The article makes that same points that (1) there is little to no professional quality control in the creation and maintenance of scientific software and (2) that scientific software should be as open and scrutinized as scientific hardware.

This observation is especially important:

Computer code is also at the heart of a scientific issue. One of the key features of science is deniability: if you erect a theory and someone produces evidence that it is wrong, then it falls. This is how science works: by openness, by publishing minute details of an experiment, some mathematical equations or a simulation; by doing this you embrace deniability. This does not seem to have happened in climate research. Many researchers have refused to release their computer programs — even though they are still in existence and not subject to commercial agreements.

(Note: In this context, “deniability” means that the hypothesis or theory must be constructed so it can be proven wrong i.e. that you can deny the truth of it.)

Scientific hypotheses differ from hypotheses in other fields specifically because scientific hypotheses can be conclusively proven wrong by experiment. A scientific hypothesis becomes a theory only when the one experiment that could prove it wrong has been attempted repeatedly. Key to that repeatability is that all scientists understand the minute details of each attempt so that they can reproduce it exactly.

Keeping scientific software secret destroys reproducibility. If you have two or more programs whose internals are unknown, how do you know why they agree or disagree on their final outputs? Perhaps they disagree because one made an error the other did not or perhaps they agree because they both make the same error. You can never know if you have actually reproduced someone else’s work unless you know exactly how they got the answer they did.

There is no compelling reason to keep scientific software secret. In the case of science upon which we base public policy on whose outcomes the lives of millions may depend, such secrecy could be lethal.

HNN is running a symposium on Jonah Goldberg’s recent book, Liberal Fascism: The Secret History of the American Left, From Mussolini to the Politics of Meaning:

While I know a great deal about the historical period in question, I have not read Goldberg’s book, so I am not going to comment on his core proposition except to say that IMHO, I tend to find arguments that the intellectual roots of Fascism and Nazism are located exclusively on one side of the political spectrum are flatly and demonstrably wrong. Goldberg’s polemical thesis though, yields a hysterical reaction because he is jubilantly shredding the hoary (and false) assertion of the academic Left, going back to the pre-Popular Front Communist Party line of the 1930s, that Fascism is a form of radicalized conservatism and a secret pawn of big-business capitalism.

Therefore, the following series amounts to an intellectual food fight between Goldberg and (mostly) a band of clearly enraged leftist professors. Enjoy!:

HNN Special: A Symposium on Jonah Goldberg’s Liberal Fascism

• Neiwert: Introduction
• Paxton: The Scholarly Flaws
• Griffin: An Academic Book – Not!
• Feldman: Poor Scholarship, Wrong Conclusions
• Berlet: The Roots of the Book
• Michael Ledeen Responds to Liberal Fascism
• Goldberg: Definitions and Double Standards
• Feldman: An Open Letter to Mr. Jonah Goldberg
• Griffin: Definitions and Double Standards – A Rebuttal
• Neiwert: Goldberg’s Response Fits His History of Evasion

After all, who doesn’t like an intemperate, online argument about Nazis? :)

Like all the poodles of the environmental beat, Margot O’Neill repeats those magic words “peer review” every couple of paragraphs like a talisman to ward off evil deniers.

From my “Scientific Peer-Review is a Lightweight Process” :

By the way that proponents of Catastrophic Anthropogenic Global Warming (CAGW) wave it about as a talisman to ward off criticism, a lay person could be excused for thinking that peer review is a rigorous process that is central to the functioning of science and that verifies the conclusions of a scientist’s research.
 
Peer review is nothing like that.
 
Peer review isn’t even central to science. Science functioned fine for centuries without peer review and scientists who work in secret or proprietary environments do not use it. Instead, peer review serves economic and social functions related to scientific publishing and does nothing else. Peer review somewhat protects the integrity of scientific media, not the quality of science itself.

I would just like to point out that Mark Styen steals from the best. ;-)

Roger, a wealthy but awkward and widely-disliked student, is hopelessly in love with O’s girlfriend, Desi. Hugo enlists him in a plot which he sells to Roger as a way of luring Desi away from O…but his real intent is to destroy both O and Michael, with Desi as collateral damage.

Does the plot sound a little bit familiar?

This is, of course, “Othello,” set in an American prep school instead of in Venice, and with the title character as an athlete rather than a military commander.

O is Othello (Mekhi Phifer)
Desi is Desdemona (Julia Stiles)
Hugo is Iago (Josh Hartnett)
Roger is Rodrigo (Elden Henson)
Michael is Michael Casio (Andrew Keegan)
Emily is Emilia (Rain Phoenix)
The basketball coach, nicknamed “Duke,” is the Duke (Martin Sheen)

No attempt is made to use Shakespearean language, which was probably a wise decision. While this adaptation may sound contrived from the above description, I think it actually works very well. (The film was released in 2001.)

There are a few interesting differences between the film and the original play, as well as some interesting angles for transforming Renaissance Venice into a modern high school:

(1)In the movie, Hugo/Iago is the coach’s son, which plays an important role in his jealousy of O/Othello. There is no such relationship or motivation in the play.

(2)In the play, Iago’s hate of Othello and of Michael Casio is driven largely by Othello’s decision to choose Casio, rather than Iago, as his principal lieutenant. The recognition/elevation of Michael is also an important factor in the movie–however, in the play, Othello’s promotion decision is based largely on factors which Iago, with some justice, sees as extraneous: book-learning and family/social connections rather than combat experience. Hugo/Iago suffers from no such social-class disadvantage in the movie.

(3)In the play, Iago convinces Othello that he, Iago, understands more about the true nature of Venetian women than Othello the Moor–an outsider to Venice–possibly can, and that hence, Othello had better listen to Iago’s advice. In the movie, this turns into an assertion by Hugo that O…the only African-American in the school…needs to pay attention to Hugo’s greater experience with white women (”They are all horny snakes,” he warns O.)

(4)In the play, Michael Casio is portrayed in a very positive way. In the film, he comes across as more than a bit of a jerk.

(5)Like the play, the movie ends with the murder of Desi and Emily/Emilia and the suicide of O/Othello…but whereas in the play, Michael survives and is designated as Governor at the end, in the movie he is shot and it is left ambiguous whether or not he survives. I think Shakespeare perhaps intended the elevation of Michael Casio at the end to symbolize the continuity of society and of proper authority: there is no such symbolism in the film. The ending of the film is at least as dark as that of the play, and that’s pretty dark.

