Monday, December 29, 2008

Calvin and Hobbes on Detroit

I have nothing but respect and admiration for the genius of Trey Parker and Matt Stone. Here is an example of a different, albeit related, medium - the cartoon - imbued with pure, prescient satiric brilliance.

Sunday, December 28, 2008

Paul Krugman's Logic on Spending

Paul Krugman is the latest reason I think the Nobel Prizes are worthless (in addition to all the other Peace and Literature Nobel Prizes). Quote: "Here’s how I see it: the opponents of a strong stimulus plan don’t really have an alternative to offer."

I was tempted to call this drivel, but, on second thought, it is not. It is a sinister attempt to shift the burden of proof on one's opponents, and that almost reduces me to unbridled profanity, but I am trying to behave. A decent analogy I can think of would go something like this: someone holds a group of people hostage and justifies killing the guy in the wheelchair by pointing out that he asked everyone to pick someone else, and nobody did. No, Krugman, you bleeping idiot, I cannot offer you an alternative in your sick parallel universe, where my money is yours. In this one, here's an alternative: put down the bleeping spending gun, and begin to sort the bodies from the last few blasts.

Meanwhile, I am actively practicing
Ricardian equivalence, namely, saving more than I want to, because I know that when this spending circlejerk is over, my taxes will go up, and I do not want to be poor. I do wonder how many others do the same, and to what extent it explains the wavering spending - and not only in the US.

Note to self: investigate availability and (if available) yields and tax treatment of leveraged municipal bond ETF's.

Monday, December 22, 2008

Melanie Reid, with all due complete lack of respect, deserves a smack-around for this shining piece of intellectual and linguistic garbage

Quote: "What we must do, I suggest, is introduce a new concept of universal compulsory volunteering."

Instead of pointing out the obvious idiocy, I'll just counter with a quote from William Graham Sumner's essay "The Forgotten Man": "The type and formula of most schemes of philanthropy or humanitarianism is this: A and B put their heads together to decide what C shall be made to do for D."

Sunday, December 21, 2008

More on Zimbabwe

A couple of new gems from/about my favorite basket case - Zimbabwe. This article (HT: Robert Davies), points out one way Mugabe's regime is financing itself for now - blood diamonds. I was not aware of that resource for Zimbabwe, as it it is mostly associated with Siera Leone. Yet, it seems that those folks cannot make money even from diamonds, as it does not appear to occur to them to leave some profit for the "diamond" goose they banished - the British company African Consolidate Resources.

Here's what happens when you let a revolutionary loose -
people find alternative uses for currency. One would hope, for the sake of the Zimbabwean people, that those bank notes are soft. And probably these guys should run the Zimbabwean central bank - they at least know about crappy ass-wipes and what is takes to flush them.

Sunday, December 14, 2008

Barroso on Who Matters

Jose Manuel Barroso, the President of the European Commission, while discussing his wet dream of the UK joining the Euro-zone for RTL radio, let slip this little gem: "I know that the majority in Britain are still opposed, but there is a period of consideration under way and the people who matter in Britain are currently thinking about it."

This arrogant piece of dirt makes no bones about his view of regular people. It could be that the reason is that he was not elected in an election, but rather appointed by the European Parli
ament. It must annoy him to no end that in the UK there is still at least some semblance of that quaint notion that, as Nigel Farage, the leader of the UK Independence Party put it, "The people who matter in Britain are the people, not the professional political class that Barroso is himself a member of."

As a bonus, notice the revealing "still" in his statement. Unfortunately, he is probably right to be smugly confident. The usual will follow - referendum upon referendum upon referendum ad nauseam, with abundant dramatic sighing on behalf of Brussels twits in between, until one actually succeeds, and then the referenda will magically cease. You have to give Barroso credit for sensing it is an opportune time to start the referenda barrage, but his arrogance and ineptitude at hiding it are pretty amazing.

