Flume Slide

I've already lost track of the count, but (nearly?) every advert pushing web-thingee is going legs up. Remember, you read it here first: advert pushing is a low value, zero barrier, non-producing use of capital. Mad men? You betcha!!

New Gold - Part The Third

For those watching Reporting Season of Mr. Market, you should have noted so many Masters of The World crying in their champagne (through their sock puppet anal-ists) that The Strong Dollar has wreaked havoc with their well deserved profits.

Boo hoo, y'all!!!! Since the Almighty Buck is really (don't argue with me) New Gold, and the global economy does continue to expand, if only haltingly, then specie must needs keep up. Without more New Gold, the existing stock gets bid up by increasing demand. As Homer puts it: "D'oh!!"

Of course the Almighty Buck is up. Ted Cruz, meet the other side of being the World's Superpower and Default Central Bank.

This Has Gotten Totally Nuts

OK, now this is getting nuts!! 128GB on a single core, four slot board? At DDR4? Who was it that insisted we need clusters of machines, for most applications?

Dr. Codd really was right. Get to it.

Canary Sing To Me

AT&T reported today, and Briefing, 4:10pm includes this tidbit:

About 1.2 mln branded smartphones added to base, including 700,000 prepaid 1.2 mln total wireless net adds

Received wisdom: prepaid is for poor people.

Robo Rat

I'll admit it. The notion that one can run an economy with increasing automation and olde style wage setting is just silly. While we now, by all accounts, take it for granted that machines should replace humans in assembly line type work, some of us have taken this notion to its logical conclusion. Which conclusion is that, without a rebuilding of wage earning, the capitalist utopia is about to end. Even Foxconn has tired of workers, cheap as they are in China, for robots.

The assumption is that only manual labor will be replaced by automation. Yet, why? Way back in the 80s while I was building databases for medical pre-qualification, we had a low priority project to make an AI-ish module for diagnosis and allowable therapy. This was in Progress, not the most relational or flexible database in the world. But AI, especially in the Boston area was au courant, so what the hell. A professor in North Carolina, not the most liberal state in the nation, has this to say:

Most of what we think of as expertise, knowledge and intuition is being deconstructed and recreated as an algorithmic competency, fueled by big data.

The mantra of the quant, especially in the financial sub-world, is that intuition is worthless because data tells the truth. May be.

An ad in 1967 for an automated accounting system urged companies to replace humans with automated systems that "can't quit, forget or get pregnant." Featuring a visibly pregnant, smiling woman leaving the office with baby shower gifts, the ads, which were published in leading business magazines, warned of employees who "know too much for your own good" -- "your good" meaning that of the employer. Why be dependent on humans? "When Alice leaves, will she take your billing system with her?" the ad pointedly asked, emphasizing that this couldn't be fixed by simply replacing "Alice" with another person.

The solution? Replace humans with machines. To pregnancy as a "danger" to the workplace, the company could have added "get sick, ask for higher wages, have a bad day, aging parent, sick child or a cold." In other words, be human.

The reposte, as always, goes something like, "by replacing expensive humans with cheap automation, product is cheaper for everybody." Which is true for those who can afford the new price, however minuscule the price difference. As time has gone on, the proportion of production cost attributable to labor continues to fall. Cheaper hands yield a yet smaller reduction in a yet smaller proportion of cost. All the while increasing output capacity, but not demand. That's a problem. Were we still in a pre-industrial world, keeping a burgeoning population enslaved to produce goods and services for the elite works. In a macro sort of way. But with a capital driven automated production world, there's the problem of killing off your market as you kill off your employees. If there's no one left to buy your widgets, how do you manage?

I suppose that the problem won't be admitted until the Wall Street masters find they've all been outsourced to a room full of HALs and Watsons. Ah, the sweet revenge. Those dirty rats!!

Well, not all rats are dirty, it turns out. The only giant rats I'd ever heard of were the giant rat of Sumatra. Made up by Conan Doyle, of course.

I'M walking in a minefield here in rural Angola, tailing a monster rat.

This is a Gambian pouched rat, a breed almost 3 feet from nose to tail, the kind of rat that gives cats nightmares. Yet this rat is a genius as well as a giant, for it has learned how to detect land mines by scent -- and it's doing its best to save humans like me from blowing up.

Why?

