Tuesday, September 30, 2008

Reads of the day

Dr. Doom has been arguing for some time now that the next leg of the financial crisis will be hedge funds. Will he be right once again?

Looking at GDI rather than GDP hints that the US is in recession territory...

...But looking at non-financial sector performance suggests that it is not

Most people expect that a new regulatory framework will emerge from the financial crisis; a forthcoming paper in the Journal of Finance shows that a bank's reaction to regulation will depend on its governance structure, so a one-size-fits-all framework may be inappropriate.

We are being flooded by comparisons of the current turmoil with the Great Depression. Here's one from Barry Eichengreen, who has researched extensively on the topic.

The best two-word summary of the rejection of the Paulson bailout: Drop dead!

Brad DeLong summarizes how we got to the current mess (starting with the post tech-bust & post-911 policies) in three graphs- impressive...

Now that the Paulson plan has been rejected, what next?

Monday, September 29, 2008

Reads of the day

European Banks: Too big to fail or too big to save

A comparison of the Paulson plan with earlier bailouts in Sweden and Japan

One of the useful side dishes of the proposed bailout bill: With a floor and as well as a ceiling, the variability of the effective Fed funds rate is likely to decrease. An "accompanying paper" explains the rationale behind the move.

A really good introduction to the TED spread, the decomposition of the spread is especially useful when trying to think about the different factors that affect this spread. The discussion of the spread between the three-month and overnight LIBOR is related to my recent point that LIBOR may not be measuring what it is perceived to measure...

And yet another discussion of what's wrong with the TED (I agree that OIS is a better indicator than LIBOR for credit strains that OIS-Tbills might show safe haven rush more accurately then TED)

Just like the banks, the members of the Congress voting on the Paulson bailout will be faced with the Prisoner's Dilemma as well.

Sunday, September 28, 2008

Reads of the day

One of the important debates of the Paulson plan is revolving around how to assign a value to the toxic assets. Daniel Gros, director of the Center for European Policy Studies in Brussels, suggests using option theory.

While the real world is obviously much more complex, using simple game theory illustrates one of the problems of the Paulson bailout: If things will get back to normal, it is in the interest of a bank to skip the auctions and hold out until the value of its securities recovers.

What the Turkish Statistical Institute (TUIK/TURKSTAT) could do when they are bombarded with criticism over CPI, which in Turkey is as often as the Germans invade France.

BTW, critics such as Ercan Kumcu had a point when TURKSTAT changed the composition of the index arbitrarily and apparently without even informing the CBT back in March 2007. But some other critiques simply reflect the inherent nature of such indices- four such concerns are summarized over at Mike's Economics Blog.

Puzzle of the Day

From Berkeley economist Brad DeLong's blog:

What if the difference between the game of investment banking and the game of lawn darts:

In lawn darts, it 's all fun and games until someone loses an eye. In investment banking, it's all fun and games until someone eyes a loss...

Saturday, September 27, 2008

Favorite Turkish economics columnists

When I used to give Economics training to branch employees at Citi, the third most popular question was which columnists I read regularly (the first question being the path of the dollar and interest rates and the second being the path of Besiktas- I often did the weekend training sessions with my Besiktas jersey, as I usually headed to a football game right after). Anyway, after a friend asked all the three questions during our recent roadtrip, I decided to address one of them here. Here are my favorite columnists and briefly what I like about them:

Deniz Gokce: Excellent tracking of current events (Turkey and world)

Serhat Gurleyen: The only one in the list I've met, and he really impressed me as very knowledable and thoughtful.

Salih Neftci: A must-read if you would like to familiarize yourself with the tools and instruments of modern finance. I wouldn't put my money on his predictions though; he likes to make specific forecasts, which are not likely to be exact all the time.

Hasan Ersel: Shows that asking the right questions is usually the most important step in reaching the answers

Ercan Kumcu: Knowledgeable ex-Central Banker, with somewhat an international macro focus

Haluk Burumcekci: Chief economist of Fortis, one of the few Turkish market economists I really trust.

Seyfettin Gursel: While his main expertise (and the main reason I follow his columns) is Turkish labor markets, I find his politics pieces interesting as well.

Quote of the day

from London Banker: "The problem with financial institution balance sheets is that on the left hand side nothing is right and on the right hand side nothing is left."

Friday, September 26, 2008

LIBORing: Confusing but definitely not boring

I have been following measures of credit strains lately, and I have come across a couple of interesting observations on the LIBOR, which is at the heart of the most commonly used measures such as LIBOR-OIS and TED spreads.

I am not a finance whiz kid, so I cannot figure out how Fed's lending, which is secured by collateral, would be higher than LIBOR, which is unsecured: But this is exactly what happened on Monday: At the Fed's auction of 28-day lending through its TAF, the stop-out rate was 3.75%, while the one-month LIBOR was around 3.20% on Monday and Tuesday. There has been quite a bit of debate in the past few months on whether LIBOR is an accurate measure (WSJ ran an article on the subject back in May). Moreover, some of the rate in the auction is probably due to the high demand (USD 134bn for USD 75bn), but even a five-minute analysis of a simple regression of the TAF rate against the bid-cover ratio a couple of controls convinced me that oversubscription can only explain so much.

