31 December 2015

Is Life a Cabaret?

There's the signature song from the musical "Cabaret", "Money", as in it makes the world go round. I've had a recent confrontation with a certain Seeking Alpha rightwinger over the notion that there is, or isn't, a profit recession and whether it matters. As I've mused a number of times, financial quants have a problem these days: Beijing does what it pleases with its economy. Math/quant models that so much as touch China tread carefully.

A more recent (today, actually) piece looked at NVIDIA's exposure to China. The comments express a contrary view to the piece. But, the fact is, what Beijing does with the yuan/renminbi is opaque. Which led me to an October Fortune story, which came to the same conclusion at the macro level. Just what these endeavors have been saying for some time. Data is the product of arbitrary human decisions. Not the other way round.

To the extent that profits are down a tad, over-supply of petro and gaming of foreign currencies against the Almighty Buck, are the reason.

This overvaluing of the the U.S. dollar relative to the Euro, yen, and Chinese yuan has led to a huge trade deficit and was one of the drivers of the global financial crisis, as foreign savers piled into overvalued, "safe" dollar-denominated assets, like U.S. mortgage debt. Though global regulators have made strides in making the international banking system safer, the fundamental drivers of global trade imbalances have been largely ignored.

Such a nice quote; I feel the warmth of shared authorship. Coming to a preamble near you real soon now.

28 December 2015

The Most Socialist State in The United States

Sarah Palin, doyenne of the right, was the part-term governor of the most socialist state in the United States. She never, so far as I can see, ever admited to this, of course. But the fact is that a whole generation of Alaskans, today's generation, have lived off the returns of a communal asset. That asset, of course, is oil. The state's ownership rights are not by state fiat. According to this piece:
When Alaska became a state, Congress mandated that the new state could not sell its resources in the ground. Whereas other states have the right to transfer land so private citizens can own and develop mineral wealth, Alaska cannot. The intent was for Alaska to retain ownership of resources, like oil and gas, to fund our government. Thus, Alaska became an "owner state."

That time, by the way, was Eisenhower. I haven't tracked the Congressional history of why that was done, but according to the Wiki, petroleum was known to exist prior to statehood was voted. And, of more import if accurate, 75% of recoverable petro has been shipped.

Which brings us to recent news. The phat life is over.
This is the nation's least-taxed state, where oil royalties and energy taxes once paid for 90 percent of state functions. Oil money was so plentiful that residents received annual dividend checks from a state savings fund that could total more than $8,000 for a family of four -- arriving each autumn, as predictable as the first snowfall.

Socialism from an asset not made by any Alaskan. Sweet way to live.
The energy industry's main lobbying group has vowed to fight Mr. Walker's proposal to collect $100 million in new taxes on oil and gas companies, while reducing by $400 million the tax credits they can claim. But at a recent town-hall event in Anchorage on the budget crisis, it was clear that the energy industry has some image problems, even up here.

"Alaska was a great state before oil came to town," Evan Beedle, 54, an unemployed former school bus driver and technician, told state officials at the meeting. "I remember when neighbors were neighbors and doors were unlocked -- now it's just a skirmish for the dollar."

Mr. Beedle continued, "I realize now that we have become dependent on oil."

What would Ayn Rand recommend? Just askin.

24 December 2015

Santayana's Revenge

"Those who cannot remember the past are condemned to repeat it."

George Santayana, in "Reason and Common Sense", 1905.

Today brings a report that there's at least one Wall Street econ who is willing to pillory the Fed's interest rate move.
The historic rate move on Dec. 16 "was very, very stupid," [Mizuho Securities USA's chief economist Steven Ricchiuto] said.

While his assessment was blunt, his no-hike view had been shared by former U.S. Treasury Secretary Larry Summers, Nobel Prize laureates in economics Paul Krugman and Joseph Stiglitz and noted bond investor Jeffrey Gundlach.

Noting the error made by the ECB,
Despite the slowdown in U.S. domestic manufacturing due to sluggish global demand and modest growth in consumer spending, the Fed may raise again in March or April, according to Ricchiuto, who said the Fed has set the bar fairly low to hike rates again.

"Would the data allow for it to happen? I don't know," he said.

Data are meaningless in the face of countervailing motive and incentive. That notion is at least as important as Santayana's. Nevermind that I'm not Krugman.

19 December 2015

The Price of Gluttony

Not all that long ago was a missive on China and the IMF. The notion offered was that being a reserve currency might not be the best thing in the world for China and the Renminbi. And so it has come to pass.
The I.M.F. and the Treasury have both urged China to let markets play a greater role in setting the value of the renminbi, which makes it harder for them to object now when market forces push down the currency.

So, now the currency crashes while the Almighty Buck continues to rise. The outflow of capital from China is documented. China is exporting deflation (with its cheap manufacturing) and cratered interest rates (with all that moolah chasing scant real investment). Yet another reason why The Giant Pool of Money won't go away.
A little more than two decades ago, Mexico concluded the North American Free Trade Agreement with the United States and Canada, cementing its position as an emerging market closely tied to the global economy. But less than a year later, as Fed rate increases prompted investors to move money to the United States, Mexico found itself struggling to protect the peso. It ended up letting the peso drop nearly 30 percent in less than a week.

I suppose there's a Chinese word that is pronounced "QE".

18 December 2015


Stupid is as stupid does. That's a very old adage. During the various arguments on various sites with regard to Valeant and Turing and KaloBios, I've been adamant that the American public shouldn't be forced to pay remaining life's earnings just to access a life saving/altering generic drug just so that the acquirer, who paid a stupid price for the drug/company, can get back the stupid price and 10% (or so) return on the stupid price. The wonders of our not really free market health industry.

Finally, an industry mogul admits the truth:
Imprimis CEO Mark Baum said that even if Turing's other investors decided to remove Shkreli, that alone would not be enough to change the fortunes of Daraprim. While at Retrophin, Shkreli hiked the price of its key drug, Thiola for kidney stones, to $30 a pill from $1.50. That price has not changed since Shkreli left.

"Once Turing went and paid what it did to buy that drug, they were locked into raising the price," Baum said.

Stupid is as stupid does.

16 December 2015

Those Rubes

Well, it has been a while since the last "I Still Hate Neil Irwin" piece, and not because the opportunity didn't arise, but out of the spirit of The Holidays. Still, the NYT Business Editors have gone deeply into their schizoid egos today.

In my dead trees version, above the fold on an inner page is a great graphic, which the web page doesn't have. It has just the video. Too bad. But, it still has the punchline:
In other words, higher interest rates, after all that, have translated into less inflation.

I'll leave aside, for now, the obvious problem that the interest rate is real return *plus* inflation. What the sentence really means, "jack up interest rates and foment recession, which kills everything; kind of like Agent Orange". Now, anyone with at least a minimally functioning brain knows that the inflation bigots have been crying, "it's here!! it's here!!" for years. But, of course, it isn't. And the reason it isn't is that all that moolah the Fed and ECB and the Bank of Japan have been dumping, or so it is alleged, into the world economy hasn't actually been into *the economy*, but into the financial system. Where it wends its way to corporations and hedge funds and the happy 1%. And, it hasn't trickled down to the 47%; the rich get that way by being tightfisted with free moolah. You would too, I expect, in the same situation. "Fuck you buddy, I got mine!!"
Once again, the sources of inflation:
1) wage push
2) cost push
3) demand pull

All three have been notable by their utter absence. Monetary policy, as being implemented these days, hasn't and can't compel any of these.

The moolah sits on balance sheets. The M&A extravaganza is only just starting. Why invest, and employ, when you can just buy your competitors? Not only less risky at the outset, but also gets you closer to monopoly (or, in a pinch, oligopoly).

Not so obvious, if one just scans the dead trees version, is Eduardo Porter's column. Since he echoes most of my Rational Macro-quant Analysis, which you can find by perusing past entries to these endeavors, I could have titled this missive "I Also Still Hate Eduardo Porter". But I didn't. Here are some quotes, each of which should sound very familiar.

Still, the urgency to head off alleged inflationary pressures seems premature, especially given that the Fed and many economists on and off Wall Street have been crying wolf about inflation for years.

... if the economy falls into a recession when inflation is very low, it might be nearly impossible for the Fed to engineer the negative real interest rates -- after accounting for inflation -- needed to jolt the economy back to life.

There are other tools at the government's disposal to reinvigorate the economy. Notably fiscal stimulus, but with today's Congress, that's doubtful.

The previous consensus among economists that we would rarely, if ever, reach this floor was based on analysis of the American economy after World War II, a period of mostly robust, stable growth. Extrapolating from that track, Mr. Williams calculated, a nearly two-year contraction like the Great Recession, which shaved 5 percent off economic activity, could be expected only once every 570 years.

The postwar golden age, though, turned out to be atypical. Basing the analysis on broader historical data -- the experience of 17 developed countries since 1870 -- raises the odds to once every 23 years.
(This one is among my top 1 or 2 errors made by the econ/quant crowd: the post WWII era was the anomaly just because Western leaders, public and private, were of the Greatest Generation and still viewed their world as a social construct. Ayn Rand had not yet polluted their hearts and minds.)

