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Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies by Jeremy J. Siegel

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asset allocation, backtesting, Black-Scholes formula, Bretton Woods, buy low sell high, California gold rush, capital asset pricing model, cognitive dissonance, compound rate of return, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fixed income, German hyperinflation, implied volatility, index arbitrage, index fund, Isaac Newton, joint-stock company, Long Term Capital Management, loss aversion, market bubble, mental accounting, new economy, oil shock, passive investing, prediction markets, price anchoring, price stability, purchasing power parity, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, technology bubble, The Great Moderation, The Wisdom of Crowds, transaction costs, tulip mania, Vanguard fund

As the U.S. stock market and the U.S. dollar soared, the dollar returns in European and Japanese markets fell behind the United States. The advantage that U.S. investors had gained through many years of investing abroad vanished, leaving many questioning the wisdom of international investing. The New Millennium and the Technology Bubble The last three years of the twentieth century, marked by the emergence of a huge technology bubble, saw strong gains in all of the world stock markets, with the European and American markets surging to all-time highs. But this was not to last. A few months into the new millennium, the technology bubble burst and stocks fell into a severe bear market. All of the developed countries’ markets fell by at least 50 percent: from March 2000 through October 2002, the U.S. market fell by one-half, matching its record post-Depression decline in the ferocious 1972 to 1974 bear market, while European and Japanese markets, which suffered declines of 60 and 63 percent, respectively, bottomed in March 2003—five months after the U.S. market bottomed and just prior to the U.S.

Capital 137 Conclusion 138 CONTENTS CONTENTS ix Chapter 9 Outperforming the Market: The Importance of Size, Dividend Yields, and Price-to-Earnings Ratios 139 Stocks That Outperform the Market 139 Small- and Large-Cap Stocks 141 Trends in Small-Cap Stock Returns 142 Valuation 144 Value Stocks Offer Higher Returns Than Growth Stocks 144 Dividend Yields 145 Other Dividend Yield Strategies 147 Price-to-Earnings (P-E) Ratios 149 Price-to-Book Ratios 150 Combining Size and Valuation Criteria 152 Initial Public Offerings: The Disappointing Overall Returns on New Small-Cap Growth Companies 154 The Nature of Growth and Value Stocks 157 Explanations of Size and Valuation Effects 157 The Noisy Market Hypothesis 158 Conclusion 159 Chapter 10 Global Investing and the Rise of China, India, and the Emerging Markets 161 The World’s Population, Production, and Equity Capital 162 Cycles in Foreign Markets 164 The Japanese Market Bubble 165 The Emerging Market Bubble 166 The New Millennium and the Technology Bubble 167 Diversification in World Markets 168 Principles of Diversification 168 “Efficient” Portfolios: Formal Analysis 168 Should You Hedge Foreign Exchange Risk? 173 Sector Diversification 173 Private and Public Capital 177 x The World in 2050 178 Conclusion 182 Appendix: The Largest Non-U.S.-Based Companies 182 PART 3 HOW THE ECONOMIC ENVIRONMENT IMPACTS STOCKS Chapter 11 Gold, Monetary Policy, and Inflation 187 Money and Prices 189 The Gold Standard 191 The Establishment of the Federal Reserve 191 The Fall of the Gold Standard 192 Postdevaluation Monetary Policy 193 Postgold Monetary Policy 194 The Federal Reserve and Money Creation 195 How the Fed’s Actions Affect Interest Rates 196 Stocks as Hedges against Inflation 199 Why Stocks Fail as a Short-Term Inflation Hedge 201 Higher Interest Rates 201 Nonneutral Inflation: Supply-Side Effects 202 Taxes on Corporate Earnings 202 Inflationary Biases in Interest Costs 203 Capital Gains Taxes 204 Conclusion 205 Chapter 12 Stocks and the Business Cycle 207 Who Calls the Business Cycle?

262 Index Options 264 Buying Index Options 266 Selling Index Options 267 The Importance of Indexed Products 267 Chapter 16 Market Volatility 269 The Stock Market Crash of October 1987 271 The Causes of the October 1987 Crash 273 Exchange-Rate Policies 274 The Futures Market 275 Circuit Breakers 276 The Nature of Market Volatility 277 Historical Trends of Stock Volatility 278 The Volatility Index (VIX) 281 Recent Low Volatility 283 The Distribution of Large Daily Changes 283 The Economics of Market Volatility 285 The Significance of Market Volatility 286 Chapter 17 Technical Analysis and Investing with the Trend 289 The Nature of Technical Analysis 289 Charles Dow, Technical Analyst 290 The Randomness of Stock Prices 291 Simulations of Random Stock Prices 292 Trending Markets and Price Reversals 294 Moving Averages 295 Testing the Dow Jones Moving-Average Strategy 296 Back-Testing the 200-Day Moving Average 297 The Nasdaq Moving-Average Strategy 300 CONTENTS CONTENTS xiii Distribution of Gains and Losses 301 Momentum Investing 302 Conclusion 303 Chapter 18 Calendar Anomalies 305 Seasonal Anomalies 306 The January Effect 306 Causes of the January Effect 309 The January Effect Weakened in Recent Years 310 Large Monthly Returns 311 The September Effect 311 Other Seasonal Returns 315 Day-of-the-Week Effects 316 What’s an Investor to Do? 318 Chapter 19 Behavioral Finance and the Psychology of Investing 319 The Technology Bubble, 1999 to 2001 320 Behavioral Finance 322 Fads, Social Dynamics, and Stock Bubbles 323 Excessive Trading, Overconfidence, and the Representative Bias 325 Prospect Theory, Loss Aversion, and Holding On to Losing Trades 328 Rules for Avoiding Behavioral Traps 331 Myopic Loss Aversion, Portfolio Monitoring, and the Equity Risk Premium 332 Contrarian Investing and Investor Sentiment: Strategies to Enhance Portfolio Returns 333 Out-of-Favor Stocks and the Dow 10 Strategy 335 PART 5 BUILDING WEALTH THROUGH STOCKS Chapter 20 Fund Performance, Indexing, and Beating the Market 341 The Performance of Equity Mutual Funds 342 Finding Skilled Money Managers 346 xiv Persistence of Superior Returns 348 Reasons for Underperformance of Managed Money 348 A Little Learning Is a Dangerous Thing 349 Profiting from Informed Trading 349 How Costs Affect Returns 350 The Increased Popularity of Passive Investing 351 The Pitfalls of Capitalization-Weighted Indexing 351 Fundamentally Weighted versus Capitalization-Weighted Indexation 353 The History of Fundamentally Weighted Indexation 356 Conclusion 357 Chapter 21 Structuring a Portfolio for Long-Term Growth 359 Practical Aspects of Investing 360 Guides to Successful Investing 360 Implementing the Plan and the Role of an Investment Advisor 363 Concluding Comment 364 Index 367 CONTENTS F O R E W O R D Some people find the process of assembling data to be a deadly bore.

 

Investment: A History by Norton Reamer, Jesse Downing

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Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Berlin Wall, Bernie Madoff, Brownian motion, buttonwood tree, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, Gordon Gekko, Henri Poincaré, high net worth, index fund, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, means of production, Menlo Park, merger arbitrage, moral hazard, mortgage debt, Network effects, new economy, Nick Leeson, Own Your Own Home, pension reform, Ponzi scheme, price mechanism, principal–agent problem, profit maximization, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sand Hill Road, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, technology bubble, The Wealth of Nations by Adam Smith, time value of money, too big to fail, transaction costs, underbanked, Vanguard fund, working poor, yield curve

The lesson behind financial innovation is clear: there are many benefits of socializing risk, but if we are not exceedingly careful to understand the potential nature and magnitude of that risk, we may impair an array of institutions at once. And so, we live in the age of a highly financialized economy. Now why, then, did the technology bubble not produce severe economic ramifications? After all, the disaster in the stock market surely should have caused the real economy to seize. Not necessarily. There were likely two related reasons why the technology bubble did not cause severe problems for the real economy. First, even though the risk of owning the technology enterprises was socialized through the stock market, the holders of the equity in these technology companies viewed it as being high-risk capital anyway. Economic agents knew 224 Investment: A History enough not to view the equity of technology firms as low risk, and therefore agents generally did not assemble their balance sheets in such a way so as to have their financial obligations depend fundamentally on the value of those stocks.

His poor health seemed to inspire some leniency and lighten the sentence of up to twenty-four years and five months the prosecutors pursued in the case.140 Rajaratnam spent the beginning of his career studying technology stocks, and he quickly ascended the corporate ladder at the investment bank Needham & Co., landing positions as the head of research in 1987, COO in 1989, and president by 1991. He eventually broke away from the firm, and he started Galleon Group in 1997 with several coworkers from Needham. Galleon was extremely successful despite the bursting of the technology bubble. In fact, the firm was up over 40 percent from 2000 to 2002 when the Standard & Poor’s 500 (S&P 500) was down 37.6 percent.141 And here is where Rajaratnam’s story becomes so similar to many of those of others convicted of insider trading. The striking feature of almost all inside traders is that they were either already successful or seemed poised for success. They simply did not need to engage in insider trading to prosper.

This was quite different than the highly rated tranches of mortgage debt (often having AA and AAA ratings), where agents believed in the soundness of the asset and often constructed their liabilities to depend fundamentally on their valuation not declining substantially. Agents thought, in short, that these mortgage assets involved their low-risk capital and as such could build more liabilities against them, and when that turned out not to be true, disaster struck. Furthermore, the technology bubble did not trigger a major credit event. Surely, tech companies themselves had a very difficult time accessing any form of capital in the wake of the bubble, but beyond this sector of the economy, there was not a wide seizure of credit. Potential lenders were not wary of all potential borrowers because generally there was not a massive shock to assets consumed by ostensibly low-risk capital. As a result, financial innovation here did not induce a grinding halt to the real economy.

 

pages: 490 words: 117,629

Unconventional Success: A Fundamental Approach to Personal Investment by David F. Swensen

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asset allocation, asset-backed security, capital controls, cognitive dissonance, corporate governance, diversification, diversified portfolio, fixed income, index fund, law of one price, Long Term Capital Management, market bubble, market clearing, market fundamentalism, passive investing, pez dispenser, price mechanism, profit maximization, profit motive, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, Silicon Valley, Steve Ballmer, technology bubble, the market place, transaction costs, Vanguard fund, yield curve

Aside from the dismal picture provided by historical experience, all but the most long-standing investors in venture partnerships face a problem in adverse selection. The highest-quality, top-tier venture firms generally refuse to accept new investors and ration capacity even among existing providers of funds. Venture firms willing and able to accept money from new sources may represent relatively unattractive, second-tier investment opportunities. Prior to the technology bubble of the late 1990s, investors in venture partnerships received returns inadequate to compensate for the risks incurred. For a few glorious years, the Internet mania allowed venture investors to share in a staggering flood of riches. Yet, the bubble-induced enthusiasm for private technology investing produced an unanticipated problem for venture investors. Indiscriminate demand allowed the managing partners of venture funds to increase the flow of management fees and take a greater share of profits.

