MODELOFF is a fun, innovative and professional competition for students and young professionals to develop and test their financial modeling skills against their friends, colleagues and top modelers from around the world. With $25,000 cash from S&P Capital IQ for the overall ModelOff Champion and more than $65,000 of prizes in total from Microsoft and […]
Category: Finance
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Kickstarting the Gift Economy
TODAY is the four year anniversary of the collapse of Lehman Brothers. At the time of its bankruptcy, Lehman Brothers was the fourth largest investment bank in the world. How could it run out of money? And, why did this disrupt the global economy? Lehman Brothers and other investment banks went down in part due […]
Your circumstances may matter less than how you perceive them
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What is an Idea Worth?
Applying Philosophy to Business (and vice-versa) This guest post is by a PhD student in philosophy from the Australian National University. DEATH AND TAXES, the adage goes, are life’s two certainties. One might add commerce and philosophy to this list, for the trade of goods and services and the trade of ideas also seem to […]
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BASEL III for dummies
An explanation of Basel III for non-specialists BNP Paribas Fortis provides a short 10 minute animated presentation on Basel III. For normal people like you and I, this is a nice, accessible and informative summary of how the Basel III framework actually works.
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Can we rely on LIBOR?
Society has lost its trust in the financial sector. Should we overhaul LIBOR? IN A RECENT article by Bloomberg Businessweek, assistant managing editor Brian Bremmer reports that investigators in America, Canada, Japan, the UK, and the EU are trying to determine whether a handful of brokers and traders have manipulated LIBOR. At this stage, it is […]
The unemployment rate tends to understate how many people are actually out of work A PREVIOUS POST looked at the reasons why the reported unemployment rate in the USA tends to understate the “real” unemployment rate. To understand why this happens, here are a few equations which show how the formula for the unemployment rate […]
THIS is a very humorous and instructive (albeit PG rated) overview of economics. Here are the super-summary notes: 1. Microeconomics: The price of sh*t is determined by supply and demand. 2. Macroeconomics: Oh, sh*t! 3. Keynesian economics: Sh*t happens because of animal spirits. 4. Neo-keynesian economics: This sh*t is sticky. 5. Neo-classical synthesis: Sh*t happens in the […]
A picture says a thousand words BACK IN 1995, which country had the second highest 10 year government bond yield? As Europe’s third largest economy, Italy is too big to bail out. Past performance is not a predictor or future performance. However, if historical bond yields provide us with any insight about the Europe’s future, […]
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US Unemployment Rate Drops: good news?
Recent improvements in the unemployment rate have come from people dropping out of labour force THE unemployment rate in the US has dipped to its lowest level in more than 2 years (source: NYT). Is this good news? Before answering this question, it would help to understand exactly how the US Bureau of Labor Statistics […]
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Monkey Economy
Monkeys learn to use money – what can we learn? ASSOCIATE PROFESSOR of Economics Keith Chen taught a bunch of monkeys to use money. What he discovered was that not only could the monkeys learn to understand the value of money and how to use it, they were also very good at changing their consumption behaviour […]
RECENT falls in the officially reported US unemployment rate are an optimistic sign. That said, it is worth remembering that the official US unemployment rate (currently around 9.1%) systematically understates the “real” unemployment rate. This is not a new phenomenon, and occurs because of the particular way in which the US Bureau of Labor Statistics chooses […]
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Death to Pennies
Inflation erodes the value of real currency ECONOMISTS tend to favour a small positive rate of inflation, and there are 4 reasons why this makes sense: Labour market flexibility: inflation allows relative real wages to adjust even if nominal wages do not move. A company that tries to pay workers less money is likely to meet […]
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The Fed is Europe’s new dealer
Europe may not go to rehab before it is too late THE US Federal Reserve took steps yesterday to make it easier for European banks to borrow and lend dollars. The Fed is now providing such cheap money to Europe that the European Central Bank can borrow from the Fed at lower interest rates than American banks. The […]
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Europe: a house of cards
EUROPEAN leaders have tried to characterise the October writedown of Greek debt as “private-sector involvement”. While the writedown would appear to be a default in all but name, efforts to maintain investor confidence have so far been surprisingly successful. Yesterday, US stocks and Asian stocks rallied amid optimism that European leaders are taking steps to […]