I plan to look at the determinants of TAF rates in more detail later on, as there is a more fundamental issue at stake here: While Central Banks are providing liquidity to ease credit strains, I am not sure how willing banks would be willing to borrow from the interbank market while they have easy access to central bank money, which is likely to increase whenever liquidity dries up. So there might be the familiar chicken-or-egg problem going on here. I hope to return to this issue after analyzing the data, but the basic message is that for a number of reasons, it might not be a good idea to make more out of LIBOR than what is really is: the rate at which banks offer unsecured funds in the London interbank market. Even if it is an accurate indicator of that, it might not be a good measurement of credit strains.

Reads of the day

Looking at the its balance sheet shows that the Fed has been flushing the system with credit.

Key facts from a new database on financial crises

How much you can buy with USD 700bn depends on the price.

To simplify is one of the key attributes of any economic modeler, and Richard Baldwin is no exception: His explanation of the Paulson plan and the argument against it is the best I have seen so far.

Much of the of the critique against the Paulson plan stems from the argument that banks are suffering from lack of capital, not liquidity. But, liquidity measures may help recapitalization of the banking sector, after all.

The two links above hint that the Treasury secretary is not a clown after all, even though his company is perceived to be as risky as the clown's. Gillian Tett of FT takes covers this as well.

Short-selling is a sin,but not if the Church does it...

The graphs of the day: The term structure of the turmoil, a la Morgan Stanley via FT Alphaville

In case you didn't notice: The Fed has cut rates, at least its NYC branch

Why doctors do not want you to be informed (dedicated to my friend Afsin Alp, who is hopefully on track to a fast recovery)

Thursday, September 25, 2008

Reads of the day

One of the most interesting ideas on how tackling the financial crisis: Let markets work their magic - here's the summary of the paper.

Is it liquidity or solvency? If the former, the Paulson plan might work.

An academic presents a view against the academics' critiques of the Paulson plan

A beginner's guide on tracking the financial crisis

Since swaps have become the bread and butter of financial news recently, here's a brief introduction

SAT question of the day

"Henry Paulson is to finance what Donald Rumsfeld was to military strategy" - Anatole Kaletsky, The Times....
Bu e-posta, Turkcell BlackBerry ile gönderilmiştir.

Wednesday, September 24, 2008

Reads of the day

What the Paulson bailout means: Sink the taxpayer or sink the banks (very nice flow of funds approach even though the idea is now obvious to everyone)

An option to leave the ban on short selling naked

Why do Bernanke and Paulson think that hold-to-maturity prices are higher than current market prices for MBSs?

A good summary of how banks have transferred credit risk

A very good introduction to credit derivatives

What went wrong in six steps (the article is about fixing but summarizes how we ended up here quite well)- for an even simpler four-step version, see Krugman

Academic economists do not like the Paulson plan at all... But is their criticism justified?

I am looking forward to Friday's trade data

With another leading indicator hinting that the Euro Area is likely to be in technical recession, I am wondering the impact on Turkish exports during the remainder of the year. Of course, using the second most popular phrase of economists, that depends on the elasticities (the most popular being just it depends), and an export demand function for Turkey (or an import demand function for the Euro Area) needs to be estimated for that purpose.

I decided to look at the issue from the perspective of Turkish export supply, and going through the literature, I found a useful CBT paper. While the objective of the paper is to analyze structural changes in Turkish exports, it estimates export supply and import demand for Turkey. I liked the paper because the data is relatively recent and because the estimated coefficients are time-varying, as the authors have adopted the Kalman filter approach.

While I would expect the intercept term to be larger and increasing through time (just a hunch), their results, with the export demand elasticity of OECD income at around 0.5, suggest that the export pullback because of a European recession will not be as great as suggested in some recent research reports. Trade data for August, which will be released on Friday, and September, will be a litmus test in this sense.

Tuesday, September 23, 2008

Reads of the day

I wouldn't be too happy either, if my blog had this as a name...

Why you get polarization and ambiguous policies in a two-party system

How we got into this mess: An anatomy of the financial crisis

And how we can(not) get out of it: It's the capital, stupid (has also links to other well-written articles on what's wrong with the Paulson plan)

While economists discuss what happened in the past two weeks, let's remember 2007, which seems so long ago now

A concise history of the dismal science in the field

The Oppenheimer of financial markets

Not much happened last week in markets...

For a researcher looking at weekly closes, last week will not seem much different from the week before; Friday's rally ensured that. The small table below is from an email that was forwarded to me over the weekend:

9-12-08 CLOSE 9-19-08 AFT

S&P 1252 1251

DOW 11422 11391

2YR 2.21% 2.13%

10YR 3.72% 3.75%

6MO 1.55% 1.51%

For a more visual presentation, see here.

