Data Fiddles, While Rome Burns

The Case-Shiller number is just out, at 5.5% up. More than expected, on a month-to-month basis. One might wonder how this might be happening, given that median income continues to fall. Just saying. Data tends to lag back as much as a year (Census data on median income, for example). Either the recovery is way better than reported data says, or the Banksters are fiddling mortgages again.

Political Intelligence

Yet another oxymoron enters the blogosphere. As I've written a few times over the last few years, building a better mousetrap with databases and stats can be used in electioneering. While the DNC has been screwing the pooch for some time (2010 and 2012 were disasters at the state and local lever; 2014, thanks to those cycles and the fiddling being done by the Lunatic Right, will be more of the same), the Obama crew did a bang up job. You can find my post-mortems in the archives.

Today brings yet another, focusing on whether to publish the work as open source. Previous reporting from the trenches made clear that the techies asserted themselves, pushing the operatives aside. Now, the operatives, in appears, want to keep the Koch secret recipe, well, secret. The comment stream is way more interesting than the piece itself.

Even in the comments, the requirements of releasing "open source" code is confused. For whatever reason, "open source" has become a synonym for GPL, and it isn't. BSD is also an open source license, and amounts to freeware (it really isn't but...). One can do as one wishes with BSD source. One can use open source applications, MySql say, and in doing so keep said application as private as one wishes. Using open source to build an application does not make the application open source. That bit of FUD has been around since at least MicroSoft began to sweat many years ago.

On the other hand, if one modifies an open source application, then the GPL does require that those changes be returned to the source tree of that application. This is where MySql got into trouble with FSF from the beginning: attempting to dual license; some changes went to the open source tree, while others went to the closed tree. Oracle does the same, if not worse. In the R world, Revolution Analytics gets dinged by some.

The issue, and only those who built it can answer, is whether the application modified existing open source applications. The number of commercial applications running on Tomcat or linux is legion; these are bespoke applications. Think of it another way: much of the Cloud infrastructure is run on linux, MySql, and Postgres; yet the applications running in the Cloud remain closed. Here is a long standing explanation.

Almost everyone agrees that if you take the copyrighted source code of any program and physically modify it - actually revise the program or translate it into another computer language - you have created a derivative work of that program.

The conflict in the comments is mostly about whether releasing the Narwhal source would be a good thing or a bad thing for the New Democratic Majority. That the comments haven't a clue about the status of the New Democratic Majority shows that they live in a bubble, just like the Lunatic Right. The only difference: the Lunatic Right is effecting coups de etat in state after state. The DNC should, but hasn't yet, answer for that.

So, the OFA folks should keep their secret sauce, and continue to bitch slap those idiots at the DNC. There is only two years, less really, to the next Waterloo for the DNC and the rest of the 99%. The new Democratic majority is a pipe dream; the Lunatic Right is taking over state governments and busily changing the election rules to inflict Sunni rule on the Shiites, right under the DNC's nose. Boehner does look a bit like Saddam, with that spray bottle tan.

Rotten to the Core

The entirety of the pundit class, both mainstream and fringe, have been weighing in on the meaning of Apple's disappointing quarterly yesterday. This is old news, from the perspective of this endeavor: I've been asserting for some time that Jobs/Apple has been pursuing a suicidal path. Where once there was a somewhat iconoclastic computer company, is now a garden variety up-scale appliance maker. The ElectroLux or Jenn-Air of the 21st century. Just because there's a cpu running the widget, doesn't make it a computer. Your Ford has as much compute power.

Up-scale anything is a low volume, low growth proposition; always has been and always will be. Ferrari sells about 6,500 units a year. And no growth. Apple's problem is that the middle class is being hollowed out. Obama's call for progressivism is also the clarion call to save Apple. Not that Jobs did or Cook does, understand this. Certainly not the proto-Jobs day trading plungers who don't have a clue. Apple has transformed itself by invading existing market sectors with novel designs, nothing more. None of the devices that have worked (remember Newton?) were original to Apple.

