Crabby Appleton's Wake

What's Apple's problem? Yet more fandango, what with iOS7 looking more like win95 than the fanboys can handle? Has Apple lost its mojo? Or has it hit a Black Swan crisis out of its control? Or, worse, both? Will it never again trade much past $450?

I've been musing on this for some time, and Krugman spurred me to type. Today he launched a Luddite lament, which just happens to contain the core of Apple's problem.

In 1786, the cloth workers of Leeds, a wool-industry center in northern England, issued a protest against the growing use of "scribbling" machines, which were taking over a task formerly performed by skilled labor. "How are those men, thus thrown out of employ to provide for their families?" asked the petitioners. "And what are they to put their children apprentice to?"

As Krugman goes on to point out, between financialization of Western economies (by shipping actual widget making elsewhere) and highly concentrated capitalization of new industry (save, financial services, itself), all labor has taken it on the chin, starting with the PATCO workers. Reagan/Thatcher made it fashionable to blame all economic ills on greedy wage earners. The result has been massive redistribution of income and wealth to the 1% and .1%. So, why is this Apple's problem? Shouldn't Apple be happy that the 1% get richer, and the poor have kids?

Today, however, a much darker picture of the effects of technology on labor is emerging. In this picture, highly educated workers are as likely as less educated workers to find themselves displaced and devalued, and pushing for more education may create as many problems as it solves.

All those Indians and Bulgarians and Chinese are willing, in no small part due to (nearly) free education, to do what has historically been high wage American brain work for the price of low wage farm work. In such countries, the choice is rather stark: earn $1/day; your choice, in the steaming hot fields, or an air conditioned office. Not too hard to see where the choice goes.

Wage arbitrage has been going on in the USofA for centuries. Manufacturing left New England in the mid-19th century for "business friendly" Southern states. When Mexico and the Caribbean acquired adequate power and water supplies and automation reduced the need for any skilled labor, off the businesses went there. And so, on to China and Vietnam (those commie bastards!) and such. It's always amusing to see Toyota pickups with those American flags, and "Proud Member of XYZ Union" bumper stickers.

So should workers simply be prepared to acquire new skills? The woolworkers of 18th-century Leeds addressed this issue back in 1786: "Who will maintain our families, whilst we undertake the arduous task" of learning a new trade? Also, they asked, what will happen if the new trade, in turn, gets devalued by further technological advance?

And the modern counterparts of those woolworkers might well ask further, what will happen to us if, like so many students, we go deep into debt to acquire the skills we're told we need, only to learn that the economy no longer wants those skills?

Education, then, is no longer the answer to rising inequality, if it ever was (which I doubt).

Therein lies the problem. Unrest in the Arab world, and Southern Europe, has been sparked by educated youth with no prospect of using that education appropriately. There's that old saw about philosophy Ph.D.'s driving cabs. What happens when it's math and engineering kids who face that prospect because IBM can find Indian equivalents for a fraction of the price? Even if education were free, worldwide, what would happen? Think of it this way: Intel has a few hundred, perhaps a few thousand, engineers designing a given chip. And a few more running the manufacturing. What's the marginal value of yet another engineer? Do we really need more folks like the London Whale? Is such the best use of talent? And those Texas ads touting all those jobs? Mostly low wage, no benefits, customer facing shift work; "want fries with that?".

What have been the growth occupations? Medical and financial services. The latter cratered the economy, and the former will bankrupt us. If you abide with certain political philosophy. What, exactly, should displaced workers learn to do? Is there sufficient work in this newly capital controlled economy for any high skill, high wage employment? Was the middle heavy income distribution of the past due to education, or mores? The answer is the latter. And that will always be the latter. Education, intelligence, and income are all relative; none is absolute. Is there any benefit to Apple if growth in employment is only in hamburger flipping? Does Apple really want, or need, the Gekkos to prevail? Or, is it already too late? The bed made, and must be slept in?

