19 October 2014

Lord of The Flies

Being stranded on an island in the Atlantic, though not all that far out, without my beloved desktop I'm forced to keep this short. I hate laptops, and this one (not mine, fur shur) is horrid. These endeavors have talked about the arc of the future, from the many perspectives of the macros, micros, and quants. Data doesn't help a bunch, if the incentive structure which generated the time series you're relying on to predict the future really isn't there any more. Much like Oakland in the view of Stein.

In today's NYT Business Upshot piece, Shiller takes on the miscreants. He's explicitly dealing with the Behavioural Economics aspects of Mr. Market, although he doesn't use the term. Rather, it's a faint feint to Ebola.
Fundamentally, stock markets are driven by popular narratives, which don't need basis in solid fact. True or not, such stories may be described as "thought viruses". When they are pernicious, they are analogous to the Ebola virus: They spread by contagion.

In the end, what's behind the recent collapse of Mr. Market's arches? Time for Dr. Scholls.
Some people say that a theory of John Maynard Keynes -- known as the "underconsumption theory" because it says people inherently underspend once they become prosperous - is taking hold.

Mark Twain wrote, arguably, the best dissection of that idea with "The Gilded Age", a decade before Keynes was born (and before "Huckleberry Finn", for what it's worth). Even if you're Daddy Warbucks, you can use only so many fast cars, loose women, and fancy food. Economists have known this, if not by explicit name, since long before Keynes.

The Wiki has a, not fawning, piece: here.

16 October 2014

One Life to Live

It was raining cats and dogs this morning here in South Fireplug, CT (although not nearly what my beloved, yet benighted, Bermuda faces tomorrow), so I postponed my daily stroll to get the dead trees NYT and a cuppa joe until it let up. In the meantime, I spent some time with r-bloggers and came across a young pup who talked about predicting life expectancy from historical data. I considered a tongue in cheek rebuttal, but tasks interfered.

The rain let up, and there were still NYTs on the shelf. What do I find? David Leonhardt's, et al take on the issue of quants not looking out the window to see if it's raining. These endeavors have addressed this issue a few times. Time series data of some attribute may be useful in predicting the attribute's future value, IFF the entities which have the attribute are running under God's Laws over which they have no control. On the other hand, when measures are of some aspect of human activity, it's mostly a Wizard of Oz situation: some human(s) are behind the curtain bending, breaking, or re-writing the "laws" of behavior which determine the attribute. It wasn't thermodynamics which propelled house prices, but various Wizards playing various games with the rules of the game. That financial quants were all too happy to ignore the absurdity of their data, well...

Curiously, one might argue that the examples (possibly, save one or two) he gives of odds are of attributes and entities which obey God's Laws. Such odds are accurate, by definition of our understanding of God's Laws. No mention of house prices continuing to rise like smoke from a volcano.

So far as life expectancy goes, if you go and look (I've provided links more than once), you'll see that from 1900 to 2000 life expectancy at birth increased by nearly 70%, but life expectancy at 65 increased about 7% of total lifetime (less if you measure from the start of Social Security). The increase in life expectancy at birth is the number that right wingnuts use to bray, "we have to kill SS because 'we' can't afford it. You all have to buy stocks and bonds from our friends in the financial services industry." Not that they see any conflict of interest. The overhead of SS is about 1%, and protects citizens from oscillations of Mr. Market. Can't say the same thing about that 401(k); all those Wall Street fat cats got fat off "your" retirement nest egg.

So, why is predicting life expectancy from today forward based on the accumulated data over the last X years silly? Because, just as the Wizard of Oz, those added years are the result of human intervention, sporadic and specific. Increase in life expectancy, whether at birth or 65 or some other age, is not a God given gift to humanity for just being on the planet for evermore years. Doesn't work that way. Most of the increase at birth is due to greatly diminished infant and child mortality, this due mostly to public health initiatives; vaccines and anti-biotics being discovered and made widely available. That's not going to happen again. One might even speculate that, with increasing wealth concentration, what had been widely available will become more restricted. With the loonies chirping about autism and vaccines and denying same to their spawn, we are finding increased (although not epidemic levels, yet) incidence of old diseases. And so on. Humanity, despite what some quants believe, isn't Brownian motion or a random walk. No, progress exists because humans change the rules, from time to time. And sometimes those changes benefit most of us rather the the 1% and we all live a bit longer. It isn't God that has provided us with longer lives than we had in 1900, it's us. As we've reached near the limit of our ability to stave off Father Doom, and, perhaps, our willingness to make this ability available to all, we will see a leveling (if not diminishment) of life expectancy at all ages.

