Head First in the Shallow End

(A post found through R-bloggers raised the question of why it seems that academic research is "shallow" these days. Boy howdy, that was enough to light a fire under my tusch! Herewith offered is the comment which resulted.)


It's not that thinking is too shallow (well, if you're not a Red Stater by location or inclination), it's that the unknowns of the natural (real) world are fewer and further between. Ph.D. candidates have to find ever smaller pin heads to study. And that was already true back in the 70's when I was in grad school. What "science" should be addressing is the population tsunami and the attendant impact on all of our lives. Most folks don't realize, in an immediate effects sort of way, that the USofA has twice as many bipeds as it did in 1950.

The Red State, back to the 19th century crowd, actively attempt to persuade the rest of us that all was better then, *and we should conduct the country's business* as if 2010 ecology (broadly defined) is the same as 1850. Go to Kentucky to see ancestors coexisting with dinosaurs.

An economist, Robert J. Gordon, has studied economic growth, and reached the obvious conclusion: the 19th century found out much of what there is to find. This quote is from his wiki entry:

In addition, Gordon has written for economic journals, outlining the relation of the productivity growth of modern day inventions to the great inventions of the late 19th century. He focuses on the impact of computers in the post-1995 economy on the durable manufacturing sector. Furthermore, he emphasises the marginal productivity of computing technology affects standard of living in a much more contained fashion than the earlier great American inventions.[1][2] He downplays the role of computer technology in the economic growth of the latter 20th century in accounting for business cycle and trends. In addition, he also questions the actual productivity of such technological developments.

So, the problems that need solving are demographic and political. Finding Higgs won't matter a damn if we intercourse our way through our food supply. Malthus was wrong only because 1) he didn't know enough about the New World to know about our great plains soils, 2) petroleum, and 3) their attendant chemical fertilizers. Now, we ain't got a New World to provide basic raw resources, we ain't got a new petroleum, and we ain't got abundant synthetic fertilizers.

Die Capitalist Dog!!

There are days when I think that somebody at the New York Times is my regular reader, since a few days later there is either an article or ed piece repeating (with quotes from folks I don't have access to) the thesis of one of these posts.

A few days ago, came this story on the declining value of investing in investing software. There was going to be a post here, crowing, but I never got around to it.

So, what happens? Today comes yet another story about returns. All those Koch Brothers are being compelled to actually invest in the USofA. Unlike stocks, bond proceeds go *to* the corporation whose name is on the paper. This is a good thing. When Greenspan cratered the Fed rates, I wonder whether he followed the intellectual breadcrumbs? By removing "risk free" Treasuries from consideration, in that the Kochs want lots more moola for the grace to lend money they can't otherwise spend, the Kochs of this world turned to "risk free" housing. That didn't work out so well, so now they're buying corporate bonds.

If one believes the Right Wingnut propaganda (that is, the Right Wingnuts believe their own story), this shift from fiduciary instruments to real investment is a Good Thing. Sort of.

Here's a few snips from the latter piece:

"It's amazing: You're now seeing 4 to 5 percent yields for weaker companies," said Adam B. Cohen, founder of Covenant Review, a credit research firm. "These are the type of yields that you used to see for blue chips like Exxon and Pepsi."

Surprise? No flation and low interest rates, no surprise. One might even argue that the nominal interest rate isn't artificially low, given the absence of flation. 5% is a good return for doing nuthin.

The percentage of high-yield issuers that have defaulted on their debt in the last year stands at about 2.8 percent, according to Standard & Poor's, well below the historical norm of 4.5 percent.

Yet, these bonds are going out as "junk"?? Sounds like the ratings' agencies are gaming the game, yet again. Who'd a thunk it?

Still, a growing chorus of market players is starting to sound alarm bells. A recent report by Bank of America warned investors against diving headlong into junk bonds at these record-low yields. Not only is there little hope for additional price appreciation, but the companies issuing this debt are vulnerable to a cyclical swing in the economy and slowing business conditions.

