OR: I discover Distribution

The progress on OR is getting me to learn again.

Just as a way of update, the Open Remote Controller (ORC) is a piece of software. ORC assumes various extensions. It runs on Java/Linux and it controls your home.

From an installers standpoint, it runs on a little physical box and network I call "the runtime". Another runtime for professionals can be KNX-TP for example.

By contrast, the runtime for developers can be something as virtual as a VMWare runtime which can mimic the proper OR linux distribution by having the proper image including drivers. You have a virtual representation of your hardware environment. It requires no hardware besides your existing development box.

For those that need a physical runtime, we need a chip somewhere. The EEE B202 is probably retailing at a local 250 :). Although not solid state the EEE packs an awesome PC in a compact format making it a good candidate to easily provide construction grade runtimes.

What I have learned a bunch about is the distribution system in hardware for HA and specifically for EU. It is a lot harder than it sounds :) These are intrisically low volume affairs for high end construction. They entirely rely on distributors for distribution (hence their name).

It took 2 days to fly 10 B202 from Taiwan to Madrid. Total cost, including travel is at 300 and it takes another 200 or more to move it around the EU with door-to-door service. Regular local post snail mail is affordable and apparently a big way everyone moves end-user sub-300 goods around in the EU. End of story is that it is a big cottage industry.

We are studying the refurbishing of B202's as convenient high-volume low-cost low-headache runtimes. This could be a DIY offering. We are also exploring the Alix route as a way to assemble a entirely silent solid-state box for half the price of an EEE. Juha Lindfors reports child-like wonder at assembling your own Alix box. We plan on having a first assemble-fest in A'dam. The thing wants LEDs says juha. We like LEDs. A part of me wonders if Ingram Micro could have them systemically off-the-shelf like a EEE would stock... :)

The breakdown of the FED $8T bailout packages

Just as I was struggling to get a complete picture of all the TARP turds floating around, the NYTimes puts a comprehensive chart of the commitments from the FED and Treasury. The committed number is mind-numbing: $8T. This is way beyond the FED balance sheet which was .8T, a tenth. The difference is of course a monetary run-off. Spent is 1.5T. Click on the picture if you want a clear picture, the best macro picture I have seen so far (the only one). Commentary below.


Government as insurer, committed 3T spent .1T

This is the smaller spent number so far and the biggest committed. That is normal. This is essentially a default protection and the top number is therefore nominal. It is CDS given to investors in bank debt and money market debt. I was reading commentary that was surprised the spreads didn't fall lower on the guarantee of the US govts. Free lunch? Lots of arbitrage going on here. Only 70B has been eaten up in money markets.



Government as investor, commited 3T, spent .65T


Biggest spend investing in securities of the bank. This is pure capital injection. Includes TARP and commercial paper programs. This is the most direct observation of the subprime virus. CDO's had toxic tranches and even the senior ones turned out to be mostly worthless when Subprime started defaulting. 40% of mortgages issued in both 05 and 06 were subprime. This number is therefore not finished. A observer in the FT commented that effectively the government was taking "super senior" positions in the banks. The example of Citigroup, were the first 29B losses are absorbed by the lower tranches is essentially the equivalent of a CDO structure. Essentially transferring the horrendous liabilities to the government this is the most effective way to say "the virus buck stops here". With some mark to suspension of disbelief this investment may actually pay off in ... 50 years... The US govt is essentially the biggest hedge fund subprime security investor in the world, except it can't face redemptions... that is the point! L3 asset buyer of last resort.



Government as lender, committed 1.7T spend .6T


These are the various liquidity program, they are loans instead of equity/purchase of assets (as in above). In theory they rest above the capital structure above. All the lending programs fall in this category. Eventually the loans are repaid but when??? originate to repo was the scam going on in that fat category, sell whatever, post it as collateral, it is the new securitization.

Conclusion
I want to remain optimistic and here is why. The shadow banking beast started blinking (spreads coming down) on the news that 3T was committed. We are now at 7T. I do believe it is more liquidity than the beast warrants. The theory is to try to drown that one in liquidity. Critics warn of inflation risk, which I am not entirely sold on. More importantly the gambit here is that the government will not need to ACTUALLY SPEND that money, that the COMMIT is sufficient. It was also the theory for AIG but it failed, will it work at the systemic level? .

Stagnation of prices and economy would be a good outcome (StagStable scenario). If it doesn't work, then we got both risk of inflation if all that pent up liquidity unleashes at once (stagflation scenario) and deflation if it isn't enough to stem the deflationary tide (stagdeflation scenario: japan).

Here is where I am at.
StagStag: 50%
Stagflation: 25%
Stagdeflation: 25%

The backlash, Keynes is the new Black

3 articles this morning point to the same theme, with about $7T of commitments from the US government (I had lost track) the flurry of commentary is around the new zeitgeist in Washington and Wall Street. How quickly ideology backlashed. The opposite abuse is just as dangerous.

Some money quotes from the FT.

We are watching a bonfire of the old orthodoxies as well as of the vanities. This week Barack Obama promised to spend hundreds of billions of taxpayers’ dollars to prop up the sinking US economy. Gordon Brown’s British government announced it would soak the rich to pay for an economic rescue package.

And already people are leaving the UK as a result.

Everywhere you look, Keynes’s demand management is replacing Adam Smith’s invisible hand; printing money, a mortal sin under the fracturing Washington consensus, is the new prudence.

