A speed-camera that automatically enters those driving below the speed limit into a lottery? Interesting idea, more carrot than stick so to speak.
Have they considered that this attracts people to drive by it slowly rather than attract people driving past it to drive slowly? Instant congestion. Economics is all about incentives and often about unintended consequences.
Yes, I know they probably weren’t serious about this idea.
Junk Bonds are debt instruments issued by corporates that have relatively low credit ratings. They pay interest at high rates as a result.
Typically viewed as risky investments, the junk bonds boom of the 80s showed that there is more to junk than just a risky investment.
Locally, our pension funds and other retirement savings money should be more heavily invested in junk bonds. I’m surprised more people aren’t talking about this. It might be due to the limited availability of junk in the SA market. On the other hand, if demand picked up, I’m sure we could see more original-issue junk bonds as yields drop and become more attractive financing vehicles.
Why should pension funds be invested in junk? Tax. Approved retirement savings vehicles in South Africa don’t pay income tax. Thus, the value of securities that would attract significant tax is higher for these investors than for the market as a whole. If risk and return are balanced for the market as a whole, the extra return available to retirement vehicles through not paying tax is a bonus over and above that appropriate for the risk.
Conversely, pension funds should stay far away from tax-efficient instruments such as preference shares. The prices of these instruments have already been bid up by tax-paying investors. Continue reading
I have to multi-task. I am the bottle-neck for too many problems already and my team needs input from me before they can continue in many areas.
But I know it doesn’t make me efficient. Switching between tasks takes time. You forget important details, and struggle to get the depth of understanding and focus required for complex issues. The cross-pollination of ideas and solutions doesn’t come close to making up for these drawbacks.
From the research:
Descriptive evidence suggests that judges who keep fewer trials active and wait to close the open ones before starting new ones, dispose more rapidly of a larger number of cases per unit of time. In this way, their backlog remains low even though they receive the same workload as other judges who juggle more trials at any given time.
Did you read those magic words? “…backlog remains low…” I don’t know anyone who doesn’t wish for the luxury of a shorter backlog of work.
The paper itself is fairly complex, analysing theoretical models of human task scheduling. You should probably add it to your pile of things to read in the middle of other work.
I have a clear strategy for how not to lose money playing the Make a Million competition. As I explain it, you may come up with some smart tactics to win the competition and enhance your returns, but you’re on you’re own there.
So, how does one not lose money with the Make a Million competition?
Don’t enter.
You are overwhelmingly like to lose money if you enter this competition. I’ve said this before, and I’ve been right before. I’m right again.
There’s also the little idea that the structure of the Make a Million competition increases risks of financial meltdown
Let’s look at some hard statistics to show what I mean.
In the MaM presentation, the organisers include some interesting statistics about number of trades, trading activity and many other metrics.
They don’t show average returns or performance.
So let’s look at some of the numbers:
Raw return data (excluding prize money) based on 2009 MaM competition.
| Average Return | -11.49% |
| Expected Loss | R 1,149 |
| Median Return | -15.06% |
| Mode Return | -9.12% |
| Probability of breaking even | 25.00% |
| Probability of earning less than 10% | 83.00% |
| Probability of doubling money | 1.78% |
| Probability of winning | 0.20% |
Suddenly the competition doesn’t look so great, does it? (This isn’t the first time, here is my analysis of the Comedy and Tragedy that was the 2008 Make a Million competition.) Continue reading
Recently had a discussion around whether government should intervene to influence the exchange rate.
Now, I don’t have fully thought-through views on if and when and how and by how much this should be done. Still thinking it through (and having to reconsider many things about currencies, interest rates, inflation, open market purchases, sovereign wealth funds and most everything from economics as a result).
However, I do take issue with some of the arguments against government intervention in currency markets:
The conversation started with the view that forex traders disagree that the rand is too strong, to which I commented that I wouldn’t trust a forex trader to know where the rand should be for anyone by the forex trader concerned. The response:
A single market actor, or a single bureaucrat, cannot know. There is no “right” price.
Which is true, and I have respect for these kinds of views. However, to imply that Pravin Gordhan was acting as a single individual, a single “bureaucrat” is a little exasperating. Almost as if someone is deliberately creating a strawman to be knocked down. In response, I suggested that a group / committee of economists with experience and skills and some models might have a view more trustworthy than a forex speculator. My view is, and remains, that even if one cannot know for certainty the “right price”, throwing ones hands in the air and saying whatever will be will be is not useful. “Abdicating responsibility” per se is not useful.
You cannot abdicate a responsibility you never had. Bureaucrats should not fix prices, for currencies or anything else.
