MacroScope

Step aside capitalism, how about leverageism

Our recent post on the End of Capitalism triggered much interest and comment.  There were plenty of diverse views, as one would expect. But one thread that came out was that what we are now seeing is not true capitalism (nor, of course, is it old-style communism). Ok, but what is it?

Anthony Conforti suggested in a comment that we need a name for what is happening,:

The first step in defining a new economic paradigm is coming up with the proper terms…new words to define a new economic environment. As words, “capitalism”, “communism”, “socialism” may now be inadequate to describe the emerging economic reality. We need new nomenclature. Any thoughts?

Here’s one suggestion. There seems to have been precious little capital building going on is the last few years, so even in a free market, capitalism sounds a bit inaccurate. How about “leverageism”? Borrowers of the world, unite. You have nothing  to lose but your shirts.

Time to pick up the challenge. What should we call the dominant economic system?

The Nobel prize for governance

The people who hand out Nobel Prizes are obviously keen this year to trumpet a new world order in economics as well as politics. Hot on the heels of giving Barack Obama the peace prize, they have awarded  this year’s economics prize for research into governance.

American economists Elinor Ostrom and Oliver Williamson won — the former for showing how common property can be managed by user associations, the latter for a theory on corporate conflict resolution.

You can read some background on  their research here and here.

Live Blogging G20

Finance ministers from the G20 are meeting in London on Friday and Saturday to discuss the next steps in battling the world’s worst economic and financial crisis since the Great Depression.

Reuters correspondents from around the world will be at the event, taking you behind the scenes and and providing unprecedented coverage through this live blog.

G20 Finance Ministers Meeting in London

Power shifts from G7 to G20

Finance chiefs from the G20 meeting in London on Friday and Saturday are likely to be in a slightly better — or at least more relieved — mood than they were last time they got together.

The world economy is still in a mess and the financial system is far from running normally. But — and it is a big but at that — fears of global economic collapse have dissipated. This is in no small part as a result of the actions of groups such as the G20 which endorsed coordinated intervention into the marketplace.

So much so, in fact, that much of this weekend’s discussions will touch on the so-called exit strategies that countries will need to get themselves back out of the stumulus and bailout business. With markets in mind, they are likely to be coy about it.

Vote here on Japan’s economy and its election

Britain’s Association of Investment Companies has UK investors who run Japanese equity funds whether they think the general election on Sunday will have a positive impact on the country, which is slowly emerging from recession.

Their answers can be found here, but the consensus was that the Democratic Party of Japan would defeat the ruling Liberal Democrat Party and that this would result in more consumer friendly policy or economic revival through higher living standards.

Managers were more divided on how long-lived any positive impact on stock market would be.

Ranking economic forecasts

Financial journalists spend a lot of time surveying market economists ahead of macro-economic data releases to find out how they think the next CPI or GDP number is going to turn out. A poll 20 or 30 economists gives a market median forecast, which will determine how traders react when the data comes out. If the figure beats expectations and points to a strong economy and likely rate rises, the currency will jump, and vice versa.

But how good are these forecasts? Why react if there’s no track record for accuracy? Economists have a pretty good feel for how reliable forecasts are for different indicators, but it would easier to have a number that tells us how reliable forecasts are for data such as GDP, jobs data or the CPI?

Forecast accuracy is a live topic in academic journals. There’s the MAE and the MSE, the sMAPE and the MAD/Mean ratio among others. Some measures depend on scale so they can’t be used to compare different series of data, such as GDP and the jobless rate. Using percentage error — the MAPE — can overcome this but it gives whacky results with outcomes of zero or near zero. One possible solution is to use the mean absolute scaled error – or MASE – suggested by Professor Rob Hyndman at Australia’s Monash University and colleague Anne Koehler from Miami University, Ohio in 2006.

from Global Investing:

The Big Five: Themes for the Week Ahead

Five things to think about this week:

CENTRAL BANKERS IN A HOLE
-- The global economy and financial system appear on the road to recovery but that is in large part due to unprecedented official stimulus that will have to be withdrawn at some point - the questions investors want answered are when, and how.  Central bankers no longer appear to be quite as shoulder to shoulder with one another on coordinated policy as they were last year in the aftermath of Lehman's collapse.
 

CHINA STOCK WATCHING
--  It is August, liquidity has dried up with the summer holiday season in full swing, and investors are palpably more cautious about the economic outlook now than they have been for months. It is against this backdrop that that the Chinese stock market is emerging as the focal point and driver of all other asset markets. The Shanghai Composite technically slipped into bear market territory earlier last week, shedding 20 percent in the two weeks from Aug. 4 to Aug. 19 on profit taking from the 90 percent surge this year. There is no major Chinese economic data scheduled for release this week, leaving thin markets at the whim of sentiment in what is a notoriously volatile stock market.
 

GROWTH FOUNDATIONS
-- The United States, Britain and Germany unveil revised estimates of Q2 economic growth. Revised GDP figures rarely garner much attention but with initial estimates from Germany, France and Japan earlier this month all showing that these countries exited recession in the last quarter, investors will be looking for further evidence the world economy has turned the corner. The hard data is stronger now than it has been for some time but is the global economy building a solid base for recovery, or is it more likely to buckle were authorities to begin withdrawing the massive fiscal and monetary stimulus?
 

Things for an economist to do on a Friday

Three things for the economy-minded to be doing on a Friday in July:

– Study a very, very clever interactive graphic from the New York Times showing that the business cycle is far from round. Here.

– Marvel at one of the Centre for Economic Policy Research’s new papers — either “The Potato’s Contribution to Population and Urbanization” or “Kinky Choices, Dictators and Split Might: A Non-Cooperative Model for Household Consumption and Labor Supply”.

– Come up with a new visual metaphor for the direction of the global economy. We have had L, U, V and W. Most recently we have heard of the Nike Swoosh and saxophone-shaped recovery (with the flat mouthpiece heading off into the distance).

Crisis reading: What’s in the book bag?

Readers of MacroScope who live in the northern hemisphere will be gearing up for some summer reading.

James Montier, the market psychologist who is also an equity analyst at Societe Generale, has come up with his annual recomendations of what to read. The full list is here, but for the current economic and market crisis he has this to offer:

My favourite book in this category is Bill Fleckenstein’s ‘Greenspan’s Bubbles’ – an excellent exposé of incompetence during Alan Greenspan’s tenure as Fed Chairman. The next choice in this group is Whitney Tilson and Glen Tongue’s ‘More Mortgage Meltdown’. This book explains clearly how we ended up in this mess (and is based on the authors — real time experience), and an added bonus is the insight into Tilson’s investment process provided by the case studies. My final choice in this section is Jim Grant’s ‘Mr. Market Miscalculates’. I’ve mentioned this excellent book before, and I believe it deserves a place on all investors’ bookshelves.

How to calculate the decline of decline

Analysts and strategists assessing whether there’s an economic recovery on the way are increasingly referring to “second derivatives”. It usually means a measure, say production, has declined, but not by as much as it did last month, or quarter.

Are second derivatives a strong basis for optimism? If you have to perform differential calculus to make a point, it may be a sign of desperation.

Equities markets continue to factor in a recovery, with the FTSE 100 up about 30 percent from its six-year low of March 9.