At this minefield, which is full of metal objects, a human with a metal detector can clear only about 20 square meters a day. A rat can clear 20 times as much.

This is one case where replacing humans is better for everybody.

Headlines

DrCodd and DrKeynes began life as fraternal twins, one dedicated to the RM/SQL and later quant while the other to generally macro-economic topics. Both have a preamble of quotes, which preamble has changed in structure over time. Currently there are a few permanent (until retired) and one cycled out each week (generally Sunday). They were taking too much real estate for a while.

On the whole, the permanent ones are specific to each venue. From today they'll share Eccles' quote, originally from DrKeynes. A bit of explanation.

A post on Seeking Alpha reinforced the notion that macro forces are, most times, more significant to an organization's performance than any quant analysis or datastore infrastructure that it develops. The Great Recession happened just because The Masters of the World couldn't find enough sovereign debt at a rate of return they considered their just due sufficient to absorb the Giant Pool of Money then floating around. That pool has only gotten bigger since, what with QE exercises in the US, EU, and Japan. All those central banks (sort of) pushing a string. Supply side "theory" on steroids, HGH, and LSD.

That piece is about the effect of Google and the various ISPs fighting over market, and how best to serve said market. Defining the market is significant, in that "high speed" and "broadband" have been used to describe just about any data pipe faster than 56K dial-up.

In sum, any attempt to apply quant methods to micro problems (i.e., at the company or even sector level) is most likely to fail, since what matters is the monetary incentives, both in place and expected in the forecast horizon. If the actor under analysis is one that can change the incentive, then the quant doesn't matter. If the actor is the victim of changing incentive, then the quant doesn't matter.

In the end, what happens to the macro-economy matters far more than any decision made at the actor level. Most of the time. Occasionally, an IBM will bend over for a pipsqueak outfit like MicroSoft, and alter the trajectory, but that is also a factor that isn't in any quant model. In the end, we're in a period of hyper-industrialization, with massive capital outlays to gain pittance improvements in widgets. The difference between having a 45" LCD TeeVee and a 21" CRT TeeVee doesn't measure up to there not being any TeeVee at all. With the capital requirements in any part of compute being what they are, only mass consumption of the output can save the day. There's a reason 450mm wafers still aren't in use. There's a reason that the memory sector is still a race to the bottom. And so on. While a single company can get by targeting the top X% of consumers, as Apple does, the manufacturers can't live that way. Should the market for such goods sink to just X%, the entire supply chain collapses. Average cost skyrockets, and even the X% will no longer be able to buy.

Holders of excess moolah seem to believe that they deserve 10% (or so) return on that moolah, no matter what. Doesn't work that way. For decades they whined "Damn Gummint debt crowds out real investment!! Boo hoo!!". Now that real returns in real investment have dried up, these same free market whiners demand that the Damn Gummint offer up debt at 10% (at least) so that they can continue to cruise the Med in their yachts. Poor souls. All that QE money hasn't gone into real investment (M&A, buybacks, subprime car loans, and other marginal financializations have replaced housing; oh joy), and that fact should cause your sphincter to contract, if only a bit.

Hoe Lee She It

Regular Reader has certainly surmised that the issue of micro, macro, and quant with regard to flation and interest has been a bugbear for the last little while. To reiterate: The Great Recession resulted from trillions of dollars chasing high yield, yet risk free, instruments, preferably without the ugly detail of real investment. Those trillions have only grown since then, not least due to the QE bucks tossed the way of corps., hedge funds and .1%ers. Dullards all.

Anyway, the punch line from my perspective is that The Masters of the World who presume to be Job Creators and general all around geniuses of finance, are simply incompetent as capital allocators. They buy back shares, merge into oligopolies, and borrow yet more moolah to send off to shareholders as dividends. I decry it all as foolish and ultimately fatal to the economy.

Also, on occasion, I've noted that the editors of the NYT exhibit a bit of humor in their choice of stories and presentation. Or, it could be cynicism for all I know. In any case, today's Business Day front page (dead trees version, of course) leads with GE's Immelt dismantling Welch, which many of us have argued was long overdue. Welch, first among many, created the financialized economy. Fie on him. Read the piece at your leisure, as the topic of this missive is the other story on the page.