Things could move still faster in the months ahead. With their myriad rescue schemes and loan guarantees, the US and British governments have nationalised their respective banking systems in all but name. The banks pretend they are still answerable to their shareholders, but it is a charade. They survive only with the explicit financial guarantee of the state.

Still, the markets remain frozen, starving business of the oxygen of credit. Unless things change soon, the politicians will have little choice but to take direct control, and quite possibly, ownership, of the banks. Nationalisation could be the first act of an Obama presidency. That at least would put some substance into all those loose analogies with FDR.

Equity ownership in banks was always a charade imho. Giving them free-reign to print money is another mistake. The amount of leverage and risk a society can absorb is a matter of legislation. Too little of it and you are under-efficient as you are not investing in your future. Too much of it and you choke on your own bad debt vomit. Boom-Bust may be an intrisic and emergent feature of free markets but not one that has to be this violent in its swings. The amount of monetary leverage was legislated back in the days, we will probably end up seeing an updated version of that. BTW, this is what people ask for when they long for a gold based system: a commodity based cap on leverage and monetary policy. Legislation feels more flexible a solution. I want to trust the political system.

The risk is that the recalibration will go too far: that innovators and entrepreneurs will be put in the stocks with investment bankers; and that fettered markers at home will be accompanied by protectionism abroad. Lest we forget, for all its manifest flaws, a liberal trading system has delivered hundreds of millions of people from abject poverty.

The market has lost its magic, but we do not know whether Mr Obama can properly rehabilitate government. So the shape of a new settlement is far from clear. What is certain is that things cannot be as they were.

A Trillion here and a Trillion there

TARP3 announced today. Finally a real "Trouble Asset Relief Program"? Actually just a pledge to offer loans of 800B for consumer credit. I am losing count of the Trillions. Reasoning goes that if the banks don't do the lending someone must? Are we about to see FED branch offices battling out for your mortgage. My, my, it smells like real panic in Washington. Scarier is the fact that Wall Street barely reacted to the Trillion in spending. Dead cat.

US Housing -30% so far

Another -15% this year. It would be good if it stopped there. We will probably overshoot, a part of me hope the damage is already done. Namely if we don't see a doubling of foreclosures on this doubling of price drop.

In related news, Obama has pledged another $700B bailout even before getting into office. That is TARP2. I fear we may need TARP5 before we get a hold of this running bull.

Facebook valued Twitter at $500m

Story this morning in the FT that Facebook reportedly valued Twitter at $500m in its own FB stock. The leak is speculated (by the FT?) to be a negotiation tactic by Twitter to get "other bidders to the table". Ah deal-drama, my favorite.

From FB's point of view it makes a lot of sense to get twitter in their social network. Far more people use FB than use Twitter. And as a side note FB does monetize its viewers. For the younger generation FB offers pictures of you and your friends. For the older generation a way to stay in touch. Many of my friends use twitter and seem to like it. The FT article mentions "trend spotting" as an emergent property of twitter. But they make NO money and have 26 employees.

And then I put myself in the shoes of Biz Stone, the co-founder of two and half years old Twitter. In this environment the VC mantra is "if you can sell, sell", as Sequoia recommended to its flock. So the guy would be advised to sell.

Then there is the small point of the fact that the transaction is in FB stock. FB was valued by MSFT at $15Bn, a valuation that prompted many observers to raise both eye-brows. Based on that historical value, FB is free to value anything at astronomical values anyway. That is why, even in this current environment, a $500m offer FROM FB may be actually worth much less. If you believe that FB would fetch 10B in a sale today, that still leaves 500x10/15=333 which is a nice possible future.

Whether FB is overvalued or undervalued is second to it being paper money anyway. The founders of twitter are being paid in paper that is far from liquid. In fact, it is plain illiquid and I would recommend the investors and founders to twitter get a cash component to the deal. Obviously if other bidders did appear at the table it would make their case stronger. How much cash does FB have anyway?

From Twitter's standpoint it also means getting a higher chance of a liquidity event. If someone is going to get something, it is probably FB. FB is a household name and has revenue. Then twitter guys will get something through FB. Even if the MSFT FB valuation doesn't pan out, it would need to go all the way to 3B instead of 15B for twitters to make $100m. Still not bad for a no revenue company.

And then a side of me wonders at the Silicon valley way of doing business, there is something inherently optimistic about the logic. In the middle of the most severe downturn in modern history, we get fed this kind of deal making drama. It is like a good soap-opera. I start remembering ...

FT says "Bring gold dollar link back"

This morning a thought provoking article in the FT. Author Richard Duncan argues that ever since 1971 when the gold exchange window was closed by the US, the world has been living the consequences of the monetary flows that have resulted from fiat money.

Basically once the US govt got free reign to print it's own money, it did and got the world economy clocking again. In a sense it was a crowning moment for Keynes. The cycle of boom bust ensued, starting with a big rash of inflation in the 70's and then world chaos in predictable order. The machine spun until it inflated the biggest asset bubble "housing" (or a bubble too far as the article calls it), until that one deflated.

The article concludes with a call to design a new monetary system. Gold seems to be an emotional favorite.

The events of September 2008 – the nationalisation of Fannie Mae, Freddie Mac and AIG; the disappearance of the investment banking industry in the US; and the Bush administration’s $700bn bailout to save what is left of Anglo-American capitalism – demonstrate that the 37-year experiment with fiat money and floating exchange rates has failed catastrophically.

