Financial Crisis: Bad Poker Players?

I have just finished reading Jonah Lehrer‘s book How we decide.

First, I loved the book. It is very well written and interesting throughout.

Second, when I reached the section on poker players, I was struck. It instantly made me think about the very recent financial crisis. Not because, I want to compare financial instruments to gambling, but rather because the decision process within both groups (financiers and poker players) is, in my view, quite similar.

In the book, when Lehrer talks about good poker players, he relates to their ability to stop calculating the odds and refer to emotions. Basically, the rational side of the brain becomes rather secondary.

The financial crisis appeared to be the exact opposite: students of finance and economics forgot (or put aside) the “something is not right” feeling and favoured some set in stone math prinicples.

Many reporters seem very keen on saying that economists did not see the crisis coming, but it makes me wonder if it’s not more that analysts and economists indeed saw it coming, but they instead ignored their perceived emotions and continued to refer to overcomplicated calculations that could not fail – theoretically.

Was the financial crisis really unpredictable or was it a badly played poker hand?

Music, TV and Movies: Songs from Motion Pictures

I’ve always loved music, movies and TV shows. I’m part of the new breed of screenmusic geeks: People who are huge fans of songs playing during TV shows and movies. The importance of those songs is too often ignored.

Some movies and TV shows are able to combine a great script, stellar acting and enchanting music. I can think of a few examples of when the screen combined those three elements: AMC’s Mad Men and HBO’s Entourage are sure picks for screenmusic.

I can think of numerous episodes where Don Draper’s mysteriousness is greatly enhanced with just the right song. On top of my head, I can quickly remember the song by Gordon Jenkins entitled Caravan, playing when he rides the train back home during the very first episode.

Here’s a link to our blog post on the issue: the Song Detective Blog

And the link to our platform: Song Detective HQ

A Texas Not-So-Much-Miracle Update

Paul Krugman reiterates that he thinks that the Texas miracle is Republican mumbo jumbo. However, I’ll reiterate that Texas might still have a slight edge over New York and Massachusetts. I highly doubt that the result is budget related, but I simply think that unemployment rate (depicted in Krugman’s graph) does not tell the whole story.

When looking at employment since peak rather than unemployment rate over time, Texas remains above (relatively speaking) New York and Massachusetts. Again, absolutely not a miracle, but Texas is, according to those numbers, doing a bit better.

Update: Free Exchange at The Economist Online has a post on the issue.

Can’t Work at Work, Create at the Pub

There’s an intriguing talk at TEDx by Jason Fried who argues that productivity isn’t currently optimized at the workplace. He argues that M&Ms (Managers and Meetings) – not twitter nor facebook, as so many have argued – are the main detriments to being able to get some work done. He concludes with three main suggestions on how to get rid of those net losses at work. Here he is at work:

TEDx – Jason Fried: Why work doesn’t happen at work

I found it quite compelling, but his argument about creative people was a bit incomplete. I too work in an office with a severe case of M&Ms, I loose an incredible amount of time by being interrupted and going to meaningless meetings. But, when it comes to being creative, it gets a bit more complicated. I think that what creative people need most is to be in their element.

For example, my buddy and I are creating a new web-based company/product – outside of my current job with the infinite number of M&Ms – and the way we discuss our project (in the way we are most creative) is by going to a local pub to talk about it deliberately. By being in our element, we can interrupt each other, be interrupted by the waitress or by someone who needs to squeeze through, but we feel comfortable and our brains feel free to create.

I do concede, however, that once we are done “creating”, we need some uninterrupted time to write and fill the gaps. Fortunately for us, we don’t yet have an office in which to work, so we do most of our labour in our respective homes with a bit of music, uninterrupted.

See also: Jonah Lehrer on distracted people and creativity.

Note: keep an eye out for our new product, there will be much more to come on the subject.

What Happened to the Future?

Google Labs Logo

I’ve been playing around with Google Labs’ Books Ngram Viewer and I wanted to try a few keywords to see what this amazing new tool for nerds could do. Basically, it lets you look up how often certain words and groups of words were used in Google’s book database.

After numerous attempts and a few anomalies (like typing “internet” generated results pre-1950), the results were fascinating. Lets take it for a spin:

According to the following graph, the future is behind us.

Future Raw

Future related (more like, future mentioning) books have taken giant steps back since the beginning of the millennium. According to the data, “future books” peaked around the year 2000. The latest data available, 2008, demonstrates that the level of future mentioning books is back to where it was in the 1970s era. Could it be that there was structural change after the tech-wreck bubble (2001 recession) or even slightly before that period in anticipation of the crash?

Strangely, however, I look at the technological improvements over the past ten years and I see revolutionary ideas one on top of the other (for instance, the iPhone, iPad, Kindle, Google stuff, Social Networks…). My first reaction is to blindly hypothesize that our current technological prowess may distract us from the future. If it is the case, could it be that technology is a detriment to forward-looking thinkers?

Note:  the data in the graph is unsmoothed (raw) “Future” data from 1800 to 2008.

Ignored Economic Comment of the Year: “Invest Now”

The following is hoisted from the archives, a piece by Olivier Blanchard and Carlo Cottarelli, Ten Commandments for Fiscal Adjustment in Advanced Economies. I had been saving it to say “it worked!”, but instead today, it’s time to look back and realize that it’s just another missed opportunity.

When I first read their article, I thought it was the best piece of information summarizing what we should expect coming out of the recession. I especially liked #7, “Invest Now”, but it seems that, six months later, austerity prevailed. Here’s what they had to say in June, it tops my list of ignored economic comments of 2010:

Commandment VII: You shall implement wide reforms to boost potential growth.

