Monday, September 29, 2014

Pimco Management vs. Paul Krugman on Bill Gross Leaving Pimco

      What we have are two theories as why he left Pimco. Krugman suggests Gross getting everything wrong on a 'Treasury bubble' back in 2011 might have had a little something to do with his departure from the fund he himself founded 43 years ago.

       "I don’t know anything about what’s been going on internally at Pimco; I just read the same stories as everyone else. I have, however, written a lot about Pimco’s macroeconomic analysis(which drove its bond-investment decisions)."

       "The interesting thing is the Pimco was initially a bond bull, based on the correct understanding that deficits don’t crowd out lending when the economy is in a liquidity trap; but it then went off the rails, with Bill Gross insisting that rates would spike when the Fed ended QE2. I tried to explain why this was wrong, and got a lot of flak from people insisting that the great Gross knew more than any ivory-tower academic. But I knew what I was talking about!"
     However, Pimco management is taking pains to insist that while he did indeed leave based on 'philosophical differences' with management these had nothing to do with investing. 
      "Pimco and its parent firm Allianz moved to stem concern over Bill Gross' surprise exit Friday, assuring investors that the relationship remains solid and they expect client loss to be minimal."
      "Officials from the two firms Monday looked to downplay the loss of Gross, who founded the firm 43 years ago."
       "Pimco CEO Doug Hodge emphasized that the differences between the two sides were tied to management and media strategy and not to investing. The firm had acknowledged Friday that "fundamental differences" led to the breakup."
       "Those differences did not pertain to clients' portfolio investment strategy," Hodge said in a conference call. "Those (nonstrategy issues) were the ones that were broadly at issue with Bill, and, as a result, his decision to resign."

      So it wasn't about investment strategy but about 'media strategy.' So if everything was fine on the investment strategy front why fire someone who allegedly hasn't hurt the investment strategy and just happens to be the founder of the firm and whose name is more or less synonymous with the firm? If it's just about media matters? At least there is no problem with investing at the firm. Oh wait:

     "The biggest issue at Pimco from a strategy standpoint has been a mass exodus of client money over the past 15 months or so, particularly from the firm's flagship Total Return Fund, which has lost more than $40 billion in all. The $221 billion fund remains the largest bond fund in the world and is still the core of the firm's $1.97 trillion in assets under management."

       I mean that kind of does sound like an investing strategy matter. Krugman has weighed in again:

     As Pimco clearly has had problems with it's investment strategy, it's a wonder they have time to fire such a household name and the firm's founder to boot over some smaller non-investing matter. 

From Never Bet on the Giants to Never Bet on the Steelers?

     I'm almost tempted to say that after yesterday's fizz out where they lost at home 27-24 at home to the previously winless Bucs. It turns out it's a good thing I broke my rule of never betting on the Giants as they were the team to put me up $900 dollars on the weekend.

     I was pretty unlucky yesterday. My picks for the Colts and Charges were spot on as they easily covered but the Steelers let Tampa hang around all day and steal the win late. As it was I needed an 8 point Steeler win as I bet the spread. I had a feeling this was not the way to go-the Steelers are not really great at covering spreads as they tend to play close games and don't put that many teams away.

     Then the Eagles my second underdog of the weekend-after getting the Giants right as a dog-took a 21-10 lead in San Francisco but then let the Niners dominate the rest of the game coming from behind 26-21. So yesterday was a pure wash with me being up for the week purely on the Giants win.

      At this point in the season I have a few thoughts. One is that the Bengals  may have gone to the next level this year. We know they're a powerhouse at home-they were 8-0 least year both straight up and against the spread and at this point I think you take them in any home game against anyone probably including the Seahawks or Denver.

     What really impresses me is that win on the road in Baltimore in week 1 which suggests maybe they will be able to win a few different stadiums than their own this year. It's also amazing to me that this team allows just 11 points a game-this is hardly the Bengals' reputation. Usually you think of the Bengals as a team with a high octane offense whose defense then gives up points as fast as QB Andy Dalton and company score them.

     A good test for them will be next week in New England. This will be very interesting both for how the Bengals handle this and how the Pats do. If you go by the past, this should be a slam dunk taking New England but my sense is that the Bengals may be a little better this year and the Pats may be a bit worse. They had a really bad loss week 1 against Miami seeing a double digit halftime lead dissipating into a double digit loss. Then last week they barely outlasted the Raiders 16-9 where Brady seemed not able to get too much going.

     So those are the first two teams I wonder if they haven't undergone something of a 'sea change'-the Bengals taking a leg up this year the Pats moving a leg down. Last the Saints. The book says you play the Saints exactly like the Bengals-take them at home bet against them on the road. They're bad 1-3 start can to be an extent chalked up to playing 3 of 4 on the road to start. However, even considering that they've been on the road they've looked awful and they were just riddled in Dallas last night. I knew the Cowboys were the choice but couldn't bring myself to bet on them. A bridge too far as it were.

     Even their win at home-a 20-9  win vs. the Peterson-less Vikings-was not terribly impressive. I'm wondering if this team is going to take a step back this year. I mean they should be seen as a lock to go against on the road but maybe even less trustworthy at home. I mean they're favored by 11 points vs. the Bucs this week. Normally that should be a given. They've outscored Tampa 83-7 the last 2 years at the Superdome. I do think they'll take it and probably cover-they will be hungry for a big win after the Dallas debacle but if they fail to cover here, you have to think that they are in fact taking a step back this year.

     So the Bengals are-maybe-a little better this year and the Saints and Pats are maybe a little worse though I feel a little more conviction on the first two theories and I think that we need to see more to verify any of these theories. A win for the Bengals in NE would be a big boon to the to premises on both those teams for opposite reasons while if the Saints fail to cover at home against Tampa with the Bucs due for a let down after a rare win and the Saints needing a big statement after such a bad outing in Dallas, you begin to think that they really have take a step back this year.

     The other teams I'm thinking about this week? The Giants over Atlanta-if my Big Blue are going to be a factor this year they absolutely need a win here and the Eagles over the Rams-if the Eagles fail here then I think that no matter how good they may look on paper with Nick Foles, they are the same old up and down Eagles.

