Your Good Mother, Part the Third

Your Good Mother has just figured out another situation you should listen to. The Gallup folks are not happy about being fingered as Romney Borgs, so now they're crying wolf. If the "aggregators" manage to get elections (and, by extension, other polling efforts such as used in, say, advertising) right, does this mean that pollsters will be put out of business, until there's only one left? Could be. That's Gallup's assertion.

One one hand, Gallup is right: the cheap drives out the dear. On the other, in this case, aggregation does identify the perpetually wrong, who will in time fade into Chapter 7. There's nothing wrong with that, given the Social Darwinist imperative. If, over time, aggregation finds the perpetually correct, and that one pollster dominates, so what? It may be that many (not widely admitted) social goods exist in our economy. In other words, Adam Smith may be largely wrong in his point of view: much of commerce devolves to one (or a few) producers. And having one (or a few) producers, means socialism. Otherwise we get monopoly, and restricted access and concentration of power. Remember, Smith's archetype was straight pin manufacture.

Organizations that traditionally go to the expense and effort to conduct individual polls could, in theory, decide to put their efforts into aggregation and statistical analyses of other people's polls in the next election cycle and cut out their own polling. If many organizations make this seemingly rational decision, we could quickly be in a situation in which there are fewer and fewer polls left to aggregate and put into statistical models.

Welcome to the world of oligopoly. And here's the coup de grace:

The aggregators that came closest to Obama's overall winning margin were the ones that attempted to account for pollsters' house effects.

In other words, making reasoned decisions on bias does the best job of removing bias. Imagine that: brains beat data. Read through the piece. Once again, lemmings end up killing each other.

First Thing We Do, Kill the Taxman

As Regular Reader should remember, I've been fascinated with Bermuda since my visit there a few years ago. Especially considering that I wasn't all that keen on going there, and that the boat ran through the remnants of hurricanes in both directions. The islands (plural when I was growing up and learning 4th grade geography) are quite pleasant.

What makes Bermuda fascinating to a Keynesian, is that it is a micro-USofA. It's economy, which was once based on its inherent competitive advantage, tourism, has in the last couple of decades, been morphed into a mid-ocean Switzerland. Or so they say. In reality, it's just a tax evasion haven for insurance companies. The island is about 20 square miles, and has about 64,000 residents, about one-third of the workforce are imported managers and such for the International Business sector (IB). At the country level, it's nearly the densest on the planet. It has no fresh water reserves, and little arable land. It has no fuel source, other than wind or ocean; neither of which is exploited to any meaningful degree.

Last week was elections, and the black oriented PLP lost to the white/IB oriented OBA. The PLP had controlled parliament since 1998, its first time winning control.

I follow Bermuda through the Royal Gazette, allegedly the least right-wing paper published on the island. Just a week after the election, they published an essay by a Canadian, who's been writing occasional pieces at least as long as I've been reading the paper. He's an apologist for the IB faction; not surprising, I suppose. He calls for regressive taxation as the cure to Bermuda's economic ills.

Why this fascinates me is straightforward: Bermuda is the apotheosis of "service economy". There may be evidence that the 99% of Bermuda are better off with the rise of IB over tourism, but I've not seen it. Given the limit size of the island, those holding dormant residential and commercial property would benefit from a return to more IB presence. Bermuda is a petri dish of social Darwinist experimentation. It also demonstrates that an economy based mostly/solely on currency is inherently unstable. The open question, to me and possibly less so to Bermudians, is whether today's Bermudian 99% would be better off had the country stayed the tourism course, rather than verging off to tax evasion land. It's worth noting that this transformation happened under the previous white/IB oriented party, United Bermuda Party (UPB). As impossible as it sounds, universal suffrage didn't obtain until 1968; previously, one had to be a male landowner, and when that proved to be insufficient (as non-whites acquired land rights), a landowner could vote in as many parishes (voting district) as one held land. 1968!!!

So, a petri dish. Assuming that the tax change occurs, and there's every reason to conclude that it will, the results matter. The transparency matters, too. Right wing governments tend to avoid data, in favour of propaganda. Will the 99% really find themselves better off, if the 1% pay less tax? Or will the situation merely turn Laffable? Enquiring minds want to know!

A Massachusetts Yankee in King Arthur's Court

Who to blame for the continuing mess we're in? How far back down (or up, depending on one's point of view) the breadcrumb trail do we go to say, "this is where it all started?" Or, how did Jason manage to find Nicky in crowded, serpentine Tangier streets when she, somehow, tore apart a cellphone with her bare hands, but dropped the fragments in the first few steps she took? Hmmm?

How far back should we look?

Could be the Israelis: the U.S.'s fawning support while they took over yet more territory from 1967 to 1972 pissed off the rest of the Middle East, until ...

Could be the other Middle Easterns (OPEC): because of the U.S./Israeli hegemony, they embargoed oil in 1973; sending the global economy into a fundamental shift with Bretton-Woods kicked to the curb and U.S. economic power with it.

Could be the Iranians (they're not Arabs): the embassy hostage taking led to ...

Could be Jimmy Carter: his handling of the embargo and the Iranians was (viewed) as inept enough to get him tossed out, which led to ...

Could be Ronnie Reagan, that dementia riddled half-wit: his (alleged) back-channel communication with Tehran led to the hostages being held through the election and thus his winning, and to his Voodoo Economics, starting with dismantling of PATCO; the blue-collar Reagan Democrats have still not figured out that Ronnie and His Friends had them as Prime Target.

Could be Arthur Laffer: creator of supply side economics (latter day tabernacle scripture) and the Laffer Curve, which was "proof" that Trickle Down Really Works if only we give the rich yet more moolah; they'll give back even more (yeah, right).

Could be Bush I: who continued Ronnie's assault on the non-financial middle class.

Could be Gramm, Leach, and Bliley: whose eponymous legislation killed off the last vestige of Glass-Steagell.

Could be Clinton: for signing Gramm-Leach-Bliley.

Could be Bush II: who shifted income and wealth dramatically to the 1% through tax policy (and other more subtle ways), thus killing off consumer demand.

Could be Alan Greenspan: who, being a goldbug at heart, would not countenance fiscal policy, thus instituted the continuing flood of moolah to banks and cratered interest rates which forced financial investments into equities in a mad rush for capital gain.

Could be Countrywide: that created the various non-conventional mortgages which could be securitized so that ...

Could be the Banksters: who were in need of "risk free" vehicles, since Treasuries had been put in the tank by Greenspan, packaged up those McMansion loans to McDonald's hamburger flippers as alternative to said Treasuries.

Could be private mortgage insurers: who wanted to reap high profit from "insuring" all those McMansion loans demanded more and more of them, which would never fail en masse, now would they?

Could be Fannie and Freddie: who saw market share erode to private insurers, and thus took on those McMansion loan packages in a big way.

Could be Bernanke: for continuing in Greenspan's footsteps, with trickle down monetary policy.

Could be Obama: for not having the gonads to tell the truth, it's demand that's collapsed, and no matter how large the flood of moolah to capitalists (certainly not the fiduciary sectors), they haven't, and won't, create more product (and hire bodies to make it) than they are now; you can't push a string.

So, this all brings us to Adam Davidson. While of NPR and the NY Times, where I see a short piece from him (nearly?) every Sunday in the Magazine, these musings of his have always sounded rather right wing-y. Not Boehner loony, but not progressive either. Today's essay is rather longer than usual, and given that it's an object lesson in many concerns of this endeavor, I offer quotes and discussion. For those that don't read the piece now, it's the tale of Adam Posen, an economist from Brookline, MA who was appointed to the Brits' equivalent of the Fed, and the fun and frolic which ensued. Yes, such an appointment hadn't been made before. I'd wager it won't happen again.

So, here we go.

Economics often appears to be an exercise in number-crunching, but it actually resembles storytelling more than mathematics. Before the members of the Monetary Policy Committee gather for their monthly meeting, they sit through a presentation from the Bank of England's economic staff.

Of course, it isn't; economics, especially as exercised by sovereigns, is about setting policy to reward one's allies and punish one's enemies. Until Samuelson wrote his first book, economics was still mostly Political Economics, which is to say an exercise in persuasive textualizing. This is not to say that more esoteric math and stats hadn't been used before Samuelson, but afterwards increasingly disconnected from reality math and stat presentation became the justification for all sorts of silliness. See: Laffer.

Economists on the right counter that paying off debt will actually inspire more confidence and prompt employers to hire.

This is a more technical (only a little) way to state Krugman's epithet: the Confidence Fairy is just waiting for a sign of subservience, and thence will wave her magic wand and make everybody so much better off. Poppycock, nevertheless. Throwing more moolah at those who have more than they can do anything with already? How many Twinkies can you stuff in your maw at once, anyway? Or hotdogs on Coney Island on July 4th.

Throughout the economy, people had to shift from highly profitable fields, like finance and real estate, into much less lucrative ones.

