october 25

Doesn't today feel a little like the day that the markets begin their seemingly inevitable collapse?

physiological constants and constraints

I wonder how much discontinuity is created by physical, in particular physiological, constraints?  And I wonder how much those discontinuities are exploited in investment decisions and forecasts.  I'm thinking about things such as body sizes, minimum sleep periods, and elimination functions and their relationship with economies of scale and extrapolation of product sizes and uses.  For example, cars have a hard time getting smaller than a certain limit because people generally fit within a certain band (and so you get oddly proportioned vehicles such as a Smart).

oil prices

Given that certain countries are highly dependent upon oil earnings for their government budgets and economies generally, how much political work goes into destabilizing other oil producing countries (and thus both permitting increased deliveries and increasing prices)?

bond yields

What if people are using bond proceeds to buy bonds (leveraged bond purchases)?  Would it be possible for the demand side of this to result in lower overall rates?  And so reinforce a low rate environment?

gas rationing

Gas rationing with odd-even license plate numbers is not really rationing.

I think it is labeled rationing but is really an interesting form of externally imposed impulse control.  Normally, with a ration, there is a prescribed amount available per person per period.  Here, none of those constraints actually imply.

Instead, by imposing "rationing" what we are really doing is limiting impulse and fear.  Impulse (at least half of consumers will now need to defer purchases by a day and all will need to plan somewhat) and fear (because there is now a plan, the desire to "get gas before they run out" eases as there is less concern about "running out").  I wonder who thought of it.

Education and an usual side-effect of opportunity

How much of the claimed declines in US academic performance/quality of education is a result of MORE opportunity for women and meritocracy?  When there were more and higher (not that there are none today) barriers to women entering the workforce, how many women became teachers who, today, would be high-powered lawyers, doctors, etc.  And thus were able to provide exceptional educations because they were actually over-qualified (or, given that teaching standards are usually quite low, more qualified than demanded by schools but actually the "right" level of qualification).  Of course, this doesn't explain all the gaps in education (some Scandinavian countries have very high quality of education but a very egalitarian society) - but it also seems to play a role.

unlocking liquidity, Ebay and UPS

Ebay made great advances in helping regular people unlock liquidity by finding buyers for otherwise idle property - the "national garage sale" concept meant that, with modest effort, regular people could reach millions of potential customers and turn near-junk into cash.  But I feel that Ebay never reached the finish line of this and, instead, became more of an alternative marketplace for professional retailers.  And I believe this more populist vision stalled because of concerns regarding fraud and reliability.  One solution would be for Ebay to make the very large infrastructure investment to take over the small scale "sell it on Ebay" stores to professionalize and standardize these efforts.  Barring that, the next best choice would be a UPS - not merely adding "sell it on Ebay" to the existing UPS stores but, rather, using the massive UPS warehouses to reimagine the entire business.  The warehousing and shipping power of UPS could bring the necessary reliability to give everyone access to the liquidity that Ebay promised.  Counterparty risk, quality risk, shipping risk and payment risk could all be handled through UPS acting as a middleman.

important leaders

Interesting that RIMM shares dropped more when Lazaridis and Balsillie stepped down than when Steve Jobs retired or passed away.

japan-style deflation

Was deflation the cause or the symptom of the weak economy?  I suspect it was more a reinforcing symptom but that, even without deflation, the economy would still have been moribund.  Just thinking about QE2 and its purported goal of avoiding deflation (rather than pumping up asset prices, especially housing and equities).

turmoil

Startling that there seem to be three relatively full-fledged civil wars going on in the middle east - all either in or directly adjacent to large oil producers - and yet no sense of impending doom or panic.  Am I missing something?  For example, not to see conspiracies, but that these are somewhat regulated conflicts where the ending is both preordained and better for the west?

