Show Me The Money!

Gentle reader, do you recall what I've been saying about quants, that Giant Pool of Money, and predicting the future? That, even without the various QEs, interest rates would still be falling, since there's less demand for physical capital. And that's because paybacks are getting longer, plant and equipment (especially in anything semi-conductor related) is getting more expensive, and thus monopoly/monopsony becomes the state of the world?

Well, lo and behold, we have today's bit of news, and there's a link to the original EETimes piece.

If we take things back another step, the reality of the semiconductor business is that fabs are expensive to build and maintain. Then they need to be updated every couple of years to the latest technology, or at least new fabs need to be built to stay competitive. If you can't run your fabs more or less at capacity, you start to fall behind on all fronts. If Intel can more than utilize all of their fabrication assets, it's a different story, but that era appears to be coming to a close.

A fab ain't a steel mill, which you can milk for decades. Ah, if only we had the good old days. And some label Buffett a silly old man.

Oh, and the PPI/CPI numbers out this week are benign. All that QE money still ends up with Mr. Market and ABC Corp. trading old, expensive (on a relative basis) debt for cheap debt. And some quants wonder why there's no job creation?

Kumite'

Some recent readings have me musing once again on the notion, "there's many a slip twixt the cup and the lip."

After finishing school, I set out into the world of work, at a time when the USofA was contracting. Not quite so bad as The Great Recession, but pretty close. I ended up mostly in my chosen profession, and got exposed to systems' building and stats-in-the-wild (SPSS). I also found that not all jobs are as time consuming as graduate school, and thus leaving significant number of hours in the day to fill; more or less meaningfully. I sought out forms of physical activity, a welcome change from six years of sitting in class, library, and impromptu study hall.

Off to the Boston Y, next to the Green Line as was my abode at North Station. How about karate? Dave Edwards was teaching a class, so I talked with him about taking his class. He advised me to study with his teacher, George Gonis over in East Boston. George taught (near as I can tell, he's no longer teaching) his branded version of Gojo Ryu, which he first learned from a man in New York City, and later continued with the man's father in the mountains of India. I don't recall ever knowing their names. As fanciful as it sounds, my all too brief (soon after I was off to DC, and Dr. McElhone) tutelage covered the time of one of his trips to India, so I was around when he returned from promotion (a higher level of black belt, but I've long since forgotten what number). Not having a hair on one's body is kind of striking. Unlike olympic swimmers, this process was part of ritual cleansing, not a mode of faster movement.

To complicate matters further, I also found an arts/meditation/foobar workshop in Cambridge, where I found a tai chi teacher, Julian Miller. His brother, Don would be there occasionally. Julian learned from William C.C. Chen, while Don with T.T. Liang, who has since passed on, although I did get to see him perform a double sword form in Boston when he was about 74.

Karate is considered a hard style, while tai chi is the ultimate soft style of eastern martial arts. Kung fu is generally considered in between. Never did do a kung fu, although I've toyed with the idea of aikido. They all teach in two parts: forms and free fighting. In most karates, the latter is called kumite'.

Now, what you see in 99.44% of mixed martial arts, kung fu movies, and the like has little to do with what is taught. More interestingly, the same is true in the kumite' section of tournaments put on by legitimate practitioners. This is particularly true of kicks. And most particularly true of the signature kick of karate (not so much in tai chi), the roundhouse.

Much to my surprise the Wiki has a description, and pretty accurate from my history anyway:

The original method involved bringing up the knee, and then swiftly turning the hip over and snapping the leg outwards from the knee to deliver a strike...

What part of the foot is used varies. When first taught, the instep. But the preceding quote is farther down the page. This is what the opening paragraph says:

A roundhouse kick (also known as swinging kick or a power angle kick but often confused with the round kick) is a kick in which the attacker swings his or her leg around in a semicircular motion, striking with the front of the leg or foot.

