17 December 2014

Putin on the Schitz [update 2]

Incentive.
Incentive.
Incentive.

As always, when there's a disruption in the process which created the time series the quant relies on to forecast future values, ignore the time series and look to the changed incentive proposal.

By now all but the most self-absorbed Fox News watcher is aware that something is going on in resource extraction economies, both foreign and domestic. Yes?

The ruble seems to have steadied from its leap off the cliff, but the flight of moolah from Russia appears unabated, and so from Brazil as well.

Why might all this be? Of course, there's the simple finances of it: lower $$$/barrel of petro means lower $$$ for Vlad. Thus, the ruble drops relative to the Buck, and the Money Men decide that Vlad isn't the savior they told him he was. Not that Vlad actually put all that petro and gas in the ground with his own two hands, of course. Lower $$$ for Vlad means he has to call on his police state to keep the lid on. "How much gasoline for that bag of carrots?"
[update]
Here's a snippet from a CBS News report today
With the ruble hitting record lows, many Russians rushed to unload their shrinking bank accounts on high ticket items like refrigerators and dishwashers.
(Remember: trade is always barter, just that "modern" economies use currency as a kind of lube job.)
[end update]
You read similar here not too long ago. "His" interest rate gag won't work: domestic moolah is leaving by the boatload along with foreign. With the ruble now basically a worthless domestic currency, and Russia not nearly a self-sufficient domestic economy, Vlad could well go to war someplace. Stoke, once again, the vision of Greater Russia (USSR) for Real Russians. Stay tuned.

The fundamental problem for all extraction based economies is that, by the nature of the beast, they have to be fascist. And the reason for that is simple: the value lies in the ground, so control of the ground determines control of the resource, which means control of the moolah. That fascism may be direct, as in Russia where Vlad and his buddies "own" the petro, or it may be indirect, as in the USofA where pliant government moats "private" ownership. The USofA, you say? Beacon of democracy? Not so much in the resource states. The oil, coal, and farm states have been very Red since the Founding. The few that stole the land, not always knowing what resources lie within (beyond soil and timber and rocks), from the Natives wanted to keep the value unto themselves. Pliant local and state (and, on occasion, federal) governments saw to it.

While it does cost more to get the stuff out of the ground once the easy X% has been taken, the value of the stuff is determined by the use of the stuff in production. There is no value-add to extraction; I don't care what Vern Smith bloviates. In the case of petro, cracking towers turn raw petro into various different compounds, with attendant different uses. Value-add exists for that, certainly. If folks can't afford to use, or they need bags of carrots to eat, petro price drops.

So, what does this all mean Mr. Natural? It means that interest rates here in the USofA are about to tumble from their already painful (if you're a coupon clipper) lows. How can that be? All that Russian and Brazilian and such moolah is looking for a safe haven. That'd be us. All that USofA moolah that might have gone to resource extraction also needs to find another home. Treasuries are lookin' mighty good. Expect the next auction to dip even further (the 10 Year Note is 13 January; will be interesting here's a concise report). Supply and demand, Econ 101: mo money chasing diminishing number of chairs as the music plays on.

[update 2]
In a stunning analysis this week, Goldman Sachs found almost $1 trillion in investments in future oil projects at risk. They looked at 400 of the world's largest new oil and gas fields -- excluding U.S. shale -- and found projects representing $930 billion of future investment that are no longer profitable with Brent crude at $70. In the U.S., the shale-oil party isn't over yet, but zombies are beginning to crash it.

And, I'll bet most readers laughed out loud when I said that the next 10-year Note auction would be instructive??

15 December 2014

Ides of December Nudge

Another in the desultory reminders that you need to read this guy.

14 December 2014

Matter Over Mind

It's deep into sports season. NFL is winding down to the last few games, Heisman is today along with the Army-Navy game, NBA is at the ¼ mark. Johnny Manziel is described as a midget. Adrian Peterson doesn't get off Scott free for beating his kid. Baseball teams swap players at multiple tens of millions of moolah a pop; having had some for just a few months. All these obscenely paid walking meat sticks get that money in large part because taxpayers foot the bill for the venues in which they play. Said venues being the only real capital needed to field said teams; the other costs are the franchise fee levied by the other owners (one step removed for Ballmer, but it's the same thing) and the payments to the aforementioned walking meat sticks. Free market? The NFL, as organization, is arranged as a non-profit. That's the truth.