Here is where Davidson starts to drink the Kool-Aid, or perhaps Posen. This silliness that finance and real estate are, by definition, the most profitable sectors of an economy is a sure sign of disconnect. Think about it this way: of the occupations in the Service Economy, how many recently defined ones represent consumer purchases? Not damn many. Doctoring, lawyering, whoring have been around for millennia. Financial engineering? Not so much, and it's an overhead cost of producing something else, which may or may not be a consumer product. All those Wall Street folks? They were/are engaged in zero-sum gaming of financial instrument prices. Such activity is non-productive; it just sucks some percentage of the funds flowing from savers to borrowers.

Because politicians tend to think only as far ahead as the next election, central bankers are supposed to protect the long-term value of a nation's currency and, therefore, the stability of its economy. The modern-day hero of central banking is Paul Volcker who, as the chairman of the Federal Reserve, fearlessly raised interest rates high enough to stop inflation even if that meant hurtling the United States into a recession and arguably costing the man who appointed him, President Jimmy Carter, his job.

Worshipping at the feet of Volker has always impressed me as sycophants with a lower brain stem hard-on. The inflation was caused by the curtailed supply of oil, due to Israel-U.S.-OPEC shadow dance. It was a truly cowardly approach.

Posen quickly recognized that the data looked remarkably familiar. "I had this aha moment," he told me. Japan was not going through a unique and inevitable economic slowdown, Posen realized. The country was experiencing something that looked a lot like the Great Depression.

Bernanke has had the same moment, but he hasn't had the gonads to tell the truth. Then again, he can't just have his say and then toddle off to run some right wing-y consulting firm. He's scheduled to become head honcho in January.

Bridging that gap between the depressed economy and its potential required that the central bank create a lot more money and get it out into the economy.

This is the correct analysis. The problem is that the Greenspan/Bernanke method doesn't actually "get it out into the economy", but rather into the hands of banksters and stock traders. Trickle down, in other words. Needless to say, Cameron and his friends didn't take kindly to the analysis.

Then Posen's defense became more technical. He said the problem wasn't a sudden collapse in the capacity of workers and factories. The problem, more simply, was that there wasn't enough demand to support full production.

Again, he's gotten the correct diagnosis. But there is a problem, one that has been discussed before in the posts which constitute this endeavor. When in a recession/depression, there are two ways to get out. One is to re-employ folks back into the work they were doing before the crash. The other is to transform the economy to employ idle workforce in different, less toxic, endeavors. Obama/Bernanke haven't, so far as I can find, addressed this problem in public. To the extent they have, they've said things like, "the housing sector is key to recovery", and the like. WWII got us out of the Great Depression because the government demand for war materiel employed idle industrial capacity, and its labor force, in a simple minded way. The difference between making Model A's and tanks wasn't a large difficulty.

Today, with the de-industrialization performed by American capital, we've become dependent on ever more non-productive occupations; financial services is merely the most obvious. To put it another way: an economy which hasn't the idle capacity in goods bought by consumers won't return to full employment. It can't. Even if Obama dumped dollars in every household, they would spend it on Chinese made goods. There would be little increased demand for financial engineers and the like. The only answer is to transform the economy to a more self-sufficient structure and level income distribution. The .1%-ers, who can't wait for supreme deflation, won't permit it.

A series of 19th-century banking crises in England and the United States inspired policy makers to create the modern central bank. Then came the Great Depression, a period of economic misery that existing ideas could not explain.

An interesting factoid, in that the Austrians keep braying that only specie based banking, without government intervention, is Nirvana. They've clearly never read any economic history.

Earlier this year, in a remarkable joint statement, the I.M.F., along with the World Bank, World Trade Organization and eight other major economic institutions, warned that austerity was hurting global growth and raising unemployment.

Mervyn King hasn't entirely disowned his earlier pro-austerity views, but he is no longer the policy's enthusiastic booster.

The plan to shrink the size of government did not generate a sudden surge of private-sector confidence and investment.

None of this should be surprising, sort of. The I.M.F. has been blamed for all manner of 99% hardships over the years, in its dealings with countries that got themselves into trouble. It typically takes a Volker-esque tack of punishing the lower class while holding harmless the wealthy.

In sum, if one wishes to re-gain full employment, one must re-gain full demand. In order to do that, one has to decide whether to re-inflate the Zeppelin which incinerated us, or set out to build a more stable, consumer goods oriented, economy. One way will work over the long term. The other will fail soon enough.

It's the QE, Stupid

Spend some time following R-bloggers, and each day, on average, is another posting detailing how to get rich with yet another "trading" algorithm/strategy. Never mind that Galbraith got it right decades ago: "Financial genius is a rising stock market". Today brings yet more evidence that he's right.

What's disappointing with today's piece: it ignores the true motivator for the inflation of the stock market, Greenspan's (now, Bernanke's) flood of moolah to stock trading firms. Free money makes pushing stocks to new highs essentially risk free behavior. And simply explains (Occam's Razor, and all that) the data. A couple of quotes are kind of fun though.

Their conclusion was that none of these factors -- which investors often cite when explaining their moves -- come remotely close to forecasting accurately how stocks will perform in the coming year. "One-year forecasts of the market are practically meaningless," Mr. Aliaga-Díaz says.

Yet, posting after posting explain how to predict tomorrow's prices using very short-term data. My, my.

...despite all the storm clouds hanging over this economy, professional investors appear willing to look past the poor data. In fact, money managers say they are more bullish about domestic blue-chip stocks than about stocks in emerging markets or the rest of the developed world, according to a recent survey by Russell Investments.

They're not looking past poor data. They're looking past the near-zero opportunity cost of "safe" (e.g. Treasuries) placements. They have to participate in the Wall Street Ponzi scheme, if they want to "earn" their beloved bonuses. Their are myriad more (perhaps) unintended consequences of Greenspan's stupidity. This was Greenspan's ploy, and Bernanke follows suit. Greenspan did this out of monetarist's zeal; Bernanke because the Right Wingnuts have emasculated fiscal policy leaving him no other option.

Your Good Mother, Part the Third

To bend an old adage, "Apples to Apples, dust to dust". The share continues to fall, with nearly as many explanations as there are stock pundits. So, here's mine.

As the quote from Eccles says, consumers are the endpoint (to use a clinical trials metaphor). The problem for capitalists is, they want to kill labor (the Foxconn guy is on the march to replace all his workers with robots). If only one does that, then he makes a killing, at least in the short term. If they all do it, well then there's no one to buy their tchotchkes.

Apple's MO has been to supply high price, low-ish volume widgets; leaving the rest to produce "commodity" level widgets in high volume. As some of the pundits have now begun to figure out, most of Apple's differentiators have been style, not substance; Apple buys parts from the same suppliers as everybody else. It's all COTS. The move to the A6 cpu is only a minor diversion, and doesn't represent innovation on Apple's part.

So, what's not to like? Two things: not just the pundits, but also the consumer has figured out that Apple parts aren't all that better, and that with the shrinking of the middle class, Apple (with the aid of the rest of the Rand-ian fringe) has killed off its customers. Does one really need to spend $2,000/year on a phone, no matter that it supplies other modes of distraction? One also needs to keep in mind that Apple didn't innovate new product genres, only waited for the first movers to stumble, then built a differentiable alternative. Rectangles with rounded corners isn't really an innovation.

Dee Feat is in Dee Flation, Part 24

Well, the Consumer Price Index is out, and it's -.3%. That's right campers, the Koch Brothers are dancing in the streets. They gots themselves DEEflation. They must be so happy. Last PPI was -.2%. Keep this up, and they'll be making real money, for doing less than nothing with their moolah. Such a Country!

Just Tap the Brakes

And now, a trip down the educational memory lane. For those who don't or won't remember their "Physics for English Majors" class, how does it happen that multi-ton vehicles manage to brake to a stop with brake lines with an inside diameter of a pencil lead??? Give up?

It turns out that some fluids, particularly liquids, are incompressible. So, consider a pressure vessel one foot cube. On one side, put a 1 inch hole, and attach a pipe with a piston pushing in. On the opposite side, put a 4 inch hole, also with a piston, but connected to a pressure gauge. Now, push on the 1 inch piston with the force of 10 psi (pounds per square inch). What's the pressure on the 4 inch piston on the other side of the vessel? One might expect it to be proportionately lower, which with proper arithmetic could be calculated exactly. Yes? Well, no.

Turns out, this is true in the financial services game, too. Recall that the Banksters got their little slaps on the wrist for nearly cratering the Western economies for good and all. They were forced by circumstance to cease raking in enormous profits from flaky housing deals, and to pay a bit of restitution. The media was all abuzz on how the great had been brought low.

Ah, but the Little Piston That Could went to work. Within months, we saw these same Banksters pushing on all those small accounts with new fees and restrictions. Living high on the hog under Dubya's hegemony wasn't going to be relinquished. If the little people didn't pay by taking on stupid mortgages, they'd pay someway. Push. Push. Push.

