Shouk HaKarmel...

As one would expect, the Shouk HaKarmel is a very busy place...

James and I stopped for (more like pulled into) lunch at a random house/stall where a woman was selling sauteed chicken bits, mixed with onions and vegetables, with hummus and pita bread...

Note the old man sitting next to me falling asleep in the chair...

Am now well provisioned: pita, an assortment of swarma meats, salad, mangoes, dates, olives, random smoked deli meats...back to the hostel...

Shabbat means grilling out...

It being Friday, most shops close down at sunset for Shabbat and remain closed until Saturday evening.  James and I are going to cook at the hostel tonight.  The Old Jaffa Hostel has such an excellent rooftop terrace garden with a kitchen that I think I will cook for myself this evening...

Headed off to the Shouk HaKarmel for provisions...and then beach...

Breakfast at Dr. Shakshuka's...

James and I had an amazing breakfast at Dr. Shakshuka's this morning.  The good doctor is generally acknowledged to make the best shakshuka in all of Tel Aviv.  For those unfamiliar, Shakshuka is a north African omelet-esque, tomato, and grilled vegetable dish which has become a popular breakfast dish throughout Israel.  Preparation varies, but Dr. Shakshuka's serves his shakshuka with as much salad, bread, and lemonade as you can eat and drink...and finished the meal off with Turkish coffee and sweetbreads.

 

Sunset in Jaffa...

Just enjoyed a couple of beers at a place that literally did not have a name (I asked!) down on the beach...note the pirate flag...

The view of old Jaffa from my table...

The evening call to prayer just echoed across the city...ambiance in Jaffa is really something.

Old Jaffa is very different from the only other part of Tel Aviv that I have seen: the section in and around the new central train station.  When I arrived from the airport,  I caught a taxi from the new central train station to the hostel.  According to my taxi driver (a 63-year old Indian Jew from Calcutta who immigrated to Israel in 1948), the area around the central train station is very run down due to large influx of predominately poor African immigrants and guest workers.  He recommended that I spend most of my time in Old Jaffa (because, according to him, it has real character).

I end with a shot of the modern Tel Aviv skyline...alas I think I will be following the taxi driver's advice and steering clear of downtown Tel Aviv.

 

Leverage and Balance Sheets...

Killing time at JFK International waiting to board my flight to Paris.  I recently came across a brilliant and simple discussion of the relationship between leverage and the size of balance sheets in Adrian and Shin (2008) and had to share...

Suppose that a household owns a house that is financed via a mortgage.  Suppose that the house has a value of 100, and that the value of the mortgage is 90 (thus household net-worth, or equity, is 100 - 90 = 10).  This household has the following balance sheet:

Assets	Liabilities
100	Equity: 10
	Debt: 90

What is this household's leverage ratio? Leverage (L) is defined as the ratio of the value of total assets (A) and the value of equity (E).  In this case the household has a leverage ratio of 100:10 or 10:1.  What happens to the household's leverage ratio as the value of the house (its asset) fluctuates?  For simplicity assume that the value of debt stays fixed for small changes is asset prices.  Then leverage is roughly...

L ≈ A / (A - 90)

So as the value of the house (i.e., assets) rises, with the value of debt fixed, household net worth increases and the leverage goes down!  Leverage varies inversely with the value of total assets.  This inverse relationship is exactly what is born out in the data.  To calculate leverage, I use the ratio of household total assets and household net worth from the quarterly  U.S. Flow of Funds data for the years 1963 - 2011. 

There is a clear negative relationship between changes in leverage and changes in household assets.

Now instead of household balance sheets, let's consider firm balance sheets.  Specifically, based on data availability, consider three classes of firms:

1. Non-financial (non-farm) firms
2. Commercial banks
3. Security brokers and dealers (includes investment banks)

If, like households, firms where fairly passive in their balance sheet management, then we should see a nice negative relationship between firms' asset values and leverage...however (not surprisingly) the data indicate that firms are a bit more active in managing their balance sheets than households.  As with households, all firm data is quarterly, and is taken from the U.S. Flow of Funds accounts maintained by the Federal Reserve.

Non-Financial (Non-Farm) Firms: I take the data from the U.S. flow of funds What is going on here? Certainly the clear negative relationship from the household scatter  is gone.  You can kind of begin to see clustering around zero growth in leverage (suggestive of firms actively managing balance sheets to maintain a fixed leverage ratio?)

Commercial Banks: The clustering phenomenon is now very apparent and consistent with the fact that commercial banks actively manage their balance sheets in order to maintain a fixed leverage ratio.

Security Brokers and Dealers: Now the relationship between leverage and assets is positive! This means that for security brokers and dealers (a group which includes all major Wall Street investment banks) leverage is pro-cyclical.

How can this be? What are the implications of pro-cyclical leverage?  I leave this as a topic for a future post...alternatively you can read Adrian and Shin (2008).

Arrived in Old Jaffa...

The view from the rooftop of my hostel in the old city of Jaffa...

...it is nice to be settled after a long journey.  Another terribly experience connecting through JFK...will avoid like the plague in the future.  Also, in the future, I will be doubly sure to check that when I book a trans-Atlantic ticket with Air France, that I actually fly Air France (and not an Air France flight managed by Delta!).  These two seeming similar travel experiences are not even remotely comparable...

Heading to Jerusalem...

I depart tomorrow for the 22nd Summer School in Economic Theory in Jerusalem on the Global Financial Crisis...

Amongst other things, I plan to follow up with Prof. Geanakoplos regarding his paper "Leverage Causes Fat Tails and Clustered Volatility." Blogging will be either sporadic, or prolific depending on wireless connectivity...