Saturday, November 28, 2009

Sovereign Funds are NOT immune….

Sooner or later it was bound to happen – there is nothing flash and probably quite a few things dim about Sovereign Funds…. especially where the business model is an entirely “top line” one – just pour in revenue and forget the rest.

Dubai is telling us a bit more is needed. As usual, size, even on the Viagra of oil is not enough – maybe not even relevant.

S&P tell us one problem is that there is no transparency – and they are already smarting over not marking down shaky debt fast enough so being opaque is red rag to a bull there. Not clever. 

If you want the world to bank you, some disclosure is essential – what is the security, what do the financials look like, who are the management, are they there by dint of family ties or experience or skills? Where are the independent views? What stops introversion?

In short – no Sovereign Funds are not special…. they do take massive risks and no amount of shuffling disclosure or veiled politics will make risk go away. Banks lending into the black hole will feel the full force of the implosion collapsing black holes generate.

Wednesday, November 25, 2009

A Noddy deal

The white man gets to pass some legislation which will probably not control one  of the drivers which is likely not responsible for even 50% of a certain non event all at vast cost to consumers and taxpayers.

Some iwi (too bad if you are say Tainui with a big exposure to farming) get to increase their already bloated exposure to the primary sector by planting and managing yet more trees on which they struggle to make a risk adjusted return.

Oh and a trip to Denmark where they can see bulk – er cows.

Sowell at his best… telling us what we ought to know but fail to see

by Thomas Sowell

No one will really understand politics until they understand that politicians are not trying to solve our problems. They are trying to solve their own problems-- of which getting elected and re-elected are number one and number two. Whatever is number three is far behind.

Many of the things the government does that may seem stupid are not stupid at all, from the standpoint of the elected officials or bureaucrats who do these things.

The current economic downturn that has cost millions of people their jobs began with successive administrations of both parties pushing banks and other lenders to make mortgage loans to people whose incomes, credit history and inability or unwillingness to make a substantial down payment on a house made them bad risks.

Was that stupid? Not at all. The money that was being put at risk was not the politicians' money, and in most cases was not even the government's money. Moreover, the jobs that are being lost by the millions are not the politicians' jobs-- and jobs in the government's bureaucracies are increasing.

No one pushed these reckless mortgage lending policies more than Congressman Barney Frank, who brushed aside warnings about risk, and said in 2003 that he wanted to "roll the dice" even more in the housing markets. But it would very rash to bet against Congressman Frank's getting re-elected in 2010.

After the cascade of economic disasters that began in the housing markets in 2006 and spread into the financial markets in Wall Street and even overseas, people in the private sector pulled back. Banks stopped making so many risky loans. Home buyers began buying homes they could afford, instead of going out on a limb with "creative"-- and risky-- financing schemes to buy homes that were beyond their means.

But politicians went directly in the opposite direction. In the name of "rescuing" the housing market, Congress passed laws enabling the Federal Housing Administration to insure more and bigger risky loans-- loans where there is less than a 4 percent down payment.

A recent news story told of three young men who chipped in a total of $33,000 to buy a home in San Francisco that cost nearly a million dollars. Why would a bank lend that kind of money to them on such a small down payment? Because the loan was insured by the Federal Housing Administration.

The bank wasn't taking any risk. If the three guys defaulted, the bank could always collect the money from the Federal Housing Administration. The only risk was to the taxpayers.

Does the Federal Housing Administration have unlimited money to bail out bad loans? Actually there have been so many defaults that the FHA's own reserves have dropped below where they are supposed to be. But not to worry. There will always be taxpayers, not to mention future generations to pay off the national debt.

Very few people are likely to connect the dots back to those members of Congress who voted for bigger mortgage guarantees and bailouts by the FHA. So the Congressmen's and the bureaucrats' jobs are safe, even if millions of other people's jobs are not.

Congressman Barney Frank is not about to cut back on risky mortgage loan guarantees by the FHA. He recently announced that he plans to introduce legislation to raise the limit on FHA loan guarantees even more.

Congressman Frank will make himself popular with people who get those loans and with banks that make these high-risk loans where they can pocket the profits and pass the risk on to the FHA.

So long as the taxpayers don't understand that all this political generosity and compassion are at their expense, Barney Frank is an odds-on favorite to get re-elected. The man is not stupid.

What is stupid is believing that politicians are trying to solve our problems, instead of theirs.

As for the FHA running low on money, that is not about to stop the gravy train, certainly not with an election coming up in 2010.

The Federal Deposit Insurance Corporation is also running low on money. But that is not going to stop them from insuring bank accounts up to a quarter of a million dollars. It would be stupid for them to stop with an election coming up in 2010.

