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  • Archive for the 'Economics & Finance' Category

    The Liquidation of Markets

    Posted by Carl from Chicago on 22nd February 2015 (All posts by )

    Every weekend I read Barry Ritholtz’s recommended reading and there are a lot of gems in there. Recently he posted this Credit Suisse graphic about markets at the turn of the 20th Century by market share and compared it with 2014 on the topic of global equity investing.

    US_stocks

    In his article he mentioned the fallacy one might fall into as a UK equity investor in 1899… why bother investing in the USA when the UK market is so much larger? And then this line of thought ends up missing the huge growth in US market share over the next century.

    However, the real issue here isn’t the relative change in market share by the different countries; it is the fact that almost all of these markets were entirely extinguished at one time or another by political, economic or military events that wiped out the investors.

    Read the rest of this entry »

    Posted in Deep Thoughts, Economics & Finance, Investment Journal | 11 Comments »

    The End of An Industry

    Posted by Carl from Chicago on 14th February 2015 (All posts by )

    When Best Buy first moved into town maybe 15-20 years ago I was excited. I could spend hours in there looking at gadgets, components, routers, TV’s, and had thoughts and dreams of tying them all together. Later, Fry’s opened up, and you could walk through the aisles and buy all the pieces to build your own PC out of parts and make it the hottest gaming platform in town.

    Recently I saw this article in Business Insider (I really like that app / site / etc…) about how to upgrade your MacBook pro (the machine I am writing this blog post on). If you have an earlier model (2011-2), you could spend less than $200 to upgrade your RAM and install an SSD drive (one without moving parts, essentially a big memory chip) and pull out your old (mechanical) hard drive and your machine will then give you many more years of excellent Apple service. Apple’s integrated operating system / hardware plan means that my older machine takes advantage of all the new features in every software upgrade of the operating system (now my Mac “rings” when I get an iphone call and that is a bit annoying but who’s complaining) as long as it has the horsepower to keep up.

    So I took the (minor) plunge and went on Amazon and bought an SSD drive and upgraded RAM and it arrive in a couple of days for less than $200. I am going to take this over to my friend Brian’s house since he’s better at this than me and we are going to take apart the machine and put in the new drive and memory.

    The real point of this story, however, is that the implicit industry of “taking apart devices and rebuilding them” that existed on the consumer side for the last 30 or so years (that I have been part of, at least) is dying. You can’t take apart newer Apple machines and upgrade them. While you can theoretically “jailbreak” your iPhone, fewer and fewer people I know even think of that and instead they are part of the world that views them as integrated devices that you can either use, take to a tech, or replace.
    Read the rest of this entry »

    Posted in Economics & Finance | 11 Comments »

    The Rise of the Dollar

    Posted by Carl from Chicago on 10th February 2015 (All posts by )

    When I was growing up as a kid I remember they had TV commercials against Jimmy Carter explaining how the dollar declined vs. other currencies over the decades. In the late 1980s the Japanese Yen soared in value until their market crashed in 1989. The Euro was originally near parity with the dollar, then fell to 70 cents on the dollar (I happened to be in Europe at the time, it was great), then rose to over $1.30 against the dollar.

    In general if you keep your portfolio all in US assets you are essentially “100% long” against the dollar. A few years ago the dollar effectively fell almost 40% vs. many of the world’s major currencies – this is the time when the Canadian and Australian dollar almost reached parity with the US dollar. For US citizens who traveled frequently across the border into Canada, it seemed strange to think of the Loonie as being just the same as a US dollar, since for years it was worth substantially less. Thus if your portfolio was all in US dollar denominated assets, your value fell 40% that year vs. the worlds’s currencies, even though you couldn’t “feel” it unless you traveled abroad or tried to buy imported goods.

    Recently, however, this has all turned around. The dollar is soaring vs. most of the world’s currencies, which is good news for travelers and makes imports cheaper. However, those who own foreign stocks are looking at losses regardless of how the underlying stock performs (often many of the underlying foreign businesses IMPROVE when the US dollar rises; for instance Indian outsourcing firms who are paid in US dollars find that this money stretches further when paying their Indian based staff in rupees), just because of the rising dollar.

    Rise_of_dollar

    Read the rest of this entry »

    Posted in Economics & Finance | 16 Comments »

    Mike Lotus Spoke to the University of Chicago Law School Federalist Society Student Chapter on February 3, 2015 About “America 3.0 and the Future of the Legal Profession”

    Posted by Lexington Green on 5th February 2015 (All posts by )

    UChicago law school

    Huge thanks to the University of Chicago Law School Federalist Society Student Chapter on Tuesday, who invited me to speak to their group on February 3, 2015. I previously spoke at the Booth School of Business, which was also a thrill. I am most grateful for the opportunity to speak at the University of Chicago, my undergraduate alma mater.

    The event was well-attended. I attribute this in part to the drawing power of the free buffet of Indian food, and not exclusively to the appeal of the speaker. The students were attentive and asked good questions. I understand that audio of the talk will be available at some point. I will post a link when it is available.

    My topic was “America 3.0 and the Future of the Legal Profession”.

    First I spoke about some of the themes from America 3.0: Rebooting American Prosperity in the 21st Century, Why America’s Greatest Days are Yet to Come, which I coauthored with James C. Bennett. I discussed the cultural foundations of American prosperity and freedom, the role of our legal profession in American history, in particular in adapting to technological changes, I then discussed some of the major technological changes which are now sweeping our nation and the world. I said that some of them will be general purpose technologies which will cause changes on the scale of the steam engine, railroads or computing itself.

    Read the rest of this entry »

    Posted in Academia, America 3.0, Book Notes, Chicagoania, Economics & Finance, Education, Entrepreneurship, Law, Personal Narrative, Politics, Quotations, Society, Tech, USA | Comments Off

    Unemployment and Jobs.

