Many Unhappy Returns

A couple of dovetail bits of news today.

First, a debate about whether stocks, broadly, are overvalued.

Second, Intel's dog not barking in the night.

Anecdotal evidence, to be sure, but another couple of data points aimed at the emerging thesis (separate and apart from the QE perturbation) that capitalists just can't find useful ways to convert fiduciary into real. Thus, the real rate of return on capital has to fall. And, despite what Brown asserts, it's not a Good Thing that services dominate the capital allocation decision. After all, we can't all eat subprime mortgages. And, if capital flows willy-nilly into software and the like, that's just more software that has to find a willing buyer. More supply, price falls. I've got a trunk load of tulip bulbs, if you're interested.

Major Kong Falls Over Switzerland

Net neutrality is dead!!! Long live Robo Cop!!! Or, what does the future hold now that net neutrality is gone?? The problem for quants is that, while data driven analysis makes perfect sense in the real world, i.e. the ones driven by forces of nature, the process gets squishy when the rules of the game change at the whim of humans. Most often, those rule changes are made by those who benefit from the change, and which change is often hidden from the public at large. And that group includes many of the quants.

When there is massive policy change such as this, the job of analysis is to consider how behavioural incentives have changed. What behaviours, previously forbidden, and which can turn a profit, are now legal? Who wins and who loses? The swan may not be black, but gray enough as to not matter.

Verizon, the entity which initiated the court action says:

"Verizon has been and remains committed to the open Internet, which provides consumers with competitive choices and unblocked access to lawful websites and content when, where and how they want," the company said in a statement. "This will not change in light of the court's decision."

By way of comparison, after the voting rights act ruling, those who made the ruling claimed that the law had worked, and nothing would change, because, well, the law had worked. Within 48 hours, those purely democratic Southern states which would never, ever return to past bad behaviour, set about undoing voting rights. You can look it up. Follow the incentive.

Anyone who actually believes that is a fool. The whole point of killing neutrality is to segment the market, and dump any segments which aren't "profitable enough".

In 2002, the agency said Internet service should not be subject to the same rules as highly regulated utilities, which are governed by regulations on matters like how much they can charge customers and what content they can agree to carry.

So, who was running the FCC in 2002?

Michael K. Powell, who was F.C.C. chairman in 2002 when the agency set up its Internet governance structure, said, "Today's historic court decision means that the F.C.C. has been granted jurisdiction over the Internet."

Then, who is Powell? Well, he's Colin's son; appointed by Clinton; and toadied for Bush. He now heads up the cable lobby.

Who, in the current world of Darwinist Capitalism, is the master of market segmentation? That would be Apple. Market segmentation means not only varying price to capture consumers' surplus (the notional version of the gambit) but also to remove market segments from supply. There has been in the common lexicon for some years the term 'digital divide', wherein the less wealthy have less of the digital domain. If the less wealthy don't have access to the innterTubes on a level playing field, this becomes yet another case of not wearing an Old School Tie (the Brits will get that; Yanks may be not so much). To the extent that current affairs reporting becomes beholden to innterTubes for dissemination, we can expect a few changes. First, the ever more concentrated control over the innterTubes will provide only 'good news'. And, second, the less wealthy will get 'good news' which portrays them as the cause of all that is bad with society. Fascism, as defined by Mussolini, is government by and for capitalists. As the information superhighway becomes the only path for information, and is controlled by a handful of capitalists, what's the incentive to not mold the information?

Remember: the 'free' parts of the innterTubes run on adverts (Wikipedia being an exception), and Apple has shown that segregating out the non-buyers from its sphere is more profitable. With the carriers now free to segregate their customers, why would they not? Why would they not make deals with Netflix, et al, to provide highspeed connections to wealthy neighborhoods/towns/cities, but not to South Buttfuck? Of course they will. There are sites already which catch my use of Adblock Plus, which is more to preserve bandwidth than to avoid ads (although I've never clicked on one and never will). Some won't let me in, others can be fooled. Market segmentation at work.

