John At The Center

As of late July, the price of a Big Mac in Japan, at Y320 ($3.78 under Wednesday’s exchange rate), represented an exchange rate of Y85.7 in implied purchasing power parity of the dollar. The actual yen/dollar exchange rate then was Y87.2 – meaning the Japanese Big Mac was 2 per cent under-valued against the dollar, according to the index.

But here’s a beautiful twist: earlier in August, McDonalds cut the price of a Big Mac in Japan to just Y200 as part of a summer campaign. At what amounts to a 30 per cent discount, that would bring PPP down to Y52 to the dollar.

via FT Alphaville » The ‘burgernomics’ of yen appreciation.

Old consensus: we need Freddie and Fannie in order to make housing “affordable.”

New consensus: we need them in order to “prevent further house price delclines,” in other words, to make housing less affordable.

via Marginal Revolution: Arnold Kling, on a roll.

Brokers who may have had a role in May’s devastating “flash crash” could face fines from the Financial Industry Regulatory Authority, said the industry group on Monday.

Finra spokeswoman Nancy Condon confirmed that brokers who gave high-frequency traders access to the markets without properly vetting them could face fines.

via Finra considering fines for ‘flash crash’ brokers – Aug. 23, 2010.

Since the risks are fewer, smaller changes are more easily adopted and can become viral. Exemptions to material adverse change clauses are a prominent example. The lore is that material adverse change clauses were first used in railroad indentures for British bonds back in the 19th century. The typical clause until the turn of this millennium was a bare statement to the effect that no material adverse effect had occurred. After 2000, however, exceptions otherwise known as carve-outs to M.A.C. clauses began to creep in. These carve-outs specified circumstances, like a change to the industry in which the target operated generally, that were excluded from being an M.A.C. The reasons that these clauses began to be included are still unknown but the IBP v. Tyson case no doubt hastened it. (I discussed this in a previous post.)

via How Innovations Spread in Deal-Making – DealBook Blog – NYTimes.com.

Small investors are “losing their appetite for risk,” a Credit Suisse analyst, Doug Cliggott, said in a report to investors on Friday.One of the phenomena of the last several decades has been the rise of the individual investor. As Americans have become more responsible for their own retirement, they have poured money into stocks with such faith that half of the country’s households now own shares directly or through mutual funds, which are by far the most popular way Americans invest in stocks. So the turnabout is striking.

via Small Investors Flee Stock Market Even as Companies Recover – NYTimes.com.

The combined assets of quantitative funds specializing in United States stocks have plunged to $467 billion, from $1.2 trillion in 2007, a 61 percent decline, according to eVestment Alliance, a research firm. That drop reflects both bad investments and withdrawals by clients.

via ‘Quant’ Funds Try to Resurrect Computer Investing – NYTimes.com.

As we rebuild from the economic crisis, we must renew the search for the appropriate balance—in finance and in other endeavors—not just between centralization and decentralization but also between case-by-case judgment and standardized rules. The right level of control is an elusive and moving target: Economic dynamism is best maintained by minimizing centralized control, but the very dynamism that individual initiative unleashes tends to increase the degree of control needed. And how to centralize—whether through case-by case judgment, a rule book, or a computer model—is as difficult a question as how much. But these are questions that we cannot afford to stop asking.

via The Big Idea: The Judgment Deficit – Harvard Business Review.

A better analogy than physics or biology is a military one. The point is that there is a strategy of intelligent reaction to any action, an arms race to leapfrog one another in information gathering and technology, to know what others are doing, and to react in a way that they will not anticipate. This is the point where I could pull out quotes from The Art War about seeing into the mind of the enemy, attacking when your opponent believes you will retreat, and the like. That is not physics.

via Rick Bookstaber: Physics Envy in Finance.

Investors brace for dramatic accounting change. That sounds like a fantasy headline from one of the great geeky professions, but it’s almost true. New rules announced on Tuesday on lease accounting will increase the average company’s debt load by 58 per cent, according to PwC and Erasmus University.

The issue: with the right kind of lease contract, companies currently keep assets off the balance sheet that are both durable and vital to operations – for example airlines’ aircraft and retailers’ stores. But accountants are on the way to banning these operating leases. Almost all leases will be considered financial, so both the assets and the corresponding discounted present value of future payments will be on the balance sheet. The result: the average retailer can expect a three-fold increase in debt levels. For Tesco, an extra £15bn of lease liabilities will be included into a pool barely £200m deep.

via FT.com / Lex – Lease accounting.

Even if that assessment springs from lips of Paul Krugman himself, we have to say the evidence increasingly seems to confirm it.

Krugman’s point was always that inflationistas, aka austerity enthusiasts — such as noted nemesis Professor Niall Ferguson — neglected the importance of “liquidity preference” when considering government deficits and stimulus spending plans.

After all, it’s all very well for the Fed to set a target rate, but it’s quite another for policymakers to implement it.

And herein lies the problem.

via FT Alphaville » Take that, Niall — Krugman was right all along.