Monday, January 16, 2012

Monday Night

  • The Telegraph has a very interesting article today, "When, oh when, will Europe face the truth?". It seems like the conversation in Europe is moving in the direction of reverting to national currencies. That seems like the British view and the S&P ratings view, at least. The money quote, "If this were just an issue of insufficient liquidity, then it surely would have been solved by now, given the expansion of central bank balance sheets which has already taken place"
  • That was the British perspective. For the German perspective, here is a random CEO of a German industrial firm, who correctly points out that "the willingness of crisis countries to reform themselves is abating if, in the end, the European Central Bank steps in." The Germans have started doing the math and realizing that having weaker countries leave the Euro, resulting in a stronger Euro, results in a net benefit even according to their fuzzy mercantilist math.
  • In the U.S., one of the Fed mouthpieces is talking about tightening monetary policy! This is a far cry from QE3! Notice, one of Prechter's predictions (and arguments for deflation) was that, even though central banks could theoretically monetize all of this debt, political constraints would prevent them from doing so.
  • ZH (clumsily) points out an unintended consequence of the ECB purchases of sovereign debt that are intended to prop up those markets. The ECB refuses to share in any "haircuts" that are negotiated between lenders and insolvent countries, because the ECB is so highly leveraged that they cannot afford haircuts. The result is that a bond is effectively senior if owned by the ECB and subordinated if it is not. And that means that for every bond that the ECB buys to prop up the market, the remaining bonds should be paradoxically worth less, because there is less recovery remaining for them to share.
  • Enough about central banks (ugh). Did you know that your probability of dying during a given year doubles every 8 years or so? Which means that your mortality rate is increasing exponentially? Which means that the probability of surviving to a particular age is falling super-exponentially! [This is a cool blog, by the way.]
  • A great paper from the same author: The problem of shot selection in basketball. He creates a very interesting model for deciding whether a player should take a shot or wait for a better opportunity, depending on how much time is remaining. He notices a discrepancy between the observed and the theoretically optimal shooting behavior of NBA players, in that they seem to be unwilling to settle for moderately high-quality shot opportunities early in the shot clock, believing that even better opportunities will arise later. One explanation for this is overconfidence.
  • Overconfidence is an interesting subject. If someone is overconfident, it means that their confidence intervals are miscalibrated: they overestimate the precision of their own forecasts. I have previously posted about managerial miscalibration and about the potentially adaptive advantages of overconfidence
  • Latest Hussman column is out: "the investment implications are very asymmetric. A slow but steady stream of modestly good economic news is largely priced in by investors, but a recession and the accompanying earnings disappointments would destroy some critical pillars of hope that investors are relying on to support already rich valuations. We're always open to shifting our investment stance and outlook in response to new evidence, but the "optimistic" evidence that many observers are using to discard recession concerns is generally based on coincident or lagging data."

1 comment:

eahilf said...

Another big gap up open to crush the morale of shorts.