An interesting sound track, ranging from hip-hop to opera.

Certainly not a substitute for the original, but very well worth seeing, in my opinion.

There is at one quite explicit sex scene, plus of course the violence at the end.

Has anyone else seen this film? Thoughts?

If you went back in time to 2002, at the time of the initial release of Mac OS X, and told everyone that over the next eight years not a single Mac OS X virus or worm would be found in the wild, everyone, including me, would have called you barking mad.

Ever since Apple began the transition to Mac OS X in 1999, computer security experts have every week of every month of every year confidently told us that Mac OS X is just as vulnerable on a technological level as Windows or any other operating system. By that they mean that it is just as technically easy for a malicious programmer to write a program to hijack the operating system of Mac as it is to write a program to hijack a Windows machine.

Several times a year, they demonstrate flaws in Mac OS X that they claim could be used to spread viruses. They complain about Apple’s insular, arrogant and cavalier attitude toward finding and patching these security flaws. They tell us that all these factors make Mac OS X a ticking bomb and that “any day now” Mac users will face a sudden tsunami of self-propagating viruses and worms just like Windows users do.

They tell us the exact same thing every week, month and year.

They told us that in 1999 with the release of Mac OS X server.
They told us that in 2000.
They told us that in 2001.
They really told us that in 2002 when Mac OS X shipped widely for desktops.
They told us that in 2002.
They told us that in 2003.
They told us that in 2004.
They told us that in 2005.
They told us that in 2006.
They told us that in 2007.
They told us that in 2008.
They told us that in 2009
And they continue to tell us that in 2010.

Yet, der Tag never comes and waiting for it is giving me ulcers.

So, I have to ask: How many more years have to elapse before we begin to suspect the security experts (and everyone else, myself included) have misunderstood something critical about how the Mac OS X security model works out in the real world?

For the past eight years, since I switched to Mac OS X, I have believed that Mac OS X was intrinsically as vulnerable as everyone says, and I have been sitting anxiously on the edge of my chair for all these years waiting for the predicted Mac OS X pandemic, but it has never arrived. Not only has the pandemic never arrived, but Mac OS X has never even caught so much as a sniffle. The stress of years of waiting for the inevitable wrecking of my Macs by viruses and worms has apparently pushed me over the edge, because I have begun to think dark, mad, heretical thoughts.

I have begun to think maybe, just maybe, the weekly, monthly and yearly cookie-cutter, rote warnings about Mac OS X security are wrong.

Insane, I know, but in any other context, eight-plus years of a predicted problem never materializing would cause us to seriously doubt that the “experts” making the prediction knew what they were talking about. Imagine that in 2002, a doctor told two people named, say, Mac and PC that they were both immune compromised and that each would have to fight off infection after infection for the foreseeable future. If Mac came back eight years later looking hale and hearty and never having had a sniffle while PC looked like a hacking leper in a Monty Python skit, most people would conclude that the doctor had misdiagnosed Mac.

Why don’t we apply the same standard to the claims about Mac OS X’s vulnerability to viruses and worms? How many times do we/they get to say, “this time for sure” and get a pass when we/they are wrong?

Well, we are told, there are non-technological reasons why not a single solitary Mac OS X virus or worm has ever appeared in the wild.

For example, we are told that the criminals and those seeking cracker infamy do a top-down market-share analysis just like a corporation does when deciding what platform to write software for. This market-share analysis (that all the blackhats learned in business school) teaches them not to bother writing software for the Mac because the market share is so small that there’s no profit in it.

I have begun to question this for several reasons:

(1) Back in the ’90s Mac OS Classic had an even smaller market share and even smaller profit potential and yet it was riddled with viruses and worms.

(2) The Mac’s market share has grown significantly since the Mac OS Classic days, but viruses have totally disappeared following the shift to the Mac OS X operating system.

(3) There are 30+ million Macs out in the world today. The real money for evil programmers is in Internet-connected computers, and there Macs account for somewhere between 5% and 10%. For those playing at home, that means that somewhere between every 1 in 20 and every 1 in 10 Internet-connected computers is running Mac OS X.

I would think that some small malware “company” would at least try to infect a small fraction of those 30 million Macs, you know, just as a public service to an under served market segment.

But I never went to business school, so what do I know?

On the other hand it occurs to me that maybe all the black hats didn’t go to business school either, and that instead of doing market-share analysis they instead approach the problem like, what’s the word?

Oh, yeah, criminals…

I know this will be a radical idea to most people, but just suppose in a wild supposition that malware programmers don’t give a rat’s hindquarters what percentage of the total world-wide installed base of computers they infect, but instead just care if they can infect enough machines in absolute numbers to pull off whatever scam they’re planning. What if they know that most botnets have under 10,000 machines? What if they look at a list of the top 10 largest botnets to date, and discover that three of the top 10 had only 300,000 machines or less? What if they think in terms of, “If I can infect and control just 300,000 machines I can make a killing!”

What if think, “The experts say that Mac OS X is just as easy to infect as Windows. They say Apple has a careless attitude toward to security. Mac users are naive. Fewer Macs are professionally administered. Almost no Macs run anti-malware software and there’s 30 million Internet-connected Macs!” What if they do a little number-crunching and think, “Wow, if I could infect just 1% of all the vulnerable Mac out there I could have a botnet in the top 10 of all time!”

What if they give up on their dreams of infecting every single Windows machine on the planet just for the glory, and instead settle for making big gobs of money infecting a small percentage of the Macs that all the security experts tell us are just sitting out there like a passed-out sorority girl with her bra stuffed with cash?

Wait, what have I done! Obviously, my genius has lead me to discover a cash cow that all the thousands of black hats over the last eight years have completely missed. Right now all over the world they’re smacking their foreheads and exclaiming, “Da! Of course! 30 million unprotected Macs! Why didn’t I think of that?”

Honestly, I try to use my superhuman intellect to do good but even I make mistakes. Now my brilliant economic insight will cause Mac OS X users to suffer a deluge of malware just like Windows users!

Either that or all the security experts are in fact largely wrong about Mac OS X security, and the blackhats don’t attack the Mac because they can’t. (Personally, I like the explanation that makes me a genius.)

