Pulling new rabbits out of the marco bag

In a matter of months, the focus and discussion of macro economists has done almost a 180 degree turn; peak oil talking-heads have taken a brake and fiscal stimulus is headed our way on Tuesday. What a perfect time to be teaching!

The first two teaching experiences I was able to use the textbook as a current/up-to-date source; the 'digging deeper' and 'focus boxes' fuelled our discussions of timely issues. Now, the text seems old and uninteresting. Two years ago this would have added a bit more work and cause some pain, but now, it is like wind in my sail.

Yes! I am happy to be teaching again! In the first lecture I told my class that I expected all of them to drop everything (other courses), take more economics courses and join us. Why? Because we will need their help! It seems that the global economy provided enough events in the past 6 months to keep a millions economists working for a career or two (example: here ).

A Brief History: In the throws of the depression, a member of the Canadian House of Commons stood-up and said: "What about these experts on the political economy, have they nothing to offer us? Nothing at all?" For decades, economists were held in lower social esteem. Then enter J.M. Keynes and crew, the social welfare state followed, and we slowly but surely gained some steam (every respectable company had a Chief Economist by 1972!). And then: Stagflation of the 1970s took hold. Economists were once again scrambling to find answers and once again we struggled to provide solutions to the economic ills.

Today: I have written recently that I think there has been a rise in economics's popularity but, once again, we are at risk of being put into the path of tomatoes and other like items if we cannot muster solutions. Now, the world is watching and we are banking on our tool kits to get us out of this!

After 18 years of expansion, the Canadian policy makers are being put to the test and it is exciting to be training young minds at such a time.

Giving to the alma mater: Why?

Do you give money to your alma mater? If not, does it have anything to with your experience at the school? For Canadians, despite their fond experiences at Canadian universities and colleges, they don't give back to their alma mater; and, perhaps, it's not obvious why one should.

In Canada, students enter a post-secondary institution under the following assumptions: I and/or my family pay tuition and taxes fund the rest; once I finish paying tuition, my obligation is fulfilled. By contrast, American schools strike a much different deal with their students upon admission: You pay tuition now, but give more later (implicitly: based on your success). From the first day students set a foot on Harvard campus, they know that alumni have given so they could have excellent experience; and, once they graduate, they are expected to (and about 60% do) give what they can to keep the excellent experience going. In Canada, the best participation rates are near 30% (Trinity College at UofT and Mount Allison take this lofty ranking), while the average is close to 10% - which is 50% less than top US schools.

In summary, I argue that Canadians and Americans differ in the type on the agreement upon admittance with their students. On average, 90% of Canadian university graduates don't feel that it is necessary to donate to their university's annual fund because they don't think that giving after graduation was part of the deal (so to speak). Economic incentives help re-enforce this belief because, perhaps for many, the 'perceived' benefits to getting a degree are given at graduation with no strings attached; I say 'perceived' because the returns to education is not the piece of paper but the benefits realized throughout one's working life (for example, a higher salary or happiness in a profession). From what I understand, American schools help counter act this attitude by social pressure if you don't give (someone might show-up at your place of employment).

Why do I give? At the University of King's College, the New Academic Building was raised a few years ago with no government funding to cover the $9 million bill. From a very small University community (1120 students currently), this was a huge effort. To everyone involved, it was clear that if they believe in the institution, they wanted to keep it alive, and they appreciated that others gave before them so they could have the King's experience. The obligation I feel comes from two factors: (1) I believe in the institution; that is, I want it to live on; and, (2) because I had a great experience as a result of others giving to the university, it is now my turn to give back.

Finally, let me clarify a misconception. Giving to the alma mater's annual fund is not about the amount of money collected, but the number of alumni giving. In the US, the participation rate in the annual fund is used to recruit top talent because it says: "people who came to this place found it of such value, they give back in thanks". Not surprisingly, big donors often ask about participation rates because they want to know if the experience is of value.

The motto of the Wardroom 30th Anniversary Renovation Campaign - an alumni led project to renovate the campus bar at King's is:

"Those who came before us gave so we could party, and now we give to keep the party alive!" - perhaps it should be shortened to "Keep the party alive!"

King's Alumni or anyone else can give online: www.ukings.ca/donate - tax receipts are given for anything over $10.

A description of recent events: The Black Sawn Drive ...

Sorry I have been away. I have been very busy with some recent volunteer work (at the University of King's College ) and, because of my position, it is difficult to provide guidance on the post-Lehman Brothers intensification.

However, there has been some great research produced of late. Most interestingly, the article (dated November 20th) by a group of researchers at Desjardins (article here!) said that puts into perspective why many of us have been left speechless:

"In the past month, investors have observed two events so rare that, when last witnessed, Franklin Roosevelt was midway through his second term as President of the United States—only eight single-day rallies in the S&P 500 have exceeded 10% since 1928, with the 11.58% gain on October 13 representing a ‘10.06-sigma’ event, and the 10.79% rally on October 28 being a similarly unthinkable 9.34 sigmas.

