Working Papers

2007 07

What Every Hedge Fund Manager Would Like to Know About the RBNZ

NZ Finance Minister Michael Cullen’s office lets slip the RBNZ’s intervention limits via an OIA request:

Multiple investigations have started to find out how confidential information on the Reserve Bank’s limits for intervening in the currency market got past the Treasury, the Reserve Bank and advisers in the Minister of Finance’s office to a newspaper.

The papers - compiled by the Treasury, double-checked by the Reserve Bank and sent to Michael Cullen’s office for final checking and approval - included two figures relating to the financial limits the Reserve Bank could go to when intervening in a high or low currency, and the limit on its foreign exchange position.

The bank intervened in the currency last month, and the figures were included in a briefing to Dr Cullen about it which was given to the Sunday Star-Times under the Official Information Act.

The figures were described in the report as “highly confidential” but were not picked up until the newspaper saw them.

Dr Cullen’s office indicated yesterday that the blame would lie primarily with the Treasury…

The Sunday Star-Times agreed not to publish the figures, saying it was not in the public interest.

Since Cullen is the responsible minister, there is not much point in blaming Treasury.

posted on 30 July 2007 by skirchner in Economics, Financial Markets

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Niall Ferguson as Neo-Malthusian

Another installment in our ‘Malthusianism never dies’ series, this time from historian Niall Ferguson:

For a long time we have deluded ourselves that “illimitable improvement” was attainable. As the world approaches a new era of dearth, expect misery - and its old companion vice - to make a mighty Malthusian comeback.

Ferguson’s counterfactual histories are unconvincing enough, without buying into his prognostications for the future.


posted on 30 July 2007 by skirchner in Economics

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‘Too Many Imports’

Treasurer Peter Costello, the consumer’s friend:


Are you concerned, you mentioned that there were a few products that were down, breakfast cereals and the like, is there concerns that there’s not more cheaper imports flowing into the market with the dollar so high?


Well, it is nice to have price falls, but we don’t want too many imports coming into the country.

posted on 25 July 2007 by skirchner in Economics, Financial Markets

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David Murray as Sen Groupie

In an interview with the WSJ, Future Fund Chairman David Murray shows a somewhat reassuring preference for serious economics over business school schlock:

WSJ: Do you have a favorite business book?

Mr. Murray: No. The book that really made an impression on me was a book by [Indian economist and Harvard University professor] Armartya Kumar Sen called “Development As Freedom.” It explains the linkage between the system of government and democracy on one hand and business on another, and they are interrelated; they can’t be as easily separated as people make out.  Business has no chance of thriving reliably for its owners under a rule of law that doesn’t embody democracy, freedom and property rights.

Here’s another book we hope Murray has read.

posted on 25 July 2007 by skirchner in Economics, Financial Markets

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The Australian Dollar’s Carbon Footprint

As the Australian dollar makes new 18-year highs against the greenback, Terry McCrann suggests we ponder the relationship between the currency, the terms of trade and carbon emissions:

The core driver of our rising dollar—and pretty much everything else in and around our economy—is the explosive growth in China’s demand for, and consumption of, commodities.

Principally, so far as we are concerned, iron ore to make steel and coal to generate power. Along with pretty much everything else—globally importantly, oil and copper.

In short, not to put too fine a point on it: our dollar is pivoting on a truly momentous eruption of greenhouse gases. Yet we and the world are—at least hypothetically—committed to not just capping that eruption, but reversing it.

Let me spell that out a little more specifically. We have a dollar challenging conventional currency gravity; on the promise of pumping more and more commodities into the Chinese “greenhouse gas factory”. Yet we want to in effect burn that factory down.

Add on the certainty that even on the assumption that the factory keeps on belching, our dollar will overshoot; what happens if we actually “succeed” in persuading China to please let us leave all the stuff in the ground?

posted on 24 July 2007 by skirchner in Economics, Financial Markets

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Capital Xenophobia

Stephen Mayne attempts to whip-up capital xenophobia against Singapore’s ‘financial imperialism:’

Planes, child-care centres, shopping centres, department stores, satellites, hotels, power lines, gas pipelines and mobile phones: the Singapore Government owns all that and more in Australia yet this is barely mentioned in public debate.

