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.