Rumors continue that there is an iTV in the offing. If so, and carried out as a novel design exercise, could it work? The iPhone really sped Apple away from being a computer maker, to being an appliance maker. iTV is pure appliance, but can physical design do for iTV over other set-top boxes what the iPhone did to RIM? Not likely. Physical design provides an avenue for advantage for objects which live either in the eye or in the hand; they're pretty to look at, or they're pretty to manipulate. Set-top boxes have no appreciable use case in either vector (love mixing metaphors, how about you?). How many of you bought your stereo receiver (assuming anyone still has a stereo) because of its looks? Thought so. The long time exception in that sphere is B&O, which markets its facade not its performance; a tiny niche company and the products aren't very good. That's Apple's future.

The Apple story of significant growth, through market invasion, requires that there be markets which already exist and which can be wrapped in a novel physical design. They've clearly worn out the iPhone meme. The last few versions haven't been meaningfully differentiated either from previous versions or competitive phones. The novelty is wearing thin, if not gone completely.

Apple may have slipped into Microsoft land, playing out the game as a worthy journeyman, collecting a fat salary but not playing any meaningful minutes. The days of Kobe are in the mirror. But, and here's the macro problem, could we have reached a technological plateau? Could it be that the innovators don't have a clue what more to do with cpus? With a concentrating upper class, a shrinking middle class, and an exploding lower class, what's a high-end digitizer to do? With smaller feature sizes still occurring (although that may soon end, too), thus greater compute power available, into what new device, smartly designed for the well heeled, should all this power be packaged? Consider that the basic inventions at play here all came to be in the first half (and for some quite early) of the 20th century. The smartphone makers and the carriers are cut from the same cloth as Wintel before them: in both cases the relationship is symbiosis, with each side supplying the needed demand for the other. In the case of Wintel, MS let "the hardware fix performance" while Intel needed Windoze bloat to justify the tick or tock (although tick-tock jargon happened later). Now, carriers need bloated data streams to claim higher fees, while smartphone vendors need bigger data pipes in order to support non-telephone functions.

The entire industry has to figure that out. The "emerging markets" are valuable only so long as the First World countries control the exchange rate regime. But, there's a problem with that, too. In the past, even the recent past, the regime was essentially mercantilist: the First World kept third world currencies undervalued, so that raw materials (and more recently, finished goods) could be imported cheaply. The third world, to First World capitalists, was never intended to be a consumer market. Now, having siphoned off a considerable amount of purchasing power from the First World middle class (by shipping employment to those cheaper currencies), looking to a third world middle class presents a problem: either third world wages/currencies (for First World menial tasks) have to rise enough to replace what's been lost from the First World, or the wheel stops spinning. It can't be both ways: cheap wages/currencies in the third world and middle class in the third world.

Yes, there are reports that Apple does do a decent iPhone business in China. But the value of the renminbi exists at the whim of Bejing.

Here is what largely happened in the West post WWII: unions and corporations conspired to create a blue-collar (low skill) middle class, which had sufficient incomes to absorb the burgeoning output of industrialization. This was a symbiotic relationship; capital needed consumers, but the rest of the world was either wild (most of South America and Africa) or devastated from the war, so domestic consumption of output required domestic incomes to buy. Having Bretton-Woods control of exchange rates, and thus raw materials from the third world (petroleum in particular), played a large part in that. Cheap energy makes for a higher use of energy, what is commonly called "standard of living". This was a period of leveling of income distribution, which powered economic growth. It ended when the Arabs got sick and tired of Israel, and took control of petroleum in retaliation. We still don't know how that will end, although there have been reports that horizontal drilling will yield mammoth amounts of, to date, unrecoverable deposits in North America. We'll see.

