Tuesday, December 8, 2009

Tuesday, December 1, 2009

This Time It's Different

Whenever someone says "this time it's different," especially in regards to some sort of investment strategy or new business paradigm, it's safe to assume that this person is either a) drinking the kool-aid, b) a moron, or c) both. Please refer to the current housing situation in Souther California if you have any questions.

Of course, now that I've made a sweeping generality, it should be apparent that I'm about to point out the exception. Yes, there is one thing about the housing boom and bust that's different this time. But it's not a good development at all.

Unlike in recessions past, homeowners have recently been quite willing to walk away from their mortgages as soon as the loans are underwater. "The hit to my credit rating," they rationalize, "is nowhere near as bad as throwing away hundreds of thousands of dollars. In 5 years my credit score will be fine, but it could take decades for the price of my house to recover." Now, a professor at the University of Arizona law school has written a paper that encourages people to do just that - walk away.

From a simplistic view, this makes a lot of sense. Yes, it's rational for you to walk away from a house that's badly underwater. It's also rational for the banks to jack up the rate on mortgages to mitigate their losses next time:

Lewis Ranieri, chief executive of several major mortgage-related companies and one of the pioneers of the mortgage securities industry, called White's entire argument "incredibly irresponsible and misinformed." Not only is the professor urging consumers to break legally binding contracts, Ranieri said, but if large numbers of them did so it would send home mortgage rates soaring and "tear apart the very basis" upon which mortgage lending rests -- the understanding that borrowers will honor their commitments and pay back the money they borrowed.
Yes, that's the same Lew Ranieri you may have read about before.

If buyers are willing to walk away from their mortgages at the drop of a hat, the result will be an adversarial relationship between the banks and the borrowers. The lenders' philosophy will change from "how do I get this person into a house" to "how do I make sure this person doesn't screw me." Mortgage rates will rise, higher down payments will be required, and far fewer homebuyers will be considered creditworthy. Unles the borrower has some major skin in the game, there's no way they're getting a loan. Ironically, it'll be the same banks that are less willing to lend that will be stuck sitting on too many empty houses. But that won't matter to the banks - they'll be so fearful of even more people defaulting that they'd rather sit on an empty house than write a mortgage to anyone with less than pristine credit.

Taken to the extreme, this will lead to a permanent renting-class in the country's major cities, since far fewer people will be able to afford the hefty downpayments and higher monthly charges. Ironic that the attempt to make home ownership possible will result in putting that dream out of reach for so many.

Monday, November 23, 2009

The Ups and Downs of Farmland

In an interesting juxtaposition, the NY Times this Sunday has two articles which show the attractiveness of farmland as an investment, and the perils.

Saturday, November 21, 2009

Too Big To Fail - First Impressions

Earlier tonight I finished reading Too Big To Fail, Andrew Ross Sorkin's book on the financial crisis of late 2008 and early 2009. Overall I was very impressed with the level of detail; Sorkin certainly has his sources.

About midway through the book I was struck by the realization that Ben Bernanke apparently played an extremely minor role in resolving the crisis, despite his position as Fed Chairman. Rather, it was NY Fed President Tim Geithner who worked along with Treasury Secretary Hank Paulson to save the financial world. Bernanke, as portrayed by Sorkin, was often uninvolved and occasionally uninformed. I got the impression that, once the big decisions were made, Bernanke would be called in for the meetings with Wall Street or Congress to lend credibility by his mere presence.

On one hand, this makes some sense. Bernanke is an academic, and has no real experience dealing with Wall Street. (From experience, I can say that very few financial academics do know what really goes on in the financial world. In fact, many of their core theories can only function in an environment that I would charitably describe as "bizarro-world.") On the other hand, there may not be a single person alive who is more knowledgeable about economic depressions. Bernanke might not have known the intricacies of the banking sector, but he certainly knew the importance of keeping that sector afloat.

Ultimately, the massive panic that took down AIG and Lehman was financial, not economic. The difference is subtle but non-trivial. Further, many of the solutions devised by Paulson and Geithner were extremely time-sensitive. I knew Morgan Stanley and Goldman Sachs were in serious trouble, but I did not know that at one point they were literally hours away from demise. Geithner and Paulson were aware of this and needed to act. It's a credit to Bernanke that, presumably out of his depth, he was comfortable delegating enough responsibility to Geithner to allow him to save the system. Were a more politically-minded individual running the Fed, we might not be here today.