And what about all the malware programmers in the world who don’t care about money? What if some do it out of challenge or out of political or personal motivation? In eight years has not one of them taken a successful run at Mac OS X? Not a one? A single one? Anyone? Bueller?

I keep coming back to large numbers. There are at a bare minimum tens of thousands of people world-wide with the programming skills necessary to exploit any one of the flaws in Mac OS X security. Eight years is a lifetime in the computer industry, and 30 million computers is a lot of computers no matter how many other computers are out there.

(Eight years) X (thousands of malevolent programmers) X (30+ million easily infected Macs) ! = ZERO viruses.

One of our variables is wrong.

All these numbers should have added up to not just one, but dozens or hundreds of successful self-propagating virus and worm variants attacking Macs. Mac OS X should at the very least be as plagued by viruses and worms as Mac OS Classic was. At the very, very least, Mac OS X should have a few dozen viruses and worms like Linux.

But zero, nada, zilch, bupkis?

When do we stop regurgitating the same explanations year after year and start thinking that maybe we’ve missed something? If not now, then do we wait another eight years to 2015? How about 2021? If by then Mac OS XX Quantum still doesn’t have a single virus can we conclude we’ve been wrong?

Nah. What kind of madness would that be? Why, if we start evaluating experts’ actual knowledge of an area by whether their predictions actually come true, that would lead to anarchy. I mean, do we really want to think like scientists?

No, the Mac OS X virus is out there lurking just like they’ve said all these years. I feel it in my bones.

Eight years ago, transitioning from the virus ridden Mac OS Classic to Mac OS X for me was like putting my foot up on the last stair step that wasn’t there. I didn’t know how to deal with the sudden lack of malware. Heck, fixing malware on Macs had helped pay my bills for many years. I thought the lack of viruses was the result of the OS being relatively new. Every day I expected to hear of the great Mac OS X viral outbreak…

… but it never came.

Now, eight years later, the ever predicted but never appearing Mac OS X viral gotterdammerung haunts me like the unseen monster of dread in a childhood nightmare. I’m always told by everyone that it’s right there, just out of sight in the shadows or knocking around inside the walls. For eight years, I have sat perched anxiously on the edge of my chair waiting for the boogie monster to jump out or at least the other shoe to drop. Now I’ve got vigilance fatigue, I need sleep and I’ve got splinters in my butt.

So, somebody out there, do me and the rest of all the Mac users a solid and please, please, please write a Mac OS X virus!

You don’t have to do anything evil with it, just release it and let spread. Really, it will make us all very happy. We can stop jumping at shadows and concentrate on real, solid threats for a change.

I’m begging here. Don’t make me suffer in suspense for another eight years.

Moody’s Investors Service fired off a warning yesterday that the triple A sovereign credit rating of the US would come under pressure unless economic growth was more robust than expected or tougher action was taken to tackle the country’s budget deficit.

and

Crucially, projections of the overall debt-to-GDP ratio for the US are seen as rising from 53 per cent in 2009 to 73 per cent in 2015 and 77 per cent by 2020. Moody’s, however, says this understates the US debt level.

“Using the general government measure, including state and local governments as well as the federal government, which is used internationally, this ratio would be well over 100 percent in 2020.”

I was struck by some of the things that Thomas said. He says the word “honesty” quite often. Also, he mentions “doing things right” a lot. I can really identify with both of those concepts.

One other thing that struck me was a concept he brought up of “things aren’t always as they seem”. I don’t want to spoil the whole video so I will leave it to you to see in what context he uses it in. It was a real eye opener and hit home with me.

I have ordered Justice Thomas’s book from Amazon (only $11 for hardcover) and look forward to posting a review here in a few weeks.

In general, I am always impressed when I hear the Supreme Court Justices speak and write. They seem to be the only ones above the fray as far as our governmental structure goes. Even though I disagree with the viewpoints of some of the justices, I really do respect them for the job they do.

I have no idea if the above is an oddity reported as a trend, or, in fact, is a trend. Interesting story either way. (Link thanks to commenter “elf”)

As late as 1997 a historian with some pretensions to veracity wrote (albeit tongue in cheek) that “complete objectivity about America is a characteristic only of God and Alexis de Tocqueville”. In truth, the young Frenchman’s methods were highly subjective. He was an aristocrat whose parents narrowly escaped the guillotine during the Reign of Terror in the French Revolution. So he came to America inclined to believe that government in the hands of the envious masses was far more dangerous than rule by disinterested aristocrats. Tocqueville was raised a Catholic, but exposure to Enlightenment philosophy hobbled his faith: “I believe, but I cannot practice”. So he came to America with little appreciation of what made religious people tick, especially Protestants of British stock. His classical education and training for a French legal career biased his mind toward deduction rather than empirical, historical thought. So he came to America with little sense of the profound experience that inspired the thirteen colonies to found the United States.

Tocqueville traveled for other motives:

Most tellingly, Tocqueville’s motive was didactic. He meant to argue that democracy either did not work in America or else could not be made to work back in France. What prompted his journey in the first place was the French Revolution of 1830 that overthrew the last Bourbon king and installed the “bourgeois monarchy” of Louis-Philippe. Its motto was juste milieu, meaning government prudently balanced between royal and popular sovereignty. But it was born of mob violence and its empowerment of the French middle class was bound to provoke demands for representation from the lower classes.

Tocqueville’s worldview bred some observational quirks:

Tocqueville revealed another damaging trait, which was to turn the opinions of others or his own first impressions into postulates. He took the New York chandler Peter Schermerhorn at his word when Schermerhorn insisted that there was no rancorous party spirit in America, that the Union was in no danger of dissolution, and that the “greatest blot on the national character was the avidity to get riche and to do it by any means whatever”. Tocqueville’s diary and letters reveal a plethora of instant judgments. Upon meeting the governor of New York in a humble boarding house, he concluded, “the greatest equality seems to reign, even among those who occupy very different positions in society.” Upon hearing Americans boast over their “very copious’ suppers he decided, “These people seem to me stinking with national conceit, it pierces through all their courtesy”. After one Sunday in Manhattan, he wrote, “Taken together,” the Americans “seem a religious people”. After one stroll down Broadway he agreed with [his friend and traveling companion Gustave de] Beaumont that fine arts in America “are still in their infancy”. After one conversation he decided, “Political passions here are only on the surface. The profound passion…is the acquisition of riches; and there are a thousand ways of acquiring them,” many of which involved “cupidity, fraud, and bad faith”. All those judgements were rendered during Tocqueville’s first week in the country even though, he confessed in a letter, his English was still laughably poor.