As returns to capital increase, the value of labor, educated or not, decreases. With declining wages, folks can't afford widgets. This is a particular problem for capital. As I've confirmed recently, computer tech finds itself in a bind. Payback periods are increasing (since the cost of new physical capital increases), yet product cycles are, at best, static; at worst,shortening. The result is a diminished return on investment, even without distributional effects. One attempt to combat the arithmetic is merger and competition elimination. Good luck with that. In simple terms: capital is well on its way toward destroying its customers.

In the short, and may be medium, term capital wins the battle. But doing so loses the war for all. Without enough folks in the 1%, the likes of Apple and Rolex collapse. When that happens, capital no longer has much value; the value of capital is in production, not hoarding, unless it's the Dark Ages and you're a thane with a castle. The Bernanke Bucks (and Greenspan Greenbacks earlier) are being hoarded by capital. Bush/Obama have engaged in supply side, trickle down, voodoo economics (to conjure that other Bush). It can't work. Some of the quants are figuring out that the QE money has only caused an asset bubble, both by corporations indulging in buybacks and coupon clippers seeking 10% return. The net effect is to boost demand for equities, thus trading interest return into capital gain. The problem with capital gain is that it's a one time deal. The only way one can continue to get 10%, say, is to churn ahead of the lemmings. The only way that the real economy (as opposed to the financial sector) can support X% return on capital is if that capital is more productive by something more than X%. What we're finding out is that the days of decades of return on investment (a steel mill, for example) are long gone.

Without continuing, long term gains in productivity, there can be no long term return on capital. The arithmetic doesn't work. The capitalist can only afford to pay 10% if his fiduciary capital has been turned into physical capital, which in its turn is somewhat more productive than 10%. Financial, i.e. time preference, can "demand" 10%, but if the real world use of capital can't sustain 10%, it won't get paid. If, through market or political power, financial gets more than the real world increment, the same seeds of destruction (collapse of consumer demand, for lack of moolah) are sown.

But, the whole artifice is held up by end user consumption, i.e. the Middle Class. Apple, and its adherents, crow about having the biggest margins, and all that profit. But without a growing (in terms of count) demographic, Apple (and Rolex) is limited in how large it can grow.

Think of it through a small thought experiment.

Time₀ we have the 1% with 10% of GDP, so for a nation of 1,000, that's 10. And, say, that works out to $1,000/annum of income. This is enough to afford an Apple Widget; less than $900 prices you out of Apple. Let's say the total population at $900 and above is 20.

Time₁ we have 1% with 20% of GDP, so for the nation of 1,000, that's still 10. These 10 now have $2,000/annum of income (or thereabouts, with the historic US data stream, the 1% have gotten nearly all of the GDP growth since 1980). Clearly, those 10 can still afford Apple. But what about those on the margin? Those from $900 to $999? Are there more now, or fewer? The answer is fewer. The top 10 have increased their share of the pie (which doesn't grow by 100%, the increase realized by the 1% in this experiment) out of proportion to their population. In this scenario, not only have the 1% kept all the productivity gains, but now have more of total GDP. The only place the additional moolah can come from is the remaining 900, whose incomes must fall. Depending on how right skew the full distribution was at Time₀, the decrease in addressable market for Apple at Time₁ could be even worse. Those having the $900 is fewer than before; perhaps 8. Apple can't sell more widgets in this scenario, at the same price, margin, and profit.

If, on the other hand, the 1% moves to 5% of GDP, the count of those having at least $900 goes up; by how much depends on the specifics of the distribution, perhaps 17. It is, in any case, a larger number than at Time₀, or the alternative Time₁.

Krugman closes with,

I can already hear conservatives shouting about the evils of "redistribution." But what, exactly, would they propose instead?

Well, they just want the rich to get richer and the poor have kids, since macro growth is of no concern to them and so have nothing to propose, beyond "we like it this way". Apple, on the other hand, has to be concerned.

That's Apple's problem, at its core. While Apple makes its appeal to the Gekkos, Apple's concerns diverge from that of the Gekkos. The Gekkos don't want macro growth, only Gekko growth. Apple can't survive the Gekkos. Apple needs more, not fewer, $900 households. Unlike exotic cars, there's not much demand for multiple Apple widgets. Yeah, having both an Aston Martin and a Ferrari is neat. Having two iPhones? Not so much. Apple has been able to capture most, if not all, of the high end market (population) during the Bush years. But, if the trend of concentration, both of current income and income growth, continues their market (population) must shrink. The arithmetic makes it so. The only question is how fast and how bad is the collapse?