Today's news is chock-a-block with the problem that won't go away: the Banksters continue to demand high on the hog profits, and socialized losses. HSBC has gotten a pass. Surprise, surprise.

State and federal authorities decided against indicting HSBC in a money-laundering case over concerns that criminal charges could jeopardize one of the world's largest banks and ultimately destabilize the global financial system.

Yet another case of being not only too big to fail, but too corrupt to convict. The piece isn't quite that explicit, but rather close.

Then, in the Business section, we find the Brits and US attempting to work out a method of punishing the next bunch of mortgage fiddlers (or whatever the scam ends up being).

In essence, they aim to take control of the sick bank and keep it operating while inflicting losses on its shareholders and, if necessary, its creditors.

Well, that didn't happen last time, to any meaningful extent (if you weren't of Lehman, that is). Lots of high priced jobs were lost in the City, of course. But most of those were mid-ish level quant related, not the Corner Suite Set.

Fearing financial instability, officials may balk at doing anything to harm the interests of creditors and opt for some form of bailout instead.

I recall it was Krugman (at least) who said something like, "When I die, I want to come back as a bondholder". Simon Johnson, of MIT and a thorn in the side of both Banksters and the regulators:

"The big problems we've seen are almost always systemic. So, does it solve the core of the too-big-too-fail problem? No."

Stay tuned. With QE4 set to stuff yet more money into the maws of the vampire squid...

Green Grow the Rushes

There's been a bit of angst on display through R-bloggers. First one Matt Asher showed his simple analysis, "disproving" global warming. Lots of comments, mostly disagreeing.

Then, Ian posted an explicit rebuttal. More comments, generally agreeing with Ian.

I confess, I commented a bit. I just returned from looking at the comment streams, still ongoing, and just have to share a bit of one of them (from one dhogaza, no link):

CO2 forcing is real. If you think you can disprove this basic physical fact with statistical analysis, I invite you to stare into the business end of a CO2 laser, hit the "on" switch, and report back afterwards ...

Ouch!

This all is relevant, beyond peeing on the global warming folks, due to the quants' penchant for ignoring physical reality, and assuming they can simulate a truer reality (they don't always say it so bluntly, but that's what they mean). These quants crashed the global economy be the simplistic assumption that the data describing the US housing markets for a short period of time would be true for all time going forward. They ignored the historic record of the ratio of house price to median income. They ignored the divergence of this metric as it happened. They ignored the process (fiddling by mortgage companies, and thence in competitive response, banks) which propelled the divergence. Their Monte Carlo models told them they were right. Sure.

Ignorance is bliss. If you've scarfed up all the money already.

Parrothead

Well, Warren's gone and done it (again?): admitted that rich folks don't really work. He doesn't say that verbatim, of course. That would be too damning, even for him. But what he says amounts to the same thing. If you've so much moolah that all you do is gamble it on stocks (and likely have no marketable skills, to boot), how much you get taxed is irrelevant. Put another way: if you've so much moolah that 5% or 10% gross returns is more than a $1,000,000, what's your options? Can you earn wages that exceed $1,000,000 instead? Not likely. What can you do? How's your three point shot? Can you sing rock and roll? Invent the next Pet Rock? Again, not likely.

Economists refer to the rich man's situation as opportunity cost: what's the alternative use of the moolah, and the alternative venue for your skills (again, if any)? For the Buffett sized rich, deflation is the least risky alternative. Implicitly, that's what they're (although, apparently, not Warren) angling for. Talk of inflation and fiscal responsibility and fiscal cliff and such are just stalking horses for a Real Depression. That way, their stockpiles in the trillions of dollars gain value without even putting them to any "use". The Goldfinger Model of Economics. Hey, that's trademarked by me.

So let's forget about the rich and ultrarich going on strike and stuffing their ample funds under their mattresses if -- gasp -- capital gains rates and ordinary income rates are increased. The ultrarich, including me, will forever pursue investment opportunities.

Here's where Warren, in my not necessarily humble opinion, goes all Pollyanna. I do believe that his brethren would rather stuff mattresses whilst depression spreads around the globe. He ignores the passive/aggressive alternative. We'll see.

Shared What?!

It can't be any fun to be an actuary any more. I read up the first exams' study guide years ago, but decided not to do the tests. McElhone's mantras, "the world is not linear" and "you don't estimate beyond the data", kept ringing in my ears. These days, when we get a once in a century event every couple of years? At the subatomic level, the universe is probabilistic. At the macro level, not so much; causes have effects, if only we pay attention.

There's a wealth of material to ponder in today's NYT "Sunday Review" and "Sunday Business"; I'll limit my musing to a piece on home insurance. The authors are from the Wharton School, and thus should have face validity. Not so much.

Here's where they go off the rails, so far as I'm concerned (a frequent theme here): they ignore community. Their theme is essentially this, household insurance in places of known higher risk should *alone bear the burden*. When I took the course in grad school, the title was "Risk and Insurance", and was conducted from the economics department, not the B school. The point of the course was to study the implementation of shared risk. The MBA crowd is solely concerned (modulo the occasional and optional Business Ethics course) with profit. That makes a difference.

First, premiums should reflect risk. This makes transparent the magnitude of the hazards one faces and could limit new construction in high-risk areas. Residents would be encouraged to reduce risk by getting discounts for, say, elevating a house or strengthening the roof.

This sounds fair, on its face. But there is a problem: if insurance companies (or public providers, for that matter) are allowed to exercise market segmentation at will, the process is no longer insurance, but prepaid consumption. The result of unfettered segmentation is to shift all of the cost (and source of profit) for any risk solely to those who are subject to that risk. Recall the recent "Your Good Mother" essay? The rich get richer and the poor whither. Insurance, from the point of view of economics, is all about shared risk, not individual risk. Individual risk is just prepaid consumption.

The justification for this predatory behavior is stated:

Those who live in nonrisky areas are subsidizing the choices of others. Take residential flood insurance. Most insurers refuse to cover the risk, so the National Flood Insurance Program, run by the Federal Emergency Management Agency, was established in 1968 with subsidized rates for those then living in flood-prone areas.

This approach is little different from allowing health insurance companies to ding subscribers with pre-existing conditions. If you live on the Atlantic beaches, you're far more likely to get hit by a hurricane. But those in Fly Over Land are far more likely to get hammered by baseball sized hail storms and tornadoes. Neither group can, just to avoid the condition, simply move to Safe Land.

The authors bury the point in an otherwise benign paragraph:

... the need to provide shareholders with an attractive return.

But shared risk is socialistic, or tribal, or communal. We all have some sort of risk associated with where we live. We can't just load up the SUV and head out for Safe Land.

How, then, to persuade folks from building in risky places? Is there sufficient acreage for a burgeoning population to live only where natural (and man made) disaster is less than average? Well, of course not. The arithmetic can't work. If all the folks in hurricane land and tornado land and earthquake land moved to Safe Land, the price of housing in Safe Land (wherever that may be, and likely in my neighborhood, as it happens) goes through the roof, so to speak. Not to mention the cratering of wages, with the influx of those needing employment. Back in the 18th and 19th centuries, there was more than enough room for the population, mostly subsistence farmers. We have since industrialized, urbanized, de-industrialized, and urbanized some more. The USofA population has more than doubled since WWII, those halcyon days of 90% maximum marginal tax rates. I suppose we could engage in the sort of back to the land re-education that Mao imposed. Doing so would certainly mitigate the risks of these Gray Swan events. And mitigate the rent seeking behavior of insurance companies.

Pulling up stakes and moving house (as the Brits put it) used to be just a matter of loading one's few possessions into a conestoga wagon and heading for Indian Territory to steal a few acres. Those days are long gone, and acting as if such action is the solution to any current problem is just plain evil.

We do need to make it more expensive to live in known dangerous places. But just as we have, nominally, a progressive tax paradigm, we should have a progressive insurance risk penalty. Those with McMansions on the beach should subsidize those living in shotgun shacks, not the other way round. Those who've been living in some risky place for some number of years, say 20, don't get dinged so much, but those who've entered recently (or in the future) when the risks have been clearly documented pay more. Local zoning and building codes are the major lever to pull to make building in vulnerable areas more, even wildly so, expensive. I don't know about you, but I don't see the commissioners of Miami Beach voluntarily curbing the building push. It was housing in Florida which was the epicenter of The Great Recession. Since increasing housing activity is viewed, even by Lefties who should know better, as the solution to The Great Recession, what to do? I highly recommend Carl Hiaasen's thinly veiled novels on the evil of development. "The trailers imploded, exploded, popped off the tie-downs and took off like fucking aluminum ducks." That's from "Stormy Weather", written in the aftermath of hurricane Andrew. You must read it, if you haven't.

It can be argued, of course, that wind insurance and flood insurance are sops to the slothful. That's the authors' point. Too simplistic by half.

