This is what interests me

Today was generally a very good. With the exception of my history class where my enjoyment of two interesting movies about Stalin and Hitler was diminished because of the girl who sat behind me and horribly smelled after previous night’s cheap beer, the day went really well.

It turns out that my general frustration from ES can be alleviated if one makes a strong case for himself.  On Monday I went to talk to the El Professore to voice my concerns about the class as such, specifically about the faulty method of testing, and while I did not manage to persuade him to change it, articulating my determination clearly affected the test and assignment grades. So once again I’m on the road towards 4.0.

And then I picked up the latest issue of Wired. Normally I would pass this magazine due to lack of free time (I generally only read economic magazines and American Scientist or New Scientist, if either features anything about genetics or evolution in general), but this time the cover drew my attention. The main story of the issue is “Recipe for Disaster: The Formula That Killed Wall Street” (available online here) and it explains what went wrong with the risk assertion.

In late 1990s a new formula for determining probability of default was created; it is called Gaussian copula and looks like this:

The explanation of individual parts is available in the article.

The formula became revolutionary because it was based on correlation of default values of the two securities based on current prices at the CDS (Credit Default Swap, an insurance against default) market. So instead of looking up and analyzing decades’ worth of empirical data, the security could be priced almost instantly based on the current market price.

Unfortunately, the model is flawed. By bundling various types of underlying assets into one security (CDO, Collateralized Debt Obligation), the probabilities became distorted, and for simplicity only the promising were taken into consideration. And then everything went sour.

Anyways, the mix of computer science and math that turns out to be finance (or just economics) is what I immensely enjoy. Last night I finished a critique for my Microeconomics class, and I was almost mesmerized by the analysis and conclusions of my underlying article on the price sensitivity of Dutch health insurance.

I cannot wait for this semester to be over. Not because I did not enjoy my classes (CS and Econ are great and so is History and Math, ES is a different story), but I feel that I spend most of my time and effort on classes that are of marginal importance to me (Hist and ES), and that prevents me from going deeper into CS and Econ. But next semester will be different — I am currently aiming to take two CS classes and Intermediate Macroeconomics and Finance. If only I could squeeze a class on probability in there…

On Obama’s hopes of taxing windfall profits

Mr. Obama didn’t bother to define “reasonable,” and neither did Dick Durbin, the second-ranking Senate Democrat, when he recently declared that “The oil companies need to know that there is a limit on how much profit they can take in this economy.” Really? This extraordinary redefinition of free-market success could use some parsing.

Although the WSJ’s opinion is not from today (it was published on Monday), it nonetheless lucidly explains the questionable nature of Mr Obama’s latest economic proposals. In one he suggests giving Americans a stimulus check in the value ranging from $500 to $1000 (depending on circumstances) which should be paid for from the proceeds of a new, so called windfall, tax imposed on Big Oil. Big Oil is a group of America’s largest oil companies and is often a subject of criticism for its notably large nominal profits; its most prominent member, Exxon-Mobile, suffered a severe criticism last week when it unveiled its quarterly financial results that showed the company earned $11.8 billion, the largest profit ever. This fact allowed Obama to find a persuasive scapegoat in his agenda of striving to help average people; he proposed tax every oil company which profits grow by more than 10% and which doesn’t “sufficiently invest in exploration of renewable energy sources” by 25%. I call this ludicrous and am further convinced that Obama is nothing but a prime-time celebrity that is willing to sell his soul to whatever might win him the votes of undecided voters. The Wall Street Journal analyzes the background of Obama’s latest idea and ridicules its obviously flawed nature.

Sounds familiar…

The combination of slowing demand, strong exchange rate and high energy prices should, according to my calculations, decrease the profit of an average manufacturing company by almost a half. [...]

The question is whether such dark outlook is necessary, considering the Czech National Bank has means available to fight the disproportional growth of the Koruna.

Hospodářské noviny — original in Czech, translation mine.

Wasting free money

The length of term for a board member at Czech national bank is six years and I think the last vice-governers were replaced two years ago. The next election will therefore take place when I’ll be graduating from Gettysburg with a degree in economics (with a focus on macroeconomics) and the seat at the board will be a strong candidate to my other dream job as investment banker. I’m fairly confident in my capabilities of economic analysis and policy design. At least I am not worse than the current board.

A few weeks ago, a prominent Czech business newspaper, Hospodarske noviny, published a first page analysis of the impact of irrationally strengthening Czech Crown to exporters. It was estimated the exporters alone have lost over 100bn Crowns (~$7bn), although I think this estimate is way too conservative. I also picked up this paper when I was coming back from Prague last week and read the Prague’s small stores owners (the ones that sell crystal and other admittedly overpriced and lavish memorabilia and junk) suffer as shopping is getting more expensive for the visiting foreigners. One owner was quoted he had never seen an American counting money and contemplating whether he can afford to buy the glass or not. The consensus is the revenues will be done 50-65%. And today, the same newspaper featured a main page story of Czech towns that suffer from the quick devaluation of Euro, which is down 22% year-to-date, and face a threat of a possibility of cancelling larger public real estate development projects in a total value of circa 150bn Crowns ($10.1bn). Oblivious to all of this, the board of governors from a beautiful majestic building near the Republic Square does nothing.