    Posted by Michael Kennedy on 28th January 2015 (All posts by )

    The Pelosi Congress extended unemployment benefits in 2009 to a maximum of 53 weeks. This has been renewed until the new Republican Congress after 2010, unable to get Obama to negotiate, allowed the extra benefits to lapse.

    Federal unemployment benefits that continue for 26 weeks after a person uses up the 26 weeks of state unemployment benefits ended Saturday, so now some 1.3 million people won’t be getting their $1,166 (on average) monthly check. By June, another 1.9 million will be cut off.

    Many in the federal government are talking about the need to extend benefits. President Obama labelled it an “urgent economic priority” and called a couple of senators to pressure them to bring the matter up when the Senate reconvenes next week, and is urging Congress to extend the benefits for another three months. Senate Majority Leader Harry Reid has promised a vote no later than January 7 for the three month extension. Gene Sperling, the head of Obama’s National Economic Council, lamented the end of the federal aid…

    Disaster was predicted.

    Amazingly, the disaster did not happen. In fact, job growth went up.

    Just looking at the economy’s overall size, you wouldn’t think that the last year was much different from any of the others since the recession. The U.S. economy grew at about the same rate in 2014 as it did in the previous four years — less than 2.4 percent, according to the Federal Reserve’s most recent projection. Yet last year was different. People started going back to work. The percentage of Americans working, more or less stuck in a ditch since 2009, increased from 58.6 percent in December 2013 to 59.2 percent last month. Employers added an average of 246,000 positions a month, about 3 million jobs overall.

    What happened ?

    Economists will debate what happened, but one of the more controversial theories is that Congress’s decision not to extend federal unemployment benefits at the end of 2013 encouraged those out of work to settle for more poorly paid jobs, giving firms a better reason to expand and hire new workers. That’s the conclusion of a new working paper from the National Bureau of Economic Research. The authors, Marcus Hagedorn of the University of Oslo, Iourii Manovskii of the University of Pennsylvania and Stockholm University’s Kurt Mitman concluded that the reduction in benefits created 1.8 million jobs last year — more than half of the total.

    That article is from the Washington Post so, of course, they provide rebuttals.

    This is an interesting result which contradicts much prior research indicating that shortening benefit duration had little impact on employment growth (e.g. here, here, here, and here). It is worth testing this result with an alternative data series. HMM use the Current Population Survey for the state level data and the Local Area Unemployment Statistics (LAUS) for the county level data. These series are both problematic for this sort of analysis.

    Oh yes, other interpretations can be found. The leader of this new (1999) Democrat think tank is a leftist economist with a reliable view for the Washington Post to cite. His credits include: “He writes a weekly column for the Guardian Unlimited (UK), the Huffington Post, TruthOut, and his blog, Beat the Press, features commentary on economic reporting. His analyses have appeared in many major publications, including the Atlantic Monthly, the Washington Post, the London Financial Times, and the New York Daily News. He received his Ph.D in economics from the University of Michigan.”

    The Wall Street Journal also weighs in on the report.

    Assuming that the pre-2014 trends would have continued among the two groups, the authors find that “the cut in unemployment benefit duration led to a 2% increase in aggregate employment, accounting for nearly all of the remarkable employment growth in the U.S. in 2014.” They then confirm these results with a second experiment that compares adjacent counties in different states whose economies are otherwise equal except for their unemployment benefits.

    Notably, job growth improved most in states and counties that offered the most generous benefits before Congress took away the punch bowl. This suggests that the extra jobless benefits reduced the incentives for businesses to create jobs and for jobless workers to fill the vacancies.

    Of course, Obama is now bragging about the new job growth.

    Mr. Obama is now taking credit for 2014’s job gains that his policies inhibited, much as he is for the boom in oil and gas drilling that his Administration resisted. Thus comes the opportunity for a late-term “Seinfeld” economic epiphany. Imagine the possibilities if the President realized that everything he thought about economics is wrong.

    Unlikely.

    Posted in Conservatism, Economics & Finance, Elections, Leftism, Obama, Politics | 7 Comments »

    How To Fix the State of Illinois

    Posted by Carl from Chicago on 19th January 2015 (All posts by )

    In a previous post I discussed the high probability of there being some sort of major fiscal calamity in Illinois in the next two years. Here I propose how to solve the issues in the state. I realize that the chance of any or all of these solutions to be put into place is near zero without unthinkable changes, but in fact they are all obvious and will likely be part of the ultimate solution.

    Consolidate Governmental Entities – Illinois has over 8400 governmental entities, the highest in the USA. These entities need to be drastically curtailed and likely should number in the hundreds, and each should have professional management, strict caps on borrowing capabilities, and an inability to sign up for long term unfunded obligations (pensions, retiree health, etc…) without stringent oversight.

    Eliminate Pensions and Defined Benefit Plans and Move to Defined Contribution Plans – Illinois’s pension and benefits woes are myriad and well documented and extend through every city and county due to firefighters and policemen and governmental workers. Regardless of the one time pain, strikes, protests, and society-shaking impacts of these moves, these unfunded obligations are an impossible burden on the state and it must move to a 401k-like plan (similar to what Nebraska did)

    Reduce State and Local Employee Compensation Pay by 25% or More – The government faces a simple choice between paying its employees what they think they deserve (ever more) and the government’s obligation to provide services to its citizens at a price that does not drive excessive taxation. This deal is broken and a large part of the burden will have to rest on governmental employees. If they do not like this solution they will be free to find employment in the private sector where it is unlikely that they will be able to match the same package of benefits and compensation. We will know that the model is in balance when the turnover rate of government is equal to that of the private sector.