11 October 2014

I Have No Interest in You, Anymore

Regular reader should recall that I've been pestering the macros, micros, and quants (especially those who're in love with time series) about The Giant Pool of Money, corporate moolah hoards, the limits of knowledge (once you know the Laws of Nature, there's little left to discover), and such. The upshot of these concerns is that real returns to physical capital, which is the only, and controlling, manifestation of compound interest must needs be declining. If there's no place to put the moolah that is productive, well...

Turns out, I'm not entirely alone. A bond pundit has weighed in, and reach just that conclusion. The piece doesn't detail the reasoning, but, really now, what else could it be? Too much moolah chasing too few real opportunities. House and car notes don't actually generate real return, only foregone consumption. That's not organic growth.

If you read German (I got tired of waiting for Google Translate to finish, sigh), this is the source interview. Not much longer than the English reference articles.

05 October 2014

Two Bill Buckners For One Mickey Mantle?

With its usual panache`, the Sunday NYT has more on-point material for the macros, micros, and quants than one short blog can reasonably deal with. I'll limit myself to two pieces, which share a minor thread.

First, is the situation with container ships. This a full page and a half on the conundrum faced by container shipping companies: how to forecast demand for slots, price of fuel, and cost of moolah to decide whether to buy, and if so how many, new ships. The piece uses the recent Triple-E types of Maersk as example, in the body (so to speak) of the new Mary Maersk. In economics, generally in 101 class, the student is introduced to the farmer's dilemma; no there isn't a Wiki piece, oddly. (If you go there, you end up with Prisoner's Dilemma, which is somewhat worse.) The problem, in a nutshell, is that farm product is largely dependent on forces out of the farmer's control, weather mostly, such that a bad harvest in one year will, often, lead to higher than usual prices that year. The Dilemma: plant more the coming year, expecting (hoping?) that other farmers won't and that the high price will be sustained. Generally, doesn't work. Ruinous competition. We see similar at today's gas pump; all that horizontal drilled black gold is driving price down. Sniff!!

What's interesting about the container ship problem is that Acts of God are less significant. It's almost entirely the result of human decision making. Some quotes.

How to drive prices down:
"There's too much capacity in the market and that drives down prices," [Ulrik Sanders, global head of the shipping practice at Boston Consulting] continued. "From an industry perspective, it doesn't make any sense. But from an individual company perspective, it makes a lot of sense. It's a very tricky thing."

A classic game theory problem, seen by upper level undergraduate and graduate macros, micros, and quants. What to do? What to do?

Remember the JIT movement? Kind of a secondary gift from Deming, though not often explicitly mentioned. So, what do these behemoths mean?
The industry wants ships that carry more containers, more slowly. Fuel prices are a major factor, so ships now commonly "slow steam" to save fuel, cruising at 16 or 18 knots instead of 22. A typical trip from Poland to China takes 34 days.

Sends us back to the good old days of primitive industrialization. We're all going Chinese.

Which brings us to a statement of such opacity, that it is hard to believe
When the world economy slackens, so does the shipping industry. At one end of Mary's route, the growth engine of China has been losing steam, while at the other, Europe is again flirting with recession.

Ah, folks: the growth engine of China is shipping widgets to the US and EU. These are not separable events. Gad.

Bigger is better, in capital. But how to get bigger?
"In this down cycle, the new-built prices are low and money is cheap, so you would much rather go and buy the vessels than go and acquire a company" that has older ships, said Martin Dixon, director of research products at Drewry. "Many shipping lines are struggling to make money, so cost leadership is key to survival. Hence, you're seeing a lot of investment in bigger ships."

In the airline industry, 727s were sold off to regionals and such when more fuel efficient Boeings and Airbuses start coming into production. Turns out, there's not that situation in container shipping. But, at least, we have fiduciary capital turning into real capital, not sub-prime used car loans and beachfront condos. I think, that's better?

The engineering of Mary reminds me of that cruise to Bermuda in an ancient boat. Tin foil boats in a typhoon? Yikes!
The two men looked over the ship's side and spoke on walkie-talkies to sailors on the ground. Minutes passed -- 10, 20, 30. The Mary, crawling at 0.1 knots, began sidling up to a pier.

"Compared to the whole size and the weight of the ship, the steel plates in the side are actually pretty thin," the captain explained. "If we get a speed higher than that, we'll start buckling plates."