Your Good Mother, Part The Second

Along similar motivation of the Dee Feat series, herewith the second (for the sake of settling on a number) in our Good Mother series. This report in today's news reminded me of this other device, reported on by "60 Minutes" among others.

So, as Your Good Mother constantly reminds you: "what would the world be like if everybody behaved like you?" (She isn't necessarily literate enough with to know which preposition to use!) Once again, particularly from the Hawaii story, it's quite possible to bring overall degradation to an economy (and its society) by going all in on Rand.

At what point is the individual, especially acting in consort with some number of others, obliged to temper actions based on externalities? For those who worship at the feet of Adam Smith (the real one), the question is a bit more piquant, since his most famous text assumes that there are no externalities! Quants, working as they almost always do, for individual actors (in the context of some market, not humans) are described by micro-economic arguments. Again, externalities are assumed away. Not a good, or honest, thing to do. One might strongly argue that The Great Recession came about just because the quants (at the behest of The Suits) took explicit advantage of the fact that their companies would be protected from meeting the demands of the externalities of what they did. The micro point of view, of course, denies culpability for externalities: "those on the other side of the transaction are obligated to caveat emptor". Again, if everybody does "it", there's no way to mitigate the externalities except by taxing the community at large. And the bad actors get to keep their gains.

Another example, charter schools. Evidence is piling up that charter/private schools, particularly those catering to "inner city" students, don't do any better at educating, overall, than the public schools from which they rob moolah. As with spontaneous cancer remissions (every type has some, small, number of long term survivors), a few success stories of individual students can be cited. I'm always reminded of my local nutball, Linda McMahon, who propounded that, since "she" (actually, her equally nutball hubby) had become a millionaire, everybody else could, too. What such folks neatly elide: if everyone were a millionaire, a loaf of bread would cost everybody $10,000 (give or take a few thousand). Just because one can cite a single success from some policy, doesn't make the policy intelligent for the community. Not that the Rand-ians care about the community.

In all three cases, we have the problem of: divide and conquer (the Big Uns surreptitious way to win), where only those who can afford the individualized alternative get the good/service. The earliest example, in recent history, was White Flight in the 1960s. Suburban communities morphed into wealth by denying the common good; one might even see this as the continuation of Manifest Destiny (a stretch, but not by much). Many Christian schools are rooted in such communities; they don't get the irony, of course.

Now, I'm not a fan of The Power Grid, and never was. The first great blackout happened when I was a child, and I lived in it. To my surprise, the wiki piece does mention the point germane to this missive: Holyoke, an abutting town, had its own standalone powerplant (you can see it from Route 5 or I-91) and got along just fine. The justification for The Grid is load/demand balancing across time/space. I'm not sure of the physics, but transmission loss is not insignificant (the Bloom Energy piece states that avoiding said loss is a meaningful part the advantage). So far as Your Good Mother is concerned: what should be the unit of community where externalities exist? For power, it would seem to be the community (city/town). Holyoke wasn't, and isn't, like the Hamptons with hordes of upper-middle class folks fleeing the hoi polloi. Mostly hoi polloi, in fact.

One could even extend a power grid analysis to the au courant meme: The Cloud. I'll leave that as an exercise to The Reader.

Inbreeding Isn't a Strength

Well, the story is starting to emerge. Here's a version from The Atlantic. Toward the end of the piece we get this:

"A lot of the software is kind of late. It's looking ugly and I go out on this Field call," Kunesh remembered. "And people are like, 'Man, we should fire your bosses man... We gotta get the guys from the DNC. They don't know what the hell you're doing.' I'm sitting there going, 'I'm gonna get another margarita.'"

The problem: it was the DNC guys who screwed the pooch in 2010, and did little to stop the tsunami in state legislatures then or this year. We now have Yankees and Johnny Rebs, in spades. It's just now Coasts versus Crew Cuts. The lackadaisical DNC gave us this. I met with those DNC guys. They let 2010 happen. They aren't the ones to follow.

And then they provided a separate way for the Analytics people, who had very specific needs, to get the data in a different form.

Of course, if they'd used Postgres and PL/R, they'd have had it all together.

Recall from Triage, the observation that getting the response data would be the most costly (and time consuming)?

With Davidsen's help, the Analytics team built a tool they called The Optimizer, which allowed the campaign to buy eyeballs on television more cheaply. They took set-top box (that is to say, your cable or satellite box or DVR) data from Davidsen's old startup, Navik Networks, and correlated it with the campaign's own data. This occurred through a third party called Epsilon: the campaign sent its voter file and the television provider sent their billing file and boom, a list came back of people who had done certain things like, for example, watched the first presidential debate. Having that data allowed the campaign to buy ads that they knew would get in front of the most of their people at the least cost.

And so it was.

This is near the end of the piece. Not the last words, but the last ones that matter:

And losing, they felt more and more deeply as the campaign went on, would mean horrible things for the country. They started to worry about the next Supreme Court Justices while they coded.

If that doesn't connect with you, shame on you.

Dee Feat is in Dee Flation, Part 23

Well, the Producer Price Index is out, both versions, and it's -.2%. That's right campers, the Koch Brothers are dancing in the streets. They gots themselves DEEflation. They must be so happy.

No Moron

The bus driver said, "Full. No more on!" Naturally, she tried to squeeze in. And so it goes for the Right Wingnuts, devoid of even a functioning lower brain stem.

For those that may have missed it, an Arizona woman ran over her hubby, for the grievous error of not voting. Being in Arizona, yes, she was mad that Obambi won and that hubby hadn't voted. The punch line follows:

Arizona's 11 electoral votes were won by Romney.

Are You Bi-Curious?

For those who might be wondering why the Democrats get cranky:

According to the Senate Historian's Office, the number of "cloture petitions" -- a procedural step that sets up a vote to end a filibuster -- was 68 in the two-year session of Congress running from 2005 to 2006, the last time Democrats were in the minority.

But that number has exceeded 100 for each of the past three two-year sessions, all of which have seen Republicans in the minority, peaking at 139 in the 2007-2008 session. There have been 109 in the current 2011-2012 session, with several more weeks of lame duck meetings expected.

Yeah, bipartisanship. Sure.

Jim

We begin, again, with lyrics:

You don't tug on Superman's cape
You don't spit into the wind
You don't pull the mask off that old Lone Ranger
And you don't mess around with Jim
-- Jim Croce

More dirty laundry explaining the Romney Bubble (Yahoo! feed):

"As a result," says Crawford, "they believed that the public/media polls were skewed" in Obama's favor, and rejiggered them to show Romney with "turnout levels more favorable to Romney." In essence, Romney "unskewed" the polls, mirroring widely mocked moves by conservatives to show their candidate with a lead, epitomized by the now-infamous website UnskewedPolls.com.

Much the same as The Great Recession implosion, the Boys In Power decided to invent their own reality. They believed their propaganda. They were convinced that they could re-make the world into their image. They learned from Karl Rove.

That's not the way the world really works anymore. We're an empire now, and when we act, we create our own reality.

Can there be anything like a Right Wing quant? Put another way, is it possible for those attached to the Right Wing (including, obviously, Wall Street) to be based in the data? The evidence, so far, is No. These Wall Street quants ignored the most basic of data driving their MBS, CDO, CDS, and other derivatives (income/mortgage ratio). Incompetence of the highest order, but The Boys In Power wanted what they wanted, and their quants were happy to say Yes. Empires fall. The Right Wingnuts have fallen. Could they have won? Not without turning their back on the Tea Party and Rand-ians who have co-opted the party.

Reagan co-opted the so-called blue collar middle class, through the brilliant stratagem of convincing enough of them that, while they were Chosen People, their neighbors were freeloaders who deserved to starve. Steve Jobs was often accused of having a reality distortion field; those that fudge data in order to appease The Boys In Power today, sometimes end up on the losing end of the bargain. Not always, of course, only when the data are important. If they are truly attached to the agenda of the clients. In the usual scheme of things, the quants get their cut up front, of course. I suspect that the devisers of Orca made out very well. If they had built a system which accurately reflected reality (in the data), they would have lost the contract, since it would have contradicted the desires of The Boys In Power. Just as the Wall Street quants were only following orders.

Spinning Wheel

To quote Blood, Sweat, and Tears:

Spinnin' wheel's spinnin' true
Drop all your troubles by the river side
Ride a painted pony,
Let the spinnin' wheel fly.

What goes around, comes around. In order to have a stable economy: those that has, spend; those that spend, has. Previous missives have called bullshit on Germany for extorting further pain from its importing countries. Germany needs these freeloaders to clear its output. The simple fact is, exporting economies have a symbiotic relationship (most often denied, of course) with the countervailing importing countries. One might even posit that the true power rests with the importing countries. Think about it for a minute.

So, today we find this report, that Germany is getting nervous about France, which absorbs a significant proportion of German output. Payback's a bitch.

France has been the number one consumer of German goods for years. In 2011, Germans sold more than 101 billion euros there, about 10 percent of overall exported goods.

