Nostradoofus

Previous posts have asked why obesity would appear in America only in the past 15 years, when we’ve had the gustatory trappings of success for many decades. A related question is why slim parents would have fat kids. What changed 20 years ago?

Here is a theory.

It turns out the insulin response is part of fetal development. The LA Times reported today that babies are twice as likely to be obese adolescents if the mother was diabetic during pregnancy. In effect, the unborn baby is at the tail of the insulin whip, responding much more strongly than the mother to overexposure to blood sugar.

But the medical definition of diabetes is a rather arbitrary numerical cutoff. Instead, consider the more basic conclusion, that routinely elevated blood sugar in a pregnant mother creates a magnified effect in the unborn child, as the baby’s insulin response is desensitized.

Now consider three changes that occurred in the past 30 years. First, the federal government began to advocate that carbohydrates be consumed at much higher levels relative to fat and protein, compared to the prevailing American diet. Second, corn syrup was widely substituted for cane sugar (corn syrup hits the bloodstream faster than sugar, placing greater strain on the insulin system). Third, snack foods, largely sweetened with corn syrup, were consumed in much larger quantity as mother stopped cooking and Big Gulps proliferated.

The effects might not immediately be visible, since the adult has a functioning insulin response that predates the dietary change; the problem might emerge only in the children.
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Nukes are a pain — dangerous and expensive to build and maintain. As a result, nations have acquired nukes almost exclusively to deter a rival. The rival is nearly always physically adjacent, more powerful, and already nuclear. Look at the timeline.

America gets nukes (1945).
Russia deters America (1949).
Britain deters Russia (1952).
France twirls Gaullist moustache (1960).
China deters Russia (1964).
Israel deters Syria & Egypt (1967).
India deters China (1974).
Pakistan deters India (1998).
North Korea deters America (2003).
Iran deters Pakistan, Israel, USA (TBD).

France is arguably the only nation to have developed nuclear weapons for no logical strategic reason. In all other cases, you may be sorry they acquired them, but you cannot deny the strategic logic.

For example, Iran is currently surrounded by US satellites and allies: Afghanistan, Iraq, Turkey. The conventional forces in those three nations far surpass Iran’s. Logically, that would be the scariest geopolitical threat to Iran. So logically, this is the primary reason Iran would seek nuclear weapons.

This strongly argues that conventional disarmament would help limit nuclear proliferation. For example, if the Kashmir borders were settled and India reduced its conventional forces, Pakistan would face no strategic threats, and thus be more likely to eliminate its nuclear arsenal. But India would do this only if China did it first. China would do this if Russia did. Russia would do it if America did.
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Microsoft CEO Steve Ballmer was publicly ridiculing Google Docs as recently as May 2008. This may prove premature.

As I have written before, the killer app in Google Apps is not its dubious Word or Excel knockoff, but rather the fantastic hosted email. Anyone who spends a week on Google Apps email will never go back, it’s that simple. The key functions — massive storage, instantaneous search, and bulletproof spam detection — run circles around Microsoft Exchange Server and everything else. Not even close. Please don’t bother disputing this unless you’ve tried it.

Spam detection now enjoys network effects, because Google employs group intelligence to detect spam. If you spam Google Apps email, thousands of recipients will instantly mark it as spam, and the message will be rejected for all remaining recipients. The more Google users, the better it gets.

Google’s dominance in email appears foregone. Does that matter? Yes, because whenever you receive a Word or Excel attachment through Google mail, you now see an “Import to Google Apps” button.

Conclusion: Google Apps hosted email has moved upstream from Microsoft Office.
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America currently blames others for its own failings in at least four important areas.

Trade imbalances: obviously we should foster exports, encourage production, discourage consumption. Currently we complain incessantly about China’s unfair advantages in trade, yet ignore the obvious: our federal policies of encouraging consumer demand — which may have made sense 60 years ago, when America had a ton of savings and produced everything domestically — now simply drive the durable goods deficit. How many people here bother to learn a foreign language and attempt to export something? Far fewer, as a percentage of population, than in China. We fail because we’re not trying very hard.

Drugs: obviously we should cut demand, not supply. Currently we spend billions destroying poppies and coca in Afghanistan and Colombia. This is pointless, because cutting supply simply increases price, thus increasing incentives for impoverished people to produce more. If instead you cut domestic demand, the price falls, reducing incentives and cutting supply.

