30 December 2014

The Winning Incentive

Today's NYT has a bumper crop of new data/facts surrounding the overarching themes of these endeavours. So, with minimal gloat, here they are.

First, there continues to be the Rightwing cabal trying to pin The Great Recession on the Dems. For the record, once again, Bush was President, Rehnquist/Roberts ran the Supremes, the House for the whole time, and the Senate save for 2 years. So, the mess is squarely Rightwing. I didn't keep a cite, but one knuckledragger asserted that The Great Recession was caused by QE. That's one deeply stupid pencil neck, or just vigorous liar.

One of the enduring myths from the Right was that the housing mess was caused by the Dems, citing the CRA quite often. What they don't admit is that the mortgage companies, CountryWide spectacularly, weren't banks and thus had no recourse to the CRA. Another myth was that the GSEs led the pack. Again, it was the privates, MGIC and the like, which led and the GSEs, seeing market share eroding, took up the sword.

What is new today, is documentation of how deeply corrupt the investment banks were in creating these loans. As asserted here, a lot, whenever the data don't make sense, follow the incentives. In the case of The Great Recession, it was the need to sop up all that idle money when American CxOs couldn't, or wouldn't, put fiduciary capital to work as physical capital.
Now, though, a trove of emails and confidential documents, filed in court, reveal the extent to which one of Wall Street's leading banks, Morgan Stanley, actively influenced New Century's push into riskier and more onerous mortgages, and brushed aside questions about the ability of homeowners to make the payments.

Who were these loans defined by and created to benefit? The answer to both isn't folks of marginal wealth and income. It's the CxOs.
But the bank remained an important backer of New Century to the bitter end. In March 2007, after other banks had withdrawn their credit lines from New Century, Morgan Stanley gave it $265 million in financing. Soon after that, Morgan Stanley withdrew the money. New Century filed for bankruptcy a few weeks later.

Should we blame all of the investment banks, commercial banks, mortgage companies, and private mortgage insurers? Getting close to, "Hell, yes".

Second, the USofA isn't the only country with a housing/investment problem. China's had one for a long time, for somewhat different reasons. It's long been the case, and known but not often mentioned in the mainstream press, that Chinese have fewer ways to get vig. Housing has been one, and by all accounts with the encouragement of Beijing. Generally, the only one. "60 Minutes" has video of ghost towns. Now, Joe Plunger (I don't know the Mandarin equivalent) can bet on stocks more easily. The inevitable result, of course, is more like a chain letter.
Although the Chinese leadership has long hoped to see a rebound in the country's stock markets, the current frenzy carries risks that could stick investors with heavy losses. Much of the trading is also being done on margin, or by using borrowed funds to buy shares. So the boom could unwind even faster if sentiment sours.

Not surprisingly, since China's capital market is largely closed, housing prices have moved in the opposite direction. It's largely the same Giant Pool of Money (again, no Mandarin), so the seesaw swings.

Third, is domestic, for now, Chinese smartphone market. Thanks to Foxconn, and the like, China is a major (if not majority) manufacturer of smartphone parts. Apple makes none of the parts in an iPhone, just so ya know. With all that capital sunk into part making, the time would come when marginal and variable cost pressures would win. Xiaomi is the result.
Xiaomi, founded in 2010, has overtaken both Samsung and Apple in China by offering inexpensive, high-quality phones through clever online marketing campaigns that appeal to China's growing ranks of young and affluent consumers. Around 500 million smartphones are expected to be sold in China in 2015, more than three times as many as will be sold in the United States, according to the research firm IDC.

Apple has always, at least since Jobs II, ignored all but the upper X% of demand. But you can't run an economy or even a sector that way. Especially in a time of out of control automation of production. Fixed costs eventually overwhelm materials and labour, so the need to shift widgets at any price rears that ugly head.
But the start-up smartphone maker's fast growth, competitive pricing and innovative marketing have struck a chord with Chinese consumers. The company hopes this approach will translate into success in overseas markets, too. Mr. Lei and his co-founders, who include the former Google executive Lin Bin, Xiaomi's president, are considering expansion into large developing markets like India and Brazil.

Correlation isn't causation, necessarily. Sometimes, but not always. For the quants, micros, and macros far less often than any of them would prefer. After all, a magic algorithm would be as valuable as Rumpelstiltskin. Data helps in predicting gross money flows, but even then, the meandering of that flow is caused by changes, generally implemented by those who stand to benefit first and most, in the rules/incentives. The only way to know you will spin straw into gold is if you know about the new incentives before anyone else. Just like the mortgage companies invented Liar Loans, and took their winnings up front, leaving the occupants and insurers up a creek without a paddle. All of those who chased the new rules were just lemmings headed off the cliff, although lemmings aren't actually that dumb. Disney made it up.

26 December 2014

Marky Mark

No, not Wahlberg, although you should see "The Departed" if you've neglected it. No, this musing is all about real books, and how to really highlight them.

Years ago, I grew tired of the huge Marks-A-Lot type with the felt tip which broke down soon enough. I used the Pentel Data Checker for a long time, but they're harder to find in the flesh these days. I've got a supply of the yellows, if anyone's interested. I used them "upside down", using the back of the chisel to draw through the text.

I discovered that Noodlers make highlight inks (the page is for firefly yellow, which isn't called out in the swatches) for fountain pens. But two issues: only firefly is a bit fluorescent, and it fades rather quickly. The others are "just" semi-transparent inks, so far as I can see. The other thing is that the others are dark enough that the drawn line stands out enough from the page as to be distracting. I haven't found a pen/nib that I'm willing to pay for that's as wide as a traditional highlighter, so one highlights through the text, not over it. Firefly does blend well enough with white book paper that the meandering line still highlights but doesn't distract.

As to how to apply? Pelikan offers up broad nibs, but the pens are obscenely expensive, and may not ship with the broadest nib; purchase separately(!). Well, the M205 is a bit cheaper, if double broad is OK. Both way more than I wanted to spend, so I've ended up with Lamy AL-Stars with broad nib. I don't remember where I got them, but Goulet is an alternative to Amazon at about the same price.

I tired of the Noodlers firefly fading, and stumbled on Pelikan yellow. Now, that's more like it. Very bright, hasn't had a fading issue, so far.

Go read a real book. You'll feel better in the morning.

Baby You Drive My Car

Once in a while, a random comment on a random post on a random thread on a random site strikes me as worthy of a post here in these endeavors. What follows is such.

IBM's (and American corps generally) problem is that they've lost their marbles. Corps managements (the CxO class) are paid those big bucks because they are supposed to be smarter allocators of fiduciary capital into physical capital, and thus earn a real return. They've all, by and large, stopped doing that. There's a reason that up to $7 trillion is sitting in corporate coffers. Buy backs and dividends only move money from one subset of the 1% to another subset of the 1%. There's no growth, which all corps need, in the general economy. It's just circling the wagons against the 99%. A Robocop world, in fact. No idea how to generate real growth yields to accounting manipulation, aka financial engineering.

The latest scheme, not one IBM is party to that I've read, is 100+% car title loans to poor people. Such a great way to build growth into an economy.

Have a nice day.

20 December 2014

Kicked to the Curb

In some businesses, it makes sense to kick to geezers to the curb when downsizing. Newspapers isn't one of them since it takes a bit of time listening to the liars to figure out what a lie sounds like, but they do that nevertheless. This is Floyd Norris' last piece for the NYT. You should read it.

He opens with:
What happens when you turn over regulatory responsibilities to people who think there is really no need for regulation?

Of course, the Right Wingnuts will likely dismiss, and not bother to read, what follows. They're always right, of course.
To a significant extent, derivatives enabled risk to be shifted from those who understood it to those who did not. Securities deemed risk-free by the rating agencies turned out to be worthless. Much of the financial innovation that so impressed Mr. Greenspan had been designed to let banks find ways to reduce their capital levels without the regulators noticing.

And for the quants:
Bank capital rules came to allow the banks to use their own -- presumably sophisticated -- models to calculate how much capital was needed for any asset they owned. Countries like Ireland and Iceland developed large banking systems and were hailed for finding high-paying, nonpolluting jobs.

Naturally, they ended up polluting the global economic structure. And the cleanup Superfund comes from, in the case of Ireland, almost wholly on the backs of small taxpaying citizens. Moral hazard? Of course not, from the banks' point of view.

18 December 2014

I Loves Olive Oyl

The problem with being dependent on data to make decisions: what do you do when there is no data? Well, punt. Let's turn our attention to the oil patch. Crude is quoted at $61/barrel (and change) today, and the blue-eyed Arabs in the Red states are whining poor mouth. Already. Gad.

Here's the dirty secret about oil, or any extractive resource for that matter: marginal cost pricing doesn't work in the short to medium term. Depending on the resource, even long term. The reason is that marginal cost <> variable cost. The latter is what determines whether to power the pumps on existing wells, or not. It is just the cost to run the motors, keep them running, and so forth. Marginal cost is how much to bring *a new* well into production. It's clear that the second number is much higher than the other. And, it explains why the Saudis are willing to keep the pumps running; an existing well is profitable at a very low barrel price. Yes, the petro companies would like to fully amortize all the sunk costs on a well, but they have no control over sunk costs. They're sunk, after all. You're not getting the money back. You kissed it goodbye long ago. So long as you get more for the crude than it cost to get it to the surface, you're ahead. It's just second-grade arithmetic. You could shut the well, hoping that the price will rise soon enough, but so do all the other owners. Who'll blink first? Shut the well, and you lose the moolah, but the other owners don't.
But being this is a .44 Magnum, the most powerful handgun in the world and would blow you head clean off, you've gotta ask yourself one question: "Do I feel lucky?" Well, do ya, punk?