Sunday, September 21, 2008

Summer Reading Report

Now that summer is officially over, it is time to go over my summer reading:

Starting with fiction, I ended up reading two very original novels. Oguz Atay’s Tutunamayanlar is truly an exceptional book, both with its satirical approach to post-Republic Turkish bourgeoisie and its revolutionary style. However, it is definitely not easy-reading and its depressive tone means that it may be the best choice under a hammock by the sea. Whereas the characters in Orhan Pamuk’s latest book Masumiyet Muzesi are melancholic if not depressed, the book is anything but: This bifurcation between the tone of the characters and the book as a whole was what kept me enchanted, and the typical brilliant set-up definitely helped. I am no literary critic, but as far as love stories go, this one sits at the very top along with other masterpieces like Love in the Time of Cholera. Oh, by the way, I found the opening and closing lines very moving, they also help you feel the cheerful tone of the novel.

As far as non-fiction goes, I ended up reading a variety of books with different audiences in mind and very different writing styles. Tim Hartford’s columns in the Financial Times, which have become one of the indispensable items of Saturday mornings for me, led me to read his two books: The Undercover Economist and The Logic of Life. While both books are extremely well-written, I was disappointed in several ways: First, while the books are a great introduction to a huge variety of Economics literature and more importantly the economist’s way of thinking, they contain almost nothing new to anyone who has majored in Economics as an undergraduate. However, since the author’s target reader is someone who would like to learn about Economics, I cannot blame him for not giving a literature review on his topics; the North Holland Handbook series and the Journal of Economics Perspectives are more appropriate for that purpose. However, I do have a more serious criticism: As anyone who has studied the dismal science would know, almost all the issues in Economics have are multi-faceted. Therefore, speeches (or even soliloquys) starting with “on one hand” and ending with “on the other” are common among economists- President Carter was aware of this when he famously asked for a one-handed economist. However, in both of his books, Tim Hartford always presents only one side of the issue he is tackling, and for someone new to Economics, a partial picture may be worse than having no picture at all.

Another disappointment of the summer was Mahfi Egilmez’s Hitit Ekonomisi (The Hittite Economy). Not that I did not get anything from the book; on the contrary, Egilmez provides many facts on the Hittite economy, all of which were new to me. But there is not much else; I was expecting to see at least some economic analysis and commentary rather than a laundry list of facts and facts. Being a big fan of the author’s book with Ercan Kumcu (Ekonomi Politikası: Teori ve Türkiye Uygulaması- Political Economy, Theory and Application to Turkey), I guess I was expecting something of similar caliber, which I didn’t get.

Last but not the least, I immersed myself on books on the financial crisis of the last couple of years. While the events of the past two weeks have revealed that there are many more pieces to this unfolding drama, books on the turmoil have started to appear. From a wide selection, I picked up The Gods That Failed: How Blind Faith in Markets Has Cost Us Our Future by Larry Elliott and Dan Atkinson, The Credit Crunch: Housing Bubbles, Globalisation and the Worldwide Economic Crisis by Graham Turner and The New Paradigm for Financial Markets: The Credit Crunch of 2008 and What It Means by George Soros. Elliott and Atkinson have written a very entertaining book with lots of anecdotes, while Turner has the most complete economic analysis of the three. Soros, on the other hand, applies his ideas from previous books to the ongoing turmoil, so there might not be much new if you are familiar with his earlier work. All these three books are playing the blame game: According to Elliott and Atkinson, it is the greedy bankers and investors, whereas Turner thinks it is free trade- incidentally, this is where he gets his theory messed up big time; according to him, “free trade today is no longer driven by comparative advantage, but the ability to maximize profits by cutting costs.” A really weak point of an otherwise informative book. Whereas both these two books put the blame on a certain group, Soros seems to wave his finger and say “I told you so, but you didn’t listen”- I am sorry George, but I still cannot make much of your reflexivity theory; I understand it all right, but I am not sure how to apply it. But maybe that’s why you make more money in a few minutes than I would do in a lifetime…

If you do not have much time to read all these books on the turmoil or if you are looking for an objective treatment of the events that led to the current mess until early this year rather than play the blame game, look no further (if you speak Turkish): Saruhan Ozel’s Global Dengezikliklerin Dengesi (The Balance of Global Imbalances) might be just what you are looking for: Ozel, Denizbank’s chief economist, has been following the economic and financial events unfold for the past few years and takes the readers as far back as the tech boom and the aftermath of September 11 to trace causes of the current problems. What you get is not only a brief and well-written summary of the last decade in the global economic and financial landscape, but also an introduction to the new financial instruments, BRICs less Brazil and last but not the least Turkey’s role in the new global landscape. It is this last part where my sole criticism of the book lies. While Ozel summarizes economic developments since the 2001 crisis well, he has got bogged down in detail in analyzing Turkey’s current account deficit. The issue is extremely important and definitely deserves discussion, but Ozel has been sidetracked from the many subtopics emanating from his analysis of the current account deficit so that his main points seem to get lost during the process. But the non-Turkey sections of the books are required reading for anyone who would like to get a crash course in understanding the world economy.