Crime: violent inner cities are “us,” not “them.” Walling off suburbs into gated communities, and building vast numbers of prisons, denies the fact that our fate is shared. It is a form of blaming the victim: we already know from New York’s success in the 1990s that crime control is mainly a function of police presence. (Duh.) Public safety is just a matter of accepting our shared fate and acting upon it.

Energy: the Middle East is utterly irrelevant to our national interest, except for its oil. Controlling the availability of that oil requires projection of military power, which makes enemies. We risk domestic terrorist cataclysm mainly because we need oil. Yet North America has sufficient natural gas reserves to power the continent for decades. Has it occurred to anyone how insanely risky it is to have our entire economy (including distribution of food) depend upon reliable shipments of an imported fluid? We’re simply using the wrong fuel. Changing to natural gas only looks expensive when you ignore the Black Swan of an oil supply interruption, which is almost certain to occur at some point.
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Stiglitz claimed recently that “neoliberalism has failed.” More accurately, neoliberalism has long suffered from confusion about its origin.

Neoliberalism depends on, and exists because of, beneficial regulation. When it fails, it fails for lack of regulatory authority.

More generally, “free” markets are a structured game whose playing field is defined by government. Even property ownership is a regulatory construct, a form of monopoly sanctioned by government. This sanction has been stable for so long that Americans forget it can exist only within a regulatory structure.

For a dramatic illustration, consider the difference in the fortunes of California and Baja California. The latter fails for lack of a regulatory structure (mainly property rights, environmental law and public safety).

Neoliberalism comes under fire today mainly because of global trading imbalances. That makes sense, because when the global trading system fails, it fails for lack of regulatory authority to normalize across national borders: labor laws, exchange rates, etc.

Despite all that, for the time being, America would be better served to focus on fixing its own manifold internal problems, rather than complain about China’s trade advantages (whether fair or unfair). For example, the U.S. government’s fiscal deficit is a big problem, within our own power to fix, and not China’s fault. The promotion of consumption over production — which is now as much cultural as governmental — is also within our power to fix, and not China’s fault.

This might all be considered a special case of America’s current problem with scapegoating.
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Programmers know this, but I’m not talking about code.

In any field, it seems, optimization creates inflexibility. This is because optimization (maximization of performance) generally requires assumptions about the continuity of conditions.

In computer programming, you gain great speed benefits by writing graphics software in assembly language, rather than a compiled language such as C. But assembly is purpose-designed for a single microprocessor family. Change families, and all your work must be thrown away. So this optimization require one big assumption about future use of your software.

In investing, you can gain higher returns with leverage. But the greater the leverage, the more central your assumption of price stability or continuity, the greater your reliance on avoiding one really bad day, and its associated margin call.

In advertising, you can maximize conversion rates by having each CPC ad click through to a specific landing page designed for that ad. But the amount of work required to make a campaign-wide change increases by an order of magnitude.

Maximizing international trade optimizes economic output but greatly increases exposure to common-factor economic collapse, such as a discontinuity in the oil supply.

Thus optimization increases performance (narrowly measured), but also exposure to Black Swans.
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A recent Wall Street Journal article’s claim that gas prices will make Riverside real estate worthless is exciting but exaggerated.

Paraphrasing the argument: imagine you are the canonical Riverside resident, commuting to LA in a flag-draped SUV. That’s 12mpg, $4.80 per premium gallon, 120 miles per day, 210 days per year: over $10,000 per year in gas, requiring at least $12,000 in pretax earnings or 20% of the median family income. (The WSJ article concludes about $14k after tax, using different assumptions.)

Accurate so far. But then the article quotes a Deutsche Bank analyst claiming such homes could become “effectively worthless” because of the cost of sustained higher gas prices.

Obviously ridiculous. 30mpg regular-gas used cars are readily available for $5,000. The return on investment of changing from SUV to high-mileage beater is over 100%. So even if people don’t behave rationally in the short run, eventually the cost per mile will drift down, using the existing stock of technology and vehicles.

So WSJ and Mr. Deutsche Bank are wrong. Yet these houses may still become nearly worthless, because overbuilding during the bubble was concentrated in marginal locations. Gas prices are not the only thing going the wrong way for Riverside county.

Unlike tradable securities, homes have a fixed location. The cost/benefit assessment of buying in a given neighborhood includes not just gas prices, but taxes, commute time, weather, crime rates, etc.

Comparatively, Riverside County is not a nice place to live. It is the smoggiest location in the nation, brutally hot in summer, yet also expensive, crime-ridden, far from economic centers, and with poor access to good schools.