How low Mr. Natural? Hard to say, since nobody seems willing to divulge the number. Easy oil comes from a fresh pipe with sufficient gas pressure to lift the crude to the surface from the deposit. All those gushers from old movies. Variable cost of a barrel from such a well: $0. Nada. Zilch. And so forth.

The Wiki explains the succession of involvement to get crude to the surface. One of the reasons Peak Oil came to be a meme was that USofA production was well (pun intended) into tertiary recovery. That costs rather more to lift. In any case, once the infrastructure to aid lift is in place, the variable cost is the electricity to run the pumps (into and out of the well) and the supply of material to inject. That's mostly water, which is ironic in the case of middle east oil, since there's so little of it nearby.

In sum then, there's money to be made from existing wells even at $50 or $60 a barrel. That's my guess, of course. And, it seems, for the Saudi's too.

17 December 2014

Putin on the Schitz [update 2]


As always, when there's a disruption in the process which created the time series the quant relies on to forecast future values, ignore the time series and look to the changed incentive proposal.

By now all but the most self-absorbed Fox News watcher is aware that something is going on in resource extraction economies, both foreign and domestic. Yes?

The ruble seems to have steadied from its leap off the cliff, but the flight of moolah from Russia appears unabated, and so from Brazil as well.

Why might all this be? Of course, there's the simple finances of it: lower $$$/barrel of petro means lower $$$ for Vlad. Thus, the ruble drops relative to the Buck, and the Money Men decide that Vlad isn't the savior they told him he was. Not that Vlad actually put all that petro and gas in the ground with his own two hands, of course. Lower $$$ for Vlad means he has to call on his police state to keep the lid on. "How much gasoline for that bag of carrots?"
Here's a snippet from a CBS News report today
With the ruble hitting record lows, many Russians rushed to unload their shrinking bank accounts on high ticket items like refrigerators and dishwashers.
(Remember: trade is always barter, just that "modern" economies use currency as a kind of lube job.)
[end update]
You read similar here not too long ago. "His" interest rate gag won't work: domestic moolah is leaving by the boatload along with foreign. With the ruble now basically a worthless domestic currency, and Russia not nearly a self-sufficient domestic economy, Vlad could well go to war someplace. Stoke, once again, the vision of Greater Russia (USSR) for Real Russians. Stay tuned.

The fundamental problem for all extraction based economies is that, by the nature of the beast, they have to be fascist. And the reason for that is simple: the value lies in the ground, so control of the ground determines control of the resource, which means control of the moolah. That fascism may be direct, as in Russia where Vlad and his buddies "own" the petro, or it may be indirect, as in the USofA where pliant government moats "private" ownership. The USofA, you say? Beacon of democracy? Not so much in the resource states. The oil, coal, and farm states have been very Red since the Founding. The few that stole the land, not always knowing what resources lie within (beyond soil and timber and rocks), from the Natives wanted to keep the value unto themselves. Pliant local and state (and, on occasion, federal) governments saw to it.

While it does cost more to get the stuff out of the ground once the easy X% has been taken, the value of the stuff is determined by the use of the stuff in production. There is no value-add to extraction; I don't care what Vern Smith bloviates. In the case of petro, cracking towers turn raw petro into various different compounds, with attendant different uses. Value-add exists for that, certainly. If folks can't afford to use, or they need bags of carrots to eat, petro price drops.

So, what does this all mean Mr. Natural? It means that interest rates here in the USofA are about to tumble from their already painful (if you're a coupon clipper) lows. How can that be? All that Russian and Brazilian and such moolah is looking for a safe haven. That'd be us. All that USofA moolah that might have gone to resource extraction also needs to find another home. Treasuries are lookin' mighty good. Expect the next auction to dip even further (the 10 Year Note is 13 January; will be interesting here's a concise report). Supply and demand, Econ 101: mo money chasing diminishing number of chairs as the music plays on.

[update 2]
In a stunning analysis this week, Goldman Sachs found almost $1 trillion in investments in future oil projects at risk. They looked at 400 of the world's largest new oil and gas fields -- excluding U.S. shale -- and found projects representing $930 billion of future investment that are no longer profitable with Brent crude at $70. In the U.S., the shale-oil party isn't over yet, but zombies are beginning to crash it.

And, I'll bet most readers laughed out loud when I said that the next 10-year Note auction would be instructive??

15 December 2014

Ides of December Nudge

Another in the desultory reminders that you need to read this guy.

14 December 2014

Matter Over Mind

It's deep into sports season. NFL is winding down to the last few games, Heisman is today along with the Army-Navy game, NBA is at the ¼ mark. Johnny Manziel is described as a midget. Adrian Peterson doesn't get off Scott free for beating his kid. Baseball teams swap players at multiple tens of millions of moolah a pop; having had some for just a few months. All these obscenely paid walking meat sticks get that money in large part because taxpayers foot the bill for the venues in which they play. Said venues being the only real capital needed to field said teams; the other costs are the franchise fee levied by the other owners (one step removed for Ballmer, but it's the same thing) and the payments to the aforementioned walking meat sticks. Free market? The NFL, as organization, is arranged as a non-profit. That's the truth.

And I, not for the first time, wonder why it is that adolescent males (and, increasingly, females) are willing to spend many hours in the gym/weight room/track getting big muscles, but not a nanosecond in the lib to build a big brain. The odds of finding employment as an NBA player? Well there are 30 NBA teams of 12 (15 if you count inactives) players each. Discounting foreigners (which one could do in years past...) that yields, at best, 450 slots. On a population basis of 319 million, with about 80 million of basketball age, and a 50/50 split in sex for that age cohort, we end up with 40 million candidates. The odds: .001% of being a NBA player; and that assumes all positions are available all the time, which, of course, they're not. For a absurdly detailed analysis of the NBA, go here.

Yet, these walking meat sticks will spend mind numbing time making big muscles, fast muscles, and so forth. In basketball there is the age-old wheeze, "you can't coach height", which limits the odds still further. Not so much in football (unless you're a midget quarterback in an era of tall ones) and baseball. The fact remains: "working" toward a career (typically measured, on average, in single digit years across all of them) in professional sports is as probable, at best, as winning Lotto. This is one case, even if the arithmetic says so, that expected value may not be a rational driver of decision. One need only remember the issue with airplane travel: there's not much chance of a crash, but if you're in one, there's a majority probability of not living through a crash.
According to the 2014 ICAO safety report, the total number of plane accidents in 2013 was 90 world-wide. Only 9 of these accidents were fatal accidents, that is, accidents involving fatalities. The Global Fatal Accident Review of the Civil Aviation Authority gives a total number of 0.6 fatal accidents per one million flights for the ten-year period 2002 to 2011. When expressed as per million hours flown, this number is 0.4. The corresponding number of fatalities is 22.0 fatalities per one million flights or 12.7 when expressed as per million hours flown.
(Or, you can look here.)
Depends on which expected value is of most value to you. Same, it seems, with teen age males. They see a massive carrot (the obscene payment if you play), but ignore the even larger stick (the more massive likelihood you'll be flippin' burgers with those pretty muscles). Those who prefer to not fly in tin coffins are derided as delusional, yet young males who decide to devote themselves to becoming a professional athlete are "living the dream"???

It appears to be that the mind numbing activities of muscle building are preferred just because they dull the mind. After millennia since we crawled out of the muck, we'd rather regress to lower levels of consciousness. Drink and drugs do the same thing, too. Not that Mormons are all that likeable for their temperance. It's kind of sad. Gives the Right Wingnuts ever more fodder. One might also note the increasing prominence of ruralism in entertainment. Country songs, swamp people, gold diggers (not the floozies), huntin' and fishin' shows, farmsonly.com (city folk just don't get it, of course), and so forth. As if the "simpleminded life" were the better one. Trouble with thinking that way is that all those pointy headed -ologists (over a number of centuries of study) have figured something out: it's the density of cities that leads to progress. All those low intellect bush people in Africa and peasants in South America and Asia are proof of that, right? (OK, before regular reader gets her panties in a bunch, that's sarcasm!!) Yet, here we see purposeful regression to low achievement.

13 December 2014

Crazy Schizo Quants

OK, so back in 2012 the Right Wingnuts were blaming Obambi for hiking gasoline prices (and, by necessity, petro price). The lobbyer doesn't have a link to the advert, anymore, so here's the quote of note:
Since Obama became president, gas prices have nearly doubled. Tell Obama we can't afford his failing energy policies.

Today, Mr. Market, led by the same Right Wingnuts is going out of its mind over falling gasoline and petro prices: here (and, of course, nearly every news source).
U.S. benchmark crude scythed below $58 a barrel for the first time since May 2009 for a weekly loss of nearly 12 percent in the midst of a tumble whose severity and magnitude matched what happened during the 2008 financial crisis.

Makes one wonder who the USofA economy is run for? All of us?? Or hedge funds?

11 December 2014

Those Crazy Quants

Regular reader, by now, is aware that I take the view that quantitative analysis is for both fun and profit, but that it should be attempted somewhat gingerly when the venue is human behavior. We get to make the rules up as we go along, unlike the other animals, minerals, and vegetables which live by God's (or Nature's, depending on your -ism) rules. The rules don't change. We ain't Brownian motion, fur shur.

Well, I just found this post on r-bloggers.
The eBook reprints several unpublished articles and reports from the Econophysics Group at ETH Zurich.

"Econophysics"???!!! And all this time, I'd viewed the Europeans as, generally, more astute. Guess not.

09 December 2014

Widget Wonderland

Three semi-related posts went past my eyeballs today. The thread which hangs them together is the value of value. How do we figure it?

