Tuesday, October 27, 2009

This is how to do it… two stories

Iceland farewells McDonald's

9:59AM Tuesday Oct 27, 2009
By Gudjon Helgason and Jane Wardell

Iceland's three McDonald's restaurants will close as the franchise owner gives in to falling profits. Photo / AP

Iceland's three McDonald's restaurants will close as the franchise owner gives in to falling profits. Photo / AP

REYKJAVIK, Iceland — All three of Iceland's McDonald's restaurants in the capital Reykjavik will close next weekend, as the franchise owner gives in to falling profits caused by the collapse in the Icelandic krona.

"The economic situation has just made it too expensive for us," Magnus Ogmundsson, the managing director of Lyst Hr., McDonald's franchise holder in Iceland, told The Associated Press on Monday.”

And here is an excerpt from a summarised snapshot by a Cornell academic……..

“Iceland is a modern welfare state, in the spirit of its Scandinavian neighbours and cousins. Everybody reaps the benifits of free health care, free education (from the preschool to the University level), guaranteed pension and high standards of living, while paying the price of a near 50% income tax. Illiteracy, poverty, prostitution and violent crime are virtually unknown in modern Iceland, and the nation is one of the wealthiest in the world, with regard to its size. The main industries are fishing, tourism, geo-thermal industries (e.g. Bláa lónið) and increasingly high-tech industries.”

What N.Z. has yet to discover

image Thx Greg M.

Sunday, October 25, 2009

Wage Control on Wall Street

This is almost too difficult to believe – a testament to the utterly unproductive nature of envy, jealousy and evidence of the lynch mob sickness running amok globally….

Ironically (given the dead men walking “third way” remnants waiting out time as his boss), UK Central banker Mervyn King  sets out the problems as clearly as any in the WSJ.

“As the U.S. political class blames banker pay for the panic (see above), we'd like to salute Bank of England Governor Mervyn King for speaking a larger truth. Mr. King gave a speech in Edinburgh Tuesday in which he said, in effect, that if a bank is too big to fail, it's just too big. This prompted British Prime Minister Gordon Brown to shoot back that breaking up the largest financial institutions wasn't the answer, adding the now obligatory call for global regulation of banker pay.

One can disagree with Governor King's contention Tuesday that the banking system, and the economy, would be better served by a stricter division between investment banking and commercial or retail banking. But more important than Mr. King's solution was his diagnosis of the problem, which shows more understanding of what caused last year's panic than the usual pabulum about bonuses.

"Why," Mr. King asked, "were banks willing to take risks that proved so damaging both to themselves and the rest of the economy?" His answer: "One of the key reasons . . . is that the incentives to manage risk and to increase leverage were distorted by the implicit support or guarantee provided by government to creditors of banks that were seen as 'too important to fail.'" Politicians—and U.S. Federal Reserve Chairmen—hate hearing that it was their subsidies for credit and for the biggest banks that contributed to the problem.

Mr. King wasn't done: "Such banks could raise funding more cheaply and expand faster than other institutions. They had less incentive than others to guard against tail risk. Banks and their creditors knew that if they were sufficiently important to the economy or the rest of the financial system, and things went wrong, the government would always stand behind them." He concluded: "And they were right."

On this essential point, Mr. King is on target, and it's heartening to hear an important public official highlight the real problem so succinctly. Mr. Brown and U.S. politicians would prefer to point to inadequate "global regulation" of finance. But show us the regulator who could have prevented the panic, even with unlimited power, and we'll show you a world without the freedom to succeed or fail.”

Friday, October 23, 2009

Bringing out the very worst in people

Theodore Dalrymple
In Britain, private arrangements are less and less private.
14 October 2009

Leanne Shepherd and Lucy Jarrett, both 32, are close friends. They work as police officers, but on different shifts. For a long time, they babysat for each other, an arrangement that suited them perfectly and enabled them to continue their careers. The authorities recently told them, however, that their arrangement was illegal. If they did not desist, they would face prosecution.

