The Cranky Finance Prof Spouts Off

Now I’m truly going to let my inner dork explode onto the scene and talk about a childhood passion and a hobby I still enjoy: Dungeons & Dragons (D&D). I don’t know that D&D needs to be explained that much anymore, but to give a succinct definition, it is a table-top role playing game (RPG) set in a low or high fantasy world. It’s all about storytelling and adventuring, and pretending to be the big hero – usually. There have been some very fun exceptions. Think the world of Tolkien, whose work served as mighty inspiration for D&D, and of...

By Jeff Oxman Vote1 0

What if current low interest rates and consequently high asset prices are because of both supply and demand problems? Specifically demand and supply in the market for loanable funds. To quickly define terms, supply of loanable funds is what non-economists call saving/investing. Demand of loanable funds is borrowing. The price of loanable funds is interest, and as we can see there are a variety of loanable funds markets conforming to different needs of both investors and borrowers. The price for loanable funds in the developed western world is extraordinarily low and has been for some time. That isn't news. What's...

By Jeff Oxman Vote1 4

Yes indeed. But let's leave it at that. Let's not go down the road of holding them up as symbols of masculinity, as is done here and here. People who hold either of them up as a symbol of masculinity have no understanding of the truth of masculinity or manliness. Manliness isn't just the feature of possessing the male appendage, and it's not the antithesis of womanliness. So no, Bowie and Prince weren't playing with the border between masculinity and femininity - they couldn't. Although I don't dispute they were male, they didn't have a public persona that was manly (although...

By Jeff Oxman Vote2 0

Why is the FOMC statement so important? Why does an occasional announcement from the Fed about what they think the short-term interest rate should be affect the market so much? To read some commentary, it shouldn't matter because the market does its own thing. In this post I want to think through (and likely make some mistakes) Fed policy, policy implementation, and what the announcement means. To begin with, the Fed can implement policy in three ways: (1) adjusting reserve requirements; (2) adjusting the target fed funds rate; (3) open market operations. Note that (3) isn't necessarily the method of...

By Jeff Oxman Vote0 0

As a finance professor, and researcher of so-called asset price bubbles, I have a certain attitude about the word. My attitude is that it’s the most over-used word in finance. Moreso even than synergies by the M&A crowd. In this article, I’m going to define a “bubble” from a financial economics (i.e. correct) point of view. Then I have a few things to say about recent burps in the stock market. sildenafil citrate tablets caverta 100 To begin, we define two values of an asset: the intrinsic value, and the market value. The intrinsic value of the asset is the present...

By Jeff Oxman Vote5 10

First, to define the term. I mean aggression as the antonym of passivity. I don’t mean destruction or bullying, as these would be perversions of aggression. I mean the aggression that is needed to make your way in the world, to get the work done that you need to, to navigate everything from traffic to abusers of your time. Aggression is assertiveness combined with force. And as Frederick Douglass said, “a man, without force, is without the essential dignity of humanity.” viagra generic A lack of force, or a passive attitude, will allow a person to avoid uncomfortable situations in...

By Jeff Oxman Vote3 0

Well, now that the ferocity of semester-end has finished, I can get back to some serious thinking. The following are eight trends I’ve been thinking about for a while now, and in the weeks to come I’ll be expanding on each trend in terms of entrepreneurial and investing opportunities. If there are major trends you believe I have missed, please let me know in the comments and I’ll consider them. These trends are important in the medium- and long-term, but to take advantage of each one there are things to be done in the short-term. Chinese canal through Nicaragua The...

By Jeff Oxman Vote2 2

A new paper has come out in the Journal of Policy Modeling (vol. 37, 189-207) by George Selgin, David Beckworth, and Berrak Bahadir. The paper essentially shows that the fed funds rate was too low relative to the natural (aka neutral) rate of interest. It's a more-or-less neoclassical paper, with a straightforward utility function for a representative household, and a Cobb-Douglas production function. Along with budget constraints, they solve for consumption and derive an expression for the steady state real neutral rate of interest. This is the level the fed funds rate should be set at to maintain a neutral...

By Jeff Oxman Vote3 1

The number one lesson of stock valuation: you are always wrong. To put it statistical terms, when you estimate the current intrinsic value of a firm's equity - that is the present value of future cash flows to the equity holders - your error term is necessarily large. So to deal with that, we do plenty of sensitivity analysis and scenario analysis and see what kind of value range we can obtain under a variety of circumstances. One of the exercises I do that I have found to be particularly useful is to reverse engineer the stock valuation to obtain...

By Jeff Oxman Vote1 6

When I teach class, I feel like a fraud. I'm supposed to know what I'm doing and be able to help them learn tools that can make more sense of the world. The basic tools are easy, but anyone can pick those up online. Check out Khan Academy for Time Value of Money, or Net Present Value for examples. Right now, with negative yields on German government bonds and European corporate bonds, stock prices through the roof and a lack of real economic reason for it, I have no idea what's going on. If I don't know how to make...

By Jeff Oxman Vote0 3

The sky is falling! Or, well... bond yields are at any rate. Germany recently issued some 5-year notes at a negative yield, and several other European countries have bonds whose yields are currently negative. See here for some good discussion on why and what it means for financial markets. One very interesting point was made close to the end of the article I linked to: that bond funds (mutual funds that only or largely invest in bonds) will keep buying whatever bonds are available because of the idle cash they have. Legally, at least in the U.S. and Canada, a...

