18th February
written by simplelight

Apparently “playing by the rules” , according to Obama, includes taking an adjustable mortgage that results in monthly payments equal to 43% (or more) of income. According to the Homeowner Affordability and Stability Plan

“For a sample household with payments adding up to 43 percent of his monthly income, the lender would first be responsible for bringing down interest rates so that the borrower’s monthly mortgage payment is no more than 38% of his or her income. Next the initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31 percent…”

So in the case of two families with identical earnings and living in identical houses we take the tax money of the responsible family that saved for a downpayment and give it to the irresponsible family that didn’t. And if you were responsible enough to rent until prices came down then you’re just out of luck.

Redistributing wealth based on income is a crude, but necessary, manner of levelling an uneven playing field. Redistribution based on debt introduces considerably more unfairness.

10th February
written by simplelight

Panel discussion at Edge between behavioral economist, Kahneman and author Taleb on the economic crisis.

Note: They might be at the edge of thought but they certainly aren’t at the edge of the network! Get yourselves a CDN people!

1st February
written by simplelight
Many people have pointed out that stocks all become perfectly correlated in times of crisis. That’s not strictly true but correlations do increase dramatically. Over the past six months (August 4th, 2008 to January 30th, 2009) notice how correlations (for a portfolio containing a selection of the Dow components) have averaged 0.67 and volatility across the portfolio has been 3.1% for the daily return standard deviation.
Bk Of America Cp BAC                             -95.8% 9.8%
Gen Electric Co GE 0.63                           -80.9% 4.8%
Intl Business Mac IBM 0.66 0.68                         -48.1% 3.0%
Intel Corporation INTC 0.57 0.64 0.74                       -66.9% 4.1%
Johnson And Johns JNJ 0.50 0.58 0.67 0.69                     -28.4% 2.5%
Coca Cola Co The KO 0.39 0.45 0.56 0.66 0.72                   -35.8% 2.8%
Mcdonalds Cp MCD 0.54 0.62 0.66 0.66 0.69 0.66                 -5.5% 2.7%
3 M Company MMM 0.56 0.66 0.68 0.68 0.77 0.66 0.75               -39.3% 3.0%
Merck Co Inc MRK 0.55 0.62 0.71 0.75 0.80 0.66 0.73 0.72             -23.6% 3.5%
Microsoft Corpora MSFT 0.58 0.55 0.75 0.80 0.72 0.68 0.68 0.68 0.73           -54.0% 4.0%
Pfizer Inc PFE 0.61 0.60 0.66 0.70 0.76 0.64 0.67 0.71 0.80 0.70         -37.5% 3.2%
Procter Gamble PG 0.53 0.62 0.68 0.69 0.84 0.70 0.73 0.78 0.82 0.72 0.77       -30.1% 2.6%
At&T Inc. T 0.60 0.57 0.72 0.72 0.77 0.64 0.69 0.69 0.79 0.75 0.75 0.76     -29.7% 3.6%
Wal Mart Stores WMT 0.44 0.51 0.57 0.57 0.75 0.61 0.72 0.66 0.71 0.61 0.64 0.73 0.66   -34.4% 2.7%
Exxon Mobil Cp XOM 0.49 0.56 0.71 0.72 0.81 0.64 0.71 0.72 0.78 0.76 0.76 0.78 0.81 0.67 1.9% 4.3%
Portfolio -44.6% 3.1%

Historically, the same portfolio has exhibited correlations between the various components which have been considerably lower. In fact, over the past twenty years (February 2nd, 1989 to Jan 30th, 2009), correlations have averaged 0.32, approximately half the correlation we have seen recently. The standard deviation of the daily returns was only 1.1%