The fly in the ointment? Lousy time to buy bonds for capital gains purposes. Back in the mid-1970s, house mortgages were well into double digit rates. House prices, in concert, were lower. Those that bought then reaped the Big Kill later when the price of housing went up and rates came back down. Double whammy. Bond traders beware.

Hull Breach!!

As has been stated more than a few times here, the 1% (and, for sure, the .1%) intended (and still intend) to crash the global economy even further than they have so far. What's a more risk free return on capital (cash) than deflation? And what was reported yesterday? You guessed it, the Eurozone contracted. Significantly. This is The Guardian's take on the situation.

So, Mr. Red Neck-Voter out in God's Country, you can continue to vote to feather the ever expanding nests of those who have declared war on you and yours, or you can wake up and smell the napalm. Buffett told what is going on. He's smart. Listen to him.

Keep Your Friends Close, Your Frenemies Cloture

The Ryan annointing (I suppose I'll have to pen something sometime, but I'm either too stunned at Mitt's stupidity or his stark evil) and the charge that Obambi hasn't done enough to fix the economy, led me to look for numbers. The numbers looked for are filibusters. Not so easy to come by, but cloture (the vote to end or preempt filibuster) numbers are. They're recorded.

What was found were existing articles, so I'll defer to them. No need to rewrite history.

This first has the graph I set out to make: the number of cloture votes by congress. It only goes to 2010, so misses the current action.

This second is just a couple of months ago, and does include current numbers, but no graph.

The only remaining item is voter suppression activities. Harder to quantify, of course, but reporting tells the tale. Obambi and his flock let 2010 happen. I still can't forgive them. Never will.

Left vs. Right: All You Need To Know

Listening to "Wait, Wait, Don't Tell Me", and their guests on "Not My Job" were missions engineers Bobak Ferdowsi and Adam Steltzner for the Curiosity Mars mission.

Here's some of the shows on The Learning Channel and History Channel:

Hatfields and McCoys
Ax Men
Swamp People
Hairy Bikers
Mountain Men

Here Comes Honey Boo Boo
Sister Wives
Toddlers and Tiaras

Return to Sender

For some time now, it's been clear that the old rules of investment are, well, old. Part of the shift was made by moneyed interests who seek only to make money, rather than output of goods to sell. These folks "invest" in fiduciary instruments (bonds, and to a lesser extent, stocks) rather than in plant and equipment. The siren song of the post-industrial, service economy. Other than hair cuts, folks directly buy few services, and virtually none of those which exemplify the new economy of financial manipulation.

The second factor is Moore's Law. Long asserted to be a good thing, variously voiced but most commonly that computing power of the integrated circuit doubles every 18 (or 24) months. Not exactly what Moore said, but close enough for government work. What's been going on for the last decade or so reveals that Moore might not be such a great thing, after all.

If we return to 2002, we find the aftermath of 9/11, and Alan Greenspan's attempt to avert a depression on Dubya's watch by continually lowering Fed rates. It worked, sort of. Much evidence exists that this effort was the Patient 0 of The Great Recession. The wealthy class didn't like earning 2 or 3 percent, risk free of course. They demanded more return for the pleasure of not using money they couldn't use anyway. Corporate bonds actually involved risk, although at much higher rates. The wealthy class always has the option of holding corporate bonds, but wasn't much interested. So now, with Treasuries paying so little, the wealthy class demanded a new source of high paying, risk free, assets.

The mortgage industry was happy to oblige. Traditionally, for most of the post World War II time, home mortgage banking was boring and simple. Your income, minus short term debt (credit cards, generally) defined the size of your mortgage. Simple. You qualified for $100,000 30 year fixed rate (whatever it was that week). Builders built houses which could be priced to the mass of incomes in the area. Such data has been collected for SMSAs (Standard Metropolitan Statistical Area, now nym-ed as MSA) for since the 1950 census. The result is, builders, knowing the median income for the SMSA and the prevailing rules and regs for mortgages, knows the exact price point it must build toward.

