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Investments for dummies

Posted in investments by Scott Locklin on November 20, 2010 

 

Since I have a weblog, a trading skunkworks and occasionally work for people in the quantitative finance domain, I’m occasionally asked by friends and acquaintances about investments. “Should I buy gold?” “What do you think of investing in company X?” or my favorite, “where should I put my money?”
The fact of the matter is, I don’t know the answer to these questions, and compared to most people, I probably am an expert on such things. I’d say, in reality, very few people in the world really knows the answers to these questions, and if they know, they’re not going to be telling you. To really understand why, consider what you’re investing in when you buy a stock.
When you buy a unit of stock, you’re buying a legal contract entitling you to part of the profits of a corporation. What is a corporation? It’s a legal arrangement for providing goods and services to the public, and providing some vaguely defined way of sharing the profits with the owners. The owners being, the people who own stock in the company. The owners are protected from legal risk incurred by the actual agents of the corporation. In other words, if a Lockheed executive tries to bribe a congressman and actually gets into trouble for it, the shareholders won’t go to jail. This is socially useful in that the shareholders can’t be expected to be accountable for the tens of thousands of Lockheed employees. While shareholders are protected from legal indemnity, they’re not protected against the financial shenanigans of the agents of the corporation. This is something that people rarely think about: if the corporation they’re invested in is manned by criminals, they probably won’t realize any returns. Even assuming the agents of the corporation are honest, that doesn’t mean they’re not dumb, or at least optimizing a utility which isn’t aligned with that of the owners. For example: many companies will incur massive debts; debts which could eventually bankrupt the company. Accounting systems are also a bone of contention. While most American companies are reasonably honest, the way that the accounting is done is hugely relevant to how a company is valued.
There are a couple of ways ordinary humans think about stocks. They may think the idea behind the company which issued the stock is a good, see a stock going up in price, and so they buy into the trend. They may actually know something about the the company: perhaps they notice lots of other people lining up to pay $4 for a cup of sugary caffeine water at the local coffee house, and so, see it as a good investment. That’s all well and good, but if you don’t know about the company’s plans, the intimate details of it’s accounting methods, and who is running the joint, you really don’t know anything about it. If you’re buying on the trend, well, that can work too, but unless you’re willing to sit around and white knuckle the trend to its ultimate conclusion and time it well enough to sell at the top, you are just gambling. Not that there is anything wrong with that.
My investment advice: invest in the small businessman. I have a minor celebrity pal who did time in Los Angeles. As all Angelinos are required by local statute to have perfect teeth, Veneers are an extremely profitable business. My pal ended up learning all about the various pieces of machinery which can be used to make this sort of thing easier on a dentist, as he had it done to his own choppers, and he ended up investing in individual dentists. He would do stuff like invest in the machinery, invest in young dentists purchases of business partnerships (Dentists usually buy into a practice, in order to have access to equipment and a ready flow of customers) and share in the profits. Since dentistry is a virtually risk free proposition, my pal made a good deal of money off of such investments.
I can see people shifting uneasily in their seats already. How did my pal know these Dentists would pay up? Well, my pal pretty much had to investigate only the individual dentists he invested in. If you’re investing even in one equity, you’re investing in a whole lot of people -people you will never know, who may or may not be honest people who are working in your interest. My pal also had a lot more legal leverage over his investments, as he owned substantial fractions of their enterprise; far more than you’d own in a given equity. In that sense, his risk is a lot lower than someone blindly investing in stock of a company.
Most people never seem to think of this option: investing in small businesses. It does require some social skills and imagination, but it seems to me, for the average joe who doesn’t even understand the rigors of double entry book keeping, let alone the difference between an accrual and an operating cash flow, this is a better bet. Otherwise, you’re just gambling. Investing in the latest trend in the stock market seems the height of folly for the regular schmoe who can’t be bothered to understand even how a very small business works. I guess if you can’t be bothered to invest in a small business, something like public utilities makes a lot more sense than speculating in something you don’t understand.

scottlocklin.wordpress.com

CDS chart of the day, Portugal edition

Many thanks to my colleague Eric Burroughs for sending over this chart, showing how Portugal’s CDS curve has evolved over the course of this year:

The black curve is how Portugal looked in April: a pretty standard upward-sloping curve, with default more likely the longer you go out.
By June, however, with the onset of the Greece crisis, things looked very different. (This is the green curve.) Obviously default probabilities were higher across the board. But they were highest at the short end of the curve: 6 months to a year out. If Portugal could make it that far, markets were saying, then it would become steadily less likely to default thereafter.
Today, with the red curve, it’s very different yet again. The contrast from just a few months ago is striking: while the 1-year CDS showed the highest default probability back then, today it’s the lowest. The EU bailout of Ireland confirms that Portugal will probably not be allowed to default any time soon.
But then look at where Portugal’s CDS curve goes after that: straight up, to the point at which the country is now considered more likely to default at 3 years out, and on from there.
The implication is clear: any bailout now only serves to make a future default more likely.
Which is not, I’m pretty sure, the message that the EU is really intending to send.

blogs.reuters.com/felix-salmon

Will Ireland's bailout end the euro crisis?

Posted by Michael Schuman Monday, November 22, 2010 at 2:43 am

 

5 Comments • Related Topics: bailouts, banks, europe, greece, sovereign debt,

The government of Ireland sought a European Union-International Monetary Fund bailout over the weekend, finally succumbing to pressure from its fellow Eurozone members and panicked financial markets. That makes Ireland the second of the Eurozone's 16 members to require a rescue, after Greece got a $150 billion package in May. Ireland's will likely be smaller – perhaps $110 billion over three years -- though the final details are still being negotiated. Olli Rehn, the EU commissioner for monetary affairs, said the bailout of Ireland is “a critical step forward” to “safeguard financial stability in Europe.”
The Irish bailout will bring to a close weeks of rabid speculation about Ireland's fate that plagued financial markets throughout the world. But is the Irish rescue finally the end of the chaotic instability the Eurozone has experienced for more than a year? Will investor confidence be restored over the zone's future? Probably not, in my opinion. As has been the case throughout the euro crisis, Europe's leaders are dealing with only one part of a bigger problem, and only when their backs are against the wall.
The Ireland crisis followed a similar pattern to the Greek crisis earlier this year. For weeks, Ireland's ministers and their counterparts across Europe vowed that the country could go it alone and fix its own financial woes without EU aid, hoping that the Irish economy could muddle through until sentiment in financial markets improved. But as with Greece, investors didn't believe them. In Greece's case, the concern was the miserable state of the government's finances; in Ireland's, it's the burden of a floundering banking sector brought low by a property bust. But in both cases, the numbers were just too ugly. In September, the Irish government said its bank rescue plan would push the budget deficit up to a staggering 32% of GDP this year and balloon its government debt to 99% of GDP. So, as was the case with Greece, nervous investors kept hiking up the spread between Irish government bonds and benchmark German bonds to record levels, a sign that bondholders saw Ireland's debt as increasingly risky to hold. Finally, Ireland and the EU bowed to the inevitable – a bailout. “A small sovereign like Ireland faced with an outsized problem that we have in our banking sector, cannot on its own address all those problems,” Irish Finance Minister Brian Lenihan admitted.
Just as the Greek bailout failed to stem the euro crisis, I believe the Irish bailout will fail as well. That's because all of the underlying issues will remain in place. Sure, this time around, the EU has funds already committed to help Ireland – the $1 trillion rescue fund announced in May, which didn't exist during the Greek meltdown. But the availability of bailout money won't resolve the uncertainties inherent in the very nature of the EU's bailout scheme.
First, the success of the bailout will depend on the ability of Ireland's government to impose incredibly severe budget cuts, demanded by its Eurozone pals in return for the rescue funds. In other words, the Irish people will have to absorb years of economic pain to protect bondholders in Germany, the UK and France. As in the situation in Greece, my guess is that investors will continue to hold doubts as to whether that formula is viable. Concerns will persist over whether Ireland can politically or economically impose such austerity measures while the economy is contracting. That may keep investors nervous, as they are with Greece, that a restructuring of debt might still be waiting in the wings, an outcome that would force a haircut on bondholders.
Second, the bailout of Ireland, as with Greece, does nothing to help the economy out of its crisis, aside from preventing an outright default. The rescue scheme ignores the crucial ingredient of growth – without which Ireland will struggle to close its budget gap, resolve its banking crisis and pay off its debts. In fact, by forcing vicious austerity measures onto the Irish economy, the bailout will only make that turnaround more difficult.
To put it simply, the entire bailout mechanism forged by the EU leaves too many questions unanswered, and thus will keep financial markets jittery. That doesn't bode well for the fates of the Eurozone's other weak members, especially Portugal and Spain, whose bonds have also been punished recently. Spain's finance minister already came out to claim Spain is not Ireland. That foreshadows the possibility that events with Portugal and Spain could follow the same course we've seen with Greece and Ireland – a combination of denial, delay and investor doubt that causes a self-fulfilling deterioration in financial markets.
I'm not saying that Spain and Portugal will inevitably suffer the same fate as Greece and Ireland. Each economy is different, and hopefully investors will realize that. And there is a chance that Europe, by showing that it is committed to employing its $1 trillion fund, can stop the contagion at Ireland's shores. Perhaps officials in Spain and Portugal can implement the reforms to keep investors appeased.
But the case of Ireland shows that even reform might not be enough to hold off a crisis once markets get nervous. The government of Ireland has been universally praised for its upright handling of its banking crisis and budgetary woes, but that wasn't enough to save them.
Even more, the ad hoc way in which Europe is handling its debt crisis – acting only when pushed to the precipice, with a program in which the stronger Eurozone members impose pain on the weaker – isn't tackling the roots of that crisis. That's why all of the previous steps taken by the EU– the Greek bailout, the trillion dollar fund, EU reform proposals – haven't stemmed the crisis. What the Eurozone requires is a proactive effort to engage its problems in a more comprehensive way, helping the weaker members to resolve their debts and return to healthy growth, not just saddling them with further debt to prevent losses at European banks. Unfortunately, based on the evidence of the past year, Europe's leaders are going to continue to muddle through, hoping they don't have to do more than they've already done. I fear that won't be enough.