Another Ton of Bricks

About a year ago, "A Ton of Bricks" told the story of Amazon's conversion, as yet still not discussed in the channels I follow, from e-tailer to brick-and-mortar retailer. Well, the conversion continues apace. Amazon's P/E ratio, as I type, is 3,182. They make a few pennies on the share. That Amazon is able to convince so many that it has found the New Way is astounding. The cost of jet transport, per pound, is so much higher than rail, it's clear now that Amazon is finally admitting what OR folks have known for decades: JIT production is fine when one is dealing with very high value parts which are small in volume, light in weight, and a small part of the BOM. In such an instance, stockpiling can add up to more in carrying cost than transport. For garden variety retail, warehousing wins. Always has and always will; so long as fuel isn't free.

Amazon isn't such a manufacturing business. It's a distributor, and its main cost is transport. The main cost it can control, at least. Unless Jeff decides to go all Walton on its suppliers. But, since Amazon has set out to be the purveyor of everything, that ain't gonna happen.

Money Matters, Part 1

This time, I've assumed the obvious, and numbered the First installment without having written the second. But money matters, although not in the way the Lunatic Right (Friedmanites, Austrians, .1%ers) generally do. The purpose of currency is to oil the wheels of commerce. Adam Smith wrote something like that.

Yesterday's Times brought us three pieces on money, all making points mused on here over the past times. Alan Blinder on 10 steps to recovery (or bill of the nation's rights?), Gretchen Morgenson on melting the bank behemoths, and Christina Romer on Fed policy. I recommend all of them.

But I'll only chew on the Blinder piece. To a certain extent, Blinder is a bit PollyAnna.

Unrepentant financiers whine about "excessive" regulation and pay lobbyists to battle every step toward reform. Conservatives bemoan "big government" and yearn to return to laissez-faire deregulation. Higher international standards for bank capital and liquidity have been delayed. I could go on.

And Phil Mickelson, who is given millions of dollars a year for playing a game, is crying poor mouth and apparently moving from California. This guy, along with the rest of professional sports, provide nothing useful to the economy or society. Their millions come from the discretionary incomes of the rest of us, either directly through tickets or funneled through the corporations that sponsor and advertise the tournaments. A few cents on the dollar spent on insurance and banking and such end up in Phil's pocket. You don't get to decide that Phil should get his millions. While I've not yet waded through the data, since the USofA has a bit more than twice the population as it did in 1950, the hollowed out middle class really hasn't been hollowed. What's happened is that the number of middle class households has plateaued in count, but dropping in proportion. Along with the increase in wealth/income concentration, the Phils of this world care about a diminishing proportion of us. All those luxury skyboxes sprouting up in stadiums isn't a coincidence: the Phils have to put the squeeze on the few left with any moolah. In other words: Phil is killing the goose that lays his golden eggs. But, as usual, he's too dumb to follow the breadcrumbs.

As the renegade economist Hyman Minsky knew, it is normal for speculative markets to go to extremes. A key reason, Minsky believed, is that, unlike elephants, people forget. When the good times roll, investors expect them to roll indefinitely. When bubbles burst, they are always surprised.

Again, the standard punditry is that The Great Recession was the result of a tulip bubble-like series of events. But it wasn't. People bought into tulips in a Ponzi-like way. It wasn't corruption, just stupidity. TGR was motivated by corruption: the creation and sale of bogus "assets". This is completely different from the dot-bomb bubble, too.

In the years before the crisis, too many directors forgot those responsibilities, and both their companies and the broader public suffered from the malign neglect. Will they now remember? Some will -- for a while. But sanctions on directors for poor performance are minimal.

Chief executives and corporate directors should "claw back" pay when putative gains turn into losses. If they don't, we may need the heavy hand of government to do it.

Here, Blinder puts on his rose colored glasses. Top corporate management, and boards, benefit at least as much from the fiddling. They're not going to claw back. The first board (member) who spanks one of these brats will find himself (not so much, her, of course) out of the sinecure of board membership. Circling the wagons, in spades.

Before the crisis, some banks took important financial activities off their balance sheets to hide how much leverage they had. But the joke was on them. The crisis revealed that some chief executives were only dimly aware of the off-balance-sheet entities their banks held. These "masters of the universe" hadn't mastered their own books.