     Then I have the Chargers over the Jets and the Seahawks over the Redskins. The Chargers are another team that might be for real this year but I'm not wholly sold on till I see more. A lopsided win here over a team they should blowout would be a step in the right direction-like they had this week against the Jaguars. 

Saturday, September 27, 2014

Rational Expectations and Five Triple Day Moves in the Markets in Five Days

     It seems to me that Sumner suffers from confirmation bias-as everything proves he's right according to him. Everything proves that Keynesianism is dying, that the multiplier is zero-indeed that there is a negative multiplier-that there is always full monetary offset and that expectations are wholly rational.

    For example the 1987 market crash proves he's right-as it didn't lead to a recession-ergo, there are no bubbles. Of course, what the crash doesn't prove is that the market is irrational though as he says it's not clear to this day why the market sold off 20 percent in one day. Yet why would rational market participants engage in such unjustified panic selling-so much storm and stress over nothing? Does this not at all suggest Keynes' animal spirits?

    I am currently reading Jim Cramer's Get Rich Carefully. He makes the point that on any given day anything the market can do anything. He mentions the Flash Crash of 2010 where the market lost 1000 points in a few minutes for no reason at all. Even a blue chip stock like Proctor and Gamble dropped from $60 to $40 in a few minutes-with no rational reason at all.
    This week I we've had a week not unlike the 1987 October Crash or the Flash Crash with the market up or down by triple digits every day. We started with two such down days then had a very big up day Weds and an even bigger down day Thurs and another very big down day Friday. I've had a lot of luck with Bank of America since news of their settlement with the DOJ hit a few months ago.

   This week due to my frustrations in trying to time Gilead and Yahoo I figured put all my option money in a $17.00 BAC call figuring it's the one stock who's tendencies I know the best through long trial and error. On Weds I got out of all other option positions and double my position in BAC 200 calls.

   Of course, the common wisdom would criticize me for no diversification at all but I just figured the way the stock was moving the last few weeks there was very little chance of a big down move-what could be the news that would bring it down? After all the big drag-the $17 billion fine to the DOJ had been fully priced in and now there was nothing holding it down.

    On a purely rational, fundamental basis I think I was right. However, what I forgot is what Cramer mentions in his book-the 'micro' in BAC may be very good right now but there is all this 'macro' panic-the large indexes have been very volatile especially since the Alibaba IPO.

     So on Thurs BAC dropped from 17.20 to $16.85 for reasons that had nothing to do with the fundamentals of BAC and something that has everything to do with the market is getting nervous for some reason-animal spirits?-that has no real tangible rational basis. Actually Crmaer thinks the tail wagging the dog is actually Russia and the Ukraine.

      I did actually find his advice on Thursday night helpful-that it's rarely the right move to sell into weakness. I found this plausible as he admitted that the one time it was the right move was in 2008. I remember 2008 and that was a good time to be a bear-I made some nice money shorting the bank stocks that year. For more on this crazy week see here.

    Speaking of unexplainable market moves, I have this idea of applying this analysis to other stuff-like NFL football games. In a way Denver's loss in the Super Bowl last year is kind of like 1987 or the Flash Crash. Based upon their 2013 performance theirt 43-7 loss to Seattle seems out of nowwhewre. It wasn't shocking that they lost; it was lot more suprising that they were blown out but what was most shocking was that they only scored 7 points. A 63-27 loss would have been a lot less shocking.

     It strikes me that the 2013 Broncos are a movie that we've seen before. They were a 13-3 teams and they set an NFL record in points scored, outscoring opponents 606-399. They scored under 31 points only 3 times in the regular season. In the playoffs that actually were somewhat slower offensively scoring just 24 and 26 points during the playoffs in wins over San Diego and New England. However, the 7 points was out of nowhere and shocking for a team that had set a record, scoring over 600 points. In a classic offense-defense showdown-the Seahawks scored a 'paltry' 417 points while giving up 239. So defense won to say the least.

    Again, we've seen this movie before-we saw it in the NFL with the 1983 Redskins, the 1998 Vikings and the 2007 Patriots. All these teams set what were at the time NFL records in points scored and then went on to come up disappointly short. The Skins scored a record 541 points in 83, led by Theisman and John Riggins but this record setting offense was a no show in the Super Bowl against the Raiders, as they were dismantled 38-9.

    Just like the 2013 Broncos the offense failed to even score 10 points when it mattered. Their point differentials were quite similar as Washington's 83 point differential was 541-332.  In the semifinals against the Rams the sky seemed the limit for the high octane Skins who smoke the Dickerson led Rams 51-7.  Yet what I find even more  interesting is that in the Championship game in Washington the point machine noticeably slowed down in the second half. In the first half they ran up a 21-0 lead but in the second the Niners tied it up at 21 and they needed overtime to eek out a 24-21 win.

    This strikes me as somewhat like the Broncos 2013 p;layoffs where though they won both games their offense was a little less spectacular. The 2013 Broncos and 1983 Redskins were very similar. The other two teams that were in some ways closer to each other. However, both the 98 Vikings and 2007 Patriots were similar but in some ways more similar to each other. Both were unbeatable all year-literally in the case of the Pats, the next thing to for the Vikings.

    The Vikings shattered the 83 Skins record with 556 points scored against 296 allowed. At 15-1 the record setting Vikes were the favorites but after blowing out the Cardinals in the 2nd round, lost a 30-27 overtime loss to the 14-2 Falcons. This was different in that they weren't blown out and the offense wasn't wholly shutdown like the Washington and Denver were but it nevertheless surprised everyone and was another case of a team seemingly unbeatable in the regular season with a record setting offense, falling short.