What’s worse, some of its members even publish articles lauding the current policy, arguing the relative stability of our stock market has been achieved by the strong Crown that has been offsetting the shakings mainly from overseas.

There’s something to note though. Firstly, our stock market is very small, it’s a dwarf and ant. Only 13 companies are traded in the main market, with one representing a significant majority of all trades (I’m in a train, will back this up with numbers eventually). Furthermore, It’s composed of firms representing industries that have not been severely hit elsewhere in the world (energy and natural resources being the most active segments on our market). Secondly, our stock market might not be volatile (although that isn’t a definite truth either) but it’s following the direction of all world indicies — it’s going down. And thirdly, the reason why we have not seen any financial to collapse, as it happened in case of Bear Stearns or recently IndyMac, is that the Czech Republic doesn’t have any investment banks, and its banks, insurance and mortgage companies do not use the malicious financial vehicles (SIV, CDO…) that are responsible for the turmoil in America or Britain, because our market is too small and we don’t have enough healthy and dodgy mortgages we could bind together and sell them as a package with a randomly set time-detonator. Our stock market is infinitesimal compared to NYSE and NASDAQ and FTSE, thus offering less space for the financial anarchy seen at the exchanges above. There isn’t a right answer to a question whether a small market is better than a market, however attributing the peace in our waters to either option is a pure lunacy.

It’s even worse that a vice-governer decides to share such diluted fantasies with educated audience, because Hospodarske noviny is mainly read by professionals and even if it wasn’t, a financial topic of commentary always successfully discourages the readers not unfamiliar with the matter. If this guy is eligible to run for a reelection, he might count me as a contender.

A website to remember

Oh no, my infatuation (or more like an affair) with Wikinvest.com is over, here comes a website that would be accompanying the Seinfeld sitcom when I’ll have nothing better to do – WikiCapital.com

No mercy for some

Just like every other workday, I opened The Wall Street Journal and skimmed through the headlines while sipping at a cup of coffee.

What else could be among the main topics for the day than ever-rising gas prices, national average of which just passed the $4/gallon mark? That is supposed to act as a psychological reminder to the buyers who are expected to transform (or are already in the process of transforming, hence falling sales of SUVs) their driving habits. While the increasing price indirectly affects prices of other goods as well, the drivers’ complains are the loudest. But frankly, is $4.00 really such a high price?

According to Wikipedia, an average American car ran a little less than 25 miles per gallon. According to a 2004 USC study, an average commuting distance is 12.6 miles every day. By doing no more than simple math we will come to a conclusion that a perfectly average commuting person (that sounds strange, doesn’t it?) will spend circa $.5 extra every day on gas than it did at the beginning of the year. Continuing in citing sources, the Bureau of Labor Statistics approximates that an average hourly wage in the U.S approaches $18. Are the rising gas prices a legitimate reason for the hysteria that is taking over the suburbs? Apparently yes, take a look how Yvonne Brune (from the WSJ article) will have to change her lifestyle:

“It’s just gotten out of hand,” said 53-year-old Yvonne Brune of Des Moines, Iowa, referring to the rising cost of gasoline. Because of higher gasoline prices, Ms. Brune, who works for a printing company doing marketing on weekdays and separately as a bridal consultant on nights and weekends, no longer makes the drive home at lunchtime — a 30-mile round trip — to spend time with her dogs.

So towards whom will this milestone-price be most detrimental? To our dogs that are will miss our presence during lunch times. I agree that this reduction ad absurdum was unfair. So who else will be affected? Texas handyman Don Passman:

Because of his job, which involves commuting from his home in Allen, Texas, about 25 miles northeast of Dallas, to clients’ houses in Dallas and other towns in the area, it is nearly impossible for him to cut back on driving. “I feel like I’m being held at knifepoint,” he said. “If they charge $10 a gallon, I’m going to pay it.”

He appears desperate. But is anyone holding him in Allen, TX, a $101,000 median family income suburb of Dallas? When most of his business is done in Dallas, can’t he consider an option of moving there? Even if the real estate prices there were higher than in Allen, the money saved on gas would in long run offset the costs. Given that he does not hold an office job and driving beyond commuting is a necessity for him, moving closer to his clients would be the most economical solution. He could switch towards a more fuel efficient car as well; does he really need a pick up truck?

The massive escape from cities towards following the WWII happened thanks to conditions that didn’t have bother with energy efficiency. But those are long gone, won’t return, and we should once again adjust to that.

I am not saying expensive gas is good. What I am saying is that on whichever level would the price finally stabilize on, adapting won’t be fatal to our lifestyles and our wallets when it comes to driving. When making sacrifices, one will have to choose his priorities and if moving is not a desirable option, upgrading to a more efficient car, optimizing trips and cutting down redundant trips will make the change. If one’s not willing to do that, then I have no mercy for him.

