Dollars and Jens
Tuesday, September 26, 2006
Predictions are Difficult
If tales of professional investment analysts making mistakes fills you with sympathetic humility, read this. If they make you feel smug because they're not about you, don't read that. You need more humility, especially if it isn't your natural reaction.

Thursday, September 21, 2006
inflation expectations
Incidentally, the spread between five year nominal-interest-rate bonds and five year real-interest-rate bonds narrowed further today, and is now at a multi-year low.

Sustaining profits
Imagine you're a sprinter, looking for an edge in your race. Imagine Nike designs a miracle shoe that can shave a full second off your 400-meter time. And it's a bargain at $150 a pair! How many races will you win next year owing to this great technological advance? Five? Ten? As many as you enter?

How about zero?

That's the correct answer, because if this shoe can shave a second off your time, it can do the same for your competitors. And you can bet that everyone will pony up the $150.
Worth noting is that this doesn't make buying the shoe optional; you have to buy it just to keep up.

Similarly, as Seth Jayson goes on to write about companies constantly improving their systems but,
with everyone generating similar cost savings and passing them onto the customers to try to boost sales, the only likely beneficiaries would be ... the customers!
that doesn't mean they can forego the improvements; they're mandatory, but won't lead to great new profits.

A lot of economic papers lean heavily and without much circumspection on the axiom that profits, in a competitive environment, get competed away. The first thing to note here is that economists don't count a fair rate of return on assets to be "profit", even though accountants (and the IRS) do — if a company can't produce enough in accounting profits to generate a fair return on capital, that capital hasn't been put to its best use, any more than workers are well deployed if a company couldn't afford to pay them what they could get elsewhere. The next big caveat is that markets aren't quite as competitive in the real world as they are in some of these papers (though, on a large scale, they're closer than most people think, and closer than they are on a small scale) — companies acquire loyal customers, or they create a brand, or they find some other way of preventing other companies from competing away their profits. Mostly, they find a way of doing something better (in some way) than anyone else can do it. In fact, this is almost exactly what the (economic) profit of a large company will end up being — it will be the extent to which that company is better at doing what it does than any potential competitor.

Along these lines, of thinking how competitors and other market participants will respond as the markets approach an equilibrium, here's an article on Saturn's no-haggle policy. I don't know much about the car industry per se, or whether this prediction is borne out, but it seems to me the natural thing to expect is that, if customers are required to pay MSRP at Saturn, while they will expect to pay less than MSRP somewhere else, then Saturn presumably has to make MSRP lower than they would if customers were going to haggle. There seems to be waste in terms of the customer's time and the salesman's time in haggling, so it seems it should be more efficient simply to post the actual price that a customer is expected to pay.

I have found it a general principle in economics, though, that things that look like waste — particularly when they look like rent-seeking — often serve some information-discovery purpose, and it may well be that haggling serves such a purpose. It may lead to customers to whom a particular car is more valuable paying more than a customer to whom it isn't quite worth what the average buyer would pay, but is still more than the unit cost of the car — if every car buyer were like that, it wouldn't be worth putting resources into building a factory and so on, but if you can get the gross profit from which to pay for the factory more readily by getting more of it from some customers than from others, then it may on the whole enhance overall economic efficiency for bargaining processes to tease that out. So I'm not too quick to jump to a clear conclusion that one system is always and definitely better than the other, though I have to say that Saturn's certainly appeals more to me as a potential customer.

Wednesday, September 20, 2006
David Friedman's Price Theory
One of my favoritest books in the whole world is on-line!

You knew I was a nerd...

fed funds
The fed has a meeting tomorrow, and, just in time, this morning the producers' price index was announced, and the core level has dropped (dramatically) for the second month in a row. Bonds rallied, and the difference between nominal and real yields is the lowest it's been since last December, and it's nearly the lowest it's been since we were talking about deflation.

In short, if the Fed raises rates tomorrow, it's time to leave the country.

Tuesday, September 19, 2006
THE Russian Government has revoked the environmental approval for phase two of the $20 billion (£10.6 billion) Sakhalin-2 oil and gas project in the far east of Russia, in which Royal Dutch Shell is the main investor. Analysts say that the move is an attempt by the Kremlin to force Shell to sell part of its stake in the project to the state-owned Gazprom.
Ask me how eager I am to invest in Russia.

Mind you, it could be above board. But this is Russia we're talking about.

Thursday, September 14, 2006
What Economists are Good For
Opportunity cost:
We live in an age of rampant populism. As the media have become more commercial and less idealistic they have turned increasingly to reinforcing their audience's prejudices and telling people what they want to hear.

Isn't it shocking about the high price of petrol! Why doesn't the Government do something? What about that terrible Reserve Bank raising interest rates! And why doesn't the greedy Government cut taxes?

The politicians have become more populist, too. With their greater use of focus groups and opinion polls, the art of politics has become more scientific - that is, more efficient at knowing exactly what people want to hear and at aiming policies at the swinging voter, not the party faithful.

Because they're better-informed about what the public's thinking, politicians are more inclined to follow rather than lead and to pander to ignorance rather than educate.

Not so the economists, few of whom ever run for office. Everything about their training makes them want to blurt out dismal truths — and they rarely resist the urge.
þ Mark Thoma, who synopsizes less sparingly.

Tuesday, September 12, 2006
interest rates
Since the close on August 14 — not quite a month ago — the yield on 5 year dollar-notional treasury notes has dropped 25 basis points, while the yield on 5 year TIPS has increased 10 basis points. Since the last hike in the fed funds target, the nominal rate has dropped 50 basis points, with two thirds of that coming off the inflation spread.

If the federal reserve continues to hold short-term interest rates up while the neutral rate — supposing we believe in such a thing — drops, to what extent is it the case that the fed has ceased its tightening campaign?

Friday, September 01, 2006
Jackson Hole
In case you weren't able to make it to Jackson Hole yourself, the papers are online.

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