Saturday, September 20, 2008

Media and Politics in Turkey: Take Three

In the spirit of a weekend diversion, I would like to take another shot at exploring Turkish media and politics (you can read my previous posts on the topic here and here). Amidst cries from MM (media mogul) Dogan's newspapers that the government was clasping on media freedom, I was curious when I recently stumbled upon a paper that looks at the relationship between media freedom and FDI: Nabamita Dutta and Sanjukta Roy, both from West Virginia University, find that FDI is a major determinant of media freedom in their panel of 115 countries, 20 years. The argument is that foreign investment to the media sector makes it financially stronger and more advanced, while at the same time improving the economic environment as a whole, which in turn enhances media freedom further. Makes perfect sense, but...

Even if we ignore the fact that it is really difficult to measure media freedom, I have been interested in FDI enough to coauthor a paper on the determinants of FDI (an enhanced version of the paper written by coauthors is here), so I know enough about the literature to tell a different but equally logical story: It is also plausible that foreigners decide to invest in the media sector when they are sure that they will not be tempered by the government, i.e. when the media is free to begin with and certain institutions are in place to ensure a stable economic environment. It is true that the authors of the paper use econometric methods to rule out my version of the story in favor of their version. Rather than go into a dry discussion of my take on their methodology, let me offer an alternate methodology. Let's do a very simple event study: While it has received some FDI in the past couple of years, Turkish media is no better (or worse) in terms freedom than it was in 2005 (for a longer and better introduction to event studies, see Chapter 1 of the Handbook of Corporate Finance: Empirical Corporate Finance)!!!

Joking aside, I am not sure panel regressions are the right way to tackle media freedom. While certain variation between countries such as rule of law and other pillars of economic environment can be measured, for other measures (such as whether media groups can be involved in other business activities, be part of conglomerates or whether there are political connections between media groups and the government- to which I will return in a future post) there is not much cross-country or time series data. And I am still not sure how many points to deduct from the media freedom index when the PM spies on journalists' dinner table conversations and asks his supporters not to buy certain newspapers...

A Short Diversion into Art

Today, I visited the Dali exhibition at the Sakip Sabanci Museum, which immediately brought back memories of my graduate macroeconomics course- just for the record, the Dali painting at the cover reflects one of the coauthors’ (the relatively shorter one) taste for anything associated with Catalonia rather than his appreciation of Dali. Anyway, I have once more established that my taste of art refuses to reach closer than Impressionism. But just like football players, there is good art, art that is barely watchable, art that is bad…and then there is Damien Hirst (replace art with footballer and Damien Hirst with Athony Seric, and you have the comments of a Greek Seric fan- incidentally, Seric turned out to be better than expected in his first official game against Metalist Kharkiv of Ukraine).

Coming back to Hirst, his Sotheby’s auction was definitely a success. However, while reading about junk items going through intermediaries with asymmetric incentives after being packaged as high quality and ending up at overly-enthusiastic buyers confident that they have made good investments, I was suddenly filled with a weird sensation of déjà vu? I am sure I have seen it before, but where and when I just cannot recall…

Friday, September 19, 2008

The Collapse of the Credit Empire (guest blog in Turkish)

Given my mediocre writing skills in Turkish, I’ve come to accept that unless guest bloggers contribute, my goal of keeping this blog semi-bilingual will not be realized. The honor of the first guest blog goes to Afsin Alp, who is a hedge fund manager in NYC (Meadowbrook Capital Management LLC). The column below appeared in the July issue of Boryad, the journal of the Stock Market Investors’ Association of Turkey. While the article was written and published two months ago, some parts of it are extremely relevant to the events of the past couple of weeks, but I restrained my urge to underline/emphasize the parts I like and instead present it as it is…

Tüm dünyada iş ve finans çevreleri ABD’yi dört gözle izliyor. Dünyanın en büyük ekonomisinde yaşanan her türlü hareket, diğer ülkeler için büyük öneme sahip. Amerikan borsaları yakından takip ediliyor. Her türlü iniş çıkışı farklı etkilere neden oluyor. Ben de New York’ta çalışan bir hedge fon yöneticisi olarak Amerikan borsalarındaki gelişmeleri ve bu gelişmelere bakış açımı Türkiye’deki yatırımcılarla paylaşacağım… Yazımda, işimle ilgili yaşadığım tecrübelerimden alıntılar yaparak, Amerikan piyasalarının içinde bulunduğu durumu yorumlaya çalışacağım. Öncelikle temel oluşturması açısından son dönemde olan gelişmeleri şöyle kısaca bir özetleyelim…

Ağustos 2007’i aslında milat sayabiliriz. Bu ay içerisinde Avrupa Merkez Bankası, Amerikan Merkez Bankası ve Japon Merkez Bankası, bankacılık sistemindeki likiditeyi artırmak için piyasalara müdahale ettiler. Aslında finansal krizin ilk etkileri 2007 yılı başlarında kendini göstermişti. Yılın ortalarına gelindiğinde ise, Bear Sterns’un iki mortgage hedge fonu batma noktasına gelmiş ve ileriki tarihlerde her iki fon da kapatılmıştı. Bear Stearns yatırımcıları toplam 4-5 milyar dolar civarında zarar etti.

