30 July 2012


This story reminds me that, recently, baseball commentators particularly have been complaining that there are too many teams. Jerry Reinsdorf has been on a contraction spree of late. The notion is that there too many players, too few of whom are as good as players were "in the good old days". Being demographics aware, I've never bought into that notion.

Let's look at some base figures.

In 1950, 150,000,000 Americans
In 1950, 16 teams with 25 players: 400 major league players
In 1950, 17,462,000 went to baseball games

In 2010, 308,000,000 Americans
In 2010, 30 teams with 25 players: 750 major league players
In 2010, 73,000,000 went to baseball games

So, there are now slightly fewer major league baseball players per capita than in the heart of the "good old days", and these numbers don't factor in the influx of foreign players, principally Latin American; the per capita value is now even smaller. Don't believe everything you hear. Not only that, even those who bemoan "dilution" acknowledge that today's average ballplayer is far more athletic than back in the "good old days". The reason for calling for contraction is that Americans, at the median, are less able to afford baseball in the flesh and there are far more avenues for wasting time and money on diversion; despite these pressures, attendance is keeping up with population growth and then some. Until the last couple of years, when attendance fell from the 2007 high. D'oh!!! I'll let it go at that. It ain't the quality of ballplayer.

While I haven't spent the time, for this posting, to confirm it, but I'd strongly suspect that the median earnings of major league baseball players is a higher multiple of USofA median earnings today than it was in 1950. Moreover, until Curt Flood, the reserve clause kept ballplayers with the teams at effectively arbitrary salaries. While not as dramatic as LeBron going to South Beach, and Dwight's inability to make up his mind where he's going, there may well be more concentration of talent in the big market teams. If this is true, and does have an effect on attendance will require much more data and time.

It ain't the quality of ballplayer.

28 July 2012

The Saddest Story Ever Told

It's difficult not to poke fun at Red State morons, especially now that they're running out of water, and will likely demand that the Federal government, you know that bunch of worthless bureaucrats, give them money to stave off catastrophe.

But, there's also this story. It would qualify as the saddest story, ever. Were it not for the fact that these yahoos want this country to be the United States of Mississippi.

27 July 2012

Book 'Em Dano

As most folks not living under a rock know by now, Zynga and Facebook did a "Thelma and Louise" improvisation this week. Herein lies a cautionary tale for both quants and macro-economics. Not necessarily the same lesson, though.

For the quants, the lesson is that real world events, not time series data, determine what happens in the market at the corporate level. Data analysis is useful in estimating, and with luck front running, money movements across sectors, variously defined. All those retail holders feverishly pounding out R graphs to tell them what's gonna happen tomorrow. Not gonna happen. With Thelma and Louise, both "make" ephemera, paid for with adverts, and the occasional lunatic who buys virtual tractors. In the case of Facebook, it went public after it had maxed out the easy 80% of users on the planet. All of these advert agencies, Google being the archetype, are vulnerable to *any* other advert agency which can convince buyers their brand of hokum peddling works better. It needn't be on the web. Have you noted that apps are increasingly iOS and Android based? For Thelma and Louise, here's a new and insurgent advert platform they don't control. Oops.

For the macro-ists, the lesson is even bleaker. Real growth in real economies comes from producing more stuff better and cheaper, with a large share of that productivity growth going to the widest spectrum of the society; either the output gets consumed domestically or it has to be exported, the latter is useful only if the consequent importers' currencies are valuable, see China and Germany for the folly of relying on exports. Not surprising then, that our decade of discontent was marked by financialization of our economy, where we forsook making widgets for money laundering and with the mass of productivity increase going not to the masses, but the Koch brothers, et al. And not surprisingly, consumer demand remains lethargic since the masses aren't garnering increasing real income. That's also why the Inflation Monster and the Bond Vigilantes are nowhere to be found; the $$$ are hold up in mattresses of the Koch brothers and their friends. But that makes the Koch brothers happy (well, not the lack of bad outcomes, of course), in that they get richer as the masses get poorer. After all, wealth and income are relative measures; make my neighbour poorer and make myself richer. Too bad the yokels in Kansas are too stupid to understand that.