Among economists and investors, the problem with the Fed's 2 percent target is that just about everybody believes it is really a ceiling. That makes it even harder for inflation to rise to that level. The market expects the Fed to act pre-emptively to ensure it never goes over that line -- which is what it seems to be doing now.

So, the right wing in DC (and Europe, too) has dug in its heels since before the Great Recession, stopping any meaningful fiscal tools from being used. The simple fact is that supply side machinery has never worked, and still doesn't. What hard headed CEO is going to make more widgets when there isn't unsatisfied demand for said widgets? Nary a one. Give said CEO piles of moolah, for free (or nearly so), and he'll find the most self-serving way to use it. Which may be just to sit on it, waiting for the next recession/depression/deflation to make his pile more valuable. Appeasement never works.

11 December 2015

The Tyranny of Average Cost, part the sixth

Once again, reporting which demonstrates that average cost can't be avoided.

In this case, we find the capex heavy chip business with major agita.
Meanwhile, smaller peers Abu Dhabi-owned GlobalFoundries and China's Semiconductor ManufacturingInternational (NYSE:SMI) are struggling.

"GlobalFoundries (is trying) to grow into existing capacity as its parent deals with sharply lower oil prices," he wrote. And, "while Semiconductor Manufacturing is growing capacity mid-teens, its revenue base is less than 10% of Taiwan Semiconductor's size. . .."

All that capacity, and minimal growth in, or even slack, demand. Soon, the physics and engineering of chips will hit The Wall. It will be world sorta, kinda like a pharma world where every drug is generic; anyone who wants to run a fab has exactly the same machinery, since Newton and Heisenberg say so. I wonder whether all those nascent coders that Bill Gates wants will be happy campers? Plumbers and nail pounders in FL will be making more. There was a time when the American, at least, economy rewarded brains and learning over simple minded brawn. May be not so much now and the future. Just as that shill Dan Gilbert touts Prudential Insurance in the midst of a global savings glut (save more, you'll earn great interest, just buy a Prudential variable annuity), turning out ever more coders just reduces the per coder income. There's not much objective about economics, really, but supply and demand do make a difference. Some times one or the other is manipulated, but there will always be a market clearing price, as you heard in the first week or so of Econ. 101.

07 December 2015

Beware of Banksters Seeking Gifts

Gretchen Morgenson has a very long piece on the latest assault by the Banksters, aided and abetted by Obambi. Hold your nose, try to keep your lunch down, and just read it. I'll offer up just one short quote:
But bringing private capital into the mortgage securities market poses perils of its own, other housing experts say: Allowing too-big-to-fail banks to dominate the nation's mortgage market would crowd out smaller lenders and expand the federal safety net, putting taxpayers at greater risk of funding bailouts in a downturn. Relying on mortgage insurers to provide that capital also seems dubious given how badly these companies performed in the 2008 crisis.

Moreover, private capital would probably flee the mortgage market at the first sign of trouble, as it did during the recent credit debacle. This raises questions about the availability of home lending when such a system goes through a rough patch.

In other words, when the shit hits the fan (again) the rule will be (again): "socialize cost and privatize profit". The American way.

Go With The Flow

For those still not getting it, there really is a reason why USofA interest rates are low and P/E rates are high. There's moolah on the move, again and still. Get used to it, and admit that there's a global savings surplus.

Also, now having a reserve currency, Beijing risks greater punishment should it pull more instant devaluations. Be careful what you wish for.

06 December 2015

On The Fish and The Bicycle

If you're old enough, or read history, you'll recognize, "A woman needs a man like a fish needs a bicycle". Woman's Lib from the 70s. There are other mythic cycles out there. Lots of them. I collided with this one and was chastized for my rhetoric. Oh well.

As I've mentioned numerous times, there're more hierarchies in software than there are in the real world. The real world is relational, much of which is mangled into hierarchical datastores. And all the mess that ensues. Equally, there are more math-y models (cycles, of course) of human processes than there are such actual processes.

The comment in the global warming post which sought to equate physical phenomena, which we pretty much understand, to human processes highlights the problem with quant away from hard science. The notion that there have been observed cycles of economic activity in the past means nothing with regard to predicting future conditions.
Sismondi and his contemporary Robert Owen, who expressed similar but less systematic thoughts in 1817 Report to the Committee of the Association for the Relief of the Manufacturing Poor, both identified the cause of economic cycles as overproduction and underconsumption, caused in particular by wealth inequality. They advocated government intervention and socialism, respectively, as the solution.
(And you all thought this Gini index stuff was just the recent maunderings of the soft-hearted?)

One can observe physical science data, fit some function to said data, and go about predicting the future of such a system. Even then, one is not supposed to estimate off the end (either end) of the data. Time series folks do so regularly, of course. Doesn't mean they should. While the arithmetic may be correct, what may not be correct is that the underlying structure has reached stasis and thus continues to exist within the range of the independent variable(s). And so it is for economic data.

We, like it or not, are at the top of that S curve of knowledge. Much of what passes for economics, and more or less the rest of social science, is grounded in previous eras of small population and abundant natural resource. Some retain the notion that "human ingenuity" will solve any difficulties we face, or will face in the future just because the 20th century was more "progressed" than earlier. This Pollyanna view results from looking at the past, the 19th century is a favorite, and applying that course of events to today and our near future. But the 19th century, and even the first 50 or 60 years of the 20th, was a time of filling in many, many gaps in our understanding of the physical world. The periodic table in particular. Most of post-Newtonian physics. Thermodynamics, arguably the most important field in physics affecting our day to day lives, became real in the 19th century. I often wonder what percent of the population realize that semiconductors were understood in the 19th century? We won't have such a frontier again. Organic chemistry is the only field which is more or less infinite, due to the nature of carbon, hydrogen, and oxygen bonding with the rest of the periodic table; one can synthesize to one's hearts content. The speed of light means we're stuck on this blue marble, even if we manage to build rockets with something with more oomph than chemical rockets. Transport powered by Mr. Fusion engines would be nice.

Attempting to analogize human systems, whether economic or socialogical or ..., is foolish. We are not automatons (yet; Blade Runners not in demand) obeying Newton's laws or thermodynamics or ... We, some of us, make up the laws (generally to disproportionately advantage the law makers) which govern our behavior. At times, such as the DotBomb and Great Recession, when moolah is in supply greater than needed by the CxO class for physical investment (M&A don't count as physical investment, either), said moolah flows into fiduciary instruments. Said instruments are constructed out of whole cloth by some of us, to their benefit. They exist, to the extent that they are at all real, based on contract law. Some regulatory oversight exists, SEC and the like, but as both DotBomb and Great Recession demonstrated, clever lawyers will skirt both law and good (beyond short term) sense to make an extra nickel.

In sum, the laws are made, and re-made, for one purpose: socialize cost and privatize profit. Were classical economics, or any of the hard science analogizing, true; such could not happen. All costs, current and future, would appear in prices and there would never be either oligopoly or monopoly (or the demand side -sonies). Chinese cities, London and Los Angeles before them, would not be engulfed in toxic fumes; the true cost of pollution would be explicit in the cost of transport and electricity, etc. Pretending otherwise is just delusional.

29 November 2015

Motive and Incentive, part the first

One of the driving memes of these endeavors is that motive and incentive are at least as important as data to understanding an economy, both at the micro (especially) and the macro level. Comes an extensive piece which deals with such in the context of The Great Enabler, the Nobel Prize in Economics (which, actually, it isn't really). Economics isn't any more "scientific" than any of the other social sciences, and the last few decades of Right Wing ascendence makes such ever clearer. The quants sought, as the micro set have always done, to remove all value judgment from the field. Doing so is explicitly to support the power center of an economy: more wealth is always better, even when (or, because) such increase of wealth devolves to a 1% or .1% of the economy. Brown nosing and ass kissing by design.

A kindred heart:
A Nobel prize in economics implies that the human world operates much like the physical world: that it can be described and understood in neutral terms, and that it lends itself to modelling, like chemical reactions or the movement of the stars. It creates the impression that economists are not in the business of constructing inherently imperfect theories, but of discovering timeless truths.

Chemical reactions obey God's, or Mother Nature's, rules over which said chemicals have no control. Thus, the results are by definition not only optimal but also justified. Casting economics as objective analysis serves the purpose. Power centers very much appreciate such rhetoric.

Folks who can bend, break, or change the rules to their advantage will do so. The rest of the flora and fauna of the planet can't do that, modulo some tool making of other primates. But only humans have banks.
GDP, inflation and even growth figures are not objective temperature measurements of the economy, no matter how many economists, commentators and politicians like to pretend they are. Much of economics is politics disguised as technocracy -- acknowledging this might help open up the space for political debate and change that has been so lacking in the past seven years.

