Tuesday, September 29, 2009

Economics for Spring - BW Spring Newsletter

Man, an animal that makes bargains.

Adam Smith 1723 – 1790

This Newsletter – now in its 9th year of publication has – like most orthodox written media in recent times – seen frequency of publication overtaken by my website http://www.brentwheeler.com and more recently my blog Eye2thelongrun . The former has longer pieces spanning several areas of interest while the later is rather more spontaneous but of course full of the usual traps which fast and loose can bring.

A key theme this spring is the wonderful evidence of the irrelevance of political process, politicians and their policies.

My chief general objection to the politics is:

1. The fact that the name of the game is manipulated outcome achieved by poor and inconsistently mandated force thinly disguised as parliamentary democracy, and,

2. The failure to heed H.L. Mencken’s great warning that the Puritanism it often invokes is “The haunting fear that someone, somewhere, may be happy” a notion surely to be eschewed by even the vaguely rational.

The saving grace may be sporadic entertainment value derived primarily through irony.

Three demonstrations without Minto….

1. I am perfectly capable of stimulating myself thank you

In a severe and well argued attack on Paul Krugman David Levine points out that barely 10% of the promised US stimulus monies have actually been spent and yet the recovery appears to be trucking along at a reasonable clip. Others too have pointed out that Obama’s cavalry have not actually arrived and don’t appear to be needed. Similar trends can be seen elsewhere.

In New Zealand too, recovery has not been a government promoted affair. Nary a bicycle clip has been raised in anger to date in spite of the talk fest. A major nine day fortnight adopter (F&P Appliances) thankfully realised before it was too late that the answer actually lay in a non government sponsored Chinese takeaway.

The apparent exception in N.Z. might be thought to be the lowering of interest rates and central bank interventions. Even there though it should be said that N.Z.’s central bank remains amongst the most removed in the world from government control and there were strong arguments in favour of a bowel mover to get interest rates more in line with economic activity levels long before the R word came anywhere near the tip of the political tongue.

No need then for the helping hand thanks – and don’t bother imposing the inevitable costs now that we can see the “help” is not required.

2. I emit therefore I am

Another stellar non performance of any real relevance has to be in the carbon emission hand wringing contest. Radio NZ – not noted for outing apocalypse now conspirators – reports that:

The world's carbon dioxide emissions is likely to fall by more than 2% this year - the biggest drop in 40 years - mainly due to the global recession. Measures such as emissions trading and China's economy-wide drive to increase energy efficiency have also played a part, but the International Energy Agency estimates that the recession is responsible for about three-quarters of the fall.

This tells us two things worth knowing. First decreased carbon emissions really are accompanied by lower growth and recessionary conditions – nice to know there is a cost before we plunge into “bold policy”. Second, on a generous view some schemes might produce a half a percent decrease – with a chunk of that coming from increased energy efficiency.

Nowhere in sight is the tedious flannel of moving motions, committee written protocols and banal communiqu├ęs. Even where government is at work – in this case in China if the report is to be believed – my understanding is that the modus operandi involves serious coercion rather than verbal posturing.

3. This is My party

There are two important things to know about referenda. First they represent the highest profile collective vote of no confidence in some piece of policy outside the formal electoral process coupled with a widespread belief that the formal process is incapable turning the policy round.

Second they represent an unacceptable assault on the machinery of and output from the factory which is Parliament. Workers at the factory are thus obliged to ignore them totally. Mere details such as “who wins” a referendum are to be treated with suitable disdain. In fact the greater the majority the more important to dismiss these straw polls since large majorities winning referenda represent large scale attempts at closing the factory or at least limiting its output.

Adopting the schizoid notion that a law works so long as it’s not enforced (the forced no smack Jack policy) or that there will be (compulsory) consultation but no change of mind regardless of result (to “h” or not to “h”) simply reinforces the irrelevance of the factory and its inmates.

