Friday, December 1, 2017

Michael Roberts — Boom or bust?


Review and critique of the latest OECD World Economic Outlook, from a Marxian POV. Useful.
The key for me, as readers of this blog know, is what is happening to the profitability of capital in the major economies. If profitability is rising, then corporate investment and economic growth will follow – but also vice versa. But if profitability and profits are falling, debt accumulated will become a major burden. Eventually the zombies will start to go bankrupt, spreading across sectors and a slump will ensue. Financial prices will quickly collapse toward the real value of their underlying productive assets.
Indeed, according to Goldman Sachs economists, the prices of financial assets (bonds and stocks) are currently at their highest against actual earnings since 1900!
What the OECD and IMF reports show is that if there is a downturn in profitability, the next slump will be severe, given that private debt (both corporate and household) has not been ‘deleveraged’ in the last nine years – indeed on the contrary.…
Michael Roberts Blog
Boom or bust?
Michael Roberts

21 comments:

Matt Franko said...

“Financial prices will quickly collapse toward the real value of their underlying productive assets.”

The prices are a function of bank capital and the risk free interest rate.... not some Darwinian “real value” figure of speech...

Matt Franko said...

Here:

https://en.m.wikipedia.org/wiki/Capital_asset_pricing_model

Taught in Business Schools as part of earning a Bachelors of SCIENCE degree in Finance and Accounting....

Tom Hickey said...

The problem with actually using that model to invest financially or trade based on outputs is that the inputs that count are based on expectations, since financial markets are about discounting the future, which is, of course, uncertain.

As Keynes said, action in the financial markets is like betting on a beauty contest. It's not so much the beauty of the contestants that counts as how those placing wages expect the judges to act.

When optimism ("confidence," measured by VIX, for example) runs high, then so do exceptions and future performance gets overestimated and vice-versa when expectations are low.

Markets are based on arbitraging the volatility induced by changing expectations on the assumption that in the long run, the market will reflect fundamentals. Think use of moving averages, regression to the mean, Bayesianism (adjusting for changing expectations based on new information), etc. as analytical techniques.

Matt Franko said...

Warren Buffet: "if the government came out today and said they were putting interest rates at zero and was going to guaranteed keep them there for 50 years, the Dow would go quickly to 100,000...."

Its a true statement...

Mike is tracking prediction markets the indicators for rate increases next year has been falling and accordingly we see a stock rally on that (and the expectations about reducing the tax rates...)

Rates are still VERY low ... not zero so we dont see Buffett's Dow 100,000 but some fraction of that...

So then you have Art Degree academic economists who never trained in this Science in the positions of authority to raise the rates and asset values fall with the rate increases and then they scratch their heads and wonder why that happens... they are morons..

Why dont these people just look at what the other people involved are actually doing??? is this hard????

If they raise the rates high enough it causes problems like higher volatility... Buffet's rick free rate is also in the Black-Scholes formula such that volatility is proportional to the risk free rate ie higher the rate, higher the volatility...

Matt Franko said...

Volatility happens with the higher rates due to the time domain response charateristics of the rate variable..

Rates are increased and the price effects via the CAPM are immediate so asset prices come down a bit in near time but then the higher rates have a SLOWER bullish fiscal effect via interest income and earnings increase and that increases the asset prices in a future time...

Its a periodic function... moron's call this "the business cycle!" figure of speech ....

Tom Hickey said...

Warren Buffet: "if the government came out today and said they were putting interest rates at zero and was going to guaranteed keep them there for 50 years, the Dow would go quickly to 100,000...."

Its a true statement...


Shows that Buffet is clueless about interest rates.

What he gets right is that the government sets the policy rate through the central bank as it agent.

But he is wrong that the central bank as delegated monetary authority "sets interest rates."

The central bank only sets the policy rate.

Why should the amount that solvent banks pay for overnight funds be more than zero %? Makes no financial or economic sense.

Allowing the central bank to set the policy is both anti-capitalistic and anti-democratic.

