RK's Musings

Concise Intro to Econometrics : Summary

The only reason I chose to read this book on a weekend was to verify the null hypothesis of the author, " an intuitive guide" :) Well, intuition and econometrics are kind of animals that don't sleep together that well in the SAME book. Either econometrics books are very math/probability oriented OR they are "stats for dummies" types. I had tons of other things to do on this weekend, but took a peek in to this ~100 page double line spacing book,just out of curiosity.

Points that grabbed my attention, not becoz of the math , but becoz of the nice angrezi that was used :)

• Model building means moving from a unconditional expectation to conditional expectation.
• Expected value of a Unbiased estimator equals the parameter to be estimated, irrespective of the number of trials
• While unbiased is difficult to verify in most situations, Consistent estimator is what is generally needed
• Examining the asymptotic behavior of the estimate is a clue to its consistency
• OLS regression method essentially minimizes the variance of the error term by choosing the appropriate parameters for the linear model
• Don't ask whether random walk fits the data or not ? Instead ask , "How can I beat the random walk ?"
• "Are mid-sized cars equally expensive in Japan and in the US, after correction for the exchange rate between these two countries ?" IS FAR BETTER A QUESTION than "Does the purchasing power parity hold good for Japan and USA? "
• Economic theories deal with aggregated quantities..Empirical work needs fine grained data
• 7 case studies to illustrate various models
  1. convergence of countries attributes - a Convergence model with no stochastic behavior
  2. Direct mailing problem - probit model for selecting customers for direct mail (a truncated regression model )
  3. Does automated trading improve trading efficiency - use multiple equation regression model for futures and spot
  4. Unemployment and recession linkage -- auto regressive model with latent variable.... With all this jazz could anyone have predicted the 10% unemployment rate that the US is facing now !! Sometimes it makes me feel that all macroeconomic variable prediction is just some jazz and has no practical value beyond keeping a few economists/econometricians in a job!
  5. Brand loyalty of the customers -- Multinomial probit
  6. Do people make up their minds before elections -- artificial neural network problem ..Basically I look at it as a non-linear regression with fancy functions!
  7. Temperature forecast uncertainty -- Use GARCH to judge the correlation structure of the forecast errors

My takeaway : Considering my interest is modeling variables in finance, I think that it would be naive to depend on some linear parameters of an equation with gaussian assumptions in it. Even though a flavor of models are presented in this book, I don't think models of such type are going to be useful anymore. THE GAME OF GAUSSIAN ERROR TERM is over.

Scientific Illusion

Here is a nice paper that I have stumbled on, "The Scientific Illusion in Empirical Macroeconomics" by Lawrence Summers.

Basic argument of the paper is :

Formal econometric work where elaborate technique is used to either apply theory to data or to isolate the direction of causal relationships where they are not obvious a priori virtually always fails. If this argument is accepted it suggest that in evaluating empirical work we should begin by asking different questions than the ones usually posed.Instead of considering the methods employed, we should ask whether the fact reported is an interesting one that affects our view of how the economy operates. Does it affect our belief about a substantive question?

Good empirical evidence tells its story regardless of the precise way in which it is analyzed. In large part, it is its simplicity that makes it persuasive. Physicists do not compete to find more and more elaborate ways to observe falling apples.Instead they have made so much progress because theory has sought inspiration from a wide range of empirical phenomena.

Macroeconomics could progress in the same way. But progress is unlikely as long as macroeconomists require the armor of a stochastic pseudo-world before doing battle with evidence from the real one.

Books such as freakonomics , frequels, undercover economist etc are a hit in the non-fiction world, precisely because there is a dearth of literature in "doing and articulating empirical research work". Deep structural parameters, structural models give a sense of scientific jazz to economics...but at the end of the day, one must realize that economics / finance is SOCIAL science.

Super Freakonomics : Summary

Last week has been a pretty unproductive week. Fell ill on Tue and Wed. Barely managed to work for a few hours on Thu. But by Friday I was back to normalcy. Generally one of the ways I get over from an inertia state to an active state is to read something interesting. So, picked up this frequel( from the back cover : nice name for freakonomics sequel ). I knew there was a lot of controversy relating to this book. Some people argued that authors got it completely wrong as far as global warming is concerned. Some argued it was a hotch potch of some articles.

