MULE VARIATIONS

Tuesday, June 10, 2008

Let the markets solve the energy crisis - FT.com

Summary:
Tony Hayward (BP's Chief Executive) argues that three of myths about the current oil prices are standing in the way of finding the right solutions to energy security and climate change. These myths are: 1) prices are due to speculation; 2) the world is running out of hydrocarbons; 3) we can switch to alternative sources of energy quickly. The solution to the crisis is to let the markets do the work: consumer will temper their consumption in response to high prices, while it will encourage the oil companies to invest in means of increasing output. Governments can help by removing barriers to that investment, improving access to resources and modernising the tax structure businesses work in. (Published: 10/06/08)

Notes

some myths that need to be put to rest if we are to find the right solutions to big global problems such as energy security and climate change

prices are caused by technical factors, e.g. speculation

may have an impact on the margins
but: the data clearly show that high prices are really caused by economic fundamentals: supply and demand
demand:

global energy demand growth in 2007 was above average for the fifth year in a row
driven by the fastest period of economic growth since the early 1970s
demand growth is concentrated in those emerging nations that also subsidise fuel prices, such as China, India and - increasingly - the oil-producing nations themselves

supply:

energy supply has struggled to respond
production by the OPEC fell by 350,000 barrels of oil a day last year
production situation is even more challenging in the market-oriented nations of the OECD (e.g. UK)

many existing basins are maturing fast

last time oil prices surged to this kind of level, 30 years ago, new production from the North Sea helped bring prices down

this time, new OECD production will have to come from frontier provinces such as the Canadian oil sands, the Arctic and the deep waters of the Gulf of Mexico

production in Russia has begun to decline

fact: until now, the growing demand for oil from China and India in recent years has been met almost barrel for barrel by rising supply from Russia

access to resources for international oil companies remains very restricted

resource nationalism is on the rise
important because it is the oil majors that have some of the best technology for bringing difficult resources on-stream

world is running out of hydrocarbons

world has ample resources:

more than 40 years of proven oil reserves
60 years of natural gas
130 years of coal

problems in bringing on new production are not so much below ground as above it

not geological but political

we can switch quickly to a low-carbon economy

biofuels, wind and solar energy

growing rapidly

but: comprise a tiny share of global energy production

humankind remains dependent on fossil fuels

coal is the fastest-growing of all the main fuel types

carbon emissions will continue to rise

all need to work harder if we are to tackle the threat of climate change.

how to secure the energy needs of the world in the 21st century?

evidence is that where markets are allowed to operate, they do work

that is the real source of hope for the future

consumers in Europe and north America are already responding to high prices by moderating demand and beginning to embrace energy efficiency
where investment is allowed to take place, energy production responds positively

last year, US oil and natural gas production increased - in the case of oil, for the first time since 1991

conclusion:

producers and consumers should be encouraged to respond to the market's signal

High prices are saying that we need more investment

in energy efficiency, new production, new technology and new energy sources such as wind, solar and nuclear

in order for that to happen, businesses and governments must act together

companies know that they need to invest more
governments must do their bit too

removing the barriers to that investment
improving access to resources
modernising the tax structures we work in

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Editor's Take: Time to get paid like a retail banker? - eFinancialCareers

Summary:
Sarah Butcher on why extravagant salaries for investment bankers may stay down, even when trade picks up again. Reasons for this are new regulations that are almost certainly on their way (central bank support for brokers will come at a cost); shareholder pressure (from individual investors as well as sovereign wealth funds) and an increasing number of clients disputing the exorbitant fees charged by investment banks. (Published: 10/06/08)

Notes:

Investment bankers are paid generously because they make big money for their employers

in 2006 profits per head in investment banking were 26 times higher than in the average industry, according to McKinsey

profits now on a downwards trajectory

pay will fall in 2008
question is when it will bounce back up

CEBR: big bonuses will be back in 2011
but: there are signs that a deeper structural shift is taking place

3 bad omens:

Regulation

Fed support for brokerage houses will come at a cost
Tim Geithner, president of the Federal Reserve Bank of New York

quoted in the Financial Times complaining that the Fed’s responsibility for financial stability is unmatched by its authority
"The gap needs to be closed."

Regulation will almost certainly involve

increased capital requirements
lower leverage,
possibly limits on overnight repo funding
higher capital charges against assets held in trading books

When good times return, banks will therefore be less able to exploit new opportunities.
Trading profits will be lower as a result.

Shareholder power

investment banks have long traded at low multiples due to uncertainty over the source of their success

clear now that those multiples are justified (profits now ephemeral)

extravagant pay in boom years is looking increasingly foolish

Sovereign wealth funds (SWFs)

could also help suppress frothy bonuses
will exert an influence behind the scenes
Brad Hintz: “Sovereign funds are going to go directly to management and ask what’s being done to clean balance sheets, cut expenses and lower headcount.”

Fee disputes

Client mutterings about exorbitant advisory fees are turning into full-scale complaints

e.g. Bradford & Bingley rights issue debacle

has helped focus minds on whether underwriting fees are justified

In Asia, where M&A activity is still expanding, a high proportion of companies use their in-house advisors to save cash

"Investment bankers could soon join their retail banking colleagues in pocketing bonuses that are fractions rather than multiples of salary - and in driving Mondeos rather than Maseratis."

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Quote of the Day

"The beginning of knowledge is the discovery of something we do not understand." - Frank Herbert

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Monday, June 9, 2008

Who’s Afraid of Friedrich Hayek? - Dissent Magazine

Summary:
Jesse Larner reviewing Hayek's Road to Serfdom. Good critique of central planning. Not as extreme a position as that of some of his followers. Hayek's main concern is human freedom. Not dissimilar to some versions of socialism (even libertarian collectivism). Hayek's limitation is that he only considers one type of socialism (Stalin's). Hayek admits that there are economic circumstances in which market forces cannot deliver the optimum result, and when the state may legitimately intervene. (Published: Winter 2008)

Notes:

Hayek revered at

American Enterprise Institute
Cato Institute
National Review
Weekly Standard

book: The Road to Serfdom (1944)

350,000 sold in US

Hayek nowhere near as extreme as his ideological descendants
admits that there are a few rare economic circumstances in which market forces cannot deliver the optimum result, and that when these occur, the state may legitimately intervene
recognizes such a thing as the social interest and will even endorse some limited redistributionalism

goes so far as to suggest that the state ensure a minimum standard of living
idea surely to embarrasses people at Cato

Hayek concerned with human freedom

in contrast to many modern conservative intellectuals
writes with passion against class privilege

not as rational and irrefutable as the right would have it; often eccentric
makes a powerful and far-ranging critique of state control of economic life in Road to Serfdom
Keynes on Road:

“it is a grand book. . . . Morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in deeply moved agreement.”
but followed up his seven famous lines of praise with eighty-four little-known lines in favor of expanded economic planning

George Orwell on Road:

“In the negative part of Professor Hayek’s thesis there is a great deal of truth . . . collectivism is not inherently democratic, but, on the contrary, gives to a tyrannical minority such powers as the Spanish Inquisitors never dreamt of.”

core of Road is an exploration of why a planned, state-managed economy must tend toward totalitarianism
Road: Economic planning assumes a social goal at which the plan aims.

But whose goal?

In a society of competing interests—a condition that would describe every human society—any goal, any plan, inevitably favors some interests against others.
Who is to say whether the favored interests are “better” for society as a whole?
There may be consensus in government, or on a delegated planning board, but this only reflects the consensus of immediately interested parties.

A complex economy is something no person or institution can understand.

