29 March 2015

Who Will Give a Fig?

The general view of Apple is that it is a Midas money maker. Yet, before the iPhone, it wasn't. With the iPod, Apple began the successful morphing from computer company to toy company. And, it wasn't the first attempt. Remember the Newton? Its short life is explained by bulls and bears in two ways:
Bull: Newton was just too far ahead of its time
Bear: Newton just didn't do anything anyone really needed

The Bear is mostly right. One might argue that iPhone 6 is Newton Reborn. Don't say that too loud near a Fanboi, however.

The trick Apple pulled off with the iPhone was to morph telephone communication into infotainment device. Before the iPhone, cellphones were really portable telephones. Yes, with a flip-phone one can have some measure of innterTubing, but iPhone shifted the emphasis to selling apps. Despite Jobs' objection to phones larger than about 4", without them iPhone wouldn't generate the profit it does.

Which brings us to Watch. Will anyone give a fig about it?
Bull: of course, it's just the latest in Apple bling (or is it, shine?) that the X% can't do without
Bear: what sort of app can one turn into infotainment heroin on a postage stamp sized screen

Logically, Bear is right. Watch can do little but tell you the time without the tether to iPhone. Even as a watch (saw the TeeVee advert last night), it's not very interesting. What makes a watch interesting is the 3D depth of the face. All those tasty nooks and crannies. Watch's display, while colorful, is just flat and boring.

Time will tell, but I sense more Newton, this time.

24 March 2015

Verrry EEEnteresting!

Do you remember who made that phrase famous? Ain't gonna tell ya.

What I am gonna ask is a simple question. The "I'm entitled to my 10% risk-free payment on my moolah" crowd are starting to make noise again. Fisher, ex-Dallas is in the news.
With all this liquidity in the system once it gets activated into real investment and the velocity of money picks up, then what might happen? The real challenge to my successors and the FOMC (Federal Open Market Committee) is to manage that carefully, and to make sure it doesn't become inflationary fuel. It has that potential.
[Aside: my emphasis, and his admission that neither the Stimulus nor QE worked.]

The question: where does the moolah to pay the interest come from?

Since Fisher is of the 10% crowd, the sooner his cabal can get their money for nuthin' and their chicks for free, the better. What he pleasantly ignores is the simple fact that The Great Recession was caused by the over-supply of idle moolah chasing 10% risk-free income. The Giant Pool of Money is still out there, fattened up with all that added moolah sitting, idle of course, on corporate balance sheets. Trillions of dollars that the CxOs, aka Masters of the World, have no bloody idea how to invest into physical capital. To put it plainly: there's been a stark lack of demand for real investment for more than a decade, nearly two. If QE had worked, it really didn't, the moolah wouldn't be sitting on those balance sheets, but converted to physical capital. The Fed (and the ECB and Japan and ...) is pushing a string. Treasuries still get bought at cratered rates just because there's so much moolah chasing risk-free bonds; the CxOs can only counter with a 0 opportunity cost. And the US Treasury isn't the only bond going at auction for next to no interest. All that moolah chasing risk-free return. Remember your Econ 101 class, and virtually anything written by Friedman, about government debt crowding out private investment and how terribly horrible such a situation is??? Well, those Masters of the World want the Damn Gummint to pay them more than they can generate in their businesses. Just because they've accumulated all that moolah. And you and I and the rest of the 99% have provided them with that moolah. Crowding out? Not so you'd notice from them.

The real interest rate is never determined by monetary policy or gold bugs, just by increases in real productivity in real production. There has been a significant slacking off of such. Consider the "innovations" in consumer goods over the last couple of decades. How many of them had the impact on household life as did the automobile, telephone, washing machine, stove, dishwasher, vacuum cleaner, etc. The last such is likely the microwave oven. When was it invented? Depending on definition, as early as 1933, or as late as 1945. In any case, a long time ago. Over the last two decades? Mostly toys and miniaturization of existing devices. Well, and Watson and the self-parking car. But both of those are engineering exercises, not scientific discovery.