Those happy with the trend will reply: "Apple just needs to sell to the high end incomes in other countries". OK, but how do those incomes get generated? In particular, how does Apple ensure that it gets the US dollar equivalent for its widgets sold ex-US? All of those Foxconn drones won't be buying iPhones. Ah, matey, thar's the rub. For Apple to profit (to the same degree) from ex-US sales, exchange rates have to remain in the US's favor. That was the regime while Bretton-Woods prevailed, but currency wars have been the norm since the 1973 OPEC embargo. Out went the dollar's favored status. Sort of. A recent post implies that chaos could ensue if Abe's gambit fails in some spectacular way, since Japan (and every other country, for that matter) holds US dollars as reserve currency. Now, whether the global/macro effect would be materially different if Japan loosed equivalent specie is debatable. I don't see any material difference; all specie would fall in value if trading supply spiked. In any case, Apple's problem with ex-US sales is that most of those countries, save Europe's, have even more skewed distributions. Not so many potential customers as national population numbers might imply.

So, in the end, Apple needs the 1% (or whatever the quantile is that they covet; it's likely more like 10%) to grow in count. Concentration doesn't help Apple's future, at all. The Gekko types aren't smart enough to see beyond the ends of their noses, so they can't figure this out. Not even Jonah with Excel. It's not coincidental that the growth in the US up to 1973 was driven by an income distribution which was heavy in the middle. And it's not coincidental that it all began to unravel after 1973, and gained momentum with Reagan in 1980/1 with the head swelling up like a melon.

Apple's problem is that it painted itself into a corner. And they don't seem to know it, yet.

About Those Needles I Spoke Of... [update]

I'm a frequentist by inclination. Rarely, not ever as I set here and attempt to recall, do I find Bayes a convincing approach to analysis. In the matter of Big Data and such, my previous musings have pointed out that if one is going to expend the effort of go needle hunting, it'd best be a really platinum needle.

Corey Chivers has done a thought experiment with the NSA data siphon. You should read it. He makes some extremely generous assumptions (generous in favour of PRISM working), and reaches a not so stellar conclusion. Just the algebra, mind, but the analysis makes clear that any actual data has to be pretty amazing for the whole thing to be worthwhile.

It's also worth noting that NSA has been doing this sort of thing for decades. When I worked in DC in the 80's, much was written about the various spook agencies. I went back a few years later, to intern with Jack Anderson (not as much fun as the current movie wrt Google, but Jack was as funny as a crutch). I even co-authored something on CIA gun running. The telephone was the beachhead. This is 1986. What NSA is doing, or is assumed to be capable of doing and won't resist, has been going on for some decades. The switch from analog telephony to digital caused a good deal of angst within Spook Nation; note the note toward the end of that facsimile about encryption and such. Back then, the spook agencies got the best mainframes IBM, CDC, and Cray could make (and no one else); it's unclear now whether that's still possible. On the other hand, I saw (but didn't keep the cite, since it seemed irrelevant at the time) the projection that 80 to 90% of traffic will soon be movies and such. More hay.

Just don't go making any sick jokes about ricin over the phone. Or, if you're in the Glass group, even thinking one.

[update]
Vinson was appointed to the U.S. District Court for the Northern District of Florida by President Ronald Reagan in 1983, and named to the FISA court in 2006 by Chief Justice John Roberts.
Here

Star Wars Episode 2, The Sultry Framework

Many years ago, in an cubical far, far away, I had the temerity to assert that the (then current) crop of java coders weren't writing java at all, but rather some bastardized framework jargon that included 'class' and ';'. The young-uns were sorely miffed. They acted as if I had called them COBOL coders (well, to all intents and purposes, or intensive porpoises for the miseducated, I had).

