Tuesday, July 22, 2014

What's Moooving: Cows as Safe Assets

As Carnegie Mellon Financial Engineering prof. Dogbert explains, we are dealing with aggregates here:
 - Dilbert by Scott Adams

This, however, leads to a whole new set of problems that come from physically* bundling the gals into the Collateralized Cow Obligation wrapper.
They ask questions like "Does this CCO make my butt look fat" and seriously, how can you answer that without incriminating yourself?
For this reason some practitioners prefer to stick with synthetic livestock, not to be confused with....ummm..., where was I?

From FT Alphaville:

In defence of cows as safe assets
You’ll remember this from last year, we’re sure:
Our main finding is that, on average, [rural Indian] households earn negative returns on their investments in cows and buffaloes if labor is valued at market wages: we estimate average returns of negative 64% and negative 39% for cows and buffaloes respectively. If we value the household’s own labor at zero, estimated average returns increase, to negative 6% for cows and positive 13% for buffaloes… if cows and buffaloes earn such low, even negative, economic returns, why would rural Indian households continue to invest in them?
That, from Anagol, Etang and Karlan, led to a host of speculation about various economic and cultural factors which might explain India’s ability to slide past the “central tenets of capitalism”… h/t’s to the Onion all round.

Which is fine. India does have a religious, cultural, and political affinity with the cow — see the hindu nationalist RSS in 1952 or the just completed elections for a snapshot — and the lack of financial inclusion over here, something the RBI is working on, might add to the rationality of owning a negative yielding cow. (Gold too for that matter)

BUT whether those are sufficient explanations for the willingness to hold such negative returning assets (and the suspicion had to be they weren’t, and not just because buffaloes also came up negative) may be an oversimplified question. Because, well, the whole “cows disprove central tenet of capitalism” call seems a touch overdone....MUCH MORE
*Fortunately the Reserve Bank of India takes a very liberal view of dematerialized assets, with many purveyors offering 'demats' served up with a soupçon of quasi-mysticism:
"Dematerialising physical shares can be a horrible experience. It can take anywhere between three months to three years," warns Kartik Jhaveri, director, Transcend India....
Somehow related:
Can Hindu Deities Open Brokerage Accounts Allowing them to Trade Securities?

UPDATE: Bombay High Court Rules Hindu Deities MAY NOT Trade Securities
No demat accounts for Hindu gods...
Indian Central Bank Issues Guidelines on Dematerialized Gold in Effort to Reduce Need to Import Physical