As rare as these events may seem, they are not nearly rare enough (at least according to the normal distribution). To put the recent experience in context, daily returns exceeding 7.5 standard deviations should only occur roughly once every 33 trillion trading days; to have observed even a single such event, the universe would have to have been approximately 10x older than it actually is!"

It is a great time to be an economist. These are historic times that will change the way we think about the world, models and how we evaluate risk. After all this is said, I am really looking forward to teaching again in a few weeks. More postings to come.

Google Inc.: I salute you!

Google Inc. turns 10 years today and I think a part of all of us should celebrate with them.

As almost everyone knows, this internet giant was started by two Standford University students with little more than a couple of CPUs and a desire to create something better. The secret to their success is also just as well known: amazing working conditions for their staff, a motto to "do no evil", they think big, and never settle for the status quo. They never stand still. (Yesterday's Globe and Mail had a great story on Google's contributions with a cool timeline of the company.)

Hats off to Google Inc.! Thank you for keep blogger, gmail, google analytics, and the new and improved search engine free. Free! Amazing!

Are even the rich changing behaviour?

A couple years ago, I engaged in an rather intense discussion with a friend of mine about the future of oil prices. He holds the view of the classic peak oil theorist . The height of our debate was when I claimed that people will change behaviour and prices would come back down. He disagreed, stating that the world is hooked on oil and there is little room for change.

Now, a few years later, prices have continued to rise more (and much to my surprise). Although I continue to have egg on my face, I remain optimistic.

What is proping up my optimistic view? Well, for one, Sean "Diddy" Combs is even changing behaviour ... WATCH IT HERE (warning: course language)!! Because the artist formally known as "Puff Daddy" can't afford the $250K fuel bill for his private jet, he is once again flying commercial and calling out to "his Saudi Arabian brothers and sisters" to lend him some oil.

Speculation in the oil market

As a follow-up to my previous posting on speculation (a.k.a betting the farm on a hope and a prayer), the world learned a little bit more about how much oil speculation was driving prices ( See the true story here.)
Today's news came one month after the U.S. Interagency Task Force on Commodity Markets released an interim report saying record oil prices were the result of fundamental supply and demand factors. The Commodity Futures Trading Commission made an unusual request last month for data from Vitol Group, a private Swiss energy company that regulators thought was helping industrial firms get the oil they needed, according to The Washington Post. The commission discovered, however, that the Vitol would be better described as a speculator, trading oil contracts to turn profits rather than assisting companies that actually needed oil delivered for their operations ( CNN Money).

So what is the big deal? Well, think "Dot-Com Bust" or the story of how one natural gas trader lost $3 Billion on price speculation (his punishment: he got fired and had to take his $100+ million he made in the previous year from bonuses because he was such a good speculator ...).

Speculation can create asset bubbles - large run-ups in asset values that quickly fall; taking huge amounts of wealth to the grave in the process. Even if there is never a bubble, it can create wild swings in prices. Most importantly when we are taking about oil or rice, the price acceleration hurts some of the poorest people on the planet and it often wipes-out the wealth (sometimes the cash socked away for retirement) of those who had nothing to do with the decisions that were made (just ask the employees of Bear Stearns).

Comments? Thoughts? Additions? Anything going on up there? Does anyone read this thing?

Til Debt Do Us Part: food for the financial soul

Til Debt Do Us Part is the one and only reality TV show I enjoy. For savers, it is probably does not peak their interest (unless it makes them feel good). But, for everyone else, a weekly "o'no-you-don't, Mr&Mrs-spend-thrift" might help keep you from over spending - it is like watching a horror movie. This show should also be part of every marriage prep-course.

Here is the shtick: (The show claims that) "Money is the number one cause of failed marriages. Rare is the couple that agrees on how the pot should be divided and the bills paid. Most families are in debt, and with debt come family arguments, tears, tantrums and marriages on the verge of divorce. To save families from the doldrums of debt, each episode of Til Debt Do Us Part follows financial wizard Gail Vaz-Oxlade as she helps families go from red to black by getting to the root of their destructive spending habits." The show's website calls Gail a "financial wizard" but she is more like the over consumption destroyer. Although I would love to see if the 50+ couples she has helped have kept their new regimes, my speculation takes nothing away from the show's power.

Why is this show amazing to watch? It gives people easy to follow tips to get their financial house in order. Although Gail does over blow the situation sometimes, I think that she does a good job of scaring everyone within listening range with her classic "if you continue spending this way, you will be in debt by [really-big-number-here] in 5 years" - I get the shakes even thinking about it. So why is this so helpful? It forces couples to add their bills subtract it from their income, and then talk about it. Most couples don't want to talk about their debt, let alone take steps to curb their spending and plan for the future ("I hate saying "no" to Jim = I would rather the bank take our house"). No really, it happens more often than you think. So, how does one get their financial house in order? The show provides some work sheets online ( here ) and a 12 step program ( here ). This 12 step program may seem over simplified to some of you, but if you read the show's comment section, it has helped a lot of people. Personally, I think people fear Gail coming to their house to talk to them about their daily Starbucks and pint of Guinness (Oh wait, might be just me).

Although this show appears on Slice, all four seasons (50+ episodes) can be viewed online ( click here and then click Full Episodes).