Wednesday, April 29, 2015
Jake Halpern’s Bad Paper: Chasing Debt from Wall Street to the Underworld (Farrar, Straus and Giroux), which came out last year but which I read only recently, is a page-turning exposé of the Wild West of buying, selling, and collecting debt, most of the practices absolutely legal.
Aaron Siegel and Brandon Wilson, the main characters in Halpern’s story, hail from radically different backgrounds. Siegel was born into lavish wealth, earned an M.B.A., and took a job at HSBC. But then he decided to launch his own fund, focused on distressed consumer debt. “Basically, he was interested in buying up the right to collect unpaid credit-card bills.” Wilson, a former armed robber who had spent ten years in jail, was Siegel’s debt broker, buying and selling portfolios on Siegel’s behalf. He was occasionally also the “fix-it” man.
In this underbelly of the financial world, spreadsheets are stolen and consumers are harassed, sometimes ripped off. The FTC, which had sole jurisdiction over debt collection before the creation of the Consumer Financial Protection Bureau, turned a blind eye to most of the complaints it received.
This past January the New York Department of Financial Services issued its final regulations on debt collection practices for third-party debt collectors and debt buyers. The CFPB is supposed to issue its own set of regulations in the not too distant future. After reading Halpern’s book, you’ll understand the need for regulation.
And you’ll make sure that you pay your credit card bill on time. You never want to deal with the folks in this book. They may not break your kneecaps, but they can make your life miserable.
Monday, April 27, 2015
In The Globalization of Inequality (Princeton University Press, 2015), an updated, expanded version of the book that first appeared in French in 2012, “the central question is whether the increase in inequality observed in the United States, in some European countries, and in some emerging countries may be considered the consequence of a globalization process, which, at the same time, has drastically reduced income differences between developed and developing countries. Does diminishing inequality among countries feed rising inequality within nations?” (p. 5) The short answer to the first question is, by and large yes. To the second, not necessarily, if the right kinds of policies are implemented.
Bourguignon carefully wends his way among the definitions of inequality and its multiple, sometimes conflicting measures. For instance, do you normalize to GDP per inhabitant, do you take redistribution into account? Here I am going to ignore these important methodological issues to cut straight to some of the empirical findings.
Over the last two decades a large majority of high-income OECD countries, including the lauded egalitarian Scandinavian countries, have experienced rising income inequality. Among the countries that have seen inequalities in wages and standards of living drop significantly since 1990 are Belgium, Spain, and Italy. In France, inequality decreased steadily until the mid-1990s, reaching a level that was low relative to other developed countries, and has increased since then, but to a much lesser extent.
A large number of developing countries, most notably China, India, Indonesia, and Bangladesh, have seen a rise in inequality between the mid-1980s and the end of the 2000s. The same holds true for some of those countries in Africa that have seen the strongest and steadiest growth—Ghana, Kenya, Nigeria, and the Ivory Coast prior to the 2002 crisis. In Latin America, inequality levels rose significantly in the 1980s and then dropped throughout the 2000s.
Contrary to popular claims, it should be obvious from these statistics that growth in and of itself is not the remedy for inequality.
Globalization has “most likely,” Bourguignon suggests, played a role in increasing inequality in most countries because the main beneficiary of “the globalization of trade and the resulting acceleration in economic growth that has taken place over the last two decades” has been capital. “In developed countries, this evolution has contributed to a greater specialization in goods whose production requires more capital, increasing both its relative scarcity and its remuneration. … [C]apital may also have been the main beneficiary in emerging countries that are exporting labor-intensive manufactured products. As for the majority of developing economies that, despite the globalization process, keep exporting mostly raw materials, whether agricultural or mineral, it is again capital- and large property-owners (sometimes the state) who profited from rising demand and prices for these basic commodities.” (p. 84)
But globalization has not been the only force at work in modifying the distribution of income. Bourguignon also points to the “vertiginous development of communication and information science and technology” (p. 85), which, to cite but a single example, has “made it possible for a single person to manage a huge portfolio, often worth a few billion dollars, and to generate larger profits. This has catapulted a relatively large percentage of traders into the very high income bracket.” (p. 88)
Governments have also had a role to play in the rising inequality within nations. They cut progressive income taxes, arguing that “the marginal tax rates on the highest incomes were practically confiscatory and were discouraging entrepreneurship and investment,” and, in some cases, introduced regressive value added taxes. For instance, in the very first year of the Thatcher government the highest marginal tax rate fell from 83% to 60% while VAT rose from 6% to 15%. And governments began distinguishing, for tax purposes, between income from capital and savings and income from labor. “As the share of income from capital tends to increase as income increases, average tax rates for the very high income brackets ended up actually falling.” (p. 93) At the other end of the scale, helping to level things out a bit, “the percentage of GDP going to social programs has increased in the majority of OECD countries.” (p. 94)
Economic policies, Bourguignon suggests, “are generally justified in the name of two very different principles: efficiency and/or equality. Over the last few decades, it would seem as if the first principle has generally won out over the latter. In the name of economic efficiency, a number of reforms have been undertaken that were intended to improve the competitiveness of national economies…. But these very reforms have often contributed to a rise in inequality, without necessarily having a major effect on efficiency.” Are there policies, the author asks, “that could simultaneously serve to promote equality and efficiency, at both the national and international levels”? (p. 116) Or will there “inevitably be trade-offs between equality and efficiency”? Is it the case that “the simple fact of dividing the cake more equally will shrink the size of the cake, because it will distort the behavior of agents and the operation of markets”? (pp. 129-30)
In the final chapters of his book Bourguignon outlines some policies that can increase efficiency and reduce inequality within individual national economies as well as some that can lead to a global convergence of standards of living and a reduction in poverty. Many of these policies have been bandied about by politicians, but few have been introduced.