I had the displeasure to be a grad student at the University of Massachusetts in the early 70s when the quant types took over the asylum, led by one Vernon L. Smith, Darwinist to the core. After all, the field was originally named Political Economics, and it certainly takes great pains to support its political patrons, often disguising its motives and incentives behind the abstruse. The irony, of course, is that Smith's Nobel was shared with Daniel Kahneman (mentioned in the Guardian piece as a counter-weight to the quants; perhaps the author should have used the Wiki), a psychologist. One wonders whether Kahneman put Smith on the couch?

27 November 2015

Billlions and Billions of Dollars

I've always suspected, just from acquired memory, that the real reason behind pharma's claim that it cost $X billion to bring a "new drug" to market is that drug companies simply don't pull the plug when the data say the drug has little chance of working and/or getting approved. For those who may not know, in the US, there are three sanctioned levels of trial, not surprisingly called Phase I/II/III. These are trials of the drug in humans. Prior to Phase I there are pre-clinical lab tests to, at least, demonstrate that the drug works chemically, biologically in glass, and biologically in non-humans.

Once FDA is convinced that the compound is non-harmful, or least non-fatal, in non-humans, clinical trials can begin. In general:
Phase I -- safety
Phase II -- safety and dosing, and possibly efficacy, in small trials
Phase III -- efficacy in large trials

As a rule, at least two PIII trials demonstrating statistical efficacy and clinical benefit beyond current therapies are needed to ask FDA for approval. The key points in these trials:
1 -- sponsors (aka, drug companies, mostly) are not required to provide the public, or investors for corporations, all data generated or FDA correspondence during development
2 -- FDA is not allowed to release much, if any, data until such time as it makes a marketing approval decision, and then the non-approval (aka, CRL) may be vague

The result of this is that drug companies often continue pouring money down a rat hole. It's what they do. That's my recovered memory of watching the drug business for the last decade or so. Finding clear data on how many drugs with failed/marginal Phase trials are then sent into the next Phase is difficult. Not the sort of information drug companies want publicized.

Part of the problem may just be a naive` view of stats, in particular what a p-value means. And, no, I don't say that as intro to pumping Bayes in clinical trials. Not even.

Then I found this piece. All is revealed.
And, of course, add to all that the entirely avoidable, but nonetheless remarkably prevalent, tendency to progress agents into Phase 3 that did not actually achieve positive Phase 2 findings (at least without the help of unjustifiable post hoc analyses).

So, here is where all that moolah goes:
If, for example, your primary end-point reaches statistical significance but every secondary end-point suggests no effect, its time to suspect the False Discovery Rate. Put another way, don't let the data from one single experiment (however important) dominate the weight-of-evidence. The attitude "well, the trial was positive so it must work - so lets plough ahead" may well be tempting, but unless the broader picture supports such a move (or the p value was vanishingly small) you are running a high risk of marching on to grander failure.

Leading to his conclusion:
Failures in large, expensive Phase 3 trials are the principle cause of poor capital productivity in pharmaceutical R&D. Some of the reasons for failure are unavoidable (such as, for example, the generalization problem). But the False Discovery Rate is most definitely avoidable -- and avoiding it could half the risk of late-stage trial failures for first-in-class class candidates. That translates into savings of billions of dollars. Not bad for a revised understanding of the meaning of the humble p value.

But, of course, drug companies won't do that, since they get to keep their bloated bureaucracies only if they continue to do trials. Cutting off the losers in PI or PII does nothing to promote that. So, they won't.

19 November 2015

You Say M-eye-cro, I Say M-ah-cro

One of the hallmarks, if not raison d'etre, of microeconomics aka The Corporate Perspective, is that macroeconomics is just the sum of all those homo economici maximizing their use of land, labor, and capital. Such argument has been used for centuries to justify all sorts of zero-sum gaming and short-term decision making. Keynes is the most well known but not first to recognize that the welfare of The Tribe amounted to more than the sum of each member's wealth. Arguing against the macro folks is the 1% argument that "only the little people pay taxes"; if you're of the 1% you directly buy your own cops and schools and such.

Short-term decision making is exemplified by "you don't miss your water until your well runs dry". In California, we find the 1% squandering water on lawns just because, today, there still is some water and today's price (which never seems to calculate depletion) is affordable for them.

Zero-sum gaming is exemplified by the likes of Airbnb, which is subject of Australian hearings. The same old story: we should be allowed to slough off social costs, both current term and long term, because we assert that we expand the larger economy. In the case of American sports teams being gifted with stadiums, often fully gratis, the carry-on effects of bars, restaurants, and memorabilia shops are asserted to bring in more commerce and tax on same than the cost of such stadiums and tax abatements. No unbiased study has ever agreed. What has been found, of course, is that such teams pull up stakes for some other jurisdiction which makes a bigger, dumber offer as soon as, or even before, the lease finishes. Such taxpayer/community gifts are only profitable to the community if customers are imported to the jurisdiction from external places; otherwise the community is simply transferring consumption from a loser (movies and bars and OTB) to an adorned winner (Your NFL Team). Plus, that winner gets extra profit from the fact of not paying substantial cost.

Airbnb has a more difficult case to make: it is a pure replacement for some other form of accommodation. What Airbnb gains, some other facility loses. Since Airbnb runs through Ireland, of course, all other countries see no tax benefit of the corporate cash flow. And, of course, all that happens locally is that Hilton loses a customer to Airbnb's rooming house. Such Airbnb facilities are often sub-rosa, so any local accommodation tax goes unpaid. The argument by the likes of Airbnb amounts to, "we're cheaper than X incumbent, so our customers will spend the difference in the locality". I won't stay at Hilton, but rather some stranger's back room, and I'll have dinner at the Hilton bar?? As if that actually made sense as a justification: the customer base spends the same, so let us avoid taxes because we help the larger, local, economy? So, even if the Airbnb argument were true, the net gain to the community is less than $0; the Airbnb sleeper spends the difference between Hilton and its cot. There is no net increase in the local economy. The only justification for taxpayers subsidizing Airbnb (by letting them skate on regs and taxes and such) is if those who sleep at Airbnb wouldn't otherwise be in the locality spending money.

The bottom line, so to speak: when analyzing micro effects, especially quantitatively, be careful not to get sucked into ignoring macro effects, both immediate term and long term. Nearly always you'll find micro actor(s) seeking to slough off costs to the macro world. It's at best a zero-sum game for the macro economy, while the 99% lose 99.44% of the time.

13 November 2015

Dee Feat is in Dee Flation, part the thirtieth

Well, the shit has hit the fan; producer prices continue to tank. All those Austrians keep telling us INFLATION IS HERE!!!!!!! Yet, like Godot, never appears.

Down a record 1.6 over the 12 months. As said so many times, motive and incentive matter more than data to those who pull the puppet's strings

11 November 2015

The Tree of Life

The giant sequoia lives into the thousands of years; ring analysis of all trees shows some wider and some narrower, resulting from level of water, sun, and soil nutrients. More food, thicker rings. Nevertheless, tree growth can be viewed as monotonic increasing in perpetuity. More or less. The same is true of many natural processes.

Unfortunately, the same is not true of human processes, since, unlike trees, we (well, some few of us) control the supporting environment. Sometimes, in some places, the environment is conducive to growth in some aspect of human-kind. Generally, this is due to a self-administered advantage. The banksters, for example, made their $$$ by bending/changing/ignoring the rules of play. They won, and when they were caught cheating, pretty much got away with the filthy lucre. Nice work if you can get it.

Much the same transference of thought goes on in the field of demographics, most often by those who know little about the subject. Josh Barro recently flapped his gums on the subject. Being coy, he framed his analysis with "good news, bad news" meme. Using the title, "Your Kids Will Live Longer Than You Thought" doesn't help.
you need to look at cohort life expectancy, a statistic that adjusts for the fact that death rates tend to decline over time as health and safety improve.

As I noted at the beginning: people live longer today than they did in 1900 not because of some deus ex machina perpetual propulsion, but because some humans figured out how to staunch various methods of early death, notably infant mortality in the period from 1900 to 1960. It wasn't magic, or God, that led to the longer life expectancy at birth. If one goes, as I have urged many times before, and looks at the real data, one sees that life expectancy at age 65 (the metric that matters when discussing Social Security or retirement generally) has increased by a small fraction of at-birth. A really small fraction.

Medicine, these days, is largely concerned with adding a few weeks or months to the terminally ill geezers. Whether we should be wasting so much moolah on geezers is a valid question. The War on Cancer has gone about as well as the ones in the Middle East.
The Technical Panel on Assumptions and Methods established by the Social Security Advisory Board, an independent government agency that advises Social Security's trustees on matters including actuarial assumptions, says Social Security is systematically underestimating future declines in mortality rates, and therefore underestimating the likely life spans of young Americans.

This statement is the Tree Growth Proposal: there's been a continual, but with diminishing incremental effect, decline in early death up to now, so there has to be more decline in the future. We're not trees, and why we die early is mostly up to our behavior. Either we stop doing deadly things (smoking) or we find in medicine (surgeries, drugs, vaccines, etc.) specific therapies to slow or halt specific causes of early death. There is no deus ex machina.