On a side note, where Barroso is failing politically, Gordon Brown is doing his very best to kill the British pound economically. Chronicle of a death foretold, indeed.

Update: on the recurring referenda, here's a little
something I found. These folks really do not take "No, thank you!" for an answer. And they will not take "Which part of "No, thank you!" did you not understand? No frigging way, now bugger off!" for an answer either.

Saturday, December 13, 2008

UAW's Contribution to Detroit's Demise

If you have a few years to waste, here's some reading I would not recommend - hat tip to J. Justin Wilson. There is only one organizational form in which any organization can manage this ludicrous level or regulation - and let's not forget that Detroit's Not-So-Big-Anymore Three do take a lot of cues from Congress, EPA, and various other regulators. It turns into a bureaucracy - an encompassing, burdensome, cumbersome, stifling bureaucracy. This organizational form can work very well in times of stability; it does, however, have one remarkable characteristic - of all organizational forms, it's the one most remarkably resistant and hostile to change. It reacts to a dynamic environment by ossifying, and to a stable environment by growing.

Modern economy, however, is anything but stable. If one looks for a predictable, linear career path, the place to look is not in business, but in academia or in government. Globalization has hit automakers with unique opportunities (a global market - and they seem to make great (profitable) use of it outside the US), but also unique challenges - competition by nimble, flexible, smart competitors. As has been noted by wise people, in globalization, it's not the big that eat the small, it's the fast that eat the slow. And why are the Detroit Three slow? Why, that pile of 2200+ pages might give some clue. We know from basic economics that any firm must combine labor, capital, and innovation in some production function in order to operate. Innovation in Detroit is too big of a subject to even begin to tackle, but it also happens to be predicated (in this case) on labor, so
let's try to use the magic of Google to see what the UAW - Detroit's legally protected labor partner - actually does:

"UAW apologizes" - 1 hit
"UAW cooperates" - 72 hits
"UAW admits" - 87 hits
"UAW works with" - 131 hits
"UAW proposes" - 305 hits
Last but not least: "UAW takes the blame" - 1 hit (and it's from a blog, in the context of "UAW gets blamed", not "UAW accepts blame")

Let's compare with these:

"UAW sues" - 336 hits
"UAW blames" - 578 hits
"UAW cries foul" - 985 hits
"UAW threatens" - 1440 hits
"UAW lashes out" - 1470 hits
"UAW demands" - 2470 hits
"UAW rejects" - 2540 hits
"UAW warns" - 3160 hits
"UAW strikes" - 9100 hits

With a partner like this, who needs competitors?

I called a "sell" on GM back when it was trading at about $19/share (before Carpe Noctem was started - so only a few colleagues can testify to this), and held that call steadfastly when the stock rose well over $30/share. I am tempted to close this trade now, for a handsome profit, and not because I do not see GM's remaining equity wiped out in the near future, but because there seem to be better uses for this capital at this point. If you want any exposure to automanufacturers at this point, a value volatility play should be "long Ford - short GM".

Monday, December 8, 2008

Two interesting articles

Here is a very good summary of an even better paper by Lawrence H. White. And here is an interesting riposte by Brad DeLong.

I think Mr. White nailed it. Mr. DeLong's article is great food for thought, although I find it hard to evaluate many of his conclusions, since he does not provide a source for many of the numbers he uses, and others are admittedly his own estimates. One of his claims, however, namely: "We have had little or no bad news about resource constraints, technological opportunities, or political arrangements.", does not pass my smell test.

We have had those in the USA, where the most voracious consumers in the world realized that real estate prices can indeed decline; that treating your biggest and most leveraged asset - your home - as a credit card (often with a variable interest rate) may not be sustainable; and that some people - no matter what the politically correct doctrine dictates - do not make responsible home owners.