Now, with Fed rates plummeting, builders saw an opportunity. The carrying cost of a house is principal and interest. Thus, price and interest rate tend to track inversely when builders have sufficient time to adjust. Why leave all that money on the table? They didn't. At first, there were sufficient mortgages to satisfy the wealthy class's demand for high return, risk free assets. As time went on, mortgage companies (not banks; they came to the game later) saw an opportunity to draw in those who hadn't been qualified. The mortgage companies invented the ever more exotic mortgages. The purpose of these mortgages was to allow ever lower income households to buy the ever increasingly priced houses. Builders got the money for the McMansions they produced. Everybody else ended up holding the bag.

The result of this part of the tale: the wealthy class's demand for high return, risk free assets led to the creation of sufficient output to meet the demand. Well, superficially.

The second half of the tale derives from Moore. On the first hand, we have the wealthy class seeking high guaranteed returns. On the other hand, we find Moore kicking the crap out of returns on physical investment. This fact was brought to hand with a couple of news stories over the last few days.

Here's one about the Samsung Galaxy 3. Apple has had the current iPhone on the market for less than 1 year (4 October 2011). There are countless more data points. Consider my pet area, SSD. OCZ keeps churning out ever newer models, all the while fire sale-ing existing models, within a period of a few months. What's the wealthy class to do? Corporate assets no longer enjoy the longevity of steel mills or factories (American capitalists decided that fiduciary assets were more fun).

The second harbinger is the Knight Capital self-immolation. Here we see the same compressed amortization timeline at work. Knight had built some new algorithmic software to take advantage of rule changes. In order to lengthen its return period, by only a few days it seems, they rushed the code into production. With predictable results.

Trading firms, market makers, brokers, investment banks, and exchanges and other trading venues are linked in a network of complex computer systems that compete to execute trades as fast as possible. That competition, combined with the never-ending array of new rules, forces market participants to constantly improve their systems.

(my emphasis)

As more of American capital is devoted to computer based efforts, whether goods or services, amortization periods have plummeted. There really isn't a long term, any longer. Investment has become a quick buck endeavor, not a long term growth prospect. This will not have a pleasant ending.

May You Live in Interesting Times

Yesterday went according to plan, sort of. Pick up a dead trees NY Times, and head for a pre-prandial pastry at Panera. This time, and not for the first, the mind wander off to ponder long term interest rates. As a professor of mine said, "whether you get paid or not, you'll always do economics." Turns out he was right.

The Right Wingnuts in the choir have been singing the Fed is Evil and Ben is Bad songs for some time, arguing that "historically low" interest rates are just bad, bad, bad. They deny the truth, which is that this interest rate level was started by Greenspan, in the hopes of averting a Depression until Dubya was out of office. Almost got there, but not quite.

Among the problems with the Wingnut accusation is that Fed interest rates very short term; the principle one being the overnight Fed Funds rate. Long term rates for Treasuries are set by auction; they have been tracking with Fed rates, but don't have to. This site has some very interesting material. I haven't gone through all of it, and what I've seen only goes back to 1900, not the Golden Age of American Exceptionalism of Right Wingnuts. The reality is that long term interest isn't just a matter of saver/lender time preference, but mostly about real return on physical investment. Fiduciary gambles ultimately depend on physical production growth to make the money to pay the vig.

So, the first question is whether or not low Fed rates have a bad effect on an economy? In general, no. The losers, if that be possible, is the Coupon Clipper Class, who seek to live off income from fiduciary instruments. When interest rates are low, then the income they receive is lower. On the other hand, these fat cats also have the opportunity to sell off sufficient numbers of bond units at the "inflated" prices brought on by declining interest. In other words, they can't lose. Further, TARP and the like were driven to protect bondholders, for some reason. As stated here numerous times: interest is just a monetization of increased productivity. This is why there must always be some real physical investment at the foundation of any fiduciary instrument.

