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.