Joe Stiglitz On High-Frequency Trading

A rather brilliant set of notes by Salmon on a rather brilliant speech by Stiglitz, making the case against market volatility in general and high-frequency trading in particular. Markets should “reward people who find out information about the real economy”. But HFT robots “steal the rents that otherwise would have gone to those who had invested in information”, with the result that “the market will become less informative” (1,650 words)

Review: Capital In The Twenty-First Century

Thomas Piketty’s “extraordinarily important” book incorporates “four remarkable achievements”: Vast historical scope; innovative empirical research; simple explanatory models; bold policy recommendations. Piketty shows that inequality of wealth is rising spectacularly; he does not explain why this matters. The answer is political, rather than economic: people in liberal societies should be equal as citizens (1,211 words)

Gold: In Search Of A New Standard

The world benchmark gold price is set each weekday by five London banks who juggle the price until they balance buy and sell orders on their books. Or, to put it another way, the market is fixed by “five competitors exchanging information on prices while also doing proprietary trading”. It’s been a good enough method for almost 100 years. But after other price-fixing scandals, there is pressure for change (Metered) (2,294 words)

The Mystery Of The Dots Pick of the day

A glorious parody. A new case for Sherlock Holmes: “I received this cable this morning. Observe, Watson, that it has been sent from Washington, DC in America. It was composed therefore in the middle of the night by the sender, this Yellen. Who sends a transatlantic message at that hour? Someone who is agitated in the extreme and cannot sleep, and finally resolves to consult a higher authority” (1,890 words)

Fred Wilson Q & A

Co-founder of Union Square Ventures reflects on 20 years in venture capital: “Working on companies that aren’t going to be successful is an important part of being a VC. Just because they’re not successful doesn’t mean you can just bail on them. It’s like having a kid, right? You can’t decide to have a kid and then at age 10 just say, ‘Okay, I’m out of here’. You’ve got to get the kid into college” (6,990 words)

How Nigeria Rewrote Its Growth Story

Nigeria has almost doubled its reported GDP, overtaking South Africa as Africa’s largest economy. How so? Nigeria moved the base date for its GDP calculation from 1990 to 2010. The old calculation ignored the arrival of new products and services, including big industries such as films and telecoms, that were not included in the 1990 database. They are captured in the new calculation (Metered) (740 words)

The Long-Term Unemployment Trap

Long-term unemployment used to be a problem mainly for Western Europe; but since the great recession it’s become problem for America too. American employers typically don’t want to hire anyone who has been out of work for more than six months, even with appropriate skills. They pay more, if necessary, to attract workers from the short-term unemployed. Once you’re in the trap, you don’t get out (840 words)

High Frequency Trading: Threat or Menace?

The furore is overblown. “Yes, the stock market is rigged, but it’s always been rigged, and that hasn’t prevented it from delivering pretty impressive returns to long-run investors. Yes, we should strive toward a market that’s rigged in the least expensive, most transparent, most efficient, most stable way possible. I don’t think we’ll ever get rid of the people (or computers) in the middle making money off the customers, though” (1,160 words)

Wolf Hunters Of Wall Street

Extract from Flash Boys: A Wall Street Revolt, Michael Lewis’s new book about the rise of high-frequency stock trading, which mystified even top hedge funds and investment banks when it started moving US markets in 2007. A trader would hit a button to by or sell a stock, only to find that the price changed before the deal was done. Somebody else was getting in first, and manipulating the market. But how? (Metered) (10,750 words)

Forces Of Divergence

Capital In The Twenty-First Century, a “sweeping account of rising inequality” by French economist Thomas Piketty, is the most talked-about economics book in years. An early reviewer calls it “one of the watershed books in economic thinking”. Picketty argues that “modern capitalism has an internal law of motion” that leads, most of the time, to the rich getting richer, and the rest trailing ever further behind (4,215 words)

Mark Zuckerberg, The Warren Buffett Of Tech

Buffett is the “classic conglomerator: he’ll buy any business, so long as it’s good”. Zuckerberg is starting to do the same thing in tech, with his purchases of Instagram, WhatsApp and, most recently, Oculus. None is an obvious fit with Facebook. But by now Zuckerberg is investing for a future beyond Facebook. He “knows that his flagship won’t last forever”. So he has “decided to build himself a flotilla” (535 words)

Academics Spy Weaknesses In Bitcoin

Princeton scientists say Bitcoin rules will have to be “significantly changed” to counter diminishing incentives to miners as bitcoins in circulation approach the cap of 21 million. Transaction fees are supposed to substitute progressively for new-coin revenues as coin issues fall, but under existing rules these fees will rise too slowly to incentivise miners. Possible solutions: Tax transactions, or raise the cap (1,225 words)