First, Blankenhorn takes on Amazon, among my favorite fubar companies. As is often the case, the comment stream is as significant as the post. The poster child for the "we lose money on each sale, but make up for it in volume" approach. Either Amazon attains monopoly, i.e. pricing, power over retailing or it goes belly up.

Second, one Peter Greulich (not familiar) takes on IBM. Here the issue is both the danger of goodwill and the structure of companies. How to value IP, services from IP, and goodwill (e.g. the sale of WhatsApp)? IBM has been shedding real capital and real production for many years. It wants to see the ROI of software driven services. The WhatsApp home run as paradigm for Big Companies, if you will. So do many corporations. Good luck.

Third, Rob Hyndman takes on Data Science. What is it? Who does it? Is it just stats with a new name? Is it just OR, with a new name? Is it more, in some sense, than just stats (Janert says so)? Likely.

Taken together, some musings on the value of value. Micros and quants invariably practice reductio ad absurdum (in the second sense, and on themselves) by looking only at the financials and ignoring the real world aspects. How else would they have blessed liar loans? If quants and micros took the "science" part of data science seriously, may haps we wouldn't go through Great Recessions? One of the comments on the Hyndman post is on that point.

If science viewed thought as property, we'd still be cavemen.

04 December 2014

Prometheus Unbound [update]

The mainstream pundits, and the blogosphere too, continue to be perplexed by the refusal of open market interest rates to rise as they had hoped/wished/needed. So, it falls to moi to yet again 'splain some more.

The notion of moolah as commodity rests on the base assumption of trade in real goods: that supply and demand are functionally infinite, and that the "curves" result from individuals' (and remember, corps are people too) levels of psychic satisfaction. To put it yet another way: real demand requires only that "I" want another widget and have the moolah to pay "more" for that widget. The only limit is my satiation with said widget. On the other side, supply, Widget Corp. is willing to make widgets until Hell freezes over if enough folks want them. Availability of production inputs are assumed to be infinite in the sense that a source of supply always exists, at some price.

Now, when it comes to investment, the situation gets a bit gnarly. The MBA types, and most quants, don't distinguish between fiduciary capital and real capital. Most, likely, don't even acknowledge that the latter even matters. But, of course, it does and explains what's going on now. Financial engineering isn't real engineering; not by a long shot.

If we view moolah as an investment commodity, then the gnarl sets in. On the supply side we have retained earnings by business and non-consumption by the rest. On the demand side we have business. What's the motivation by business to take fiduciary capital (moolah, to you and me) and turn it into physical capital? One thing only (in a rational world, of course): that the plant and equipment so made will yield more profit than by not doing so. Nothing else. Financial engineering, so beloved by Wall Street and The City, doesn't count.

Note, however, the difference in the demand function betwixt consumer demand and capital demand: the consumer just wants a better hard on, but the CxO demands that the capital produce returns **not otherwise attainable**. The CxO, if s/he's rational, isn't maximizing some satisfaction function, but some very specific engineering breakthrough. In order to get that return the CxO has to know, or have a high probability, that the new plant and equipment are better than what s/he's got now.

Said plant and equipment may be something entirely new, such as a Swiss screw machine around 1870, or it could be off-the-shelf items not yet adopted by a business. Either way, unless such plant and equipment actually exist, there is no demand for the fiduciary capital. It will just sit around as retained earnings or used to buy back shares or buy bling for the CxO class. Since the MBA and quant class remain stuck in a 19th century mindset (Right Wingnuts all), they can't see that the arc of technology and resource availability has turned, at best, flat. If one considers the widgets we use today, how many implement a semantic that didn't exist before say, WWII? I'll bet a nickel that the number is 0. Capital has spent the last few decades in ever decreasing incrementalism. Ponder that for a moment. Near zero interest has not a thing to do with Big Gummints, but an utter void in the heads of the CxO class to find new, and useful, ways to turn moolah into machines.

This is the base reason so much fiduciary capital has been thrown at non-productive uses such as residential real estate. The Masters of the World are intellectually adrift. And we, as a species, know just about all there is to know about physical reality. Hell, we've found the God Particle. Once you've reached the edge of the World, there's no frontier to explore.

Sometimes ya just shouldn'ta oughta got out of bed. Left the punchline in the briar patch. So, here it is.

Widget Corp. can go buy more land, labour, and physical capital if it has the moolah. What it can't buy is any new Law of Nature (or God, depending on your -ism) or the brains to find it. Those two either exist, or they don't. These days, the chances that there remain any of the former get nearer and nearer to 0 and thus the chances to buy the latter (I wonder, would paying Newton or Einstein more moolah made any difference?) do too.

03 December 2014

A Rock and a Hard Place

From the first time I recall seeing him, I've been convinced of Chris Rock's cerebral approach to comedy. Yes, he is foul mouthed, but the fundamental ideas are sound. He is of course, a high school drop out. Stay in school kids.

So, it comes as no surprise that he and I have/had a similar take on the 2008 election: force the Right Wingnuts to wear the albatross. I was pretty convinced that I should vote for McCain, since there would be no way for the Right Wingnuts to avoid the albatross with the McNugget in the White House and Palin pandering to the guns and God folks. It would be a painful time, but the Right Wingnuts would be toast. Likely for more than a generation.

Didn't happen.

What happened next was predicted: the Right Wingnuts out maneuvered the Obambi into a Trickle Down Recovery, thus getting nearly all the moolah, and the 99% a crumb here and there. Obambi, and the DNC, did the dirty work of the Right Wingnuts, who get to point at Obambi and say, "where's the jobs??"

In the end, we really elected McCain and Palin.

01 December 2014

60 Seconds

That appears to be how much time and effort went into last night's "60 Minutes" piece on consumer credit card and ATM and such hacking. If you accepted the statements made, then you believe:
1) retailers and banks are doing everything humanly possible
2) Eastern European hackers are the Smartest Computer Folks in the World
3) breaches can't be stopped
4) Corps. should buy the services of that "security expert"

Here's what we actually know (and the "60 Minutes" reporter[s] would have if they did any reporting):
1) the POS breaches are due to antique versions of Windoze that Corps don't want to spend money to upgrade
2) Corps. routinely don't isolate valuable and vulnerable customer nets from the rest
3) hackers are using time honored methods to breach old versions of Windoze
4) banks are replacing OS/2 run ATMs, which are nearly bulletproof, with Windoze rather than secure certified *nix
I want to be clear with my point of view here. I think that migrating from OS/2 to Windows is the most stupid thing that can be done to an ATM Machine.

So, as with the coders who refuse to upgrade their skills to Organic Normal Form™ schemas, Corps. continue to run vulnerable systems for customer data just because it's seen as too expensive in time and money "to do the right thing". [Aside: if banks ran ATM networks as described by Allen Holub in "The Bank of Allen" series, none of these problems would occur, of course.] IOW, once again, the problem isn't tech it's politics. The restitution, if any, is a slap on the wrist. Just a cost of doing business. The restitution and fines for allowing breaches can be written off, so the taxpayer picks up most of the cost. The upgrades can still be put off. The CxO types still get their fat bonuses for saving on IT spend by not taking security seriously.

25 November 2014

Play to the Front Row

The pundit class has been wondering, in print, how it can be that we have increasing income/wealth inequality, but, if one believes the data, a recovery from The Great Recession and general growth.

The answer, in a nutshell, is Apple. Apple has made a living by ignoring the bottom 80% (or thereabouts) and selling a limited set of models to the top 20% (or thereabouts). A small list of models means what Henry Ford (is said to have) said, "you can have it in any color you want, so long as it is black". Smaller global BoM, smaller unit cost, higher gross margin. You just have to convince your market that they only need that one model. Mo money. As other microeconomists and quants see the light; likely have for some time, what can we expect?

As these endeavors have pointedly asserted, when it comes to data, analysis and decisions based on data is a worthy exercise only when the venue under analysis obeys God's (or Nature's, depending on the -ism you subscribe to) laws. Read the news every day, and you'll find a case where the clever (but not clever enough to avoid getting nabbed, of course) have bent or changed the rules to their advantage. Data on human endeavors is not reliable when used to predict the future. The future's rules won't be today's or history's. When the players are making up the rules as they go along, relying on recent data is foolish. Data driven decision making only works when the decision makers are forced to obey a rule set out of their control. Lower animals and glaciers come to mind.

When the recommendations of data and incentive conflict, follow the incentive. The clever will, like mouses, squeeze through the tiniest crack in the wall. Build a new wall, and they'll find the new cracks. Time series won't tell you where those cracks are.

So, what does Apple have to teach us? First, that by concentrating on the High End, its market in units is limited; as concentration continues apace, the number of individuals near the top X% diminishes as the X%-ers accrue more moolah. Apple counters that fact by limiting models of any device, and thus minimizing corporate BoM. The counter is to increase the number of distinct devices. Whether the iPad (or the don't-call-it-an-iWatch) can survive is an unanswered question. Reporting today reveals geographic/economic differences in mix between iPhone 6 and 6+. Why might this be? The logical conclusion is that lower wealth populations will have more buyers willing to compromise both ends of the size factor by having just one device. The phablet only holder, while the higher wealth populations will have a more reasonable device for each end of the size factor. Should this be a surprise? Not.

What of the macro effect then? It depends. That Burberry marketing gal had an easier time of it peddling coats than she will compute devices. In general, the top X% will have more moolah to spend on bling, but they won't necessarily spend more on bling from any one XYZ, Inc. widgets. Said widgets, unlike fancy coats, may have no value beyond having one. What we should expect then (looking at the incentive, not the old data), is to find more XYZ, Incs. making different sorts of bling for the X%-ers. Samsung was reported in the last couple of days to be reducing its model count drastically. Lowering the corporate BoM to make more moolah. So, what's the next big thing in X%-er bling? I wish I knew.

But, not all is wonderful in X% land. Consider participant sports. Turns out Tiger Woods is thought by some to be key to the golf widget makers' survival. Golf can be an expensive pastime, right up there with skiing. Poor person envy? May be yes, may be no; but it doesn't matter to the analysis. I've never had any interest in either, which I can duly afford if I wanted to. And therein lies the problem with growing the moolah flow to providers of the various bits and pieces associated with them: how to engage the small population that is the X%-ers, because only they can afford the vig. What Americans play tennis anymore?

Professional team sport provides some insight into how it can be done. Players in these stadium sports get ever more tens of millions of dollars per annum to behave like teenagers. How can this happen? Again, look to the incentive. Partly, TV dumps billions of dollars into the pot. But consider the stadiums. Research (I've not got cites to hand, but they weren't hard to find when last I went looking) has shown that most are partly or fully paid for by taxpayers, both directly and indirectly. Most are in large metropolitan areas, where the number of seats is a small fraction of the market population. Since, let's say, the stadium on average needs 50,000 behinds to fill it up, then the team need only convince the increasingly wealthy 50,000 to attend out of a few million in total population. They have no need to attract the lunch bucket crowd. IOW, the Apple crowd has another way to spend disposable income. For the privilege of being special, they can afford to pay yet more. The Washington football team attacked in 2009 when The Great Recession hit. All was not well in Mercedes land (for the record, the real money in the DC area isn't made by civil servants). What's odd about such suits (the piece reports that Washington is not alone in suing) is that, according to legend, season tickets for Washington football (and many others) has a long waiting list. Hard to see where the loss is? Kind of like foreclosing on a house that's still brand spanking new. It should be no surprise that the various leagues expansions into ever smaller markets (hockey in Florida, Arizona, and North Carolina???) have led to failures, and near so. They have to have some minimum population to have the necessary 50,000 X%-ers. Some leagues (3 of 4, not NBA, near as I can find) counter with "revenue sharing" wherein the rich big city owners give to the small hick town owners, aka rich white guys' Socialism.

In general, the incentive for an economy's production under rising concentration of income/wealth is to shift to more varieties of lower volume bling. No one needs two smartphones, drug dealers and con artists possibly excepted, so some other forms of bling must be created to sop up the excess moolah. This happened before in the USofA. The most well known was called The Gilded Age, a coinage and book title from Mark Twain, which, by way of setting context, he wrote before both "Tom Sawyer" and "Huckleberry Finn".

So, the question for macros, micros, and quants: can such an economy thrive? And, of course it can. Except for the period post-WWII to the 1973 oil embargo, that's been the history of the USofA. It was only that rather short period of unspoken Socialism that is the unusual condition. The downside, depending on which side of the X% you sit, is the necessity of an increasingly motivated police state to keep the non-X% from revolting. If you read 19th century American history, it was awash in minor and major insurrections. The fact that there was ever more land to move to and pillage helped keep the lid on, until it didn't. The Civil War is the one remembered, but there were more clearly economic ones across the century. Here is another list, but both don't include Bloody Kansas, more properly the First Civil War. So, of course we can have an economy based on the top X%, but as X gets smaller, the police state must get more motivated. And to think, all those ex-Middle East armored personnel carriers and such have found their way to civilian police under a black president. The X% can't say, "if you don't like it here, move to the frontier and see if it's any better." There is no more frontier. Have a nice day.

19 November 2014

A Dirty Little Secret [update]

The quants operate, oft times unknown to themselves, based on a dirty little secret. "What might that be", called from the Peanut Gallery?? The notion that the risk-free, inflation-free interest rate is equal to homo economicus' "rate of time preference", i.e. homo econ will lend you one unit of fiduciary capital (dollar, bolivar, ruble, whatever) for one unit of time (day, month, year, decade, whatever) on condition that homo econ gets one unit plus some vig. And that such rate is completely independent of everything in the real world but homo econ's demand for the vig.

All those wonderously complex financial engineering models, the quant ones not the reg fiddlers of course, depend on this notion of some exogenous interest rate. Taint so, alas.

The secret, of course, is that this assumption of control, or even choice, is false. The risk-free, inflation-free rate of interest is determined by technological improvement. This risk-free, inflation-free rate is the last chance opportunity cost faced by capitalists. But, here's the thing: if they're unable to conjure productive uses of physical capital, there's no other demand that homo econ can bring to bear on borrowers. Homo econ may want 10% for the use of his moolah, but no one can earn that, so his demand is ignored. And so on down the number line, to 0% where there is no productive use and time preference is irrelevant. No one wants your damn moolah!! In times, such as now, when capitalist overlords can find no way to turn fiduciary capital into physical capital, i.e. (again) they cannot conceive of new plant and equipment improvements which are more productive than existing, it matters not how much holders of units of value wish to be paid. There's no growth in the system to pay them. Full stop. Period.

Unlike usual trade with a supply and demand which are independent and infinite (that last bit is vital), capital return isn't. While a capitalist can make an infinite number of widgets, simply given a high enough price (or consumers take an infinite number given a low enough price), an infinite return on physical investment has to be the result of infinite ingenuity in technology. You have to be organically smarter, you have to know that which is better and was not known before; it's not sufficient to, somehow, "work harder" or have access to more abundant, cheaper inputs. Ah? You need a bigger brain which can divine more about the real world than is universally known, already. Ah? What happens when all that's left to discover is trivial? Cold fusion? Mr. Fusion? Ford Fusion? Movies on a portable phone?

Thus, in this state of the world, we get stories with titles thus, U.S. stocks are soaring, global economy in a ditch: Now what?. Even the business press is befuddled. They really ought to know better. It's just simple arithmetic.
And what's great for American corporations isn't always great for most Americans. Merger activity has picked up to new highs this year, and U.S. profit margins continue to hit record levels, defying forecasts that they are going to come back down to earth. [Yahoo Finance Editor-in-Chief, Aaron] Task says, "The problem for the rest of us is that these corporations... are not spending a lot of money on new development... and they aren't doing a lot of hiring or when they do hiring they are not paying people big wages."

There's a reason that Big Gummint debt, which is auctioned (not set by fiat) just to remind, is going for so little. The alternative is to sit on your moolah when you can't figure out a way to allocate to growing (organically, not just by buying your competitor) your business. Which Big Corps are doing, to a faretheewell. The opportunity cost is, basically, 0.0 (props to Bourdain). They're sitting on trillions of dollars, with nothing to spark their interest. So to speak. Well, they've invented securitized, sub-prime used car loans. Deja vu all over again.

The Wiki article is pretty much what is written in Econ 101 (and subsequent) texts. Quite obviously, it ignores the source of the vig. That source is technology, nothing more. The Dark Ages were a time of stasis because knowledge was so, not the other way 'round. Now that we know pretty much everything about how the real world works, we're near a permanent Dark Age; this isn't 1800 with the periodic table to be filled in. We're in a period, likely infinite, of ignorance, no longer a world of discovery. Most everything that marks us as modern was discovered in the first half of the 20th century or earlier (the understanding of semiconductors began in the 19th century). The technology discovery curve has flattened out; the big deal is whether a 4" smartphone is worse than a 5" smartphone. The population curve hasn't. There is no New World to pillage. And so on. Have a nice day. And, abandon the hope that compound interest will make you, or your spawn, rich just because it worked for your grandpappy. Those days are past.

To demonstrate how meager "innovation" is these days, we now know that the iWatch is just visual Bluetooth!! Some fool recently compared present day innovation to the steam engine. Gad.

18 November 2014

Make It a Double

When I was growing up there were three categories of lushes: the crude drank bourbon, the smooth drank scotch, and the sissies drank screwdrivers (so Mom couldn't tell; she still could, of course). Seems to be still the case.

There's been a push, and some pushback, for artisinal bourbons. They don't really exist, of course. Here's the short answer as to what makes a bourbon, bourbon. Note, in particular, that aging is not a requirement. In fact, the latest fancy of lushes is white lightning, often called corn squeezins, because it's just the pure alcohol distilled from corn mash. Put that stuff in burned barrels until it gets some color (kind of like white folks wanting a tan), and you can call it bourbon. Doesn't even have to done in Kentucky, although those that are make a big deal of it.

The point being: bourbon is crude liquor made fast. You can leave it in the barrel for a year or more, but it's still just colored corn squeezins.

I bring this up, because Neil Irwin badly tries to analogize bourbon to petro-products in his piece today. For someone who presents as a quant/economist, bad piece. About the only thing they have in common is that they're both liquids. Too bad that Irwin chose such an approach, since the petromarket is totally screwed up. But bourbon production has nothing to aid in fixing it.

- little physical investment; little barrier to entry
- available nearly instantly, unless you want other wise; the longer you hold the higher you can charge
- typically, but not required to be, made in Kentucky

- lots of physical investment; massive barrier to entry
- not available, if at all, for years after initial investment; holding may, or may not, yield a higher price
- can be found nearly anywhere, that's left unexplored

What is true of petro-products, and needs to be dealt with, is that it is, for first world countries, as vital to existence as clean air and water. As such, it should be husbanded for the benefit of all, and all future generations. The cyclic nature of production, in response partly to market price (but also to more efficient, in the short term, technology), is quite real. Do we, of the current generation, have the right to burn off nearly all of it in our Hummers? The Rand-ians say so. May be we should stuff a cabbage in their mouths.

14 November 2014

ATM at Home

These endeavors began at the bottom of the Great Recession, and one of the first themes (and continues unabated) was that the use of the Home as ATM was driven by the increasing inequality of wealth/income. The right wingnuts are always complaining that growth is poor because poor folks don't spend money, but that's their point, of course. As the 99% continued to lose out on the growth rewards, they were enticed into burning the (un)earned equity in the Old Homestead. Hard numbers were hard to come by, unfortunately, so the schemers could continue to claim that the Great Recession was the result of Democrats' loosening of the mortgage process to allow their poor folk constituents to get into the game.