Why? Because they exceeded the permitted time to babysit without having received professional training in such matters as resuscitation and child psychology. Moreover, the state considers their mutual babysitting a potentially taxable economic benefit. It does not matter that the arrangement was entirely reciprocal and voluntary. British citizens may no longer make such private agreements among themselves.

One of the nastiest aspects of this little story is that the authorities were alerted to the two women’s terrible crime by one of their neighbors. An increasingly intrusive state engenders an increasingly nasty population of secret informers.

Theodore Dalrymple, a physician, is a contributing editor of City Journal and the Dietrich Weismann Fellow at the Manhattan Institute. His most recent book is Not with a Bang but a Whimper

“National standards” – the ordinary standard of competition

You can tell by the amount of screaming that this is going to produce some interesting and likely useful outcomes.

Within two years schools will have to reveal how their pupils are achieving in some core educational skills. The screams of outrage are no less predictable than those from any self interested group about to held to account. The quality of argument is much the same as that heard when the taxi industry was deregulated.

The screams seem a little more valid because education is “important”, “crucial” and “fundamental” – and so it is. Further these people are bright (we would certainly hope so), persuasive (as any good teacher should be) and impassioned (again we certainly hope so). But nothing more.

The people we pay to tell kids they are accountable get to be held accountable for their part – and only their part – in some of what the kids achieve.

Will these disclosures be abused, misinterpreted, misquoted, used in questionable ways? Of course. All disclosures are. Will the disclosures measure the “right things”. Not perfectly – certainly not…. no measuring tool is perfect.

Neither of these issues mean we are better off being ostriches. Neither of them mean we should not try to rank institutions by their performance.  Life has no “teachers exempt” clause.

What is most important here is not the detail of “national standards” – it is, as the principals et al rightly suspect, the fact that a wedge has begun to to be driven into making the education process subject to the same pressure for performance that everyone else – in healthcare, in the government, on the factory floor, in the office etc – is subject to.


Competition – the word and the process it’s popular to hate at dinner parties…. saying you hate it is the current means for, well… competing.

Actually, the more important the issue, the more important it is that open competitive processes drive it – like it or not, they are the best processes for producing excellence in any field.

Seen in it’s totality, competition is a rich and varied process – incorporating all of education’s “love words” – collaboration, team work, individual merit, individual differences and collective strength. That richness can generally never be learned from a book nor internalised from lectures – it has to be experienced.

This move, it should be hoped, even with a wimpy 2 year “ease in” phase, is a step along the way to that experience.

Tuesday, October 20, 2009

The $600m “bonus” for staff theft…

Annual losses in the NZ retail sector through employee theft amount to some $600m (Davis Consulting 2009). In contrast to the  much criticised  management executives remuneration packages, these “excesses” form no part of any employee contract. To the contrary they involve simple theft which impacts on customers, shareholders and other employees.

This “lumpen” abuse sees rare mention.  Nor is it “provoked” by the dire poverty of all hands – so shonky equity arguments  fail as well.  Approximately 20% only of the workforce are involved. The other 80% get by without resorting to crime.

While the media and others are braying about management compensation they might give a thought to how many Telecom Chief Executives can be purchased for $600m.

Saturday, October 17, 2009

Whose philanthropy?

In the rush to shower plaudits all over the University of Canterbury’s proposed “philanthropic bond” issue we might pause to ask exactly whose philanthropy is involved here.

The University – in very large measure a state funded institution whether through direct taxpayer dollars or indirectly through soft interest loans to fee paying students – lies in the “too something or other to fail” category.

In short it won’t go bust – a characteristic unlikely to escape the beady eye of investors both institutional and individual let alone the brokers scalping off a commission selling these instruments of charity.

It may well be the case that foreign student and other non NZ taxpayer revenue will contribute in some measure to the modest coupon – I see no explicit, legal separation of the commercial from the non commercial to date – but into receivership the University will not go.

Even in devising the deposit guarantee scheme for banks, the Treasury had the financial institutions in question pony up a fee for the guarantee – and one related to risk at that.