But it can generate a sustainable order, with a rational allocation of resources, as individuals respond to their own circumstances and make choices as consumers and entrepreneurs, signaling the subjective value that they place on goods and capital stock through the price mechanism

One of Hayek’s most original contributions to economic theory:

insight that economic systems are based primarily on information rather than resources

To plan an outcome and to direct economic inputs and outputs toward this outcome is to stifle the emergence of a spontaneous, democratic response to the needs of the individuals who make up the community

a response that will necessarily have winners and losers
but will not privilege the vision or depend on the limited information of a governing elite
furthermore, will encourage further experimentation

responsibility of a government that fosters individual freedom is

to set up transparent and impartial rules so that the legal reaction to personal choices can be predicted for all, regardless of social station;
to tolerate no privileged access to the law;
to provide security; and
to protect contracts and private property

so long as doing so does not conflict with the very small set of social assumptions on which there truly is broad consensus

ensure a minimum standard of living (?)

Hayek disapproved of prebendal institutions that increase the wealth and power of an elite at the expense of other members of the class in whose interests the elite is supposedly working, and of society at large

whether that elite be composed of

union members,

holders of exclusive concessions,

hereditary lords

recognized that institutions that interfere with the price mechanism encourage relations of patronage.

Hayek understood at least one very big thing:

that the vision of a perfectible society leads inevitably to the gulag

human societies are jerry-built structures, rickety towers of ad hoc solutions to unforeseen problems.

their development is evolutionary
as in biological evolution, they do not have natural end-states

Comprehensive models of how society should work reject the wisdom of solutions that work and deny the legitimacy of individuals who demonstrate anti-orthodox wisdom

models from Lenin to Mussolini to Mao to Ho to Castro to Qutb deny the very right to exist of individuals who demonstrate anti-orthodox wisdom

Hayek makes little distinction between socialism, communism, and collectivism

the only kind of socialism he considers in Road is state-managed, perfect-society utopianism, in which the direction of the economy and all of its inputs and outputs are planned, with the accompanying political and moral degradation that Hayek demonstrates quite convincingly
this focus on state-led socialism should not be particularly surprising in 1944
but: other visions of socialism, and other socialistic traditions, were certainly available to Hayek when he wrote

libertarian, less top-down approaches
socialisms of Luxembourg, Kropotkin, Proudhon, many others
the possibility of nontotalitarian models of social democracy, like those that emerged in Europe after the war

therein lies limitation of Hayek

Hayek’s ideological descendants often assume, either sincerely or disingenuously, that in a world very different from that of 1944, socialism by definition still means state control of the economy in the interest of perfecting social relations

Because they understand very little of the thoughtful left, it is hard for many on the right to acknowledge that as a critique of socialism, Hayek’s ideas are limited rather than devastating
Hayek doesn’t seem to grasp that human beings can exist both as individuals and as members of a society, without necessarily subordinating them to the needs of an imposed social plan

although he acknowledges that the state can legitimately serve social needs, he contradictorily views collective benefits as incompatible with individual freedom

Hayek rejects the very concept of social justice

for much the same reasons that he rejects the arbitrary valuation of labor

in Hayek’s view there is no way to put an objective value on a grievance or to weigh it against other claims

because he locates all responsibility and agency only at the level of the individual, he sees no way in which any claim can be generalized to society

Hayek’s political philosophy recognizes only negative rights.

Positive fulfillment beyond the most basic needs is a matter of individual striving.

brief survey will show that there are all kinds of imaginative ways in which libertarian collectivism can coexist with capitalism and markets

e.g. fishing co-operatives

investors and crew are paid in shares of the catch
form of economic organization that is found wherever fishing is pursued as a way of life
has ancient origins.

corporate stock ownership plans or the limited employee ownership of companies like Avis or United Airlines

This is a socialism that is not incompatible with democracy, markets, or liberty.

It is not subject to the perfectionist fallacy

public disbursements in the social interest don't necessarily start us down a slippery slope to the totalitarian state

Hayek, in suggestively conflating government spending with government planning, pulls a bit of a sleight of hand in Road.

Democracy turned out to be a lot stronger than Hayek expected.

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Measuring single cell RNA expression levels find considerable transcriptional differences among phenotypically identical cells - BMC Genomics

Summary:
Single cell gene expression profiling. Shift towards understanding similarities and differences between individual cells at the transcriptional and translational level. Gene expression levels may be distorted by sampling effects (copying and amplying mRNA pool). Particularly problematic for low copy number transcripts in single cell samples (random dropouts of low abundance transcripts from amplified single cell cDNA populations). Magnitude of distortion will also depend on transcript abundance distribution. High number of genes with transcript abundances lower then 10-20 and relatively few genes with high transcript. Study finds that the majority (44%) of genes are represented by limited number of mRNA copies (less 25), and this may account for the large cell-to-cell variations in mRNA copy number that we have observed. They also conclude that sampling effects do not impede our ability to extract reliable gene expression profiles from single cells and that significant differences in gene expression levels exist between phenotypically identical cells. (Published: 03/06/08)

Notes:

Single-cell gene expression profiling provides a powerful tool to analyze the composition of complex cell populations

many contexts in which the focus is shifting towards understanding the cellular networks of individual cells and the similarities and differences between individual cells at the transcriptional and translational level

Limitations to the sensitivity and resolution of current technologies for studying gene expression mean that when using samples as small as those generated from single cells we are inevitably faced with amplifying cellular mRNA.

amplification stage may introduce significant distortions in the measured gene expression levels

especially for genes with small numbers of transcripts in the material under study

this distortion is introduced by sampling effects that arise from inefficiencies in the processes of copying and amplifying the original mRNA pool.

In a complex mRNA population with small absolute numbers of individual transcripts, such as that from a single eukaryotic cell, sampling effects can result in only a subset of the population of starting RNA molecules being represented in the final amplified population

particularly problematic for low copy number transcripts in single cell samples:

in the first step of the process, reverse transcription may fail for a small proportion of the original mRNA molecules

eliminated from subsequent amplification and detection

For genes with only a small number of transcripts in the starting material, this will create a variable (assuming the failures are random) distortion in the relative representation of transcript abundances in the final experimental sample

potentially leading to the absence of such low abundance transcripts in the final amplified population.

first round of PCR amplification will have a similar effect, and subsequent rounds will have effects of diminishing importance, in terms of complete dropout of lowabundance transcripts

overall effect of random dropouts of low abundance transcripts from amplified single cell cDNA populations would be that random sets of transcripts would be called as absent in different cells

one estimate is that there is a lower limit of 80 copies of a single mRNA per cell for detection of two-fold differences between samples

magnitude of the overall sampling effect will, in theory, depend on two factors:

the transcript abundance distribution which is the variation of transcript number among genes being expressed in a cell (and in particular the relative numbers of genes with low transcript numbers);
and the copying and amplification efficiencies for conversion of the original population of mRNA molecules into DNA or RNA detectable by the expression profiling platform in use

The copying and amplification efficiencies can be estimated from experimental data. However, the estimation of the transcript abundance distribution poses two distinct problems: knowing the form of the distribution; and evaluating the shape and scale parameters for the distribution.

conflicting reports of the transcript abundance distribution in a typical eukaryotic cell

ranging from a distribution with a median value for mRNA transcript copies per gene of less then one
to a distribution with a median of approximately 100 copies

difficulty is that, in general, the transcript abundance distributions of real single cells are not known but are inferred from population measurements

Based on published data, a simple approximation is that the transcript abundance distribution is log-log-normal, as this distribution captures certain key features of our current understanding of the single cell transcript abundance distribution:

there is a high number of genes with transcript abundances lower then 10-20 and relatively few genes with high transcript

Discussion

The main findings of this study are that the contribution of sampling effects to observed single cell expression data is likely to be minor and that substantial transcriptional differences exist between phenotypically identical cells.

indicates that one can generate reliable gene expression profiles from single cells using microarrays to interrogate globally amplified RNA populations

However, the considerable variation in gene expression levels between similar cells is likely to dictate that relatively high numbers of cells would need to be analysed to robustly identify significant and consistent differences in gene expression between cell populations.

