Business and Economics

Is efficient market theory becoming more efficient? 5/27/17

Article: ""Quants and quirks"     

 >The Efficient Market Hypothesis states that all current information regarding a stock is already built into the stock’s current price. Predicting future stock price movements would require access to future information, which is impossible, meaning that stock price changes cannot be predicted. The Dow Jones lost 23% of its value in a single day (October 19, 1987 - Black Monday). Economists like Robert Shiller won a Nobel Prize by demonstrating that the market’s movements were far more volatile that was considered possible under the EMH.

> A new trend is towards “smart beta”.The beta calculation is essentially a comparison between the movements of an individual stock (or portfolio) and the movements of the market as a whole” (page 210). Once unsystematic risk has been eliminated from a portfolio through diversification, any risk that remains is the market risk or beta. If we assign a beta of one to the market overall, then a stock with a beta of 2 will go up by 20% if the market rises by ten percent. By the same logic, a stock with a beta of 0.5 will only fall 5% if the overall market drops ten percent. The higher the beta, the more volatile the stock and the greater it will reflect any movement in the overall market. Some investors believe even higher returns can be obtained if the total stock market fund is tilted in favor of some strategy or “flavor”. For example, tilt the fund in favor of “value” stocks (stocks with low P/E ratios and low prices relative to book value). Since the tilt happens as the fund is being set up, the fund is passive and trading is minimized. And systematic risk will still be diversified away. But returns (they claim) will be enhanced. Tilting a total stock market portfolio in the direction of one of these strategies is known as a smart beta strategy.

> In that it requires a lot of time and analysis (which costs money) to uncover such “smart beta” strategies, Antti Ilmanen argues that markets are “efficiently inefficient”. Individuals can’t beat the market but large firms with capital and computing power can.

> Andrew Lo of MIT has proposed an “adaptive markets hypothesis” in which markets change in an evolutionary manner. Successful investment strategies persist while unsuccessful ones lose money and fade away.


Overview of Piketty's "Capital" Three years on 5/20/17

Article: "A political economy   

Piketty was one of three empirical economists including Emmanuel Saez and Anthony Atkinson who used tax data to show that over time, in a capitalist economy, wealthy becomes more and more concentrated in the hands of a few.

> Mathematically, this reduces to r > g - the rate of return on investments exceeds the overall growth rate of the economy. Wealth will grow faster than income, allowing wealth to concentrate in the hands of a few families over time.

> The political connection - as wealth becomes more concentrated in the hands of a few, those few will use that wealth to shape laws that allow them even higher rates of return and protect them from competition.


Temp Workers 7/16/16

Article: ""How the 2% lives" 

Temporary workers (with no benefits) make up 2% of the American workforce (3 million people). Since 2009, 10% of all new jobs have been temp jobs. They make 15% less than comparable full-time workers and 15% of them live in poverty. Census Bureau study (2005) says 8 in 10 temp workers would prefer a permanent position - putting the lie to the claim that temp workers enjoy their “flexibility”.  


Minimum Wages 6/25/16

Article: "Minimum Wage - Maximin"  

On June 21st 2016, the city council in Washington, DC voted unanimously to raise the minimum wage to $15 by 2020. Only California and New York have taken comparable action at the state level. But, thanks mainly to local laws, almost 17m workers have benefited from higher minimum wages since the “fight for $15” began, according to the National Employment Law Project. At least 10m of those will eventually receive $15 an hour.

Campaigners claim that higher local minimum wages are necessary to alleviate poverty, particularly as minimum wages are often not adjusted for years at the state and federal levels. Prices are already 10% higher than in 2009, the last time lawmakers upped the federal rate. 

These justified concerns about poverty are often mixed up with anger about stagnant median incomes or inequality. Minimum wages exert little pressure on middle-America’s earnings; neither do they restrain the pay of bankers or CEOs. Until recently it looked like low minimum wages did cause middle-earners to pull further away from very low-earners during the 1980s. But a recent study by economists David Autor, Alan Manning and Christopher Smith suggests that minimum wages explain only 30-40% of this trend.

Minimum-wages, then, are best viewed as one route to helping the lowest earners. Since nobody thinks that low pay is desirable, the argument against minimum-wages is that they destroy jobs. Campaigners deny this, with some justification. A canonical study in 1993 found that employment in New Jersey restaurants increased, rather than fell, in response to a minimum wage rise. More recent research, from 2010, examined all county-pairs that straddle a state border and found that, for the period from 1990 to 2006, differences in minimum wages had no effect on employment in low-wage sectors.

Other economists dispute these findings. But some jobs clearly can survive higher minimum wages. In 2015 more than half of workers earning at or below the federal minimum wage worked in restaurants, bars and the like. Such service jobs cannot be moved overseas, and many, such as cleaning the floor of a McDonalds, are hard to automate. These jobs will survive if firms can tolerate lower profits or raise their prices sufficiently. Soaring demand for services in fast-growing, high-income areas like New York and San Francisco typically enables them to do so. Seattle began raising its minimum wage in April 2015, initially from the state minimum, $9.32, to $11 for large firms. Yet the proportion of jobs in the Seattle area in the food service and preparation industry has grown from 7.2% in April 2015 to 7.4% today.

The canonical study for minimum wage comes from Card and Krueger - "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania".