Here we go again: bombing Iran?

Reports in the Asia Times that the Bush administration is getting ready to bomb the Revolutionary Guard HQ back to the
stone age this summer.

Where diplomacy fails, before recurring to bombs, I say give these clowns high-speed internet access, a good English dictionary, 4 season's of the OC TV-show on DVD, and give time 2 generations to wash out. The kids will learn poky english and engage the wider community. Respect grows out of education and communication. The grand kids, will be fluent familiar and respectful of a "one-world-culture" while fully immersed in their local customs.

And most of this current silliness might be gone. Swallowed up in the great unifier and equalizer that is the Internet. One-world, One official 2nd language (english) and then 1000 local dialects as first language (yes, including French, Spanish and Mandarin)

The impact of the internet to the software industry was huge, JBoss a part of it, many industries are impacted today (yes, the DJ one comes to mind), we are about to start an OSS project in the Consumer Electronics space with some friends. The Internet is just getting started, wait for the political implications of If language is unified, culture gets closer, commerce booms, standards of living equalize.

Nation-states are a obsolete concept. Hopefully the Internet will slowly erode at the sovereignty of nation states and they will dissolve into a larger federation. It is feasible, look at how the EU states gave up monetary control, even before the age of the internet, certainly one of the biggest control points of a local govt.

Dreaming on.

New drivetrain on the Tesla... but still waiting

I am number 215 in line for the Tesla EV car. It was supposed to be delivered in February. The projection now is more like December. Hey! it is still within the same year! I believe! I want to believe!

Truth be told, when I visited their shop, I was a bit scared. It felt more like a silicon valley hacker den than a real car factory. I wanted less US hacker, more German engineer. I mean after-all I am going to be driving this thing and the fact that they call their drive-train version 1.5 and a lot of the car is still 1.0 is enough to send a shiver down my software engineers spine.

I have resigned myself to the fact that this product is highly experimental, potentially harmful until proven otherwise, and is more a "prototype" even in its final version. I still can't wait to get my hands on the car, I am a willing beta tester.

The news is about coverage from the CTO of Tesla around the gear box. Basically it is a "one speed" car with a new gear-box. It used to be a 2 speed car. The blog (you have to be a member to access it) is full of congratulatory posts. Great! fantastic! genius! Me? I just want to ask "where the frak is my car?". The longer they delay the less good-will they have from me. There is still a lot of cheer leading going on, and clearly, people plunking down 100k on faith, do it because they believe this is "more than a car". Clearly I should cut them some slack. This is an ambitious project, with challenging new technology and since this is a car and not software they better iron out the kinks.

But let's get the car going and in the garages of the early buyers shall we? In the famous words of the "Wolf" in Pulp Fiction: "let's not suck each other d*cks quite yet"...

Dumb and Dumber: the US Energy non-policy

From NYTimes Richard Friedman writes a scathing op-ed in "Dumb as we wanna be"

He bashes everyone on the political spectrum calling it a "political brownout" and a "disaster"

Dumb: on McCain Clinton

The McCain-Clinton gas holiday proposal is a perfect example of what energy expert Peter Schwartz of Global Business Network describes as the true American energy policy today: “Maximize demand, minimize supply and buy the rest from the people who hate us the most.”

But here’s what’s scary: our problem is so much worse than you think. We have no energy strategy. If you are going to use tax policy to shape energy strategy then you want to raise taxes on the things you want to discourage — gasoline consumption and gas-guzzling cars — and you want to lower taxes on the things you want to encourage — new, renewable energy technologies. We are doing just the opposite.

Dumber: Democrats vs Bush

The Democrats wanted the wind and solar credits to be paid for by taking away tax credits from the oil industry. President Bush said he would veto that. Neither side would back down, and Mr. Bush — showing not one iota of leadership — refused to get all the adults together in a room and work out a compromise. Stalemate. Meanwhile, Germany has a 20-year solar incentive program; Japan 12 years. Ours, at best, run two years.

He goes on to describe the kind of delay we have in driving that innovation. Europe has many developed programs. So what! Let's catch them. America is nothing if resourceful, but right now, the politics of partisanship is so broken basic stuff does not get taken care of. Shame on them! Time to fix this and get moving past the 20th century politics. If politics is not serving the needs of the people then what good is it?

Mathematics: Can +, x and ^ operands be generalized to higher orders?

Ok so here is one mathematical oddity that has me puzzled for some time, well 3 years to be precise. Yesterday I finally decided to take a pen and a paper and see if I could make any headway to put myself to sleep, here is what I wrote down.

Definition of Operands at degree n: OP(n)

OP(0): a OP(0) b == a + b

Recursion:
a OP(n) b == a OP(n-1) a OP(n-1) ... OP(n-1) a (b times)


you then have

1. OP(0): by definition it is +
   
   Operand zero is the sum (by definition)
   
   
2. OP(1): a OP(1) B = a OP(0) a OP(0)... OP(0) a (b times) = a + a ... + a ( b times) = a x b , which implies OP(1) == x
   
   Operand one is the multiplication
   
   
3. OP(2): a OP(2) B = a OP(1) a OP(1) ... OP(1) a (b times) = a x a ... x a (b times) = a ^ b, which imples OP(2) == ^
   
   Operand two is the power operation
   
   

So in other words with this definition of operands we can trivially rebuild the 3 familiar operands (+, x , ^).

Let's go on and look at Operand 3:

OP(3): a OP(3) b = a OP(2) a OP(2) ... OP(2) a (b times) = a ^ a ^ ....^ a (b times)

for example a OP(3) 2 = a ^ a.