Whatever others have to say about this, I have found this book a real page turner. Even though some people criticized the book saying that it was a mish mash of random thoughts, the author clearly mention their intention in the very first note. They identify the theme as "role of incentives" and their hypothesis is that people respond to incentives which are not necessarily predictable. These stories are based on "economic approach" where the underlying premise is that behavior is driven by a rich set of values and preferences.

While presenting this opinion about incentives, authors introduce a number of interesting examples like the following

1.This campaign by US Dept of transportation urging people not to drive drunk. Authors estimate that walking while drunk is 8 times fatal than driving drunk. Simple alternative (a seemingly safe one) to driving drunk is actually more dangerous.

2. How Cable TV might have improved the status of women in India

There are 5 chapters in the book with each chapter filled with umpteen number of stories, where results are presented based on the economic approach, looking at micro data, trying to ask questions and teasing out some answers. In a sense, this kind of thing actually makes economics interesting I guess. Its the same with stock market . Long term predictions(read anything more than a couple of months) are very difficult. Near term predictions are also not great too. If one looks at stock market data, almost everyone is dealing with the same starting point, univariate time series of stock prices, option quotes. You can do a low frequency, medium frequency or high frequency analysis. More and more I get exposed to data, I have a feeling that there is money to be made only in high frequency trades ..

Coming back to the book,

How is a street prostitute similar to deparment store santa ?

The first chapter is about authors understanding demand curves of prostitutes. One of the challenges of asking questions about such topics is data. Everyone knows the more sensitive the topic is, the more difficult it is to procure data. Drugs, Violence, Sex are some of the things where getting data becomes a dangerous adventure. So, credit does go to Sudhir Venkatesh's hard work to actually get the data in the first place. Once you have some structured data , slicing and dicing is the fun part and here is where the authors excel is bringing out some interesting observations. In creating a narrative, the authors come out with a lot of aspects about women, women's lives, prewar prostitution etc. Here are some aspects mentioned in the book

• It is hard to be a woman , be it developing countries or developed countries, say the authors. Practices such as breast ironing , abandoning girl childs in China, pay scale mismatch in corporate America etc. make it difficult to lead a woman's life
• Prostitution has by far managed to be a woman's game( though things are changing pretty fast:) )
• Prewar prostitutes were earning far more than the current street prostitutes. It is argued that one of the reasons could be the rise of premarital sex.
• Whole lot of observations are based on the working paper, Empirical Analysis of Street-level Prostitution . It's abstract says the following :
  • Combining transaction-level data on street prostitutes with ethnographic observation and official police force data, we analyze the economics of prostitution in Chicago. Prostitution, because it is a market, is much more geographically concentrated than other
    criminal activity. Street prostitutes earn roughly $25-$30 per hour, roughly four times their hourly wage in other activities, but this higher wage represents relatively meager compensation for the significant risk they bear. Prostitution activities are organized very
    differently across neighborhoods. Where pimps are active, prostitutes appear to do better, with pimps both providing protection and paying efficiency wages. Condoms are used only one-fourth of the time and the price premium for unprotected sex is small. The
    supply of prostitutes is relatively elastic, as evidenced by the supply response to a 4th of July demand shock. Although technically illegal, punishments are minimal for prostitutes and johns. A prostitute is more likely to have sex with a police officer than to
    get officially arrested by one. We estimate that there are 4,400 street prostitutes active in Chicago in an average week.
• Reference to NYTimes article(The economy of desire) which makes a case(weak one though) that having a relative in the family with AIDS changes the sexual behavior as well as self-reported identity and desire of a person
• Article supporting Larry Summers Hypothesis - He, Once a She, Offers Own View On Science Spat
• Why legalizing sex work is dangerous for sex workers .. Taboo / Illegal things are priced at a premium. Once you remove restrictions, prices drop like crazy and thats bad news for escorts. From the freakonomics blog , here is an interview with a high profile prostitute.
  Link A Call Girl’s View of the Spitzer Affair

Authors finally after all these stories, anecdotes, empirical evidence suggest that street prostitute is similar to a department store santa, they both take advantage of short-term job opportunities bought about by holiday spikes in demand


Why should Suicide bombers buy Life Insurance?