O dönem, çalıştığım yatırımcılara her çeyrek yazdığım yazımda, kredi piyasalarındaki bu problemlere değinmiş ve FED’in likidite artırımı için çabaladığından bahsetmiştim. Ancak bu çabaların sonucunun ABD’yi korkunç bir enflasyonist ortama iteceğini belirtmiştim. Nitekim piyasaya basılan onca Amerikan dolarının etkisi emtia piyasalarında kendini göstermiş ve gelişmekte olan piyasalardaki hızlı büyümeden kaynaklanan talep artışlarını da ekleyince, fiyatlar astronomik bir şekilde yükselmişti. Altın fiyatları 1000 dolar seviyelerine ulaşmış ve crude oil fiyatları 150 dolar seviyesine çıkmıştı. Merkez bankaları tarafından likidite sağlanmaya çalışılsa da kriz yayılmış ve genişlemişti. Citigroup, Merrill Lynch, Lehman Brothers, Bank of America, Wachovia, UBS, Credit Suisse gibi pek çok banka ve aracı kurum ciddi miktarlarda zarar yazdılar.

Bugün bu zararların toplam değerinin 1 trilyon dolar civarında olduğu tahmin ediliyor. Ancak FED’in krizin ilk dönemlerinde yaptığı açıklama, zararların 100-200 milyar dolar civarında olduğuydu. Buradan da anlaşılacağı üzere, aslında problemin derinliğini ve büyüklüğünü hiçbir kurum öngörememiş ve gerekli önlemler alınamamıştır. Şahsi kanaatim, bu finansal krizin1930’larda yasanmış “Büyük Buhran”dan sonra ABD’nin başına gelmiş en büyük ve köklü problem olduğu yönünde. Hatta son 25 yılda ülkede gerçekleşen büyümenin (bu büyüme içine teknoloji ve emlak balonlarını da eklersek) kredi piyasaları sayesinde yaşandığı da göz önünde bulundurulursa, olayın vahameti daha net gözler önüne serilmiş olur. Tahminim, 100’e yakin irili ufaklı bankanın batacağıdır. Aktifleri büyük olan bankaları ise FED koruyacak ve batmalarına (finansal sistemin sürdürülebilirliği açısından) izin vermeyecektir. Bunun örneğini Bear Sterns, Fannie Mae ve Freddy Mac’de gördük. Ufak bankalara yatırılan paralar risk altındadır. Federal Deposit Insurance Corp. (FDIC) ancak 100 bin dolara kadar olan hesapları sigorta etmekte ve garanti vermektedir.

Benim için artık kredi ile büyüme tarih oldu. Bu durum en çok “Amerikan doları”nı etkileyecek. Zaten son birkaç yıldır bu etki gözlemleniyor; ancak kurda daha çok devalüasyon yaşanması da olası. Bu tezin oluşması 10-15 yıl sürebilir. Bu, emtia piyasalarının sadece dolar ile trade edilmekten çıkarılmasına kadar gidebilecek bir süreçtir. Ancak şu noktada bir parantez açıp Türk Lirası ile ilgili düşüncemi de belirtmek istiyorum: 50 milyar dolar bütçe açığı -ki bu rakam 1980’lerden beri yaşadığımız en büyük açık- sürdürülebilir değil. Yüksek faiz ile desteklenen değerli Türk Lirası politikası orta vadede ülkeyi kriz ortamına sürükleyecektir. Yatırım olarak Türk Lirası’nda olmayı kesinlikle riskli buluyorum. Şu noktayı tekrar vurgulamak istiyorum: ABD’nin krizden kurtarılması için yürütülen çalışmalar arz kaynaklı olmayan enflasyonist çözümlerdir. Son dönemde FED bunun farkına varmış ve kuvvetli dolar kurunu istediğini açıklamıştır. Ancak sözlü yapılan bu yorumlar ve ödünç almadan yapılan açığa satışların önlenmesi için çıkarılan kanunlar, sadece “Ne kadar zaman daha piyasaya dolar sürmeden panic ortamını düzeltebilirim?” mantığıyla yapılmıştır. Piyasaya yollanan bu sinyaller kısa vadede etkili olsa da, orta ve uzun vadede atılması gereken adımları sadece ertelemektedir.

