GDP and the Decline of National Statistics

Posted on August 28, 2008 by Felix

Zubin has a good roundup of reactions to the latest GDP numbers, which basically amount to a lot of economists caught wrong-footed and desperately trying to explain why a 3.3% growth rate isn’t anything like as healthy as one might imagine.

Teh Blogs, too, are sounding the same note: "it’s a big flashy number, but it probably doesn’t mean all that much," says the Economist, although others are more upbeat.

Barry Ritholtz has a good question, noting that all of the government expenditure figures were revised upwards:

If you are wondering why the government does not know what it is actually spending in near real time, welcome to the club.

The really big-picture lesson from this GDP report, however, is that government statistics in general, and GDP statistics in particular, are continuing their long and steady decline in terms of accuracy and usefulness.

There are a lot of factors behind this fact. Just some: the fragmentation of the economy, with a large rise in the number of small companies and self-employed individuals; the globalization of the economy, with its attendant blurring of the idea of what counts as "domestic production"; the fact that first-rank economists simply don’t become statisticians any more; and a general fiscal neglect of the statisticians that the government does have.

I’m pessimistic about the prospects for this trend being turned around any time soon: it’s hard to imagine a less sexy rallying cry than "we need to work on the accuracy of our national statistics". But if anybody can do it, maybe Jason Furman can. Vote Obama! You might not like his policies, but at least you’ll be able to measure their effect!

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The FBI and Mortgages

Posted on August 27, 2008 by Felix

The LAT’s Richard Schmitt knows how to write a startling lede:

WASHINGTON — Long before the mortgage crisis began rocking Main Street and Wall Street, a top FBI official made a chilling, if little-noticed, prediction: The booming mortgage business, fueled by low interest rates and soaring home values, was starting to attract shady operators and billions in losses were possible.

"It has the potential to be an epidemic," Chris Swecker, the FBI official in charge of criminal investigations, told reporters in September 2004. But, he added reassuringly, the FBI was on the case. "We think we can prevent a problem that could have as much impact as the S&L crisis," he said.

Wait, we didn’t need mortgage regulation to prevent the current mess, the FBI alone could have prevented it, if only it had been a bit more on the ball and hadn’t moved thousands of agents off the crime beat and onto the terrorism beat?

Actually, not really. Schmitt’s article presents no evidence that Swecker’s optimism as to the FBI’s abilities was remotely justified. And in fact while there was undoubtedly criminal behavior going on during the mortgage boom, both the boom and the bust would have been pretty much the same size in its absence. There’s more than enough blame to be spread around for the mess we’re currently in; you can’t place it all on criminals.

I have a feeling that the "epidemic" that Swecker was worried about was decidedly smaller than what eventually ensued, and that his billions in losses were very much in the single-digit range, caused by overinflated valuations rather than falling national house prices.

But still, at least the FBI diagnosed that there was something rotten in the mortgage market, as early as 2004. Which is more than you can say for any other arm of the US government.

(HT: Campbell)

Posted in crime, housing | Comments Off on The FBI and Mortgages

Why Infrastructure Privatization is Moving Slowly

Posted on August 27, 2008 by Felix

Jenny Anderson has an evenhanded overview of US infrastructure privatization today. In a nutshell: it’s necessary, but it’s going to happen very slowly.

The good news is that the media is moving away from "OMG the government is selling off our public assets on the cheap" and is giving fair shrift to people (including a few state governors) who point out that there’s simply no way the public sector is going to spend $1.6 trillion over the next five years on necessary infrastructure spending. If the private sector is willing to do it, either alone or in public-private partnerships, then that’s a great way of moving past the current impasse.

There’s also good reason to believe that the private sector can and will be more efficient than the public sector when it comes to things like building highways. As Virginia Postrel noted back in 2004:

Consider the choice between the immediate cost of building thicker roads in the first place and the long-term cost of repairing thinner roads as they wear down. An economic calculation would have suggested much thicker Interstate highways, even ignoring the cost of disrupting traffic with repairs.

But the Interstates were built relatively thin, in part because of political pressures to get the system spread everywhere as quickly as possible. Now they’re wearing out, and money must go for repairs. That investment, while necessary, is inefficient and yields a relatively low return.

A private-sector consortium with a 75-year or 99-year concession to build and operate a new toll road is less likely to make the same building-thin-roads mistake than a fiscally-pressured state government keen to minimize short-term costs in an environment of falling tax revenues.

But Postrel’s article also points to one reason why infrastructure privatization is likely to remain politically unpopular. Building roads has immediate and visible effects: you can suddenly get from A to B much more quickly and easily. The immediate and visible effects of maintaining roads, on the other hand, are just the traffic jams caused by construction work. And that’s not something that people really want to pay for, either in tolls or in taxes.

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Extra Credit, Tuesday Edition

Posted on August 26, 2008 by Felix

Trade of The Day: Buy Freddie Paper With Fed Leverage

Their loss is your gain, Part II – or – WaMu Deathwatch

Student Loan ABS: Do or do not! More bonds with high spreads and no credit risk.