As I began reading this note, I had a feeling that it was similar to "outliers" , Gladwell, story all over. Thankfully the authors mention that the point was already made by several other books and stop belabouring the same point. The whole chapter revolves around Craid Feied who manages to set up a database for ER and thus revolutionizes information management systems in a lot of hospitals. Some of the interesting things mentioned in this part are

• The effect of surname in academic profession :) Link : The benefits of being economic professor A ( and not Z)
• Deliberate Practice has 3 components. Setting specific goals, obtaining immediate feedbacks , and concentrating as much on technique as on outcome
• Why terrorism is so cheap and easy ?
• How the estate tax has an impact on the death rates of people who inherit tons of money ? very funny things mentioned in this context
• The most interesting part is the fact that hospital database is being used to track terrorists

The authors answer the question about suicide bombers . The database suggests that one of the defining characteristic of a suicide bomber is , he /she doesn't buy life insurance. So the quirky take on that fact is : Suicide bombers should buy life insurance to leave no trail behind them.

Unbelievable Stories about Apathy and Altruism

This part was a little dragging. Behavioral economics, apathy shown by 38 people towards a murder in a NY neighborhood, stories about altruism etc are the aspects touched upon

Fix is in - and It's cheap and Simple

I think this is the BEST chapter in the book

Premise under which the narrative is built around : Cheap and Simple fixes often address problems that seem impervious to any solution.

• Starts off with the story of Hungarian Scientist Ignatz Semmelweis who came up with a simple fix to solve perpetual fever, something witnessed immediately after child birth in many hospitals. Fix was : Disinfect your hands before operating on maternity patients. Simple but powerful fix which has saved innumerable lives till date.
• Polio is another vaccine which can be considered as a fix. Instead of dealing with the problem after the fact, see to it it doesn't arise in the first place.
• McNamara fix of seat belts in cars to prevent fatalities
• Nathan's solution to hurricanes is fascinating. A little dig in to Nathan's intellectual venture gives a superb account of what he and his team is up to.

What do Al Gore and Mount Pintabu have in common ?

Reader meet Nathan and his team again in this chapter where the solution to global warming is presented in a different way. There is a considerable debate about this chapter. I have no clue on what is right and what is wrong about global warming. The only thing I feel is the solution of actually spraying something in the air to global warming is lateral thinking.. Who knows, it might work.

To digress at this point, recently I came across an interesting example of lateral thinking. This was long time ago when prince of Turkey wanted to modernize the society. He did not want women to wear burkhas!. Well the usual boring way to stop women from wearing burkhas is to impose some law, penalty, etc... However he was a great lateral thinker. He passed a law where , "All prostitutes were ordered to wear burkha" .Behavior change among normal women was immediate !!. Terrific example of how you can fix things, change aspects of societal behavior by lateral thinking...... May be Nathan and his team need to be given a hearing and funding to see whether their lateral solutions works..Who knows, it might just work...

My takeaway from this book : Understanding data and teasing out answers to interesting questions is a great fun activity. If one spends enough time gathering data or visualizing data, one is bound to ask useful questions. Lateral thinking and open minded ness towards solutions usually result in interesting solutions.

Reflections

Via NYTimes :

But as I traveled the land, the data did not fit the framework. The children of the lower castes were hoisting themselves up one diploma and training program at a time. The women were becoming breadwinners through microcredit and decentralized manufacturing. The young people were finding in their cellphones a first zone of individual identity. The couples were ending marriages no matter what “society” thinks, then finding love again. The vegetarians were embracing meat and meat-eaters were turning vegetarian, defining themselves by taste and faith, not caste.

Indians from languorous villages to pulsating cities were making difficult new choices to die other than where they were born, to pursue vocations not their father’s, to live lives imagined within their own skulls. And it was addictive, this improbable rush of hope.

English Mania

Jay Walker @ TED shows evidence of the english mania. This year, China is going to be the country with the largest number of english speaking people. Mass chanting of english sentences is something which I have never heard of, till date!
But in China...