The record of what can be achieved through political processes is a poor one. The record of achievement through spontaneity and pouncing on random good fortune is much stronger – primarily because it is closer to reality than obsession with the feeble idea that power per se is of great moment. This may not have once been as true as it seems to be ever faster becoming…

For politicians then – in all walks of life - best to remember Henry Kravis – “if you don’t like change you are going to hate irrelevance.”


Like all decent economists I know I shouldn’t predict. I try not to and naturally warn others against it. This works well with bank economists – when they tell me the dollar will fall I ask them how many lots short they are – pretty much the answer is zero. Like all curious cats however I can’t resist now and again.

I did claim somewhere near the beginning of the recent road bump that Asian economies (which I stretch from Thailand / India to include all the rest short of Japan) would scream out of this well ahead. That may be the last signal that this millennium does not belong to the West. So far – confirmed. Am I long Asia? In my own modest way – yes I certainly am - despite not eating the hens’ feet yet.

YTD August 2009 the MSCI equity returns looks like this:

1. Indonesia 75%

2. Sri Lanka 68%

3. Vietnam 67%

4. China 64%

5. India 62%

6. Australia 19%

7. New Zealand 13%

Can this last – obviously not and prices are not the bargains they were. The valuation gap between Asian and western stocks has widened though; the spread between eastern and western P|E rose to 8.6 in mid-July, from its three year average of 4.5 (Asia: 23x, the U.S.: 16x, EU: 13x).

Advice? Asia is here to stay and we need to understand it. Forget going to that N.Z. suburb Brisbane and get up to Asia for the holidays to learn about it – and I don’t mean trolling Orchard Road for Italian shoes or visiting the “gem factory” from the Indra Regent, Bangkok.

Strong Suits in IT

Weaving your way through various rubbish on the web can be trying with most of the free stuff offering precisely and unsurprisingly exactly what its price suggests it would. On the odd occasion however, someone is making gains from someone other than the long suffering downloader and thus we get useful pieces of “free” software.

Some picks are:

1. Unlocker assistant – every now and again you go to delete a file or move it and get a stern rebuke to effect of “You do not have permission to do this” or “this file is in use, be off with you”. No amount of coaxing will do. Unlocker assistant http://ccollomb.free.fr/unlocker/ is the answer. As well as unlocking it will delete anything which won’t go away. Ultimate flush. Free and it works.

2. Bulk file rename – so blasted flexible and powerful as to be almost daunting till you realise you only need use what you want, this free program does what the name suggests. Best applications are in music files and with photos where the default rubbish generated by the camera / photo software / MP3 player is a true pain and the pain extends to dozens of files. Try this smart piece of work http://www.bulkrenameutility.co.uk/Main_Intro.php

3. A serial, running diary with tagged entries and the ability to sync between smart phones, the net and PC / laptop, I find this free real time diary “day book” invaluable. It’s easy with one click to keep email you want without clogging up the inbox, take photos of products etc and note them… anything where a continuous record is useful. Searching and grouping is as good as your tagging. Try this http://www.evernote.com. It will rip anything off the web and into a note and has a superlative clipping tool which is very simple to grab screen and bits of screen shots with. Free and it works.

4. Keeping up with updates is a true pain but also a necessary one. Announcing that you are a technophobe no longer cuts it at parties (never did in my humble – just keep up, what?). A good way to keep up is via http://www.filehippo.com/updatechecker The smart alecs here have produced a little program which runs through your installed programs, matches them to the latest version and you can get your favourite bore on the phone and just keep saying “yes”, “ no” etc while you click your way to “free” updatedness.

The Last Word

IMPARTIAL, adj. Unable to perceive any promise of personal advantage from espousing either side of a controversy or adopting either of two conflicting opinions.

Have a good spring / autumn

Monday, September 28, 2009

To Explain Longevity Gap, Look Past Health System

. . . more timely unconventional wisdom

September 22, 2009 nyt


If you’re not rich and you get sick, in which industrialized country are you likely to get the best treatment?

The conventional answer to this question has been: anywhere but the United States. With its many uninsured citizens and its relatively low life expectancy, the United States has been relegated to the bottom of international health scorecards.