One Bethany McLean has talked to the perps, and comes up with the hard data.
According to the financial statements of New Century, the huge lender whose bankruptcy in early 2007 helped kick off the financial crisis, cash-out refinancings were 64.2 percent and 59.5 percent of its business in 2003 and 2004; home purchase loans made up only 25 percent to 35 percent for the two years. A New Century executive told Congress that its customers needed to "tap into their home equity to meet other financial needs, such as paying off higher-interest consumer debt, purchasing a car, paying for educational or medical expenses and a host of other personal reasons." I'll always remember seeing a bank ad blowing in the windy, bleak Chicago winter of 2009. "Let your home take you on vacation," it read.

The right wing just can't admit that it's trying to have its cake and eat it too: keep the 99% poor, but keep the economic merry-go-round spinning at breakneck speed. It can't work that way. Li just made it easier to justify, but not intellectually or arithmetically viable. That link is to a Forbes article; amazing.

The bottom line, so to speak, from McLean's research:
According to Jason Thomas, now the director of research at the Carlyle Group, only about a third of subprime mortgages that were turned into mortgage-backed securities between 2000 and 2007 were used to buy homes.

Makes one wonder what's driving the consumer sector these days? The obvious answer is that the Jobs-ian paradigm is at work: consumer oriented companies are all chasing the 20% with money. The 19th century USofA economy worked that way. Back to the future.

13 November 2014


It appears to be an article of faith, among the New Age capitalists such as Jobs/Cook of Apple fame, that one need only target the few, at a high price, to be success in business (without, of course, really trying). In other words, as you learned in Econ. 101, demand is price inelastic. In fact, one might argue, that the Apple paradigm is to grossly overcharge the BoM, since if the widget's painfully expensive it must be good. Marketing has to convince the few who buy that they've gotten a good deal.

But price inelasticity isn't a given, and most often applies to things like food, water, and clean air. Necessities of further existence, in other words.

Now comes word that M$ has seen the light. Gee. Lower the price, take a smaller cut on lots more shifted, and abracadabra, more moolah. Gad.
Since the price cut was introduced on November 2, Xbox One sales in the U.S. have tripled.

Nobody, pimply faced adolescent males who don't bathe possibly excepted, needs any sort of game console. Go read a book, for crying out loud.

D'oh!!! Get me a Duff's.

12 November 2014

What Are The Odds?

The initial title was going to be something like, "Marty McFly is Grounded", since the subject is Matt Martoma, and yes, it's a bit of a stretch for an allusive pun.
Mathew Martoma, a former portfolio manager at billionaire Steven A. Cohen's SAC Capital Advisors LP hedge fund, on Wednesday lost a bid to stay out of prison while he appeals his insider trading conviction.

As the saying goes, "be careful what you wish for, you just might get it." The wish, in this case, is that cracking down on white-collar financial crime will deter the self-absorbed, greedy Wall Streeters from sinning. It was TNT running "Castle" marathons that got me hooked on the first run on ABC. In the archive shows, Lockwood (a bad guy hired by the Real Bad Guy) says to Capt. Montgomery, "If you and Raglan and McCallister hadn't sinned so spectacularly, then God wouldn't have sent a punishment like me." Soon after Lockwood and Montgomery have a shoot out with both getting killed.

In the case of Wall Street and Martoma, what seems the most plausible outcome? Well, these guys are quants, more or less, so they think in terms of odds and expected value. Well, if we raise the odds of getting caught, losing the moolah, and having to wear Orange for a decade or so, then we've lowered the expected value of schemes currently in play. We, therefore, should expect that the Wall Streeters will dream up schemes which increase in value (to them, not the 99%). I'll all for the guillotine as punishment for such behavior, but that's not enough. The folks in Congress, well the past one not the next one fur shur, also need to anticipate where the wedge will go next. Crooks be clever dudes.

07 November 2014

Just A Taste

One of the continuing themes of these endeavors is that quant isn't always the best guide to the future; moreover, the data which is ground, finely, through the mill stones isn't always understood for what it is. This is particularly vexing for the macros in the crowd. The micro folks tend to have population data to hand, so aren't really doing stats as a math stat would define the effort.

Chief among these are the government (any one, by the way) economic activity data. Floyd Norris saves me the time to recite the problem(s) once again. The main point is that only the weekly UI numbers are population data. All else is sample data, of varying "quality" and source. Census does most of the actual surveying, for BLS, Commerce, and such. There are periodic censuses for economics, mostly in non-population census years for obvious reasons.

Having been a Fed quant, although not for any agency which produced public macro-economic numbers, I will attest that the grunt quants took no shit from the political appointees. The recent "scandals" that seem to come from the bureaucrats were actually perpetrated by what were known as Supergrades for decades. They're now called The Senior Executive Service, but the issue remains: they're a bit fish and a bit fowl; some of their moolah is scheduled and some arbitrary from the Suits. They sit (or sat, depending on how one looks at it) in the top three rungs of the ladder of civil service. Some argue that this change, which happened under Carter and while I was there, has weakened the Chinese Wall betwixt the grunts who try to be honest and the appointees, who aren't.

Anyway, Norris does a decent job of explaining the situation, without getting into talking about stratified random samples and such. [Aside: with the current hard on for Big Data, one might wonder whether the expertise, across the profession, for sampling might just go poooof???]

My favorite quote:
[Paul Singer, a hedge fund billionaire and top Republican donor], in his denunciation of official figures, questions adjustments that are made for the quality of goods and argues that government indexes understate the costs for the wealthy because prices of things like luxury real estate and art have increased far more than the prices of goods purchased by the middle class.

Oh, the poor little rich kid!! And such folks just don't understand why the French finally had enough and separated some heads from some bodies?? These are the same folks, of course, who bet that house prices would keep going vertical forever, and when they didn't came to the taxpayer begging. And, having gotten their billions, bitch and moan about any small attempt to keep them from desolving the economy, again. I think that's a working definition of ingrate.

As to quant not being the best avenue to understanding the direction of the road ahead, the NYT has another article today which tells you more than any time series. Both Japan and China have forced working folks into mortgages as the sole investment vehicle available. Various reasons why, but the consequence is, mostly, that mortgages aren't productive use of capital. Any return comes from the holder's ability to shift moolah from consumption to paying the mortgage. Psychic income is baloney. The notion of safety in home mortgages was true before the 1% sucked up so much of national income; mortgages were made and held locally, and so on. So olde fashioned. But we didn't get chaos. Change the rules, and you change the incentives, and you change the money flows. Kind of like a switch in a train yard. That Giant Pool of Money is still out there, and continues to grow. American corporations continue to: sit on it, buyback shares, buy each other, and otherwise spend it on non-productive (in the macro sense) allocations. So soon you forget, heh?

01 November 2014

Time Loves a Hero

Well they say time loves a hero
But only time will tell
If he's real, he's a legend from heaven
If he ain't he was sent here from hell
-- Barrere, Payne, Gradney (from "Time Loves A Hero", Little Feat)

Yesterday was a bit different, schedule wise, in that this is deemed to be a Windy Weekend here in West Redneck, CT. Thus my morning was devoted to moving mucho leaves from their temporary pile on the lawn to permanent recumbence elsewhere. To gird my loins, I made a quick look at r-bloggers, and found that Rob Hyndman had, unusually, posted a job advert. It is from Amazon, and provided me with great mirth as I set about to haul leaves.

His post is mostly a quote from the (unnamed) email he received from Amazon:
... we have found that applied economists compare quite favorably with the machine learning specialists and statisticians that are sometimes recruited for such roles.

The job posting itself is on the AEA site. And provides added humor.
Amazon economists will apply the frontier of economic thinking to market design, pricing, forecasting, program evaluation, online advertising and other areas. You will build econometric models, using our world class data systems, and apply economic theory to solve business problems in a fast moving environment.

Sounds a whole like the description of what those benighted knuckleheads from Wall Street were doing, doesn't it??

All well and good, you say; but where's the laugh out loud part? Well, as I set out to haul leaves I noted that Amazon had provided a job (or, at least, career track) email. Oh goody!! I penned a snarky, but lighthearted, rebuke. But why, you may wonder?

Consider that, among quants, the economists are the most incompetent. While a grad student, most of my profs were the initial wave of New Quant Economists who represented what has been wrong with econ quant for some decades since: they were all flunked out math and science Ph.D. drudges, who found that they could find repentance in the econ department. Thus, we get econ quants who still think in terms of God's Inviolate Laws running the show, rather than the reality that it's Political Economics run by social Darwinists making up the rules as they go along. The rules change without regard to data. The data changes in response to rule changes, which are blithely ignored by said quants. They all believed that a well known ratio (median house price / median income), could go straight up forever. Yeah, sure. They apply the wrong context to a field of which they've not even had 101 training. They consider it just another series of algebra exercises. Political economics ain't algebra.

So I hauled leaves, which meant that I'd missed my mid-morning stroll to get my dead trees NYT. And, if it's Friday, it must be Krugman. I sorely would miss my dose of Krugman, but I really didn't want to re-gather all them leaves. Remember, this is after I'd sent my snarky email (no, they haven't replied). Having done with hauling, I didn't expect there'd be any left, but I got the last copy. Oh joy. He, once again, rubs the mainstream and right wing cabal's collective noses in the Japanese experience.
For now, here's what you should know: Japan used to be a cautionary tale, but the rest of us have messed up so badly that it almost looks like a role model instead.