The Dismal Art Of Forecasting

Economic forecasting began in America with the financial panic of 1907 and the work of Roger Babson, a “serial entrepreneur” of “faddish beliefs” who popularised the idea of business cycles. A century later the business and financial worlds are “deluged” by data and forecasts, but with no general increase in certainty about the future. If there is a signal, it is lost in the noise. “Everyone is shouting at the same time” (3,200 words)

The Scottish Pound Myth

Most Brits believe Scottish pound notes to be legal tender in England. Not so. Scottish banknotes are issued by private banks. English merchants accept them out of trust and habit, not obligation. If Scotland left the UK, its banks could go on issuing Scottish pounds, and even collateralise them with British pounds, though the Bank of England would no longer be lender of last resort to the Scottish issuers (1,220 words)

The Secret World Of Fast Fashion

How Korean immigrants reinvented the American fast-fashion industry. They left Korea in the 1960s and 1970s for Brazil, Argentina, New York, California; resettled in LA in the 1980s and 1990s concentrating capital, expertise and connections; the kids go to Parsons. Clothes are designed in LA, outsourced to China and Vietnam, sold to US wholesalers within the month. Top of the tree: the Chang family, owners of Forever 21 (2,470 words)

A Primer On Inequality And Economic Growth

Short and plain; mostly graphs; particularly helpful in situating the newly influential ideas of Thomas Picketty. Incomes tend to be more equal in richer countries. But in developing countries – those with most growth still ahead of them – inequality and growth go together. Tentative conclusion: inequality is a cause or effect of growth spurts; sustained growth requires the political stability associated with greater equality (570 words)

The Automatic Corporation Pick of the day

Corporations can be thought of as “information-processing feedback loops”. They propose products, bring them to market, learn from results, and adjust, while trying to maximize profit. So why can’t corporations be completely automated — replaced by algorithms? Innovation could be ensured by allocating a fraction of resources to “exploring new points in the space completely unrelated to the current neighbourhood” (670 words)

A Deeper Look At Uber’s Dynamic Pricing

Uber investor defends surge pricing. Basic argument: it’s supply and demand, drivers are independent agents, the market is efficient. Two interesting points: Periods of peak demand for rides – Saturday nights, storms, New Year’s Eve — are also periods of reduced supply, when drivers would rather not drive; and surge prices are less damaging for Uber’s reputation than sustained periods with no cars available (2,375 words)

The Future Of Film

Tight, lucid primer on Hollywood’s evolving business model. In 2013 major studios released 32% fewer films than in 2003, but spent 75% more per film. Even when a blockbuster as such makes little or no money, it can “establish a platform through which entertainment becomes a recurring service”, with future income from comic books, merchandise, television spin-offs and, increasingly, video games (2,100 words)

The Gavel Drops At Sotheby’s

Portrait of the venerable auction house, lagging behind Christie’s and under siege from investor Daniel Loeb, who sees art as “an expanding economy” and Sotheby’s stock as “the only public route to investing in it”. Entertaining cast of tycoons and collectors including David Martinez Guzman, Mexican-born financier who keeps a billion dollars’ worth of art in a Swiss warehouse and never looks at it (6,500 words)

Wallets Wide Shut

Industrial companies are in good shape, especially in America. But they are not investing. Why? Perhaps because the nature of investment is changing. “While companies recognise that innovation is a key comparative advantage in today’s global economy, they are also humbled by its increasingly winner-take-all nature. Successful innovation today is a lot less about financing and much more about finding the ‘killer app’” (1,000 words)

Chris Anderson’s Expanding Drone Empire

Former editor of Wired builds new career as CEO of drone maker, 3D Robotics. The industry seems to be heading for a boom: Amazon is talking up drone deliveries. 3D’s business model is a newish one for manufacturing. It “relies on both open-source hardware and software and thus laughs at secrecy. 3D Robotics patents nothing; it collaborates on everything, mainly through the DIY-drones community” (2,735 words)

What You Can Learn From My Real Estate Investments

Excerpt from Buffett’s annual letter to Berkshire Hathaway shareholders. “Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake” (2,800 words)

Postscript: Mavis Gallant

Her short stories “sit solidly, almost bad-naturedly, in memory”. They “come to dinner, and, no matter how late the hour, you just can’t show them to the door”. She lived most of her life “as a foreigner, in France, childless and husbandless”. She showed no regrets, but she may have felt them. The reader is “haunted both by the moments of beauty and intelligence and by the scenes of devastating loneliness or disappointment” (915 words)

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