22 March 2014

Rocket in My Pocket

The search for MH370 raises the simple question: where are the pictures from all those American spy satellites? I was thinking Key Hole, KH12, but it turns out the Key Hole designation went out of vogue way back in the 1970s. Wow. Some surfing reveals a bit of irony.

Turns out that the lift vehicle for all those satellites runs on a Russian main engine, RD-180. Not just the design, but also the manufacture. They are made in Russia. Who knew? Vlad must be laughing up his sleeve.

19 March 2014

Not Tonight Honey. No Interest.

Narrator: Return with us now to the thrilling days of yesteryear... Mr. Peabody (and Sherman...) please set the WABAC to 1790, France where we'll have some cake with Marie Antoinette.

Control Room: Ummm... Mr. Peabody is an animated dog, there is no WABAC, and Marie likely had nothing to say about cake and starving peasants.

Narrator: It's a bleeding metaphor, you stupid sod!! For the behaviour of those parasite Banksters!!! So shut up and get Mr. Peabody's ass in gear!!

Ah, got that out of my system. Time, once again, to go on An Albert Adventure.

The Banksters, and their political enablers have been going on and on about crushingly low sovereign interest rates, aka Treasuries. They keep beating their jungle drums for 10%/annum payment for letting their moolah sit idly by. (All the while, China is headed for its own over extended housing crisis; when will they ever learn?) Let's think about that for a minute, or two.

In classical economics, one is taught about IS/LM. The problem (among many, as the Wiki piece explains) with this construct is that it ignores the pressure of returns to real physical capital; the magnitude of such returns are the controlling factor (i.e., you won't get more than that), irregardless of what the finance folk insist. The tsunami of moolah which hit the US housing market, to some degree in response to Greenspan's cratering of Treasuries, was just a recent case of fiduciary capital avoiding physical investment (China, are you listening? Thought not. You're up next). Make no mistake (the major one made by Bankster and Quant alike): there is no real return on residential real estate (while one can make a tenuous argument for real return on commercial; although I don't buy that, either); the vig comes out of the pockets of mortgage holders, which is to say either rising wages or current consumption. With stagnant to lowering wages, folks used the Ponzi gains *for* consumption. The Titans were happy for the demand, until they needed a scapegoat to blame. In the end, real returns on physical capital controls all investment since this is the only way to increase output through investment.

Without growth in productivity in real production, there can be no returns, beyond simplistic avoided consumption. The right wing folks, not surprisingly, have been clamoring for just that. "Americans should save more!!!" Yet there are trillions of $$$ not being invested now? Borrowers pay the vig out of improvements in production or non-consumption (killing consumption, as one might expect, reduces return on the investment through the simple expedient of lower demand for output). Raising rates on Treasuries will simply divert ever more funds from production improvements to fiduciary robbing Peter (today's citizens) to pay Paul (tomorrow's). Naturally, the moolah hoarders, who always complain that high interest rates on Treasuries "crowd out" real investment, are now clamoring for just such rates; ignoring the plain fact that the Titans can't figure out how to make money on physical investment with rates near 0.0. Who's crowding out who? They possess no wage earning skills, and the intent to live the good life irregardless. Make 'em sell pencils at the curb.

Why might that be?

The answer: our Titans of Industry can't figure out how to make productive use of their profits (investible funds). Recall that the rush to US housing was driven by Greenspan's cratering of Treasuries. Viewed historically, and ignoring the huge volume of mortgages manufactured by the Banksters (the fundamental mistake), US housing was "nearly" risk free, and the assumption that no significant number of mortgages would go belly up at once made sense to both Banksters and Quants. There was nothing in the historical data to point to such. But then, there hadn't been such a massive fiddling with the rules of engagement before; as always, policy beat the crap out of data. There was also nothing in the historical data to evidence the tragic bifurcation of median house price and median income (thanks to the fiddling), which became clear in 2003, and screamingly obvious by 2004.

In the end, trillions of $$$ were, and are, seeking 10% return for doing nothing and taking no risk.

So, to the question: what would happen to the Banksters and Quants if, all around the globe, sovereigns borrowed no net money? All countries ran a balanced budget? What would they do? Apple, et al, sit on their own trillions of $$$, not being able to figure out what to do with it. What if there were no zero-risk 10% instruments? Wouldn't that force the Titans of Industry to actually earn their keep: making intelligent capital allocations? Which they surely avoid doing, like a dark ages peasant did plague corpses.