Bk Of America Cp BAC                             3.2% 2.5%
Gen Electric Co GE 0.49                           8.4% 1.8%
Intl Business Mac IBM 0.31 0.41                         7.3% 1.9%
Intel Corporation INTC 0.31 0.40 0.45                       15.4% 2.7%
Johnson And Johns JNJ 0.27 0.39 0.23 0.22                     14.5% 1.5%
Coca Cola Co The KO 0.28 0.38 0.21 0.22 0.41                   12.4% 1.6%
Mcdonalds Cp MCD 0.27 0.36 0.24 0.22 0.30 0.34                 12.9% 1.7%
3 M Company MMM 0.35 0.45 0.28 0.29 0.31 0.34 0.28               9.1% 1.5%
Merck Co Inc MRK 0.27 0.36 0.23 0.22 0.51 0.35 0.26 0.28             8.2% 1.9%
Microsoft Corpora MSFT 0.31 0.41 0.41 0.55 0.28 0.27 0.23 0.26 0.26           21.5% 2.3%
Pfizer Inc PFE 0.30 0.40 0.25 0.23 0.52 0.35 0.27 0.29 0.54 0.29         12.0% 1.8%
Procter Gamble PG 0.27 0.37 0.19 0.20 0.41 0.43 0.33 0.34 0.35 0.21 0.36       14.3% 1.6%
At&T Inc. T 0.32 0.37 0.26 0.25 0.32 0.32 0.27 0.29 0.29 0.28 0.29 0.30     8.4% 1.8%
Wal Mart Stores WMT 0.32 0.45 0.29 0.30 0.34 0.36 0.32 0.35 0.31 0.33 0.33 0.34 0.32   13.8% 1.8%
Exxon Mobil Cp XOM 0.29 0.37 0.26 0.24 0.33 0.34 0.25 0.37 0.31 0.28 0.32 0.27 0.35 0.29 13.5% 1.5%
Portfolio 13.2% 1.1%

 All these results were created using the tools at

25th January
written by simplelight

H1-B visa holders are the Palestinians of American politics (with apologies to the Palestians). Each side uses them for their own interests. One side wants to protect them from being exploited and the other side wants to prevent them from exploiting. Neither side has their best interests at heart.

U.S. Senator Charles Grassley, an Iowa Republican, sent this letter to Microsoft [emphasis mine].

January 22, 2009

 Mr. Steve Ballmer

Microsoft Corporation

One Microsoft Way

Redmond , WA   98052-6399

Dear Mr. Ballmer: 

I am writing to inquire about press reports that Microsoft will be cutting approximately 5,000 jobs over the next 18 months.  I understand that the layoffs will affect workers in research and development, marketing, sales, finance, legal and corporate affairs, human resources, and information technology. 

I am concerned that Microsoft will be retaining foreign guest workers rather than similarly qualified American employees when it implements its layoff plan.  As you know, I want to make sure employers recruit qualified American workers first before hiring foreign guest workers.  For example, I cosponsored legislation to overhaul the H-1B and L-1 visa programs to give priority to American workers and to crack down on unscrupulous employers who deprive qualified Americans of high-skilled jobs.  Fraud and abuse is rampant in these programs, and we need more transparency to protect the integrity of our immigration system.  I also support legislation that would strengthen educational opportunities for American students and workers so that Americans can compete successfully in this global economy.

Last year, Microsoft was here on Capitol Hill advocating for more H-1B visas.  The purpose of the H-1B visa program is to assist companies in their employment needs where there is not a sufficient American workforce to meet their technology expertise requirements.  However, H-1B and other work visa programs were never intended to replace qualified American workers.  Certainly, these work visa programs were never intended to allow a company to retain foreign guest workers rather than similarly qualified American workers, when that company cuts jobs during an economic downturn. 

It is imperative that in implementing its layoff plan, Microsoft ensures that American workers have priority in keeping their jobs over foreign workers on visa programs.  To that effect, I would like you to respond to the following questions:

*          What is the breakdown in the jobs that are being eliminated?  What kind of jobs are they?  How many employees in each area will be cut?

*          Are any of these jobs being cut held by H-1B or other work visa program employees?  If so, how many?

*          How many of the jobs being eliminated are filled by Americans?  Of those positions, is Microsoft retaining similar ones filled by foreign guest workers?  If so, how many?

*          How many H-1B or other work visa program workers will Microsoft be retaining when the planned layoff is completed?

My point is that during a layoff, companies should not be retaining H-1B or other work visa program employees over qualified American workers.  Our immigration policy is not intended to harm the American workforce.  I encourage Microsoft to ensure that Americans are given priority in job retention.  Microsoft has a moral obligation to protect these American workers by putting them first during these difficult economic times.


Charles E. Grassley

United States Senator

Of course, no mention of Microsoft’s moral obligation to its shareholders. And I don’t remember anyone caring about “the American workers” when we tied Microsoft up in court for years and drained their coffers. Maybe those laid off can dust themselves off and volunteer at Mozilla, the organization “dedicated not to making money”.

If US immigration policy is not intended to harm Americans then who is it intended to harm? 




15th January
written by simplelight

Stats from Howard Marks’ letter to Oaktree clients:

  • Consumer credit outstanding grew 260 times from 1947 to 2008 (4% of GDP to 18%)
  • Bank indebtedness: 21% of GDP in 1980, 116% in 2007
  • Federal debt: $1 trillion in 1980, $11 trillion in 2008
  • State debt: $1.2 trillion in 2000, $1.85 trillion on 2005 (9.2% CAGR)
  • Solvency became contingent on the continuous availability of credit
  • An upward sloping yield curve promotes short term borrowing to cover investing long.