Read more: http://curiouscapitalist.blogs.time.com/2010/11/22/will-ireland%e2%80%99s-bailout-end-the-euro-crisis/#ixzz163Mfo38L

More on amateur economics

Nov 2nd 2010, 15:31 by R.A. | LONDON

I THOUGHT I made a pretty nice point on Sunday concerning the way amateurs fuel housing bubbles. I wrote then that it asn't amateur participation in the market that made prices bubbly; rather it was the influx in new amateurs, which allowed the Ponzi-like bubble to keep inflating. As evidence, I cited the unusual rise in the homeownership rate during the 2000s from 67% up above 69%. Unfortunately for me, Calculated Risk has gone and put up a chart that complicates the story:
As you can see, there's an even larger increase in the homeownership rate from the early 1990s to 2000, of nearly four percentage points, than we observe in the bubble decade. Now, this doesn't mean my earlier story was wrong (you thought I'd say that). Bubbles often begin with a "real" shift in fundamentals that generates upward price pressure. The tech boom began with a wave of investment in new, productivity-enhancing technologies. It could be that the housing bubble of the 2000s was rooted in an earlier fundamental shift.
Like what? The generation that fought World War II famously came home and produced a baby boom—an unusually large cohort of births between the mid-1940s and mid-1960s. From the early 1980s to the mid-1990s, these Baby Boomers were entering middle age and generating an echo boom of their own. Prime child-rearing age also happens to be prime homebuying age; the rate of homeownership jumps substantially as one moves from twentysomethings to thirtysomethings. In other words, much of the increase in the homeownership rate observed in the 1990s was likely rooted in a change in the composition of the population—from groups less likely to own homes toward groups more likely to own homes.
This increased demand would nonetheless have run up against supply limits to generate rising prices, and rising prices generated new enthusiasm for participation in the housing market. What turned this enthusiasm into irrational exuberance, however, was the massive credit growth of the 2000s and the innovations that increased the pool of potential homeowners. In the 1990s homeownership increased because more people were moving into the "typical homeonwer" category. In the 2000s homeownership increased because the "typical homeowner" category was broadened to include new people.
As it turned out this broadening was not sustainable, and when the pool of potential borrowers was finally empty the homeownership rate (and prices) fell substantially. What will be interesting to observe is whether some of the underlying increase in demand for homeownership is also reversed. Boomers are now approaching retirement age, and homeownership rates decline slightly among those over 65. The echo boomers are now young adults, but their household consumption patterns may be significantly different from their parents'. They're likely to marry later and have fewer children, and they may be turned off from homeownership by the crisis. Rates of homeownership could begin a long secular decline.
The effect of that decline on prices will depend on the extent to which existing supply can be shifted from owner-occupied to rented. Where this shift is slow to take place, the slump may persist for quite a long time.

theconomist.com/blogs/freeexchange

CDO lemons, a government fruit bowl

Posted by Tracy Alloway on Nov 01 12:51.
‘Asymmetric information’ in Collateralised Debt Obligations is not a good thing.
That much we know from Goldman Sachs’ Abacus 2007-AC1 CDO and, err, Goldman Sachs’ Abacus 2006-13 and Abacus 2006-17 deals. But a new Federal Reserve discussion paper takes the issue a step further to ask: could asymmetric information alone have caused the collapse of private-label securitisation?
The abstract:

A key feature of the 2007-2008 …financial crisis is that for some classes of securities trade has ceased. And where trade does occur, it appears that market prices are well below what one might believe to be the intrinsic value for that class of security. This seems to be especially true for those securities where the payouff streams are particularly complex (for example, CDOs). One explanation for this is that information about these securities’ intrinsic values is asymmetric, with the current holders having better information than potential buyers. We show how the resulting adverse selection problem can help explain why more complex securities trade at signi…cant discounts to their intrinsic values or do not trade at all…

The proving of the hypothesis is probably the least interesting thing in the paper. Authors Daniel Beltran and Charles Thomas find that “when market participants are pessimistic about the state of the economy in the future; the increased pessimism interacts with asymmetric information causing the CDO market to shut down.”
But what’s really worth highlighting here are the authors’ suggestions for fixing the so-called ‘lemon problem‘ in structured finance. And there are three of ‘em:

… The …first policy has the government buy relatively low value securities and commit to holding them until maturity. The government has no better information than any other buyer. What makes the government special, and hence provides a role for policy, is that it is the only agent that can credibly commit to not sell the securities before they mature. The policy is useful because after the government makes its purchase the market for the remaining securities reopens and these remaining securi- ties trade at prices closer to intrinsic values. Although this policy involves a cost to the government, the cost is smaller than the gains that arise from having the market reopen…

Tarp take-two then, government fruit bowl edition:

The second policy considered is the creation of a “bad bank” to purchase all of the securities tainted by the asymmetric information problem. Securities holders sell their securities to the bad bank for a given price. The bad bank …finances the purchases of these securities by issuing identical shares that entitle the owner to interest in the cash flows generated by all the securities in the bank. The bad bank keeps track of the cash flows of each security it purchased, which are used to calculate their ex-post hold-to-maturity values. After observing the cash flows of each security, the bank claws back money from sellers who sold securities that had ex-post values less than the original share price, and makes supplemental payments to sellers who sold securities that have ex-post values that exceeded the original share price. So long as participation in the plan is mandatory and the claw backs can be enforced, this proposal eliminates the asymmetric information problem in a way that is fair to all investors.

The final suggestion:

… The government could lower the appraisal cost by promoting disclosure of the individual mortgages underlying CDOs. Currently, information regarding the …rst generation assets (e.g. mortgages) underlying a particular CDO could be obtained, although at a considerable price, from a database provider such as Intex, which covers over 20,000 structured fi…nance deals. But some CDO structures are so complex that, even with knowledge of the underlying assets, investors would face an enormous computational burden when trying to compute their intrinsic values. Consequently, when market prices vanished for many structured …financial products, investors often pur- chased fair value assessments from third-party appraisers … To address the root of the asymmetric problem and resuscitate the market for private-label ABS, …financial regulators should encourage better disclosure of the underlying loans backing securities and potential conflicts of interest, increased investor due diligence, and reliable ratings or third-party appraisals.