Geithner

He seems like a nice enough guy but he is being disingenuous when he says the government lacked the powers it needed to handle the collapse of a company like AIG and that, "Coming into AIG we had, basically, duct tape and string."  Setting aside the method (meaning tools), it was the PRICE that was wrong.  The tools at hand (using AIG as a conduit to cover banks exposed to CDS losses) were used poorly.  The Fed could have poured less cash into AIG rather than paying out on CDSs at 100 cents on the dollar.  Also, the subtext seems to be that the CDS counterparties used economic collapse as a playing card ("we will bring the financial system down by demanding that AIG make good on its CDS obligations") and that the Fed caved in.  Crazy both in the recklessness of the counterparties and if the Fed bought the argument.  Put simply, the Fed should simply have said: "we can pay you some amount on the CDSs or you can take your chances in bankruptcy court with AIG."  As bankruptcy court for AIG would have meant bankruptcy for the counterparties (as the financial system collapsed), they would have accepted the "some amount".  Separately, why is Goldman's hedged position with AIG relevant?  Either they were hedged (in which case there was no need to bail GS out because there was no system risk from failure to satisfy the CDS obligations to GS) or they weren't (in which case they weren't in a position to demand 100 cents on the dollar).

The Fed should ask for its money back.

I'm pretty sure I've heard this story

Gold, stocks, etc. have been rising recently.  Isn't most of this simply a function of a declining dollar?  In other words, inflation?  An asset bubble?  Much of the government's stimulus efforts seem to have been translated into increased holdings of financial assets rather than increased spending.  Which isn't great for TIPS (CPI flat, asset prices way up).

Oh well.

Standstills

I don't get it.  What is the basis for an agreement where an investor agrees to limit future share purchases in exchange for representation on the board of directors?  Is it a bad thing for someone to acquire a large block?  Even if it is, isn't there a conflict of interest in the group making the deal (the current board, I assume).  In fact, can a board even strike a binding agreement on who will be on the board of directors?  Perhaps votes are such a fiction that nomination (perhaps this can be agreed) are sufficient?  I'm really very confused by the conflicts and the message.

Wall Street problems

This is generally right, especially adding in my pet theory of sales guys rising a little further than they ought to.

Graphs confuse?

I wonder if stock charting inherently misleads (or at least confuses) the reader because we reflexively treat lines as representing physical motion (and thus see momentum (and its corollary, inertia) where there is none). It might be more useful to identify useful graphical representations of similar motion (using physical metaphors is probably a bad place to start but helps to highlight the problem) to avoid seeing patterns (another reflexive trait) where there are none.

The great (but one time) unlocking

How much of US economic growth over the past few decades has been from one-time unlocking of previously frozen assets? I'm thinking home equity loans, unsecured borrowing, etc. And how much of Wall Street's income has been from finding this untrapped value and monetizing it? If we are largely unlocked (and we seem to be - we've borrowed against every asset I can think of, including future personal income all the way from the federal level to the personal by federal debt through credit cards), then growth from spending and growth from financial services income would seem to be over. Yikes.

Is it clear something went wrong?

The leader in the Economist this week is "What Went Wrong With Economics". The alliteration notwithstanding, is it really clear that something went wrong? I thought there were many calls for pricking the asset bubble over the prior years (including from the Economist). Also, doesn't standard economic theory predict that where incentives are not properly designed (for example, mortgage originators are seeking one-time initial fees rather than a reliable stream of income payments; bond raters are paid by the issuer rather than the purchaser; etc.) that you will have poor results?

A hope

Price variations are generally a function of liquidity needs rather than changes in underlying value. I hope.

new model?

I wonder if the more gradual declines (relatively speaking) and absence of a capitulation day is due to investors being (somewhat) better educated and, in any event, indoctrinated with the view that a crash is the wrong time to sell?

Spitzer's Fault?

Only half tongue in cheek, was Eliot Spitzer a proximate cause of the current economic turmoil?

Consider his weakening of the investment banks (leading them to take on riskier strategies to maintain earnings), targeting of AIG (leading to the ouster of its CEO – the one man who could keep Financial Products in line), and failure to limit mortgage lending fraud and abuses (items more appropriately with a state AG’s mandate).

And then the consequences: Lehman’s bankruptcy, Bear’s bailout, Merrill’s merger, AIG’s nationalization, and today’s frozen credit markets.