Revealed: the art Damien Hirst failed to sell: Even if Hirst stops making his signature paintings, Jay Jopling’s got enough inventory to last him a while.

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Why Citi Needs Rubin

Posted on August 26, 2008 by Felix

What is it with all these Citi memos which are coming out? There was the Asia reshuffle, the Markets reshuffle, the axing of the executive committee, and now the investment bank expenses memo. The weird thing is that all of them seem to make Citigroup more complicated and more bureaucratic: Markets, for instance, now comprises no fewer than ten different product groups — up from three. And Markets, remember, is one of seven product groupings within the bank as a whole — a number which is also up from three. And then there’s a whole set of regional reporting lines layered on top.

It’s almost enough to make one appreciate Bob Rubin.

While the substance of the memos is regrettable, their style is even worse: investment-banking head John Havens, for instance, today decided to refer to "the work around headcount" as a euphemism for layoffs. Everything is long on circumlocution and short on vision or simplicity.

Citi employees could be forgiven a few hollow laughs of late upon receiving yet another memo talking about how all these shake-ups are designed to tear down walls between fiefs and give the bank just one face as far as the client is concerned. It’s the same story we’ve been hearing for a decade, and it has never seemed further away from fruition — especially given that Vikram Pandit wants to sell off hundreds of billions of dollars’ worth of "non-core assets" which presumably will have to be walled off quite assiduously before they’re sold.

So I’m willing to come to the defense of Bob Rubin, and his continued presence at the bank. If there’s one person capable of transcending fiefs and being the Face of Citi as far as the bank’s most important clients are concerned, it’s Rubin. And it might well be to Rubin’s credit that so far the bank’s troubles have been entirely internal: there’s very little evidence that any large or important clients have deserted it. While Rubin was successfully schmoozing policymakers and industrialists, the professionals whose services he was selling were managing to screw everything up on their own. Should Rubin have been more focused on Citi than on its clients? Maybe, but don’t tell that to Pandit, the "client-centricity"-obsessed CEO.

In any event, one of the biggest risks facing Citi right now is regulatory. The all-things-to-all-people model has been shown not to work, and there are very strong arguments for bringing back Glass-Steagal, or something like it, and paring America’s banks back to a point at which their failure wouldn’t cause an economic depression.

The biggest victim of such a regulatory crackdown would be Citigroup, whose only reason for existence is to somehow monetize its own enormity. It’s not impossible: HSBC and Santander seem to be able to be profitable, international, and large. In theory, a strong investment bank like Citi’s should be able to bolster such profits. And if that’s ever going to happen, Citi’s going to need Rubin in Washington, heading off any attempts at breaking up Citi.

Yes, a break-up might be for the best, both from a regulatory perspective and from the point of view of shareholders. But for the time being management is sticking to its "global universal bank" mantra, and so long as that mantra remains, Rubin will continue to be invaluable.

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What’s an Easy Way to Buy Cheap Assets?

Posted on August 26, 2008 by Felix

It’s much, much bigger than regional banks buying GSE preferreds. You can buy Fannie and Freddie senior debt at significant spreads over the government which is guaranteeing it; hell, you can write credit protection on the US government and make non-negligible amounts of money doing so. More generally, there’s a large number of bonds out there issued by non-leveraged companies which are nicely profitable and don’t have significant funding needs, but which are still trading at all-but-distressed levels.

So here’s my question: Let’s say you’re a buy-and-hold investor — someone with a personal pension fund, say, which won’t be touched for a couple of decades. You don’t care much about mark-to-market losses, you just want to take advantage of some of the present craziness to buy good long-term assets on the cheap. I’m not talking distressed debt funds, or anything which requires active management: I’m just looking for a simple way of playing the reversion-to-making-sense trade. Is there one?

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Why do Regional Banks Hold Fannie and Freddie Preferreds?

Posted on August 26, 2008 by Felix

I just saw this, from the FT:

Regional banks, together with US insurers, hold the majority of Fannie and Freddie’s $36bn of outstanding preferred stock, which could be wiped out in the event of a government rescue.

This is creating some bickering between Treasury and the Fed, according to John Carney, with the Fed worried that an aggressive recapitalization of Fannie and Freddie could have nasty systemic consequences if the brunt of the hit was borne by regional banks.

But here’s my question: what on earth were these regional banks doing holding the GSEs’ preferred stock in the first place? Senior debt I could understand, but this is equity, at least from a regulatory perspective. And when they bought it, I doubt it was yielding much more than their own cost of funds. It all makes very little sense to me — which of course is par for the course, in this credit crunch.

If we’ve learned one thing over and over again this past year, it’s that the financial system often behaves in bizarre and seemingly illogical ways. At some point, a "reversion-to-making-sense" trade will start becoming profitable. But if you’re marking to market, be warned: there might well be a lot of downside yet to come.

Posted in bonds and loans | Comments Off on Why do Regional Banks Hold Fannie and Freddie Preferreds?

How Big are Subprime Losses?

Posted on August 26, 2008 by Felix

According to Bloomberg we truly are all subprime now:

Losses and writedowns on securities related to home loans to people with poor credit now exceed $504 billion at financial institutions.