This book is written for the layman but is nonetheless intellectually rigorous. It sets out the causes of and some remedies for a problem that urgently needs to be solved if we are to avoid what the book’s title warns again, the globalization of inequality.
Sunday, April 26, 2015
In his new book, illustrated with his sketches, he tries to get people to focus on what’s important to them. “Think about your one-page plan as a snapshot, not an instruction book. If you’ve ever put together a kids’ toy, you’ll know that most of them come with a fifty-page instruction manual. Sure, the fifty-page plan is incredibly important—probably vital if you want the drawbridge on the castle to open or the rocket to launch—but what’s arguably most important is the picture on the front of the box. The picture lets you know you’re on the right track.” (p. 14)
Saturday, April 25, 2015
Mary Norris has worked at The New Yorker for almost 40 years, the last 22 as a query proofreader. Although the bulk of Between You and Me is devoted to an often humorous account of grammar and punctuation, including The New Yorker’s predilection for commas, it has a wonderful chapter titled “Ballad of a Pencil Junkie.”
Norris became a fan of the soft-“lead” No. 1 pencil and used No. 1’s exclusively at work. Eventually, they became difficult to find, and some of those she did track down turned out to be defective. No. 1’s were pretty well passé. But then, to great fanfare, including a launch party, a company brought back the Blackwing pencil which, to the dismay of many artists, had been discontinued—ungraded but softer than a No. 2—and she was hooked. (She seems to have a lot of company.)
From pencils Norris moves on to erasers, the bane of my existence (I don’t know how I ended up with so many erasers that either do nothing or smear everything), and then to pencil sharpeners. For pencil sharpening fanatics with a sense of humor, there’s a manual called How to Sharpen Pencils by David Rees and, better yet, the Paul A. Johnson Pencil Sharpener Museum in Logan, Ohio, southeast of Columbus. Just when you were at a loss about where to spend your summer vacation!
* * *
James Ward takes us to the office as well as back to elementary school, beyond pencils and erasers to paper clips, pens, stationery, pencil boxes, highlighters, glue, business cards, post-it notes, staplers, and file cabinets.
Among other things,
That the word 'pencil' derives from the same Latin base as the word 'penis' (meaning 'tail').
That the first ballpoint pen to be sold in the United States (in 1945) was sold exclusively by Gimbels Department Store in New York and that, despite its high retail price of $12.50 (around $160 today), on the morning of the launch “five thousand people were waiting to swarm through the doors, and fifty extra policemen were hastily dispatched to restrain the throng.” (pp. 45-46)
That the Bureau for At-Risk Youth in New York overlooked “the rather obvious fact that pencils get shorter as they are sharpened” when, in 1998, “they handed out pencils to pupils of a nearby school printed with the slogan ‘too cool to do drugs’. As the students quickly realized, sharpening the pencil changed the message initially to ‘cool to do drugs’ and then simply to ‘do drugs’.” (p. 99) It was only when a ten-year-old pointed out the problem that the company started printing the slogan in the opposite direction.