What, you must be wondering, does Amazon's love affair with econ quants got to do with Krugman and Japan? Glad you asked. It dawned on me that Amazon and econ quants were a perfect match, the totally dysfunctional marriage. Amazon's only hope to be consistently profitable is to gain monopoly status in retailing, since:
The net result of nearly two decades in business is that Amazon's trailing 12-month price-to-earnings ratio stands at an alarmingly high 550. Compare that to consistent profit earners with significant online retail operations such as Google (p/e 29), Wal-Mart Stores (2) or eBay (25), and it's easy to be confused by investors' hunger for Amazon.

Amazon, Bezos in particular, hasn't yet figured out that moving widgets by the tonne on trains is way cheaper, per widget, than by each in aeroplanes. He seems to be getting a clue, what with all these so called distribution centers he's building. They're really just brick and mortar stores, by a different name. In order to compete on price, Amazon has to eat the inflated distribution cost by setting the widget price low enough that, when delivery is added in, the total isn't way out of whack. Some folks may have been stupid enough not to do the arithmetic, but not now. The total price of that widget from Amazon has to compete with the price, ignoring the total cost of driving, at Target or WalMart or Sears.

The only way Amazon gets justifiable profit is when it gets monopoly power to pass on the inflated delivery costs. There is no other option, save bankruptcy. The numbers can only add up one way. Well, unless you're an accountant who can bend or change the rules. Clueless CEO and clueless quants seeking to be "the king of the world!" Jack, and his boat, sank.

26 October 2014

You Don't Have to Believe Me

Recent musings, motivated by continued discontinuity between real world finance time series and micros/quants insistence on predicting past the data, have been devoted to this problem. The world is not linear (Dr. McElhone), and is mostly driven by incentive modifications rather than historical data. Those that believe otherwise still think The Great Recession was caused by the Trilateral Commission attempting to impose a New World Government. Baloney, of course.

On the other hand, some academics understand that time series prediction is flaky in actual practice.
There are at least four sources of uncertainty in forecasting using time series models:
4. The continuation of the historical data generating process into the future.


19 October 2014

Lord of The Flies

Being stranded on an island in the Atlantic, though not all that far out, without my beloved desktop I'm forced to keep this short. I hate laptops, and this one (not mine, fur shur) is horrid. These endeavors have talked about the arc of the future, from the many perspectives of the macros, micros, and quants. Data doesn't help a bunch, if the incentive structure which generated the time series you're relying on to predict the future really isn't there any more. Much like Oakland in the view of Stein.

In today's NYT Business Upshot piece, Shiller takes on the miscreants. He's explicitly dealing with the Behavioural Economics aspects of Mr. Market, although he doesn't use the term. Rather, it's a faint feint to Ebola.
Fundamentally, stock markets are driven by popular narratives, which don't need basis in solid fact. True or not, such stories may be described as "thought viruses". When they are pernicious, they are analogous to the Ebola virus: They spread by contagion.

In the end, what's behind the recent collapse of Mr. Market's arches? Time for Dr. Scholls.
Some people say that a theory of John Maynard Keynes -- known as the "underconsumption theory" because it says people inherently underspend once they become prosperous - is taking hold.

Mark Twain wrote, arguably, the best dissection of that idea with "The Gilded Age", a decade before Keynes was born (and before "Huckleberry Finn", for what it's worth). Even if you're Daddy Warbucks, you can use only so many fast cars, loose women, and fancy food. Economists have known this, if not by explicit name, since long before Keynes.

The Wiki has a, not fawning, piece: here.

16 October 2014

One Life to Live

It was raining cats and dogs this morning here in South Fireplug, CT (although not nearly what my beloved, yet benighted, Bermuda faces tomorrow), so I postponed my daily stroll to get the dead trees NYT and a cuppa joe until it let up. In the meantime, I spent some time with r-bloggers and came across a young pup who talked about predicting life expectancy from historical data. I considered a tongue in cheek rebuttal, but tasks interfered.

The rain let up, and there were still NYTs on the shelf. What do I find? David Leonhardt's, et al take on the issue of quants not looking out the window to see if it's raining. These endeavors have addressed this issue a few times. Time series data of some attribute may be useful in predicting the attribute's future value, IFF the entities which have the attribute are running under God's Laws over which they have no control. On the other hand, when measures are of some aspect of human activity, it's mostly a Wizard of Oz situation: some human(s) are behind the curtain bending, breaking, or re-writing the "laws" of behavior which determine the attribute. It wasn't thermodynamics which propelled house prices, but various Wizards playing various games with the rules of the game. That financial quants were all too happy to ignore the absurdity of their data, well...

Curiously, one might argue that the examples (possibly, save one or two) he gives of odds are of attributes and entities which obey God's Laws. Such odds are accurate, by definition of our understanding of God's Laws. No mention of house prices continuing to rise like smoke from a volcano.

So far as life expectancy goes, if you go and look (I've provided links more than once), you'll see that from 1900 to 2000 life expectancy at birth increased by nearly 70%, but life expectancy at 65 increased about 7% of total lifetime (less if you measure from the start of Social Security). The increase in life expectancy at birth is the number that right wingnuts use to bray, "we have to kill SS because 'we' can't afford it. You all have to buy stocks and bonds from our friends in the financial services industry." Not that they see any conflict of interest. The overhead of SS is about 1%, and protects citizens from oscillations of Mr. Market. Can't say the same thing about that 401(k); all those Wall Street fat cats got fat off "your" retirement nest egg.

So, why is predicting life expectancy from today forward based on the accumulated data over the last X years silly? Because, just as the Wizard of Oz, those added years are the result of human intervention, sporadic and specific. Increase in life expectancy, whether at birth or 65 or some other age, is not a God given gift to humanity for just being on the planet for evermore years. Doesn't work that way. Most of the increase at birth is due to greatly diminished infant and child mortality, this due mostly to public health initiatives; vaccines and anti-biotics being discovered and made widely available. That's not going to happen again. One might even speculate that, with increasing wealth concentration, what had been widely available will become more restricted. With the loonies chirping about autism and vaccines and denying same to their spawn, we are finding increased (although not epidemic levels, yet) incidence of old diseases. And so on. Humanity, despite what some quants believe, isn't Brownian motion or a random walk. No, progress exists because humans change the rules, from time to time. And sometimes those changes benefit most of us rather the the 1% and we all live a bit longer. It isn't God that has provided us with longer lives than we had in 1900, it's us. As we've reached near the limit of our ability to stave off Father Doom, and, perhaps, our willingness to make this ability available to all, we will see a leveling (if not diminishment) of life expectancy at all ages.

11 October 2014

I Have No Interest in You, Anymore

Regular reader should recall that I've been pestering the macros, micros, and quants (especially those who're in love with time series) about The Giant Pool of Money, corporate moolah hoards, the limits of knowledge (once you know the Laws of Nature, there's little left to discover), and such. The upshot of these concerns is that real returns to physical capital, which is the only, and controlling, manifestation of compound interest must needs be declining. If there's no place to put the moolah that is productive, well...

Turns out, I'm not entirely alone. A bond pundit has weighed in, and reach just that conclusion. The piece doesn't detail the reasoning, but, really now, what else could it be? Too much moolah chasing too few real opportunities. House and car notes don't actually generate real return, only foregone consumption. That's not organic growth.

If you read German (I got tired of waiting for Google Translate to finish, sigh), this is the source interview. Not much longer than the English reference articles.

05 October 2014

Two Bill Buckners For One Mickey Mantle?

With its usual panache`, the Sunday NYT has more on-point material for the macros, micros, and quants than one short blog can reasonably deal with. I'll limit myself to two pieces, which share a minor thread.

First, is the situation with container ships. This a full page and a half on the conundrum faced by container shipping companies: how to forecast demand for slots, price of fuel, and cost of moolah to decide whether to buy, and if so how many, new ships. The piece uses the recent Triple-E types of Maersk as example, in the body (so to speak) of the new Mary Maersk. In economics, generally in 101 class, the student is introduced to the farmer's dilemma; no there isn't a Wiki piece, oddly. (If you go there, you end up with Prisoner's Dilemma, which is somewhat worse.) The problem, in a nutshell, is that farm product is largely dependent on forces out of the farmer's control, weather mostly, such that a bad harvest in one year will, often, lead to higher than usual prices that year. The Dilemma: plant more the coming year, expecting (hoping?) that other farmers won't and that the high price will be sustained. Generally, doesn't work. Ruinous competition. We see similar at today's gas pump; all that horizontal drilled black gold is driving price down. Sniff!!

What's interesting about the container ship problem is that Acts of God are less significant. It's almost entirely the result of human decision making. Some quotes.

How to drive prices down:
"There's too much capacity in the market and that drives down prices," [Ulrik Sanders, global head of the shipping practice at Boston Consulting] continued. "From an industry perspective, it doesn't make any sense. But from an individual company perspective, it makes a lot of sense. It's a very tricky thing."

A classic game theory problem, seen by upper level undergraduate and graduate macros, micros, and quants. What to do? What to do?

Remember the JIT movement? Kind of a secondary gift from Deming, though not often explicitly mentioned. So, what do these behemoths mean?
The industry wants ships that carry more containers, more slowly. Fuel prices are a major factor, so ships now commonly "slow steam" to save fuel, cruising at 16 or 18 knots instead of 22. A typical trip from Poland to China takes 34 days.

Sends us back to the good old days of primitive industrialization. We're all going Chinese.

Which brings us to a statement of such opacity, that it is hard to believe
When the world economy slackens, so does the shipping industry. At one end of Mary's route, the growth engine of China has been losing steam, while at the other, Europe is again flirting with recession.

Ah, folks: the growth engine of China is shipping widgets to the US and EU. These are not separable events. Gad.

