Gasoline versus oil

According to Gasbuddy, around May 1^st (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

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

Chile (like many other) is a country of contradictions. The latest is this.

Since the return to democracy, (1989),  4 left wing governments have cheerfully followed the most conservative (free markets) of economic policies . The results speak for themselves, look at per capita income growth and poverty reduction rates.

During the left presidencies, (Aylwin, Frei, Lagos and Bachelet) people seemed to be happy. No government mistake (see transantiago) or corruption scandal created any significant anger. People seemed content.

In the first years of Pinera’s government and despite a devastating earthquake, people have come to the streets. To demand everything from clean energy to free education. There are crowded events and marches almost every week.

The irony is that Pinera has been more populist than any government in the left. See for example the proposed maternity leave or bonus payments.

Growing old

Every chance I get I tell my students that they will be the first generation with a bimodal death age. Those who are wealthy, take care of themselves eat well and exercise will live to 120 (I would stress wealth and eating habits)  and those who don’t… well… diabetes, cholesterol will make sure they die at 50 – 60. I finally run across a piece that provides evidence of it. It is related to retirement,  but worth reading.

I challenge my students to think about career paths when they will have to work 100 years. It becomes important to do something that you enjoy.  Who could stand to be a lawyer or banker for 80 years?  Who could be good at some trade for so long?

 I also challenge my students to think about graduate school l when they are not 30 but 55 or 65.

I want to challenge Universities about the same. At a time when many schools are rethinking themselves,  are we ready to attract and receive the new mature-adult student? Do we know what they need to know?

Can we learn from the nonprofit sector?

As I emerge from my summer break, I wanted to share something that a little out of the scope of this blog, but close to my heart and research.

Many suggest that the nonprofit sector is plagued witth inefficiencies , lack of technology and know how. My research and that of other academics suggests otherwise, for this reason I want to bring your attention to Mother Teresa, CEO by Bose and Faust. They suggest we can...

Australian Dollar and IRP

My students frequently ask me about Interest Rate Parity in what they call “the real world”. They are eager to know if this arbitrage blah blah can help them make money. The Australian dollar is on fire, needless to mention its New Zealand cousin. Take a look at the following chart (from yahoo finance). For the last 3 months the AUD and NZD have risen 6 and 12 percent respectively against the dollar. (Nice return!) During the same time frame an investment in the SP&500 would have lost value (2 percent), while the Euro was barely above 0.

According to fxstreet.com the interest rate in Australia has been 4.75% since November 2010 while the FED has set the rate in the US at 0.25% since December of 2008. Tempting… isn’t it? One should borrow in the USD and deposit (lend) that money in AUD.

So what if a student had borrowed $1,000,000 and used the money to buy AUD back in March 2011?

On March 21^st the student would have borrowed $1,000,000 at 0.25% and bought Aussies at the going exchange rate. According to Oanda, the bid /ask rates were 1.0037/47 AUD to get 1 USD. Therefore USD1,000,000 would have bought AUD1,003,700. The student would have the deposited the money in an Australian Bank earning 4.75%. At the end of the 3 months this is what we have.

a)      Owed to American Bank: USD 1,000,000 x (1+(0.0025/4))=$1,000,625, this needs to be paid on June 21^st .(today)

b)      To be received from Australian Bank: AUD1,003,700 x (1+(0.0475/4))=AUD1,015,618.94, which would have to be exchanged at today’s rate. Again, according to Oanda, the bid /ask rates are 0.9465/67 AUD per 1 USD. Our student would get a total of  resulting in a total of USD1,072,799.13

Our student would now pay the loan to US bank and clear USD72,174 in profit. Not bad... I don't even want to do the numbers for the NZD. Not bad but not riskless either.

Here is when I break the news. Our student spent 3 months with a long open position on the AUD. It could have gone either way. To lock the exit of the position we must have bought a forward contract to purchase the USD back... and that is the end of the profit.

Too small to fail and foreign exchange

 

I grew up listening to the following saying… When the US economy catches a cold, the developing world catches pneumonia. Forget about that. It is the reverse what holds.

Forget about the behemoth corporations so big and influential that their demise could compromise the entire financial system of the planet.

   

How about too small to fail? How is it possible that the world markets are so obsessed with one country; Greece which represents a mere 0.44% of the world’s GDP? Even if we add Portugal and Ireland we only get 1.06% of the world’s GDP…

You may be thinking, well the markets are really worried about Spain, the big daddy of the PIGS… Let’s add it and we reach a still minuscule 3.07% of world’s GDP.

When was the last time that Australia (same size as Spain) threatened to derail world's financial system.

  According to reports, today between 20- 40 thousand protesters took the street s of Athens and clashed against the police. These protesters have immense power over 7 billion fellow human beings.

Think about it. Too small to fail is the new too big to fail.

The only difference… the Euro and its artificial imbalances. Forex market would have corrected this issue long time ago.