US Politics: March Madness

[OldGimletEye]

On 4/2/2018 at 10:20 AM, Mlle. Zabzie said:

 

Separately on your point on share buybacks, one thing to keep in mind is the role of the activist investor. Their theory of course is that shareholders can use excess capital more efficiently to get a higher return than the corporation can (I think of this as the libertarian view of corporate governance). I believe (though don’t have time to find the links to literature, apologies) that this isn’t necessarily borne out in practice.

The fundamental theory of asset pricing goes something like:

p(t) = E_t[m(t+1) x(t+1)]

where p(t) is an asset’s current price m(t+1) is the stochastic discount factor and x(t+1) is the payoff equaling d(t+1), the dividend, and p(t+1) the asset price in the next period, t+1. And E_t is the conditional expectations operator.

And if p(t+1) = E_t+1[m(t+2) x(t+2)], getting something like:

p(t) = E_t[m(t+1) d(t+1) E_t+1[ m(t+2) (d(t+2)+ p(t+2) )] ]

And if I keep subsisting for periods t+2, t+3… use the law of iterated expectations, and impose a transversaityl condition, I get something like:

p(t) = E_t[m(t+1) d(t+1)+………….+m(t+n) d(t+n)]

Now, I haven’t said one word about E_t at this point. I can rewrite like:

p(t) = E[m(t+1) d(t+1)………….m(t+n) d(t+n) | X(t) B ]

where E is the unconditional expectations operator, X(t) is relevant time t information and B are the parameters.

Now:

p(t) = E_t[m(t+1) x(t+1)]

can be a model describing individual behavior or it can be used as model describing aggregate behavior. Now suppose X(t) represents all the relevant information and people know, in the aggregate, the parameters B. Then we are in the world of rational expectations. And I can theorize that rational expectations holds because knowledgeable investors will quickly eliminate asset mispricing.

Of course it may be the case, in the aggregate only part of the relevant information is used, getting something like:

p(t) = E[m(t+1) d(t+1)………….m(t+n) d(t+n) | Z(t) B ] where Z(t) is a subset of all the relevant information.

Or maybe investors don’t always know the parameters in the model and have to learn them over time, and I can write something like:

p(t) = E[m(t+1) d(t+1)………….m(t+n) d(t+n) | X(t) B(t)) ]

where investors or the market learns about about B(t) over time with some kind of kalman filtering updating process like:

mis pricing error = X(t) B(t) + v

B(t) = A[ B(t-1) - B]+ w, where B is the true value.

Anyway, much of Robert Schiller’s empirical work has been showing that the rational expectations rational valuation model often doesn’t often hold in the real world, at least on the aggregate level.

I think the stock market is overvalued. And lots of people think it is overvalued. Question is why I’m I not going and shorting the crap out of it, so I can get extremely rich, and then spend all my time doing bong hits and playing X-box? Probably because I don’t feel like I have endless liquidity to draw from, if I’m wrong about when the market will correct. I’d be extremely bummed out if I had to sell off my underoos collection and my darth vader dolls because I mis-timed the correction.

Most active investors are not that good. Or at least, there aren’t enough good ones to quickly correct the market when it becomes overvalued, it would seem.

A few years back there was a paper about the LA Housing market during the real estate boom. The upshot of the paper was that many of the house flippers, the newbies at least, weren’t that good, and tended to loose money, while the more experienced ones did alright, because they understood fundamentals better, but weren’t able to correct the market. In that case, the LA housing market, seemed to follow traditional noise trader models.

[OldGimletEye]

1 hour ago, dmc515 said:

Yeah his stuff was more specific than that.  I'm being circumspect because this is a public forum and naming him would be bad for him, my department, and, most importantly, me.  But if you wanna discuss further just PM.

Yeah, I will do that.  I'd certainly be interested. And this is of course your area of expertise not mine, as I'm not a political scientist by training as you know. Though I did stay in a Holiday Inn Express last night. LOL.

[DMC]

2 minutes ago, OldGimletEye said:

Though I did stay in a Holiday Inn Express last night.

That'll at least get you into a MA program, at the least.

[LongRider]

Yaaaaay, we finally have the trade war Cadet Corporal* Bone Spurs has promised us!  So much winning! 

*Cadet Bone Spurs received a promotion, not a in-field promotion mind you, but a golf course promotion.  We're all so proud.

[OldGimletEye]

1 hour ago, dmc515 said:

That'll at least get you into a MA program, at the least.

LOL. 