Next Google in India ?

Via NYT:

“If a foreign-born engineer doesn’t come to Google, there is a very good chance that individual will return to India to compete against us.”

Root of the Problem

Michael Lewis : Since the beginning of the crisis I’ve wondered why the government has found neither the will nor the way to attack the root of the problem -- the people who borrowed money to buy homes they shouldn’t have bought.

Link : Bloomberg

2 Tiered Structure

Via Bloomberg

Taleb says:

• We have had worst form of banking structure.. Capitalism when banks made profits, Socialism when banks showed losses!
• 2 Tiered structure is the way to go , where the First tier comprises banks that are completely nationalized and are operated as utility companies. Second tier comprises companies that are free to take any risk they want to take,but with the rider that they will never ever be bailed out!!
• I don't understand Options , being a option trader for 10 years. How will the regulators understand ? Nothing complicated than vanilla options should be traded.

Where's the end ?

Via Bloomberg

The IMF report released yesterday , Jan 27, signaled that write downs and losses at banks totaling $1.1 TRILLION so far are only half of what’s to come. Losses on that scale would leave banks needing at least $500 billion in fresh capital to restore confidence in their balance sheets.

Here is how fast things are changing...A couple of months back, I read a book called "The Trillion Dollar Meltdown" by Charles R Morris. My review for the book is here . Now there is a new book by the same author titled " The Two Trillion Dollar Meltdown"

Going by the current trend , I think he is currently writing a third book and the title is easy to guess :)

Fortune's Formula : Summary

I came across so many references to this book that I finally decided to take a peek in to it. At the heart of it, the book is about Kelly's criterion.A simple example made me motivate to read this book.

If you know that you gain 50% with prob = 0.6 and lose 50% with prob = 0.4...AND...if you have X dollars, how much do you bet ?A naive strategy of using expectation over one step is dangerous. Expected gain over 1 step = 0.6*0.5-0.4*0.5=0.1 Expected profit >0 . Should you bet your entire $X ? Common sense tells us that it cannot be the answer as there is a high probability that you would be out of the game before law of large numbers kicks in. Kelly was interested in knowing what fraction of the wealth should one bet, given the odds of gains. Well, the answer for the riddle is f=2p-1 where f is the fraction and p is probability of a gain. This is all the matters if you want to have a 10,000 ft view. However if you want to know the STORY behind the criterion, this book is a wonderful way to spend time and understand the story which William Poundstone has thoroughly documented. This book is pretty readable..It just tells the story behind the criterion and it tells it in a fantastic way.

PART 1 - ENTROPY :

The book starts like a crime thriller. It tells a story of John Payne who starts a wire service to communicate horse track results to the bookies. In a strange twist of events, AT&T rise and Payne's original network converge to the establishment of Bell Labs, a place which is credited to have been the place of innumerable famous personalities. The first part of the book introduces some famous personalities .

(Shannon) (Thorpe) (John Kelly)

Firstly, about Claude Shannon, one of the few brilliant scientists who was single handedly responsible for bringing "Information theory" to the world. His contribution was immediately applied to a wide range of fields. Edward Thorpe , a brilliant empiricist who sets Shannon in to a direction where they team up to build a tool to estimate probabilities at a roulette wheel. In their adventure, they realize that it is very important to have a betting strategy in place. The simple martingale strategy of betting twice on loss until you win is a risky proposition as the gambler might be bankrupt before he manages to win.

Shannon's key idea was the essence of a message is its unpredictability. John Kelly's , another brilliant scientist's key insight in to this idea was:
Greedy-though prudent better is faced a similar situation as a receiver of a noisy message in shannon's case. Kelly extrapolated the same shannon's ideas to the horse betting scheme. The key equation spelled out by Kelly is : Gmax = R where Gmax is the growth rate of gambler's money and R is the information transmission rate (Shannon's theory). It is also popularly known as edge/odds kelly criterion which is often quoted in the media.Ed Thorpe used Kellys ideas in BlackJack and made a killing in the vegas casinos.