That, “as the nineteenth century progressed, rubber gradually replaced stale bread as the preferred method of erasing pencil lines, to the relief of all those artists and draftsmen besieged by hungry ducks.” (p. 104)
Thursday, April 23, 2015
But along the way Crawford challenges ideas that have been ingrained in western culture since the Enlightenment and decries some recent developments—for instance, the move in developed economies away from producing goods or delivering services in favor of creating experiences, particularly those where we can escape to “a zone of autistic pseudo-action.” (p. 88)
In his discussion of the gaming industry, the quintessential creator of engineered reality, Crawford relies extensively on Natasha Schüll’s book Addiction by Design, which I reviewed a couple of years ago and which he calls “arguably one of the more important works of social science to appear in the last thirty years.” (p. 91) But, though the growing economy of “affective capitalism” is “usually explained with reference to leisure activities like gambling, playing video games, viewing porn, or taking recreational drugs,” it applies to some jobs as well—trading, for example. “The anthropologist Caitlin Zaloom worked in the financial futures trading pits in Chicago, and relates what it is like to be a derivatives trader who stares at screens of rapidly shifting data, looking for patterns. In this intense, self-enclosed world, which she compares to a video game, traders engineer ‘peak experiences of attention’ for themselves. Traders get into ‘the zone’ (they actually call it this), a state of total absorption where all else falls away. This is possible only because the messy human realities behind the financial entities they are trading in (for example, people’s mortgages) are mediated away by layers of representation and mathematical models, allowing a kind of ‘control without contact.’ The models become fascinating in their own right; traders enter deep into their logic and live in the data, rapt in the experience of a growing, intuitive grasp of it. Needless to say, in the years leading up to the financial crisis this quasi-autistic financial game caused massive casualties, but they took place somewhere else, out in the world beyond the screen.” (p. 90)
Okay, so Crawford doesn’t think much of trading as a profession. Does he have anything to offer that could actually help traders?
In his discussion of firefighters, Crawford writes about how these men debrief one another after facing danger. “The fruit of this conversation enters into your ongoing rehearsal of the experience. If this rehearsed version bears up, and jibes with further experience, it becomes internalized, available to the subconscious mind in coping with future situations. For experiences to become part of the secure, sedimented foundation of a skill, they must be criticized. Other people (and the resources of language) are indispensable. Without them, your experiences are partial, and may sediment as idiosyncratic bad habits.” (p. 61) The trader who is his own sole critic may end up wallowing in confusion and reinforcing his mistakes. Thinking critically about your own thinking is, Crawford suggests, “at bottom a social phenomenon.” (p. 62)
Sunday, April 19, 2015
When he left the Treasury Department in 2009 and returned to private life, he was “as unhappy as [he’d] ever been.” He began his memoir about the financial crisis, On the Brink. “Writing is said to be therapeutic for some authors. I’d like to meet one or two of them. It sure wasn’t for me. Writing On the Brink, I found myself reliving the most harrowing moments of the crisis—complete with sleepless nights. The strain wore on my family. As a matter of fact, when I later told Wendy that I was thinking about writing another book—this one—she said simply: “Fine. And I’m going to start dating again.” (p. 266)
As he searched for what to do after On the Brink was published and he and his wife left Washington for Barrington, Illinois, he knew that he wanted to stay involved with conservation and with China. In 2011 he founded the Paulson Institute, “an independent ‘think and do’ tank that conducts environmental and sustainable development projects and research on economics and the environment in the United States and China.”
His new book, Dealing with China: An Insider Unmasks the New Economic Superpower (Twelve/Hachette, 2015), which should help to publicize the work of the Paulson Institute, was presumably less stressful to write than his first--the Paulsons are still together. It’s part memoir, part prescription.
As memoir, it’s a fascinating glimpse into how Goldman did deals in an evolving China. To paraphrase the old Smith Barney commercial, they made their money in China the old-fashioned way, they earned it. They not only had to be creative in structuring deals, they also had to learn how to read China’s political and business leaders. Paulson recounts the China Telecom IPO, where “the most obvious challenge” the Goldman team faced was that, “in conventional terms, there was as yet no actual company to underwrite.” (p. 61) And in a nation largely “ruled by men, not laws,” “trust and face were uppermost.” (p. 85)
As prescription, Paulson focuses on what he considers to be China’s foremost task—“retooling its economy for the long run.” (p. 370) He is a strong advocate of competition, as long as it’s fair, and offers some principles to guide U.S. relations with China. Prescription, almost by definition, is never as interesting a read as memoir, but policy wonks can learn from Paulson’s extensive experience in China. Environmentalists can also take heart reading about some of the projects China has undertaken, although what still lies ahead is daunting.
Paulson writes well (he was an English major, after all) and has a good story to tell. I found Dealing with China a captivating book.