Aslında kendi hedge fonlarımızda son iki yılda elde ettiğimiz başarının arkasında bu sebepler yatıyor. Yani piyasaların dinamiği değişti ve bu değişime ayak uyduramayanlar var olamayacak. Bu riskleri doğru ölçtüğünüzde fırsatlar kendini gösteriyor. Yine yatırımcıya yazdığım yazılardan bir alıntı ile devam etmek istiyorum: “En önemli fırsatlar kaotik piyasalarda, yani yatırımcının irrasyonel tavır sergilediği pazarlarda kendini gösterir.” Bizim için piyasaların içinde bulunduğu durum, bulunmaz bir fırsattır. Benim bu durumdaki öngörüm, sermaye piyasalarının kısa vadede pozitif getiri sağlamaktan çok uzak olacağı yönünde. ABD’de yaşanan talep daralmasının diğer ekonomilere yayılması kaçınılmaz. O yüzden emtia piyasalarını temkinli yatırım olarak seçenleri uyarmak istiyorum: Emtia fiyatlarının ne kadarı gerçekten arza dayalı, ne kadarı spekülatif? Bunu tam anlamıyla bilmek mümkün değil. Ancak gelişmekte olan piyasalardaki büyümenin yavaşlaması bile bu fiyatlarda büyük dalgalanmalar yaratacaktır.

Thursday, September 18, 2008

A few words of wisdom from Turkish policymakers to ensure a good night's sleep

I was just going over summary of the day's news to make sure I did not miss anything when I stumbled upon a comment from Tevfik Bilgin, head of the BRSA. According to Mr. Bilgin, Lehman Brothers does not have any transactions with with Turkish banks that could cause systemic risk. Having read this, I kind of assumed that Mr. Bilgin was also ready to cover the extra funding costs of the banking sector, so I felt really relieved.

Just as I was about to close shop for the day, I saw Nazim Ekren's (minister in charge of coordinating economic policy) answer to a question on what the government was doing to minimize the effects of the global financial turmoil on the Turkish economy. Here is my translation of his answer: "We had shared with you earlier the Southeastern Anatolia, Eastern Anatolia and Konya plains projects with respect to the global food and energy crisis. Similarly, with respect to the international financial crisis, we have started an important initiative with our project to turn Istanbul into global financial hub, another international project which will allow liquidity and funds that are currently unevenly balanced into Turkey and Istanbul..."

Now that I know that the banking sector is safe & sound and that Istanbul will emerge from the financial crisis as the new financial hub, I am sure to have a good night's sleep, even though I am out of milk...

P.S. Joking aside, a buddy has emailed me asking whether I thought Turkey was positioned to weather the global economic storms. I plan to email him Minister Ekren's words with the famous tagline from the cult classic The Fly: "Be afraid, be very afraid"...

It seems my pleas from the previous post have been answered...

Thanks to The Big Picture's Barry Ritholtz (http://bigpicture.typepad.com/comments/), I now know the difference between Lehman, Bear and AIG:

"• Lehman Brothers was like the little kid pulling the tail of a dog. You know the kid is going to get hurt eventually, and so no one is surprised when the dog turns around and bites the kid. But the kid only hurts himself, so no one really cares that much.

• Bear Stearns is the little pyro -- the kid who was always playing with matches. He could harm not only himself, but burns his own house down, and indeed, he could have burnt down the entire neighborhood. The Fed stepped in not to protect him, but the rest of the block.

AIG is the kid who accidentally stumbled into a bio-tech warfare lab . . . finds all these unlabeled vials, and heads out to the playground with a handful of them jammed into his pockets."

If only someone could explain to me Fed's definitions of liquidity and solvency in equally layman's terms....

Wednesday, September 17, 2008

My take on the AIG bailout

I have been neglecting my blog for the past few days in favor of trying to get a good grasp of the latest events, and it seems that the more I read the more confused I get:) For example, I am still not sure I understand Fed's definition of liquidity versus solvency (in fact, I am not sure whether the Fed does either), but here is what the AIG bailout means to me...

EDIT: WSJ Real Time Economics just made me remember that the sponsor of Newcastle is Northern Rock, which was taken by the BOE earlier on. So the March 9 matchup between ManU and Newcastle will effectively be "battle of the central banks"...

Friday, September 12, 2008

I am telling below what the oil price will be a year from now on, so read on

No, not really; I was just trying to trick you into having a look at this blog:) Joking aside, while they are far too humble to make such a bold statement, the authors of a recent paper attempt to do just that and have found an easy-to-use way. In Can Exchange Rates Forecast Commodity Prices (NBER working paper 2008-02), Yu-chin Chen, Ken Rogoff and Barbara Rossi show that commodity currencies, i.e. currencies of commodity exporters, can forecast the price of the country's major commodity export. Moreover, these commodity currencies do a good job in predicting overall price movements. The intuition is, according to the authors, that exchange rates are asset prices that embody expectations of future movements in macroeconomic fundamentals, specifically ones that will directly affect the exchange rates.