While upping transparency is always an admirable goal, we wonder what forcing appraisal costs lower might mean for third-party valuation firms — many of which already have hefty government contracts for, say the Fed’s Maiden Lane portfolios.

ftalphaville.ft.com/blog

The neo-medieval trade

Posted by Joseph Cotterill on Nov 01 16:53.
Markit pointed out something interesting on Monday: there’s a record spread between their iTraxx Europe and SovX Western Europe CDS indices.
Chart via Bloomberg, click to enlarge:

SovX WE — which is filled with such wholesome sovereign goodness as Portugal and Ireland — has obviously had a few down days recently, on account of renewed troubles within its weakest members.
Not to mention possible EU treaty changes on deficit control that might favour sovereign debt restructuring in the long run. ECB board member Lorenzo Bini Smaghi seemed less than cheerful on the changes’ ability to force fiscal reform in a speech made on Monday, so there’s one to watch.
But how about the performance of the 150 investment-grade corporate credits housed inside iTraxx Europe, eh?
This does bring to mind a recent historical meditation by Citigroup’s chief economist Willem Buiter (emphasis ours):

Historically, before the 19th century, the norm everywhere (including in the countries that we now characterize as advanced economies) was that sovereign risk tended to be worse than the credit risk of leading merchants or private bankers…
The poor credit rating and performance of sovereigns in Western Europe before the 19th century should not come as a surprise, as prior to the modern age of broad-based income taxes and indirect taxes, the sovereign’s revenue sources were limited…
We would not be surprised, for instance, to see leading Spanish banks trading through the Spanish sovereign and we have already observed instances in which Italian or Greek companies had CDS spreads that were below those of the sovereign…

Although we’re probably just being dramatic.
Then again, Barclays Capital analysts had the clever idea last month of selecting European corporate credits demonstrating the lowest possible correlation to the SovX, in a bid to avoid volatility.
Click BarCap’s charts to enlarge:


BarCap don’t like financials, however, given their high correlation to their sovereigns. Bad news for the iTraxx Europe Senior Financials.
Beyond that — perhaps this is a trade going back to the future.

ftalphaville.ft.com/blog

Γιατί οι άνδρες ζουν λιγότερο από τις γυναίκες;

Πηγή: Express.gr  25/10/10-11:12

Ο μέσος άνδρας τρέχει πιο γρήγορα από μια γυναίκα ή σηκώνει μεγαλύτερα βάρη, αλλά σε τελευταία ανάλυση το ισχυρό φύλο είναι οι γυναίκες, αφού ζουν πιο πολύ. Σε όλο τον κόσμο οι γυναίκες ζουν κατά μέσο όρο περισσότερο από τους άνδρες (γύρω στα πέντε χρόνια) και το ζήτημα απασχολεί χρόνια τώρα τους επιστήμονες, οι οποίοι τώρα πια φαίνεται να πλησιάζουν στη λύση του αινίγματος. Η αιτία φαίνεται πως είναι ότι οι άνδρες είναι γενετικά πιο "αναλώσιμοι" σε σχέση με το υποτιθέμενο "ασθενές" φύλο, με άλλα λόγια οι γυναίκες ζουν πιο πολλά χρόνια λόγω της ανώτερης βιολογίας τους (που έχει να κάνει τελικά με το ότι γεννάνε) και όχι του υποτιθέμενου λιγότερου στρες σε σχέση με τους άνδρες στη ζωή τους.     Αν και με το πέρασμα του χρόνου, η "ψαλίδα" στο προσδόκιμο ζωής φαίνεται να κλείνει κάπως, παρόλα αυτά τον τελευταίο λόγο τελικά τον λένε πάντα οι γυναίκες - στην κυριολεξία. Μάλιστα, όσο πιο προχωρημένη είναι η ηλικία, τόσο μεγαλύτερη είναι η απόκλιση στο προσδόκιμο ζωής ανάμεσα στα δύο φύλα. Στην ηλικία των 85 ετών υπάρχουν κατά μέσο όρο έξι γυναίκες για κάθε τέσσερις άνδρες, ενώ στην ηλικία των 100 ετών υπάρχουν υπερδιπλάσιες γυναίκες που τα έχουν εκατοστήσει σε σχέση με άνδρες. Και φυσικά δεν είναι τυχαίο ότι ο άνθρωπος που είναι γνωστό ότι μέχρι σήμερα έζησε περισσότερα χρόνια από κάθε άλλον, ήταν μια γυναίκα, η γαλλίδα Ζαν Καλμάν, η οποία πέθανε το 1997 σε ηλικία 122 ετών και 164 ημερών.     Μέχρι σήμερα έχουν δοθεί διάφορες -όχι ευρέως αποδεκτές- ερμηνείες για την υπεροχή των γυναικών και την μειονεξία των ανδρών: ότι οι άνδρες κάνουν πιο απαιτητικές από σωματική άποψη εργασίες, άρα φθείρονται περισσότερα βιολογικά, ή ότι εμπλέκονται σε πιο ριψοκίνδυνες ή επιβλαβείς δραστηριότητες από τις γυναίκες (πόλεμος, καυγάδες, κάπνισμα, περισσότερο αλκοόλ, χειρότερη διατροφή κ.α.), άρα πάνε γυρεύοντας να πεθάνουν μια ώρα αρχύτερα. Οι ερμηνείες αυτές ουσιαστικά έχουν ένα επίμαχο κοινό σημείο: ότι οι άνδρες έχουν περισσότερο στρες στη ζωή τους και αυτό τους "σκοτώνει" νωρίτερα (φυσικά οι φεμινίστριες πάντα έλεγαν ότι οι "γυναικείες" δουλειές σε ένα νοικοκυριό είναι εξίσου δύσκολες και ίσως δεν είναι τυχαίο ότι -στατιστικά- οι παντρεμένοι ζουν αρκετά περισσότερο από τους εργένηδες).     Η νέα θεωρία, που κερδίζει έδαφος και φιλοδοξεί να ρίξει φως σε ένα από τα μεγαλύτερα μυστήρια της ανθρώπινης βιολογίας, διατυπώθηκε από τον καθηγητή Τομ Κέρκγουντ του πανεπιστημίου του Νιούκασλ, κορυφαίο γεροντολόγο διεθνώς, σύμφωνα με τη βρετανική "Ιντεπέντεντ" και το αμερικανικό περιοδικό "Scientific American". Ο βρετανός επιστήμονας υποστηρίζει ότι το γυναικείο σώμα είναι πιο ικανό να εκτελεί τις εργασίες "συντήρησης ρουτίνας" που απαιτεί ένας οργανισμός, προκειμένου να διατηρεί υγιή και ζωντανά τα κύτταρά του. Με τον τρόπο αυτό καθυστερεί τη γήρανση και τον θάνατο, παρά τη διαδεδομένη αντίληψη -ιδιαίτερα στους κύκλους των αισθητικών και της βιομηχανίας καλλυντικών, που παίρνουν υπόψη μόνο τις αλλαγές στο δέρμα- ότι οι άνδρες γερνάνε πιο αργά από τις γυναίκες.     Σύμφωνα με τον Κέρκγουντ, υπάρχουν πλέον επαρκή επιστημονικά στοιχεία για να υποστηριχθεί ότι ουσιαστικά οι άνδρες είναι βιολογικά πιο "αναλώσιμοι" από τις γυναίκες, επειδή τα κύτταρα του σώματός τους δεν είναι προγραμματισμένα να διαρκούν τόσο όσο των γυναικών. Η λεγόμενη "θεωρία του αναλώσιμου σώματος" (που πρωτοεμφανίστηκε πριν από χρόνια) τείνει πλέον να γίνει η κυρίαρχη επιστημονική θεωρία σχετικά με το γιατί γερνάμε και γιατί οι γυναίκες ζουν πιο πολύ.     Η θεωρία αναφέρει ότι αν και τα γονίδια είναι αθάνατα και μπορούν να ζήσουν για πάντα, με το να περνάνε από τη μια γενιά στην άλλη, το σώμα φθείρεται επειδή είναι σχεδιασμένο (γενετικά προγραμματισμένο) από την εξέλιξη και την φυσική επιλογή να ζει μόνο όσο χρειάζεται για να μεταφέρει τα γονίδια στην επόμενη γενιά, συνεπώς είναι αναλώσιμο. Το σώμα, όπως ένα αυτοκίνητο, χρειάζεται "συνεργείο", δηλαδή συνεχή κυτταρική συντήρηση για να ανανεώνεται, όμως με το πέρασμα του χρόνου διάφορα "σφάλματα" (βλάβες του DNA) συσσωρεύονται στα κύτταρα και τους ιστούς. Έτσι γερνάμε, επειδή το σώμα μας δεν μπορεί να αποφύγει τα γενετικά λάθη. Αυτά τα "σφάλματα", που σιγά-σιγά γίνονται όλο και περισσότερα, είναι πια πολύ δαπανηρά από ενεργειακή άποψη για την επιδιόρθωσή τους, γι' αυτό τελικά το σώμα μας υποκύπτει και πεθαίνει.     Το πότε αυτό -ο θάνατος- θα συμβεί, εξαρτάται από το πόση προσπάθεια το σώμα καταβάλλει για να συντηρήσει και να επιδιορθώσει τα σφάλματά του. Και σε αυτό φαίνεται πως οι γυναίκες υπερτερούν, επειδή χρειάζονται μικρότερη προσπάθεια. Αυτό συμβαίνει επειδή στους ανθρώπους, όπως και στα περισσότερα άλλα είδη ζώων, η κατάσταση του σώματος του θηλυκού είναι πολύ σημαντική για την αναπαραγωγική επιτυχία. Το έμβρυο πρέπει να τραφεί μέσα στην μητέρα του και το νήπιο να την θηλάσει, πράγματα που εξηγούν γιατί το γυναικείο σώμα πρέπει να είναι πιο ανθεκτικό στον χρόνο από το ανδρικό.     Οι βιολόγοι έχουν πια βρει στοιχεία ότι τα θηλυκά στα περισσότερα είδη ζουν περισσότερο από τα αρσενικά. Τα πειράματα που έγιναν στο εργαστήριο του Κέρκγουντ, επίσης έδειξαν ότι τα θηλυκά έχουν καλύτερα συστήματα συντήρησης και επιδιόρθωσης του οργανισμού τους.     'Αλλες μελέτες έχουν ακόμα βεβαιώσει ότι τα κύτταρα που προέρχονται από το σώμα ενός θηλυκού, είναι καλύτερα στο να αποκαθιστούν τη ζημιά σε ένα σώμα, σε σχέση με τα κύτταρα που προέρχονται από το σώμα ενός αρσενικού. Σημειωτέον ότι τα αρσενικά (π.χ. γάτες και σκυλιά) ζουν περισσότερο από τα μη ευνουχισμένα, ενώ κάτι ανάλογο φαίνεται πως συμβαίνει και με τους ευνούχους άνδρες, σύμφωνα με το βρετανό επιστήμονα, επειδή η μεγάλη ποσότητα τεστοστερόνης (που έχει ένας φυσιολογικός άνδρας) κάνει κακό στο προσδόκιμο ζωής του.