But a prominent researcher, Samuel H. Preston, has taken a closer look at the growing body of international data, and he finds no evidence that America’s health care system is to blame for the longevity gap between it and other industrialized countries. In fact, he concludes, the American system in many ways provides superior treatment even when uninsured Americans are included in the analysis.

“The U.S. actually does a pretty good job of identifying and treating the major diseases,” says Dr. Preston, a demographer at the University of Pennsylvania who is among the leading experts on mortality rates from disease. “The international comparisons don’t show we’re in dire straits.”

No one denies that the American system has problems, including its extraordinarily high costs and unnecessary treatments. But Dr. Preston and other researchers say that the costs aren’t solely due to inefficiency. Americans pay more for health care partly because they get more thorough treatment for some diseases, and partly because they get sick more often than people in Europe and other industrialized countries.

An American’s life expectancy at birth is about 78 years, which is lower than in most other affluent countries. Life expectancy is about 80 in the United Kingdom, 81 in Canada and France, and 83 in Japan, according to the World Health Organization.

This longevity gap, Dr. Preston says, is primarily due to the relatively high rates of sickness and death among middle-aged Americans, chiefly from heart disease and cancer. Many of those deaths have been attributed to the health care system, an especially convenient target for those who favor a European alternative.

But there are many more differences between Europe and the United States than just the health care system. Americans are more ethnically diverse. They eat different food. They are fatter. Perhaps most important, they used to be exceptionally heavy smokers. For four decades, until the mid-1980s, per-capita cigarette consumption was higher in the United States (particularly among women) than anywhere else in the developed world. Dr. Preston and other researchers have calculated that if deaths due to smoking were excluded, the United States would rise to the top half of the longevity rankings for developed countries.

As it is, the longevity gap starts at birth and persists through middle age, but then it eventually disappears. If you reach 80 in the United States, your life expectancy is longer than in most other developed countries. The United States is apparently doing something right for its aging population, but what?

One frequent answer has been Medicare. Its universal coverage for people over 65 has often been credited with shrinking the longevity gap between the United States and other developed countries.

But when Dr. Preston and a Penn colleague, Jessica Y. Ho, looked at mortality rates in 1965, before Medicare went into effect, they found an even more pronounced version of today’s pattern: middle-aged people died much more often in the United States than in other developed countries, but the longevity gap shrunk with age even faster than today. In that pre-Medicare era, an American who reached 75 could expect to live longer than most people elsewhere.

Besides smoking, there could be lots of other reasons that Americans are especially unhealthy in middle age. But Dr. Preston says he saw no evidence for the much-quoted estimates that poor health care is responsible for more preventable deaths in the United States than in other developed countries. (Go to nytimes.com/tierneylab for details.)

For all its faults, the American system compares well by some important measures with other developed countries, as Dr. Preston and Ms. Ho enumerate. Americans are more likely to be screened for cancer, and once cancer is detected, they are more likely to survive for five years.

It’s been argued that the survival rate for cancer appears longer in America merely because the disease is detected earlier, but Dr. Preston says that earlier detection can be an advantage in itself, and that Americans might also receive better treatment. He and Ms. Ho conclude that the mortality rates from breast cancer and prostate cancer have been declining significantly faster in the United States than in other industrialized countries.

Americans also do relatively well in surviving heart attacks and strokes, and some studies have found that hypertension is treated more successfully in the United States. Compared with Europeans, Americans are more likely to receive medication if they have heart disease, high cholesterol, lung disease or osteoporosis.

But even if the American system does provide more treatment for more sick people, couldn’t it do something to reduce its workload?

When I brought up Dr. Preston’s work to Ellen Nolte and C. Martin McKee, two prominent European critics of the American system, they suggested that he was taking too limited a view of health care. They said the system should take responsibility for preventing disease, not just treating it.

Dr. Preston acknowledges that the United States might do more to keep young and middle-aged people from getting sick, but he says it’s not clear that other countries’ systems are more effective.

“The U.S. has had one spectacular achievement in preventive medicine,” he says. “It has had the largest drop in cigarette consumption per adult of any developed country since 1985.” If Americans keep shunning cigarettes, the longevity gap could shrink no matter what happens with the health care system.