    Then of course we have the 2007 Pats, the first team ever to go 16-0. The 17-14 loss to my Giants was not a blowout but it still was stunning-after all they came in 18-0 to a Giants team that was only 10-6 in the regular season. Just as both the Redskins and Denver started looking a little less impressive just before the big game, the Pats hadn't been so dominating in the playoffs, winning their two games just 31-20 over the Jaguars and 21-12 in the Championship against the Chargers. Actually despite scoring 589 regular season points to just 274 allowed during the regular season, they had seemed to even slow down somewhat over the last 6 regular season games, having a lot more close games and not scoring quite as many points as during the first 10.

     While many commentators dismissed it, I still think that the final regular season game where they had to rally from 11 points to just edge out the Giants 38-35 gave the Giants a lot of confidence and had a lot to do with them making the SB much less defeating the Pats in the rematch.

     So is there something about setting new scoring records along with record point differentials-recall that Bill James' Abstract tells us a large point differential is s sign of a strong team that's conducive to seeing your offense and team come up short at the last minute when it really matters? This gets back to the economists' distinction of correlation and causation. Maybe there is no causation but I still wonder what the odds would really be to see such strong correlation.

Friday, September 26, 2014

Bond Vigilante Bill Gross Leaves Pimco for Janus

      It actually sounds like he was about to be 'asked to leave' as he's been exhibiting 'increasingly erratic behavior'-according to some of his coworkers at Pimco.

      Gross was one of Krugman's signature 'bond vigilantes.' Maybe his 'erratic behavior' is due to him reflecting on all that money he lost a few years ago on the 'Treasury bubble.'

     In any case, for now, investors of Janus think having Gross join the firm is the greatest thing since sliced bread.

      "Bill Gross has an exemplary track record with decades of success and he will offer an exceptional approach to navigating today's increasingly risky markets with a focus on macro, unconstrained strategies. His involvement provides Janus a unique opportunity to offer strategies and products that are highly complementary to those already managed by our credit-based fixed income team," Richard Weil, CEO of Janus Capital, said in a statement."

        No matter how things go for him at Janus, perhaps we shouldn't feel too bad for him-he's worth $2.4 billion dollars. However, his 'erratic behavior' shows that even for billionaires, if 'you cut me I will bleed.' 

        After the absurd racist behavior of Don Sterling some worried that there's no way you can really punish a billionaire. Time would prove that worry wrong as his punishment totally humiliated him-being banned from running his own team, being banned from the league for life. 

         When you're that rich it may not be easy to punish you financially. However, you can be humiliated-Zizek would say you can be hurt 'symbolically' and symbolic pain is always the worse-think of 'symbolic pain' as injury to your social standing

          Gross may be fine financially after his inflatonphobia was shown to be all wet, but symbolically he took a hit and maybe that's why he's so erratic these days. 

Thursday, September 25, 2014

Giants 45 Redskins 14: Why Rules Are Meant to be Broken

      Thank goodness they are meant to be broken otherwise I would have not bet on the Giants yet again. What can I tell you. I had promised after their terrible game Week 1 in Detroit not to be on the Giants again.

       So what made me do this again? A few things probably. First of all, I'm a big fan and always want to think they can win. However, in all honesty they looked a lot better the last couple of weeks. In their second game-a 25-14 loss to the Cardinals that I actually saw at the stadium; my first time watching a football game at the stadium ever-they looked a lot better. Week 1 they just got beat on all sides of the game-offense, defense, special teams.

     Against the Cardinals they were a lot better. Eli had a very strong game with lots of completions and yards but he-and the rest of the team-made lots of stupid mistakes that beat themselves.

    Still beating yourself through bad mental errors is a major step up from getting beaten up badly which is what happened against the Lions. Then last week after making some mistakes early against an unbeaten Houston team, they shook it of and played a very strong game winning 30-17.

    So I figured they had a chance this week against the Redskins. They were dominating against Houston and they have been so tonight against the Skins-who knows how much longer we will be allowed to call them that?

    Add to this the fact that the Giants always play well against Washington-year after year, going back to 1984. Check it out, they've absolutely dominated them since then.

    So I broke my rule and won this time. It's going so well I'm writing this now with 9 minutes still left right now. Since I started writing this, the Giants have scored again and then picked off Kirk Cousins again and the Giants with a 38-14 lead are at the 10 yard line again now.

     No doubt, part of why I beet this was why I bet week 1-Week 3 like Week 1 was good for me, I made $720 over the weekend; I was right on the Bengals and Saints, just missing on the Patriots who of course beat the Raiders but only by 7 points.

     UPDATE: The Giants just scored again to go up 45-14. You know, before the season I was saying that the one thing you could say to build a case for the Giants is that everyone thought they would be lousy. As I recall that's what all the brilliant prognosticators were saying in 2007 and 2011 too.

     Another update: the Giants win here tonight gives them 96 all time against the Skins which is the most of any NFL team against another one.

      Eli had exactly 300 yards-he's just been relieved by Ryan Nassib. I notice that the while Eli threw 4 TDs tonight and ran for a 5th and the Giants intercepted Cousins 4 times, Eli had at least as many commercials tonight.

      Yeah, sure. He's not as great as Brady. I mean Eli hasn't won a Super Bowl in 10 years while Brady has won 2 since then-oh, wait.

       He'll never be as good as his brother he has won twice as many Super Bowls-oh wait,

       This weekend I'm going with the Colts over Tennessee and Steelers over Tampa. As I got the jump on this throw away game tonight, if I get both of those I might not bet on the 4 o'clock games on Sunday. If I don't then I will take the Chargers over Jacksonville and maybe the Eagles over the Niners. As I already got the Giants as a dog straight up maybe I won't try that again with Philly if by then it's a good day.

      Getting the picks wrong sucks-today in the market was a day where everything went wrong, but I'm going to try to follow Jim Cramer in believing that you don't want to 'sell into weakness.'

      I've done pretty well with my football picks so far though-a 7-4 record so far and this game puts me up $1750 on the year, a nice 60% gain. Of course, getting picks right carries a certain risk-that you get too carried away-as a someone who enjoys market trading I know this all too well. So if both the Steelers and Colts come through, maybe I should sit out the evening games.

       As much as anything these games I'm looking at for Sunday is a bet against the teams my picks are playing. The Bucs, Titans, and Jaguars are all at the bottom of the NFL power rankings.


