Latest Stories

• Weekend Readings: Chess, Rhodes Scholars, Trade, etc.
• Readings: Lawyers, Wealth, and Rare Earths
• Isildur1 and the Week That Changed Online Poker
• The Rise and Fall of Empires
• Everything is Viral -- Even the Things That Aren’t

 

Consider the Lobster

In honor of Conde Nast shuttering Gourmet magazine, take some time to read David Foster Wallace's classic and controversial article "Consider the Lobster" from that magazine's pages in 2004.

In any event, at the Festival, standing by the bubbling tanks outside the World’s Largest Lobster Cooker, watching the fresh-caught lobsters pile over one another, wave their hobbled claws impotently, huddle in the rear corners, or scrabble frantically back from the glass as you approach, it is difficult not to sense that they’re unhappy, or frightened, even if it’s some rudimentary version of these feelings …and, again, why does rudimentariness even enter into it? Why is a primitive, inarticulate form of suffering less urgent or uncomfortable for the person who’s helping to inflict it by paying for the food it results in? I’m not trying to give you a PETA-like screed here—at least I don’t think so. I’m trying, rather, to work out and articulate some of the troubling questions that arise amid all the laughter and saltation and community pride of the Maine Lobster Festival. The truth is that if you, the Festival attendee, permit yourself to think that lobsters can suffer and would rather not, the MLF can begin to take on aspects of something like a Roman circus or medieval torture-fest.

Does that comparison seem a bit much? If so, exactly why? Or what about this one: Is it not possible that future generations will regard our own present agribusiness and eating practices in much the same way we now view Nero’s entertainments or Aztec sacrifices? My own immediate reaction is that such a comparison is hysterical, extreme—and yet the reason it seems extreme to me appears to be that I believe animals are less morally important than human beings;20 and when it comes to defending such a belief, even to myself, I have to acknowledge that (a) I have an obvious selfish interest in this belief, since I like to eat certain kinds of animals and want to be able to keep doing it, and (b) I have not succeeded in working out any sort of personal ethical system in which the belief is truly defensible instead of just selfishly convenient.

Lot's more here, with footnotes, of course.

 

Report on Bank Capital Injections is Fun Reading

The new special inspector general report on emergency capital injections into U.S. banks is fun reading. That said, not much should come as a surprise given the circumstances, pace, mad times, etc.

In particular, many will make much of a passage mid-way through showing that while Treasury Secretary Paulson said that all the original nine banks accepting TARP capital injections were fine, the truth was otherwise. The Fed and Treasury were worried about some of those banks. Ergo, Paulson lied, right?

Well, I suppose, but that is a somewhat academic point, as even the auditor concedes. Paulson could hardly have been expected to make an awful situation worse by pointing out that some banks were in even dodgier shape than people knew, thus making their situation more dire. Granted, Paulson could have used more nuanced language, but in the circumstances if this is the biggest concern coming from auditing the capital injections then this constitutes passing with flying colors.

Check it here.

 

The Coming U.S. Crackup

Clive Crook on something that has been on many people's minds lately, the sense of a coming U.S. crackup:

For many years, relative stability was a marked feature of US politics – as compared, say, with Britain. And this surely worked to America’s advantage. Perhaps US politics is starting to look more like postwar British politics. If so, it is safe to say that the country will not like the results.

But one wonders whether even more may be at stake than the capacity to form sound and steady policy. So inflamed are the US political classes that a deeper breakdown begins to be imaginable.

Historically, the US has both accommodated and benefited from a remarkable degree of cultural pluralism – with sufficient civic tolerance, mutual (if sometimes grudging) respect and unashamed patriotism to bind the whole together. Now, more than ever, the instinct of politicians and their energised supporters is to divide. Mr Obama seemed to promise a corrective, but that hope is fading. Old and new media, obsessed with gladiatorial politics, offer no remedy. They either take sides or act as fight promoters; in any event they worsen the polarisation and leave the centre unserved. The internet’s echo chambers stir brainless anger and push the poles still further apart.

In the coming years, the US has enormous challenges to face – not least, like Britain before it, the trauma of relative economic decline. Right now, its polity looks unfit to cope. “A house divided against itself”, said Abraham Lincoln, “cannot stand.”

More here.

 

Michael Milken on Crises

Michael Milken on credit and crises in today's FT:

This illustrates the myth that investments currently in favour are safe. In two 1982 articles – “Nowhere to Go but Down” and “Nowhere to Go but Up” – I made the points that companies with few perceived problems tend to be priced for perfection; and conversely, that it is hard to bankrupt even weak companies, which nearly always rally when investors, management and labour co-operate to sustain them. Like more than 99 per cent of companies, these enterprises do not carry investment-grade ratings. But non-investment-grade companies create virtually all net new employment.

Finally, as I said in an academic paper nearly 40 years ago, investors need to understand that capital-structure risk should vary inversely with business risk. Companies with volatile revenue streams must avoid leverage and build their capital structure with substantially more equity than debt. Some should have little or no debt.