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Beware of Greeks Bearing Bonds
THE MARKETS have been temporarily buoyed amid optimism that European leaders will find a solution to the debt crisis. Unfortunately, the optimism is likely to be short lived because the problem with Greece is not just that they owe everyone a lot of money. Greek debt is a symptom of a more endemic problem rooted in the […]
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Helping the 99%
WITH the Occupy Wall Street movement still in full swing, we have to stop and think for a moment about the distribution of wealth in the world. One of the slogans of the Occupy Wall Street movement is “we are the 99%”, which is a reference to the fact that the top 1% of households […]
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Greek default in all but name
Whatever you say it is, it isn’t ~ Alfred Korzybski IN OCTOBER 2011, private banks accepted a 50% writedown on Greek debt. European leaders negotiated the writedown to avoid a technical default. It is surprising that ratings agencies did not classify the writedown as a default when you consider that S&P defines sovereign default as […]
ON WEDNESDAY November 23rd, an auction of German government bonds (known as “Bunds”) managed to sell only €3.6 billion out of a total €6 billion worth of Bunds on offer (source: Economist). Germany is one of the most financially stable countries in the Euro-zone, so its failure to sell all of its Bunds is worth […]
IN THE WAKE of the global financial crisis, there has been a backlash against the mainstream school of economic thought, of which Greg Mankiw is a proponent. Mainstream economists did not predict the global financial crisis and notable commentators, including Steve Keen, single out the narrow minded and simplistic ideas put forward by mainstream economists as the […]
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Mankiw’s 10 Principles of Economics
Economics is about decision making in situations of scarcity ECONOMICS is the study of how individuals, firms and government make decisions to manage scarce resources. What does this mean exactly? Professor Greg Mankiw teaches economics at Harvard University and is the author of a popular economics text book called Principles of Economics which is used at many Ivy League […]
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Economies of Scope
Economies of scope exist where a firm can produce two products at a lower per unit cost than would be possible if it produced only the one ECONOMIES OF SCOPE is an idea that was first explored by John Panzar and Robert Willig in an article published in 1977 in the Quarterly Journal of Economics […]
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Free Money Day
TOMORROW, SEPTEMBER 15th, at various public locations worldwide, people will hand out their own money to complete strangers, two coins or notes at a time, asking the recipients to pass one of these coins or notes on to someone else. The aim is to raise awareness and start conversations about the benefits of economies based […]
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Hard economic times
When the economy slows, you’re likely to get RAPED, SHAFTED or SCREWED Due to the current financial situation caused by the slowdown in the US economy, Congress has decided to implement a scheme to put workers of 50 years of age and above on early, mandatory retirement, thus creating jobs and reducing unemployment. This scheme […]
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5 Principles for Value Investing
WARREN Buffett is the world’s most successful value investor. Very few people have ever managed to achieve his level of investment success. The interesting thing about that fact is that there are only a few simple principles that you need to know if you want to be a successful value investor. Stick to your Circle […]
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Quantitative Easing
Printing money is the last refuge of failed economic empires and banana republics QUANTITATIVE EASING is a monetary policy tool sometimes employed by central banks to stimulate the economy when conventional monetary policy becomes ineffective. To stimulate the economy, the central bank normally carries out expansionary monetary policy by lowering short-term interest rates through the […]
Subtitle: The battle between John Maynard Keynes and F.A. Hayek DURING THE global financial crisis, we were told by governments that the best way to fix the world economy was to increase spending. This sounds simple enough given that increased government spending and lower interest rates can be used to boost output, but it is […]
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Change is constant
NOTHING exists which is permanent. Your current success is the result of your past efforts and good fortune, and how well you have responded to changing circumstances along the way by seizing new opportunities and avoiding threats. An interesting example of a company that failed to respond to changing times is General Motors. GM was […]
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What is the purpose of a business?