If ever anyone was both best placed to design such a fee and facing the worst possible incentives to do same, it would be the former RB Deputy Governor who is currently VC of Canterbury.

This however seems, at present, less likely than getting a reasonable rating for a junk bond funded Undie 500 in 2010.

We might bear in mind that taxpayers generally like to choose their own charities thank you rather than having their funds oh so obscurely channelled through the most innocuous sounding distribution pipe to underwrite risk in a university building programme.

Monday, October 12, 2009

Time alone is not enough

From Jason Zweig in the WSJ…

Can you make the risk of stocks go away just by owning them long enough? Many investors still think so.

"Over any 20-year period in history, in any market, an equity portfolio has outperformed a fixed-income portfolio," one reader recently emailed me. "Warren Buffett believes in this rule as well," he added, referring to Mr. Buffett's bullish selling of long-term put options on the Standard & Poor's 500-stock index in recent years. (Selling those puts will be profitable if U.S. stocks go up over the next decade or so.)

As the philosopher Bertrand Russell warned, you shouldn't mistake wishes for facts.

Bonds have beaten stocks for as long as two decades -- in the 20 years that ended this June 30, for example, as well as 1989 through 2008.

Nor does Mr. Buffett believe stocks are sure to beat all other investments over the next 20 years.

"I certainly don't mean to say that," Mr. Buffett told me this week. "I would say that if you hold the S&P 500 long enough, you will showsome gain. I think the probability of owning equities for 25 years, and having them end up at a lower price than where you started, is probably 1 in 100."

But what about the probability that stocks will beat everything else, including bonds and inflation? "Who knows?" Mr. Buffett said. "People say that stocks have to be better than bonds, but I've pointed out just the opposite: That all depends on the starting price."

Why, then, do so many investors think stocks become safe if you simply hang on for at least 20 years?

In the past, the longer the measurement period, the less the rate of return on stocks has varied. Any given year was a crapshoot. But over decades, stocks have tended to go up at a fairly steady average annual rate of 9% to 10%. If "risk" is the chance of deviating from that average, then that kind of risk has indeed declined over very long periods.

But the risk of investing in stocks isn't the chance that your rate of return might vary from an average; it is the possibility that stocks might wipe you out. That risk never goes away, no matter how long you hang on.

The belief that extending your holding period can eliminate the risk of stocks is simply bogus. Time might be your ally. But it also might turn out to be your enemy. While a longer horizon gives you more opportunities to recover from crashes, it also gives you more opportunities to experience them.

Look at the long-term average annual rate of return on stocks since 1926, when good data begin. From the market peak in 2007 to its trough this March, that long-term annual return fell only a smidgen, from 10.4% to 9.3%. But if you had $1 million in U.S. stocks on Sept. 30, 2007, you had only $498,300 left by March 1, 2009. If losing more than 50% of your money in a year-and-a-half isn't risk, what is?

What if you retired into the teeth of that bear market? If, as many financial advisers recommend, you withdrew 4% of your wealth in equal monthly instalments for living expenses, your $1 million would have shrunk to less than $465,000. You now needed roughly a 115% gain just to get back to where you started, and you were left in the meantime with less than half as much money to live on.

But time can turn out to be an enemy for anyone, not just retirees. A 50-year-old might have shrugged off the 38% fall in the U.S. stock market in 2000 to 2002 and told himself, "I have plenty of time to recover." He's now pushing 60 and, even after the market's recent bounce, still has a 27% loss from two years ago -- and is even down 14% from the beginning of 2000, according to Ibbotson Associates. He needs roughly a 38% gain just to get back to where he was in 2007. So does a 40-year-old. So does a 30-year-old.

In short, you can't count on time alone to bail you out on your U.S. stocks. That is what bonds and foreign stocks and cash and real estate are for.

In his classic book "The Intelligent Investor," Benjamin Graham -- Mr. Buffett's mentor -- advised splitting your money equally between stocks and bonds. Graham added that your stock proportion should never go below 25% (when you think stocks are expensive and bonds are cheap) or above 75% (when stocks seem cheap).