A death spiral of deflation seems most likely. Remember: when in conflict, policy beats data like a rented mule. The data say, "Titan, you must invest to earn your 10%". But the Titan, being in control of sovereigns and having no clue what to do with its moolah hoard, yet demands its 10% tithe. There are two avenues to that 10%: tax the populace sufficiently to transfer said 10% on nominal "borrowing" (the balanced budgets would remain, but the transfer is now obvious) from the populace to the Titan, or the sovereigns do no nominal "borrowing" and allow deflation to run rampant.

Dystopia for most, luxury for a few. But, in due time, ever fewer of the 1% would be able to afford luxuries. On the one hand, there would be rampant deflation due to lack of moolah in the hands of the masses, and the resulting collapse of demand. So prices fall. That's good for the moolah hoarders. Until it isn't. In due time, inventories are burnt off, but not replaced since real demand has disappeared. Take healthcare, for example. Most, save vaccines in particular, modern medicine results from massive investment in capabilities, financed by widespread demand for the resulting goods/services. It is the widespread demand which keeps average cost under control, despite what one might think about Medicare and Medicaid freeloaders. With such demand gone Poof!, average unit cost of nearly everything gets out of hand. Now, cost push inflation sets in, for those who actually have some moolah. Even the 1% eventually need Obamacare.

Will the Titans finally start converting fiduciary capital into real capital? That is the question. I think not, since capitalists have evinced an ever shrinking time horizon. A recent story (sorry, didn't save a cite) passed by, in which Silicon Valley VCs were forthright: why should I put my money into a capital demanding startup when I can put it into some knucklehead web app (aka, advert pusher) and get back ten times as much, with the same level of risk? Just as the US/Chinese housing markets went berserk under the fusillade of moolah, so too, in its time, will the web app. $19 billion for WhatsApp? I guess we're back in Kansas.

17 March 2014


A story out today, "ARMs are back! Reverse mortgages too! Is this housing bubble 2.0?" contains this prized morsel of wisdom:
"A typical first-time homebuyer may be unable to afford a typical home in the near term, if mortgage rates and home prices continue to rise without sufficient increases in income," writes Orawin Velz, director of economic and strategic research at Fannie Mae.

Well, Duh??? Where was s/he in 2003?? Has Mr. Housing-Market been popping those blue trapezoids again?

Santayana and Pete Seeger had something to say about all that.

16 March 2014

Confirmation and Contradiction for 2014-03-16

A wealth of confirmation over the last few weeks, but I'll resist temptation, and keep this missive to one, Jeremy Rifkin's riff on the death of capitalism.

What he misses, or at least doesn't say, is what's really driving the death spiral. And that factor is what I've mentioned a few times along the way: as capital moves to finance, rather than production, it faces ever diminishing returns. This was true in the run-up to The Great Recession, just because the tsunami of moolah had to crash somewhere, and the American buck was the safest place to land. And, within that venue, the surest and safest way to get more return than what Treasuries were offering (recall that Greenspan had already cratered rates) was the slam dunk residential mortgage market. Until it wasn't.
While economists have always welcomed a reduction in marginal cost, they never anticipated the possibility of a technological revolution that might bring those costs to near zero.

Or as Paul Graham once put it (2005; that long ago):
Like everything else in technology, the cost of starting a startup has decreased dramatically. Now it's so low that it has disappeared into the noise. The main cost of starting a Web-based startup is food and rent. Which means it doesn't cost much more to start a company than to be a total slacker.

So, we get, as I recently termed it, high tech cottage industry. The problem is that, while one can outfit a quad-core i7 with 32Gig and an SSD for about what the average 20-something slacker spends annually on a smartphone and thus be able to code most anything, the fact is that what gets made by these guys is truly trivial. (I slipped that bit of confirmation in the backdoor. Hehe.) One guy can make most of an angry bird by his own self, then hire a bunch just like hisself later on. Building a modern ERP, to replace SAP (for instance), takes a big bunch of people working industrial. All these kiddie apps? Not so much.