Does anybody else out there feel a little uneasy about this phenomenon, especially given the secretive, autocratic and undemocratic tendencies of the Singapore Government?

Mayne can’t bring himself to fully explain why we should feel uneasy, probably because he realises how close he is to sounding like Pauline Hanson.

In fact, we should be grateful that Singapore saves so much that it needs to export direct investment capital on a large scale (as indeed, does Australia, albeit on the part of mostly private rather than government-linked businesses).  Australia is the beneficiary of this cheap foreign capital, which allows us to sustain higher rates of consumption and investment than would otherwise be possible. 

Since foreign-owned businesses operating in Australia are subject to Australian law, their activities can hardly be considered objectionable.  Indeed, investing in Australia makes the activities of Singapore’s government-linked corporations more transparent, something a shareholder activist like Mayne would surely welcome.

As Mayne suggests, if you don’t like these foreign ownership arrangements, there is also no obligation to transact with these businesses:

I, for one, switched my mobile phone contract from Optus to Telstra as a small consumer protest when Australian drug trafficker Van Nguyen was executed by the immovable Singapore authorities in 2005.

Most of us have a somewhat better sense of perspective.

posted on 23 July 2007 by skirchner in Economics, Financial Markets

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The Economics of Google Ads

Alan Kohler gives us a lesson in the economics of Google and the investment newsletter industry:

IF YOU google the phrase “Alan Kohler”, the top link in the main, unpaid search results is one of my articles on smh.com.au. Next is Eureka Report. But above that, against a beige background, there are two other links - one is to Eureka Report and the other is a link to Australian Stock Report, one of our competitors.

Australian Stock Report has bought the Google phrase “Alan Kohler”. Eureka Report’s link only sits above it in the section headed “sponsored links” because we have paid more for it (to Google) in the auction system known as search engine marketing (SEM).

Over to the right, in another sponsored links section for the search on the phrase “Alan Kohler”, there’s a link to Stock Resource - another competitor - and under that are a couple of book sites trying to flog my books (booktopia and ebay). Ebay buys millions of keywords, and among other things competes to buy just about every author’s name. We have also bought the phrase “Eureka Report”, of course, but if you google that then six competitors’ links appear in the sponsored links section of the results. They have all bought the phrase “Eureka Report”, but once again we have paid the most so we can be at the top. I hasten to add that we are also playing this rather brutal little game: we have bought, among things, the phrases “Rivkin Report” (another newsletter) as well as “Australian Stock Report”. Each of those newsletters ensures that its link is at the top of the Google sponsored links by paying the highest price. But Australian Stock Report’s search result, for example, is crowded with 10 competitors that have also bought its name.

Thus do all of the financial newsletters compete with each other to throw money at Google.

Another way to put this is that, when it comes to subscriptions obtained via Google marketing, the newsletters probably only make a profit from renewals in the second year - in the first year virtually the whole price of a new subscription goes to the Google machine. This is the essence of the Australian Competition and Consumer Commission’s case against Google for misleading and deceptive conduct, which caused a flurry of feather fluffing and squawking in the global internet henhouse last week.

posted on 18 July 2007 by skirchner in Economics

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Pro-War Libertarians

Randy Barnett has a WSJ op-ed on libertarian approaches to war and self-defence, which is partly a response to Ron Paul’s lamentable performance in the Republican presidential candidate debates.  An unfortunate aspect of libertarianism and classical liberalism in the US is its continued fusion with Old Right isolationism, a phenomenon that is largely absent from these traditions outside the US.  As the lead-in to the op-ed notes, ‘first principles tell us little about what constitutes appropriate and effective self-defense.’  There are exceptions to these isolationist views, however, as Barnett notes:

there are those pro-invasion libertarians who are now following the progress of Operations Phantom Thunder and Arrowhead Ripper. They hope that the early signs of progress in this offensive will continue, so that American and Iraqi forces can achieve the military victory necessary to allow the Iraqi government to assume responsibility for protecting the Iraqi people from terrorists, as well as from religious sectarian violence. They hope this success will enable American soldiers to leave Iraq even before they leave Europe and Korea, and regain the early momentum that led, for example, to Libya’s abandonment of its nuclear weapons program.