Alternatively, these findings argue that single cell expression profiling will be particularly useful for identifying absolute differences in gene expression between cell types.

A second implication of this study is that one important limit on the use of amplification techniques for single cell expression profiling is that if amplification efficiency drops significantly below 90% then the sampling effect may considerably distort the measured expression profile

One promising technique for mRNA amplification from individual cells, which combines global exponential and linear amplification, has been shown to produce very low levels of noise and highly reproducible data and may limit the significance of sampling effects when profiling rare transcripts [22].

Our results demonstrate that the actual transcript abundance distribution for the tested cell type has a peak at approximately 5-20 copies per gene.

We recognize that our experiments are based on a particular type of mouse neural stem cell, but in the absence of any reason to suppose that the transcript distributions of most other cell types are radically different from this, we believe the result should generally apply to expression experiments performed on a wide range of cell types.

Although our method did not allow us to discriminate between different models of overall gene and transcript numbers in the cell, we believe it strongly suggests that more then 85% of transcripts are present in relatively low copy numbers (less then 100 copies per cell).

Insight into the variability of the gene expression profiles of single cells has been obtained using a number of technical approaches, incuding microarray analysis following linear T7-based amplification [16, 25], multiplexed FISH (fluorescence in situ hybridization) [26] and quantitative PCR [27].

Transcriptional bursting has been observed in Escherichia coli, in which protein levels have very little correlation with mRNA levels, particularly for younger cells [28], as well as Dictyostelium [29] and mammalian cells [30].

Overall, those findings are consistent with a model for cellular phenotypes that are underwritten by transcriptional programs that appear inherently noisy when total cellular transcript levels are measured at the single cell level.
It has been suggested that because in the individual cell the transcriptional machinery is controlled by a relatively small number of transcription factors, it may result in stochastic behavior in gene activity.

Conclusions

Our current results revealed that the majority (44%) of genes are represented by limited number of mRNA copies (less 25), and this may account for the large cell-to-cell variations in mRNA copy number that we have observed.
also concluded that sampling effects do not impede our ability to extract reliable gene expression profiles from single cells and that significant differences in gene expression levels exist between phenotypically identical cells

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Globalisation is good - The Guardian

Summary:
Peter Mandelson defending globalisation in response to the protectionist rhetoric heard during the presidential primaries. Feeling is that globalisation is out of countrol, no longer something we do but something that is done to us. But open markets and economic integration are far the best tool we have for increasing global economic welfare. "Only stable, cooperating states can manage the coming squeeze on resources."Globalisation and active welfare states are not incompatible. "Protective states do not have to be protectionist ones." (Published: 09/06/08)

Notes:

The Atlantic world is no longer the centre of the economic world, because the economic world no longer has a centre.
many Americans see global economic change in zero-sum terms

as suggested by the protectionist and anti-trade rhetoric evident in the presidential primaries
Economic inequality is reduced between countries, but widens within our own societies.
Globalisation is no longer something we do, it is something that others do to us.

"Nobody would disagree that globalisation has its dark side. But the open markets and economic integration that drive it are still by far the best tool we have for increasing global economic welfare. That is an essential contribution to global stability. Only stable, cooperating states can manage the coming squeeze on resources."

US and Europe should recognise that in an interdependent world, they have nothing to gain from a stalling of growth in the developing world

rather than worry about a relative decline in their economic weight, or retreat from international engagement
should focus on renewing the global institutions needed to hold this new mix of states together through difficult debates on climate change, energy security and trade
have to adapt these institutions - the UN, the WTO, the IMF - to give the emerging economies a chance not just to exercise their rights, but to assume their responsibilities.

at the moment when we most need the tools of internationalism, our own politics has begun pushing in the other direction

economic nationalism is the symptom of a deeper problem.
we can't shape globalisation without tackling the causes of protectionism.
means tackling our own economic insecurity and inequality.

entrenched political myth that globalisation and active welfare states are incompatible

OECD data for the last 20 years: strong welfare states have equipped countries for globalisation much better than weak ones.

states that have encouraged labour market flexibility, high levels of education and retraining, and helped women and older people stay in the workforce

Progressives in the US and Europe need to revive the New Deal case for governments that help people engage with open economies, rather than leave them exposed
Protective states do not have to be protectionist ones.

Gordon Brown has never erred in rejecting the false comforts of populism and setting out a positive politics of globalisation

sees globalisation as part of the solution rather than part of the problem
world needs to hear the same message from President Obama or McCain

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Sunday, June 8, 2008

Quote of the Day

"Only lend money to those who do not need it" - first rule of banking

Another way to put it is this: borrowing should only be undertaken to improve returns, not to cover basic needs. Optimally, then, borrowing should be a choice, not a necessity and bankers should act accordingly.

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Free the gene genie - FT.com

Summary:
OpEd in the FT arguing that politicians in industrialised countries and green groups can no longer indulge in anti-GM rethoric. World must employ all resources to raise crop yields without using more energy and chemicals. Benefits from GM food are great enough and the food crisis severe enough to make use of them. Friendlier attitude towards GM by the EU is essential for the technology's adoption in Africa. GM on its own cannot transform the world food outlook. Requires overcoming structural deficiencies of agriculture in developing countries. (Published: 07/06/08)

Notes:

world population is growing faster than agricultural production

this for the first time in two generations
food shortages and rising prices the inevitable outcome

world must employ all the resources of science and technology, including genetic modification, to raise crop yields without using more energy and chemicals
politicians in industrialised countries with strong environmental lobbies (i.e. Europe)

could indulge in anti-GM rhetoric as long as most crops were in surplus

wasn't worth taking any risks by introducing GM crops

would benefit companies such as Monsanto (and might help farmers) but would do nothing for consumers

can no longer afford the luxury of dismissing GM

global evidence of a dozen years growing commercial GM crops shows an overall net benefit, in higher yields and lower inputs
isolated problems with crop management but no known effects on human health and little impact on biodiversity

Other changes in agriculture have a far greater potential for environmental damage than genetic modification.

e.g. new cropping and cultivation methods,

but the world must continue to monitor for unintended consequences from GM crops

plant metabolism is so complex that scientists cannot predict fully what foreign genes may do

research is leading to a second generation of GM crops

with added traits such as drought and salt tolerance, better nutritional content and improved flavour
will deliver more direct consumer benefits than the first-generation crops

just kill pests or resist herbicides

friendlier attitude to GM by the European Union is essential for the technology's adoption in regions such as Africa

African governments often take their lead on regulatory issues from Europe
as long as the EU remains hostile, some countries will be reluctant to "contaminate" their farmland with GM crops

even with government support, introducing appropriate biotech plants to the developing world will be a formidable problem

scientists will have to listen to poor farmers and develop the crops they want
essential that outsiders do not impose new varieties that turn out to be unsuited to local conditions or prevent farmers saving and planting their own seeds in the traditional way

GM on its own cannot transform the world food outlook

overcoming the structural deficiencies of agriculture in developing countries would do more to raise yields

from poor soil management to inadequate storage facilities

But: the additional benefits of biotech plants are great enough - and the threat of a global food crisis serious enough - to give them a warm welcome worldwide