When Richard Nixon destroyed the Bretton Woods International Monetary System in 1971 by closing the “gold window” at the Treasury, he severed the last link between dollars and gold. What followed was a spiralling proliferation of increasingly spurious credit instruments denominated in a debased currency. The most glaring and lethal example of this madness has been the growth of the unregulated derivatives market, which has ballooned in size to $600,000bn, the equivalent of almost $100,000 per person on Earth.

Under the post-Bretton Woods dollar standard, credit growth powered economic growth. In the US, the ratio of total credit to gross domestic product rose from 150 per cent in 1969 to 350 per cent in 2007. Credit financed consumption and sucked in imports with a devastating impact on America’s trade balance. By 2006, the US current account deficit had reached almost $800bn.

As the dollar standard flooded the world with funny money, economic instability spread around the globe. The reinvestment of “petrodollars” created the Latin American economic boom in the 1970s and then the third world debt crisis of the 1980s. Japan’s trade surplus with the US drove up Japanese property prices in the late 1980s until the imperial gardens in Tokyo were worth more than California; and then produced the lost decade in Japan when that bubble popped in 1990. Next came the rise and fall of the Asian miracle bubble. Each economic convulsion resulted from the excessive influx of dollars into those economies. No regulatory regime could cope when confronted with such an extraordinary incursion of exogenous money.

The Bretton Woods collapse severed the link between the world’s currencies and gold. Central banks were then free to create as much money as they wished. Between 2001 and today, central banks outside the US created the equivalent of about $6,000bn. This can be seen in the seven-fold increase in foreign exchange reserves in that period. The money created (which accounted for most, if not all, of Federal Reserve chairman Ben Bernanke’s so-called global savings glut) was used to buy dollars and suppress the value of the currencies of US trading partners to perpetuate their trade advantage.

When those dollars were reinvested in dollar-denominated assets, it was America’s turn to bubble. As central banks bought up US treasury bonds, they drove up their price and drove down their yields. However, there were not enough new Treasury bonds being issued to absorb the rest of the world’s trade surplus earnings, so central banks bought Fannie and Freddie debt as well. That allowed those government-sponsored enterprises to acquire or guarantee more than half of all the mortgages in the country before they failed. Between unnaturally depressed interest rates and the buying spree by Fannie and Freddie, US property prices surged. The US housing bubble followed the ill-fated Nasdaq bubble. However, the inflation of the US housing market was one bubble too far. When it imploded, the global financial system was hurled into crisis, leaving the 21st century version of Anglo-American financial capitalism discredited.

The lesson that must be learnt from this disaster is that “free market” capitalism under a fiat money regime does not produce the same blessings (sustainable prosperity) that are produced by true free market capitalism within a monetary system anchored by gold. When President Nixon severed the link between the dollar and gold, he changed the nature of the Anglo-American economic model and ultimately destroyed it.

The world cannot return to a gold standard overnight without provoking a brutal contraction of credit and a global depression. However, neither can we afford to pretend that nothing has changed and that the global economy can continue to function on the dollar standard. The time has come to convene a forum of the world’s leaders to hammer out and begin the transition to a new rule-based international monetary system predicated on sound money and balanced trade. Current Group of 20 efforts fall well short of what is required.

The writer is author of The Dollar Crisis: Causes, Consequences, Cures

I don't get all these calls for Gold to make a come-back as a monetary standard. I would have to read up on monetary policy under a gold standard. Governments, specifically in the US have expanded dramatically. Undoing this sounds difficult and a bit idealistic.

On the other hand, getting back to a gold like fixed exchange rate stability, would minimize the occasions for economic war. That would be a good thing. But could this could be achieved through negotiation rounds, but this is not something that will happen overnight. Getting all this crowd to agree is going to take some time.

I am turning 40 today

We are having a party with family in Madrid. I feel a bit strange. I feel very lucky to have had what I have had. Great parents and family, great studies, a lucky company that gave me enough to retire at 38 and a fantastic family of my own.

I look forward to the next 20 years.

FED says deflation possibility has increased probability

Via FT, Don Kohn:

The Fed vice-chairman stressed he did not believe deflation was the most likely outcome for the US economy, but was a “less remote” possibility than he previously thought.

“Some people have argued that we should save our ammunition, that interest rate cuts aren’t effective,’’ Mr Kohn said. “I think that were we to see this possibility, that we should be very aggressive with our monetary policy, as aggressive as we can be.”

He is saying 2 things.
1- less remote possibility of deflation.
When financial types talk about possibility and probability they are speaking in well defined mathematical terms. The world of future possibles, the enumeration of possible states that an economy can reach in the future is a Hilbert space of configuration. In some worlds we are experiencing hyper inflation, in another world war and famine and yet in others peaceful existence in sustenance. These are possible world, possibilities. Then the possibility has a probability. The probability denotes how many time the given world appears in the world of possibles (3 out of 10). This is standard talk for quantum physicists where the "world of possibles" is in fact what drives the dynamics of the particles. Another way of saying what Kohn is saying is "the probability of deflation, a possible, has increased".