Next, second, and last a short piece on free trade. Regular reader may recall the many times these endeavors have talked about New Gold (the US buck), export driven (small) economies, the US trade deficit and how all of these factors have to exist in symbiotic rhythm for the whole house of cards to stay vertical. Well, another Left Wingnut offers up some musing. Just two quotes.

First a bit on how to ignore experience.
[in 1995], the W.T.O. adopted a rule obliging members to abide by rich nations' patent laws. (Never mind that Americans stole technologies from Europe throughout the 1800s.) These laws typically enabled investors in rich countries to reap substantial rewards, while poor nations like India were forced to pay the same price for patented drugs as the rich West, because they were not allowed to make generic substitutes.

But the consensus was flawed. Even free-trade advocates now admit that American wages have been reduced as a result of outsourcing, the erosion of manufacturing and an ever-increasing reliance on imports. Middle-income countries, meanwhile, have been blocked from adopting policies that might make them world-class competitors. Nations that have ignored the nostrums of the Washington Consensus -- China, India and Brazil -- have grown rapidly and raised their standards of living. Improvements in poverty and inequality occurred in Latin America only in the 2000s, after the I.M.F. and the World Bank reduced their grip on those nations.

Second, a simple re-statement the macros, micros, and quants can't ignore.
A third lesson is that models of growth that depend indefinitely on exports are not sustainable. The large imbalances in trade between China and the United States distort economies. The same is true of Germany's huge trade surpluses, which are based on a fixed euro and restrained domestic wages.

To the extent that capital seeks out slavery level subsistence wages, in the short term the micros and quants crow of their success, and excess compensation. In the medium term and longer, everybody loses. In due time, there'll be no one to buy the widgets. Not to mention, which these endeavors do on occasion, that exporting countries have a habit of moving their currencies, relative to the importers, in ways advantageous to themselves. The Golden Goose is the middle class consumer. China has about 1 billion folks. The country could have grown its domestic economy, but chose to "sell" its citizens to foreigners. India did likewise.

The thread? Well, trade, of course. And the permanent fact that, They Ain't No Such Thing As A Free Lunch.

01 October 2014

Birds of a Feather, And All That

Steven Davidoff Solomon makes a run at corporate boards in his piece on Darden Restaurants, today. He closes the piece with:
Absent a last-minute, face-saving compromise, the likelihood of a full-scale ouster raises the glaring question: Why would the board pointlessly and perhaps foolishly invite its own demise?

To recap, for those not wanting to read the piece: a couple of tutes decided to buy up stock as activist shareholders. These are Starboard Value and Barington Capital Group. Both are hedge funds. They determined that Darden Restaurants, and the management thereof, was being mismanaged. The CEO and board disagreed. Much mayhem has ensued.

As Adam Smith (the real one, and I suspect the fake one, too) is so famous for: each economic actor behaves with enlightened self interest, which gave rise to the term homo economicus. Of course, Smith was opposed, on the whole, to capitalists generally and concentration specifically. What is this self interest for a corporate board member? Well, evidently it is to be best buds with other CxOs. In the case of Darden, as of today, eleven of twelve directors are current or former CxO/director of some corporation. If you want to expand your scope of earnings as a director, it helps if you don't look behind the curtain of whatever boards you currently have. Be nice to your CEOs and fellow board members, and you'll find far more opportunities to be a board member. I think that's what's called a sinecure. One hand washes the other. Birds of a feather flock together.

This is not to say that hedgies have the best interest of Main Street or Ma and Pa Kettle foremost in mind, of course.

For the quant types, this all raises the core question: if macro effects are just the sum of all those micro effects, isn't the whole shebang the result of such (low grade) corruption, rather than some human-centric version of thermodynamics? It ain't what ya know, it's who ya know; ya know? Or, as one who's been there puts it:
Directors were not appointed to compensation committees on the basis of distinctive skills or interests. Rather, they tended to be directors who could be relied on by management to be both sympathetic to management's compensation requests, and non-confrontational.

To get on the compensation committee, of course, one need be on the board. Be nice to your CEOs, and they'll be nice to you when it's your moolah to be decided. Stingy comp committee members won't be around long, ya think? Ring around the Rosie.

So, to answer Solomon's question (that does have a nice ring to it, doesn't it?): what's one board when you've got a whole life of other boards to run, ahead of you? Hedgies, after all, are not viewed as white knights anywhere.

15 September 2014

Up The Down Staircase

I'm not a fan of David Stockman, to say the least. But recent punditry on the subject of interest rates, asset prices, and bubbles led me to the obvious question: is it true, as it appears, and in the data; that corporations (that is to say, their capital allocators) are executing share repurchases in excess? Which is to say, as I have said more than a few times, that the growth in share prices is the result of intrinsically lowered returns on real investment? Which is to say, further, that the Masters of the Universe CxO types simply aren't generating any return?