These libertarians are still rooting for success in Iraq because it would make Americans more safe, while defeat would greatly undermine the fight against those who declared war on the U.S. They are concerned that Americans may get the misleading impression that all libertarians oppose the Iraq war—as Ron Paul does—and even that libertarianism itself dictates opposition to this war. It would be a shame if this misinterpretation inhibited a wider acceptance of the libertarian principles that would promote the general welfare of the American people.

posted on 17 July 2007 by skirchner in Economics, Foreign Affairs & Defence

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Governor Bollard’s Prop Trading Operation

This week, the RBNZ joined the RBA in effectively entering the foreign exchange proprietary trading business.  The RBNZ announced that it would abandon its practice of matching its foreign currency assets with foreign currency liabilities.  The RBNZ is now looking to increase its foreign exchange reserves on an unhedged basis.  The official rationale for the move is to give the RBNZ access to internally funded foreign exchange reserves in the event of a ‘crisis’ in which the NZ dollar falls sharply.

For a small open economy with an open capital account and a floating exchange rate, such a ‘crisis’ seems an extremely remote possibility.  Regular readers will recall that we ridiculed Nouriel Roubini last year for predicting that Australia and NZ were about to suffer an exchange rate crisis.  The Australian and NZ dollars have since marched to new multi-decade highs in another one of Nouriel’s many spectacular forecasting failures.  As recently as 2001, the New Zealand economy weathered a depreciation in the NZD-USD exchange rate to 0.3900 without recourse to intervention and with no adverse macroeconomic consequences.  Indeed, the circumstances that might give rise to a negative exchange rate shock are likely to be those in which a sharp depreciation in the exchange rate would be an entirely appropriate and stabilising response.  Sharp exchange rate depreciations can be invaluable in insulating the domestic economy from negative external shocks, just as the current appreciation in the NZ dollar is partly insulating the NZ economy from the positive external shock associated with a rising terms of trade.  Countries that experience exchange rate ‘crises’ typically do so because of their commitment to managed exchange rate regimes.  The problem simply doesn’t arise with floating exchange rates.

The RBNZ argues that by not having to borrow in international capital markets to fund future intervention to support the NZD, it is avoiding the risk of capital losses on these borrowings.  This is a tacit admission of the likely ineffectiveness of foreign exchange market intervention, since an effective intervention operation to support NZD should yield capital gains, not losses.  Since a central bank’s balance sheet is denominated in its own, ultimately irredeemable, monetary liabilities, it is not clear why the RBNZ should be at all concerned with capital losses in this context.

Like other central banks, the RBNZ will be able to take a long view on the management of its foreign exchange reserves, buying the NZD low and selling high, which should earn the RBNZ a tidy profit over the long-run, although maintaining an unhedged foreign exchange exposure will be more expensive than the former approach to reserves management, given the high yield on NZD denominated assets.  In that sense, the new approach to foreign exchange reserves management is harmless enough.  But it does highlight the fact that the RBNZ under Governor Bollard has little faith or no faith in the stabilising properties of open capital markets and floating exchange rates.  In some respects, this is just the flip side of Bollard’s misguided preoccupation with the domestic-saving investment imbalance in his rationalisation of monetary policy.  The real danger is not anything the RBNZ might do in relation to intervention or the management of its foreign exchange reserves, but that Governor Bollard, like Nouriel Roubini, simply doesn’t understand open economy macro.

posted on 13 July 2007 by skirchner in Economics, Financial Markets

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The ACCC Goes After Google

Further to the previous post, the ACCC goes after Google.  The accompanying statement suggests the ACCC is more interested in the novelty value of the case than redressing any harm that might have been done to consumers or competing firms:

This is the first action of its type globally. Whilst Google has faced court action overseas, particularly in the United States, France and Belgium, this generally has been in relation to trademark use. Although the US anti-trust authority the Federal Trade Commission has examined similar issues, the ACCC understands that it is the first regulatory body to seek legal clarification of Google’s conduct from a trade practices perspective.

