Weekend Reading Ideas – February 21, 2015

Noted for your weekend procrastinations.

  1. Cyprus: an island in search of a saga to learn from – In March 2013 Cyprus stared into the abyss of financial collapse. In order to qualify for a €10bn Troika loan, the absolute maximum the Troika – i.e. the European Union, EU, the European Central Bank, ECB and the International Monetary Fund, IMF – was willing to lend, Cyprus had to raise €5.8bn. After the Eurogroup threw out its first rescue plan, which included a levy on guaranteed deposits, i.e. less than €100.000, the Cypriot Parliament rejected a levy on non-guaranteed deposits only. Instead, the Cypriot government grabbed deposits above €100,000 in Laiki to merge it with Bank of Cyprus where non-guaranteed deposits were turned into shares.
  2. The Real Battle Over Greece Still Lies Ahead – The agreement allows Greece to lower previously agreed targets on reaching a primary budget surplus. In return, it will refrain from unilateral actions that may jeopardize fiscal targets and will abandon plans to use about 11 billion euros ($12.5 billion) in leftover European bank support funds to help restart the Greek economy. Sakellaridis acknowledged that marks a turnaround from a previous target.
  3. ‘Faster Real GDP Growth during Recoveries Tends To Be Associated with Growth of Jobs in “Low-Paying” Industries’ – To preview our conclusion, we found that the percentage change in job losses during the latest recession was higher in “high- paying” private-sector industries—which we define as industries with above-average hourly earnings—than in low-paying sectors. Likewise, the percentage change in job gains during the recovery was also proportionately larger in high-paying industries. It should be pointed out, though, that the total number of jobs in low-paying industries exceeds the number of jobs in high-paying industries by nearly 70 percent.
  4. The One Where Larry Summers Demolished the Robots and Skills Arguments – Folks, wage inflation in the united states is 2%. It has not gone up in five years. There are not 3% of the economy where there’s any evidence of hyper wage inflation of a kind that would go with worker shortages. The idea that you can just have better training and then there are all these jobs, all these places where there are shortages and we just need the train people is fundamentally an evasion. […]
  5. Investment Charges When Mexico Privatized Social Security – “Mexico launched a fully-privatized defined contribution plan in 1997, with 17 participating fund managers which could compete to manage investors’ privatized social security accounts. Given the tight regulations on investment vehicles, fund managers each offered one, essentially homogenous investment product. Investors could choose which firm they wanted to have manage and invest — for a fee — their personal social security account. Despite the large number of competitors selling an essentially homogeneous product, management fees and fund manager profits were high.”
  6. Greece and the EU: a question of trust – Its rock-star economist finance minister Yanis Varoufakis planned to run fiscal surpluses of 1.5% indefinitely, which is hardly profligate, and make structural reforms to encourage business, remove distortions and improve tax revenues. He complained that the reforms imposed by previous governments under the aegis of the IMF, ECB and European Commission were not good enough and he wanted to see far more extensive and radical reforms. And he wanted to “bail in” creditors by replacing existing debt with nominal GDP linked bonds, which would not pay out until growth improved and would therefore give creditors a direct interest in ensuring Greece recovered. To those of us watching on the sidelines, this did not appear unreasonable.
  7. How to Make It in Conservative America (If You Aren’t White) – It’s tempting to dismiss D’Souza as an outlier. He’s aligned with the right-wing of the Republican party, while the vast majority of American South Asians identify as Democrats. Still, anyone who spends time among South Asians will recognize the popular currency of attitudes like D’Souza’s. Moreover, D’Souza indicates a wider problem, given that one of the Republican Party’s most prominent Islamophobic voices is Louisana Governor Bobby Jindal, a South Asian.
  8. Why Active Management Fell Off a Cliff – Perhaps Permanently – Subramanian says that the answer for fund managers is to avoid crowded trades, because the ten most under-owned stocks are already beating the ten most widely-held by 5.1% in the first five weeks of this year. In other words, the ongoing flight from active funds into index products carries with it a self-reinforcing trend that exacerbates the underperformance of managers rather than cures it.
  9. The Biggest Threat To Your Portfolio – * Fleeing into the arms of a charlatan who purports to having predicted it. * Buying into Black Swan funds and protective products that cap all future upside and cost a fortune. * Obsessing over hedges after the fact. * Selling out with big (permanent) losses and sitting in cash. * Freezing 401(k) contributions or having retirement cash allocated to money market funds. * Excessive trading. * Planting a flag and being unwilling to publicly change our minds in the face of new evidence. * Throwing money at bizarre alternatives like coins, bars, bricks and bullion which have no proven ability to fund a retirement. * Conflating political views with investment expectations
  10. Risk Management Always Matters – Far too many investors spend enormous amounts of time and energy constructing policy portfolios, only to allow the allocations they established to drift with the whims of the market. […] Without a disciplined approach to maintaining policy targets, fiduciaries fail to achieve the desired characteristics for the institution’s portfolio.
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