The difference in wording is critical. What passes, today, for a roundhouse kick is merely a leg swing. It isn't of much use, as it telegraphs it's intentions like a horny sailor on shore leave. The true roundhouse begins with the knee thrust upward. If you've studied with a veteran, you've been taught that from the knee elevated position, at least two kicks can be completed: a front snap or a roundhouse. Yes, a true roundhouse is a front snap on its side. The front snap extends the energy of the moving glute and thigh through the lower leg to the foot, and thus the target. Whichever part of the body the opponent has left least protected determines how to finish the kick; either the head or the kidneys. Take your choice. If you've studied well enough and long enough, both kicks take the same time to complete. There's no speed advantage to the simpler front snap.

What the hell has this got to do with databases and stats, I can hear from the peanut gallery!!!???

Just this. Folks who should know better de/un-normalize the schema because everybody else says it's for performance. Folks who should know better abuse the assumption of normality (not to mention homoscedasticity) in data without even thinking a second about it. There was a time when "thou shalt not estimate beyond the data" was the First Commandment. Not so much these days. The trigger for this stroll down memory lane were some recent posts.

This on the problem with backtests.
This on joy of honest data analysis.
This on backtests.
(all links posted on R-bloggers; you do spend time there as I suggested?)

It's easier to do a leg swing and call it a roundhouse, but that doesn't mean you should.

Klein Bottle

When I was in high school, or perhaps even as early as junior high, I discovered geometric topology (algebraic topology is a tad tougher to grok), in the form of various conundra. Prime among equals was the Klein bottle.

... informally, it is a surface (a two-dimensional manifold) in which notions of left and right cannot be consistently defined.

Lawrence Klein, on the other hand, certainly knew left from right. He was, on the whole, of the left.

And, contrary to certain mealy-mouthed economists of late (nudge, nudge; go read recent musings):

"The only satisfactory test of economics is the ability to predict," he wrote.

Pop Quiz

Claaaaaaaaaaaaaaaassssssssssss!!!!!! Listen up!!

From today's newsfeeds, Briefing.com:

08:34 am : [BRIEFING.COM]
September nonfarm payrolls came in at 148K versus the 183K expected by the Briefing.com consensus. Nonfarm private payrolls added 126K against the 183K consensus. The unemployment rate was reported at 7.2% while the Briefing.com consensus expected the rate to hold at 7.3%.

Jimmy, how does the answer get smaller when the numerator got bigger? Jimmy?? Jimmy, you stupid sloth, what's the answer!!!!!!!!!!!!!

Politically Incorrect

More bloviating on the Nobel choice of economics winners. Today it's one Raj Chetty who argues that "Yes, Economics Is a Science". He's wrong, of course, despite living in a saltwater economics environment with Krugman, et al.

I'm troubled by the sense among skeptics that disagreements about the answers to certain questions suggest that economics is a confused discipline, a fake science whose findings cannot be a useful basis for making policy decisions.

No, what's troubling is that the likes of Fama live in a bubble, often parodied by Maher. And the likes of Chetty don't call bullshit.

And the reason: the data is used to support the a priori policy decisions. Each side hires quant guns to defend it. I don't think Chetty even read his piece before submitting it, because he tells the tale of dueling data over the question whether extending unemployment insurance duration leads to a welfare society of entitlement junkies.

These studies have uniformly found that a 10-week extension in unemployment benefits raises the average amount of time people spend out of work by at most one week. This simple, unassailable finding implies that policy makers can extend unemployment benefits to provide assistance to those out of work without substantially increasing unemployment rates.

Economics isn't a science, it's political economics, as it was called in Adam Smith's (the real one) day, and with good reason. Economics of the sort of Fama, which serves only to defend social Darwinism from protest, was what motivated Smith and those a generation or two on both sides of his life to coin the term Political Economics. They were well aware that the commonweal is different from the benefit to the very upper class, and set about devising an explanation for why the 99% ought to reap more of the benefits of an economy. And they understood that the key was the political process. With autocracy one had monopoly. Which the chicken and which the egg? Flip a coin, because it doesn't matter. Once one abides the other comes along for the ride. Left alone, the monopolist/autocrat would grind the rest into subsistence poverty. The only way to combat this devolution was a set of law which protected the majority from the minority.

If autocracy is the form of "government", then the autocrats, by definition control that which is of value. If monopoly, such as oil fields in third world countries, then the monopolist has to be "protected" from protest by autocracy. Or, who is the NSA protecting?