However, before you develop a strategy based on these results, here are a few "use at your own risk" disclaimers. First, the countries in the study are all major commodity exporters, with commodity exporters representing at least a quarter of their export earnings. Second, they are small countries, so can not affect the price of most of the countries they are exporting. Third, they all have floating, market-based exchange rates. So, rule number 1: This exercise will not work for any country/currency. Fourth, you actually need to know some forecasting and time series to model the relationship, so rule number 2: don't try to do this at home unless you know your metrics; buy your starving PhD student friend dinner so that she will do it for you. Fifth, we are talking about monthly data here, so if the the depreciation in the rand this week does not reflect to a fall in the price of gold the following week, do not blame me (or the authors for that matter). I would turn part of my apartment as shrine to for any economist able to capture that volatility and forecast exchange rates at those frequencies. Finally, rule number 5: This is not for daily trading, traders beware.

Despite the disclaimers above, the results of the paper, which are robust to the specification used (I have tried quite a few), are exciting, not only for practitioners, but also from a theoretical point of view: They validate the modeling of agents adjusting their behavior to expected future events, which is even though much criticized as unreal, has been the bread and butter of international macro for the past 30 years.

Coming to my claim in the title: Doing this exercise for oil is tricky because some major oil exporters have pegged currencies, others are not liked by the US, still others have presidents that do not like the US. While affinity to the US is not modelled in the paper, the currencies of those countries are not determined in international markets, either. Despite these challenges, the authors list predicting oil prices as a future avenue of research.

For a non-technical summary of the table, written by the authors themselves, see http://www.voxeu.org/index.php?q=node/1631

Thursday, September 11, 2008

What to do when you have too much data for a macro forecast?

At first sight, the question appears not to have much meaning: It is usually lack of data rather than too much data that forecasters particularly dislike (I plan to devote some time to forecasting with poor data in later blogs). After all, when you have lots of data, you can usually do something with it, but that "something" might not be a good forecast at all. In other words, in data-rich forecasting, the task of the forecaster is to choose the right methodology and come up with an accurate forecast, and a recent paper throws some light on the issue.

Jan J. J. Groen and George Kapetanios (Revisiting Useful Approaches to Data-Rich Macroeconomic Forecasting, FRBNY Staff Report 327) go over the well-known methods in forecasting large amounts of data such as factor models (such as principal components) and Bayesian ridge regressions, both of which are readily available in most software packages nowadays. They also go over forecast combinations. However, I was most interested in their description of partial least squares regression, which I had not heard of before, so I got another tool in my forecasting arsenal. However, the paper goes much beyond a literature survey, as the authors use Monte Carlo experiments as well as forecasting exercises for main US macro data (unemployment, industrial production, Fed Funds and inflation) to show that the new kid (or rather the lesser-known cousin) performs no worse (and usually better) than the other two methodologies.

They might be fighting a tough battle, but at least they have equity analysis on thir side...

Turkish daily Hurriyet is at the forefront in the battle between PM Erdogan and MM (media mogul) Dogan, in fact to such an extent that a rival media group's (Calik, which is perceived to be very close to the ruling AKP, with the PM's 27 year-old son-in-law as the group's CEO- the PR of Calik beware: I have empirical evidence for this last statement -for the perception, not the CEO's age, as I was not present at his conception) in a paper I am currently working on, which I will discuss in my blog as soon as I done with a few topics I'd like to cover first) principal daily Sabah today published an article titled: News that are not published in Hurriyet:

But Hurriyet has the equity analysis on its side, for now: A Merrill Lynch (did I spell it right?- I never know quite how many r's and l's I need) report finds it "undervalued and a relative trade versus DYH", its parent company. Hmmm, I never made much sense of those ratios, but an alternative explanation: Hurriyet wins the battle of the newspapers, but PM Erdogan strikes with a vengeance against MM Dogan... Joking aside, the analysts also note that "Hurriyet is not low risk, we think, all the more so with ongoing tension between the governing AKP and Hurriyet's owner Dogan. Anyway, if you are interested, the full report is here: http://research1.ml.com/C/?q=HaGuAM6rhyjltljEpgrEYA%3D%3D

Tuesday, September 9, 2008

Mediocrities and Turkish Politics

In the opening lines of Peter Schaffer's play Amadeus, Salieri complains to a priest, “Mediocrities everywhere”. He is lamenting in fact about his own mediocrity more than anyone else’s, as his music is forgotten, while Mozart’s is cherished less than a decade after his untimely death. As I watch PM Erdogan’s Kasimpasa-style bickering with media mogul Aydin Dogan, I find myself repeating Salieri’s words over and over again. I then remembered that I couldn’t find anyone worthy enough to bother to cast a vote for in the July 2007 elections (it turns out that not showing up for an election is also rational since the marginal vote cannot affect an election, as Tim Hartford illustrates in his latest book, The Logic of Life), and a couple long-forgotten papers suddenly popped up inside my head…

