Category Archives: Market inefficiencies

A Bit of a Rant on Free Trade

Ah, but it’s a good rant, colorful and defensibly reasoned, by Angry Bear reader OldVet, “Taking the other side of Trade – what’s free and what’s not.” He makes a valid core observation: free trade hasn’t delivered the goods (at least for the US) that it was alleged to, and that is at least in […]

Is Alpha All It’s Cracked Up to Be?

Supposedly, the reason that sophisticated investors like pension funds and endowments pay 2% management fees and 20% upside fees (and sometimes more) to hedge funds and private equity funds (and higher-than-index-fund fees for long equity managers) is that they are buying “alpha,” which is the manager’s ability to beat the relevant market. (To be more […]

Robert Shiller on Market Declines, Particularly the Latest

We found Yale economist Robert Shiller’s article, “Fears, Not Facts, Drive Global Markets,” thanks to Economist’s View. As much as we agree with Shiller’s conclusion (as author of the book “Irrational Exuberance,” he is considered an expert), that the size and seeming suddenness of market declines can feed on themselves, we don’t agree with the […]

"When to Violate the Top Two Commandments of Antigovernment Crusaders"

This article by Robert Franks, a Cornell economist, in today’s New York Times gives several simple but compelling examples of how conservative ideology is internally inconsistent. Conservatives like to claim that keeping government small is pro growth and makes us all better off, at least in a financial sense, by giving us a bigger economic […]

Appetite for Risk Makes it Easy for Private Equity Funds to Overleverage Companies

I trust readers don’t mind the high proportion of Financial Times stories today. You’ve probably figured out that the FT often runs stories that don’t get reported in the US. While the title of this post is a bit of a mouthful, the concept is pretty simple. As you know, the pricing of risky credit […]

Study Recommends Carbon Tax over "Cap and Trade"

As we’ve noted, Wall Street firms have been investing in various means of profiting from likely future regulation of carbon emissions, particularly carbon trading. A study by Dr. Robert Shapiro, undersecretary of Commerce in the Clinton Administration (which we found thanks to Greg Mankiw’s blog), concludes that carbon taxes would be more effective than emissions […]

Shortcomings of Prediction Markets and Markets Generally

Barry Ritzhold of the Big Picture has had a run of posts lately on topics near and dear to my heart. He has written before on the subject of prediction markets, and his latest comment, on a particularly wrongheaded story in the New York Times, makes some important observations about markets in general. This topic […]

"Carry on Living Dangerously"

An informative article in the current Economist on the dangers and economic distortion created by the carry trade, a topic we’ve discussed. On a massive scale, investors, typically hedge funds, are borrowing in yen, a currency with very low borrowing costs, and investing in currencies where the interest rates are high, like the New Zealand […]

How Big Traders Can Extract Excessive Profits

There’s an old saying in poker: if you are playing the game and you don’t know who the mark is, that means it’s you. Given that investment banks like to recruit successful poker and blackjack players as traders, one has to imagine that the ability to play a chump is a useful skill in both […]

"Markets Are Not Magic"

An excellent post by Mark Thoma in his Economist’s View, which although it was prompted by a post about Ayn Rand, could just have easily been in response to the New York Times’ lead story today, “In Washington, Contractors Play Biggest Role Ever.” Thoma discusses what markets are good for (efficiency, not equity), and what […]

"CAPM is ‘C.R.A.P.’"

So says this post in AllAboutAlpha which cites a report by James Montier, a Kleinwort Benson economist, which in turn cites a good deal of impressive academic work from folks like Eugene Fama (a University of Chicago professor and one of the luminaries of modern finance). Now why is this important? Well, much of how […]

Perverse Effects of Deregulation of Energy Markets

This informative commentary in today’s Financial Times, by Jerome Guillet, an investment banker specializing in the energy sector, makes the observation that the energy projects that get built are the ones that are cheapest to get financed, but in the end, are often not the cheapest to operate. Utilities, which can obtain government guaranteed financing, […]

When Did Housing Lending Standards Become So, Umm, Lax?

The Housing Bubble Blog put the question more neutrally in its post headline, “When Did Lending Standards Start Charging So Much?,” but the responses all point in one direction: Readers suggested a topic on when loan standards changed. “Here’s my question for the gang – when did lending standards start changing so much? I was […]

Where Has the (Perception of) Risk Gone?

We have pointed out various signs of complacency in financial markets regarding risk: declining credit spreads (January 16), a lack of concern about systemically high use of leverage (previous post plus January 18), and technical indications that suggest we are near a stock market peak (January 22). Yet there is an almost irrationally high level […]