25 July 2012

Bonds, James' Bonds

There's an old (or, perhaps, newish) saw, variously constructed, that goes: "When I die, I want to come back as a bondholder". It was spoken often during the Bailout Debacle. Some, notably Sheila Bair, questioned why it was that only bondholders got off scott free in the bailouts, not counting the firms that were allowed to fail.

As mentioned more than once in this endeavor, banking is a low (at best, more likely no) value activity; merely marrying lenders with borrowers. All of the "innovation" in "products" in the last few decades have served only to increase the size of the diverted money stream from lender to borrower into the pockets of Banksters. Financial service companies don't create value; value is created by smarter production, which financial services doesn't do. Financial services just moves money from Abercrombie to Fitch, for a nice fee.

So, today's Times brings this story laying out the plight of the poor but honest bond trader, soon to be extinct. The piece starts with this:
Bond traders have long defined Wall Street's swagger and, in good years, generated a large share of its profits.

I don't have a cite right to hand (mentioned the number countless times before), but in the run up to the Great Recession, even otherwise assumed-to-be product companies (GE comes to mind) had upwards of 40% of profit from financial services. Again, that profit is just a skim off the lender to borrower money flow. If you read the piece, you'll find that bond trading, outside of Treasuries, has been a dark matter sort of endeavor since time immemorial. Opaque trading means gross profit (in both senses of "gross").

But, a hard rain's gonna fall. The scant changes in process mean that they,
...could drive down the large cut that banks take from most bond trades and make it cheaper for investors to buy and sell bonds.

Poor baby!!

Where does the large vig come from?
Banks have found trading these bonds profitable because they have greater leeway over the pricing than if they traded in a market with transparent prices.

In other words, the big banks keep both lenders and borrowers in the dark, and get fat and happy off the manipulation. But times they are a changin'. The days of trading on the telephone are being replaced by exchange trade, and we all know what that means: computers do the work. Once again, the invasion of flunked out hard science types into commerce. We'll see if they avoid screwing things up the way they've done in the past.
The traders here are mostly educated in math or physics, often outside the United States, and their desks are piled high with textbooks like the "R Graphs Cookbook", for working with obscure computer programming languages.

My impression that sites like R-Bloggers is dominated by the stock hounds looks to be accurate. Pick me! Pick me!

Going forward, bonds will be traded more like, if not in concert with, stocks.
This has resulted in banks shrinking the inventories of bonds they used to have on hand in case a customer wanted, say, a million dollars' worth of 10-year General Motors bonds. Now, those same customers have to look more broadly to find the same quantity, potentially bypassing Wall Street all together.

Not so sure I buy the notion of WS being eliminated, just a different part; more like a NASDAQ for bonds. Play Station and X-Box for millionaires. Old style bond traders, the ones who did deals over the phone, are out of work, and the math-y types are in. From a profitability point of view, automation triumphs. I doubt that bond trader out on the street gets the irony of his solidarity with 19th century New England weavers.

22 July 2012

Such a Deal

A few days ago brings one of the more egregious attempts at health care cost analysis I've seen in quite a while. It attempts to make the case that malpractice is the cause of high health care costs. I added some thoughts, which may or may appear by the time you read this.

So, what is the profitability of health insurance? I don't have the time or energy to research the top 10 or top 100, but I do have some association with United Health Care, so I'll look at their SEC approved numbers.

First off, profitability is gross profit divided by invested real capital.

Here's United's invested capital (Property, equipment and capitalized software): $2,515,000

Yes, just a bit over $2 million. I'll bet you didn't know that. Insurance, along with the rest of financial services, is a capital light industry. A few computers and some office cubes is about it. I'll bet you thought they had billions and billions of dollars tied up in the effort. Nope.

So, how much gross profit did United generate in 2011?

Here's the numbers:
Revenues: $101,862,000
Operating costs: $15,557,000

So, gross profit: $86,305,000

Well, not really, since we really should deduct those Medical Costs. United Health claims $8,464,000.

