Showing posts from 2021

Nobel prize for causal inference: why it matters

This year's Nobel prize in economics was awarded to three brilliant economists, David Card, Joshua Angrist, and Guido Imbens for revolutionizing the way economists (and social scientists) do empirical research. Specifically, Card got it for his contributions to labor economics, and Angrist and Imbens got it for causal inference, but all three made breakthrough contributions of applying the scientific method to economics. In the field, we call it the "credibility revolution". I am very familiar with the work of all three as I've used their papers very often while learning about causal inference, teaching it, and citing it in my own empirical research. I also had the honor of receiving comments on one of my papers (the recently published Politics of Bailouts ) from Josh Angrist at a conference I co-organized.  The way I wish to pay respects to the three of them is by explaining to you, my dear reader, why this Nobel prize in particular deconstructs that typical malevol

The bond market is showing no signs of recession. Yet.

This article was first published on Seeking Alpha on July 15th 2021 . This article contains updated graphs for the subsequent month and a half (a new version will look at the situation again in October).  A lot of investors and analysts like to look at various stock market indicators for signs of widespread market hubris, overconfidence, greed (&  fear ), or an upcoming contraction. Many like to point out that stock valuations are at their extremes, particularly in the tech sector, or that, for example, the Shiller PE ratio is running at a 39 multiple (the only time it was higher was prior to the 2000 dot-com bust). Many such indicators certainly have merit for uncovering sentiment, and while they can be good indicators of whether a bubble is reaching its climax (e.g. the Shiller PE ratio), whether a market is overheating, or that a correction is due, a much better indicator of an upcoming contraction is the bond market.  This is not only true historically (e.g. via the inverted y

The GameStop conundrum

This week we saw a huge play come to its climax. For a while the retail investor community at r/wallstreetbets (WSB) on Reddit has been pumping several stocks that have been targeted by short sellers (mostly in the form of big hedge funds). GameStop ( GME ) was among the most prominent ones (others include AMC , BB , BBBY , NOK , etc.). The pump was done on the aforementioned subreddit, spilling over onto other social media platforms like Twitter where many retail investors, bystanders, billionaire businessmen, and even celebrities have joined in to push the stocks up in the massive short squeeze against the short sellers.  Why has this caught so much attention? The motivation of the WSB community was driven by the fact that many short positions in these companies were overleveraged. GME  for example had a short interest at 140% of its float . This means that there was more demand for borrowing stocks to be sold short than the number of stocks in circulation ( this article explains t

Again no inflation? Velocity of money and the E-P ratio reexamined

A lot of investors are wondering when exactly can we expect inflation to hit our economies? An economist's answer - only in the long run.  This bad joke is turning out to be true. Despite the huge, unprecedented (sic!) rise in money supply over the past year, it is unlikely we will experience a rapid increase in inflation over the coming two years. Why is this so?  Let's start with a fascinating development on the money markets. Velocity of money , that important indicator derived from Fisher's quantitative theory of money (MV=PQ) measuring the circulation of money in the economy (how fast goods are bought and sold), became detached from the real economy approximated by the employment-population (EP) ratio.  For those new to the blog, I have been particularly fond of tracking these two indicators, and for a very good reason - I find them a realistic portrayal of the situation in the real economy. The velocity of money has, thus far, been a great indicator of economic activ