2- as aggressive as we can be.
The FED has just declared that it will whack deflation as energetically as does inflation. The main goal of the FED is price stability. Deflation is bad because it makes debt very heavy and it depresses spending in a strongly reinforcing negative feedback loop. So the FED will fight that sea monster and has a good 3T of ammunition. Many argue that merely replacing private debt with public is not what is needed. USSR of A is going to be a good place to live in given the infrastructure spending that is going to go on.

There is no telling if it will be enough. We know it is in that ballpark.

Chocolate con churros--Meet the Neighbors

This is my favorite Spanish breakfast--Spanish hot chocolate is very thick and soupy and churros are sort of like string shaped donuts with no sugar. It is in no way heart-healthy and the first time I tasted it, I thought it tasted weird, but it grew on me. I've finally found an unpretentious bar--Cafe Simpatia--on my walk back from taking the children to the school bus--where this costs two euros twenty centavos and the barman automatically knows what to bring me.

My biggest preoccupation in Spain is the details of daily life and raising four children in a foreign country. Any insights I might have will reflect that, so if you are expecting to read about the latest, coolest nightclub or the most up-to-date cultural offerings in Madrid, this is not the spot. "Chocolate con churros" is a metaphor, for me, of adapting to a different place and the quick sketch writing that most suits my schedule and interests.

Meet the Neighbors

We live in a nineteenth century building in the Barrio de Salamanca whose twelve units (mostly still owned or rented out by various descendants of the original family) are occupied by older inhabitants, who never had children or whose children are mostly grown up. My husband now has proof of my laughable American naivete in wanting to invite the neighbors over for a get-to-know you drink. Apparently the neighbors, at least the across-the-hall and floor-below inhabitants, don't like us, or rather they don't like our noisy children. Nobody in this building seems to really talk to each other (I speak more to the live-in help than to some of their employers, whom I have never met), so the central point of communication is the "portero" (doorman). He transmitted the neighbor's complaints to our landlady, who communicated them to us. To know us (or our children) is not necessarily to love us; the cultural quirkiness lies in specifically why our neighbors consider us to be deviants. It all hinges on our schedule, which is "desfasado" (off kilter) with that of self-respecting Spaniards.

While they politely note that our children are mostly silent after 8pm, they particularly resent the fact that the children get up at 7am and trample around the apartment like a herd of wild elephants. This is a necessity during the week since the children have to be on the school bus on or before 8pm. Unfortunately, getting my children to sleep much past 7 or 8 am on a weekend is luxury I have yet to enjoy. My childless neighbors don't get up until 9 or 10am and the older children of the other neighbors happily sleep in on the weekends as well.

If you are going to live here and don't come from some Latin or other country with a similar timetable, the first thing that takes some getting used to is the schedule. People don't seem to work much before nine thirty in the morning, many shops don't open until 10 am. Lunch is at 2pm instead of 12 and most of the shops and public services close from 2pm to 5pm. If it's a public service, it usually opens at 9 and closes down for good (to the public) at 2pm. I don't know what kind of lunches working people take here, but most stay in the office until 7pm or much later depending on their profession and level of responsibility. 8pm is the happy hour and nobody has dinner until 10pm. Most restaurants don't even open until 9pm, and even that is considered a rather uncivilized "giri" (foreigner) hour.

It seems that if I were Spanish my children would adhere to a more civilized schedule, or at least be more silent and better behaved, but also I wouldn't give much of a damn what the neighbors thought anyway. I discussed the neighbors' complaints with some of my husbands' local family members and their feeling was why in the world would anybody care about getting to know their neighbors? They have lived in compete anonymity, or, barring that, a detente of mutual dislike with theirs for decades, exchanging nothing more than the requisite hola (hello) and hasta luego (see you later) on the elevator. They told me that the official noise ordinance is from 12pm to 8am and, as long as I generally respected that, there's nothing anybody can do.

This point was really brought home to us by the story the landlady told us about the previous tenants who lived in a state of open war with her family for generations, protected by some grandfathered rent control law, whereby tenants can inherit apartments and inflation-indexed rent from their parents and spouses. The grandfather of the deceased spouse of the last tenant rented our apartment in 1931. As the years passed, land values and rents increased dramatically beyond the official inflation index, but nobody could kick the tenants out as long as they paid their ridiculously low hereditary rent. The landlords couldn't sell the apartment because the undesirable tenants and their low rent went with the property. The only thing they could do was prevent the tenants from doing any work to the apartment, so at the end they had to wait until the widow of the grandson of the original tenant died to recuperate an apartment, that was in shambles.

Sidenote: The portero also inherited his job from his father. He seems to occupy an executive function over invisible subordinates. In his case, doorman is somewhat of a mis-nomer, since he is present at unpredictable hours, spends most of his time smoking outside and gives me a look (with my baby carriage or shopping bags) that dares me to ask him to open the door. Other times, he relies on a tactic of turning the act of opening the door into an exaggerated parody that brings home just how inconvenient my presence is, accompanied by a smirk of satisfaction in being the central dispatch for the neighbors complaints about us, and the certitude that he (or his descendants) will outlast us.

What has changed is the consumer

Thinking back on things that have changed recently, in terms of context for the economy, I believe the consumer to have changed.

This is an economy lead by consumer spending. Clearly the consumer was spending more than he brought in and took on debt burden that would tap out eventually. But I don't think we are seeing just a slight re-adjustment to kill overlever (which would be a -3% variation in consumption).