Monday, September 21, 2009

The cow jumped over the moon… hopes Fonterra

The Board of Fonterra is about to try to get farmers to pay for the high cost of the two ideas farmers - that is, some farmers - have long claimed they would not give up at any price. We may be about to find out whether indeed there is in N.Z dairying - as there is in everything else in life - "a price at which".

The two ideas - that co operative ownership is the best model for the industry and that farmers will only ever allow farmers to own and invest in "their industry" - have become such motherhoods in New Zealand that the most hardened commentators have either (1) given up in disgust and gone home (2)become too scared to look at the guts of these arguments objectively or (3) worse - become convinced themselves.

So we are missing plenty....

First the entire house of cards which is monopoly supply of milk to farmers has to be supported by state coercion through legislation. No one else needs or gets that hand up. If this model is so robust why is force needed? This is anti smacking stuff for farmers. A large number of nursery rhymes about collective behaviour, weak selling and such like have circulated for years while the evidence says, unsurprisingly, that these people are price takers not price setters and no amount of collusion can stop competition for long - ask OPEC.

Second, farmers are already donkey deep into agriculture without the company they think they own forcing them to become even more undiversified, more exposed to the exchange rate volatility they hate, invested still further in a so called "value added" business which only provides them returns at the expense of the milk price they get, and further exposed to a company which is run primarily via a political process.

Third, "their" company is asking them to invest at a cost of equity about which little is known other than the fact that it's limited liquidity, its rules around ownership and the dependence of the model on state imposed monopoly all combine to drive risk higher than standard levels. Paying over the top for equity in a company you have a compulsory sales arrangement with in which the company sets the price is, at the very least, bizarre.

These are high costs to pay for the illusion that the form of "ownership" which keeping other investors out brings is of any value. Auckland International Airport - now safe from marauding herds of Canadian teacher pensioners is still struggling to structure its capital optimally. Silver Fern Meats whose latest capital raising efforts imposed restrictions to limit non farmer investment to 20% ended up with a shortfall in capital raised. They are currently looking at selling investment assets - ironically a bunch of shares in another agricultural venture - to raise capital.

The "rights" this ownership confers are a mixed blessing - essentially the right to vote for a farmer politician or two on the board, the right (well there is less choice than these words imply if you want to sell milk) to be part of the monopoly which prevents the competition which would bring the company to account - and of course the "right" to have to buy more artificially priced shares should the farmer be courageous enough to produce more milk.

One of the tougher decisions in dairy farming is when to stop producing lest you are forced to buy more shares which might be marked down in value. Far more prudent to stop producing than to buy.

Finally - the model itself - again a sacred cow (sic).

Investors in any company make money when costs, including costs of supply are driven down as far as possible. That is how farmer investors in Fonterra would or could maximise dividends - by driving down their supply prices.

Suppliers maximise returns by obtaining the highest possible prices for their product - not by leaving plenty on the table for dividends to the owners. High cost of supply to the company sits well with the supplier and poorly with the investor.

Who wins? Hard to tell - its far too opaque since prices are the product of advisor reports not markets - but we do know that farmers have a comparative advantage at being suppliers. Being strong performing dairy farmer suppliers - rather than some time minority capital investors - is their core business and they do it well. And anyway, creditors get paid out well before equity  investors.

This is very likely why in spite of Fonterra and before it the Dairy Board have been arguing the need for investment in "value added" businesses for years but significant actual returns to farmers have yet to be seen - as a supplier owner with expertise and a core business in supplying why would you want it otherwise?

In short - the model is schizoid. Thus capital comes and goes with redemption and growth fighting one another in a process which never sees a stable capital structure. The value of permanent capital was recognised by the Dutch and the English in the middle of the 17th century.

Just what price is "enough" for the rights to be a part of all this? We don't know but may be about to find out. What is for sure is that it's pointless looking for objective answers from farmer politicians who have everything to lose and nothing to gain.

