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.