Of course, there is no such incentive. The incentive is to, Darwinist/Rand fashion, crush the weak under the boot heel. And, there is no punishment for being a bad actor.

The allure of innterTube ads is that they're more focused than print ads. But net neutrality limits the ability to segment aggressively. The time will come when sites will not only block those that don't view or click ads, but don't buy. Who better to enforce this segmentation than the carriers? Rather than each advert owner having to keep track, the carriers offer up a throttle: they'll keep track of those who buy and those who don't. Those who don't get blocked from some sites, and get reduced bandwidth in the bargain. In due time, the innterTubes will become like the Apple ecosystem: of, for, and by the top 20% of the wealth curve. That Old School Tie will be adorned with the Verizon Hyperspeed tie tack.

R, How to Write It, and Some Bad Quant

The stream of R books continues. Amazon sent this one along this morning. This is the chapter 10 Title:

Loops, The Un-R Way to Iterate

A step in the right direction. Which brings us to a couple of posts that popped up on R-bloggers, also this morning.

"R as a second language".

In most languages if one wants to do something many times the obvious way is using a loop (coded like, for() or while()). It is possible to use a for() loop in R but many times is the wrong tool for the job
...
There are some complications with some of the design decisions in R, especially when we get down to consistency which begets memorability. A glaring example is the apply family of functions and here is where master opportunist (in the positive sense of expert at finding good opportunities) Hadley Wickham made sense out of confusion in his package plyr.

Both statements ring true: the apply() functions are set-oriented (fits the RDBMS mind-set), and their lineage makes the syntax a Google-able construct which in turn makes the plyr package so much better.

Hot on that post's heels is this one, with a similar point to make.

... in R it is much simpler to take advantage of the R idioms to get there a lot faster. With this approach there is no need for loops or conditional branches. There is also no need for iterative array construction. Instead everything is done in one shot using a set-theoretic approach combined with function transformations.

Again, we read about set. While I've always been irritated by the fanboi need to cloak R in OOD/OOP/functional mystique (rather than actual syntax/semantics/structure), the (nearly) declarative approach to syntax (and, thence semantics) is comforting. R is just FORTRAN's function/data, and folks should just let it go at that. Iteration belongs on the metal, modulo true array processors (which don't explicitly need it); the continuing bottom of the brain stem memory of assembler (and, face it, C) likely accounts for loops in so-called higher level languages. Bah.

So, now we're on to concerns of quants. It seems that Big Data is Dead?

Google Trends shows searches of the term "Big Data" peaked in October, ending a nearly ceaseless climb that began three years earlier.

Huge flatfiles of un-normalized bytes may finally be seen as The Emperor's New Clothes by The Deciders out there:

In the case of Big Data, this probably means less focus on back-end technologies like new types of storage or database frameworks, and a rethinking about how best to integrate human knowledge, algorithms and diverse sets of data.

Can you say: "I want my PL/R"? And have I mentioned: the free-as-in-beer DB2/LUW can accommodate 15 terabytes? You don't get all the really cool bells and whistles, but that's pretty big data.

And now, for a little night music. Jenny Lind was the "Swedish Nightingale", which is close enough to a canary for government work. "We have our canary!" cried some. I'd noticed that house prices had been on a run, but not enough to put fingers to keyboard. This writer is from the AEI, so he blames The Damn Gummint, of course:

Both this bubble and the last one were caused by the government's housing policies, which made it possible for many people to purchase homes with very little or no money down.

Which, of course, is baloney. The bubble was motivated, widely known by anyone not hanging out with Mussolini's ghost, by the financial sector seeking high (but risk free) returns. So, they invented 'interesting' mortgages in order to sell more houses/mortgages which could be packaged together to make high yielding, but low risk (housing is always safe, isn't it?), securities. It wasn't the $10/hour bus drivers who went to CountryWide and said, "make me a mortgage that looks like this". Not the way it happened. The author is clearly confused, because he says:

In 1997, housing prices began to diverge substantially from rental costs. Between 1997 and 2002, the average compound rate of growth in housing prices was 6 percent, exceeding the average compound growth rate in rentals of 3.34 percent. This, incidentally, contradicts the widely held idea that the last housing bubble was caused by the Federal Reserve's monetary policy. Between 1997 and 2000, the Fed raised interest rates, and they stayed relatively high until almost 2002 with no apparent effect on the bubble, which continued to maintain an average compound growth rate of 6 percent until 2007, when it collapsed.