Inflation and the USD Q&A

Posted by Neil Hume on Oct 28 16:48.
 
Q: How much does the USD need to fall to meaningfully boost US inflation?
A: A lot.
That’s the conclusion of a benchmarking exercise Goldman Sachs has run on dollar weakness and inflation and explains why Jan Hatzuis and his team believe the Fed needs to buy $2,000bn of assets under QE2 if it serious about hitting its inflation and unemployment targets. A couple of hundred billion here or there is just not going to cut it.
The report finds that:

• statistically, the pass-through from USD declines into US inflation has always been low, and appears to have fallen to near negligible levels in recent years.

• USD needs to fall a lot further – even after recent  declines – to contribute to raising inflation towards the Fed’s desired level.

• Ultimately, core inflation remains hostage to movements in components which are driven by domestic developments rather than external.

Historically, only a relatively small fraction of a Dollar fall is ‘passed through’ into consumer prices. For example, a paper by researchers at the Fed concludes based on data from 1981 to 2000 that a 10 percent decline in the trade-weighted Dollar boosts inflation by only around 30 bps, a very small effect. The small magnitude of this effect reflects a variety of factors, among which perhaps the most important is the desire of foreign exporters to preserve market share in the US, which means that they tend to react to Dollar falls by accepting smaller profit margins rather than hiking prices.

What all this points to is that – in line with the academic literature – the ‘pass-through’ from Dollar declines to US consumer price inflation is small. This in turn means that – if indeed the Fed sees the Dollar as one of its key policy levers for preventing inflation from staying below its mandate for a prolonged period – the Dollar needs to fall a lot further from here.

Ultimately, core CPI inflation remains hostage to the slowdown in rental (shelter) price and services (less shelter) price inflation – a point we have made repeatedly in our research and one of the main reasons why our bond forecasts have been below the forwards over the past 18-months. These components represent a significant component of the core inflation rate at approximately 31.9% and 28.3% respectively and are typically determined largely by domestic as opposed to external factors. And so as domestic conditions remain depressed, core inflation is likely to remain below levels the Fed would consider consistent with its mandate for some time.

Sadly Goldman doesn’t spell out what “a lot further from here” means. All we do know is that it’s Markets team are forecasting a further 5 per cent decline in the Dollar on a  broad, trade-weighted basis over the next 12 months.

ftalphaville.ft.com/blog

Sex.sells

Αυτή η σύνοψη δεν είναι διαθέσιμη. Κάντε κλικ εδώ, για να δείτε την ανάρτηση.

Re-evolution of the CLO

Posted by Tracy Alloway on Oct 27 11:32.      ftalphaville.ft.com
The market for Collateralised Loan Obligations — those sliced and diced business loans — may have only just reopened, but boy, has it evolved!
News came on Tuesday that JP Morgan is revising the $400m CLO arranged for Apollo Management; reducing the triple A-rated tranche by $1.75m, and increasing the triple B-rated tranche by $4m. The reason, presumably, is investor demand for those riskier, higher-yielding, slices. The structure should now look like this:

ALM Funding 2010-3 is the latest in a series of CLO deals this year, with the market waking up after a long credit-crunched hiatus. But as the FT noted back in May, and the ALM CLO hints at, the structure of these new deals is rather different.
For something like the COA Tempus CLO, which reopened the market in March, the percentage of triple A-rated debt in the deal total is lower than at the height of the credit boom. Many of the deals also come with extra yield to boot, even on the top-rated tranches. For instance, the yield on an earlier Apollo-managed CLO (ALM Loan Funding 2010-1) offered 170 basis points over Libor for the AAA-rated tranche. Compare and contrast that with pre-crisis yields as low as 20bps over Libor.
Some sample, (rough) 2010 CLO structures below:

The Information Economy Powers Wage Increases

October 26, 2010, 6:00 am

By EDWARD L. GLAESER

 Edward L. Glaeser is an economics professor at Harvard.
What large county in the United States experienced the largest increase in weekly wages during the generally bleak 12 months between early 2009 and 2010? It’s a long, narrow island with some very tall buildings, and many observers thought the recession would wreck its finance-based economy.
Yes, the wonder county of 2009 appears to have been New York County, that is, the borough of Manhattan, where wages grew by a stunning 11.9 percent, according to the Bureau of Labor Statistics. National wages rose only by an anemic 0.8 percent, and only 19 areas had wage growth above 3 percent.
Most counties detailed by the bureau showed wage declines over the year. The biggest loser was San Mateo County, in California, where wages dropped by 17.7 percent. While California’s unemployment rate remains at 12.4 percent, the idea-intensive economy around San Francisco Bay, like Manhattan, appears to be holding up quite well.
Santa Clara County, which contains Silicon Valley, experienced 8.7 percent wage growth from 2009 to 2010. San Francisco County had 5.4 percent wage growth. These two counties were third and fifth on the list ranking areas by wage growth.

The success of these areas is particularly remarkable because they started off with higher wages. Typically area incomes revert to the mean, but in the recent recession, at least some places that started with higher earnings have gotten richer over time. This matches a post-1990 pattern in which the incomes of initially richer areas have risen more quickly.
As a result, the earnings gap between the nation and either Manhattan or Santa Clara County has become enormous. The weekly wage in Manhattan now averages a stunning $2,404 — 170 percent higher than the national weekly wage of $889 and 45 percent higher than the impressive $1,655 weekly wage in Santa Clara County. (Of course, the median wage, the point at which half of workers earn more and half less, would be significantly lower, as the Wall Street salaries draw the average upward.)
Far from knocking New Yorkers down, the recession seems to have made them more prosperous, on average.
The bad news is that more money has been earned by fewer people. The rise in the incomes of these coastal cities has not been accompanied by increases in the number of employed people. Employment in Manhattan dropped by 1.7 percent over the year and employment in San Francisco fell by 3.1 percent.
The national drop was 2.1 percent, and only 22 counties (of the 320 ranked in this report) managed to increase employment in the Bureau of Labor Statistics list.
Another source of worry is that the rise in earnings was led by New York City finance, which experienced a whopping 22.7 percent increase in weekly earnings from 2009 to 2010.
Many of us hoped that the recession would provide an opportunity for New York to become a little less reliant on its dominant industry, but that doesn’t seem to have happened. At least, there has also been substantial wage growth in Manhattan’s professional and business services (10.9 percent), manufacturing (9.9 percent) and other services (18.1 percent).
These wage gains are only the latest bit of evidence confirming that America’s economic future depends on its information-intensive cities. Our country is never going to be able to compete with Asia as a producer of ordinary manufactured goods. If the products are old, then they will be produced where costs are lowest. Our economic eminence depends on continually coming up with new ideas in software, biotechnology and finance.
One implication of this is that our future will never seem as certain as it did when America had enormous dominance across vast markets for manufactured goods. In those days, we could be pretty sure that incomes would continue to rise if we just kept doing what we were doing. Now we need to hope that the uncertain process of American innovation will continue forward on its jerky path.
A second implication is that America’s future depends on its schools. This recession has also emphasized the enormous handicaps facing less-skilled Americans. Only 39.5 percent of adult Americans without a high school degree currently have a job, according to the bureau, while 73.1 percent of adults with college degrees are employed. If we want the United States to be strong, we must make sure that we have more college graduates and fewer high-school dropouts.
The final implication is that cities remain vitally important to our economy. That importance reflects the fact that places like Wall Street and Silicon Valley create skills that are even more valuable than those taught in our schools. Globalization and new technologies have made knowledge ever more valuable, and we are a social species that acquires skills by hanging around other smart people.
Cities, like New York, succeed by being places where people can acquire the knowledge that is so critical for innovation.

