The Big Picture: calls bullshit on china growth

Barry Riholtz is a great read. Sometimes TBP can be downright hilarious and clever.

Barry runs 5th grade math to debunk popular myth of china growth (23%!!!). His findings are that either a/ china is lying through its teeth b/its monetary mass has grown by 23%.

Of course it is c/ all of the above. By controlling monetary mass, china controls monetary gauges of economic activity. Much like the FED enjoys this role in the US. Barry basically is saying that all of the growth could have been a monetary mirage engineered by the financial authorities.

Just like it was in the US. What with loose monetary policy since deregulation happened. In the US the monetary mass was set by the private sector. Naked CDS in default, they are the latest in financial aphrodisiacs. Money-vampires, they may have caused the liquidity drain that triggered the quant-panic implosion of aug 07.

Little souvenir of a terrible year, writing and depression

It's that little souvenir of a terrible year
which makes my eyes feel sore...
from Here’s Where the Story Ends by the Sundays

Adapted from a letter to a good friend

… the work and adrenaline keep you from thinking too much. Sometimes, that’s a good thing. It’s the down time, you’ve got to watch out for, the slow-growing doubts and anxieties that creep in the void. After 5 years of building a company--eating, sleeping, living and breathing that entity, and caring a lot about a lot of the people we worked with, selling it felt like selling a child. If the purchasing entity’s culture is radically different from your own, and (you may feel in your less charitable moments) represents everything you built your company as a reaction against...that feeling is compounded. You can out-do the haters, writing your own epitaph. Not that this maudlin navel-gazing will generate much sympathy among your friends and acquaintances, either. You sound like the jilted ex-wife, complaining about the new wife coming in and redecorating the house and yanking the children out of their expensive private schools, etc. People's reaction is pretty much "Take your big-ass divorce settlement and move on." One person, in the industry, to whom I wrote, could relate. He wrote that selling his first company felt that way, but that "it gets easier each subsequent time..."

…my experience (with the meds) is that they don't "make you happy"--as I thought they would, until I tried them. What they do (when they work) is "take the edge off" and "help you cope." When I think about how I feel now versus back then, the biggest change is what (now) seem like relatively small things, used to really upset and overwhelm me. I couldn't let go or put things in perspective. I’d seize on some issue or thought pattern and gnaw away at it, like a pit bull with a bone. Things still upset me and I still get the blues, but the difference is that this is occasionally, not most of the time. Mostly, my baseline mood is a lot more calm, at peace…I don't necessarily like these people, but now I can accept them--along the lines of "They is what they is; and they ain't what they ain't…"

It's not just the lows that are more infrequent, but I can also recognize and appreciate more frequent moments of happiness…it hasn't been easy...I can recognize some of the bad old bad habits coming back. Maybe this will work now, maybe it will work later, I don't know. The good thing is that I know that, at least, there is something that will work.

What helped me a lot were two changes in my life: moving and starting a new creative project. Home was very connected in my mind with the productive start-up years, so living here felt very anti-climactic once we sold the company. Right now, I like the detached feeling of living in another country. Nobody knows you or gives a damn who you are. And, even if they did, nothing about who you were or where you came from in X is relevant in Y. This doesn’t just work with geography, but changing industries or careers, as well. Ironically, having strong roots and family ties makes it easier to let go of everything and feel at home in totally foreign places...because I can (and usually do) always go back. A cheesy reference, but the line from the movie Fight Club: "Don't let the things you own, own you" makes a lot of sense to me.

As for writing a play, I am somebody who is essentially happy when doing creative work. In my case, what I enjoy is writing. I think I read and write, in the words of C.S. Lewis: to know that I am not alone. I wrote the play with a new friend--who like so many people living parallel lives that I passed on a daily basis, I’d never gotten to know before. Working on a new creative/collaborative project has helped pull me out of my isolation, feel like I am moving forward with a positive, fun, totally different phase of my life…I am unhappy when I cannot control circumstances. What I like about writing is that I have complete control of this entity and can take all the things that have frustrated me in my life...work them out on my own terms, and have the last laugh.

it's that little souvenir of a colourful year
which makes me smile inside
so I cynically, cynically say, the world is that way
surprise, surprise, surprise, surprise, surprise
here's where the story ends
ooh here's where the story ends

Economics in crisis

I am in ATL for the past 3 weeks and bored out of my mind. Thank god I got a trip to NYC tomorrow to work on OpenRemote a bit. Meanwhile I browse the economic commentary. There is a great article this morning in the FT about Economics in crisis. Read it, it is short and sweet and touches upon many of the topics explained in the "dummies" series.

The gist of the argument is that there are two camps, Ricardians and Keynesians. They disagree on basic problems facing our economy. The debate, including pro-eminent Nobel prize winners, has degenerated in schoolyard name calling without much progress being done on "the truth".