Sunday, November 22, 2009

How over protective rubbish bounces back….

Currently, one would go a long way to find better examples of the law of unintended consequences than those provided by advocates of the wimpolene  and trampysteria – a popular product developed in response to a fashionable psychosis – arising in relation to kids and trampolines.

The current Listener provides the facts… but of course not the analysis. Here is the simplified version.

It seems that accidents related to trampolines are increasing. So too it seems is the amount of trampolining. No surprises there one would have thought. If there are more kids trampolining might it be that there are more accident prone kids now “at risk”? Possibly. Might it be that there are more kids who are less accident prone now “at risk”? Possibly.

ACC has no kept no accident figures but the all knowing agency feels confident enough to   say that trampolines are best used only in supervised sports or gymnastics.

Other pieces of research brilliance show:

- injuries are most common amongst children aged six to 14. Wow.

- children are likely to get injured when bouncing with drunken adults (doctors at a Scottish A&E brought you this). Again – get away.

- the lightest person on the trampoline is five times more likely to get injured than the heaviest. Re discovery of gravity. Cool.

The cost of uncovering these stunning insights is undisclosed.

Much more interestingly though, manufacturers  - who began to improve the safety fittings of trampolines years ago (covering springs etc at relatively low cost) have recently upped their game with the butterfly net over the kids approach.

Prices I checked showed that old woman’s hairnet versions cost about $300 more than the standard “no net don’t bounce with drunks” versions.

Result? Well one is cost of trampolines up therefore popularity of second hand trampolines at lower prices up  and effective life of old trampolines increased – the Listener says there is a “big market” in second hand tramps.

Exposure of ever increasing numbers of kids to older less safe trampolines arguably then on the increase.

Our neighbour’s friends solved the problem by having standard tramp no hairnet, but one parent at each corner while “my baby” bounced – starter for 10 - guess the opportunity cost of their time.

Friday, November 20, 2009

Missed – by a country mile

While various groups beat up various other groups in trying (hopelessly) to pin blame on anyone that won’t sue, commentators on and submitters to the parliamentary inquiry into finance company collapses persist in running away from the role of idiot investing based on the proposition that there is a free lunch and that risk can be made to go away – even the most basic tool – diversification was ignored in the investor scramble for high returns.

Here is a classic snippet typical of numerous such incidents….

“A Paraparaumu couple also fronted to the committee. Rowland Crone was an accountant and manager until he retired in 1995 and he and his wife used investments to supplement their super.

Six of 10 finance companies the couple invested in defaulted -- representing 38 percent of their portfolio. They had invested in companies with A and B ratings.

"They were rated as top finance companies."

The pair got 39 percent of payments back.”   NBR 20 November.

This unfortunate was an accountant and a manager. So Mr Crone is well ahead of others in the knowledge and experience game.

Ten finance companies ???

Perhaps 80 odd years of the welfare state and the last 9 years assurances that NZ really does give out and should dish up free lunches means these very likely otherwise intelligent people got the idea that you can ignore risk, ignore diversification and that regulators can look after you. $0.61 in the dollar says this is misguided.

Tuesday, November 17, 2009

Static Guessing is terribly dangerous…

The reasons we cannot pin down the cost of an ETS or other climate change intervention are fairly obvious. Even so two things we seem to keep on missing:

1. These are fiscal costs govts keep trying to estimate. Likely mere bagatelle compared with the opportunity costs. The opportunity cost of the debate alone has already cost us dearly. So the cost is not just about spending a lot of money. It’s about spending a lot of money on the wrong thing while not spending that sum on the right thing(s).

2. The implicit assumption in all this is that static analysis will do, that behaviour doesn’t change when costs alter and that it is possible to find the “right” straight line. Clearly nonsense. We have no idea what sort of behaviour will ensue once some “scheme” is in place… look at the alteration in behaviour a few pieces of selective deception from an outed science fraud coupled with an embittered election failure can do.

Saturday, November 14, 2009

From the blog of the Ever Excellent Steven Landsburg

Krugman to the Rescue


by Steve Landsburg

on November 13, 2009

in Economics and Policy

It’s always impressive to see one person excel in two widely disparate activities: a first-rate mathematician who’s also a world class mountaineer, or a titan of industry who conducts symphony orchestras on the side. But sometimes I think Paul Krugman is out to top them all, by excelling in two activities that are not just disparate but diametrically opposed: economics (for which he was awarded a well-deserved Nobel Prize) and obliviousness to the lessons of economics (for which he’s been awarded a column at the New York Times).

