Archive for the ‘Uncategorized’ Category

Temporal minimalism

Friday, June 25th, 2010

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

Friday, June 25th, 2010

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

Wednesday, June 23rd, 2010

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.

Dead euro walking

Thursday, May 20th, 2010

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

Thursday, May 20th, 2010

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

Thursday, May 6th, 2010

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

Thursday, May 6th, 2010

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

Monday, April 19th, 2010

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.

What Killed Palm

Saturday, March 20th, 2010

A popular finance blogger asked me yesterday where Palm went wrong. Though I was a leading developer of Palm games and graphics software, I hadn’t considered this in a while. The specific question might be:

Why does the iPhone earn a third of all smartphone segment profits on just 8% share (by revenue), while Palm, despite an 11-year lead in mobile devices, is on life support, with negative lifetime profits, its shares down a split-adjusted 99.26% since the IPO?  What happened?

The answer is prosaic:  profit requires a sustainable competitive advantage.  Palm never found one.  Apple did.

One could kvetch all day (all week) about operational errors at Palm, but the central problem was strategic.  They never raised barriers to entry.  The carriers, retailers, distributors and PC vendors always held the power. Palm remained just a tool — though a very good one — for replicating other vendors’ PC data in the field.

Many bought the iPhone because they already own a pile of music purchased through iTunes — music that can only be played through an iPod.  You don’t want to carry a separate phone and iPod, so you pay a premium for an iPhone.  In short, the switching costs and network effects of iTunes are a big reason iPhone is so profitable.

Also when you buy an iPhone, likely as not you buy it directly from Apple.  There is no 3rd-party distributor or retailer to eat up margin.

Yes, iPhone is a great product, but that is not what sustains the margins.  The switching costs and distribution control sustain the margins.

Palm never grasped this. They still don’t.  They are narrowly focused on product. Their original design was fantastic, and opened a whole product category. The Pre is also great, by all indications. But good design is merely a necessary, not a sufficient, condition for consistent profitability.

Lacking any defenses, Palm still must fight every day for retail shelf space and wholesale pricing; Apple need not.  Palm cannot cross-sell from desktop computers; Apple can.  Palm controls no meaningful content format;  Apple does.  There is a long list like this, and it accounts for Palm’s travails as much as, or more than, any operational limitation.

For a time, perhaps 1996 to 2003, Palm had a big tactical advantage.  Their original design was so far out in front that competition was fragmented and poorly orchestrated.  That time could have been spent developing defenses.

For example, Palm could have used the PalmPilot sync software as a beachhead to wrest control of PC contact management software from ACT.  Palm could then have mainted those contacts in a closed data format, creating switching costs.  As long as their software was truly excellent, industry beating, then customers would be happy, despite a premium price.  Instead, Palm abdicated, treated contact management software as an afterthought for 10 years, while third parties developed sync tools.

The tactical advantage is now long lost.  Game over, it seems.

Slashing red tape in California

Thursday, March 18th, 2010

Following up on recent posts about inefficient regulation, here are several specific examples to show how California could radically simplify its operations.  This would slash state expenditures, hugely reduce compliance demands on small businesses, reduce barriers to hiring and business formation, yet have little or no impact on existing tax and revenue structure.

  1. No state-specific income tax rules.  Conform state tax to federal, without exception.  You simply pay 10 cents to Calif. for every dollar you pay to the IRS, minus any amount you paid to other states.
  2. No “use tax.”  Place burden on the seller to charge and remit California sales tax for California buyers.
  3. All state and county interactions are online and paperless by default:  taxes, licenses, etc.
  4. No smog check on vehicles under 10 years old.  Gross polluters were all made before 1980 anyway.
  5. Eliminate state investment advisor registration.  This is how most other states do it, because SEC already registers managers with over $30m AUM.  This is a classic 95/5 Pareto optimization:  by dollars, most fraud is concentrated in big scams like like Madoff and Allen Stanford;  meanwhile, registration has not been shown to reduce fraud, and the law still applies whether registered or not.