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Wednesday, September 28, 2011

A great take on the Euro crisis

After so many not so good pieces comes this one from BBC's Paul Mason. kudos to him.

Take a look for yourself

A loose canon

Sunday, September 25, 2011

Debt to GDP does not matter

Debt to GDP does not matter

For too long we have focused on a simple and simplistic indicator to say that the PIIGS (Portugal, Ireland, Italy, Greece and Spain) and everybody else are doomed. Further, these countries can't grow their GDPs so the logic conclusion is that they will never pay...

My personal Debt to GDP ratio is about 250% and nobody seems to care... My bank does not, neither do I. My mortgage payment is only 20% of my income. I comfortably fulfill my obligations with my current income level.

The tricks are these:

I did not buy my house using my credit card, rather a 30 year fixed rate mortgage.
My house is collateral

I am pretty sure that my case is rather ordinary, so if millions of people can afford leverage 3 times their incomes, why can't a country?

Debt terms are as relevant as debt levels, why don't journalist bring this up?

The real question then is
Can a country pledge collateral?

Could Jack Welch or Warren Buffet be better presidents?

Not unlike Americans, Chileans were disenchanted with the political class 2 years ago. In the last election Mr. Sebastian Pinera, a very successful entrepreneur run and won the highest office with the promise of managing the country as a corporation. Better administration. Less waste, more flexible decision making, more efficiency... what is not to like?

Could a Jack Welch or Warren Buffet be better for the US than a professional politician?

The Chilean experience seems to say no. Chile boasts the highest growth rate post recession in LATAM and very low unemployment.

Mr. Pinera's approval rate... under 30%.

Be careful what you wish for...

See The limits of a superman by John Paul Rathbone for more on the topic

Tuesday, September 20, 2011

A Lesson to the US on Infrastructure

As we are reminded by our authorities over and over, the US is in great need to upgrade its infrastructure. The choices we are given are taxes or "no" (as in we will just not do it).

With the World Cup (soccer) and the Olympics around the corner, Brazil's needs are so much greater than the problems we face. How will they do it? Rousneff should be jealous of Obama's problems.

Not quite.

Brazilians are much more pragmatic. They have just auctioned the rights to build and operate new "Sao Goncalo do Amarante" airport. A Brazil-Argentine consortium has 3 years to build an airport and then 25 years to operate it. Read article here.

How much will Brazilian tax payers pay for this?
Nothing, the consortium actually paid the government for the rights.

Are Brazilian unique?
Not quite, Argentina and Chile have had privately operated major airports and ports for many years. In Mexico, consortiums that operate roads are publicly traded companies

Who pays? Those who use airports and roads and ports.

Imagine the possibilities.

Friday, September 16, 2011

A bonus for Adoboli?

In the next days, Mr. Adoboli will undoubtedly be portrayed as a villain by his former bosses and the press. Regardless of his role in this debacle, I wonder what would have happened if Adoboli had been right? He takes on unauthorized or un-scrutinized positions at the prop desk and he makes 2b in profits. I posed this question to my students who agreed that he would have gotten a promotion, big bonus and a genius status.
So the difference between villain and genius is random
I think they are right.

Wednesday, September 14, 2011

Gasoline versus oil

According to Gasbuddy, around May 1st (Labor day in most countries) crude oil reached $113/barrel. A week later it was down 14% to around 97. See chart below.  By mid August, a barrel of oil was trading around $79, a 30% drop since May.  Not bad.

Gasoline prices however have not followed. On average, we were paying $3.97 per gallon in early May while $3.58 in mid August, for a drop of merely 10%.

Someone is making money

Friday, September 2, 2011

CAPM and Ouija Board

How am I going to use the CAPM now?

Gillian Tett from the Financial Times rightfully argues that we have arrived to a world without a risk-free rate. Yes, no rf. In fact she points to Credit Default Swaps being more expensive to the US government than 70 American companies. It is not an issue where to find rf, but whether if it is relevant. Does rf exist? We may come to the conclusion that there no such thing as rf. To make things more complicated, another pivotal assumption in the field: market efficiency has a shrinking following.  

It is time for academia to rethink its teaching of finance. Personally I will have a hard time teaching the CAPM this year.

Adieu CAPM, welcome the Ouija board