These days the likes of Fama continue to garner great gelt from the deepest pockets, just as F. Lee Bailey once did. The other issue is data itself: micro data is readily available to corporations/lobbyist/etc. since they have dominion over the process under study. Macro problems, on the other hand, are supplicants to governments (and a few NGOs) for orts of data. Most often this is sample data of shaky provenance. Just read the entirety of a monthly BLS employment report; you'll be in tears.

One of the quite recent indictments of the Fama myth of perfect information, and such, is the cost/price/margin situation with the iPhone 5C/S. If there were rational consumers and perfect information, as the Fama acolytes insist is the way the real world works, then the price difference would reflect the marginal cost difference. According to iSuppli there's a $26 difference, which ends up being a $100 difference in price. In Fama's world, that can't happen. But it does.

Economics will remain not-a-science so long as the mass of economists engage in advocacy to the highest bidder, irregardless.

Noble Gases

These are the noble gases:
Helium, atomic number 2
Neon, atomic number 10
Argon, atomic number 18
Krypton, atomic number 36
Xenon, atomic number 54
Radon, atomic number 86
A bunch of guys in Stockholm, intellectual number 0

Yes, a bit of spleen regarding the good burghers of StockholmM who decided to award the economics prize to two right wingnuts from Chicago and one rationalist from New Haven. Talk about schizoid? Or, perhaps, they were intimating that sometimes the quant/micro guys are right and sometimes the behaviourist/macro guys are right?

In one sense, I suppose one could make such an argument. The problem is: what's good at the micro/quant level (corporation or hedge fund) is seldom good at the macro level. As Charles Erwin (not Roger Smith, and not what's commonly quoted) infamously said, "...I thought what was good for our country was good for General Motors, and vice versa". Not that there's much semantic difference between the two statements. Turns out, not so much.

The underlying problem of quants versus the world, is that quants engage in gaming a zero sum game for their employers, while the macro folks worry about the greater good. Micro folks, not surprisingly, both deny that value judgments are meaningful and that whole is greater than the sum of the parts. In other words, an economy which produces 1 billionaire is just as good and fair as one which produces 20,000 $50,000 households. Chew on that for a minute.

Fama adds a snarky quote:

Asked in 2010 about those who warned that housing prices would crash, he responded, "Right. For example, Shiller was saying that since 1996."

Sometimes you just want to slap the brat.

The King's English

(HSBC, apparently, doesn't want to hear bad tidings, as it wouldn't Submit the following. The reference is to this piece.)

Well, it is comforting that fascism reigns supreme amongst the bankster crowd. Mr. King listed 5 reasons for a decline of The West. He missed out.

The most important proximate cause of the decline is the rich waging war on the poor (see: Warren Buffett). Since the 1973 OPEC/Arab oil embargo, the 1% and .1% of Western countries have amassed an unprecedented proportion of wealth; not seen in the modern era. One must needs return to the US Gilded Age, and the economic wasteland of the time. Just as the Right Wingnuts of the USofA want a country that looks as it did in 1850, it appears Mr. King does too. Unfortunately, there isn't another virgin resource continent (virgin, if one chooses to decimate those already living there) to be had.

In fact, economic growth is doing quite well, if you look narrowly at capital/labour productivity. What's missing is a method of distribution. Oddly, Mr. King channels Adam Smith, but ignores Smith's open disdain for capitalists. He really should re-read the book.

The reference to the French Revolution is particularly galling: the revolution happened because "Let Them Eat Cake" was the modus operandi of the rich.

The excesses have been two fold: the 1% grabbed an outsized share of GDP, and the rest took to home equity loans (made easily available by banksters, at a nice up-front profit) to maintain subsistence.

Blaming the poor for economic decline is a trite approach; blame the victims.

Morose Reactionary Insurance

A while back, I mused that even the 1% would need Obamacare. I offered up the non-data based, just logical, argument that MRIs would become too expensive, due to the high fixed cost relative to marginal cost, should the number of scans be substantially reduced. Without Obamacare, and the increase in the uninsured, eventually the "poor" will be allowed to suffer (and die). No MRI for you.

Finding actual data on the specific fixed/marginal load isn't easy. I've finally found a Nova Scotia study which helps. (See Appendix C, the total cost is about $3 million.)