Sunday, September 21, 2014

The Ray Rice Phenomeon and the Revenge of the Football Widow

      It's been suggested even before the current huge inflow of news of football players behaving very badly that the NFL won't last, that it's kind of the relic of an earlier time that tolerated such organized violence.

      There might seem to be some truth in this claim when you consider how strict the rules are becoming on defenders-giving a built in advantage for NFL offenses vs. NFL defenses-the furor over things like the name of the Washington Redskins-it is just a matter of time before the Redskins are no more?-the President of United States himself recently saying that though he's a NFL fan, if he had a son today he wouldn't let him play football.

      Now we have the current furor over all these players being accused of some appalling offseason behavior. I'm certainly not going to defend  the behavior of Ray Rice or Adrian Petterson or Jonathan Dwyer.

      I do think that there is something to the saw that this is how Petterson was raised. I'm certainly not saying what he has done to we now know two of his children is in anyway an appropriate word for what he calls 'disciplining my child' but it is true that he was raised to believe this was appropriate so you can say this is what he was taught and he didn't necessarily realize that the rules of the larger society have now changed. So while his conduct is not defensible it's not impossible to at least understand which perhaps should be at least considered in judging him.

       I guess what I wonder about though is the way this story keeps growing and growing. It seems to me that those crying out about this terrible behaviour want to hang this on the NFL. My rather tongue in cheek title just refers to the fact that many of the people criticising the league don't care anything about football and perhaps think it should go defunct anyway. Maybe many wives will be glad if their husbands are now free to go shopping with them for a new china set on Sundays.

       These players deserve the criticism and need to be punished to the full extent of the law. What I wonder about is why the NFL is taking such a big hit. You have the President of the National Organization of Woman demanding that the NFL basically end the social evil of domestic violence. What is the real criticism of the League here? You can argue that Rice's original punishment was much to lenient. I would tend to agree though I should point out that the previous NFL rules in place at the time didn't call for anything more than this.

      If the initial punishment didn't fit the crime he has now been suspended indefinitely form the NFL-he will not play football this season and maybe never will again.

      The new policy I think is very appropriate-6 weeks for the first offense, a lifetime ban for the second. However, this hasn't satisfied the voracious critics-now it's become a witch hunt on what did Goddell know and when did he know it?

       What I think is going on is that the haters of the NFL are already trying to table it. The NFL is not about football anymore it exists to solve the problems of society.

         P.S. What I'm saying I guess is that while the vile behavior of these men must be punished-after a fair trial-I'm rather ambivalent about the NFL itself being targeted. Did the NFL create domestic violence? To hear NOW tell it, you'd think so.

         I also think that if Goddell's original punishment was insufficient it was not wholly impossible to understand as many philanthropic groups defended Rive and even his own now wife who was the victim defended him. I hear some voracious critics of the League complain that most battered women defend their abuser so that's not excuse. This again suggests that the League is not about football but they're supposed to be sociologists. I just don't think this is fair criticism.

         And yes, I'd like to hear about football on the morning of football Sunday on ESPN not about Ray Rice and Goddell.  I bet now a days the football widows enjoy watching ESPN more than their husbands.

        In any case, it's truly living up to it's name: NFL means the No Fun League and it's only going to get worse. 

Friday, September 19, 2014

For Alibaba Jack Ma is a feature not a Bug

     Jim Cramer ran thru and disputed the 10 'bogus' worried about Alibaba going into it's IPO. Number two was worry about obscurity in who owned the company and founderJack Ma owning 8% of the company. 

      "Second objection: The ownership is very convoluted with many hidden owners and an opaque structure. Sure, that's true. We know Jack Ma, the major domo of Alibaba, owns about 8% of the company and is selling some stock on the deal. Yahoo! (YHOO) has 22%. The rest? It's not all that clear. But does it matter? They all obviously have skin in the game, so I don't think that's as big an issue."

      After listening to Ma being interviewed this morning on CNBC by Crmaer and David Faber, I have to put hom in the pro rather than the con column. He really struck me as a very impressive guy. Cramer called him the most 'uncynical interview I can remember'-he raised some eyebrows by saying that the company philosophy is customers first, eomployees second, and invaestors third. 

      He really touched everyone with his Forrest Gump rerereence. The man who most inpired him wasn't Mao-for those always beating the Communism horse-but Forrest Gump. 

      Sumner is another one always raving about China. I sometimes think his Sinophilia is a little overdone-just like I find Morgan Warstler's Technophilia. Here he goes again.

      Still I don't find his beating the China horse as obnoxious as his beating the zero mulitplier horse and after seeing Mr. Pa, maybe the future of China is a bright as Sumner thinks it is. 

Sumner and Yglesias: Overstating the Case for Market Monetarism

     He loves to have liberals like Yglesias make his case so he can say 'Even the liberal Keynesian Yglesias says Obama has failed on monetary policy. Very happily he quotes him here:

      "The viewpoint that there is nothing the Federal Reserve can do to boost the economy when short-term interest rates are already at zero, leaving deficit spending as the only effective stimulus option, is not believed by most experts.'
     Sumner gloats:

      "Some commenters tell me “we Keynesians agree the Fed should do more stimulus, the problem is the right wing.”  That’s half right.  The right wing is a problem, but so are the Keynesians. Keynesians overwhelming oppose additional monetary stimulus, according to polls.  I base that on the fact that only about 5% of economists favor more stimulus, and most economists are Keynesians.  Furthermore, some of the economists who do favor additional stimulus are non-Keynesians."

     I don't get it: Sumner says that most economists are Keynesians yet I thought that he had 'driven a stake into the heart of Keynesianism' because he won a bet with Krugman last year. Now he admits that he might have overstated the case for this a little

     Clearly one logical generalization we cant make is that all economists are logical as his logic is kind of spotty here. He also contradicts Yglesisas himself here by saying that most economists 'oppose stimulus'  as Yglesias had said that the liquidity trap is not believed by 'most experts.'  The trouble is that this claim that most 'experts' or 'economists' believe unconventional monetary policy works beyond a shadow of a doubt is just plain false.

