Amazon.com (AMZN) is absolutely on fire. The company posted Q1 results that blew away estimates, with EPS of 41 cents a dime ahead of the Street, as both gross margins and operating margin expanded in the face of the worst economic downturn since the Great Depression. Not only are consumers continuing to migrate shopping to online from offline, but Amazon continues to gobble up share: Morgan Stanley’s Mary Meeker notes that Amazon’s U.S. business has grown at least 18 percentage points faster than overall e-commerce for eight consecutive quarters. Throw in better-than-expected demand for the Kindle–annoyingly, the company won’t give any specific data on sales of the device–and you have a recipe for an investor lovefest.

And when I say the stock is on fire, I don’t just mean today. AMZN is up about 67 percent year to date, and a whopping 145 percent since the stock’s November low.

Read the rest of this post on the original site

A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists–even Wall Street quants–have received the Nobel in economics before, and Li’s work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut–determining correlation, or how seemingly disparate events are related–and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.

For five years, Li’s formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

Read the rest of this post

When the economy goes south, one name invariably surfaces on the lips of pundits and economists: John Maynard Keynes. That is because the twentieth century’s greatest economist is generally associated with the idea that markets require government intervention in order to function properly. During boom times, when the market seems to be working, no one has any use for Keynes’s skepticism toward unrestrained capitalism. But, during recessions–when the economy grinds to a halt and Washington suddenly looks like the only thing that can save it–Keynes invariably enjoys a revival. The current economic crisis, our country’s worst since the Great Depression, is no exception. Everyone, it seems, has spent the past months rediscovering Keynes.

But the tendency only to turn to Keynes for technical advice in bad times doesn’t really do justice to his worldview. Keynes’s ideas were not just a prescription for an ailing economy; they were a complete theory of capitalism, one meant to be relevant in both good times and bad. They were also more than just an economic program; his ideas about capitalism–spelled out most thoroughly in his 1936 work, The General Theory of Employment, Interest, and Money–were developed in tandem with his political philosophy. Keynes saw each as bound up with the other. “The most pressing reforms which are economically sound do not, as perhaps they did in earlier days, point away from the ideal,” Keynes wrote in 1932. “On the contrary, they point toward it.” Keynes, in other words, was interested in more than manipulating the levers of policy to keep economies thriving. He was interested in how economics intersects with political questions of equality and fairness and justice.

This fall, the Bush administration and the incoming Obama administration have had to confront not just narrow technical questions about budget deficits, interest rates, tax cuts, and savings, but also broader political questions about the proper relationship between government and the economy. Without our realizing or anticipating it, the entire panoply of concerns that Keynes faced in the 1930s has come back to us. Turning to him for answers is therefore an understandable, and wise, move–but only if we treat his ideas as what they are: not quick-fix steps for a battered market but long-term principles for creating a functional and just economy.

Read the rest of this post

It’s difficult to avoid the comparisons between the current sad state of financial affairs and the Great Depression. “This is not like 1987 or 1998 or 2001,” Merrill Lynch CEO John Thain said at a conference on Nov. 11. “We will in fact look back to the 1929 period to see the kind of slowdown we are seeing now.” Time depicted President-elect Barack Obama on its cover as Franklin Delano Roosevelt. And in Washington, the buzz is all about what the new team will do in its first 100 days. What’s next? Show trials in Moscow?

All this historically inaccurate nostalgia can occasionally make you want to clock somebody with one of the three volumes of Arthur M. Schlesinger Jr.’s history of the New Deal. The credit debacle of 2008 and the Great Depression may have similar origins: Both got going when financial crisis led to a reduction in consumer demand. But the two phenomena differ substantially.

Read the rest of this post