Ali’s blog

Mostly quant stuff with occasional digressions

Archive for February, 2008

A German perspective on Obama

Posted by alifinmath on February 29, 2008

An interesting piece on Obama, also in Der Spiegel. Truth to tell, the United States is too big to work as a democracy. The old Greek city-states were democracies in the precise sense that citizens would meet in a forum and vote by a show of hands on particular proposals. No windy vacuous rhetoric about “change” and the “audacity of hope.” American political discourse — as conducted by politicians and media commentators — is the pits.

On how circumscribed political discussion here presently is, some instructive words from Chomsky:

NC: First of all that’s a common feature of intellectual culture. One good U.S. critic, Harold Rosenberg once described intellectuals as the “herd of independent minds.” They think they are very independent but they are a stampede in a herd, which is true; when there is a party line, you have to adhere to it and the party line is systematic. The party line is subordination to state power and to state violence. Now you are allowed to criticize it but on a very narrow grounds. You can criticize it because it is not working or for some mistake or benign intentions that went astray or something, like you see right now in Iraq war, the tone of debate about Iraq war but take a look at it – it’s very similar to the debate in PRAVDA during the invasion of Afghanistan. Actually I brought this up to a Polish reporter recently and I asked him if he had been reading PRAVDA. He just laughed and said yeah it’s the same. Now you read PRAVDA in the nineteen eighties, it’s you know: “the travail of the Russian soldiers that are going to get killed and now there are these terrorists who prevent us from bringing justice and peace to the Afghans, we of course did not invade them, we intervened and helped them at the request of the legitimate government, the terrorists are preventing us from doing all good the things we wanted to do etc.” I have read Japanese counter-insurgency documents from the second WW, from the ninety thirties – the same, you know: “…we tried to bring them an earthly paradise, but the Chinese bandits are preventing it …” in fact I don’t know of any exception in history. If you want, British imperialism is the same, I mean even people of the highest moral integrity like John Stewart Mill were talking about, well we have to intervene in India and conquer India because the barbarians can’t control themselves, there are atrocities, we are to bring them the benefits of the British rule and civilization and so on.

The point is there’s no candid and careful discussion of foreign or economic policy among either political candidates or media pundits. The first question that has never been answered by any public figure (except Greenspan in his autobiography) is why did the USA invade Iraq in the first place. Without asking that question and insisting on credible answers, no sensible way out of that morass can be discussed. Likewise, no sensible way out of the economic morass can be discussed without a careful analysis of how the US has ended up this particular creek without a paddle. Just talking “inspiring” drivel won’t do the trick.

Instead of honest discussion, we are exposed to twenty-fours of non-stop advertising-driven garbage. I stopped both watching American television and reading American newspapers a long time ago.

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What’s driving up the price of oil? A perspective from the other side of the pond.

Posted by alifinmath on February 29, 2008

In Der Spiegel:

“Supply and demand cannot explain the high prices,” says Fadel Gheit of Oppenheimer & Co., a leading commodities analyst. Like many in his profession, Gheit believes financial investors are driving up prices. He’s reminded of the Internet bubble around the turn of the millennium. According to Gheit, oil is also seeing “excessive speculation” at the moment.

Enormous amounts of money are currently changing hands in the business of oil contracts. With the American real estate debacle infecting ever larger segments of the capital markets, from stocks to bonds, investors are seeking alternatives worldwide. Oil, with its supposedly straightforward market rules and ever-rising prices, seems to be a perfect tool for spreading risk and maximizing profit. But many investors will have a rude awakening when they realize that an investment in oil, though it may look different, is no less a gamble than other types of investments.

The world consumes 86 million barrels of oil a day, but trading volume is 15 times as high. The difference represents bets on future price developments.

The upshot of all this trading is that speculators now hold up to 45 percent of all oil contracts — three times as many as at the turn of the millennium.

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The battle for hearts and minds

Posted by alifinmath on February 28, 2008

In Interestingly not a single commissioned officer has been charged. What impression does this give the rest of the world? Does this answer Bush’s rhetorical question about why people don’t particularly care for the US?

