Triple Crown

"A horse! A horse! My kingdom for a horse!" Market quants are always seeking a better horse, never quite getting there. And occasionally falling off onto their ass; and the rest of the world's while they're at it. The debacle at JP Morgan, and the obfuscation attendant thereto is just the latest installment.

Quant methods (one position I had early on was in the Office of Analytic Methods, so I've been there) can be quite useful. The issue, and for market quants a major one, is that quant methods assume, and that's something they have to do, that whatever human behaviour is being investigated responds just like a natural system. Engineering of human behaviour. For the very short term, say the trading day, one can measure money flows among some set of instruments, and with sufficiently detailed data and sufficiently powerful computers, anticipate where the money is going to be before it gets there. But that's just the USofA/Russia MAD paradigm. No economic good comes of it, of course. It's casino activity. It's a zero sum game.

In the long term (a decade or longer), macroeconomic forces take over. Or, as Galbraith said: "financial genius is a rising market". Japan is the explanatory counter example. To the extent that an economy (speaking of nationally bounded entities) moves from real investment to fiduciary investment (the term still hurts my teeth, but it's common), real growth dissipates. The reason is clear: economic growth is driven only by technological increase, and that means physical investment.

It is not a good thing that Facebook would be valued at $100 billion. Nor is it a good thing that Young People seek to make fortunes building Farmvilles. I'm not, I'll suppose, the first to point out that shifting smart people into zero-sum software gaming (stock market or otherwise) from physical sciences (assuming they are really smart enough to do EE, for example; I've never been convinced that they are, by the way) is also not a good thing. It is said of Texas and Saudi Arabia: you can't eat oil. In Texas, these days, you can't even raise cattle. They're being shipped north (not, alas, to Blue States) where there's some water and grass. You can't eat virtual food, either.

Uruguay, in the 1960's, did the segue from real economy to fiduciary economy. It ended up with severe income inequality and civil war. That lesson has been ignored. Well, a tiny country south of the equator; out of sight, out of mind.

Welcome to Oz

IBM (IBM) announced the opening of a branch office in the city of Da Nang in Central Vietnam as part of the co's continued geographic expansion initiative to increase its presence in key growth markets. from: Briefing.com

For Want of a Merkin...

As I, not alone but lonely, have written many times: the Euro can't work without a partner of fiscal policy. Just as the Blue States send $$$ billions to Red States (ingrates though they are), so Germany, France, etc. must have a de facto fiscal policy towards their poor Southern Brethren. Germany, in particular, has to face the music: the PIIGS took an awful lot of product off your hands. Just because you think you should still get full (unearned, largely) price for the effort, you won't. Get over it. Well, Ms. Merkel has shed her merkin. I'll suppose it was news everywhere; I happened to see it in my dead trees Times. Along similar lines (really), there is this story (from Time magazine, via Yahoo! News) that the Fed is responsible for Jamie Dimon's brown undies. The reasoning, to be generous, is that by keeping "the" interest rate low, banks et al were compelled to make money the fiduciary way since "the surfeit of dollars in the marketplace have nowhere productive to go." Read the quote again. Read it? Read it again. That quote is the crux of the argument of this endeavor: only through improved technology, which increases production and/or reduces cost, can capital "earn" a return. Putting capital only into fiduciary instruments, leads to the *need* for inflation, since without it, there's no source of $$$ to pay the return. Consider that thought again. If you've borrowed $1,000 to "invest", but you've no productive place to put that money, or you've lent it for residential housing, your $1,000 generates nothing new or increase in the economy. Nada. Zilch. Zippo. The only way to get more cash, to pay the vig, is if your other income(s) rises. For that, it's mostly wage push inflation. We don't have that. But more importantly, these "pundits" have said the words, but seem to be utterly ignorant of the import: "nowhere productive to go". Yet, these .1%-ers want 10% per year for the right to have some of their cash. The fact the JP Morgan, and all the others to be fair, would rather trade fiduciary instruments rather than build plant and equipment here in the Red Blooded USofA says about all you need to know. They've killed off the productive sectors of our economy, now scream bloody murder that the Devil made them do it. Fact is, capital isn't worth nearly what the banksters and .1%-ers want it to be. Welfare queens, yeah.

Dee Feat is in Dee Flation, Part 18

Well, the Flation Numbers came out this week and last. And, as usual, the Prosperity Through Austerity And Inflation's The Issue folks can't be happy. Here they are: Core PPI 0.2% Core CPI 0.2% PPI -0.2% CPI 0.0% I'll leave it to the reader to see the forest and the trees. All that free money from the Fed sure ain't getting into the hands of people who spend. That's why there's no inflation. As the planet runs out of arable soil and hydrocarbons, with an exponential population growth, prices will rise due to shortage. The Idiots of the Central Banks will be too stupid to see this, and immediately raise interest rates, hoping beyond hope to play the role of Volker the Saviour. But they will only make matters so much worse. A Confederacy of Dunces, I'll say.

