From Al Filreis: Man Tries to Pay Bill with Spider Drawing
The Sports Guy on his favorite YouTube clip
Historical stock returns and the Graham P/E ratio
Timeline twins from Kottke, with some interesting comments following
The Atlas of the Real World
Showing posts with label money. Show all posts
Showing posts with label money. Show all posts
Friday, November 21, 2008
Thursday, November 13, 2008
Friday Five: Links to take you to the weekend in style
A little early this week, as I'll be offline tomorrow:
Harold McGee offers the most striking contribution to the turkey technique conversation I've seen in a long time. (My solution to the problem that the breast is always overcooked? Let the rest of the family eat it.)
Take your David Foster Wallace jauntily from 1987 or elegiacally from 2008. Steel your heart before clicking.
Michael Lewis on the end of the boom; this is an essential supplement to Liar's Poker and probably worthwhile if you haven't read LP.
Here's an unusually interesting entry on the groundbreaking blog of Paul DePodesta, the GM of the Padres, about the decisions regarding Brian Giles and Trevor Hoffman in the offseason.
And I can't quite leave politics behind yet: the cotton vote.
Harold McGee offers the most striking contribution to the turkey technique conversation I've seen in a long time. (My solution to the problem that the breast is always overcooked? Let the rest of the family eat it.)
Take your David Foster Wallace jauntily from 1987 or elegiacally from 2008. Steel your heart before clicking.
Michael Lewis on the end of the boom; this is an essential supplement to Liar's Poker and probably worthwhile if you haven't read LP.
Here's an unusually interesting entry on the groundbreaking blog of Paul DePodesta, the GM of the Padres, about the decisions regarding Brian Giles and Trevor Hoffman in the offseason.
And I can't quite leave politics behind yet: the cotton vote.
Friday, October 10, 2008
Friday Five: Links to take you to the weekend in style
Here is the five-year chart of the TED spread--that's essentially the difference between the rate banks use to lend to each other (on the high side) and essentially risk-free short term treasuries on the other. In other words, it's an indication of how much default risk banks perceive in other banks. The normal TED spread until 2007 was between 0.1% and 0.5%. As I write, it's 4.6%, up almost 10% today.
There's a cuss word at the end of this amateur political ad. The ad is funny, but I link to it because I wonder every cycle why more political ads don't work like this one. (I wonder seriously--I assume the political folks see some problem with this lighter approach.)
I hadn't realized that Tyler Cowen has a short version of his wonderful book chapter about choosing restaurants on this page of his dining guide site.
Many people have linked to George Packer's fascinating article on Ohio voters. I think there's an untold story to be told in the answer to a question the piece does not invite us to ask: why is Barbie Snodgrass making thousand-dollar mortgage payments? That amount buys a lot of house in Columbus if you're talking about a standard 30-year mortgage. (The loan amount would be a little shy of 200K--and reader, if that amount sounds small to you, be sure to check out rust belt house prices). Is this about predatory lending? A gimmick loan? Or is it a manifestation of American housing ambition, a working-class analog to what Michael Lewis is starting to write about?
If you don't get the Lewis reference, here you go: Michael Lewis's Mansion
There's a cuss word at the end of this amateur political ad. The ad is funny, but I link to it because I wonder every cycle why more political ads don't work like this one. (I wonder seriously--I assume the political folks see some problem with this lighter approach.)
I hadn't realized that Tyler Cowen has a short version of his wonderful book chapter about choosing restaurants on this page of his dining guide site.
Many people have linked to George Packer's fascinating article on Ohio voters. I think there's an untold story to be told in the answer to a question the piece does not invite us to ask: why is Barbie Snodgrass making thousand-dollar mortgage payments? That amount buys a lot of house in Columbus if you're talking about a standard 30-year mortgage. (The loan amount would be a little shy of 200K--and reader, if that amount sounds small to you, be sure to check out rust belt house prices). Is this about predatory lending? A gimmick loan? Or is it a manifestation of American housing ambition, a working-class analog to what Michael Lewis is starting to write about?