Germany invaded France on 10 May 1940. They're doing it again, but now using the cover of the EuroZone. Once a Nazi, always a Nazi.

Ann's Horse Didn't Win, Either

My, my. A recent missive here asserted that Gallup was wrong. Gallup was wrong right up to the end, although according to 538, they had inched toward Obambi at the end. Didn't quite get there. But that's not today's topic.

Turns out, Willard had his version of Triage!! I know nothing, nothing I say, about it. Except what I read in the newspapers.

The success, though, would have to depend on volunteer troops united by a Web-based smartphone app.

Is this the Literary Digest, all over again? Deja vu? I haven't found the original (I'm not on their mailing list, so...), here's the PR (from yet another Right Wing organ) referenced above. Figures that the Right Wingnuts would chose a predator as the project's nickname. I suppose, in their over-weening adolescence, they thought it was cool.

OTOH, there's this (kind of like Triage, don't you think):

For example: if we happen to be down in a state at lunch time, we can pinpoint exactly what is causing it. So, if we know we're going to win X state by 3 points, let's move our resources to Y state, county. In sum, Project ORCA will give us an enormous advantage by being able to know the current result of a state.

As described in the Triage piece, the key to making these kinds of systems work is timeliness of data. I suspect that these webby quants had never worked campaigns, spent time in a political city (my first two were Boston and DC), or understood that "dashboards" are cute, but GIGO.

In the primary, we learned it was difficult to be working from Boston and really affect voter turnout in the states. It was disappointing to receive data later and realize if we had access to that data earlier, we could have done something differently and affected the outcome.

Kind of late in the game, though. It's not quite as silly as my own state's Linda McMahon, who managed to get on the ballot more than once (as did Murphy). It seems that there were other parties officially on the ballot, which motivated McMahon to run ads in the last couple of days with talking head "real people" saying that they'd vote for Obama, and ..... Linda (as she termed herself, I suppose to offset the images of burly half naked men clobbering each other with metal chairs).

Another key component to Project ORCA is state-of-the-art dashboard. For the past several months, a "brain" has been built into this dashboard and it will take in, analyze and recommend actions on the millions of pieces of incoming data. In the fast-paced environment of an Election Day command center, having this programmed "brain" will alert decision-makers to key findings and suggest reallocation of resources.

Deja vu. That's the essence of Triage. But far too late in the game.

Here's the original, quoted liberally in the Yahoo! feed. It must have hurt. When I lived in Washington, there were a bunch of local papers in the Viginia and Maryland burbs. Thanks to WikiPedia, now I know why I hadn't heard of the Examiner: a mini-Koch bought them up some years ago and turned them into a freebie Washington Times. Mein Gott! Dat's gotta hurt.

Later, another aide said Orca had pretty much crashed in the heat of the action. "Somebody said Orca is lying on the beach with a harpoon in it," said the aide.

You know, if only they'd built Orca with R. Open source and quite powerful. Kind of a community organized to analyze data. Turns out a community, once motivated, can kick Roark's butt.

Merry Quant

The return of the mini (and micro-mini) skirt does my heart good. Once again, we wait for the heaven sent Sharon Stone moment. Ah, not so often. I do wonder: do our Merry Quants know they're the descendants of such a creative mind? Or, are they just in it for the money? Just the money I guess. But that begs the question: why did financialization overwhelm our economy, and other countries'? In the 1960s, Uruguay started down that road, and ended up with guerrilla warfare and military coup. While I've long since lost my thesis, this paper provides a more recent appraisal. It's not any prettier.

So, why did/do the quants hold sway, and play only in fiduciary instruments? Why financialize (conversely, de-industrialize) an economy? Is there a Maslow's pyramid of economic development? No, I think not. What's happened since Reagan is a shift of power, aided and abetted by Washington's Right Wing tilt, to the easy, fast buck. Dr. Smith used the phrase of "the quick buck versus the slow deuce". While something of a Right Wingnut (he considered himself an entrepreneur stuck in a small New England college; his signature idea was a concrete Sunfish. I'm not joking.), he had no use for the quick buck artists. Yet, we've allowed them to take over the economy. Why?

The answer, by my lights, is obvious: fiduciary capital is easier; there's no messy physics (in all of its manifestations) to muck up the plan. That which exists only as bytes in computers can be controlled (or so the thinking goes) by programs in computers. The Merry Quants, and their handlers, ignore the truth; at some point a fiduciary attaches to a real object. In the case of The Great Recession, that object was a McMansion in Boca. It was attached to a subprime, fixed reset, ARM sold to a minimum wage janitor. And so the dominoes fell.

Last Sunday's NY Times "Sunday Business" has a long piece describing the impetus for the flight to fiduciaries. When one makes direct investment in physical capital, one is tied to the market for the widgets involved. To earn that return, it's not merely a matter of scarfing some of the money flow between saver and borrower, as the vampire squid do their voodoo so well. When you build it, you're betting they will come. And buy your widgets. Which widgets you've made for cheaper due to your investment. And, if you've been really clever, they buy more widgets, to boot.

This endeavor has oft quoted Your Good Mother: "what would the world be like if everybody behaved like you?", in the context of opprobrium for bad behaviour. Turns out, if everybody tries to make and sell the same widget at the same time, nobody makes any return on the invested capital. Thus Warren Buffett's observation about moats.

In the shale gas case, a gold rush meme doesn't work out. Gold is craved for no good reason, so having it, when and where others not so much, is always profitable (aside: it was the merchants who served the miners that made out selling eggs and the like for obscene prices), while natural gas is only valuable in use. Explode the supply, and well, you get it.

But while the gas rush has benefited most Americans, it's been a money loser so far for many of the gas exploration companies and their tens of thousands of investors.

Not that the Banksters didn't try for a nice slice of the pie.

Like the recent credit bubble, the boom and bust in gas were driven in large part by tens of billions of dollars in creative financing engineered by investment banks like Goldman Sachs, Barclays and Jefferies & Company.

After the financial crisis, the natural gas rush was one of the few major profit centers for Wall Street deal makers, who found willing takers among energy companies and foreign financial investors.

Not all were convinced.

"He is like the bartender serving drinks for people who can't handle it," said Fadel Gheit, a managing director at Oppenheimer & Company, about Mr. Eads [one of the money men profiled]. "And the whole gas industry has gotten a rude awakening, a hangover, with gas prices plummeting. The investment bankers were happy to help with a smile and get their cut."

To the predictable conclusion.

In hindsight, it should have been clear to everyone that a bust was likely to occur, with so many new wells being drilled and so much money financing them.

But, there is a silver lining; well for those of us with an eye-for-an-eye streak.

Some local landowners, having spent their initial lease bonuses, are now deeply in debt. Local restaurants and other businesses are suffering steep losses now that so many drillers have left town.

From the point of view of our Merry Quants, they flew just a bit too close to the sun. Best to stick with fiduciaries. How about re-insurance in Bermuda?

The Next Time Bomb

Our Regular Reader knows my fascination with Bermuda; there've been more than a few missives about the country. Most reflect my belief that Bermuda represents a real life, real time social petri dish. As Bermuda goes, so will the USofA. The reason is straightforward: Bermuda abandoned its natural strengths in tourism, to becoming a tax evasion haven (Bermudians dislike that characterization, but so what?). The government rewrote its laws (much as North Dakota did for the credit card industry) to support tax evasion. The result of this was to import a significant number of foreigners, at high salaries. The result of this increased skewing of income distribution has led to two inflation forces: demand pull, due to the high salaried imports bidding up housing, in particular; and cost push, due to the increased demand for imported goods caused by those same high salaried minority. The predictable reaction: native Bermudians demand wage increases to "keep up with prices", as such folks always do. They'd done nothing to produce the higher prices, and didn't buy the argument that they deserve to have their incomes de facto reduced. Income is always relative, never absolute.

Last month, the NY Times ran a piece on Bermuda's next foray into manipulating the financial services sector of the global economy. Further revealing the hollowness of Bermuda protestations of innocence.

We have another mine. We need a new canary. Herewith, some eye opening quotes.

The hedge fund industry has been rushing headlong to open Bermuda-based reinsurers. ... And while the hedge funds are likely to profit, the question is: Who's watching to make sure this doesn't lead to another financial calamity?

And, of course, few if any strings attached:

Yet while they are partly hedge funds, these new companies are regulated as reinsurers. And Bermuda requires only minimal capital requirements and disclosure of financial positions, and it does not strictly regulate how these companies invest their money.

As the incentives which led to The Great Recession, hedgies are looking for better than risk-free return (Treasuries, for example), damn the torpedoes.

Let's close with one more quote (you really should read the whole piece; especially if you're the Stephen King sort of weeny):

In other words, the reinsurance market is starting to look like many of the markets before the financial crisis -- lightly regulated and interconnected in ways that policy makers can't see, with banks potentially left with the wreckage. The industry may be right that reinsurance is different and has its own checks and balances, but we've also heard that before. It behooves United States regulators to make sure.