And, that would be, the CEO of BlackRock (the hedge fund, not the town of movie fame) telling the world,

He is planning to tell the leaders that too many of them have been trying to return money to investors through so-called shareholder-friendly steps like paying dividends and buying back stock.

Holy shit!

"The effects of the short-termist phenomenon are troubling both to those seeking to save for long-term goals such as retirement and for our broader economy," Mr. Fink writes in the letter. He says that such moves were being done at the expense of investing in "innovation, skilled work forces or essential capital expenditures necessary to sustain long-term growth."

Gad. A hedgy telling The Masters of the World to get off their dullard asses and make real investment with all that moolah they've been granted.

Mr. Fink says the move "sends a discouraging message about a company's ability to use its resources wisely and develop a coherent plan to create value over the long term." Moreover, he argues that "with interest rates approaching zero, returning excessive amounts of capital to investors" isn't helpful because they "will enjoy comparatively meager benefits from it in this environment."

Vindication, thou art mine.

Those Bermuda Bastards

I think it was Dr. Hemond who said, "If you need a little money, you go to a bank. If you need serious money, you go to an insurance company." Mostly, of course, life companies; the payout risk is somewhat more quantifiably predictable. Causes of death don't change all that much from year to year. Hurricanes, tornados, and faulty autos; not so much. Or very much, depending on how one chooses to parse the English.

Earlier in the week, the NYT ran a story describing how rich people create captive insurance carriers.

Stephen M. Moskowitz, a tax lawyer and certified public accountant in San Francisco who advised the California lawyer, said he also worked with a dentist who set up a captive to insure against a terrorist attack in his dental office.

I thought about musing about how incentive, once again, tops data, but let it go. Very zen of me. But it appears the "Times" was using that story as a loss leader or hors d'oeuvres. Today, we get the entree: life insurance companies, since they get to play 50 states' insurance departments against one another, are playing Russian roulette with your family's security blanket. Once again, those that make the rules get to bend them to their benefit.

In concert with what many, humble self included, have said about banking leading to, and especially after, The Great Recession; banking is supposed to be dull.

The life insurance business is supposed to be dull -- sell policies; collect premiums; salt the money away in the safest sorts of investments, mostly bonds; pay out benefits; and make money along the way by investing surplus assets prudently. No wild bets, no siphoning of assets, no off-the-books maneuvers.

Here, again, we see the side-effect of the over-supply of savings, globally. Interest bearing instruments rise in price, thus lowering the effective interest rate on their coupons. It was just this, still growing, over-supply that led to the Great Recession. Rather than invest in producing assets, which depend on getting the right plant and equipment installed, The Masters of The World chose "risk free" assets. Since they were all chasing the same classes of assets, US Gummint debt mostly, US housing looked like a better yield with little increase in risk. Think of it as arbitrage in reverse: all the Masters fixated on one narrow (in the global sense) class and threw trillions of moolah at it. Even if the Crash never happened, the result would have been about as bad for the Masters: collapsing returns.

Today, with all that moolah chasing Treasuries, the historical class for life insurers, the companies face collapsing returns. Again. So, again, they fiddle the rules. This time with, some, help from the regulators. The piece points to Iowa, and my favorite "Lord of the Flies" whipping boy country, Bermuda.

For years, Iowa has been working to make its capital, Des Moines, an insurance hub, with considerable success. Insurance now accounts for more than 24,000 jobs in and around the city, and for more dollars in the state economy than agriculture.

Just as Bermuda, or at least the rich white ones, decided that tourism was too dull and not rich enough, Iowa's powers that be decided to kowtow to insurance company fiddling. The essence of the fiddle, both with Bermuda and Iowa companies, is to create captives which actually have no moolah, but lots of liability.

One maneuver known as "captive reinsurance" grew to $364 billion in 2012 from $11 billion in 2002, according to a Treasury Department report issued in 2014. The report said captive reinsurance exemplified one of the three most important types of risk to financial stability that emerged last year.

Captives get created as shells, take the liability, while the parent keeps the profit. Nice work.

Putting obligations into a captive and saying they are reinsured is a little like putting dirty laundry into a closet and saying it's being cleaned.

I can't top that one, ya know.

[New York State's superintendent of financial services, Benjamin M. Lawsky] keeps saying that captive structures remind him of the deals that proliferated in the run-up to the financial crisis of 2008. That ended in a giant taxpayer bailout.

