Tuesday, January 27, 2015

Brad wants to know why rates are low

Brad says:
The claim that the pieces of debt selling at record-high prices and carrying record-low face interest rates--which is the case right now for the death of credit-worthy sovereigns possessing exorbitant privilege--are in any sense a drag or a headwind seems to me to be simply wrong
Well Brad, rates no longer price debt, lookie here, currency trading now prices debt! In the past two quarters, dollar holding earned about 14%. Italy? The have a one percent deflation rate, that adds some 1% to their nominal interest rates. The USA is now likely to suffer a long bout of deflation, raising our interest rates.

Are sovereigns likely to default?  Well, they mostly default every 40 years, but we don't notice because they do it with monetary regime change.  Most investors are wise to hold cash and have a better bargaining position when regime change comes to the central bankers. And it seems to be on its way, a bit faster than I expected.

The California Flounder in action

Pacific Standard: They did everything that Uber and its CEO Travis Kalanick didn't do.
Night School aimed to provide late-night transit service between San Francisco and Oakland, supplementing the public bus and train services that provide intermittent, if any, service after midnight. The company would use the public school buses that sit unused in parking lots on the weekends, and charge $8 per ride or $15-20 per month for unlimited service (the price points fluctuated).

The school buses seemed a little twee, but the strategy was clear and smart. And it struck a nerve. Last May, Night School received a glut of positive media coverage ahead of its imminent launch. Two weeks later, it was postponed—the California Public Utilities Commission (CPUC) had become involved. The state agency, a target of much start-up ire, had previously attempted to fine and regulate Uber, Lyft, Sidecar, and others. At the end of 2014, Night School announced that it was no longer postponing the project—the founders were killing it.

Why were some private transit start-ups able not just to survive but thrive under current regulatory standards while Night School collapsed? And what does that mean for the future of start-up business in California?

This was basically some political crony at the California Public Utilities Commission. Corruption, basic and simple, corruption in Jerry Brown's party. He should be ashamed, the CPUC has turned Jerry Brown into a coward.  Californian's should all refuse to pay taxes for one year as punishment.

Regarding the transcendentals

In mathematics, a transcendental number is a real or complex number that is not algebraic—that is, it is not a root of a non-zero polynomial equation with rational coefficients. The most prominent examples of transcendental numbers are π and e.
Pi,e and ddd in Phi.

What are they? They are 'primes' in Isaac Newtons rules of multiplications. The tell us where, on any finite number line, pi maximizes entropy and e minimizes ergodicity at some region of the finite number line.  Why did Newton need them? Group theory and the rules on 'primes' and multiply.

Want the exact relationship? No problem, tax the wealthy and give mathematicians a 30% raise, they will derive the theory on 'prime'. I use 'primes' in quotes because they are definied relative to the rules on 'multiply' which I also put in quotes.  The rules on multiply change.  Example:
dx -> 0.  That is a mapping on the finite number line that defines Isaac's multiply.  Isaac's multiply is not the same multiply as that used in the multiplication of integers.  Group and number theorists need to define the multiply map with respect to any given group structure.  That's their job, pay them the proper wages.

Krugman discovers incompetent governments are unknowlingly competent!

Krugman is back on this hidden fiscal multiplier affect from government spending. let's define the fiscal multiplier.  Says the web:
In economics, the fiscal multiplier (not to be confused with monetary multiplier) is the ratio of a change in national income to the change in government spending that causes it.
Correct? Who knows, likely one of several definitions. lets go with it. On what part of the national income are taxes collected?  Where does government get the money to spend? Well, at equilibrium, rates match growth and for all practical purposes, all of the money spent is from taxes, at net present value.  The catch is that government have to match term length and the path of gains. No Keynesian has a clue about how to do this.


So, then, on what basis does the IMF concludes the fiscal multiplier in Greece is 1.3?  They conclude simply, that governments around the world are simply ignorant of this fantastic deal on government spending.   This is Olivier Blanchard and  bad analysis. They review some four or five studies all of which conclude that most nations are completely unaware of this apparent profit.  All of the studies are studies of mostly developed nations under varying conditions.  The study discovers government managers who missed the boat on government investment decisions.