Apologists for the venture capital industry might wish to examine a shorter time frame, allowing the concentrated impact of the bubble to exercise greater influence over the results. Trailing ten-year numbers for the Venture Economics sample clock in at 29.4 percent per annum, compared to 23.0 percent per annum for the common stock equivalent. Perhaps the 6.4 percentage points of incremental returns provide adequate recompense for the extraordinary risk of investing in start-up enterprises. Even so, the incremental return exists solely because of the technology bubble. Examine the trailing ten-year results for a period ending in the pre-bubble year of 1996. The Venture Economics sample of nearly six hundred funds produced a trailing ten-year return of 15.2 percent per annum, relative to a public market equivalent of 14.9 percent per annum. The decade ending December 31, 1996, represents a much more reasonable assessment of venture capital’s relative return-generating power than does the decade ending December 31, 2000.

A high level of co-investment by the general partner represents a sure way to align investor interests, creating a salutary symmetry in general partners’ attitudes toward gains and losses. Unfortunately, in the broader venture world, significant general partner co-investment represents the exception, not the rule. Interestingly, however, a fair number of the venture capital elite invest substantial amounts of personal funds side by side with their limited partners. Investment success allows fund sponsors to move the terms of trade in the general partners’ favor. The technology bubble of the late 1990s provides a case in point. Inspired by enormous investor demand, venture firms raised bubble-era funds in the neighborhood of ten times the size of funds raised only a decade earlier, moving from a typical 1990-vintage fund size of $100 million to $150 million to a 2000-vintage fund size of $1 billion to $1.5 billion. Along with the increase in fund size came an increase in fee income that far outpaced the growth in the size of the professional staff.

 

pages: 726 words: 172,988

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial innovation, financial intermediation, George Akerlof, Growth in a Time of Debt, income inequality, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, sovereign wealth fund, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

Michael Lewis, The Big Short, regarding American International Group (AIG) THE GLOBAL FINANCIAL crisis that broke into the open in the summer of 2007 is often ascribed to excessive mortgage lending and excessive securitization of low-quality, subprime mortgages in the United States.1 At the peak of the crisis, in October 2008, the IMF estimated that the total losses of financial institutions from subprime-mortgage-related securities amounted to $500 billion.2 When seen by itself, $500 billion seems huge, but in the context of a global financial system in which the banking sector’s assets are on the order of $80 trillion or more, it is actually not all that large. In fact, the $500 billion loss from subprime-mortgage-related securities is dwarfed by the more than $5 trillion of losses in the value of shares on U.S. stock markets in the early 2000s, when the so-called technology bubble of the late 1990s burst.3 How could this loss in the value of mortgage-related securities have such a large effect on the global financial system and on the broader economy? Why was the subprime crisis so much more damaging than the bursting of the technology bubble a few years earlier? And why has this crisis been so much more damaging to the world economy than the many banking crises of the early 1990s, including the Japanese crisis, which also involved very large losses in real estate lending?4 The one-word answer to these questions is “Contagion.”

See also equity stock exchanges, corporate debt and, 234n26 stock market, U.S.: crash of 1987 in, 262n51; technology bubble of 1990s in, 60, 61, 255n3 stock options, 214 Stout, Lynn, 285n32 strategic theory of international trade, 320n23 stress tests, 186–87; limitations of, 170, 186–87, 315n76; risk assessment with, 73, 186–87, 315n76 structured investment vehicles (SIVs): breakdown in funding for, 299n45; definition of, 159; regulation of, 161–62; risks of, 162 subprime mortgage(s): claimed to be short-term loans, 298n44; in financial crisis of 2007-2009, 60–61; interest rates on, 276n12 subprime mortgage crisis, U.S.: careless lending in, 56; contagion in, 60–61; dividends paid during, 174–75; flawed regulation as factor in, 323n38; versus technology bubble of 1990s, 60, 61 subprime-mortgage-related securities: reasons for impact of losses from, 60–61; value of losses from, 60, 255n2 subsidiaries, in resolution of failed institutions, 76–77, 262n62 subsidies, 129–47; for bank borrowing, 9, 129–30, 137–38, 139–40, 235n30; for corporate borrowing, 130, 139–40; costs of, to society, 145–47; explicit (See explicit guarantees); externalities and, 197–99; guarantees as type of (See guarantees); implicit (See implicit guarantees); and international competition, 197–99; perverse, 13, 81, 130, 139, 188, 198, 226; and size of banks, 89, 130, 270n31; tax, 139–40, 188 Sumitomo Corporation, 260n39 Summers, Lawrence, 230n7, 298n39, 331n19 Sundaresan, Suresh, 316n81 supervisors: assessment of insolvency by, 176; concern for international competitiveness, 319n8; in regulatory capture, 204–5; response to violations of capital requirements, 188–90; role in financial crisis of 2007-2009, 204, 212, 226, 336n56 Sutton, Willie, 200, 321n29 swaps: in bankruptcy, exceptions for, 236n35; use of term, 259n34.

Their attempts to deal with the situation further depressed financial markets, which then affected other financial institutions.5 When dominos are standing near one another, one piece falling can make all the others fall, too. Similarly, the initial losses on subprime-mortgage-related securities triggered a chain reaction that eventually threatened to bring down the entire financial system. This is why the final damage was much greater than the initial loss might have led one to expect. By contrast, when the technology bubble burst and stock markets declined in the early 2000s, the losses were mainly borne by final investors.6 Because of those losses, many people will end up with substantially smaller pensions, but at the time there were few defaults and bankruptcies that dragged down other institutions, and there were no furious asset sales that further stressed the system. Even the 2002 bankruptcies of Enron and WorldCom, the largest bankruptcies before the financial crisis, did not create the kind of havoc that was seen in 2007–2009, especially after the Lehman Brothers bankruptcy.

 

pages: 892 words: 91,000

Valuation: Measuring and Managing the Value of Companies by Tim Koller, McKinsey, Company Inc., Marc Goedhart, David Wessels, Barbara Schwimmer, Franziska Manoury

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air freight, barriers to entry, Basel III, BRICs, business climate, business process, capital asset pricing model, capital controls, cloud computing, compound rate of return, conceptual framework, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, discounted cash flows, distributed generation, diversified portfolio, energy security, equity premium, index fund, iterative process, Long Term Capital Management, market bubble, market friction, meta analysis, meta-analysis, new economy, p-value, performance metric, Ponzi scheme, price anchoring, purchasing power parity, quantitative easing, risk/return, Robert Shiller, Robert Shiller, shareholder value, six sigma, sovereign wealth fund, speech recognition, technology bubble, time value of money, too big to fail, transaction costs, transfer pricing, value at risk, yield curve, zero-coupon bond

Although the empirical results do not fit the theoretical model perfectly, they still clearly demonstrate that the market values companies based on growth and ROIC.10 Nevertheless, there have been periods when deviations from economic fundamentals were so significant and widespread that they affected the stock market as a whole. Two recent examples are the technology bubble that burst in 2000 and the credit bubble that collapsed in 2007 (see Exhibit 5.7). The technology market boom is a classic example of a valuation bubble, in which stocks are priced at earnings multiples that underlying fundamentals cannot justify. When Netscape Communications became a public company in 1995, it saw its market capitalization soar to $6 billion on an annual revenue base of just $85 million. As investors quickly became convinced that the Internet would change the world, they sent the Standard & Poor’s (S&P) 500 index to a new peak of more than 1,500 in 2000. By 2001, the index had tumbled back to half that level. Although the valuation of the market as a whole was affected, the technology bubble was concentrated in technology stocks and certain very large stocks in other sectors (so-called megacaps).

Blume and D. Easley, “Market Selection and Asset Pricing,” in Handbook of Financial Markets: Dynamics and Evolution, ed. T. Hens and K. Hoppe (Amsterdam: Elsevier, 2009); and J. De Long, A. Shleifer, L. Summers, and R. Waldman, “The Survival of Noise Traders in Financial Markets,” Journal of Business 64, no. 1 (1991): 1–19. 68 THE STOCK MARKET IS SMARTER THAN YOU THINK cases, such as the technology bubble of the 1990s, this could take a few years, but the stock market always corrects itself to align with the underlying fundamental economics. MARKETS AND FUNDAMENTALS: THE EVIDENCE Even some of the most conventional beliefs about the stock market are not supported by the facts. For example, most growth and value indexes, like those of Standard & Poor’s, categorize companies as either “value” or “growth” based on a combination of factors, including market-to-book ratios and priceto-earnings (P/E) ratios.

Similarly, market bubbles and crises have always captured public attention, fueling the belief that the stock market moves in chaotic ways, detached EXHIBIT 5.2 Distribution of Growth Rates for Growth and Value Stocks Growth stocks do not grow materially faster . . . . . . but do have higher ROICs Value median Growth median 8.7% 10.2% Value median Growth median 15% 35% 14 35 Growth 12 30 10 Value 8 6 % of companies % of companies Growth 25 20 15 4 10 2 5 Value 0 0 –3 1 5 9 13 17 21 3-year average sales growth, % 25 –5 5 15 25 35 45 50+ 3-year average ROIC excluding goodwill, % MARKETS AND FUNDAMENTALS: THE EVIDENCE 69 EXHIBIT 5.3 Stock Performance against Bonds in the Long Run, 1801–2013 $ 100,000,000 Stocks 10,000,000 1,000,000 Stocks (inflation-adjusted) 100,000 Bonds 10,000 Bills 1,000 100 10 CPI 1 0 1801 1816 1831 1846 1861 1876 1891 1906 1921 1936 1951 1966 1981 1996 2011 Source: Jeremy J. Siegel, Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies (New York: McGrawHill; 2014); Ibbotson Associates; Morningstar EnCorr SBBI Index Data. from economic fundamentals. The 2008 financial crisis, the technology bubble of the 1990s, the Black Monday crash of October 1987, the leveraged-buyout (LBO) craze of the 1980s, and, of course, the Wall Street crash of 1929 appear to confirm such ideas. But the facts tell a different story. In spite of these events, U.S. equities over the past 200 years have delivered decade after decade of consistent returns to shareholders of about 6.5 percent annually, adjusted for inflation.

 

pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

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Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund

Tens of billions of dollars’ worth of investment capital was diverted into flimflam schemes that ultimately came to nothing. (At the same time, some of the dot-coms, such as Amazon and eBay, did eventually develop into profitable companies.) Chicago School economics is premised on the idea that rationality and competition prevent bad outcomes: in this case, rationality actually aggravated the market failure. “Our findings are consistent with the view that investor sentiment driving the technology bubble was predictable to some extent, and that hedge funds were exploiting this opportunity,” Brunnermeier and Nagel wrote. “Under these conditions, riding a price bubble for a while can be the optimal strategy for rational investors.” As it happened, this result had been formally demonstrated a number of years before the Internet bubble, in a series of papers that put forward what came to be known as the “noise trader” approach to financial markets.

In plans that offer a default asset allocation—a mixture of stocks and bonds, usually—about three quarters of all participants accept it. Similarly, if a plan’s default option involves investing in the parent company’s stock, many people accept that, too. “[T]his pattern of investment was unaffected by the prominent bankruptcies of Enron, WorldCom, Global Crossing, and many other firms in the aftermath of the collapse of the technology bubble,” Laibson notes. “Employees who lost their entire life savings in the Enron debacle were frequently discussed in the media at the time of the Enron bankruptcy, but American workers have not generalized that message.” Evidently, economic reasoning is not something that comes naturally to people. Maybe this is because of the way the human brain is wired. In recent years, many behavioral economists have adopted Plato’s idea that human beings have two distinct decision-making systems, one intuitive and the other deliberative.