In setting the policy rate, the cb is choosing winners and losers.

In a capitalistic system, banks should decide among themselves what each bank pays to borrow overnight based on perceived risk involved. For most banks that would be very close to zero percent as a market rate. Banks that were forced to pay higher rates would simply go out of business. Banking would be dominated by very strong (large) firms.

In a democratic system, monetary policy would be viewed as fiscal policy and either set by the legislature or else delegated to the financial system as Britain did with libor. Yes, there was collusion there but that is illegal and should be treated as a financial crime.

If the policy rate is going to be used fiscally, then the elected government should take the responsibility instead of delegating it to a politically independent board of technocrats with an agenda.

If the banks ran the system and set the overnight interest rate based on the market perception of risk, which would be negligible, would the asset markets skyrocket? No? I didn't thinks so.

Tom Hickey said...

moron's call this "the business cycle!" figure of speech ...

Matt, the "business cycle" is a curve or set of curves that can be viewed, e.g., using FRED. Plotting rates of change over time that do not fall along a straight one is "cyclical." Business cycles are made up of expansions, that is, a rising curve, and contractions, that is, a falling curve.

Moreover, all abstractions are "figures of speech." You seem to be assuming that "figures of speech" are just handwaving. They have uses.

When "x" is used as the token called "a variable," it is a figure of speech that goes proxy for the arguments. In quantitative systems, the values of the variable are numbers that represent quantities. When used in models those numbers are metrics that relate the model to what is being measured. All this operates iaw specified (formal) rules. This is how science works wrt to mathematical modeling.

Ordinary language operates the same way, only the rules are different in being looser.

Ordinary language is looser than formal languages, which makes it richer but less rigorous. Formal languages are more rigorous but they loose the ability to capture a range of meaning.

Wittgenstein compared this to choosing different nets for the size of the fish that one wants to catch.

Moreover, the use of formal languages depends on being able to use ordinary language while there reverse doesn't hold.

People are trained to use the type of "net" for the type of "fishing" that they plan to do and are being trained for. But everyone learns ordinary language as the common basis for communication and being able to use different mesh nets to capture various kinds of information.

Matt Franko said...

The government sets the "risk free rate" Tom...

The "risk free rate" is in the CAPM functional equation...

plug and chug... rinse and repeat... kinesthetic learning...

This is how they train people in the business schools... numerous trials of repetitive computations using the functional equations... it becomes second nature...

They dont "write papers!" or some shit over there.... they repetitively train... they grind...

https://en.wikipedia.org/wiki/Kinesthetic_learning

this is simply what they have been trained to do....

Matt Franko said...

"But he is wrong that the central bank as delegated monetary authority "sets interest rates.""

He is asserting that they set the "risk free rate"... which is used in the equation... it only uses the ONE interest rate...

Here:

"The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The risk-free rate is customarily the yield on government bonds like U.S. Treasuries.

Read more: Capital Asset Pricing Model (CAPM) https://www.investopedia.com/terms/c/capm.asp#ixzz508NLW6pv
Follow us: Investopedia on Facebook

The asset values are a function of what fiduciaries believe to be the future characteristics of the risk free rate.... its >0 as the govt will not set the rate at zero or any other fixed rate as they believe they can regulate the economy to achieve stability by continuously varying the rate up and down... "monetary policy"....

I'm not advocating for it I'm just telling you what these people are doing...

If the govt set rates to zero for 50 years guaranteed then the NPV of the Dow would be a sum total of all the estimated profits to be earned by those 30 firms for the next 50 years...

Buffet says it implies a 100,000 on the index today if you add all of those profits up 50 years future at a zero risk free rate...

Matt Franko said...

Here is Buffet's background:

"Warren graduated with a Bachelor of Science degree from the University of Nebraska, Lincoln, after which he applied to Harvard Business School. After being rejected by Harvard, Warren matriculated at Columbia Business School, where he graduated in 1951 with a Master of Science in Economics. While at Columbia, Warren studied under legendary value investor Benjamin Graham.

