Temporal minimalism

June 25th, 2010 by admin

About 18 months ago, I gave away most of my physical possessions in a successful bid for simplicity.

Now, blog writers do craft catchy leads for impact. I could have written, “I gave away a pile of old clothes, books and junk, which collectively comprised 51% of the individual objects I owned.” Yawn. But overdramatic phrasing aside, this action greatly improved quality of life.

But possessions merely chipped a bit from a Sisyphean boulder of excess.  The real application for this “fewer, nicer” philosophy is time and attention.  I long resisted hard decisions, because I have so many interests, in no particular hierarchy.

I finally chose a crucible:  do fun things that have more direct impact on the rest of the world.  The top of that list includes both the whimsical (playing in my band) and the serious (developing, using and publishing investment tactics to clients in 8 countries).

Near the bottom of the list is this blog, which deals in subjects that interest me, but about which I have little leverage for direct action or impact.  So with great reluctance, I conclude it must be the first thing to go.

I write compulsively (figuratively, not clinically).  To prevent posting in moments of caffeine-infused weakness, this site has been converted from Wordpress to static HTML, where it remains readable but not easily editable. Just a safeguard.

And so, to my ~5 readers, I bid adieu.  There will be more blogs someday, I suspect.

Expected value and risk-seeking leaders

June 25th, 2010 by admin

The following is just a mashup of Darwin, SapolskyDawkins and Kahneman, but is interesting, to me anyway.

It’s easy to see how an evolutionarily stable subset of humanity could arise that compulsively takes insane risks to gain leadership positions.

Various primates, including humans, tend toward social hierarchy, with a greater or lesser tendency for there to exist a single male leader that may greatly, sometimes wildly out-reproduce the rest.  For example, the current state of genome evidence suggests that 8% of all Asians are descended from a single male less than 2,000 years ago, presumed to be Genghis Khan.

Evolutionarily, that kind of payoff is worth some risk. A lot of risk, in fact. Even an action with an 90% chance of sudden death (”hey guys, watch this!”) is “worthwhile” if the increase in reproductive success is sufficiently vast.  If the expected return is positive, evolution will make that risk-taking tendency increasingly common in a population, until the odds renormalize.

As a result, it is easy to see how something we today call a pathology — compulsive risk-seeking behavior, as occurs among gamblers, short-term traders, Kennedies, and would-be teapot dictators — is evolutionarily possible.

In Dogged Pursuit of Failure

June 23rd, 2010 by admin

The following policies have all failed consistently, for decades, yet are still actively pursued, with little or no evidence to suggest eventual success.

  • Economic sanctions (Cuba, Iran, Iraq, etc.)
  • Counterinsurgency (Algeria, Vietnam, Afghanistan, etc.)
  • ESL education (actually slows language acquisition)
  • War on Drugs (raises price, attracting more supply)
  • Agricultural subsidies (negative ROI, other market distortions)
  • Government housing (as opposed to successes like special zoning)

I’ll add more as I think of them — there are plenty — but it’s interesting to ask why these things would persist indefinitely, when they always fail.  A big reason may be the lack of transparency that results from a lack of careful, consistent, widely published measurements.

The illusion of recovery

May 26th, 2010 by admin

Let’s play connect the dots.

USA Today, 5/26/10:
Private pay shrinks to historic lows as gov’t pay rises
(private salaries fall to 41% of personal income;  public assistance reaches 18%, up 50% in 10 years)

Bloomberg, 5/24/10:
FHA volume signals ‘very sick system’
(95% of all new home mortgages are government-sponsored.)

WSJ, 4/19/10:
Rising personal consumption attributed to homeowner strategic defaults
(Chief economist of Economy.com [Moody's] attributes rising personal expenditures to the fact that 5 million households now live in homes they are not paying for.)

WSJ, 5/7/10:
U-6 unemployment still over 17%, near postwar high

Marketwatch, 5/12/10:
Tax receipts still falling
(Federal gov’t runs loss even during tax month — 4/09 and 4/10 are the only two months it’s ever happened.)

Treasury Dept:
Public debt 88.9% of GDP, rising at ~10% of GDP per year
(Fastest increase in peacetime US history, similar rate to World War II)

The dots form this picture:  epic public borrowing substitutes for normal economic activity, with no end in sight. We are witnessing a titanic battle between deflationary economic conditions and inflationary federal policy. Anything could happen. Hope it doesn’t.

Dead euro walking

May 20th, 2010 by admin

I’m going to call it now.  The euro area as we know it today is finished, and will survive only among stable, highly industrialized EU economies — DE, FR, IT — while dying in most of the Mediterranean.

Most econ commentators now admit this is a possibility, but Nostradoofus foretells that it is a near certainty, and sooner than we think.  Single digit years at most.

The reason is simple self-interest.  Peripheral EU states joined the euro to borrow more cheaply.  If they can no longer do so, and if the price of membership is now fiscal agony, then the euro has nothing to offer them but deflation and 20% unemployment.

Greece’s leadership has a long tradition of acting in its own short-term interest:  profligacy, excessive borrowing, etc.  We have no reason to expect a change in that culture, so at this point, what is in Greece’s short-term interest? Default on the euro debt and leave the currency union.  Hence that is the most likely result.

Once that door is open, other heavily indebted hangers-on are likely to leave, e.g. Portugal.

I’m looking forward to a brief window of inexpensive vacations in Santorini.

The real trouble with Keynes

May 20th, 2010 by admin

Forget, for a moment, the debate over whether Keynesian policy “works,” however one wants to define that. Forget the adverse incentives, the moral hazard, the misallocation of capital. There is actually a bigger problem.