I agree, this does not look good. Whenever, in software development, I would see flaring arguments go up, I knew that 80% of the time the issue at end was irrelevant because unknown. Meaning when there is no "right or wrong" yet, because we just don't know what it is or because it doesn't matter.

So the root cause for me is one of ignorance, or rather lack of knowledge by the composite body of economists. Speaking of bodies, I share the view that economics is a discipline that borrows from mathematics, psychology and more importantly biology. Studying complex systems does not match well with black and white answers to mind-models.

Mathematics has the luxury of being exact. That means a high degree of correlation of opinion around a "theorem". The theorem is either right or wrong, you can get a long time to "get it" but it is binary. Physics is also pretty binary. Physicists agree on Gravity, Quantum mechanics. But make no mistakes there is plenty of disagreement on stuff not known.

But the state of knowledge around policy impact, monetary impact, and the mathematical equations that can describe money as a dynamic entity in time is not that advanced. There isn't a clear model for what happened in the past 2 years and what needs to be done, if anything, going forward. There is plenty of research, but this feels like a young field, witness the disagreements.

Economics might be a field where quorum sensing could be interesting. There is good and bad in all models. The article does a good job of parsing it. We are dealing with a live body (the economy) and the impacts of our actions go through so many channels we cannot fathom the dynamics backing it. So a practitioners approach is needed. Take biology, the field "guardians" are doctors in the hospital sense, not the PhD sense. Math PhD are running computer simulations all day long, playing with the dynamic equilibriums to research new ideas which they then feed to the "doctors" for clinical trials eventually.

Economics as a discipline will evolve, a new consensus needs to emerge. Quorum sensing is something we all do. Increased communication via press/blogs is good. I certainly didn't know squat until 2 years ago. I also believe that this current crisis is making super-stars of certain economic figures (Krugman, Taleb, Roubini, Bernanke etc) and it will energize the field.

But I am with the author on the gist of the argument: for the field to evolve there needs to be some humility to unify what are, after all, under-developed and partial representations of the economic world. It is an exciting time to be in it. Nothing boring here.

Google Chrome OS.

It is as big as the death of MJ. The new OS by Google. To be delivered 2010.

Can Google finally unify the Linux camp and beat Apple? I believe they can. For me, OSX is a great OS in the sense that it is robust, usable and yes, pretty. It just doesn't get in the way. But then you can say the same of gmail and blogger. They are great products. They work, they are easy. Pretty? no... but hey, it is web software.

Of course a side of me cannot help but cringe at the thought that this is yet another pet project by Google. You know the kind. It crashes, it doesn't really work and it barely makes sense. You wonder if the project is seriously supported by Google or the pet project of Huan "zig-zag" Tseng, employee 43083.

And yet I hope they will pull it off. This feels different. Real. They have pulled off mail, blogger and docs in a relatively easy way. Android is an interesting project. At Open Remote, it makes all the sense in the world to have an OS that boots instantly in a "dedicated" mode; to us it's a panel. From Open Remote's viewpoint we are eagerly awaiting new panel touch hardware. The Android/Chrome combination throws the gauntlet on the low-end of the market.

A netbook calls for a netbook centric OS that really delivers. Simpler, more robust. There seems to be a faction at Google that is serious about inventing the next generation mass computing platform. I want to believe. Godspeed.

TF20: Indie Pop

Download.

Time for an indulgence. I have a sweet tooth for Pop. I was a teen in the 80's. There is excellent stuff being done today in the indie dance genre, which is really pop revisited with dance rythm and modern production. There is downright good music in there.

This mix was assembled with relatively new material, most within the year. For throwback there is some 80's raw. This is all originals, made from original, there is almost no production. It did take a long time to work on transitions. I threw in there two originals from the 80's, spot them.

Playlist: French, Yelle, a modern version of an 80's classic. Yelle has been specializing in porting old french pop to modern times. Computer Camp Love, 2009, catchy tune, very modern, funny lyrics. Needy Girl, by Cameo. One of the best tunes this year all around. The bassline is borrowed from the 80's original that is overlaid in the beggining, Rumors... There is another bassline in there that you might recognize. Needy Girl is a fantastic tune. Outstanding pop.

For fun I threw in there Dim-da-da heavily remixed. It segways into a good modern tune called "Remind me", I do that via acid bells for support of the "pompompero".

Many of you may have heard this tune in the Geico commercial of a year ago or so. This is a great tune, instant hit quality. It transitions to Popular Culture. It is one of those rather trippy tracks that can come out of underground indie production. This one is un-even but inspired. The whinny singing is great, "give us popular culture for free!".