Henry Latene idea : If in each period, the investor chooses the alternative with the largest geometric mean across possible states, the geometric mean strategy is going to dominate all the strategies. I am facing a paucity of time but I would love to read more on this. STREETWISE, a book having a collection of papers relating to portfolio management has one of the papers on Henry Latene. May be I will read it some day.

The first part of book titled entropy covers the people behind kelly criterion and gives a non-mathematical introduction to the same. After reading this part ,it is difficult not to go beyond this introduction and explore the ideas of risk management. Let's say I have a statarb strategy to pick stocks. How do you manage the risk of the portfolio becomes extremely important ? I should somehow find time to read about these issues and work on its implementation.

PART 2 - BLACK JACK :

This part is a journalistic account of Thorpe using Kelly Criterion in Las Vegas to make money. The story highlights one key idea that is recurrent in various forms through out the book.

Law of Large numbers is largely misunderstood by gamblers. The probabilities are realizations over the long run and you need to a criterion to bet , to avoid Gambler's ruin. Kelly's criterion is one such criterion, edge/odds tells you the way you should bet on successive outcomes. This part of the book compares 4 strategies , Bet it all, Martingale, fixed wager system, Kellys system. At a first glance , Martingale system looks good but there is a gambler's ruin in the pursuit of the strategy, meaning, there is a chance of ruin before the law of large numbers strikes. This is where kelly criterion , which is a geometric criterion does exceedingly well. Even though the trajectory path is jittery, the kelly criterion beats all the strategies.

The above reliance on the way to make law of large numbers is exactly what Shannon used in Information theory. Sometimes reading all these beautiful ways to look at things, makes me feel that I should never try to lose this habit of reading regularly. However I have seen that once I start working in a company / startup, i find it difficult to devote time to read in silence. I hope to change that pattern this time around!

One thing that will make any math inclined reader to ponder is , "How to use Kelly criterion in stock trading strategies ?" I am certain that there is a ton of literature out there. I should find some time to go over it sometime!. Also a few of the books mentioned in this part of the book are
"Beat the dealer", "Beat the market". I guess the ideas of delta hedging was put to use by Thorpe in Newport Ventures, a successful company, much before Black scholes used it in the famous Black scholes formula

Part 3 - Arbitrage

This is the part of the book I love the most because it is a topic close to my heart. It talks about Thorpe's attention to convertible bond arbitrage and the way he devised a risk neutral strategy for warrants. The delta hedging technique which Black Scholes popularized years later was being practically implemented years earlier by Thorpe. This book talks about the rise of random walk in finance literature and the popularization of efficient market hypothesis .Samuelson, Fama, Sharpe, all touted EMH. Shannon on the other hand believed that the only way to make money was through arbitrage. However he himself did not use the technique in the earlier years to make money. His success came from picking few stocks.

However Thorpe who had already used Kelly criterion, used warrants to make money, wanted to expand and get more money to manage. One way he did was to popularize his concepts in "Beat the market". The book's popularity brought him investors who were eager to put in money. Thorpe's Princeton-Newport ventures did a tremendous business which is still a sort of benchmark for all the money managers. A dollar invented in 1968 would have grown to $14.78 in 1988. Over 19 years this was a return of 15.1 %(S&P averaged 8.8%). The most interesting thing was about the standard deviation which was 4%, meaning a Sharpe ratio of 3.7, a bloody good Sharpe ratio by any standards. If you ever think of managing money, this ratio should always be in your mind to remind you that there was guy who beat the market hands down with a Sharpe ratio of 3.7. WOW!, till this day, money managers talk about this performance. If you read this part of the boo,k, you cannot help but start thinking about kelly criterion, delta hedging, information ratios. The meat of the book lies in this and the next part

On a side note, there is a new term that I came across in this part of the book:

Paul Samuelson coined the term , Performance Quotient. Like IQ, this measures a portfolio manager's ability to generate alpha.A PQ of 100 is average.Sameulson theorized that if such people existed, they would all be invisible. :You would not find them working for Ibanks. They have too high an IQ for that.They would operate by stealth, investing their own money or their friends money.They would keep the system to themselves."