[Mlle. Zabzie]

24 minutes ago, OldGimletEye said:

The fundamental theory of asset pricing goes something like:

p(t) = E_t[m(t+1) x(t+1)]

where p(t) is an asset’s current price m(t+1) is the stochastic discount factor and x(t+1) is the payoff equaling d(t+1), the dividend, and p(t+1) the asset price in the next period, t+1. And E_t is the conditional expectations operator.

And if p(t+1) = E_t+1[m(t+2) x(t+2)], getting something like:

p(t) = E_t[m(t+1) d(t+1) E_t+1[ m(t+2) (d(t+2)+ p(t+2) )] ]

And if I keep subsisting for periods t+2, t+3… use the law of iterated expectations, and impose a transversaityl condition, I get something like:

p(t) = E_t[m(t+1) d(t+1)+………….+m(t+n) d(t+n)]

Now, I haven’t said one word about E_t at this point. I can rewrite like:

p(t) = E[m(t+1) d(t+1)………….m(t+n) d(t+n) | X(t) B ]

where E is the unconditional expectations operator, X(t) is relevant time t information and B are the parameters.

Now:

p(t) = E_t[m(t+1) x(t+1)]

can be a model describing individual behavior or it can be used as model describing aggregate behavior. Now suppose X(t) represents all the relevant information and people know, in the aggregate, the parameters B. Then we are in the world of rational expectations. And I can theorize that rational expectations holds because knowledgeable investors will quickly eliminate asset mispricing.

Of course it may be the case, in the aggregate only part of the relevant information is used, getting something like:

p(t) = E[m(t+1) d(t+1)………….m(t+n) d(t+n) | Z(t) B ] where Z(t) is a subset of all the relevant information.

Or maybe investors don’t always know the parameters in the model and have to learn them over time, and I can write something like:

p(t) = E[m(t+1) d(t+1)………….m(t+n) d(t+n) | X(t) B(t)) ]

where investors or the market learns about about B(t) over time with some kind of kalman filtering updating process like:

mis pricing error = X(t) B(t) + v

B(t) = A[ B(t-1) - B]+ w, where B is the true value.

Anyway, much of Robert Schiller’s empirical work has been showing that the rational expectations rational valuation model often doesn’t often hold in the real world, at least on the aggregate level.

I think the stock market is overvalued. And lots of people think it is overvalued. Question is why I’m I not going and shorting the crap out of it, so I can get extremely rich, and then spend all my time doing bong hits and playing X-box? Probably because I don’t feel like I have endless liquidity to draw from, if I’m wrong about when the market will correct. I’d be extremely bummed out if I had to sell off my underoos collection and my darth vader dolls because I mis-timed the correction.

Most active investors are not that good. Or at least, there aren’t enough good ones to quickly correct the market when it becomes overvalued, it would seem.

A few years back there was a paper about the LA Housing market during the real estate boom. The upshot of the paper was that many of the house flippers, the newbies at least, weren’t that good, and tended to loose money, while the more experienced ones did alright, because they understood fundamentals better, but weren’t able to correct the market. In that case, the LA housing market, seemed to follow traditional noise trader models.

Thanks. Totally agree with this. Was though more focusing on the Ackmans of the world (though Pershing Square has had its patootie handed to it recently). His is more the set of theories that say if a corporation has excess cash it will invest it in projects with a lower rate of return for investors than the investors would get if the cash were returned to the investors so that they could diversify. There is some circularity in that set of arguments but I digress. So a lot of corporations will have a gadfly pushing them to do stuff that they wouldn’t necessarily do for a short run bump in stock price. On the flip side I believe there is a lot of literature showing that M&A activity usually underperforms the expected ROI, I think because synergies are over estimated and integration costs are underestimated but it has been a while. R&D has a better chance of a big return but it is inherently risky so you get a lot of zeros. That’s why big pharma often only does late stage development and buys molecules from VC. Anyhow. All interesting. 

[mormont]

1 hour ago, Rippounet said:

Why not? Surely any program aimed at courting blue collar workers will get their votes regardless of their skin color.
What's the point of introducing a divide when it's not necessary?

Recognising that race is as important a factor in this cohort of voters as class is, is not 'introducing' a divide. The word 'white' is exactly as pertinent as the words 'blue collar' are in courting this cohort. 