But, later on:

They claim that people will not be able to buy homes. What they really mean is that people won't be able to buy expensive homes. When down payments were 10 to 20 percent before 1992, the homeownership rate was a steady 64 percent -- slightly below where it is today -- and the housing market was not frothy. People simply bought less expensive homes.

Ya can't have it both ways, Jake. The moolah, whether Chinese, German, or American, flooded the mortgage process, pushing up housing costs, while the Banksters went about making mortgages for this housing stock available to the larger number of buyers needed to "clear the market" (cute econ speak, what?). Affordability was swindled in order to conjure the securities. In the short term (and we're definitely in the short term with the Bubble/Recession), only so many units could be built, yet to accommodate the Giant Pool's valuation (Banksters chasing mortgages with ever more bulging pockets) prices had to rise to "clear" the Pool's value. The builders were the ultimate winners:

When anyone suggests that down payments should be raised to the once traditional 10 or 20 percent, the outcry in Congress and from brokers and homebuilders is deafening.

Couldn't agree more; said it before.

I disagree with the use of rental payments as the measure of bubbles, however. There's no material difference between rent and (full load) mortgage; just go read up on what's going on in the Oil Plains States to see the effect of localized inflation of housing. The measure that matters is (local, for some definition of local) median income. No, what drove the Bubble/Recession was the flood of moolah. Without that flood, no amount of fiddling with mortgage lending rules would make a difference; there'd be no reason to generate ever more mortgages made possible by fiddling the rules, since there'd be no increased demand for the resulting securities; no demand means no supply, Laffer be damned. One could argue, even, that had the chronology happened the other way (relaxation of rules, first), no flood of money would have been conjured, since such mortgages would be clearly wonky to those who *need convincing* to part with more moolah, which they either didn't have at all or would have to move from other instruments. It was at the behest of the Giant Pool that the mortgages were conjured. Causation makes a difference, both in assessing blame and determining regulation from here.

In the end, it wasn't The Gummint which drove the The Great Recession. Without the flood of moolah seeking better than Fed rates (so, I guess the author should be pointing the j'accuse finger at Greenspan?), the housing bubble couldn't have happened. Without the quants figuring out how to abuse copulas, it wouldn't have happened. Without the collapse of demand for technical brains in technical professions (thus being 'freed up' to pursue finance, in the sense of automation 'freeing' farmers to work in Detroit after the turn of the 20th century), it wouldn't have happened. Without the decline in median income, and thus the willingness to spend unearned (and unexpected, largely) equity on consumption, it wouldn't have happened.

The author's most egregious lie:

By 1994, Fannie was accepting down payments of 3 percent and, by 2000, mortgages with zero-down payments. Although these lenient standards were intended to help low-income and minority borrowers, they couldn't be confined to those buyers. Even buyers who could afford down payments of 10 to 20 percent were attracted to mortgages with 3 percent or zero down. By 2006, the National Association of Realtors reported that 45 percent of first-time buyers put down no money. The leverage in that case is infinite.

Yet, he contradicts himself with regard to the driving enemy:

In effect, then, borrowing was constrained only by appraisals, which were ratcheted upward by the exclusive use of comparables in setting housing values.

And who drove the appraisals? I guess it must have been The Gummint? For what it's worth: Fairfax County Virginia was using stat analysis of home sales (as opposed to on-site inspection) to do appraisals by, at least, the mid-1970s (I was there). Such software is a big seller, and has been for a long time. Here's one example:

Based on a 20-year proven relational data model and common value approaches (Cost, Market, Comparable Sales and Income), the CAMA module produces reliable and accurate results which also apply if or when an assessment must be defended through the appeal process. Comprehensive comp sheets, ratio analysis and a CAMA valuation sheet that lists all items on a property and the dollar results of each component help automate the document management process.

