn above average returns without taking above average risks — a disheartening message for any would-be financiers.   I’m certain that Professor Montgomery will give us a lively talk.

The talk is Monday at 4:30 p.m. in Seitz 102.

For those of you interested in learning about how economists think about investments should consider the Investments directed study that we will offer in the fall of 2015.  In the next few weeks we will roll out our 2015-16 schedule, so watch this space for details.

Please Don’t Fed the Bears

The graph shows the trajectory of today’s S&P 500 index (green) and the yield on the 30-year treasury bond (blue).

Reuters weighs in:

The U.S. Federal Reserve said on Wednesday that it would continue buying bonds at an $85 billion monthly pace for now, surprising financial markets that were braced for a reduction in the central bank’s economic stimulus.

Can you guess what time the Fed made the announcement?

Clearly, anyone betting on a Bear market took it in the teeth today (especially if it is just delaying the inevitable).  I guess we’ll have to wait and see.

Wednesday UD
Is Anyone Yellen for a New Chair?

Real markets, really interesting panel

On the heels of a fascinating Chicago trip, we have the Investments Summit coming to Lawrence on Saturday, 4:00—6:00, in the Hurvis room. Click the poster for more details. Our panelists bring a variety of backgrounds and experiences:

Charles Saunders ’84, Partner and Senior Portfolio Manager, NorthRoad Capital Management; Dean DuMonthier ’88, Portfolio Manager, Copia Capital; Guy Scott ’88, Co-Portfolio Manager and Executive Vice President, Janus International Equity Fund; Hugh Denison ’68, Portfolio Manager, Heartland Advisors; Markus Specks ’06, Hedge Fund Analyst, Varde Partners, Inc.

In addition to some of the basics of the investment trade, there will be a special focus on high energy prices. How do rising energy prices affect portfolio construction? Which companies suffer or benefit from rising energy prices? This is a great opportunity to learn about issues that are of great interest today, from the perspectives of people who are participating in the markets and who see the most recent developments up-close. See you there!

Always Check the Second-Order Conditions

Here’s something to consider as Wall Street gets set to report record profits — a  Sunday New York Times piece on the machinations of the derivatives market.   As it turns out, the new banking regulations tend to restrict entry and favor incumbent firms.

“When you limit participation in the governance of an entity to a few like-minded institutions or individuals who have an interest in keeping competitors out, you have the potential for bad things to happen. It’s antitrust 101,” said Robert E. Litan, who helped oversee the Justice Department’s Nasdaq investigation as deputy assistant attorney general and is now a fellow at the Kauffman Foundation. “The history of derivatives trading is it has grown up as a very concentrated industry, and old habits are hard to break.”

Sometimes known as “capture,” of course. When I learned this back in the day, my professor emphasized that capture does not mean that firms necessarily want regulation, but given that there are regulations, firms will bend them to their own advantage — especially politically connected ones.

And shouldn’t be all that surprising, even to the most optimistic of you.

Well worth reading.

UPDATE: For rather convincing rejoinders, see here and here.

Another Puzzelah

Here’s another question for you — is Wall Street worthless?  I think I’ve asked this before, but I came across two items this week that take this head on.  On the pro-market side, we have Russ Roberts over at Cafe Hayek wondering why he never noticed the rampant cronyism between Wall Street and Capitol Hill:

I am increasingly pessimistic about the fake nature of Wall Street as part of the capitalist system. It is part of the crony capitalist system. I am ashamed at how long it has taken me to notice this. But once you start paying just a bit of attention, it’s hard not to notice.

He then adds fuel to the fire by wondering whether the Bootleggers and Baptists apply to Wall Street generally.  Don’t know the Bootleggers and Baptists story?  Check it out here.

So while Roberts gnashes his teeth, John Cassidy at The New Yorker spills out 10,000 words on the general worthlessness of Wall Street, concluding that most of what it does is socially worthless.

This shouldn’t come as too much of a surprise to you:  Professor Finkler cites it here and I posted something about it here.  We have also seen John Cassidy in the thick of the economics profession here.

Access to Capital

When I conceived of the “free market Monday” tag, this recent Reuven Brenner article in Forbes is what I had in mind.  Brenner is one of the great champions of the idea that access to capital and fluid capital markets are prime drivers of capitalist economies. In this piece, he talks about the importance of risk capital in revitalizing the North American economic outlook.

I also recommend Brenner’s Force of Finance for anyone looking for a modern day capitalist manifesto.  You can get a good taste of Brenner in his review of Invention of Enterprise.

QE2

Those of you who think that “quantitative easing” means that we’ve relaxed the general education requirements might consider cracking a newspaper — or the virtual equivalent.

This second round of quantitative easing, or QE2 for short, is all over the news because the Federal Reserve Board (the Fed, not “the feds”) plans to “inject” $600 billion into circulationOut of thin air.  Wa la.

As you might expect, the dollar is down and gold is up.  And stocks are up, too, though I didn’t necessarily believe this argument.

Not everyone is happy about this, and by not everyone, I mean the Brazilians and the Chinese. Keep an eye on this one.

Negative “Adds” in the Bond Market

Ah, my favorite macro thought experiment

Slate has a very nice piece on investors buying US Treasury bonds that yield negative interest rates! Now, why on earth would someone buy a bond with a negative interest rate? Though the answer is not complicated, it is more than a sentence explanation, so I will let you read it for yourself.  Let me just say, inflation is involved.

For those of you not versed in corporate finance (or “core-fin,” as it’s known), the article provides a good summary of how debt markets work.