If you don't get the Lewis reference, here you go: Michael Lewis's Mansion
Monday, October 06, 2008
No-risk free money in the presidential betting markets
A couple of weeks ago, I wrote a couple of posts about the divergence between Intrade and fivethirtyeight.com in their estimates of the probable results of the upcoming Presidential election. In the second of those posts, I linked to Nate Silver's recognition that the betting markets themselves did not agree: Intrade consistently leans Republican relative to the Iowa Electronic Markets.
As it happens, I paid close attention to the two markets on Saturday, and I saw the prices converge, with the IEM probability of a Democratic victory steady around 71 and the Intrade probability drifting up to that level from the sixties. That evening, a hammer dropped: a huge, sudden sell order of the kind Nate had identified reinstated the Republican lean of the Intrade markets, and it has remained intact since, even growing. At this writing, the probability of a Democratic victory (which creates a slightly neater comparison than the Obama-only price) is this:
Intrade: 68.1 (ask 68.3)
IEM: 76.4 (bid 75.0)
That's spread of 8.3 points between the prices of the most current sales! (Incidentally, the Nate Silver model has the probability creeping closer to 90% now.) That spread is the kind of problem that arbitrage should be fixing, and I hope people who understand these markets better than I do can comment on why it's not. But here's how the arbitrage trade would work, and this is why I included the current ask (selling) price for Intrade and bid (buying) price for IEM as a more realistic estimate of what a trader could do right now.
The way the arbitrage trade works is that you short sell the commodity where it is priced high and buy shares where it is priced low. The principle is incredibly simple, although its application is often wickedly complicated: it's like buying a bag of peaches for eight dollars and then selling them for ten.
In this case, let's say you start by selling 100 DEM shares on IEM, where the price is higher. Buy low, sell high. (This is short selling, so you sell first and pledge to buy later; a short sell makes money if the price goes down.) At $75 each, that gives you $7500. At the same time, you buy 100 DEM shares on Intrade. at $68.30, that costs you $6830.
In a month, you're going to get the value of 100 Intrade DEM shares (the ones you bought) in exchange for the value of 100 IEM DEM shares (the ones you sold short). And this is the key: at that point, the values will necessarily be the same. Either all those shares are worth $100, or they're all worth nothing. Either the Democrats will have won, or they won't have won. The share values must converge.
So if Obama wins, you get $10000 for the 100 shares you bought on Intrade (now worth $100 each), which nets you $3170 ($10000 minus the original cost of $6830). That's balanced by your loss on the short sale of $2500 (buying back shares for $10000 that you sold for $7500). The net is $670.
And you get the same amount if McCain wins. In that case, you lose the $6830 you paid for the Obama shares, but you get to buy back your short sell for nothing, which means you keep the original $7500 you received by making the sale. The difference is again $670.
Your balance on November fifth, no matter who wins: $670.
That's a fantastic guaranteed return for a month, even if you add in the transaction costs, and even if you don't compare it with the current behavior of the equity markets.
So why on earth is this difference persisting? There seems to be a serious issue with market manipulation--as Nate suggested--or with some other kind of market inefficiency. My sense is that the problem is more with Intrade with IEM, which is important given that a lot of serious people, such as Greg Mankiw, use Intrade to represent the voice of betting markets as a whole. Something is not working as it should here.
Note: this post does not constitute investment advice. I am not a professional. If you make investments based on blog posts by English majors, well, you figure out the end of the sentence.