UPDATE: Responses to the ACCC’s action:

Chris Dimmock, chief executive of search marketing company Cogentis, said the system worked well. “How can they expect any one organisation to know the business practices and partnerships and strategies of every other business organisation in the country? It’s unrealistic,” he said.

Google Australia spokesman Rob Shilkin said the action represented “an attack on all search engines and the Australian businesses, large and small, who use them to connect with customers throughout the world”.

“Google Australia believes that these claims are without merit and we will defend against them vigorously,” he said.

posted on 12 July 2007 by skirchner in Economics

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Mischiefs that Ought Justly Be Apprehended from a Rudd Government

The ACCC will be kept very busy doing not very much under a prospective Rudd government.  Rudd wants increased scrutiny of supermarket prices, in addition to the increased surveillance of petrol prices he has already proposed.  As Jennifer Hewett notes, these proposals are redundant at best:

Labor’s big pronouncement yesterday on referring grocery prices to the Australian Competition and Consumer Commission for review is not just a triumph of populism. It’s also a complete absurdity.

The ACCC already has the power to investigate possible pricing anomalies and does so regularly.

But the idea that Graeme Samuel can do a better job of lowering prices than Coles or Woolies is ludicrous.

The timing of Rudd’s opportunistic announcement only makes that more obvious.

At Woolworths’ release of its sales figures on Tuesday, CEO Mike Luscombe spent a long time justifying to analysts why his business was investing so much money in reducing prices rather than increasing its margins.

Bottom line: it wants to beat Coles by attracting more customers willing to buy more products. That involves a constant battle to lower its own costs as well as the cost to consumers.

Labor Party bleating about unjustified price rises suggests they either don’t understand what drives an aggressively competitive market, or they are just feigning ignorance. It’s difficult to decide which is worse.

Of course, one could say much the same about the ACCC itself.  The ACCC has a dismal track record in the courts on these and many other issues.

posted on 12 July 2007 by skirchner in Economics, Financial Markets

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Carbon Offsets

Live Earth helps Chris Dillow reduce his carbon footprint:

The moment it came on, I turned the TV off.

At the same time, Live Earth Sydney was held against the backdrop of a terrifying drought:

Faced with record beer queues, thirsty fans at Saturday’s Live Earth concert at Sydney’s Aussie Stadium were seen by the Herald offering others $50 for their beer rather than wait an hour to buy refreshments.

Thousands, deprived of the traditional rock ‘n’ roll accompaniment, went to a Coca-Cola stand, forgetting that its manufacturers had been under fire in India for allegedly creating water shortages and pollution around their bottling facilities.

Scores were seen leaving within the first two hours of the nine-hour festival, fed up with the lack of basic services, cutting their losses on a $99 ticket. Gate attendants were heard telling the human tide that they should complain to the promoter.

It was “unAustralian”, one spectator protested. “This is what happens when you let hippies organise a big event,” another said. One woman, asked by Missy Higgins “how you all are back there”, earned a wry round of applause from the stands when she shouted: “Sober.”

Be sure to put your TV back on for this.

More global warming ‘denialism’ from Scott Armstrong and Kesten Green:

We asked scientists and others involved in forecasting climate change to tell us which scientific articles presented the most credible forecasts. Most of the responses we received (30 out of 51) listed the IPCC Report as the best source. Given that the Report was commissioned at an enormous cost in order to provide policy recommendations to governments, the response should be reassuring. It is not. The forecasts in the Report were not the outcome of scientific procedures. In effect, they present the opinions of scientists transformed by mathematics and obscured by complex writing… We have been unable to identify any scientific forecasts to support global warming. Claims that the Earth will get warmer have no more credence than saying that it will get colder.


posted on 09 July 2007 by skirchner in Economics, Financial Markets

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Wisdom Beyond Their Years

Treasurer Peter Costello encounters a teenager who understands dynamic inconsistency:

Recently a student at Melbourne High School asked me whether the recent superannuation changes I announced could be undone by a future government. Why would it bother you? I asked him. ‘Because I want to put as much money into superannuation as I can this year’ he said.