      I gave Sumner credit earlier for calling the Scottish election early but pointed out that it doesn't therefore make full monetary offset true.

       Nothing here makes it remotely true either.  



Scotland Just Says No as Foucault Rolls Over in His Grave

     Let me first start by doing something I try not to do too often-give some credit to Scott Sumner:

     "I presume everyone knows by now, but I haven’t seen other bloggers discuss the election.  The Scottish independence campaign lost badly."

     "That’s probably why the Spanish stock exchange was up sharply earlier today. Markets are the first to know."

      Maybe by the time he wrote that almost everyone knew but I didn't and I heard it there first and after checking elsewhere i didn't see anyone talking about it so Kudos to Scott. 

       Of course, just because he was right about this doesn't mean he's right about the fiscal multiplier being zero or full monetary offset-he's at times 'suggested' that the multiplier may even be beneath zero. 

       What would Foucault make of this no to independence? My jibe about rolling over in his grave assumes he was the ultimate proponent of 'revolution for the sake of revolution'-almost reminding you of Bakunin who thought that any kinds of 'violence against the state' is in some deep sense liberatory. 

      Mao too believed in 'permanent revolution' which was something as he was at the time the undisputed head of his own government. Foucault had embraced the Iranian revolution of 1980 not according to Zizek for any fascination with premodern Theocracy as an alternative to 'Western Nihilism' but rather, his fascination with revolution as such. Here the means are baptized holy-revolution is to be celebrated not because it will necessarily give us a Utopia or even a much netter society than what we have now but simply because revolution itself is to be celebrated. 

         That's because it was the one time when man didn't do what comes easiest and most natural to him: for once he chose not to obey. 

      Again, who knows what he might have said about this. This is not how revolution is supposed to happen anyway-at the ballot box where all parties observe a proper code of conduct, etc. Not exactly Che Guevera-who talked about revolution at the point of a gun. 

       The Irish Independent spun this as the result being somehow not really no as 'the largest city' voted yes.

      One major argument for no was monetary-if Scotland had left the pound it could have been a mess. There was the argument that they could have left the UK but remained on the pound but that might have given Scotland the worst of all worlds model of the euro where there is monetary but not fiscal union and the record there is obviously something n o one would want to replicate. 

        Even with the independence measure defeated there is talk of 'devolution' going forward with Cameron promising a ' more independent England as well as a more independent Scotland and Wales.'  We'll see where this all might lead. Meanwhile the UK is maybe seeking it's own independence from the euro. 



Wednesday, September 17, 2014

CPI Falls in August: A Giants Fan and an Inflationphobe Walk into a Bar...F

     I certainly learned my lesson betting on the Giants a week ago on Monday night against the Lions. I had initially promised myself that I won't bet on the Giants as I'm too emotional about them-I could never bring myself to bet against them.

    However, I had a very good weekend in Week 1-in my first time ever betting on the NFL I was up $1500, thanks to the an improbable rally by the Eagles, not just rubbing out a 17-0 1st quarter deficit but covering the 10 and 1/2 point line at the last minute by returning an interception for a touchdown.

     I've learned my lesson: I must never bet on the Giants. At least it only took me one time. How many times do the inflationphobes have to be wrong?

     Krugman never tires of mocking them but they never tire of being wrong. At this point they're reduced to playing the Bill Clinton's Monica Lewinsky strategy-'it depends what the definition of is is'-they will never settle on a straightforward definition of inflation but keep moving the goalposts.

     Today of course the big focus in the market is the Fed so this CPI number will be culled over-does this push back the time for the first rate hike?! A Guest on CNBC pointed out that what matters more than when the first hike will be is how fast rates will rise and where they will end.

      We can argue about Secular Stagnation but people are acting as if it's true. I mean if the hawks and the market bears are right and the economy is close to overheating, then it's striking to compare the the way prices are acting today to the last time we were near the end of the boom cycle-2007. Back then inflation was at 4%. Now we haven't even hit 2% inflation and this is it?

      Some observations on today's market. Gilead may be in some trouble-at least until they figure out how important this failed test for Solvadi is. It's been a great ride for the stock but it clearly topped out at $110-it sold off twice on news about it making a deal to have the drug sold for less in poor countries-ie, it's been looking for an excuse to selloff and with a real fundamental reason to we'll see if teh bears are able to keep it under $100 this time-the last two times it snapped back very strongly.

       The market doesn't seem to like lower oil and gas prices. Yes, lower gas and oil means higher real wages for workers and higher profits for business that have significant fuel costs, but the market seems to think that this is more than cancelled out by the deflation of commodity prices.

         Finally, for this week's NFL I was really unlucky this last week. I admit I should never have gone with the Giants-even though I only had them covering a 7 point spread. However, this last week was really bad luck. How often will both Seattle and San Francisco lose by 9 and 8 points respectively when they are 7 and 8 point favorites respectively?

        I did nail both the Bengals at home over the Falcons-they were favored by 7 and easily covered against Atlanto-they were 8-0 both straight up and against the spread last year-and the Browns beating the Saints-for N.O. to be favored by 7 on the road was absurd against a Browns team that had a very impressive 20 point comeback against the Steelers in week 1-even if they did lose in overtime.

        This week I have the Bengals at home-favored by 7-against the Tennessee and the Saints at home-by 9 and 1/2-against the Vikings. Basically pick the Saints at home and bet against them on the road. The same would seem true of the Bengals, but they actually had a very impressive road win in week 1 so maybe that will not be the case this year.

Friday, September 12, 2014

Krugman, What Keynes Really Mean, and is Economics a Science?

    The question just came to me again as I read Krugman here.

     "Lars Syll approvingly quotes Hyman Minsky denouncing IS-LM analysis as an “obfuscation” of Keynes; Brad DeLong disagrees. As you might guess, so do I."

