Monday, February 21, 2005

"Easy Al" Greenspan

From Barrons: "The accompanying chart, which comes to us by grace of Trey Reik, of Clapboard Hill Partners, a New York-based investment outfit, shows one of the singular effects of Mr. Greenspan's eagerly accommodating reign at the Fed. It tells the story of credit in this fair land from 1916 through the present. Keeping in mind that Mr. G took over in 1987, you can readily see the trajectory picks up altitude abruptly from then until now.

Mr. Reik observes that for the past 100 years, the nation's credit-market debt has averaged between 140% and 160% of gross domestic product. The principal exceptions came in 1929, when the stock market went bananas, and in 1933, during the traumatized period that followed the Great Crash, when four years of the Depression (GDP shrank by an awesome 45%) hoisted the ratio to 287%, prompting a devaluation of the dollar. That was the all-time peak, never approached again until the remarkable rise that began in the 1980s and has resolutely continued ever since, lifting the ratio to today's astonishing 304%."


Anonymous said...

Then why is the Federal Reserve so sanguine even in the midst of a tighening cycle which will likely for quite a while? Corporate saving is near record highs, the government deficit is structural and will grow faster than GDP indefinitely unless there is an increase in revenue, household saving is near record lows. Not pleasing you would think, yet the Fed is sanguine.


Anonymous said...

John Norstad paper on efficient markets is convincing, yet why do there appear to be lasting anomalies in significant sectors of the stock market? Small cap growth stock, for instance, trail small cap value stocks for any lengthy period I can spot. Such a persisting pattern puzzles me. Curious :)


Anonymous said...

Why should there be a persistence of superior returns from the small cap value index over small growth that lasts and lasts? There are other such anomolies that have puzzled me, though I would not argue with the efficient market hypothesis or with indexing as a superior investment method.


Anonymous said...

Life on the Beanstalk, or Real Estate in Southern California

We came over the mountains and down into Los Angeles a little more than a month ago. The heavy rains had subsided, and the hills were stationary again. Most of the roads and highways had reopened, though it was impossible, on certain routes, to get to San Juan Capistrano or Ojai or to drive up Topanga Canyon.

In Malibu, high above the Pacific Coast Highway, you see surprising sights even now. A land spill has nearly closed off a residential street and, beside it, steel buttresses hold back the rest of the slope. Here and there blue tarps have been thrown across hills to keep the slips from slipping further when the rains return. Up the coast, south of Santa Barbara, the earth is still settling over the edge of La Conchita, where 10 people died in a recent landslide.

I felt a sudden claustrophobia when we came over the mountains that first time, as if we had somehow left the mainland behind. I felt it again when we drove up Mount Baldy at night and looked out over the lights of the San Bernardino Valley.

The passes leading out of this great basin are so few, the mountains steep and brittle. But most of that unease has worn off. This is the wrong season for fire, and the thought of earthquakes barely crossed my mind at our friend's house in Malibu - just a few yards downhill from that bulging hillside in a neighborhood that burned to the ground in 1978. I think of earthquakes only when I'm idling under a freeway overpass, waiting for a light to change. I can feel the concrete slab rumbling overhead.

But what never goes away is the dread of real estate. It's an utterly anomalous feeling. I meet perfectly pleasant people here - people whose lives differ from mine in only the ordinary ways that lives do differ - and yet they seem extraordinary to me because they are vested in California real estate.

I think of it as a fable of sorts. You wake up one morning and find that overnight a giant beanstalk has sprouted under your house and lifted it high off the ground. The next night it happens again, and soon you're in the clouds. The view would be terrifying - the plain earth is so far out of sight - except that all around you are other houses on other beanstalks.

It's an old story, and yet no one gets tired of telling it. Most of our friends here live in very modest houses - 1,500 square feet and under. But they live in immodest places. It is literally nothing to come across, as we did, a laborer's cottage in Santa Barbara, built in the days when laborers could still afford to live in that town, appraised at nearly $1 million.

A friend in Brentwood notices that her sense of her house's worth is always a decade behind the times. I think this is a sober defense against an unsettling unreality. What can it mean when the houses on one block in La Jolla are worth more than all the real property in the western half of South Dakota? ...


