Shiller quote of the day

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richard
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Shiller quote of the day

Post by richard »

Economists who adhere to rational-expectations models of the world will never admit it, but a lot of what happens in markets is driven by pure stupidity – or, rather, inattention, misinformation about fundamentals, and an exaggerated focus on currently circulating stories.
http://www.project-syndicate.org/commen ... 78/English
jln
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Re: Shiller quote of the day

Post by jln »

The article Richard cites is about debt-to-GDP ratios, and is well worth reading. Shiller does a great job of cutting through tons of confusion about this topic.

John Norstad
peter71
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Post by peter71 »

Hi John, hi Richard,

If only because you both are on Shiller's side this time I'll give this particular piece a thumbs down. :D

To me the ubiquity of the 90% figure is itself evidence that few are attaching any particular import to a simplistic round figure like 100%, and it's also just not clear to me that the median market participant is behaving irrationally here . . . is there some asset that's trading at panic/bubble prices here and that Shiller can thereby cash in on?

Best,
Pete
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bob90245
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Post by bob90245 »

peter71 wrote:... and it's also just not clear to me that the median market participant is behaving irrationally here . . . is there some asset that's trading at panic/bubble prices here and that Shiller can thereby cash in on?
Whether the market is rational or irrational is complete beside the point. Does it really matter either way? I agree with Peter's final point: show us a trading strategy that you and I can receive alpha consistently after costs.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.
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market timer
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Post by market timer »

Reminiscent of Taleb's rants against value-at-risk without an alternative measure suggested.
Uninvested
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Post by Uninvested »

I hate to say it but I think Schiller has it pegged right.
peter71
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Post by peter71 »

Uninvested wrote:I hate to say it but I think Schiller has it pegged right.
So what's the trade, and how did it work with say, Japan, when it crossed over the 100% public debt to GDP ratio ages ago? For that matter, what's the trade now with Japan close to 200%?
dumbmoney
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Post by dumbmoney »

The article is correct as far as it goes, but doesn't explain why Greece bonds have credit risk and US/UK/Japan/etc bonds don't. It's because Greece bonds are not backed by the currency issuer (the European Central Bank).
I am pleased to report that the invisible forces of destruction have been unmasked, marking a turning point chapter when the fraudulent and speculative winds are cast into the inferno of extinction.
peter71
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Post by peter71 »

Hi Dumbmoney,

Here's some specific passages I object to:
Economists like to talk about thresholds that, if crossed, spell trouble. Usually there is an element of truth in what they say. But the public often overreacts to such talk . . .
Questions: Are we talking about the general public here or the investing public? If the former, are they really fixated on ANY figure re something as obscure as debt-to-GDP . . . if the latter, how about some evidence? How have investors reacted when the many countries that have crossed the 100% threshold did so? Alternatively, what are some similar "magic numbers" that have led to irrational investor behavior?
Could it be that people think that a country becomes insolvent when its debt exceeds 100% of GDP?
Perhaps it could be, but historical and present evidence suggest not.
A paper written last year by Carmen Reinhart and Kenneth Rogoff, called “Growth in a Time of Debt,” has been widely quoted for its analysis of 44 countries over 200 years, which found that when government debt exceeds 90% of GDP, countries suffer slower growth, losing about one percentage point on the annual rate.

One might be misled into thinking that, because 90% sounds awfully close to 100%, awful things start happening to countries that get into such a mess
Huh? Is this really how investors think? "Differences in values of +/- 10% are just too complicated to think about???"


I'm not a Shiller hater, but honestly this piece gives me pause . . .

Best,
Pete
Uninvested
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Post by Uninvested »

peter71 wrote:
Uninvested wrote:I hate to say it but I think Schiller has it pegged right.
So what's the trade, and how did it work with say, Japan, when it crossed over the 100% public debt to GDP ratio ages ago? For that matter, what's the trade now with Japan close to 200%?
I am not sure of the trade right now. Japan is indeed an anomaly. I think it may have to do with the fact that they have such a high internal savings rate and those people buy most of the debt.