Friday, November 13, 2009

Vegas Sportsbooks Feeling the Pain

This article is a bit old, but is very interesting. I've always suspected that the Vegas sportsbook odds allowed for inefficiencies, and my gut feeling has been that the mispricing had to do with the blowouts.

I've always wanted to try to build a prediction model for football matchups, but never had the time or hard data. After reading this, I'm once again intrigued.

Tuesday, November 3, 2009

More Japan

Ambrose Evans-Pritchard of the UK Daily Telegraph jumps on the Japan-bashing bandwagon in his latest column. Citing a dramatic increase in Japanese Sovereign CDS, a massive debt/GDP ratio, and miserable performance from the BoJ, Evans-Pritchard sees a real possibility of a Japanese default.

"The debt situation is irrecoverable," said Carl Weinberg from High Frequency Economics. "I don't see any orderly way out of this. They will not be able to fund their deficit. There will be a fiscal shutdown, a pension haircut, and bank failures that will rock the world. It is criminally negligent that rating agencies are not blowing the whistle on this."

While I agree that Japan's situation is precarious, I do want to nitpick on one minor point. The spike in the Japanese Sov CDS wasn't due to a sudden fear of default per se. Rather, it was more a result of David Einhorn bashing both Japan and the ratings agencies at the Value Investors Conference 2 weeks ago:

My firm recently met with a Moody’s sovereign risk team covering twenty countries in Asia and the Middle East. They have only four professionals covering the entire region. Moody’s does not have a long-term quantitative model that incorporates changes in the population, incomes, expected tax rates, and so forth. They use a short-term outlook – only 12-18 months – to analyze data to assess countries’ abilities to finance themselves. Moody’s makes five-year medium-term qualitative assessments for each country, but does not appear to do any long-term quantitative or critical work.

Their main role, again, appears to be to tell everyone that things are fine, until a real crisis emerges at which point they will pile-on credit downgrades at the least opportune moment, making a difficult situation even more difficult for the authorities to manage.

This statement about Moody's was directly related to a discussion of Japan's economic woes. It's worth reading the whole speech to get the proper context. In fact, it's worth reading the whole speech, period. (I had wanted to post Einhorn's comments a couple of weeks ago when I first read them, but I didn't have a link for it at the time, and then got distracted by the Galleon stuff.)

Einhorn gave his speech on Oct 19th. The Japanese CDS started to skyrocket on Oct 20th. This is not a coincidence - the VIC notes were emailed all over the street by the end of the day.

Regardless of who said what first, the point here is that Japan is in trouble, and people are starting to notice.

Wednesday, October 28, 2009

Chris Wood Gets The Vapors

Chris Wood of CLSA writes in the WSJ:

The reality of an increasingly command-driven economy in America means that government policy is likely to become the key determinant of where investors should place their money. For example, the near-term prospects for the housing market in the U.S. will be strongly influenced by whether the federal government extends its first-time home-buyer tax credit when it expires in November. Like cash for clunkers with autos, the risk is that such a program is simply buying demand from the future.

He's concerned that the increasingly hands-on intervention in industry by the US Governement will lead us into a liquidity trap a la Japan's Lost Decade. I'm not sure I totally agree with him; Japan's liquidity trap was due to a flight to quality - institutional investors ran to JGBs because Japanese corporations were way overleveraged. Today, it's the US Government that is stretched too thin. I wouldn't count out stagflation as a possible outcome rather than deflation.

Liquidity trap or not, I thought this was worth repeating:

This is why Wall Street should make the most of the rally in U.S. stocks while it lasts. The next bubble in asset markets will not be in the West but in emerging Asia, led by China. The irony is that the more anaemic the Western recovery proves to be, the longer it will take for Western interest rates to normalize and the bigger the resulting asset bubble in Asia. Emerging Asia, not the U.S. consumer, will be the prime beneficiary of the Fed's easy money policy.

Go read the whole thing - it's worth it.