    Outsource 33% or More of Governmental Jobs – There are large opportunities for efficiencies in the governmental sector, through use of the Internet, changes in processes, and injection of competition into areas traditionally done by the government. Even within areas that are generally governmental functions (like the police), a significant portion of the functions such as administration could be done by third-party or online vendors.

    Reform Purchasing By Use of Modern Techniques and Focus on Outcomes Not Political Concerns – Our procurement systems in Illinois are riddled with favoritism, opaque decision methods, and a focus on aiding politically connected firms. In addition, payment of vendors is very slow which rules out many smaller and less capitalized vendors. We need to focus on market based outcomes (quality of service, cost reduction, speed to market), and reward vendors with consistent and timely payments rather than focusing on political connections and long term relationships which favor a few incumbents.

    Read the rest of this entry »

    Posted in Big Government, Chicagoania, Economics & Finance | 15 Comments »

    Is American Entrepreneurship in Decline?

    Posted by David Foster on 19th January 2015 (All posts by )

    Jim Clifton, who is Chairman & CEO of Gallup, presents data showing that creation of new businesses has fallen considerably over a long-term trend running from 1977 to the present, and that for the last several years, the number of firms created has actually fallen below the number of firms closing.

    LINK

    And furthermore:

    The U.S. now ranks not first, not second, not third, but 12th among developed nations in terms of business startup activity. Countries such as Hungary, Denmark, Finland, New Zealand, Sweden, Israel and Italy all have higher startup rates than America does.

    Read the whole thing.

    These numbers and trends seem somewhat counterintuitive to me. I see a lot of startups looking for angel funding, and quite a few of them getting it. There is a lot of public interest in entrepreneurship, as evidenced by the success of TV programs such as “Shark Tank”, and even universities are attempting to capitalize on the interest in entrepreneurship by offering courses and programs on the topic.

    I suspect that much of the decline in business creation is among people who don’t have a lot of formal education–many of them immigrants–and who in former years would have started businesses but are now inhibited by inability to navigate the dense thicket of regulations and pay the substantial costs involved in doing so. OTOH, I also suspect that quite a few of these people have actually created businesses, in fields such as home maintenance or home day-care, and are doing so off-the-books in ways that don’t get counted in the formal statistics.

    Among those who do have college degrees–and especially among those who have spent six, eight, or more years in college classrooms–student loan debt, much of it incurred on behalf of degrees having little or no economic or serious intellectual value, surely also acts as an inhibitor to business creation.

    Posted in Academia, Business, Economics & Finance, Education, Entrepreneurship, USA | 5 Comments »

    Department of Unintentional Irony

    Posted by Jonathan on 9th January 2015 (All posts by )

    House Minority Whip: DC has undermined confidence for too many years:

    Congress has been undermining confidence among the private sector for too many years, House Minority Whip Steny Hoyer (D.-Md.) said on Friday, referring to comments from former Treasury Secretary Larry Summers earlier on CNBC that confidence in and of itself is an economic booster.
     
    “For instance, [the Terrorism Risk Insurance Act] was allowed to expire. The good thing we did with over 415 votes was to approve it this week. Frankly, we could have done that six months ago, and we…

    Now he tells us!

    To which Party does Rep. Hoyer belong, and which Party has done more to undermine business confidence over the past decade by systematically increasing taxation and regulation as a matter of governing philosophy?

    Oh, and which Party is about to take control of Congress?

    Posted in Big Government, Economics & Finance, Political Philosophy, Politics, Quotations | 1 Comment »

    The Failure of State Sponsored Capitalism

    Posted by Carl from Chicago on 31st December 2014 (All posts by )

    It is my assertion that over the last few decades since the fall of communism a lack of understanding of how markets actually work has become commonplace around the world. When it was capitalism vs. communism (or socialism, or even fascism), you generally knew where you stood. To wit:

    • Capitalism said that the free market would provide the best outcome for society, while communism / socialism felt that capitalism had to be tempered and / or that key assets should be owned by the state 
    • Capitalism said that government should be small, and stick to a few areas of logical focus such as security and foreign affairs, while socialism / communism celebrated government and government jobs as a way to employ the citizenry and achieve social goals

    Subtly, the growing attraction of jobs that were primarily in the government sector (environmental jobs, education jobs, health care jobs, and outright government work) and the basic thought that you could build a nice, steady career there with assured benefits and pensions while “doing right for the world” became commonplace. These jobs were often seen as “nicer” and “better” than the ruthless corporate jobs that are continually vilified or parodied on television (such as “The Office” or virtually any thriller set in business).

    On a parallel scale, the idea that “State Owned Enterprises” (SOE) could be a significant part of the world economy, and compete effectively with private sector companies, became widespread. Let’s leave aside the companies that fell into the US governments’ hands during 2008-9 like the banks and car companies; I am focusing on the world wide companies, often country “champions”, that are in our midst and whose performance has now been hit with the usual causes of failure of these sorts of entities, including:

    1. Politically motivated investment
    2. Forced government subsidies or protectionist behavior
    3. Corruption
    The “poster child” for this negative outcome is Petrobras, the Brazilian oil company, which is 64% owned by the state.  Petrobras was briefly the 4th most valuable company in the world after their 2010 IPO; now it is barely in the top 100.  Petrobras hits all these typical failure points with a vengeance.  The government forced them to purchase goods and services from inefficient Brazilian suppliers, subsidized their citizens with Petrobras funds, pushed them to invest in deep offshore finds which were risky relative to the company’s capabilities, and finally just engaged in simple corruption to fund their political party candidates.  All of these actions weakened the company and now a downturn in oil prices and a heavy debt load put the company in a seriously bad state.