The point being: we're not in 1850 with most of physics and chemistry and biology yet to be discovered. Real return is paid for out of increased productivity. One might argue that playing games on mobile phones (i.e., not using the phone as a phone, in the first place) diminishes human productivity. Without such an increase in output, the vig has to come from delayed/foregone consumption; otherwise known as a Zero Sum Game. In other words, paying the Fat Cats their 10% comes out of the lives of the rest of society. Not a prescription for a long lived, stable society.

17 March 2015

New Gold, Part The Second

Well, that didn't take long. Time for the Second Installment. And I still Hate Neil Irwin; perhaps I should sue ESPN and Laettner for trademark infringement? It was just a few days ago that New Gold got its own serialization. Today Neil Irwin offers up some quotes that I couldn't get.

Let's start with:
In India, it is a leading electric utility, Jaiprakash Power Ventures, selling off facilities and negotiating with lenders to avoid a default, having increasing its debts thirtyfold in six years.

Before getting into the New Gold aspect of that, a quick tangent. Gentle reader may recall the observation that even the 1% will require Obamacare if they get their way in excluding a significant fraction of the 99% from healthcare. The issue, of course, is amortizing the fixed cost of healthcare. It was reported yesterday (I forget which newscast I heard it from), that electric utilities here in the USofA are banding together to penalize home solar. The argument is simple: for every house that goes off grid with solar panels, the fixed costs thus lost to price must be born by those that remain on the grid. The utility lobby is shrewd in framing the issue as, "the rich can avoid the grid, leaving higher costs to the poor on the grid". Or, as the old saying used to condemn stupid businessmen: "we lose money on each widget, but make it up on volume". In fact, that's exactly how large corporations do make money; they spread large fixed cost over large output. (This is also why obliterating the middle class is bad for capitalists, but they haven't figured that out yet.) If Rolex sold watches by the tens of millions, they'd cost not much more than a Timex. You can do the thought experiment as an exercise.

OK, back to New Gold. What Irwin, and other high priced pundits, doesn't tell you is what QE was all about. The right wingnuts in particular framed QE as "printing money" into the general economy; dropping dollars from an airplane over every Anytown, USA. "Inflation is coming. Inflation is coming." Of course, that hasn't happened, because QE was structured so it couldn't happen. QE raised the demand for bonds, thus driving up their price and driving down return (interest rate). The Fed (and ECB and Japan and ...) was pushing a string, assuming that by lowering the opportunity cost of physical investment, corporations would turn all that moolah into plant and equipment rather than yet more convoluted fiduciary instruments.

But, none of these "banks" bothered to look at the history of The Great Recession. To wit: it was caused by The Giant Pool of Money ending up in housing (by definition, a non-producing asset class) rather than physical productive investment in the first place; the lack of willingness to turn fiduciary capital into physical capital was the real cause of The Great Recession, so QE by itself didn't matter. Changing the rules to remove the obvious egregious uses helped. So, most of QE went into various fiduciary products. Stock buybacks. Sub-prime used car loans (d'oh!). And, it turns out, all those explosive emerging markets.
In effect, as Fed policy makers sit around a mahogany table in Washington to try to guide the United States economy toward prosperity, their actions are having outsize, often unpredictable impacts across the globe, owing to the dollar's central role in the global financial system. [my emphasis]

The point, of course, is that the impacts are purely predictable. The US buck is New Gold and if there isn't enough to go around, markets get screwed.
By September 2014 there were $9.2 trillion of such dollar loans outside the United States, up 50 percent since 2009, according to the Bank for International Settlements.

The cries of anguish from the likes of Apple and IBM and ... over the devaluation of their winnings in other currencies just break my heart.
Since the Federal Reserve signaled in summer 2013 that it would wind down its "quantitative easing" policy of buying billions of dollars in bonds using newly created money -- that the gusher of dollars flowing into the global financial system would come to an end, in other words -- the dollar is up 25 percent against a basket of commonly used international currencies.