      "There are really two questions here. The less important is whether something like IS-LM — a static, equilibrium analysis of output and employment that takes expectations and financial conditions as given — does violence to the spirit of Keynes. Why isn’t this all that important? Because Keynes was a smart guy, not a prophet. The General Theory is interesting and inspiring, but not holy writ."

     Without even starting to take sides between Krugman, Delong on one side and Syll on the other let me just say that no matter how many times Krugman mocks the idea of caring what 'Keynes really meant' I never get why asking what he meant is so self evidently absurd as he, and Delong. and Wren-Lewis, and Noah Smith or Katrik Athreya think it is. 

     As I've chronicled I've tried reading some econ textbooks and in fact am currently reading the one Krugman wrote with his wife Robin Weil, but haven't yet come to the chapter that explains why this is so absurd. Yet there must be some NK textobook somewhere that explains it as all NKers repeat this mantra.

       This is why I wonder if Econ is really a science. You never hear physicists sniffing about 'What Einstein really meant' or "What Newton really meant.'

     At least Krugman-unlike Athreya, to say nothing of Mankiw-doesn't disparage Keynes and GT. He even claims to have read the book. From what Athreya says, the problem with Keynes is that what he does is not what he and his fellow 'modern maccroeconomists' mean by 'macroeconomics'-Keynes writes in 'prose' so it's not a true work of macroeconomics-some argue that Hicks is the first macroeconomist in this vein. 

      In other words, because Keynes uses plain English, his work is just interesting 'literature' much like the work of Proust or Doestevesky. You may like it or not like it but it has little bearing on economics. Again, Krugman in this post actually treats Keynes a little more respectfully but the picture I've drawn here is the typical attitude as represented by Athreya, et. al. 

       In fact, Krugman does go on to defend Keynes-and by extension IS-LM-from a very common criticism of what folks like Stephen Williamson christen 'Modern Macro'-which basically means post-Lucas Macro-that Keynes and then IS-LM use a static equilibrium model. 

         "It’s also a protean work that contains a lot of different ideas, not necessarily consistent with each other. Still, when I read Minsky putting into Keynes’s mouth the claim that"

Only a theory that was explicitly cyclical and overtly financial was capable of being useful
      "I have to wonder whether he really read the book! As I read the General Theory — and I’ve read it carefully — one of Keynes’s central insights was precisely that you wanted to step back from thinking about the business cycle. Previous thinkers had focused all their energy on trying to explain booms and busts; Keynes argued that the real thing that needed explanation was the way the economy seemed to spend prolonged periods in a state of underemployment:
[I]t is an outstanding characteristic of the economic system in which we live that, whilst it is subject to severe fluctuations in respect of output and employment, it is not violently unstable. Indeed it seems capable of remaining in a chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.
     "So Keynes started with a, yes, equilibrium model of a depressed economy. He then went on to offer thoughts about how changes in animal spirits could alter this equilibrium; but he waited until Chapter 22 (!) to sketch out a story about the business cycle, and made it clear that this was not the centerpiece of his theory. Yes, I know that he later wrote an article claiming that it was all about the instability of expectations, but the book is what changed economics, and that’s not what it says.
The point is that Keynes very much made use of the method of temporary equilibrium — interpreting the state of the economy in the short run as if it were a static equilibrium with a lot of stuff taken provisionally as given — as a way to clarify thought. And the larger point is that he was right to do this."

      So Krugman does defend GT and if he says he read it I believe it but that distinguishes him to most NKers I would guess. 

       UPDATE: Krugman also deserves credit for admitting that the GT changed economics-not only do Keynes bashers, but also many alleged 'New Keynesians' damn GT for 'saying nothing new'-I think Hayek begun the line of saying what he was right about had already been said and what hadn't been said was all wet.      

        As Keynes himself had said 'first they say you're all wrong then they say you've said nothing new.'



Simon Wren-Lewis Responds on Sumner and Fiscal Policy

      In my previous piece I discussed the NKers and what I see as their somewhat inadequate response to Sumner-I think that like him or not he's had a big impact on the pubic discussion on fiscal and monetary policy, the best way to deal with stabilizing the economy, etc.

       I must admit to being quite gratified that Dr. W-L has responded. He feels I've perhaps mis-characterized the NK response to Sumner.

        The idea of nominal GDP targeting goes back to James Meade at least. It has been endorsed by many NKs - most notably Mike Woodford. But we do not have this kind of religious devotion to it that MMs have. And of course, we also do not have this phobia about fiscal policy.

       "You imply we should debate more with MMs. My experience of this has not been good. A couple of years ago now when I tried to point out what was really a schoolboy error on savings and investment in one of his posts, he came out guns blazing - its difficult to have a serious discussion under those conditions."

        "I had a similar experience with Mark Sadowski recently, which I wrote about here:

        "I should add that this is not true of all MMs. For example I think David Beckworth does try to be constructive (see, and I'm happy to discuss things with Nick Rowe anytime because I learn a lot."

        "So my policy is that if I think there is an issue where I have got something new to say, or where I can help clarify something, or where there is a genuine misunderstanding that others might make, I'll write about that, but not as part of a debating contest. I did see Sumner's reply to my latest post, and I did not really understand the stuff on inflation. Pretty well everyone doing academic work on macro nowadays models the welfare cost of inflation, and they are not 'confusing inflation with NGDP growth'. Most work is based on Woodford's analysis, which looks at misallocation costs due to relative price changes. So either this is simply wrong in a very obvious way, or I have just misunderstood, but in either case it didn't seem worth pursuing."

      No doubt, Sumner does tend to come out with guns blazing-I recall the very discussion WL refers to here-it was where Sumner tried to prove John Cochrane was right or mayve that Krugman and W-L were wrong by referring to the identity S=I.

       I'm not much of a fan Sumner;s style either-my personal dealings with him when I've commented on this blog have been basically always unpleasant as he usually answers any question or point of mine with unmitigated snark. He doesn't seem to appreciate any skepticism very much and when he can't answer something, his fallback position is to say what do I know I'm not an economist. 

