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.

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.

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.

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.

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.

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

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

You Lazy Pigs

The climate change deniers have a thing or two to teach us. Mostly, if you've got the moolah, you can buy whatever data you want. The banksters did the same thing until the Great Recession made the scam impossible to continue.

Now comes Coke: "It's all your fault, not ours!". Read it, then come back. It'll curdle your blood.

Here's all you need to know:

A 12 ounce can of Coke contains 9 1/3 teaspoons of sugar.

To burn that off, you'd need to:
spend 26 minutes walking Spot.

That's just one can of Coke, which most folks will slurp up in a couple of minutes. Here's one example of what Coke will do to you.

To be fair and balanced, booze is worser. Some beer, not so much.

No, They Ain't Worth It

Recently, the usually smart Neil Irwin defended CEO comp in a manner I find puzzling.

...the stewardship of large, complex companies is really important, and anyone who cares about the American economy should want the most capable people in charge of them.

As to why, he says,

There are competing (and not necessarily exclusive) theories as to why executive pay has soared so much.

One is that it reflects self-dealing by corporate boards, mutual back-scratching by corporate elites who overpay one another out of some kind of cultural solidarity.

But then goes on to tell "the other side of the story". Very Pollyanna, that.

Yes, it is a case of a circle jerk. Where's John Stewart when we need him? At least, Maher is back.

On the face of it, stewardship is a reasonable statement. On the other hand, not one study I've seen or seen referenced has found that CEOs make a positive impact.

Across the board, the more CEOs get paid, the worse their companies do over the next three years, according to extensive new research. This is true whether they're CEOs at the highest end of the pay spectrum or the lowest. "The more CEOs are paid, the worse the firm does over the next three years, as far as stock performance and even accounting performance," says one of the authors of the study, Michael Cooper of the University of Utah's David Eccles School of Business.

Or, as I read somewhere (never kept, nor can I yet find, the cite):

If these really capable guys wanted to strut their stuff, they'd take on the basket cases. As it is, a sock puppet could run an American corporation.

Carnac Predicts, Part the Second

It's not much of a secret that I've little patience with those who've taken as their life's work the manipulation of consumers' psyches for the sole purpose of shifting more of their employers' widgets. Not a righteous use of our collective intelligence. Jobs and Apple being the canonical example.

One side of the situation is "predictive analysis", which ignores all warts in the data in fealty to R². The notion espoused by the predictivists is, all that matters is correlation. Such fealty to old data predicting future data was what allowed the Great Recession to happen.

Now comes a new post on the book's site, and a quote I have to get behind:

A specialist in high content screening might naturally take the ratio of these two features of cells because it makes good scientific sense (I am not that person). In the context of the problem, their intuition should drive the feature engineering process.

In terms of the Great Recession, one might have said

A banker in housing markets might naturally take the ratio of house price to income because it makes good micro-economic sense (danger to the firm) as well as macro-economic sense (danger to the whole economy), and conclude that corruption was afoot.

In the case of cell science, there's God's Laws to obey. In the case of the Great Recession, they're fungible Man's Laws. In the former case, getting wrong will be punished, in the end. In the latter case, not so much.

A Question of Balance, Part the Second

Every now and again, the mainstream pundits catch up with these endeavors. Not often enough, evidently. The major theme has evolved to: when the process under discussion obeys God's Law then data reflects an unbiased reality, if one is careful collecting the data, and can predict the future; but when the process is some Human Endeavor, data means little to decision making while motive and incentive drive these decisions; humans will change the data generation process sub-rosa (to those not in on the scam). The Housing Bubble happened because that Giant Pool of Money (still with us and growing) demanded a high-return, low-risk instrument, so mortgage companies (thence, not first, banks) found cracks in law and regulation which made creation of yet more and larger mortgages a fact. The data, price/income ratio, said this was stupid, but the motive and incentive was to ignore contrary evidence. And so it was. The Giant Pool was happy. Until it wasn't, but the smart money had already exited, so it didn't care.

What's been going on with the Euro follows much the same pattern. Adam Davidson brings forth some new reporting, which is required reading. Once again, the smart money followed motive and incentive, rather than data. The smart money made a bundle, then left the 99% holding the bag.

There is definitive proof, for anyone willing to look, that Greece is not solely or even primarily responsible for its own financial crisis. The proof is not especially exciting: It is a single bond, with the identification code GR0133004177. But a consideration of this bond should end, permanently, any discussion of Greece's crisis as a moral failing on the part of the Greeks.

He goes on to provide a primer on how bonds are "sold", and it's important to understand this mechanism. The US Damn Gummint uses the same method. The interest paid on US bonds is not set by the Fed or Treasury, although perhaps by the Trilateral Commission (yes, it really exists, not merely a co-figment of left and right paranoia). Buyers of such instruments aren't also buying Savings Bonds. They're "sophisticated" investors, with lots of computers to decide what to pay.

So, Greece became a Euro country, and Germany had one more nation where it could export on a hard currency. And Germans won't stand for getting anything less than a full Euro; otherwise Europe with the Euro is just like Olde Europe where countries fiddle their currencies against predators like Germany. Can't have that. Exactly like our Red states with conscripted labor selling into Blue states, with (dwindling) middle class consumers. It will end just as badly, but with more bloodshed in all likelihood. As knuckleheads like Walker kill off his state's middle class, the Red states will find their Total Addressable Market shrink. And don't give me any crap about international exports. The bleating about the "strong dollar" killing profit increases in volume with each quarterly. And that's only the beginning. Just wait for countries explicitly devaluing. "The horror! The horror!"

Davidson brings up Bretton Woods, but you should do, at least, a Wiki journey to learn more if you can't do a five minute Toastmasters' on the topic.

Here's the punch line:

But the bailout broke this virtuous circle, signaling that the bond market would stay safe even when bond buyers were wildly reckless, pouring billions of dollars, for example, into risky subprime-mortgage bonds. The bailout represented a transfer of wealth from the rest of the economy into the bond market -- precisely the opposite of what is supposed to happen.

Ireland, earlier, sacrificed its citizens on the bank altar, so there's reason for Greek bondholders to demand the same.

The IMF said that as a result of the failure to impose losses on bank creditors, "many in Ireland question why Irish taxpayers should be the ones covering the cost of addressing such euro area-wide concerns. A bail-in or other solution that would have 'mutualised' these costs would likely have resulted in more equitable burden sharing."
...
Banks had extended credit heavily to property speculators during the latter stages of the Celtic Tiger economy, between about 2002 and 2006, but the sector collapsed when the global financial crisis hit in 2007 and 2008.

IOW, Ireland crashed, as did the USofA, on the backs of out of control banks. Somewhat different from Greece, certainly.

And, back to Greece.

The institutions that bought that €7 billion in Greek debt in 2009 made a very bad judgment. Even at the time, it was clearly a foolish gamble -- so foolish, in fact, that it can be explained in only one way. They believed that in the event of default, the Germans would bail the Greeks out. And just to be clear: This doesn't mean they believed that the Germans would be kind to the Greeks. It means they believed that the Germans would be kind to the people who owned Greek bonds, a significant percentage of whom were certain to be German themselves.

So, in the end, what mattered to those buying in on GR0133004177 was motive (high-return at little risk) and incentive (failure would be paid by others), not data. As it always is in the venue of human processes.