EC101: Links for 20th June, 2019

  1. “One needs to be cautious in these type of businesses trading at higher multiples as slip in any one of the parameters – decline in sales and profit growth, build up of debt, deterioration in working capital, capital misallocation – wrong acquisitions and expansions will lead to derating of the stock quickly. The company has shown no signs of these as of now and investors need to keep a close look at these.”
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    A vastly under-rated skill among economics students. The theory of (and in this case also the application of) reading a balance sheet. Read this article to get a sense of how to read one – and in an ideal world, try to write a similar article about a firm of your choice.
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  2. “In other words, to quote Simon, “so long as the rate of interest remains constant, an advance in technology can only produce a rising level of real wages. The only route through which technological advance could lower real wages would be by increasing the capital coefficient (the added cost being compensated by a larger decline in the labor coefficient), thereby creating a scarcity of capital and pushing interest rates sharply upward.” In other words, the price of capital would have to rise by more than the price of consumption.”
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    Under what circumstances will advances in technology cause the real wage rate to go down? The vastly under-rated Herbert Simon provided an answer to this question way back when – read this article to find out its rediscovery.
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  3. “Now that the crisis is in the rearview mirror and the current expansion is nearing the longest on record, is it possible to go back to having a balance sheet as small as in 2007? The answer is no. The amount of currency in circulation has grown so much that it is not possible to shrink the balance sheet to its earlier size. This is good news because it reflects a growing economy. The larger balance sheet also reflects banks wanting to hold more reserves at the Fed. Banks partly hold these highly liquid and essentially risk-free assets to meet new liquidity regulations designed to improve the resilience of the overall financial system.”
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    A short, but useful essay about the huge expansion to the Federal Reserve’s balance sheet, and why it is unlikely to shrink anytime soon. A useful read for students of monetary economics.
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  4. “The correlation phrase has become so common and so irritating that a minor backlash has now ensued against the rhetoric if not the concept. No, correlation does not imply causation, but it sure as hell provides a hint. Does email make a man depressed? Does sadness make a man send email? Or is something else again to blame for both? A correlation can’t tell one from the other; in that sense it’s inadequate. Still, if it can frame the question, then our observation sets us down the path toward thinking through the workings of reality, so we might learn new ways to tweak them. It helps us go from seeing things to changing them.”
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    The phrase is burned onto my brain, as it is for everybody else who ever attended a statistics class. “Correlation is not causation” Sure, it isn’t – but this article warns us against the over-use of this phrase, and how it might have ended up making us not think deeper.
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  5. “The Baumol effect reminds us that all prices are relative prices. An implication is that over time prices have very little connection to affordability. If the price of the same can of soup is higher at Wegmans than at Walmart we understand that soup is more affordable at Walmart. But if the price of the same can of soup is higher today than in the past it doesn’t imply that soup was more affordable in the past, even if we have done all the right corrections for inflation.”
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    A short, but very readable interpretation of the Baumol effect – and as this excerpt makes clear, also a great reminder of the fact that all prices, everywhere and always, are relative.

Links for 25th February, 2019

  1. “So it makes sense that, when Bibi and Poldi were on the outs, the Happs and their colleagues tried to patch things up. After all, this was a couple that—whether they knew it or not—had made it through the Great Depression, two World Wars, and the millennium. Surely one little spat wouldn’t do them in.”
    Love, as it turns out, doesn’t last forever – only about eight decades or so. Interesting for a variety of reasons besides the obvious one – the efforts that were taken at reconciliation on part of the staff I found equally instructive!
  2. “Coal use in China is very high and increasing. India has been canceling coal plants as solar becomes cheaper but coal is still by far the largest source of power in India. Thus, there is plenty of opportunity to buy out, high-cost coal mines in China and India.”
    Alex Tabarrok on why buying coal might well be a great way to, well, not use coal – or at least, help others not use it. And where else might this idea be usefully applied, hmmm? And does buying always mean by paying money?
  3. “The master key is part of a new global effort to make the whole domain name system secure and the internet safer: every time the keyholders meet, they are verifying that each entry in these online “phone books” is authentic. This prevents a proliferation of fake web addresses which could lead people to malicious sites, used to hack computers or steal credit card details.”
    The internet, which we not just take for granted but are positively addicted to, has a rather weird security system underpinning it – and having read the article twice, I can’t quite say I understand it. Which is worrying, really. This is via @insoupciant on Twitter.
  4. “In the meantime, slow productivity growth may be the last thing that’s holding back wage growth. Even as they try to make up for past rises in inequality, policy makers shouldn’t forget the importance of technology and economic efficiency. But regardless of what policy does, workers may finally be getting more of the raises they’ve been missing out on for more than a generation.”
    Noah Smith on wage stagnation in the USA – what changed, when it changed and why (the reasons are many). Worth reading for a good introduction to wage rates in the USA.
  5. “Los Angeles architect Tim Smith was sitting on a Hawaiian beach, reading through the latest building code, as one does, when he noticed that it classified wood treated with fire retardant as noncombustible. That made wood eligible, he realized, for a building category—originally known as “ordinary masonry construction” but long since amended to require only that outer walls be made entirely of noncombustible material—that allowed for five stories with sprinklers.His company, Togawa Smith Martin Inc., was working at the time with the City of Los Angeles on a 100-unit affordable-housing high-rise in Little Tokyo that they “could never get to pencil out.” By putting five wood stories over a one-story concrete podium and covering more of the one-acre lot than a high-rise could fill, Smith figured out how to get the 100 apartments at 60 percent to 70 percent of the cost. The building, Casa Heiwa, opened its doors in 1996, and the five-over-one had been invented.”
    A fascinating article in Bloomberg on how most modern construction in urban America is on the back of a loophole in the rules regarding construction in USA. An unintended consequence, if you will. The pitfalls of policy-making, rules, incentives and unbridled urbanization, all in piece. Well worth your time!