Under normal circumstances we would have gross profit (revenue minus direct costs) and net profit (revenue minus direct costs minus overheads). Okay, why not use net profit? For the simple reason that managements have complete control over siphoning gross profit into "costs" at their whim. In all other business, gross profit is the measure. The financial services industry generally, and insurance far more so, tries like hell to deflect attention from the true level of investment in the business and the true costs of running the business. In particular, that $74,332,000 in "Medical Costs" is just a pass through to providers. One might argue that Big Pharma sucks up too much in total health care costs, and that's reasonable. But Medical Costs aren't a cost of doing business for United Health; it's not equivalent to Ford buying raw steel to make Mustangs. United Health never really touches the money, much less ***adds any value to it*** as Ford does to raw steel to make that Mustang.

United Health made 4 times its invested capital!!! In one year. Not a bad deal. The rest of the difference is waste and corruption up the management pyramid.

In order to understand the impact of malpractice, it helps to understand demographics. It turns out, not surprisingly, that older doctors get sued with a substantially higher frequency (here)
To look at how claim frequency changed over the duration of a physician's career, we grouped physicians into three age categories: under age 40, between age 40 and age 54, and age 55 and older. Fifteen percent of the young physicians but 60.5 percent of physicians in the eldest age group reported claims.

So, in other words, as the boomers age, so do their doctors, who get senile and get sued. It's not rocket science. Experience is the best teacher, but Father Time sucks your brains out.

17 July 2012

Dee Feat is in Dee Flation, Part 21

Well, the Flation Numbers came out this week and last. And, as usual, the Prosperity Through Austerity And Inflation's About To Attack folks can't be happy. Here they are:
Core PPI 0.2%
Core CPI 0.2%
PPI 0.1%
CPI 0.0%

Once again, we see that the $$$ the Fed makes available to banksters just isn't making it to consumers. There's just no demand pull on goods and services. The nearly continent wide drought (not yet here in the comfortable, mostly, Blue Northeast) will have a bad effect on grocery items, but that won't happen until later. Without that increased demand for goods and services (ones actually made in the USofA), the demand for employment also goes nowhere. Two sides to the same coin. Cutting business taxes will only transfer the money to the 1%, without increasing employment. Employment increases when capitalists can't meet demand with existing staffing. THERE IS NO OTHER REASON. Sorry for the shout, but knuckledraggers have so much shit in their ears, it's necessary to raise one's voice.

14 July 2012

LIBOR of Love [update]

In accepted newspaper fashion, we start with the punchline (spelled 'lede' in that jargon): there'll be no frog marching of velly British bankers, including Barclay's, over the LIBOR "scandal". On that, there hangs a tale.

LIBOR was invented by a British banker in the 1960s: "In fact, according to Minos A. Zombanakis, a former banker at Manufacturers Hanover who says he made the very first loan based on Libor by inventing the product on the fly, it was a sense of responsibility and trust between banks that underpinned the rate's success." LIBOR, based upon all the reporting I've read so far, has no force of law or even contract; merely a service provided by the British Bankers Association (which didn't create it; read on). That last bit is what's important. Here's his experience of the history. "This is how Libor came to be born: as a way to price short-term funding for a syndicate of banks." Not quite what you expected, what?? This is not, nor ever has been, a Fed Funds rate.

Near as I can tell, LIBOR was invented, and remains, as a shorthand for and by bankers. Initially just City of London bankers cared about it, on both sides of use. The bankers who input rates were the same ones who used the resulting average rate to set the interest rate on money lent out. There was no incentive to cheat, and if there were any, only those within the club got hurt. Kind of a zero sum game of poker at the Elks Lodge.

But, in time, LIBOR became more widely used. What isn't clear is whether any of the mechanisms were set down in either contracts or law that contributing banks (the ones who submit rates to be averaged) must tell the truth to the BBA or that the BBA asserts that the average rate it promotes is true and accurate. Without agreements to accuracy, there can't be a penalty for lying, since lying is not defined in the process.

Thus, no frog marching. We'll see.


I've spent some time spelunking, and come up with this reportage. Not suprising, to me, LIBOR fixing is quite legal, directly.

Peculiarly, the practice is not explicitly prohibited in UK law. As highlighted in a Parliamentary document published on 3 July, the FSA fine was imposed under the general discretion they enjoy under the Financial Services and Markets Act 2000. The fine was for breach of principle 5 of the FSA Handbook which states that, 'A firm must observe proper standards of market conduct'. Libor-rigging does not appear to fall within the FSA's market abuse criminal powers, which cover actions 'in relation to qualifying investments traded on a market'.

