Author: shyam

Whenever there is a new piece of technology, finance figures out a way to butcher it. Using social media for sentiment analysis is a great tool for manufacturers who don’t sell directly to the consumer to get advance warnings of shifting tastes or possible product recalls. If you look at the lead times between when the product is boxed and shipped to the retailer and when sales turnover numbers make their way back to the manufacturer, twitter is a god send of an early warning system. For example, it makes sense for a company like P&G to invest in social media monitoring tools to make sure that a new fragrance they released into the market is not met with backlash that spirals out of control.

However, I have seen a significant uptick in data vendors pushing social media sentiment analysis tools onto traders. Now traders can react to twitter sentiment in real time. Does it really make sense or did we just find a new way to lose money?

First, do investors really know how to gauge the impact of bad publicity on the stock price? For example, if P&G released a purfume that people on twitter hated, should investors really care and by how much?

Second, the stock markets are reflexive. Investors will say a lot of nice things about a company whose stock is going up and will start finding faults with it when it starts going down. You don’t need twitter to tell you that.

Third, does it really matter what they say? For a day-trader, the order-book summarizes how others are voting, in real-time, with their own money, on where the stock should trade. For investors, daily or weekly charts neatly summarize the sentiment of people willing to bet their capital, i.e., people who put their money where their mouths are.

Fourth, it only makes sense if you get this news ahead of everyone else who is going to react the same say as you did. For example, Reuters releases the University of Michigan Surveys of Consumers to “ultra low-latency” subscribers 2 seconds before it is made widely available. Since you might expect all investors watching this news to react the same way, those 2 extra seconds allow you the front-run the “muppets”, so to speak. But if only you have the news, and nobody else cares about it or have differing opinions on how it is going to impact the stock, then it makes no sense for you to have it.

And lastly, remember this: the market is the news.

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“I don’t gamble. I only invest in gold.”

When I was growing up, nobody had heard of “Akshaya Tritiya.” And then, perhaps borrowing a page from how Hallmark created Valentine’s Day, jewelers have turned it into the most auspicious day to buy gold. Have people actually stepped back and asked themselves why they are partaking in this madness?

Is Gold money? No.

Try paying for your morning coffee with bullion and be prepare to be astounded at the discount you are offered on your gold. Not only is gold not money in a disaster scenario – it is not even wealth! People will hunger for food, water, and fuel – not gold.

Is Gold a good disaster trade? Only if disaster hits you and spares everybody else. From  Dubai’s blow-up to the Grexit that wasn’t to the almost-collapse of the Euro Zone to the Arab Spring to the death of Andy Rooney, gold was the first thing to fall as investors rushed to sell whatever they could.

Back in 2010, The Economist had warned: the traditional markets for gold cannot be expected to pick up the slack if rich-world investors’ appetite should pall. And this is exactly what Indian investors need to keep in mind when they use anecdotal evidence to gloss over the fact that at the end of the day, gold is just like any other commodity. And it maybe the ultimate Greater Fool trade.

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In 2010, a pair of Harvard economists published a paper, “Growth in a Time of Debt” that concluded that countries with a debt exceeding 90% of their annual GDP experienced slower growth than their thriftier peers. It was a statistic to which pro-austerity policymakers could cling and Germany, with a “never again” attitude towards Weimar Republic era hyperinflation, got much of Europe to sign-off on austerity to obtain bail-out funds.

However, biggest problem with austerity is that it can potentially kick-off a deflationary spiral that might actually increase indebtedness. And the latest euro-zone stat is proof of that: In the euro area the government debt to GDP ratio increased from 87.3% at the end of 2011 to 90.6% at the end of 2012. Besides, how is growth going to come about if both the public and private sectors contract at the same time?

The latest manufacturing PMI numbers are showing that the slow-down has now spread to the “core” Euro-zone economies. “The renewed decline in Germany will also raise fears that the region’s largest growth engine has moved into reverse, thereby acting as a drag on the region at the same time as particularly steep downturns persist in France, Italy and Spain.”

Bill Gross, of PIMCO fame, who had once warned that UK debt levels were too high, leaving gilts “resting on a bed of nitroglycerine” has recently changed his tune: “The UK and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not. You’ve got to spend money.”

And last week, Reinhart and Rogoff’s most famous finding has been debunked by a 28-year-old student. Earlier this month, Thomas Herndon, a graduate in the economics department at Amherst College in Massachusetts, found that they had made fundamental mathematical errors in the study – and all because of a flubbed Excel spreadsheet.

Will Europe’s policy makers change their stance and resort to a looser monetary policy and ease up on the austerity principle? Markets in europe (London +1.88%, Germany +2.23%, France +3.14%) started rallying as soon as the dismal PMI numbers came in – at least they seem to believe that the liquidity spigot is soon going to be let loose.

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Atanu Dey has an interesting post where he outlines the three lessons of development economics:

1. Economic policies matter
2. The objectives of the policymakers matter in the choice of economic policies
3. The public determines what policies the politicians choose

He concludes:

The problem is that the general population does not know the basics of good economic policies. That’s the great challenge we face.

 

People need to know because if they did know, the policymakers would know that they cannot fool the public any more of their self-serving policies. That would bring about the conditions for the policymakers to choose good policies.

However, I feel that decades of socialism has corrupted the Indian soul. Deep within us, we know that current policies are setup to enrich those in power. And we also know what is to be done. But we don’t force our policymakers to make those changes because we, as a nation, are morally bankrupt. We are happy fighting between ourselves for the scraps that are thrown at us. And secretly, we all want the dole.

Source: Three Lessons of Development Economics, or Why Utsav Mitra is Mistaken

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