Tag: finance

Scant progress

In the middle of an economic slowdown and a huge expansion in spending to reduce households’ winter fuel costs, the new UK government has just announced, in its new “mini-budget” its intention to drastically cut taxes on wealthy individuals and corporations. Not surprisingly, the price of UK bonds has plummeted, and interest rates have risen to their highest level since the 2008 financial crisis.

The Guardian quotes international market experts from ING saying this was a “perfect storm” for the UK, as “global markets shun sterling and gilts.” They continue

Price action in UK gilts is going from bad to worse. A daunting list of challenges has arisen for sterling-denominated bond investors, and the Treasury’s mini-budget has done little to shore up confidence.

“Little to shore up confidence” is such an elegant bit of English understatement, so extreme as to amount almost to deception. Like “the expanded hours for flight departures at Heathrow have done little to improve the noise pollution problem for residents near the airport” or “Herr Hitler’s new ‘Nuremberg Laws’ have done little to shore up confidence in fair treatment among Germany’s half million Jewish citizens.”

“When it becomes serious, you have to lie”

I wish I could think of some witty way to frame this, but some comments just have to speak for themselves. I’ve been reading the latest book by my favourite economic historian, Adam Tooze, who has moved from the financial history of the Third Reich and the First World War to examine in his new book the financial crash of 2007-8 and its aftermath. I’ve never had much time for those who see the EU being run by arrogant anti-democratic technocrats. But then we have this remark by Jean-Claude Juncker, then prime minister of Luxembourg and acting chair of the Eurogroup, now president of the European Commission:

Monetary policy is a serious issue. We should discuss this in secret, in the Eurogroup …. If we indicate possible decisions, we are fueling speculations on the financial markets and we are throwing in misery mainly the people we are trying to safeguard from this …. I am for secret, dark debates …. I’m ready to be insulted as being insufficiently democratic, but I want to be serious …. When it becomes serious, you have to lie.

I guess the best you can say is, this is macho posturing of a tax-evaders’ shill trying to show he’s tough enough to sit at the top table of power politics.

In the long dark night of the European soul, even a Luxembourgish prime minister dreams of being Metternich.

Fraud detection and statistics

Elizabeth Holmes, founder of Theranos, has now been formally indicted for criminal fraud. I’ve commented on the company before, and on the journalistic conventions around intellectuals that fostered her rise. But now that the Theranos story is coming to an end, I feel a need to comment on how utterly unnecessary this all was.

At its peak, Theranos was valued at $9 billion and employed 800 people. Yet according to John Carreyrou, the Wall Street Journal reporter whose investigations exposed Theranos’s fraud, the company is down to just 20 employees who are trying to close up shop.

All credit to Carreyrou, who by all accounts has done an excellent job investigating and reporting on this fiasco, but literally any statistician — anyone who has been through and understood a first-year statistics course — could have said from the start that this was sheer nonsense. That’s presumably why the board was made up mainly of politicians and generals.

The promise of Theranos was that they were going to revolutionise medicine by performing a hundred random medical tests on a drop of blood, and give patients a complete readout of their state of health, independent of medical recommendation of specific tests. But any statistician knows — and every medical practitioner should know — that the reason we don’t do lots of random tests without any specific indication isn’t that they’re too expensive — many aren’t — or that they require too much blood, but that the more tests you do, the more false positives you’re going to accumulate.

If you do a hundred tests on an average person, you’re going to find at least a few questionable results — either from measurement error, or because most tests aren’t all that specific — requiring followups and expensive investigations, and possibly unnecessary treatments.

Of course, if I had to evaluate the proposal for such a company I would keep an open mind about the possibility of a conceptual breakthrough that would allow them to control the false positives. But I would have demanded very clear evidence and explanations. The fact that the fawning news reports back in 2013-15 raved about the genius new biomedical technology, and failed to even claim to have produced (or found) any innovative statistical methodology, made me pretty sure that they had no idea what they were doing. In the end, it turned out that the biomedical innovations were also fake, which I probably should have guessed. But if the greedhead generals — among them the current secretary of defense, who definitely should be questioned about this, and probably ought to resign — had asked a statistician, they could have saved a lot of people a lot of unpleasantness, and maybe helped save Elizabeth Holmes from herself.

Less than zero: A new reckoning

One of the most important lessons I ever learned about capitalism and the nature of wealth I learned from Donald Trump. And now I discover that I was entirely misled, at least as regards Trump’s particular role.