America’s Portfolio Managers Grow More Bullish on Stocks and Interest Rates,” Barron’s, May 3, 1999, 31–38. 181 Pension fund investment in the Internet bubble: Eli Ofek and Matthew Richardson, “DotCom Mania: The Rise and Fall of Internet Stock Prices,” Journal of Finance 57, no. 3 (June 2003): 1122. 181 “From an efficient markets perspective . . .”: Markus K. Brunnermeier and Stefan Nagel, “Hedge Funds and the Technology Bubble,” Journal of Finance 59, no. 5 (October 2004): 2013–40. 182 “follow the advice of financial . . .”: Andrei Shleifer, Inefficient Markets: An Introduction to Behavioral Finance (New York: Oxford University Press, 2000), 10. 183 “[R]ational arbitrage can . . .”: Ibid., 174. 184 “This risk comes from . . .”: Ibid., 14–15. 184 “We were too early in calling . . .”: Mitchell Pacelle, “Soros to Appoint a CEO After Firm’s Chaotic Year,” Wall Street Journal, August 10, 1999, C1. 185 Fama update on the efficient market hypothesis: Eugene G.

 

pages: 342 words: 99,390

The greatest trade ever: the behind-the-scenes story of how John Paulson defied Wall Street and made financial history by Gregory Zuckerman

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1960s counterculture, banking crisis, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, index fund, Isaac Newton, Long Term Capital Management, margin call, Mark Zuckerberg, Menlo Park, merger arbitrage, mortgage debt, mortgage tax deduction, Ponzi scheme, Renaissance Technologies, rent control, Robert Shiller, Robert Shiller, rolodex, short selling, Silicon Valley, statistical arbitrage, Steve Ballmer, Steve Wozniak, technology bubble

The 1998 collapse of mega–-hedge fund Long-Term Capital Management, which lost 90 percent of its value over a matter of months, also put a damper on the industry, while cratering global markets. By the end of the 1990s, there were just 515 hedge funds in existence, managing less than $500 billion, a pittance of the trillions managed by traditional investment managers. It took the bursting of the high-technology bubble in late 2000, and the resulting devastation suffered by investors who stuck with a conventional mix of stocks and bonds, to raise the popularity and profile of hedge funds. The stock market plunged between March 2000 and October 2002, led by the technology and Internet stocks that investors had become enamored with, as the Standard & Poor’'s 500 fell 38 percent. The tech-laden Nasdaq Composite Index dropped a full 75 percent.

THE HOUSING MARKET DIDN’'T SEEM LIKE AN OBVIOUS BENEFICIARY OF the age of easy money. As the World Trade Center toppled on September 11, 2001, and Osama bin Laden’'s lieutenants boasted of crippling the U.S. economy, the real estate market and the overall economy wobbled—--especially around the key New York area. Home prices had enjoyed more than five years of gains, but the economy was already fragile in the aftermath of the bursting of the technology bubble, and most experts worried about a weakening real estate market, even before the tragic attacks. But the Federal Reserve Board, which had been lowering interest rates to aid the economy, responded to the shocking September 11 attacks by slashing interest rates much further, making it cheaper to borrow all kinds of debt. The key federal-funds rate, a short-term interest rate that influences terms on everything from auto and student loans to credit-card and home-mortgage loans, would hit 1 percent by the middle of 2003, down from 6.5 percent at the start of 2001, as the Fed, led by Chairman Alan Greenspan, worked furiously to keep the economy afloat.

 

pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, labour market flexibility, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, means of production, Menlo Park, moral hazard, moveable type in China, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, We are the 99%, Wolfgang Streeck

One reason is that share prices are not set by private investors – the ‘representative household’, in the economic jargon – but by fund managers to whom savers and pension fund trustees have delegated authority for managing their money. These fund managers, the agents, may have a very different agenda to that of savers and trustees, the principals. They also have more and better information about companies and markets. So there is, as the economists put it, both a principal–agent problem and an information asymmetry problem. These lead to conflicts of interest. The technology bubble in the second half of the 1990s provides a good example of how the conflict works. Dot.com stocks rose initially on the basis of a conviction that technology had fundamentally changed the way the economy worked, so that expectations of future profits spiralled while conventional methods of company valuation were abandoned. One consequence of this was that funds invested in unglamorous ‘value’ sectors underperformed the market.

Either way, pricking involves the central banker in substantial career risk because the logic of incurring a modest recession today to avoid a deeper one tomorrow is lost on politicians. They will simply note the current loss of output and jobs and call for the central banker’s head. That, no doubt, was why Alan Greenspan was so terrified of blowing the US economy out of the water with a pre-emptive strike against the technology bubble. The central banker’s dilemma was summed up with characteristic shrewdness by J. K. Galbraith, whose politics and economics were as far removed from Alan Greenspan’s as it was possible to be, in his book The Great Crash 1929: Action to break up a boom must always be weighed against the chance that it will cause unemployment at a politically inopportune moment. Booms, it must be noted, are not stopped until after they have started.

 

pages: 561 words: 87,892

Losing Control: The Emerging Threats to Western Prosperity by Stephen D. King

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Admiral Zheng, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, capital controls, Celtic Tiger, central bank independence, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, demographic dividend, demographic transition, Deng Xiaoping, Diane Coyle, Fall of the Berlin Wall, financial deregulation, financial innovation, Francis Fukuyama: the end of history, full employment, George Akerlof, German hyperinflation, Gini coefficient, hiring and firing, income inequality, income per capita, inflation targeting, invisible hand, Isaac Newton, knowledge economy, labour market flexibility, labour mobility, low skilled workers, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, Ponzi scheme, price mechanism, price stability, purchasing power parity, rent-seeking, reserve currency, rising living standards, Ronald Reagan, savings glut, Silicon Valley, Simon Kuznets, sovereign wealth fund, spice trade, statistical model, technology bubble, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, Washington Consensus, women in the workforce, working-age population, Y2K, Yom Kippur War

This might not matter if most emerging economies’ business cycles were tied to the US business cycle because, in those circumstances, Fed policy that was good for the US goose would also be good for the emerging-market gander. But emerging-market business cycles are not perfectly linked with the US. In the late 1990s, at the time of the Asian crisis, the US economy was booming. In the early years of the twenty-first century, when the US economy was struggling to cope with the consequences of the collapse in its late 1990s technology bubble, emerging markets were booming. Consider once again the linkages between US monetary policy and monetary conditions in emerging markets. If the US economy is relatively weak, the Federal Reserve will naturally have a bias towards ‘easy’ monetary policy. Indeed, in 2003, Fed funds, the key US policy rate, fell to just 1 per cent, a remarkably low number compared with earlier history. The dollar came under tremendous downward pressure as investors pulled their savings out of the US to hunt for returns elsewhere in the world.

JAPAN: AN EARLY LESSON IN AGEING The evidence to support this view is striking. In 1989, Japanese boomers believed they had made a killing. The stock market had risen dramatically through the 1980s and rising land prices seemed to be a one-way bet. Shortly afterwards, however, equity prices and then land prices began to fall, marking the beginning of a twenty-year period of persistent asset-price declines. Ten years later, at the height of the technology bubble in 1999, American and European boomers found themselves in a similar state of fervour. Even when stock prices slumped in 2000, house prices carried on rising, creating the false impression that people genuinely owned assets that would support them in their impending retirements. Other, more esoteric, assets became increasingly popular. Pension funds loaded up on asset-backed securities, which too often were linked to poor-quality loans in the US housing market.

 

pages: 309 words: 95,495

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe by Greg Ip

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Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, double helix, endowment effect, Exxon Valdez, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, Kenneth Rogoff, London Whale, Long Term Capital Management, market bubble, moral hazard, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, savings glut, technology bubble, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk

I asked a Fed governor that fall: should the Fed repeatedly intervene when the market was in trouble? Well, I remember her answering, it’s a central bank’s duty to act when the financial system is threatened. In the following decades, I saw a fiscal crisis convulse interest rates and the dollar in my native Canada, an exchange rate crisis erupt in Europe in 1992, the Asian financial crisis, the near failure of Long-Term Capital Management in 1998, and then the rise and fall of the technology bubble. By 2007, I was looking for the next crisis everywhere: in home prices, leveraged buyouts, the trade deficit. I was not, however, looking for catastrophe. I had by now developed a deep respect for the authorities’ ability to counteract mayhem; I assumed that the economy, though it might get bumped around a bit, would come out okay. A similar thought process was going on in the world’s central banks.

But in those rarefied times, it was: the following year, though the company was still losing money and the Nasdaq bubble was deflating, Amazon borrowed $870 million in euros, also convertible to stock. In effect, Amazon exploited the irrational exuberance of the dot-com bubble to stay afloat long enough to become a colossus, revolutionizing not just retailing but book publishing and cloud computing. Between 2004 and 2008, it paid back all its bondholders, some at a premium, except those who had converted their bonds to shares. Dot-com stocks were the most famous players during the technology bubble, but more money was lost in a different sector. A host of existing and start-up telecommunications companies persuaded investors there was a mint to be made laying the fiber-optic networks that would carry booming Internet traffic between cities and continents. To finance the high costs of laying miles of fiber, telecommunications companies such as Global Crossing, Williams Communications, Tycom, Flag, and 360 Networks raised billions of dollars issuing stock and bonds.

 

pages: 584 words: 187,436

More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby

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Andrei Shleifer, Asian financial crisis, asset-backed security, automated trading system, bank run, barriers to entry, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, capital controls, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, currency peg, Elliott wave, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, German hyperinflation, High speed trading, index fund, Kenneth Rogoff, Long Term Capital Management, margin call, market bubble, market clearing, market fundamentalism, merger arbitrage, moral hazard, natural language processing, Network effects, new economy, Nikolai Kondratiev, pattern recognition, pre–internet, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical arbitrage, statistical model, technology bubble, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs

“The yen, which was as liquid as water, suddenly dried up like the Sahara,” he pleaded to his investors, failing to add that liquidity had evaporated not least because of Tiger’s recklessness.5 Tiger had been short an astonishing $18 billion worth of the currency—a position almost twice as large as Druckenmiller’s famous bet against sterling.6 By trading currencies even more ambitiously than his rivals at Quantum, Robertson had baked his own Sahara.7 In the aftermath of this disaster, Robertson promised his investors that he would scale back his currency trading. But Tiger’s yen losses were just a foretaste of the troubles in store—troubles that came in the surprising guise of a technology bull market. THE TECHNOLOGY BUBBLE OF THE LATE 1990S SERVES AS a test for two views of hedge funds.8 On the one hand there is the optimistic view—that sophisticated traders will analyze prices and move them to their efficient level. On the other hand there is a darker view—that sophisticated traders lack the muscle to enforce price efficiency and that, knowing the limits of their power, they will prefer to ride trends rather than fight them.

