Michael Covel: News & Info.

“The cornerstone of Harvard professor N. Gregory Mankiw’s introductory economics textbook, Principles of Economics, is a synthesis of economic thought into Ten Principles of Economics.”

What are those and what do they really mean? Read.

Mankiw’s Principles:

#1. People face tradeoffs.
#2. The cost of something is what you give up to get it.
#3. Rational people think at the margin.
#4. People respond to incentives.
#5. Trade can make everyone better off.
#6. Markets are usually a good way to organize economic activity.
#7. Governments can sometimes improve market outcomes.
#8. A country’s standard of living depends on its ability to produce goods and services.
#9. Prices rise when the government prints too much money.
#10. Society faces a short-run tradeoff between inflation and unemployment.

Yoram’s Translations

#1. Choices are bad.
#2. Choices are really bad.
#3. People are stupid.
#4. People aren’t that stupid.
#5. Trade can make everyone worse off.
#6. Governments are stupid.
#7. Governments aren’t that stupid.
#8. Blah blah blah.
#9. Blah blah blah.
#10. Blah blah blah.

A day after an equity market mini-correction, “news” fills the air at Yahoo! Finance:

“It’s typical that you get a bounceback the next day,” said Joseph V. Battipaglia, chief investment officer at Ryan Beck & Co. “Now we’re essentially flat on the year. Can we go up from here or down? That sorting-out process will continue now.”

I don’t know what anyone could do with those comments. They probably sound great to some, but in terms of usefulness, they serve scant purpose. That said, some players were more careful:

Bernanke let the lawmakers know he wouldn’t be led into publicly contemplating what role Greenspan’s remarks or any other developments had played in setting off the worst one-day point drop since Sept. 17, 2001, after the terrorist attacks. “I don’t think it would be useful for me to try to parse the movement into the components associated with different pieces of news or pieces of information,” he said.

That is a refreshing piece of candor. No attempt to give an immediately circumspect “why” answer.

From the Street.com today:

“The market has been stretched for the last three months, and there’s been lots of speculation,” said Phillip Roth, chief technical market analyst with Miller Tabak. “It’s been destined to crack, but no one knew which trigger would do it.”

1. A market is stretched? A market is a market. There is a price every day. They don’t stretch either up or down. They do go up and down.
2. There is always speculation in markets. Same as it was a 100 years ago, 10 years ago, 1 year ago and today. Nothing new.
3. “Destined to crack” will always be a subjective statement.
4. When a market goes up or down, fast or slow, there is never a way to truly know the “trigger”.

What to make out of today? What’s the big lesson? Stocks went down. You don’t like that answer? You want a story? You want to feel better by attempting to “understand”? There are lot’s of folks who can make you feel better with endless “why” theories. I am not one of them.

From Motley Fool comes this “wisdom”:

It’s YOUR money. According to this prominent Wall Street whistleblower, those high-priced investment types are getting high on YOUR commissions. And you won’t believe the other dirty secrets this gentleman revealed to us about the teeming underbelly of the financial services industry. You owe it to yourself to hear every word! Because only then — once you know the full truth — can you decide for yourself whether you want to continue feeding Wall Street’s insatiable addiction. Or if you should keep your money where it belongs… in your own account, compounding exponentially into a private fortune for you and your family to enjoy. You Absolutely Can Do It It’s not even hard. You simply need to buy and hold the very best U.S. stocks. These are the opportunities that make investors truly wealthy, gaining in excess of 22.8% per year.

This kind of writing only exists because people want it to exist. Give “The Fool” credit for feeding the demand and building a business that makes money. Of course, their writing is 100% BS.

One view on hedge funds from Loren Steffy of the Houston Chronicle:

Hedge funds need latitude to maintain the kind of returns that makes them attractive to investors. Instead of buying only stocks and bonds, for example, hedge funds make riskier plays. They may buy an entire company, restructure it, and sell it a few years later for a big profit. They may buy and sell stocks by the hour. They may sell stocks short, betting, essentially, that the stock will fall in value. They may dabble in derivatives, currencies, collateralized mortgage options or the swap market. Or all the above. All that risk, of course, doesn’t always lead to reward. Last year, about 5 percent of all hedge funds failed, according to Hennessee Group, a New York-based hedge fund consultant. A typical fund has about a three-year life span. But the hedge funds that succeed do so precisely because they are free of restrictions. That creates a double-edged financial sword for investors, because hedge funds provide an important function. The markets need them. Hedge funds sop up risk, which helps reduce volatility, and they employ tactics such as short-selling that make markets more efficient. A study by the Federal Reserve Bank of Cleveland last year found that hedge funds tend to reduce price volatility in the market. That’s why Paulson and his fellow regulators are reluctant to offer investors more than platitudes. For most of us, though, the best way to benefit from hedge funds is to stay out of their way. So take my advice. If you’re thinking a hedge fund may be the right investment for you, it probably isn’t.

Loren is right. Immediately go hide under your bed. Put your money under your mattress. Eventually you will be dead and the fear will subside!

It appears investors don’t agree with him: read (PDF).

A hedge fund resource site at Harvard.

Following up on my post the other day about Nassim Taleb, I found a question/answer with him about his new book The Black Swan:

Q: What do you want people to take away from reading your book?

A: How not to be a fool for things that matter. You can take advantage of uncertainty if you know how to look it in the eye, and know the limits of what we understand. You should learn to accept fuzziness and know that we know very little in some domains, but that it can be so useful a guidance to reality. How to avoid taking seriously the “faux experts” (those who wear suits and act in a pompous way). How listening to the media, or studying economics, degrades your knowledge of the world.

His advice is straightforward and very on target, but how many people will really stop to reflect on his words?

The Black Swan Glossary (PDF) from Nassim Taleb. Good reading.

Feedback in tonight from Mebane T. Faber:

You linked to my white paper awhile back. A newer version was recently published in the Journal of Wealth Management. The Journal of Wealth Management link is here, and the free SSRN version is here.

Ed Seykota gave an insightful explanation on risk management recently on his site:

Risk is a combination of the possibility of a loss and the magnitude of the loss. We register risk in our bodies as a feeling of fear. One way to manage various forms of risk, including prospective risk, initial risk, open risk, and unconscious risk it to make sure your feeling of fear is an ally, fully functioning on your emotional instrument panel. In our medicinal culture, some people attempt to medicate fear, rather than manage risk…In general, people with willingness to experience fear and other feelings are better risk managers than those who have fear in k-nots or fear under the influence of narcotics.