Without specifics as to why, and where from, such future declines will increase I say, "horse shit". We know what causes most early death, and drugs and vaccines have eliminated most of them. Lung cancer has diminished as people are shamed into quitting and not starting. Smallpox is officially gone. Mostly, same for tuberculosis, flu, polio, and so on. The main cause of early death in the Rich West is too many calories, while in the Poor East it is too few.
In the long run, the Social Security Administration assumes the "mortality improvement rate" will be 0.71 percent -- that is, the odds of dying at a given age will fall, on average, that much each year.

Again, more horse shit, without specifics. We are not trees. We won't live longer if you just give us more water and more nitrogen. Gad.

10 November 2015

The Poisoned Apple

Another in the line of missives centered on The Tyranny of Average Cost™ was percolating in my lower brain stem, but not yet putting fingers to keyboard, when what should I see, not tiny reindeer, but this Debbie Downer report on Apple.

Back in the beginning, even before some readers were yet born, Apple was the computer company for the rest of us. An IBM/PC cost in the neighborhood of $5,000 (that's 1981 moolah, btw), while the Apple machines were much cheaper, and less expensive. Then came the Age of the Clone, and the race to the bottom, and so on. With the Mac, Apple became the computer for the upper X%. X being somewhere in the range of 10 to 20. The die, to quote Caesar, was cast.

These days, Apple is largely The High End Smartphone Company. But no one, that I've seen in the popular press, has asked the simple question: can Apple survive without all those low end (and, allegedly, unprofitable) phones flooding the world? And, of course for those following the bouncing ball, not even close. Let's consider a small thought experiment, since dragging out specific data will be arduous if not impossible.

There are a few major fabs: Intel, Taiwan Semiconductor, Samsung, GlobalFoundries.
But $500/wafer is a far cry from the $1,600 or so that a finished memory chip wafer costs, or the $5,000-odd cost of a finished high-end processor wafer. Of that cost half or more is capital depreciation on the equipment that converts the raw wafer to finished chips.

The lion's share of the capital depreciation is lithography equipment, basically cameras on steroids.

Trying to figure out the total shipments of all cpu is beyond my patience. But, if we take the 10 billion/annum shipments of ARM designs as a base, then ask how many of those went into Apple phones, we get some idea of Apple's dependence on foundries' capacity. In 2013, around 150 million were shifted.

So, 150 million out of 10 billion cpu. Apple, as is so often the case with the right wing, is parasitic off the low end. IOW, without all those 9.8 billion other cpu sales, Apple would have to absorb the amortized capex of the foundries all by itself. And this, of course, is the rationale of all those fabless chip companies; get rid of real capital in order to drive up RONA. By the simple expedient of having no assets and charging everything to direct cost. Of course, the assets do have to exist someplace, so from a macro view it's all a shell game. And a zero-sum one, at that.

Ironically, Apple's Watch has been held up as the great disrupter of the Swiss (aka, really really expensive) watch industry; and may not be selling all that well. In fact, it has been the actions of Swatch to stop supplying base movements to the rest of Swiss watch makers. The conflict has been going on for years, but boils down to The Tyranny of Average Cost™: Swatch has the existing capacity to supply all of the boutique watch makers, who themselves individually can't find the capital to create production capacity (which is redundant at the outset). Some of the larger small makers have gone into production of base mechanisms in the last few years, but it is wasted capital, in the macro sense. Swatch's high-end brands now have a cost advantage, in that the capex has been paid for by the boutique makers over the years, while they have had to invest in redundant capacity. The customer and the boutique makers lose, while Swatch wins. Ah, tyranny they name is Rand.

Yeah, I know, this is back of the envelope figuring, but the The Tyranny of Average Cost™ can't be denied. Apple is, through its foundry suppliers, able to cater to the 20% by virtue of the existence of the 80%. Or, as discussed some time ago, if only the 1% get healthcare, they'll demand Obamacare for themselves, since they surely don't want to carry the capex of the healthcare system all by their lonesomes. They may hate, and condemn their oppression by, the 47% but they need the 47% to participate in order to staunch The Tyranny of Average Cost™. If only the 1% get MRIs, how much will an MRI cost? A lot.

04 November 2015

The Tyranny of Average Cost, part the fifth

Regular reader may recall my observation on the folly of Amazon's business model: it's an order of magnitude cheaper to ship by rail than by air. All this building of stores, sorry Fulfillment Centers, was perfect evidence that Bezos sees the problem, but finds the most expensive way to solve it.

Now, of course, Amazon is going into the brick and mortar business. There must be great angst among the pundit class!! Betrayed by Jeff!!

The reason, of course, is it's cheaper to stock a B&M location with the high volume stuff, leaving the high-cost, low-volume stuff to the warehouses. It's only taken a couple of decades for him to figure it out. I suppose the extended interregnum from the declaration of disrupting B&M retail with mail-order only service to now will be enough for folks to forget that point. Just as the large iPhone was solely a decision by Tim to improve the lives of iPhone users, and not the evident demand for same from users, well... Here, too, Jeff will say that he's invented a new sort of B&M.

Yeah. Right. Sears went from being a mail-order only business to being a B&M outfit. Some people just refuse to learn.

28 October 2015

The Global Euro

Let's take a trip through Tim Cook's head. What must be Tim's constant thought? Well, as CEO of the best company on the planet, it must be: how to continue being the best company on the planet over the next decade, or so. Best, of course, from Wall Street's perspective. After that, he'll just pull the rip cord on his golden parachute.

How did Apple get here, one might muse? Was it Steve's genius? Not really. Apple rescued Steve as much as Steve is credited with saving Apple. Next was a failure, pure and simple. Until the iPhone, Apple was just a niche personal computer company. Still is, if you cull out all the non-computer revenue from the filings.

All that wonderful gross margin from iStuff comes from a simple fact: Apple works by cheap goods sold dearly. It has managed to do this by the cult of personality of Steve. The innards of any Apple product are bought in off-the-shelf. Yes, I know: the Ax cpu is wholly Apple's creation of genius engineering, blah blah blah. Fact is, not so much. All the teardowns of the various A chips indicate: added more cache, added more gpus (bought in, of course), and did a good bit of manual layout. The ISA of an ARM chip is set. The node is set by what the foundries can do. If the MO of Apple were not clear before, then the destruction of GT Advanced Technology should make it clear: Apple gives you a pittance, then shoves a telephone pole up your butt. Which fact answers the Big Question: why does Samsung supply Apple? The answer is, they can afford to. Only another economic Gorilla can. It's what the econ types call countervailing power.

It's worth recalling that the first iPhone had a strong advantage for the first couple of years: Apple had captured the supply market for cap touch screens which fact limited competition severely.

(I started this missive while still on the Island, and it's now mid-day Tuesday. I'll wait for the Apple quarterly news before continuing, although the share price isn't moving up.)

Just got back from a teeth cleaning, and Apple is getting cleaned in after hours. I'm going to wait until 8 pm eastern to continue. ... Was down a bit in after hours, now up a bit in pre-market. So.
"The law of large numbers does kick in," he added."Can the iPhone grow another 2-3 years or is it done growing?... I think investors are worried about the next two-year period. 'Can there really be iPhone growth?' Because absent that there's not really going to be much growth from Apple."

In simple terms: China was the last roll-up opportunity. If that sounds alien, check out what's been going on with Valeant; roll-up city. This quarter went OK, and Christmas may as well. Does either speak to the future? No.

Which brings us to Germany, Greece, the Euro, and the Trilateral Commission. One of, if not the largest, paranoid fantasy of the far Right.
On the right, a number of prominent thinkers and politicians have criticized the Trilateral Commission as encroaching on national sovereignty. In his book With No Apologies, former conservative Republican Senator Barry Goldwater lambasted the discussion group by suggesting it was "a skillful, coordinated effort to seize control and consolidate the four centers of power: political, monetary, intellectual, and ecclesiastical... [in] the creation of a worldwide economic power superior to the political governments of the nation-states involved."

Well, perhaps The New World Order is.

The point, of course, is that Germany, through the elegant expediency of forcing the Euro down all those countries' throats, has the benefit of a New European Order, which solely benefits it. While Volkswagen can adjust the price, in Euros, of the Passat across the countries (last issue of report), higher in France while lower in Greece, for example recognizing ability to pay; this is an active step which is totally different from the passive shocks incurred when China, say, pulls the rug out from under the Renminbi. What Apple wants, should Tim ever admit it, is for all countries to do as Bermuda has: a fixed 1-for-1 exchange with the US Buck. Bermuda even calls it a Dollar. That's what Germany got with the Euro. That's what Apple, and the rest of US multis want. Each quarterly they bitch about "currency problems".

A New World (Monetary) Order controlled by Apple and fellow co-conspirators wouldn't upset them in the slightest.