So they just let Julian get bigger and bigger without letting him know that he was becoming the market.” 7. Michael Derchin, Tiger’s airline analyst, says Robertson “saw Soros make a lot of money on the macro side, and I think he got attracted to it. And so he made some very big macro bets that blew up on him.” Michael Derchin, interview with the author, March 18, 2008. 8. For an excellent scholarly treatment of this dilemma, see Markus K. Brunnermeier and Stefan Nagel, “Hedge Funds and the Technology Bubble,” Journal of Finance 59, no. 5 (October 2004). 9. John Cassidy, Dot.con: The Greatest Story Ever Sold (New York: HarperCollins, 2002), pp. 3–8. 10. Julian H. Robertson, letter to the limited partners, August 7, 1998. 11. Tiger’s share of US Airways fluctuated around the 20 percent level. In June 1998 it was just about exactly 20 percent, judging from SEC filings. On March 5, 1999, Bloomberg reported that Tiger owned about 19 percent of US Airways.

An academic study of hedge funds in this period confirmed that their portfolios were heavy with tech stocks, especially in the third quarter of 1999. Technology stocks went from 16 percent of their equity portfolios to 29 percent in just three months, even though the tech sector accounted for just 17 percent of all U.S. stocks at the end of September. See Brunnermeier and Nagel, “Hedge Funds and the Technology Bubble.” 30. John Griffin, interview with the author, November 29, 2007. 31. Oppel, “A Tiger Fights.” 32. Julian H. Robertson, letter to the limited partners, December 8, 1999. 33. Julian H. Robertson, letter to the limited partners, January 7, 2000. 34. Julian H. Robertson, letter to the limited partners, March 30, 2000. 35. Druckenmiller interview. The role of Celera Genomics as a trigger is suggested in a detailed reconstruction of Quantum’s last weeks, which quotes Druckenmiller as saying to a trader, “This is insane.

 

pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

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Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, Corn Laws, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, interest rate swap, Isaac Newton, iterative process, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour mobility, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Naomi Klein, Nick Leeson, Northern Rock, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, value at risk, Washington Consensus, Yom Kippur War

Why did the Fed allow euphoria to run loose in the 1990s? Greenspan himself had felt constrained to warn about ‘irrational exuberance’ on the stock market as early as 5 December 1996, shortly after the Dow had risen above 6,000.z Yet the quarter point rate increase of March 1997 was scarcely sufficient to dispel that exuberance. Partly, Greenspan and his colleagues seem to have underestimated the momentum of the technology bubble. As early as December 1995, with the Dow just past the 5,000 mark, members of the Fed’s Open Market Committee speculated that the market might be approaching its peak.99 Partly, it was because Greenspan felt it was not for the Fed to worry about asset price inflation, only consumer price inflation; and this, he believed, was being reduced by a major improvement in productivity due precisely to the tech boom. 100 Partly, as so often happens in stock market bubbles, it was because international pressures - in this case, the crisis precipitated by the Russian debt default of August 1998 - required contrary action.101 Partly, it was because Greenspan and his colleagues no longer believed it was the role of the Fed to remove the punchbowl from the party, in the phrase of his precursor but three, William McChesney Martin, Jr.102 To give Greenspan his due, his ‘just-in-time monetary policy’ certainly averted a stock market crash.

gold standard 58 Britain and 55-6 and crisis of 1914 300 inter-war years 161 Keynes on 58 and rentes 100 spread of 294 US abandonment of 307 and Wall Street Crash 161 Gordy, Berry 250 Gore, Al 117 An Inconvenient Truth 224 government bonds 65-72, 100 Government National Mortgage Association see Ginnie Mae government sponsored enterprises (GSEs) 251 graduates 5 grain 27 Grameen (‘Village’) Bank 279-80 Gramm, Senator Phil 170 Graunt, John 188 Gray, Edwin J. 258 Great Depression 9 and home ownership 241-6 see also unemployment Great Fire (1666) 186 Great Inflation see inflation Great Scene of Folly, The 147 Greece 296 Greenspan, Alan: and Black Monday (1987) 166 on bond market 65 and Enron 168-70 on ‘irrational exuberance’ 121 and mortgage crisis 266 successes of 168-9 and technology bubble 167-8 Greenwich, Connecticut 320 Griffin, Kenneth C. 2 Grinspun, Bernardo 111 Gross, William 68 gross domestic product (GDP): financial sectors and 5 international data 210-11 growth (economic) 31 GSEs see government sponsored enterprises Gualpa, Diego 21 Guangzhou (Canton) 289-91 Guatemala 2 Guicciardini, Francesco 46 Habsburg Empire 3 Haghani, Victor 322 ‘haircuts’ 115 Haiti 275 Halley, Edmund 188 Hamburg 186n.

 

pages: 500 words: 145,005

Misbehaving: The Making of Behavioral Economics by Richard H. Thaler

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Albert Einstein, Amazon Mechanical Turk, Andrei Shleifer, Apple's 1984 Super Bowl advert, Atul Gawande, Berlin Wall, Bernie Madoff, Black-Scholes formula, capital asset pricing model, Cass Sunstein, Checklist Manifesto, choice architecture, clean water, cognitive dissonance, conceptual framework, constrained optimization, Daniel Kahneman / Amos Tversky, delayed gratification, diversification, diversified portfolio, Edward Glaeser, endowment effect, equity premium, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, George Akerlof, hindsight bias, Home mortgage interest deduction, impulse control, index fund, invisible hand, Jean Tirole, John Nash: game theory, John von Neumann, late fees, law of one price, libertarian paternalism, Long Term Capital Management, loss aversion, market clearing, Mason jar, mental accounting, meta analysis, meta-analysis, More Guns, Less Crime, mortgage debt, Nash equilibrium, Nate Silver, New Journalism, nudge unit, payday loans, Ponzi scheme, presumed consent, pre–internet, principal–agent problem, prisoner's dilemma, profit maximization, random walk, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, technology bubble, The Chicago School, The Myth of the Rational Market, The Signal and the Noise by Nate Silver, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, ultimatum game, Walter Mischel

Graham noted that his strategy of buying the cheapest members of the Dow Jones Industrials would not have worked over an earlier period, 1917–33, and he cautioned that “Undervaluations caused by neglect or prejudice may persist for an inconveniently long time, and the same applies to inflated prices caused by overenthusiasm or artificial stimulants.” That advice was worth heeding during the technology bubble of the late 1990s, when value investing performed spectacularly badly, since the most expensive stocks, the Internet darlings, kept increasing in price, leaving those boring value stocks behind. Many in the investment community revered Benjamin Graham, but by the early 1980s most academic financial economists considered his work passé. A simple strategy of buying “cheap” stocks was obviously inconsistent with the Efficient Market Hypothesis, and Graham’s methods were hardly state of the art.

., 191–92, 195–98, 196 calendar effects in, 174 cheap, 219–21 growth, 28, 214–15, 222, 227 October 1987 crash of, 7, 232 regression toward the mean, 222–23 value, 214–15, 220–21, 222, 227–28 variability of prices of, 230–33, 231, 367 “Stock Prices and Social Dynamics” (Shiller), 233 strikes, 372 Strotz, Robert, 99–100, 102, 108 Structure of Scientific Revolutions, The (Kuhn), 169 Stubhub.com, 18–19 stub value, 246, 246 Stulz, René, 243 Sufi, Amir, 78 suggested retail price, 61–63 Summers, Larry, 178, 239–40, 247 sunk costs, 21, 52, 64–73, 118, 180, 261 and revised Ultimatum Game, 266–67 Sunstein, Cass, 258, 260, 269, 322, 323–25, 330, 333, 343, 345 on ethics of nudging, 337n Super Bowl, 139n, 359 supermarkets, 62n supposedly irrelevant factors (SIFs), 9, 24, 315 budgets and, 74 luck on Deal or No Deal, 298 noise traders’ use of, 240 purchase location as, 61 in retirement savings, 310–11, 312, 315 and returns on investments, 196 sunk costs as, 267 tax cuts as, 350 surcharge, discount vs., 18 surge pricing, 136–38, 200n surplus value, 285–86, 285, 286, 288 Susanne (game show contestant), 299–300 Sydney, Australia, 138n Tarbox, Brian, 317–19, 321 tax cuts, 350–51 taxes, 165 compliance with, 334–36 and savings, 309–13 taxi drivers, hours worked by, 11, 199–201, 295 Taylor, Tim, 173n technology bubble, 7, 78, 220, 234, 250, 252 teenage pregnancy, 342 Teichman, Doron, 269 10% club, 277–78, 293–94 test periods, 227 texting, 190n, 342 Thaler, Alan, 14 Thaler, Jessie, 129 Thaler, Maggie, 118n theories, normative vs. descriptive, 25 theory-induced blindness, 93–94, 128 Theory of Games and Economic Behavior, The (von Neumann and Morgenstern), 29 Theory of Interest, The (Fisher), 88–89 Theory of Moral Sentiments, The (Smith), 87–88 “THERE ARE IDIOTS” paper (Summers), 240–41 Thinking, Fast and Slow (Kahneman), 38, 103n, 109, 186 Thompson, Rex, 242 Tierney, John, 327 time, value of, 21 time-inconsistency, 92–93, 99 time-shares, 71 Tirole, Jean, 307 Tobin, James, financial economics work of, 208 tokens, 149–53, 151, 263, 264–65 Tories, see Conservative Party, U.K.

 

pages: 207 words: 63,071

My Start-Up Life: What A by Ben Casnocha, Marc Benioff

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affirmative action, Albert Einstein, barriers to entry, Bonfire of the Vanities, business process, call centre, David Brooks, don't be evil, fear of failure, hiring and firing, index fund, informal economy, Jeff Bezos, Lao Tzu, Menlo Park, Paul Graham, place-making, Ralph Waldo Emerson, Sand Hill Road, side project, Silicon Valley, Steve Jobs, Steven Pinker, technology bubble, traffic fines

ComplainandResolve.com had established relationships with several dozen local government agencies in Cali- MY DOT-COM LIFE BEGINS 11 fornia and helped more than one hundred citizens resolve their issues. By this measure I considered the effort a success, despite making no money. So that summer after seventh grade I reflected on how I had gotten engrossed in something as exciting and exhausting as my own internet company, even on a small scale. I wasn’t the only one reflecting. The 1990s technology bubble had burst and there were quite a few entrepreneurs doing some serious thinking . . . only theirs was disbelief over how they could have blown through $50M in a couple years, whereas mine was whether I wanted to really be someone different or instead spend more time with school friends talking about who were the hottest girls. (If you don’t remember sixth-seventheighth grades, this is the focus of most boy-to-boy conversations.)