By Jeff Oxman Vote1 0

This is a response to this NPR 'news story' I heard the other day. The gist was that this guy was telling us that Americans aren't saving enough for their retirement. That may or may not be true, it seems like a very personal issue, but I want to address two points here that should concern people like us. My first point is to address savings. I'll take it at face value that Americans aren't saving enough for retirement for this point. Given that I teach finance, I have a fairly good idea of what this means in practice. Say...

By Jeff Oxman Vote8 2

We are all well aware of the extraordinarily high level of the federal debt. It's the highest it's been, as a % of GDP, post-WW2. What may not be as well known is that the Fed's holdings of Treasury debt is at levels not seen ever before, in terms of levels. However, as a percentage of Treasury debt outstanding, the Fed's current holdings are right around 15%. The last time the Fed had persistently high holdings of Treasury debt, it was the 1970s. And we all know how that worked out. The main difference is the height of Treasury...

By Jeff Oxman Vote2 4

Who's working where? Inspired by this post by Robert Murphy on Mises.ca, I put together graphs of employment changes for the states of the U.S. I grouped them by broad region, so some graphs have more states than others. (Click image to enlarge). The first thing we notice is that, except for a few special cases, the employment patterns are pretty consistent for most states during and after the real estate bust. Massive drop-off, and slow climb since. Louisiana had it's own challenges with Hurricane Katrina, clearly. The biggest gainer is, of course, North Dakota. Texas is doing well too,...

By Jeff Oxman Vote0 0

The worst vice is advice, but I can't kick the habit. I had an epiphany today, though, that I think is worth sharing. Whether you are learning gourmet cooking, sculpture, carpentry, metal working, or anything else, there is one common piece of advice I would offer. There might otherwise be commonalities, I don't know. But for sure this one bit is good for anything you might try. My advice is: minimize your loss, given that you are going to try whatever you are going to try. For example, if you are learning to cook, don't go for the most complex...

By Jeff Oxman Vote1 1

We've been living with "big data" for a long time now. "Big data" is essentially a buzzword, along the lines of "sustainable." We should really understand that "big" just means "larger than we have used in the past." Yes, there are storage and architecture costs, but of course there always have been. Arguably, what's made "big data" or the size we're dealing with now is the cheapness of data storage. Walmart and Target wouldn't collect all the data they do if they couldn't store and use it economically. To a financial economist, big data is old news. We can't publish...

By Jeff Oxman Vote3 0

I just thought of a new way of describing us and those like us: liberty entrepreneurs. Every day, we're looking for and developing ways to be more free, and we're helping others to do the same. And Jeffrey Tucker is a perfect example of a liberty entrepreneur. He's an inspiration for me to find ever-increasing ways of living "outside the statist quo" as Mr. Tucker might say. In his guide "Prepare for Life Without the State," Mr. Tucker offers a variety of suggestions for creating a state-free lifestyle. In this post, I'll discuss how Mrs. Cranky Finance Prof and I...

By Jeff Oxman Vote7 2

Should we expect 2% 10-year Treasury yields for the foreseeable future? Here I give some reasons we might think so. First, QE3 ended in October of 2014, but yields have actually gone down a little bit since then. But even though QE has ended, the Fed continues to conduct open market operations, as the open market operations people are reinvesting interest earned on the bond portfolio (the coupons). In the chart below, I show M2 and excess reserves. Excess reserves did drop down towards the end of 2014, but is still very high. M2 is, naturally, at its highest point...

By Jeff Oxman Vote4 0

You have been misled! The VIX is often referred to as a volatility index, or sometimes even a 'fear' index. This implies it is used as a gauge of Mr. Market's perception of the likelihood of a stock market crash. This is not the case, however. First, what is the VIX? Not to get too technical, but first we need a little option pricing tutorial. The price of an option, be it a put or call, is a function of five factors: the price of the underlying asset, the exercise price of the option, the risk-free rate of return, the...

By Jeff Oxman Vote2 2

The honest person is feared by the dishonest person. Those who have gained political power have almost universally done so through dishonest means, and maintain it thus. The honest person holds her personal integrity as the single inviolable feature of herself. This is a person who remains incorruptible and is therefore not understood by the dishonest. The dishonest seek to control and exert power over others, to protect themselves and enrich their own material wealth; perhaps simply because the dishonest desire power over others. The honest person is immune to the dishonest person's entreaties, and will not be swayed under...

By Jeff Oxman Vote1 0

Improve Your Life The D&D Way! Jul 9, 2016

Issue Debt and Have Children! Jun 26, 2016

Bowie and Prince Musical Geniuses? Apr 24, 2016

Thinking Through the Fed Announcement Sep 20, 2015

Don’t ever say “bubble.” Aug 27, 2015

In Praise of Aggression Aug 2, 2015

Sunday Investment Times May 31, 2015

Austrian Business Theory Going Mainstream Apr 26, 2015

Turning Stock Valuation on Its Head Apr 11, 2015

What if I Told Them What I Really Think? Mar 13, 2015

Negative Yields and The ZLB Mar 3, 2015

On Retirement Saving Feb 26, 2015

Will it be the 1970s Stagflation Again? Feb 23, 2015

Employment Patterns Among the States Feb 4, 2015

#1 Advice to Amateurs of Anything Jan 20, 2015

“Big Data,” Financial Theory, and Sunspots Jan 17, 2015

On The Tuckerian Lifestyle Jan 12, 2015

Persistent Low Returns – The New Normal? Jan 12, 2015

Does a Low VIX Tell Us Anything About a Market Crash? Dec 18, 2014

Why Honesty is Dangerous Dec 16, 2014