Author: shyam

Book Review: Crashed

In Crashed: How a Decade of Financial Crises Changed the World (Amazon,) Adam Tooze gives us a chronological, blow-by-blow account of the 2008 Global Financial Crisis (GFC) and its after-effects.

As a financial history buff, I found the book fascinating, albeit a tad tedious with the details. It also reinforced my belief that you cannot take the politics out of the political-economy – i.e., the study of economics cannot be divorced from politics.

With prices accelerating toward annual increases of 14 percent in 1979, Volcker and the Fed decided that it was time to apply the brakes.

In June 1981 the prime lending rate touched 21 percent.

The result was to send a shuddering shock through both the American and the global economies. The dollar surged, as did unemployment. Inflation collapsed from 14.8 percent in March 1980 to 3 percent by 1983. In Britain this was the crisis with which the Thatcher government began. In Germany it would contribute to Schmidt’s unseating and his replacement by the conservative government of Helmut Kohl. France’s Socialist government under President François Mitterrand would be forced into line in 1983.

Crashed

The Chinese model gets a fair amount of ink and it helped fill some of the gaps I had in my understanding of how the Party, Policy and Politics are intertwined, local vs. central political power, etc.

The book also highlights the all too familiar role of bumbling researchers with errors in the models that unleash large social movements that lasts years after the corrigendum is published. Reinhart and Rogoff’s “Growth in a Time of Debt” lead to painful austerity in England, debt brakes in Germany and birthed the Tea Party in the US. No one wanted to hear later that the analysis was riddled with errors.

Recommendation: Skim.

Euclidean Distance for Pattern Matching

Most of us have learnt how to calculate the distance between 2 points on a plane in high school. The simplest one is called the Euclidean Distance – a pretty basic application of the Pythagorean Theorem. The concept can be extended to calculate the distance between to vectors. This is where it gets interesting.

Suppose you want to match a price series with another, ranking a rolling window by its Euclidean Distance is the fastest and simplest way of pattern matching.

For example, take the most recent 20-day VIX time-series and “match” it with a rolling window of historical 20-day VIX segments and sort it by its Euclidean Distance (ED.)

Here, the ED has dug up a segment from November-2010 as one of the top 5 matches. Take a closer look:

While not a perfect match, it “sort of” comes close.

Sometimes, a simple tool is good enough to get you 80% of the way. This is one of them.

Book Review: Merchants of Doubt

In Merchants of Doubt: How a Handful of Scientists Obscured the Truth on Issues from Tobacco Smoke to Climate Change (Amazon,) authors Oreskes and Conway describe how the Big-Tobacco’s efforts to obfuscate evidence against smoking founded an entire industry dedicated to spreading FUD against science.

History shows us clearly that science does not provide certainty. It does not provide proof. It only provides the consensus of experts, based on the organized accumulation and scrutiny of evidence.

There are always uncertainties in any live science, because science is a process of discovery.

The inherent uncertainties involved in the scientific exploration of a topic provides the opening for the Merchants of Doubt. By highlighting these uncertainties and engaging in relentless campaigns of doubt-mongering, these MoDs have twisted the scientific process and created an anti-science brigade.

With the rise of radio, television, and now the Internet, it sometimes seems that anyone can have their opinion heard, quoted, and repeated, whether it is true or false, sensible or ridiculous, fair-minded or malicious. The Internet has created an information hall of mirrors, where any claim, no matter how preposterous, can be multiplied indefinitely. And on the Internet, disinformation never dies.

Is it any wonder that there are people who still believe that the Earth is flat?

Recommendation: When you read this book along with This Is Not Propaganda, you’ll want to kill-off all social media/messaging companies and see yourself agreeing with the basic plot of Utopia. So, avoid, to preserve sanity.

Factors

The following articles were published on our freefloat newsletter.

Some portfolios you consistently ended up with higher returns, implying that there was something about the market, something systematic, that was driving them. What are these factors? Factors, Intro

Systematically accounting for excess returns became an academic sack race. Factors, The Famous 5

While fundamental factors play a role in explaining excess returns, technical factors cannot be ignored either. Thus, Momentum. While the market can be sliced-and-diced in many different ways, here’s a simple way to go about it: The All Star Backtest

Momentum portfolios are extremely volatile. But, is it possible that a portfolio of less volatile stocks out-perform the market? Ergo, the Low Volatility Anomaly.

Everybody wants to invest in “high quality” stocks. How does an investor go about measuring Quality?

Both Factor Rotation (buying what worked best in the past) and Multi-Factor (buying all factors) work. As long as you stick with it.

Book Review: Trade Wars Are Class Wars

In Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace (Amazon,) authors Matthew Klein and Michael Pettis argue that a handful of elites have captured the financial benefits of open global trade and finance. This has caused a global savings glut and a hunt for safe assets that has resulted in a series of boom-busts in American asset prices and an hollowing-out of its manufacturing base. These underlying income and wealth inequalities have manifested themselves as trade wars.

Excerpt:

Trade war is often presented as a conflict between countries. It is not: it is a conflict mainly between bankers and owners of financial assets on one side and ordinary households on the other—between the very rich and everyone else. Rising inequality has produced gluts of manufactured goods, job loss, and rising indebtedness. It is an economic and financial perversion of what global integration was supposed to achieve.

America’s openness to international trade and finance means that the rich in Europe, China, and the other major surplus economies can squeeze their workers and retirees in the confidence that they can always sell their wares, earn their profits, and park their savings in safe assets.

The world’s rich were able to benefit at the expense of the world’s workers and retirees because the interests of American financiers were complementary to the interests of Chinese and German industrialists. Both complemented the interests of the wealthiest throughout the world, even from the poorest countries.

The book is an easy read and anyone who is interested in understanding the current macro environment should read it.

Recommendation: Read it Now!