It would be useful if a few more critics turned some serious spotlight on the political roadshows to come - after all, that monopoly is granted by taxpayers - not farmers, not by suppliers to Fonterra, not by Fonterra management and certainly not by farmer politicians. Taxpayers too are owed some accountability.

Sunday, September 20, 2009

Buffett and Lehman Bros

From Times on line blog….

He may be a financial guru. But Warren Buffett's inability to work his mobile phone might have played a role in the collapse of economic markets last year.

Time has a story about a phone call between Buffett and Bob Diamond, president of Barclays. Diamond had just 24 hours to stop Lehman Brothers collapsing and a last-minute plan on how he might get Buffett to underwrite it.

Buffett asked Diamond to send over more details. Here's what happened next

Buffett got back to his hotel room around midnight and was surprised to find ... nothing. Lehman went under, and within days, the world was in a full-blown financial crisis.

Fast forward 10 months. Buffett, who admits he never has really learned the basics of his cell phone, asked his daughter Susan about a little indicator he had noticed on the screen: "Can you figure out what's on there?" It turned out to be the message from Diamond that he had been waiting for that night.
I caught up with Buffett afterward, and asked him whether, in retrospect, he might have gone for the deal. He pulled the simple little Samsung phone out of his pocket and pondered it for a moment. It's entirely possible, he suggested. "I don't know."

Wednesday, September 16, 2009

More blinding brilliance from EU trust busters…

In another piece of blinding European antitrust brilliance the EU trust busters are set to break into Oracle’s bid for ailing Sun Microsystems owners and promoters of the world’s largest open source database software.

Their reason is fear of lessened competition. Open source is an obvious source of contestability and any regulatory demise met by Sun is likely to lessen or at least raise the cost of generating open source solutions……

and yet, at the same time, just to keep us guessing, their media and comms regulator is said to bee keen on business models such as Google’s current sweep up of the books in libraries – copyrighted and less so – in order to generate greater access to these assets.

Saturday, September 12, 2009

Benefits have costs – please net off.

Don Boudreaux again using simple stuff to, make points people keep on missing….. This to the editor LA Times.

You write that “Obama made a compelling case for [health-care] reform.  How it’ll be paid for, though, is another matter” (”Dollars and sense,” Sept. 10).

Even overlooking the very real question of whether or not Mr. Obama’s vision for health-care ‘reform’ can possibly materialize as he describes it, I’m baffled by your editorial.  How can a compelling case for something be made unless and until questions about that thing’s affordability are answered?  Would, for example, a case that I make to my wife that I buy a new Lamborghini – which is certainly a splendid automobile – be “compelling” if I identify no obvious way to pay for it?

Wednesday, September 2, 2009

Death, and no free lunch “totally totally oarsum” version

The Price for Spending Eternity with Marilyn Monroe

Earlier this month, Elsie Poncher posted on eBay her late husband's crypt for sale. The unique feature about the crypt is its location directly above the crypt of Hollywood icon, Marilyn Monroe in Westwood Village Memorial Park cemetery. Mrs. Poncher decided to sell the valuable crypt and move her husband's remains to another part of the cemetery in order pay the $1.6 million mortgage on her Beverly Hills home.

Last week, someone purchased the crypt with a winning bid of $4.6 million. That bid has since fallen through with the bidder unable to pay but there were a number of other multi-million dollar bids which may now become the winning bid.

In Ontario, the Cemeteries Act prohibits the private resale of burial plots or crypts. When someone purchases a burial plot, they receive interment rights in perpetuity, not property rights. The property rights belong to the cemetery and if required, transfer to a third party requires the consent of the cemetery and the cemetery maintains the right to buy back the interment rights.

However, in the United States many states do not have similar legislation and some suggest that the reselling of burial plots have increased in recent economic times .
Thanks for Reading,

Diane Vieira (courtesy Marginal Revolution)

Tuesday, September 1, 2009


1. Liquidity. It helps to know what it is and to value ALL assets having regard to liquidity. Liquidity is the ability to buy and sell more or less at will, on a timely basis, without materially affecting price. Simply not selling does not mean that value is maintained. Failure to crystallise losses which would otherwise be revealed through an absence of liquidity does not keep the genie in the bottle - it merely puts off the day of reality check.