For the finance types, infinity is (sorta, kinda) accurate. But not for a bus driver earning $10/hour facing an ARM reset. Not even close. The mortgagee is just a homeowner, not a titan of Wall Street. There's no 'real return' to be earned by the homeowner; the homeowner doesn't use the house to build either more or better (or both) 'psychic return' home widgets which he then sells to the market (a la Herbalife). Doesn't work that way. A house isn't an assembly line, or one robot, or even a simple milling machine; it generates no real return to anyone, not even the finance guys (they only get moolah). Leverage is just a red herring.

So, clearly there's more moolah flowing (not, yet, flooding) to the mortgage market. Recent stories have shown that hedge funds (at least) have gotten into the landlord business, buying up large tracts all to once. A more cogent analysis (assuming there's sufficiently granular data) would measure separately for owner-occupied and investor-owned units. It's pretty obvious that median income measures (which are still stagnant, at best) don't support increasing prices. I'd bet on deep pockets looking to monopolize SMAs fighting amongst themselves. Lots of money to be made being the major/sole source of shelter in an SMA.

Where Have All the Returns Gone?

Not to belabor the point too, too much; but if you still doubt that real returns in anything compute related are a vanishing species, just have a look at this Apple slide. Read the whole page. Poof!

From a later page:

That's right, I still have my old PowerMac G5 Dual 2.5GHz (upgrade from my original 2.0 model). It's interesting to note that single threaded performance has only improved by 2.8x over that 2.5GHz dual G5 machine from around a decade ago.

And now a word from Amdahl:

The first thing I noticed while running this test is how much the workload can impact CPU core utilization. Even though I was dealing with a substantial 4K project, only portions could spawn enough work to keep all 12 cores/24 threads busy.

All that investment of billions and billions of dollars just to ... what? As the Red Queen said, "Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!" (Pulled from the wiki)

An Epidemic of Kissing Disease

How old would you think the word 'monoculture' is? My guess, before I went out to discover, was at least since Stephen J. Gould. Turns out, that's wrong, that is, off by a bunch.

According to here, it appeared in the OED for the first time in 1901. Which likely means it was in use during the 19th century.

Those in the *nix community have been vocal in their warning that M$ DOS/Windows dominance leads to the usual casualties of inbred stock. What they've been less vocal about is the monoculture at the hardware level. While one can build linux from source, and if you can verify that all the source is clean, then you're somewhat outside the box. But that chip is still X86.

So, have a read of the latest paranoid's jeremiad. One might wonder how the 'strict constructionists' abide such? Just because the Floundering Fathers didn't have PCs and innterTubes, does it follow that only the means of communication and domicile that existed in 1789 are protected from Government (and their corporate minions)? One might conclude that, in the case of personal freedom, the Right would eagerly adopt a 'living document' viewpoint. Or could it be that they believe in the sanctity of government, after all? Obama has, just on the basis of admitted behavior, done what the Right Wing wants. The crunch will come when any level of protest gets one labeled 'terrorist'. We've been there before, and it wasn't pleasant.

Who is being protected from whom?

Where's a Robo Cop when you need one?

Dig a Hole to China

As mentioned in these endeavors over the last couple years, on occasion, it is obvious that the Chinese experiment in social Darwinism must needs assault its economy in much the same way it did the West's. That Giant Pool of Money is still out there, getting bigger, and still demanding high return on minimal risk. That there ain't no such thing as a free lunch matters not to those who wish to live well on moolah alone. Daddy Warbucks, at least, actually made some stuff. Today's banksters merely suck moolah from the fire house aimed by the savers at the borrowers. Never forget that it was a Chinese, Li, who foisted the Gaussian Copula on us. Financial quants are driven by visions of finding the Ultimate Loophole in the system, that crack in the dam holding back all that moolah from their hungry maws, and Li provided, what looked like, that loophole. No, it is way too Byzantine to conclude that Beijing sent him in, "Bond, James Bond" style, to wreak havoc on the hated West. Or is it....?