As I discussed in a post a couple of years ago, back in the 1990s I read a newspaper article about Donald Trump’s most recent bankruptcy, and was struck by the fact that, despite having vastly more liabilities than possessions, Trump was still treated as a wealthy man, and not worse than a pauper. And his creditors were willing to come to an arrangement that allowed him to live a rich-man lifestyle, if somewhat less opulent than before. I understood that to mean that modern capitalism makes debt almost as valuable as property, that the person with a billion in debt and the person with a billion in property are considered to be much more similar to each other than either is to the one who has neither debts nor wealth.

Now, having read several books on Trump, including most recently Seth Hettena’s Trump/Russia: A Definitive History, I see that this beautifully esoteric interpretation must yield — at least in the case of Trump — to a simpler and crasser interpretation: At various stages of his career Trump has been propped up by criminals who found the Trump Organisation, and its self-absorbed empty-headed chief, too useful as a cover for moneylending — first for the New York mob, then on a larger scale for Russian oligarchs and criminals from the former Soviet Union — to let it fail. In some sense, this is the value of debt: When there are large numbers in play, it’s easy to hide smaller numbers, just as long as you can come to an agreement to keep the flow going. And it does take a special kind of person to have managed to accumulate that amount of debt in the first place, making Trump’s debt truly a rare and valuable commodity.

I’m perfectly willing to accept a certain claim of innocence, that Trump believed all along that the fact that he kept managing to steer around failure demonstrated nothing but his unique genius. It reminds me of Hitler’s famous comment “Ich gehe mit traumwandlerischer Sicherheit den Weg, den mich die Vorsehung gehen heißt”: I follow, with the certainty of a sleepwalker, the path that Providence has laid out for me.

That narcissistic naïveté probably was, and remains, his most useful quality. First time tragedy, second farce.

Xtreme hedging

When a series of roadside bombs hit a bus carrying members of the Borussia Dortmund football club last week, it was easy to assume that this was somehow related to islamist causes, which have been responsible for — or, at least, eager to claim credit for — much of the most prominent random violence in Europe in recent years. But this attack turns out to be linked instead to the age-old prime mover in random violence against civilians: Finance.

The accused is believed to have acted for profit, attempting to kill or injure as many members of the Borussia Dortmund team as possible with the bomb. According to the investigators, he hoped to profit from a fall in the value of the team’s stock… The suspect had opened a [€40,000] consumer credit line and purchased 15000 put options.

Is this really illegal? I’m sure he just needs the right academic economist to explain to the investigators how important it is to increase liquidation in the market. It’s reminiscent of the scene in Catch 22 where Milo Minderbinder explains the logic of private enterprise:

One day Milo contracted with the American military authorities to bomb the German-held highway bridge at Orvieto and with the German military authorities to defend the highway bridge at Orvieto with antiaircraft fire against his own attack. His fee for attacking the bridge for America was the total cost of the operation plus six per cent and his fee from Germany for defending the bridge was the same cost-plus-six agreement augmented by a merit bonus of a thousand dollars for every American plane he shot down. The consummation of these deals represented an important victory for private enterprise, he pointed out, since the armies of both countries were socialized institutions. Once the contracts were signed, there seemed to be no point in using the resources of the syndicate to bomb and defend the bridge, inasmuch as both governments had ample men and material right there to do so and were perfectly happy to contribute them, and in the end Milo realized a fantastic profit from both halves of his project for doing nothing more than signing his name twice… It was an ideal arrangement for everyone but the dead man in Yossarian’s tent, who was killed over the target the day he arrived.

I’m skeptical of the claim that “This seems to be a crime without precedent in German history, and may represent a completely new phenomenon.”

Tactfully

The Guardian reports on UK government posturing to back out of its financial commitments to the EU, ahead of next week’s formal collapse start of the Brexit negotiations:

The EU scrutiny committee chairman, the Conservative MP Sir Bill Cash, urged the UK negotiators to point out during the talks that the UK wrote off half of Germany debts after the second world war, and as a result did not owe the Germans anything politically or legally. 

Cash said the UK had been “net contributors for many decades” and the “massive contributions” paid to Brussels would offset any divorce fee demanded by officials. He urged the government to remind Europe’s leaders of the 1953 London debt agreement, “where Germany, for all its malfeasance during the second world war” and unprovoked aggression, had half its debt cancelled.

Cash said that given Germany’s dominant role in the EU, it might be worth “tactfully” reminding people “that there is a realistic position here that we really don’t owe anything to the EU, whether it’s legal or political”.