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Saturday, June 7, 2008

Biotechnology seen as a key to solving food crisis - Reuters

Summary:
Ed Schafer (US Agriculture Secretary) and others at UN Food Summit calling for biotechnology, including genetically-modified organisms (GMOs), to help produce more food by raising yields and producing crops in developing nations that are resistant to disease, pests and environmental damage due to climate change. (Published: 03/06/08)

Notes:

summit on seeking ways to combat high food prices when climate change may aggravate shortages
Schafer: "Biotechnology is one of the most promising tools for improving the productivity of agriculture and increasing the incomes of the rural poor. We are convinced of the benefits it offers to developing countries and small farmers"
green groups and Frankenfoods

green groups say genetically-engineered crops threaten biodiversity

many European consumers are wary of eating products dubbed by critics as "Frankenfoods"

Schafer: biotechnology, including genetically-modified organisms (GMOs), could help produce more food by raising yields and producing crops in developing nations that are resistant to disease and pests
Philippine Agriculture Minister Arthur Yap:

"Genetic engineering offers long-term solutions to some of our major crop production problems"
But: not a panacea for all of his country's agricultural problems.
Progress being made in the Philippines included research into rice and coconuts resistant to disease
"We're also working on virus-resistant papaya, papaya hybrids with a longer shelf life that should be ready for market in 2009"

U.N. Climate Panel:

Climate change could aggravate production around the world with more droughts, floods, disruptions to monsoons and rising sea levels
In Africa alone, 250 million people could face extra stress on water supplies by 2020.

Burkina Faso Agriculture Minister Laurent Sedogo

country has worked with U.S. agriculture group Monsanto to battle pests that blighted the cotton crop
"We are about to plant 15,000 hectares" of a new crop that was resistant to pests

would also cut down on the use of pesticides that could damage the health of farmers

World Bank and aid agencies

estimate that soaring food prices could push as many as 100 million more people into hunger.
About 850 million are already hungry.

C.S. Karim, an adviser to Bangladesh's agriculture ministry

A cyclone last year "is a wake-up call for all of us. It shows the vulnerability of Bangladesh. "
Bangladesh is going ahead with efforts to make crops able to survive floods and more salinity in the soil

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Quote of the Day

"Character is what you have left when you've lost everything you can lose." - Evan Esar

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Friday, June 6, 2008

Nassim Nicholas Taleb: the prophet of boom and doom - The Times

Summary:
Interview with Nassim Nicholas Taleb, author of "The Black Swan: The Impact of the Highly Improbable." Problem with probability theory: Fat Tony vs. Dr. John. On buying "out-of-the-money" options: when markets rise, they rise by small amounts, when they fall, they fall dramatically. Mediocristan vs. Extremistan. On banks and failing of Long Term Capital Management. Importance of religion and being ecologically conservative. Investment strategy: 90% in safest government securities, 10% high risk. (Published: 01/06/08)

Notes:

most economists, and almost all bankers, are subhuman and very, very dangerous

live in a fantasy world in which the future can be controlled by sophisticated mathematical models and elaborate risk-management systems

in December lectured bankers at Société Générale

told them they were sitting on a mountain of risks – a menagerie of black swans
didn’t believe him
six weeks later the rogue trader and black swan Jérôme Kerviel landed them with $7.2 billion of losses.

"Clothes matter; they send signals"
risk management

facing up to those aspects of randomness about which something can be done

“Scientists don’t know what they are talking about when they talk about religion. Religion has nothing to do with belief, and I don’t believe it has any negative impact on people’s lives outside of intolerance. Why do I go to church? It’s like asking, why did you marry that woman? You make up reasons, but it’s probably just smell. I love the smell of candles. It’s an aesthetic thing.”

"Take away religion, and people start believing in nationalism, which has killed far more people."
Religion as way of handling uncertainty

lowers blood pressure
thinks religious people take fewer financial risks

obsessed with probability
Brooklyn-born Fat Tony and academically inclined Dr John: two of Taleb’s creations

You toss a coin 40 times and it comes up heads every time. What is the chance of it coming up heads the 41st time?

Dr John gives the answer drummed into the heads of every statistic student: 50/50.
Fat Tony says the chances are no more than 1%.
“You are either full of crap,” he says, “or a pure sucker to buy that 50% business. The coin gotta be loaded.”
chances of a coin coming up heads 41 times are so small as to be effectively impossible in this universe.
It is far, far more likely that somebody is cheating.
Fat Tony wins. Dr John is the sucker

1985: France, Germany, Japan, Britain and America signed an agreement to push down the value of the dollar

held options that had cost him almost nothing and that bet on the dollar’s decline
1987 – Black Monday

options were suddently worth a fortune
became obsessed with buying “out of the money” options
was sitting on a pile of out-of-the-money eurodollar options
realised that when markets rise they tend to rise by small amounts, but when they fall – usually hit by a black swan – they fall a long way.

on fall of Long-Term Capital Management

hedge fund set up in 1994 by, among others, Myron Scholes and Robert C Merton

joint winners of the 1997 Nobel prize in economics

had grandest of all possible credentials and used the most sophisticated academic theories of portfolio management
went bust in 1998 and, because it had positions worth $1.25 trillion outstanding, it almost took the financial system down with it
modern portfolio theory had not accounted for the black swan, the Russian financial crisis of that year

Mediocristan vs. Extremistan

Mediocristan: where early humans lived

Most events happened within a narrow range of probabilities – within the bell-curve distribution still taught to statistics students.
we don’t live there any more.

Extremistan: world we live in

created world we don't understand

black swans proliferate, winners tend to take all and the rest get nothing
our systems are complex but over-efficient
no redundancy, so a black swan strikes everybody at once
banking system is the worst of all

banks make money from two sources

they take interest on current accounts and charges for services

this is easy, safe money

but they also take risks, big risks, with the whole panoply of loans, mortgages, derivatives and any other weird scam they can dream up.

“Banks have never made a penny out of this, not a penny. They do well for a while and then lose it all in a big crash.”

increased economic concentration has raised our vulnerability to natural disasters

Kobe earthquake of 1995 cost a lot more than the Tokyo earthquake of 1923

countless other ways in which we have built a world ruled by black swans – some good but mostly bad
believes in tinkering

Trial and error will save us from ourselves because they capture benign black swans
three big inventions of our time: lasers, computers and the internet

all produced by tinkering and none of them ended up doing what their inventors intended them to do
all were black swans

big hope for the world is that, as we tinker, we have a capacity for choosing the best outcomes

good investment strategy is to put 90% of your money in the safest possible government securities and the remaining 10% in a large number of high-risk ventures

insulates you from bad black swans and exposes you to the possibility of good ones
Your smallest investment could go “convex” – explode – and make you rich

High-tech companies are the best

The downside risk is low if you get in at the start and the upside very high
Banks are the worst – all the risk is downside
Don’t be tempted to play the stock market

“If people knew the risks they’d never invest.”

We should be mistrustful of knowledge. It is bad for us.

Give a bookie 10 pieces of information about a race and he’ll pick his horses.
Give him 50 and his picks will be no better, but he will, fatally, be more confident.

We should be ecologically conservative:

global warming may or may not be happening but why pollute the planet?