Graham's rule remains a good starting point even today. If time turns out to be your enemy instead of your friend, you will be very glad to have some of your money elsewhere.

Sunday, October 11, 2009

What’s Needed Is Uncommon Wisdom – Joe Grundfest

The power of good sense Joe Grundfest brought to the SEC has long gone – unfortunately.

October 6, 2009, 11:30 am NYT Dealbook

Joseph A. Grundfest is the W.A. Franke professor of law and business and co-director of the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford Law School.

Public policy reflects the common wisdom. Legislation cannot pass the House of Representatives unless half the members support it. It takes a 60 percent supermajority to avoid a Senate filibuster. Can wisdom get more common than that?

This process works well when the common wisdom is correct. But when the populace and politicians share a collective need for scapegoats then all bets are off. The common wisdom can then reflect a self-serving desire to deflect responsibility more than a reasoned analysis of the causes and consequences of our recent economic failure. The incentive to define a common wisdom that identifies scapegoats is all the more valuable if it helps us avoid the need to make painful and fundamental changes that we would rather avoid.

Consider the debate over executive compensation. The common wisdom is that rapacious bank chief executives made off with millions of dollars because their compensation was not tied to performance: they were able to take the money and run. This common wisdom is politically and emotionally convenient because it suggests that by changing compensation arrangements for bank C.E.O.’s, a deal that doesn’t hurt any of us who aren’t bank C.E.O.’s, we can help avoid a future economic calamity.

The facts, however, don’t support this common wisdom. Recent research by Rudiger Fahlenbach and Rene Stulz documents that bank C.E.O.’s had substantial amounts of wealth invested in their own firms. The average value of stock and options held in bank shares was more than ten times the value of the chief executives’ 2006 compensation. The average value of C.E.O. shares held as of the end of 2006 was $61.5 million, and the average C.E.O. lost about $31.5 million of this portfolio — slightly more than half the value of their equity holdings. C.E.O. compensation patterns also had no correlation with several different measures of bank performance.

If bank C.E.O.’s had seen the crash coming, they would have engaged in a wide variety of actions designed to protect the values of their own portfolios. But that’s not how they behaved. The evidence is instead that these bank C.E.O.’s were also blindsided by the speed and magnitude of the financial crisis, and that they paid dearly for their inability to anticipate the crash.

The implication of these facts is that bank C.E.O. incentives cannot be blamed for the credit crisis or for the performance of banks during that crisis. Instead, C.E.O.’s managed their banks in a manner that they authentically believed would benefit their shareholders. The evidence is also that these C.E.O.’s did not think that their strategies posed significant risks to their institution’s survival or to the federal taxpayer. Sure, they were miserably wrong, but they didn’t know they were making a huge mistake that would cost them, their shareholders and taxpayers a huge fortune.

In that respect, these very highly paid C.E.O.’s were no different from the overwhelming majority of civil servants working at the Federal Reserve, the Securities and Exchange Commission, and many other financial regulatory agencies in the United States and abroad. These civil servants had extensive access to all the portfolio information known to the regulated banks and brokerages.

Regulators who had access to information from many different banks and brokers were also far better informed than individual bank C.E.O.’s who had access only to their own bank’s information. Regulators also had incentives to be skeptical of bank portfolios; their pay didn’t depend in the least on any bank’s financial performance, and regulators would be professionally rewarded if they were able to blow the whistle on a problem before it caused the failure of a federally regulated financial entity. Yet, despite superior information and drastically different incentives, regulators also missed the problem.

The best evidence is therefore that compensation incentives were not correlated to any understanding of the danger that lurked in our economic system. Compensation reform might make sense for a ton of reasons — some political, some moral, some vengeful — but no one should think that these reforms will reduce the risk of a future financial meltdown.