Once again we get the fallout from the 1%'s demand of 10% (or so) return on the use of their idle moolah. It doesn't, and hopefully won't (from their point of view), be put to productive use. That's too risky. They just deserve their tithe.

The Truth Will Out

From the beginning of the QE exercise, I've been slapping the "inflation is coming!! inflation is coming!!" crowd with the reality: the Fed (nor the other central banks, which the Fed really isn't you know) hasn't been dropping Benjamins from 747s over Anytown, USA all this time. No, it's been giving it to corps. and .1%ers. The result is local inflation, the stock market in particular, and corp. balance sheets' cash position.

There are three drivers of inflation:
1) wage push (workers get more moolah for the same work; actually gotten less since the Crash)
2) cost push (materials and equipment go scarce, so their price goes up; California's water will soon do that to food)
3) demand pull (Ma and Pa Kettle everywhere come into a windfall of moolah, thus bidding up the price of everything)

QE did none of those, in the general economy. Finally, a mainstream pundit (minor leagues, but hey!) gets it. Took long enough.

Self Delusion

For those with a "60 Minutes" and stock market Jones, there's new news on the Lumber Liquidator front. The brokerage Raymond James had some tests done on LL laminates, both the deconstructed and whole part methods. One report says:

Raymond James said that the tests commissioned by "60 Minutes" were of a deconstructed laminate - not the same as the tests that the California Air Resource Board mandates.

Yet another site/blog says something different:

Here's what they found:

"In the tests Raymond James commissioned, the deconstructive method showed formaldehyde levels similar to the tests done by "60 Minutes," while test on the finished laminated flooring sealed in the emissions."

Dueling stock promoters. Love it.

Now, "60 Minutes" says it confirmed the testing used with CARB:

60 Minutes also confirmed with CARB officials that this deconstructive test method is the way they test finished goods for CARB formaldehyde emissions compliance.

And, lo and behold:

This Standard Operating Procedure (SOP) is to be used to prepare a finished good for laboratory testing to determine if the finished good complies with the ATCM to Reduce Formaldehyde Emissions from Composite Wood Products. This SOP describes a procedure for preparing or deconstructing finished goods made with composite wood panels and preparing specimens prior to laboratory testing according to the requirements of ARB's Monitoring and Laboratory Division SOP "Sampling and Analysis of Formaldehyde Emissions from Composite Wood Products."

So, CARB says to take the item apart. RJ and LL say that CARB is lying. Odd.

What's even odder is that Mr. Market is buying this. LL is up a tad this morning. What's a quant to do? The Data say one thing, while those desiring to change the incentive say another. As always.

Of Some Interest

For a long while now, I've been needling the micro- and quant crowd with respect to understanding and predicting interest rates. The real rate is set by the productivity of physical capital used by business. When business can't figure out what to do with their moolah (demand), as has been the case since at least 2000 (all that moolah went into housing, rather than productive physical capital, for a reason), good old supply and demand drives down price (interest). When business considers yet another web advert platform the wisest placement of capital, well... The reactionaries always claim, now that the rate is low, that the Fed (and ECB and Japan and ...) are killing investment by their actions. Never mind that when rates are high they bitch that Damn Gummint debt (i.e., interest payments) drives out private investment. Cake and eat it too, and all that. In sum, the moolah hoarders want the American taxpayer to ship them 10%/annum no matter what's going on in the real economy. In fact, a sort of bailout: no use for moolah in the real economy, then the Damn Gummint should pay them their God given 10%! Nice work if you can get it.

Well, Gentle Ben has spoken up:

But what matters most for the economy is the real, or inflation-adjusted, interest rate (the market, or nominal, interest rate minus the inflation rate). The real interest rate is most relevant for capital investment decisions, for example. The Fed's ability to affect real rates of return, especially longer-term real rates, is transitory and limited.

and

The bottom line is that the state of the economy, not the Fed, ultimately determines the real rate of return attainable by savers and investors.

He closes with

The state of the economy, not the Fed, is the ultimate determinant of the sustainable level of real returns. This helps explain why real interest rates are low throughout the industrialized world, not just in the United States. What features of the economic landscape are the ultimate sources of today's low real rates? I'll tackle that in later posts.

It may be time to send him a bill for my consulting services.