Wednesday, April 15, 2015
The Warren Buffett Philosophy of Investment: How a Combination of Value Investing and Smart Acquisitions Drives Extraordinary Success (McGraw-Hill, 2015) is a carefully constructed analysis of the key elements of Buffett’s investing prowess. The author relies heavily on previously published work, but she uses this material to present one of the most coherent accounts of Buffett’s achievement that I have read.
Take, for instance, her chapter on Berkshire Hathaway’s use of debt. When Berkshire purchases a company, “Buffett recommends that the acquired company reduce and gradually end its relationship with its bank. Berkshire becomes the company’s banker. This enables the company to take advantage of Berkshire’s credit rating.”
Chirkova continues: “A business achieves its best results when both sides of the balance sheet are well managed. Berkshire Hathaway pays considerable attention not only to searching for good investments, but also to optimizing its capital structure. This optimization requires selecting the appropriate level of debt. Although Buffett’s views on borrowing may suggest otherwise, Berkshire’s level of leverage cannot be regarded as very low.” (p. 173) Between 1976 and 2011 it averaged about 37.5%. Nearly all of this leverage came from the capital float of Berkshire’s insurance companies. In more years than not, the cost of this “borrowing” was negative, in some years highly negative, “as payouts were far lower than the premiums collected.” (p. 178)
Chirkova suggests that, despite Buffett’s claims that nobody can time the market, he has been a savvy timer in the catastrophe insurance business. Moreover, “it is not purely accidental that Buffett’s insurance business is oriented toward supercatastrophe insurance. In supercatastrophe insurance, the payouts are separated in time from the moment of premium collection by a considerable period. Losses are accounted for not in the year of the catastrophe, but once the damage has been assessed. At the same time, the premiums received are invested. The longer the period that the collected funds are held, the greater the earnings on the investment of these funds. Buffett’s investment capabilities allow him to invest premiums with better returns than those that would be available to other insurers. The outcome reinforces itself. Premiums are invested with greater profitability, which assists the insurance business.” (pp. 181-82)
In another instance of “watch what Buffett does rather than what he says,” he has actively participated in the derivatives market. Perhaps his best known deal was his sale of long-dated puts on the S&P 500, FTSE 100, Euro Stoxx 50, and Nikkei 225, executed in 2006-2008. Buffett received $4.9 billion for the sale, money that Berkshire could invest as it pleased. In retrospect, the timing of these trades may seem less than fortuitous since for accounting purposes Berkshire had to write off $10 billion in 2008. But this was only a paper loss, and Buffett had a real $4.9 billion to put to work in the depths of the Great Recession. Moreover, even if the equity indexes were to fall to zero, the maximum amount Berkshire would owe the buyers of the puts (at intervals between 2019 and 2027) would be $37.1 billion. And if Buffett gets an annual return of 10% on the $4.9 billion, then in 15 years he will have accumulated about $20.5 billion; in 20 years, $33 billion. It’s hard to imagine that he can lose on this deal.
Chirkova explores multiple facets of Warren Buffett’s investment philosophy as it has evolved, from numbers to reputation. She compares his strategy to those of Robert Merton and Peter Lynch, arguing that “the first of these two investors was practically the direct opposite of Buffett, and the second a near perfect clone.” (p. 108) She traces out his circle of friends, and even reveals that he doesn’t always drink cherry Coke.
If you’ve never read a book about Buffett’s investing skills, The Warren Buffett Philosophy of Investment is a great place to start. If you’ve already read twenty books about Buffett, you owe it to yourself to make this one your twenty-first. You will undoubtedly learn a few new things, and you may well find unexpected interconnections among things you already knew.
Sunday, April 5, 2015
The strength of a national economy—and, by extension, the prosperity and progress that most people believe are byproducts of economic growth—is measured by a well-known but, Philipsen argues, fatally flawed metric, the gross domestic product.