economix.blogs.nytimes.com

The usual suspects

Oct 26th 2010, 15:10 by The Economist online 

Public-sector corruption remains a cause for concern
WITH scores of 9.3 out of 10, Denmark, New Zealand and Singapore are the world's least corrupt countries, according to a new index from Transparency International, an anti-corruption watchdog. At the other end of the table, Somalia ranks bottom with a score of 1.1, ahead of Afghanistan and Myanmar. Worryingly, Brazil, Russia, India and China—the BRICs currently considered the global engine for economic growth—all score less than 4. The 178-country index is based on 13 surveys of experts and business people. These surveys are not standardised and the overall methodology changes from year to year, making it difficult to say whether a country has indeed done better or worse if its score alters. Still, Transparency International has identified 16 countries which showed improvements or declines since last year. Notable among these is America, which dropped from 7.5 (19th place) to 7.1 (22nd place). As in most developed countries, the issue is not bribery, but a lessening of political transparency (for instance in campaign finance) and regulatory oversight.
 
Correction: An early version of this map wrongly put France in the same dark orange category as Italy. But its score is actually 6.8. Apologies.

economist.com/blogs/dailychart

Latitudes not Attitudes: How Geography Explains History

Ian Morris, 20 October 2010

Many reasons have been given for the West’s dominance over the last 500 years. But, Ian Morris argues, its rise to global hegemony was largely due to geographical good fortune.

I am wearing your clothes, I speak your language, I watch your films and today is whatever date it is because you say so.

This is what Shad Faruki, a Malaysian lawyer, told the British journalist Martin Jacques in a 1994 interview. And he was right: for 200 years, a few nations clustered around the shores of the North Atlantic – ‘the West’, as we normally call them – have dominated the world in ways without parallel in history.
Most people, at some point or another, have wondered why the West rules. There are theories beyond number. Perhaps, say some, westerners are just biologically superior to everyone else. Or maybe western culture is uniquely dynamic; or possibly the West has had better leaders; or the West’s democratic politics and its Christianity might give it an edge. Some think western domination has been locked in since time immemorial: others that it is merely a recent accident. And, with many westerners now looking to China’s double-digit economic growth to pull the world out of recession, some historians even suggest that western rule has been an aberration, a brief interruption of an older, Sinocentric, world order.
When experts disagree so deeply, it usually means that we need fresh perspectives on a problem. Most of those who pronounce on Western rule – economists, political pundits, sociologists – tend to focus on recent times and then make sweeping claims about the past. Asking why the West rules, though, really requires us to work the other way round, posing questions about history, then seeing where they lead. As the masthead of this magazine puts it: ‘What happened then matters now.’

The shape of history

Explaining why the West rules calls for a different kind of history than usual, one stepping back from the details to see broader patterns, playing out over millennia on a global scale. When we do this the first thing we see is the biological unity of humanity, which flatly disproves racist theories of western rule.
Our kind, Homo sapiens, evolved in Africa between 200,000 and 70,000 years ago and has spread across the world in the last 60,000 years. By around 30,000 years ago, older versions of humanity, such as the Neanderthals, were extinct and by 10,000 years ago a single kind of human – us – had colonised virtually every niche on the planet. This dispersal allowed humanity’s genes to diverge again, but most of the consequences (such as the colour of skin, eyes, or hair) are, literally, only skin deep and those mutations that do go deeper (such as head shape or lactose tolerance) have little obvious connection to why the West rules. A proper answer to this question must start from the fact that wherever we go – East, West, North, or South – people are all much the same.
So why have their histories turned out so differently? Many historians suggest that there is something unique about western culture. Just look, they say, at the philosophy of Socrates, the wisdom of the Bible, or the glories of Leonardo da Vinci; since antiquity, the West has simply outshone the rest. Such cultural comparisons, however, are notoriously subjective. Socrates, for instance, was certainly a great thinker; but the years in which he was active, during the fifth century bc, were also the age of the Hebrew prophets in Israel, of the Buddha and the founders of Jainism in India, of Confucius and the first Daoists in China. All these sages wrestled with much the same questions as Socrates (Can I know reality? What is the good life? How do we perfect society?) and the thoughts of each became ‘the classics’, timeless masterpieces that have defined the meanings of life for millions of people ever since.
So strong are the similarities between the Greco-Roman, Jewish, Indian and Chinese classics, in fact, that scholars often call the first millennium bc the ‘Axial Age’, in the sense of it being an axis around which the whole history of Eurasian thought turned. From the Mediterranean to the Yellow Sea, larger, more complex societies were facing similar challenges in the first millennium bc and finding similar answers. Socrates was part of a huge pattern, not a unique giant who sent the West down a superior path.
From a global perspective, Christianity, too, makes more sense as a local version of a broader trend than as something setting the West apart from the rest. As the Roman Empire disintegrated in the middle of the first millennium ad and new questions (Is there something beyond this life? How can I be saved?) gained urgency, the new faith won perhaps 40 million converts; but in those same years, in the wake of the Han dynasty’s collapse in China, Mahayana and Theravada Buddhism offered their own answers to the same questions and won their own 40 million devotees. Soon enough Islam repeated the feat in Africa, the Middle East and South Asia.
Even such astonishing Renaissance men as Leonardo and Michelangelo, who refined the wisdom of the ancient West to revolutionise everything from aeronautics to art, are best seen as Europe’s versions of a new kind of intellectual which societies needed as they emerged from the Middle Ages. China had produced its own Renaissance men some 400 years earlier, who also refined ancient wisdom (in their case, of course, the East’s) to revolutionise everything. Shen Kua (1031-95 ad), for instance, published groundbreaking work on agriculture, archaeology, cartography, climate change, the classics, ethnography, geology, maths, medicine, metallurgy, meteorology, music, painting and zoology. Even Leonardo would have been impressed.
Over and over again, the triumphs of western culture turn out to have been local versions of broader trends, not lonely beacons in a general darkness and, if we think about culture in a broader, more anthropological sense, the West’s history again seems to be one example of a larger pattern rather than a unique story. For most of their existence, humans lived in small, egalitarian hunter-gatherer bands. After the Ice Age some hunter-gatherers settled down in villages, where they domesticated plants and animals; some villages grew into cities, with ruling elites; some cities became states and then empires and, finally, industrialised nations. No society has ever leaped from hunting and gathering to high technology (except under the influence of outsiders). Humans are all much the same, wherever we find them; and, because of this, human societies have all followed much the same sequence of cultural development. There is nothing special about the West.