Ah! Steer, The 1%-er's Favorite White Meat

While it's both satisfying and correct to dismiss the Rand/Hayek/Wingnut lunatic fringe as evil fruitcakes, and the global oligarchs to whom they offer "intellectual" support surely are, there is a reason they've come to defend the indefensible. This missive will attempt to provide an explanation, without resorting to mere sarcasm and anger. I will do my damnedest. Marshall had this to say (he who is said to have started economics down the road of algebra, and turned 'political economics' to 'economics'): "(1) Use mathematics as shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can't succeed in 4, burn 3. This I do often." The fruitcakes defy (1), and proceed from there. The fruitcakes assume that macroeconomics is just collective (a bit of sarcasm, what?) microeconomics; that is, the macro-economy is merely the sum of its participants. This is their pitfall; while it would be true in an anarchy without any form of government, even cavemen had leaders. While an externality, say a few gallons of water pollution, may be inconsequential in the realm of a single actor, if all actors pollute a few gallons... well, you get it. As any Good Mother has said to a bratty child: "what would the world be like if everybody behaved like you?" In the days of "be fruitful and multiply", the world was about 170 million. In the days of Adam Smith and "Wealth of Nations" (you should look it up, if only to read the full title), the industrial revolution had barely begun; Europe was still a collection of monarchies; the USofA hadn't yet happened; world population was about 1 billion, the USofA about 4 million, and the developed world (such as it was) was still to exploit the New Worlds' resources. In other words, economies weren't constrained by excess humans and waning resources; and here in the about-to-be USofA, the solution to any socio-economic problem was to send the problem off to Indian Territory to steal some land; out of sight out of mind, swept under the rug. Keep in mind, that the Dark Ages happened when the world, as experienced in Europe, was largely resource constrained. Well Dorothy, we ain't in Kansas any more. Smith's great assumption was that no actor (either singly or in combine) could affect actors other than through direct trade. Monopoly, monopsony, oligopoly, and oligopsony didn't exist. Of course, they did. The Monarch could decide by fiat. Large landholders could decide by fiat (Smith and his ilk had the least respect for landholders; he saw the distortions). His world was fantasy, even then. Much more now. As has been seen, since 1776, industrialization has "freed" labour from the farm, so it could man the factories. But by now industrialization has freed labour from factories (well, China excepted). The result, return on real investment falls, due to collapsing demand and foreshortened earning time for physical capital. We need a theory of distribution; with the wage mechanism narrowing the haves and expanding the have-nots, there's no cash in the system to buy up production. We also need population control; we don't have enough Earths to supply a 90210 lifestyle to anything more than a handful of us. Whether anyone should really live that way... The other problem with the fruitcakes is that they, along with their brethren in the coupon clipping class, view currency as commodity. Thus, we see stock trading winnings classified as "capital gains", when all that's happened is a wager. Except for IPOs and the occasional secondary offering, none of the money involved in stock trading ends up with the corporations for the purpose of building new physical infrastructure. Corporate bonds, rather more. In sum, corporate capital faces the specter of over-production whilst dis-employing its consumers. Individual greed may be good, but in the aggregate leads inexorably to global collapse. The upshot of their "analysis" is that, if all governments pay off debt, right now!, then the bond fairies (as Krugman likes to call them), will reward everybody with a better life. But what the bond fairies want, all they want, is the inflated returns they contracted for way back when. This has always been the issue. The Rand-ians merely seek to corral ill-gotten gains. With regard to The Great Recession, the problem is that banks, and the 1%-ers, got greedy. With Greenspan's cratered interest rate, they still wanted their 10% income with no risk. So, the banks manufactured a 10% product. Now that it's come a cropper, the 1%-ers still want their ill-gotten 10%. Ain't gonna happen. Pigs get fat, hogs get slaughtered. The deals were too good to be true; yes, they were. Their greed got them sucker punched. Go get an icepack and shut up. The main reason the fruitcakes embrace austerity is that's how they think they'll still get their 10% forever. Stupid. Push your debtor over the edge, and you get bupkis. Let your debtor grow income, and you'll both prosper. The Rand-ian blinders, again. The developed West has "developed" past industrialization, to service economies. So it is said. Real consumers don't buy many services; certainly there aren't but a handful of consumer services (services as defined by BLS and others from the point of view of employment data) that exist today which didn't exist in your grandfather's time. Most "good jobs" in services, IT and finance and such, exist as infrastructure for corporations, not offered to consumers. Hamburger flipping is the Consumer Direct, Other Service Economy, along with Wal-Mart greeter. As such, the USofA is far more vulnerable, strategically, today than in times past; we'd have a hard time providing the necessities to our population if our "services" ceased to be valuable. Sort of like, well, October 2008. [update] Went looking for an academic exploration of what seems obvious: that return on physical investment, particularly "high tech" capital, diminishes over time. My reasoning can be summed up thus: a steel making blast furnance from the 1920's was of constant productivity for decades (there weren't new versions being built every few years), while a wafer fab (the plant which makes raw computer chip dies) has at most a few years of exclusivity in productivity; newer, smaller size chip fabs are built every year. Thus, the return on the fab is less than the return on the blast furnance. While the fab owner may try to extract a premium for its use (most chip companies contract fab out; they don't own a fab), it will be supplanted in tens of months. Thus, I suspect strongly, the segue to financial capital. The problem there is that financial capital generates no output. Here's a study, which is focused on Japan, but no matter.