Of course not. Years ago, some politically savvy comic noted that a sock puppet could do as well running corporations. In all, a sock puppet would be an upgrade.

Send in the RAF

Most folks know that the RAF, in "The Battle of Britain", saved the country from the Germans. Most folks also know, certainly if they read this endeavor, that the Germans are winning today's battle to ruin Britain. The Germans have been on a blitzkrieg throughout the EuroZone to slay the victims of The Great Recession, I'll wager to solidify their winnings from the housing bubble. It's a fact that the Germans spent heavily on private sector housing speculation, particularly in Spain, which crashed on private debt not public.

Recent news here in the USofA is surprising, sort of. First, Wal-Mart claims that it will now "Buy American", at least a bit more than it has been. Not just "Buy American", of course. Second, Apple has been getting its gonads squeezed quite merrily, with the realization that there is really no place for it to go with its historic methods. Churning yuppies with iPhone X may not be working any more. iPhone 5 is widely reported to have plateaued, much earlier than previous versions. Apple has, at least since the Mac was released, eschewed market share for high margin, volume be damned. Is there a neglected computer device genre that Apple can steal? It seems, no. Organic growth of its existing products is truly harder to do. While Jobs was deified for his vision, in fact Apple invented no new devices. Apple added fancy bells and whistles, and differentiated, but didn't invent. Design is cute, but function eventually wins out. Samsung is proving that. So is Android. RIM and Nokia may well, as well.

Apple's approach hinges on having enough 1%ers around to churn. Fanboi is the epithet of choice. But as the USofA becomes ever more concentrated in wealth/income, the market shrinks. It may not shrink by large numbers in any time period, but Apple needs for it to grow. Anything less than substantial growth blows. So, we have reports of a cheap iPhone, and dueling pundits. Hamilton says that cheapening the brand will spell the end of Apple. Burr says that the market must be expanded by other means if it doesn't expand organically. They're likely both right. $1,000/year for telephone service is not a necessity. I know, a smartphone is more than a telephone. But all of those other things it is, they're largely entertainment. Providing entertainment is a fickle business. Just ask MySpace.

Which brings us to today's news. As these missives have opined, Germans need those slothful southerners (sound familiar?) to soak up output. Here's some reporting confirming Germans' problem.

... Germany, the Continent's flagship economy, contracted by about 0.5 percent in the final months of last year. Combined with a flurry of disappointing results recently in other major economies, the stumble raised questions about Europe's ability to escape recession.

Oops!!

Last month, Britain said its austerity budgets would extend three extra years, to 2018, because of weaker than expected growth.

So, Cameron and his fellow fools are ignoring the evidence right in front of their noses, and what they were told would happen by the Keynesians: austerity kills growth, which kills revenues, which kills growth, which kills revenue... If Britain makes it through 2018, it will be a dung heap. Maggie lives.

But back to the Germans.

... export-led growth that kept chugging, in spite of the cloud hanging over the euro zone. But its European partners are also among its biggest customers, leaving it vulnerable to the Continent-wide slowdown exacerbated by the very austerity policies of Chancellor Angela Merkel.

Again, they were told. But Merkel chose to ignore. The 1%ers got their moolah dishonestly, and if they are allowed to keep it, all economies will crash. A global Japan. While one Japan is tolerable, a globe full of them spirals down a black hole.

Dee Feat is in Dee Flation, Part 25

The PPI is out this morning. Down again, by -.2%. What's curious, is that one of the bear ETFs that I follow is up more than 2% in pre-market as I type. Things may well work out differently during the trading day. But curious. Much as the Lunatic Right screams about the Inflation Invasion and Bond Vigilantes, Mr. Market knows that capital gains depends on a modicum of inflation to keep the economic engine purring along. Deflation really is worse than inflation, number for number.

The overarching danger is with the .1%-ers who've accumulated such gazillions of cash. They'd rather have universal, and massive, deflation. We all go Japanese (well, if you'd read Krugman yesterday, you'd know that the Japanese may have come to their senses), and the .1%-ers "earn" returns on their hoardings in a Goldfingeresque manner. Rednecks are generally too stupid to even know they've been played as cat's paws.