Location, location, location

You may have noticed that all the historical examples I have mentioned – Italy, Greece, Israel, India, China – lie in a narrow band of latitudes, roughly 20-35° north, stretching across the Old World. This is no accident: in fact, it is a crucial clue as to why the West rules. Humans may all be much the same, wherever we find them, but the places we find them in are not. Geography is unfair and can make all the difference in the world.
When temperatures rose at the end of the last Ice Age, nearly 12,000 years ago, global warming had massive consequences everywhere, but, as in our own times, it impacted on some places more than on others. In the latitudes between 20° and 35° north in the Old World and a similar band between 15° south and 20° north in the Americas, large-grained wild grasses like wheat, rice and teosinte (the ancestor of maize) and large, relatively tame mammals like wild goats, pigs and llamas went forth and multiplied in the warmer weather. This was a boon for humans, who ate them, but in the process of managing these other species – cultivating and tending the plants, herding and culling the animals – humans unintentionally domesticated them. We unwittingly altered their genomes so much that they became new species, providing us with far more food. Genetically modified organisms had been born. Potentially domesticable plants and animals existed outside the lucky latitudes, but they were less common. Indeed many places, such as large parts of Western Europe, sub-Saharan Africa and Australia, had no domesticable native species at all. The consequence, given that humans were all much the same, was predictable: the domestication of plants and animals – farming – began in the lucky latitudes long before it began outside them. This was not because people in the lucky latitudes were cleverer or harder-working; nature had just given them more to work with than people in other places and so the task advanced more quickly.
Nor was nature even-handed within the lucky latitudes. Some places, above all the so-called ‘Hilly Flanks’, which curve from what is now Israel through Syria, southern Turkey, northern Iraq and western Iran, were extraordinarily well endowed; China between the Yellow and Yangzi rivers and the Indus Valley in Pakistan were somewhat less so; Oaxaca in Mexico and the Andes in Peru somewhat less still. Consequently, the Hilly Flanks were the first to see farming firmly established (by 7500 bc); then came China and Pakistan (around 5500 bc); then Oaxaca and Peru (by 5000 bc); and then, over the next 7,000 years, most of the rest of humanity.
Farming spread from its original cores because it could support more people than hunting and gathering. The lives farmers led were often harder and their diets poorer than hunters’, but that was beside the point. The farmers’ weight of numbers, nastier germs (bred by crowding and proximity to domestic animals), more efficient organisation (required to keep order in larger villages) and superior weapons (necessary to settle constant quarrels) steadily dispossessed the hunters, who either took up farming in their own right or ran away.
The agricultural cores developed increasingly complex institutions as they expanded. Within 3-4,000 years of the start of farming (that is, by 3500 bc in Southwest Asia, 2500 bc in the Indus Valley, 1900 bc in China, 1500 bc in Mesoamerica and 1000 bc in the Andes) the first cities and states were taking shape. Within another few centuries, most had bureaucrats keeping written records and by 2,000 years ago a continuous band of empires, with populations in the tens of millions, stretched from the Mediterranean to China. By then imperialists and traders had exported agriculture, cities and writing beyond the lucky latitudes as far afield as cold, rainy Britain in the northwest and hot, humid Cambodia in the southeast. These great empires – the Han in the East, the Mauryan in India, the Parthian in Iran and Iraq and the Roman further west – had many similarities; but the biggest, richest and grandest by far was Rome, the descendant of Eurasia’s original, westernmost agricultural core in the Hilly Flanks.
Geography explains why farming first appeared towards the western end of the Old World’s lucky latitudes; and, if the West had simply held on to the early lead that nature’s unfairness had given it, geography would be the obvious explanation for why the West now dominates the world.
But that is not what actually happened. The West has not always been the richest, most powerful and most sophisticated part of the world during the last ten millennia. For more than 1,000 years, from at least 600 to 1700 ad, these superlatives applied to China, not the West.
After the fall of the Roman and Han empires in the early-to-mid first millennium ad, China was reunited into a single empire while the West remained divided between smaller states and invading Arabs. By 700, China’s capital at Chang’an had probably a million residents and Chinese literature was enjoying a golden age. Woodblock printing presses churned out millions of books, paid for with the world’s first paper money (invented in the 10th century). By 1000 an economic revolution had joined the cultural explosion: 11th-century China produced almost as much iron each year as the whole of Europe would be doing in 1700, on the eve of its Industrial Revolution. Chinese ironmasters produced so much, in fact, that they clear-cut entire forests to feed their forges, and – six centuries ahead of the West – learned to smelt their ores with coke.
For centuries, Chinese wealth and power dwarfed the West’s. Between 1405 and 1433, while little Portuguese caravels tentatively nosed down Africa’s west coast, Chinese emperors dispatched gigantic fleets across the Indian Ocean under the leadership of the eunuch admiral Zheng He (who, according to legend, was nearly three metres tall and 230 cm around the belly). Zheng’s flagship was on the same scale as its skipper. At 80 metres long, it was the largest wooden ship ever built. When Columbus set sail in 1492, his own flagship was shorter than Zheng’s mainmast and barely twice as long as the big man’s rudder. Columbus led three ships and 90 sailors; Zheng led 300 ships and 27,870 sailors. His fleet extracted tribute from the cities of India, visited Mecca and even reached Kenya, where today Chinese archaeologists are diving to locate wrecks of Zheng’s ships.

The power of place

The glories of medieval China seem, on the face of it, to disprove any geographical explanation for why the West now rules. After all, geography has not changed very much in the last 500 years.
Or maybe it has. Geography shapes history, but not in straightforward ways. Geography does determine why societies in some parts of the world develop so much faster than others; but, at the same time, the level to which societies have developed determines what geography means.
Take, once again, the example of Britain, sticking out from Eurasia into the cold Atlantic Ocean. Four thousand years ago, Britain was far from the centres of action in the Nile, Indus and Yellow River valleys, where farming had been established for millennia, great cities had grown up and labourers by the thousand broke their backs to immortalise divine kings with pyramids and palaces. Distant Britain had few of these things, which spread only slowly from the Mediterranean core to the Atlantic periphery. Geography made Britain backward.
But, if we fast-forward to 400 years ago, the same geography that had once made Britain backward now gave the island nation wealth and power. Britain had been drawn into a vastly expanded and more developed core, which now had ships that could reliably cross oceans and guns that could shoot the people on the other side. Sticking out into the Atlantic, such a huge disadvantage 4,000 years ago, became a huge plus from the 17th century.
The first sailors to the Americas were Italians (Christopher Columbus was from Genoa; the famous ‘British’ explorer John Cabot, who reached Newfoundland in 1497, actually grew up as Giovanni Caboto, in Florence). They were soon shoved aside by the Portuguese, Spanish, British, French and Dutch – not because the Atlantic littoral produced bolder or smarter adventurers than the Mediterranean, but simply because Western Europe was closer to America.
Given time, the 15th century’s greatest sailors – the Chinese – would surely have discovered and colonised America too (in 2009 the Princess Taiping, a replica of a 15th-century junk, came within 20 miles of completing a Taiwan–San Francisco round trip, only to collide with a freight ship within sight of home). But in much the same way that geography had made it easier for people in the Hilly Flanks to domesticate plants and animals than for people in other parts of the world, it now again stacked the odds in the West’s favour. The trip from England to New England was only half as far as that from China to California. For thousands of years this geographical fact had been unimportant, since there were no ocean-going ships. But by 1600 it had become the decisive fact. The meaning of geography had changed.
This was just the beginning of the changes. In the 17th century a new kind of economy took shape, centred around the North Atlantic, generating massive profits and driving up wages in north-west Europe by exploiting the geographical differences round its shores. In the process, it enormously increased the rewards for anyone who could explain how the winds and tides worked, or measure and count in better ways, or make sense of the secrets of physics, chemistry and biology. Not surprisingly, Europeans began thinking about the world in new ways, setting off a scientific revolution; they then applied its insights to the societies they lived in, in what we now call the Enlightenment. Newton and Descartes were geniuses, but so too were Chinese scholars like Gu Yanwu (1613-82) and Dai Zhen (1724-77), who also spent lifetimes studying nature. It was just that geography thrust new questions on Newton and Descartes.
Westerners answered their new questions, only to find that the answers led to still newer questions. By 1800 the combination of science and the Atlantic economy created incentives and opportunities for entrepreneurs to mechanise production and tap into the power of fossil fuels. This began in Britain, where geography conspired to make these things easier than anywhere else; and the energy windfall provided by fossil fuel quickly translated into a population explosion, rising living standards and massive military power. All barriers crumbled. British warships forced China to open to western trade in 1842; Americans did the same in Japan 11 years later. The age of western rule had arrived.

