Saturday, March 15, 2008

Now Spinning: No hype; all quality

Since my friends and family want me to stop playing "sub-prime mortgage blues" over and over again, I had to find some new tunes. So, I pulled these two gems to the top of my play list.

The Guardian recently published a wonderful congratulations to Jenn Grant's CBC Galaxie Rising Star award for her debut full-length album “Orchestra for the Moon”. To put this in context, Jenn was selected over the Joel Plaskett Emergency (sorry Joel) and several other (including indie faves The Weakerthans ). Give this article a read. Give a listen a few hits of hers here . I hope to see her in the Maritimes this summer.

Second, the international acclaim for Amy Whinehouse is not why I am a fan. Sure, popularity could be a strong buy signal, but it was not until I was getting my hair cut a few weeks ago that I heard this salty album (Previously, I had only heard that she does not want to go to rehab no, no, no). I was surprised and delighted.

Yes, economists do have taste.

sub-prime mortgage blues

Believe it or not people visit my blog in search on "economics songs" and leave disappointed. Finally, supply meets demand: Thanks Greg Mankiw, here is a (soon to be) classic.

Please enjoy.

Saturday, March 8, 2008

Beyond Reason: From Jelly Beans to 'Group Think'

Every once in a while the Economist publishes a great article that one can use to teach undergraduate economics students. In the February 23rd edition (page 90), the Economist turned a jar of jelly beans into a look behind stock market anomalies.

"Perhaps the most compelling reason why market prices are tough to beat is the 'wisdom of crowds' phenomenon.

If people are asked to estimate the number of jellybeans in a jar, their average estimate is usually quite close to the truth; indeed, the average guess is far better than the vast majority of individual guesses. In other words, , as Michael Mauboussin of the fund-management group Legg Mason remarks, the collective is smarter than the average person within the collective."

Wait for it ... the twist:

"But this wisdom depends on the diversity of the people making the guesses", without a high degree of diversity, "group-think" takes over and investors "no longer guess how many jelly beans are in the jar, but what other people's guesses might turn out to be".

A little clearer: "There is an old test that neatly makes this point. Participants have to choose a number between zero and 100 that will be two-thirds of the average choice of the others taking part. So if you thought the average would be 50, you would go for 33. However, if everyone makes this logical leap, the best guess should be 22 (two-thirds 33). Extending this process a few times and you can work out that the best choice would be zero. In real life, however, not everyone is so rational and the correct answer is never that low."

In essence, this is why it is nearly impossible to quantify the precise of irrationality of investors. In addition, this is also why stocks can deviate far from their underlying worth (according to price-to-earnings ratios or otherwise) for a long period of time only to quickly come crashing back to reality (the dot-com case and point). The problem for investors is that if they do not join the party on the way up (such as the rise of Nortel to $120+), there client's complain of their poorly performance compared to their competitors in the short-run. Sadly, because if this, they may not be around to see the correction (and claim victory). We all wish we could pick the peak and the trough - making money (jumping) up and down.

Thoughts, comments, and/or objections wanted.

Saturday, March 1, 2008

"The Big Picture" on the US Housing Market

Today I have added some popular US blogs links (Canadian blogs coming soon) to my blog, including Barry Ritholtz's "The Big Picture". It got my attention by posting this chart on the state of the US housing market today. I have not had much time to review these blogs thoroughly, but I hope to in the coming days. According to the NY Times, it looks like the number of foreclosures is close to the total housing sales in January - pointing a large amount of excess supply on the US housing market. This picture also adds some interesting regional flavor to this story (I feel for Nevada) .... go to The Big Picture for more!

BC is leading the Pigou way

The British Columbia Provincial Budget was the most "green" in Canadian history. It did not go unnoticed by this economist nor Greg Mankiw .

There has been a lot of news about the BC budget but the aspect I like the best is the revenue neutral nature of the structures: The money raised through carbon taxes are going to be redistributed to individuals and companies by tax reductions. Great! Exactly what I (and many others) have been suggesting.

My Favorite Details
1.) As of July 1st, gasoline will go up 2.4 cents and raise to 7.2 cents by 2012; 2.) Low-income West coasters will receive an annual "climate-action credit" worth $100 per adult and $30 per child; 3.) They have added a new transit plan; 4.) They plan to renovate public buildings and pay home owners to make energy saving changes.

I am not endorsing everything in this budget - for example, the increase in gasoline tax is less than what I was hoping (more like a $1.00 would of made a much bigger statement). However, it is start! Congratulations to the Province of British Columbia!