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Welfare-to-work programs

Posted by alifinmath on February 28, 2008

In the FT:

A rethink by policymakers as well as economists has brought a big change over the past decade in the way many developed countries think about their welfare states – turning them into active supporters of work rather than passive supporters of inactivity at the taxpayer’s expense.

Most famously in Wisconsin, and then in other US states, lone mothers on benefit within weeks of having given birth were required to look for work and take it – or face removal of their cash assistance. Time limits were set on how long they could claim.

America’s welfare rolls tumbled 60 per cent from a peak of more than 5m cases to fewer than 2m in less than a decade. Controversy remains over the impact of that. Some former claimants did well. But even advocates of an approach that to European eyes looks decidedly harsh worry about the one in five “floundering families” – lone parents who appear to have no recorded income from either benefits or work.

Whereas European programmes tended to train the unemployed – often expensively and unsuccessfully, for jobs where it turned out there was little real demand – the US approach was “work first.” The important thing was to get people into a job – any job – whether flipping hamburgers, waiting at table or lugging parcels. Dealing often with families where parents and even grandparents had never worked, programmes focused on “soft skills” – getting up and turning up on time, losing weight, looking neat, not swearing at the boss or customers. Skills training could wait.

In exporting their model, however, the US operators face some hindrances. “There is a marked difference between the US and much of Europe,” Dan Finn, professor of social policy at Portsmouth University and an employment programme expert, says of the sector. “In the US, the central aim was to reduce the rolls – simply to get the numbers claiming down.” Although the UK, Australia and the Netherlands have moved much more to a work-first approach, much of Europe “still has a stronger sense of social inclusion and the need to build human capital, while the UK, for example, has a strategy to reduce poverty. So it is not enough to claim success simply because lots of people have disappeared and stopped claiming. The sort of outcome seen in the US – where some families appear to have no income – is not one that European countries want.”

I have mixed feelings about all of this. My first point is that in post-industrial USA and Europe, many well-paid and skilled industrial and white-collar jobs have irrevocably disappeared — casualties of technology or because they’ve drifted to lower-wage countries. There are fewer meaningful, skilled, and manufacuring jobs around: flipping burgers is not quite the same as die-making and welding. 

My second is that real work serves not just an economic purpose but alse to provide some sort of social cohesion. The erosion of this cohesion can be seen in contemporary Britain, where the growth of a large underclass  — households where no-one works — has exploded in the last thirty years. But this cohesion can’t be recovered by placing people in meaningless low-paid temporary service-sector jobs or make-work schemes.

And my  third is that welfare-to-work schemes often serve cynical political purposes: the idea is to massage the unemployment or welfare figures, while not addressing the root of the malaise. This is particularly the case in the United States, where politicians seeking re-election or more important jobs, and immersed in a soundbite media culture, are anxious for good statistics — regardless of the truth behind them. 

Related to this political anxiety to get people off the unemployment or welfare rolls (and the concomitant evisceration of whatever sparse welfare provisions the USA may have once had) is the fact that there are large swathes of American workers who can be classed as “working poor”: people whose incomes don’t really allow them to support families; whose incomes aren’t enough to pay for a roof, clothing, or food (let alone medical care, higher education, or any sort of rea; skills training). The Europeans aren’t keen to go this route.

Having said this, however, there is some merit in schemes that encourage unemployed and demoralised people to enter the world of work again, no matter how meretricious the work or how ill-paid. Humans define both themselves and their social relationships by their work and the lack of meaningful work can be detrimental to mental and physical health.

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Dollar slides to new lows

Posted by alifinmath on February 27, 2008

In the FT:

The euro broke new records above $1.50 against the dollar on Wednesday, pushing oil and precious metals to fresh peaks, while weighing on equity markets.

The dramatic moves followed weak US data and comments from the Federal Reserve which reinforced expectations of further aggressive US rate cuts.

Dollar weakness was widespread. There were records for the euro, which gained 0.8 per cent to $1.5087, and the Swiss franc, up 0.8 per cent at SFr1.0668. The dollar index, a measure of the US unit’s strength against a basket of currencies, fell to a record low of 74.264.

Tumbling US house prices and weak consumer confidence overshadowed rising producer price inflation on Tuesday. Later, the Federal Reserve’s Don Kohn said slowing growth was a greater risk than rising inflation.