    Read the rest of this entry »

    Posted in Business, China, Crony Capitalism, Economics & Finance, Education | 20 Comments »

    Can China Liberalize in Time? Keep Your Eyes on Shandong

    Posted by T. Greer on 30th December 2014 (All posts by )

    This post was originally posted at The Scholars Stage on the 27th December, 2014. It has been re-posted here without alteration.

    Shandong is the red one. 


    Map by Uwe Dedering. Wikimedia.

    Things are looking up for President Xi Jinping. Arthur Groeber sums things up well in a challenge he recently gave China File readers: “Name one world leader with a better record.” [1] Mr. Groeber has a point. All those who predicted that the Hong Kong umbrella movement would prove an impossible crisis for President Xi have been proven wrong. The protestors are gone, but Xi is still around, signing energy deals with Russia, launching new international development banks, and even shaking Shinzo Abe’s hand. He has restructured the Chinese Communist Party’s most important policy bodies, and if the recently concluded 4th Plenum Communique is anything to judge by, more reforms are coming.  One domestic rival and crooked official after another has fallen to his anti-corruption campaign, which having felled 200,000 “tigers and flies” is now tearing into the once unassailable PLA. To top things off, sometime this summer Xi Jinping’s countrymen began calling him “Big Daddy Xi.”[2] The term is a compliment: President Xi is now the most popular leader on the planet.

    Aesop’s portrait of Xi Jinping

    “The Frogs Who Desired a King”
    Illustration by Milo Winter (1919). Wikimedia.

    For all of these reasons and more Xi Jinping is considered to be the most powerful leader China has seen since the days of Deng Xiaoping. Yet the real test of Xi Jinping’s power isn’t found on the foreign arena or in struggles to cleanse the party of graft.  Grand standing on the international stage and stoking up nationalist feeling is not hard for any leader–especially in China. The attempt to centralize the Communist  Party of China and purge the corrupt from its ranks is a much more impressive display, but in many ways this entire campaign is more a means than it is an end. What end? An obvious answer is that the good President pursues power for power’s sake, as leaders the world over are wont to do. But there is more to it than this. This man did not attain his high position through will-power alone. He was selected to accomplish a job that needs doing. And while the frogs may regret crowning the stork to be their king, it is worth our while to ask why the frogs desired a king in the first place. [3] In China’s case the answer is fairly simple: If Beijing does not want to see its own Japan-style “lost decade” then economic reform is needed, and it is needed urgently. Xi Jinping has been trusted with the power to reshape the Party because that is the kind of power that is needed to defeat the vested interests that stand in the way of economic liberalization.

    I won’t get into a full discussion of why reform is so urgent here–if you are curious I strongly recommend Michael Pettis‘ September essay, “What Does a ‘Good’ Chinese Adjustment Look Like?” which lays out the essential points in detail. More important for our discussion is the pace and scale that these reforms take. The 2013 Third Plenum was devoted to this question;  financial analysts have been abuzz ever since discussing how well the Plenum’s directives are being implemented. Of particular concern are the financial happenings at the county, city, and provincial levels. It was infrastructure spending by these governments that rode China through the recession, and that effort has left many of these governments over leveraged and left others liable for a host of non-performing loans. Reforming this system is necessary. It is also difficult, for it means slaughtering the favorite cash cows of powerful men and forcing China’s wealthy and connected to face the risk inherit in their poor investments instead of shifting losses to the state.


    Two views of China’s local debt, by province.

    Taken from Gabriel Wildau, “Half of Chinese Provinces deserve junk ratings, S&P warns,”
     Financial Times (20 November 2014)


     Any attempt to liberalize markets and end China’s financial repression must start here. By extension, any attempt to assess the power Xi Jinping has over the Party must also start here. We will know that Xi Jinping has the level of control over his country that everyone says he does when local government finances see substantive reforms. Read the rest of this entry »

    Posted in China, Economics & Finance | 8 Comments »

    Posted by Jonathan on 18th December 2014 (All posts by )

    what inflation?

    Chicagoboyz closely monitor all relevant information sources for clues to the direction of Federal Reserve policy.

    Posted in Economics & Finance, Photos | 4 Comments »

    Worthwhile Reading & Viewing

    Posted by David Foster on 9th December 2014 (All posts by )

    Amazing treehouses from around the world

    Failure Porn.  Is there now too much celebration of failure?

    Why do journalists love twitter and hate blogging?  (from 2011)  Also:  the message of the medium:  why the Left loves twitter

    Leftists don’t like being reminded of the socialist roots of Naziism.  Also:  Hitler and the socialist dream.

    Best programming languages for beginners to learn.

    Some signs of recovery in the rustbelt

    A 3d printed kinematic dress

    Lightpaper!

    Posted in Business, Economics & Finance, Human Behavior, Leftism, Media, Photos, Tech | 10 Comments »

    Quote of the Day

    Posted by Jonathan on 2nd December 2014 (All posts by )

    Richard Epstein, The flawed 75% tax solution from Hollande and Piketty:

    The basic question is why would anyone assume that major shifts in tax rates should have only relatively modest effects on the production of wealth. No one would say that about a cut in market wages of over 50 percent. So why assume otherwise in a tax context?

    Posted in Big Government, Economics & Finance, France, Leftism, Political Philosophy, Quotations, Taxes | 6 Comments »

    Theme: Productivity and Economic Growth

    Posted by David Foster on 1st December 2014 (All posts by )

    As Jonathan pointed out here, one problem with the blog format is that worthwhile posts tend to fade into the background over time, even when they might be of continuing value.  One approach I’d like to try is Theme roundups, in which I’ll select a number of previous posts on a common topic or set of related topics, and link them with brief introductory sentences or paragraphs.  At least initially, I’ll focus on my own posts.

    The posts in this second “theme” roundup focus on issues affecting productivity and economic growth.