The read downside to consumption may be the consumer re-aligning his priorities. For example it is clear to me that while the price of oil has been all over the place, it has awaken fears of inflation and oil dependency that I think will trigger behavioral changes as powerful as what we have seen with 911.

It is Chic, already in Iceland, to dress like you are feeling the pinch. Makes me think of Zoolander and the expo of "Derelict".

Obama should thank Bush, a $4T gift

Obama wanted to spread the wealth around and has virtually been passed on a carte blanche to do so by the conservative movement.

In the US fiasco, the conservatives have so expanded public sector spending, with 2 wars and the 3T TARP at home, that it will in fact be difficult for Obama to spend it all.

Couldn't have wished for a better gift from Bush?

Brave new market world

Barron's this weekend explains the world has changed. It means quant models need to be rethought.

What is being predicted as rare events by the models are daily occurences.

All the melodramatic talk of the lowest-ever consumer-confidence reading, the greatest increase in the money supply and the highest sustained market-volatility levels in the annals of markets is spreading numbness.

The clustering of so many once-rare "90% days" -- when 90% of stocks and trading volume move in one direction -- has muted the commentary on them. When the Dow industrials jumped 6.7% Thursday after erasing steep losses, it was their largest one-day jump since...Oct. 28. So maybe it's telling that the morning after this huge gain (and 11% intraday reversal), the market story made neither page A1 of The Wall Street Journal nor the front page of the New York Times business section.

The world has changed, the models are virgin once more. Hacker quants are going to be in demand for a long time. A quant will build a model and test its assumptions with existing data. But where no historical data exists, no validation has been made, or no model covers it. It is a new configuration.

OR: riding the eee wave

Just wanted to do give a quick week end update on Open Remote. We hang out around OR skype chat these days. This is a good way of working. Everyone is remote, but chatting with someone in China is not a problem. It is fun and it also leaves a trace you can read. The chuit-chuit sound is as intrusive as email so it works for me.

Most notable, Juha is making progress on the hardware. We were looking at assembling custom hardware to fill the role of the Controllers. It is a Linux box on miniATX hardware (Alix, Atom etc). After spec'ing around we are going to go with the eee. I am awaiting a shipment of 10 B202, origin TW. These will be OR limited series :) development machines. I was going to have them tagged by a talented street artist here in Madrid, but he flew back to Chile.

By standardizing on the eee it enables us to focus on software and delivering a box that works with IR as a milestone. We are actively pursuing delivering iPhone-IR integration as a first runtime. The interesting thing is that once we have a running end-to-end example, adding new runtimes will be modular. Both from the hardware and software standpoint.

We are surfing the eee wave, then. Atom is a good thing and will go down in price, Moore's Law style. Juha was commenting on Skype that it would be ARM vs ATOM in the near-future. With ARM7 currently pricing in the $30 range, we are talking about actuators, embedded soon.

Something tells me the hardware side of automation is about to evolve by a quantum leap.

CDO schematics

Look at this thing. That is the "architecture" of a CDO. Does it remind you of object design a little bit :)

Oil at 57

such volatility in such an important commodity is astounding. How can the planet "plan" with such price variations. From 140 to 57 in 3 months? How can this be the result of offer and demand.

BBB to AAA, the CDO trick

After rereading the article below and help from wikipedia, I finally understood how to transform BBB debt into AAA debt, and the whole colateralized debt obligation (CDO) thing that seemed so magical and is supposed to have gotten us in the mess.

The trick is actually quite simple. It says put all your BBB together in a company (SPV or Special Purpose Vehicle) and redistribute payments from the lot to create a sub AAA tranche. The investors in that tranche are holding on to a AAA rated security.

By redistributing the cash flows, you can in fact extract 10% of AAA and leave 90% residue that is worse than the original BBB. Making up numbers here.

Investors awash in leverage, loved to consume the AAA tranche, plus some entities can only buy AAA securities. Bankers loved to make them.

Furthermore I am under the impression from reading this article that they in fact recycled the leftovers from the first CDO process into another CDO. Except at that level you are stretching to find a cash flow that are in fact alive in that cesspool and I guess it is easy to mis-rate these second derivative securities. Apparently rating agencies applied ratings to the various CDO tranches without much understanding of the underlying security.

The wall street corruption as a loop

Great article, the end of wall street's boom. It is a little long but reads really well. Basically this guy puts the root cause of the current mess at banks going public. From the comments, a program for why Wall Street went kookoo.

Comments mine.

Posted: Nov 11 2008 11:05pm ET
I imagine the code review went like this:

"Hey wait, that function never returns -- it's infinitely recursive!"
"Yes, but we get a payout on each recursion"
"...How soon can you get it into production?"

void createCommissions( shittyLoans )
{
commissions = 0.0

// Shitty loans get securitized as CDO
cdo = BulgeBracketFirm.formatAsCDO( shittyLoans )

// Ratings get assigned to the securitized debt, AAA
aaaDebt = RatingsAgency.formatAAA( cdo )

// Wall Street makes money selling debt to investors
commissions += BulgeBracketFirm.Sell( aaaDebt, bulls)

// Hedge the CDO with a Swap.
cds = BulgeBracketFirm.createDefaultSwap( cdo )

// There is two sides to the trade, notice that is never the Firm
longSide = cds.getLongSide()
shortSide = cds.getShortSide()

// Cash was coming in from selling the short side of the Swap
commissions += BulgeBracketFirm.sell( shortSide, bears)

BulgeBracketFirm.payBonuses(commissions)

// The long side was crap loans, so rinse and repeat?
return createCommissions( longSide )
}

TARP is a hedgefund

The lack of transparency on the TARP, the name given to the US gov rescue program, may be by design. It doesn't want to show where all the stuff is coming from. It is on record, just not public.