2. Property. This is generally not a liquid asset. Property is no different to any other asset but sales take place over an extended period in an often thin market with significant transaction costs (mainly search and validation costs). Even a "perfect sale" often has a six week settlement period, documentation takes significant amounts of time to prepare, validate, examine and have signed. If cash is needed rapidly do not look to property sales as a saviour.

3. Debenture Stock. The instrument provides only uncertain security. The right to stand in a queue behind other claimants for a share in what is left of the assets of a business is worth only what the value of such a share of whatever those assets might be worth upon realisation. In this sense debenture stock offers a form of residual claim without any of the upside of equity investments. Worse the changing value of the assets against which the debenture is a claim is opaque and difficult for an investor to determine with any certainty.

4. The Trustee Scheme of Regulation. This is amongst the most bizarre of the illusory regulatory regimes developed in a vain attempt to protect investors. In NZ no trustee has been sued. Trustee management and trustees have no "skin in the game" and face very weak incentives to perform - vague reputational capital at most. Some companies have connections to investment companies - Perpetual Trustees and Marac finance have the same parent for example. Trustees can do no more than monitor and investors have to pay for the impoverished service they provide while creating an illusion of protection.

5. Related Party Transactions Lead to Risk. Even where the related party is "rich", too many related party transactions generate risk because they reduce diversification and indeed concentrate risk in particular asset classes and with particular individuals. This risk concentration is far more of a problem than concerns about "crooked or questionable dealings". The latter is not generally an issue. Concentration of risk is a problem and no amount of disclosure or Chinese wall building can remove it.

6. Reinvestment Rates. Reinvestment rates do not grow and shrink in even, smooth, linear increments. Instead, declines especially come in "chunks", or quanta so that a rate might decline in the sequence 70% - 60% - 59% - 35% - 30% zero. Business models built on the need for continuous reinvestment are therefore subject to significant reinvestment rate risk. This problem is even worse when the business is growing - the more loans written the higher the risk, and thus the more likely the default on repaying early investors. Such business models have as their base the Ponzi scheme.

7. Provisions Based on Existing Losses. Generally companies work hard to prevent crystallising losses. They don't like the bad press. In many cases defaults on loans are "shelved" by extending loan terms, granting exemptions, "re structuring" loan payments and otherwise not crystallising losses. The loss history is therefore an inadequate description of loan default. Provisioning based on history is therefore likely to significantly understate future losses. Provisioning should instead be based on likelihood of loan default and resulting loan value after liquidity is taken into account.

8. Capitalising Interest and Fees. Much credit assessment is aimed at determining an acceptable amount to be lent given the credit risk of the borrower. Practices such as capitalising interest and fees into the loan may add to that amount. Ability to repay the total amount owing on such loans is not apparent until the loan matures. Moreover, the need to capitalise interest is typically generated by a lack of cash at the time the loan is made – in itself a common indicator of unacceptable credit risk. Capitalising interest tends to “grow the book” of the finance company and with loans of potentially dubious creditworthiness.

9. Prior Charges and Ranking. Both security of investment and payment of interest are typically subject the paying of “prior charges”. In plain terms, other creditors are placed “ahead” of investors thereby diminishing the value of investor security. Where that security is a debenture the investors claim is weakened. It has been common for debt capital raised by finance companies to carry a prior charge status which effectively reduces investors to a residual status “behind” banks and like institutions.

10. Poor Response to Distress Problems. The most common response by finance companies in distress was denial. The key form this takes is refusal to sell down assets aggressively and at prices which crystallise losses. The hope is that asset values will improve. Often this results in adding to a losing position. Restructuring by swapping in second mortgages so as to release cash has a similar effect in that additional risk is added to an existing strained position. Moratoria which are not accompanied by attention to unwinding related part transactions, asset sell downs, loss crystallisation and business plan re thinks frequently prove to be palliative at best.