3 OP(0) 3 = 3 + 3 = 6
3 OP(1) 3 = 3 + 3 + 3 = 3x3 = 9
3 OP(2) 3 = 3 x 3 x 3 = 3 ^ 3 = 27
3 OP(3) 3 = 3 ^ 3 ^ 3 = 3 ^ 27= 7.6 e 12

LOL what a weird bird. 3 OP(3) 3 = 8 e12

and a OP(3) n = a power a power a ... power a (n times) which kind of boggles the mind. I will call OP(3) bogglemind :)

I have tried to compute its derivative, needless to say I haven't made much progress but I did compute the following result (likely completely false):

d((x OP(3) n))/dx = (x OP(3) n) (x OP(3) n-1)/ x

It says that its derivative is roughly itself squared..... You will excuse the lack of rigorous presentation in my dissertation:) At that point, I fell asleep counting so many sheep.

It could be easy to program the various OP(n), however OP(3) already puts associates the duplet 3,3 to e12 so.... it will blow computing power very quickly. Analytical means may be the only recourse.

But the question that is really really puzzling me since the first time I thought about OP(3) is that Nature makes extensive use of OP(0), OP(1), OP(2). Why does it stop there? is there any place where OP(3) could emerge?

Nature makes extensive use of OP(0) (the sum), OP(1) (the multiplication) and you likely use them in your everyday life.

Even OP(2) is found everywhere although you may use it less in everyday life: in physics with electromagnetism, in finance with compounding interest, in biology with growth of compounds in transcription networks, in chemistry with reaction dynamics, and even in theory of knowledge, see Kurzweil for example and the "singularity": your new knowledge grows proportional to your existing knowledge (you build new knowledge on your existing knowledge) which is the very definition of exponential growth over time.

But what about OP(3)? why hasn't this cuddly monster raised its pretty head? Surely a phenomena that puts integers 3 and 3 in relation with e12, is a weird weird physical phenomena. The domains I have encountered that span of 10 orders or magnitude in a given finite time frame have been:

1. Biology: cell metabolism. A few compounds can influence a cell counting e10 proteins.
   
2. Weather: Butterfly effects.
   
3. Physics: Renormalization theories, my master thesis was on renormalization of non-abelian gauge theories. Don't worry I don't remember what it was about either. However I remember this: when parts of the equations blew up, theoretical physicists would take the very pedestrian approach of "taking them out". Which always felt like a hack to me. I have read since that there was a geometrical basis for such a surgical removal of the "blow ups" but maybe the blow up have a real causal basis?
   
4. Information Theory in the age of the Internet: can a few good men really influence the world population in a finite amount of time? 1 -> 5 e 9. It relates to the critical mass of information on the Internet (JBoss's visibility from 0 to 60 in 2 years)

But a real avenue of exploration may be: phenomenas whose derivative is the square of themselves. dF/dx= F^2.

Things that grow as the square of themselves would make use of OP(3). Can someone name physical phenomenas? I have no idea very frankly, I just don't remember. I just find it amusing and entertaining.

If OP(0,1,2) are so popular in Nature, why would OP(3) have no role? Maybe we just live in, observe and try to explain a world to our proportions and the proportions of 1->e12 span our current existence and physical reality. I hope a real mathematician has already looked at this problem. I would love to hear from any of the 1000 readers/week if any of you has heard of such a thing and has a link. I am convinced OP(3) has been talked about already.

Information Bias: Bear understanding

This morning I think I understood the concept of "information bias" as it relates to me.

When a news item hits, one is inclined to discard pieces of information that do not fit a preconceived understanding and will readily scan and integrate those that do. Furthermore, one will interpret neutral coverage with "rose/dark tinted lenses" according to disposition and preconceived notions (half full/half empty phenomena).

I always try to keep an open mind to data and news, but this morning I realized I suffer from it. I readily UNDERSTAND a news item that speaks to a conclusion I have already reached. A supporting data point immediately fits the theory and I can grasp its meaning and significance by just scanning the article, I don't need to THINK. For example this morning the FT had coverage on foreclosures increasing the glut and putting more downward pressure on house prices. Typical self-reinforcing feedback loop.

However a data point that does not fit a theory or, worse, contradicts a theory, is not readily understood. For example the actual drop in employment or house prices was too small, and I had to stop and actually think about it. I don't think I discard the information, rather it may be tough to integrate in a broader picture. Since this datapoint is not linked to other memory constructs in our brains. The datapoint is orphaned, devoid of context and meaning. A new mental construct needs to relink that datapoint, a new understanding needs to be developed, and that takes more time, chemically speaking.

Therefore, information bias is not only a reflection of my human vanity in seeking to self-justify my little theories, but also a genuine delay and difficulty in processing information that contradicts said theories.

In conclusion, the information bias, may simply be a reflection of "asymmetric processing of information" in our brains: data that fits is easily and readily assimilated, data that doesn't requires more time and processing. As a result, in a given time period we will see/perceive/understand more datapoints that validate our views than not.

QED. Information bias could be simple corollary of asymmetric processing (reinforced by vanity).

Battlestar Galactica: BSG and me

Frak, frak, frak, motherfrakker, clusterfrak, frakker, frakked up, frak me, frakkin' A, fraktard--lately I find myself employing the word and its derivatives at the most inopportune times. There's a certain ambiguity about the expression, which combines the childish glee of saying a bad word, with a sneaking suspicion of massive un-coolness on the level of somebody's middle-aged midwestern aunt saying "Oh, for cry out."