Again, the mistake of assuming that US bucks are all the same. They are, of course, but not really if they remain sequestered in the banking industry. Again, the Fed didn't send out 747s dropping Franklins over the countryside; if they had we'd be closer to real full employment than we are. Businesses only expand to satisfy unmet demand; the notion that they create output just because they can is silly. The US banking system had all those trillions of bucks sitting on the balance sheet. American corporations had no use for them; they also had/have outlandish cash positions, even with the foreign devaluations. Real returns, direct real returns, come from new productive plant and equipment put to good use. Returns from fiduciary instruments aren't inherent, but depend on increased income from the holder. Which is why The Great Recession happened; houses don't produce saleable output and household incomes certainly weren't/aren't rising.

Hyun Song Shin, who heads research at the Bank for International Settlements, argues that a rising dollar has an effect of tightening the supply of money across the global economy.

As they say in Texas, "Boy, howdy!!"

15 March 2015

Mutually Assured Destruction

There is no whining in baseball. Well, that's a paraphrase. Situationally, there is not much that financial quants can tell you worth knowing.

Yet, another story.
Look more closely at those gaudy returns, however, and you may see something startling. The truth is that very few professional investors have actually managed to outperform the rising market consistently over those years.

It's not a complete condemnation, though,
The data in the study didn't prove that the mutual fund managers lacked talent or that you couldn't beat the market. But, as Keith Loggie, the senior director of global research and design at S.&P. Dow Jones Indices, said in an interview last week, the evidence certainly didn't bolster the case for investing with active fund managers.

All those thick books on financial engineering and academic papers? There are better ways to exercise your quant muscles.

13 March 2015

New Gold, Part The First

As has been discussed in these various endeavors over the last couple of years, the US Buck is the globe's New Gold. There just isn't enough of the yellow stuff to go around. And what with Apple figuring out how to make 18k with less than 75% Au, one wonders how the gold bugs are sleeping at night? As always with Apple, and its cabal of knuckleheads with more money than brains, "cheap goods sold dear". Apple is a marketing machine, pure and simple.

Once again, we see an object lesson in the conflict twixt the macro-quant and the micro-quant. What's good for Apple isn't necessarily good for the USofA. Or anyone else, for that matter.

Which brings us to today's Krugman installment. He isn't as forthright as I've been on the subject of New vs. Old Gold, but today's musing gets closer to the bone. The bone being: in order for the globe's commerce to move forward, and avoid that deflationary trap, the value of US Bucks has to keep expanding out in Those Other Countries.
We've been warned over and over that the Federal Reserve, in its effort to improve the economy, is "debasing" the dollar. The archaic word itself tells you a lot about where the people issuing such warnings are coming from. It's an allusion to the ancient practice of replacing pure gold or silver coins with "debased" coins in which the precious-metal content was adulterated with cheaper stuff. Message to the gold bugs and Ayn Rand disciples who dominate the Republican Party: That's not how modern money works. Still, the Fed's critics keep insisting that easy-money policies will lead to a plunging dollar.

Well, as already pointed out, Timmy has no problem debasing Old Gold if it makes him a couple of extra bucks.

And, in order to keep good order in international commerce, this means the US has to run trade deficits each and every year.
Who wins from this market move? Europe: a weaker euro makes European industry more competitive against rivals, boosting both exports and firms that compete with imports, and the effect is to mitigate the euroslump.

Well, German luxury goods exporters, in particular. The 1% get a break on the next Mercedes or Audi. How thoughtful.

Readers may have noticed that the financial services industry, insurance and brokerage in particular, have gone on an advert blitz in the last couple of years. Scaring the non-wealthy into thinking like the truly wealthy; toss more moolah to the financial services mega-corps and quit buying stuff. Two problems with that are immediate:
1) the tsunami of moolah that moved into US (and Spain and ...) real estate due to no demand from industry is still out there looking for above average returns with below average risk; add in Ma and Pa Kettle's nest egg, and one gets yet lower interest return -- that ol' supply and demand canard.
2) the current US and global malaise is directly the result of over supply of (or, slack demand for) consumer goods due to slack growth, if at all, in median income

In the end, real return is a measure of real improvement in production. We know, right wingnuts excepted, that production gains over the last few decades have flowed to the 1%, rather than the rest of us. When you've got more moolah than you can spend, getting more won't appear in real demand. Surprise: it hasn't. D'oh!