Tocqueville made curious scheduling decisions:

Tocqueville and Beaumont spend only forty-one weeks on American soil. Their inspections of Sing Sing and other prisons consumed eight weeks. Beaumont’s desire to study Indians around the Great Lakes cost five more weeks. A sentimental journey to French Quebec lasted ten days. Nor did they use the remaining six months wisely: they devoted to the entire South just one month.

Tocqueville continued his streak of “snap judgements”:

He decided that Philadelphians “knew only arithmetic” because of their grid of numbered streets, and that their women “practice and unrestrained coquetry” even though “tout de monde agrees in acknowledging that they stop there.” A Quaker merchant who had lived in New Orleans told him that northerners were active, intelligent, cold, and calculating, whereas southerners were open and lively but inclined to a hauteur and laziness. This primed Tocqueville to admire New England and to sense something “disorderly, revolutionary, passionate” about the South. On the shores of Lake Huron an old Catholic priest dismissed America’s 450-odd Protestant sects as rienists (”nothingarians“), wherefore Tocqueville deduced that all Americans must someday gravitate to natural religion or Catholicism! In Cincinnati he was told Ohio thrived while Kentucky languished on account of slavery in the latter. Accordingly,Tocqueville failed to notice the fantastic wealth of planters and merchants as he raced through the South on steamboats and stagecoaches.

In Washington City, the former president John Quincy Adams explained that whereas New England was founded “by a race of very enlightened and profoundly religious men,” the new western states were “populated by all the adventurers to be found in the Union, people who for the moste part were without principles or morality” or “who knew only the passion to get rich”. Had Tocqueville visited Saint Louis and talked with Senator Thomas Hart Benton, perhaps he would have realized how quickly the West was replicating the civilization beloved by Adams. He even squandered his entrée in the federal city by engaging in small talk with President Jackson and evening frivolities with his cabinet. In any event, Tocqueville though the rustic capital a sorry excuse for America’s Paris, and couldn’t wait to board ship for home. He admitted having spent less than half the time needed to get a true picture of the United States. “Yet I hope I have not wasted my time.”

McDougall argues that Tocqueville missed a lot about America:

Insofar as De la Democratie en Amerique made him famous he had not wasted his time. But the volumes were neither systematic nor thorough. Tocqueville failed to cover the country in terms of geography; never set foot in a college or factory; and met no authors, artists, or scientists. He studied no canals and failed to grasp how important government-private partnerships were in constructing them. He inspected no miliary or naval facilities, and witnessed no revivals or camp meetings. He heard complaints about Jackson, but missed the new two-party system then in gestation. He suspected the potential of railroads, but did not imagine the transport, energy, and industrial revolutions they would spark. It could even be said that the society he tried to describe in Democracy in America ceased to exist before the decade was out.

Not that the young Frenchman’s work was without insight:

Tocqueville deserves renown. He helped to pioneer sociology and posed questions of timeless relevance. What institutions, laws, and customs make a democracy? Are democratic ideals universal, and if so must democratic forms vary across nations and cultures? What social conventions and popular habits buttress or threaten democracy? Moreover, he got some things right. Although irony was not in his nature, he suspected democracy in America was a great truth maintained by a delicate balance of fictions. A brilliant young lawyer in Cincinnati gave him the clue. “We have carried ‘Democracy’ to its last limits,” the man said. “The right of voting is universal. Thence result, especially in our towns, some very bad elections.” The unworthy candidates won “by mingling with the populace, by base flattery, by drinking with it,” whereas distinguished men simply “can’t struggle struggle against the flood of public opinion.” Thus did the future chief justice Salmon P. Chase encourage Tocqueville to conclude that “the ablest men in the United States are rarely placed at the head of affairs”.

Yet, even with a scaffolding of “fiction”, democracy in America had important supports:

Last but not least, democracy in America was sustained by a breathtaking conformity imposed by public opinion shaped in turn by religion. Tocqueville learned that last point from a doctor in Baltimore. Don’t be misled, the doctor said, by separation of church and state and the seeming indifference to doctrine prevailing among Protestants. The great majority of Americans were fervent believers and quick to ostracize unbelief. Such social pressure mus create many hypocrites, Tocqueville replied. Yes, said the doctor, but “it prevents people’s speaking of it. Public opinion accomplishes with us what the Inquisition was never able to do.” If American men (not to say women) desired success in society, matrimony, business, or politics, they learned “to keep their mouths shut” about religious doubts. Tocqueville did not grimace; he marveled. So their secret was this. Americans were a people “seeking with almost equal eagerness material wealth and moral satisfaction; heaven in the world beyond, and well-being and liberty in this one.” They established a religious tolerance to which even Catholics conformed. But a dominant Protestant ethic regulated domestic life, especially through the influence of women, forging a public consensus that in turn regulated the state. To be sure, sects proliferated. But all conflated civil and religious liberty and all preached the same moral code. “Thus while the law permits the Americans to do what they please, religion prevents them from conceiving, and forbids them to commit, what is rash or unjust.”

Now Tocqueville knew why missionaries from New England were so anxious to proselytize the West. Since the liberty and equality Americans cherished were derived from religion, the future of their democracy hinged on saving the frontier from heathenism. “Despotism may govern without faith,” he wrote, “but liberty cannot…How is it possible that society should escape destruction if the moral tie is not strengthened in proportion as the political tie is relaxed? And what can be done with a people who are their own masters if they are not submissive to the Diety?” Evidently, the American answer was to help them believe, and if they still could not believe make them fake it. Thus were the spirits of religion and liberty, so often at war in Europe, “intimately united” in America. The separation of church and state empowered Protestant public opinion to make civil society a sort of church.

“The American,” Tocqueville quipped, “is the Englishman left to himself.”

Originally posted on the Committee of Public Safety.

Added Aqua in response to a comment on the Trump Tower. Obviously I took that photo in the summer because we haven’t had a nice sunny day like that for a while.