My husband and I finally succumbed to the a) the plastic fantastic life: traveling to beautiful exotic places, interacting with beautiful, important people, in the course of carrying out beautiful, important work, ahem...b) taking a break from running around with the kids for our nightly Netflix date (don't call us after 9) of seasons-old programming from our new favorite, newly discovered TV series, recommended by friends: BSG (Battlestar Galactica)

My French-born husband wants to know if "House" could be a cult classic. I try to explain that "House" could not be considered a "cult classic." It is too consistently good and too many mainstream people like it.

Battlestar Galactica is a cult classic: being a B or B+ series, that has not (and never will be) discovered by the masses, about which one can feel a certain sense of superiority for overcoming all of its short-comings in return for rare nuggets of superior and transcendent drama, not to mention the satisfaction of belonging to a geeky subculture where you can impress your friends with the correct usage of all the series-specific jargon. Kind of like being in the Open Source Java community of yesteryear.

I have this obsession with BSG, in spite, or because of...

1)Tier two script writing--all those non-story arc episodes you have to "power through"--we're in the doldrums of it right now--"The tylium refinery labor dispute episode"--what the frak? Hello, if I'm watching sci-fi, it's to see the last battle that will determine the fate of the human race and hot Cylon sex, not because I'm interested in the working conditions of the underclass laboring in the tylium refinery.

2)Wooden acting--per "Entertainment Weekly," which I catch up on in my weekly appointment for allergy shots: half the fun is to see if any of the actors can break out of their one trademark facial expression.

3)Egregious use of genre cliche: "The One, whose destiny it is to save the human race;" a "tough, but damaged" central character--this role mostly monopolized by Starbuck; "Oh my God the machines have infiltrated our central defense system and are going to set off a nuclear catastrophe that will end the human race;" "the machines now look like us now;" the guessing game of who's the Cylon," and the old stand-by of "will they ever act on their latent attraction to each other and actually get it on"(Apollo/Starbuck, twilight romance of Admiral Adama, President Roslin)--the latter usually works best with female audience by exploiting their latent romantic tendencies. Granted, these are all staples of tier-one drama, as well. There are only so many story lines out there, the difference is in the writing and the acting.

4) HD would be

a) Bad, according to Nathalie, 'cause there's already too many disturbing close-ups on Admiral Adama's acne-pitted face. Come on, he should at least be earning enough per episode for some laser or collagen improvement.

b) Good, according to Marc and Andy O.--for highlighting more naked Boomer/Athena/Number6 scenes. Here is an actual conversation between Marc and Andy O. "AndyO: I swear she was naked... Marc:was not... AndyO: yes, she was... Marc: you mean she was naked under her military uniform...(they settle the score by going back and actually watching actual BSG episode in slow mo with poorly lit, multiple naked Boomers)...Marc: ok, you're right on that one! but, seriously, man! from a time investment standpoint for actual skin, you might want to consider porn, I recommend Natasha Nice these days.

5)In the sack/most frakkable?

He says: Starbuck, ok but not so much, too metro-butch (the feminine equivalent of metro-sexual). D'Anna? nah, all the sex appeal of a cold cucumber sandwich. Number Six, mos def'. He's ready to upgrade to his pneumatically-enhanced Cylon wife right now, oh wait, she winds up displaying all the annoying pyscho-bitchy qualities of a real wife. The Baltar projection episodes with Number Six are definitely tier-one, by far the best thing in the series. Hands-down, hottie, according to both of them: Athena/Boomer. Marc also likes Dualla.

She says: Gaius Baltar. Need I say more? As the picaresque, scheming, self-absorbed, disgraced, and utterly craven computer geek, he is by far the most interesting character in the series. Lee Adama and Helo? Nah, too bland.

6) Insiders only:

Deep thought a) If Rickard Oberg had based his alternative reality on BSG, who would be a Cylon, what kind? No spoilers please, we haven't watched all the episodes yet.

Deep thought b) Selling out (Gaius Baltar in BSG), Apache/recent licensing issues/MSFT as seen by Andy O. "You know you're getting older when you can accept selling out, as long as it's a greedy sell-out, for something that actually was worth it. What's pathetic is selling-out and being cheap..."

LarryE: smartest man in Silicon Valley?

This weekend's Barron's comes with LarryE face plastered on the cover with this title " The smartest man in Silicon Valley". LarryE reminds me of Zoolander. It's the face, the expression, the same old mock turtleneck. This man has only one facial expression and it is called "blue steel".

The other thing zoolanderish about him is some of the things he says. When I met him, surely one of the highlights of my short career, he dropped "you know, second place is the first loser". I was young, impressionable and I wanted to be impressed. I thought: "wow, a deep thought from Larry". I was ready to cherish it for the rest of my life, like others keep a relic from a pop-star, until someone pointed out the line was straight out of "Top Gun". I felt cheated.

As he watches the floating cherry blossoms and feeds the remains of his dismembered enemies to the koi in his zen garden the great man reflects:

"I'll never forget the expression: "He just doesn't get it", Well, somebody didn't get it. And it wasn't me. It just cracked me up".

Yup, you don't make up shit like that. It's vintage Larry alright. He didn't lift that from Top Gun, maybe Rambo? But let's give credit where credit is due, the article is about the success of Oracle at integrating companies and growing the top line and the profitability at the same time. Blah, blah, blah read the article.

And finally, I have news for you Larry: you are not the smartest man in SV... I AM!

Inflation down?