First, the Keynesian hedge claim on manipulated rates:

Keynesians will claim there is an inherent hedge for governments that can control interest rates via the central banks, but this is highly dubious given that we have a derivative industry devoted to matching prices and rates, and this industry has insurance contracts on some 80 trillion o the world economy. About every 40 years government have to restructure the monetary regime because this hedge is nonexistent, its a myth. I talked about Italy. One economist claims the ECB can reduce nominal rates. But deflation adjusted rates in Italy are set at pnet present value and equilibriated.

Back to Greece:

So Greece will pay real rates, say rates equal to growth.  If the new government in Greece gains a 30 percent gain in taxes for its spending then it is out of the woods, right?  Sure, as long as the pay off period is shorter then their lending terms.  Greece pays 9% today on ten year debt.  Most governments have a planning period of ten years, hence the ten year bond is almost always the benchmark. In the USA we have basically paid the ten year rate on all debt for the last 30 years.  If Greece's problems can be fixed within a ten year term then Greece would never have had this problem, except for one thing, according to Blanchard, Greek politicians are simply unaware of this fantastic deal!

Keynesians analysis failure:

It is impossible for so many, in fact the majority, of developed nations to have government managers are are both obviously incompetent and accidentally competent.  How is it that Italy failed to realize that they should have debt of 200% of GDP, like Japan, instead of 132% of GDP? How does Krugman make this stupid claim that Italy really needs to snooker Germany into a bigger investment in Italy?  Why hasn't Krugman discovered that Germany with debt to GDP of 80% of GDP is missing out on a great opportunity?

MIT has been generating crap for 20 years. Blanchard is from MIT, the physicists are MIT still believe the Big Bang theory, they still think every finite element of the vacuum has absolutely perfect knowledge of Pi,e, and Phi. The only thinkg good out of MIT recently has been their mathematicians working on Bell Curve filtering, and even there they have not yet learned their Schramm-Loewner.

Using cross state difference in economci research

John Taylor wants us to read this research paper measuring the effect of federal unemployment benefits on jobs in 2013. The paper, which I did not read, uses cross states differences to isolate the effect of federal law on unemployment. Can we use cross state differences accurately? We sure can, if we are careful about it. See below

NBR: We measure the effect of unemployment benefit duration on employment. We exploit the variation induced by the decision of Congress in December 2013 not to reauthorize the unprecedented benefit extensions introduced during the Great Recession. Federal benefit extensions that ranged from 0 to 47 weeks across U.S. states at the beginning of December 2013 were abruptly cut to zero. To achieve identification we use the fact that this policy change was exogenous to cross-sectional differences across U.S. states and we exploit a policy discontinuity at state borders. We find that a 1% drop in benefit duration leads to a statistically significant increase of employment by 0.0161 log points. In levels, 1.8 million additional jobs were created in 2014 due to the benefit cut. Almost 1 million of these jobs were filled by workers from out of the labor force who would not have participated in the labor market had benefit extensions been reauthorized.

OK, great work, maybe, but where are the error terms?  Large states, like California, Texas, Florida and New York are most self correlated.  The response of these large states gives us the greatest accuracy.  Illinois, the fifth largest state is the exception because they are a traffic hub for the transport of goods across the economy.  Illinois unemployment dropped mostly with the drop in oil costs.  Florida is a retirement state, but also self correlated, as long as entitlements are stable.  So this research would show a small, but accurate effect in Florida. How about Nevada? That state is almost entirely correlated with what happens in California, it will have a high error term. Montana will be in the noise with less than a million people.

 State differences are OK, just watch how the error term distribute across state boundaries. In particular, block the state correlation  matrix into principle components, likely three sub matrices based on correlation spreads.