This may have started as a subprime crisis, but it’s much bigger than that now. $504 billion is the total writedown at banks (I think it actually excludes AIG and other non-bank financial institutions), but the losses aren’t all attributable to subprime lending. (There have been enormous writedowns on leveraged loans too, just for starters.)

That said, it would be interesting to see how big the subprime losses alone have been. Does anybody have that number?

Posted in banking, bonds and loans | Comments Off on How Big are Subprime Losses?

How Many Architects Does it Take to Build a Bank?

Posted on August 26, 2008 by Felix

DealBook asked a pointed question yesterday, riffing off a WSJ article:

How many investment banks does it take to run an initial public offering?

Apparently it’s not only the mega-IPOs, like Visa, which are suffering from too-many-cooks syndrome: even tiny MAKO Surgical’s $51 million float had two joint book runners and four “managing underwriters”.

That’s nothing, however, compared to the number of architects working on the new Goldman Sachs headquarters:

Pei Cobb Freed and Adamson are working with Preston Scott Cohen, SHoP Architects, Ken Smith Landscape Architect, Piet Oudolf, Office dA, Architecture Research Office, Kuwabara Payne McKenna Blumberg Architects, Gensler, and Skidmore, Owings & Merrill, each of which has charge of some facet of the building.

The stated rationale for the long list is a little weird, to say the least:

“The premise is that each of these diverse talents will cause the other to do their best work,” said Timur Galen, the head of corporate services and real estate for Goldman Sachs, who is an architect himself.

I’d love to hear this argument in a bit more detail, because it makes no sense to me as it stands. Great architecture generally involves a unified vision: I can’t, off the top of my head, think of this a la carte approach ever being particularly successful in the past. And how, in practice, do you even get ten different architectural shops to work together seamlessly and respond intelligently to each others’ work? For that matter, how do you even divide an architectural commission into ten parts to begin with? The number of meetings involved must have been absolutely staggering.

I can’t help but wonder whether there’s a security issue here. This building will house billions of dollars’ worth of financial information, and access to certain areas will be very tightly controlled. Far from requiring all the different architects to share everything with all the others, maybe there were large chunks of the project operated on a need-to-know basis, with no one architect (except, one assumes, Galen himself) ever being in possession of all the information.

Of course, I’m speculating wildly, and chances are Galen just wanted to give commissions to a lot of different people. But mandating ten different shops does seem a little excessive.

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Extra Credit, Monday Edition

Posted on August 25, 2008 by Felix

Risk aversion – Berkshire style: "when most people do stress tests the process is “well what happens if property prices drop 30%?” and someone says “what if they drop 40%?” and the response is – they can’t go that far. The Buffett question for a risk manager is “what if they drop 70%?” You might say it can’t happen. One word: Japan."

Yes, Virginia, there is a Santa Claus, but Q4 EPS setting an all time high, let’s get real

Election Forecast: Obama ahead by 82: Another electoral map powered by prediction markets.

Usain Bolt: It’s Just Not Normal

Lipton Defends the Indefensible, Again and Again: The first sighting of a genuine hyperlink in a Carl Icahn blog entry!

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When Vikram met Jim

Posted on August 25, 2008 by Felix

The scene: Vikram Pandit’s office at 399 Park Avenue. Pandit is pacing uncomfortably in front of Sandy Weill’s old fireplace. Through the door enters Jim Forese, head of Citi’s capital markets group.

Pandit: Jim. Have a seat.

Forese: Mr Pandit.

Pandit: I’ve got your memo here.

Forese: The one announcing "a new Global Markets structure that rebalances our product set to reflect better each underlying asset class and creates a regional matrix to ensure our activities are well coordinated locally"?

Pandit: That’s the one. I’m sorry, Jim, but it’s far too simple and direct.

Forese: I do apologize, Mr Pandit, I’m better at making money than I am at announcing org-chart changes. Which bit did you have a problem with?

Pandit: Well, look here. "We are focused on our core clients." It’s a short, declarative sentence, only seven words long. And anybody can understand it.

Forese: Oh. Yes, I see that now.

Pandit: Let’s see if we can’t obfuscate it a little. These clients, they basically fall into two groups, right?

Forese: Issuers and investors, right.

Pandit: Jim, will you never learn? People understand who issuers and investors are. Let’s call them "origination and distribution clients".

Forese: Ah, OK. "We are focused on our core origination and distribution clients." Yes, that’s much less comprehensible.

Pandit: Jim, we’re only getting started. How about that "we"? Can’t we beef that up a bit too? I think this is a great opportunity to use the word "client-centric" — after all, you know that every time you use that term in a memo, you get an extra $500,000 in your bonus.

Forese: I thought that talking about being focused on clients was enough?

Pandit: Well, it normally would be, but if you say it twice in the same sentence, you get a million-dollar bonus right there.

Forese: We’re a client-centric organization that’s focused on our clients?

Pandit: Very good, Jim, we’ll turn you into a Citi man yet. Let’s shuffle that in to what we’ve got already. So now, "we are a client-centric organization focused on our core origination and distribution clients".

Forese: I like it. But if we’re client-centric twice, shouldn’t we be focused twice too?