“This isn’t about a lie or a conspiracy or a deceit or a deception,” Mr. Blair said. “It’s a decision. And the decision I had to take was, given Saddam’s history, given his use of chemical weapons, given the over one million people whose deaths he had caused, given 10 years of breaking U.N. resolutions, could we take the risk of this man reconstituting his weapons program or is that a risk it is responsible to take?”

(See also.)

One good thing that came out of the Chicago real estate bubble…

Cross posted at LITGM

Natural gas has three main components, broadly speaking – 1) exploration / extraction 2) transportation 3) distribution. In general, natural gas is lightly regulated for exploration / extraction, has general principles for transportation (open access) and is pretty heavily regulated for distribution (local monopolies).

One critical difference between electricity and natural gas is that natural gas can be stored while electricity must be available at the specific time it is needed. Thus users and utilities can store natural gas and have it available for peak times, while the only way to meet peak load demand for electric utilities is to have units on line generating electricity during the hottest parts of the day or to “shed load” by pushing customers off-line to reduce demand.

Both electricity and natural gas are mostly consumed using North American (including Canadian) resources. While OPEC maintains an oil cartel, the fuel used to generate electricity (coal, nuclear fuel, gas) mostly comes from North America. While these resources can be transported across the ocean (for instance Japan imports virtually all of what it needs to fuel electricity) in the USA (and Canada) we have most of what we need for these industries. Until recently there wasn’t a practical way to bring in natural gas from regions that weren’t connected by pipeline, so we were bound to use North American resources.

Exploration & Extraction

The exploration and extraction of natural gas is a mostly unregulated industry (compared to electrical utilities, at least). The biggest constraint was that vast swathes of the US were placed off-limits for natural gas drilling due to environmental concerns. In the 1970’s, a moratorium was placed on new natural gas connections because it appeared that the US would run out of natural gas. However, improvements in extraction capabilities resolved that situation and wildcatters responded to higher prices by finding additional supplies.

Recently it looked as if we were going to run out of natural gas again. Futures prices on natural gas, which were around $2 / unit in the 1990’s, spiked to as high as $14 / unit in the winters of 2006-8 (prices are seasonal and typically move with the weather) but now are below $4 / unit due to the fact that massive supplies of natural gas have been located in shale formations as drillers redoubled their efforts in light of these high prices.

The natural gas industry, as we can see above, is able to use market forces to respond to price signals. Drillers used innovation and new technology to find new supplies which in turn brought down the high prices. If the extraction / exploration industries were heavily regulated and monopolized (like power generation), it is likely that they would just have utilized the high prices as an opportunity to reap large profits rather than to expand supply.

Transportation

Regulation of natural gas was profoundly impacted by FERC order 636 in 1992. At that point, the pipelines were forced to open their capacity to multiple bidders, including “end use customers” who were able to buy gas directly (through brokers) and have it transported to them directly. This order is generally credited with de-regulating the pipeline industry, once their “stranded costs” were recovered.

While there are many difficulties in building new pipelines from an environmental and cost perspective, generally the United States natural gas industry has been able to bring new pipeline capacity on line. This is different than the electricity transmission industry, where new capacity additions have been relatively minuscule. One big reason is financing – the pipeline companies can get end users to “subscribe” to pipeline capacity to fund development while there aren’t effective ways to “monetize” demand for transmission capacity in the still heavily regulated electricity sector. In short, a new electrical transmission line benefits everyone in terms of access to lower prices and improves reliability (because the grid is interconnected and load needs to be spread) but there isn’t an easy way to pay for these benefits.

Another improvement in transport is Liquified Natural Gas, or LNG. Cooling and compressing natural gas allows it to be transported on special tankers which can carry it across the ocean and into new markets. Many nations (such as oil producing nations) are awash in natural gas (sometimes they just burn it off as they extract oil) but they don’t have a way to get it to countries that can utilize it (such as the United States). LNG offers a way to do this, assuming you have a pipeline leading to the port and the LNG facility is built (they cost billions to build) and also that the LNG facility at the end country is interconnected with a pipeline that has available capacity. Here is a link to the physical location and capacity for the nine LNG terminals in North America. As you can see, they are concentrated on the gulf coast of the United States. The US has added LNG capacity, which is great because it allows for price competition from overseas producers and also (theoretically) allows US producers to ship their gas overseas, as well.

Alaska has huge amounts of natural gas. For years they have been considering how to get that gas to the “lower 48″ where there is high demand. This article from the WSJ titled “Latest Risk to Alaska Gas Pipeline: More Gas” (which is where the shale graphic above also came from) describes the effort to build and finance the pipeline. The two options are 1) build a pipeline to the coast and an LNG terminal which they could be exported, costing $26B 2) build a pipeline through Canada all the way to the lower 48 at a cost of $41B. The pipeline would take a decade to build – meaning that they would need a forecast of natural gas prices in the lower 48 in 2020 to finance this effort.

However, the shale gas boom has blown a huge hole in the economics of this pipeline. It is much harder to justify this giant investment at $4 / unit gas than at $14 / unit gas. Per the article:

“I think we’ve probably cost ourselves a few years, which allowed the shale plays to come in… we should have build this pipeline four years ago”

This is from the perspective of the State of Alaska – because once the pipeline is built the cost of extraction is low and the Alaskan natural gas would sell at the market price in the lower 48 (whatever that turned out to be) – but with the lower prices, you can’t finance this new pipeline at all.

Distribution:

Distribution is the least important element of the natural gas industry. This function is your local pipeline company, that has a monopoly on pipes because it doesn’t make sense to have 2 companies digging up streets and having parallel infrastructures (like it does for telecom). The local company pays for gas and passes it on to end customers, and pays the transportation costs (negotiated per FERC rules on open access) as well. They also finance the local pipeline distribution infrastructure. While you may pay a large natural gas bill – take a look at it – only the portion for local distribution and customer service actually goes to the local distribution company; the rest pays other elements of the supply chain (extraction and transportation).

Innovation has been pretty low in this sector of the industry, but really there isn’t a lot to do. When natural gas was at $14 / unit these utilities were feeling the brunt of customer anger, but now their situation is much more low-key. At $14 / unit there was a lot of interest in conservation and perhaps fuel-switching or use of other technologies (i.e. solar to heat water instead of natural gas) but this interest has waned lately at $4 / unit. Electrical utilities are spending billions on time-of-use meters but natural gas doesn’t have quite the same time-of-use issue because they can store capacities locally and inject them into the system at peak times (up to system capacities). Since the natural gas infrastructure is largely underground it is less subject to storm damage and other sources of outage when compared to the electrical industry, which suffers mightily from these sorts of outages.