Anonymous said...

February 21, 2005

The Math Test Score Upper Tail: Is There Reason to Believe That Sociology Swamps Biology?

In 1992, 2.8% of Asian-American women who took the Math SAT scored 750 or above.

In 1992, 2.1% of white men who took the Math SAT scored 750 or above.

In 1992, 0.4% of white women who took the Math SAT scored 750 or above.

In 1992, 0.2% of African-American men who took the Math SAT scored 750 or above.


Anonymous said...

Winter 2002

The Biology of Race and the Concept of Equality
By Ernst Mayr - Daedalus

In the eighteenth century, when America's Constitution was written, all our concepts were dominated by the thinking of the physical sciences. Classes of entities were conceived in terms of Platonic essentialism. Each class (eidos) corresponded to a definite type that was constant and invariant. Variation never entered into discussions because it was considered to be "accidental" and hence irrelevant. A different race was considered a different type. A white European was a different type from a black African. This went so far that certain authors considered the human races to be different species.

It was the great, and far too little appreciated, achievement of Charles Darwin to have replaced this typological approach by what we now call population thinking. In this new thinking, the biological uniqueness of every individual is recognized, and the inhabitants of a certain geographic region are considered a biopopulation. In such a biopopulation, no two individuals are the same, and this is true even for the six billion humans now on Earth. And, most important, each biopopulation is highly variable, and its individuals greatly differ from each other, thanks to the unique genetic combinations that result from this variability....

In a Darwinian population, there is great variation around a mean value. This variation has reality, while the mean value is simply an abstraction. One must treat each individual on the basis of his or her own unique abilities, and not on the basis of the group's mean value.

At the same time, nothing could be more meaningless than to evaluate races in terms of their putative "superiority."


Steve Hsu said...


Very nice comments...

1) Any "proof" of market efficiency is only as good as its assumptions. As you point out, there is a lot of data pointing the vast inefficiencies. The whole field of behavioral finance is concerned with irrationality of markets and their participants.

2) Who knows why the markets are so sanguine. The VIX (CBOE volatility index - traditionally a fear gauge) is near all-time lows right now. Perhaps they are right and all the deficit (CA and budget) worriers are wrong?

3) Yes, California real estate is mind-boggling, but so were Internet stock valuations in 1999 :-)

4) Brad Delong normally has good instincts, but that data can be interpreted in a number of ways, many of them even less PC than Summers' comments.

5) Mayr emphasizes variance over mean. Both are standard statistical measures, and so just shorthand for the actual distribution which contains all the information. Summers, you will note, was also concentrating on variance = standard deviation.

Anonymous said...

Well, Anne and Steve, interesting comments, as always. The chart is pretty frightening.

My thoughts about the whole non-PC debate is summarized in the following exchange:

"Kissinger: What do you think of the French Revolution?

Chou en Lai: It is too soon to tell."

Yes, it is too soon to tell, when it comes to women in hard sciences :)

I am quite convinced in this century we will see many women doing 'end of the tail' work in the hard sciences (Already, some are doing much better than average.) Why do I think think that? History!

Unlike Americans (who think history began only a couple of hundred years ago) or even the current (dominant 'Western') Europeans, we in Asia are a bit more aware of what has happened before.

The British colonial masters thought Asians, particularly Indians (and Japanese too, for that matter) were 'lazy' and 'not very smart'. Well, that is amusing :) Obviously, they did not know about the rich traditions in mathematics, sciences, particularly astronomy and medicine, and philosophy and literature. This was going on while the W Europeans were 'barbarians'.

But the Europeans did not even understand each other, for that matter. The British thought they were superior to the Germans, and they both thought they were better than the Russians, who they thought were less capable.

Well, it is hard to imagine 19th century hard science without the Germans (Russian contribution modest), and impossible to imagine hard sciences in the second half of 20th century without the Russians (German contribution more modest).

In the meantime, women should develop a thick skin and prove 'em wrong. Already there are a few women in hard sciences who are doing better work than most male scientists.


Anonymous said...

Nicely done, MFA. I understand completely for you recalled a fair number of English writings for me. You too, steve :)

Anonymous said...