[update 2]

And then here's as close to a smoking gun as we're likely to find. This quote is from "Exhibit no. 5" at the bottom of the piece (the quote is from a Wall Street Journal piece linked to).

One major but basic problem: The FSA never established a rule that the data banks submit to Libor should be accurate and fair, said Steven Francis, a regulatory expert at law firm Reynolds Porter Chamberlain. "This is a major regulatory failing," he said. "It's frankly ridiculous that there wasn't one in place."

We ain't no frogs in this pond.

10 July 2012

Dee Feat is in Dee Flation, Part 20

This week's episode of Dee Feat brings with it some specific numbers related to one of the constant themes here in KeynesLand: you don't gots enough buyers, you gots bad capital. As Eccles says, it all has to add up. In other words, in the short to medium term it really is a zero sum game.

Today's NY Times has reporting from China that Flation has taken a Dee Tour. Irritatingly, not only is the story not on the front page, nor the front of the business section, but below the fold inside (with the link, you'll not have to trundle through).

Here are a couple of juicy quotes.

The start of the piece:
Prices are tumbling across the Chinese economy, according to government data released on Monday, as a flood of goods pouring out of the country's factories and farms exceeds anemic demand from Chinese households and businesses.

Which leads to the deflation spiral, put this way:
...give consumers an incentive to delay purchases until prices fall further.

Given that China can't clear output with both a massive export effort and domestic demand, what's capital worth, really? The Christian Right Wingnuts compound their stupidity by calling for population growth as the cure all!!! And the Earth is only 6,000 years old. And isn't chock full of more than 7 billion units.

08 July 2012

Fakin' It

Paul Simon put it for all time, "And I know I'm fakin' it, I'm not really makin' it." One of the themes of this endeavor has been the destruction of physical production in favour of soft/financial "innovation". There have been occasional beeps in the ether that Big Thinkers are beginning to get the problem. Today brings a revelation that some folks on the Other Coast get it.

You really need to read this, if only to make me feel better. The Valley Boys are echoing one of my memes. Victory!

07 July 2012

From the Mouths of Babes

Some may remember that Groklaw started as a means to track the progress of various SCO litigations. For a few years, if not from the beginning (I forget), there has been a "News Picks" column. The entries are precises or cuts from titled stories. Today's includes the following. To clarify, the first bracketed text is my edit, while the second is in the original.

[Facebook] is tracking the apps that people use through its popular Facebook Connect feature, which lets users log into millions of websites and apps as varied as Amazon.com, LinkedIn and Yelp with their Facebook identity. The company then targets ads based on that data, said people familiar with the company's plans.

Facebook may also track what people do on the apps, though it hasn't made a final decision, said one of the people.

[PJ: This may be a new way to test IQs. If you are on Facebook after all this, how dumb are you?]

03 July 2012

March of the Penguins

Maindonald's book opens with the following:

It is easy to lie with statistics. It is hard to tell the truth without statistics.
[Andrejs Dunkels]

While I've always been a fan of quant, since it should tie decisions to the real world, too often they're manipulated to conform to an external agenda. The Barclays evil is about as brazen as it gets. But this piece isn't about Barclays (this just in: Diamond fell on his sword a few minutes ago), but credit raters. From today's NY Times comes the story of how it was that the agencies colluded with the banks. Pretty brazen.

The story closes with a couple of meaningful quotes (note to editors: the punch line comes first in newspaper stories, not the tail end).

The court filings also demonstrate a lack of methodology for analyzing the Cheyne debt. For example, in an e-mail before the deal was sold, S.& P.'s lead analyst wrote to a colleague: "I had difficulties explaining 'HOW' we got to those numbers since there is no science behind it. The documents show that the lead analyst at Moody's noted there was "no actual data backing the current model assumptions" for segments of the Cheyne deal.

"I don't want to miss one deal because of our model assumptions either. Is there any possibility of 'tweaking' the default table to get all of this so that we don't have to compromise?"

And, of course, the quant community continues to deny that they were anything but disinterested technicians. Yeah, right. Sometimes, the Emperor is just nude.