Really great links - equity premium puzzle - consumption in China - brain drain

From the archives of Xavier Gabaix and David Laibson - The 6D Bias and the Equity-Premium Puzzle - Consumption growth covaries only weakly with equity returns, which seems to imply that equities are not very risky. However, investors have historically received a very large premium for holding equities. For twenty years, economists have asked why an asset with little apparent risk has such a large required return. Grossman and Laroque (1990) argued that adjustment costs might answer the equity-premium puzzle. If it is costly to change consumption, households will not respond instantaneously to changes in asset prices. Instead, consumption will adjust with a lag, explaining why consumption growth covaries only weakly with current equity returns. In Grossman and Laroque’s framework, equities are risky, but that riskiness does not show up in a high contemporaneous correlation between consumption growth and equity returns. The comovement is only observable in the long run.

Paolo Pellegrini - "And while many pin their hopes on China, that country is still primarily growing its investment spending, not its consumption. It will be very difficult for the Chinese leadership to let consumption take off because a subsequent slowdown would be politically destabilizing."

Arnold Kling/Laura Freschi - Brain drain - "Even using official figures, which likely far undercount the value of remittances by excluding informal channels, remittances sent back by Africans abroad outweigh the cost of educating them at home. Why pass up a high return opportunity (Africans earning high incomes abroad and remitting) and insist on a low return activity (educated Africans underemployed at home)?"

The Reformed Broker - Soros Still Enamoured With Paulson Picks - "One of my favorite anecdotes from the book The Greatest Trade Ever was when John Paulson heads up to George Soros' offices for a light lunch and a heavy discussion of how Paulson's real estate/ mortgage crash trade was conceived and constructed. It seems that Soros continues to follow his new friend into positions and trades."