It finishes with one of my favorites (08). It is rather theoretical techno "Black Sheep", the last track, Black sheep uses sounds that only acid bells displayed. I do like modern production! This is not pop, just a wicked track!

It was fun to compile this list. It does mean listening to a lot of stuff, but there are many things in the flow that I like. You can randomly listen to 300 tracks and extract a good 30. It is worth it.

The fallacy of rational expectations

Rational expectations is how most modern economics models agents. In equilibrium, agents will choose the option that optimizes their outcome. This assumes a tremendous intelligence on the part of the human.

It is plain obvious our race does not possess this quality. Our decisions are faulty, made with partial information, based on gut instinct, sometimes just plain dumb.

Think about Ponzi type II investors. The investor speculates that the price of houses will go up, spurring demand for both credit and houses. This sparks a self feeding loop of a credit bubble and a housing bubble. This ponzi scheme is stable in the short term, even highly profitable and can go for awhile and becomes generalized (7 years?).

You will start hearing "real estate ALWAYS goes up" and other stupid things. In retrospect this is a sure sign the Ponzi is about to blow. People can rationally build up expectations that the market will go up based on short term experience and ignore the rational long-term outcome that it will blow up at some point. We blow ourselves up every time with money.

Some models represent agents as Ponzi II speculators. Just for fun I would look for papers where some agents are "dumb or random". Not everyone has a cloud of computers to pick solutions out of a 120 variables universe. Sheesh!

The Oil Glut

Nathalie went to bed one night and told me "I want to invest in oil". Oil was at $32, I believe this was 4-5 mo ago?. I went online to research just how one invests in oil. I read about Contango, ETFs and owning oil tankers. I realized a big part of the cost is the ongoing cost of storage. It seemed complicated and not terribly interesting. I told Nathalie I had no appetite for risk. Today Oil stands at $65.

Via naked capitalism, an article on supply and demand. Basically the short term supply is going to be huge. So downward pressure should increase. The article forecasts oil at $20. Mind you, before the bubble in commodities, I had read an article stating that oil would go from $70 to $50. It was basically right, even understated, considering that oil went to $30 but after having visited $150.

Such volatility in market pricing is mostly the result of the futures market. Any time someone tries to compute spot from futures, there is a lot of guess work going on. Also the futures are susceptible to speculation. A barrel of oil changes hands 27 times before it reaches the consummer. This makes for volatile prices. If one were to look at oil markets would they find the reflection of supply and demand or a swarm of speculators?

An orderly transition of our economies to something else than oil will take a century and at least 3 generations, assuming we make oil last that long. Grand-pa, tell us about the old cars again? What happened to the reserves of oil? Did the markets handle it well or did it degenerate in war? I hope our economies are more resilient and clever than that.

Buiter on credit and naked CDS

Excellent article by Willem Buiter, professor of econ at LSE, in the FT. I want to quote a few passages

Despite inadequate supervision and regulation, the financial innovation process that started in the final quarter of the 20th century probably improves overall economic performance during normal times. It does, however, increase the likelihood of abnormal times—panics, manias and crashes—occurring, and exacerbates the scope and severity of financial crises.

Those that have been following the for-dummies series will be able to dissect this sentence easily :) It is the monetarist argument in Buiter-speak. He writes well and fluidly but is a bit opaque imo. Financial innovation of MBS and associated CDS did result in a rapid increase of the total monetary volume. Buiter says

When risk is mispriced and misallocated, financial crises and collapses can occur. Financial crashes and associated defaults and bankruptcies are socially costly because they involve a waste of real resources as well as a reshuffling of property rights. When that happens, the aggregate non-diversifiable risk in the economy is not just distributed inefficiently, but its total quantum is increased. Risk that should be diversifiable under orderly market conditions ceases to be so.

In other words liquidity dissapears from these markets. The secondary implodes, you can't sell the stuff, just like you can't resell your house.

Not to toot my own horn, but as Buiter says himself in the article "if you don't toot your own horn, who will?". He lashes out against naked CDS.

One of the reasons for my ignorance (widely shared, I may say in my defence) was the pace of financial innovation in instruments and institutions. Most of the new instruments and institutions were motivated purely by regulatory and tax arbitrage, domestic and crossborder. But some it it was genuine. Even those that were genuine and potentially socially useful (interest rate swaps, securitisation, CDS). Even the genuine innovations were, however, often abused and became socially damaging. CDS provide an example. Just as short selling equity is potentially efficiency enhancing but naked short selling is just gambling, so insuring credit default risk is potentially efficiency enhancing when the buyer has an insurable interest and the writer of the CDS is sufficiently capitalised. Current arrangements permit ‘naked’ CDS buying (buying CDS on a security in excess of the face value of your holdings of that security).

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