Watch the puzzled looks on people's faces. Bernanke drops rates and inflation drops.

The year-on-year increase in consumer prices was 3.9 per cent, down from 4.0 per cent in March despite registering the fastest gain in food prices in 18 years. Core inflation, which strips out volatile food and energy prices and which is used by the Fed to guide interest rate policy, was 2.3 per cent in April.

The month-on-month increase in headline inflation was 0.2 per cent, when economists had an average forecast of 0.3 per cent, but a row broke out almost immediately over the accuracy of the figures.

Of course the drop is so small, and so "first time" that I write it off to "statistical noise". But the fact that it is "not increasing" is quite remarkable. I also love watching blogs this morning with people who actually professionally know a lot about the economy and important things like that run around like headless chickens. Priceless, literally.

Grand Theft Auto 4: blah!

Discussing with a good friend of mine this morning that is as big a gamer as I am, prompted me to write this blog. Basically we stared at each other (via IM) going: "Most people rate it 10/10, I don't get it, do you?" , "I don't really like it, do you?".

I am big fan of the series, so of course I was there at release date and bought my copy. I was excited as a fly on sh*t. I was quickly disappointed. I am halfway through the game and I have just dropped it. Didn't get hooked like the other series, just powered through half the game and then... just dropped it. I have only done this once before with GTA Miami. GTA San Andreas is one of my all time favorite games.

Main gripes are:

1. The driving SUCKS, this is a BAD driving game. I mean it is really worse than the previous games. I loved one car in GTA3, I loved the bikes in both SA and LCS (PSP). Here most of the cars are slow, bounce around like hip-hop cars and the controls are just sluggish. Coming off a game like Burnout, which I just finished, this feels just painful.
   
2. The fighting SUCKS, this is a BAD FPS. The fighting controls are sluggish, the fights are too easy.
   
3. I don't want to role play a heroin dealer. I am sick and tired of the "dark relativism", maybe I am growing up but organizing heroin deals to buy the latest shoes so that my russian friend looks good is just not a story line I relate to. Going to strip clubs and watching a 3D model do dirty things, is fine but I can't have the kids around and then shooting them up?
   

On the plus side

1. Graphics are good
   
2. Story has depth, it is more a movie than a game. Really it feels like a chopped up version of Scarface in NYC but interupted with "you drive the car from A to B"
   
3. Shooting pigeons is the most fun I have had in this game, but that lasted a day until I realized I was free-roaming shooting pigeons in a virtual world.
   

The most odd point is something I both like and dislike: the TAXIS. In this version of the game you can ride the taxis and speed through moving. Which is great: I don't hijack cars EVER, I just get in a taxi and pay and get there at once, it speeds up the game. But the downside is that I don't listen to the radio, I don't "drive around" I don't drive at top speed. I never get into the mood of the game.

Bottom line it is ALL VERY BORING TO ME.

I will put recommendations for 2 games I have really liked: Burnout Paradise, FANTASTIC GAME, fantastic driving, graphics, music. Then I am playing IRON MAN... not for everyone but I do like the controls of fighting (flying not so much) but it still beats GTA4...

Martin Wolf: get used to high oil prices

Martin Wolf takes the "no speculation here" view on oil this morning in the FT. The main point of the argument is summarized in the top left drawing: namely that compared to the early 70's we are reverting to mean in terms of "price/production", this view basically says "the 85/00" period was a historical aberration. To me the yearly growth charts (the other charts) basically show "supply does not follow demand" although yearly variation could show manipulation and speculation. I would have liked total demand to go along with that information.

From the article:

Fifth, do try to reach global agreement on a pact on trade in oil based on the fundamental principle that producers will be allowed to sell their oil to the highest bidder. In other words, the global oil market needs to remain integrated. Nobody should use military muscle to secure a privileged position within it.

Finally, do become serious about investing in basic research into alternative technologies. Energy self-sufficiency is an implausible goal. Investing for a post-oil future is not.

We are no longer living in an age of abundant resources. It is possible that huge shifts in supply and demand will reverse this situation, as happened in the 1980s and 1990s. We can certainly hope for that happy outcome. But hope is not a policy.

The first 4 points are basically a rehash of "supply/demand" is driving pricing (as opposed to speculation or just dollars). The fifth point is scarier, an earnest call to not use "military muscle" to secure a privileged position... I am tempted to say "too late?".

Obviously research is something I have a personal interest in following. I do believe in a surge of nuclear, the 70's aversion to it is zany and legacy romanticism. I am also a big believer in solar power, both centralized (a la mirror collection in the middle of the desert to heat water tanks and drive turbines like in spain) or more high-tech solutions with solar cells and distributed collection (meaning your home).

Obviously the big out lier is still fusion. It has been on the horizon for the past 30 years but like any mirage moves WITH the horizon, always there, but never REALLY there. I read somewhere, that tens of billions would really enable us to explore options in more depth. Instead of spending 1T on a war to secure oil, we would spend a fraction on research? Oh but blowing shit up is so much more fun.

I am an uber-bear?

From Telegraph (via Naked Capitalism) my french Ecole Polytechnique comrades over at the Societe Generale are striking a very bearish note in their allocation recommendation.

The bears at Société Générale are going into Siberian hibernation, issuing an "Ice Age" alert. They have slashed exposure to global equities to a minimum 30pc for the first time ever.

Their weighting of super-safe "AAA" government bonds has been raised to a maximum 50pc. This is a bet on gruelling "Japanese" deflation. The bank expects equities to fall by 50pc to 75pc.