A conventional high field fixed site can be sited with appropriate shielding, connectivity, receiving and waiting room all in the vicinity of 2.6 million dollars. In addition, "uptime" is reported to be higher in a fixed site.

It is recommended that the province fund and operate each scanner eight hours a day, five days a week, booking 14 patients per day. Each scanner operating 50 weeks per year at 70 scans per week would provide up to 3500 scans on an annual basis. This would increase capacity up to 7,000 scans. This would bring the Province of Nova Scotia closer to the national average. Current data is changing in view of the rapid diffusion of MRI technology across the country.

If you look at the detail on page 20ff, you'll see how tiny the true variable costs are. The staff is salaried (i.e., in normal accounting they'd be paid from one account, and "billed" back per MRI to another). The variable costs, "supplies" of various sorts, come to $87,000 per year. That's $24/MRI. As to the fixed cost, let's say interest free amortization over 5 years for the $3 million installation. That's $600,000 per year. Remaining fixed cost is $535,000 per year. So, we're left with $1,135,000 to defray for each yearly block of 3,500 scans. That comes to $324/scan. As simple arithmetic makes clear, viability is highly dependent on usage. Cut the usage in half, and total cost nearly doubles. Yes, for once the world is linear. For more expensive procedures, robotic surgery machines for example, their vendors will simply go out of business. Rand would be so happy that we've found a way to rid the world of useless cripples.

It's Rutting Season

This endeavor began with a simple proposition: history demonstrates, without equivocation, that economic growth and prosperity occur when consumers have enough wherewithal to clear all output at prices which support a return on capital (which is not usurious). It is, in the short term, a zero-sum game. Over the long term as well, since imbalance in the short-term leads to distortion, which is a positive feedback mechanism.

This notion is embodied in the subtitle: "It's the Distribution, Stupid". Props to Bubba for the template.

For most of this existence, it's been kind of lonely. Save for few rational left wingnuts, the lemmings in Kansas (that's a metaphor, see: Rich, Frank) have held sway over the nation's mindset.

Then, along comes Daniel from the lion's den. Who'd a thunk an investment banker would get religion? Well, one has. It sounds as if he's been reading my musings. If only.

Herewith some quotes:

We are in an age of global oversupply: an oversupply of global labor (hence high underemployment); an oversupply of global productive capacity (hence ultra-low inflation); and an oversupply of global capital (hence low interest rates).

We are not, however, in an age of global energy surplus. Far from it. One might argue that the malaise in the West began with the OPEC/Arab oil embargo of 1973. Prior to that, America squandered petrol like a drunken sailor, as My Pappy used to say. Suburban sprawl. Reliance on gasoline. Removal, much less creation, of public transport.

We are no longer faced with a world in which supply-side economic remedies -- easy money, reduced taxation, fiscal belt-tightening and deregulation -- can spur new capacity and the creation of well-paying private sector jobs.

It's worth noting that the financialization of Western economies, with physical production being banished, has much to do with the failure of supply-side mantras. If it were the case that the USofA (or the EU) was a closed economy, there is a grain of truth to had in supply-side. But it isn't, nor was it when Laffer made it famous. Keep in mind that Laffer didn't invent anything, merely popularized it. Much as LA gurus popularized and debased Eastern mystic religions.

Beginning in the late 1990s, a wave of capital, much of it the result of trade surpluses and big piles of savings in Asia, flooded the world's capital markets.

True, but the impact of 9/11, and the scurrying of said capital to financial, rather than physical, investment played the largest part. Real estate investment, heretofore, had been a backwater; save for insurance companies and commercial real estate (that's another episode). But with Greenspan cratering Treasuries, in a paroxysm of supply-side zeal, that Giant Pool of Money sought the nearest neighbor (a quant reference!). Houses. Bah.

Cheaper credit through monetary easing, for example, doesn't yield much in an era when cheap capital already exists in abundance.

Amen. As noted here, even recently, real return on real physical investment, particularly in the au courant sectors of high tech, has been falling due to the rapid technological obsolescence in the sector. A fab just doesn't have the productive lifespan of a blast furnance had in 1950.