02 August 2015

A Question of Balance, Part the Second

Every now and again, the mainstream pundits catch up with these endeavors. Not often enough, evidently. The major theme has evolved to: when the process under discussion obeys God's Law then data reflects an unbiased reality, if one is careful collecting the data, and can predict the future; but when the process is some Human Endeavor, data means little to decision making while motive and incentive drive these decisions; humans will change the data generation process sub-rosa (to those not in on the scam). The Housing Bubble happened because that Giant Pool of Money (still with us and growing) demanded a high-return, low-risk instrument, so mortgage companies (thence, not first, banks) found cracks in law and regulation which made creation of yet more and larger mortgages a fact. The data, price/income ratio, said this was stupid, but the motive and incentive was to ignore contrary evidence. And so it was. The Giant Pool was happy. Until it wasn't, but the smart money had already exited, so it didn't care.

What's been going on with the Euro follows much the same pattern. Adam Davidson brings forth some new reporting, which is required reading. Once again, the smart money followed motive and incentive, rather than data. The smart money made a bundle, then left the 99% holding the bag.
There is definitive proof, for anyone willing to look, that Greece is not solely or even primarily responsible for its own financial crisis. The proof is not especially exciting: It is a single bond, with the identification code GR0133004177. But a consideration of this bond should end, permanently, any discussion of Greece's crisis as a moral failing on the part of the Greeks.

He goes on to provide a primer on how bonds are "sold", and it's important to understand this mechanism. The US Damn Gummint uses the same method. The interest paid on US bonds is not set by the Fed or Treasury, although perhaps by the Trilateral Commission (yes, it really exists, not merely a co-figment of left and right paranoia). Buyers of such instruments aren't also buying Savings Bonds. They're "sophisticated" investors, with lots of computers to decide what to pay.

So, Greece became a Euro country, and Germany had one more nation where it could export on a hard currency. And Germans won't stand for getting anything less than a full Euro; otherwise Europe with the Euro is just like Olde Europe where countries fiddle their currencies against predators like Germany. Can't have that. Exactly like our Red states with conscripted labor selling into Blue states, with (dwindling) middle class consumers. It will end just as badly, but with more bloodshed in all likelihood. As knuckleheads like Walker kill off his state's middle class, the Red states will find their Total Addressable Market shrink. And don't give me any crap about international exports. The bleating about the "strong dollar" killing profit increases in volume with each quarterly. And that's only the beginning. Just wait for countries explicitly devaluing. "The horror! The horror!"

Davidson brings up Bretton Woods, but you should do, at least, a Wiki journey to learn more if you can't do a five minute Toastmasters' on the topic.

Here's the punch line:
But the bailout broke this virtuous circle, signaling that the bond market would stay safe even when bond buyers were wildly reckless, pouring billions of dollars, for example, into risky subprime-mortgage bonds. The bailout represented a transfer of wealth from the rest of the economy into the bond market -- precisely the opposite of what is supposed to happen.

Ireland, earlier, sacrificed its citizens on the bank altar, so there's reason for Greek bondholders to demand the same.
The IMF said that as a result of the failure to impose losses on bank creditors, "many in Ireland question why Irish taxpayers should be the ones covering the cost of addressing such euro area-wide concerns. A bail-in or other solution that would have 'mutualised' these costs would likely have resulted in more equitable burden sharing."
Banks had extended credit heavily to property speculators during the latter stages of the Celtic Tiger economy, between about 2002 and 2006, but the sector collapsed when the global financial crisis hit in 2007 and 2008.

IOW, Ireland crashed, as did the USofA, on the backs of out of control banks. Somewhat different from Greece, certainly.

And, back to Greece.
The institutions that bought that €7 billion in Greek debt in 2009 made a very bad judgment. Even at the time, it was clearly a foolish gamble -- so foolish, in fact, that it can be explained in only one way. They believed that in the event of default, the Germans would bail the Greeks out. And just to be clear: This doesn't mean they believed that the Germans would be kind to the Greeks. It means they believed that the Germans would be kind to the people who owned Greek bonds, a significant percentage of whom were certain to be German themselves.

So, in the end, what mattered to those buying in on GR0133004177 was motive (high-return at little risk) and incentive (failure would be paid by others), not data. As it always is in the venue of human processes.

26 July 2015

Sacks, Shiller, Stiglitz

A pretty famous book, for the geek crowd at least, is "Godel, Escher, Bach". So, today brings an alliterative triad. Cool.

Once again, we enter the world of incentive and motive over data. Data's been taking rather a nastry beating here, of late. But, if one recalls how we got The Great Recession, it was the primacy of motive (financial services taking all the profits and sloughing the costs of house mortgages) and incentive (returns on financial instruments look greater than on physical investment) over data (the ratio of house price to median income going nuts) then it's not a stretch to keep an eye on those two balls in the air.