Imagine my joy to find a posting which continues that saga. And nearly as pointedly as I have.

I also highlighted the increasing prevalence of "Trojan languages", wherein frameworks present themselves as libraries in JARs but actually require learning new languages to be used effectively.

Which is not to say that I've hopped on the Scala bandwagon. Just another client side data messer-upper language, for my taste.

So while I knew I couldn't collect gold standard data, I decided I could use the momentum from the original blog post to collect at least some data, and some data would be better than none.

Well, not really. Collecting data which, even if (and more so if) the bias is unintentional and therefore unknown. Again, policy always trumps data. We wouldn't still have billions of lines of COBOL extant if data were the basis of decisions. He concludes that Scala tips the scales to the plus side.

Fellini Meets Bergman

Federico Fellini and Ingmar Bergman crossed paths in the news the last couple of days; satiric hilarity meets major depressive disorder in the span of one day.

So, first Federico.

We all still remember The Great Recession's start, and the London Whale's puking (not Jonah, alas), yes? Much has been made here that quants, by and large, know little about economics (beyond certain micro adages) and, it turns out, little beyond Excel to accomplish their "analyses". Turns out, they don't learn much Excel until just as they're needing to use it. Kind of like a soldier who's never loaded or fired his weapon (a single action Colt revolver) until the enemy comes out of the bushes, Uzis blazing. What a way to run an economy.

Imagine my surprise, then to read that quants, in a manner of speaking, are being trained in just a few days, and to use Excel!!! As if that were what a serious quant would depend on. I guess when there's sufficient money to be made by going on the cheap and stupid, Wall Street just can't resist.

Enter specialized boot camps where -- for fees that sometimes exceed $1,000 a day -- would-be masters of the universe can perfect Excel modeling techniques and financial analysis.

So, where are these Masters?

"I just want someone who can really use Excel and PowerPoint," said one senior loan syndication banker at a European bank, describing his recent interviews of newly minted M.B.A.'s in New York.

Excel and PowerPoint, the Leopold and Loeb of finance. "Wonderful", as Dirty Harry opined. It's the Lemming Triple Crown.

But, it gets better:

In June, Training the Street will start a four-day Undergraduate Wall Street Boot Camp in New York and will charge students $3,000 (not including accommodations) to learn the basics of financial modeling, valuation and analysis. Wall Street Prep, widely viewed as more intensive on analytics, sells CD-ROMs for $39, for a basic Excel course, and as much as $499 for a "premium package" detailing financial modeling.

If you've ever been a cigarette smoker, and of a certain age, let me take you back to the Goode Olde Days of matchbooks. Inside, invariably, was an ad for some get rich quick program, for just a few dollars. Taxidermy at home, was my favorite. Now, you can spend a few dollars, and you too can participate in destroying the world economy.

Wait, wait. Could it be? Yes, as we read on to find:

But Wesley Hansen said such a course was vital when he switched to a career in finance. He was a camera operator on reality shows like "The Bachelor" before graduating last year from the University of Southern California's Marshall School of Business, where he took Training the Street courses.

"I had no clue how to use Excel, so it helped me get a job, no doubt," said Mr. Hansen, who is now an equity analyst in California with the brokerage firm BMA Securities.

I suppose it's beyond hope that Mr. Hansen stays as far as possible from Other People's Money.


And now for Ingmar, and his tale of a canary in a coal mine.

Recall how this endeavor has pointed to the disconnect between median house price and median income, starting about 2003? The canary in the coal mine, so to speak. Widely ignored, of course, because ignorance was compensation bliss for the Masters of the Universe. As one said, paraphrasing, "everybody else was dancing, so we had to, too". The Lemming Trifecta.

Also, as this endeavor has mentioned more than once, most of that Fed moolah has been going to Banksters and the like, not wage earners. Thus, it's obvious, a priori, that this moolah flood is the reason the Dow and NASDAQ and S&P are on a tear. More dollars chasing a, more or less, fixed bundle of stocks. The other side of the coin, also mentioned here ad nauseum, is the flight to "higher risk free returns" by those coupon clippers who used to get a 7% solution holding Treasuries. Livin' high on the hog off the taxpayer. Whether the coupon clipper class realizes they're now embedded in a Ponzi scheme is unknown.