Part 4 - St. Petersburg Wager

This is the famous wager problem where expected value of the wager is infinite. So, the question is that no one would pay infinite amount to play the game. whats the fair value of the game. This paradox created a lot of interest and lead to popularization of utility function ,Bernoulli's masterpiece where he mentions that risky ventures should be evaluated based on the geometric mean of the outcomes. This ultimately lead to the involvement of Henry Latane, Markowitz, Kelly and finally it was being accepted that mean-variance analysis does not talk about compounding of investments. But Kelly's world is about compounding of returns, the winnings are being reinvested continuously.Even though Samuelson and Merton were strict opponents of geometric criterion, other people like Henry Latane, Thorpe believed in Kelly criterion.

The world to this day is divided I guess between Kelly and Mean-Variance approach. However Thorpe, the man with one of the highest PQs believed in kelly(half-kelly to be conservative). Kelly has no log normal assumption or distribution assumption. It has no utility function behind it. It is a plain simple formula to avoid ruin. Will it work in specific markets ? Can some on use Kelly in India for stock selection? I do not know whether people are using it. But it will be fun to play with the money and see whether it works.

Part 5 - RICO

This part gives a historical recount of RICO, a tax evasion law that became attached to Princeton-Newport ventures. Most of the partners got indicted. Thorpe was one person who was found innocent. The whole issue with princeton-Newport ventures was that they were parking stocks at firms and buying back at a price so as to offset short term gains. Tax evasion!! was good in the short run until RICO hit them. However this did not happen during the stellar performance of the fund where it had a Sharpe ratio of 3.7. So , for all the aspiring fund managers, that metric can still be considered as a benchmark for your performance !

Part 5 - Blowing up

This details the blow up that took place at LTCM. Ironically , the fund failed to be long term!. The point in illustrating this case by the author is to bring the relevance of Kelly criterion and how the criterion would have saved LTCM from a blow up. Thorpe brilliant point about convergence trades made me think about the relevance of some trading strategies that I know about.

Part 6 - Signal Vs Noise

Well , the last part of the book is a short collection of diverse views on Kelly . Shannon, it turns out was more than a stock picker than arbitrage exploiter. Thorpe believed in relative value and made a killing in various markets. The book ends with the author not taking any side to the debate on Kelly. Left to the imagination of the reader and interpretation, I feel that somebody soon , the heavy weights(PhDs) from ivy/other schools with get behind the Kelly bandwagon and make it popular. Ideas about mean variance will die soon and may be then , people will start giving importance to Kelly criterion.

This book has made me inquisitive about the actual implementation of Kelly formula, how to use it in a long-short portfolio.

Lets say I manage to identify some long-short trades, is my current implementation of risk management sound ? May be I should simulate P&L with Kelly criterion and see how it behaves!. The following are some of the wonderful references which I hope to read some day:

• Beat the market - Thorpe
• Streetwise - Peter Bernstein
• Portfolio Choice and Kelly Criterion
• Henry Latane's paper on geometric mean
• Shannon's basic funda relating to Information theory
• Implementation of Kelly Function
• How to implement Gmax = R

Wow!! its a long way to go for me, before before understanding all the stuff clearly..

Niall Ferguson :Chimerica is going to stay

Prof, Niall Ferguson says, one doesn't have to worry too much. Some of his arguments are very convincing.

Dow 1448 by 2010 !

Here is a prediction saying we are in a frightening bear market! As all predictions are, it is a prediction after all. If only the author bets money on the bearish trend, will I take the prediction , seriously.

Alas! neither can the author confirm on that, nor I can verify his action! This is the perennial problem of all predictions. Is it cheap talk! or a serious prediction! ? God knows!

 

Faster Convergence!

Via Niall Ferguson

What are the geopolitical implications of all this(credit crunch)?

One possibility is that the "great reconvergence" between East and West is speeding up. If you go back to the very first report that Goldman Sachs produced about the "BRICs economies" (Brazil, Russia, India and China), China was projected to overtake the United States in gross domestic product in 2040. But in more recent reports, that has been brought forward to 2027. Maybe it will be even sooner. For one inevitable consequence of the credit crunch is that the United States will grow more slowly for the foreseeable future -- at closer to 1 or 2 percent per year, rather than the 3 or 4 percent it has grown used to. By contrast, China's semi-planned economy can comfortably maintain growth of 8 percent or more per year, propelled forward by state-led investment in infrastructure and growing consumer demand. Because net exports are no longer the key driver of China's growth, an American sneeze need not necessarily cause an Asian cold.