 

State-Building: Governance and World Order in the 21st Century by Francis Fukuyama

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Asian financial crisis, Berlin Wall, Bretton Woods, centre right, corporate governance, demand response, Doha Development Round, European colonialism, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, George Akerlof, Hernando de Soto, Nick Leeson, Potemkin village, price stability, principal–agent problem, rent-seeking, road to serfdom, Ronald Coase, structural adjustment programs, technology bubble, The Market for Lemons, The Nature of the Firm, transaction costs, Washington Consensus

However, there are at least three basic reasons why there can be no optimal specification of formal institutions and thus no optimal form of organization, particularly for public sector agencies. First, the goals of many organizations are unclear. Agents can carry out the will of principals only if the principals know 3 This approach has a number of drawbacks, as evidenced by the corporate scandals of Enron, Worldcom, and other companies at the end of the technology bubble of the 1990s. Stock prices reflect too many factors, many of them not under the control of managers, to be an accurate measure of the management’s individual efforts. weak states and the black hole of public administration 51 what they want the agents to do, but this is not always the case. Goals often emerge and evolve through complicated interactions between organizational players or are defined by the roles assigned to players in the organization—the so-called where you sit is where you stand rule (Allison 1971).

 

pages: 280 words: 73,420

Crapshoot Investing: How Tech-Savvy Traders and Clueless Regulators Turned the Stock Market Into a Casino by Jim McTague

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algorithmic trading, automated trading system, Bernie Madoff, Bernie Sanders, Bretton Woods, buttonwood tree, credit crunch, Credit Default Swap, financial innovation, Flash crash, High speed trading, housing crisis, index arbitrage, locking in a profit, Long Term Capital Management, margin call, market bubble, market fragmentation, market fundamentalism, naked short selling, pattern recognition, Ponzi scheme, quantitative trading / quantitative finance, Renaissance Technologies, Ronald Reagan, Sergey Aleynikov, short selling, Small Order Execution System, statistical arbitrage, technology bubble, transaction costs, Vanguard fund, Y2K

He happily appeared in Washington, DC, on behalf of the industry at several events hosted by the SEC and by the Commodities Futures Trading Commission (CFTC). The good-natured Gorelick described himself as a “recovering lawyer.” During the 1990s, he migrated from a big New York legal firm to an Internet start-up, Deja.com, a shopping comparison site where he served as a corporate counsel. He transitioned into a business role, and he liked it. The technology bubble burst in 2000 before Deja.com could bring an initial public offering (IPO) to market. It sold its shopping service to EBay and its newsgroup search archive to Google.1 Gorelick spent the next six months consulting and mulling over different career options. During that hiatus, he had some discussions with a former colleague—Robbie Robinette, who had a background in physics—about using sophisticated computers to trade stocks.

 

pages: 270 words: 75,803

Wall Street Meat by Andy Kessler

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accounting loophole / creative accounting, Andy Kessler, automated trading system, banking crisis, George Gilder, index fund, Jeff Bezos, market bubble, Menlo Park, pets.com, rolodex, Sand Hill Road, Silicon Valley, Small Order Execution System, Steve Jobs, technology bubble, Y2K

After Spitzer released these emails to the press, who quickly wrote huge pieces on New York nursery schools, Jack retracted these statements by declaring he said these things to “bolster his professional importance.” Now that’s the Jack that I remember. Jack paid a $15 million fine and is now barred for life from the securities business. My guess is that is a relief to him. As a boxer, he knows how to get up from a knockout punch. · · · There are plenty of smoking guns to blame for the Internet and Telecom and Technology Bubble. None are very satisfying. Fed Chairman Alan Greenspan pumped the money supply to stave off a banking crisis based on Y2K computer problems and the excess money went into the stock market. Or how about excessive stock options led greedy management to fudge earnings numbers to pump up their stock. Yeah, maybe. It was structural problems on Wall Street that created the bubble, though excess money supply and corrupt management certainly contributed lots of the hot air.

 

pages: 251 words: 76,128

Borrow: The American Way of Debt by Louis Hyman

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asset-backed security, barriers to entry, big-box store, cashless society, collateralized debt obligation, credit crunch, deindustrialization, deskilling, diversified portfolio, financial innovation, Ford paid five dollars a day, Home mortgage interest deduction, housing crisis, income inequality, market bubble, McMansion, mortgage debt, mortgage tax deduction, Network effects, new economy, Plutocrats, plutocrats, price stability, Ronald Reagan, statistical model, technology bubble, transaction costs, women in the workforce

Everyone believed that the risks associated with AAA, AA, and BBB securities were accurate. The same AAA rating given to the United States could be given, through insurance and securitization, to nearly any group of home loans. Having steadily risen since 1991, housing prices began to rise rapidly in the late 1990s. Bolstered by the low interest rates intended to stimulate the economy after the technology bubble collapse of 2000, Americans dived in headfirst. For most people, particularly of modest means, mortgages were the only kind of leverage they were able to get. Securitization provided endless capital, and investors required originators to produce more mortgages in which to invest. The traditional 20 percent down payment was no longer needed. Americans on the make could borrow large sums of money at a low cost and watch as house prices rose.

 

pages: 297 words: 89,820

The Perfect Thing: How the iPod Shuffles Commerce, Culture, and Coolness by Steven Levy

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Apple II, British Empire, Claude Shannon: information theory, en.wikipedia.org, indoor plumbing, Internet Archive, Jeff Bezos, Jony Ive, Kevin Kelly, Sand Hill Road, Saturday Night Live, Silicon Valley, social web, Steve Ballmer, Steve Jobs, Steve Wozniak, Steven Levy, technology bubble, Thomas L Friedman

The iPod, of course, is only the most recent, and most compelling, advance in a movement of portable cocooning that's been under way for decades. Even before personal stereos, some critics had observed the lure of isolated musical environments, which were then mostly found in the semiprivate enclosures of automobiles. In his 1974 book Television: Technology and Cultural Form, the sociologist Raymond Williams used the term "mobile privatization" to describe the phenomenon of people forming technological bubbles around themselves, isolating themselves from the scrum of human relations. "What is experienced ... in the conditioned atmosphere and internal music of this windowed shell," he wrote, is "the pursuit of self-determined private choices." Sounds good to me. But Williams was less into celebrating choice than decrying its effect. Technology, he was saying, was making us into islands, particularly in our cars.

 

pages: 397 words: 112,034

What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

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affirmative action, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Bretton Woods, capital controls, Cass Sunstein, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial innovation, floating exchange rates, full employment, Gini coefficient, global reserve currency, global village, high net worth, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, invisible hand, Just-in-time delivery, Kenneth Rogoff, labour market flexibility, labour mobility, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, sovereign wealth fund, special drawing rights, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Washington Consensus, women in the workforce, yield curve

Chinese official purchases could easily give a significant boost to the confidence of the gold market in 2012 or 2013, but the market will not know what is happening until the central bank makes an announcement. The price of gold has reached a new high in nominal terms, but it will not regain the inflation-adjusted peak it had in 1980 until the price rises to nearly $2,400 per ton. The price of gold began to rally in 2001 when the world economy was recovering from the collapse of the technology bubble. The price gains occurred against a backdrop of low US interest rates, record current account imbalances, and the emergence of China as a major economic power. The current economic environment will be conducive to further price gains. Interest rates are at record lows. Central banks will have to maintain accommodative monetary policies in order to protect their banking systems. The dollar benefitted from problems in Europe, but the United States is also confronting unprecedented fiscal deficits.

 

pages: 444 words: 86,565

Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum, Joshua Pearl, Joseph R. Perella

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asset allocation, asset-backed security, bank run, barriers to entry, capital asset pricing model, collateralized debt obligation, corporate governance, credit crunch, discounted cash flows, diversification, fixed income, London Interbank Offered Rate, performance metric, shareholder value, sovereign wealth fund, technology bubble, time value of money, transaction costs, yield curve

They must be viewed within the context of specific sectors and cycles (e.g., housing, steel, and technology). These conditions directly affect availability and cost of acquisition financing and, therefore, influence the price an acquirer is willing, or able, to pay. They also affect buyer and seller confidence with respect to undertaking a transaction. For example, at the height of the technology bubble in the late 1990s and early 2000s, many technology and telecommunications companies were acquired at unprecedented multiples. Equity financing was prevalent during this period as companies used their stock, which was valued at record levels, as acquisition currency. Boardroom confidence was also high, which lent support to contemplated M&A activity. After the bubble burst and market conditions adjusted, M&A activity slowed dramatically and companies changed hands for fractions of the multiples seen just a couple of years earlier.

 

pages: 353 words: 104,146

European Founders at Work by Pedro Gairifo Santos

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business intelligence, cloud computing, crowdsourcing, fear of failure, full text search, information retrieval, inventory management, iterative process, Jeff Bezos, Lean Startup, Mark Zuckerberg, natural language processing, pattern recognition, pre–internet, recommendation engine, Richard Stallman, Silicon Valley, Skype, slashdot, Steve Jobs, Steve Wozniak, subscription business, technology bubble, web application, Y Combinator

I also restructured the software development process, created a brand new internet-based business intelligence product and, over the next year and a half, we fixed the buggy product line which, in the end, was very attractive to customers. We started to grow again and over two years, our market cap went from $100 million to almost $5 billion. 1997 to 1999 was an amazing time for the company as we expanded into more and more countries. When the technology bubble burst, we emerged relatively unscathed because by then we were a large, stable, profitable company with thousands of customers. Our market cap dropped somewhat, but we were in good shape, and we felt that it was time to leapfrog our competition. We had been competing against Cognos for a very long time and it was head-to-head. One year they were number one, another year we were number one.

 

pages: 317 words: 106,130

The New Science of Asset Allocation: Risk Management in a Multi-Asset World by Thomas Schneeweis, Garry B. Crowder, Hossein Kazemi

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asset allocation, backtesting, Bernie Madoff, Black Swan, capital asset pricing model, collateralized debt obligation, commodity trading advisor, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fixed income, high net worth, implied volatility, index fund, interest rate swap, invisible hand, market microstructure, merger arbitrage, moral hazard, passive investing, Richard Feynman, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, short selling, statistical model, systematic trading, technology bubble, the market place, Thomas Kuhn: the structure of scientific revolutions, transaction costs, value at risk, yield curve

In the mid 1990s, the growth of new trading technologies, emerging markets and market liquidity lead to a rise of various equity and fixed income trading and arbitrage strategies. The financial crisis of 1998 exposed the risks of these strategies in terms of liquidity and transparency. Soon after however, the internet boom triggered the flood of capital into equity based strategies, including private equity. The market decline after the technology bubble in the early 2000s brought a renewed interest in risk managed products. Unfortunately, it was these very structured products that eventually failed in the 2007 and 2008 credit crisis and have focused investor and government concerns on issues related to various structured products and the use of over-the -counter derivatives in various fund products. It seems unlikely that investors will suddenly overcome the urge to invest in last year’s strategy.