Natural Gas and Electricity:

The falling prices of natural gas are having a profound impact on the electrical generation industry. At $4 / unit, natural gas is competitive with less efficient coal units and blows the renewables out of the water (except for hydro, of course, but you can’t build any more hydro in the USA due to environmental concerns). Natural gas is cleaner than coal and easy to construct and site, so it becomes the de-facto solution to our looming energy generation capacity crunch, as well. In other blog posts I predicted that new coal and nuclear plants were a figment of the media’s imagination for a variety of reasons, but the plentiful supply and low price of natural gas (due to these shale fields) is another stake in the heart (if one was needed) to any designs on new coal or nuclear plants.

The reaction of our non-regulated natural gas industry (exploration) to high prices and how they basically “solved” our energy problems (and will solve our electricity issues, per above) should be a text book example studied in all schools. This is what happens when markets are allowed to work as they should, and innovation responds to high prices as a market opportunity, in turn reducing prices down towards their historical norms. It didn’t come through MORE regulation, or jaw-boning rich capitalists, or NY Times op-ed pieces – it came through free markets and the belief in human innovation.

We got it half right, at least. For more info if you are interested go to this site, naturalgas.org, which seemed to have reliable information and links to other useful information.

Cross posted at LITGM

Sonic Boom falls within the genre of the quick-reading airport business book. Using a series of places as exemplars (Shenzhen, Waltham MA, Yakutsk, Erie PA, etc.), the author shows how a globalized economy can create prosperity from swampland, and restore prosperity to Rust-Belt and 19th century industrial hubs. The writing is crisp and smooth. The manner is often witty, and occasionally wise-ass. It’s anything but turgid … which is a great relief from many of the “big think” books which come and go on the bestseller lists.

Easterbrook’s central theme is that globalization is a net plus for the world, but it also creates accelerating levels of change and uncertainty for all participants. And he feels that both trends will continue. He makes the effort (in distinction to the MSM) to uncover the positive changes to mortality, health, and prosperity for the world’s people in the past century and even more in the past two decades since the collapse of the Soviet Union. The case for “uncertainty,” on the other hand, could hardly have been made more emphatically than by the economic and political events of the last 18 months. And in line with his earlier book, The Progress Paradox: How Life Gets Better While People Feel Worse, increased quality of life doesn’t necessarily translate to more personal happiness.

For readers of this blog, this may all seem old hat. Free markets, free trade, “Creative destruction,” etc. etc. Readers more interested in the nuts and bolts explanation of globalization’s success might better refer to Martin Wolf’s Why Globalization Works but Easterbrook’s book might be a fine option as a gift for teenagers or for friends whose “to hell in a handbasket” experience of modern life is leaving them at loose ends.

The optimistic (if cautionary) tone of the book is compromised a bit, to my mind, by Mr. Easterbrook’s concluding chapters. His enthusiasm for better health care and education as a foundation for further American prosperity is admirable. Betraying his Brookings Institution background, however, his solutions for more equitable distribution of the benefits of these two industries harken to an earlier era and betray none of the optimism and “silver lining” perspective of earlier chapters.

Education and heath-care costs are increasing at a rate that out-paces inflation. While Easterbrook is methodical in his earlier explanation of how people leave the farms for factories, and then for service industry and white-collar work … he doesn’t seem to spot the same pattern in the allocation of individual or family budgets over the last century.

We are no longer an agricultural society. Nor one based around industrial factories. For a brief shining moment, Western prosperity was so dominant, and medicine’s successes and failures were so starkly drawn (in favour of increased life expectancy at modest cost), that the majority of people could aspire for suburban comfort and prosperity while paying diminishing attention to the costs of all else: Not to food, not to heat, not to clothing, not to tuition or doctor’s bills. They fulfilled their aspirations by dedicating the majority of middle-class family budgets to vehicles, real estate, and vacations. Such priorities may no longer be sustainable. Making an adjustment in 21st century dreams may be far more wrenching than for the generation that moved off the farms or saw the de-industrialization of America.

Health care is becoming increasingly elaborate and increasingly engages the most highly-skilled members of our society. Demand is unlimited (for better, more comprehensive, more insightful care) and supply is necessarily limited. The pressure for cost increases (absolute and relative to other household expenses) is therefore relentless. Similarly with education, elite universities have switched to being prestige engines … effectively a zero-sum game. Frank and Cook’s The Winner-Take-All Society: Why the Few at the Top Get So Much More Than the Rest of Us is a great review of this process in the educational system. As a result, education at the undergraduate level isn’t delivering a knowledge product so much as a social milieu. And that, again, is costed based on highest bidder for service. Even at state schools, the elaborating demands for professional certification necessitate larger budgets and larger fees … not to mention pressure for successful football teams.

Fewer kids, diminished housing and vacation dreams, bigger education and health care bills. I’m not sure how that cycle gets broken at any point in our lifetimes. We no longer dream of forty acres and a mule. Nor of a lush pension after 35 years on the shop floor. We dream nonetheless, and markets respond accordingly. McMansions and tropical beaches are currently a necessity of the good life but “nice-to-haves” and “must-haves” tend to shift over time.

Barring Mr. Easterbrook’s Big Rock Candy Mountain digressions (for which he can’t really be held accountable since they are my hobbyhorses), Sonic Boom is an upbeat, well-written book that explains the impact and trends associated with globalization in plain language. Recommended for readers seeking a quick introduction to the subject.