Well, that already sounds pretty tactful to me, backing out on financial commitments to all of Europe because of Germany’s “malfeasance” in the first half of the 20th century. It’s funny that the British didn’t mention how strongly they felt about this back when they were applying for membership in the EU. You would have thought their memories would have been fresher.

Bullet not dodged

I thought I should post an email that I wrote yesterday morning, expressing my despair before the election, when I thought we might “dodge the bullet” of Trumpism, but still held out little hope for a political system that put us in front of the gun in the first place: Continue reading “Bullet not dodged”

Trump and the bicycle-riders

We now have Donald Trump’s final argument for his election, which basically amounts to saying that manly man Donald Trump will beat down the foreigners and Jews — George Soros, Janet Yellen, Lloyd Blankenfein — who are secretly pulling the strings behind the political establishment. (Speaking of Janet Yellen, I have to confess that I hadn’t noticed that the Federal Reserve had been led by elders of Zion Jews — three of them Republicans — for all but nine years since 1970.)

I think often of a public lecture that Yale history professor John Boswell gave in the 1980s with the title “Jews and Bicycle-riders”. The title came from a celebrated anti-Nazi joke of the 1930s: A Jew is pushed off his bicycle by a Brownshirt, who looms over him and screams “Who is responsible for Germany’s misfortunes?” “The Jews,” replies the trembling Jew, “and the bicycle riders.” “Why the bicycle riders?” asks the Nazi. And he replies: “Why the Jews?”

Boswell’s lecture was mainly about homosexuality, pointing out that prejudice against gay people had risen and fallen over the past two millennia, and tended to parallel the ups and downs of antisemitism, and to be promoted by the same people. The joke suggests that antisemitism is irrational and arbitrary, and has nothing really to do with the Jews; Boswell extends this to say that antisemitism and homophobia are both targets of convenience for what is really an anti-urban, anti-cosmopolitan agenda.

(The bicycle-riders in the joke are supposed to be an obviously ridiculous target of discrimination. Boswell might have been amused to know that in the febrile politics of the 21st century, bicycle-riders have also become a frequent target of right-wing abuse — for example, Colorado Republican who called Denver cycling initiatives “part of a greater strategy to rein in American cities under a United Nations treaty” and Rob Ford in Toronto: “What I compare bike lanes to is swimming with the sharks. Sooner or later you’re going to get bitten… The cyclists are a pain in the ass to the motorists.”)

Obviously part of the point was that the credibility of antisemitism was at a low point in the mid-1980s, while discrimination against sexual minorities was decidedly respectable. From the perspective of 2016 things look decidedly different. Homophobia us barely tolerated in polite circles, while antisemitism is ascendant. I’m sure I thought in 1985 that the downward trajectory of antisemitism was inevitable — it was so obviously irrational — while the rights of gay and lesbian people seemed to need fighting for. In retrospect, I see that no matter how marginalised they may be, both of them are always capable of recolonising the body politic when the right conditions return. Somehow this seems to me more obvious and intuitive with regard to homosexuality than with regard to Judaism; Boswell’s link helps to clarify the danger.

Waiting for Armageddon

The US presidential election is now just 4 days away. It seems to me that people are not taking the danger seriously. In particular, last week, in the hour after the FBI started its intervention to bring on the apocalypse (more work for them, I suppose), it was reported that the S&P500 stock index fell by about 1%. If we suppose that the FBI’s announcement made a Trump victory 2% more likely, that suggests an expectation that Trump would wipe 50% off the value of the stock market. Yet that doesn’t seem to be incorporated into the current value of the markets. It’s almost as though investors are in denial: When forced to focus on the Trump danger they rate it apocalyptic, but as soon as the news quiets down — within minutes — they go back to treating the probability as 0.

I’d like to believe Sam Wang’s projections, that the election result is all but certain for Clinton. Nothing is all but certain, least of all the future. Nate Silver’s reasoning, leading to about a 2/3 chance for Clinton, seems to me very sound: Trump will win only if he wins about half a dozen states where he has about a 50% chance. That sounds like about a 2% chance, except that they are unlikely to be independent. The reality is likely to be somewhere between 2% and 50%. Where it is, is almost impossible to judge. I’m slightly more hopeful than that because I believe in the power of Clinton’s organisation. But how much more?

But even 2%, for the risk of a crybaby fascist as president, is far too much. It’s not clear to me how the US can come back from this disaster, even if Trump loses.