The TARP is buying hedgefund grade securities and getting a lot of volatility on its books. It is a 700lB gorilla entity in a market that measures 1500B? Yes, the TARP is a hedgefund, and a big one. The system generated too much bad debt and systemically. TARP is here to take care of it. Time for the asset class to appear as just an expensive fee schedule. Will the hedgefund industry go poof! like Iceland did?

But don't cry for the masters of finance. They got their bonuses on a annual basis and in cash. They will do just fine, through the credit winter. In fact they are looking forward to some well earned R&R now that that weather is getting rough. Thank you for the fish! When the going gets tough, the hedgefunders pack up.

Fintag's funny

USA and the war on intellectuals

This is something I have felt for a long time. Being a over-educated frenchman, I always felt this anti-intellectualism. Not that it bothered me.

Obama and the War on Brains

Barack Obama’s election is a milestone in more than his pigmentation. The second most remarkable thing about his election is that American voters have just picked a president who is an open, out-of-the-closet, practicing intellectual.

Maybe, just maybe, the result will be a step away from the anti-intellectualism that has long been a strain in American life. Smart and educated leadership is no panacea, but we’ve seen recently that the converse — a White House that scorns expertise and shrugs at nuance — doesn’t get very far either.

We can’t solve our educational challenges when, according to polls, Americans are approximately as likely to believe in flying saucers as in evolution, and when one-fifth of Americans believe that the sun orbits the Earth.

Almost half of young Americans said in a 2006 poll that it was not necessary to know the locations of countries where important news was made. That must be a relief to Sarah Palin, who, according to Fox News, didn’t realize that Africa was a continent rather than a country.

Perhaps John Kennedy was the last president who was unapologetic about his intellect and about luring the best minds to his cabinet. More recently, we’ve had some smart and well-educated presidents who scrambled to hide it. Richard Nixon was a self-loathing intellectual, and Bill Clinton camouflaged a fulgent brain behind folksy Arkansas aphorisms about hogs.

As for President Bush, he adopted anti-intellectualism as administration policy, repeatedly rejecting expertise (from Middle East experts, climate scientists and reproductive health specialists). Mr. Bush is smart in the sense of remembering facts and faces, yet I can’t think of anybody I’ve ever interviewed who appeared so uninterested in ideas.

At least since Adlai Stevenson’s campaigns for the presidency in the 1950s, it’s been a disadvantage in American politics to seem too learned. Thoughtfulness is portrayed as wimpishness, and careful deliberation is for sissies. The social critic William Burroughs once bluntly declared that “intellectuals are deviants in the U.S.”

(It doesn’t help that intellectuals are often as full of themselves as of ideas. After one of Stevenson’s high-brow speeches, an admirer yelled out something like, You’ll have the vote of every thinking American! Stevenson is said to have shouted back: That’s not enough. I need a majority!)

Yet times may be changing. How else do we explain the election in 2008 of an Ivy League-educated law professor who has favorite philosophers and poets?

Granted, Mr. Obama may have been protected from accusations of excessive intelligence by his race. That distracted everyone, and as a black man he didn’t fit the stereotype of a pointy-head ivory tower elitist. But it may also be that President Bush has discredited superficiality.

An intellectual is a person interested in ideas and comfortable with complexity. Intellectuals read the classics, even when no one is looking, because they appreciate the lessons of Sophocles and Shakespeare that the world abounds in uncertainties and contradictions, and — President Bush, lend me your ears — that leaders self-destruct when they become too rigid and too intoxicated with the fumes of moral clarity.

(Intellectuals are for real. In contrast, a pedant is a supercilious show-off who drops references to Sophocles and masks his shallowness by using words like “fulgent” and “supercilious.”)

Mr. Obama, unlike most politicians near a microphone, exults in complexity. He doesn’t condescend or oversimplify nearly as much as politicians often do, and he speaks in paragraphs rather than sound bites. Global Language Monitor, which follows linguistic issues, reports that in the final debate, Mr. Obama spoke at a ninth-grade reading level, while John McCain spoke at a seventh-grade level.

As Mr. Obama prepares to take office, I wish I could say that smart people have a great record in power. They don’t. Just think of Emperor Nero, who was one of the most intellectual of ancient rulers — and who also killed his brother, his mother and his pregnant wife; then castrated and married a slave boy who resembled his wife; probably set fire to Rome; and turned Christians into human torches to light his gardens.

James Garfield could simultaneously write Greek with one hand and Latin with the other, Thomas Jefferson was a dazzling scholar and inventor, and John Adams typically carried a book of poetry. Yet all were outclassed by George Washington, who was among the least intellectual of our early presidents.

Yet as Mr. Obama goes to Washington, I’m hopeful that his fertile mind will set a new tone for our country. Maybe someday soon our leaders no longer will have to shuffle in shame when they’re caught with brains in their heads.

I liked the bit about the 7th grade reading level vs 9th grade level speech used during the debates. The Nero story is chilling!

