30 December 2014

The Winning Incentive

Today's NYT has a bumper crop of new data/facts surrounding the overarching themes of these endeavours. So, with minimal gloat, here they are.

First, there continues to be the Rightwing cabal trying to pin The Great Recession on the Dems. For the record, once again, Bush was President, Rehnquist/Roberts ran the Supremes, the House for the whole time, and the Senate save for 2 years. So, the mess is squarely Rightwing. I didn't keep a cite, but one knuckledragger asserted that The Great Recession was caused by QE. That's one deeply stupid pencil neck, or just vigorous liar.

One of the enduring myths from the Right was that the housing mess was caused by the Dems, citing the CRA quite often. What they don't admit is that the mortgage companies, CountryWide spectacularly, weren't banks and thus had no recourse to the CRA. Another myth was that the GSEs led the pack. Again, it was the privates, MGIC and the like, which led and the GSEs, seeing market share eroding, took up the sword.

What is new today, is documentation of how deeply corrupt the investment banks were in creating these loans. As asserted here, a lot, whenever the data don't make sense, follow the incentives. In the case of The Great Recession, it was the need to sop up all that idle money when American CxOs couldn't, or wouldn't, put fiduciary capital to work as physical capital.
Now, though, a trove of emails and confidential documents, filed in court, reveal the extent to which one of Wall Street's leading banks, Morgan Stanley, actively influenced New Century's push into riskier and more onerous mortgages, and brushed aside questions about the ability of homeowners to make the payments.

Who were these loans defined by and created to benefit? The answer to both isn't folks of marginal wealth and income. It's the CxOs.
But the bank remained an important backer of New Century to the bitter end. In March 2007, after other banks had withdrawn their credit lines from New Century, Morgan Stanley gave it $265 million in financing. Soon after that, Morgan Stanley withdrew the money. New Century filed for bankruptcy a few weeks later.

Should we blame all of the investment banks, commercial banks, mortgage companies, and private mortgage insurers? Getting close to, "Hell, yes".

Second, the USofA isn't the only country with a housing/investment problem. China's had one for a long time, for somewhat different reasons. It's long been the case, and known but not often mentioned in the mainstream press, that Chinese have fewer ways to get vig. Housing has been one, and by all accounts with the encouragement of Beijing. Generally, the only one. "60 Minutes" has video of ghost towns. Now, Joe Plunger (I don't know the Mandarin equivalent) can bet on stocks more easily. The inevitable result, of course, is more like a chain letter.
Although the Chinese leadership has long hoped to see a rebound in the country's stock markets, the current frenzy carries risks that could stick investors with heavy losses. Much of the trading is also being done on margin, or by using borrowed funds to buy shares. So the boom could unwind even faster if sentiment sours.

Not surprisingly, since China's capital market is largely closed, housing prices have moved in the opposite direction. It's largely the same Giant Pool of Money (again, no Mandarin), so the seesaw swings.

Third, is domestic, for now, Chinese smartphone market. Thanks to Foxconn, and the like, China is a major (if not majority) manufacturer of smartphone parts. Apple makes none of the parts in an iPhone, just so ya know. With all that capital sunk into part making, the time would come when marginal and variable cost pressures would win. Xiaomi is the result.
Xiaomi, founded in 2010, has overtaken both Samsung and Apple in China by offering inexpensive, high-quality phones through clever online marketing campaigns that appeal to China's growing ranks of young and affluent consumers. Around 500 million smartphones are expected to be sold in China in 2015, more than three times as many as will be sold in the United States, according to the research firm IDC.

Apple has always, at least since Jobs II, ignored all but the upper X% of demand. But you can't run an economy or even a sector that way. Especially in a time of out of control automation of production. Fixed costs eventually overwhelm materials and labour, so the need to shift widgets at any price rears that ugly head.
But the start-up smartphone maker's fast growth, competitive pricing and innovative marketing have struck a chord with Chinese consumers. The company hopes this approach will translate into success in overseas markets, too. Mr. Lei and his co-founders, who include the former Google executive Lin Bin, Xiaomi's president, are considering expansion into large developing markets like India and Brazil.

Correlation isn't causation, necessarily. Sometimes, but not always. For the quants, micros, and macros far less often than any of them would prefer. After all, a magic algorithm would be as valuable as Rumpelstiltskin. Data helps in predicting gross money flows, but even then, the meandering of that flow is caused by changes, generally implemented by those who stand to benefit first and most, in the rules/incentives. The only way to know you will spin straw into gold is if you know about the new incentives before anyone else. Just like the mortgage companies invented Liar Loans, and took their winnings up front, leaving the occupants and insurers up a creek without a paddle. All of those who chased the new rules were just lemmings headed off the cliff, although lemmings aren't actually that dumb. Disney made it up.

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