"Nowhere and nothing will be immune. We are on the cusp of an equity meltdown that will slash and shred portfolios," said Albert Edward, SG's global strategist.

"We see a global recession unfolding. Liquidity will drain away and crush the twin emerging market and commodity bubbles. The recent hope that 'the worst might be over' is truly staggering. Profits are disintegrating," he said.

Well I am already at that allocation. So I guess I should be moving some more, but where, where the frak do I go from that kind of allocation. 10% equity? Synthetic exposure to market via options?

I am starting to get a taste and understanding for options and that may be the way to play this current market. I do share the view that there is one more drop to come. How bad it is is still fuzzy, but the shorts are out there. The word "hedge" takes on its full meaning, it isn't the bullshit structure that most snake oil vendors are peddling out there: put in bonds, borrow lower, multiply through debt. I don't need to be paying the fees for that NON-SERVICE. Managers are lazy and passive in these structure.

No, hedge means "hedge" meaning the capacity to buy risk protection in a portfolio above and beyond straight diversification. The zero-sum game nature of the options always makes it an interesting bet, I am always betting against someone else, and puts in perspective the odds, but I always had a taste for hedging in the roulette game at the Casino. It is the only one I could play.

Growl!

Teaser: riding ATV with Mark Spencer

I decided to take a trip to spend some time with Mark Spencer. Many of you may know Mark from "Digium/Asterisk". David Skok, our investor at JBoss is invested in Digium. Mark lives in Huntsville, Alabama, NASA town, where men are men, drive trucks, pack guns, fix old school car engines, and can design motherboards with their eyes closed.

Mark recently purchased 42 acres of land, with his own ATV track. At the entrance he has his own flag pole with the Asterisk flag. In the picture you see the two of us getting ready for an ATV session that was a bunch of fun. I didn't know I could have so much fun on a ATV. I didn't get to shoot the gun he has, next time. It was all really pretty cool.

Anyway, this is also meant as a teaser. Why meet with Mark? well he is a genius at hardware design. Let me just say that I am forcing myself into working on a new project. It involves hardware and home automation. Nuff said, let's see if we can get our act together and pump some innovation out in the field. Stay tuned alpha geek friends.

Martin Wolf on financial regulation

I am somewhat late to this piece, though it took me a little while to condense it in my mind. There is a great article by Martin Wolf on a quote from Volcker.

Simply stated, the bright new financial system – for all its talented participants, for all its rich rewards – has failed the test of the market place.” Paul Volcker, April 8 2008

Then Martin Wolf, churns out 7 principles of regulation he calls the 7 C's that need to be kept in mind these are

1. Coverage. Avoiding too much leverage in the system by off balance sheet that are designed to bypass regulation.
   
2. Cushions. Equity capital and subordinated debt provide shock absorbers over the long run. Liquidity can provide longer time lines even when solvency is an issue and equity has been TEMPORARILY wiped out (insert mark to market whining here)
   
3. Commitment. Originate and distribute is evil as there is no accountability as to the quality of the debt.
   
4. Cyclicality. The existing rules create non-linear behavior by way of feedback.
   
5. Clarity. Opacity in the OTC markets is partly to blame for the lack of good pricing.
   
6. Complexity. Source of lack of clarity and lack of pricing models.
   
7. Compensation. Wall Street is incentive to bet your money on risky schemes for immediate payout and when it blows up, well YOU blow up, not them. This a-symetric incentive is to be blamed for many of the current excesses.
   

After thinking it seems to me that the common thread of all this is risk management and risk pricing all linking to monetary level and debt levels.

1. Coverage. Coverage is related to debt levels. Glass Steagal needed to be updated more than it needed to be repudiated. If 10x leverage on 1 of coverage wasn't enough for optimal financials, 30x in the shadow system proved disastrous. Asking for appropriate coverage is equivalent to asking for appropriate leverage. I have already blogged about establishing those limitation at the iBank and cBank in general. The cBanks created all their shenanigans to bypass the 10x. The iBanks lended way above safety levels.
   
2. Cushions. Shock absorbers again related to debt levels. I have blogged in the past about the L3 asset problems and who was to hold them. The point is that holding onto illiquid hard to price L3 assets IS A VALUABLE SERVICE, borrow short, lend long. Whether it is VIABLE is a function of riding out the noise in the mark to market. An L3 asset holder should be limited in the amounts he can hold relative to equity but really LIQUIDITY is another way to ride that out, as is being done right now with the FED liquidity swap discount windows. Capital and the issue of solvency related to L3 assets forgets that these assets are supposed to be long term and temporary insolvency shouldn't trigger catastrophic events.
   
3. Commitment. Legislating commitment is an interesting concept that essentially goes back to forbidding securitization on the surface of it. I would have liked a more in-depth analysis from Martin Wolf. Truth is that securitization in and on itself isn't evil. What is evil is a system that has an incentive to NOT PRICE CORRECTLY the debt. Again debt is good as long as the default risk is correctly priced in. Having the originators keep some skin in the game may not be a bad idea as they would have to price the risk CORRECTLY and be a lot closer to the ground in order to do that. That accountability, in both senses of the word, has been long gone in the current systems.
   
4. Cyclability. Cycles may be the result of natural bi-stable models, which arise systemically in constrained feedback loops. More on that in the context of cell biology soon. In other words, wanting to avoid cyclability may be a naive goal that is just not achievable in largely unregulated markets. Debt levels of expansion and contraction may be a natural thing as we probe the limits of leverage. Legislation should focus on that level of leverage at the i/c/Banks and let the natural cycles hold. Removing them would kill the golden goose as they are a natural part. I have argued in the past that non-linear cycles may not be a bad thing as they amplify the moves and shorten the time of adaptation, the Japan style intervention only led to prolonged pain in the system.
   