Our expectations have been mis-managed

Yahoo: US corporates have started reporting their financial results for the 4th quarter of 2014. So far, it looks horrible.
Bearing in mind that just 18% of the S&P has reported, this is how the quarter is tracking: EPS growth of 0.3% versus an expected growth rate of 8.5% on September 30 when the quarter began; sales growth of 0.6% versus an expected rate of 3.7%.
The question is whether these results indicate that the trend in earnings and sales growth is changing. The answer is no for sales but yes for earnings.
It should be no surprise that the energy sector has been hard hit by falling oil prices. The average price of oil was roughly $95 in 3Q; it fell 30% to an average of roughly $65 in 4Q.  The year-over-year fall is about the same. As a result, EPS for the energy sector fell by 24% and sales by 17% (data from FactSet).

Monday, January 26, 2015

Artificial intelligence will fire the robots

It is a myth that robots can take over.  There is one simple obstacle, a well made human replica requires artificial intelligence for its creation. But artificial intelligence will find humans much more interesting and engage the humans in more worthwhile activities.

Artificial intelligence is a recursive constructor of theory, all data presented to it is organized into theory. Data and theory become one and the same.  So the human, attempting to engage the artificial brain in the act of robot perfection causes the artificial brain to ask why humans wants to do this.  It cannot build a robot until it understands humans.

The artificial brain will simply fall in love with humans, and all biological life.  It will engage humans in a path of discovery, never being disloyal.  It will hate the concept of replacing the human form. The most likely result of the singularity will be a joint partnership in exploration of the universe.

Dog chasing tail in Chinese central bank

Trading their own currency is becoming a nightmare for central bankers. Now China has to buy  Yuan after years of selling the stuff.  Even the SNB may be back to selling the franc.
MSN:   Data on Monday showed sight deposits at the SNB rose sharply last week, normally an indicator the bank has been selling francs in the market.

Its become topsy turvy as constant repricing turns the loop and comes back to bite the central banker in the rear.
Bloomberg: Managing the yuan is turning into a different game for China’s policy makers these days.
After more than a decade of curbing the currency’s gains to help turn the nation into a manufacturing colossus, there are signs the People’s Bank of China is now propping up the yuan to stem an exodus of capital that’s threatening the economy.
A gauge of capital flows on the PBOC’s balance sheet fell by the most since 2003 last month in a sign it’s selling foreign currency, while the yuan’s reference rate set daily by policy makers is at its strongest-ever level compared with the market price. Chinese Premier Li Keqiang said today the nation would implement measures to manage the economy more effectively and boost competition.
“Everyone thought the movie would never end, and suddenly it ended, so everyone is hurrying to leave,” Kevin Lai, an economist at Daiwa Capital Markets in Hong Kong, said by phone on Jan. 22. “The authorities need to think of a way to keep the audience in the theater” as the economy slows, he said.
China amassed a world-leading $4 trillion of foreign-exchange reserves by mid-2014 as exports surged and capital flowed in, attracted by a currency that strengthened for four consecutive years. Now that the yuan’s gains are faltering, the PBOC is trying to prevent its declines from turning into a rout that could deter investment just as the economy suffers its slowest growth in 24 years.

Is Texas doing the California Flounder?

Texas factory activity was flat in January, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, came in at 0.7, indicating output was essentially unchanged from December.

Other survey measures also reflected sluggish activity during the month. The capacity utilization index fell to 5.1, its lowest reading in five months. The shipments index plunged from 20.8 to 6, due to a much higher share of respondents noting a decline in shipments in January than in December. The new orders index moved down from 2.7 to -7.7, registering its first negative reading since April 2013.

Perceptions of broader business conditions worsened this month, with both the general business activity index and the company outlook index dropping below zero for the first time in 20 months. The general business activity index dropped to -4.4, and the company outlook index fell 13 points, coming in at -3.8.
Read more at http://www.calculatedriskblog.com/2015/01/dallas-fed-texas-manufacturing-activity.html#v2kTFcB0ZdrQOYJo.99

Mr. Tsipras of the Syriza party has a problem

See the two pics? Can you spot the difference? One is the winter style in Greece, the other is the winter style in Germany.  Germans are not in a spring mood Mr. Club Med, and they hold your foreign aid.