And not to forget: we're on the asymptote of knowledge of the physical world. Well, at least in terms of what modes of science research might yield consumable products. Tang isn't in the offing. Nor is Mr. Fusion, as some knuckleheads would have us believe.

So, let's start with Sacks. He didn't contact me first about the title, "My Periodic Table", but the allusion, that I've used more than once in relation to what remains unknown about the physical world, is eerie. He writes about his personal asymptote.
I almost certainly will not see my polonium (84th) birthday, nor would I want any polonium around, with its intense, murderous radioactivity. But then, at the other end of my table -- my periodic table -- I have a beautifully machined piece of beryllium (element 4) to remind me of my childhood, and of how long ago my soon-to-end life began.

Shiller discusses his standard topic, housing. Regrettably, he still ignores the elephant in the room: are the current rises, regionally, out of sync with median income in those regions? One would think that a deep thinker on housing, and how the Great Recession came to be, would put such data front and center. Rises in house prices in the presence of rising median income are not dangerous. Rises, without such matched income, are what fueled the Great Recession. It remains true that The Giant Pool of Money chases low capital (wholly financial, of course) instruments. ROI is the ratio of returns to money put up. Put up little money, and get a WhatsApp $19 billion. Why build real output, when you can have a fat bank account without actually creating anything substantial? Who will make carrots in the face of such instruments?

Shiller's article asserts that short selling is the panacea for bubbles. But he never demonstrates how or why the mechanism works. Too bad.
...in 1977 Edward M. Miller pointed out in The Journal of Finance something that should have been obvious: Efficient markets require the possibility of selling short. In the stock market, for example, with short-selling, people who think the market is overpriced and headed for a fall can borrow shares and sell the borrowed shares at the current high price. If share prices do indeed fall, they can buy the shares back at a lower price and repay the loan, with a profit.

How is this action, a micro-economic process, supposed to stop bubbles from occurring? He never really says. Too bad. Well, the theory is thus in a nutshell. In Mr. Market, short selling creates artificial shares in the market. Greater supply, therefore drives down the price. What Shiller doesn't discuss why house prices might be bid up in the first place. The run up to the Great Recession was fueled by mortgage companies (not banks, in the beginning) fiddling the rules in order to create mortgages far above what incomes had previously supported. That's just corruption, not smart money (or dumb money) doing a lemming run. The various derivatives, which created the demand for mortgages in the first place, were themselves created to absorb The Giant Pool of Money that wasn't interested in becoming physical investment. In other words, the last housing bubble was secondary effect of the demand for financial instruments by the Giant Pool of Money. The Giant Pool continues to grow, so we can expect that nervous money (that which doesn't want to wait for physical investment to prosper) will, yet again, demand more fiduciary instruments. Whether the new rules will prevent the shenanigans this time? Only the Shadow knows.

What is true,
The bottom line is that there is no reason to assume that the real estate market is even close to efficient. You may want to buy a house if you love it and can afford it. But remember that you cannot safely rely on "comparable sales" to judge that the price is fair. The market isn't efficient enough for that.

What Shiller ignores is that house buyers don't buy based on house price, but monthly payment. That nuance was what allowed Countrywide, and later others, to create mortgages with initial payments within budgets, but which exploded later. Why? Since the bubble began to inflate, mortgage brokers could say, "well, before your mortgage re-sets above your ability to pay, you'll sell off the house at a much higher price. You get to keep some of the capital gain, too boot." Until you couldn't any more. It's that simple.

The point of recent housing bubbles is the simple fact that such bubbles have occurred not because irrational middle-class yuppies get in over their heads, but because mortgage creators make mortgages for ever increasing values disconnected from incomes. If Congress had the gonads to codify a loan to income ratio, housing bubbles would disappear in an instant. But the financial services industry won't allow that.

Finally, Joe Stiglitz. He takes on Greece, yet again. What I'd forgotten: he's ridden in this rodeo before;
As I read the details, I had a sense of déjà vu. As chief economist of the World Bank in the late 1990s, I saw firsthand in East Asia the devastating effects of the programs imposed on the countries that had turned to the I.M.F. for help. This resulted not just from austerity but also from so-called structural reforms, where too often the I.M.F. was duped into imposing demands that favored one special interest relative to others.

So, what's the agenda? It's WWIII, but without the guns (so far). The Germans are determined to punish the little people, by keeping them in economic chains.
... the I.M.F.'s current managing director, Christine Lagarde, said that there needs to be what is euphemistically called "debt restructuring" -- that is, in one way or another, a write-off of a significant portion of the debt. The troika program is thus incoherent: The Germans say there is to be no debt write-off and that the I.M.F. must be part of the program. But the I.M.F. cannot participate in a program in which debt levels are unsustainable, and Greece's debts are unsustainable.

