Thursday, November 13, 2014

Worth reading: Greenspan and Tett

This discussion, between Alan Greenspan and the brilliant Gillian Tett of the Financial Times, is well worth reading. It's an interview at the Council on Foreign Relations in New York two weeks ago.

The former Fed chairman comments on the difficulties he sees when the Fed needs to remove the easing it has applied. His comments on gold are maybe the most surprising of all. (He seems to love it.)

Surprising and thought-provoking stuff. I sent it to my clients recently.

(There is a video of the discussion online, too.)

Thursday, October 23, 2014

A Debate with Myself

Have the long-term, equilibrium valuation multiples of the stock market increased?

THESIS: in a fiat money world, inflation insurance is worth paying a premium for. This raises valuation multiples like the price/earnings ratio and q (price / replacement value). Deflation, which would hurt equities, is no longer much of a risk, now that it is so easy to create money.

ANTITHESIS: An arbitrage exists. If companies trade for more than it would cost to create them, which appears to be the case now, business people will start them, sell shares in public offerings, and pocket the difference. This is more apparent with the q ratio than price/earnings. And there is no limit to number of companies that can be created and sold off. Prices will get competed back down to replacement value (or in other words, the q ratio will tend back toward a value of 1.0).

SYNTHESIS: Fiat money creates the venture capital industry! or at least supports it.

Tuesday, September 30, 2014

Advice to a Younger Me

I sometimes try to imagine what, in my maturity, I would say to a younger me. What useful advice could the married-with-kids, 52-year-old Jon Shayne give to the me who was in college?

For one, I could encourage the younger me to trust my own instincts more, and to worry less about what others think.

Of course, that advice is easier to give than to follow.

For the most part, I have a hard time coming up with anything useful I could tell a younger me. But recently, I figured out something that might have been useful, back when. A truly insightful bit of advice that the me-of-today could have given to the Jon Shayne of the early 1980s.

When I was in college at Harvard, the course catalogue was very thick. It was a paper book of perhaps 350 pages. One of the courses was titled, "Compunications," with a p. My college roommate, John Rabinowitz, and I used to laugh about it. We never took the course; we were liberal arts students. We just noticed it in the catalogue. The name struck us as pretty ridiculous.

This was probably 1981 or '82. The course description said that computing and telecommunications were in the process of merging, so much so that it would soon no longer be useful to think of them as two separate fields. According to the catalogue pitch, we should think of them as one field: compunications. The logic of this was lost on me, because John and I were too busy chortling about how the word sounded.

What impresses me now is that the professor who created this course, whoever he or she was, was completely correct. None of us students had cell phones, nor personal computers. We still used land lines and typewriters at that point. But the professor apparently foresaw, in some sense at least, the internet and voice-over-IP telephony.

So my advice to the young me: you can pretty much ignore the whole course catalogue, except for "Compunications." It is not as silly as it sounds. Quite the contrary. Master it, and you will have a lot of fun, and will wind up owning a few islands in warm, sunny places.

Although I guess this rhymes with the advice, "Plastics," given to Dustin Hoffman's character in The Graduate (1967).

Is there a moral here? Well, perhaps only that outlandish ideas are not necessarily bad. They are sometimes brilliant.

Friday, August 15, 2014

Quote of the Day

"Central bankers have had enormous responsibilities thrust on them to compensate, essentially, for the failings of the political system. And my worry is we don’t have sufficient tools to do that, but we’re not willing to say it. And, as a result, we push as hard as we can on the existing tools, and they may create more risk in the system."

-- Raghuram Rajan, Governor of the Reserve Bank of India. In other words, he runs India's central bank. The quote is from this interview with him in the FT today (registration may be required). He used to be an economist at the University of Chicago's business school, and is former chief economist of the IMF.

Rajan is famous for a prescient 2005 paper, "Has Financial Development Made the World Riskier?" Larry Summers famously derided him when Rajan presented the paper at the 2005 Jackson Hole conference, but Rajan got the last laugh. (I love stories in which nice guys finish first.)

Friday, July 25, 2014

How to Reduce the Volatility of Your Stock Portfolio, in Five Words

It's easy: don't look at the prices.

I was reading a piece about investing in farmland. The measured volatility of returns on land investments is very low compared to stocks, because you only get prices for land when you appraise it. And you don't do that very often.

Hence, my idea, which is surely worthy of a Nobel Prize, or at least a MacArthur Foundation genius grant, on how to reduce stock market volatility.

Of course, you can afford not to look only if you have not taken out a margin loan. (And that is one more reason not to take out a margin loan.)

I'm not going to hold my breath waiting for the call from Sweden.

Thursday, July 24, 2014

Shadow Banking, Defined

Matt Levine gives a useful definition of "shadow banking" in a recent Bloomberg column:
Roughly speaking, "shadow banking" refers to the parts of the world that are regulated according to the capital markets view -- lots of disclosure regulation, much less capital-and-risk regulation -- but treated by their investors more according to the banking view, where the customers try not to think too hard about the risks. You can see why this would be scary: If regulators aren't worrying about the risks (it's not a bank!), and investors aren't worrying about the risks (ehhhh it's a bank!), then ... no one is worrying about the risks? That seems bad.
Levine's column is on money market funds.

Shades of Donald Rumseld, known knowns, and unknown unknowns. It's o.k. to have a financial product that is regulated. It is also o.k. to have one that is unregulated, and known to be unregulated. But beware the product that is unregulated, but thought by investors to be regulated. That is the problem with retail money market funds.

Money market fund share prices should float, even for individual investors. Stable values should be the province of regulated banks, not mutual funds.

Thursday, June 5, 2014

Recommended Reading

Andrew Smithers is blogging some very good material on stock market valuation at the website of the Financial Times.

(There is no charge to read the Smithers FT blog, but you do have to register. It is well worth it.)