And I, not for the first time, wonder why it is that adolescent males (and, increasingly, females) are willing to spend many hours in the gym/weight room/track getting big muscles, but not a nanosecond in the lib to build a big brain. The odds of finding employment as an NBA player? Well there are 30 NBA teams of 12 (15 if you count inactives) players each. Discounting foreigners (which one could do in years past...) that yields, at best, 450 slots. On a population basis of 319 million, with about 80 million of basketball age, and a 50/50 split in sex for that age cohort, we end up with 40 million candidates. The odds: .001% of being a NBA player; and that assumes all positions are available all the time, which, of course, they're not. For a absurdly detailed analysis of the NBA, go here.

Yet, these walking meat sticks will spend mind numbing time making big muscles, fast muscles, and so forth. In basketball there is the age-old wheeze, "you can't coach height", which limits the odds still further. Not so much in football (unless you're a midget quarterback in an era of tall ones) and baseball. The fact remains: "working" toward a career (typically measured, on average, in single digit years across all of them) in professional sports is as probable, at best, as winning Lotto. This is one case, even if the arithmetic says so, that expected value may not be a rational driver of decision. One need only remember the issue with airplane travel: there's not much chance of a crash, but if you're in one, there's a majority probability of not living through a crash.
According to the 2014 ICAO safety report, the total number of plane accidents in 2013 was 90 world-wide. Only 9 of these accidents were fatal accidents, that is, accidents involving fatalities. The Global Fatal Accident Review of the Civil Aviation Authority gives a total number of 0.6 fatal accidents per one million flights for the ten-year period 2002 to 2011. When expressed as per million hours flown, this number is 0.4. The corresponding number of fatalities is 22.0 fatalities per one million flights or 12.7 when expressed as per million hours flown.
(Or, you can look here.)
Depends on which expected value is of most value to you. Same, it seems, with teen age males. They see a massive carrot (the obscene payment if you play), but ignore the even larger stick (the more massive likelihood you'll be flippin' burgers with those pretty muscles). Those who prefer to not fly in tin coffins are derided as delusional, yet young males who decide to devote themselves to becoming a professional athlete are "living the dream"???

It appears to be that the mind numbing activities of muscle building are preferred just because they dull the mind. After millennia since we crawled out of the muck, we'd rather regress to lower levels of consciousness. Drink and drugs do the same thing, too. Not that Mormons are all that likeable for their temperance. It's kind of sad. Gives the Right Wingnuts ever more fodder. One might also note the increasing prominence of ruralism in entertainment. Country songs, swamp people, gold diggers (not the floozies), huntin' and fishin' shows, farmsonly.com (city folk just don't get it, of course), and so forth. As if the "simpleminded life" were the better one. Trouble with thinking that way is that all those pointy headed -ologists (over a number of centuries of study) have figured something out: it's the density of cities that leads to progress. All those low intellect bush people in Africa and peasants in South America and Asia are proof of that, right? (OK, before regular reader gets her panties in a bunch, that's sarcasm!!) Yet, here we see purposeful regression to low achievement.

13 December 2014

Crazy Schizo Quants

OK, so back in 2012 the Right Wingnuts were blaming Obambi for hiking gasoline prices (and, by necessity, petro price). The lobbyer doesn't have a link to the advert, anymore, so here's the quote of note:
Since Obama became president, gas prices have nearly doubled. Tell Obama we can't afford his failing energy policies.

Today, Mr. Market, led by the same Right Wingnuts is going out of its mind over falling gasoline and petro prices: here (and, of course, nearly every news source).
U.S. benchmark crude scythed below $58 a barrel for the first time since May 2009 for a weekly loss of nearly 12 percent in the midst of a tumble whose severity and magnitude matched what happened during the 2008 financial crisis.

Makes one wonder who the USofA economy is run for? All of us?? Or hedge funds?

11 December 2014

Those Crazy Quants

Regular reader, by now, is aware that I take the view that quantitative analysis is for both fun and profit, but that it should be attempted somewhat gingerly when the venue is human behavior. We get to make the rules up as we go along, unlike the other animals, minerals, and vegetables which live by God's (or Nature's, depending on your -ism) rules. The rules don't change. We ain't Brownian motion, fur shur.

Well, I just found this post on r-bloggers.
The eBook reprints several unpublished articles and reports from the Econophysics Group at ETH Zurich.

"Econophysics"???!!! And all this time, I'd viewed the Europeans as, generally, more astute. Guess not.

09 December 2014

Widget Wonderland

Three semi-related posts went past my eyeballs today. The thread which hangs them together is the value of value. How do we figure it?