5. Clarity. This is the exchange idea for OTC products in derivatives. Adding to the public information around these derivatives really increases the pricing precision. All of this really says that we will better PRICE RISK, which in turn could enable us to increase leverage. Correctly pricing risk is at the core of the problem. Clarity goes a long way as it increases information and price discovery about these products. That one (the exchange for OTC products) is a no brainer.
   
6. Complexity. Related to the previous one in the sense that pricing is key and complexity makes pricing more opaque. Complexity in and on itself isn't bad, take securitization which in and on itself isn't bad, but if a slice of the product is badly priced you have increased the number of products that are bad: it is a case of one bad apple can make the whole basket bad. Limiting leverage and monetary mass will limit the amounts of risk being explored and diminish the probability that you misprice the edges of risk and contaminate the basket. Again correct management of risk and pricing of risk doesn't mean we need to throw away complexity. Rather we can manage the risk associated with this complexity by limiting monetary mass.
   
7. Compensation. This one is also a no-brainer. The financial industry has an incentive to take GREAT short term risk with leverage to juice YEARLY BONUSES because when the game is up, it is the investors money that evaporates but not LAST year bonuses. Clearly a compensation like the VC private equity approach where compensation is done at liquidation of the fund instead of yearly is a much fairer approach. Here again risk is at the center as the incentives are gamed AGAINST the investor, by taking more risk than the reward is, it is a case of mispricing of fees in relation to risk. Legislation could look at banning yearly payouts in iBanks and impose more of a VC like LP structure although I suspect that iBanks that take that approach and tie their compensation to the payout of the LP will be very succesful.
   

Cell Pluripotency and RNA interference

I recently blogged a small post about the rush to stem cells. In 2006, it was proven that by introducing 4 transcription factors in fibroblasts cells, these would reprogram themselves into pluripotent cells. Science magazine has a "perspective" piece on the current state of research.

Pluripotency is a cell state that can give rise to any type of cell. Knowing that the body has 200 cell types, rebuilding pluripotent cells is a goal in and on itself. The cells are called "induced pluripotent stem cells" or iPS cells. From a ethics and religious standpoint, the advantage of these cells is that they do not derive from Embryonic Stem cells (ES cells) and therefore do not run into the same objections.

From Science:


What this drawing shows is that the cells that are obtained, the iPS cells are very similar from ES cells. Whereas the path on the right use embryos (hence the moral objections) the left path uses fibroblasts or Gastric cells (stuff from your gut) . It is unknown as of yet whether other types of cells such as neurons can be reprogrammed to be iPS cells. It is also not completely understood how the reprogrammable cells are reprogrammed.

However that much is known: the ES cells are 'specialized' by way of miRNA. Micro RNA are snippets of RNA code usually fairly small in size, say 30-50 bases, whose main property is that they bind to a DNA site and INTERFERE with the production of proteins. It is a SILENCING mechanisms. The field of miRNA interference, or RNAi, is popular. It seems that an ES cell becomes a specialized cell by a given cocktail of miRNA and a resulting multi-RNAi expression. In other words, ALL CELLS are iPS in their genetic code (they all have the same genetic code) but by applying different filters of RNAi, the cells specializes. In other words, cell specialization and reprogramming seems to be an epi-genetic phenomena. The article speculates that the transcription factors that have been proven to induce PS state in cells basically interfere with the interference or over promotes the protein expression associated with PS state.

The article concludes that the main advantage of iPS cell technology is that it is patient specific. In other words most of the problems of organ transplant and the rejection mechanism associated with the immune system detecting an alien body could be circumvented. Proving that these cells are stable is important. Today the delivery of protein cocktail to the cell uses viral packaging as viruses are good at attaching to cells and delivering DNA cargo to a cell. Developping non-viral delivery is important you wouldn't want your whole body resetting in "iPS" state under treatment. The study of reprogramming up and down the iPS<->Special cell tree is important. The study of the STATE MACHINE OF CELLS is under way.

Is financial blogging like Open Source development?

Via naked capitalism this morning

The lightbulb went off only today. This debate has very strong parallels to the arguments between traditional software developers and the open source crowd. Admittedly, there are also big differences, because developers are out to address very specific needs with code, while (one hates to say it) the purposes of journalism and blogging are less clear cut. Journalists like to think that their job is to inform, but what does that mean, exactly? Like it or not, a fair bit of entertainment has also crept into the profession. And perhaps most important, the decision of what is and isn't newsworthy is very much swayed by a media outlet's posture, prevailing social/community values, and (the dirty secret) the need to play by the rules of access journalism.

Hmmmm... having invented professional open source with JBoss :) I feel compelled to comment.

Blogging in general is similar to OSS in the way its output is based on others people input. Blogging is quick and because it is NOT VETTED it presents opinions across the spectrum faster than traditional media. It is the instant commentary mechanism that I find valuable. A news item comes out and the blogosphere churns out an output that is distributed across a bell curve of opinions. In that sense the Bazaar is there.

