Saturday, June 25, 2016

That Awkward Moment When....



You think someone has just made a profound epistemological observation, but it turns out she was just referencing a song by Clarence Clarity.

Until quite recently I hadn't even heard of Clarence Clarity, as a natural consequence of my out-of-touchness with contemporary music. But I've looked into his video "Will to Believe," and it isn't half bad.

Here's the link.

Click here.

Friday, June 24, 2016

Now You See Me 2

Image result for now you see me 2 cast

This movie got terrible reviews. Indeed, it got at least one non-review review that turned into a discussion of why some movies should never get sequels, but Hollywood obliviously makes sequels anyway, and ... etc., the writer was off the the races then, writing about everything except this movie.

But the theater was packed when I was there, and I enjoyed the show. Most people around me (admittedly not all) seemed caught up in it.  This must have included at least some who weren't familiar with the original.

I'll avoid any spoilers, which seriously limits how much I can say about a movie of this sort. But I'll plow on anyway. There is a Big Reveal moment that takes place on a barge in the middle of the Thames. So if you find London scenery inherently fascinating, that'll be a plus for you.

The ending, the very ending,  didn't work for me though. Perhaps the five minutes or so after the Big Reveal on the aforementioned barge might charitably be see as wind-down time. A lot of quasi-philosophical talking and some further reveals that are anti-climactic after the big one.

Loose ends still exist that could be tied up in a Part Three if everyone is willing.

The former Harry Potter, Daniel Radcliffe, plays a great Bad Guy. That's not a spoiler, BTW. His character is a bad guy from the moment he is introduced. Heck, the movie poster makes it plenty obvious. See above.

Anyway,, go and enjoy.

Thursday, June 23, 2016

Panic at the Pump



Meg Jacobs has written Panic at the Pump, a history of the 1970s energy crisis in the US which, in her view, destroyed post New Deal liberalism, bringing a generation of small-government conservatives to power.

There were two distinct oil shocks: the first arising from the Yom Kippur War and the resulting embargo (1973-74), the second from the fall of the Shah in Iran (1979).

I haven't read the book, except for brief excerpts available online. I notice it here only as a work likely to prove of interest for my astute and ever-curious readers.

Here's one of those brief excerpts:"[T]he embargo stunned Americans, as if they had come under a surprise attack, if not an outright act of war, because of the serious implications for the economy and the country's security. By 1973, Americans relied on oil for almost half of their energy needs, and each day imports made up an expanding portion of the country's supply."

Imports, the author says, were 36% of US oil supply in 1973, and the public had been unaware of this before the embargo suddenly made it an urgent matter. We thought of ourselves as an oil producing nation -- as indeed, we were and are, though not to a degree that could or can sate our demand for the stuff.



Sunday, June 19, 2016

Econometrics: A Link

Image result for computers clipart

A widespread opinion prevails that the science of economics has gotten more quantitative and algorithmic as computer hardware and software capacity has increased. The science has moved in that direction, in other words, simply because it could.

In words Ira Gershwin once provided for his brother's music, "they tell all you chillen the debbil's a villain, but it ain't necessarily so."

I recently encountered a very well-wrought argument that the impact of the computer revolution within economics is generally overstated.  Here's a link from ssrn.  In case anyone reading this doesn't know: that's the social science research network. I love it! You can get so much stuff free there that other sites are trying to get you to pay for.

I also love the anthropomorphic desktop computer clip art I've posted here. Some days I'm just easy to please.

Saturday, June 18, 2016

Dilbert and Schrodinger




As I believe I've mentioned, my day-by day calendar displays a different Dilbert cartoon strip each day. Here is the text from two recent such strips.

Day 1. Three characters: Dilbert, Personnel director Catbert (who is a cat, because they love to treat people as toys) and another cat.

CATBERT: "This is Wulf. He used to work for a famous physicist named Schrodinger. He escaped before the experiment was finished and now he's both alive and dead at the same time."

DILBERT: "Like a zombie?"

CATBERT: "uh-oh."

WULF: "Wow. I have half a mind to be offended by that."

Day 2. Wulf is sitting with Wally in the break room.

WULF: "I was Schrodinger's car back in the day. That's why I'm alive and dead at the same time. I know the truth about the afterlife because my dead half  told my living half all about it. Do you want to know what happens?"

WALLY: "Stop projecting your curiosity on me." [Drinks coffee.]

I love it. I don't think it's helping to teach me physics, but it is a funny bit of riffing.