And, for those of you out there who didn't get the title of the post:
The Vapors - Turning Japanese (Sorry, no embedding.)

Friday, October 16, 2009

Master Of The Rolodex

Raj Rajaratnam, the founder of hedge fund Galleon Group, was arrested this morning for insider trading. According to prosecutors, Rajaratnam received tips from other hedge fund managers, corporate executives including employees of IBM and Intel, a McKinsey consultant, and former employees of Bear Stearns. (What is it with these ex-Bear guys and insider trading?) Rajaratnam's fund is alleged to have profited to the tune of $17 million through these tips. I think there's a lot more to come. The size of the alleged scheme doesn't make sense relative to the rest of the facts.

Anyone who's worked on Wall Street is told, from the get-go, that insider trading is one of the deadliest of sins. If you are caught, and you WILL get caught, you will go to jail, and you will never work in the industry again. Ever. You will also have to pay back all the money you illicitly gained, plus hefty penalties. You're regularly reminded of this through stern lectures from your compliance officer, presentations made by outside counsel, and by the occasional front-page article like the one we saw today. The SEC is ever-vigilant, we are told. They investigate the slightest hiccup in trading volumes, and do not stop until they get their man.

The reality isn't so simple. Work on the street long enough, and you'll realize that insider trading is pretty easy to commit. People talk. They say things in elevators or in hallways when they think nobody is listening. They leave papers lying around all the time that contains sensitive information. (Bud Fox in Wall Street totally had the right idea, btw. The fact that the cleaning ladies in my office don't drive Bentleys says a lot about either the quality of their character or a significant language barrier.)

What deters most people from acting on this inside information isn't the fear of the SEC directly. Rather, it's a cost-benefit analysis. If I put on a huge position in a stock just days before it's taken over, my account would be red-flagged in an instant. There's no chance of getting away with it. The only chance of success, as it were, would be to put on a position that's small enough to fly under the SEC's radar. And here's where the system works - I'm just not going to bother. There's no point in risking my entire career over a profit of maybe $20k. Most people on the street earn ten times that in a year, often more. Even if you're 99% certain you'll never get caught, that 1% chance is still more costly than the PV of a successful Wall Street career.

Getting back to the day's news - this is what doesn't make sense to me. Why would Rajaratnam risk his reputation, his career, and his freedom, over such a small amount of money? The guy is a billionaire. $17 million doesn't move the needle for a guy like Rajaratnam. And, assuming he traded the stocks in question through is fund, rather than in a personal account, he'd personally take home only a fraction of that amount.

I suspect these insider trading profits are a lot larger than what Rajaratnam has thus-far been charged with. The prosecutor has already hinted at this according to Bloomberg: "The prosecutor said there’s additional evidence and may be more charges against him and that the case is “overwhelming.” " I'm also suspicious that Rajaratnam would be worried enough about a $17 million case that he would consider fleeing the country, as was implied in an earlier WSJ article:

In court documents, prosecutors said Mr. Rajaratnam had expressed to another individual that he believed a former Galleon Group employee was wearing a wire and that Mr. Rajaratnam had purchased a plane ticket to fly to London on Friday from New York's John F. Kennedy International Airport.

So, it sounds like Rajaratnam was onto the Feds, and the prosecutor had to act with what he had before Rajaratnam could leave the country.

I'd keep an eye on this case - I think we may see some much bigger numbers, and potentially a few more hedge funds dragged into the mix.

Wednesday, October 14, 2009

Now That's Ballsy

Apparently, Saudi Arabia is trying to get compensated for lower oil consumption as a result of new global environmental initiatives. This pretty much sums up my opinion:

“It is like the tobacco industry asking for compensation for lost revenues as a part of a settlement to address the health risks of smoking,” said Jake Schmidt, the international climate policy director at the Natural Resources Defense Council. “The worst of this racket is that they have held up progress on supporting adaptation funding for the most vulnerable for years because of this demand.”

I'd actually be very interested to hear the Saudis' methodology for calculating "fair" compensation. It should be possible, given this model, to calculate the implied price of oil that Saudi Arabia considers to be justified. Armed with that data, the rest of the world should be able to ask some very interesting and potentially embarassing questions about Saudi oil production policies. I'm very curious...