More here.

 

Readings

• Long excerpt from Andrew Ross Sorkin's 'Too Big to Fail' (Vanity Fair)
• Norway leads, and U.S. to 13th, in new Human Development Report 2009 (UNDP)
• If Cavemen Wrote Pessimistic Science Fiction, We'd Never Get Anywhere (io9)
• Seminar on visualizing economic  statistics (OECD)
• Soros Says ‘Basically Bankrupt’ Banks Restrain U.S. (SBloombergource)
• Larry Summers and the White House economic team (New Yorker)
• Is the Economic Storm Over? Consumers Weigh in on the “New Frugality” | Nielsen Wire (Neilsen Wire)

 

Drive-By Economics: Hawaii Edition

I was in Kona, Hawaii, this past week, and thought I’d share some drive-by economics. High on the list was the low level of occupancy at major hotels and resorts, with golf courses deserted – quite literally zero players – and luxury hotels running on skeleton staff.

The most extreme example? The luxury Mauna Lani Resort on the Big Island, adjacent to the Fairmont Orchid where I stayed, is quite literally mothballed. It is closed until November 1. Spooky and more than a little surreal to think of a 300-plus room resort taped off and deserted.

Relatedly, here is July hotel occupancy data for the Hawaiian islands (via Honolulu Advertiser / STR):

As always, if people have other data points to share, post ‘em here. I’m particularly interested in commercial real estate data, as the continuing problems in this area – as shown in the above example -- are rapidly passing the criticality point where lenders can “extend and pretend” much longer.

 

Weekend Reading: Deep Wells, Normal, Fires, etc.

A quick look at a few items from my weekly Weekend Reading column:

• Can India's economy overtake China? (Source)
• BP's Tiber one of industry's deepest wells (Oil & Gas Journal)
• Wall Street faces day of reckoning over Bear Stearns (Telegraph)
• Big Universities Report Steep Investment Losses (NYTimes)
• A “new normal” for the world economy (The Economist)
• Mexico's troubled oil industry: How many Mexicans does it take to drill an oil well? (The Economist)
• In Los Angeles Fire Aftermath, Scientists Study What Remains (NYTimes)
• Masters of the financial universe back to old tricks (Satyajit Das)

 

Mauldin on Fingers of Instability

The latest John Mauldin missive is highly worth reading:

Another Finger of Instability October 2, 2009 By John Mauldin Fingers of Instability Ubiquity, Complexity Theory, and Sandpiles Stability Leads to Instability A Stable Disequilibrium 3 Billion and Counting The Texas Senate Race - A Game Changer 60 Years and Counting

"To trace something unknown back to something known is alleviating, soothing, gratifying and gives moreover a feeling of power. Danger, disquiet, anxiety attend the unknown - the first instinct is to eliminate these distressing states. First principle: any explanation is better than none... The cause-creating drive is thus conditioned and excited by the feeling of fear ..." Friedrich Nietzsche This weekend I turn 60 and have been a little more introspective than usual. I am often told that the letter I wrote well over three years ago on ubiquity and complexity theory and the future of the economy was the best letter I have ever done. I went back to read it, and it has aged well. I basically outlined how a financial crisis would unfold, and now it has. On reflection, I think that there are perhaps other, even larger, events in our future than the recent credit crisis and recession; yet, just as in 2006, there is a great deal of complacency. But as we will see, there are fingers of instability building up that have the potential to create large disruptions, both positive and negative, in our future. And for the political junkies in the room, I offer a brief insight into what may be one of the more intriguing behind-the-scenes developments in recent years. Now, to the letter. "Any explanation is better than none." - Nietzsche And the simpler the explanation, it seems in the investment game, the better. "The markets went up because oil went down," we are told (except that when oil went up, then there was another reason for the movement of the markets). But we all intuitively know that things are far more complicated than that. However, as Nietzsche noted, dealing with the unknown can be disturbing, so we look for the simple explanation. "Ah," we tell ourselves, "I know why that happened." With an explanation firmly in hand, we now feel we know something. And the behavioral psychologists note that this state actually releases chemicals in our brain that make us feel good. We become literally addicted to the simple explanation. The fact that what we "know" (the explanation for the unknowable) is irrelevant or even wrong is not important in achieving the chemical release. And thus we look for reasons. The credit crisis happened because of Greenspan's monetary policy. Or maybe it was a collective mania. Or any number of things. Just as the proverbial butterfly flapping its wings in the Amazon triggers a storm in Europe, maybe an investor in St. Louis triggered the credit crisis. Crazy? Maybe not. Today we will look at what complexity theory tells us about the reasons for earthquakes, tornados, and the movement of markets. Then we look at how the world and that investor in St. Louis are all tied together in a critical state. Of course, what state and how critical are the issues.

Read the rest of this entry »  

Olympic Odds Awry?

Three questions:

1. Why would any city want to host the Olympics?
2. Why were the odds so awry on the 2016 hosting city? I had assumed Rio would win in a walk, and yet, as shown in the following figure, Chicago was the favorite among oddsmakers. 
3. Finally, why the hell didn’t I notice how awry the Olympics odds were and place a bet? Yeesh.