The authorities are in panic mode. At the moment, the US economy appears to be in freefall. And the only instrument of economic policy the US government now allows itself is interest rate adjustments (no industrial policy nor price policy nor wage policy). What stupid chumps. This is something that’s been brewing for several years and comes as no surprise to people like myself. No more speculative bubbles on the horizon by which to hide the anemic and enfeebled nature of the US economy and postpone yet further the day of reckoning, with insufficient indigenous production capacity, insufficient demand, crumbling infrastructure, ill-trained workforce, insufficient savings and investment, and record disparities in wealth and income. The Banana Republic States of America.

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Jim Rogers’ opinion

Posted by alifinmath on February 26, 2008

Today in the Irish Examiner:

Co-founder of the highly successful Quantum Group with George Soros in the 1970s, he said the world’s largest economy was already in recession and that it would last several years at least.

In Dublin yesterday to address a conference sponsored by Merrion capital, Mr Rogers accused the US authorities of “lying” about the level of inflation and about the health of the economy.

The excesses of the financial markets in the US over the past 10 years, where financiers enriched themselves without any gain transferring to the rest of the economy, leaves the US and the rest of the world with a high price to pay.

“The US is in recession. I know the government says it’s not, but it’s lying,” he said.

What’s going on in housing is worse than recession at this stage and the same is true of the motor industry which has had its worst year since 1985, he said.

The amount of machinery sold this year hit its lowest in 50 years, he said.

“I would like to know what’s doing so well that’s compensating for all these areas that are in recession,”, he added.

Apart from farming, nearly every aspect of the economy is under-performing.

The US is in recession and it’s going to get worse,” he said.

And the US Federal Reserve is making the same mistakes as the Japanese Central Bank made in the ’90s and repeating mistakes that the US made in the ’70s, he said.

They are “printing money” in an effort to prevent a recession in order to help “their friends in the financial markets”, he said.

Yep, I can’t dispute any of this, and it reflects my own (humble) opinion.

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Health care spending

Posted by alifinmath on February 26, 2008

Something that Chris (Prouty) just brought to my attention:

By 2017, consumers and taxpayers will spend more than $4 trillion on health care, accounting for one of every $5 spent, the federal government projects.

The 6.7 percent annual increase in spending — nearly three times the rate of inflation— will be largely driven by higher prices and an increased demand for care, the Centers for Medicare and Medicaid Services said Monday. But other factors in the mix include a growing and aging population. The first wave of baby boomers become eligible for Medicare beginning in 2011.

The government economists say it’s hardly a new trend that the health care sector will grow more quickly than the overall economy. Over the past 30 years, health spending has exceeded growth in the gross domestic product by about 2.7 percentage points each year. Over the coming decade, that difference is expected to narrow slightly.

I suspect similar increases will hold in other Western countries and this is not a uniquely American phenomenon. What is uniquely American, however, is the disproportionate share of the GDP healthcare consumes (because of a bureaucratic and profit-driven system).

Not surprisingly, healthcare is one of the areas where jobs will continue to grow in the coming decades. Nurses, medical orderlies, and so on.

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Food shortages

Posted by alifinmath on February 26, 2008

In the Guardian today:

“This is the new face of hunger,” Sheeran said. “There is food on shelves but people are priced out of the market. There is vulnerability in urban areas we have not seen before. There are food riots in countries where we have not seen them before.”

WFP officials say the extraordinary increases in the global price of basic foods were caused by a “perfect storm” of factors: a rise in demand for animal feed from increasingly prosperous populations in India and China, the use of more land and agricultural produce for biofuels, and climate change.

The impact has been felt around the world. Food riots have broken out in Morocco, Yemen, Mexico, Guinea, Mauritania, Senegal and Uzbekistan. Pakistan has reintroduced rationing for the first time in two decades. Russia has frozen the price of milk, bread, eggs and cooking oil for six months. Thailand is also planning a freeze on food staples. After protests around Indonesia, Jakarta has increased public food subsidies. India has banned the export of rice except the high-quality basmati variety.