What Rifkin doesn't get at: the problem as been around since, at least, the music CD. They're really much cheaper, in marginal cost terms, than the LP. Nor does he address the unintended consequence of vanishing returns to real capital. Capital will continue to move to financial/fiduciary instruments, and thus to more Too Big To Fail corporations. Which brings with it the concentration of wealth and income we've seen recently. That's not going away any time soon. So, through the bathroom window, here's where the Kaufman quote came from. Without a fat middle class, we end up with a stagnant economy, much as the 19th century was. Huh? Well, in 19th century America, there was an entire continent full of resources never seen before. The development of the USofA derived not from being smarter than those gay Europeans, but by having natural resources sufficient to enable unprecedented waste and profligacy. We don't have a continent like that, anymore. There was little in the way of a middle class, and most worked to eat and produce goods for the 1%. What Rifkin gets to is that we won't have even the need for vast numbers of subsistence laborers to make stuff for the top X%. But the 47% won't be allowed to lie around in hammocks, leaching off those productive banksters.

Capital will still control, and as it continues to concentrate, its control becomes more absolute. And the finance quants will continue to ask, "what are my orders?"

06 March 2014

Winner by TKO...

"In today's fights over financial reform, the advantage goes to those who hold the low ground, the underground, the dark room where a rule can be modified in ways only a small handful of experts can follow. These are the battles the banks can win."

That's from Jesse Eisinger's DealB%k column today. You should read up on it.

The point, made here on more than one occasion, is that events trump data whenever the two conflict. Unlike data from the physical sciences, data from human processes is subject to the whims of Goliath. And, unlike in that Bible story taught in Sunday School, Goliath nearly always wins.

03 March 2014

Mind the Cutlery

When I was a kid, the parents had many sayings related to child rearing. Some were intended to restrain the kids just for the sake of the parents' nerves. "What would the world be like if everyone behaved like you?" was one of those. A few were actually intended to keep the kids from doing further harm to themselves; very anti-Darwinist, if one stops to ponder. Let the dumb ones kill themselves before they can reproduce. Aye, matey!! "Don't let the kids near the sharp cutlery" was one such.

In the larger venue of quants/stats/OR/foo, there is a similar need. Not as often enforced. The financial quants were given 1-2-3 (sired by VisiCalc, and sire of Excel), and the world hasn't been as safe for civilians ever since. One no longer needed to really know the maths, anymore; anyone could run 1-2-3 and anyone could write a macro. Many admin assistants did both. Fact is, though, is that it is difficult to decide which causes more harm: the use of Excel by the London Whale (and other equally inept "business users") or the blind transference of maths into finance by the likes of Li's copula (or any of the multitude of failed math/science Ph.D.s who found fortune in Wall Street)? Which is the bigger threat? Hard to say.

Now we have R threatening to displace not only SPSS and SAS and Stata and such, but also Excel. Couple this with the increasing number of books/websites/tutorials aimed at arming the ignorant ("You don't need any maths to do this. Don't worry, I'll tell you how to do it.") finance folk (the spawn of those 1980's admin assistants) with "R skills". It's beginning to look a lot like we're creating a children's army armed with Samurai knives. Would you fly in a 787 if it were calculated by admin assistants? Very much of the global financial structure is.

A couple of postings have recently appeared via r-bloggers. One guardedly cautionary, the other not so much.

Martin gets to the point:
There are too many decent but not great R books on the market already and there is no reason for me to spend time to create another one.

Now, he's referring to ggplot2, not some esoteric branch of stats, which may or may not be relevant to some particular area of endeavor. Still, he's quite right.

On the other hand, arsalvacion reviews a Packt text (yes, same publisher that Martin turned down) which says it can teach you finance quants in R in a mere 164 pages. That's got to be handing out straight razors to three year olds, for crying out loud. Fortunately, some of the reviewers over at Amazon are a tad more circumspect.

Finance quants are hobbled (or spurred on, depending upon one's point of view) by the difference between quantitative analysis in human activities and the physical sciences. In the latter venue, God makes the rules and they don't change, although it may take a very long time to figure them out. Humans can't make new ones, or change the ones we've figured out. In the former, humans make the rules, and change them to suit the whims of those with the most control. The causes of The Great Recession were humans either fiddling with the rules, or attempting to game them. Both, every now and again.

You, too, can be a finance quant; just like learning taxidermy from those matchbook cover correspondence courses.