With the West's fitful (can you say: "neutering Volker"?) attempts to bring the banksters to heel, all that Chinese money is now being directed inwardly. With the expected result. I've mentioned the "60 Minutes" report (revealing the ongoing real estate fiasco) from a few months ago, and much earlier stories from print sources.

Today brings us another. Don't be surprised.

I long ago forgot where I read/heard it (you can find it in older essays), but the following semi-quote about sums up the cynic's view:
"One hears from CEO types about how much work it is to run these corporations, but they never seem to want to take on failing companies. The ones they do run could be just as successfully run by a sock puppet."

Which brings us to:

Yao Jingyuan, the former chief economist at the state statistics agency, said ... "With this kind of operational model banks will continue making money even if all the bank presidents go home to sleep and you replaced them by putting a small dog in their seats."

The piece ledes with the punchline, as any cub reporter has been taught to do:

China's financial system is in danger of becoming too big to bail out.

My, my. All that money, and little to do with it, besides build yet more condos.

Official bank lending has more than doubled since the global financial crisis, growing nearly twice as fast as the overall economy.

Without all those Western mortgages to soak up the moolah, China is generating such internally. Good luck with that.

"The chains of lending and borrowing can be long, just like the securitized subprime mortgages. The result can be devastating."...said Yu Yongding, a senior fellow at the Institute of World Economics and Politics of the Chinese Academy of Social Sciences...

Stating the obvious:

Savers have had few alternatives to banks until very recently: Real estate prices are already stratospheric relative to incomes...

Ya think??? Time to copulate.

Pilgrim's Progress

In one of my previous cubehomes, I had a Post-it note with the kilocalorie measure of known chemical sources. At the top of the list was gasoline; IIRC, ethanol was next at about half as much. Over the years, I've prattled on about this fact. The whole notion of progress boils down to increases in energy consumption per capita (mean or median, take your pick). Given both gasoline's energy density and portability, there is no transformational alternative energy source, short of Mr. Fusion, which doesn't demand a transformation of society's structure. You can look it up: GM bought up electric railway systems (with a vengeance post WWII) in cities and towns, and put in buses. The rationale (not that GM had any specific interest at stake, of course) was that buses could be sent on diverse routes as populations shifted, and needs changed. Ignored by such argument was the fact that populations huddled around tram lines, not the other way round. Suburbia has done quite the same with ring and radial limited access motorways in cities. I lived in, and watched, the transformation of Washington, DC with respect to both rail and highway creation. If you build it, they will come.

Put more bluntly: all of the other alternatives require socialized usage of said energy source. It's the divisibility and portability of gasoline that makes it transformational relative to the socialist structures of centralized energy sources. Chemical batteries haven't (and can't, by my ancient understanding of physics, chemistry, and thermodynamics) reached such a density. As populations move (or forcefully relocated) to cities, the lure of gasoline diminishes. As the farmersonly.com ad says, "city folks just don't get it". May be true, but sodbusters in their shitkickers are a rapidly shrinking minority; intent on running the country their way, of course. Because city folks just don't get it. We out here in God's country need our Bible, Guns, and Meth.

And, lo and behold, for the last couple of weeks, the socially responsible folks at Exxon/Mobil have been running a PSA (no, I don't find a YouTube version listed, so you'll just have to watch football, and such, to see it) extolling this density advantage: a gallon of gasoline will run your smartphone for 3,000 days. Gasoline uber alles!!

But, what got me to type all this out was the result of looking into the collapse of the USSR. And this toddle through the innterTubes led me to this article, which I've not gotten all the way through, so there's some chance that the following quote will end up being contradicted later. Even so, I'll take the chance:

Yes, labor, capital and technological innovation are important inputs into economic growth, but what Cleveland et. al. (1984), Cleveland et. al. (2000), Smil (1991, 1994, 2005) and Reynolds (2002) make so clear is that energy is a vital ingredient to growth and technology. If you take away energy, the labor, the capital and the technology inputs cannot do a thing. As one physicist friend said to me once, "I bet (those economists) can't even change a tire."

I do believe that's the first time I've seen some pundit make the connection.