Tuesday, October 6, 2009

Dollar Demise

This article from The Independent entitled The Demise of the Dollar has been circulating around the Asian trading desks tonight. The story, as best as I can tell, is that China, Japan, France, Russia, Brazil, and several Gulf States are secretly meeting to create a new currency basket with the intention of moving crude oil off of USD pricing. Such a move, as the article's headline dramatically implies, would be the end of the dollar's dominance as the premier currency of international trade.

I was a bit torn on whether or not to post anything about it. On one hand, it's getting a lot of traction, (at least in Japan and Hong Kong.) On the other hand, it's sensational journalism - long on alarmism and short on detail. And it's poorly written, to boot. In the end, I decided to outline a few salient points as to why I think this article is bogus.

To wit:

  • There should be no surprise that the major players in the global economy are considering an alternative to the dollar. I'd wager that even the US itself is working out contingency plans for Euro-denominated crude. Given the massive stimulus packages and Wall Street bailouts of 2008 and 2009, the possibility of a significant dollar devaluation is very real. I'd be more shocked if most countries weren't considering the alternatives.

  • China has a huge long USD position through its ownership of US Treasuries. Any drastic move to weaken the dollar is going to hurt China more than it will help.

  • Japan and France are both very strong allies of the US. Japan is not particularly close to China; Russia is not particularly close to France. The Gulf States don't always agree internally, and should not be considered a bloc. Putting together an agreement would not be easy.

  • It's one thing to have governments agree to create a currency basket. It's another thing entirely to get private corporations on board. I'd be a lot more concerned if this consortium included ExxonMobil, BP, and ChevronTexaco.

  • Buried at the end of the article, we learn that the current deadline for this program to be implemented is 2018. That's a long way off, and a lot can change in 9 years.

    I don't really believe that this is a prelude to "a future economic war between the US and China over Middle East oil – yet again turning the region's conflicts into a battle for great power supremacy." I do believe, though, that it's another compelling argument for the US to aim for completely renewable energy. Get us off of oil. and the US can let China deal with the Middle East and all its problems.

    It didn't take very long for some cold water to get thrown on this story:

    Japanese Finance Minister Hirohisa Fujii said at a news conference in Tokyo today that he “doesn’t know anything about it,” when he was asked about the newspaper report.
  • Friday, October 2, 2009


    When I traded on the floor of the AMEX, I knew a lot of traders who worked for Susquehanna. They were a sharp group of guys, and very secretive about what they were doing. Everyone knew they were big players, and everyone assumed they made a lot of money. Based on this article, it seems the assumptions were correct.

    They were also, unsurprisingly, universally good at poker.

    Tuesday, September 8, 2009

    Inside Information

    Interesting white paper that suggests that spikes in short selling prior to downgrades are indicative of analysts tipping off their clients before issuing reports during 2000 and 2001. Based on a few things I saw while trading options during that span, I can't say that I'm surprised by this result at all. Nonetheless, it's good to see statistical evidence to support something I've always suspected.

    By examining levels of short selling during the days prior to an analyst downgrade, the authors show a steep increase in shorts during the 3 days just before the downgrade is announced. This spike in shorting is demonstrated to be significant even after correcting for earnings releases, corporate announcements, "me-too" downgrades, and other biases. I admit I'm not a statistician, but the results look robust to me.

    I have only one minor quibble with this paper. The authors should have taken into account the reason for the downgrades, and eliminated so-called downgrades on valuation. These downgrades, which occur when a stock has reached the analyst's price target, often do not result in a significant market reaction, and are also somewhat predictable. I suspect that eliminating downgrades that were a result of a stock reaching its target would increase the efficacy of the study, and may also show that analysts were more eager to tip off their customers about highly impactful downgrades.

    Full pdf version of the paper can be found here. H/t Paul Kedrosky.

    Thursday, September 3, 2009

    Poor Guidance

    Washington Monthly magazine has released their
    2009 college guide. Meant as an alternative to the US News & World Report college issue, the WaMo list is based on totally different criteria, emphasizing colleges' "contributions to society" as opposed to straight academic performance or endowment size. For someone used to the typical Ivy League dominance, this list is rather, er, different.