How Rafat Ali Found a Job

A motivating read in recession times

Link :How Rafat Ali Found a Job

Reflects the current job market :)

Indian airline sector is hotting up

 

Home price bubble bursts finally !

There have been mixed feelings about home prices in USA in the past few years. A few years back I was part of a team trying to design a model for a mortgage bank to increase the percentage of acceptance of a HELOC as soon as a customer is qualified for a mortgage loan. However the VP of the company was expecting a burst and was worried about a scenario where the bank would be saddled by a set of high risk HELOC portfolio. He allowed the roll out of the model on a small acquisition base and wanted to wait till the housing effect cooled down. In the hindsight, it appears as a correct move.

Via NYT today :

"Nationally, the median price of single-family homes fell 2.7 percent, to $219,300."

“You have two kinds of weakness here: there is the traditional economic-driven weakness in parts of the Midwest, and there is the bubble-bursting weakness,” said Jan Hatzius, chief United States economist at Goldman Sachs. “That’s what is bringing
down the national home price appreciation rate.”

India - Superpower myth ?

A CNN money article mentions that India is being hyped as a super power and there are problems far too many that it should solve in a systematic manner for it to become a super power. One of the remarks by Prime minister sums up the problem  -  "Our biggest single problem is the lack of jobs for ordinary people."

Link : India won't be a superpower until it alleviates poverty

Sensex at 30,000 by 2012

Swaminatham A. Iyer , a known economist writes in TOI Op-ed that he expects Sensex to reach 30k with in 6 years , logic being 18% profit rate per annum is perfectly sustainable...If not for anything , there is a case for stashing away some money in the index funds..

Bank - 24 / 7

Yesterday I had been to citibank to deposit some stuff and submit my change of address form..Yes, change of address in this e-age,and highly connected internet world, sadly has to be submitted in a letter and put in a drop box.

The bank timings on saturday are from 10:am to 12:00pm...I do not understand the logic...Bank is just like any other service organization . The way they intrude us day in day out with the calls like overdraft facility, Loan on sms etc...makes me wonder, why the heck are we not allowed to bank on weekends and intrude a little in to their free time ? Bank obviously can afford an additional shift for branch personnel on weekends... i seriously don't understand why shouldn't the branches be open 24/7 ?  Its high time banks realize this...

Immigrants - No threat to US

Via New York Times :

"The idea that there are jobs that Americans won't do is economic gibberish,"

Costs in starting a Hedge Fund

Via Yahoo Finance:

1. A lawyer to create investor contracts and such, at a charge of $400 an hour, or about $30,000 a year

         2. Back-office outsourcer to handle stuff like shareholder communications runs as much as  $75,000 a year

3. Optional compliance consultant ($15,000-ish), who ostensibly would keep the regs away

200,000 is the basic infra cost..There is track record that you need to bring to the table and one needs to have a superb power to speed network,,,

The above was the gyan dished out a recent seminar , Against all this, there is one cold fact that makes anybody realize that we are in seeing a cambrian era for Hedge funds : Last year 1,000 or so funds went belly-up. But around 2,100 new ones
started, bringing the grand total to over 8,000, up from 600 ten years
ago

Change in 401(k) in US

Via WSJ.com

The 401(k) retirement plan, one of the most important savings tools available to Americans, is about to get a makeover.Some of the new features that would be part of the new plan from 2008 are Automatic enrollment, Automatic increase by employers, investments in higher yielding investments.
Why is it being changed?
The problem is, too many people are making bad decisions, such as
leaving their money parked in low-yielding investments instead of more
suitable choices.

Case for investing in Index funds

Consider an hypothetical example. There is a wheel which has 2 colors painted on it , red and green on each half of the area on the wheel. When the wheel is rotated against the needle , it either stops on red area or the green area. The events that is of discussion in this example , i.e the needle being on the red area OR the green area is completely random.