Japan's Ties to China: Strong Trade, Shaky Politics

TOKYO - Just as China's state news agency was berating Japan for its 'wild behavior' in joining the United States to express their 'common strategic objectives' in Taiwan, the news came Monday that Japanese trade with China jumped 27 percent last year, hitting a record high of $168 billion.

It was only the latest example of a troubling dynamic in the countries' relations: white hot economics and deep freeze politics.

The joint United States-Japan declaration on Taiwan, buried last week in a long, seemingly bland statement of cooperative security objectives, left many Chinese analysts outraged. 'Japan colonized Taiwan for half a century,' one Chinese expert based here said Monday, hardly containing his anger. 'When Japan talks about Taiwan, we think they have no right to talk.' He asked to remain unidentified because he did not want to criticize Japan publicly.

But others say Japan's mention of Taiwan in its list of goals for a safer Asia was part of a larger effort to stand up to China's expanding power.


Steve Hsu said...


Thanks for your comments. I found the Norstad site partially for you :-) (Note, it doesn't have exactly the kind of info you were looking for - sizes of markets, real world stuff, etc.)

I agree it is too early to tell about M/F cognitive differences as they apply to success in science. But, I think there is already a great deal of evidence, e.g., from functional MRI, that (on average, or statistically) M/F brains are different, in ways that are unlikely to be due to sociology. The effects of testosterone on brain development in fetuses has been pretty well established, and even a low-testosterone male has 10x the level of testosterone in the average female. As a general observation, it seems likely to me that systematic M/F differences are likely to be larger effects than between different ethnic groups.

My, we are all off-topic around here. I wonder who is responsible? :-)

Anonymous said...

Thanks Steve!

I was away for a few days so have not caught up with your blog; seems like I missed some interesting conversations ;)

I just got to see the Norstad site this morning. It looks very good. I have not seen Hull's book yet.

What do you think about Paul Wimott's "Intro to Quant. Finance"? I just borrowed a book from the library. Of course, it discusses derivatives for the most part, but has some real-world bits in the introductory part...

I suppose the best thing to do is read the Economist or FT, as you suggest. I am just surprised there is seemingly no book(s) where they list the different types of financial products, the size of their markets, etc.. This should rightly belong in an introductory economics text, in my opinion.

More generally, although there are several factors contributing to a country's macro-economy, they are finite and not too large number of parameters. Krugman's book (The Age of Diminished Expectations) is another sort of book/source I have in mind, but written for an arbitrary country, and perhaps filled with comparative assessment of economies of the world.

But I am trying to piece together what I would like to know about from various sources, including your blog (likely your theoretical physics background enables you to write in a simple (but not simpler) and clear fashion:)).

PS: Off-topic. In my rating of the various physicists and mathematicians, I think I would put some of the mathematicians above the physicists in Landau's list. I have in mind, especially, Gauss (who had an unparalleled mastery of diverse branches of mathematics) and Euler (who was extraordinarily prolific).


Anonymous said...

A question.

Credit market debt: 304% GDP.

According to a previous blog entry
(Tuesday, February 08, 2005
Household debt ), US household debt around 120% of disposable income.

How are these two numbers consistent? Isn't disposable income less than GDP?

Likey, I do not know what 'credit market debt' is.


Steve Hsu said...


"credit markets" includes the bond markets, in finance lingo. For example "credit risk" refers to default by a bond issuer.

Wilmott is good - you might enjoy his Web site. But he tends to be PDE focused - I prefer path integrals :-)

Finally, yes Gauss and company were super geniuses and probably deserve to be in the ".5" or even "0" category!

Einstein is interesting precisely because his technical powers (though great by ordinary standards) were limited and his physical insight played a more important role in his work.

Anonymous said...


Thanks for the quick explanation. Much clearer to me now.

Do you have any book/paper on the PI approach to quant finance, or is it in the old Sloan unpublished report. I wish you had published it, so people like me (and also theorists who may want to move to finance after their Ph.D.) could benefit!


Steve Hsu said...


If I recall properly, Hagen Kleinert's book on path integrals now has a lot of material on finance and derivatives (in addition to the stuff on polymers and all that). You have to get the latest edition, though.

Anonymous said...

Excellent (book suggestion on PI fpr finance). Thanks, Steve!


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