We have had those in China, where the government might finally be coming to grips with the fact that you can only build so many roads and airports that hardly anyone uses, while in the process majorly ticking off people who think they own the land you build on, and sending a lot of them in the cities to build impressive buildings - albeit occupied at 10% because of high real estate prices. Furthermore, China may be realizing that it piggybacked on the US consumer. Now, the US consumer will not turn into a Chinese saver overnight, but he/she can cut down on spending, and that translates into tens of thousands of export-oriented factories closing in China, with all the ensuing economic and social disruption.

We have had those in the OPEC countries, Canada, Australia, and Russia, where the realization might be taking place that China (and even the USA) may not continue to gobble oil, coal, industrial metals, and cement at those dizzying rates.

In a nutshell, I think Mr. DeLong is talking/writing out of experience gained in a much less globalized economy. It used to be that the wealth of the US consumer mattered some, but not too much, to many people all over the globe. These days, many governments will need to learn that if you depend on America's consumption, you will prosper disproportionately (in relative terms to your initial condition) when America does, but you will also suffer disproportionately when America catches a cold - and therefore, you might want to grow a domestic consumer class. Globalization acts as a feedback loop too - distress abroad reverberates this much more strongly at home. If I were Mr. DeLong, I'd revisit some assumptions; when a model gives you output that is garbage, only too often it turns out you have fed it garbage.

Finally, for further intellectual tittilation, look at this
article by Mark Buchanan. It just may (or it may NOT) be smart to buckle up for a permanent volatility shift.

Saturday, December 6, 2008

Understanding Bernanke

At a November 8, 2002 conference to honor Milton Friedman's 90th birthday, Ben Bernanke said: "I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again." Or... will we?

Mr. Bernanke has an academic and political career to think about, and thus will never emphasize some of the less politically correct points about the Great Depression.
He seems to have learned the wrong lessons from the Depression and from Milton Friedman. Here is an excellent essay by Lawrence W. Reed, which gives a great perpective on the business climate FDR created. I have taken the liberty to extract some points.

Herbert Hoover raised top marginal tax rate from 24 to 63%. FDR raised it further to 79%, then later to 90%. According to economic historian Burton Folsom, in 1941, Roosevelt proposed 99.5% marginal tax rate on all incomes over $100,000, and when questioned by an adviser, replied "Why not?". He followed this with an executive order to tax all income over $25,000 at 100%. He also lowered the personal exemption to $600, and hence most US households paid income tax for the first time. Congress rescinded the 100% tax, but went along with the exemption reduction. Furthermore, FDR also tried
in 1937 to "pack" the Supreme Court with a proposal to allow the president to appoint an additional justice to the Court for every sitting justice who had reached the age of 70 and did not retire. This failed in Congress, but until it was struck down, added further uncertainty in the investment climate. In his private diary, FDR’s very own Treasury Secretary, Henry Morgenthau, wrote: "We have tried spending money. We are spending more than we have ever spent before and it does not work. . . . We have never made good on our promises. . . . I say after eight years of this Administration we have just as much unemployment as when we started . . . . and an enormous debt to boot!"

Now back to present day, with Mr. Bernanke at the helm of monetary policy. As any macroeconomist, he surely looks at the MV=PQ identity. The perennial clash between monetarists and Keynesians focuses on whether V is stable (monetarists say more-or-less yes, and Keynesians more-or-less no), and whether Q is exogenous (monetairsts say Q is determined by "
land, labor, capital, and enterprise", and Keynesians say M can influence Q significanly). Bernanke is observing a credit crunch, i.e. V is tanking. Money is not moving. Even banks with ample liquidity are not lending. His response? Look here. But maybe, just maybe, he ought to re-visit the underlying assumptions for MV=PQ. Among those (not an exhaustive list):
1) Money supply is exogenous.
Well, yes, until is is not. When banks do not lend at any rate (and interests rates cannot get much lower), clearly the bank multiplier is not working right, and the Fed is shooting at a moving target - and one moving way too fast for their lousy shooting skill.
The mechanism for injecting money into the economy is not that important in the long run.
Well, no, until it is. The line for federal handouts/bailouts is getting longer by the week - banks, insurance companies, car manufacturers, states/municipalities...