25 October 2015

I Still Hate Neil Irwin, part the third

Spent the last week on the Island, wonky WiFi and just the Wifey's Windoze laptop. No editor or links. Very quiet on the rabble rousing front. So, I get back and The Times does its cynical, or ironic, or sarcastic two-step. Time to rabble.

First, a long piece on collapsing commodity markets. I'll just leave that for you to peruse at your leisure. No, this missive is all about Neil Irwin and me. Yum.

More than once, I've referenced pieces by the esteemed Mr. Irwin because they provide reportage proving (or, at the least, demonstrating) certain themes of these endeavors. Most often, as this one, they deal with quant (data) issues in macro-economics. Always a thorny problem. Most macro data is generated as sample surveys of business and labor.

Today's piece deals with a subject near and dear to my heart: Dee Feat is in Dee Flation. Not been a missive under that title in some time. Not that there's been a dearth of data, of course, just that the tune remains the same: we're headed down the rabbit (or, rat, as you prefer) hole of deflation. The cash hoarders look likely to get their return on idle moolah. Sigh.

Irwin takes a new path. One I haven't discussed since, I'll guess, grad school. Perhaps undergraduate. The dreaded Phillips curve. He explains, a bit.
How much faith should be placed in a line on a graph first drawn by a New Zealand economist nearly six decades ago, based on data on wages and employment in Britain dating to the 1860s?

The answer, of course, is not much. Phillips, as many macro-economists (esp. of the Right Wing, labour hating, branch), assigns only that sole cause to inflation. But, as the first piece so clearly shows, flation isn't just about wages. Far from it. Just ask your local greasy spoon proprietor why s/he's exploded the price of your 2 over easy.
As the Fed's chairwoman, Janet L. Yellen, put it in a 2007 speech, the Phillips curve "is a core component of every realistic macroeconomic model."

Except it doesn't work. Or at least, it hasn't worked very well in the last few decades in the United States. And it has proved particularly problematic to try to use that historical relationship to predict where inflation is going.

What he neglects, shamefully, is tell the reader about other drivers of flation. That's my task. Again.

To refresh, there are three ways flation (either direction) happens:
- wage push
- cost push
- demand pull

The first happens when workers get paid more than their marginal product (wiki), at least according to even Right Wingnuts who worship at the feet of classical economics. Otherwise, it's just Social Darwinism with capital compressing wages to subsistence, i.e. slavery without the chains. Which worked fine, in a macro sense anyway, during pre-industrial and even early industrial regimes. These days, with such heavy capital requirements, the The Tyranny of Average Cost™ makes it a fool's enterprise. Irwin goes on a long discussion of why Phillips and actual inflation are disconnected, beyond the simple arithmetic.

The second happens when there's not enough widgets to satisfy needs. Petro goes through cycles, which we're always experiencing. And, for the nonce, your 2 over easy. Why the likes of Irwin can't point out this obvious fact is puzzling. Over the decades, and centuries, I'd wager that material shortage is the number 2 cause of inflation.

Finally, that third is what the Right Wingnuts prefer to call "debasing the currency", and why they hate QE and fiscal policy and every other tool used to resurrect an economy. Argentina in the 1980s. But even Left Wing economists know that dropping moolah from airplanes will, if long enough and large enough, cause inflation. This is particularly true when an economy:
- is largely non-self sufficient
- lacks surplus capacity in desired widgets

In other words, the USofA today. Financialized economies, Bermuda is my favorite whipping child, are more susceptible to demand pull inflation, since the moolah dropped from airplanes won't be spent on domestic production. Spent on domestic production, the point of dropping moolah from airplanes, we find more demand for home grown widgets; thus more employment, more investment, more profit and so on. The point of dropping moolah is simply to get folks buying stuff. However, if the stuff isn't created domestically, the follow-on benefits don't occur. And so it was in Argentina.

Simply relying on naive` Phillips is foolish.
If you simply look at the unemployment rate in the United States versus the Consumer Price Index, excluding volatile food and energy prices for every year since 1958, there is nearly no statistical relationship at all, just a jumble of dots. (A best-fit line actually points the wrong direction, correlating higher unemployment with higher inflation, albeit very weakly.)
[my emphasis]

To the rescue comes a Freshwater Economist, Robert J. Gordon of Northwestern. Yes, another nerd who sees the future as distinct from the past. The link is an interesting read, for nerds anyway, but on to the day's topic:
Robert J. Gordon, an economist at Northwestern University, has his own version that he argues explains inflation levels throughout recent decades. But it is hardly simple. Its prediction for inflation relies not just on joblessness but also on measures of productivity growth, shifts in food and energy prices and overall inflation over the six preceding years.
or by factors that policy makers have little control over (like what happens to oil prices)

In other words, the sum total effect of those two other, oft ignored, forces. It ain't just the greedy 47%.

16 October 2015

The 2 Percent Solution

For some time, both the quant version of these endeavors and the macro-economic version have harped on the quite apparent lack of investing in real assets. Corporations are sitting on $2+ trillion just overseas. QE money has largely gone to financial instruments. True innovation in physical widgets has clearly stalled: the best new thing is Force Touch on an iPhone?? Really?

The CxO class just can't seem to find creative ways to allocate fiduciary capital to physical form. I found this HBR piece recently and was going to write it up. Nah, just go read it. The bottom line, so to speak, is that the Masters of Wall Street are extorting the CxO class to put moolah into fiduciary, rather than physical, investment. The United States of Bermuda.

Well, even Yahoo! Finance (am I the only one to view that as oxymoronic as "happily married"?) now gets it. Real value in an economy comes from physical investment in productive processes. Finance and real estate and insurance (FIRE, as it's known) are just ways to skim moolah off the transfer from savers to borrowers. All their profit comes from extortion. The American Way.

04 October 2015


Volkswagen demonstrated, once again, that The Masters of Universe make money the old fashioned way, they steal it. So, what does the Angela of death have to say?
"I believe the reputation of the German economy and the trust in the German economy has not been shaken by this to the extent that we are no longer considered a good business location," she told Deutschlandfunk, according to the text of an interview due to be broadcast later on Sunday.

Of course, Germany is a good place to do business. Government is the lap dog of business. Germany didn't define fascism, Mussolini did, but they perfected it. Government for, and by, capital. So long as Germany can export, particularly in the fixed rate Euro, it can sit fat and happy. Without export, the German economy collapses. Much like China.

30 September 2015

I'd Rather Be Lucky Than Good

There's an article on SA, that starts with Abraham Wald, a Brit stat who, during WWII defied the generals. Not a team player, he. The issue was how to re-armor aircraft in order to save them and, more importantly, the flyers. The generals looked at the bullet holes, pointed, and said, "there". Wald also looked and said, "not so much".

What's of interest, beyond the article, is the comments. The gist of which is that, following Wald's thesis, stock picking is foolish, and that inordinant gains are, mostly, just plain luck. You get the market rate of return, period. Unless dumb luck smiles on you.

Which, in turn, raises a question not addressed by either the article or the comments.
Something similar occurs in the investment industry. It claims that some people are extremely skilled, since year after year they've outperformed the market. They'll identify these "investment gurus" and convince you of their abilities. But a simple thought experiment can show that it would be impossible to not have these gurus produced just by luck.

If one goes to the track, and bets on FlapperFluzzy in the seventh, at 40 to 1, and she wins, you get taxed at median income rates, not some capital gains slap on the wrist rate. You got lucky at the track. You don't get an additional tax break.

So, if luck is so much a part of inordinant investment gains, and has even less benefit than playing the ponies, why not revert to the 91% rates of Eisenhower? He of the "fear the military industrial complex"? After all, what else are they going to do with the moolah? Stuff it in a mattress?

23 September 2015

ZPOP [update]

It's been mentioned in these endeavors a few times: 99.44% of macro-economic data is from surveys, rather than census. The sole prominent number is weekly unemployment; that should be a census of all recipients of UI. Other than that, it's sample data mostly run by various parts of the Census Bureau for BLS or whoever. I've admonished gentle reader, on occasion, to read footnotes to the unemployment report, to see:
1) there's not just one unemployment rate
2) the CI of those rates might make your head spin.

Now, comes reporting that the Atlanta Fed is proposing a new measure of unemploymentthat they're calling ZPOP. In essence: percent of prime age working population who want jobs, with jobs.

The first question which crossed my mind, naturally, when reading the reporting: is the Atlanta Fed Red or Blue?, mostly right or mostly wrong? The regional Feds aren't unbiased, non-partisan think tanks, much as most would have you believe. Here's the list of the Fed banks. Lockhart is president of Atlanta. Here's the WSJ rankings of accuracy. Click the labor tab, and Lockhart floats to second. Not bad.

In any case, the notion of focusing on "prime age" unemployment as the standard bearer makes perfect sense. Note, as has been recently mentioned, that labor force participation decline is not from geezers going out to pasture. It's from the genWhatevers living in Mom's basement because they can't get any kind of job. We can't afford it.