GDP was born in crisis and forged in war. In 1933 Simon Kuznets and a small staff from the Commerce Department and the National Bureau of Economic Research got the job of providing estimates of total national income for the years 1929-1931. The team found that total national income paid out to individuals had declined by 40% between 1929 and 1932. Their report was something of a best seller: “within eight months of its printing, almost 4,500 copies were sold at $ .20 a copy.” (p. 103) Soon enough the concept of national income became part of everyday political culture. “As a 1936 New York Times editorial remarked, ‘Estimates of national income, once discussed only among a handful of economists and statisticians, are now cited glibly in conversations over cracker boxes and brass rails, and many campaign arguments are based upon them.’” (p. 105) By World War II Kuznets and his students “turned the statistics of the gross national income and product accounts into information essential for planning and wartime production.” (p. 115)
GDP began to take on a life of its own. “Growth of GDP promised to create employment and necessary demand; it allowed the United States to provide vital aid to Europe and Japan and to maintain a large military during times of rising tensions with Soviet communism and growing threats to global resources and foreign markets; it eventually helped the United States win the Cold War and a series of proxy ‘hot’ wars against communism; it helped ease domestic unrest and prevented possible ‘class wars’ by raising the standards of living (as defined by per capita GDP).” (p. 126) Eventually it became a global article of faith.
What does GDP measure? For the most part, only goods and services that have a price, that are bought and sold in the market. The author introduces us to Ms. Golden Arrow, our guide to how this all plays out. Here are a few examples. “If Ms. Arrow stays home with [her children], perhaps even schools them at home, none of her work is factored into GDP, and officially nothing grows. If she does any of the things increasing numbers of American parents do—send them to private schools, enroll them in after-school activities, drive them from music lesson to math tutoring to basketball practice, hire babysitters for the much-needed evening out with her spouse—her GDP contribution grows by leaps and bounds. … If Ms. Arrow manages to stay happily married throughout all this, her spousal bliss adds nothing to official accounts of national economic success. If she runs into marital problems, requiring doctors, pills, and therapists, or perhaps even law enforcement, her GDP meter starts ticking in earnest. It hits full stride if she ends up in divorce: lawyers, courts, domestic help, separate living quarters, eating out, membership fees for dating services.” GDP remains stagnant when she lives in a safe, stable neighborhood. “But introduce things like severe inequality, social strife, or economic distress, and the resulting need of extra security measures—added police, home security systems, locks, handguns, jails—will advance GDP growth. So does her decision to move to a distant suburb: more roads, more gasoline, more construction, more accidents, more residential services.” (pp. 155-56) You get the picture. GDP is quality-blind, people-blind, justice-blind, ecosystem-blind, complexity blind, accountability-blind, and purpose-blind.
Philipsen maintains that, as a measure, GDP is both primitive and dangerous and should be abandoned. It is a delusion that jobs, the good life, or progress itself depends on GDP growth. (p. 208) Sustaining and expanding human well-being, which should be our goals, are not the same as promoting growth or income.
We need new measures that speak to these goals. We need “a national dialogue about goals of an economic constitution based on the four essential sides of our goalpost: sustainability, equity, democratic accountability, and economic viability. Simultaneous to this dialogue, taking place nationally and internationally, we can have ‘experts’—legal scholars, economists, ecologists, climatologists, medical professionals, philosophers—begin the process of figuring out how best to measure the performance of the goals embedded in our new economic constitution, and thus establish structures and regulations that support and incentivize the pursuit of these goals.” (p. 271) Some efforts are already underway, most notably the “Beyond GDP” initiative by the European Commission, but much remains to be done. Philipsen’s book is a clarion call.
Wednesday, April 1, 2015
At the book’s core are four basic weekly trades—long call or put, credit spread, risk reversal, and backspread (1 x 2). Seifert explains when to initiate them and how to manage them. For instance, higher-priced stocks don’t lend themselves to the outright purchase of a call or put or to a backspread. “Once you move to the higher-priced stocks, you must go to the synthetic in order to overcome the premium. Although the option model works the same for higher-priced and lower-priced stocks, the dollar risk comes into play, and since our goal is to minimize the dollar risk and maximize our leverage, you must use the risk reversal on high-priced stocks.” (p. 113)
He analyzes how the trader should deal with these four types of option positions in varying market conditions—in a congestion phase, a trending phase, and a blowoff phase. To take but a single example, you could sell a bullish credit spread in a congested market, especially at a double bottom. You’re looking for a reward/risk ratio of approximately 2/3. “If you are more aggressive, you could consider the 60/40 [delta] spread and see if you can do it ‘Vega neutral.’” (p. 140) If the market rallies after you put your trade on, you can do nothing and allow it to expire worthless or you can roll it up. To play defense, you can sell another credit spread on the other side of the market, turning your initial position into an iron condor.
Seifert’s vocabulary is sometimes idiosyncratic, so the reader has to pay close attention early on or risk having to go back for remedial education.
Profiting from Weekly Options is not the most obvious place to begin an options education even though it assumes no previous knowledge. But those seeking to capitalize on the growing weekly options market will find it a worthwhile addition to their trading library.