"Taleb's top life tips"

Scepticism is effortful and costly. It is better to be sceptical about matters of large consequences, and be imperfect, foolish and human in the small and the aesthetic.
Go to parties. You can’t even start to know what you may find on the envelope of serendipity. If you suffer from agoraphobia, send colleagues.
It’s not a good idea to take a forecast from someone wearing a tie. If possible, tease people who take themselves and their knowledge too seriously.
Wear your best for your execution and stand dignified. Your last recourse against randomness is how you act — if you can’t control outcomes, you can control the elegance of your behaviour. You will always have the last word.
Don’t disturb complicated systems that have been around for a very long time. We don’t understand their logic. Don’t pollute the planet. Leave it the way we found it, regardless of scientific ‘evidence’.
Learn to fail with pride — and do so fast and cleanly. Maximise trial and error — by mastering the error part.
Avoid losers. If you hear someone use the words ‘impossible’, ‘never’, ‘too difficult’ too often, drop him or her from your social network. Never take ‘no’ for an answer (conversely, take most ‘yeses’ as ‘most probably’).
Don’t read newspapers for the news (just for the gossip and, of course, profiles of authors). The best filter to know if the news matters is if you hear it in cafes, restaurants... or (again) parties.
Hard work will get you a professorship or a BMW. You need both work and luck for a Booker, a Nobel or a private jet.
Answer e-mails from junior people before more senior ones. Junior people have further to go and tend to remember who slighted them.

Expand notes

The euro: how happy a birthday? - FT.com

Summary:
Mike Wickens (York). Argues introduction of euro has not achieved its goals. Inflation rates have not diverged, but ouput and inflation are not converging. Problem with a one-size-fits-all policy. In part due to inflexibility in fiscal policy imposed on members, in part due lack of labour mobility. Single market legislation has produced single market in goods and capital, but little progress in single labour market. Main difference with US or regions within e.g. UK. Need single labour market. But movement of labour in Europe causes tensions. Completing single labour market controversial and may deter countries like UK from joining. (Published: 05/06/08)

Notes:

ECB has maintained average eurozone inflation between 1.6 and 2.5 per cent since 2000
growth of prices and output

for EU as a whole: both about 15%

but: wide discrepancy among member states

Ireland: 31% and 44%
Germany: 5% and 11%
UK: 18% and 20%
the higher a country's inflation on joining the euro, the greater has been the price level rise thereafter

inflation convergence observed before the euro has not therefore continued since

How much of this is due to the "one-size-fits-all" monetary policy?

setting a single nominal interest rate for all eurozone countries implies that high inflation countries have a low - even a negative - real interest rate, while low inflation countries have a higher - and positive - real interest rate
the lower the real interest rate, the higher is economic activity and hence inflation

therefore, we would expect output levels and inflation rates to diverge

But as inflation rates have not diverged either, this explanation cannot be the whole story.
Having a more rapidly growing price level implies a loss of competitiveness.

This, together with higher output, may be expected to raise exports from lower to higher inflation countries, thereby reducing economic activity in high-inflation countries and increasing it in low inflation countries.
conventional view is that these effects will be strong enough to act as an automatic corrective to the divergence otherwise inherent in having a common monetary policy
has not happened
may have prevented inflation rates from diverging, but it has not resulted in inflation and output growth rates converging as required in a successful currency union

not fault of ECB: remit is aggregate euro area inflation, not that in member countries
what can be done?

short-term and long-term solution
short-term: countries need more flexibility in the conduct of their fiscal policy

only macro-economic policy instrument left to stabilise their economies in the short term is fiscal policy

control of their interest rate and their exchange rate given up

need ability to adopt different rules from those in the stability and growth pact
correct framework for fiscal policy is to tax-finance permanent expenditures and debt-finance temporary expenditures

non-cyclical expenditures, such as those on health and education, should be financed through taxation, but additional cyclical expenditures, like unemployment benefits, should be debt-financed

no matter the size of deficits in business cycle slowdowns, countries should be allowed to finance them through debt

provided the additional debt is paid off during the good times

long-term: raising productivity and completing the single market

more difficult to achieve and more controversial
Improving productivity requires using the eurozone's advantages in human capital to innovate in new products and processes.
This must be coupled with moving out of economic activities in which competitiveness has been lost and into new activities that give a temporary monopoly that is exploitable in world markets which would result in benefits to all countries.

single market legislation has helped produce a single market in goods and capital, but there is little or no progress in creating a single labour market
problems brought about by a one-size-fits-all monetary policy also apply to the states of the US and the regions of the UK but, because of labour mobility, are manageable
recent tensions brought about by recent movements of labour in Europe show that completing a single labour market would be highly controversial and might further deter the UK and other countries from joining

Expand notes

Thursday, June 5, 2008

Act now to prick the oil price bubble - FT.com

Summary:
Meghnad Desai (LSE) argues that high price of oil is due a speculative bubble, not related to supply and demand. No macro-economic factors to explain sharp rise in prices. Index and pension funds treating oil as an asset rather than commodity, with no intention of using it. Market not driven by supply and demand but simply by price expectations. Needs to be made less profitable in order to discourage this. Up to Group of Eight leading industrialised nations leaders to urge Nymex to implement this policy. (Published: 05/06/08)

Notes:

latest price rise has baffled many: what has happened to supply and demand to cause such a steep and sudden price rise?

Gordon Brown: "the cause is clear: growing demand and too little supply"

China and India are buying more oil.
Costs of exploration and extraction are going up.
Nigeria and Venezuela are causing anxieties about supply.

But: none of this is new

Nothing has happened in the real oil economy to justify such a sharp and steep rise in its price.

latest sharp upsurge in the price of oil most likely a speculative bubble rather than an outcome of market fundamentals

Soros: commodity index funds treating oil as an asset rather than a commodity to be bought and sold for use, thus creating a bubble
index funds and pension funds are investing in oil futures, not for direct use but as financial assets for profit
index funds and pension funds are neither buying oil nor selling it: they are passive investors in commodities

have invested $260bn (C169bn, GBP133bn) in commodity markets, compared with $13bn just five years ago. Much of this money is in oil.
this paper market is not driven by the pressures on demand and supply but entirely by price expectations

global economy is likely to be forced into a serious crisis if we do not explore the possibility that this is a bubble that needs to be burst quickly

best way to counter speculation is to make it less profitable.
protect the regular traders in the real oil economy

ie. those who intend to close their positions by making or taking delivery of oil)
charge them a lower margin than those who have no intention of plying the oil trade

purely financial traders must be made to pay a proper price for their speculation

can be done simply by increasing the margin that they have to put down to trade as open interest, from the current 7 per cent to about 50 per cent

up to the Group of Eight leading industrialised nations leaders to urge Nymex to implement this policy

no need for western governments to go down on their knees to Arab oil sheikhs, or to ration oil to the increasingly cash-strapped and angry consumers

Expand notes

Venturing Into Startup Life - Genome Technology

Summary:
VCs talking about current investment climate in life sciences (IPOs vs M&A) and describing investment approach and requirements. Need for big ideas, IP and strong management team. Also includes some business plan tips. (Published: 06/08)

Notes:

investing in life sciences has changed over last few years

used to be enough to have IP on a gene or a new method to form a company
no longer sufficient
venture funds trying to lessen risk in a less certain market
big movement away from funding academic innovation
funds pursuing lower risk approaches

eg. spin-out drugs from pharma companies

yet despite these changes, VCs still looking for the next great idea

VC capital attracted by life sciences has increased:

2006: $7.6b; 2007: $9.1b

as long as there's an exit strategy, interest will continue

life sciences IPO market has been pretty bad

2007(Q1): 7; 2008(Q1): 4

M&A market more interesting

pharmaceutical and medical device industries continue to acquire small companies and are paying pretty strong prices for them

question about how long this will continue

if it starts to drop of, then there's really rough times ahead for biotech industry

VC requirements

big ideas

not incremental approaches
got to really open a new way of thinking about a problem
risky is OK, just has to be very bold

intellectual property

idea has to be able to be covered by IP rights
want a technology that company can protect
so investors can recoup or expand upon funds put into creating the product
VCs can help out with protection

strength of management team

lot of energy, creativity and skill
some early stage VCs will set a management team up