Upon further chewing, I've got to discuss something in the CBS News piece. The author is an academic economist (self-describes as econometrician). Here's the quote
One final note about this and other measures of resource utilization. Full employment is defined as more than full utilization of resources. Just because a worker is employed doesn't mean he or she is doing what they're best at or employed in their most productive occupation. If an unemployed engineer takes a job waiting tables to feed the family, that worker will be defined as fully employed, but that worker's potential is hardly fully utilized.
[my emphasis]

This point of view tends to be Left Wing; Right Wingnuts would rather that anyone but them live at subsistence: more of the economic pie for themselves, of course. But there's also a real world issue, which is that, over the last few decades, the more education one has the more likely you're employed in the non-productive sectors of finance or health or government. The problem with GDP is that its measurement is fungible. Not too long ago the BEA changed the playing field:
On July 31 [2013], the U.S. Bureau of Economic Analysis will rewrite history on a grand scale by restating the size and composition of the gross domestic product, all the way back to the first year it was recorded, 1929. The biggest change will be the reclassification--nay, the elevation--of research and development. R&D will no longer be treated as a mere expense, like the electricity bill or food for the company cafeteria. It will be categorized on the government's books as an investment, akin to constructing a factory or digging a mine. In another victory for intellectual property, original works of art such as films, music, and books will be treated for the first time as long-lived assets.

The net effect of this, of course, is to further incentivize folks into non-production employment. Not that Joey's going to read the GDP detail before declaring his college major, but the policy wonks (Left and Right) will and are certain to favor such sectors. Gramm-Leach-Bliley came about just for that reason: "we're good at finance, so let's do more!!" Let the Chinese make the stuff. The richest country on the planet in all of human history, but we don't actually make any of the widgets we buy. This makes sense? As the Bloomberg piece says,
Robert Atkinson, president of the Information Technology & Innovation Foundation think tank, criticizes "intangible-capital fundamentalists" who, he says, unreasonably dismiss the contribution to growth of investment in tangible high-tech equipment.

The point, of course, is to reward the non-producing sectors. You know, like financial services which happily "innovated" us into the Great Recession. We really, really need more folks in finance and cartoons.

19 September 2015


So much interesting news today, but I'll limit this missive to two topics driven by Apple that have been discussed here, more or less, in the past.

First, the advert world is falling!!! Now, I'm more than willing to admit that I'm mostly a Luddite with respect to smartphones: I only use it as a telephone, rather than an entertainment/distraction device. I've better ways to burn neurons in a worthless way.
Just two days after Apple enabled ad-blocking apps through its new mobile operating system, iOS 9, users are embracing the new technology after long complaining that the ads track them, slow down web browsers and are just plain annoying. In less than 48 hours, several ad-blocking apps with names like Peace, Purify and Crystal soared to the top of Apple's App Store chart.

So, of course, the advert pushers scream "bloody murder!!"
"This will be hard on small publishers," said David Jacobs, chief executive of 29th Street Publishing, which helps publishers create apps. "There are definitely some small publishers out there that make 50 percent to 75 percent of their revenue from ads, and they have margins of about 10 percent."

Such assertions are, of course, baloney. InnterTubes adverts are no different from newspaper or TeeVee adverts: a shotgun of content at a, somewhat, captive herd of prey. It's, obviously, harder to avoid adverts in the latter two venues. Hmm, may be there's a business decision to be made here. The advert pushers ignore the gorilla sitting on the coffee table: people who block ads are the sort who're infinitely not inclined to click, ever. In other words, the advert pushers are scamming their business clients with "impressions" numbers, as if such numbers actually measured anything material. Such numbers are no more material than the number of folks who read the NYT are to advert buyers there.

So, I found the PageFair report. What was amusing was the nature of the comments. In the Red Corner, advert pushers claiming that ad blocking is stealing from them, while in the Blue Corner are ad blockers who say
Secondly, this is just a BS number. It's like the RIAA claiming that every single song shared is a loss in sale. The math was bogus then, it's bogus now. I never, ever, ever, click on click-bait ads. Furthermore, someone leaching off me to sell my browsing behavior without my permission is morally bankrupt. The model needs to die.
[BT Richards]

This sounds to my like the world upside down. I'm responsible for these companies missing money for something I didn't ask for? Don't get me wrong, there is nothing wrong with ads, but when someone is canvassing rubbish at my door I also slam the door in his face. So why should I accept this behavior in my browser, which has become my virtual door in the online world.

The comment stream goes on and on. The Blue Corner gets it: adverts are only valuable to those that *want* to be pestered, for everybody else not so much. The Mad Men have been getting away with the "impressions" fiction forever. It's just a scam, only on the innterTubes the scam is just more obvious. Boo hoo. If the advert pushers were serious about the problem, they can implement the Nuclear Option, which is to ban users who don't *actually buy* in some specified period. Obviously, such period would have to be measured from first visit to a pushing site. So, if I visit the ABC site which adverts the SPQR widgets, if I don't buy an SPQR widget within, say, a year, I'm blacklisted from ABC. That would establish that ABC really does provide measurable value to SPQR. Over time, the number of visits to ABC will likely drop by 99.8%, but the value of those visits to advert pushers is demonstrably real.

Will advert buyers and the SPQRs of the world admit that this is the only way to price adverts rationally? Not in the lifetime of Dr. Who (all of them).

Which brings us to the second topic: the sky is falling on the iPhone, and perhaps all of Apple's insistence to sell only to the 20%.
APPLE is offering a new way for consumers to purchase iPhones, and while the company is calling the new system a "financing" plan, it is essentially a lease. The idea is to get people to constantly trade in their one- or two-year-old phones for the newest models. And Apple is employing a tactic similar to one that luxury carmakers use to get more people driving Mercedes-Benzes, BMWs, Audis and Lexuses that they could otherwise not afford to buy: creating a monthly payment that is appealingly low.

Just as the house builders, then the car companies, came to understand that the sticker price is irrelevant to buying, so too now Apple. Got to get that monthly vig down below the pain threshold.
But, of course, these relatively small charges not only accumulate, they never stop, adding one more perpetual charge to consumers' monthly bills. Why not simply buy something as utilitarian as a smartphone, especially since new iterations offer only incremental changes for the average user?

(Aside: there is now the ultra low mileage lease. Cute. One might wonder how Apple will replicate that nuance?
The deal offered gives you only 10,000 miles a year, which is lower than the 12,000 miles that most leases allow - which is still far lower than the national average of 15,000 miles. Right of the bat, I am thinking, "Gee, you could really put your wiener in the wringer with this one!"

So, logically, the Next Step for Apple (get it?) is go ARM (not the chip) on the customers: cheap "lease" payment for the first six months, say, then a nice bump after that. "You're an upwardly mobile Yuppie, working in finance software? Well, then get the Edition. In a couple of years you'll be making more than enough to afford the upsized monthly. Just sign here."

I love it when the more money than brains crowd get clocked.
The Apple plan also seems more expensive than getting an iPhone through a cellular carrier, which will generally charge a lower down payment and build the rest of the phone's cost into the monthly payment. Now, someone on the Apple plan could essentially be paying twice -- first for the phone, and then for the portion of the phone's cost that is embedded in a monthly bill.

Apple's silly gross margin comes from somewhere. I'll leave it to gentle reader to connect the dots.

16 September 2015

On The Road To Bermuda

Hard to imagine, or may be not, what the Hope and Crosby comedy romp "On The Road To Bermuda" might have looked like. But we're seeing a real time version, except rather than those two old ham cut-ups making silly puns, it's China trying to broadjump from largely rural subsistence farming economy to financial manipulation expert.

It ain't working, of course. Yes, China has accumulated oodles of foreign tender, and acts as today's version of 19th century New England company towns. But the fact is: Bermuda, and the other island predators, are able to exist simply because they are tiny populations in the middle of nowhere. They are allowed to exist because international banking wants them. China is none of those. It does have that substantial manufacturing sector.

The Shanghai index jumped in a few minutes at the end of the day:
Remarkably, the Composite was down 0.6% roughly 90 minutes before the end of the session. A late spike in buying interest, however, turned the tide in a big way. While there were some headlines that could ostensibly be cited as a catalyst for the late surge (eg. PBOC Chief Economist making uplifting remarks about the economy), it was generally regarded as a government-backed move.
source: briefing.com

Doesn't Beijing know that only the USofA is allowed to act like the Banker to the Rest of the World?

15 September 2015

The Rent Is Too Damn High

Just shows how much I keep track of certain things. I caught a bit of SNL one time in the last few years, and I thought "The Rent Is Too Damn High" guy was some cast member playing a fictitious nutball. Turns out, not so much. Which brings us to today's topic, Drug Prices Are Just Too Damn High!!

Lots of folks have been making noise about drug prices, but not offering much in the way of fixes. Too much lobbying money to be lost, I expect. The Pharma Pholks justify the sky-high prices of new-ish drugs on the fact that 90% (or so; depends on whose numbers one looks at) of compounds fail to be approved. Of those, more than a few end up not making much.