Strong growth has a staggering effect on public debt: a one percentage point increase in potential growth—assuming a tax ratio of 40 percent—lowers the debt ratio by 10 percentage points within 5 years and by 30 percentage points within 10 years… In the current context of weak aggregate demand, reforms that increase investment are more desirable than reforms that increase saving. While both have positive long-run effects,  investment friendly reforms increase demand and output in the short run, while saving friendly reforms do the opposite.

The bottom line is that the philosophy of spending the restart the economy wasn’t popular back then and now, we’re faced with below potential growth amidst an out of sorts economic system.

The Great Recession was a crucial point in time to target specific long term growth sectors, but advanced economies failed to do so.

The whole piece is here for the nostalgic or blindly hopeful.

Texas: I Woudn’t Call It a Miracle, but a Slight Advantage, Maybe?

Paul Krugman questions the latest talks on the Texan recovery (Matthew Yglesias, The Economist, The Atlantic).

In Paul Krugman’s analysis, he uses unemployment rate, which might not tell the whole story about the labour market. The following graph uses the same three states, but depicts the employment situation since the peak, before the recession.

The graph does show that Texas has a bit of an edge on Massachusetts and New York. In fact, it shows that Texas is doing fairly better 22 months after its employment peak. Surely, it does not seem like Texas has had a full proof economy throughout the recession, but employment does seem to be doing better so far.

Pent-up Demand: Too Soon for a Sustained Recovery?

Consumer spending accounts for more than two-thirds of the economy (GDP or economic growth). Therefore, monthly data releases give a good idea of where the economy might be heading before quarterly reports.

This is from Bloomberg’s Why Investors Care: “The pattern in consumer spending is often the foremost influence on stock and bond markets.”

However, there’s another interesting relationship between consumer spending and the labour market. By plotting the initial unemployment claims (4-week moving average) and retail sales (excluding food services), there seems to be an important link between the two.

The following charts include both series. The first one uses monthly data going back to 1992 while the second one uses the monthly data from January 2009 to March 2010 and weekly data from 2010 week 14 to week 18.

Overall, the graphs suggest that the series are strongly related. But most importantly, the second graph shows that initial claims have stop falling in the past weeks. That would suggest that the retail sales (y/y %) should decelerate slightly during the corresponding period.

What does it all mean? Well, based on those few new data points, it could be interpreted as retails sales coming in at a slower pace for April (to be released Friday May 14th), meaning that the latest increase in consumer spending was indeed pent-up demand, hence the economy could encounter a slowdown as soon as Q2-2010; that being said, Q2-2010 could still be a quarter of somewhat strong growth due to the final steps of the stimulus package.

As a whole, it does not suggest a doomsday scenario, but it does raise concerns about the sustainability of the current recovery. At some point in time – rising stock market or not – consumer spending will again depend on income growth. For that to be the case, the labour market will have to recover in a significant manner (which isn’t what we are seeing right now).


Retail sales were up 9.6% from April 2009 (y/y %). On the graph, retail sales flattened out, following the pattern of initial claims. Though sales did not decelerate, I still expect them to do so given that the labour market should continue to show a fragile recovery.

Important and interesting update:

This is from Mark Thoma via email: “I think the main question is whether the relationship [between initial claims and retail sales] is causal, in which case it’s useful for forecasting, or if both series are being driven by something else (e.g. overall economic conditions) in which case, for forecasting, it’s important to identify the primary causal variable.”

More to come on the issue…

So Soulful Black Keys: ‘Brothers’

NPR music has another great first listen: this time it’s the Black Keys’ new album ‘Brothers‘.

May 18th, the album will be released. For now, enjoy NPR’s player.

I highly recommend a thorough analysis of the album. NPR describes the album as “strong stuff […] with more of an R&B influence. The album was recorded mostly in a studio dripping with the sounds of Aretha Franklin, Wilson Pickett and The Rolling Stones (circa Sticky Fingers), and even finds The Black Keys covering soul singer Jerry Butler.” Another worthy detail provided by NPR, the song “Tighten Up” is produced by Danger Mouse, an Economic Word favourite.

I love the bluesy-soulfulness of the album.

So far, my grade is between a solid A- and an A.

China’s Bubbling Credit

Is China’s credit over-heating?

Lately, when China-interested economists put aside the currency issue, they talk about bubbles. Some have argued that China will have to tighten its credit policy in order to avoid repeating the US’s mistake in creating a credit bubble. However, the following graphs tell a different story.

Clearer version of Credit Bubbles US & China

The loan to deposit ratio remains at a “reasonable” level and deposits are growing almost as fast as loans in China. If you compare China’s situation to the US’s, you notice that the loan to deposit ratio in China is not inflating like in the US preceding the crisis (credit bubble). It would suggest that there is no credit bubble in sight for the Chinese and there is still plenty of room for credit growth. Here’s a graph containing both loan to deposit ratios:

During the 2004 Chinese export boom, the loan to deposit ratio fell constantly. The Chinese authorities had decided to restrain interior demand in order to relieve some of the pressures on inflation. Since the recent crisis, inflation became less of a threat. China’s loan to deposit ratio then picked up to stimulate internal demand; but, it is still well below its pre-2004 levels and even further from the US levels.

China is indeed faced with some constraints to growth: its enormous stimulus package coming to an end and an inflation rate showing signs of over-capacity growth, but credit does not appear to be one of them.

Note: Chinese real estate remains, in my opinion, an ambiguous variable regarding bubbles.