VC approach

start

sources: looking at business plans, scouring literature, contacts

some begin with an unmet need and subsequently hunt for a technology

some start with thinking about the type of company they might want to invest in

getting going

from idea to point where more funding is needed: ~1.5 years
first step: talking science

learning about the science for months
educating oneselves, with company's help, about:

specifics of the technology in excruciating detail
company's prospects as a business
what company is going to require in order to be succesful

building financial model

tries to take needs and future plans of the potential customers into account (e.g. pharmaceutical or medical device companies)
helps investors assess how much funding the company will need

molding the mission of the company

taking scope of the whole field, especially competitors
company should ideally have a lot of different projects going on that are independent to spread the risk

need to think big about the opporunity

people

VC will find CEO and others to run the company
investors become members of the board

match-making and recruiting people to run the company

business plan best practices

being bold

need to think big; academics often think too small
has to be a big thing
cannot be incremental

assembling the best minds

big names in management section, if possible
big impact on investors if the leading people in the world are somehow involved

thinking broadly

take in full scope when describing market and competitive environment
many startup don't understand the full range of competitors

place yourself in shoes of potential customers:

what would they want and where else can they go to fulfill that need

don't define competition too narrowly

being realistic

when comparing company with other succesful companies, don't focus solely on the exceptional successes
people need to understand what is more likely the average outcome for a company
build a model based on hitting the average outcome as opposed to hitting the exceptional outcome

Expand notes

Quote of the Day

"Public speaking is the art of diluting a two-minute idea with a two-hour vocabulary." - Evan Esar

Expand notes

Wednesday, June 4, 2008

A party pooper’s guide to financial stability - FT.com

Summary:
Charles Goodhart (LSE) and Avinash Persaud proposing two devices to help regulators and supervisors play a useful counter-cyclical role: 1) amending supervisors' pay (rather than bankers directly); and a "simple framework" building on Basel II by raising capital adequacy requirements by a ratio linked to the growth of the value of bank assets, bank by bank. Should moderate excessive lending and build up reserves during booms. (Published: 04/06/08)

Notes:

Almost 12 months on from the start of the credit crunch and eight months since the run on the Northern Rock bank
developing consensus on what is to be done to make the financial system less vulnerable to crisis:

more disclosure, more regulation and reform of bankers’ compensation
largely the same consensus we reach after every crisis, ultimately to little effect

where there is a will there's a way?

financial supervisors had the wherewithal to do something about the party in the financial sector that was played out in full view of everyone between 2003 and 2006
they did not have the will to do it

William McChesney Martin (former chairman of fed): authorities should “remove the punch bowl before the party gets going”

but: parties are fun

difficult for underpaid supervisors to squeeze past and take away the bowl of punch when there are:

powerful and rich lenders, borrowers with seemingly worthy projects and politicians taking credit for the good times

some argue it is not regulators and supervisors but monetary policy committees that should perform the role of official party pooper

but: interest rates changes alone cannot deliver both price and financial stability:

asset bubbles often follow periods of price stability (US 1929; Japan 1990s; Asia 1997-98; subprime mortgages 2007-08).
moreover, the level of interest rates required to prick a bubble might eviscerate the rest of the economy

proposing two devices to strengthen the backbones of regulators and supervisors

amend supervisors’ pay

easier than aligning bankers’ bonuses to longer-term outcomes
large annual bonuses for supervisors that are withheld for five years and paid conditionally on successful supervision during this period

will be more willing to remove the punch in time – thereby limiting bankers’ bonuses in the first place

need independent assessment of supervisory success to avoid excessive regulatory zeal

raise Basel II capital adequacy requirements by a ratio linked to the growth of the value of bank assets

focusing on value will help lessen the pro-cyclicality of fair value, mark-to-market accounting and value-at-risk models.
each bank would have a basic allowance of asset growth

would be linked to

the inflation target
the long-run economic growth rate, and
some margin for structural changes in the bank lending/gross domestic product ratio

this formulation enables regulators’ financial stability committees better to link micro to macro stability
allowances would be different for small operations

growth in the value of bank assets would be measured as a weighted average of annual growth

to emphasise more recent activity, exponential weights can be used
growth above the basic allowance over the past 12 months would have a 50 per cent weight, growth over the preceding year would have a 25 per cent weight and so forth until 100 per cent is approximated.
regulatory capital adequacy requirements would be raised by 0.33 per cent for each 1 per cent excess growth in bank asset values.
If a bank grew its assets at a rate of 21 per cent above its allowance, its minimum capital requirement would rise from, say, 8 per cent to 15 per cent.

purpose is to moderate excessive lending and build up reserves during booms
should help supervisors act as a countervailing force to powerful procyclical forces

proposal is evolutionary, since it builds on Basel II and it provides a simple, transparent rule for supervisors to play a useful counter-cyclical role

but: they must be given better incentives to do so
have already seen the deleterious but powerful effects of banking bonuses

Why not use financial incentives for more socially useful behaviour

Expand notes

Government Sponsored Versus Private Venture Capital: Canadian Evidence - NBER Working Paper

Summary:
Paper investigating the relative performance of enterprises backed by government-sponsored venture capitalists and private venture capitalists. Results indicate that enterprises financed by government-sponsored venture capitalists underperform on a variety of criteria, including value-creation and innovation. Arises in part from a selection effect and in part from a treatment effect. Results cast doubt on the desirability of certain government interventions in the venture capital market. (Published: 05/08)

Notes:

Only abstract; paper requires purchasing.
Study focuses on a broader set of public policy objectives:

value-creation, innovation, and competition

Enterprises financed by government-sponsored venture capitalists underperform on a variety of criteria:

value-creation: as measured by the likelihood and size of IPOs and M&As
innovation: as measured by patents

Cause 1: selection effect

private venture capitalists have a higher quality threshold for investment than subsidized venture capitalists

Cause 2: treatment effect

subsidized venture capitalists crowd out private investment
subsidized venture capitalists provide less effective mentoring and other value-added skills

Expand notes

EU Backs US$1.5 Billion Research Program to Develop Hydrogen Cars - FuelCell Today

Summary:
European Union approved a 940 million-euro ($1.5 billion) research initiative to spur the development of hydrogen-powered cars, seeking to reduce air pollution and reliance on imported oil. The program aims to accelerate the commercialization of hydrogen and fuel-cell technologies, allowing "commercial takeoff" between 2010 and 2020. FuelCell Today Newsletter: "More than ever, funding for fuel cells is being made available by governments worldwide. The opportunity to bridge the gap between research into and commercialisation of fuel cell technology has perhaps never been greater." (Published: 02/06/08)

Notes:

Joint Technology Initiative (JTI)
940 million-euro ($1.5 billion) research initiative to spur the development of hydrogen-powered cars
50 percent financed by companies including Royal Dutch Shell Plc and Bayerische Motoren Werke AG and 50 percent funded by the EU over six years
aims to accelerate the commercialization of hydrogen and fuel-cell technologies, allowing "commercial takeoff" between 2010 and 2020
Existing market barriers include

the cost and durability of fuel cells,
the sustainable production of hydrogen
the safe distribution and storage of hydrogen.