First, Blankenhorn takes on Amazon, among my favorite fubar companies. As is often the case, the comment stream is as significant as the post. The poster child for the "we lose money on each sale, but make up for it in volume" approach. Either Amazon attains monopoly, i.e. pricing, power over retailing or it goes belly up.

Second, one Peter Greulich (not familiar) takes on IBM. Here the issue is both the danger of goodwill and the structure of companies. How to value IP, services from IP, and goodwill (e.g. the sale of WhatsApp)? IBM has been shedding real capital and real production for many years. It wants to see the ROI of software driven services. The WhatsApp home run as paradigm for Big Companies, if you will. So do many corporations. Good luck.

Third, Rob Hyndman takes on Data Science. What is it? Who does it? Is it just stats with a new name? Is it just OR, with a new name? Is it more, in some sense, than just stats (Janert says so)? Likely.

Taken together, some musings on the value of value. Micros and quants invariably practice reductio ad absurdum (in the second sense, and on themselves) by looking only at the financials and ignoring the real world aspects. How else would they have blessed liar loans? If quants and micros took the "science" part of data science seriously, may haps we wouldn't go through Great Recessions? One of the comments on the Hyndman post is on that point.

If science viewed thought as property, we'd still be cavemen.

04 December 2014

Prometheus Unbound [update]

The mainstream pundits, and the blogosphere too, continue to be perplexed by the refusal of open market interest rates to rise as they had hoped/wished/needed. So, it falls to moi to yet again 'splain some more.

The notion of moolah as commodity rests on the base assumption of trade in real goods: that supply and demand are functionally infinite, and that the "curves" result from individuals' (and remember, corps are people too) levels of psychic satisfaction. To put it yet another way: real demand requires only that "I" want another widget and have the moolah to pay "more" for that widget. The only limit is my satiation with said widget. On the other side, supply, Widget Corp. is willing to make widgets until Hell freezes over if enough folks want them. Availability of production inputs are assumed to be infinite in the sense that a source of supply always exists, at some price.

Now, when it comes to investment, the situation gets a bit gnarly. The MBA types, and most quants, don't distinguish between fiduciary capital and real capital. Most, likely, don't even acknowledge that the latter even matters. But, of course, it does and explains what's going on now. Financial engineering isn't real engineering; not by a long shot.

If we view moolah as an investment commodity, then the gnarl sets in. On the supply side we have retained earnings by business and non-consumption by the rest. On the demand side we have business. What's the motivation by business to take fiduciary capital (moolah, to you and me) and turn it into physical capital? One thing only (in a rational world, of course): that the plant and equipment so made will yield more profit than by not doing so. Nothing else. Financial engineering, so beloved by Wall Street and The City, doesn't count.

Note, however, the difference in the demand function betwixt consumer demand and capital demand: the consumer just wants a better hard on, but the CxO demands that the capital produce returns **not otherwise attainable**. The CxO, if s/he's rational, isn't maximizing some satisfaction function, but some very specific engineering breakthrough. In order to get that return the CxO has to know, or have a high probability, that the new plant and equipment are better than what s/he's got now.

Said plant and equipment may be something entirely new, such as a Swiss screw machine around 1870, or it could be off-the-shelf items not yet adopted by a business. Either way, unless such plant and equipment actually exist, there is no demand for the fiduciary capital. It will just sit around as retained earnings or used to buy back shares or buy bling for the CxO class. Since the MBA and quant class remain stuck in a 19th century mindset (Right Wingnuts all), they can't see that the arc of technology and resource availability has turned, at best, flat. If one considers the widgets we use today, how many implement a semantic that didn't exist before say, WWII? I'll bet a nickel that the number is 0. Capital has spent the last few decades in ever decreasing incrementalism. Ponder that for a moment. Near zero interest has not a thing to do with Big Gummints, but an utter void in the heads of the CxO class to find new, and useful, ways to turn moolah into machines.

This is the base reason so much fiduciary capital has been thrown at non-productive uses such as residential real estate. The Masters of the World are intellectually adrift. And we, as a species, know just about all there is to know about physical reality. Hell, we've found the God Particle. Once you've reached the edge of the World, there's no frontier to explore.

[update]
Sometimes ya just shouldn'ta oughta got out of bed. Left the punchline in the briar patch. So, here it is.

Widget Corp. can go buy more land, labour, and physical capital if it has the moolah. What it can't buy is any new Law of Nature (or God, depending on your -ism) or the brains to find it. Those two either exist, or they don't. These days, the chances that there remain any of the former get nearer and nearer to 0 and thus the chances to buy the latter (I wonder, would paying Newton or Einstein more moolah made any difference?) do too.