Wrong approaches to increase the food production

“[Ban Ki-moon] is recommending nations ‘improve vulnerable people’s access to food and take immediate steps to increase food availability in their communities.’ That means increasing food aid, supplying small farmers with seed and fertilizer in time for this year’s planting seasons, and reducing trade restrictions to help the free flow of agricultural goods.” — The Wall Street Journal

Those are great but redundant and costly ways to spur the food production by 50% by 2030. Increasing food aid, giving out seeds or fertilizers is in the long run unsustainable policy, because will doesn’t take into account the basic market forces and because it hopes to build the future under the same conditions as we have now. While I don’t want to dispute U.N. Chief’s erudition, soothing the hungry of the world by making them believe in such unrealistic faith is wrong. Instead, the U.N. should focus more on the energy policies of all of its members — not only those facing problems; should make a shift from focusing on global warming towards battling the local pollutions; and should make the deepest efforts to encourage democracy around the world. The history proves us that it’s been the dictators and tyrannizers who drove the successful countries down.

Good luck, Unasur

“We will work to have in the future a single central bank a single currency,” Lula said today in his weekly radio program broadcast nationwide.

I’m pretty sure that South America’s new initiative to create a new single-currency market will be a gigantic flop. If nothing else, basing its stability on one BRIC country, and having multiple dictators involved, will for sure account for some of the union’s hard times.

And more, do the policymakers really believe the South America’s spread between its inflation rates is close and stable enough to be overseen by a single central bank? A single central bank is not always a win…

More on bloomberg.

On region lockouts

I and my brother have owned an Xbox 360 for almost two years now and up until today we’ve had no problems whatsoever. Neither of us is an overly avid player, especially I am not, so the system serves as a media center most of the time; for us it replaces a DVD player and by connecting my iPod to it I can finally listen to music from adequate speakers too. But occasionally, a hell doesn’t have to freeze over, we play games there too.

Now, Xbox games are extremely expensive in the Czech Republic. Unsurprisingly, the price difference between a Czech and American version doesn’t justify itself by any form of advantage, say an extended warranty or translation of the game (which is a common added value in case of PC games). We’ve realized after our first purchase that buying a brand new game from an official distributor will not be sustainable in the long run, even though we hadn’t planned on shopping much from the beginning. So instead of laying out $100+/a game for a new copy we’ve begun buying used games for a significantly lesser price, say $30 for a title. Buying used games carries with itself a risk that the disc might malfunction — because of its treatment by the previous owner– or the package as such might be incomplete — the manuals or original boxes and covers are often missing — but even if the costs negative externalities are added to the final price, one still buys a product with a good premium.

But from an economic point of view of a developer, this rational behavior is comparable to piracy, only that in this case the developer is receiving his share for the first copy. Once an original owner completes the game and sells it to someone else, he is causing an economic loss to the producer, because all the subsequent buyers take the non-variable utility of the game while compensating only the previous owner, not the original developer. It is a bit unfair.

Why would one go to study abroad to Africa?

My friend complained to me a few weeks ago that her upcoming visit to the Czech Republic will ruin her budget. The complaints came in mid-February, when the dollar was in the middle of a free fall. The times of lavish spendings she remembered so vividly, the times when you’d get 23 Korunas for a dollar, were a history.

Thankfully, the friend was slightly exaggerating. If you come here for a few weeks, you won’t feel any substantial impact on your wallet, even if you stick solely with eating overpriced meals (that is $10+/lunch) and drinking excessive amounts of underpriced alcohol. Coming to Europe for a whole semester is another story; then you might consider cutting some expenses (Starbucks coffee?).

That seems to upset the American college students who are considering studying abroad. The unfavorable EUR/USD exchange rate is thus causing them to turn their backs to London and Paris and head to Africa instead. As today’s WSJ article says:

“We’re sending an unprecedented number of students on an arts program to Mali” in western Africa, says Eric Singer, Goucher’s associate dean of international studies.

I don’t get this. Perhaps I am too conservative, too focused on the post-graduation career options, but I can’t figure out why people want to go Mali and study its… art (I agree that “an unprecedented number” might mean 2, a shocking 100% increase of a usual situation where one student decides to travel to the Sahelian country, but still…)? My perception of money is apparently different from that of other students. I am willing to pay $35,000 worth of annual tuition (or its fraction – laud the inventor of scholarships!), but only there is a reasonable potential of a return on the investment. Regrettably, neither the current nor the potential future demand for commercial sharing (i.e. teaching) the newly acquired knowledge of Malian culture currently doesn’t justify the investment. Can anyone email me with an enlightening explanation of this — economically irrational — behavior?

But maybe after a year at Gettysburg I too will long for escaping the educational system and will leave for an adventure to Africa or Southeastern Asia, but right now I am puzzled.