Paulson and Co. let Lehman go under, which sent a chill down the spine of every financial professional in the world. Confidence in one's counterparty's solvency was shattered, and thus V tanked. Everyone and their grandmother is holding on to any cash they have, and will not lend at any rate. Now, I actually think it was right to let Lehman fail, but I also think many others should, and Bernanke is hellbent on not letting them, cost upon the taxpayers and their descendants be damned.

But, let's give Mr. Bernanke the benefit of doubt. Let's say he is desperately working on his part of the MV=PQ, and hoping the government has wisened up, and will not repeat the policy blunders from that 30's. This is probably naive, but at least somewhat defensible. Then logically he should be hoping to be able to mop up this monstrous amount of liquidity pumped into the system when things begin to pick up. When will that be? My pessimistic estimate: just about the time Mr. Obama will be thinking about his re-election prospects. And thus, the Obama administration will probably work feverishly to counter Bernanke's (more likely, his successor's) tightening efforts, which will probably be "too little too late" anyway.

My forecast: inflation will spike around late 2009 to early 2010, and (better, more likely, but still bad scenario) the Fed's efforts to contain it will kill a nascent recovery, or (worse scenario) the Fed will do little, and inflation will rampage at a level the US has not seen yet. I hope I am wrong, but I will be properly positioned short T-bonds and long gold (or any better inflation hedge I may think of).

Tuesday, December 2, 2008

Scrooge McDuck's Wisdom

Funny cartoon, at about the right level for the average politician, although some may need help with some of the advanced terminology, like definitions of "money" and "inflation".

Dale Amon at Samizdata.

Saturday, November 29, 2008

The Global Elders and Zimbabwe

BBC reports on the mission of the Global Elders to help Zimbabwe. As usual, when one sees a pompous name - Global Elders - one should skeptically expect much form with little content. To begin with, the Elders could not even get into Zimbabwe - Robert Mugabe's ZANU-PF party thumbed their nose at the celebrity cast of this reality show. Furthermore, at 0:22 in the linked video: " The Elders wanted to know what had forced them to leave, and how they are surviving." Well, you have to be seen as doing something even if you can and will do nothing - as the bunch of washed up bureaucrats and politicians knows. So they are asking questions, the answers to which are available to anyone curious.

Where do you even begin to answer such an idiotic question? The poor souls in the Johannesburg church have run away from a place that:
1) Has
cholera - a disease, which takes only clean water and sanitary sewer systems to eradicate. The government has abandoned all pretence to care for public health.
Is run by a gang of thugs who may lack the sophistication of Nazis in WW2 Germany, but make up for it with diligence, all the while employing their tested methods . The government not only does not protect people, it actively terrorizes anyone it even suspects might potentially be against it.
3) Has unemployment (data is highly suspect, but estimates range) between 80% and 90%. For all practical purposes, Zimbabwe has no economy. The only "productive" activities left are foraging for food, crime, and smuggling - mostly of people out of the country.
4) Has had white farmers (who happened to know how to actually grow food) expropriated, and any foreign or white-owned business forced to cede 51% equity interest. For all practical purposes, property rights do not exist in Zimbabwe.
5) Has inflation that not only has handily beaten any record human history knows, but is, by
admission of the Zimbabwean Central Statistical Office, impossible to measure, because there are not enough goods in stores to do so. That admission came a year ago; since then, there have been rumors that these days the computers they use cannot handle the number of digits required to attempt to calculate inflation. A proxy for the Zimbabwean dollar based on shares of Old Mutual listed in Harare and London gives approximately 12 quadrillion Z$ for one US$. According to some estimates, inflation rate runs at 80 sextillion (10^21) per cent. For all practical purposes, Zimbabwe has no currency anymore.
6) Has widespread starvation (too many links to choose from). A story from a couple of years ago, which I cannot find a link to, claimed that in 2005 (to the best of my recollection), starvation was somewhat alleviated by an unusually generous "harvest" of caterpillars.