Of course, if the kid fully understood dynamic inconsistency, he would realise that asking Costello is pretty pointless.


posted on 06 July 2007 by skirchner in Economics, Financial Markets

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Gold Buggery

The WSJ is peddling more gold buggery on its op-ed pages, this time from David Ranson and Penny Russell:

Depreciation of currencies relative to gold has become unpredictable, chronic and planet-wide…

currencies depreciating against gold across the board is a sign of world-wide inflation—and it has begun to set off alarm bells in many major economic capitals. But in Washington, our own central bankers remain placidly confident that everything will turn out all right.

The unfortunate result is that the current crisis of confidence in paper money goes largely undiagnosed by the bulk of economists and policy makers.

One could equally say ‘appreciation of [insert name of commodity here] has become unpredictable, chronic and planet-wide.’  In other words, commodity prices have been going up.  The ‘depreciation’ in the USD against gold is matched by a similar depreciation against base metals, as well as a broad range of other commodities.  Commodities are becoming more expensive in terms of a broad-range of currencies because of supply-demand imbalances in the global markets where commodity prices are determined.  The appreciation in commodity prices in terms of a broad-range of currencies tells us this is a real, not a monetary phenomenon.  Far from signaling a ‘crisis of confidence,’ it points to the current strength of the global economy.

posted on 05 July 2007 by skirchner in Economics, Financial Markets

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Federal Election Betting Markets

Canberra bookie Portlandbet has opened a book on the outcome of every federal seat ahead of this year’s general election:

Punters have the opportunity to bet on any and every seat for the first time with prices on all 150 seats being offered.

On current prices, Portlandbet forecasts the Coalition to return to government with a reduced majority, winning 77 seats to 71 for the Australia Labor Party. Independents should win 2 seats.

This is consistent with the flow of money for the Coalition in recent weeks, who have firmed in Portlandbet markets from $2.15 to $1.87.


posted on 05 July 2007 by skirchner in Economics, Financial Markets

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John Cassidy of The New Yorker profiles Harry Kat, who maintains:

It is possible to design mechanical futures-trading strategies which generate returns with the same, and often better, risk-return properties as hedge funds.

The trading strategies employed by some hedge funds are based on little more than glorified technical analysis within the framework of an overall capital management strategy.  To that extent, Kat’s results should not be entirely surprising.

posted on 03 July 2007 by skirchner in Economics, Financial Markets

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Jeffrey Sachs as Central Planner

William Easterly, on the ideology of development:

The ideology of Development is not only about having experts design your free market for you; it is about having the experts design a comprehensive, technical plan to solve all the problems of the poor. These experts see poverty as a purely technological problem, to be solved by engineering and the natural sciences, ignoring messy social sciences such as economics, politics, and sociology.

Sachs, Columbia University’s celebrity economist, is one of its main proprietors. He is now recycling his theories of overnight shock therapy, which failed so miserably in Russia, into promises of overnight global poverty reduction. “Africa’s problems,” he has said, “are … solvable with practical and proven technologies.” His own plan features hundreds of expert interventions to solve every last problem of the poor—from green manure, breast-feeding education, and bicycles to solar-energy systems, school uniforms for aids orphans, and windmills. Not to mention such critical interventions as “counseling and information services for men to address their reproductive health needs.” All this will be done, Sachs says, by “a united and effective United Nations country team, which coordinates in one place the work of the U.N. specialized agencies, the IMF, and the World Bank.”

So the admirable concern of rich countries for the tragedies of world poverty is thus channeled into fattening the international aid bureaucracy, the self-appointed priesthood of Development. Like other ideologies, this thinking favors collective goals such as national poverty reduction, national economic growth, and the global Millennium Development Goals, over the aspirations of individuals. Bureaucrats who write poverty-reduction frameworks outrank individuals who actually reduce poverty by, say, starting a business. Just as Marxists favored world revolution and socialist internationalism, Development stresses world goals over the autonomy of societies to choose their own path. It favors doctrinaire abstractions such as “market-friendly policies,” “good investment climate,” and “pro-poor globalization” over the freedom of individuals.

posted on 03 July 2007 by skirchner in Economics, Financial Markets

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