Read more: Warren Buffett: His Life and Education | Investopedia https://www.investopedia.com/university/warren-buffett-biography/#ixzz508QoEwS5
Follow us: Investopedia on Facebook

He has two SCIENCE degrees... Masters from a Business School...

Now today, Columbia has changed it to an Arts degree:

http://econ.columbia.edu/master-arts-program-economics-columbia-university

fucked it up...

Tom Hickey said...

And in 50 years, some of those companies won't be in business anymore.

Uncertainty.

Will asset prices be higher with a lower policy rate that the market assesses a stable than they would be otherwise. Quite likely. The model is an instrument for estimating this. Does the model predict the future? No way.

Moreover, do we want a group of technocrats influencing market prices? If so, why?

Tom Hickey said...

He is asserting that they set the "risk free rate"... which is used in the equation... it only uses the ONE interest rate

Matt, you wrote "rates." That is what I was responding to.

Tom Hickey said...

He has two SCIENCE degrees... Masters from a Business School...

Is everything called "science" actually STEM, or STEM-based?

If so, then all academic economists and business school grades are STEM people since they are highly trained in advanced math and applying math is modeling the world.

But they are the ones screwing things up.

Ash Carter had a PhD in theoretical physics from Oxford. How successful was he running the DoD?

The Dilbert cartoons I put up "suggest" that one can be a math genius but in modeling, the math is only as good as the modeling assumptions.

Any model depends on the parameters being well-chosen and the data reliable, and the proof is in the degree to which the model provides the results it purports to give.

If all this were determinative, there would only be one side on trades, or the sellers would be just interested in portfolio shifting. This is the assumption of investing in markets that inherently efficient so that the price is always"right," and then cashing out as one needs liquidity in retirement years.

Matt Franko said...

“Moreover, do we want a group of technocrats influencing market prices? If so, why?”

Again Tom I’m not advocating for anything I’m just telling you what these people are doing....

Matt Franko said...

"Ash Carter had a PhD in theoretical physics from Oxford. How successful was he running the DoD?"

Management is not what we are talking about and he seemed to manage DoD okay in any regard ... you may disagree with the missions but that is not a technical issue...

We are talking about being able to achieve a technical understanding of a somewhat complex system... there is a proper way to be trained to be able to do this... and an Art Degree is NOT the way I can tell you that...

Try to separate the normative from the technical... once the normative aspects are settled, you have to bring in qualified/competent technical people to get it done in when the matter is a material one...

Tom Hickey said...

Management is not what we are talking about and he seemed to manage DoD okay in any regard ... you may disagree with the missions but that is not a technical issue...


He was hired as a manager and commandeered foreign and military policy. Obama should have fired him if he had not directed it. The guy was a nut case and Obama a wuss.

What I am saying is that STEM people may be brilliant in STEM but clueless in other things that are important for their role.

Hiring STEM people is no panacea.

Ben Johannson said...

Notice how the current valuations, profits and corporate debt have converged to a near or all-time high. Keynes' theory of investment would suggest a change in delta for any of these (for debt in the form of bankruptcies) will have a pronounced effect on the other two, so I do agree the next downturn is potentially quite severe. It also guarantees another massive bailout for the financial sector.

Matt Franko said...

“Hiring STEM people is no panacea.“

You have to figure out which type of training is most appropriate for a specific job...

Matt Franko said...

You can’t put Arts Degree people in charge of implementing economic policy... that is what we are seeing ...

Tom Hickey said...

“Hiring STEM people is no panacea.“

You have to figure out which type of training is most appropriate for a specific job...


That's true in most fields, but it is not true in politics in a democracy, so the selection process is the basis of the problem. It's another paradox of liberalism.

An alternative is some kind of authoritarian technocracy, which is what China is doing, for example.

Noah Way said...

You can’t put Arts Degree people in charge of implementing economic policy.

Because the Harvard MBAs have done such a magnificent job ...