Monday, July 19, 2010

Saudi Succession

Articles like this are why I read The Economist.

Monday, May 31, 2010

Video of the Time Being: Marc Faber

For the pessimists in the audience, (or anyone with an hour to spare,) I present Marc Faber, speaking at the Von Mises institute:

Perhaps a bit extreme, but I think it's good to consider viewpoints that go beyond one's comfort zone.

Monday, April 5, 2010

Ten(ish) Books

I'm a bit undecided about this recent blog meme started by Tyler Cowen in which we learn which 10 books the blogger finds most "influential." On one hand, I think it's an interesting idea, and it's probably a good insight into where that blogger is coming from. On the other hand, it just seems ripe for self-congratulatory elitism. Somehow I have a hard time believing that so many popular bloggers were that into Proust and Nietzsche. (Then again, I suppose philosophy majors need to do something after graduation. These guys seem to think it could have gone even further. Rabelais? Seriously?)

At any rate, after reading a few of these posts, I decided to put together my own list. It was at this point that I realized that the word "influential" is a pretty subjective term. Influential how? Influential in terms of shaping my career path? I could put that together fairly easily. Influential in shaping my outlook on life? That's another story entirely. And what about books that haven't really shaped my life in any meaningful way, but are just books that I really really like? Isn't that influence as well?

And then I realized, I'm not sure I can even think of enough books to make a list.

It's not because I don't read much - I'm actually a voracious reader on a very wide variety of subjects. I admit that philosophy isn't well represented in my personal library, but I think that's a result, not a cause. There were a few times I remember reading something that made me stop and say something along the lines of "Yes - this is how things really are;" however, in all of those instances, it was a case of an author eloquently describing something I had already conceptualized, but not really figured out quite how to articulate. (Also, almost every one of these instances has been very specific to work.)

The one big exception was Michael Lewis' book Moneyball. The underlying concept of mathematically quantifying the value of something, and then trying to either buy it when it's cheap or sell it when it's expensive, is the essence of derivatives trading. What I hadn't internalized, though, was that this concept can be applied well beyond derivatives, or even finance in general. That was a big revelation for me - the concept of value goes beyond finance. Almost immediately, I started trying to apply the ideas in the book to all sorts of situations. If there were such obvious mispricings in baseball, what about other sports? What about in other assets? What about online?

Unfortunately, the world is pretty efficient when there's money on the line. Still, that doesn't mean that the right opportunity isn't out there if you know where to look. About a year ago a colleague told me about a huge mispricing in certain types of life insurance that allowed his firm to profit handsomely. And, post-Katrina, I remember being totally engrossed by an article in the NY Times Magazine about catastrophe bonds and how our understanding of hurricane risk on the East Coast is totally wrong.

The author of that article? Michael Lews.

Friday, January 22, 2010

Garry Kasparov has an interesting essay about chess and AI here. In a nutshell, computers can beat most humans at chess, but solely through the use of brute force. There's no real intelligence in the AI. He even speculates, as I've often thought myself, that computers will eventually be strong enough to "solve" chess - to conclusively evaluate every possible move in the game. (Checkers, incidentally, was solved in 2007.)

Kasparov thinks that the game that can teach computers to think is Poker, because it's a game of incomplete information. I agree, but I think that go would also be a good avenue to try. Go involves a less linear style of thinking than chess, which is really hard for computers. I've read that the best go programs are routinely beaten by decent amateur players. (Not that I'd have a shot - I've barely played. According to this program I'm rated 19-kyu, which is the Japanese rating system equivalent to "bag of rocks".)

Maybe shogi would be a good intermediate step. It's very similar to chess in that it's a highly organized and linear game, but the piece-drop rule adds a bit of a go-like twist.

Tuesday, December 8, 2009

Tuesday, December 1, 2009

This Time It's Different

Whenever someone says "this time it's different," especially in regards to some sort of investment strategy or new business paradigm, it's safe to assume that this person is either a) drinking the kool-aid, b) a moron, or c) both. Please refer to the current housing situation in Souther California if you have any questions.

Of course, now that I've made a sweeping generality, it should be apparent that I'm about to point out the exception. Yes, there is one thing about the housing boom and bust that's different this time. But it's not a good development at all.

Unlike in recessions past, homeowners have recently been quite willing to walk away from their mortgages as soon as the loans are underwater. "The hit to my credit rating," they rationalize, "is nowhere near as bad as throwing away hundreds of thousands of dollars. In 5 years my credit score will be fine, but it could take decades for the price of my house to recover." Now, a professor at the University of Arizona law school has written a paper that encourages people to do just that - walk away.

From a simplistic view, this makes a lot of sense. Yes, it's rational for you to walk away from a house that's badly underwater. It's also rational for the banks to jack up the rate on mortgages to mitigate their losses next time:

Lewis Ranieri, chief executive of several major mortgage-related companies and one of the pioneers of the mortgage securities industry, called White's entire argument "incredibly irresponsible and misinformed." Not only is the professor urging consumers to break legally binding contracts, Ranieri said, but if large numbers of them did so it would send home mortgage rates soaring and "tear apart the very basis" upon which mortgage lending rests -- the understanding that borrowers will honor their commitments and pay back the money they borrowed.
Yes, that's the same Lew Ranieri you may have read about before.

If buyers are willing to walk away from their mortgages at the drop of a hat, the result will be an adversarial relationship between the banks and the borrowers. The lenders' philosophy will change from "how do I get this person into a house" to "how do I make sure this person doesn't screw me." Mortgage rates will rise, higher down payments will be required, and far fewer homebuyers will be considered creditworthy. Unles the borrower has some major skin in the game, there's no way they're getting a loan. Ironically, it'll be the same banks that are less willing to lend that will be stuck sitting on too many empty houses. But that won't matter to the banks - they'll be so fearful of even more people defaulting that they'd rather sit on an empty house than write a mortgage to anyone with less than pristine credit.

Taken to the extreme, this will lead to a permanent renting-class in the country's major cities, since far fewer people will be able to afford the hefty downpayments and higher monthly charges. Ironic that the attempt to make home ownership possible will result in putting that dream out of reach for so many.

Monday, November 23, 2009

The Ups and Downs of Farmland

In an interesting juxtaposition, the NY Times this Sunday has two articles which show the attractiveness of farmland as an investment, and the perils.