As described before, paying interest for the use of moolah without better productivity from the "investment" is just forgone consumption. There won't be any real return generated. This is the primary reason for the Great Recession: paying the vig on house mortgages comes out of the incomes of the "owners" of said houses. And, increasing incomes of those holders aren't generated by the houses, of course. And those incomes weren't, and aren't, increasing. Eventually, 2 + 2 = 4 couldn't be denied.

The new "Housing Bubble"? Sub-prime used car loans.

09 March 2015

Another Quandry

Hot off the presses:
Germany's trade surplus narrowed to EUR19.70 billion from EUR21.60 billion (expected surplus of EUR21.00 billion) as exports fell 2.1% month-over-month (consensus -1.5%; prior 2.8%) and imports declined 0.3% (expected 0.5%; last -0.7%)

The problem with killing your customers is that you end up killing yourself. The Great Quandry twixt the macro-quant and the micro-quant.

06 March 2015

Dee Feat is in Dee Flation, part 29

It's been quite a while since the last episode, but this one is too good to pass up. A link in Yahoo! Finance, of all places has this graph, and the link to one of the intermediate (it's a Holmesian trail to follow) citers.

This is the original, original. You may need to click it to see it all.

Source: Thomson Reuters, AMP Capital (via: here)

It's worth pointing out, for those that just look at the picture here, that the terminal link given here (not the link in the Yahoo! Finance piece) is a longer essay on the current state of the Defeat of Deflation. By an Aussie, no less. Not much of a Tea Bagger axe to grind, although this and the last few governments there have been to the right of center.
As can be seen in the next chart low inflation is generally good for shares as it allows shares to trade on higher price to earnings multiples.

Finally, a highly paid pundit, albeit on the other side of the globe, gets it. Damn, but these guys are thick headed. But he, too alas, doesn't get to the heart of the matter: the CxOs of the world can't find a way to absorb all that moolah chasing yield. No real investment, no real returns, lots of bidding for "risk free" seats on the Titanic.




01 March 2015

It's Lonely At the Top

So, here we go again. In essays past, I've made the point that being the globe's reserve currency, aka New Gold, has certain consequences. One of those is the need to run trade deficits with the rest of the globe in order keep a growing supply of moolah available. Without such, the global economy slips into deflation, as was the case through the end of the 19th century when all worshipped Old Gold. Part and parcel of this monetary regime has been the surge in the USofA's reliance on banksters for employment and GDP. Neither aspect of being the New Gold is necessarily beneficial to the USofA or the rest of the globe. Two more pieces today on point.

First, Gretchen Morgenson reports on research into banksters swallowing the economy. It is not a Good Thing, of course.
According to a compelling new paper published two weeks ago by the Bank for International Settlements, high-growth financial sectors actually hurt the broader economy by dragging down overall growth and curbing productivity.

As screamed from these pages: you can either make things, or suck off the teats of those that do. Banksters are suckers. Morgenson doesn't quite close the loop of logic by asserting that bankster salaries and profits necessarily come out of cash flows in the real economy. But close.
The paper is titled "Why Does Financial Sector Growth Crowd Out Real Economic Growth?" and it builds on past research that found that overall productivity gains were dragged down in economies with rapidly growing financial industries.

Recall, even recently, the observation that using quant methods in human activities is fraught with peril, since, unlike with nature and God's laws, some humans get to change the rules to suit themselves at the expense of others?
Also questioning the dominance of finance in our society is Luigi Zingales, professor of entrepreneurship and finance at the University of Chicago Booth School of Business. In his 2012 book, "A Capitalism for the People," he wrote that the financial sector, "thanks to its resources and cleverness, has increasingly been able to rig the rules to its own advantage."

And that from a Freshwater university, where the rightwing reigns supreme!