Pieces of Eight

Only a few, Krugman notably, have kept saying, contradicting the Rand-ians, that the Great Recession is due only to governments run amok (the intelligent understand that this only describes Greece). He frequently points to Spain, where, he says, the problem has always been corporate debt. But without details. I have read from a few others, similar. Well, todays NY Times business page tells the details. Worth reading.

Dunce Caps

Mr. Market is popping xanax and quaaludes like Jelly Bellies (from bygone years; he's kept an ample supply) with the results from France and more agita in Greece. Seems an opportune time to discuss what the mainstream pundits avoid. How did we get here? The mainstream pundits, by and large, and civilians nearly to a man, when asked would say "the banks crashed because of the subprime mess". And, as the proximate cause, that's not too wrong. But doesn't follow the breadcrumbs back far enough. The first step back up the trail, is to ask why subprime? It's been documented that mortgage companies and banks set off to loosen requirements (ultimately, to "declared income" subprime ARM instruments) in order to satisfy the demand for CDOs derived from home mortgages. Why? Because the so-called "sophisticated investors" (that's how they're described whenever some entity goes to place shares or notes to a select few), are just as gullible as retail plungers. Those with accumulated wealth, especially when the accumulation is multi-generational, adopt an entitlement attitude toward their positions; economic, societal, and political. Mitt isn't an outlier, he just lives, as they all do, in his own bubble. The demand for housing CDOs (and credit default swaps) derives from conflicting (although not acknowledged in the minds of the bubblists) demands: maximum return with minimum risk. They wish to live off the fat of the land, forever. As stated in this endeavor many times, return on invested capital is only real (as in "reality based decision making", anathema to Dubya and Dick) if the capital (aka, moolah) is used to build or acquire physical goods (equipment is a good description) which increase productivity. (Aside: it's well documented that service sector is the least productive. Betcha didn't know that!) Make more stuff cheaper or make the same stuff even more cheaper. Either way, capital earns its reward. The cost-cutting approach is anti-growth, of course, and kills the golden goose (aka, the middle class) in due time. It was demand for mortgage CDOs that drove the economy off the cliff. But why? Why did capitalists dive into them to such a degree? The answer has to be: capitalists couldn't find productive uses for capital in productive investments. I'll say that once again: those with accumulated wealth (people and corporations-is-people) couldn't figure out how to be productive investing their wealth. Adam Smith should be rolling in his grave. So far as he was concerned, the only justification for capitalists was their superior ability to make better use of wealth. Pure and simple. But, our simpleton capitalists of today can't do that. As a result, they turned to specifically unproductive uses of their moolah. Remember, the only way a household can pay a mortgage is to forgo other expenditures. The larger the mortgage payment, the less it spends on movies and cars and even food. Mortgages, from a macro-economic point of view, are a zero-sum game. Yes, there are those ads on the TeeVee which claim that each house "creates" one job. I suspect that's a very fuzzy number, derived from questionable sources. What matters, in such assertions, is whether other uses of the funds would have a greater or lesser multiplier effect. Physical productive investment is greater. Take my word for it. Let's walk another step back the breadcrumb trail. Rather than let Dubya have a recession, Greenspan crater interest rates in 2001. That should have led to a boom in real investment, one would think. But, on further reflection, all that did was increase the spread between "safe" housing investment and Treasuries. For all those wimpy capitalists, Treasuries were no longer the mattress-place to hide cash. Housing now became the place. In order to do that, more CDOs had to be manufactured by mortgage companies and banks. And so they were. Would all those CDOs been marketable without the complicity of the credit raters? Of course not. But they relied on the mortgage companies and banks to play by the rules, long established. They weren't, and the credit agencies didn't really want to know. The living off the rising equity in the house syndrome took hold, big time. During Dubya's reign, median income continued to stagnate, even falling some years. The middle class was being butchered, and it didn't even whimper. How many of you, dear reader, took out home equity loans to pay for fishing boats, cruises, and new cars? What you should have been doing is voting Blue State, but you didn't. You didn't look beyond the end of your dick, nicely risen on home made Cialis.

Watch More TeeVee

Reminder: Part 3/4 of "Money, Power, and Wall Street" is tonight at 9 PM, most places. Set your teevee timer.