He provides a stark example of the mercantilism of the Germans
Consider the case of milk. Greeks enjoy their fresh milk, produced locally and delivered quickly. ... In 2014 the troika forced Greece to drop the label "fresh" on its truly fresh milk and extend allowable shelf life. Now it is demanding the removal of the five-day shelf-life rule for pasteurized milk altogether. Under these conditions, large-scale producers believe they can trounce Greece's small-scale producers.

Imagine the pettiness. Certainly, according to reports, the troika will protect the wealthy. You know, the ones who buy Mercedes and Audis.

24 July 2015

Pay Me Now and Pay Me Later

It bears repeating: given enough time and further concentration, even the 1% will need ObamaCare in order to afford decent health. In the course of musing on said subject, I coined (so far as I know) the phrase "the tyranny of average cost" to immortalize the issue. If a given widget, which has either high capital production cost, or high fixed capital cost (get it?), there result in two alternatives: shift widgets to as many users as possible, or gouge a tiny number of users. Either way covers the capital cost.

It also bears repeating: data is the result of motive and incentive, so in predicting the future one has the best chance by following the water downstream than by looking back at where it came from. And so it is.

Pharma has been under some pressure to justify the increasingly high price tag of recent drugs; many in oncology. Today's news brings some more facts to the discussion. Not everyone, including humble self, buys the notion that it takes billions of dollars of direct R&D to make a drug. But that has been the standard excuse from pharma.
The past R&D cost is really kind of a red herring," said Len Nichols, a health care economist at George Mason University, referring to research and development. "The current revenue doesn't pay for past R&D; it pays for current R&D."

It should be noted that GMU is the token right-wing seat of academe in the Capitol area. What's telling, and not mentioned, about the observation is that this is exactly the funding model used by Social Security. I guess it's premitted for big business, but not public business. (Aside: today also brings a piece on American socialism, as it actually exists; yes it does exist and you've read much of it here before.)

Another point ignored in the piece is Pharma's hard on for orphan drugs. FDA's acceptance of an ODD means that the company can pretty much charge whatever it wants pretty much forever. Here's a piece from a normally right-wing organ questioning orphan drugs.
Leonard Nimoy now rests in peace, dying of complications from Chronic Obstructive Pulmonary Disease, a condition he shared with 10 million other U.S. citizens. Too bad drug developers and investors haven't been busy pursuing drugs for debilitating conditions affecting millions of Americans, instead of pseudo-orphan drugs.

One of the benefits of procrastination (this missive was to be posted yesterday) is that new information can be included. And so it is. Today's news relates to specifics of Pharma, the HepC fiasco now ongoing. Two points that gain confirmation here.

First, a "cure" for HepC infection that's quick, easy, and painless just encourages drug shooters to keep shooting with dirty needles, as predicted in these musings. Many (most? all?) HepC patients are drug shooters. 1992 is the cutoff date for innocent infection, from transfusion.
Zach Wayman says he first contracted hepatitis C several years ago by sharing needles with other heroin addicts. He went into rehab and was successfully treated for the virus. But he relapsed into addiction and reinfected himself, testing positive for hepatitis C again this spring.

And, of course, HepC is centered in Red States, God's country, gun country, keep the Damn Gummint out of my life country. Of course, many (most? all?) of those getting HepC treatment are Medicaid folks. Poor folks. The 47%. And Right Wing, still.
In May, the Centers for Disease Control and Prevention reported a sharp increase in reported cases of hepatitis C among young adults in Kentucky, Tennessee, Virginia and West Virginia. While rates of acute hepatitis C, which is very costly to treat, have risen around the country, Kentucky's rate was more than seven times the national average.

Second, so, who pays? If one follows the money, those Blue State Damn Liberals, of course. Just as they send all kinds of other money to Red states.
The cost of the new hepatitis drugs is so high that state Medicaid programs and many private insurers say that even treating a fraction of the infected population is breaking the bank.

Medicaid, funded nationally in effect, picks up the cost. Not that the Right Wingnuts would ever admit it. Of course.

The real irony, for those who like it:
Karen Ruschman, a nurse practitioner at a private gastroenterology practice here, said many young adults with hepatitis C have not been able to quit heroin because treatment programs, especially those using Suboxone, a medication that suppresses opiate cravings, are expensive and hard to get into. Addicts typically "can buy heroin cheaper than they can get into a Suboxone clinic," Ms. Ruschman said.
[my emphasis]

Perhaps we should just pay the drug dealers to develop drugs?

17 July 2015

A Question of Balance

A few times over the course of the Euro Crisis, I've noted that, based on motive and incentive, Germany (and, to a lesser extent, France) were conducting a self-serving scam on the rest of Europe. I hadn't found specific data, but, since data is the results of actions and since actions are the results of motive and incentive; it had to be the case.