If you were asked to predict the color that needle would stop, one would say probability of red = 0.5 and probability of green = 0.5. Now suppose before the experiment began , the wheel and the needle were configured in such a way that the probability of red = 0.7 and green = 0.3. Incase you do come to know of this fact ? How do you react ?

Majority of folks respond by doing the following: In 70% of the cases, they say red and spin the wheel and in 30% of the cases, they would say green and spin the wheel. What do you think is the outcome ? The probability of getting a right answer in this case = 0.7 *0.7 +0.3*0.3 = 0.59

What's the point of the above example ?
 One needs to note that the above the folks who follow the above strategy are treating the chance component of the experiment as if it is required skill and there is a cost to this behavior. If they simply contented themselves with noticing red's 70 percent base rate and then acknowledge that they had no influence over or intuition in to the sequence of outcomes, they could guess successfully 70% of the time by always predicting red. The probability numbers become more clear when one computes the probability that red will come up atleast once in the next four spins = 1-0.3*0.3*0.3*0.3 = > 0.99 . The probability that red will come up four times in succession = 0.7 power 4 = 24%

This is a trivial example but points to the value of acknowledging uncertainty and behaving  accordingly, may be by adopting unwavering policy

I believe that stock price is inherently unpredictable and has a uncertainty in its behavior. In the light of above example , is there not a case, of picking a random set of stocks, and just sticking ? Dont you think people would make money by passively investing in index funds than going for aggressive mutual funds ?? Some food for thought...

Six Trends Driving the Global Economy

           People Power
           Video Unlimited
           Personalize It
           Carbon Killers
            Buy It Now
           All-Access Economy

To read about them -- its here  Wired Trends:

Apple walks away from India

India: Why Apple Walked Away

It says the decision was cost-driven. "India isn't as inexpensive as it used to be," the source says. "The turnover is high, and the competition for good people is strong." Apple feels it "can do [such work] more efficiently elsewhere."

The shutdown highlights concerns about the sustainability of India's fast-track economy. True, India grew 9.3% last quarter and is still home to the world's largest and fastest-growing offshore outsourcing sector, which last year generated some $17.3 billion in revenues and employed nearly 700,000 people, according to the McKinsey Global Institute. Yet India's benchmark Sensitive index, or Sensex, has dropped by 20% in the past month as global investors have fled emerging-market stocks. And the outsourcing sector is now plagued by concerns about rising wages. Entry-level pay at tech and outsourcing companies climbed by as much as 13% annually from 2000 to 2004, while salaries for midlevel managers jumped 30% a year during the same period, to a median of $31,131, according to McKinsey and Nasscom, India's software industry association.

India : Rising Interest rate scenario

Why do banks jack up prices when reverse repo is increased by RBI ?

Reverse repo: When the RBI borrows money against its securities, the interest rate at which it does so is known as reverse repo. In other words, this is the rate the RBI pays banks when they lend money. This rate has gone up from 4.75% to 5.25%(Recent Credit Policy announcement)

Repo: When the RBI lends money to banks against their securities, it is known as the repo rate. This rate is 6%. This is what the banks pay the RBI when they borrow money. This rate has not changed.

It means the RBI is willing to pay more now for the money it borrows and clearly signals a shift towards a higher interest rate.

RBI and interest rates

Should RBI hike interest rates on the scheduled Oct 25 monetary policy announcement ?
Rajeev Malik and Abheek Barua present 2 contrasting views

Phd education : In Need of a Spruce up

A Phd education entails a serious dedication to a field and a country when harnesses the power of Phd's reaps high dividends..But look at the state of Phds at IITs. Isnt it high time, we learn to focus on Phd education and make it an engine for the future growth. This is especially in the case of upcoming revolutions like Nano, RFID...Will India miss the bus on these technologies ?

Link : In three years, only four IIT-Bombay PhD placements

Indians make it to MIT innovation awards

Four Indians bag the MIT Innovator's award: ANITA GOEL for work on nano, SHILADITYA SENGUPTA for  Delivering drugs to cancer cells , NARASIMHA CHARI for Setting the mesh networking standard and RAJIT MANOHAR for Taking the clocks out of computer chips.

It really inspires me when I read about such people.