AIG second bailout: $150Bn

The fun never stops. A huge bail-out package is announced this morning to the tune of $150Bn. That is a big number for ONE company. It goes to show that risk distribution via CDS was a bit of a mirage. CDS ended up concentrating at the re-insurance level a.k.a AIG. It does provide a big fat target for the mother of all corporate bailouts.

From the FT:

The renegotiation of the bail-out, which could be politically controversial, came after AIG rapidly used up most of the government original facility, raising fears that it could run out of cash.

The first wad of cash was $85Bn. They burnt through that money in a blink. AIG is nationalized at 85%.

TF 16. Nov 2008 Ronnie Foster

Download file here.

You know when people say “there is a candy in store for you?” meaning you have been missing out on something great and you are in for a treat. Via the play-list of DJBone on RA, I discovered the work of Ronnie Foster. Canadian born, living in Japan, musical drums genius.

Immediate like for me, on first ear. Heavy drums. Strong Detroit sound, hi-hat patterns (!). Then melody on drums and synth. Yes. It is a good energy head sound.

So it is natural that it would mix well with some deep house. Although one can hardly call Aril Brikha deep house. He is technically classified as Techno, but truly the drums from Foster are dominant anyway, so it is the Aril melody that comes out and that melody is house. Or at least the resulting mix is.

The mix is 20 minutes long with 3 titles from RF that stand out for me,

1- Techrider. RF
Excellent drum driven track. Plays solo in the beginning and is repeated on house.
2- The Pretender. RF
Something .... is happening. I love the original track, but here I never really play it bare. The second part of the original is something to discover a capella. It kicks in after “, on this street, in this house”. I like the bouncy energy that ensues in the original track. It is almost acapella at the end.
3- Spiriot. RF
Love this one. It plays pure. This guy is both heavy and easy. Instant classic. Drum mastah.

Mix:
a. Kept within, Aril Bikhra.
b. Out of my mind.

bonus:
Streetgirls feat. Meral Al-Mer, tocadisco.

Stem Cells on tap

Via Science.

To rule out any risk of viral vectors integrating into the host genome and causing tumors, Okita et al. (p. 949, published online 9 October) used a plasmid transfection procedure to introduce transcription factor genes into mouse embryonic fibroblasts to make pluripotent cells. These cells show many features of embryonic stem cells, including the expression of pluripotency markers, as well as the capacity to develop teratomas and chimeras when transplanted into mice. Importantly, there was no evidence of plasmid integration and, although less efficient than other methods, this method looks like it will offer a safer way of inducing pluripotent stem cells.

Basically this is a safer way to go about delivering the transcription genes necessary to trigger a pluripotent state in embryonic muscle cells. It is safer because it does not use viral vectors that affect the target DNA by retro-fitting.

The resulting cells express protein markers that are signatures of pluri-potent cells.
I had to go and read up on Teratoma and Chimera. The first one is a cancerous growth that can be grotesque, like an eyeball, hair, teeth. Not good. Basically this means that the cells are not controllable by the environment and grow whatever. The second one says that many cells successfully implanted from other instances. Same specie, different instances (transplant). Are they saying that by allowing for the reprogramming of a cell it allows for more acceptance rate when you transplant?

Carbon nanotubes as injectors

Via Nature a domino like collapse in nanotubes. Pinch the end of a nano-tube and it will collapse on all its length. Driving force is Van Der Waals in this case (electrical).

Dominoes in Carbon Nanotubes

Tienchong Chang
Shanghai Institute of Applied Mathematics and Mechanics, Institute of Low Dimensional Carbon and Device Physics, Shanghai University, Shanghai 200072, People's Republic of China

(Received 17 June 2008; published 21 October 2008)

We demonstrate by molecular dynamics simulations that the domino process can be developed in single-walled carbon nanotubes (SWCNTs). Once a section of a SWCNT with an appropriate diameter (>3.5 nm) is collapsed, the successive collapse of the neighboring portions can generate a domino wave along the longitudinal direction of the tube. The wave is driven by van der Waals potential energy and its natural speed can be up to 1 km/s. Molecules inside the SWCNT can be accelerated by the domino wave and finally shot out. The finding shows for the first time that a SWCNT can be an energy supplier, which provides opportunities for designing new concept (domino-driven) nanoelectromechanical system devices.

This is an obvious weakness for the robustness of the material. Yes it is strong most of the time but if you pinch it, wham, the whole structure collapses. It however opens interesting possibilities as a mechanical device, an injection pump for example.

O/R: The installer's dilimma

Home Automation today is an expensive hobby. To play in that field you need to commit $/E100k. It doesn't need to be that way. The cost of hardware, built at $5 and sold at $500, is there to take care of the ecosystem needed to implement the solutions in the field, a.k.a "the installer".

The reason the margins need to be so big is because the installation and maintenance side of the job are so time intensive. You do few jobs per year, so these jobs need to be expensive. This has confined automation to commercial and high end residential. The cost of automation becomes marginal compared to the whole but doesn't scale down.

To scale volumes and profits, one has to save time. Saving time in programming, installing and servicing are ways to scale the activity up.

Some of the self service tools we are developing go a long way towards that goal. You will find that the iPhone UI we are building is going in that direction with easy to use web based interfaces so that even end-users can engage in simple scene programming. Not all clients will adopt that, but more and more will. The more self-served the customer is, the more time is freed up and the price can come down.