The real problem is that Keynes places unrealistic demands on a capitalist democracy.  When you encourage currency debasement, mass redistribution, interest rate distortion, et al — even briefly — you open a populist door that is very hard to close. Giveaways are the politician’s crack, almost impossible to put down once taken up.

The possible exception to this is monetary stimulus, if the central bank is sufficiently independent.

Charlie Munger discusses emigration

May 6th, 2010 by admin

Yesterday, at the 2010 annual meeting of Wesco Financial Corporation, chairman Charlie Munger (better known as Warren Buffet’s vice-chairman at Berkshire Hathaway) held forth on a variety of business and investing topics.

Munger spent a great deal of his opening monologue singing the praises of Lee Kwan Yew, who, as Singapore’s rather ironfisted “prime minister” from 1965 to 1990, led this tiny, resource-starved, ethnically divided, malaria-infected island nation to become one of the wealthiest, most prosperous, best educated, most stable, most peaceful and least corrupt places on earth.

Munger later commented that, while he personally liked the California climate and would not consider leaving the US, he could certainly understand the logic of emigrating to Singapore.

Anyone who has followed 86-year-old Munger over the years knows him to be a conservative Republican, steadfast patriot, supporter of the Iraq invasion, and (until recently) perennial optimist about America;  but also rational and willing to change his views. When this man says “Basically, It’s Over” for America, and that he understands the logic of leaving the US for Singapore, one should sit up and take notice.

Healthcare bill deepens regulatory morass

May 6th, 2010 by admin

One of the biggest, least-understood problems with US economic policy is a lack of attention to the costs of regulatory complexity, including tax preparation.  America has traditionally been an easy place to do business, so the recent Gordian knot of basic compliance has arisen almost unnoticed.

Compliance costs are regressive, falling disproportionately on small businesses that lack a full-time accounting and compliance staff.  Since small businesses are the biggest source of US employment, it is logical to conclude that increasing regulatory complexity measurably increases total unemployment (expanded thoughts here, here and here).

Weeks after healthcare reform passed, reporters are still trying to figure out the ramifications of the 2400-page law.  Here’s an ominous one from CNN:

Health care law’s hidden tax change to launch 1099 avalanche (ht Eric)

Some choice quotes from the article:

…in 2012 all companies will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services…

While this sounds almost exactly like existing law, the subtle addition of “corporation” and “goods” makes it vastly broader:

…under the new rules, if a freelance designer buys a new iMac from the Apple Store, they’ll have to send Apple a 1099.

So apparently every business will soon be generating 1099s for the office landlord.  The web hosting provider.  The local restaurant where sales meetings are held.  The airline.  The travel agent.

This is just the latest straw on the camel’s swayed back.  With each new sheaf of regulatory paper, the small businessperson increasingly asks himself two questions:  ”Could I offshore this?” and “Should I leave the country?”

Of course, not everything will be offshored, and not everyone will leave.  But these are not questions America’s entrepreneurs should even be asking.

VW, Icelandic Volcanoes, and War Prevention

April 19th, 2010 by admin

This is so far reported only in Spanish-language media.  Several hours ago, VW shut its Puebla, Mexico assembly line for the Bora (not sold in the US) because of the Iceland volcano.  This is VW’s best-selling car and its largest plant (Puebla also makes most A4-based VWs sold in the Americas, including Golf, Jetta and New Beetle).

The shutdown is typical of just-in-time manufacturing systems;  break the supply chain, and final assembly runs out of parts within hours or days.  Obviously some critical component (probably lightweight and high value, such as electronic control systems) was being shipped from Germany by air.

Transnational interdependencies are bad news for the economic cost of natural disasters, but perhaps good news for geopolitical stability:  transnational just-in-time manufacturing decreases the likelihood of war by increasing its cost to all parties.

War then becomes unlikely unless at least one participant has no economic interdependencies.  For example, the US could invade Iraq in part because so few in the West had economic interests there.

How do you end conflict in the Middle East?  Install dozens of large, domestically owned, export-driven, just-in-time manufacturing plants in Iran, Iraq and Syria.  This would appear to deliver more stability than sanctions, bombing or occupation, because vested interests on all sides would then fight to preserve them.

Why house prices cannot recover soon

April 15th, 2010 by admin

CalculatedRisk already said this in December 2009, but he buried the lead, so a lot of people likely missed it:  for the foreseeable future, house prices are far more likely to fall than rise, because mortgage rates are rising, personal income is flat, and subsidies are falling.

Homes, unlike other kinds of real estate, are historically priced not by their earning power, but as a more-or-less fixed percentage of personal income.  That is, homeowners take on the mortgage they can afford, which is a relatively stable percentage of income.

During the bubble, that relationship got out of whack, but has since been mostly restored (it’s still higher than the historical average, but not much).  This has led the Wall Street Journal and others to argue that houses are now cheap.

But that makes an extrapolation error.  Today’s affordability depends upon today’s interest rates, income and homeowner subsidies.  If these change, then prices will eventually change with them.

If you believe home prices will rise in the next few years, then you must believe one or more of the following must occur to make mortgage payments more affordable:

  1. Mortgage rates will fall.
  2. Personal income will rise.
  3. Subsidies (mortgage deduction, homebuyer credit) will be expanded.

None of these is realistic;  in fact, all three are moving in the opposite direction. Homes are becoming less affordable. Right now. The odds of an abrupt reversal are remote.

Thus, in aggregate, house prices will probably stagnate or decline for the foreseeable future.  There will be regional exceptions, but this is the overall picture for housing in the United States.