       Nevertheless I do think that Sumner can't simply be ignored. For one thing. if he's able to shout down all critics he will better able to carry the day in the public debate. I do think he's had a big impact for perhaps good and ill-I think it has been productive to the extent that laypeople like me were unaware of this whole dimension of economic policy prior to him in particular and the monetary blogs more generally. 

         He has pretty much said his goal is to bury all who would contradict him. 

          It's clear that Sumner sees himself as in a war against what he calls 'Keynesianism.' Mr W-L on the other hand sees Sumner as an annoying school boy throwing spit balls in class.-just ignore him and he'll go away. Except he most certainly hasn't gone away. Why does it matter? Well when Krugman says that 'sorta kind NKers' like himself have gotten this Great Recession right or most right, Sumner is the one who most credibly claims that this is not so. 

           I'm not saying Sumner is right just that he is probably the most effective conservative ideologist today. If there is anything I disagree with him most on besides the fiscal multiplier and 'monetary offset' is something else I've often heard him say: he says that he takes people at their word and criticizes those-basically liberals-who read nefarious motives beneath what they're actual words say. 

          People like Mark Sadowski have suggested that I'm almost delusional in my paranoia but as it has been said just because you're paranoid doesn't mean they aren't out to get you. I would say I respect Sumner's intellect, what I don't do is trust him. At the end of the day I believe he has a very determined political agenda that masquerades as a purely technocratic economic one. What he wants to deny is the very existence of what used to be called political economy. 

          One result of his religious preference for monetary policy over fiscal is the political abrogation of the public's right to have any say in one of the most important social question of all-their own economy. I haven't seen anyone really reflect on what an anti-democratic jibe Sumner's claim that there is no such thing as public opinion in economics really is. 

         So W-L's dismissal of Sumner as a loudmouth is understandable but problematic. Even in his comment to me he admits that he may not understand Sumner's point about inflation. 

          So my policy is that if I think there is an issue where I have got something new to say, or where I can help clarify something, or where there is a genuine misunderstanding that others might make, I'll write about that, but not as part of a debating contest. I did see Sumner's reply to my latest post, and I did not really understand the stuff on inflation. Pretty well everyone doing academic work on macro nowadays models the welfare cost of inflation, and they are not 'confusing inflation with NGDP growth'. Most work is based on Woodford's analysis, which looks at misallocation costs due to relative price changes. So either this is simply wrong in a very obvious way, or I have just misunderstood, but in either case it didn't seem worth pursuing.

         So it's at least possible that Sumner made a good point that went over his head. At least this is how Sumner would spin this I have no doubt. What Sumner is saying is that NGDP is the better gauge than inflation as inflation can be 'good or bad'-whether it's good or bad depends on for instance:

          1. Where we are in the business cycle. 
          2. Whether we have supply side or demand side inflation-or for that matter deflation. 

          His argument is that if policymakers focused on NGDP they would only in effect be targeting the 'right kind' of inflation, that which is associated with the demand side rather than the supply side. 

           What I had argued in my previous piece is that this si something that it would help for a NK type like W-L to clarify. 

            Another point is Sumner's disparaging of Keynesians as wrongly focusing on interest rates as the sole or main lever of interest rates while he argues that they are merely an 'epiphenomenon'-now this point I don't think is new to Sumner, it goes back to Friedman, it's a Monetarist jibe. However, if Sumner is wrong then Keynesians of any stripe need to clarify where. 

              I should finish by saying that as W-L admits not all the MMers are personally as obnoxious-to those who disagree with him-as Sumner. Actually, most MMers other than Sumner are pretty polite, and charming folks-Nick Rowe, certainly David Glasner, Scott is kind of the exception. 

               He's not all bad but he sees himself as in a war. Is it all hyperbole? I don't find much that reassures me of that. I feel if Sumner's in a war I want the other side.. 

               The reason for that is because as I said above, I just don't trust him. Sumner says we should take people at their word. For this reason I very much take him at his word when he talks about dancing on the grave of Keynesianism. 


Thursday, September 11, 2014

Scott Sumner vs. Simon-Wren Lewis on Monetary vs. Fiscal Policy

     I'm always grateful when Keynesians of any stripe attempt to respond to Sumner because for the most part I think he's been underestimated by particularly the so-called New Keynesians-Wren-Lewis, Delong, Krugman, Noah Smith, et. al.

     In Sumner's relentless frontal attack on the use of fiscal stimulus he never gets tired of declaring 'the death of Keynesianism.' For the most part Keynesians themselves have been MIA which only emboldens him-kind of like what they say about terrorists.

     Krugman for his part has had very little to say about Sumner; presumably so as not to encourage him. I've found what little Krugman has said about him lately rather weak: basically Krugman argues that the Market Monetarists are wasting their time as they have no natural constituency. That depends on how you define natural constituency. True, the Tea Party House hardly seems open to any kinds of 'Monetarism' whether 'Market' or other. Nevertheless, Mr. Sumner has gotten a hearing in the conservative intelligentsia-on the National Review, by even Larry Kudlow who definitely speaks with some Washington Republicans and now Sumner even writes a regular column at Econolog.

     I don't know how you want to define constituency but Sumner doesn't define it as how many House Republicans he has on his speed dial; not unlike Keynes his target audience he claims is other economists. One of his favorite sayings-right

after 'the fiscal multiplier is roughly zero' is 'there is no such thing as public opinion.

     To a man he is only trying to reach economists so if he reaches them he has his constituency. As for a constituency that will support him, that's conservative economists and more broadly the conservative intelligentsia, and while I would agree they were slow to discover his virtues, they are noticing now. At the end of the day, Sumner understands that today's GOP is a somewhat more unreliable vehicle than the GOP that Milton Friedman rode in his day, so his agenda is not simply achieving Republican control-he hopes to be able to shape the thinking of economists and so their advice to policymakers in what economists call 'the Long Run.'

    Even though I think Krugman needs to do more to really call out Sumner I appreciate any attempts. I did convince Delong to write a piece awhile back. I thought some of his points were good but Sumner as usual just ignores the criticisms he can't answer and as his opponents are much less determined not much happens.