Pandit: You are a fast learner! "Focused" is the same as "focused most heavily". And no bank is friendlier to extraneous adverbs than Citi!

Forese: Maybe we should be focusing most heavily, that makes us sound more like a bank which never sleeps. Once you’re focused, you can sleep. But if you’re focusing, you can’t be sleeping.

Pandit: Good point. "We are a client-centric organization focusing most heavily on our core origination and distribution clients". But what are you focusing?

Forese: Huh? Ah. More words! "We are a client-centric organization focusing our resources most heavily on our core origination and distribution clients". Ooh, this is getting good.

Pandit: And if you can’t just be focused, you can’t just be client-centric, either. We can add some verbal MSG here, I think.

Forese: I know! "We are committed to being a client-centric organization focusing our resources most heavily on our core origination and distribution clients".

Pandit: No, no, it’s still not flatulent enough. You can’t be focused, you have to be focusing. You can’t be committed, you have to… have to…

Forese: I’ve got it. "We are affirming our commitment to be a client-centric organization focusing our resources most heavily on our core origination and distribution clients."

Pandit: I love it. Affirming! You get an extra half-mil for that alone. Now just add a little throat-clearing at the beginning, and you’re good to go.

Forese: "At the same time, we are affirming our commitment to be a client-centric organization focusing our resources most heavily on our core origination and distribution clients."

Pandit: Very good, I give you a triple-A rating! Now, go off and make sure the rest of the memo reads like that, there’s a good chap.

Forese: Yes, Mr Pandit.

Pandit: And show in the next pupil on your way out.

Posted in humor, leadership | Comments Off on When Vikram met Jim

Wise Investing: No Substitute for Saving

Posted on August 25, 2008 by Felix

Here’s a depressing statistic. In a recent Harris survey, 3,866 Americans were asked which things were "extremely important to achieving financial security in your retirement". 39% said that "investing wisely" was extremely important, while just 34% said that saving money during one’s working years was.

The problem is that while the financial-services industry is very good at marketing and selling investment products, it’s very bad at marketing and selling thrift, and living within one’s means. After all, the only thing which is marketed more aggressively than investments is credit products.

But if you want a financially comfortable retirement, the first best and pretty much only thing you need to do is save a lot of money while you’re working. Thanks to the magic of compound interest, everything else is likely to follow. If you save a lot it’s quite easy to eventually amass a seven-figure sum; if you’re permanently in debt, then it’s impossible. How you invest your savings is a secondary or even tertiary consideration.

The dream of anybody who invests in the stock market is that by being lucky or smart they’ll get such enormous returns that they’ll end up with the same amount of money as people who started with a much larger initial investment. It’s a nice dream, but it’s not very realistic.

There are good ways to unnecessarily lose money in the stock market: trading frequently, paying high fund-management fees, that sort of thing. "Investing wisely" is basically just the art of avoiding those pitfalls. It’s not the art of getting abnormally high returns from your initial investment.

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Ignore Stock Market Volatility

Posted on August 25, 2008 by Felix

Jim Surowiecki has a great line this week, in his column on stock-market volatility:

For now we’re stuck in a Yeatsian market: the best lack all conviction, while the worst are full of passionate intensity.

The sentiment here is spot-on. Right now we’re in a William Goldman market: nobody knows anything. In such a situation, one might expect that traders and investors both would tread cautiously, and the market would make no sudden moves. Instead, volatility has gone up dramatically, and 2% swings in the stock market are commonplace.

It’s worth noting, however, that Surowiecki’s column is grounded in a pretty strong version of the efficient markets hypothesis. He talks about "real news" twice and "new news" once, as drivers of stock prices, and contrives to act surprised that sometimes stocks move dramatically even when there’s no news of either description.

But in order for this to be at all surprising, you have to believe that stock prices reflect all the information in the market, and that in order for stock prices to change, new information (aka "news") has to arrive. It’s a belief which is understandably attractive to journalists, who traffic in news. But it’s also a theory which remains stubbornly immune to empirical validation.

Along any given timeline, there will be points at which big news events happen. And there will be points at which big stock-market moves happen. But the two don’t overlap nearly as often as you might think, and indeed when they do overlap, the direction of the stock-market move is often counterintuitive.

As Surowiecki says, what we’re witnessing right now is symptomatic of stock-market behavior broadly. Market participants tend to "herd"; down markets tend to be accompanied by increased volatility; and if anybody wants to make money in this market they’re going to have to be willing and able to change their directional bets frequently.

There’s also the fact that a credit crunch is a classic crisis of confidence, which means that big stock moves really are news, in and of themselves. Creditors are in control right now: any leveraged company which can’t fund itself in this market is toast. And creditors keep a very close eye on the stock market: if a leveraged company’s share price is strong, there’s probably relatively little to worry about. If it’s weak, however, that implies that the equity cushion is being eaten away fast, and that it might not be such a good idea to roll over that company’s debts.

If the stock of Lehman Brothers, say, is falling, then, that’s in and of itself reason for its creditors to be worried — which in turn is reason for the stock to fall further.