    I have a major problem with WaMo's rankings but, before I get into things, I just want to state up front that I am not, in any way, putting US News on a pedestal. There's no question that the US News rankings aren't perfect. Seeing my alma mater jump into the top 10 because of one huge donation made it all too clear that the rankings are too heavily influenced by endowments and donations. It's an imperfect system, but as an approximation, it's not bad.

    On the other hand, the WaMo rankings seemed to come completely out of left field. South Carolina State University at number 6??? I've never even heard of that school. Thanks to a combination of a high ROTC participation and significant gap between expected and actual graduation rates (45% vs 22%!!) SCSU pulls in higher than all eight Ivy League universities. For a school with a median SAT score of about 840 (math+verbal).

    I think a ranking system like this is indicative of a big problem with how we, as Americans, view higher education. Too many people, I think, view a college degree as another hoop to jump through on the way to a career, not as an education that needs to be earned. I'm a firm believer that anyone and everyone who wants a college degree should have the ability to earn one, but only if they have the ability to learn and study at a high enough level. The system we have now, where for-profit degree mills and underfunded, underacheiving institutions will accept anyone with a pulse, both waters down the meaning of a college degree, and widens the income gap between those who did and did not go to college.

    Ranking a school like SCSU in the top 10, I think, exacerbates these problems. Rewarding an institution that spends a whopping $4 million per year on research, has zero faculty who are members of national academies, and graduates less than 50% of its students, is a huge mistake. A school like this shouldn't be lauded. It should be condemned. A college like SCSU isn't educating and preparing its students to become the leaders and intellectuals of tomorrow. It's taking their money for 4 years and then giving them a piece of paper. Ranking SCSU as a top-10 institution is an insult to the students and graduate at the true top universities who work long and hard to earn their degrees, and equally to the students at places like SCSU who are duped into thinking that, by purchasing a piece of paper that says "college degree" on it, their paths to success are guaranteed.

    I know this post is pretty harsh, and I'm not trying to demean the students of SCSU. I'm sure many of them are intelligent, hard working, and have earned every ounce of pride and prestige that comes with a college degree. What angers me is that an institution that apparently spends the bare minimum on both research and faculty is being rewarded, and that WaMo is enabling that institution through a ranking system based on the nebulous concept of "contributions to society." Any high school student who applies to SCSU with the expectation that they will get either a top-notch education or a head-start on their career based on these WaMo rankings is making a huge mistake.

    Video of The Time Being

    Amazing video of the California wildfires encroaching on Los Angeles.

    Tuesday, September 1, 2009


    Sometimes the most interesting part of an article or documentary is a single sentence, often just an aside or a tangent, tantalizing in it's genius yet brevity. Now and again I'll pick up on one of these tangents while I'm reading, or watching TV, or otherwise wasting time, and I'll become absolutely hooked. I'll try to finish whatever it was that I was working on, but the effort is usually wasted; that one idea entreats, no, demands, that I drop everything else and focus in on it. The Idea. Capital letters because, by now, The Idea has become an entity in it's own right. The Idea is coercing, demanding; the only way to satisfy it's hunger is to give in to give in to The Idea's allure and follow it down the rabbit hole. Only after The Idea has been thoroughly explored, considered, and hashed out, will The Idea let me rest. Dormant, but never completely gone. Asleep, but sometimes woken by seemingly random triggers, just as ravenous as before.

    Just a few days ago I was struck by one of these epic moments and, while it's probably the sort of thing that only I could get excited about, and there's no ultimate conclusion, I can tell already that I'm going to enjoy the ride.


    A few days ago I wasn't very tired after work, and decided that the best way to fall asleep was to put on my headphones and listen to a podcast of some sort. (This is usually a pretty good solution - usually I learn something interesting. If not, I pass out.) It had been a few weeks since I last checked out New Books In History, which has a great collection of hour-long, interesting interviews focusing on pretty much the entire gamut of world history, perfect for satisfying at least one of my conditions mentioned above for late-night narratives.

    Since my last visit, a promising episode on WWI had been posted, which I found impossible to resist. (I think documentaries about WWI are fascinating, The Great War was a tremendous, cataclysmic event, responsible for massive geopolitical upheval, and a dramatic change in attitude across the western world. Also, Blackadder.)