And here is the crux. The normative “should” in this sentence reflects a libertarian, anti-government view (again, one which much of the time I strongly share). However, in this case, it’s patently ridiculous.
Governments create currency in the first place. They create it through issuing notes and open market transactions. The allow banks to create more of it through reserve requirements. Governments (the “bureaucrats” so to speak) are setting prices for currencies all the time. Monetary policy, interest rates, inflation, central bank reserves, exchange controls and yes, exchange rates, are heavily influenced by government and central bank actions.
Government cannot not impact the exchange rate, so they may as well have a view on what they’re doing and why.
(Just in case anybody jumps up and down, froths at the mouth and starts shrieking about if we were on the gold standard none of this would be true, please read my post on the gold standard currency and what a terrible, terrible idea it is for reasons that have been established over and over again for decades for anyone who bothers to research it.)
When companies value pension obligations and required contribution rates, they make assumptions about the expected future investment returns. (Accounting standards require market-based rates reflecting fixed interest returns, but that’s a separate point).
So what assumptions are pension funds making? The WSJ has an interesting article showing that the average US pension fund is assuming future returns of approximately 8%. To put that in perspective, yields on 30 year T-bonds in the US are about 3.9%, 10-year yields are below 3% and inflation is currently about nothing. This is a huge real return and suggests that many of these pension funds may be underfunded.
It’s also interesting to work out what Equity Risk Premiums these valuation assumptions imply. FinanceClippings makes some educated guesses at likely portfolio construction, and estimates assumed ERPs of nearly 8%. For reasons I’ve described before, an 8% ERP is madness.
FinanceClippings assumes a simple portfolio mix of 50% equities and 50% government bonds in this calculation, and assumes the average yield will be consistent with 30-year assumptions. I would differ slightly here. If we are looking at an overall portfolio, I would expect some investment grade corporate bonds and property in the mix too. These assets could be expected to earn 1% to 2% over risk-free over time (after adjusting for expected default loss on the corporate bonds). These return assumptions may seem low to some, but this is another area where it’s easy to overestimate the possible returns based on inappropriate periods of data. Continue reading
The debate around jobs, jobs at any cost, fair wages, fair working conditions, exploitation and what truly is best for the economy is complex. Don’t let anyone tell you different. If it really were that simple we’d have finished having the same debate while the Feudal System was still active.
However, the recognition of the issue that minimum wages and strong labour laws (in favour of labour) can make labour less attractive, less affordable and therefore lead to lower employment has been missing form government debate for many years.
Then I saw this story on Business Day: Patel grants reprieve on minimum wages. At issue is 385 clothing manufacturers and 22,000 jobs. The companies have been given a temporary reprieve until the end of December to pay wages below legislated minimum wage.
Also at issue is the call for greater protection for the textile industry. Current import duties are around 40%. That is a significant additional cost for all consumers to bear. The vocal employees and unions and employers within the textile industry want us all to pay higher prices so that they can stay in business.
At or near full employment, this protectionism could only make sense if the local textile industry were considered a good prospect for long term competition and value. A so-called infant industry (hopefully one that will grow to become an international player). It’s abundantly clear that the textile industry in South Africa has no special competitive advantage or potential.
However, the argument is more complicated when we have an economy way below full employment, and a competitor country with an artificially weak currency propping up a politically powerful export sector. I’m not (yet) saying protection for our textile industry should be increased, but based on my thinking and research recently I’m starting to understand that the problem is more, not less, complex.
The danger is that the right policy decisions will always be clouded by very loud lobbying and special interest group needs. We need more careful analysis and fewer emotive ideas.
Junk Bonds, also known as High Yield Bonds, are debt instruments issued by companies with poor credit ratings, or are the debt instruments of companies that were issued as high quality bonds from strong companies that have since fallen on hard times (“Fallen Angels”).
Typically these are any bonds that are not classified as Investment Grade (BBB rated or better).
Junk Bonds behave very differently from Investment Grade bonds. Their value depends only marginally on market interest rates and far more on the underlying economic strength and operational performance of the issuing company.
They don’t often the unlimited upside of ordinary equity, but with the high starting yield (10% to 25% depending on the circumstances) it can provide a very healthy return if the company doesn’t default. There is also a chance for rerating where if the strength of the company improves dramatically, the bond may be repriced to a lower market yield, resulting in a significant capital gain.
So company founders can issue junk bonds rather than diluting themselves by issuing equity and still provide attractive returns to investors and an opportunity for savvy investors (and those who just think they are savvy) to “pick” their company with the prospect of fantastic returns if it performs really well. Continue reading