Econbrowser: Inverted yield curve edges closer

This one's for the Finance and Economics Professors among my readers.

James Hamilton at Econbrowser is discussing how the an inverted yield curve yield curve is related to recessions (for those not familiar with the term, an inverted yield curve describes the pattern where rates on longer-term debt instruments are lower than those on shorter term instruments). He starts out by explaining the Expectations Hypothesis:

A very simple model known as the expectations hypothesis of the term structure of interest rates posits that investors don't particularly care which maturity they invest in, and as a result would always bid prices for different maturities so that the expected yield from rolling over securities of different maturities is identical.

He then goes on to explain how the Expectations Hypothesis doesn't fully explain the shape of the yield curve, and closes with some thoughts on how changes in the yield curve are related to expected recessions.

All in all, a good piece to give to your class for discussion the next time you teach about the term structure of interest rates. Click here for the whole thing.

Updated 11/30: Kash at Angry Bear also has a few thoughts on the subject, and a nice non-technical explanation of why the inverted yield curve is often followed by a recession.

Can Professor Pigskin Pick Stocks?

In the movie Grand Canyon, one of the characters says "The answers to all of life's questions can be found in the movies." He was wrong - actually, all the answers can be found in The Simpsons. Here's a great illustration of how random chance can produce what looks like superior forecasting:

Homer: Doh, the Broncos won! Why didn’t I bet on them like Professor Pigskin told me too?

Lisa: Who’s Professor Pigskin?

H: He’s a pig who can predict football winners in advance.

L: How is that possible?

H: Because he’s got something no gambler’s ever had. A System! I’ve got the pamphlet four weeks in a row and every time the pick of the week has been right on the money.

L: Ohhhh. I get it. Every week they send out two pamphlets, half picking one team and half picking the other. Eventually, there’s a small group of people who only receive the correct predictions and think Professor Pigskin is always right. That’s when they ask for your money.

HT: Blogging Wall Street.

I wonder if Professor Pigskin picks stocks?

This is similar to an example I regularly use in class to illustrate how quite a few mutual funds could end up beating the market five (or even ten years) running just by chance.

Now I'll use Professor Pigskin instead.

Tim Harford - The Undercover Economist

Tim Harford is one of the most interesting "popular" economists currently writing (by "popular" I mean those that have had some success in bringing economics to the masses). His regular column for the Economist called "Dear Economist" is one of my favorite reads. In it he answers common questions (like how to deal with an arranged marriage, or whether to save for the future) in a Miss Manners style using economic reasoning.

For those of you who enjoyed Freakonomics, I'd recommend his book"The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor–and Why You Can Never Buy a Decent Used Car!" -- it's a great read, and would also make a good stocking stuffer.

Patri Friedman at Catallarchy has just posted an interview of Harford, which you can here.

I've Been Devolved!

Just when I had gotten used to living on dry land as an Adorable Rodent, the all-powerful NZ Bear decided to rework his ranking algorithms at The Truth Laid Bear. As a result, I've been devolved to a Flippery Fish.

Ah well, I've been meaning to get back to swimming regularly for exercise. All this does is accelerate the process.

This Week's Carnival of Personal Finance

Monday is Carnival Day! This week's Carnival of Personal Finance is up and running at Financial Fruition.

First, there are three pieces on budgeting and record keeping. In Budget Breakdown, Dawn at Frugal For Life provides the essential information on budgeting. In Budgeting Made Easy, Retire at Thirty provides another "budgeting primer" piece. Finally, in Poor Money Management, Cathy at CFO (Chief Family Officer) talks about having a monthly spending plan.

Dan from Searchlight Crusade continues his series on things to watch out when geting a loan in Games Lenders Play (Part IV).

In Unclaimed Property That'’s Rightfully Yours, Steve Pavlina works us through the process of searching for unclaimed property. It's worth it - I did this a few years ago and found a small account (about $50) that was owed to the Unknown-Mother-In-Law. It scored a few points for me.

Finally, Clint at Million Dollar Goal discusses How Taxes Affect Your Returns. Remember - it's the after-tax return that matters.

That's it for this week in the "money" carnivals.

This Week's Carnival of The Capitalists

This week's COTC is up at Gillblog. The posts that caught my attention this week include:

Free Money Finance has a lot of personal finance advice pulled together from a variety of sources.

Barry Ritholtz, at The Big Picture, is musing about how the President's suggested tax reform capping the mortgage deduction might affect various parties.

In two posts on hedge funds, James Hamilton, at Econbrowser, discusses risk and returns in hedge funds and shows once again that there's no free linch, while Professor Bainbridge tells us why he thinks hedge fund activism is overrated.

As always, look around - you might find other things you like.

SEC Admits SOX May Be Too Costly

The SEC is slow, but there are signs of hope that they are realizing the probles with Sarbanes-Oxley. This from the Wall Street Journal:

U.S. regulators may need to revisit internal-controls requirements for public companies if compliance costs remain high, according to Securities and Exchange Commissioner Cynthia Glassman.

In a recent speech in Denmark, posted on the SEC's Web site Friday, Ms. Glassman said she is concerned about excessive compliance costs associated with the requirement and raised the possibility of revisiting the rules, which were written by the SEC and the Public Company Accounting Oversight Board. She also said she would be "receptive" to recommendations to modify the internal-controls requirements for smaller companies, both in and outside the U.S.

Click here for the whole thing (online subscription required).

The good thing about regulators is that they regulate. That's also the bad thing - their bias is to step in with new regulations (even when not needed), since it gives them a reason for being.