    The podcast, which can be found here, had been playing for about 15-20 minutes or so when the interviewer asked Alexander Watson, the author of the book in question how he decided on the specific focus for his book. Watson responded that it actually wasn't his original intention. Initially, Watson was researching an idea suggested by his advisor, Niall Ferguson, involving the card games that soldiers played to pass the time in the trenches, and how the different games played by the opposing armies may have affected how they fought, and...


    At this point I'm no longer paying the slightest bit of attention to the podcast, because I've been struck by The Idea. What inferences can we draw about a culture based on it's traditional games? In my mind, this is a huge question, with all sorts of offshoots. Is Go so much more popular in Asia than in the West because it centers around the idea of balance, a concept that is valued in Asian cultures but de-emphasized in the West? How is it that chess, invented in Persia, spread across Europe virtually unchanged, but became the dramatically different Xiangqi in China, and then evolved even more significantly into Shogi in Japan? Why did the Jewish culture, which has existed for thousands of years, never develop a distinctive game of its own?

    I'm not a social scientist, anthropologist, or ludologist, and I don't have a very good idea of how to go about finding the answers for any of these questions, or any of the others I'm sure I'll think of along the way. But I'm going to give it a try anyway, and see where it takes me. I know how my mind works well enough to say that this idea is going to be floating around in my head for a very long time, quite possibly for the rest of my life, sometimes dormant, sometimes at the forefront. I think it's interesting enough to indulge.

    Saturday, August 29, 2009

    Thanks, IRS

    I'm amazed. Apparently, the IRS investigators and federal prosecutors have decided that the best way to reward whistleblowers is to turn around and issue them longer, more onerous sentences than the tax evaders they helped convict.

    Bradley Birkenfeld, a former UBS employee, spent 3 days with the IRS divulging information on UBS's tax evasion schemes, including the names, strategies, and documents that the government would need to make a slam-dunk case against UBS.

    After prosecuting, and wringing a $780 million fine out of UBS, the prosecutors turned around and charged Birkenfeld with Tax Evasion Conspiracy. Why? Because Birkenfeld didn't reveal his own role in the scheme.

    I'd agree that Birkenfeld not mentioning his involvement should warrant some punishment, but more severe than the people he helped to expose? That doesn't make sense. What's more, as mentioned here but omitted in the first article, Birkenfeld was stuck between a rock and a hard place. If he gave up the details of the clients he assisted as part of this scheme, Birkenfeld would have gone to jail in Switzerland. By keeping silent, he's now going to jail in the US.

    The upshot of this whole scenario is that the incentive for helping the IRS is now nonexistent. We have numerous laws in this country designed to prevent corporations from retaliating against whistle-blowers, but apparently if the IRS is involved, it's a whole new ballgame. All this case has done has made it less likely for people to assist the government going forward, and in fact makes it easier for companies involved in tax fraud to use extortion to keep their employees from talking. "If you turn witness against us, it'll just be worse for you. Keep it quiet, and we'll all get off with a slap on the wrist."

    Nice going, IRS.

    Friday, August 21, 2009


    I've recently been watching a great youtube series of tutorials on how to play Japanese chess, or Shogi. The rules are similar to western-style chess, although there are some very interesting complications, such as the ability to re-use pieces that have been captured.

    I've played a bit of chess from time to time, but I never really achieved more than a basic level of competency of a teenager - I typically can beat my younger sister, but usually lose to my father. I'm comfortable with the movement of the pieces, but the larger strategies are a mystery to me. This is surprising, since I think one of my strengths is my ability to synthesize information in order to find the big picture.

    At any rate, the shogi tutorials are very well done, and are inspiring me to play chess again. I've been concerned lately that, thanks to a combination of my job and frequent use of the internet, my ability to concentrate is slipping. Chess is a game that forces you to focus on a single task for a while. I think it will be good therapy.

    Friday, August 14, 2009

    Cone Shells and Vermeers

    This is a well written article in Smithsonian magazine about history of seashell collecting. Collecting shells is a hobby of mine; although I've never considered myself a serious collector by any means, I do have some nice shells that I've found on the beaches of Sanibel Island, Florida.