The ever dependable Floyd Norris has data on a related aspect: margin. Margin means you buy stocks without paying all the bill. Your broker lends you the extra. All is fine so long as the price goes up, since you sell off some of the appreciated shares to clear the bill.

The latest total of borrowing amounts to about 2.4 percent of G.D.P., a level that in the past was a danger signal.
...
The first time in recent decades that total margin debt exceeded 2.25 percent of G.D.P. came at the end of 1999, amid the technology stock bubble. Margin debt fell after that bubble burst, but began to rise again during the housing boom -- when anecdotal evidence said some investors were using their investments to secure loans that went for down payments on homes. That boom in margin loans also ended badly.

Recall the lesson learned from the run up to the Great Recession? Median income was, at best, stagnant. Greenspan crashed interest rates. The coupon clippers went on a frenzied search for "nearly risk free returns", and settled on US residential housing. In order to secure enough "product" to fulfill the demand from the coupon clipping class, the Subprime/ARM/liarLoan/etc. were devised. This clusterfuck had two, in the very short term, beneficial effects: 1) the 99% had a source (home equity loans against unearned appreciation) of consumption not of their meager wages, and 2) the coupon clippers got back to living high on the hog with their 7% (or even better) solution. But like heroin, the withdrawal hurt like an asteroid hitting in the Yucatan.

If that pattern repeats, it could indicate that the stock market rally, which carried the S.& P. 500 to record levels in May, will not last much longer.

Economists have a term, "wealth effect", which means that if you think you've got lots of moolah, you'll spend as if you do. The Wiki has a thumb nail sketch. It is clear from the data that during the Dubya years households spent, on the whole, motivated by the ability to monetize real estate appreciation, which was not driven by retiring mortgage value, but by increases in appraisals. That increase in demand for housing, in its turn, was driven by corruption in the mortgage process (not by rising median incomes able to pay higher prices for houses), to create ever more instruments for the coupon clippers. Kind of like screeching positive feedback one sometimes hears at rock concerts. Whether we're seeing the same thing with margining in the stock market, buying low and selling high on credit, hasn't yet been revealed in enough data. We likely won't have enough data until after the patient has died. A postmortem analysis, so to speak. What we do know is that median income remains stagnant. The inference is thus clear.

I Need a Date

This post is too funny to not pass on. It's also useful for those teaching or doing baby-stats. All intro texts (R or stats or psychometrics or ...) cover the same ground, so to speak, but lack the cute setup.

On a serious note: measure of central tendency is handled, most often, in the first or second chapter; thence largely ignored. But if your field is resides in non-natural processes, i.e. anything man made or man interceded, it really does matter. As the saying goes, "figures don't lie, but liars figure." What you choose as your measure of interest/importance can make a big difference to your policy recommendation (yes, policy decisions, 99.44% of the time, is why stats get done). Since your audience is mostly suits (politicians, MBAs, CxOs, and such) who are innumerate, you can pull the wool over their eyes with ease. Or more often, the Suits have a policy decision, for which you are charged with finding a quantitative slam-dunk defense. Or, just as often, you're in the opposition, and you need to make a Wilson Burger. I give you Supply Side Economics and DSM-V (or DSM-5; I guess they figure that altering the name slightly will confuse the critics?).

Losing At the Casino

For some time, but until now unfollowed, I've harbored the notion that MCMC (Markov Chain Monte Carlo) modeling might be suspect in The Great Recession. Turns out, I'm not the only one.

Skinny Tails

Monte Carlo simulation is a convenient statistical tool by which an analyst can make inferences over the probability of rare events. Basically, the method takes a model with its estimated parameters and simulates possible sample paths under some distributional assumptions on the errors. The technique is particularly useful for understanding the tail risk of distributions. The method has been widely adopted by banks, investors, and financial advisors. And, because the models failed so horribly in the current downturn, the method is now under attack.

Ya think????