Bigger is better, in capital. But how to get bigger?
"In this down cycle, the new-built prices are low and money is cheap, so you would much rather go and buy the vessels than go and acquire a company" that has older ships, said Martin Dixon, director of research products at Drewry. "Many shipping lines are struggling to make money, so cost leadership is key to survival. Hence, you're seeing a lot of investment in bigger ships."

In the airline industry, 727s were sold off to regionals and such when more fuel efficient Boeings and Airbuses start coming into production. Turns out, there's not that situation in container shipping. But, at least, we have fiduciary capital turning into real capital, not sub-prime used car loans and beachfront condos. I think, that's better?

The engineering of Mary reminds me of that cruise to Bermuda in an ancient boat. Tin foil boats in a typhoon? Yikes!
The two men looked over the ship's side and spoke on walkie-talkies to sailors on the ground. Minutes passed -- 10, 20, 30. The Mary, crawling at 0.1 knots, began sidling up to a pier.

"Compared to the whole size and the weight of the ship, the steel plates in the side are actually pretty thin," the captain explained. "If we get a speed higher than that, we'll start buckling plates."

Next, second, and last a short piece on free trade. Regular reader may recall the many times these endeavors have talked about New Gold (the US buck), export driven (small) economies, the US trade deficit and how all of these factors have to exist in symbiotic rhythm for the whole house of cards to stay vertical. Well, another Left Wingnut offers up some musing. Just two quotes.

First a bit on how to ignore experience.
[in 1995], the W.T.O. adopted a rule obliging members to abide by rich nations' patent laws. (Never mind that Americans stole technologies from Europe throughout the 1800s.) These laws typically enabled investors in rich countries to reap substantial rewards, while poor nations like India were forced to pay the same price for patented drugs as the rich West, because they were not allowed to make generic substitutes.

But the consensus was flawed. Even free-trade advocates now admit that American wages have been reduced as a result of outsourcing, the erosion of manufacturing and an ever-increasing reliance on imports. Middle-income countries, meanwhile, have been blocked from adopting policies that might make them world-class competitors. Nations that have ignored the nostrums of the Washington Consensus -- China, India and Brazil -- have grown rapidly and raised their standards of living. Improvements in poverty and inequality occurred in Latin America only in the 2000s, after the I.M.F. and the World Bank reduced their grip on those nations.

Second, a simple re-statement the macros, micros, and quants can't ignore.
A third lesson is that models of growth that depend indefinitely on exports are not sustainable. The large imbalances in trade between China and the United States distort economies. The same is true of Germany's huge trade surpluses, which are based on a fixed euro and restrained domestic wages.

To the extent that capital seeks out slavery level subsistence wages, in the short term the micros and quants crow of their success, and excess compensation. In the medium term and longer, everybody loses. In due time, there'll be no one to buy the widgets. Not to mention, which these endeavors do on occasion, that exporting countries have a habit of moving their currencies, relative to the importers, in ways advantageous to themselves. The Golden Goose is the middle class consumer. China has about 1 billion folks. The country could have grown its domestic economy, but chose to "sell" its citizens to foreigners. India did likewise.

The thread? Well, trade, of course. And the permanent fact that, They Ain't No Such Thing As A Free Lunch.

01 October 2014

Birds of a Feather, And All That

Steven Davidoff Solomon makes a run at corporate boards in his piece on Darden Restaurants, today. He closes the piece with:
Absent a last-minute, face-saving compromise, the likelihood of a full-scale ouster raises the glaring question: Why would the board pointlessly and perhaps foolishly invite its own demise?

To recap, for those not wanting to read the piece: a couple of tutes decided to buy up stock as activist shareholders. These are Starboard Value and Barington Capital Group. Both are hedge funds. They determined that Darden Restaurants, and the management thereof, was being mismanaged. The CEO and board disagreed. Much mayhem has ensued.

As Adam Smith (the real one, and I suspect the fake one, too) is so famous for: each economic actor behaves with enlightened self interest, which gave rise to the term homo economicus. Of course, Smith was opposed, on the whole, to capitalists generally and concentration specifically. What is this self interest for a corporate board member? Well, evidently it is to be best buds with other CxOs. In the case of Darden, as of today, eleven of twelve directors are current or former CxO/director of some corporation. If you want to expand your scope of earnings as a director, it helps if you don't look behind the curtain of whatever boards you currently have. Be nice to your CEOs and fellow board members, and you'll find far more opportunities to be a board member. I think that's what's called a sinecure. One hand washes the other. Birds of a feather flock together.

This is not to say that hedgies have the best interest of Main Street or Ma and Pa Kettle foremost in mind, of course.

For the quant types, this all raises the core question: if macro effects are just the sum of all those micro effects, isn't the whole shebang the result of such (low grade) corruption, rather than some human-centric version of thermodynamics? It ain't what ya know, it's who ya know; ya know? Or, as one who's been there puts it:
Directors were not appointed to compensation committees on the basis of distinctive skills or interests. Rather, they tended to be directors who could be relied on by management to be both sympathetic to management's compensation requests, and non-confrontational.

To get on the compensation committee, of course, one need be on the board. Be nice to your CEOs, and they'll be nice to you when it's your moolah to be decided. Stingy comp committee members won't be around long, ya think? Ring around the Rosie.

So, to answer Solomon's question (that does have a nice ring to it, doesn't it?): what's one board when you've got a whole life of other boards to run, ahead of you? Hedgies, after all, are not viewed as white knights anywhere.

15 September 2014

Up The Down Staircase

I'm not a fan of David Stockman, to say the least. But recent punditry on the subject of interest rates, asset prices, and bubbles led me to the obvious question: is it true, as it appears, and in the data; that corporations (that is to say, their capital allocators) are executing share repurchases in excess? Which is to say, as I have said more than a few times, that the growth in share prices is the result of intrinsically lowered returns on real investment? Which is to say, further, that the Masters of the Universe CxO types simply aren't generating any return?

So, of course, I went wandering on the innterTubes asking for the value of corporate repurchases. Alas, a Stockman piece came up first. Ever more alas, since he uses the data to make his usual wrongheaded conclusion. He hasn't actually learned much since his defense of Voodoo Economics.
Self-evidently, the corporate form of business organization is designed such that some considerable portion of net earnings should be returned to their owners each year. But a 95% rate of distribution is a giant aberration. Were this outcome to occur on the undisturbed free market, for example, it would signal an economy that is dead in the water and that participating companies face a dearth of opportunities to reinvest profits in future growth.

And, of course, that's exactly what's been going on. As the science and engineering geeks figured out some time ago, we're in the post-discovery age, of marginal incrementalism (kind of like, very unique). With real interest earnable near zero, then share prices (and bond prices, to be clear) go up to meet this rate. Or, as Vinny in those mob movies used to say, "who's gonna give ya a better deal, huh?" Lots of Chinese and Germans and such thought that Florida and Costa del Sol real estate was a sure thing. Not.

Or, as another pundit put it:
Corporate CEOs, with their massive share-buyback programs are in effect investing in the stock market rather than in expanding business opportunities at their companies. Either they expect higher returns from the market, or lower returns in their business, or some combination of both. Given their questionable track record in timing the market, this may be a cause for concern.

It's one thing, although wholly foolhardy, to pay Goodell $44 million to "oversee" the behavior of his employers, since it's just football. Quite another for the Masters of the Universe to get paid such sums and not actually do anything.

05 September 2014

Alice In Wall Street

Financial engineers, despite their pronouncements of math/stat/coding wizardry, are really just some truffle pigs and cockroaches. The truffle pigs snuffle in the ground, generally around trees in deep parts of the forest, for the scent of the black truffle. A valuable fungus, that black truffle. Finding one, the handler has to quickly extract it from the maw of the pig. Turns out, unlike retrieving dogs, pigs like to eat their catch. Cockroaches insinuate themselves in the darkest parts of dwellings, seeking water and the occasional crumb. Few of the mainstream pundits have taken this bull by the horns. Today, Floyd Norris, reliably more aggressive then 99.44% of his brethren, lays out the story. Again, and with some rather wonderful quotes.

Not to mention: I've referenced Lewis Carroll more than once, generally repeating the phrase "... words mean what I say they mean...". Which isn't exactly the text.
Part of the regulatory challenge was laid out in 1871 by Lewis Carroll's "Through the Looking-Glass":

"When I use a word," Humpty Dumpty said in rather a scornful tone, "it means just what I choose it to mean -- neither more nor less."

"The question is," said Alice, "whether you can make words mean so many different things."

"The question is," said Humpty Dumpty, "which is to be master -- that's all."

Norris spends most of the column with the history of Lehman, and Repo 105.
Lehman taught us that there were plenty of tricks around to make balance sheets look better for one day and then revert to an undisclosed reality that was much worse.

One of the tricks was to adjust the weights of assets; as in weighted average. Of course, analogous to a Bayesian prior, the banker gets to make up the weights. And that's what Lehman (and the rest as well, of course) did.
It turned out Lehman was valuing some securities at 85 percent of face value while competitors thought they were worth 20 percent or less.

In general, the bankers do have a point: some assets are riskier than others. Home mortgages, for example, won't go rotten all at once all over the country. Will they? So the banker puts a lower risk weight when figuring the backing capital.
That made sense in theory -- some assets are clearly riskier than others and more likely to produce losses. So less capital was needed for low-risk assets, like loans to high-quality borrowers. Trusting regulators let the banks use their internal risk models to determine the weightings.

But, quoting Stanley Fischer, Fed vice chairman
"... any set of risk weights involves judgments, and human nature would rarely result in choices that made for higher risk weights."

But, here's the pig/cockroach bit:
Financial engineers invented securities that would count as equity for bank regulatory rules and balance sheets but looked like debt to the Internal Revenue Service. Unfortunately, when the pinch came, they turned out to be more like debt. Big banks are being forced to stop using such things.

