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.

Saturday, November 21, 2009

Too Big To Fail - First Impressions

Earlier tonight I finished reading Too Big To Fail, Andrew Ross Sorkin's book on the financial crisis of late 2008 and early 2009. Overall I was very impressed with the level of detail; Sorkin certainly has his sources.

About midway through the book I was struck by the realization that Ben Bernanke apparently played an extremely minor role in resolving the crisis, despite his position as Fed Chairman. Rather, it was NY Fed President Tim Geithner who worked along with Treasury Secretary Hank Paulson to save the financial world. Bernanke, as portrayed by Sorkin, was often uninvolved and occasionally uninformed. I got the impression that, once the big decisions were made, Bernanke would be called in for the meetings with Wall Street or Congress to lend credibility by his mere presence.

On one hand, this makes some sense. Bernanke is an academic, and has no real experience dealing with Wall Street. (From experience, I can say that very few financial academics do know what really goes on in the financial world. In fact, many of their core theories can only function in an environment that I would charitably describe as "bizarro-world.") On the other hand, there may not be a single person alive who is more knowledgeable about economic depressions. Bernanke might not have known the intricacies of the banking sector, but he certainly knew the importance of keeping that sector afloat.

Ultimately, the massive panic that took down AIG and Lehman was financial, not economic. The difference is subtle but non-trivial. Further, many of the solutions devised by Paulson and Geithner were extremely time-sensitive. I knew Morgan Stanley and Goldman Sachs were in serious trouble, but I did not know that at one point they were literally hours away from demise. Geithner and Paulson were aware of this and needed to act. It's a credit to Bernanke that, presumably out of his depth, he was comfortable delegating enough responsibility to Geithner to allow him to save the system. Were a more politically-minded individual running the Fed, we might not be here today.

Friday, November 13, 2009

Vegas Sportsbooks Feeling the Pain

This article is a bit old, but is very interesting. I've always suspected that the Vegas sportsbook odds allowed for inefficiencies, and my gut feeling has been that the mispricing had to do with the blowouts.

I've always wanted to try to build a prediction model for football matchups, but never had the time or hard data. After reading this, I'm once again intrigued.

Tuesday, November 3, 2009

More Japan

Ambrose Evans-Pritchard of the UK Daily Telegraph jumps on the Japan-bashing bandwagon in his latest column. Citing a dramatic increase in Japanese Sovereign CDS, a massive debt/GDP ratio, and miserable performance from the BoJ, Evans-Pritchard sees a real possibility of a Japanese default.

"The debt situation is irrecoverable," said Carl Weinberg from High Frequency Economics. "I don't see any orderly way out of this. They will not be able to fund their deficit. There will be a fiscal shutdown, a pension haircut, and bank failures that will rock the world. It is criminally negligent that rating agencies are not blowing the whistle on this."

While I agree that Japan's situation is precarious, I do want to nitpick on one minor point. The spike in the Japanese Sov CDS wasn't due to a sudden fear of default per se. Rather, it was more a result of David Einhorn bashing both Japan and the ratings agencies at the Value Investors Conference 2 weeks ago:

My firm recently met with a Moody’s sovereign risk team covering twenty countries in Asia and the Middle East. They have only four professionals covering the entire region. Moody’s does not have a long-term quantitative model that incorporates changes in the population, incomes, expected tax rates, and so forth. They use a short-term outlook – only 12-18 months – to analyze data to assess countries’ abilities to finance themselves. Moody’s makes five-year medium-term qualitative assessments for each country, but does not appear to do any long-term quantitative or critical work.

Their main role, again, appears to be to tell everyone that things are fine, until a real crisis emerges at which point they will pile-on credit downgrades at the least opportune moment, making a difficult situation even more difficult for the authorities to manage.

This statement about Moody's was directly related to a discussion of Japan's economic woes. It's worth reading the whole speech to get the proper context. In fact, it's worth reading the whole speech, period. (I had wanted to post Einhorn's comments a couple of weeks ago when I first read them, but I didn't have a link for it at the time, and then got distracted by the Galleon stuff.)

Einhorn gave his speech on Oct 19th. The Japanese CDS started to skyrocket on Oct 20th. This is not a coincidence - the VIC notes were emailed all over the street by the end of the day.

Regardless of who said what first, the point here is that Japan is in trouble, and people are starting to notice.