Felix Solomon's take

So the lesson here, I think, is mostly that stock-market tails are fat. But there is a sub-lesson, too, which is that Monte Carlo simulations can be very dangerous, if they're implemented by people who don't know what they're doing. Including the quants at Moody's.

A 2007 critique (who knew anyone refused the Flavour Aid?)

The amount of derivatives in play is in the hundreds of trillions of dollars all bet on Monte Carlo Simulation. Wow!
...
It sure seems like a hell of a lot is riding on the Monte Carlo Simulation of CDOs as well as the parameters and assumption that feed into the model. If and when a Credit Event occurs that rifles through multiple CDO tranches, the guarantors will be about as well capitalized to handle the guarantees as is Madame Merriweather's Mudhut Malaysia. Do I smell a government bailout coming up?

Ya think???

Practical magic?

The downside of Monte Carlo is that it is more trusted than historical data. This misplaced trust is rooted in the idea that if a person has no historical data, then the Monte Carlo forecast can be anything that is believed plausible. For example, the phrase: "Contingency was determined by running Monte Carlo" is equivalent to "PI was determined by using Monte Carlo." Monte Carlo could render reasonable results for each value. They both will not be precise answers because Monte Carlo is an approximation, and the results for both could be completely wrong.

The issue with such methods is that they view human actions as Brownian motion (really!). While reasonable for physical processes, not so much for finance, where the rules are made up by humans and can be changed at a whim. That's why we got our Great Recession: humans changed the rules faster than the data streams could reveal the changes. The analysts made their decisions under the assumptions that Tomorrow will look pretty much like Today, which in its turn looks pretty much like Yesterday; and, as with physical processes, that the platform was stable during measurement. The fact that median house price had come unstuck from median income wasn't relevant to the modellers or their models; to look in that direction wasn't in the self-interest of those engaged in the game. Alas, if you look at the data through a toilet paper tube, you'll not see that hyena licking his chops for dinner. You're dinner.

And, as past is prologue, comes reports that brokerage houses are luring retail investors into options trading. There's nothing more fun than playing with nitroglycerine whilst bungee jumping.

At Ameritrade, which has been the most aggressive, derivatives trades accounted for about 40 percent of all customer trades last year -- more than double what it was just five years ago. A vast majority of those trades were in options.

The growth has been a big help for the online brokers at a time when stock trading has fallen. The commission on the average options trade is more than twice that on the average stock trade, according to TD Ameritrade's former treasurer, Michael Chochon.
...
[H]e saw investors taking up options trading and "blowing up" on an almost daily basis. He said Ameritrade carefully tracked the risks its customers were taking but did not warn them until they were close to losing it all, if then.

If that sounds a bit like the Banksters grinding ever more, and expensive, fees from common depositors to make up for the loss of all those wonderful profits on subprime and such, well "yes I said yes I will Yes" (that's from a famous dirty book, btw).

No Child Left Behind

It was always a puzzle: why would Dubya promote making kids smarter? It is well known that smarter folks lean leftward, while the dumb and gun-totin' and God-addled lean rightward. Dubya couldn't really be serious, he was just looking for an excuse to defund inner-city programs deemed too efficient at leveling the playing field.

But, of course, the right leaning always claim that smart folks don't really exist, or are just pointless elites. And, may be so. But comes today a study which demonstrates that smarter means having a better bullshit filter. Dubya's worst nightmare. He and his Koch snorting buddies can't be happy.

There may be ways to improve one's ability to filter out unnecessary information, Tadin said, but he isn't sure what such an exercise would look like. "Most so-called IQ enhancing exercises focus on how you process things that matter, not how to better suppress those that don't," he said.

Well, not really. The filter bit goes by the name, critical thinking. Here's the wiki. For those old enough, or willing to read some history, there's the In Box Test. There's no obvious Wiki article, which tells you something. Here's one victim's tale, so I guess it's still around.

Needless to say, but I will anyway, IQ measurement is the bete noire of psychometricians, arguably the first quants. It poses much the same problem faced by financial quants: there is no absolute zero; it's all relative. And, as with the financial quants, it's mostly a zero sum game.