But the real lesson to be learned from all this stock-market volatility is that nearly everybody attributes far too much importance to one-day or one-week or one-month moves in stock-market indices. Writes Surowiecki:

Precipitous falls in the market have frequently been followed immediately by sharp rallies, and vice versa. And, while some of these moves have been occasioned by real news, more often it’s been impossible to tell just what made investors so damn exuberant or so gloomy…

In this market, the same traders who on Tuesday seem convinced that the apocalypse is nigh are, on Wednesday, just as sure that we’ve weathered the storm.

Who says that investors are being particularly exuberant or gloomy? The only evidence is short-term moves in the stock market, and once again you need to believe in some kind of efficient markets hypothesis to work backwards from a market plunge to gloomy investors.

Yes, it’s conceivable that if a whole bunch of investors woke up one morning in a particularly gloomy and pessimistic mood, then the stock market would fall. But that’s not what happens in real life. Think back to the last time you bought stocks: were you particularly happy or exuberant? What about the last time you sold stocks: were you gloomy or sad? Things are never as simple as that. The concept of "market psychology" is a wonderful invention for journalists desperate for a narrative, and is a great sales tool for people who believe in technical analysis. But again it’s basically an unfalsifiable fiction, backed up with almost nothing in the way of empirical evidence.

Surowiecki says that "in the long run volatility is a very bad thing, because it makes ordinary investors less inclined to trust markets". Which is true largely because the financial press insists on reading far too much into short-term stock-market moves.

The path of the stock market is naturally bumpy, especially in down markets. If financial journalists in general, and the talking heads on CNBC in particular, were a bit more sanguine about daily volatility, then maybe ordinary investors wouldn’t be worried. But there seems to be an insatiable demand for news about what the stock market is doing today, complete with accompanying narratives about how a 30-point decline in the S&P 500 is evidence of broad-based pessimism about the global economy, or something else along those lines.

The cure for this disease? Don’t read, watch, or listen to any stock-market reports. They never contain any useful information, and you’re much more likely to mistake noise for signal than you are to learn something substantive.

Posted in investing, stocks | 5 Comments

Ben Stein Watch: August 24, 2008

Posted on August 24, 2008 by Felix

Would you rather sit on an airplane than talk on a cellphone? Do you stare openly and voraciously at New Yorkers when you walk down Sixth Avenue? If your answers to both these questions are yes, then I highly recommend that you dive right in to Ben Stein’s column this week: I think he might be your soulmate.

On the other hand, if you think that PDAs are useful devices, it’s probably best to give this column a miss: there’s not much point in reading a luddite rant in which anybody with a cellphone has given up their "human flesh and spirit" to "become plastic and electronic machinery".

That said, I did learn something useful by reading this column. I’ve often wondered how it is that Ben Stein’s NYT pieces uniquely seem to avoid any kind of editing or fact-checking process. Now it’s confirmed that he must have some kind of no-editing clause in his contract. Check out this sentence:

They walk in rows of three, each on a cellphone, not even talking to the people next to her.

There’s nothing factually wrong here, it’s just a simple gramatical error. (No female subject has been introduced earlier on to whom the "her" might refer.) No copy editor would ever let such a thing pass, so we must conclude that somehow Stein has persuaded the NYT not only to run his rambling bunkum on a regular basis, but also that they’ve agreed not to alter a word of what he writes.

If this is really the case, one has to wonder what exactly is going on here. Running Stein’s claptrap at all is unforgivable; running it unedited is positively unethical. The self-styled newspaper of record even edits its blogs; to allow Stein such free rein would seem to violate any number of core Grey Lady principles. I think it’s high time the public editor started looking in to Stein’s arrangement.

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CO2 Emission Datapoint of the Day

Posted on August 22, 2008 by Felix

Barbara Kiviat reports:

Over a 24-hour period, a single cargo ship sitting at Long Beach with its engines running throws off more emissions than all the passenger car traffic in the Los Angeles metro area.

I’m sure that most cargo ships at Long Beach don’t keep their engines running for 24 hours at a stretch — not nowadays, anyway. But on the other hand, I’m sure that there are quite a lot of cargo ships sitting at Long Beach at any given time. Net it all out, and is it fair to say that the port of Long Beach is responsible for more CO2 emissions than all the cars in LA?

Update: Never mind. Barbara clarifies in the comments to her post that she’s talking mainly about SOx emissions, and that statistic isn’t surprising at all, since SOx emissions from cars are de minimis. This is what happens when you draft a blog entry offline, from an RSS entry, and don’t read the web page before posting. Lesson learned.

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Extra Credit, Thursday Edition

Posted on August 21, 2008 by Felix

U.S. Sees Biggest GDP Gain out of Major Seven OECD Countries: Which probably says more about the usefulness (or otherwise) of GDP as an indicator than it does about the relative health of the OECD nations.

Quiz Question: Financial Services in Inc 5000: Who are these fast-growing financial-services companies?

Consumer Inflation: What Do Alternate Measures Say, and Why

Nonfeasance in Financial Oversight: The government was charged with regulating real-estate appraisers. Did it? One hardly needs to ask.