As a result, when housing supply far exceeds demand, this is logically one of the first places to be abandoned. Gas prices are only one reason.

For historical precedent, consider the Antelope Valley northeast of Los Angeles, which includes the cities of Lancaster and Palmdale. The area lies within Los Angeles County, but is geographically part of the Mojave Desert: baking heat, high winds, dust storms, etc.

The Antelope Valley was marginal to begin with, held together by a local postwar aerospace industry. When that declined, the area was decimated. A double-digit percentage of homes there were abandoned, and Palmdale Airport closed for decades. It can happen.

Riverside is a huge county, stretching from the Arizona border to within 30 miles of the Pacific Ocean. Parts of it (e.g. Corona) are not far from LA, and may recover quickly. But I sure wouldn’t want to own a 4,000-square-foot home in, say, Indio right now.
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The Economist writes in “From buy-backs to sell-backs” that the slowdown or reversal of share repurchases is an ominous harbinger for stock markets.

The article seems to miss the central reason for the change: the cost of risky debt was historically, monumentally low before August 2007, leading everyone (corporations, individuals and governments) to increase their debt/equity ratio.

The academic model cited in the article, with tax effects, argues for a 100% debt, zero equity structure. In the real world, this is usually moderated by a nonlinear increase in the cost of debt as the debt/equity ratio increases: lenders simply won’t go that high. But just how high they may be willing to go is a moving target. Before last summer, lenders were eager, so many public companies dutifully issued debt and bought back stock, increasing firm value by increasing debt/equity ratio, as in the academic model.

Suddenly in August, the price of risky debt skyrocketed, dramatically reducing the optimal debt/equity ratio. Companies are frantically trying to delever in response.

The best CFOs recognized all along that the cost of risky debt, and the cash flow available to service it, change through time. As a result, the true optimal debt level was much lower than implied by the prevailing cost of capital during the go-go years of 2005-2007.

The article also mentions rights issues by banks. These are a related matter, but not in the way implied. Banks were on the other side of the leverage table before 2007, providing the aforementioned monumentally cheap risky loans. The results of this are well known, and banks need to rescue their now impaired balance sheets. Few will lend to them, so one of their only financing options is to issue stock. A rights issue is the least expensive way to do so.

The really ominous harbinger for stock markets is neither the slowdown in buybacks, nor the increase in rights issues, but rather the underlying reason for both: inability to borrow. This cannot be resolved until the root cause of the credit crunch — a crisis of confidence in credit rating agencies — is corrected. This problem lays outside the realm of monetary policy, and thus cannot be fixed by the central banks.

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T-Mobile, which has supplied Wi-Fi service for years at Starbucks shops, is now suing the coffee chain over its plan to let AT&T Wireless deliver competing Wi-Fi service for free. T-Mobile alleges harm to its “substantial investment” in its Wi-Fi network.

Let’s stand back a moment and consider the economics of charging money for Wi-Fi access.

Every Starbucks already has a broadband line in the back room. Adding a Wi-Fi hub costs $80 in hardware, plus 30 minutes of installation time by a high school graduate, say another $20, for a total of $100 per store.

So, to provide unsupported free Wi-Fi at 7,000 Starbucks stores would cost a non-recurring onetime $700,000, or less than 0.1% of the operating income of either Starbucks or Deutsche Telekom (the owner of T-Mobile). After that initial expenditure, such a network would be essentially free to operate.

Obviously, then, T-Mobile’s “substantial investment” is not in the actual Wi-Fi service infrastructure. Instead, essentially all effort and expense goes into guarding the gates: building and maintaining a billing infrastructure to charge for, and control access to, all those Wi-Fi hubs from a central location.

A controlled-access Wi-Fi infrastructure of this scale likely costs 100 times more to build, and thousands of times more to operate, than the free version. If over 99% of the recurring operating cost is in guarding the gates, the whole enterprise is perilously exposed to a free competitor. As Wi-Fi becomes ubiquitous, you’ll always be able to poach a connection from the store across the street.

In short, this is a bad bet. Wi-Fi access is not a business, it’s a feature. Uncontrolled access, possibly with advertising, is the most likely outcome.
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Restaurant chain TGI Friday’s now advertises “right-sized” (i.e. small) entrees for $5.99.

But this happy development is a causative flyspeck alongside the implications of the exploding price of corn syrup, exacerbated by the midwest floods. If the price of a Big Gulp doubles, America may save more money on health care than it spends on food.

Not so helpful to the truly poor, of course.

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