I like to sense opinion by looking at the distribution. For example let's say there is a news item on markets movement, I like to read blog commentary to see how much people agree or disagree on whether it will go up or down next week, there is a distribution and to me it is not only the "average" but the actual distribution that is interesting. If the opinions are tightly grouped and there is no dissent then it is a "fairly safe assumption" in how I manage my investments for example, this is the basis for momentum investing. If on the other hand there are drastic pieces (that still make sense I try to discard propaganda) then the issue is volatile and undecided. Then I trade volatility. News driven trading feeds off blogging as a distributed quorum sensing mechanism.

While the COLLECTIVE output has some characteristics of OSS, the individual output really isn't IMHO. The product of blogging is well... blogs. Individual entries about particular topics. A particular blog reflects the opinions of the individual not the collective. The product of OSS, meaning the ACTUAL SOFTWARE, IS a product built by individuals but what gets selected is done by a collective (or semi collective usually with meritocracy).

But this is where, in my not so humble opinion, Yves Smith's argument falls apart, the only thing that stands after 10 years in the OSS industry is in fact the peer review. The natural selection that happens in OSS: bad software gets weeded out by a collective brain. PEER REVIEW IS THE ONE AND ONLY MECHANISM IN OSS.

This peer review is in fact COMPLETELY ABSENT from blogging. And that is the mainstay of the argument made by the panel Yves comments on, that traditional journalism is PEER REVIEWED, while blogging isn't.

Quantum Computing steady advances

I have been meaning to take a morning and read through the literature and try and come up with a back of the blog coverage of what I see out there. If anything I want to clarify my own ideas on the state of the field. There is a flurry of research and what I am reading is way past the theoretical predictions of 5 years ago where quantum computing was an idea expressed in pen and paper. Today experiment seems to be leading the theoretical way and opening new venues of research. Here are some highlights.

1/ Spintronics in carbon nano-tubes

Covered in Nature March 27 2008 issue.

Spintronics is the field that uses the spin of electrons to represent information rather than their charge. Already is used in production in large capacity hard drive heads and was rewarded with the Nobel prize in 2007 (Fert and Grunberg). Spintronics are being investigated in exotic geometries like nanotubes. By applying a Coulomb blockade along the axis of the tube, we can create an energy space where basically ONE electron or ONE hole can exist and we can track those energy state (see picture). The notable result here is that these experiments show that the spin is HIGHLY COUPLED with the orbital movement. Meaning that we now have a way to manipulate the spin by manipulating the movement of the electron, by interacting with the charge. That means there is an easy way to set the bits of information in spin. We can read and write spin by electrical manipulation alone.

2/ Long coherence/fast read in Diamonds

Using the good old geometry of carbon in diamonds and ultrafast laser (I can't find the article in my piles of papers), experiments have demonstrated read times that are well below the decoherence time. Diamonds offer a good medium to create entanglement, the basis for quantum computation by putting in close contact the spin carrying electrons. The problem is that the quantum information is encoded in the superimposition of states. In quantum physics this can be represented by its wave function |psi> = a|A> + b|B> in simple cases, where |A> and |B> are the individual states and a and b the relative weights of the states. Remember that in q-physics things exist in probabilistic superimposition at the same time. They are not one or the other, they are both. The degeneration of this state, also known as the "wave function collapse" leads to classical observations. The collapse is also known as "decoherence" and the quantum information disappears on the time-scale of decoherence. Here with femtosecond pulses of laser light they are able to observe the superimposition (measure) and extract the quantum information by light means. In other words reading time << decoherence time, paving the way for a practical application in diamond.

3/ Silica on Silicon quantum wave guides
Covered in this morning's Science May 2nd 2008.


Fig. 1. Silica-on-silicon integrated quantum photonic circuits. (A) A directional coupler, which can be used as the building block for integrated photonic quantum circuits by replacing the bulk BS. (B) The modeled transverse intensity profile of the guided mode superimposed on the waveguide structure. (C) Design of the integrated two-photon CNOT quantum logic gate.

This is really pretty neat. Using conventional fabrication techniques on silicon, a lab from Bristol UK demonstrates quantum coupling of photons in waveguides. They build a logical gate (C) and measure the results. Looks like a winner to me. Cheap, reliable, in line with current fabrication techniques. Less out there than the 2 previous results but exciting because of that 'pedestrian approach'.

While those computers won't be on our IT departments any time soon, I need to start looking at the cool software for those devices. I am thinking a kick ass financial markets modeler as the interactions are highly coupled and dynamic and probabilistic. If only I could find the Hamiltonian for the S&P 500!!!. Bring it on.

Rod Johnson has an SMD moment

JRod is in the house! Matt Asay linked to my post on Spring Source earlier today echoing the sentiment of "how is this an application server?" He thereby attracted the wrath of the Rod.

Matt: I just don't understand why it's an application server. I'm probably too ignorant to appreciate the applicability of the nomenclature, but to me it doesn't fit.

Rod: Indeed, you do not understand. It is an application server because it provides a complete runtime environment that is an alternative to existing application server products. Spring is a part of it. It's sad to see you quoting the bitter FUD of Marc Fleury. He also doesn't understand the technology enough at this point to comment; he clearly has a vested interest in attacking SpringSource; and he's irrelevant to the future of the industry. Rgds Rod

Rod, I know you have a hard-on for JBoss, but keep your sprocket in your pocket. Funny how somebody with the personality of a cold cucumber sandwich suddenly finds his picante! Later in the thread the man lashes out at a Spring user for saying "this is not an app-server, why should I pay you for Spring?"

You haven't been in OSS any time at all if you haven't felt the urge to lash out at a customer, er user who refuses to pay his protection money, and that's the point. Open Source is a bitch. I sympathize. At JBoss, we called this the SMD moment.