 

pages: 313 words: 101,403

My Life as a Quant: Reflections on Physics and Finance by Emanuel Derman

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Berlin Wall, bioinformatics, Black-Scholes formula, Brownian motion, capital asset pricing model, Claude Shannon: information theory, Emanuel Derman, fixed income, Gödel, Escher, Bach, haute couture, hiring and firing, implied volatility, interest rate derivative, Jeff Bezos, John von Neumann, law of one price, linked data, Long Term Capital Management, moral hazard, Murray Gell-Mann, pre–internet, publish or perish, quantitative trading / quantitative finance, Richard Feynman, Sharpe ratio, statistical arbitrage, statistical model, Stephen Hawking, Steve Jobs, stochastic volatility, technology bubble, transaction costs, value at risk, volatility smile, Y2K, yield curve, zero-coupon bond

Each week I went to two fixed-income risk meetings, one equities risk meeting, one firmwide risk committee meeting, at least two Derivatives Analysis group meetings, and a meeting of all the managers in Firmwide Risk. Then there were three different meetings with three different controllers for equities, fixed income, and currencies and commodities respectively, as well as the periodic meeting of all the VPs in Firmwide Risk. That was when times were good. By mid-2000, after the bursting of the technology bubble and the subsequent decline in all stock markets, I had many more meetings with discouraged young quants in my group who foresaw a very limited upside. By early 2001 I was spending a large fraction of my time trying to cheer up disgruntled but talented people. There was one real perquisite to being a senior person in Firmwide Risk-you got to participate in the firm's central risk meeting once a week and watch all the biggest big shots in action as we listened to the state of our business prospects and discussed current events and strategies.

 

pages: 398 words: 100,679

The Knowledge: How to Rebuild Our World From Scratch by Lewis Dartnell

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agricultural Revolution, Albert Einstein, Any sufficiently advanced technology is indistinguishable from magic, clean water, Dava Sobel, decarbonisation, discovery of penicillin, Dmitri Mendeleev, global village, Haber-Bosch Process, invention of movable type, invention of radio, invention of writing, iterative process, James Watt: steam engine, John Harrison: Longitude, lone genius, nuclear winter, Richard Feynman, Richard Feynman, technology bubble, the scientific method, Thomas Kuhn: the structure of scientific revolutions, trade route

You might even briefly entertain some fantasy of moving into a plush penthouse apartment, surveying the serene, deserted city around you through its floor-to-ceiling plate-glass windows, and cultivating all you need to eat in a dense permaculture in the roof garden. A more plausible model for post-apocalyptic city dwelling would be to live immediately adjacent to a major park and plow up the turf to cultivate crops. In some cities, the environment will quickly become uninhabitable once the technological bubble bursts. Places like Los Angeles and Las Vegas have been incongruously built in very arid or even desert locales, and will rapidly wither as maintenance fails on the aqueducts supplying them with water from afar. Washington, DC, on the other hand, will face the opposite problem, as it was built on former swampland that will begin to revert to its original state with the loss of drainage. I suspect, therefore, that you’ll find it far easier to leave the cities for good and move to a more appropriate site: a rural location with fertile, cultivable ground and older buildings better suited for off-grid habitation.

 

pages: 304 words: 93,494

Hatching Twitter by Nick Bilton

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4chan, Burning Man, friendly fire, index card, Jeff Bezos, Kevin Kelly, Mahatma Gandhi, Mark Zuckerberg, pets.com, rolodex, Saturday Night Live, side project, Silicon Valley, Skype, social web, Steve Ballmer, Steve Jobs, Steven Levy, technology bubble, traveling salesman, WikiLeaks

Sometimes he sat and sketched in his notepad, staring out the window as bike messengers and start-up founders streamed by. Other times he hung out in the 550-foot-long park, an ovate patch of grass that looked like it belonged in front of the royal palace in London, not in San Francisco’s warehouse district. In the center of the park was a rickety old brown swing set. South Park had played a crucial role in the late nineties as home to many of the now-defunct start-ups that quickly wilted away after the technology bubble burst. Pets.com and other start-ups that had collectively squandered hundreds of millions of dollars on ridiculous parties, asinine salaries, and expensive TV ads met their timely demise overlooking South Park. It hadn’t always been the epicenter of tech. Before the start-ups had moved in, the park had been home to brothels, drug dealers, dive bars, and sordid hotels. After the bubble had gone pop, it had almost returned to its Seedyville roots, but in mid-2005 South Park and the Web were making a comeback.

 

When the Money Runs Out: The End of Western Affluence by Stephen D. King

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Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

Many of the factors that led to such scintillating rates of economic expansion in the Western world in earlier decades are no longer working their magic: the forces of globalization are in retreat, the boomers are ageing, women are thankfully better represented in the workforce,3 wages are being squeezed as competition from the emerging superpowers hots up and, as those superpowers demand a bigger share of the world’s scarce resources, Westerners are forced to pay more for food and energy. In the 1990s, it looked for a while as though new technologies might overcome these constraints. We hoped our economies would still be able to expand thanks to the impact of technology on 2 4099.indd 2 29/03/13 2:23 PM Introduction productivity. The story didn’t last. The technology bubble burst in 2000. Fearing the onset of a Japanese-­style stagnation, Western policy-­makers pulled out all the stops: interest rates plunged, taxes were cut and public spending was boosted. Yet, even before the onset of the subprime crisis in 2007, it looked as though these policies had led only to a serious misallocation of resources: too much money was pouring into housing and financial services (and, particularly across Europe, into public spending) and not enough into productive investment.

 

pages: 407 words: 103,501

The Digital Divide: Arguments for and Against Facebook, Google, Texting, and the Age of Social Netwo Rking by Mark Bauerlein

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Amazon Mechanical Turk, Andrew Keen, centre right, citizen journalism, collaborative editing, computer age, computer vision, corporate governance, crowdsourcing, David Brooks, disintermediation, Frederick Winslow Taylor, Howard Rheingold, invention of movable type, invention of the steam engine, invention of the telephone, Jaron Lanier, Jeff Bezos, jimmy wales, Kevin Kelly, knowledge worker, late fees, Mark Zuckerberg, Marshall McLuhan, means of production, meta analysis, meta-analysis, Network effects, new economy, Nicholas Carr, PageRank, pets.com, Results Only Work Environment, Saturday Night Live, search engine result page, semantic web, Silicon Valley, slashdot, social graph, social web, software as a service, speech recognition, Steve Jobs, Stewart Brand, technology bubble, Ted Nelson, The Wisdom of Crowds, Thorstein Veblen, web application

That’s why they called me cyberboy. < Douglas Rushkoff > the people’s net Originally published in Yahoo Internet Life (2001). TO THOSE OF US who really love it, the Internet is looking and feeling more social, more alive, more participatory, and more, well, more Internet-y than ever before. This might sound surprising, given the headlines proclaiming the official bursting of the technology bubble. Likewise, analysts on the financial cable channels and the venture capitalists of Silicon Alley now shun any company whose name ends in .com and have moved on to more promising new buzzwords, such as wireless. But the statistics fly in the face of conventional wisdom. In terms of real hours spent online and the number of people getting new accounts every day, Internet use is up. We spent an average of 20.2 hours looking at Internet sites in March 2001, up from 15.9 hours last year and 12.8 hours the year before, according to the latest data from Jupiter Media Metrix.

 

pages: 468 words: 145,998

On the Brink: Inside the Race to Stop the Collapse of the Global Financial System by Henry M. Paulson

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asset-backed security, bank run, banking crisis, Bretton Woods, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Doha Development Round, fear of failure, financial innovation, housing crisis, income inequality, London Interbank Offered Rate, Long Term Capital Management, margin call, moral hazard, Northern Rock, price discovery process, price mechanism, regulatory arbitrage, Ronald Reagan, Saturday Night Live, short selling, sovereign wealth fund, technology bubble, too big to fail, trade liberalization, young professional

Structural differences in the economies of the world had led to what analysts call “imbalances” that created massive and destabilizing cross-border capital flows. In short, we were living beyond our means—on borrowed money and borrowed time. The dangers for the U.S. economy had been obscured by an unprecedented housing boom, fed in part by the low interest rates that helped us recover from the downturn that followed the bursting of the late-’90s technology bubble and the impact of the 9/11 attacks. The housing bubble was driven by a big increase in loans to less creditworthy, or subprime, borrowers that lifted homeownership rates to historic levels. By the time I took office in July 2006, fully 69 percent of U.S. households owned their own homes, up from 64 percent in 1994. Subprime loans had soared from 5 percent of total mortgage originations in 1994 to roughly 20 percent by July 2006.

 

pages: 526 words: 158,913

Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America by Greg Farrell

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Apple's 1984 Super Bowl advert, bank run, banking crisis, bonus culture, call centre, Captain Sullenberger Hudson, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, glass ceiling, high net worth, Long Term Capital Management, mass affluent, Mexican peso crisis / tequila crisis, Plutocrats, plutocrats, Ronald Reagan, six sigma, sovereign wealth fund, technology bubble, too big to fail, yield curve

And with that introduction, Fleming reminded the employees that the company’s underlying business remained sound. He said the story in the morning’s paper was “nonspecific” and “relied on unidentified sources.” He pointed to Cribiore and assured everyone that the search for a new CEO was proceeding “with speed and careful deliberation.” “This is not the first time that our firm has faced challenges,” Fleming continued. “The crash of 1987, the credit crisis of 1998, the bursting of the technology bubble in 2000, and the terror attacks of 9/11. In many ways we can better navigate this challenge because it does not call for an overhaul of our strategy or a resizing of our business. “We have accomplished a great deal in the past five years. Following the bursting of the tech bubble and 9/11, we pulled together as a firm and embarked on a new strategy to create a truly global, diversified financial services company.

 

pages: 349 words: 134,041

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives by Satyajit Das

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accounting loophole / creative accounting, Albert Einstein, Asian financial crisis, asset-backed security, Black Swan, Black-Scholes formula, Bretton Woods, BRICs, Brownian motion, business process, buy low sell high, call centre, capital asset pricing model, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, currency peg, disintermediation, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, Haight Ashbury, high net worth, implied volatility, index arbitrage, index card, index fund, interest rate derivative, interest rate swap, Isaac Newton, job satisfaction, locking in a profit, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Marshall McLuhan, mass affluent, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, mutually assured destruction, new economy, New Journalism, Nick Leeson, offshore financial centre, oil shock, Parkinson's law, placebo effect, Ponzi scheme, purchasing power parity, quantitative trading / quantitative finance, random walk, regulatory arbitrage, risk-adjusted returns, risk/return, shareholder value, short selling, South Sea Bubble, statistical model, technology bubble, the medium is the message, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, volatility smile, yield curve, Yogi Berra, zero-coupon bond

CDOs are also massively leveraged: if you buy the 2% equity in a CDO, then you are 50 times leveraged, compared to the 10 to 12 times that a normal bank uses. Losses and leverage are not good bedfellows. Sound, highly-rated companies also found reefs. Asbestos liability and the Californian electricity deregulation claimed victims. As the credit cycle turned, the arbitrage CDOs were hard hit. They had been based on US high yield (junk) bonds. The US recession and the unwinding of the technology bubble saw record numbers of default. Contagious crises in Asia, Eastern Europe and Latin America didn’t help. The credit models failed miserably. The concept of average credit losses proved average – it seemed the worst case was much worse. If the average was made of one year of very large losses and several years of no losses, then that didn’t work well either. Some CDOs were actively managed. Managers had been appointed to trade the portfolios, the idea being that they would minimize losses by selling deteriorating credits.