The basic reason for The Great Recession was that there was no such foundation. Much as I find .com investing pointless, the first time through and now, there is really no such thing as residential (there may be for commercial, it depends) housing investment. Housing creates no physical product, only what some economists call "psychic returns" (if images of Patrick Jane dance in your head, you're watching too much of the TeeVee). They provide no additional money stream to pay the vig. Plant and equipment do. Some argue that intellectual property does, but on the whole I disagree with that notion. But that's another episode.

So, then, what should the long term interest rate be? Who wins, and who loses, when it rises or falls? What causes it to move? Inflation, or deflation, are believed to be the most significant determiner (but follow the above link, to be disabused). But I disagree there, too. In a post from some time ago (I've lost the link), there was a quote from a business person to the effect that no productive use could be found for a pile of money, so the company decided to buy back its shares. Economists, more so than MBAs, have long criticized this. The demand for investment, ultimately, is determined by the quality of physical investment. Lose vision for how to allocate capital, and the economy falls back on fiduciary fiddling.

Not to put too fine a point on the issue, these are *risk free* interest rates. Corporate bonds, where capital has a least a chance of being used to improve output, pay more.

Which brings us to some pieces from yesterday. Let's start with this front pager. The saltwater faction of economists spend a good deal of typing pointing to object lessons in real life for guidance on what decisions should be made here in the USofA. Japan has been such a lesson for some decades, the country has been in the shitter for that long. This piece lays out the history, and implications, of Japan's dance with Dee Flation. The story casts itself as an inter-generational conflict; old folks living on pensions and bonds versus everybody else.

By speeding the flood of cheaper imported products into Japan, the strong yen is contributing to deflation, a broader drop in the prices of goods and services that has helped retirees stretch their pensions and savings. The resulting inaction on the yen, according to a growing number of economists and politicians, reflects a new political reality, with already indecisive leaders loath to upset retirees from the baby boom who make up more than a quarter of the population and tend to vote in high numbers.

Now, whether most of the money being made off of bond yields and deflation is pensioners is an assertion I certainly question. But it is part of the issue.

Back to Japan. It seems to have its share of narrow minded wingnuts, too.

Shigeru Ono, a retired oil company manager who won a small following blogging on deflation's virtues ...

The piece goes on the chronical the de-industrialization of Japan, not a feel good story. It ends with this:

One way to spur such awareness, critics say, would be to allow national pension payments to drop with falling consumer prices, as the law demands. But the government ignored the law for years rather than upset elderly voters.

Last year, it finally took a baby step, slightly trimming pension payments. The loss of just a couple of dollars a month, though, was enough to start Mr. Ono, the blogger, rethinking. "Now I am starting to realize that deflation can be bad, too," he said.

Which was just the front page. Get to the Business Section, and a piece from a Pro Publica on the virtues of being an unpunished bankster. Sandy Weill gapes out at you; at least in the dead trees version, it's a dull B&W photo, on-line is far more disgusting. Ooh. Regular reader will know that when Weill floated the break them up balloon a few days ago, I asserted that he's got a bunch of stock that's worth more in pieces than the companies whole. IOW, he's advocating to make himself yet richer. Such a public servant.

His institution had also served as a (unheeded) harbinger of the banking rot to come. Throughout the 2000s, Citigroup was riddled with scandal. It settled with the Federal Trade Commission over deceptive practices. Its CitiFinancial unit was embroiled in predatory lending controversies before it was fashionable. The bank was an entwined backer of both Enron and WorldCom. Citigroup employed Jack Grubman, who was at the heart of the research conflict-of-interest scandals of the early 2000s. Even back in his less reflective days, Mr. Weill had to apologize for that.

I'll close with a snip from the piece, which echoes writing here, over the years:

In 1936, Roosevelt gave his famous speech listing reckless banking and speculation among the "enemies of peace." These enemies hated him and he asserted, "I welcome their hatred."

Obambi would do well to sail with that wind.