Scuba Diving in Arcania

If I were to be interested in scuba, I'm not, the Caribbean island of Arcania is where I would go to look for unusual and brightly colored specimens. Since actually going there is not on the agenda, a thought visit is required. This journey was inspired by news out today, that an obscure Fed research group had looked into The Great Recession. The reporting says that new ways of modeling, not heretofore used in economics or policy, will come to our aid. Not surprisingly, the methods described, but otherwise named, sounded rather familiar.

So, off we go. That which is new, ain't necessarily so. As stated muchly, Your Good Mother knows better, and quants as often as not are hired to obscure the truth; ignoring or suppressing basic metrics.

To reiterate: TGR was caused by the (willful?) ignorance of quants (financial engineers). As early as 2003, it was clear from available data that the house price / median income ratio had come seriously unstuck. Since housing is not a return (cash) generating allocation of capital (modulo "psychic" income, even if you're a believer in that sort of thing the cash value is arbitrary and not real), the only support for increasing mortgage levels is increases in median income. The latter wasn't, and isn't, reality; thus the inflation in house price had to be corrupt. Quants don't generally have a corruption variable in their models.

Which brings us to Norris' article. The gist of it is that "agent based modeling" (quotes in the original) offers a better quant, which will identify problems before they morph into a TGR.

But a new assessment from a little-known agency created by the Dodd-Frank law argues that the models used by regulators to assess risk need to be fundamentally changed, and that until they are they are likely to be useful during normal times, but not when they matter the most.

Risk assessment by quants has been based on time series analysis for a very long time. The problem with time series analysis is the assumption that tomorrow looks mostly like today, and today looks mostly like yesterday. More so than other quant methods, time series analysis *assumes* that all determinants of the metric under study are embedded in that metric's historical data. As a result, when the price/income ratio went parabolic, the quants (and their Suit overseers) said, "goody, goody" when they should have said, "what the fuck is going on?" It was not in either the quants or Suits direct, immediate money, interest to question the parabola. They all, ignoring Your Good Mother's advice on group behaviour, went off the cliff in a lemming dive.

Mr. Bookstaber argues that conventional ways to measure risk -- known as "value at risk" and stress models -- fail to take into account interactions and feedback effects that can magnify a crisis and turn it into something that has effects far beyond the original development.

And that part is correct. But the argument, and the logic which extends, doesn't deal with identifying the underlying cause of TGR. It does attempt to find where the bread crumbs *will go*.

The working paper explains why the Office of Financial Research, which is part of the Treasury Department, has begun research into what is called "agent-based modeling," which tries to analyze what each agent -- in this case each bank or hedge fund -- will do as a situation develops and worsens. That effort is being run by Mr. Bookstaber, a former hedge fund manager and Wall Street risk manager and the author of an influential 2007 book, "A Demon of Our Own Design," that warned of the problems being created on Wall Street.

Agent based modeling? As we're about to see, it's old wine in new bottles. Kind of like NoSql being just VSAM.

"Agent-based modeling" has been used in a variety of nonfinancial areas, including traffic congestion and crowd dynamics (it turns out that putting a post in front of an emergency exit can actually improve the flow of people fleeing an emergency and thus save lives). But the modeling has received little attention from economists.

This is where it gets interesting. If you review ABM (why did they end up with the acronym for Anti-Ballistic Missile?) here in the wiki, you can walk a breadcrumb trail. ABM is fundamentally very old, and came from economics, although more recently associated with operations research.

The patient zero of ABM is Leontief's input-output analysis. Leontief built I/O analysis in 1936, well before computers and data were as available as today. My senior seminar somehow got Robert Solow to give us a talk on economic growth (that year's topic). In 1958, Solow co-authored "Linear Programming and Economic Analysis". Large, interaction based, models have been part and parcel of economics for decades.