Rod is wrong on a couple of things: I DO understand the technology enough to call it out for what it is "an emperor has no clothes" attempt to monetize his ISV base. I will respectfully point out that all this mumbo jumbo about modularity being a "quantum leap to the next generation" is just bullshit. We were peddling modular application servers with JBoss and its JMX base back in 2000, except we had real run-time substance behind it. This is almost 10 years old. We are looking at Tomcat and Hibernate (both from JBoss developers) with Spring, a modular kernel and a little bit of marketing bullshit sauce on top. What is new is the licensing gimmick. Licensing schmicensing. Your users are not dumb, they see right through this flat footed license change, don't get mad and patronize them when they call you out.

He got one thing right, though. I am becoming irrelevant to the industry. I have no troops to command any longer, I just write this blog. On the other hand, I did have the good taste to become irrelevant AFTER I exited the industry.

Four Horsemen of Financial Apocalypse

I am usually not inclined to indulge in religious iconography or prophecy as it is mostly noise from my point of view, but this one is too good to pass up. As the markets are ebullient these days, on the one hand I am grateful for my lucky star and on the other, I can't shake the jitters, I am still focused on the underlying issues and I have a hard time enjoying this bear rally.

Via VoxEU this morning an analysis of the DYNAMICS of the issues.

Four dangers
The first danger we have witnessed since August 2007: The subprime mortgage crisis gave rise to a liquidity crisis in the international banking system, due to uncertainty about who holds the losses. This is leading to reduced lending to firms and households. But that is not the end of the story, because the reduced lending will lead to reduced consumption and investment. With a lag, reduced sales of goods and services will reduce stock market valuations. And, with another lag, the lower stock market prices will – in the absence of any favourable fortuitous events – intensify the banks’ liquidity crisis.

The second danger lies in the dynamics of U.S. house prices. As more and more U.S. households find themselves unable to repay their mortgages, foreclosures are on the rise, more houses are put on the market, the price of houses falls further – with further lags – this leads to more foreclosures and declines in housing wealth. This dynamic process plays itself out only gradually, as households face progressively more stringent credit conditions and house sales gradually lead to lower house prices.

The third danger results from the interaction between wealth, spending and employment. As U.S. households’ wealth – in the housing market and the stock market – falls, their consumption is beginning to fall and will continue to do so, again with a lag. This decline in consumption is leading to a decline in profits, of which more is on the way, which in turn will lead to a decline in investment. The combined decline in consumption and investment spending will eventually lead to a decline in employment, as firms begin to recognise that their labour is insufficiently utilised. The decline in employment, in turn, means a drop in labour income, which, with a lag, leads to a further drop in consumption.

And that leaves the fourth (and possibly the nastiest) of the dangers, one that concerns the latitude for monetary policy intervention. As the Fed reduces interest rates to combat the crisis, the dollar is falling. This is leading to higher import prices and oil prices in the United States, putting upward pressure on inflation. The greater this inflationary pressure – which is currently in excess of 4 percent – the more difficult it will be for the Fed to reduce interest rates in the future, without running a serious risk of inflaming inflationary expectations and starting a wage-price spiral. U.S. firms and households will gradually recognise this dilemma and the bleak prospect of little future interest rate relief will further dampen consumption and investment spending.

I really have 2 comments to make.

1- What the article really identifies are the feedback loops in the system in the variables of "liquidity, house prices, consumers". I have talked about non-linear dynamics in the past. Remember that self feeding loops lead to non-linear behavior and are the basis for complex system dynamics. The problem with these systems is that the output is non-deterministic and the language used can only be probabilistic. Think quantum physics. In this instance the author gives extra attention to the TIME-SCALES, although he doesn't quantify them. It is not enough to know what variables are involved and how they interact, knowing the DYNAMICS of the interaction is really key to understanding the probabilities. The best parallel I have found in science is in the system biology field. It is a hard science but really permeated with the understanding that you are dealing with the living. Far from being a dismal science, I would characterize economics as "living sciences", closer to biology than math. In biology, the study of timescales of interaction is key to modeling the steady states of cells. In solid state physics, studying the phase transitions leads to usually highly dynamic equations. Another way to read the article above is to say that we are now WITNESSING such a transition and it happens on a monthly/yearly timescale, while the day to day observation of markets may shield the underlying trend in noise. But the trends are there.

2- Limits of the FED action. That one I am not so convinced by. The gist of the argument is that the FED field of action is increasingly limited. The FED is running into a wall. The FED will soon start being counter productive by stocking inflation fears as it cuts interest rates. The point is interesting and well taken. Already yesterday's FED cut sent the markets on a rocky up and down because they signaled END of easing cycle. However, the FED is really doing monetary policy not only with the rates but also by taking on assets that are impaired as they are doing so through the various lending facilities. Remember that the FED has committed $400B of T-Bills in swap for many securities (see Dead mice collateral in this blog). It has another $400 it could commit to that, BEFORE really actually running the printing presses. I have argued in the past that the FED essentially has ONE MORE bullet in its arsenal to stabilize markets without running inflation. And then it can really start the presses. In other words, the market is flush with FED liquidity at the moment, there is plenty more where that came from, and its nature is not necessarily inflationary. I have also not read a modern analysis of inflation as a function of M2. I have read everywhere that "inflation is ALWAYS a monetary phenomenon" but nowadays, with the more elastic offer, how does price react to an increase in demand on elastic goods? Not all goods are elastic (see commodities) but many are, no? I still believe in the power of the FED to get us out of this predicament.