Given that Wall Street runs DC, not the other way around, do you think that likely? Will the Merry Quants blow up the world again? How many of you, Dear Readers, have even heard of re-insurance? How many would know to even go looking? QED

A Horse's Ass?

It would appear the Gallup is trotting down the same bridle path as The Literary Digest. While likely not as well known as the Chicago Tribune "Dewey Defeats Truman" headline, it is actually more significant today.

In retrospect, the polling techniques employed by the magazine were to blame. Although it had polled 10 million individuals (only about 2.4 million of these individuals responded, an astronomical sum for any survey), it had surveyed firstly its own readers, a group with disposable incomes well above the national average of the time (shown in part by their ability still to afford a magazine subscription during the depths of the Great Depression). The magazine also used two other readily available lists: that of registered automobile owners and that of telephone users. While such lists might come close to providing a statistically accurate cross-section of Americans today, this assumption was manifestly untrue in the 1930s. Both groups had incomes well above the national average of the day, which resulted in lists of voters far more likely to support Republicans than a truly typical voter of the time.

Today, Gallup is doing something similar, by relying on landlines. They say they've decreased the sampling using such, but when one poll is the outlier among many, it's wrong.

Come Into My Parlor, Said The Spider

A minor, but recurring, theme of this endeavor is the fragility of advert driven business, web division. As most know, virtually everything on the web is either advert based, or shopping (well, by most accounts porn is the majority by far). Deriving one's revenue from folks who may or may not want to buy something else has been debated for decades. I first got a glimpse when I read "The Hidden Persuaders" by Vance Packard, either high school or junior high (now often called Middle School). It was written in the late 50s, and I read it sometime later.

Over my Panera coffee this morning, there was this article about click based adverts in my dead trees version. Made some notes, thought about posting about it, but... nah. Then, kaboom, Google pooped the bed!

What to make of all this? First and foremost: the advert based interTubes was always fragile. The 2000 dotbomb wasn't the end of things, although I do miss the Pets.com sock puppet. (Aside: I read some wag who opined that CEOs are so overpaid, because these MegaCorps could be run by a sock puppet. That was before 2008, of course.) As Mr. Telford found out, there always other, and oft times cheaper, ways to get people to buy your widgets. As I've written long before, Google is always one "innovation" away from irrelevance: a more effective (at least to the advert buyers) advert platform will do to Google what Google did to newspapers. Of note, Mr. Udell (another small businessman):

"The cost to get someone just to visit your Web site has, in some cases, become prohibitive. Something that cost $3 might be a no-brainer, but at $20 it becomes absurd. It's basic math, and if it doesn't add up, we won't do it." He said he planned to redirect some of his advertising dollars to print, television and radio. [my emphasis]

Google is trying to do, successfully, what Sun didn't do with java: leverage one product to sell something else. Sun expected java to increase its shift of servers. Google is trying much the same with Android; which is not java. We'll see. Google may have overpriced its advert platform. On the other hand, Yelp is reported to be tracking fake positive reviews, and other business espionage.

One wonders: will Google tweak its "algorithm" yet again to degrade organic matches? Do they really have any choice? For myself, I always use AdBusters, which I found when I was on dialup as a way to reduce bandwidth hogging. AdBusters causes some controversy, but I don't see the issue. If one has no intention of following ads, as I don't, why object to AdBusters? It isn't as though I'll start madly clicking away, while page loading slows to a crawl!

Make a widget and sell it.

Lefty Loosy, Righty Tighty

It's not often that I send regular reader off to some other post, but this is the exception. I'm going to explore the data referenced, just as I hope you will. There's more to quant than predicting the next 10 bagger.

For what it's worth is.R() is new to R-bloggers and already my preferred reference. You could do worse than spend time there. But don't leave Here, of course.

Just a note for Ubuntu users: you'll need to symlink gfortran-X.X to gfortran, if Hmisc isn't already installed (it requires fortran, of course and Hmisc will error out complaining it can't find the compiler). The build scripts I've run across don't look for these Ubuntu's (Debians?) versioned compilers. Also, and I haven't worked out the fix, on my 10.04/2.15.0 machine, the party legend doesn't fill, and the two legends are flipped. We'll see. Since the version in the post doesn't expand, it's really hard to read.

The Future of Investing

There's one point about which no contention exists: return on investment is generated by increased productivity of the invested capital. However, as The Great Recession (and Spain's current problem as explained in todays NY Times) has made clear to anyone with at least a functioning brain stem (which vampire squid lack, by the way), fiduciary instruments don't generate real returns, irregardless that the Squid Squad managed to flummox most that the opposite were true. Real estate, as distinct from industrial plant, can generate fiduciary returns only if the owners somehow receive increasing real incomes. Wage earners think that's true during times of wage pull inflation, so ARM type mortgages make sense in that circumstance. Currency, and prices, are arbitrary measures; the Prime Principle.

Now we have the Superman's CAPE (Cyclically Adjusted P/E), as a "new" measure of return courtesy of Robert Shiller in his 2000 tome "Irrational Exuberance". The notion is that a retrospective 10 year moving average of P/E is a better measure, since it incorporates more information. But CAPE, at least as much as standard P/E, is based on the assumption that the world is linear and monotonically (as measured in trend) upward. In other words: past is prologue.

Being in the Malthus/Ehrlich camp, well, no. The issue boils down to the science. It's been suggested that the inventions of the 19th century were more significant than those since (more below, finally). I'd argue that the future of invention or innovation isn't especially bright. And thus, the notion of investment and returns stands on wobbly legs. How can this be?

By 1900 we knew about the entirety of the planet. We knew where all the arable land was. We knew about all the fossil fuels, although it wasn't until the 1930s and 1940s that we knew about the largest reserves. We knew how to identify lodes, although computer technology has allowed exploration in places not possible before. Nevertheless, secondary and tertiary deposits is all we have to show for it. Oil sands (by various names) consume vast amounts of fresh water to process; those hydrocarbons extract a significant trade-off. Drink or burn, that's your choice.

Turns out, this avenue has been explored. I knew I'd seen a cite that someone had written an article/book/whatever addressing the issue. Couldn't find anything; very frustrating. So, off to my thought experiments, so composed and mused here. Just a few minutes ago, I found it!. Eureka, I cried! Jonathan Huebner is discussed here (I knew I'd find a cite, eventually this is the original). His research largely confirms my thought experiments. A car with GPS is still just a car. That may be good or bad, depending on your point of view. At least one commentator disagrees, citing patent count per capita as proof that Huebner is wrong. The tsunami of pointless software patents is proof enough that Huebner is correct. And, Jan Vijg wrote a book on the same lines.

Since 1900 we've learned: relativity (which makes bombs and some electricity, although really only making steam), quantum mechanics, the Bohr model of the atom, semi-conductors. The various electronic devices are refinements of the vacuum tube, a 19th century discovery (yes, it is); solid state devices are just billions and billions of teeny diodes and triodes. We've leveraged that knowledge into various medical therapies, such as DNA discovery. We, from now on, exist in a world of superficial increments to our technology. There's no real return, of any magnitude at the macro level, to be garnered. A CD/DVD is still a recording of audio and video; 19th century *inventions*.

Some say, well no one knew about the 19th century discoveries before they were found, so what's to stop humans from making yet more in the 21st? The answer is simple: we've discovered or found all the laws of nature, all the elements, all the arable land, all the potable water. Unlike 19th century America, we don't have a vast frontier of natural resources to stumble upon and exploit. We have filled the planet. We know the limits of both nature and ourselves, whether all of us admit it or not.

Is it reasonable to conclude that productivity of physical capital can rise in the 21st century the way it did in the 100 years from 1850 to 1950? Nope. Just as in that rat experiment referenced some time ago in these musings, we have to learn how to prosper without the luxury of "infinite" new resources and breeding. An obscene amount of virgin resources is what made American Exceptionalism, and nothing else. Without the resources, this would just be West Britain. Petroleum, in the form of gasoline and diesel, provide us with portable high calorie energy sources. It supports most of agriculture and manmade materials. The portability is most of the value to the economy; until Mr. Fusion is invented, we're stuck. These fossil resources are temporary, and perhaps more temporary than we think. Europeans have learned that lesson, having been living on that piece of ground for the better part of 2,000 years. Red blooded Americans still believe they can behave like Davey Crockett. In Montana, it appears they do.

A lack of physical productivity increase puts the whole enchilada in question. While the Banksters were able to flummox both themselves and most of the financial world leading up to the dotcom bomb and The Great Recession into believing that purely fiduciary investing (trading instruments, in plain English) generates real returns, it isn't true. Only inflation of asset prices can occur. Such inflation can be motivated either by economy wide inflation (what most mean when they say 'inflation'), or by sector specific inflation. The latter is what has motivated the stock market since March, 2009. Just as the crash was fake, in the sense that the Bankster tail was wagging the macro dog, the climb out was the inevitable bounce after a market wide short. The QEs since have funneled funds into instruments, which floats asset prices, but does little to stimulate general recovery. Unless, and until (not likely), the Apples and GEs decide to "re-distribute" some of that moolah to the 47%, nothing will change with the economic recovery (it hurts to type that last bit).