The lessons of history

So what do we learn from all this history? Two main things, I think. First, since people are all much the same, it is our shared biology which explains humanity’s great upward leaps in wealth, productivity and power across the last 10,000 years; and, second, that it is geography which explains why one part of world – the nations we conventionally call ‘the West’ – now dominates the rest.
Geography determined that when the world warmed up at the end of the Ice Age a band of lucky latitudes stretching across Eurasia from the Mediterranean to China developed agriculture earlier than other parts of the world and then went on to be the first to invent cities, states and empires. But as social development increased, it changed what geography meant and the centres of power and wealth shifted around within these lucky latitudes. Until about ad 500 the Western end of Eurasia hung on to its early lead, but after the fall of the Roman Empire and Han dynasty the centre of gravity moved eastward to China, where it stayed for more than a millennium. Only around 1700 did it shift westward again, largely due to inventions – guns, compasses, ocean-going ships – which were originally pioneered in the East but which, thanks to geography, proved more useful in the West. Westerners then created an Atlantic economy which raised profound new questions about how the world worked, pushing westerners into a Scientific Revolution, an Enlightenment and the Industrial Revolution. By the mid-19th century, the West dominated the globe.
But history did not end there. The same laws of geography continued operating. By 1900 the British-dominated global economy had drawn in the vast resources of North America, converting the USA from a rather backward periphery into a new global core. The process continued in the 20th century, as the American-dominated global economy drew in the resources of Asia, turning first Japan, then the ‘Asian Tigers’ and eventually China and India into major players.
Extrapolating from these historical patterns, we can make some predictions. If the processes of change continue across the 21st century at the same rate as in the 20th century, the economies of the East will overtake those of the West by 2100. But if the rate of change keeps accelerating – as it has done constantly since the 15th century – we can expect eastern global dominance as soon as 2050.

An age of rapid change

It all seems very clear – except for one niggling detail. The past shows that, while geography shapes the development of societies, development also shapes what geography means; and all the signs are that in the 21st century the meanings of geography are changing faster than ever. Geography is, we might even say, losing meaning. The world is shrinking and the greatest challenges we face – nuclear weapons, climate change, mass migration, epidemics, food and water supply – are all global problems. Perhaps the real lesson of history is that by the time the East overtakes the West, the question of why the West rules may have ceased to matter very much.

Ian Morris is Willard Professor in the Departments of Classics and History and the Archaeology Center at Stanford University and author of Why the West Rules - For Now: The Patterns of History and What they Reveal about the Future (Profile, 2010).

Further reading: 

• Jared Diamond, Guns, Germs and Steel (Vintage, 1998)
• Jack Goldstone, Why Europe? (McGraw-Hill, 2009)
• Martin Jacques, When China Rules the World (Allen Lane, 2009)
• David Landes, The Wealth and Poverty of Nations (Abacus, 1999)
• Kenneth Pomeranz, The Great Divergence (Princeton University Press, 2000)

historytoday.com

Richard Clarida's retrospective on the financial crisis

October 24, 2010

I earlier discussed several of the presentations at the monetary policy conference at the Federal Reserve Bank of Boston last week. But missed in the popular coverage of the conference was an insightful discussion by Columbia Professor Richard Clarida that expressed very nicely the conclusions that I have come to as well on the events that led us into these problems.

Clarida wrote:

The subtitle of this paper is not 'I Told You So' and for a good reason. I didn't, and it wasn't because I was shy. Rather, as will be discussed later, I, like the vast majority of economists and policymakers, suffered-- in retrospect-- from Warren Buffet's 'lifeguard at the beach' problem: "you don't know who is swimming naked until the tide goes out"....
The efficient markets paradigm was seen as a working approximation to the functioning of real world equity and especially credit markets. The growing role of securitization in credit markets, especially in the US, was seen as a stabilizing innovation that reduced systemic risk by distributing and dispersing credit risk away from bank balance sheets and toward a global pool of sophisticated investors. While asset prices might well drift away from fundamental value and for long periods of time, 'bubbles' were difficult enough to identify ex ante so that the role for monetary policy was to limit collateral damage to inflation and economic activity when they burst....
It is startling to note in the US the chasm that emerged during the 'great moderation' between credit extended to the household and non-financial business sectors-- much of it through the 'shadow banking' system to be discussed below-- as compared against nominal GDP. This was the 'great leveraging' that accompanied the 'great moderation'....

Source: Clarida (2010; presentation slides)

Shadow bank liabilities versus traditional bank liabilities, in trillions of dollars. Source: Clarida (2010)

Clarida continued:

...greater and greater use of leverage which in turn supports asset prices which in turn support more leverage. And importantly, this channel is missing in the justly celebrated and influential Bernanke-Gertler model (1999) presented at Jackson Hole in 1999. In that model, the bubble affects real activity in two ways. First, there is a wealth effect on consumption, although that effect is presumed to be rather modest. Second, because the quality [of] firms' balance sheets depends on the market values of their assets rather than the fundamental values, a bubble in asset prices affects firms' financial positions and, thus, the premium for external finance. Although bubbles in valuations affect balance sheets and, thus, the cost of capital, B and G assume that—conditional on the cost of capital—firms make investments based on fundamental considerations, such as net present value, rather than on valuations of capital including the bubble. This assumption rules out the arbitrage of building new capital and selling it at the market price cum bubble-- the Ponzi finance stage of a bubble in the Minsky nomenclature.... "This time it was supposed to be different" because securitization and the expertise of the ratings agencies in assessing default risk correlations across various tranches of structured products was in theory supposed to make the financial system more stable and reduce systemic risk....
With the benefit of hindsight ... it seems clear-- at least to this author-- that the financial crisis and the credit and securitization bubble that preceded it resulted not only from spectacular failures in securities markets-- to allocate capital and price default risk-- but serious failures also as well by policymakers to adequately understand, regulate, and supervise these markets. Policymakers, academics, and market participants simply didn't know what they didn't know. They assumed that either it couldn't happen (after all, AAA securities 'never' default), or if it did, it would be systemically unimportant. Until the tide went out. But by then it was too late.

econbrowser.com

Focus on the real

Oct 26th 2010, 12:17 by R.A. | LONDON

HERE'S an interesting piece of analysis:

In nominal terms, the yuan has strengthened about 2.5% since China's June 19 decision to ease its currency policy. That works out to an annualized rate of nominal appreciation of almost 8%. The simplest way to calculate real appreciation is to add on the difference between China's inflation rate (3.5%, according to August data) and US inflation (about 1%, or even less if the dip in the September figures holds up). Doing so gives us an annual rate of real appreciation of more than 10%. Two or three years of that would pretty well eliminate the 20 to 40% undervaluation that critics are talking about.

As Tyler Cowen says, what you're really interested in is the inflation rate for tradable goods, but the point is still a good one. China's inflation rate (and, almost certainly, its rate of wage growth) is well above America's. That's just as important in determining export competitiveness as movements in the nominal exchange rate.

economist.com/blogs/freeexchange

Οι μέλισσες ικανότερες από τους Η/Υ στην επίλυση προβλημάτων;

Ο μικροσκοπικός εγκέφαλος μιας μέλισσας μπορεί να λύσει περίπλοκα μαθηματικά προβλήματα πιο γρήγορα και από τον ταχύτερο επεξεργαστή ενός ηλεκτρονικού υπολογιστή, αποκαλύπτουν τα αποτελέσματα έρευνας του Πανεπιστημίου του Λονδίνου (Royal Holloway).
Σύμφωνα με τους ερευνητές, τα έντομα αυτά έχουν την ενστικτώδη ικανότητα να πετούν ακολουθώντας το συντομότερο δρόμο μεταξύ των λουλουδιών, τα οποία εντοπίζουν σε τυχαία σειρά, λύνοντας έτσι το επονομαζόμενο «πρόβλημα του περιπλανώμενου πωλητή». Στο διάσημο αυτό γρίφο, ο «πωλητής» καλείται να βρει τη συντομότερη διαδρομή μεταξύ των τοποθεσιών που θα πρέπει να επισκεφθεί. Κι ενώ οι ηλεκτρονικοί υπολογιστές τον επιλύουν συγκρίνοντας το μήκος όλων των πιθανών διαδρομών και επιλέγοντας στη συνέχεια την πιο σύντομη, οι μέλισσες καταλήγουν στην ίδια λύση χρησιμοποιώντας... το μυαλό τους.
«Οι μέλισσες που αναζητούν τροφή λύνουν «προβλήματα του περιπλανώμενου πωλητή» σε καθημερινή βάση», λέει ο Δρ. Νάιτζελ Ρέιν της Σχολής Βιολογικών Επιστημών στο Royal Holloway. «Επισκέπτονται άνθη που βρίσκονται σε διάφορες τοποθεσίες και, καθώς χρησιμοποιούν πολλή ενέργεια προκειμένου να πετάξουν, βρίσκουν μια διαδρομή που τους επιτρέπει να πετάξουν όσο το δυνατόν λιγότερο».
Οι ερευνητές χρησιμοποίησαν τεχνητά άνθη, τα οποία ελέγχονταν μέσω υπολογιστών, για να παρατηρήσουν τη συμπεριφορά των εντόμων. Σκοπός τους, να διαπιστώσουν κατά πόσο οι μέλισσες θα ακολουθούσαν τη διαδρομή που θα τους υπαγόρευε η διάταξη των λουλουδιών ή θα αναζητούσαν τη συντομότερη διαδρομή. Τα έντομα «εξερεύνησαν» την περιοχή, στην οποία ήταν τοποθετημένα τα λουλούδια προκειμένου, απ’ ό,τι φάνηκε, να μάθουν να πετούν ανάμεσά τους με τέτοιο τρόπο ώστε να εξοικονομήσουν ενέργεια και χρόνο.
Τα συμπεράσματα της έρευνας, που θα δημοσιευτούν στην επιθεώρηση The American Naturalist, δεν παρουσιάζουν ενδιαφέρον μόνο για όσους ασχολούνται με τα του ζωικού βασιλείου, αλλά αφορούν από πολλές απόψεις και τους ανθρώπους. Για παράδειγμα, θα μπορούσαν να χρησιμοποιηθούν ώστε να κατανοήσουμε καλύτερα τη διαδικασία της επικονίασης των καλλιεργειών και των λουλουδιών. Παράλληλα όμως, όπως επισημαίνουν οι ερευνητές, ο άνθρωπος θα μπορούσε να μάθει από τις μέλισσες, αφού ο τρόπος ζωής του βασίζεται σε τύπους δικτύων, π.χ. τη ροή των πληροφοριών στο Ίντερνετ, τις αλυσίδες προμηθειών στο εμπόριο, ακόμη και την κίνηση των οχημάτων στους δρόμους.
«Κατανοώντας με ποιον τρόπο οι μέλισσες μπορούν να λύσουν το πρόβλημά τους με ένα τόσο μικρό μυαλό», λέει ο Δρ. Ρέιν, «μπορούμε να βελτιώσουμε τη διαχείριση αυτών των δικτύων της καθημερινότητας χωρίς να απαιτείται η πολύωρη χρήση υπολογιστών».