MAINSTREAM economics would have you believe that the purpose of business is to maximise profits. If a business loses money it will soon go bust, this much is clear. Profit is necessary for any ongoing business operation, however the fact that a business makes a profit does not explain the purpose or raison d’être of […]
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Bank Bailouts and other Moral Hazards
In the previous post on Moral Hazard, we learnt that Moral Hazard refers to any situation where a person is not fully responsible for the consequences of their actions. As a result, they may take greater risks than they would have otherwise. Here are 6 examples of situations where Moral Hazards arise in practice. 1. Insurance […]
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Moral Hazard
Moral hazard is when they take your money and then are not responsible for what they do with it. ~ Gordon Gekko 1. Relevance of Moral Hazard THE unemployment rate in the United States is now around 9%. Over 13% of all US mortgages are either delinquent or in foreclosure (Mortgage Bankers Association). Total loses […]
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Barriers to Entry
You may want to launch a new product, start a new business or enter a new market. What’s stopping you? BARRIERS to entry are costs that must be paid by a new entrant but not by firms already in the industry. Barriers to entry have the effect of making a market less contestable and allow […]
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Pleasure is the goal of life
SEEMS fairly straight forward doesn’t it. The purpose of life is the pursuit of pleasure, and the quest for those objects and experiences that will make our life more enjoyable. As I recently discovered while reading “The Consolations of Philosophy” by Alain de Botton, this was exactly the philosophy held by Epicurus, an ancient Greek […]
An economic indicator is any statistic (e.g. the unemployment rate or GDP) which indicates the past, current or future strength of the economy THERE is talk about town and in the media of an economic upturn in the final quarter of 2009 – “banks are lending, consumers are buying, and companies are hiring.” While it […]
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Tony Robbins – Six Human Needs
FOLLOWING on from the theme of my last post, which highlighted Alain de Botton’s kinder and gentler philosophy of success, I think it would be valuable to consider why we do what we do. In an attempt to become “successful” many of us work long hours and sacrifice time that could be spent with friends and […]
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Results: CFA Level 1 Exam 2009
THE CFA Level 1 Exam Results have just been released. Following on from my slightly worried exam-day overview of the 2009 CFA Level 1 Exam, I thought you may be interested to know the result: Pass mark: 70% Pass rate: 46% Result: Pass!! Feeling: very relieved
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Madoff made off with $65 billion
ON 29 June 2009, Bernard Madoff pleaded guilty to defauding investors and was sentenced to 150 years in prison. The 71 year-old swindler is due to be released in 2159. Madoff’s $65 billion investment fraud has been referred to as a gigantic Ponzi scheme “dating at least as far back as the 1980s” (The Economist). […]
ONE of the take away lessons from the CFA curriculum is that the conventional method of valuing an investment is to determine the present value of expected future cashflows. One way of doing this would be to use the constant growth dividend discount model, which estimates the value of a stock by assuming that dividends […]
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CFA Level 1 Exam 2009 – post audit
An exam day overview I did the CFA Level 1 Exam yesterday. If you haven’t heard of the CFA Exam before, see the article “CFA Exam – What is it? Why do it? How to prepare.” It is definitely one of the most exhausting tests I have undertaken, a gruelling six hour 240 question multiple […]
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Economies of scale
1. Importance of economies of scale IN THE early 20th century, by using assembly lines to mass produce the Model T Ford, Henry Ford became one of the richest and best-known men in the entire world. Economies of scale provide a company with two main benefits: Increased market share: Lower per unit costs allow a […]
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Warren Buffett on hard work
WARREN Buffett‘s 2006 letter to shareholders makes for very interesting reading. One of the sentiments that Buffett expresses in the very first page of his letter is one of gratitude to the managers who have run his companies over the last 42 (now 44) years. Buffett indicates that he and Charlie Munger, Berkshire’s vice chairman, […]
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Understanding financial statements 101
UNDERSTANDING financial statements is very important if you are looking to invest, become a consultant, work as a CEO or in upper management, or want to start and run your own business. Understanding financial statements will allow you to assess a company’s current financial strength, and determine its profitability and creditworthiness. This article provides an […]
THIS article is intended to be pretty light-hearted. It provides an insight into the strengths of the current Australian economy after talking with two aspiring amateur economist taxi drivers. Taxi driver 1 I was chatting with the taxi driver on the way home from work last week, and he was complaining to me that, despite […]
It’s the economy, stupid “IT’S THE economy, stupid” is a well known phrase that was widely used during Bill Clinton‘s 1992 presidential campaign against George Bush senior. The phrase was coined by Clinton campaign strategist James Carville and refers to the notion that Clinton was a better choice because Bush had not adequately addressed the […]
What is an asset? THE question, “What is an asset?” seems like an absurdly simple question. But if you understand the answer to that simple question, and act on it, you have started down the path that leads to riches. Few people become rich, so clearly then, few people understand the answer to this question. […]
BACK IN 1998, Warren Buffett gave an inspirational talk to a group of MBA students at the University of Florida, College of Business. In the speech, Buffett gives his perspective on investing, in which he outlines the need to understand the underlying economics of the businesses that you invest in, and the need to stick […]