    Energy, Productivity, and the Middle Class.  The primary driver of middle class affluence has been the availability of plentiful and low-cost energy…especially in the form of electricity…coupled with a whole array of productivity-increasing tools and methods, ranging from the horse-drawn harvester to the assembly line to the automated check sorting machine.

    Demographics and productivity growth.  Slowing population growth is of concern in just about every developed county because of the effects on worker/non-worker population mix.  Economist Michael Mandel presents a country-by-country analysis of the productivity growth rates required, in light of these demographics, to achieve a doubling of individual income by 2050.  (from 2005)

    The Innovator’s Solution.  My review of the now-classic book by Clayton Christensen and Michael Raynor.  Far more valuable than most books on business strategy.

    Closing time?  Citigroup (this is from 2010) listed  “ten themes that spell the end of Western dominance,” while Joel Kotkin challenged what he called “declinism.”

    Entrepreneurship in decline?   Michael Malone, who has been writing about technology and Silicon Valley for a couple of decades, worries (in 2009) that the basic mechanism by which new technologies are commercialized–the formation and growth of new enterprises–is badly broken. (Malone’s original article has disappeared, but I excerpted part of it.)

    Decline is not inevitable.  Many Americans have come to believe that our best years are behind us.  I assert that American decline is by no means inevitable…and if we do wind up in long-term decline, it will be driven not by any sort of automatic economic process, but rather by our own choices–especially our own political choices.

     The suppression of entrepreneurship.  Home Depot co-founder Ken Langone has some words for Obama.  (2010)

    The politics of economic destruction.  What Democratic Senator Christopher Dodd tried to do to angel and venture capital funding of new enterprises.

    The idea that bigness automatically wins in business still seems to have a remarkable number of adherents, despite all evidence to the contrary.

    Startups and jobs…some data.  (the original post was just a link)

    Bigotry against businessspeople.  Media and political hostility toward businesspeople, and its consequences.

    Leaving trillions on the table.  The transistor as a case study in central planning versus entrepreneurial diversity.

    Misvaluing manufacturing. The once-common assertion that “services” are inherently of higher value than manufacturing was not very well thought out.  (2003)

    “Protocols” and wealth creation.  With  help from Andrew Carnegie, I challenge some assertions in a David Brooks column.

    Musings on Tyler’s technological thoughts. Comments on Tyler Cowen’s book Average is Over.  While it’s worth reading and occasionally thought-provoking, I think much of what he has to say is wrong-headed.

    Posted in Business, Economics & Finance, Entrepreneurship, Politics, Tech, USA | 4 Comments »

    On Russia and Ukraine

    Posted by Carl from Chicago on 30th November 2014 (All posts by )

    For many years I’ve studied the Russian front during WW2, where the Germans and their allies battled the Russians (and their empire) in some of the largest and deadliest battles on earth. The war went far beyond the battlefield, with the Russians taking over the ancient German capital of Prussia, evicting / killing all the (remaining) citizens, and turning it into today’s Russian enclave of Kaliningrad. This is fair desserts; the Germans planned to turn Moscow into a reservoir. That war was about annihilation, a complete extermination and permanent subjugation of their foes.

    In recent years I’ve tried to turn away from this focus, since I didn’t think that this conflict, ancient by modern standards, had much to teach us anymore, and just following along a well-worn narrative was teaching me nothing. And I did move on, reading about more modern conflicts, and today’s volunteer and high-tech military as opposed to the “old world” of conscripts, artillery, heavy armor, utter destruction of cities and the civilians trapped inside them, and political control superseding military objectives.

    The Russian armed forces also seemed to be gliding towards irrelevance, other than their ubiquitous nuclear weapons. Their performance in Chechnya was poor until they basically razed (their own) cities into ruin with heavy artillery fire; to this day I don’t understand why this wasn’t called out as a giant atrocity. In Georgia they were able to beat a tiny, poorly armed adversary, but their motorized divisions seemed to be driving by compass and they did not cover themselves in military glory. Their military transitions from conscript forces with older weapons and tactics also seemed to be foundering in the face of objections from old-line military-industrial complexes.

    When Ukraine slipped out of Russia’s orbit and the vast presidential compound of the ex-president was paraded on TV worldwide, Putin obviously viewed this as a direct threat to his authority. The Russians historically had been at odds with the Ukrainians over natural gas prices and on other topics, but it wasn’t obvious that this was going to move into a warlike situation. Ukraine is rich with agricultural resources but these resources aren’t prized by the Kremlin; they need easily extractable resources like oil, natural gas and various iron ores that they can pull out of the ground and sell for hard cash overseas. John McCain’s recurring joke that Russia isn’t much more than a gas station with nuclear weapons in fact has a lot of merit. Other than around Moscow, parts of St Petersburg, and in “showplace” locations like Sochi and Vladivostok Russia in fact was falling into ruin and shambles.

    But something was happening; the Russian forces that invaded the Crimea (even though they were never formally identified as Russians) appeared to be well organized and well armed. It was not the “Keystone Cops” group that I might have expected. They handled themselves with relative distinction, fulfilling their objectives with limited civilian casualties and using discretion against the Ukrainian military forces they encountered. This was the complete opposite of the blundering incursions into Chechnya.
    Read the rest of this entry »

    Posted in China, Economics & Finance, Military Affairs, Russia | 59 Comments »

    Narratives, Scenarios, and Strategies

    Posted by Grurray on 22nd November 2014 (All posts by )

    “Essentially, all models are wrong, but some are useful”

    -George E.P. Box

    Models, predictions, and forecasts are always wrong, or, more accurately, they’re never completely right. That’s obvious since the map can never truly be the territory. Some are better than others, but no matter how hard we try and how much information that we gather, we’ll never construct a representation of reality better than the real thing. That being the case, forecasts therefore reveal more about ourselves and our present state of mind than anything about the future.