Usually, this is very near the end of the road for a dictator. To stay in power, a dictator needs an oppressive apparatus, usually a mix of army, police, and followers/allies. However, the army and police need to be paid, and followers/allies need favors. Such a situation can be very stable, as long as the economy produces enough for the dictator to pay. When collecting taxes does not do it, and there is no one with wealth left to steal from, you crank up the printing presses - inflation being a very regressive tax, which is also highly efficient in extracting distributed wealth from the poorest. But a point comes, when you cannot make people use your money - not even facing down the barrel of a gun, since you no longer have the guns. The army and police must be paid, and enough not only for their own physical survival, but for that of their immediate family, and likewise for other allies. When no matter how many zeroes you put on a currency bill, noone will give you a dollar or a loaf of bread for it, you - the dictator - have a serious problem. You try to clamp down on any speculation in hard currency (done a long time ago in Zimbabwe), and you try to deflect the pressure outward - evil colonial powers, subversive elements, etc. (also done long ago). Soon enough, you either have to start a war, or to plan to flee with whatever is left in the coffers or offshore bank accounts.

This is what some of the Elders most likely know (Annan, Tutu, Cardoso (Ph.D. in sociology), Brahimi) and some most likely do not (Machel, Bhatt), but ought to. What they do not want the unwashed masses to realize and clamor about is that we have on our hands a prime example of a case where many of their theories have fallen apart in a most spectacular manner. National sovereignty, non-intervention, disarming of populaces, humanitarian aid, wealth and income redistribution - all have failed Zimbabwe. The most humane thing to do for the Zimbabwean people at this point would be to airdrop a few thousand high-quality sniper rifles with instructions on how to use them and a mechanism to render the weapon useless after a couple of months. If Mugabe does not receive significant boost to his lead intake within that time frame - repeat. When he does - then, and only then, send in humanitarian aid.

Sunday, November 23, 2008

To vote or not to vote - for what?

Megan McArdle has some buyer's remorse about her electoral choice. In an electoral system system with only two viable options, there is always the temptation to view those options on a single dimension spectrum - after all two points define a line, but not a plane, much less a space of higher dimension. This time, for example, Megan looks at the dimension competence vs. "painting a pretty picture for voters." I would argue that, before the actual results are in, the utility of viewing any candidate in American politics through this prism asymptotically approaches zero - or you could just use the simple proxy of "has/doesn't have a campaign strategist."
Moreover, such a strategy - prioritizing one dimension, with maybe a couple more as tie-breakers, without accounting for spreads between positions and for absolute position on an axis - can lock a voter into a pattern of "practical voting" that can turn out very ugly in the long run. Perry de Havilland of Samizdata summarizes it superbly
here. An excerpt:
Guys, you have been voting for the lesser evil for so long you may have lost sight of the fact that you have been voting for evil, just a tiny bit less than the other guy."
PPAA prefers to look at Nolan charts, only of the multi-dimensional kind, along the lines of the ones suggested by the Friesian Institute, and his default position is to not vote - it is up to a candidate to convince him that he or she is good enough, not just better.

Saturday, November 22, 2008

Welcoming Introduction

I intend to post here my observations and predictions about social, political, economic, psychological, etc., events and trends.

I happen to be very libertarian, extremely opinionated, and not at all politically correct - so scale your expectations accordingly, or be prepared to be offended, or find other blogs to explore. No reasonable discussion will ever be suppressed on Carpe Noctem, but nor will uncivil behavior be tolerated. As you can imagine, the definition of "uncivil behavior" is rather amorphous, but profanity is considered a fucking acceptable means of expression, as long as it is not directed at undeserving participants in the discussion. God knows there are plenty of idiots and villains out there, feel free to call them what they deserve.

Welcome, and enjoy!