[OldGimletEye]

1 hour ago, Mlle. Zabzie said:

Thanks. Totally agree with this. Was though more focusing on the Ackmans of the world (though Pershing Square has had its patootie handed to it recently). His is more the set of theories that say if a corporation has excess cash it will invest it in projects with a lower rate of return for investors than the investors would get if the cash were returned to the investors so that they could diversify. 

Okay I get where you're coming from. Interesting. 

[Mlle. Zabzie]

20 minutes ago, OldGimletEye said:

Okay I get where your coming from. Interesting. 

It’s part of the distortive activity in the market - big pools of cash that are trying to drive a relatively short run IRR.  Also if you think about it Fidelity, Vanguard and a few other really big mutual fund family’s control huge blocks of the market. They turn like carriers but one thing to note is that they are relatively tax indifferent because they are RICs (basically pass through) and the fund manager comp is on a pre tax basis (which it sort of has to be because you don’t know what the rate is at which the income is being passed through- could absolutely apply a blended rate but that’s not how it is done). So there are a lot of market actors that have really different incentives than you or I have on an individual basis. That of course feeds into the “irrationality” (which is only thought of as such because of some simplifying assumptions first made in the 19th C). 

[OldGimletEye]

2 hours ago, Rippounet said:

Why not? Surely any program aimed at courting blue collar workers will get their votes regardless of their skin color.
What's the point of introducing a divide when it's not necessary?

On policies that will appeal to and benefit blue collar workers.

I think you need to have what I’d call macro policies. Ones that will benefit all blue collar workers whatever their race or gender. Things like aggressive full employment policies, minimum wage, and so forth.

And then you need to have micro policies that target the issues of specific groups, like fighting the problem of over incarceration of African Americans. And making sure sexual harassment doesn’t happen on the shop floor.

Sell the macro policies to white working class voters. Implement the micro policies for the groups that have a specific set of issues.
 

[OldGimletEye]

1 hour ago, Mlle. Zabzie said:

It’s part of the distortive activity in the market - big pools of cash that are trying to drive a relatively short run IRR.  Also if you think about it Fidelity, Vanguard and a few other really big mutual fund family’s control huge blocks of the market. They turn like carriers but one thing to note is that they are relatively tax indifferent because they are RICs (basically pass through) and the fund manager comp is on a pre tax basis (which it sort of has to be because you don’t know what the rate is at which the income is being passed through- could absolutely apply a blended rate but that’s not how it is done). So there are a lot of market actors that have really different incentives than you or I have on an individual basis. That of course feeds into the “irrationality” (which is only thought of as such because of some simplifying assumptions first made in the 19th C). 

This is extremely interesting. Lots of interesting stuff. I'll have to pick your brain on it, particularly on the tax and merger stuff. Unfortunately, right now I have to get the boss's coffee.

I'll be back later to ask questions.

[Mr. Chatywin et al.]

13 hours ago, dmc515 said:

Conceptually, I don't see any reason to have more confidence that Trump's cult of personality is stronger than Obama's.  And empirically, it's been demonstrated they either haven't shown up at the same levels or switched back to voting Dems in the elections since inauguration.

My best guess, when it comes to cult of personality, is that Trump’s floor is higher and ceiling is lower than Obama’s, which could be reflected in the midterms. But again, it’s important to keep in mind what the motivation is for each’s base, and fear is a much more powerful emotion than hope.

[Mr. Chatywin et al.]

4 hours ago, Fragile Bird said:

Ooh-la-la! China just announced tariffs on another 106 US items, including soybeans, cars and whiskey.

Shit got real!

Let’s see how far the markets fall today! Ah, the dangers of bragging about the stock market!

I said a few days ago that soy beans would be the big warning sign of a full on trade war. This is going to be devastating to the Midwest.

It appears we’re crossing the Rubicon, and the die is cast.

5 hours ago, Fragile Bird said:

Hold onto your hats, boys and girls, we got us a trade war.

Pff. When one can quote Jurassic Park, one must!:

 

[Maithanet]

3 minutes ago, Tywin et al. said:

My best guess, when it comes to cult of personality, is that Trump’s floor is higher and ceiling is lower than Obama’s, which could be reflected in the midterms. But again, it’s important to keep in mind what the motivation is for each’s base, and fear is a much more powerful emotion than hope.

But I think something that often gets lost is that Obama's '08 coalition is vastly bigger than Trump's in 2016.  Obama won almost 53% of the vote.  He got 3.5 million fewer voters in 2012, and still won that election comfortably.  Now there's no guarantee that Trump's support will similarly suffer between '16 and '20, but if it goes down AT ALL, he is virtually guaranteed to lose his reelection bid.  Trump is good at holding his coalition together, but that coalition isn't very big. 