So, of course, I went wandering on the innterTubes asking for the value of corporate repurchases. Alas, a Stockman piece came up first. Ever more alas, since he uses the data to make his usual wrongheaded conclusion. He hasn't actually learned much since his defense of Voodoo Economics.
Self-evidently, the corporate form of business organization is designed such that some considerable portion of net earnings should be returned to their owners each year. But a 95% rate of distribution is a giant aberration. Were this outcome to occur on the undisturbed free market, for example, it would signal an economy that is dead in the water and that participating companies face a dearth of opportunities to reinvest profits in future growth.

And, of course, that's exactly what's been going on. As the science and engineering geeks figured out some time ago, we're in the post-discovery age, of marginal incrementalism (kind of like, very unique). With real interest earnable near zero, then share prices (and bond prices, to be clear) go up to meet this rate. Or, as Vinny in those mob movies used to say, "who's gonna give ya a better deal, huh?" Lots of Chinese and Germans and such thought that Florida and Costa del Sol real estate was a sure thing. Not.

Or, as another pundit put it:
Corporate CEOs, with their massive share-buyback programs are in effect investing in the stock market rather than in expanding business opportunities at their companies. Either they expect higher returns from the market, or lower returns in their business, or some combination of both. Given their questionable track record in timing the market, this may be a cause for concern.

It's one thing, although wholly foolhardy, to pay Goodell $44 million to "oversee" the behavior of his employers, since it's just football. Quite another for the Masters of the Universe to get paid such sums and not actually do anything.

05 September 2014

Alice In Wall Street

Financial engineers, despite their pronouncements of math/stat/coding wizardry, are really just some truffle pigs and cockroaches. The truffle pigs snuffle in the ground, generally around trees in deep parts of the forest, for the scent of the black truffle. A valuable fungus, that black truffle. Finding one, the handler has to quickly extract it from the maw of the pig. Turns out, unlike retrieving dogs, pigs like to eat their catch. Cockroaches insinuate themselves in the darkest parts of dwellings, seeking water and the occasional crumb. Few of the mainstream pundits have taken this bull by the horns. Today, Floyd Norris, reliably more aggressive then 99.44% of his brethren, lays out the story. Again, and with some rather wonderful quotes.

Not to mention: I've referenced Lewis Carroll more than once, generally repeating the phrase "... words mean what I say they mean...". Which isn't exactly the text.
Part of the regulatory challenge was laid out in 1871 by Lewis Carroll's "Through the Looking-Glass":

"When I use a word," Humpty Dumpty said in rather a scornful tone, "it means just what I choose it to mean -- neither more nor less."

"The question is," said Alice, "whether you can make words mean so many different things."

"The question is," said Humpty Dumpty, "which is to be master -- that's all."

Norris spends most of the column with the history of Lehman, and Repo 105.
Lehman taught us that there were plenty of tricks around to make balance sheets look better for one day and then revert to an undisclosed reality that was much worse.

One of the tricks was to adjust the weights of assets; as in weighted average. Of course, analogous to a Bayesian prior, the banker gets to make up the weights. And that's what Lehman (and the rest as well, of course) did.
It turned out Lehman was valuing some securities at 85 percent of face value while competitors thought they were worth 20 percent or less.

In general, the bankers do have a point: some assets are riskier than others. Home mortgages, for example, won't go rotten all at once all over the country. Will they? So the banker puts a lower risk weight when figuring the backing capital.
That made sense in theory -- some assets are clearly riskier than others and more likely to produce losses. So less capital was needed for low-risk assets, like loans to high-quality borrowers. Trusting regulators let the banks use their internal risk models to determine the weightings.

But, quoting Stanley Fischer, Fed vice chairman
"... any set of risk weights involves judgments, and human nature would rarely result in choices that made for higher risk weights."

But, here's the pig/cockroach bit:
Financial engineers invented securities that would count as equity for bank regulatory rules and balance sheets but looked like debt to the Internal Revenue Service. Unfortunately, when the pinch came, they turned out to be more like debt. Big banks are being forced to stop using such things.

Not satisfied with just putting a heavy thumb on the scales, they dispensed with the scale entirely and made up the numbers.

So, are financial engineers good for the commonweal, or only for themselves and their handlers?

As the song says, "Mama don't let your kids grow up to be banksters".