That said, about the US, it is clear that whatever they do about the budget, the debt will increase unsustainably. If I could somehow be out 10 years from now, rates will be much much higher either through default, inflation or investors saying no more. But no trade is obvious to me right now.
allsop
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Post by allsop »

peter71 wrote:
Uninvested wrote:I hate to say it but I think Schiller has it pegged right.
So what's the trade, and how did it work with say, Japan, when it crossed over the 100% public debt to GDP ratio ages ago? For that matter, what's the trade now with Japan close to 200%?
The general government net debt for Japan is estimated to be about 117% of GDP for 2010, and increasing quite a bit for this year.

From IMF: General government debt for USA, Japan and Italy
peter71
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Post by peter71 »

allsop wrote:
peter71 wrote:
Uninvested wrote:I hate to say it but I think Schiller has it pegged right.
So what's the trade, and how did it work with say, Japan, when it crossed over the 100% public debt to GDP ratio ages ago? For that matter, what's the trade now with Japan close to 200%?
The general government net debt for Japan is estimated to be about 117% of GDP for 2010, and increasing quite a bit for this year.

From IMF: General government debt for USA, Japan and Italy
Haven't looked at your site, but 200% is a conservative estimate of the average of the 2010 CIA/IMF figures on Wikipedia of 225% . . .

http://en.wikipedia.org/wiki/List_of_co ... ublic_debt

. . . and this site's current figure of 195%

http://www.usdebtclock.org/world-debt-clock.html
saurabhec
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Post by saurabhec »

If this keeps on going, I will have no intellectuals and academics left to admire :D Shiller has been one financial economist that I have long admired not just for his pathbreaking research but also his overall take on life. Like many of my idols, it appears that I might need to have an intellectual break-up with Mr. Shiller as well. Is it really credible for someone to say that those in the thick of battle to make money in the financial markets have been misled by Rogoff's work? Sure academics might be smart and even win Nobel prizes, but in the real world folks don't take their work as the revealed wisdom and canon academics might think they should. No one at a hedge fund taking a directional bet on Greek debt is doing so on a simplistic analysis of a 90% breakpoint at which point a death spiral commences. It just so happens that many liberal economists are aghast at the uncivilized brutes opposed to Keynsian stimulus and tax hikes, and are lashing about in agony because they know that their ideas are losing traction with taxpayers and voters.
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Post by Valuethinker »

saurabhec wrote:If this keeps on going, I will have no intellectuals and academics left to admire :D Shiller has been one financial economist that I have long admired not just for his pathbreaking research but also his overall take on life. Like many of my idols, it appears that I might need to have an intellectual break-up with Mr. Shiller as well. Is it really credible for someone to say that those in the thick of battle to make money in the financial markets have been misled by Rogoff's work? Sure academics might be smart and even win Nobel prizes, but in the real world folks don't take their work as the revealed wisdom and canon academics might think they should. No one at a hedge fund taking a directional bet on Greek debt is doing so on a simplistic analysis of a 90% breakpoint at which point a death spiral commences. It just so happens that many liberal economists are aghast at the uncivilized brutes opposed to Keynsian stimulus and tax hikes, and are lashing about in agony because they know that their ideas are losing traction with taxpayers and voters.
I'd turn it around.

Keynesian ideas were never really tried-- the models said the stimuli applied in 2008-10 were too little, and so it proved. And so taxpayers and voters don't really have an opinion on them. They are just worried about their jobs. They don't know what is the right prescription, but they see things are bad, and react.

Polls don't tell us taxpayers want spending cuts. Or rather, they do in the abstract, but they don't want spending cuts on anything that would have a significant impact on deficits: healthcare, defence, pensions, law and order etc. Usually they mention 'foreign aid': which, in the case of the US, if you strip out Israel, Afghanistan, Iraq and Egypt, is something like 1% of Federal Budget.

They are opposed to deficits, but they do not want either tax rises nor spending cuts. (to be fair to the UK parliament, we've had tax rises both VAT, National Insurance and Income taxes: fiscal conservatism is much more genuine here than it is across the drink).

Shiller is reacting to a policy nostrum that has gone around.

Italy, Japan and Belgium would all suggest that if there is something magic about 100%, there's an 'x' factor there we are not catching with 100% debt/GDP.