This endeavor said, in it's first installment:

How does a stimulus program increase demand for those goods and services still capable of manufacture by Americans? That is the question being avoided by all.

So, near the end of that missive:

Finally, the ultimate point: Mr. Obama exercised a Freudian slip when he used the phrase "spread it around". He was accused by the Right Wing professional commentators of running, not to be president, but "redistributer in chief". Guess what, that's what has to happen to get us out of this mess. The real issue is that the Right Wing likes to see labor devalued; they don't see the current situation as a mess, but a return to the way the world should be.

What Obambi did was implement (charitably, due to obstructionism from the Right Wingnuts) Hoover-ite Trickle Down economics. Didn't make much difference, of course. He dare not admit either part of that, I suppose.

Inflating fiduciary instrument prices does nothing to help the larger economy, nor perversely, investment decisions for inter-generational support (aka, retirement or Social Security). By skewing the nominal return on fiduciary instruments relative to physical investment, the result is mis-allocation of capital. CAPE doesn't help in the decision.

Shiller is noted to have the view:,

... based on more than 140 years of history, the market's CAPE would indicate that investors should expect annualized gains of just under 4 percent a year, accounting for the effects of inflation. That's worse than the long-run average of real annual returns of more than 6 percent for blue-chip stocks.

Again, as McElhone says, "the world is not linear". Not only does that mean there will be oscillations, it also means that reality can deteriorate at an increasing rate if you push Mother Nature into a corner. We have, and she is pissed. What drives real returns is technological progress. Much of that in the past decades has either been in non-production fields (analysts, of various stripes), or automation which dis-employs humans. Predicting future returns depends on understanding where emerging technologies have advantage. Right now, I'd wager there aren't many. We know the scope of the planet; there is no New Frontier to exploit. Apple becomes a behemoth shifting portable distraction devices. Not exactly like US Steel or General Motors of yore.

Fiduciary instruments can only gain value at the expense of other forms of "investing", since they provide no intrinsic gain. We saw this when Greenspan cratered Fed interest rates: funds flew to housing, as nearly "risk free" instruments. The industry created ever more units of these instruments so sop up the funds. The crash was unavoidable.

Finally, is there some method to fund future incomes (retirements) from future returns? Likely not, given the current structure. Some returns will be generated by further automation of industry, but at the direct cost of wages and demand for output; whether demand can keep up with supply is not a slam dunk. Will there be "distribution" of real returns to wage earners? Not if the the 1%/.1% have their way. Since they control governments, not likely. With a lack of real returns available to corporations (recall that 40% of profits in corporations were due to financial activities, leading to The Great Recession), real and nominal interest rates have to fall. Ultimately, real returns to real investment control the interest rate. If a corporation can garner 10% organic growth/return, they'll pay most of that to acquire the moolah to do so. When corporations run out of real return opportunities, as it appears, they'll not pay much for access to the moolah. Real interest rates fall just because there is a lack of demand for the moolah. In fact, it is in their narrow self interest to *deflate* world currencies, since doing so increases the value of the accumulated moolah. Get ready for it.

The entrepreneurial sector has been predominantly software, and much of that software is Facebook-ish: entertainment. You can't eat Facebook. You can't wear Facebook. You can't run your auto on Facebook. More Facebook won't improve any economy, only subtraction from other sectors. It didn't take Mr. Market long to figure out that Facebook was a waste of money. Hell of a basis for the world's greatest country.

Confirmation Day, Part the Second

While there are bunches, I'll leave it at this. I've seen her on Maher's show once or twice, and been impressed. Since she stole my title, in essence anyway, I'll stay pissed for a day or two.

We'll Need a Bigger Boat

Why did/do flunked out math and physics PhD candidates go into finance/business admin/economics? The quants. Follow the money. They started in earnest in the 1970s, and became the Mongol hoards (or a school of squid?) which cratered the global economy a couple of years ago (we are past that, right?). Now that the pillaging is done with, Wall Street has turned off the money spigot, yes? No. See here. Not all that newsy, in that the previous year wasn't much different.

Between 2009 and 2011, compensation in the securities industry grew at an average annual rate of 8.7 percent, outpacing 5.3 percent for the rest of the private sector.

Note that the main data refers to 2011; we don't yet know what the numbers will be for 2012, but...

Some 48 percent of 911 Wall Street employees surveyed by eFinancialCareers.com said they felt their bonuses this year would higher than in 2011.

OK, so they've done so much better by the world's economy, they need yet more moolah. But here's the real problem:

Financial jobs accounted for nearly a quarter of all private sector wages paid in [New York City] last year, even though they accounted for just a fraction, 5.3 percent, of the city's private sector jobs.

One of the real conundra of the financial services sector is the assumption that it's driven by computers and quants and superior smarts. Put another way, in the industrial sector, wages have been falling in deference to capital. Earlier posts have discussed the fall in labor as input to production. In the finance world, not so much. With all the talk of double secret probationed HFT computers, it's the Boys in the Boiler Room who get most of the moolah. Moolah that, could, be used to buy plant and machinery for physical production. All that money just to partner savers with borrowers? My, my.

Nearly half of all revenue on Wall Street is earmarked for compensation; in 2009, Morgan Stanley, which was hit harder during the crisis than most of its rivals, found itself paying out a record 62 percent of its net revenue in compensation and benefits. That number has since come down.

What Would Jesus Think?

The subtitle of this endeavor, "It's the Distribution, Stupid", emphasizes the reality: The Great Recession is just the latest manifestation of laissez faire capitalism, which has few winners and many losers. And, given the lotto mentality foisted on stupid people ("I'm gonna by an NBA star, and make lots of money") by the Right Wingnuts, the majority end up blaming the plumber rather than themselves for the dishrag stuck in the drain.

I thought I was among a diminishing minority. And I may be. On the other hand, The Christian Science Monitor (despite the name, a truly Right Wingnut paper) prints this editorial. Neither the editors, nor any of those quoted, have the gonads to be forthright and just state the obvious: with burgeoning capital productivity and diminishing wages, letting capitalists decide who gets paid what will lead to destruction of all, including said capitalists.

The World Bank, too, sees a need for many countries to avoid the model of export-led growth that has long relied heavily on wealthy consumers in Europe and the United States. A slowdown in richer nations means poorer nations must look more to their own markets or neighboring countries.

They're talking to you, China. Listen up. Oh wait:

China ... needs to rely more on its internal market.

In other words, be self sufficient. Pay those Foxconn workers (I know, Foxconn isn't real Chinese) enough that they can buy all those trinkets. Export dependence is still dependence. If it were heroin, the Right Wingnuts would be up in arms.

When Good News Happens to Bad People

Back in February, there was "Lies, Damn Lies, and the BLS", which you can find in any of the various incarnations of this endeavor. At the time, the numbers came out better than the pundits predicted. It happened again this week (for September), but since it is the second but last run of the numbers before the election (Election Day is Tuesday the 6th, while the numbers day is Friday the 2nd) with enough time to get all piqued up.

And did the Right Wingnuts get all piqued!!! To repeat: the data come from sample surveys, two not a single integrated survey. And if you read the fine print, as I suggested back in February, then you'll see that the estimates have plenty of room to waffle. I don't recall any articles in February that went into the details. Well, this time there is. Worth reading up. The on-line version is graphier, and therefore more useful.

As to the GOP stroking out: the BLS folks who make the decisions are Supergrades (here for explanation), who, in all likelihood, got to these positions of authority under BushII. If there's any conspiracy, it's among geeks who live in Fairfax County with a stay at home wifey and three kids in Christian School. I spent a decade working with those sorts (not at BLS, for the record).

Let's Get Physcal

A recurring theme in this endeavor has been that the Euro was doomed from the beginning, since it was wrapped in a straitjacket monetary policy with nothing more to show for the effort; at least The Emperor was merely naked. And when The Great Recession arrived, it all went to hell in a handbasket. Monetary policy is pushing the string; fiscal policy is pulling it. That monetary policy generally fails should come as no surprise. Not that the Right Wingnuts here in the USofA have permitted much fiscal policy to deal with our bit of The Great Recession.

Imagine my surprise to see in today's news that the adults have spoken up. It's hardly a done deal, but the Northerners have to deal with the Southerners Over There (Over There), just as we have to deal with Mississippi. The Eurofolk have the advantage of not having that purely American straitjacket, the Electoral College.

This appears to be the paper. The Reuters' piece is off by a couple of months in reporting when the paper appeared. Searching yields other documents, some from September. In any case, sanity is recovering.