Self-sufficiency in food: always and everywhere a bad, bad idea

The Future of Cars: An insight from Ryan Avent: "Technology is likely to blur the lines between transit and driving".

Fictitious restaurant wins Wine Spectator Award of Excellence

Googlebits: Does Google really account for 0.7% of GDP?

Rhenium: Son Of Moly: Yet more on the polyvalent transition metal of the day.

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Status Update

Posted on August 21, 2008 by Felix

I’m going to be travelling by train, plane, and foot for most of the coming week, which means that posting will be sporadic and confined to times when I have an internet connection. Still, nothing major ever happens in August, right?

Posted in Announcements | Comments Off on Status Update

UBS: Still Entrenched in the Art World

Posted on August 21, 2008 by Felix

Count me in with Anthony Haden-Guest: for all their credit-related losses, the big private banks and wealth managers like UBS and Lehman Brothers are not going to ease up on their sponsorship of art-world events.

Guest quotes a couple of art-world insiders as saying that UBS’s sponsorship of Art Basel is in jeopardy and that it might even start selling off chunks of its art collection. But the former seems wildly implausible to me, while the latter simply wouldn’t move the needle, as they say, in the context of more than $40 billion of losses.

The private-banking and wealth management units of these banks are steadily profitable, even in times of turmoil. Right now, with investment-banking revenues and profits plunging, they’re the one part of the business which is still making good money and providing stability to the greater whole. And if you’re in those businesses, the only important thing is that you spend as much time getting in front of rich people as you possibly can. To that end, sponsorship of Art Basel is an unparalleled opportunity for UBS, and one which they would be foolish to give up — especially given the Swiss connection. UBS still has some pride, and it’s pretty unthinkable that they would let US Trust, say, take over a major sponsorship in their own back yard.

The stated reason why UBS might pull back is that the "targeted audience in Basel and Basel Miami has seemed to be American" — and UBS has announced that it will no longer provide offshore private-banking services for US clients. But it will still provide onshore private-banking services, and in any case both Basel and Basel Miami are increasingly international, with the whole world going to the Swiss fair and many very high-value Latin American clients going to the one in Miami.

The Fine Art Fund’s Philip Hoffman is also sniffing around UBS’s art collection:

Hoffman is betting that some art will go too. "People like UBS who are having terrible hits really probably shouldn’t have $500 million tied up in art," he says. "They have some Freuds, and they’ve got some major pictures in their collection."

Sorry, but if you’re in the market for distressed assets being sold at fire-sale prices by investment banks, you’re much better off buying CDOs than dropping hints that there’s a few paintings you might be interested in. Selling art isn’t frowned upon in the art world quite as much as it used to be, but the downside for UBS would still be much greater than any upside, unless they sold to a major museum. Which I don’t think is what Hoffman had in mind.

Posted in art, banking, private banking | Comments Off on UBS: Still Entrenched in the Art World

Rumor Sourcing of the Day

Posted on August 21, 2008 by Felix

As Zubin will tell you, the WSJ has a favored locution when it cites anonymous sources: it likes to call them "people familiar with" the situation. The sourcing is so vague it can mean just about anything — essentially it’s the WSJ’s way of saying "trust us, we’re sure this is true, but we can’t tell you where we got it from".

Today, however, there’s a peculiar twist on the usage of the phrase: it’s referring to something which is false rather than something which is true. Last month, it seems, there was talk that Credit Suisse had pulled a line of credit with Lehman Brothers:

Fed officials contacted Credit Suisse last month, but it isn’t clear if the move occurred before or after the Securities and Exchange Commission subpoenaed dozens of hedge funds and financial firms about four Lehman-related rumors. One person familiar with the rumor said it was circulating in early July.

One wonders just how familiar this person was with the rumor. Were they passing acquaintances? Something closer than that?

Indeed, the whole article is a little weird: it makes a very big deal of the fact that the Fed called up Credit Suisse to see if the rumor was true. It explains:

Urging lenders and trading partners to stick by an embattled firm also carries the risk that it will inflame the same anxieties that the Fed is trying to soothe. That is one reason why such calls occur rarely.

But nowhere in the article does it say that the Fed urged Credit Suisse to do anything: all we’re told is that the Fed "quietly called" the bank to see if the rumor was true. Which is exactly what you’d hope the Fed would do if it heard that credit lines to a major investment bank were being pulled. And the Fed seems to have had no particular interest in managing or quashing rumors: once it was assured that the rumor was not true, it seems to have let the matter drop.

In other words, the Fed’s actions seem to be based very much within its mandate of overseeing the health of the banking system; there’s nothing to indicate that the Fed was sidling into the rumor-policing territory of the SEC.

But reading between the lines of the article there’s definitely the impression here that the Fed was doing something important and newsworthy, and maybe even putting pressure on Credit Suisse to keep its Lehman lines open. If you ask me, this is the way that rumors get started.

Posted in banking | Comments Off on Rumor Sourcing of the Day

Polyvalent Transition Metal of the Day

Posted on August 21, 2008 by Felix

If you want a leveraged play on long-term energy prices, rhenium might be a good place to look. The obscure metal has a very high melting point of 3,186°C — only tungsten’s is higher — which means that if you use it in turbine blades, that allows

engines to run hotter and burn fuel more effectively. Demand for the metal is now so strong that it costs $11,100 per kilo, up from less than $300 in the 1990s when fuel was cheap.