Question: how should one invest in 2009? A global reflation seems the most likely path. Does the US have any option other than inflating its way out of its troubles…

23rd November
written by simplelight

What has been wanting on the right at the start of this century is a true “conservative disposition” — the disposition to enjoy what is rather than pining for what might be (to paraphrase Himmelfarb), to enjoy the givens and the goods of life without subjecting them to social or political validation.

Rationalism in Politics, despite being clouded by the “fumes of tradition”, is a breath of fresh air.

His [the Rationalist’s] mental attitude is at once sceptical and optimistic: sceptical, because there is no opinion, no habit, no belief, nothing so firmly rooted or so widely held that he hesitates to question it and to judge it by what he calls his ‘reason’; optimistic, because the Rationalist never doubts the power of his ‘reason (when properly applied) to determine the worth of a thing, the truth of an opinion or the propriety of an action. Moreover, he is fortified by a belief in a reason’ common to all mankind, a common power of rational consideration, which is the ground and inspiration of argument: set up on his door is the precept of Parmenides–judge by rational argument. But besides this, which gives the Rationalist a touch of intellectual equalitarianism, he is something also of an individualist, finding it difficult to believe that anyone who can think honestly and clearly will think differently from himself.

19th November
written by simplelight

Volatility is usually expressed as the annualized standard deviation of returns. Volatility is proportional to the square root of time. That means one can approximate a volatility over a smaller time period than one year by dividing the annual vol by the square root of the number of trading periods one is interested in.

So, to convert annual volatility to a daily vol, divide by 16, which is the square root of 256 — about the number of trading days in the year. This paper on converting 1-day to h-day volatility contains some important caveats. (Summary: Modeling volatility only at one short horizon, followed by scaling to convert to longer horizons, is likely to be inappropriate and misleading, because temporal aggregation should reduce volatility fluctuations, whereas scaling amplifies them.

Back in the days when vol was 15-20% annually (way back in 2007), a daily vol was about 1%. These days, the VIX is closer to 80 which implies a daily return of +- 5%.

On Sept 15th, 2008, when Lehman was allowed to go bankrupt (“Lehman is not too big to fail” – Paulson), the VIX went up to 80 and has been in that region ever since. The Lehman bankruptcy has turned out to be a massive event in financial history.

23rd September
written by simplelight

Others have weighed in on whether volatility should be considered an asset class. From the point of view of a long term investor it clearly doesn’t make sense to buy and hold volatility. (In that sense, it is the ultimate cyclical asset class and we should be glad we don’t live in a world of ever increasing volatility!). However, in terms of the diversification benefit for a portfolio, the VIX does exhibit low (and negative) correlation with many of the major asset classes. The table below shows the correlation matrix for major asset classes over the past 750 days, a period during which the VIX had negative correlation with US stocks and real estate and no correlation with European stocks. Notice, though, that a similar diversification benefit could probably have been achieved with a combination of treasuries and bonds.

Ishares Lehman Ti TIP                
Ishares Leh Agg F AGG 0.95              
Ishares Gsci Cmdt GSG 0.90 0.78            
Vanguard Sf Reit VNQ -0.78 -0.69 -0.69          
Ishares Msci E.M. EEM 0.56 0.68 0.52 -0.37        
Ishares Msci Eafe EFA -0.14 0.05 -0.14 0.25 0.70      
Vanguard Sm Cap E VB -0.54 -0.38 -0.47 0.63 0.25 0.75    
Vanguard Lg Cap E VV -0.32 -0.12 -0.32 0.39 0.56 0.94 0.89  
Cboe Volatility I ^VIX 0.78 0.81 0.60 -0.80 0.55 0.00 -0.39 -0.14

Note: this chart was generated on the AssetCorrelation website which is an excellent resource for monitoring the diversification of your own portfolio.

31st July
written by simplelight

Until recently, the best way for individuals to gain exposure to commodities was through exchange-traded index funds such as IGE. Unfortunately, the exposure was indirect as you were essentially investing in the equity of companies that dealt in commodities. In the case of IGE, you were mostly holding the stocks of oil-companies. As of 2008, there are better commodity index funds, such as GSG (the Goldman Sachs Commodity Index) which gives you direct exposure to a broad array of commodities. Even better, GSG exhibits less correlation with almost every asset class when compared to IGE.