Not satisfied with just putting a heavy thumb on the scales, they dispensed with the scale entirely and made up the numbers.

So, are financial engineers good for the commonweal, or only for themselves and their handlers?

As the song says, "Mama don't let your kids grow up to be banksters".

28 August 2014

Reservations for ... 8 billion??

Quite recently, in various versions of these endeavors, there was an essay dealing with the Old Gold vs. New Gold situation. Not for the first time.
The hidden truth: the country with the reserve currency of the global economy will always, in fact must, run trade deficits. Think about the situation from the point of view of other economies. They have to get reserve currency in order to acquire goods and services.

Imagine my surprise, and wistfulness at not having gotten paid, to see today's NYT piece on just that subject. And about the same conclusion. Well, sort of.

Bernstein paraphrases a Treasury economist (Kenneth Austin) who has published an essay in The Journal of Post Keynesian Economics, here (it's not open, alas). The notion of post Keynes usually means full bore Randian, but not in this case:
Post-Keynesian economists are united in maintaining that Keynes's theory is seriously misrepresented by the two other principal Keynesian schools: neo-Keynesian economics which was orthodox in the 1950s and 60s -- and by New Keynesian economics, which together with various strands of neoclassical economics has been dominant in mainstream macroeconomics since the 1980s.

In any case, neither Bernstein nor Austin (filtered by Bernstein) defend the notion of the reserve country having to be a net debtor, only that the level of its currency circulating can, more or less, be under its control. As events stand now, they both argue the USofA is at the world's economies' mercy.

The Unfortunate Alternative is hard specie, and one need only read up world, and USofA, economic history from the 19th century through the Great Depression to see how foolish that is. If you think the world is not level now, you ain't seen nuthin yet.

24 August 2014

The Poor Will Always Be Us

The environs of Washington, DC are widely excoriated by The Right as being the bastion of Liberal Evil. Not least, the disparity of median income there being higher than most, if not all depending on the year measured, of the rest of the country. Having lived there for the better part of a decade, I can say with certainty that income level was and is driven by the private sector consultants and such, not the bureaucrats who have difficulty keeping up. Bureaucrats aren't living in the big houses in McLean. The academic scene is largely liberal, with the notable exception of George Mason University, in Virginia. That state is really two, with Northern Virginia (actually spelled as such) turning a once deep red state a pleasing shade of lavender. It ain't blue yet, however.

GMU provides the NYT with one of its token right wingnuts, in the person of Tyler Cowen, who regularly displays a breathtaking degree of cognitive dissonance. That the Times would continue to print his stuff is puzzling. I can only guess that the Editors are allowing the loonies to shoot themselves in the foot on full view. I mention this mostly because his essay today exceeds his usual level of incompetence and villainy.

Let's wield the sharp cutlery, shall we?
For all the talk of the Great Depression, we might look at a different exemplar for modern times, 18th- and 19th-century economic history India. That country's economic retrogression during that era may help us understand the quandary that some parts of the world face today.

The overarching theme of the piece is that 18th and 19th century India is prescriptive for today's US and Western economies generally. Baloney. The 18th and 19th century global economy was dominated by mercantilism, with India and the New World colonies being principle examples of those on the losing end of the bargain. This period was marked, more than any other way, by the discovery and pillaging of natural resources in this New World, mostly by European overseers. The second most important point was the development of science and engineering from primitive to near completion (save for Einstein and Bohr and the final entries in the periodic table). Most of the widgets that you use and prize today were invented by The Great Depression, they're just smaller and faster now. In other words: the scope of new knowledge and new resources from 1800 to 1900 overwhelms what can be expected from 2000 forward. The simple fact is, we know just about all there is to know about the physical world and where the useful parts reside. And there is no New World to pillage. (For those talking about mining other planets and such: not with chemical rockets, boyo.) And we're nearing, if not met, the carrying capacity of these, now firmly limited, resources. Wealthy Chinese are scuttling away from their air and water as fast as possible. The notion that there's some magical, as yet undiscovered, venue of employment to support a vast new middle class is a pipe dream (and that phrase refers to the Chinese opium pipe, just so you know). The journey goes from farm to factory to cubicle. Full stop. We've found the whole pie, now we need to carve it up in such a way that civilization survives.
In 1750, India accounted for one-quarter of the world's manufacturing output, but by 1900 that was down to 2 percent.
India just didn't do enough to move toward production on a larger scale or with better machines.

Well, let's consider this period. Slave based production of cotton and textiles by the US South dominated the period. Why ship cotton half way around the world, when your slaves can grow it here? Of course, not. Virginia (tobacco) and the Carolinas (rice and cotton) are much closer to London than anywhere in India, after all. At the time of the American Revolution, slavery production was the major source of hard currency, not manufacturing. India didn't stand a chance. Moreover, industrializing agriculture yields more poor people when there aren't alternatives. Take the modern example: robotics replacing hands in the manufacture of autos. You know the rest. The notion that India somehow missed its opportunity to be Europe's supplier of industrial output in 1850, or thereabouts, if only India had spent more on machines is asinine. The reason that Apple, and the rest, can exploit China is the 747 freighter. That aircraft didn't exist in 1850. Nor did the container ship.

Here's where the cognitive dissonance really kicks in:
International trade grew rapidly after World War II, but at least in the early postwar years most of that trade was among countries with roughly comparable technologies and real wages. And that trade spurred growth rather than damaging laggard economies.

In the last 20 years, the economic surge of Asia, especially China, has brought a large trade readjustment to the world, one with few parallels with the possible exception of the rise of the Western economies several centuries ago.

The post WWII economic surge was built on the afterglow of socialism, but not by that name, of course. The war effort was a case of "all for one, and one for all". The notion of shared responsibility, rather than Randian greed (she didn't start in earnest until the 1950s), was the order of the day. Corporations paid real taxes, unions bargained widely, and Bretton Woods made the US buck supreme. Cowen, either because he's too stupid or vile, elides the simple fact: American corporations now exploit totalitarian labor for the benefit of the few. It was brought to you by Richard Nixon in 1972.

But this is all good for China, right?
China's per capita income, less than $300 in 1984, is now in the range of $10,000.

Well, Cowen, being an econ professor, knows that even in the best of economies mean/average/per capita income overstates reality. I can't find a median income measure for China, but that's not too surprising:
Results of a wide-ranging survey of Chinese family wealth and living habits released this week by Peking University show a wide gap in income between the nation's top earners and those at the bottom, and a vast difference between earners in top-tier coastal cities and those in interior provinces.
In March 2012, Bo Xilai, a top party official who was trying to create a populist image for himself and was later purged, said at a news conference that the Gini coefficient had reached an alarming 0.46. His willingness to announce the number came as a surprise to many observers.

(The US gini, 2011, was .477. That's worse than China, just to be clear how the number works.)

China's .1% are doing just fine, thanks. The rest, not so much.
Average annual income for a family in 2012 was 13,000 renminbi, or about $2,100.

I wonder, how did per capita income quintuple in a year? It didn't of course. Cowen just made it up. Or the ghost of Ayn whispered it in his ear while he nodded off during a lecture at AEI.

Back to Cowen:
French citizens expect a great deal from their government, and strikes are a common response to reduced wages or benefits.
Chinese export growth and wage competition may have been a kind of final straw that made old ways unsustainable.

So, it would appear, Cowen's remedy is for Western labor to accept Eastern poverty as the new normal? How, exactly, is that progress or a solution?

Reading history, and data, makes the story quite clear. Economies which (ahem!) enforce equity, such as the Scandinavians, thrive overall, while those which embrace Rand fall into revolt. Cowen bemoans the prospect of stagnant/falling median income in the USofA, but at no point offers a remedy other than benign acceptance; it's God's will. He has to know that while median income has gotten poorer, the 1% have gotten richer. And he has to know that these effects derive in concert, not by coincidence. And he has to know that slack demand is the result. And that slack demand leads to lowering median income. Rinse. Repeat.

When the dominance of a service economy was being first recognized, in the 1970s, the notion was that such a move was at least as beneficial, overall, as the migration from farm to factory pre-WWII. Instead of factory workers, we'd all be office think workers, earning much more than our beaten down factory fathers. Hasn't worked out that way. We, still, mostly buy real widgets. You can't eat software.

We can't all be London Whales, crashing our small corner of the economy. And if we were, the whole economy crashes. Wait, didn't we do that?

So, you can be poor because totalitarian regimes elsewhere keep wages at bare subsistence and your job goes there or... you can be poor here as corporations implement wage arbitrage down to bare subsistence with the outsourcing as threat. Of course, in due course, there'll be no one in the USofA, or anywhere else, who can buy the all the widgets being made. What a country!! The United States of Mississippi. But, of course, you can't sell much in Mississippi; they're all really, really poor.

The fundamental problem is that wage or tax or foo arbitrage by corporations ultimately fails for structural reasons. As your Good Mother told you, "what would the world be like, if everybody behaved like you?" The second and third worlds, largely autocratic governments, provide cheap hands in order to earn hard currency (which they, mostly, keep for themselves, of course). Today, that's the US buck. The same thing goes on here, the red states ban unions and drive down wages, so corporations move to such states. The problem, of course, is that both kinds of arbitrage depend, absolutely, on a high wage population (those God hating blue staters, of course) to suck up output. What happens when there's no longer a pool of high wage earners to export to? The issue grows more dire as automation becomes both more widespread and expensive. You do remember the story about ditching 300mm wafer production for 450mm?? Hasn't happened. Likely, never will; insufficient demand for so many more chips to pay for the machinery. In due course, and since the world is non-linear (according to Dr. McElhone), demand utterly collapses when least expected.