    The Research Feature in the fall issue of the MIT Sloan Management Review, “Beyond Forecasting: Creating New Strategic Narratives” (link here – requires a one time registration – or purchase Kindle article here for a few dollars), concerns a certain type of forecasting called scenario planning. The authors studied a tech company that was being hit hard during the 2001 economic crash and needed to find new strategies to navigate the rough seas ahead.

    Their research revealed that

    “future projections are intimately tied to interpretations of the past and the present. Strategy making amid volatility thus involves constructing and reconstructing strategic narratives that reimagine the past and present in ways that allow the organization to explore multiple possible futures.”

    These explorations of possible futures, more commonly referred to as scenarios, are stories intended to describe possible futures, identify some significant events, main actors, and motivations, and convey how the world functions.

    The authors note that constructing forecasts based on these methods usually doesn’t work very well because the future is uncertain and often unfolds in a way that is very different from current trajectories. The current paths are comfortable and familiar, so they are difficult to deviate from. Constructing scenarios of the future actually first requires constructing paths that connect the past, present, and future. The narratives are those paths.

    ”In comparing strategy projects within CommCorp, we found that the more work managers do to create novel strategic narratives, the more likely they are to explore alternatives that break with the status quo. In other words, to get to an alternative future, you have to create a story about the past that connects to it.”

    Predicting, prognosticating, and prophesying have been around since time immemorial. The modern version of strategic scenario planning can be attributed to Herman Kahn at the Hudson Institute and his “thinking the unthinkable” about nuclear war by taking into account non-linear, disruptive changes that lead to an uncertain future. The first to bring scenarios into the business world was the pioneering strategy guru Pierre Wack at Shell Oil who coined the term. Wack was a colorful and imaginative individual who took Kahn’s insights and repurposed them to affect the quality of judgment rather than quality of predictions.

    Among the many books, case studies, and articles on the Shell planning department, I just completed The Essence of Scenarios: Learning from the Shell Experience, a history of the scenario group culled from interviews of former members. Pierre Wack helped found it and headed it throughout the 1970s. The book concerns the entire history from then until the present, but it devotes a large part to Wack’s work and legacy.

    In contrast to Kahn’s theories, Wack was less concerned about decoding uncertainty or getting predictions right and more concerned with making future uncertainty more relevant to the present situation.

    “Wack was interested in scenarios as a way to ‘see’ the present situation more clearly, rather than as a basis for knowing about the future. The value of the scenarios is not in better forecasting what ‘the’ future will be, but in encouraging already smart people to learn by ‘seeing’ the present situation afresh, from the perspective offered by plausible, alternative futures , in a process that Wack termed ‘disciplined imagination’.”

    With an emphasis on present adaptation instead of future clarity, their first attempts happened to be nicely prescient. Their November 1971 scenarios covering “Producer Government Take/World Economic Development” and their January 1973 scenarios for “Impending Energy Scarcity” presented different tracks for oil prices including: a low slow growth scenario based on the continuation of past agreements with producer countries, a track that the corporate leadership expected; and a high price growth scenario which factored into concerns that producer countries were reaching limits to how much more capital inflows they could absorb.

    These scenarios involved explorations for prices through the late ’70s into the early ’80s. It’s important to keep in mind that, in keeping with the notion that they weren’t meant to be exact predictions, the high price track scenario still ended up being off by a factor of 20 as oil embargoes and inflation pushed prices higher than anyone could have imagined. Despite the fuzziness of the numbers, however, presenting a possible future far off from what was expected shifted thinking outside the company’s comfort zone.

    There was some initial skepticism from top executives, but the scenario planning helped the company to think differently and conditioned them to adjust in flexible ways that they wouldn’t have considered previously. Consideration of the high price track eventually led to Shell investing in nuclear and coal which helped offset the political turmoil and price shock that would arrive in the mid ’70s.

    “In October 1973, the first oil crisis began to unfold, and the entire organization became aware of the possibilities that scenarios offered. The 1973 scenarios report had provided a new frame of reference – the mindset of the oil producer countries. This new frame was significantly different from the usual analytical frame – the mindset of an oil company. The scenarios had enabled Shell executives to rehearse the future as a thought experiment rather than a crisis exercise. When the crisis actually occurred, Shell was able to collectively re-interpret the turbulent situation and to respond much faster than its competitors.”

    In order to be taken seriously, the Shell scenario team had to relate to top management how the oil producers’ situation related to their own situation.

    “In September 1972, Wack gave what those present remember as a three-hour, enthralling performance that was based on an image of the six scenarios as a river forking into two streams, each of which divided into three tributaries. The insight about hither oil prices and possible energy crisis… were integrated into one of these scenarios.”

    This technique demonstrated the narrative of how the high price scenario was linked to Shell’s operations and how it could have sprung forth from Shell’s past. The key was teasing out the culture, values, and qualities of the past that could make that future plausible.

    Similar re-interpretations of the past are what the MIT researchers found were most successful for their tech company. It wasn’t that they provided better predictions, but it helped provide a unifying vision and get everyone to buy into course changes that didn’t seem to fit before.

    “the crash in the market for its existing products had forced everyone at CommCorp to reevaluate the company’s historical strategic trajectory. This questioning enabled one manager to reinterpret CommCorp’s history, not only as a provider of big-ticket hardware for the backbone of the Internet but also as a provider of communications technologies across the whole network. By seeing the company as all about “communications,” the manager was able to propose a project for improving access at the “last mile” of the network. This reinterpretation made a radical shift in a future vision possible: CommCorp could provide small-ticket, standardized products as well as customized, high-end technologies.