naftemporiki.gr

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Tax incentives: Boeing 707 edition

I’m going to a book party at a bar in Newton, Mass. tonight (yes, life here in metropolitan Boston is unspeakably glamorous) for Sam Howe Verhovek’s Jet Age: The Comet, the 707, and the Race to Shrink the World. It’s a great little book—and I don’t think the fact that Verhovek’s brother is a friend of one my wife’s best friends from high school (the reason I was invited to the book party) invalidates my positive opinion. I brought a galley along on a flight West a couple months ago and, despite being alarmed by Verhovek’s accounts of exploding jet airplanes, couldn’t stop reading. I had finished it by the time I landed in Reno.
The reason I’m bringing all this up (other than to impress you with the facts that I know Sam Howe Verhovek’s brother and have been to the Biggest Little City in the World), is because there’s a really fascinating tale in the book involving tax incentives. During the Korean War, Congress enacted an excess profits tax meant to keep military contractors from, well, profiteering. In its infinite wisdom, Congress defined excess profits as anything above what a company had been making during the peacetime years 1946-1949.
Boeing was mostly a military contractor in those days (Lockheed and Douglas dominated the passenger-plane business), and had made hardly any money at all from 1946 to 1949. So pretty much any profits it earned during the Korean conflict were by definition excess, and its effective tax rate in 1951 was going to be 82%. This was unfair and anti-business. If similar legislation were enacted today, you could expect U.S. Chamber of Commerce members to march on Washington and overturn cars on the streets.
It being 1951, Boeing instead sucked it up and let the tax incentives inadvertently devised by Congress steer it toward a bold and fateful decision. CEO Bill Allen decided, and was able to persuade Boeing’s board, to plow all those profits and more into developing what became the 707, a company-defining and world-changing innovation. Writes Verhovek:

Yes, it was a huge gamble, but for every dollar of the dice roll, only eighteen cents of it would have been Boeing’s to keep anyway. For Douglas and Lockheed, both in a much lower tax bracket, that was not so easy a call.

So that’s it! High tax rates—confiscatory tax rates—spur innovation! Well, at least once in a blue moon they do. Which is an indication that there might be some important stuff missing from the classic economists’ view of taxation, as summed up by Greg Mankiw a few weeks ago:

Economists understand that, absent externalities, the undistorted situation reflects an optimal allocation of resources. It is crucial to know how far we are from that optimum.  To be somewhat nerdy about it, the deadweight loss of a tax rises with the square of the tax rate.

Somehow I don’t think that formula held true in Boeing’s case.

ustin Fox is editorial director of the Harvard Business Review Group and author of The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street He normally blogs at http://blogs.hbr.org/fox/

blogs.reuters.com/justinfox 

Pay Attention — or Else

 Michael Schrage
7:45 AM Thursday October 21, 2010
To heck with airbags. Prevention is better than amelioration, right? That's why Mercedes ads have car owners soberly celebrating how their smart cars alertly saved their lives. These luxury vehicles were so clever that they sensed when they — and the driver's attention — had dangerously drifted and took immediate corrective action. No accidents; no airbag necessary. An ounce of prevention is worth two tons of twisted metal.
But after seeing the ad a few times, I couldn't help wondering why my laptop and mobile phone aren't similarly supportive. Are they stupid? I want my phone and computer — not just my car — to let me know when my mind is wandering. Shouldn't an iPad and an Android be at least as smart as a Mercedes?
Innovative technologies have made workplace surveillance and monitoring employees hot-button management issues. Organizations increasingly use digital devices as their media for making sure people are doing what they're supposed to be doing. Privacy advocates, unions, and regulators are alternately infuriated and intrigued by the intrusions these tools permit and encourage. As Mercedes' advertisements foreshadow, our mental models of monitoring require radical updating and upgrading.
A GPS discloses location and a video tracks actions but what's going on inside the mind? The Mercedes "Lane Keeping Assist" offers a wonderful proxy for driver focus. Cars don't drift into oncoming traffic if the driver is focused and alert. How hard would it be for Google or Microsoft to alert me that I've become distracted from my work onscreen? Perhaps I wouldn't want my Kindle to politely tell me that I'm no longer paying attention to what I'm reading, but surely my colleagues would like my digital devices to nudge me into finishing my work on time. Would I want my clients and collaborators to run apps on their iPhones and laptops helping assure that they are paying close attention to our work? You bet.
Almost 40 years ago, Nobel laureate and artificial intelligence pioneer Herb Simon observed that in an information-rich networked environment, attention is the scarcest and most essential resource. Managing people increasingly means managing their attention and monitoring their attention spans. While the technologies may not (yet) exist, the proliferation of digital devices demanding implicit, tacit, and active engagement means that management has the next best thing: network tools to analyze individual and interpersonal attention.
Even as you read this — you are paying attention, aren't you? — there's an Indian call center where an innovative company is experimenting with real-time voice stress analyzers and other physiological diagnostics to determine that employees are fully engaged in their work. Is it difficult to believe that, at Chinese and Korean manufacturing facilities, eye-tracking technologies are monitoring the gazes and blink rates of line employees in order to replace anyone whose attention has begun to flag? If you were undergoing surgery, wouldn't you want some sort of attention-monitoring mechanism assuring that the surgeon, nurses, and anesthesiologist had their minds focused on you rather than other priorities?
Quite serendipitously, the ubiquitous automobile has emerged as a global laboratory and Petri dish for innovation in attention — and distractive — technologies. Automobiles can be programmed not to start if they sense alcohol on the driver's breath. They've become subject to scores of ordinances, laws, and regulations prohibiting texting, television and talking while you drive. Every year, next-generation of sensors and software aspire to automate functions and reduce the cognitive load on drivers even as new screens and displays appear to assist driver behavior.
We're just at the very beginning of linking the digital devices that people bring into their cars with the cars themselves. The question of whether we want our Android or iPhone app to take precedence over the car's own guidance system won't be rhetorical.
The far larger question, however, is one that will soon be ferociously debated in executive suites and human resource departments all over the world: how rigorously do we want to monitor our employees' minds? We already video-record their workplace, monitor their email, and track their phone calls. Should we check up on their attention and concentration, too?
If all it takes is a few dozen lines of code in an Android or a cookie in their laptop or a cheap eye-tracking attachment to a workplace CCTV network, why not? Mercedes saves lives by investing in attention management technologies. Shouldn't your company save money and improve quality by doing the same?

blogs.hbr.org

Dining On A Budget

Is it cheaper to eat at home… or go out?  This elusive question is never easy to answer, as the actual “cost” of a meal depends on what is most valuable to you: your money, your time, or your health.  Although each of these values can be widely subjective, the financial cost and calorie counts can be a bit more concrete.  The infographic below takes a look at how eating at home compares to dining out:

click to enlarge

 

billshrink.com/blog