[Mr. Chatywin et al.]

18 minutes ago, Maithanet said:

But I think something that often gets lost is that Obama's '08 coalition is vastly bigger than Trump's in 2016.  Obama won almost 53% of the vote.  He got 3.5 million fewer voters in 2012, and still won that election comfortably.  Now there's no guarantee that Trump's support will similarly suffer between '16 and '20, but if it goes down AT ALL, he is virtually guaranteed to lose his reelection bid.  Trump is good at holding his coalition together, but that coalition isn't very big. 

Again, floors vs. ceilings, and I am talking about the midterms. Trump’s base is smaller, as is his overall coalition, but I suspect it’s more fanatic, which could lead to surprisingly strong turnout in November, especially if they’re scared because one of their primary motivations is fear (I do agree with your take on 2020 though).

On an unrelated note, markets opened down 400. Today will be interesting.

[Mlle. Zabzie]

8 minutes ago, OldGimletEye said:

This is extremely interesting. Lots of interesting stuff. I'll have to pick your brain on it, particularly on the tax and merger stuff. Unfortunately, right now I have to get the boss's coffee.

I'll be back later to ask questions.

I have some calls and meetings today but will try to dig up some of the literature that isn't behind a paywall.  

[aceluby]

14 minutes ago, Tywin et al. said:

Again, floors vs. ceilings, and I am talking about the midterms. Trump’s base is smaller, as is his overall coalition, but I suspect it’s more fanatic, which could lead to surprisingly strong turnout in November, especially if they’re scared because one of their primary motivations is fear (I do agree with your take on 2020 though).

On an unrelated note, markets opened down 400. Today will be interesting.

What a time to get into investing

[James Arryn]

It’s kinda awesome that the leader of an economic superpower is essentially using the Martingale rationale for the national economy. 

[Rippounet]

1 hour ago, mormont said:

Recognising that race is as important a factor in this cohort of voters as class is, is not 'introducing' a divide. The word 'white' is exactly as pertinent as the words 'blue collar' are in courting this cohort. 

I'm not sure why. Anyway, OGE put it better than I could:

58 minutes ago, OldGimletEye said:

On policies that will appeal to and benefit blue collar workers.

I think you need to have what I’d call macro policies. Ones that will benefit all blue collar workers whatever their race or gender. Things like aggressive full employment policies, minimum wage, and so forth.

And then you need to have micro policies that target the issues of specific groups, like fighting the problem of over incarceration of African Americans. And making sure sexual harassment doesn’t happen on the shop floor.

Sell the macro policies to white working class voters. Implement the micro policies for the groups that have a specific set of issues.

It's high time the Dems' fought on the macroeconomic front. That doesn't mean abandoning other issues ; on the contrary, a good platform would have policies that complement each other for the benefit of all.

To do that, I think one needs to recognize that some issues *are* about class, first and foremost.

[Maithanet]

42 minutes ago, Tywin et al. said:

Again, floors vs. ceilings, and I am talking about the midterms. Trump’s base is smaller, as is his overall coalition, but I suspect it’s more fanatic, which could lead to surprisingly strong turnout in November, especially if they’re scared because one of their primary motivations is fear (I do agree with your take on 2020 though).

On an unrelated note, markets opened down 400. Today will be interesting.

I'm just not really sure why you think that the midterms will be so different from the special elections.  Trump did all he could to whip up support in Alabama and PA-18.  He went to each of those places and held a rally.  Republicans spent a ton of money on those races.  And in the end, Republican enthusiasm was still depressed, while Democratic enthusiasm was supercharged. 

In the midterms, Trump won't be able to go to every threatened House district, and Republicans won't have the resources to flood the airwaves like they did in PA-18.  Yes, I expect that turnout will be higher for midterms than for special elections, that's always the case.  But Trump's coalition in 2016 was based on two things:

1.  Drag the race down into the mud to depress turnout amongst Democrats.

2.  Use racial language to increase turnout amongst white voters with a high school or less education.  This group typically has terrible turnout, but showed up well in 2016.

Since 2016, #1 was been a complete failure, Democrats are scared and they are motivated.  #2 has also mostly been a failure, because as a group voters with less education usually don't show up for special elections or midterms.  Maybe he can turn it around between now and November, but it's not like he hasn't been trying already.  The midterms are always a higher educated portion of the population than the presidential races, and that is not playing to Trump's strengths.