Today brings an archetype of the problem. Xenoport, a small drug company, just announced the results of a Phase II trial for its psoriasis drug. (For those not following clinical trials: three phases, I being basically safety, II being a few cherry picked patients, III being large sample with a control (often placebo, but sometimes an existing therapy) to gather sufficient data to ask FDA for OK.) The main reason so many drugs don't get approved, or used if approved, is they simply aren't better (efficacy and/or side effects).

The pharma gadfly, Adam Feuerstein has a piece on the trial, and here's the punchline:
The side effects of XP23829, however, raised some alarm bells, notably diarrhea rates ranging from 22% to 40% at the highest, most effective dose. Other GI side effects noted in the study were nausea, abdominal pain and vomiting. Fifteen percent of psoriasis patients treated with the highest dose of XP23829 discontinued the study compared to 2% for placebo patients.

Xenoport, in its press release, said it would proceed to Phase III trials. Now you know where the money goes: pissed down a rat hole. And the CxO folks pull down six and seven figure compensation each and every year. Xenoport is down 28 percent, and change, today. Will that dissuade the Suits from spending the money? Not hardly.
XenoPort, however, said it expected to start late-stage trials next year and that it would explore partnerships to speed up the development of the oral drug globally.

There oughta be a law.

13 September 2015

A Quotidian Day

There's just too much in today's "Times" to cut&paste with commentary, so I'll just give the link, title, and pick a quote (may be two). You do the rest.

Are Western Values Losing Their Sway?
The Chinese vision is not universalist but mercantilist, and Beijing is interested less in remaking the world than in protecting itself from vulnerabilities of globalization, including the chaotic freedoms of the Internet. China, like Russia now, pushes back against Western aspirations and efforts to reshape the world in its own image.

There Is No Theory of Everything
[Frank Cioffi] hated big theories and any kind of metaphysical pretention and he would use little quotations to pick away relentlessly at grand explanations. He used the particular to scratch away at the general, like picking at a scab.

(The on-line text is materially different from my dead trees version. The first time, I think.)

Teaching Slavery to Reluctant Listeners
Twenty-four decades have passed since the Continental Congress deleted Thomas Jefferson's criticisms of slavery from his first draft of the Declaration of Independence, and college students today arrive knowing little about the way America's history of slavery has shaped their lives. Avoidance of the topic is deeply ingrained.

Finally, one young woman had heard enough. Born in Jamaica, S. lived in a working-­class neighborhood in Broward County. She was unquestionably the best writer in the class. S. turned around in her seat and pinned the complainers with a glare. "Stop whining and do the work -- that's why you're here."

Safety Suffers as Stock Options Propel Executive Pay Packages
Stock options have been the jet fuel propelling some of the biggest executive pay packages over the years. From an investor's point of view, these instruments are problematic because they provide an executive with little downside if the company's underlying shares fall but oodles of upside on the rise.

So, there you have it. Life is a seesaw. How you view life depends a lot on where your end of the board points.

11 September 2015

Canary Sing To Me, Part the Second

Recognizing when the Canary flies past whilst digging in the coal mine is more art than science. With Apple's announcement regarding "renting" iPhones, we see a Yellow Bird of Peril flit by. Just as auto makers are turning to 84 month notes to shift product, so too is this move by Apple. Maintaining the iPhone's silly GM leaves Apple little choice but to hide behind "monthly payment" being within the 20% household's budget. Good luck.

10 September 2015

The Best Show on the TeeVee

If you're not watching "Parts Unknown" on CNN, you're a moron. It's, hands down, the best show on the TeeVee. Bourdain's first one, on FoodTV, "Cook's Tour" was 30 minutes and OK; the snark was there from the start. It was mostly a food show.

He then moved to Travel Channel for "No Reservations", and began to find his footing. In August, 2006 there was supposed to be an episode on Beirut, but a couple of days in to the visit, Israel beat the shit out of the city, along with Bourdain and his crew. If you missed it then, Travel Channel still repeats it on occasion. You must find it. What we got was reportage, and the episode got an Emmy nomination. Should have won.

Thence on to CNN and "Parts Unknown", and the reason for this short epistle. My homepage, for the nonce, is CBS News, and it announces that heroin has invaded white America, specifically Vermont. A year late and a dollar short. Bourdain did that last year.
"Like a lot of our shows it's a stealth program -- it claims to be about one thing and it's actually about another," he says. "... In [preparing] for this show I noticed there's been this incredible explosion of heroin use in rural Massachusetts and New Hampshire and Vermont -- small, white, rural, small-town, Norman Rockwell America. No criminal gangs, no outside posses coming in, nothing like that, [but] little Timmy next door is a dope fiend now. And so is mom and grandma. On heroin, the worst drug in the world. How did that happen? So we started to look into it."

It's season 4, episode 8 "Massachusetts". Again, go find it.

04 September 2015

May The Force Be With You

Pundits have been claiming that the dropping unemployment rate is due to dropping labor force participation, which in its turn is due to geezers (and near geezers) quiting work.

Wrong. Here's the BLS data and note that the geezer end of the table is increasing. One can't live on Social Security, and there's no pensions to be had any longer. And, here's this months data. Note that the overall PR is below the geezer actuals from the first table.

All those young slackers.

02 September 2015

From The Mouths of Bambinos

The Donald prates about the Mexicans, while Carson is hot on his heels. Who would have thunk it? You can look it up, but net migration from Mexico to the USofA has been falling for years, and remains 0, more or less. While Carson pulls yet closer.

There has been, may be gone, the Mexico Moment which was supposed to last longer than, well, a moment.

Turns out, even the winners understand that "It's the distribution, stupid".
"Unfortunately the problem in Mexico is the wage rate, which is enough only to survive," said Mr. Rascón, 48. Unless people have money to spend, he added, the companies that sell to them will never be able to expand the way his has.

The Donald really should go have an anchor baby there, with his foreigner wifey, then campaign for President. He'll fix that economy right up.

30 August 2015

China Syndrome, Part the Fourth

Once again, reporting on the ground belies some/much of what quants think, or at least say, about the China situation. Many wear rose-colored glasses. A large part of the problem is that Beijing is well known to make up macro-economic data. While a fine practice from a political point of view, it leaves decision makers (Chinese citizens, foreigners, and Chinese bureaucrats) in the dark.

More reporting today: zombie factories. Even "60 Minutes" has found the effort to report on ghost towns. But... since so much of Chinese GDP is funneled into "investment", much of it non-producing by the bye, it matters materially what's going on with those investments.

Basically, nothing. What's even more amusing is this:
Like many industrial cities across China, Changzhi, which expanded aggressively during the country's long investment boom, has too many factories and too little demand. That excess capacity, many economists indicate, will have to be eliminated for the Chinese economy to return to healthy growth.
[my emphasis]

One might wonder how that logic is supposed to work? Must be some Austrian economists. The point, of course, is that Beijing has used its fiat over labor to flummox the West out of being productive. This whole, "Beijing is finally steering the economy to domestic consumption" is baloney. Just as the Austrians have provided the Republicans with the excuse for income concentration, so to in Beijing. As it ever was, "It's the distribution, stupid". Neither Beijing nor the RNC want to hear it.

27 August 2015

Yet More Tyranny

Remember The Tyranny of Average Cost™? It exists just about everywhere in production. One the of major irritants of modern life is "paying" for cable channels "I don't want to watch". Interestingly, ESPN's many channels have been the major benefactors of this bundling.

Today brings a new analysis of Apple garroting the cable networks.

The thesis of the piece is somewhat on point, which I'll dwell on. Of interest is many (most? all?) comments, which boil down to: I only want to pay for the channels I watch. TeeVee a la carte, in other words. For those well off enough to eat in classy restaurants, ones that offer both dinners and a la carte menu, know full well that the a la carte meal is far more expensive, and not always superior to the dinners on offer. Again, The Tyranny of Average Cost™ strikes again. With a la carte TeeVee, in due time only the mega channels/networks will survive, and there goes choice. There exists choice of off-the-mainstream TeeVee because all subscribers subsidize the utility. And, despite what the Masters of the World assert, cable/sat TeeVee is a utility.

The author accurately points out that the "smaller" (read: left wing intellectual) channels can exist because they get more funds from bundling than it is expected they would get from a la carte. The result of either/both of unbundling and disintermediation would make a vewwy, vewwy compelling study and experimental design. Suffice to say that the conservatives would expect to see The Science Channel and its God and Guns hating ilk to die, while the liberals would hope that the God, Guns, and Amphetamine set go away. Given that the country, on the whole, is far more urban and liberal (closeted though it be) than right wing, I suppose that the result would surprise the snake handling set (yes, there are channels, "National Geographic" and "Animal Planet" which display such). No more "Outdoor Channel", too.

Production costs don't diminish with burgeoning numbers of channels. On the other hand, advert dollars are spread thinner, per channel. If one views 1960s TV on the Encore set, for example, one sees cheap production values: backlots and sound stages galore. Today, mostly on site, even if within the TMZ. Is it any wonder that the Golden Age of TeeVee profits fell off the table when cable dispersed from midwest farming towns to the Big City? Split three ways is one thing; split 500 is quite another. All that original programming on cable-only channels would disappear overnight. Well, except for the snake handlers, since they'll do it for cameras gratis.