While immediate productivity can be achieved through software-only tools, there is also a big margin available for hardware to go up in smarts. Where standards like KNX are implemented with kb of memory from 10 years ago, today's hardware standards speak in MB. A cell phone runs J2ME or Android. Within the decade, these smart actuators could sell for half the price of their memory limited ancestors with 10 times more features. Can you imagine the day where actuators will export their features for the network to automatically register and export.

We have done that in Java, yes we can. (sorry Obama fever).

O/R: What is in a name?

Matt Asay asks us what is in the Open Remote name.
For him it means pointing remotes at houses. He was surprised to discover that we do Audio-Video control and Home Automation control. Frankly there isn't much in the name.

I wanted it to call it iRemote, which was an even more restrictive name. The website was kind of available but the name was already registered. Then Juha Lindfors, an old JBossian, pointed out that Open Remote was available both as a URL and a trademark. So we went ahead.

We are making progress on the software and hardware fronts. See Juha Lindfors progress report on Hardware.

OpenRemote October Update

It's been a while since I last blogged. There's been a lot of activity happening in the forums and some discussions behind the scenes and it's time to summarize some of those here.
Controller Hardware

One of the main things we've been doing over the last month is decisions on the pre-built hardware boxes. As you may know, we have a hardware reference implementation that we have published (Thanks to Mark Spencer!) which has been sort of a baseline for us to evaluate what kind of software we can support.

Some people went ahead and built the box (hey Neil) so it's a real workable thing you can put together and play with.

However we recognize that there's a barrier in ordering parts from separate vendors, putting things together, installing the software and so on. That's why we've been trying to find somebody to put the boxes together for us, we will preinstall the software and you're off to an easier start with OpenRemote.

By the way, if somebody knows a good solid shop who can put together a box, please let us know. We don't require customizations, our parts are off-the-shelf, we are just looking for somebody to do the assembly. What we do need is a shop that is able to support small volumes, pay-as-you-go orders in small bulks (say 25 or 50 units) as we can't make huge order commitments just yet.
Controller Form Factor

The form factor is another thing we've discussed a lot. You can see from the first hardware reference implementation that the box has the capability for infrared, serial and X10 integration.

We've thought about this a bit and realized there are going to be distinct user groups for the OpenRemote hardware. Some are looking for a product to control their A/V setup at home. This mainly involves replaying the infrared commands from the controller box, or if you got lucky with your hardware, controlling it via serial connections.

In addition some people are interested in controlling their homes via X10, INSTEON or KNX -- building scenes and timed macros to control lights, security and so on.

Finally there's a professional installer community who'd prefer as little infrared as possible and rather integrate via serial or low-voltage twisted pair.

Rather than building a single box that can do all of that, we've decided to split things up into distinct extension modules that you can stack on top of the main unit.

We are thinking of a stackable (flat-top) form of a base CPU unit with the mainboard and USB / Ethernet / X802.11 connectivity and then, depending on what you want to do, additional stackable units on top for infrared, X10, serial, KNX, whatever is your fancy.

This way we can keep the cost of the base hardware unit low and additional features become on-demand USB extensions.
Hardware Parts

We are also looking at different options for the mainboard of the CPU unit. The original reference implementation calls for an Alix board with an AMD Geode chip on it. Other options we are considering is an Atom-based mainboard (you may or may not have noticed but the Atom based netbooks are flying off the shelves, hugely popular computers with price tags as low as $250) or VIA C7 based motherboard.

For infrared we are thinking the IR emitters from IguanaWorks or possibly TIRA, both of which seem to be well supported by Open Source community and LIRC. If you got ideas for other IR equipment you're happy with, let us know.

The goal is still to get Linux and Java up and running from CompactFlash. If you have strong background with Linux distros on portable devices, set-top boxes, mini-PCs and such, please ping us here or on the forums (or even in private email if you're shy). Especially curious to hear about experiences with different Linux distros working off of CompactFlash.

That's all for now. There's a bunch of stuff happening on the software side as well which I'll cover a bit later (think about home floor plan images with AJAX interface when configuring your home automation setup, just to whet your appetite...)

Deflation, Inflation, the debate is back

Sustained variants of D and I are always and everywhere monetary phenomenons. I have this theory that what we have seen recently (95-08) in terms of market growth, was largely the result of monetary expansion showing up as asset inflation. Growth can be mistaken with asset inflation in fact.

And if the process is in reverse will we in fact see strongly negative growth following monetary levels or is there a magic floor at 0%? In that light some commentary in mainstream press goes as far as saying that stagnation, a la Japan, would be a best case scenario. Maintaining nominal zero would be an achievement.

This morning the FT argues that the governments will be able to balance inflation and deflation. A positive scenario.

But remember that most of the leverage was in the financial industry, is there enough room in real industry, for the government to inject that kind of money into the economy through public works. War economy follows the same logic although I would hardly call it public works.

The cover of Newsweek is about the green revolution going on in politics. A revolution, not only to save the planet but in fact our economies. Our economies need the investment from the government to in fact make that transition. The article explains why VC's time horizon are not compatible with energy research time lines.

We could also see a dramatic improvement in roads, infrastructure etc. In fact the government will be looking for any excuse to throw money at its economies.

Remember that the last time around (1930's) the problems were addressed and solved with fascism and a massive world war. Here is to hoping we do better this time.

Let's get going people.