Many Happy Returns

Today brings not one, but two, cautionary tales. The reason for doing quants, either for anonymous blogging or mucho dinero, is to deal with issues which can only be answered with data, not policy. I'm on record that policy trumps data every time, but with the proviso that the policy can be enforced *despite* the eventual collapse. Greenspan's crashing of interest rates was a policy which motivated The Great Recession; he almost fully admitted it after the fact. There was clear data that the collapse was in the making, but ignored by both policy makers (who wants to admit error?) and participants (who wants to be first to miss the boat?). Capital's need for real return, and the consequent need for monopoly, appears in disparate stories today.

To recap. The justification for real physical investment is to make, and sell, either more product at constant price or current/less product at lower cost. This productivity delta is the real return. The Great Recession(s) come about when fiduciary capital is placed in other fiduciary instruments, rather than physical investment. Returns on real estate, whether residential or commercial, can only come out of the income streams of the underlying entities, households or businesses. Residential housing provides no financial returns, in use; paying the vig either comes out of rising incomes (there weren't any during Bush II) or consumption shifts (the volume of moolah needed couldn't be supported by that, although some apologists asserted so). In almost all commercial cases, the same is true. One might argue that a Park Avenue address will attract more business than one in Alphabet City (do they still call it that? and is it still a slum?), in greater proportion to the rent differential; but I'll consign that to outlier status.

So, real return to real capital requires making more and better stuff. Banksters tend to ignore that. AnandTech has another Haswell piece posted today.

If all mainstream client computing moves to smartphones, and Intel doesn't take a dominant portion of the smartphone market, it will be left in the difficult position of having to support fabs that no longer run at the same capacity levels they once did. Without the volume it would become difficult to continue to support the fab business. And without the mainstream volume driving the fabs it would be difficult to continue to support the enterprise business.

There's more background in the text, but it amounts to this: Intel needs to keep its fabs running full blast to get the return on the cost of the fabs. In order to do that, it needs to produce chips which move like hotcakes. You sorta have to get it right.

On the other side of the world, we get the Chinese solar problem. The title: "Strategy of Solar Dominance Now Poses a Threat to China" in my dead trees copy, the title on-line is different.

But now China's strategy is in disarray. Though worldwide demand for solar panels and wind turbines has grown rapidly over the last five years, China's manufacturing capacity has soared even faster, creating enormous oversupply and a ferocious price war.

Trying to generate that real return? You betcha. Does it work, by default? Not hardly.

In the solar panel sector, "If one-third of them survive, that's good, and two-thirds of them die, but we don't know how that happens," said Li Junfeng, a longtime director general for energy and climate policy at the National Development and Reform Commission, the country's top economic planning agency.

We have to do something about that Ruinous Competition!!! Wind turbines? Same thing.

The Chinese government also wants to see the country's more than 20 wind turbine manufacturers, many of which are losing money, consolidate to five or six. "Wind does not need so many manufacturers," said Mr. Li, who in addition to drafting renewable energy policies is the president of the Chinese Renewable Energy Industries Association.

Capitalists continually assume that they deserve outsize returns, but every time they try it, chaos results. Will they never learn?

The modest cutbacks in production barely put a dent in China's overcapacity problem. GTM Research, a renewable energy consulting firm in Boston, estimates that Chinese companies have the ability to manufacture 50 gigawatts of solar panels this year, while the Chinese domestic market is on track to absorb only 4 to 5 gigawatts. Exports will take another 18 or 19 gigawatts.

The enormously expensive equipment in solar panel factories needs to be run around the clock, seven days a week, to cover costs.

Both Intel and the Chinese alt energy sectors are the poster children for fiduciary "investing": while fiduciary "investing" is faux, the return is largely controlled, in the short run (which is all they care about), by policy. The residential home builders made out like bandits, literally, while mortgage companies, banksters, and MacMansion buyers got the shaft. As always, one needs to follow the money. The Chinese alt energy companies (and the government) can't, or won't, find buyers for its shiny new toys. One might argue, and the government surely did, that investing in some fiduciary capital in product producing entities is better than investing only in infrastructure. Infrastructure, as MacMansions, is difficult in the same way: how does one impute (much less collect) real returns? For infrastructure, the return is explicitly societal. PhD candidates have been writing dissertations on the problem for decades. Eisenhower's "National Defense Highway System" was the earliest in my lifetime. The official name became "Dwight D. Eisenhower National System of Interstate and Defense Highways" under Bush I. What's it worth? Well, Ike wanted it because he saw the difficulty (to the Allies) caused by Germany's Autobahn; it was intended to be a network to move men and materiel during the coming wars. Just as DARPAnet was all about the military and turned into a commercial enterprise we call The Web. Who gets the return?

Death Spiral

They just won't listen. Mainstream pundits, and capitalists alike, have decided "Weakening demand is forcing new and accelerated cost reductions at companies from Bank of America and Hewlett-Packard to Staples and Eastman KodakCo, dimming the outlook for an already struggling U.S. labor market." That's what greeted my on the Yahoo! Finance Home Page, the link to a Bloomberg story.

The .1% keep slicing off filets of the Golden Goose (aka, middle class), and wondering why it keeps getting smaller. These are The Smartest Guys in the Room?? I doubt he was the first to say it, in one form or another, but the au courant expression of reality comes from Krugman: "my spending is your income, and your spending is my income" (from here, and others). The only ones, of course, who benefit from deflation, induced by unemployment and recession/depression, are the .1% holding moolah. They get (I can't bring myself to type 'earn') truly 'risk free' return on that moolah. Talk about lazy welfare queens.

Confirmation Day, Part the First

If it's Sunday, then it's NYT Sunday Business and Sunday Review. As a young Episcopalian, I had my Confirmation Day; now it's time to look into these two major sections in search of Mainstream Punditry confirming past musings. We'll see if there's a posting here each week. May be yes, may be no. This week is yes.

Let's start with David Leonhardt's "Obamanomics: A Counterhistory". He makes the case, without coming out just saying it (may haps his handlers won't permit it), that Obama's error was not implementing fiscal policy. Obama, well Bernanke by default of course, just continued the monetary policy of Greenspan. The result, of course, is inflation in the sector getting the moolah, abetted by all the existing money chasing "risk free" high returns. Those have evaporated, so the lemming money is chasing the smart money.

Ben S. Bernanke, the chairman, works hard to achieve consensus on the Fed's policy committee, and in 2010 and 2011 the committee was skewed toward officials predicting -- wrongly, we now know -- that inflation was a bigger threat than unemployment.

So, why did The Smartest Guys on the Planet get it wrong? My assessment from the start was that they're Banksters, one and all, even the Obama operatives. This makes them monetarists, which makes them view money as commodity, which makes them view any increase in money as universal throughout the economy. Of course, what they were doing, with TARP and QEx, was narrowcasting the manna. That they concluded that the moolah would "trickle down" to the greater economy was just either blindness or perfidy. "Pull the string, and it will follow wherever you wish. Push it, and it will go nowhere at all." - Dwight Eisenhower. That formulation and cite isn't familiar, but too cute to pass up, all things considered.

Leonhardt gives these guys wide berth, asserting, covertly, that they're still The Smartest Guys on the Planet, just made a small error in judgment. I don't buy it. Monetarists and Banksters engage in trickle down. It's the only mantra they know.

Leonhardt does get credit for pointing to the evil Right Wingnuts:

By any measure, Mr. Obama and his team faced a tremendously difficult task. They inherited the worst economy in 70 years, as well as an opposition party that was dedicated to limiting the administration to one term and that fought attempts at additional action in 2010 and 2011. And the administration can rightly claim to have performed better than many other governments around the world.

Finally the Times finds someone (Jeff Sommer) to get really close. The title tells it all: "As Money Pours Down, It's No Wonder That Stocks Are Up". One has to wonder; do these editors ever talk to each other?

Robert Rodriguez, managing partner and chief executive of FPA, an asset management firm in Los Angeles, says it's possible that fund managers, seeking to bolster their returns, will "continue to pile into stocks in the remainder of this year and push them to even higher levels." But he says he believes that the market is already overextended, and his firm has begun to reduce its stock exposure.

With both Fed free money and all that (possibly apocryphal) Chinese money seeking high returns, there isn't much choice. Stuffing it in the mattress isn't really an option. While the Apple's of the world continue to do that, pension funds and hedge funds don't have the luxury to flip the bird to their "owners". Their job is to generate returns. It's just these sort of days that prove publicly funded pensions are the only sensible approach. That's been touched on here before. Perhaps again, soon. In a nutshell, Social Security wasn't/isn't/never can be an "investment plan". To do so would undermine governance of the country, and waste oodles of moolah along the way. Serving two masters never works out well.

Money For Nuthin, The Picture

So, what's the data look like? Among Real Quants, pie charts are viewed as stinky doo, whilst Suits love 'em. Figures. I'm not a big fan of them, not so surprisingly, but these data are simple enough, and the chart stark enough (whilst still being honest) that it can't be passed up.

You'll likely need to expand it to see the labels, although the two that mean something are legible.