Morgenson ends with:
Ideally, finance should propel an economy by helping create jobs and wealth for a broad portion of the population. But clearly, there's a point when finance sucks too much oxygen out of the room, leaving the rest of us gasping for air.

Bigger, in finance, it seems, is not better.

Next up, the rightwing's favorite whipping boy, The Fed.

America's New Gold is run by the Federal Reserve (sort of, but that's a longer story), and Adam Davidson tells the backstory. He starts with the San Francisco earthquake that motivated the creation of the Fed. Lots of gold physically moving all over the place. One point that is too often never mentioned, but Davidson does, is the nature of 19th USofA economy:
There were [bank] runs, and dozens of financial institutions failed in what was the country's worst financial panic to that point -- which is saying quite a bit, because the country had weathered major financial crises every generation since its founding.

Social Darwinism is really the nature of American Exceptionalism, historically. Not something to be proud of, in fact. But all those Montana militia guys think it's still them and their squirrel guns. Sigh.

So, what happens when a country's currency is the globe's reserve currency? Among other things, it becomes the safe refuge if there's an economic hiccup anywhere. The resulting tsunami of currencies into The Buck causes its value to rise. And then what happens?
The modern dollar was born because Americans wanted control over their own economic destiny. But now the rest of the world is at our whims.

And when that "whim" is self-preservation of the USofA, the externalities, the econ set calls it, can bite the innocent.
In 2011 and 2012, with its "quantitative easing" program, the Fed created tens of billions of new dollars each month. Enough of those dollars flowed to Turkey that the economy there grew by around 9 percent for two years. "That's China levels," [Inan Demir, chief economist of Turkey's Finansbank] pointed out. In 2013, when Ben Bernanke, then the Fed chairman, announced that the Fed would stop making all those new dollars, the Turkish stock market fell by a third and hundreds of thousands of Turks lost their jobs. The story is similar in South Africa, Hungary, Indonesia, Brazil, Lebanon and many other emerging markets, where economic policy makers and corporate executives anxiously await Yellen's every word.

Much the same thing happened in the race to the Great Recession in Spain, where Germans in particular, shifted large amounts of moolah into seaside residential real estate. Then, they didn't. Oops.

These days Yellen and the Fed, it seems, are out to force the string to straighten up and do its duty to the economy. The idea behind QE was always to incentivize the Job Creators to make real investment and Creat Jobs by lowering the cost of capital to the point where just sitting on it made the opportunity cost so horrible that not Creating Jobs wasn't sensible any more. Still hasn't happened, on the whole. Corporations, and the .1%, are sitting on trillions of dollars, hoping for a depression and the resulting deflation. If some Palin is in the White House, they'll get to keep their winnings; Palin-lite won't re-set The Buck to diminish the windfall. We'll be the New Ireland. I can't wait. The force is inflation. Sitting on moolah when there's no inflation in the economy (even, some months, outright deflation) waiting for The Big One to drop in your lap follows the incentive. On the other hand, if there is material level of inflation, the incentive is to use the moolah in real physical investment to earn something. So far, the Masters of the World have not been able to find such investments. The crux of the matter is: have the MoW been obstinate, or have we reached the point in our understanding of the Newtonian world that new and better stuff just isn't out there? Did all that moolah go to real estate not because the MoW were infinitely risk averse, but because they just couldn't find anything better to do with the moolah? For once, having the MoW quaking in their boots is actually the better reason.

Davidson ends up with some musing on finance, Newton, Heisenberg, and the Great Recession. Then he spoils it all,
The financial crisis came about because people believed they were in a world of risk -- where the chance of default on mortgages and more complex derivatives can be plotted with great precision -- when instead there was deep uncertainty afoot.

Wrong, wrong, wrong. They could be plotted, and were, by those not beholden on the scam. All one had to do was look at the median house price to median income ratio to see that deceit was afoot; the end game wasn't the least bit uncertain, but foreordained. But both the perps and the business press chose to be blind. The former because they were raking in the moolah, and the latter because they wanted continued access to the perps for stories.