The JTI aims to reduce time to market for hydrogen and fuel cells technologies by between 2 and 5 years
quicker impact on improving energy efficiency, security of supply, pollution, and on improving potential for reducing greenhouse gases
EU is creating public-private partnerships in research and development to help raise R&D spending to 3 percent of gross domestic product from 1.8 percent and bridge the gap with the U.S. and Japan
In the UK, the Technology Strategy Board has allocated an indicative amount of £4 million to fund highly innovative collaborative research proposals on components and materials for low impact buildings, something that fuel cells could be a good fit for
FuelCell Today Newsletter: "More than ever, funding for fuel cells is being made available by governments worldwide. The opportunity to bridge the gap between research into and commercialisation of fuel cell technology has perhaps never been greater."
See also: JTI website

Expand notes

There is no excuse for Britain not to join euro - FT.com

Summary:
Willem Buiter (LSE) says case for Britain adopting the euro has never been stronger. Macroeconomic stability, the defence of London's status as a global financial centre and the political logic of deeper European integration all call for the dumping of sterling and adoption of the euro. (Published: 02/06/08)

Notes:

case for the UK shedding sterling and adopting the euro has never been clearer
From a conventional macro-economic perspective, no reasonable argument for a small, highly open economy like Britain's to retain monetary independence

for economies with a high degree of international financial integration, the exchange rate does not act as a buffer against asymmetric shocks

i.e. permitting an easier adjustment of international relative prices than under an irrevocably fixed exchange rate.

instead it becomes a source of unnecessary noise and volatility.

best way to deal with asymmetric shocks is to smooth national consumption by increased portfolio diversification and cross-border labour mobility

international portfolio diversification is aided by the reduced exchange rate risk that comes with membership of the euro area.

joining Schengen, the European border-free travel area, would boost the ability of labour to adjust to economic shocks

UK's large financial and banking sector conducts much of its activity buying and selling financial instruments denominated in foreign currencies, not in sterling

UK has massive gross external liabilities and assets

well over 400 per cent of annual gross domestic product each

compared with less than 100 per cent for the US and 700 per cent for Iceland

UK as a giant hedge fund: highly leveraged entity borrowing shorter than it lends and invests

has a lot of short-maturity foreign-currency-denominated foreign liabilities and illiquid, non-sterling denominated foreign assets
not a bad way to make a living, but means country needs a lender of last resort and market-maker of last resort
has one for sterling-denominated financial instruments: Bank of England (after malfunctioning at the onset of the credit crisis in August 2007) now performs this role effectively
however, B of E cannot print euros, dollars, Swiss francs or yen

cannot be an effective lender of last resort, or market-maker of last resort, if UK banks find themselves unable to roll over their non-sterling-denominated short-term liabilities or unable to sell their foreign-currency-denominated assets in illiquid international wholesale markets

to deal with either problem, the Bank would be dependent on the goodwill of other central banks, through swaps and credit lines in foreign currencies

they would have to be willing to buy sterling when the markets are yelling: "sell it"
would be possible, but an (unnecessary) risk

main question is whether the UK is more like the US and euro area or like Iceland

more like Iceland:

only the US and the euro area have serious global reserve currencies, with about 63 per cent and 27 per cent of the global stock of reserves respectively.
Sterling, with about 5 per cent, no longer plays with the big boys and girls

countries that want a large, internationally active banking sector and financial system need a serious global reserve currency to provide the lender of last resort and market-maker of last resort services required to limit the risk of a bank run or liquidity crunch bringing down their banking system
it is possible to run a large financial sector with a local currency such as sterling or the Icelandic krona, but it involves taking an unnecessary and costly risk

sooner or later that risk will be reflected in the cost of capital and render the country uncompetitive

if London wants to remain the world's financial capital, there is only one choice for the UK: adopt the euro now and wonder why it did not do so in 1999

political arguments for joining the euro area:

future of Europe is federal and euro is a symbolic step towards deeper political integration
UK can continue acting as it has since the European Union (or its predecessor institutions) was created:

stand on the sidelines, snipe, join late and reluctantly and then moan about how things are turning out

or it could be at the heart of Europe, shaping its institutions
UK punches below its weight because it is not a full member of the EU: if you are not in the euro group, you do not count

Expand notes

Britain is Better Off Outside the Euro - FT.com

Summary:
Martin Wolf giving some reasons why Britain is better off outside the euro. Whether the UK meets arbitrary economic tests at a particular moment is irrelevant. What is right today may be wrong tomorrow. Britain needs the ability to increase short term interest rates in order to restrain the growth of credit. Exchange rate flexibility has not led to price instability. There is no evidence that being outside the eurozone has imposed a performance penalty upon the UK economy. Argument against joining mainly economical, but also part political. (Published: 29/05/08)

Notes:

Lex column last week: UK close to meeting the economic tests for joining; only obstacle to entry is political
Martin Wolf disagrees:

Whether UK meets arbitrary tests at a particular moment is irrelevant
What is right today may be wrong tomorrow.
If country is to join eurozone, its people must be willing to cope with the consequences forever, however unpleasant they may sometimes be.

At present exchange rates, entry looks more plausible than for the past 12 years

implied rate of old D-Mark against the pound was 2.46 on May 23

well below the rate at which sterling was put in the old exchange rate mechanism in 1990

Proponents of joining claim UK is paying price for staying outside euro zone

real central bank intervention rate has averaged 3.2 per cent in the UK since 1999, against just 1.4 per cent in Germany or even negative levels in Ireland and Spain
these relatively high short-term rates have also pushed longer-term rates above levels in the eurozone

Arguments not compelling
not long ago some argued that the fact that sterling had been so stable against the euro from early 2003 to late 2007 was a reason for joining

now people argue that sterling should join the eurozone because it is weak
all this shows is that the equilibrium exchange rate varies
the rate that made sense when the world was willing to finance the UK's property-related borrowing spree no longer does so today

high short-term real interest rates were needed to contain the growth of credit

if UK had been a member of the eurozone, with lower interest rates, both credit growth and the economy would have been stronger, domestic inflation higher and real short-term interest rates possibly even negative

would be no offsetting stimulus from the fall in the exchange rate as there is at the moment

sterling has fallen by about 14 per cent against the euro since last August
to achieve the same gain, Spain, now struggling with the end of a far bigger property-related boom, would need an annual rate of increase in unit labour costs a percentage point lower than in its eurozone competitors, for a good 15 years

advantages of exchange-rate flexibility need not go with worse price stability

between 1998 and 2008, consumer prices will have risen by just 18 per cent in the UK, the same amount as in Germany and below the 20 per cent rise in France and 26 per cent in Italy

because sterling has fallen against the euro, the domestic price level will rise in the UK relative to the eurozone

provided the Bank of England is determined to prevent pass-through to domestically determined prices, this should not endanger low inflation to any significant extent

no evidence that being outside the eurozone has imposed a performance penalty upon the UK economy

between the first quarter of 1999 and the first quarter of 2008, UK economy expanded by 28 per cent, against 21 per cent in the eurozone as a whole and 16 per cent in Germany
no evidence that Emu has improved the economic dynamism of its members

if anything, membership seems to have reduced the pressures for reform.

The proposition then is fundamentally an economic one:

remaining outside the euro preserves the safety valve of currency flexibility, while losing nothing in aggregate economic performance.
Being outside has not even hurt London's position as a financial centre.

Big proviso is that the Bank of England continues to fulfil its mandate

might now require a period of much slower growth, or even a recession.
but long-lasting slowdowns in particular economies are just as likely (probably even more likely) inside the eurozone

Proposition is also political:

inside a currency union, years of slow growth will occasionally be needed if relative costs are to come back into line
there are countries in which it is possible for politicians to sell this proposition.

Spain and Italy may be among them.
Not UK.

