Quantifying

Material World is an outstanding book. It takes six materials: sand, salt, iron, copper, oil and lithium and explores their role in the world economy. What is especially fascinating about this book is that the author takes both an historical approach and a forward look into the coming transition to a low carbon economy. The author is no scientist or engineer so whilst this can be frustrating at times it allows him to take a wider perspective connecting the past, present and future and considering many aspects of how these materials came to be so important. It is refreshing to share with him as he discovers more about his subject. This is a deeply researched book with an extensive bibliography and many interviews as the author travels the world to visit mines and quarries. A major theme of the book is that this 'material world' of mines, oil refineries and chemical factories is mostly hidden from us and so we take it for granted. We don't need to think about it too much any ...

With kind permission from The British Museum This post is a continuation of an earlier post on the 23rd January in which I compared gold bullion with equities (Nasdaq Composite) as an investment. The results there showed that the statistics of the gold price were, surprisingly, very similar to those for the Nasdaq Composite. But the gold price has an almost zero correlation with equity prices. In this post I'm going to show that this makes gold a very valuable holding alongside equities in a diversified portfolio. As the picture above indicates gold has been used as a currency and store of value for millennia. Rome issued gold coins with art work that wouldn't be too out of place in mints today such as the  Royal Canadian Mint  which still issues coins for investment purposes. Modern finance has made it easier to invest in gold though, using instruments such as Exchange Traded Funds (ETF) which track the bullion price. ETFs are issued by major investment managers s...

Source: Network Rail Prophecy would be a wonderful thing - and I'm not talking about the biblical kind - just economic prophecy will do. Financial traders eagerly await numbers such as the  US Non-farm payroll  which has the power to move major markets or the  Purchasing Managers Index  which in the link is nicely mapped globally by Bloomberg. In a post last month I looked at yield curve inversions as an indicator of changes in real GDP and therefore of recessions. The conclusion was that they are indeed a statistically significant indicator of real GDP but only weakly so. A better indicator is simply the change in real GDP from the previous month. Using some statistical jargon GDP is autocorrelated. But what about other indicators of future economic growth (or decline)? There are a plethora of them. A good one might enable you to detect tipping points when an economy starts to move into recession.  In this post I'm going to examine a closely watched ...

Sources: LBMA, Nasdaq OMX Group Many investors hold a portfolio containing only equities. Some 'balanced' portfolios will be a mixture of equities and bonds (often only conventional though with no index-linked bonds). But what is the effect of holding gold in your portfolio? The legendary investor Warren Buffet has famously disdained gold because of its lack of usefulness. But you don't have to go far on the  Bank of England  website to find a profusion of information on the subject. They boast of the 400,000 bars of gold in their vault. I make that around $240 billion at a current price of $1500/troy ounce. That's a lot of money just sitting there looking at you. The chart above uses data taken from the US Federal Reserve database FRED. I've chosen to use the Nasdaq Composite because of the availability of data going back to the 1970s. This was a period of high inflation in which gold performed well but in subsequent decades it lagged. Still the chart cle...

Short Guide to Inflation-indexed Bonds Summary In this post I introduce you to inflation linked bonds and how they can be used by investors in an investment portfolio. Introduction Most private investors focus their attention on the equity market. It's exciting and offers the possibility of big gains, albeit at the risk of big losses or worse every now and then. Others are nervous of the equity market and prefer government or corporate bonds with their predictable (mostly) flow of coupons and pay-out (hopefully) on the maturity date. If your nervousness has developed into paranoia you may invest in gold as an insurance against war and pestilence. And if all of these options and choosing between them seems like too much then, of course, cash is a respectable investment although in some countries you may now be 'rewarded' with a negative interest rate. But there's a good alternative to all of these options and that's inflation-linked bonds. What are I...

Data source: US Treasury Summary I show how to build a simple model of the real GDP (Gross Domestic Product) for the US economy using data publicly available from the Federal Reserve and US Treasury. I do this using the popular Python programming environment. Although the yield spread has a statistically significant effect on GDP its magnitude is small. Introduction The pattern on the chart above looks ominous. It shows the constant maturity yields for US bonds and bills from 1990 until the current day. The multiple curves are for different maturities starting at 3 months (blue) and ending with 20 years (green). The dominant hump feature centred around 2007 is due to the global financial crisis when the short term interest rate rose quickly to equal the long term interest rate. There is a similar feature emerging at the moment. The yield curve inversion that happened in the middle of last year has been much discussed in the financial press and also by the Federal Reserve ...

The UK Productivity Puzzle It is now almost a month since the death of Stephen Hawking, one of the worlds most celebrated scientists. He received many honours and awards during his lifetime although the Nobel Prize for physics eluded him. But famously he is said to have refused a knighthood in the 1990s http://www.bbc.co.uk/news/uk-43396008 over issues with the UK government's funding of science. It's interesting then to read through the House of Commons Briefing Paper "Productivity in the UK" https://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN06492#fullreport which shows in Table 3.1 that by 2020 £2 billion out of £5.5 billion of the National Productivity Investment Fund will be allocated to Research and Development (R&D). Perhaps then, in addition to his legacy of work on black holes, he will be remembered for his principled and successful stand against cut-backs in research funding. The parliamentary report indicates that the UK government ...