And therein lurks the danger of the common wisdom. We cannot enact legislation or adopt regulation that diverges too far from the common wisdom; otherwise it will not be supported by the majority. But large portions of the common wisdom are immune to reason because they serve emotional or political objectives. These emotional or political components of our common wisdom are doomed to lead us astray in the long run, but they are exceptionally effective in the moment. The error of our ways becomes broadly apparent only with the benefit of hindsight as the force of time reshapes the common wisdom, and as further experience generates facts that were unknown at the time we decided to act. This is, in a sense, the difference between journalism and history.

If we were truly invested in solving the problems that led to our recent economic crisis, we would be making fundamental economic changes that would require no small degree of self-sacrifice. As one example, we would be reconsidering the huge subsidies to housing that are embedded in our tax code and in countless legislative enactments. We wouldn’t be racing after every scatterbrained idea that might make homeownership more affordable, regardless of the true underlying economics. But that would require self-sacrifice, and that’s not as much fun as blaming a bank C.E.O. you’ll never meet.

What can we do to solve this problem? Not a thing I can think of. It is part of the fabric of the human condition in a democratic society. We have adopted foolish regulatory responses to serious economic and social problems in the past, and we are about to do so again. We can only hope that the common wisdom doesn’t lead us to pay an uncommonly high price.

Thursday, October 8, 2009

I think it works therefore it works…

A rather neat aspect of introducing a new operating system to the world – such as Microsoft is about to do with Windows 7 – is that there is an opportunity to watch two phenomena often associated with investment at work. One is the idea of information cascades. The other is the endowment effect.

Information cascades arise when people exhibit a tendency to do as “others before them” have done on the grounds that there is safety in numbers. The effect is self reinforcing - typically regardless of the veracity of the “first mover”.

So when “everyone” is trashing Vista it seems churlish not to join in.  The merits of Vista may have little to do with the size of the effect.

Moreover, the endowment effect, whereby people remain irrationally attached to “what they have” – their investment in an opinion - also helps ensure that changing the mind of the crowd about Vista is a tough call – and may never happen. Certainly the release of SP1 and SP2 appear, judging by the “whinge barometer” of letters to magazines and reviews, has not dispersed the crowd.

Now before Windows 7 has even been officially released (22nd October for that), there is a tonne of hoopla about its superiority with highly respectable geek critics such as Tech Republic running myriad articles such as “10 Reasons to like Windows 7” and many like variants.

Does it matter? Well yes actually. Endowment theory means the generally positive view of Windows 7 has a good chance of staying even if the OS is no better than Vista. Moreover those with an “investment” in saying it is great face incentives to work hard to rapidly iron out bugs, figure work arounds and generally encourage Microsoft to make it great.

From the other side of the ring, Vista hating will likely appear to have been well justified. Already (Tech Republic and Znet again) stories about “forgetting the whole sorry saga” are appearing – which might mean Microsoft stops supporting Vista sooner than some would like.

In contrast XP – which was a “winner” according to its information cascade, is coming in for more positive reinforcement as geekdom sets out ways to make Windows 7 emulate and work with XP.

So – here – right in the middle of what we might assume is the world’s most rational of market places for evaluation are prime examples of two classic psychological effects operating in ways Mr Spock would have loved to hate.

Saturday, October 3, 2009

No Free School Lunch

The Herald is running, and by dint of importance or nothing better to run, the ODT too, a story showing that about $700m in non govt funding is propping up “free education” in non private schools in N.Z.

Let’s not huff and puff about the make up of the “$700m” since it includes contributions from International Students – not just so called school fees and hotdog sales. Serious ding nonetheless.

I do note that $700m is roughly what Cullen paid for that munted train set KiwiRail. We should though, take this opportunity to get our heads straight about “free”.

It ought to be obvious – but sadly is not – that regardless of how education is provided it is never, ever, ever free. It might be well worth having but it is not free.

Next horror show is the century long claim that the state provides “free education”. It does not. Never has, certainly does not at present and likely never will.

So it is illusory, delusionary and just plain misrepresentation from any in all parts of the government and it’s supporting people, legislation and other baggage to witter about “free education”.

Cease and desist – it is akin to the old Communist Chinese labour market arrangement…. “they pretend to pay me and I pretend to work.”