As it happens, I paid close attention to the two markets on Saturday, and I saw the prices converge, with the IEM probability of a Democratic victory steady around 71 and the Intrade probability drifting up to that level from the sixties. That evening, a hammer dropped: a huge, sudden sell order of the kind Nate had identified reinstated the Republican lean of the Intrade markets, and it has remained intact since, even growing. At this writing, the probability of a Democratic victory (which creates a slightly neater comparison than the Obama-only price) is this:
Intrade: 68.1 (ask 68.3)
IEM: 76.4 (bid 75.0)
That's spread of 8.3 points between the prices of the most current sales! (Incidentally, the Nate Silver model has the probability creeping closer to 90% now.) That spread is the kind of problem that arbitrage should be fixing, and I hope people who understand these markets better than I do can comment on why it's not. But here's how the arbitrage trade would work, and this is why I included the current ask (selling) price for Intrade and bid (buying) price for IEM as a more realistic estimate of what a trader could do right now.
The way the arbitrage trade works is that you short sell the commodity where it is priced high and buy shares where it is priced low. The principle is incredibly simple, although its application is often wickedly complicated: it's like buying a bag of peaches for eight dollars and then selling them for ten.
In this case, let's say you start by selling 100 DEM shares on IEM, where the price is higher. Buy low, sell high. (This is short selling, so you sell first and pledge to buy later; a short sell makes money if the price goes down.) At $75 each, that gives you $7500. At the same time, you buy 100 DEM shares on Intrade. at $68.30, that costs you $6830.
In a month, you're going to get the value of 100 Intrade DEM shares (the ones you bought) in exchange for the value of 100 IEM DEM shares (the ones you sold short). And this is the key: at that point, the values will necessarily be the same. Either all those shares are worth $100, or they're all worth nothing. Either the Democrats will have won, or they won't have won. The share values must converge.
So if Obama wins, you get $10000 for the 100 shares you bought on Intrade (now worth $100 each), which nets you $3170 ($10000 minus the original cost of $6830). That's balanced by your loss on the short sale of $2500 (buying back shares for $10000 that you sold for $7500). The net is $670.
And you get the same amount if McCain wins. In that case, you lose the $6830 you paid for the Obama shares, but you get to buy back your short sell for nothing, which means you keep the original $7500 you received by making the sale. The difference is again $670.
Your balance on November fifth, no matter who wins: $670.
That's a fantastic guaranteed return for a month, even if you add in the transaction costs, and even if you don't compare it with the current behavior of the equity markets.
So why on earth is this difference persisting? There seems to be a serious issue with market manipulation--as Nate suggested--or with some other kind of market inefficiency. My sense is that the problem is more with Intrade with IEM, which is important given that a lot of serious people, such as Greg Mankiw, use Intrade to represent the voice of betting markets as a whole. Something is not working as it should here.
Note: this post does not constitute investment advice. I am not a professional. If you make investments based on blog posts by English majors, well, you figure out the end of the sentence.
Tuesday, July 15, 2008
Book review: Thomas J. Stanley and William D. Danko, The Millionaire Next Door
The Millionaire Next Door
is one of the most interesting books about money you'll ever read, partly for the reasons the authors intend and partly for reasons they unwittingly reveal.
The book's primary insight involves the separation of income and wealth ("wealth" meaning net worth over a million dollars, a standard that may now be out of date). When people speak of the wealthy, they almost always define that category in terms of annual income, which we often infer from the visible signs of wealth, but Stanley and Danko reveal the limitations of that approach. Most millionaires, it turns out, are people who don't have the cars or houses or clothes we associate with rich people. Instead, they tend to be people with medium-high to high incomes whose habitual frugality lets them accumulate a lot of money. The book presents a series of case studies comparing people of similar ages and incomes who have different net worths: on one side are PAWs (prodigious accumulators of wealth), and on the other are UAWs (under-accumulators of wealth). Often, these differences come down to professional lifestyles: lawyers and doctors tend to be in communities where financial showiness is valued, for instance, while owners of blue-collar businesses actively avoid that showiness.
