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Sunday, May 6, 2012


So Friday the 4th of May, U.S. Treasuries rallied again.  Investors heard that payrolls rose a very small amount (~115,000) while expectations were 50% higher.  This meant that panic ensued in the markets and investors took the “risk-off” response and accordingly ran into U.S., German and Japanese government bonds. 

Now think about this, U.S. Treasury yields are below the Federal Reserves stated inflation target of 2%.  Think of inflation merely as another way of saying “U.S. dollar debasement”.    This means that real yields are negative where real yield is the return after inflation.  As of this writing, 2-year note yields 0.26%, 5-year note yields are 0.78% and 30-year yields are 3.07%.  But, and here is the kicker, this is not just an American phenomena.  German bond (the “Bund”) 10-year yields set a record low hitting 1.58% and Japanese bonds 10-year yield is a lowly 0.89% as pension funds, hedge funds, mutual funds and plain old mom and pop funds bought those too. 

Remember that bond yields move inversely to price so that if their yields are hitting lows, the prices of the bonds are rising due to this demand.   So, considering the U.S. debt and annual budget deficit sizes, along with Japanese massive government debt, along with the German situation of the Eurozone, these strong demands for sovereign debt are a testament for really how lousy things are.    Nobody is buying these bonds for their yield, they’re making purchases of government debt in spite of it.  They buy them simply for wealth preservation because they’re scared wherever else they put their money it’s going to lose value (i.e. read, “considerable value”).  This means they’ll take negative returns on their money because at a minimum they’ll get back their principle, though they lose the time value of their money.  They’ll do this because they’ll take a “guarantee” of a small loss over the uncertainty associated with large losses.  Even if it’s costly in real terms, they trust that the U.S, German and Japanese governments will not default.  Now that’s a scary outcome!

Saturday, February 11, 2012

Risk Forecasting in an Uncertain World.

With the current situation in the Eurozone combined with the increasing percentage of revenue coming from overseas among the largest stocks in the world, there is a simultaneous increase in currency risk for many companies. This trend translates into increasing currency risk for asset managers also, and one example concerns the increased risk for GIIPS-country companies. For example, suppose you are a publically-traded importer of Korean goods located in Italy and you suddenly find your stock trading in Lira, while your debt is still denominated in Euros. In this scenario, the Lira would be devaluing relative to the Won and Euro, and you’re going to have to pay more for the Korean import items, while your debt service costs are going up.  This means business and total risks are increasing because there is a new currency exposure present. This increased volatility should result in increasing market risk and increasing tracking error to one’s portfolio. We’ll examine options for measuring and dealing with these kinds of risks in one’s portfolio and offer a perspective on global risk estimation and stress-testing.

Above is the link to the recording!

Tuesday, January 10, 2012

Do Gun Laws Influence Crime Rates?

It’s with much chagrin that I read in the WSJ rather regularly comments from people on gun laws.  That is, they are either for or against them based on their views and sometimes suspect empirical evidence to support their view.  However, in their excellent book “Freakonomics” (Harper Perennial, 2005) Steven Levitt and Stephen Dubner make a convincing case that the reason violent crime has drastically lowered from the conditions of the 1980’s has to do with Roe vs. Wade and the emergence of unwanted children not being born.  Hence their conclusion, and I’ve seen nobody argue with evidence to the contrary, that abortion legalization has had an unexpected result of lowering violent crime. 
To quote Levitt and Dubner:
In the early 1990s, just as the first cohort of children born after Roe v. Wade was hitting its late teen years — the years during which young men enter their criminal prime — the rate of crime began to fall. What this cohort was missing, of course, were the children who stood the greatest chance of becoming criminals. And the crime rate continued to fall as an entire generation came of age minus the children whose mothers had not wanted to bring a child into the world. Legalized abortion led to less unwantedness; unwantedness leads to high crime; legalized abortion, therefore, led to less crime.

Now when I read Dave Culver (Letters, Dec 28th) argue that it’s the issuance of “concealed carry” that’s responsible for lowered crime rates versus Richard Reay (Letters, January 10th) argument that, no it’s better police-ing, I’d argue they both miss the mark in explaining the result of lower crime nowadays.  The chart below was created from the FBI’s website ( accessed January 10th).  Here I chose eight states with relaxed gun laws on the left.  These eight are Alaska, Arizona, New Mexico, Colorado, Florida, North Carolina, Texas and Vermont.  On the right I show three more highly restrictive states when it comes to gun laws, those states that represent ideal gun laws from the perspective of most anti-gun organizations, those states of Illinois, California and New York.
The bars represent the murder and non-negligent manslaughter rate of 100,000 people from 1990 to 2009 from the FBI database.  This is a subset of violent crime, so rape, robbery and aggravated assault are not included, though the results are similar.

From this chart, it’s very obvious what occurred in almost all the datasets except Vermont, that around 1994 or so, violent crime fell and it fell dramatically as a percentage of past rates.  It more than halved and those states with larger populations, those states where there might be expected to be larger poor populations, more ghetto, more of their population living in situations where un-wanted pregnancies would likely occur (FL, NC, TX, IL, CA and NY) had the largest drops.  These are the states with large cities with large urban poor population where the effects of abortion would be expected to have a higher impact.  Levitt and Dubner’s conclusions are from looking at every state in their well-written book.  Here I just chose to examine those states of obvious consequence. 
Though I’m not a supporter of government supplied abortion, nor do I believe that more gun laws will lower crime further, it’s difficult to argue a major contributor to lower violent crime these days is due to the legalization of abortion under Roe vs. Wade in 1973, for just about the time those kids who “would have been born” who weren’t were reaching their late teens and early 20’s, violent crime begins to fall. 
In fact the next graph is the average of this murder rate from 1960 until 2009 for the 8 relaxed gun law states versus the 3 more stringent gun law states of CA, NY and IL.   From this chart, the higher crime rates of CA, NY and IL standout through the 80’s right up to the early 90’s and rapidly fall off from there.  However, what is also easily seen is that those states with more relaxed gun laws also had a similar fall-off of violent crime though not as dramatic.  This data also debunks the myth that concealed carry laws contribute to higher crime rates, a concept the anti-gun lobby would tend to assert.  We see violent crime rates falling nationwide across all states in this FBI dataset. 
What I believe is the real cause of violent crime has to do more with the culture of the urban poor where the criminal element and anti-social behavior is elevated to celebrity status.  It’s not politically correct to dwell on this cause however because that involves calling rap and hip-hop culture bad for the environment and in doing so one incurs being labeled a racist.  Moreover changing the culture of our inner cities is much more difficult than passing a new gun law but deals with the heart of the issue that legalized abortion addresses somewhat.  Lastly, when the only positive role model for the inner city community, so celebrated in that culture, are sport celebrities (many of whom model the exact culture that leads to violence) or musicians (in which case many times also is associated with a culture of violence), violence will not be reduced further.

To change the U.S. inner cities from being the purveyors of violence that they are, involves changing the inner city culture so that being a chemist, math teacher, accountant and banker resides at the same level as those choices do say, in Asian immigrant culture for instance.  Ghetto culture thrives on violence and is celebrated among the youth.  That most of those states with relaxed gun-laws do not have large inner city urban culture is a major reason they have less violent crime generally (for example Vermont, Alaska, Arizona etc.)  Additionally, this also means relaxing the state gun laws to allow concealed carry in NY, CA and IL will not increase crime any more than tightening gun restrictions from their current status will reduce violent crime.  Violent crime is a symptom of the inner city culture, not a symptom of the current suite of gun-laws applied in varying ways across the U.S.