Friday, June 17, 2016

Thinking Back on Enron

Image result for Enron

Everybody's favorite avuncular billionaire, Warren Buffett, has said that the academic theory known as the capital asset pricing model and its underlying notion of beta  (the systemic risk of a particular portfolio versus the market as a whole) is worthless. After all, he says, “a stock that has dropped very sharply compared to the market … becomes ‘riskier’ at the lower price than it was at the higher price.” Value investors, like Benjamin Graham, know better. It may well be a bargain at the lower price, while it was an unreasonable risk while it was still at the higher price. 

Avuncular Charm

Is there really paradox here? Let us now let ourselves be lulled by Buffett’s avuncular charm into seeing paradox where there is none. Let’s analyze this in pieces. I won't make you wait for the conclusion though. My own view is that though there are problems with the CAPM, Buffett's aphorism (if that's what the above sentiment is) doesn't address them. Indeed, CAPM looks rather good when seen through the lens of Graham-inspired value investing. Let's get to it.

Three Possibilities

I submit that the significance of a price drop for an investor considering a purchase depends entirely on why the hypothetical stock’s price dropped very suddenly relative to the market:  dropped so suddenly as to have an impact on the historical vol for that stock. I submit further that there are three distinct possibilities. The stock’s price may have experienced its sharp drop for (1) no real reason, (2) for a reason that is transparent to most market participants – as when a takeover deal has fallen through, or (3) for a reason that is opaque to many market participants.

If the emphasis is on (1), then Buffett is making a Talebian “fooled by randomness” point. That is a possible construction, but far from an obvious one, and it isn’t very Graham-like of him, so I’ll move on.   

Perhaps the emphasis is on (2). Consider a situation in which Smallish Firm’s stock experienced a run-up in its price after rumors, eventually confirmed, that Bigger Firm was interested in buying SF with a hefty premium to market.  One would expect the market price to rise to close that premium, producing something close to Mr. Market’s best estimate of the coming offer. Then (on our hypothesis) Bigger Firm backs away, deciding that the expected operational synergies aren’t there after all. In this case, the backing-away will unsurprisingly cause a sharp drop and an increase in the historic volatility (continuing a process no doubt begun by the rumor-sparked run up of preceding weeks.) But of course, everybody important has been reading the Wall Street Journal and everybody knows why the price of SF stock collapsed.

If this is the sort of price fall Buffett had in mind, I have to rate his point “valid, but not all that interesting.”   Since by hypothesis everybody knows what happened, the new increased vol figure won’t enter as a separate factor in a potential investor’s calculations in any case. The “straw man” here is a very mechanical follower of a very simplified view of MPT – hardly a worthy opponent for someone of Buffett’s stature.

In the Wake of Due Diligence

But let’s move on to (3). This is the intriguing one, IMHO. Suppose the real reason BF backed away from the deal with SF was that when they got into their due diligence in a serious way, when they looked at the books, they encountered reasons to worry: they came to suspect that many of SF’s assets were overvalued on those books, and its liabilities understated.  I have in mind here a situation in which the withdrawal of BF’s offer is not itself the only new information reflected in the price drop:  this drop reflects the leakage into the broader market of BF’s unhappy discoveries in SF’s books.

In this case, I submit, MPT looks pretty good. It may alert us to the fact that, even though we don’t know the reason for the drop (or the drop seems larger than justified by the reason we do know about), there is a reason, and that the lower-priced stock of SF is not a “buying opportunity” but a trap.

Consider late November 2001. A walking-dead stock known as Enron, or NYSE: ENE, receives a boost from news that Dynegy has appeared as a white knight. This doesn’t last long: Dynegy looked at the books and said “goodbye” by November 28th.  This brought more than just a reversal of the preceding bounce – it was a big push toward $0.
By that time, if it took volatility figures to persuade you that buying ENE was not a great plan: well, you would have been historically dense. Still, if this news caused an increase in the vol figure and that caused some mechanistic follower of CAPM to back out of such a purchase: it did that individual a good deed just ahead of the December 2d bankruptcy filing.

Thursday, June 16, 2016

Blooming buzzing confusion

Image result for nicholas humphrey soul dust


Sensible proposition recently advanced by Nicholas Humphrey: for the first few months of life an infant possesses not one unitary self but several different sub-selves.

Native intelligence, memory, and the reception of sensory information. These seem to be the cores of the chief sub-selves Humphrey has in mind. Each has to learn that it is on the same team as the others, and ultimately each becomes a "faculty" of a single self.

This reminds me of William James' phrase "blooming buzzing confusion." The phrase refers especially to the confusion of the data of the different senses into one unhelpful congealed lump in the infant mind.  But part of the confusion may indeed by the absence of a single integrated self to do the integrating of the data. They aren't on the same team until they decide that they are on the same team.