[Update] The Intrade graph for North America host city. Given the low trading volumes, that had to be part of the problem here.

[Update 8/3/2009] A few people have asked why I think the odds were all that awry, when they implied that Chicago was only a slight favorite over Rio. True enough, but Chicago went out in the first round, Tokyo in the second, and Madrid in the third, implying that Chicago was the fourth choice of the IOC among the finalist cities, not a slight favorite for first.

 

Readings: China, Tamiflu, Sports Timing, etc.

• China Can't Do It Alone (World Bank Group)
• Can China be the world’s growth engine? (vox)
• Our obsession with precisions sports timing, and its consequences (VF)
• Worries that excreted Tamiflu in rivers will create resistant strains in birds (ScienceNews)

 

Three Graphs About Drugs

I alluded to these three graphs in a presentation today, so here they are. The first one shows the recent uptick in drugs being developed at all stages; the second shows how the number of new drugs in post-clinical stage is abysmal; and the the third shows the flat-line in new molecular entities (NMEs). (The first two graphs are courtesy of PharmaProjects, while the third is from Parexel.)

 

Everything is Okay. Really.

This is more than a little econo-surreal, but it’s worth watching. Everything is okay. Really. So go shopping.

 

Recency Effects in Geology & Financial Markets

Recency effects – we overweight near-term events and underweight everything else – cause havoc in financial markets. It causes us to think of the last few years as normal, whether it’s housing, technology stocks, equity multiples, or the ease with which you can raise venture capital. It generally takes a crisis to disabuse us of the idea, which is an awfully high price to pay when the alternative is simply paying slightly more attention to history.

The problem is much worse in geology, however, when it can range from thousands to millions of years between catastrophic events. Almost every major geological problem occurs rarely, at least in the sense of short human lifespans, but most still have a likelihood of 100% of one day occurring again.

To the preceding point, consider this quote from a 2001 paper about Hualalai lava flows:

Public and perhaps official understanding of specific lava flow hazards and the perceptions of risk from renewed volcanism at each volcano are proportional to the time lapsed since the most recent eruption that impacted Kona, rather than a quantitative assessment of risk that takes into account recent growth patterns.

Source: C. E Gregg et al., “Perception of Lava Flow Hazards and Risk at Mauna Loa and Hualalai Volcanoes, Kona, Hawaii,” December 2001, http://adsabs.harvard.edu/abs/2001AGUFM.V12B0972G. )

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According to a recent survey conducted by the same researchers, even residents of the west coast of Hawaii’s big island have little idea of the hazards they face.

On average less than two-thirds of residents were aware of the most recent eruptions that impacted Kona and a minority felt that Mauna Loa and Hualalai could erupt again. Furthermore, only about one-third were aware that lava flows could reach the coast in Kona in under three hours …Hazard awareness and risk perception varies between subpopulations defined by age, geography, and ethnicity. Long time intervals since damaging lava flows have occurred in Kona has contributed to lower levels of awareness and perception of the threat.

Source:  C. E Gregg et al., “The Perception of Volcanic Risk in Kona Communities from Mauna Loa and Hualalai Volcanoes, Hawai`i,” December 2002, http://adsabs.harvard.edu/abs/2002AGUFM.V12B1431G.

 

Albert Edwards: Lance the Over-Valuation Boil

A keeper bit of bearish growling from SocGen’s Albert Edwards:

One of the key lessons from Japan’s lost decade is that investors’ confidence that the authorities are in control of events will ultimately drain away. In a balance sheet recession, one should expect frequent downturns as the authorities balk at additional stimulus. Only then will zombie investors, sucked dry of confidence, squeeze the remaining puss from equity market valuations. Only then will the 20 year boil of equity market over-valuation be properly lanced.

More here.

 

Reason #7,232,761 Why Brokers are Weasels

Getting Out Early: An Analysis of Market Making Activity at the Recommending Analyst's Firm

Abstract:

This paper examines trading volume for Nasdaq market makers around analyst recommendation changes issued by an analyst at the same firm. Using Nasdaq PostData, we find a disproportionate increase in market making volume associated with the firm's recommendation changes and evidence of elevated sell volume at the recommending analyst's firm in the 2 days preceding a downgrade. The implications are that the information source matters in determining the placement of trades and that the issuing analyst's firm appears to be rewarded for prereleasing information through increased volume. These findings constitute new evidence of compensation for research production through the market making channel.

Source:

JENNIFER L. JUERGENS and LAURA LINDSEY, “Getting Out Early: An Analysis of Market Making Activity at the Recommending Analyst's Firm,” The Journal of Finance 64 (October 2009): 2327-2359.

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While I’m on it, two other new JoF papers worth scanning:

• Why Do U.S. Firms Hold So Much More Cash than They Used To? (Source)
• Making Sense of Cents: An Examination of Firms That Marginally Miss or Beat Estimates (Source)