Here is where the article, and Bookstaber, stumble:

Mr. Bookstaber said that he hoped that information from such models, coupled with the additional detailed data the government is now collecting on markets and trading positions, could help regulators spot potential trouble before it happens, as leverage builds up in a particular part of the markets. [my emphasis]

The cause of TGR wasn't leverage; it was the corruption of historic norms. The result of the corruption was an increase in leverage by those who didn't even know they'd done so: hamburger flippers living in McMansions. It remains a fact: only increasing median income can propel house prices. With contracted resets, not tied to prime, only those in growth income employment (or generalized inflation, which amounts to the same thing) can finance the growing vig. ABM, as described here at least, won't detect such corruption of markets. It can't.

Perhaps regulators could then take steps to raise the cost of borrowing in that particular area, rather than use the blunt tool of raising rates throughout the market.

Here we find the anti-Krugman (and humble self, of course). It was the rising interest rates from contractual resets that finally blew up the housing market. Had regulators forced ARMs to reset higher and faster, TGR would have triggered earlier, and might not have been Great. It's the job of economists to know how the economy works. Leontief's I/O model is the basis of contemporary macro-economic modeling.

Here's the thing. In the relational model, the developer specifies a priori which tables relate and which columns in the tables create that relationship. These relations aren't probabilistic, they're deterministic. A similar distinction exists in macro analysis. A traditional I/O model, while derived from real world data, is deterministic in the input and output relations. On the other hand, traditional macro models are probabilistic; R² rules! Unless economists, and pundits, identify fundamental metrics, and build their models around them, they'll not have any luck predicting. Depressions and recessions have deterministic causes. Now, the loony monetarists tend to blame to the victims, just as they have this time (AIG suing the American taxpayer?). Keynesians tend to blame the centers of economic influence, just as they have this time. Historically, the Keynesians have been right more often than not. Volker be damned.

Older Than Dirt

My Pappy, though steadfastly lower class, had a yen for "U.S. News & World Report", an organ of the Lunatic Right which was more than happy that he and his family (and all others similarly situated) remain lower class. Consume the necessities produced by American corporations, leaving the good stuff for the more deserving. Yahoo! has some deal with the progeny of US News to run feature articles. And today is such a day.

Now, if the Lunatic Right were correct, then the idyllic wastelands of rural America would be the peachy keen place to live. You and the rest of the Tea Baggers living to a ripe old age, spitting and cursing city folk for their new fangled ways. And all that.

Turns out, at least in the US, that city living is the place to be if you want to get old. Being naturally female (surgically altereds don't benefit) makes a big difference too.

A large majority of the oldest U.S. citizens live in urban areas.

States with the largest populations generally have the most centenarians. California has the largest number of centenarians (5,921), followed by New York (4,605), Florida (4,090), and Texas (2,917). Alaska has the fewest residents age 100 and older (40). Wyoming (72), Vermont (133), and Delaware (146) are also among the states with the fewest centenarians.

It is overwhelmingly women who live to age 100.

So there you have it: Green Acres (and the 19th century) is the place to be, but only in fiction.

The Way We Were

Well, it's New Year's Day, and here I sit in my drafty New England garret ready to contemplate the most significant opportunity last year in the intersecting worlds of macro-economics and quants. The winner is obvious: the continuation (from 2010) of the DNC's incompetence. Ah, I bet you were thinking: Obama won? That was no surprise. Given that he won by a larger margin than any one of the pundits predicted, including 538, his coattails were a tad motheaten.

2010 set in motion the eventual hegemony of the radical loony Right. 2012, thanks in no small part to the DNC, leveraged the gains in 2010 (particularly the opportunity to set voting districts and "rules", code for voter suppression) such that more state and local government is now in the hands of the lunatic Right. DNC has much blood on its hands, but they've been quiet. Quaking in their well paid bunkers in Georgetown and Bethesda and McLean.

Here's some reporting on the damage. Countering 2010 and 2012, is the movement (mentioned here before) that urbanization is the great Lefter. Once again The Atlantic lays it out quite nicely (this one is linked). I wonder whether those might be ggplot2 maps?