    Anyway, while seashells are what drew me to the article initially, we're going to take a detour, because what's really interesting about the article involves pricing.

    During the 17th century, a Glory of the Seas Cone sold at auction at triple the price of this masterpiece by Vermeer. Today, that Vermeer would cost easily tens of millions of dollars, while a Glory of the Seas cone goes for about $40 on ebay. Seashells, apparently, were once considered more valuable than even the finest works of art. This seems ridiculous on the scale of Dutch tulipomania, and most likely mania had a lot to do with it. However, as the Smithsonian article posits, it seems there was actually some degree of economic justification for this pricing discrepancy:

    But what seems common to us could seem breathtakingly rare to early collectors, and vice versa. Daniel Margocsy, a historian of science at Northwestern University, points out that Dutch artists produced five million or more paintings in the 17th century. Even Vermeers and Rembrandts could get lost in the glut, or lose value as fashions shifted. Beautiful shells from outside Europe, on the other hand, had to be collected or acquired by trade in distant countries, often at considerable risk, then transported long distances home on crowded ships, which had an alarming tendency to sink or go up in flames en route.

    Eventually, due to a combination of safer transportation, increased global trade, and, most importantly, the discovery of the native habitat of this particular species of shell, the price of the Glory of the Seas Cone has plunged. By contrast, Vermeers have skyrocketed in value as collectors became more discerning, and many contemporary works were gradually lost or destroyed.

    The point I'm trying to make is that what seems scarce may not really be so rare, and what seems commonplace may not be so common, especially after the passing of time. (Anyone who's played MMORPGs for a good length of time has probably seen this phenomenon in fast-forward several times, but that's fodder for another post.) I'm not saying you should go out and load up on baseball cards, (the infamous Billy Ripken F*ck Face error is no Vermeer, I can assure you,) but I wouldn't bet the farm either on somethig whose value is based solely on perceived scarcity and mania-driven demand.

    Thursday, August 13, 2009


    There's an interesting article in Vanity Fair about North Korean counterfeiters. Specifically, about how the production of so-called supernotes remains unchecked, despite efforts to shut down the counterfeiters.

    The fact that the US dollar is considered the currency of global trade makes it a prime candidate for counterfeiters, but I think there's another compelling reason. Take a look at a US $100 bill. Now take a look at some Euro notes. It doesn't take much to see that the Euro looks a lot more difficult to forge. Indeed, while the number of counterfeit Euros in circulation is increasing, they're typically of far lower quality and far easier to detect than the North Korean supernotes.

    So why doesn't the US completely redesign our paper money? We could add holograms, clear plastic windows, more watermarks and security strips, and change the notes' material to the plasticy stuff that Australian money is already made out of. If, as the VF article suggests, actively pursuing the North Korean counterfeiters was too politically sensitive, a full overhaul of our currency would still accomplish the goal of stemming the flow of fake money. Plus, by cutting off the DPK's source of hard currency, it just may tip the negotiations to our favor.

    Addendum: A colleague of mine based in Hong Kong relayed an interesting point that the article just barely mentions: the Macao connection. Macao, while not fully integrated with the PRC, is still controlled by China. It is very unlikely that North Korea would be able to operate a bank in Macao for the sole purpose of laundering supernotes without the Chinese being aware of and, potentially, complicit in the operation. Perhaps greater political pressures came into play.

    Wednesday, August 12, 2009


    Welcome to The Second Derivative. This blog is a collection of thoughts, ideas, articles, and links with a common goal - to inspire thought and analysis. My goal is not to just to take these things at face value, but to also consider both their implications and their root causes and assumptions. I'm aware this is a very ambitious goal, and I certainly may not succeed. Then again, even if this blog ends up being nothing more than a repository for links that I personally find interesting, that's a failure I'd consider acceptable. If I can provoke some good discussion along the way, that's a failure I'd consider noble.

    Ideally, I'd like to write about a very wide range of subjects. There's probably going to be a lot of finance and economics, since that's what I do for a living. Probably not too much US politics - there are many, many people out there who are much wiser about the subject than I, and I have no interest in getting involved in the mud-slinging. Foreign affairs, however, is fair game. As is science, history, literature, technology, and pretty much anything that intrigues or inspires.

    Won't you join me?