25 August 2015

I'm In Your Debt

You do remember The Joker (Rogoff) and Penguin (Rinehart) of quant econ? What quants and micros never seem to do is get beyond narrow, yet superficial, analytics. All the while spouting such rhetoric as "deep dive", "laser focus", and "it's the Damn Gummint's fault".

What the Right Wing apologists never do is look beyond affirming their agenda, that it's either the Damn Gummint or Little People who pay taxes who are the cause of all that misery.
Every financial crisis, he and his co-author, Carmen M. Reinhart, concluded, stems from the same simple problem: too much debt.

Well, Rogoff is at it again, this time gloating that he got China right long before anybody else. He didn't, really, but did go public early on. Only God knows who was first.

His explanation: too much debt. Yeah, so?

And, of course, that's quite wrong.
...distribution ... of wealth as it is currently produced ... to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery.

That's a quote from Eccles, which appears in the preamble to some of the versions of these endeavors. Since the quants and micros only care about maximizing profit for a narrow sector, or even just one corporation, the "winner takes all" meme is more to their liking, and never questioned. That "winner takes all" leads to collapse of the whole edifice, is never considered.

What Rogoff, and his ilk, fail to do is ask the question that matters: why is it that consumers turn to debt to pay for their widgets, rather than out of income???? Hmmm????

The Great Recession happened partly because The Giant Pool of Money demanded high-return, low-risk instruments, which the financial services sector was happy to concoct and provide. The problem, of course, was that the 99% couldn't float the needed mortgages with the existing, standard, protocol. So, the protocol was fudged. A lot. But the needed instruments were created.

One of the side effects of artificially inflated house prices was the Home Equity Loan: "use your house to pay for that dream vacation", and such. So, not only were the poor inveigled into McMansions with teaser APRs, but otherwise sensible folks enticed into making the homestead an ATM. And why not? Wages for the 99% have barely budged over the preceding decades, and this provided more cash flow to consumer goods companies. Do you really think they'd say, No? Of course not.

With the increased concentration of both wealth and income over the last three or four decades, money to buy widgets out of pocket for the 99% just isn't there. So, how do corporations shift widgets? Credit (or DEBT as Rogoff has it), of course. The key to The Great Recession was that mortgage companies, then banks who saw their market share dwindle, understood the real issue: monthly payment. Folks don't buy a $100,000 house, they buy a $750/month house. It's the monthly nut that matters. "Look, the initial payment is within your income. In a few years the payment will reset, but then just sell the house at much higher price, if don't strike it rich. You'll actually be better off."

We see the same scam going on now with auto sales. The 84 month car loan (25% of loans in 2014) is the same scheme: keep the monthly payment within protocol. Auto makers can shift higher cost/profit cars, too boot. Good deal for everybody. The amounts, per household, aren't (one hopes, anyway) as troublesome as the subprime mortgages. One hopes.

Nevertheless, a mini-Great Recession will occur with these car loans, if the job market gets soft. All those cars being repo-ed may well cascade through the economy nearly as evilly as the mortgages did. Folks get laid off. Stop paying for the car. Car gets repo-ed. Without wheels, you can't get work. And so on.

But it's all the fault of those greedy 99%, who won't live on the starvation wages corporations deem them worthy of. Eccles can't be denied, forever.

24 August 2015

Krugman Finally Says It

Some time back, I invented (so far as I know) the phrase "Tyranny of Average Cost"™ to describe the problem faced by capital/fixed cost biased production: in order to make moolah from the investment, one has to shift a lot of widgets at a moderate price or shift just a few at unaffordable price. Apple has, sort of, taken the latter course. Without sufficient demand, the investment never pays off. Without sufficient payoff, investment in physical assets slows, even stops. Economies such as Bermuda exist based on almost wholly fiduciary investment. Some here in the USofA are sore jealous.

Yesterday's missive told the tale of Intel and physical investment. The author of the piece sees superior use of fiduciary capital in finance. The comments, on the whole, argue that Intel (at least) should stay the course of making physical widgets. On the other hand, there is that siren tune of WhatsApp: a handful of guys with PCs getting $19 billion (not really, but it does sound good, doesn't it?). The ROI is outta sight. The problem, of course, is what your Good Mother told you when you were in short pants:
What would the world be like if everybody behaved like you?

Barriers to entry for such Service Economy companies is nil. Which is why WhatsApp got the $19 billion: it was simple extortion. Legal, but extortion nevertheless.

Well Krugman finally says it, almost.
More than a decade ago, Ben Bernanke famously argued that a ballooning U.S. trade deficit was the result, not of domestic factors, but of a "global saving glut": a huge excess of savings over investment in China and other developing nations, driven in part by policy reactions to the Asian crisis of the 1990s, which was flowing to the United States in search of returns. He worried a bit about the fact that the inflow of capital was being channeled, not into business investment, but into housing; obviously he should have worried much more. (Some of us did.) But his suggestion that the U.S. housing boom was in part caused by weakness in foreign economies still looks valid.

This financialization of the USofA economy has been going on for a while. Longer, in fact, than even Krugman admits in today's column.

What both Bernanke and Krugman miss, or are too tired to deal with, is that the glut began no later than the DotBomb. All that moolah to fund .coms like Pets.com (loved the sock puppet; just your average CEO in drag) came from somewhere. The "Giant Pool of Money" should be reviewed at least once a year; it explains most of what's going on. Still.

Which brings us to a new neologism (from your local Department of Redundant Redundancy): The Cudgel of Good Enough™. All producers of tech widgets find themselves facing the same problem: what functionality can be invented that is new, useful, and high margin? The smartphone business is ground zero, of course. The Big Deal with the next iPhone, if all these reports are to be believed, is Force Touch. Doesn't have quite the allure of an iPhone, when none existed, does it?

What's a company to do? On the one hand, income/wealth concentration continues apace, such that any growth in the global economy happens to the 1% (or .1%). For, say, Burberry that's not so much a problem, since selling a man Just The Right Coat For The Occasion™ is what they do. (You should have stayed with coats, Angela, I guess your Plan B makes it low risk?) For an iPhone shifter, not so much. Not even The Donald needs more than one. No, I've no idea whether he really does or not. Thus the Watch, which isn't likely to be a smash hit. Tim would have leaked that by now if it were.

Back to the SA story. The author does have a point: the marginal benefit of semiconductor progress has plummeted since the heady days of the Pentium, while the cost of implementing those benefits continues to increase. The Tyranny and The Cudgel beat Intel like a drum. Remember when the 450mm wafer was just around the corner? Never happened, of course. One might argue that node shrinks have been a substitute, but, if so, at much greater cost. Soon enough, control of power at 10nm (certainly below that) becomes an issue.

Is there a happy ending? As Krugman puts it,
But there's also, I believe, a sort of emotional prejudice against the very notion of global glut. Politicians and technocrats alike want to view themselves as serious people making hard choices -- choices like cutting popular programs and raising interest rates. They don't like being told that we're in a world where seemingly tough-minded policies will actually make things worse. But we are, and they will.

To quote the subtitle of one version of these endeavors, "It's the Distribution, Stupid".

China Syndrome, Part the Third

Well, I guess one can conclude that, if China's domestic hiccup can cause a global financial panic, then it really is a first world country. Sort of.

19 August 2015

A Well Rounded Education

As is well known, I've not been a fan of Jobs, his Reality Distortion Field, or Apple in general. The fact is, Apple has been an assembler of Other People's Parts from the get-go, just like most of the rest of the small computer (and compute device) sector. Unusually adept marketing is their value add.

The iPhone design patent is especially galling. Today it is reported that USPTO may be willing to revisit the blunder.
Now, in a new twist, examiners at the U.S. Patent Office have had second thoughts. In an August ruling, they agreed to consider new prior art evidence, which led them to a commonsense conclusion: the rounded rectangles design is obvious, and should not have been granted a patent in the first place.

Capitalists regularly rant that bureaucrats are stupid, incompetent, low lifes who should be left to starve in the desert. Except, of course, when their stupid incompetence grants market monopoly. And obscene infringement awards.

13 August 2015

Just Like Ali

The financial quants must be getting tired of having their collective bell rung by Beijing's rope a dope. Once again, as always, motive and incentive murder data.

To be honest, no one has a clue where the [Chinese] economy is, and I don't think that it's properly measured.
-- Viktor Szabo/2015

11 August 2015

Told Ya So

For some time now, especially since the Germans' assault on Greece, I've been telling ya'll that American corporations bleating about "the strong dollar" hurting their profit positions was the sprinkle before the hurricane. In due time, the BRICs would devalue in order to fend off other BRICs and the $/€.

Told ya so.

Briefing.com --
Overnight, China devalued the yuan by the largest amount on record, sending the USD/CNY pair higher by 1.9% to 6.3249.

We've only just begun.
-- The Carpenters