    The narratives and scenarios became a way to define the company as it was today and illustrate a more coherent organizational structure. This is possible because of the rich potential of examining the past.

    “strategy making is not about getting the ‘right’ narrative. It’s about getting a narrative that is good enough for now, so that the organization can move forward and take action in uncertain times. This recognizes that strategy will in some ways always be evolving and “emergent.”

    Everyone loves to try to make predictions, but the real value lies in re-evaluating the past and restructuring past trajectories to provide for a launching point to navigate into the future. This “re-programming” the past is the way to deal with an uncertain future. Instead of forecasting futures that merely extrapolate from the status quo or futilely fighting future models that conflict with conventional mental maps, the use of narratives, scenarios, and strategies provides ways to create stronger and more harmonious models of the present.

    Posted in Academia, Book Notes, Deep Thoughts, Economics & Finance, Energy & Power Generation, Entrepreneurship, Management, Predictions | 16 Comments »

    Retrotech: Using Network Technology for a Stock Trading Edge

    Posted by David Foster on 13th November 2014 (All posts by )

    1914-style

    Posted in Business, Economics & Finance, Markets and Trading, Media, Tech | 4 Comments »

    The American Mittelstand

    Posted by David Foster on 5th November 2014 (All posts by )

    Two posts that sort of go together:

    GE Capital cites some data from the National Center for the Middle Market on the importance of the “unsung heroes of the US economy”–the 200,000 businesses with annual revenues ranging from $10 million to $1 billion.

    Amy Cortese writes about the potential re-emergence of local/regional stock markets, which could provide an avenue for companies in the middle market category to obtain financing and hence accelerate their growth.

    Posted in Business, Economics & Finance, Entrepreneurship | 9 Comments »

    Buy Ebola, Sell the Fed

    Posted by Jonathan on 24th October 2014 (All posts by )

    The stock market began to recover from its recent selloff as initial ebola fears abated. Meanwhile bond markets remained strong.

    Conclusions? The fed-fueled bubble bull market in stocks isn’t over. Ebola won’t kill us all. Future Ebola outbreaks will have to be much more severe to generate market reactions of similar magnitude. (Corollary: The next Ebola-inspired market selloff will be a buying opportunity, and thus may not happen.)

    Caveats. Watch for a govt bond selloff, perhaps as a result of unexpected events. The entire financial world has been watching for this for the past several years. It could happen in two weeks or two years, but it will happen eventually.

    —-

    Disclaimer: This is not investment advice. You would be crazy to listen to me and probably shouldn’t even be reading this, as I have predicted twenty of the last 2 bear markets in bonds.

    Posted in Current Events, Ebola, Economics & Finance, Markets and Trading, Predictions | 7 Comments »

    Economic and Political Turmoil a Century after the Great War: Is it Deja Vu All Over Again?

    Posted by Kevin Villani on 17th October 2014 (All posts by )

    This year marks a century since the outbreak of WW I and coincidently the initiation of US Federal Reserve System operations. Prior to these events, politics were democratizing, economic growth was booming, economies were liberalizing and global trade and finance were growing, all at a pace not seen again for almost another century. Recognizing that achieving these mutual benefits required an externally imposed political discipline, all of the countries participating in this happy situation voluntarily followed a set of rules governing domestic and international trade and finance for automatic and continuous adjustment to changing economic reality, then provided by the gold standard.

    It was during this enlightened period that philosopher George Santayana wrote: “those who cannot remember the past are condemned to repeat it.” Hedge fund manager and Brookings Director Liaquat Ahamed set out to remind us why countries failed to recapture this economic dynamism after the Great War with the publication of the Pulitzer Prize winning Lords of Finance: The Bankers Who Broke the World in 2009. This book took on greater significance when in 2010 Federal Reserve Board Chairman Ben Bernanke recommended only this historical account in response to the Financial Crisis Inquiry Commission’s request for a book reference explaining the 2008 financial crisis. What history had this most recent financial crisis already repeated and what was Chairman Bernanke determined to avoid repeating in the aftermath?

    Read the rest of this entry »

    Posted in Book Notes, Current Events, Economics & Finance, History, Public Finance, Systems Analysis | 6 Comments »

    The Great Lightbulb Conspiracy

    Posted by Grurray on 15th October 2014 (All posts by )

    This year has seen many historical anniversaries, and one that has gotten some recent notoriety is the 90 year anniversary of the planned obsolescence of the light bulb by an industry cartel.

    How exactly did the cartel pull off this engineering feat? It wasn’t just a matter of making an inferior or sloppy product; anybody could have done that. But to create one that reliably failed after an agreed-upon 1,000 hours took some doing over a number of years. The household lightbulb in 1924 was already technologically sophisticated: The light yield was considerable; the burning time was easily 2,500 hours or more. By striving for something less, the cartel would systematically reverse decades of progress.

    It’s even more notable because last week three pioneers in LED technology just won the Nobel Prize.

    We all know about the efficiency standards for light bulbs that are effectively banning incandescent bulbs in slow motion. I’ve noticed during my usual stops at the home improvement stores that the choices for the vintage bulbs are fewer and farther between, and the prices for what’s left are creeping up.

    The promise of the new standards is that the new LED lighting is far superior. While it’s much more expensive, the steady drumbeat of the diffusion of technology is supposed to reduce the costs, eventually putting them within reach of the common household.

    The costs have indeed dropped exponentially, but that’s undoubtedly been helped by government aid and deliberate shortages of the old technology. Besides the federal standards, every state has some sort of efficient lighting rebate program that artificially decreases the price. Tax breaks and other incentives have encouraged manufacturers like GE to expand production in the US and create a few hundred jobs, which, although nice, don’t quite make up for the thousands they shipped to China during the Great Light Bulb Leap Forward. How much of the price gains can be attributed to Moore’s Law type improvements and how much to government supports is a legitimate concern.