What I think is much more interesting is to look at *why* each country is in the doo do:

- Greece it's a debt problem, out and out-- Greek debt was out of control *before* they joined the Euro, and the country just cannot collect enough taxes to service the debt level it had taken on

- Portugal it is a growth problem-- Portugal is geographically and in other ways isolated from Europe, and it had a very out of date economy which was not competitive, joining the Euro killed what competitiveness it had

- Ireland is a banking problem - Ireland was doing well, had low debt to GDP before the crash. Due to deregulation and outright fraud, the Irish banking system collapsed and the Irish government nationalized it without imposing significant penalties on the bondholders. Roughly 30% (?) of Irish debt to GDP is bank obligations.

Now Ireland has more debt than it can possibly repay. But it's debt it took on from the banks.

- Spain had low debt to GDP, and regulation meant the primary Spanish banks did not collapse in the Crash-- eg no exposure to MBS. However Spain suffered the bubble property bust that Ireland did: Spain has had about the worst fall in housing prices in the world.

- Italy has been running a primary budget surplus (befofe interest) since 1992-- they have well set their house in order in that sense. The problems in Italy are around structural rigidities, overgenerous government pensions (neither of which Berlusconi has done anything about: Italy is a bit like if Rupert Murdoch was US president: his media monopolies are part of the system, so why would he break it up), and entering the Euro at an overvalued level, thus making Italian industry uncompetitive.

Note like Japan, Italy finances itself to a high degree internally: Italians have a very high savings rate, and buy a lot of government bonds.

- Belgium there is not yet a crisis despite debt to GDP of (over?) 120%. Despite an inability to form a government for over 1 year. That in itself tells you something.

So what should Europe do?

- we need looser monetary policy. Northern consumers need to spend, whilst southern economies deleverage

- we need to achieve selective exit from the Euro: the Euro should be rebased around a much smaller group of countries (France, Germany, Benelux)

- this means we will have to recapitalize large chunks of the European banking system

- we need bigger infrastructure spend-- straight fiscal impulse. There's lots of roads yet to be built in Europe, especially in the newer EU entrants. And in the 'new demographics' countries that surround us: North Africa, Turkey, Belarus, Ukraine, Balkans etc. Roads, sewers, railroads.

High speed rail is one of the great European success stories of the late 20th century. That network could still be expanded eg to Warsaw and eventually Kiev and Moscow and St. Petersburg. The promise of 1900 of a continent united in transport and culture, is still possible.

If we are to have any hope of achieving a carbon neutral Europe that atmospheric scientists tell us we will need by 2050-2060, then massive investment into low carbon energies (including nuclear), conservation and new technologies such as electric cars are necessary.

This is not, in fact, different from what was done in the last global slump of the 1930s. Germany built autobahns, the UK had a suburban housebuilding boom, and a streetcar construction boom. The UK electricity grid was constructed. Towards the end of the 30s of course there was massive military buildup, fortifications etc: that won't be necessary this time, but giant flood defences will be-- we could get started on those.

We could also target direct job creation measures at the most vulnerable groups: ethnic minorities, under 25s, over 50s, unskilled workers especially men. Employ those people, even at low wages, and they will spend that money and so stimulate the rest of the economy. And there will be long term supply side benefits: all the studies show that you permanently damage people (particularly young people) as productive workers if you exclude them from the labour force for long periods.

Whilst Europe's structural unemployment level (Non Accelerating Inflation Rate of Unemployment-- NAIRU) is undoubtedly much higher than the USA (say 7-8% vs. 4-5% in the US) there's no reason why we have to run a sustained continent-wide unemployment rate of above say 7.5%.

The 21st century is going to be about aging western demographics, increased and increasing environmental challenges, instability and change in emerging demographic countries especially in Africa and the Middle East. And probably about mass migration.

Europe and Japan are on the bleeding edge of those trends. Our response could light the way for the world. In the period 1600-2000 we led the world in thought, politics and economics. Our dominance is slowly being surrendered to Asia (US having taken the lead in many respects in the last 70 years or so)-- that's inevitable.

But we can still show the way.