Tim Besley, in a 2005 survey paper published in the Journal of Economic Perspectives (19, 43-60) summarizes the economics literature on the decision of individuals to enter politics (if you follow my blog long enough, you’ll soon discover that economists like to poke their noses into many places); one lesson learned from the paper is that mediocre politicians are the rule rather than the exception in many countries. In fact, a more recent paper by Andrea Mattozzi and Antonio Merlo (PIER working paper, 07-007) on the same subject is aptly titled Mediocracy. In their framework with two sectors competing for workers, the political party and lobbyists (this could easily be replaced by a private sector), aspiring politicians with higher skills increase the cost to the party of the average recruit, and so are avoided. Moreover, an increase in the skills of the lobbying sector relative to the party decreases the skills of the best politician- maybe one of the negative side effects of the increases in productivity in Turkey after the 2001 crisis. Joking aside, I think that to explain mediocrity in Turkish politics, one needs to consider non-economic factors as well. Although I do not read much political science, one of the most thought-provoking books I read in 2006 was Haluk Ozdalga’s Kotu Yonetilen Turkiye: Ornek Vaka Turkiye, where the author, one of the princes of the late Ecevit before falling sour with him, recounts his hard-to-believe experiences in the party. You can find a review of the book by a friend of mine at http://www.radikal.com.tr/ek_haber.php?ek=ktp&haberno=4967 – incidentally, I had read the book upon my friend’s suggestion and emailed a somewhat less favorable review than his to the author at the time, but I feel I am closer to his viewpoint now. That’s what overexposure to Turkish politics for a prolonged time can do to you…

How to be a good banker

"If you don't fully understand an instrument, don't buy it. If you would not buy yourself a specific product, don't try to sell it. Ifyou don't know very well your customers, don't lend them any money. If you do all these things, you will be a better banker, my son"

Emilio Botin - Chairman of Santander

...the best summary of the banking woes I've seen so far

A program to get your economics in shape fast

Well, I am finally back after a prolonged absence- the initial excitement of blogging died down quickly at the end of July and now hopefully I'll be able to jot something down every couple of days.

Anyway, what led me to this post is a request from an old friend of mine who recently found out that his economics knowledge is a bit rusty, both at a theoretical level and from a current events perspective and asked me to recommend him some "stuff" to read. He is a mid-level manager in his early 30s, with an MBA from a top-20 program in the US, so he does not really feel like getting bogged down in the math of one of the excellent macro textbooks out there. I started scratching my head and after some burning some serious brain cells, I was able to come up with just the right book:

Ekonomi Politikası / Teori ve Türkiye Uygulaması (Political Economy, Theory and Application to Turkey) by Mahfi Egilmez and Ercan Kumcu: The authors are two well-respected policy economists (but with credible academic hats), Kumcu was a long-time vice president in the Central Bank of Turkey and Egilmez the undersecretary of the Treasury. What I really like about the book is that it combines macro theory with applications to the post-liberalization (since the mid-80s) Turkish economy. Of course, it does not claim to be a comprehensive expose of macro theory or recent Turkish economic history. But after going through the book, you’ll definitely have a better understanding of macro as well recent economic developments in Turkey.

For those of you not fluent in Turkish, Macroeconomic Essentials: Understanding Economics in the News by Peter Kennedy is a similar book: The author explains the “really important” ideas in macro and manages to link them successfully to the real world by way of very short news clips. The book itself, is really well-written and to the point, which wouldn’t come as surprise to many students of economics who have relied on Peter Kennedy’s famous econometrics book for making sense of the Econometrics taught in the first-year graduate courses. Anyway, this would make a very nice complement to the Kumcu/Egilmez book.

While I am done with the book recommendations, my friend is also looking for readings to keep him informed on current economic developments. The easy answer would be to tell him to read the Financial Times and The Economist on a regular basis. Indeed, both are my favorite exports from England right after Newcastle Brown Ale, but for the sake of our 20-year friendship, I felt I needed to try harder and went over all the economics blogs I am following. Given his background, I came up with the following:
Econbrowser (http://www.econbrowser.com/): Run by economics professors James D. Hamilton and Menzie Chinn. Has well-written summaries of recent policy-relevant research as well as economic developments. Slightly US-centered, but still very education.
Carpe Diem (http://mjperry.blogspot.com/): Run by economics professor Mark J. Perry. A bit more diverse than the macro-oriented Econbrowser, and really fun-to-read.
Follow the Money (http://blogs.cfr.org/setser/): Economist Brad Setser’s blog. Has good coverage of international macro.
Financial Times Alphaville: (http://ftalphaville.ft.com/blog/): Very good survey of a variety of policy-relevant publications, all the way from various newspapers and journals all the way to academic articles and blogs. Although I follow more than 50 blogs, the guys at FT manage to catch the really important/interesting stuff from other blogs most of the time, and make me wonder quite often whether I am wasting my time bothering with logging on to the google reader.

Last but not the least, my friend should not expect to be economically fit unless he has a firm understanding on just what the f--- is going on in financial markets…Fortunately, there is a plethora of good books on the subrime-liquidity-credit-monoline-banks-funny named GSEs-what’s next meltdown. In fact, I have taken it to task to read seven books on the subject in September; right now I am about to be done with the second. Once I am done with all seven, I will post my review and recommendation on those. In the meantime, I expect my old buddy to get abs and buns of steel…