The specific elements of the investing plan are as follows:
- Interactive brokers can make margin loans at 1.25% annual interest. This LOW rate of interest is made possible by the country’s current super-low rate policy
- Some stocks are offering dividends as high as 5%. In the current low interest rate environment (you are likely to get 2% on CD’s & government paper, and almost nothing on your money market and bank deposits), that 5% rate seems very enticing, especially since dividends are taxed more favorably on individuals than interest income (dividends are as low as a 15% rate, while interest income is as high as 35%+)
- Interactive brokers will offer you LEVERAGE. By leverage, this means that they will LOAN you more money than you have in your brokerage account so that you can invest and magnify your returns, either UP or DOWN

Using this method, the specific “napkin” offer is as follows:

- You put up $100,000 of money in a brokerage account
- Using that money as collateral, you borrow $400,000, or 4X leverage
- Now you have $500,000 in your account to invest with
- Pick 5 stocks yielding 5% or more, and invest $100,000 in each stock
- Your stocks should then bring in ($500,000 * 5%) = $25,000 / year in income
- The interest on your $400,000 that you borrowed from Interactive Brokers costs you ($400,000 * 1.25%) = $5000 / year in expenses
- Your net income is $25,000 – $5000 = $20,000 / year
- $20,000 / year in income on an investment of $100,000 is a 20% annual yield, at a time when you can only earn maybe 2% risk free. This is a substantial return

The first thing people would ask is WHY Interactive Brokers would lend out $400,000 on a $100,000 investment at such a low rate? From a margin account perspective, Interactive Brokers doesn’t take much risk. Let’s say the value of all the stocks fall 10%. In this model, your portfolio value has dropped from $500,000 to $450,000. While your equity (investment) has shrunk from $100,000 to only $50,000, they haven’t taken a loss yet, because they can step in and liquidate your portfolio in the open market, take back their $400,000 (including the accrued interest to date plus any fees they want to charge), and hand you back your remaining cash. As long as they “pull the trigger” to liquidate the positions before it reaches the $400,000 mark (or nearby, so that they get their interest and fees), they will be made whole.

This example indicates the “down side” of leverage. When the markets go against you, and your equity component is but a sliver of your total portfolio, even small market moves can kill you. At some level this is what caused the banking crisis in late 2008; the large institutions had little equity capital and super high levels of debt (more than 30X their equity available, depending on what you count as equity capital), meaning that even a small crisis of confidence or repayment risk started to topple the entire structure. You might ask WHY these banks, whose depositors are guaranteed by the US government (FDIC) and who are so central to our financial system that they cannot be allowed to fail could leverage up so much, but that is grist for another post (failed regulation).

One question that I started asking as I stared at the napkin – how many quality companies are there out in the market that pay greater than 5% dividend yields? I am looking for companies with a reasonably strong share price and a history of paying high dividends, not companies that paid a modest dividend but whose stock price has fallen so far that it SEEMS like they offer a high dividend (these are unstable dividend payers who likely will lower their dividend at some point in the future).

Using the cool Google Finance stock screener, I put in a criteria of stocks with a greater than 5% yield, more than $1B in market cap, and that they couldn’t have had a 52 week return of worse than -20% (to screen out ones that have a big dividend yield because their price has been plummeting). I was surprised that there were a number of major companies offering such high yields, including:

- AT&T (T) at 6.62%
- Altria (MO) at 6.9%
- Southern Company (SO) at 5.38%
- Bristol Myers Squibb (BMY) at 5.2%

So at least there were a number of reasonable candidates for this sort of analysis. You can see how the value of a company paying out dividends this high would rise in our current minuscule interest rate environment. On a personal note, when an ETF specializing in dividend paying stocks, DVY, came out about 5 years ago – I jumped in right away, figuring that it would be a good play with the reduction in taxes on dividend payments to 15%. However, this fund essentially loaded up on financial firms, which were viewed as reliable dividend payers, and was socked during the financial meltdown when many of the components either vanished or were severely punished.

So far the “back of the napkin” has checked out – the real issue, however, is that we are mixing “apples and oranges” by seeking yield with a volatile assets. The 5 stocks (in this example) could easily drop by 10% in a narrow range of time, essentially making Interactive Brokers enact a margin call (they aren’t going to wait until you have zero equity in your account, at that point you’d be levered up 9 to 1). What you are betting on is that you can hold these assets and that they’ll trade in a narrow range (or up, a situation that we’ll get to next) for a reasonable amount of time, in fact at least a year or so in order to obtain that yield.

The flip side is that if stock prices go UP, you will have a bonanza on your hands. In addition to the 20% yield that you’d earn if you were able to hold for a year, you’d get gains on both your money and the money you borrowed. If stocks went up 10%, your gain would be ($550,000 – $400,000 borrowed money – $100,000 original investment) = $50,000 on a $100,000 investment, or a return of 50% (on top of the 20% yield you’d receive). This is the “magic” of leverage – I saw an analysis one time that compared the S&P 500 return against hedge funds and if you levered up the S&P 500 with this sort of margin you’d receive returns that would give the hedge funds a run for their money (they almost all use leverage, too).

The odds that this basket of stocks will decline by 10% or more, causing IB to liquidate your holdings to pay off the margin call, is pretty high. The yield play is really secondary to how long that you can avoid that sort of a down turn. On the other side, gains are very beneficial in this model. It probably doesn’t make sense to mix yield with leverage to this degree, unless you are a professional investor and this is only a small part of your broader portfolio.

The low interest rates that we have today encourage risk taking because the government has set the rates so low. With low rates, virtually any business model with any sort of return looks at least feasible on a napkin.

Personally, I was pretty impressed by the number of solid-looking companies paying such high dividends. Even with zero leverage, a 5% return is great, especially since the effective tax rate is 15% on these dividends (for now, at least, until the tax cuts are rescinded which is likely in 2011). The issue is that even a small market downturn will make that 5% return moot, if these stocks fall harder than a general corporate issue.

This ad certainly did make me think about a lot of things; the power of leverage; the ability of a low interest rate environment to make almost any business idea sound good; and what is driving these companies to such a high dividend payout ratio.

Cross posted at LITGM and Trust Funds for Kids

‘Twas the soul of Judas Iscariot,
Strange, and sad, and tall,
Stood all alone at dead of night
Before a lighted hall.

‘Twas the Bridegroom sat at the table-head,
And the lights burnt bright and clear —
‘Oh, who is that,’ the Bridegroom said,
‘Whose weary feet I hear?’

The complete poem is here.

Not being a Victorian, some of the words are unfamiliar, and not being a Christian, I’m not sure I understand all the symbolism…but what a vivid, beautiful, powerful poem.

This is no way to run a state. This article in the Chicago Tribune describes the annual ritual:

The CTA made an offer today that its labor unions could refuse, and they quickly did: Give back a 3.5 percent pay raise this year in return for reducing employee layoffs and major cuts in bus and rail service that are set to begin Feb. 7.

