I found (actually LM found) a cool blog. John Cassidy is posting there interviews with Chicago School economists. I did particularly like the one with Fama..
Here is a quote, just to give you a taste:
Krugman wants to be the czar of the world. There are no economists that he likes. (Laughs)
By the way, despite being super smart, I think some of the Chicago guys, Fama and Cochrane for instance, are a bit too extreme…
At the end of an article Fear of the dragon in this week’s Economist, analyst Chris Wood (I have no clue who that is) is cited saying that China is doing more to eliminate the global imbalances than the US (Global Imbalances = Chinese working like crazy and not spending – exporting a lot, Americans consuming way too much – importing ). He says that China is encouraging spending while the US is doing nothing to prop up the already low and further falling saving rate.
He misses the point why the US saving rate is falling and that the government has a very limited maneuver space. The saving rate is falling because of massive US government’s borrowing and stimulus spending. The Americans, like the Chinese are trying to spend more to prop up the economy. The falling saving rate is a (negative) byproduct of the fiscal stimulus. Unless the above cited analyst argues that the fiscal stimulus is stupid, he has no case…
By the way, even though one can certainly argue against the stimulus, I actually think that despite all the inefficiencies associated with government spending, it makes sense. (More on that sometimes else…)
There was a big excitement about the BRIC (Brazil, Russia, India, China) countries among investors last year. The excitement was in to some extent understandable, despite the Global Depression GDP growths were (Br:0%,Ru:-7%,In:5.5%,Ch:8.2%, The Economist), with the exception of Russia quite a respectable performance. It was, probably still is, believed that the emerging economies are better prepared for the 21st century and will be shaping the world (I think this notion is ridiculous, but more on that sometimes later).
Last yeat, the BRIC stock markets grew in dollar terms by (Br:154%,Ru:128%, In:95%,Ch(SSEB):129%), USA grew in the same period by 26% and Euro area by approx. 29% in dollar terms. Note that some of the market have suffered a huge blow in 2007. In February 2008, the change on December 2007 was (Br:-50%,Ru:-73%,In:-61%,Ch:-60%). Us fell in the same period by -43% and Euro Area by -55%.
In my opinion, diversifying portfolio and investing in the BRIC countries made sense some time ago (I would have bought an index). I don’t think it does anymore. I think the stocks (especially IPOs) are overpriced.
Investors are looking for positively skewed stocks (low probability of huge payoff – Imagine you bought Lenovo few years ago), and are in their overconfidence persuaded that the stock they’ve bought is going to be next success story, like Lenovo, so they are willing to overpay for it. Where to find more highly skewed stocks than in the emerging markets?…
They are also looking for ambiguous stocks (stock with not known fundamental value), if the fundamental value is unknown investors can dream that they have had a luck and picked the next Microsoft. And they overpay for the stock… Given the analyst coverage, information, laws protecting investors etc. guess where to find more ambiguous stocks, in the US or in the BRIC countries?
Last (but probably most importantly) seeing how the BRIC countries have weather the crisis have made us think that they really are different and better prepared for the 21st century. We got extremely excited about the developing world and the excitement got extended on their stock markets…
To put it very bluntly, B(R-who knows)IC markets are overvalued because investors got overexcited about them.
Yesterday came out an article in the FT, the article says the same thing as I do that the BRIC stocks are overvalued, but completely misses the point why. I would recommend reading last four paragraphs (the author gives few indicators of stock market overvaluation for China) . The first paragraphs are nonsense. To give one simple short example, the answer to paragraph 4 is: buy an index and the problem he is talking about is gone…
p.s. Investing in the B(R-who knows about Russia)IC markets as analysts still recommend is equally stupid as buying gold…
Krugman has (as usual in a confrontational tone) announced the end of the Chicago School.
It’s true that there were better times for the Chicago School, home of the Efficient Market Hypothesis, than the post financial crisis period of 2009/2010, but announcing the end of the School is a bit premature. I think as long as Chicago reconsiders some of its positions it needs not to perish (as Krugman surely wishes)…
What bothers me is Krugman’s style of writing. He quotes Fama and Cochrane in the second paragraph, but he does not give the link to their speaches/articles. How do I know he did not take the quotes out of the context, as he did with many in his “How did Economists get it so Wrong”? (See Cochrane’s response:”How did Paul Krugman Get it so Wrong?”)
True, based on the quotes Fama and Cochrane look like idiots, but did they really say that?… I am sorry, but I don’t trust Krugman’s articles any more.
I like very much Thaler and Sunstein’s book Nudge. The basic theme of the book is Liberal Paternalism, which is broadly speaking (the way I understand it) creating environment in which individuals can make the right choices. Liberal Paternalism should by no means limit individual’s choices.
New move by number of Japanese railway companies is a beautiful example of Liberal Paternalism. The company is installing blue lights on platforms, the blue color should have a calming effect and so prevent people from committing suicides by jumping under arriving trains!
Note that the company rejected building fences around the platforms, leaving people with the option of actually jumping! (I guess the fences would have to have some gates, for people to actually get to a train. I don’t know the details.)
I am not sure whether Liberal Paternalism was on East Japan Railways’ mind when choosing blue lights over fences, but it fits perfectly.
People are nudged to live while still having an option to commit a suicide!