Turns out, this was an accurate thought experiment.
[source: ec.europa.eu/eurostat/statistics-explained]

There are a host of other tables and graphs for your amusement. In sum: Germany wins and everybody else loses. Germany wants to be paid for its (largely) high-end widgets in hard currency, without having to be counter-weighed by currency re-valuations. And they got their way. Now the issue is how much further Germany pushes its serfs.

13 July 2015

Everybody Into The Pool, Part the Second

Well, that didn't take long. The Chinese have been luring the retail sheep for a while, so now the US Mr.Market decided to fleece ever smaller sheep. The thing is, of course, that such a move would have benefited Joe Sixpack back when the market started its Superball rebound. Not so much at this point. Now, the only point is to lure in yet more funds to keep the beach ball inflated.

Vampire squid capitalism at its finest.

12 July 2015

I Still Hate Neil Irwin, Part the Second

Well, yes. But only because he's got the better platform. Green with envy. His take on China:
Repeat after me: The stock market is not the economy. And the economy is not the stock market.

While I certainly agree, no one else does. The DotBomb, Great Recession, and China Syndrome all flow from the same issue: the financial sector subverts both the economy and the regulators. Quants too lazy to dig ditches, but not smart enough to do real engineering. And they get to make their own rules. Yes, there are and must be regulators, otherwise you're left with "Lord of the Flies", played in real life by adults. Not a long term solution.

Since China has little to no social safety net (and Right Wingnuts insist this is a Communist country?), there's been a steady push to financialize. This in the prime manufacturing economy on the globe. And it can't absorb its domestic Giant Pool of Money???

Anyway, real estate has been the vehicle of earning return. But as we all know, don't we, that real estate returns are contingent upon mortgage holders' increasing *real* income. Without that, it's all smoke and mirrors. As it has been in China for at least a couple of decades.
But others in the long list of actions China has taken to try to shore up the market seem focused more on directly propping up the market itself and less on containing the consequences of the market sell-off. There was the June 29 decision for local government pensions to invest in stocks for the first time, a July 1 relaxation of securities trading fees, a July 2 relaxation of rules on margin trading to make it easier for people to make risky bets on stocks and a July 5 decision by a state-owned investment fund to buy more stocks.
[my emphasis]

If that sounds rather like Quantitative Easing, well, yes, yes it does. While Obambi and his clique might argue otherwise, the fact is that the moolah went to Mr. Market and by-passed Main Street and Ma and Pa Kettle. I guess what's sauce for the goose is less so for the gander; if there's an agenda at work.
No arm of the American government tried to prop up the stock market through outright purchases of stock during either the dot-com bubble crash or the 2008 financial crisis. (Perhaps capital injections into troubled banks in 2008 are an exception, though those interventions were targeted at propping up the banking system, not the stock market as a whole.)

GM and AIG might not see it that way. While not across-the-board buying, the agenda was the same.

11 July 2015

Everybody Into The Pool

Yet more news on the Giant Pool of Money front. China's stock market has imploded, which you likely have heard about. But the point is: this is yet more evidence of the segue from physical investment to fiduciary investment, and the perils thereof.

China, more than most (if not, all) countries has the infrastructure to absorb moolah and convert it to plant and equipment. After all, China's now the USofA's manufacturing belt. If not China, then who will make physical investment? China has oodles of moolah, yet Joe Snowpack was limited to real estate, until Beijing "told" them to buy stocks. And, boy did they. But not blue chips, but Blue Books. Gad.

Since the first draft of this missive, we've yet more news. What's interesting, IMHO, was that as I began reading, the bell called "wealth effect" rang in my lower brainstem. Imagine my shock and awe when later the report invoked same. An economics/business reporter who's got some chops!!!
Because China's wealthy suffered most of the stock market losses, sales of designer luxuries from Western European and American brands could slip. "It's concentrated among the wrong people for a lot of these Western companies," said Brian Buchwald, the co-founder and chief executive of Bomoda, a consumer research company in New York and Shanghai

I wonder when Angela will be taking meetings with MB? Greece is one thing, but such a large sink for high-end cars is quite another.
In 2014, German luxury carmakers and premium brands Porsche, Mercedes Benz, BMW, Audi and Volkswagen had record vehicle sales worldwide and in China. Once again, China contributed most to the growth in global car sales although the Chinese car market expanded slower in 2014 than in preceding years.

Just watch what happens to the renminbi/yuan if China's domestic economy goes into the weeds. I wonder whether Angela will convene with the ECB to punish Beijing??? ("But, but, but... you can't devalue the yuan!!!") I bet she wishes she could. Exporters are always, and I do mean always, hostage to their importers. Especially ones who control their currency. Now you see why the Euro was a Berlin (and a bit Franco-) scam? Angela seems deaf to that reality. First Greece, now this. Heavy is the head that wears the crown.