The standoff threatens to cost 1,067 union and 100 nonunion employees their jobs as the CTA whittles away at a $300 million budget deficit that is caused mainly by tax-revenue declines linked to the recession.

But the public stands to feel much of the pain in less than three weeks when there will be longer waits between buses on 119 routes, 41 bus routes will have shorter hours and nine express bus routes will be eliminated.

Note – the unions aren’t being asked for cuts – they are being asked to give up scheduled pay raises. But of course they are balking at this; after all, why concede anything, when the politicians back down every time and just issue debt or raise taxes to cover it anyways?

No one knows how this will end; in the past the state always stepped in to throw more money at it, or come up with some sort of accounting or borrowing gimmick as a temporary fix, but our financial situation is getting more and more dire by the day.

For a while I was thinking of setting up a site dedicated to Illinois’ fiscal woes, but someone beat me to it.

IllinoisIsBroke.com describes the state of our state, which is of course very bad. This site puts most of the blame on our broken and underfunded pension system, which is a prime culprit.

It will be interesting to see how the game of chicken plays out this year since our funding options are drying up; some day this game has to end with the draconian cuts being implemented to wake people up to the situation.

Cross posted at LITGM

Adam Andrzejewski is the only person running for the Republican nomination for Governor of Illinois who presents any hope of turning around the dire decline we are facing.

I had the pleasure of meeting Adam recently, and he confirmed the positive impression I got from his website. He is very smart, aware of the gravity of the problems facing Illinois, and has some concrete plans to change the way business is done here.

I was most impressed with his proposals to take on the culture of corruption that has made the once-great State of Illinois a national and even global joke.

Take a look at the issues pages on Adam’s site. Then compare the specifics he offers with, for example, the nonexistent proposals on Jim Ryan’s site, or the comparatively vague proposals of the long-time insider, and purported front-runner, Andy McKenna.

The insiders in both parties are so tightly wound in Illinois that they are referred to as “The Combine.” The GOP serves as nothing more than the junior partners in a combined Machine, and appears to have no principled differences whatsoever from the Democrats.

Adam’s candidacy presents a chance to move toward a genuine two-party political process in Illinois, and to start getting the financial mess under control.

Let me also address the cynical response that he “can’t win.” There is a large field, turnout will probably not be huge, and it won’t take much for one of the GOP candidates to pull ahead. So, vote for the best guy.

Plus, as Lech Walesa — an Adam supporter — put it: “Nobody gave us a chance to win over the communists. Nobody. And we proved them wrong.” The Combine can also be beaten.

Please take a look at Adam’s site if you are an Illinois voter.

As Michael Ledeen observes: This fear is extremely broad-based. It is not limited to social class nor to domestic or foreign policies. Banks are not lending, companies are not hiring, because they are afraid of what Obama will do next.

It is very clear that Obama/Pelosi/Reid view America primarily as a playing field for a neo-Hobbesian struggle of group against group. And the winning and losing groups at any given moment are determined not only by the elements of the “progressive” creed, but also by the social prejudices of the the leading promulgators of that creed…and by the political exigencies of any given moment.

If you are a union worker in a well-paid industry, for example, you probably thought you were in good shape with the Obama administration…

Yeah, a pro-union President, that’s nice…But wait…here’s a proposal to put a special tax on our contractual health care benefits! That’s not an expense we were counting on! Oh…okay, now they’ve dropped that idea. Hope they don’t change their minds again.

Which they might, if the political tradeoffs point in that direction.

If you’re an investment banker (a very significant proportion of whom supported Obama), you probably felt that underneath the populist rhetoric, Obama and his advisors held you in a lot higher regard than he did the factory workers and small-town residents (remember those “bitter clingers?”) and ditto, that he had a lot more respect for you with your Ivy League MBA than he had for people with state college degrees who are running manufacturing companies. Almost certainly true…but it doesn’t mean that he won’t sacrifice your interests for a small boost in the polls. On the other hand, he may decide that Wall Street contributions matter even more than next month’s polls, and throw you another bailout instead of throwing you under the bus. Either way, your future depends more and more on Obama’s attitude toward you and less and less on your own business ability.

If you’re a small businessperson, you’ve heard a lot of talk about how valued you are and how much the government is going to help you. But you have friends whose businesses have been crippled and even destroyed by ill-thought-out regulations…like the dreadful Consumer Product Safety Improvement Act…and you know that the people running Congress don’t care enough to make responsible adjustments. So you wonder when your turn to be sacrificed will come up.

The reality is that Obama, with the complicity of Pelosi and Reid, is in the process of creating an economy and a society in which the primary factor affecting the success of every individual and every business is the attitude of the federal government toward that individual or business. See, for example, this: Remember when we used to care about P/E ratios? Now we’re all political science majors. And don’t kid yourself that this explosive expansion of the political realm affects just corporations and Wall Street players. It will, if allowed to continue, affect and increasingly dominate the lives every of every individual in the country.

A commenter at the Michael Ledeen link quotes Thomas Jefferson: “When the people fear their government there is tyranny. When government fears the people there is liberty.” We now have an environment in which increasing numbers of people have very valid reasons to fear what their government will do to them…and in which the attitude of government toward the majority of the people is, increasingly, one of contempt.

In a previous post, I quoted Benjamin Franklin:

There are two passions which have a powerful influence in the affairs of men. These are ambition and avarice—the love of power and the love of money. Separately, each of these has great force in prompting men to action; but, when united in view of the same object, they have, in many minds, the most violent effects.

The whole direction of the country, under the direction of Obama/Pelosi/Reid, is toward the uniting of ambitiona and avarice in precisely the manner feared by Franklin. When moneymaking is principally accomplished by grabbing hold of the power of the state and using it to club rivals over the heard, it is no longer a mutually-beneficial positive-sum game. The uniting of ambition and avarice erodes the spirit of a country as well as its productivity.

We are in the hands of a group of people who for the most part know nothing about business or about any form of economically-productive activity, who know nothing about technology, who wilfully fail to understand the seriousness of the threats of international terrorism and of rogue regimes, whose offices and/or credentials have given them a total lack of humility, and who–despite the aforesaid credentials–are mostly very shallowly educated. There is plenty of reason for fear.