“For us, the main concern is for the poorest countries and the net food buyers,” said Frederic Mousseau, a humanitarian policy adviser at Oxfam. “For the poorest populations, 50%-80% of income goes on food purchases. We are concerned now about an immediate increase in malnutrition in these countries, and the landless, the farmworkers there, all those who are living on the edge.”

Much of the blame has been put on the transfer of land and grains to the production of biofuel. But its impact has been outweighed by the sharp growth in demand from a new middle class in China and India for meat and other foods, which were previously viewed as luxuries.

“The fundamental cause is high income growth,” said Joachim von Braun, the head of the International Food Policy Research Institute. “I estimate this is half the story. The biofuels is another 30%. Then there are weather-induced erratic changes which caused irritation in world food markets. These things have eaten into world levels of grain storage.

The impact of climate change will amplify that already dangerous volatility. Record flooding in west Africa, a prolonged drought in Australia and unusually severe snowstorms in China have all had an impact on food production.

“The climate change factor is so far small but it is bound to get bigger,” Von Braun said. “That is the long-term worry and the markets are trying to internalise it.”

The underlying causes — more grain for livestock, use of biofuels, and climate change — are not going to go away. The real price of food is going to rise inexorably. I’ve never believed that the price mechanism rationally allocates resources in the real world (it always works to the advantage of the rich and powerful), and governments are having to circumvent it with subsidies and rationing. The influence of traders and speculators will possibly have to be reined in in the years to come — *shrug* — difficult to know how this will play itself out. Food shortages will add fuel to the fire of political “extremism,” and we’re all looking at a bleaker and more volatile future.

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Wheat prices hit new highs

Posted by alifinmath on February 26, 2008

In the FT:

Prices of top-quality wheat jumped 25 per cent to a record high on Monday in their largest one-day increase as Kazakhstan, one of the largest grain exporters, said it would impose export tariffs to curb sales.

The move, which follows similar export restrictions in Russia and Argentina, is likely to put further pressure on already tight global wheat supplies, analysts said.

Spring wheat at the Minneapolis Grain Exchange surged an unprecedented $4.75 to a record high of $24 a bushel as consumers scrambled to secure supplies and speculators poured fresh money into the agriculture market.

The price of spring wheat, used to bake bread, has more than doubled since January and has risen fourfold in the last year, contributing to a rise in global food inflation.

Iraq and Turkey said they were planning substantial wheat purchases to replenish inventories and analysts said China could be forced to follow because of drought damage to its next crop.

Global supplies are scarce after extreme weather damaged the crops in Australia, Canada and the European Union. As a result, the US is experiencing record demand and its inventories are set to drop to the lowest for 60 years.

Climate change is for real and we can expect escalating problems with regard to agricultural produce in the years to come as a stressed biosphere behaves ever more erratically and starts to fail because of the pressure it’s undergoing. In this as in everything else, governments — particularly the US government — will do too little too late.

The population estimates for 10,000 BC vary between 1m and 10m. This was when we still hunter-gatherers, I guess, before the neolithic era. Even if we accept the higher figure — 10m — we are now 700 times as many and this has to tell on our environment. In particular, the environmental impact of those in the West — particularly the United States — is unsustainable with regard to soil degradation, supplies of fresh water, and climate change. This will be reflected in, among other things, pricier food.

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Skullduggery behind the scenes

Posted by alifinmath on February 25, 2008

From the FT:

A group of eight banks, led by Citigroup and UBS, is preparing to inject up to $3bn into Ambac, the second-largest bond insurer. The money would be part of a plan to split Ambac’s operations into a AAA-rated municipal bond business and a structured finance business with slightly lower ratings.

A downgrade of Ambac would potentially lead to downgrades on $550bn of bonds that it guarantees. Banks could be affected because a downgrade could reduce the value of Ambac guarantees on collateralised debt obligations and derivatives trades, such as credit default swaps.

Banks have had to calculate whether costs of putting funds into Ambac would be less than the costs of writedowns associated with downgrades. Bond insurers are facing a surge in claims after guarantees on mortgage-related bonds have proved to be riskier than anticipated.

This last part isn’t clear to me. Banks will have to inject real capital into these bond insurers (which will probably be used up to pay other people for their defaulting bonds) versus writing down their own bond portfolios —  where no real capital changes hands. Why not opt for the latter?

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