    His promise to 'bash anyone standing in my way' is real but at the end of the day Nkers have been slow to recognize this. When Krugman says things like 'People who believe like me and follow standard economics and the IS-LM model; we got a lot of things right in this Lesser Depression' Sumner will swoop in with his childish jibes about a 2013 bet he allegedly won-because growth didn't fall of a cliff there was nothing wrong with doing the sequester.

   In any case, Wren-Lewis's questions Sumner's attack on fiscal stimulus-the zero fiscal multiplier, full monetary offset, etc.-Sumner has at times 'suggested'-one thing that makes him so clever is he so rarely asserts these things merely 'suggests'-that the multiplier could even be negative-seems to me to be handicapped from the start-ie, harder for him to gain traction with.

    What strikes me with NKers is much less their disagreement with MMers but just how much they agree on. They all agree on Long Run Monetary Neutrality and all agree that in normal times monetary policy is superior to fiscal as a stabilization tool. This is why Sumner doesn't see his agenda as such a lift. Basically NKers-who could easily be called New Monetarists-ie, NMers-don't usually like fiscal stimulus either. Only at the ZLB does this change. I wonder with so much agreement how easy it will be for them to disagree effectively here.  Here is WL on the consensus  for monetary policy.

    Suppose there is a shortfall in aggregate demand associated with a rise in involuntary unemployment in a simple closed economy with no capital. Do we try and raise private consumption (C) or government consumption (G)? If the former, why do we prefer to use monetary policy rather than tax cuts?

If consumers have stable preferences over privately and publicly produced goods, then ideally we want to keep the ratio C/G at its optimal level. So if the aggregate demand gap is caused by a sudden fall in C, we will want to do something to raise C. As real interest rates are the price of current versus future consumption, the obvious first best policy is to set nominal interest rates to achieve the real interest rate that gets C to a value that eliminates the consumption shortfall. That is the basic intuition behind the modern preference to use monetary policy as the stabilisation instrument of choice: part of what I have called the consensus assignment.

      Nevertheless while WL prefers conventional monetary policy to fiscal normally, at the zero bound this changes. In reading WL's post I knew Sumner would quibble. One thing, of course, is that WL focuses on QE which is not Sumner's optimal unconventional monetary policy.

Debates over monetary policy should not be debates over QE.  The discussion should focus on what policy regime is optimal.  An optimal policy regime would probably not involve any QE at all. And even if it did, it would still be less inefficient than fiscal stimulus. That was my point.  (Remember that the “advance to consumers” must eventually be clawed back via distortionary taxes.)
One way of stimulating demand when interest rates are stuck at zero is to promise a combination of higher than ideal inflation and higher than ideal output in the future. (This can be done either explicitly or implicitly by using some form of target in the nominal level of something like nominal GDP. For those not familiar with how this works, see here.) The cost of this policy is clear: higher than ideal future inflation and output. Once again, these costs can be worth it because of the severity of the current recession, which is why nominal rates are stuck at zero. Whether these costs are greater or less than the cost of changing government spending is debatable: a paper by Werning that I discussed here suggests optimal policy may involve both.
Given that inflation doesn’t matter at all, it is hardly possible for it to be above or below “ideal” levels.  People who talk about the welfare costs of inflation are confusing inflation with NGDP growth.  There are welfare costs of excessive long run NGDP growth, primarily excess taxation of nominal returns on capital. But inflation by itself does not have important welfare costs.  The only possible inflation cost is the “menu costs” of price changes, but even that is unclear, given that nominal wage changes also involve menu costs.  Thus a NGDPLT policy minimizes both the “welfare cost of inflation” and the problem of suboptimal output fluctuations.  There is no trade-off. NGDPLT also reduces financial sector instability, relative to inflation targeting.  It’s a win-win-win policy.

     Is Sumner claiming that fiscal stimulus will later be taxed back on a 1 to 1 basis from taxpayers? If so, evidently he's unselfconsciously assuming full Ricardian Equivalence. However, it's true that WL fails to notice Sumner's critique of the concept of inflation. Is he unaware of it? Sumner's premise is that NGDP targeting is superior to inflation targeting as there is what you might call 'good inflation' or 'bad inflation' or more precisely there is supply side and demand side inflation. NGDP targeting would prevent the CB from targeting the 'wrong' kind of inflation or for that matter the 'wrong' kind of deflation. When NKers like Krugman say we need higher inflation, Sumner's answer is that what they mean is higher demand side inflation or better yet, higher NGDP.

    Now by not noting this, WL kind of makes it easy for Sumner to dismiss him-in reality this is besides the point at issue here-whether or not unconventional monetary policy isthough  always and necessarily preferable to fiscal policy.

     In fact, as  Keynesian one probably could call for NGDP targeting and still ask for fiscal stimulus as part of the policy to meet this target. Krugman noted something like this a few years ago when he tentatively seemed to give NGDPLT his blessing.

    Here he seemed to accept that maybe an NGDP target might be politically acceptable-as most noneconomists suffer from what Nick Rowe calls the inflation fallacy. However, Krugman didn't touch on the point Sumner makes about supply side vs. demand side inflation. The selling point of NGDPLT is that the CB won't tighten like the ECB did in 2011 because of a temporarily spike in commodities-driving by the Japanese earthquake that year or the Fed tightening in 2008 because of the run up in the Summer of commodity prices-these were supply side spikes that had nothing to do with AD is the premise.

     However, none of this really effects the debate over fiscal vs. monetary. There's nothing to stop us from using fiscal policy to achieve a nominal target-just direct the CB not to 'offset' it-which is something that even if you listen to the words of Bernanke and the rest of the Fed, seems to have always been overstated.

     Sumner may say that unconventional policy should not be defined as simply QE but what else is really left? Simply expectations.

      The other argument Sumner makes that the NKers fail to respond to is that monetary policy is wrongfully conceived as changes in interest rates but that this is a Keynesian error. I think that the Krugmans, Delongs. and Wren-Lewises need to respond to this-and the supply side demand side of inflation point-to effectively engage Sumner's argument.