    Now there’s some question about how long prices are going to keep falling going forward.

    In stark contrast to the promised dynamics that the technology is supposed to follow, LED prices actually rose considerably last month.

    In contrast, 40W equiv. LED bulb prices were up 14.3% in the U.S. market. Manufacturers including Cree, Philips, GE and other renowned brands have raised prices for certain products in the U.S. market.

    Because of industry consolidation, the top ten LED manufacturers now control 61% of the market. That much control brings pricing power over the market, and they are apparently now using it.

    With green energy executive orders on Obama’s agenda and the unelected EPA issuing mandates, the oligopoly is sure to get worse with permanently higher cost per lumens the possible result.

    The LED industry, taking a page from the incandescent bulb industry so many years ago, is discovering the key to the rent seekers’ success – competition is for losers, and unfortunately sometimes so is progress.

    Posted in Economics & Finance, Energy & Power Generation, Politics, Tech | 21 Comments »

    Regulatory capture is normal, and that’s the problem

    Posted by Lexington Green on 3rd October 2014 (All posts by )

    portraits of Julian Sanchez and Megan McArdle

    You must read this excellent piece by Megan McArdle, It’s Normal for Regulators to Get Captured. “regulatory capture is not some horrid aberration; it is closer to the natural state of a regulatory body.”

    This is true. That is why the entire modern administrative state has to be re-thought, re-configured and replaced. It does not work, it never worked, it cannot work.

    The regulatory state is the defining feature of the Industrial Era, America 2.0 state. It needs to be shut down, wrapped up and replaced.

    This does not mean return to the law of the jungle. It means making laws that actually align incentives with desired ends, as imperfect as that always is.

    Read the rest of this entry »

    Posted in America 3.0, Book Notes, Chicagoania, Economics & Finance, USA | 14 Comments »

    Milton Friedman: “Only a crisis — actual or perceived — produces real change.”

    Posted by Lexington Green on 29th September 2014 (All posts by )

    Milton Friedman

    There is enormous inertia—a tyranny of the status quo—in private and especially governmental arrangements. Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.

    Milton Friedman, Capitalism and Freedom, Preface to the 1982 edition.

    This could easily have been the quote at the front of America 3.0.

    A crisis, or series of crises, are likely to be coming in the years ahead as the economy and government based on industrial era (America 2.0) models fails more and more completely and obviously. The inertia, the tyranny of the status quo, embedded in our existing institutions is going to resist meaningful reform. It will not be an inert resistance, either, it will be attacks on agents of change. To use Clausewitz’s phrase, the defense of the status quo will be “a shield of blows.” Some people will be hurt by the blows.

    But it won’t work. It cannot work.

    Our task in the book was and is precisely to offer alternatives to existing policies, and explain why our proposed alternatives suit America’s inherited underlying culture, and the technology which will shape our future. Many of the things we suggest in the book have been dismissed as “impossible” even by friendly critics. But as Milton Friedman correctly noted, the politically impossible can become the politically inevitable, if it is an idea whose time has come.

    Posted in America 3.0, Book Notes, Economics & Finance, Quotations | 10 Comments »

    Sign of a New Peak for Stocks?

    Posted by Carl from Chicago on 20th September 2014 (All posts by )

    Back in the woeful years of the dot.com boom and bust I worked for a company with a dubious distinction. The value of that company in the stock market was less than the value of the cash we had on our books. What the market was essentially saying is that the sum total of all our efforts as employees was NEGATIVE – we would be worth more if we just shut down immediately and gave back the cash to investors. The fate of that company, of course, was to go bankrupt.

    Today there are some other major signs of froth in the market. Yahoo is a classic web / advertising / technology stock with a solid market capitalization of $40 billion. Yahoo’s CEO, Marissa Mayer, was a Google alumna and has been receiving a lot of press for her intelligence and drive to change the company, as well as her good looks.

    Screen Shot 2014-09-20 at 8.43.59 AM

    However, all is not as it seems.  The primary value for Yahoo isn’t its online advertising, email, or users – it is the stakes that they amassed in the hot Chinese e commerce company Alibaba (NYSE: BABA) and also Yahoo Japan.  In fact, the value of Yahoo is less than the value of these stakes, which are approximately $45B, partially due to the reason listed in this Bloomberg article:

    While the market value is large for Yahoo’s Asian assets, that doesn’t necessarily reflect the value available to investors and the company because of taxes, said Ben Schachter, an analyst at Macquarie Securities USA Inc. Yahoo, which would have made $8.3 billion by selling Alibaba shares at the IPO, only reaped around $5.1 billion after taxes.

    Taxes are ‘‘one of the big issues,” Schachter said.

    While it is true that $45B in investment value isn’t worth $45B because of the after-tax implications, it certainly implies that the market isn’t valuing Yahoo at very much at all.  It is also possible that the market thinks that Alibaba is over-valued at its current price of near $100 (after a huge run-up from its IPO price of $68, another huge sign of froth in the market) but the two stocks will generally track closely together now.  Yahoo is sort of a broken “tracking stock” for this value.
    Read the rest of this entry »

    Posted in Business, Economics & Finance | 7 Comments »

    “How Gangs Took Over Prisons”

    Posted by Jonathan on 18th September 2014 (All posts by )

    This article describes a situation that is similar to what happens in a neighborhood controlled by the Mafia. Monopolies and cartels raise the prices of the products they sell by restricting supply. This is usually a bad outcome. However, when the product is crime or violence there are benefits to restricting supply.

    (Via Instapundit.)

    Posted in Crime and Punishment, Economics & Finance, Tradeoffs | 6 Comments »