 

pages: 487 words: 139,297

Dancing in the Glory of Monsters: The Collapse of the Congo and the Great War of Africa by Jason Stearns

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Berlin Wall, business climate, clean water, colonial rule, failed state, Fall of the Berlin Wall, land tenure, Mahatma Gandhi, means of production, microcredit, technology bubble, transfer pricing, unemployed young men, working-age population, éminence grise

Benjamin Serukiza, the former RCD vice governor of South Kivu, confirmed this: “I had to mediate between local businessmen and the Rwandan brigade commander here. He only wanted to allow one Rwandan trader, who was close to the Rwandan government, to have access to the mine. He said it was for security reasons, but we knew it wasn’t.”43 The initial profits, however, were nothing compared to what was to come. “Everything changed in 2000, when the coltan price soared,” Pierre Olivier remembered. It was a fluke. That year, the information technology bubble coincided with heightened demand for cell phones and the Christmas release of a Sony PlayStation console. Demand for tantalum, the processed form of coltan, had been rising steadily for years, but now the markets got caught up in a buying frenzy. Within months, the local market price of tantalum shot up from $10 to $380 per kilo, depending on the percentage of ore content, while the world price peaked at $600 per kilo of refined tantalum.44 Dozens of comptoirs—mineral trading houses—opened up in Bukavu and Goma to take advantage of the coltan rush.

 

Commodity Trading Advisors: Risk, Performance Analysis, and Selection by Greg N. Gregoriou, Vassilios Karavas, François-Serge Lhabitant, Fabrice Douglas Rouah

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Asian financial crisis, asset allocation, backtesting, capital asset pricing model, collateralized debt obligation, commodity trading advisor, compound rate of return, constrained optimization, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, discrete time, distributed generation, diversification, diversified portfolio, dividend-yielding stocks, fixed income, high net worth, implied volatility, index arbitrage, index fund, interest rate swap, iterative process, linear programming, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, p-value, Ponzi scheme, quantitative trading / quantitative finance, random walk, risk-adjusted returns, risk/return, Sharpe ratio, short selling, stochastic process, systematic trading, technology bubble, transaction costs, value at risk

D1 D2 D3 D4 D5 D6 D7 D8 D9 D10 D1a D1b D1c D10b D10c D10c Index Bull Market Period Mar 2000 Alpha Jan 1998– TABLE 4.12 Persistence in Performance Subperiod Analysis CTA Performance, Survivorship Bias, and Dissolution Frequencies 71 analyses are less significant.9 The table also indicates that each decile is significantly exposed to the CTA Global Index. The R2 is particularly high, especially for the upper deciles, but is generally low for the subdeciles. The central part of Table 4.12 reports the decile analysis over the April 2000 to December 2002 period. This period corresponds to a bear market since the technology bubble exploded in March 2000. It indicates that all the deciles but D6 have negative alphas. The only one significantly negative is D5. This result indicates that no group of funds offers persistent returns during the bear market that began in the first half of 2000. As expected, the top-performing subdecile (D10c) yields a positive (but not significant) alpha. Nevertheless, each decile is significantly positively exposed to the CTA Global Index.

 

pages: 504 words: 139,137

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

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algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Black-Scholes formula, Brownian motion, buy low sell high, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, Eugene Fama: efficient market hypothesis, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, late capitalism, law of one price, Long Term Capital Management, margin call, market clearing, market design, market friction, merger arbitrage, mortgage debt, New Journalism, paper trading, passive investing, price discovery process, price stability, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, systematic trading, technology bubble, time value of money, total factor productivity, transaction costs, value at risk, Vanguard fund, yield curve, zero-coupon bond

Journal of Finance 59, 711–753. Brennan, M. J., and E. S. Schwartz (1977), “Convertible Bonds: Valuation and Optimal Strategies for Call and Conversion,” The Journal of Finance 32, 1699–1715. Brinson, Gary P., L. Randolph Hood, and Gilbert L. Beebower (1986), “Determinants of Portfolio Performance,” Financial Analysts Journal 42(4), 39–44. Brunnermeier, Markus, and Stefan Nagel (2004), “Hedge Funds and the Technology Bubble,” Journal of Finance 59, 2013–2040. Brunnermeier, Markus, Stefan Nagel, and Lasse Heje Pedersen (2008), “Carry Trades and Currency Crashes,” NBER Macroeconomics Annual 23, 313–348. Brunnermeier, M., and L. H. Pedersen (2005), “Predatory Trading,” Journal of Finance 60, 1825–1863. Brunnermeier, M., and L. H. Pedersen (2009), “Market Liquidity and Funding Liquidity,” The Review of Financial Studies 22, 2201–2238.

 

How I Became a Quant: Insights From 25 of Wall Street's Elite by Richard R. Lindsey, Barry Schachter

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Albert Einstein, algorithmic trading, Andrew Wiles, Antoine Gombaud: Chevalier de Méré, asset allocation, asset-backed security, backtesting, bank run, banking crisis, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, Brownian motion, business process, buy low sell high, capital asset pricing model, centre right, collateralized debt obligation, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, discounted cash flows, disintermediation, diversification, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, full employment, George Akerlof, Gordon Gekko, hiring and firing, implied volatility, index fund, interest rate derivative, interest rate swap, John von Neumann, linear programming, Loma Prieta earthquake, Long Term Capital Management, margin call, market friction, market microstructure, martingale, merger arbitrage, Nick Leeson, P = NP, pattern recognition, pensions crisis, performance metric, prediction markets, profit maximization, purchasing power parity, quantitative trading / quantitative finance, QWERTY keyboard, RAND corporation, random walk, Ray Kurzweil, Richard Feynman, Richard Feynman, Richard Stallman, risk-adjusted returns, risk/return, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, sorting algorithm, statistical arbitrage, statistical model, stem cell, Steven Levy, stochastic process, systematic trading, technology bubble, The Great Moderation, the scientific method, too big to fail, trade route, transaction costs, transfer pricing, value at risk, volatility smile, Wiener process, yield curve, young professional

Yet almost all the information one generates is deeply flawed, and is more likely to be flawed, the more JWPR007-Lindsey May 7, 2007 17:27 Allan Malz 303 sophisticated it is. Second, not only is it inevitable that the information is deeply flawed, but it is also not such a bad thing. I’ve been fortunate to be in at least some of the right places at the right time: at the Fed during the Golden Age of Supervision, at RiskMetrics during and after the technology bubble, and at a hedge fund during what may prove the heyday of hedge funds. Perhaps it’s the distorted perspective that comes from studying modern finance too much, but it seems to me that my career has been driven a lot more by my response to random events and larger forces than by my personal attempts to shape a path. Almost like life. JWPR007-Lindsey May 7, 2007 17:27 304 JWPR007-Lindsey May 7, 2007 17:32 Chapter 22 Peter Muller Senior Advisor, Morgan Stanley I ’ve had a fun and lucrative career as a quantitative trader.

 

pages: 515 words: 132,295

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

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3D printing, accounting loophole / creative accounting, additive manufacturing, Airbnb, algorithmic trading, Asian financial crisis, asset allocation, bank run, Basel III, bonus culture, Bretton Woods, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, interest rate derivative, interest rate swap, Internet of things, invisible hand, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, knowledge economy, labor-force participation, labour mobility, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund

Arthur Goldhammer (Cambridge, MA: Belknap Press of Harvard University Press, 2014), 209. 53. Lauren Carroll, “Hillary Clinton: Top Hedge Fund Managers Make More than All Kindergarten Teachers Combined,” PolitiFact, June 15, 2015. 54. William Lazonick, “Profits Without Prosperity,” Harvard Business Review 92, no. 2 (September 2014). 55. James K. Galbraith and Travis Hale, “Income Distribution and the Information Technology Bubble,” Working Paper No. 27, University of Texas Inequality Project, January 2004. 56. Robert Frank, The High-Beta Rich: How the Manic Wealthy Will Take Us to the Next Boom, Bubble, and Bust (New York: Crown Business, 2011), 54. 57. Richard Wilkinson and Kate Pickett, The Spirit Level: Why Equality Is Better for Everyone (London: Penguin Books, 2009). 58. Rana Foroohar, “Thomas Piketty: Marx 2.0,” Time, May 19, 2014. 59.

 

The Future of Technology by Tom Standage

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air freight, barriers to entry, business process, business process outsourcing, call centre, Clayton Christensen, computer vision, connected car, corporate governance, disintermediation, distributed generation, double helix, experimental economics, full employment, hydrogen economy, industrial robot, informal economy, interchangeable parts, job satisfaction, labour market flexibility, market design, Menlo Park, millennium bug, moral hazard, natural language processing, Network effects, new economy, Nicholas Carr, optical character recognition, railway mania, rent-seeking, RFID, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, six sigma, Skype, smart grid, software as a service, spectrum auction, speech recognition, stem cell, Steve Ballmer, technology bubble, telemarketer, transcontinental railway, Y2K

But perhaps the best news for the industry is that there are still plenty of opportunities in the new world of it. “If we go with the market, help our customers to realise the business value of it, then we can be a good business,” says ibm’s Mr Wladawsky-Berger. For a start, all that experi- 38 COMING OF AGE mentation during the dotcom boom actually produced some useful results. Things tried during a technological bubble tend to make a comeback. The first transatlantic cable, for example, was a disaster, but it prompted others to try again. Most business-to-business marketplaces failed dismally, because these start-ups thought technology would quickly overthrow existing power structures, explains Mr Moore. But these firms got one thing right: there are lots of assets trapped in inefficient supply chains.

 

pages: 580 words: 168,476

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

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affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, invisible hand, John Harrison: Longitude, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, London Interbank Offered Rate, lone genius, low skilled workers, Mark Zuckerberg, market bubble, market fundamentalism, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, obamacare, offshore financial centre, paper trading, patent troll, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, women in the workforce