It turns out that the rhenium market is so small — production only totals about 50 tons per year — that it’s not traded on any exchange. You want rhenium in any quantity? Then you’ll probably have to talk to Anthony Lipmann, who’s cornered the market in the metal and who doesn’t think much of hedgies:

"I get calls from hedge funds every day," Lipmann said in an interview at his office in Walton-on-Thames, about 20 miles (32 kilometers) southwest of London. "I merely quake at the words, ‘hedge fund.’ We’re like hedgehogs with their needles up when they come ’round. This is so arcane what we do; they’ll never get in."

Of course, if you only want a small amount of the stuff, rhenium ribbon is available online for as little as $128. It might be the perfect material with which to wrap up a present for the minor-metals trader in your life.

(HT: Jones)

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Leon Black: The Picasso Connection

Posted on August 20, 2008 by Felix

The art world has no éminence more grise than John Richardson, art historian extraordinaire and author of an enormous biography of Picasso which, three volumes in, is still 40 (of Picasso’s) years from completion. Part of the problem is that Richardson has had trouble funding the book:

I understand that the funding for the book has been a challenge. I’ve heard that the image costs have been greater than the sales revenues. Is it true that you published two books between volumes two and three in part to raise money?

Well, it’s partly correct. Far more to the point, Picasso was extremely generous to me and gave me a number of drawings and prints and other things, virtually all of which have had to be sold to pay for the book. It wasn’t the illustrations so much — although the charge for copyright and for royalties is considerable — but the research, travel, books. And the advances from my publishers weren’t nearly enough to keep me going for the ten years volume three took to write. In the end, my friend Mrs. Sid Bass came to my rescue and got a lot of her collector friends to contribute to the John Richardson Fund for Picasso Research, and that’s what’s kept this labor of love going. …

Have you managed to hold onto some of your Picassos? I hope you haven’t sold them all.

Only a couple of the drawings he gave me — also a few prints and things. All my other Picassos had to be sold in order to pay the expenses of the biography.

So while Megan Barnett is piqued by Jeffrey Epstein’s appearance on the IRS returns of Leon Black’s charitable foundation, I’m more interested in this:

The foundation lists upcoming donations of $1.6 million to such groups as the Children’s Museum of Manhattan and the J. Richardson Fund for Picasso Research.

I like the idea that Black is doing his part to allow Richardson, who’s now in his mid-80s, to finish this massive and important project. Black is certainly a well-entrenched member of the Art Establishment: a trustee of the Metropolitan Museum of Art, he’s described by Colin Gleadell as "a generous donor and known as a buyer who seeks only historically significant art of the best quality".

As such, Black bought Brancusi’s gray marble Bird in Space for $27.4 million in 2005 — a record for a sculpture at the time, and surely a much better investment than similarly-priced objects by Jeff Koons. But the investment in Richardson could prove to be better still, if it ends up giving the world the long-awaited fourth volume — the one in which Richardson meets Picasso and starts writing from personal experience — before Richardson can write no more.

Posted in art, private equity | Comments Off on Leon Black: The Picasso Connection

Extra Credit, Wednesday Edition

Posted on August 20, 2008 by Felix

Disclosure? I Call B.S.: If you knew exactly what was going to happen to CDOs back in 2006, you still wouldn’t have been able to calculate the effect on the banks.

Have Economic Debates Changed Since 1977? A very funny list of economic objections from George Stigler. My favorite: "21. The central argument is not only a tautology, it is false."

Blog World Financial Blogger Panel: I’m on it, do let me know if you’re going to be in Vegas on September 20.

Help us, Phil Plait, you’re our only hope! A masterful debunking of Olympic star-sign bollocks.

Calling The Bottom Of Calling The Bottom Of The Real Estate Market

In Vino Veritas: Former UBS Banker Starts Wine Fund: Which charges 2-and-20, natch. One feels it would be easier, cheaper, and more rewarding just to buy a few cases for oneself.

The Future of Crossing the Street: Maybe we can all just get along!

Posted in remainders | Comments Off on Extra Credit, Wednesday Edition

Barack Obama, Economic Policy Wonk

Posted on August 20, 2008 by Felix

David Leonhardt has a must-read piece on Barack Obama’s economic policy in this weekend’s NYT Magazine. It’s long (over 8,000 words), and even so it doesn’t tease out all the implications of, say, Obama’s 100%-auction cap-and-trade system on US fiscal policy. But the real achievement of this article, I think, is not its length or its depth but rather its one-sentence description of Obama, which sums him up extremely well:

Barack Obama: A Free-Market-Loving, Big-Spending, Fiscally Conservative Wealth Redistributionist.

Leonhardt makes the good point, towards the end of the article, that this kind of thing can be hard to sum up in a Reaganesque soundbite, especially when Obama is understandably keen on bundling his economic policy with his environmental policy.