I had heard the broad outlines of this argument from a friend, so it was fascinating but not surprising to read the details. What really got my attention, however, was one of the case studies that compares two doctors, one saver and one spender, who have similar (very high, in this case) incomes. In a departure from the usual concerns of the book, the authors suddenly mention that the spender is very concerned about federal income tax rates, whereas the saver is not. The reasoning: the saver has a great deal of wealth separate from his annual income, and he lives well within his mean. The spender, on the other hand, regards extreme consumption as the sign of wealth, and he has so much debt from houses and cars that he needs almost every dollar of his huge income to keep pace with his consumption.
The book is written by anti-tax conservatives, as is sometimes explicit and routinely implicit in their framing of issues, so they don't dwell on this point. The implications, however, are clear. When people on the left talk about tax rates for "the wealthy," they equate wealth with income. That equation leads to the assumption that "the wealthy" aren't affected by an increase of a percentage point or two in the top marginal tax rate. What the book makes clear is that the wealthy in terms of net worth are almost entirely unaffected by small changes in the marginal tax rate, but there are a lot of wealthy people in terms of income who perceive themselves, at least, as facing fairly dramatic lifestyle changes based on those changes. And that's why--in addition to principled arguments--so many people who appear to be above economic worry are so passionately and personally opposed to even small marginal increases in tax rates.
The valuable thing about the book for liberals is that it's an analysis only conservatives would think to undertake: it examines only medium-high to high income earners to see how income does or does not become wealth. The results are sometimes mind-blowing, no matter your initial perspective.
is one of the most interesting books about money you'll ever read, partly for the reasons the authors intend and partly for reasons they unwittingly reveal.The book's primary insight involves the separation of income and wealth ("wealth" meaning net worth over a million dollars, a standard that may now be out of date). When people speak of the wealthy, they almost always define that category in terms of annual income, which we often infer from the visible signs of wealth, but Stanley and Danko reveal the limitations of that approach. Most millionaires, it turns out, are people who don't have the cars or houses or clothes we associate with rich people. Instead, they tend to be people with medium-high to high incomes whose habitual frugality lets them accumulate a lot of money. The book presents a series of case studies comparing people of similar ages and incomes who have different net worths: on one side are PAWs (prodigious accumulators of wealth), and on the other are UAWs (under-accumulators of wealth). Often, these differences come down to professional lifestyles: lawyers and doctors tend to be in communities where financial showiness is valued, for instance, while owners of blue-collar businesses actively avoid that showiness.
I had heard the broad outlines of this argument from a friend, so it was fascinating but not surprising to read the details. What really got my attention, however, was one of the case studies that compares two doctors, one saver and one spender, who have similar (very high, in this case) incomes. In a departure from the usual concerns of the book, the authors suddenly mention that the spender is very concerned about federal income tax rates, whereas the saver is not. The reasoning: the saver has a great deal of wealth separate from his annual income, and he lives well within his mean. The spender, on the other hand, regards extreme consumption as the sign of wealth, and he has so much debt from houses and cars that he needs almost every dollar of his huge income to keep pace with his consumption.
The book is written by anti-tax conservatives, as is sometimes explicit and routinely implicit in their framing of issues, so they don't dwell on this point. The implications, however, are clear. When people on the left talk about tax rates for "the wealthy," they equate wealth with income. That equation leads to the assumption that "the wealthy" aren't affected by an increase of a percentage point or two in the top marginal tax rate. What the book makes clear is that the wealthy in terms of net worth are almost entirely unaffected by small changes in the marginal tax rate, but there are a lot of wealthy people in terms of income who perceive themselves, at least, as facing fairly dramatic lifestyle changes based on those changes. And that's why--in addition to principled arguments--so many people who appear to be above economic worry are so passionately and personally opposed to even small marginal increases in tax rates.
The valuable thing about the book for liberals is that it's an analysis only conservatives would think to undertake: it examines only medium-high to high income earners to see how income does or does not become wealth. The results are sometimes mind-blowing, no matter your initial perspective.
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