., 131, 132, 285, 317, 318, 350 Sweden, 366 economic mobility in, 18 financial crisis response in, 168, 169, 361 financial stability in, 220 GDP of, 183 inequality in, 23, 127 labor in, 230 tax system in, 22 Switzerland, 183 tariffs, 50, 61, 325 taxes: alternative minimum, 394 on capital gains, 71–72, 87, 88, 115, 211, 274, 330, 361, 378, 395 corporate, 62, 73–74, 95, 115, 142, 179, 214, 215, 221–22, 224, 225, 270, 272, 273–74, 278, 283, 296, 331 economic growth and, 22–23, 84, 86, 88 and economic stimulus, 216, 217, 218, 221 estate, 73, 76, 88, 166, 167, 274, 361, 395 on financial sector, 213–14, 215, 247, 248 globalization and, 62, 63, 142, 278 income distribution and, 30, 31, 72 loopholes in, 42–43, 72, 115, 212, 214, 215, 221, 222, 272, 273 market correction through, 34 middle-class deductions in, 222–24, 379 and national debt, 207, 376 on natural resources, 39–40, 213 on pollution, 213, 215, 224 on poor, 74, 88, 218 progressive, 5, 31, 107, 114–16, 142, 212, 218, 273–74, 379, 395 Reagan’s revision of, 5, 71, 114, 221 regressive, 38, 74, 77, 79, 157, 208, 214, 237, 251, 299 on rent seeking, 39, 115, 212–14, 215, 274, 395 Right’s view of, 216 state, 74 on wealthy, 5, 38, 42–43, 62, 71–73, 74, 76, 77, 84, 86, 87–88, 114, 115, 116, 138, 142, 159, 167, 208, 209, 211, 212, 214–15, 218, 221, 223, 224, 225, 226, 256, 274, 275, 294, 312, 335, 344, 360, 383, 394 technology: bubble in, 85, 87, 88, 89, 211, 243, 391, 396 economic impact of, 30, 79, 80 government investment in, 15, 93, 115, 155, 174, 217, 267, 281, 283 idea-shaping and, 156 labor demand and, 53, 54–56, 63, 79, 80, 277, 280, 283, 334 monopolies in, 42, 44, 45–46, 96 and stock trading, 165 telecommunications: government auction of, 50 monopolization in, 44, 97, 98 see also technology TEPCO, 189 Thaler, Richard, 161 Thatcher, Margaret, 316 Thucydides, 29 Tingbergen, 392 T-Mobile, 44, 203 tobacco industry, xviii, 151, 160, 354, 357 Tocqueville, Alexis de, 288 Townes, Charles, 41 Toxic Asset Relief Program (TARP), 362 trade: agreements on, 140, 141, 324–25, 326 austerity and, 231 globalization of, 61–64, 144, 324–25, 326 imbalances in, 279–80, 396 Treasury bills, 177, 208, 217, 396 Treasury Department, U.S., 61, 246, 253, 258, 353, 369 Tremonti, Giulio, 389 trust, 115, 120, 121–26, 134, 346 Turing, Alan, 41 Turkey, 22, 23 unemployment, xii, xv, 11–12, 13, 74, 89, 91, 179, 207, 393 extent of, 1, 10–11, 15, 75, 301, 302 macroeconomic policies affecting, 38, 61, 62, 64, 82, 85, 86, 230, 231, 236, 237, 238, 239, 240, 241, 242, 251, 259, 260, 261, 262, 263, 379 in manufacturing, 54, 56, 57, 232–33, 285, 321 political importance of, 251–52 stimulus package’s effect on, 232, 236 underreporting of, 11, 15, 291, 304–5 of youth, x, xviii–xix, 12, 265 unemployment insurance, xv, 11–12, 16, 23, 74, 210, 211, 218, 229, 242, 276, 291, 301, 355, 381, 384, 385 Unequal Democracy: The Political Economy of the New Gilded Age (Bartel), xxiv Union Carbide, 189 United Automobile Workers (UAW), 57 United Kingdom, 21, 129, 214 austerity in, 220, 231 economic mobility in, 18, 19 financial crisis response in, 171, 362–63 privatization in, 176, 316, 364 United Nations Development Program (UNDP), 22 United States: alternative futures of, 289 average tax rate in, 72–73 battle of ideas in, 154–55, 157–59, 162–86 changing social patterns in, 14–15 class distinctions in, xvi–xvii, 20, 180, 292 consumption in, 13, 54, 84–85, 86, 89, 104–6, 183, 233, 234, 235, 244, 311, 380, 385 cost of living in, 366 crime in, 15 economic history of, 4–5, 6 economic mobility in, xv, 4, 5, 18–19, 25, 94, 117, 147, 265, 267, 307 educational attainment in, 55 family stresses in, 10, 14, 26, 95, 106, 169–70 global influence of, xii, 137–38, 143–44, 145, 155, 254, 277–78 globalization’s effect in, 62, 63, 64, 184 income inequality in, 2, 3, 4, 7–8, 9, 22, 24, 25, 26, 27, 29, 30, 53, 54, 55, 56, 57, 71, 72, 77, 79–80, 81, 85, 86, 127, 153, 178, 183, 202, 233, 240, 241, 267, 294–95, 296, 297, 298, 299, 300, 311, 328, 332, 335 inequality cycle in, xi, xii, xiv, xx, xxii, 3–4, 18, 31, 76, 77, 82, 86–89, 91, 267 infant and maternal mortality in, 14, 302, 303 international comparisons to, 21–24, 25, 52, 73, 97, 98, 183, 309, 366 labor force polarization in, 8–9, 56, 79, 80, 133, 277 liberty in, 190 life expectancy in, 14, 303 lifetime inequality in, 26, 311 living standards in, xii, 14–15, 16, 24, 25, 26, 95, 98, 99, 183–84, 240, 266, 267, 268 median income in, 22, 295–96, 297, 299, 300 neighborhood segregation in, 75–76 opportunity in, xv, 3, 4, 17–20, 25, 75–76, 94–95, 108, 116, 117, 126, 127, 160, 265, 266, 268, 273, 275, 282, 287, 290 poverty in, 16–17, 26, 27, 38, 84, 298, 305, 306, 311, 332; see also poor value system of, xv, xvii, xx, 144, 187, 266, 288, 289, 292 wealth distribution in, 2, 3, 7, 8, 13–14, 24, 25, 32, 38, 56, 70, 72, 73, 76, 80, 82, 91, 93, 108, 147, 167, 171, 172, 202, 275, 295, 384 see also economy, U.S.; government, U.S.; politics, U.S.

 

pages: 840 words: 202,245

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

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accounting loophole / creative accounting, Asian financial crisis, bank run, Bretton Woods, capital controls, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, laissez-faire capitalism, locking in a profit, Long Term Capital Management, market bubble, minimum wage unemployment, Mont Pelerin Society, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, oil shock, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, shareholder value, short selling, Silicon Valley, Simon Kuznets, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

It is worth summarizing the list of such crises we have already discussed: the defaults on Third World debt in 1982; the stock market crash of 1987; the thrifts failures and junk bond collapse culminating in 1989 and 1990; the Mexican debt crisis in 1994; the Asian financial crisis in 1997; the Russian default in 1998; the collapse of Long-Term Capital Management, also in 1998; and the bursting of the high-technology bubble beginning in 2000. Even given this list, the 2008 crisis, as noted, was much worse. Partly it had to do with excess dollars around the world. There was a rapidly rising flow of capital from overseas countries like China, which had increased its reserves of dollars to several trillion dollars, making funds available for borrowing in the United States at low rates. A high savings rate in China and several other nations, where business and consumers spent less than they could on goods from outside their borders, contributed to huge trade surpluses as local companies took more dollars in than they paid out.

 

pages: 272 words: 19,172

Hedge Fund Market Wizards by Jack D. Schwager

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asset-backed security, backtesting, banking crisis, barriers to entry, Bernie Madoff, Black-Scholes formula, British Empire, Claude Shannon: information theory, cloud computing, collateralized debt obligation, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, diversification, diversified portfolio, family office, financial independence, fixed income, Flash crash, hindsight bias, implied volatility, index fund, James Dyson, Long Term Capital Management, margin call, market bubble, market fundamentalism, merger arbitrage, oil shock, pattern recognition, pets.com, Ponzi scheme, private sector deleveraging, quantitative easing, quantitative trading / quantitative finance, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Sharpe ratio, short selling, statistical arbitrage, Steve Jobs, systematic trading, technology bubble, transaction costs, value at risk, yield curve

See Russian financial crisis of 1998 Spear, Leeds & Kellogg (SLK) Specialists Special situation investing Spinoffs. See also Special situation investing Static hedging Statistical arbitrage strategy Statistical prediction Sticky businesses Stops Subprime mortgages/bonds Systematic trend-following strategy Systematic value approach TABX index Tangible book value (TBV) Tangible common equity Taylor, Martin Technical Analysis (Edwards and McGee) Technology bubble. See also Dot-com bubble TED spread Thames River Capital Management Thorp, Edward firsts achieved by gambling experiments and strategies option pricing model statistical arbitrage strategy warrant pricing model Time arbitrage Time horizons Time value Trade implementation Traders, hiring Trade size. See also Kelly criterion Trading around a position Trading book rules Trading pits, changes since electronic trading Trading rules vs. guidelines Trading style development Trend following Trend-neutral model Trend vs. countertrend methodologies Trinity Industries 200-day moving average Tyco Value and Special Situation Investing course Value at Risk (VAR) Value investing Value Investors Club Value-weighted indexes Vidich, Joe Volatility Volatility assumption Volatility vs. risk Warburg Securities Warrants Weighted indexes Wells Fargo Williams, Greyson Wolfe, Tom Woodriff, Jaffray on data mining on fund capacity statistical prediction research Woodriff Trading Worst of option XLP index You Can Be a Stock Market Genius (Greenblatt)

 

pages: 348 words: 39,850

Data Scientists at Work by Sebastian Gutierrez

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Albert Einstein, algorithmic trading, bioinformatics, bitcoin, business intelligence, chief data officer, clean water, cloud computing, computer vision, continuous integration, correlation does not imply causation, crowdsourcing, data is the new oil, DevOps, domain-specific language, follow your passion, full text search, informal economy, information retrieval, Infrastructure as a Service, inventory management, iterative process, linked data, Mark Zuckerberg, microbiome, Moneyball by Michael Lewis explains big data, move fast and break things, natural language processing, Network effects, nuclear winter, optical character recognition, pattern recognition, Paul Graham, personalized medicine, Peter Thiel, pre–internet, quantitative hedge fund, quantitative trading / quantitative finance, recommendation engine, Renaissance Technologies, Richard Feynman, Richard Feynman, self-driving car, side project, Silicon Valley, Skype, software as a service, speech recognition, statistical model, Steve Jobs, stochastic process, technology bubble, text mining, the scientific method, web application

Gutierrez: How do you describe your work to someone who has very little knowledge of mathematics? Heineike: There are a lot of people in the research, investment, and strategy analysis space with challenging and complex questions about what’s happening or likely to happen in the world. This set of questions encompasses questions like: What do people think about my business? What is the next ­technology bubble? What is a major market player’s long term IP strategy? What do people mean when they say terms like happiness, family, love? The way ­people have historically tried to answer these questions was that they hired ­consultants, some interns, they sat down themselves and googled things, or they had this epically long RSS or Twitter feed that they read and read and read, so that they could eventually summarize their findings into maybe a spreadsheet or a PowerPoint slide.

 

Debtor Nation: The History of America in Red Ink (Politics and Society in Modern America) by Louis Hyman

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asset-backed security, bank run, barriers to entry, Bretton Woods, card file, central bank independence, computer age, corporate governance, credit crunch, declining real wages, deindustrialization, diversified portfolio, financial independence, financial innovation, Gini coefficient, Home mortgage interest deduction, housing crisis, income inequality, invisible hand, late fees, London Interbank Offered Rate, market fundamentalism, means of production, mortgage debt, mortgage tax deduction, p-value, pattern recognition, profit maximization, profit motive, risk/return, Ronald Reagan, Silicon Valley, statistical model, technology bubble, the built environment, transaction costs, union organizing, white flight, women in the workforce, working poor

Always the choice to lend was at the same time a choice to borrow, and that choice was determined by a combination of risk and return—that is, yield on the investment. This process of investment is not unique to debt, it is the foundation of our capitalist system. The current financial crisis stems from the same source as the large capital poured into consumer credit: a frantic drive for yield. Capital sloshed about in the past few years from the technology bubble to the housing bubble, as investors sought safe (but always better than average!) returns on their money. Money poured into the riskiest tranches of mortgage-backed securities, not from malice, but for a simple increase in return over a treasury bond. As this book goes to press, the world’s great capital reserves have fled the equity markets for American federal debt. If this crisis is going to end, there must be more productive places to invest than in the U.S. federal government’s debt.