What’s abundantly clear from the article is that Obama has a thinking man’s economic policy: empirical, post-ideological, pragmatic. Yes, he does have an unfortunate fondness for ethanol subsidies, which comes from a combination of his Midwestern roots and the primary electoral calendar. But beyond that, he has Bill’s, rather than Hillary’s, openness to new ideas and focus on ends rather than means.

And more to the point, he’s interested in this stuff:

Shortly after I boarded Obama’s campaign plane this month, one of his press aides warned me that the conversation might not last long. She explained that he was exhausted from two days of campaigning in Florida and might decide to nap as soon as he got on the plane. But a few minutes later he summoned me to the plane’s first-class section, evidently choosing an economics discussion over a DVD of “Mad Men,” which was sitting on his side table. His eyes were tired, and he looked a good deal older than he had only four years ago, on the night that he became famous at the 2004 Democratic convention. But we ended up talking for an hour. After I returned to my seat, the press aide walked back to tell me that Obama had more to say.

It’s a passage you simply can’t imagine reading about either George W Bush or John McCain. And given that the economy is quite rightly Issue Number One in this election campaign, it should surely help Obama that he really cares about his economic policy, rather than simply reading off a list of party-political talking points.

Should, of course, being the operative word. Whether it will, of course, is another matter.

Posted in fiscal and monetary policy, Politics | Comments Off on Barack Obama, Economic Policy Wonk

Rant of the Day: Daniel Davies on Afrobollocks

Posted on August 20, 2008 by Felix

Poor Edmund Sanders. He writes a perfectly well-intentioned article about Ethiopia’s famine, complete with interview with prime minister Meles Zenawi, only to run into the acid pen of Dsquared:

Bonus points for the mention of "the Chinese model" in a country that’s so utterly a US catspaw in the region, by the way – the nefarious representative of the PRC is fast becoming a stock Afrobollocks character, along with the poor little starving person, the Nigerian fraudster, the Harvard-educated hope of his country, the "tribal chief" and the James Bond villainesque President for Life (with proverbial "Swiss bank account", natcherally; the Caymans, Channel Isles etc apparently have zero market share with African dicators according to Western hack journalists), the bright-eyed and impractical aid worker and the rascally international banker.

I only wonder where Jeff Sachs and Bono fit in to all this.

Posted in development, rants | Comments Off on Rant of the Day: Daniel Davies on Afrobollocks

Blurb Whore of the Day

Posted on August 20, 2008 by Felix

Rachel Donadio had an entertaining essay in Sunday’s NYT Book Review on blurbing. It’s a fine art, she says: "Blurb too often, or include too many blurbs on your book, and you might get called a blurb whore."

Well. I have in front of me The World is Curved, a new book by David Smick.

On the front cover is a blurb from Alan Greenspan. On the back cover is a longer blurb from Alan Greenspan, as well as blurbs from Larry Summers, Barton Biggs, Bill Bradley, George Schultz, Jean-Claude Trichet, and Lawrence Eagleburger.

But wait! That’s not all! Open it up, and the first thing you find — before even the title page — is five more pages of blurbs, from Stan Druckenmiller, Jagdish Bhagwati, Jeffrey Garten, Robert Hormats, Frank Carlucci, William Seidman, Lee Hamilton, Karl Otto Pöhl, Carla Hills, Louis Bacon, Glenn Hubbard, AW Clausen, Yochi Funabashi, James Schlesinger, John Taylor, Hans Tietmeyer, Murray Weidenbaum, Peter Kenen, Otmar Issing, Pedro Pablo Kuczynski, Ted Truman, Gary Clude Hufbauer, Michael Boskin, Allan Meltzer, Michael Steinhardt, Peter Fisher, John Williamson, William Kristol, Benjamin Friedman, Richard Clarida, Norbert Walter, Ron Insana, Horst Siebert, Renato Ruggiero, Charles Dallara, and Nigel Lawson.

And yes, there’s more still on the website.

Having slogged my way through the first couple of chapters, I think I can pretty safely say that none of these people has actually read the book all the way through. Here’s a passage taken more or less at random:

The financial markets, as I started my consulting business in the mid-1980s, had become a global cauldron of uncertainty. Under globalization, many of the tried-and-true rules of economics and financial trading suddenly no longer applied. No econometric model — no magical black box of economic formulas — was useful anymore in predicting the future. Financial liberalization had created an ocean of liquidity that was sloshing all over the economic and financial rulebooks. Success required, more than ever, operating creatively from gut instinct.

Once you cut through the mixed metaphors and the hyperbole, what you’re left with is silly and unhelpful.

Smick is a smart chap — as he takes great pains to show us on a regular basis with anecdotes of him regaling the rich and powerful with his analysis — and occasionally, buried in the turgid prose, one finds something genuinely insightful. What’s more, if you read what Smick has written in the past, it’s generally clear and lucid.

So I’m not sure what’s happened here; I suspect that it’s a combination of Smick overcompensating for the fact that he’s writing for a broader audience than he’s used to, along with a desire on his part not to give away too much of the analysis for which he charges his clients so much money.

But from a consumer perspective, it’s quite clear that blurbs are not to be trusted. Especially not when they’re as numerous as this.

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