At the battle of Waterloo, Grouchy failed to follow Gerard's suggestion (Arthur Conan Doyle would go on to create a memorable 'Brigadier Gerard' as a character) and 'march to the sound of the guns' -- a move which would have brought him onto the battlefield to defeat Wellington.

This is another 'march to the sound of the guns' moment in European history.

We know what the battle is-- the physical and demographic change of the Planet Earth and humanity upon it. We know what the long term objective is: survival and the furtherance of European values and European civilisation. Mozart. Shakespeare. Oktoberfest. The Rights of Man.


What we need to do is ignore imaginary constraints of debt to GDP ratios, gird our loins, and march to the sound of the guns.
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Frugal Al
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Post by Frugal Al »

Valuethinker wrote:Keynesian ideas were never really tried-- the models said the stimuli applied in 2008-10 were too little, and so it proved. And so taxpayers and voters don't really have an opinion on them. They are just worried about their jobs. They don't know what is the right prescription, but they see things are bad, and react.

This is always the Keynesian argument, we just didn't throw enough money at the problem. Sorry to disagree, but many voters do have an opinion on Keynesian ideas: They don't work.

As for Shiller's debt/GDP ratio concerns, I don't think anyone that looks at it in depth thinks that there's some arbitrary ratio which is that (whatever) country's rubicon. However, when we look at trends and sustainability we can see that without overt action, at some point, that rubicon will indeed be crossed, only to be known after the fact.
555
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Post by 555 »

This article agree with the argument I made in this thread.
http://www.bogleheads.org/forum/viewtopic.php?t=58049
Debt-to-GDP ratio is not a pure number, it has units of time.
"A year is the time that it takes for the earth to orbit the sun."
grayfox
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Post by grayfox »

OK, if the national debt is equal to one year's national income, which is about 14 trillion, and 10-year Treasuries are yielding 3% interest, then if all the debt was in 10-year Treasuries, the annual interest payment on the debt would be about 420 billion dollars.

420 billion is the number to compare to national income, 14 trillion. So if it was all in 10-year, about 3% of national income would go to servicing the debt.

If they are going to set a limit, it should be on what percent of national income goes to servicing the national debt. I don't know what a reasonable number would be. 3% doesn't sound all that crazy, provided that the money is being spent on long-term capital investment and not just paying current expenses.
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Post by market timer »

555 wrote:This article agree with the argument I made in this thread.
http://www.bogleheads.org/forum/viewtopic.php?t=58049
Debt-to-GDP ratio is not a pure number, it has units of time.
"A year is the time that it takes for the earth to orbit the sun."
Nothing is special about one year, but time to repayment is critical in evaluating borrowing and investment decisions. Yield, for example, is %/year. It could just as easily be expressed as %/quarter or %/month, but the logic behind our investment decisions would not change.
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Post by 555 »

Exactly.
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Post by saurabhec »

Valuethinker wrote:[

Keynesian ideas were never really tried-- the models said the stimuli applied in 2008-10 were too little, and so it proved. And so taxpayers and voters don't really have an opinion on them. They are just worried about their jobs. They don't know what is the right prescription, but they see things are bad, and react.

Polls don't tell us taxpayers want spending cuts. Or rather, they do in the abstract, but they don't want spending cuts on anything that would have a significant impact on deficits: healthcare, defence, pensions, law and order etc. Usually they mention 'foreign aid': which, in the case of the US, if you strip out Israel, Afghanistan, Iraq and Egypt, is something like 1% of Federal Budget.
.
VT,

Sounds like a a classic non-American assessment of what the American voter wants. Contrary to what you and domestic liberals might think, Keynesian policies were summarily rejected in the last mid term elections and rightly so. I don't understand the liberal obsession with high speed rail and infrastructure upgrades. High speed rail is a four decade old technology that is completely unsuited to the American situation. Investing in high speed rail is an utter waste of taxpayer money.
jln
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Post by jln »

Boy, would I love to jump in to this debate! But sadly it's too political. I'd end up linking to Krugman and DeLong and Thoma, who have written tons about this recently, and it would just get ugly. So if you're interested, do a little work with Google. :-)

John Norstad
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