Expand notes

Tuesday, June 3, 2008

China and Wal-Mart: the champions of equality - FT.com

Summary:
Media claims that Wal-Mart and China are having a destructinve effect on local businesses are ubiquitous. Christian Broda (University of Chicago) argues that China and Wal-Mart benefit the poor far more than the rich. As a result inequality between the rich and the poor has actually decreased in the last decade, rather than increased. Trading allows everyone, and especially the poor, to buy things that they could not otherwise afford. (Published: 03/06/08)

Notes:

Media reports of job losses to China and the destructive effect of Wal-Mart on local businesses are ubiquitous
Lawrence Summers and Martin Wolf: recently highlighted the dangers of having high-income countries turn against globalisation
Not the case that inequality in these high-income countries has risen as a result of globalisation

How rich you are depends on two things

how much money you have

how much the goods you buy cost

Unfortunately the conventional wisdom on US inequality is based on official measures that look only at the first half, the income differential
National statistics ignore the fact that inflation affects people in different income groups unevenly because the rich and poor consume different baskets of goods.
Inflation of the richest 10 per cent of US households has been 6 percentage points higher than that of the poorest 10 per cent in the period 1994-2005

Why has inflation for the poor been lower than that for the rich?

In large part it is because of China and Wal-Mart.

Poor families in America spend a larger share of their income on goods whose prices are directly affected by trade – such as clothing and food – than wealthier families
The higher a person’s income, the more they spend on services, which are less subject to competition from abroad

China

Prices of consumer goods in US stores have fallen most heavily in sectors where the Chinese presence has increased most (canned food, cotton shirts,...: negative inflation)

In sectors where there is no Chinese presence, inflation has been more than 20 per cent

Wal-Mart

Superstores sell the same products as traditional shops but at much lower prices.
Today the poor buy roughly twice as much of their non-durable goods in these stores as the rich do.
Poor consumers have therefore been the biggest beneficiaries of Wal-Mart’s coming to a town.

really worrying that, in spite of these facts, we have had a backlash against China and Wal-Mart in the US
trade sceptics: no point in buying cheaper goods if you have lost your job

but America’s unemployment rate is about 5 per cent, close to its record low

Trading allows everyone, and especially the poor, to buy things that they could not otherwise afford.

Expand notes

Solving Pump Pain - New York Post

Summary:
Jerry Taylor (Cato Institute) suggesting four things the US Congress could do in order to bring down the price of oil: 1) Opening up key areas for oil and gas exploration and development; 2) Opening up the West to oil-shale development; 3) Emptying out the Strategic Petroleum Reserve; and 4) Suspending (or ending) federal rules that force refiners to use only low-sulfur oil to make gasoline and diesel. (Published: 02/06/08)

Notes:

skyrocketing energy prices:

gasoline price at pump, now: $3.94/gallon; 5 years ago: $1.43/gallon

home electricity, now: 10.31c/kWh; 5 years ago: 5.43c/kWh

"we'll keep on finding ways to save as prices stay high"

driving less, buying fuel-efficient cars, ...

demand side: should government mandate more conservatism?

No
too much" conservation is as economically harmful as "too little"

only thing government should do is ensuring that prices are "right"

ie. reflecting total costs

mainly an issue for electricity, where retail power prices typically bear little relation to wholesale prices

governments need to encourage real-time pricing of electricity - so that consumers will get the signal to, for example, run the clothes dryer at night, when power is cheaper.

supply side: four things government could do:

Open up key areas for oil and gas exploration and development.

Arctic National Wildlife Refuge and 85 percent the outer continental shelf are currently stated "off-limits" by Washington
absurd and hypocrytical for our politicians to fulminate about the need for more oil production from OPEC when they won't lift a finger to increase oil production here at home
will take years to get these fields on-line: all the more reason to start now

by the time those new fields would be producing, global oil production will probably be about 100 million barrels per day
optimistically, the fields would yield about 3 million more barrels a day - for a long-run cut in the price of crude of about 3 percent.

however, will do more for natural-gas prices than for oil
gas prices are highly sensitive to regional (rather than global) supply and demand issues, so we'd likely see far greater reductions in electricity prices

Open up the West to oil-shale development.

US has three times more petroleum locked up in shale rock than Saudi Arabia has in all its proved reserves
costly to extract

oil prices need to be at at about $95/barrel to allow a reasonable profit from extracting oil from Rocky Mountain shale

probably profitable now
problem: mostly on federal land; Washington has so far said, "Hands off!"
Environmentalists object to both these first two ideas

insist that the wilderness that would be despoiled by energy extraction is worth more than the energy itself
nonsense - faith masquerading as fact

How much something is worth is determined by how much people are willing to pay for it

Empty out the Strategic Petroleum Reserve.

holds 700 million barrels of oil
draining it could add add up to 4.3 billion barrels of crude a day to the market for about five months
if the theories of a speculator-created "oil bubble" are true, it would pop the bubble and send prices tumbling
national-security risk is myth

as long as we're willing to pay market prices for crude oil, we can have all the oil we want - embargo or no embargo.

Suspend (or end) federal rules that force refiners to use only low-sulfur oil to make gasoline and diesel.

best short-term fix for high gas prices
refiners once relatively free to use heavy crude to make transportation fuel
today: environmental regulations make it difficult and costly
there's a (relative) glut of heavy crude right now
light-crude oil markets are incredibly tight, with no real excess production capacity.
heavy-crude markets are robust, with plenty of crude going unsold for lack of buyers
suspending low-sulfur rules would bring those heavy crudes into the transportation fuels

Expand notes

Monday, June 2, 2008

Exxon Rejects Proposals Backed by Rockefellers - NYTimes.com

Summary:
Report of a "robust debate" among shareholders at an Exxon Mobil annual meeting concerning the company's policy toward renewable energy and global warming. A significant portion wants the company to invest more profits in alternative sources of energy. This appears to be a case of shareholders calling for more Corporate Social Responsibility, at the expense of profitability. Shareholders putting pressure on world's largest independent oil company to invest in renewable energy. (Published: 29/05/08)

Notes:

"The vote was announced after a robust debate among shareholders, those who defended management as a great engine for profits and those who argued that a narrow focus on developing oil and gas as energy sources would threaten the global environment and ultimately the company's financial health."
"Exxon Mobil is acting like a dinosaur, not adopting to a changing environment" - New York shareholder
"We're faced with a profound moral and business challenge" - New Jersey shareholder
Exxon's CEO, Rex Tillerson: "We're focused on safely and reliably meeting the growing energy demand while working to reduce our impact on the environment. [...] A lot of climate policy is still up for debate. [...] Society must be realistic about the economic impact of policies aimed at curbing the burning of fossil fuels. [...] Exxon has to keep focused on its mission of developing more oil and gas reserves [...] Oil and gas will remain the primary fuel source for decades to come. [...] But ... Exxon Mobil will be at the forefront of technological change in producing alternative energy sources."
While Exxon has invested more in renewable fuel research [under Tillerson, as compared to under Lee Raymond], it is far less public about those policies than major rivals like BP, Chevron and Royal Dutch Shell.
Calls for role of CEO and Chairman to be separated

Peter O'Neill (Rockefeller descendant and PE investor): an independent board led by a chairman who was not chief executive would help the company "keep an open mind" and "take long-term steps" not only to work for a cleaner environment but also to take important risks to find more oil reserves.
Rockerfeller family members: company needs to show more leadership in developing alternative fuel sources that will combat global warming

Others backed and have co-sponsored three other resolutions that Exxon study the impact of global warming on poor countries, reduce company emissions of greenhouse gases and do more research on renewable energy sources like wind turbines and solar panels.
Neva Rockefeller Goodwin: "These increased concentrations of CO2 in the atmosphere will cause weather disasters that will work against everyone's best hope for robust development in emerging countries while also increasing the vulnerability of the poor in the rich countries. It will also impact the global economy."
Under Exxon rules, proxy resolutions are non-binding unless they have the support of the board. But company executives say they must take the opinions of shareholders seriously, especially when they represent a majority of votes taken.

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Exxon Rejects Proposals Backed by Rockefellers - NYTimes.com

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