Thursday, 29 September 2011

FTT - Financial Transactions Tax.

Tobin's tax was designed to reduce volatility in the fx market.

Its also been suggested that the FTT, which would be a 10bps tax on stock, bond and derivative trades would be a good way to raise revenue.

Several commentators who really SHOULD know better, cite stamp duty in the UK as being a model.

Perhaps they'd care to look at the thriving CFD market, and the amount raised from retail investors and compare that to institutional investors? and reappraise their view! The tax simply does not work within the UK.

As to whether it reduces speculation? or volatility? well lets just say that if you think 10bps is going to stop somebody buying into a bubble or selling into a panic, well you need your head examined.

Thursday, 22 September 2011


the headline is a little unfair to the following link;

BlackRock Buys Junk Debt at Spreads Exceeding Bearish Scenarios

but there are several things that I dislike about it, as I commented on twitter;

1) the first is a general point. VALUATIONS ARE NOT AN INVESTMENT THESIS. Especially when you are comparing a risky number to a historical realization for a long term instrument. Yes it is appropriate to look at historical default rates, but to compare them to a risky market number is not. It is naive to ignore liquidity risk, risk of recovery, a market price to those risks AND then to forget about how short a sample of history one is looking at.

2) it is very consensual to believe that commodity producers and China are more stable. That the represent the future, and that Asia is insulated from the economic cycle. Although it is en-vogue to laugh at decoupling, there are more than enough people that treat it as a resting principle. The sectors that they proceed to say they are targeting demonstrate this;
"[the] firm is targeting bonds of speculative-grade companies involved in energy, mining, oil, natural gas, cable and wireless operations"


"You want companies that have more stable and visible cash flow streams, so their earnings quality is a lot higher and more stable to withstand economic downturns"

now these two statements are very much at odds with one another in my mind.

Mining, Oil, Nat Gas, these are all dependent on the industrial cycle. Sure you can see a mine, and see that there has been good historical demand, and that China had a massive fiscal stimulus, but to extrapolate that into the future isn't clear cut.

"a bubble is any kind of debt-fueled asset inflation where the cash flow generated by the asset itself—a rental property, office building, condo—does not cover the debt incurred to buy the asset."

I believe that he is talking about Chinese property in this quote from his interview with Bloomberg Business Week, but surely that applies to mines, oil and nat gas investments?

Sunday, 4 September 2011


There have been several people pushing the ideas of Karl Marx recently, from the FT's Alphaville, UBS economist George Magnus to the "neutral" BBC article that appears to have no author.

Marx was a terrible economist.

At the heart of Marxist economic theory, in fact I would say its central pillar is the Labour Theory of Value. LTV asserts incorrectly that the value of a good is the amount of man hours required to create it. So a portion of hot chilli con carne taking an hour to make is worth the same amount as a few litres of freshly squeezed ice cold orange juice. The most common objection is that Marx's theory is demonstrably wrong because it does not include input costs, ie. a gold ring is worth more than a silver ring. Marx took that simple incorrect theory and then proceeded to the conclusion that the difference between the selling price and the labour value of the product is the profit, which the bourgeois capitalists extract.

Marx doesn't really care if its by ripping off the consumer (I think because he believes they will act in self interest in a free market), but cares about the extraction coming at the expense of those providing the labour. He believes that the value that capitalist create is purely their ability to own the means of production enabling them to purchase labour at an unfair price.

In short, capital, capitalists, inventors and entrepreneurs only generate returns because they are in a privileged position to manipulate workers.

This is utter nonsense. If anything in a democracy it is labour that is able to manipulate the system rather than capital, witness the UAW or public sector unions destroying the fiscal position of their employers.

In our earlier example, the reason on a very hot day that cold orange juice will make a profit and the hot chilli con carne will not, is not because the owner of the means of production is able to bully his workforce, but because the decision to allocate capital correctly provided a popular and valuable choice to the market.

Additionally Marx makes some rather bold predictions that are neglected in the article above. According to Marx, what should be happening in the West is that profit margins should be falling, leading to companies cutting the pay of their staff, there should be mass over production of goods and chronic under consumption as workers purchasing power declines.

Instead we are now seeing very high profit margins, higher worker productivity and pay but weak cyclical demand. That really has almost nothing to do with Marx, other than the enormous sense of entitlement in large parts of Europe and a dollop of leftwing hunger to return to the rhetoric of class war.

What I personally find particularly jarring is the juxtaposition of the West, with a massive social benefits system, free education, health care, and living standards the highest they have ever been in the history of mankind, that is nominally a free market system, that consumes the enormous production of a supposedly communist country, with a much lower standard of living, poor working conditions, low/no employee rights, no benefit system, no state healthcare and pensions. Yet it is those in the rich west complaining that they don't have a big enough slice of the income and resources pie??

It is as absurd to claim the "system" isn't fair because your neighbour has a bigger mansion than you in Chelsea.

a little break down; from 27th April to now

Utilities  2%
Consumer Defensive   (3)%
Healthcare   (8)%
Communication Services   (11)%
Consumer Cyclical   (13)%
Real Estate   (15)%
Energy   (17)%
Basic Materials   (17)%
Industrials   (23)%
Technology   (23)%
Financial Services   (24)%

What is interesting to me is the return on technology, its very idiosyncratic given the relatively "normal" systematic returns that we see with the other sectors, ie. we expect to see utilities outperforming fin serv and cyclical industrials and base materials in an anticipation of a double dip/slowdown, I'm not sure/ well I didn't think that we would see such a dramatic fall in tech in the same scenario.

Looking at factor returns;
size  4.99%
value  15.81%
dividend  7.52%
momentum  9.42%
balance sheet   (0.43)%
"cloud"  11.62%
model  6.07%
conc. Model  6.97%

I find it even more surprising that the return on the balance sheet model has been so poor over the period. What does stand out is that the value and dividend models have performed very well over that time frame, to me that means that there has been a lot of relatively unsophisticated participation in the market before and after the sell off started.

The "cloud" factor is interesting as well, although mostly driven by the awful performance of normal tech.

I feel comfortable posting numbers like this because these factors are quite robust. Something often neglected much to the detriment of real returns in the long term.

Saturday, 3 September 2011

an interesting tax proposal;

Prof L.J. Kotlikoff presents an interesting tax reform plan;

What I think is interesting is effectively shifting the burden on taxation onto consumption, rather than profits and income.

There are several questions I think need to be answered that are more practical than political;
1) LJK suggests taxing imputed rent; I think that is very difficult to achieve.
2) What revenue would this raise theoretically? and what revenue would it raise after one calculated the effects of normal avoidance schemes?
3) It would be interesting to see how much of the savings from tax return filing would be eaten up in the calculation of implied value of rent consumed?