Tuesday, November 10, 2009

Annoyed with self – this is obvious and important and I missed it…

Why is the “PC” thing so bad? Why should it be killed at birth? Outside a general discomfort I could not get to the logic of why it seemed to me such a problem – and irked me so.  He / she is a “modern liberal fool” is not enough.

The answer is now clear (finally to me):

1. The number of false positives is too high. (Screen all males for some deadly disease and find 1 in a thousand have it – more importantly 999 don’t)……. screen a million people getting on a plane lest they be terrorists  and find 1 in 1.0 m is and .99999m are not.

2. Every false positive imposes a cost equal to the cost of preventing one (true) positive on all the true and the false. The one jump in (maybe) 1,000 that breaks a kids arm on a trampoline is a 0.001 chance. The other jumps have a 0.999 chance of causing no harm. But all true and false bear the cost of preventing the  0.001 chance.

3. Apply to a remark saying “Humpty Dumpty should have been able to be put back together and kids will be psychopaths if taught otherwise”. False positives…. high, very high. Maybe at least as high as the trampoline case. Impose cost of all those false positives to catch the 0.001 true and 0.999 bear the cost……..

3. The more “PCness”, the more false positives, the more cost.

4. Original problem costs outweighed by TOTAL false positive costs – PLUS cost of inability to see problem.

5. The net is …… needless, and by definition, rising net cost.

Now apply that to – universal health screening to “you name it”… and you have….. most of the fiscal states of dead Western style health systems, pension regimes and welfare systems.

Persevere with this – the germ of the insight came from Dubner and Levitt's latest “Superfreakenomics”…(p.92) but the expansion (bow to current paranoia re plagiarism) is entirely mine thank you…..

Wednesday, November 4, 2009

worth a chase and a thought…

Thanks to MR

Abstract: Behavioral scientists routinely publish broad claims about human psychology and behavior in the world’s top journals based on samples drawn entirely from Western, Educated, Industrialized, Rich and Democratic (WEIRD) societies. Researchers—often implicitly—assume that either there is little variation across human populations, or that these “standard subjects” are as representative of the species as any other population. Are these assumptions justified?

Here, our review of the comparative database from across the behavioral sciences suggests both that there is substantial variability in experimental results across populations and that WEIRD subjects are particularly unusual compared with the rest of the species—frequent outliers.

The domains reviewed include visual perception, fairness, cooperation, spatial reasoning, categorization and inferential induction, moral reasoning, reasoning styles, self-concepts and related motivations, and the heritability of IQ. The findings suggest that members of WEIRD societies, including young children, are among the least representative populations one could find for generalizing about humans.

Many of these findings involve domains that are associated with fundamental aspects of psychology, motivation, and behavior—hence, there are no obvious a priori grounds for claiming that a particular behavioral phenomenon is universal based on sampling from a single subpopulation.

Overall, these empirical patterns suggests that we need to be less cavalier in addressing questions of human nature on the basis of data drawn from this particularly thin, and rather unusual, slice of humanity. We close by proposing ways to structurally re-organize the behavioral sciences to best tackle these challenges.

Keywords: external validity, population variability, experiments, cross-cultural research, culture, human universals, generalizability, evolutionary psychology, cultural psychology, behavioral economics.

Tuesday, November 3, 2009

All the chords you know

Coleman Hawkins, Bud Powell, Kenny Clarke…. not a bad version:

All the Things You Are… for the enthusiast. Bud is away up there here. Europe – early on with no prejudice.

Try to get your head around this…

I came across this simple theory of overoptimism recently (though it was published years ago).  Suppose an agent has at least two actions from which to choose.  An action gives either a payoff one or zero.  For each, the agent has a subjective probability that the action gives a payoff of one.   The probabilities  of success are drawn independently from the same distribution GAgent A then chooses one his actions, the one with the highest mean, according to his subjective beliefs.  How do his beliefs about this action compare to those of an arbitrary observer?

Here’s where it gets interesting.  The observer’s beliefs are different from agent A’s.  They are drawn from the same distribution G but there is no reason that the observer’s beliefs are the same as agent A’s.  In fact, the action agent A took will only be the best one from the observer’s perspective by accident.  Actually, the observer’s beliefs will be the average of the distribution G which is lower than the belief of  agent A since agent A deliberately took the action which he thought was the best.  This implies that the agent A who took the action is “overoptimistic” relative to an arbitrary observer.

There are two further points.  If there is just one action, this phenomenon does not arise.  If agents have the same beliefs (a common prior), it also does not arise.  So it relies on diverse beliefs and multiple actions.  The paper is called “Rational Overoptimism and Other Biases” and is by Eric Van den Steen.