Google + Kurzweil: "What an amazing, slightly terrifying combination"

I disagree with Jon Mitchell's take on the fantastic news that Ray Kurzweil has joined Google in a full-time role in Mountain View as Director of Engineering.

Inventor and futurist Ray Kurzweil joins Google

Pairing the iconoclastic futurist/inventor with arguably the most innovative technology company in the world is not scary but very exciting (although I catch Jon's drift).

Much as it did when it hired Vint Cerf, one of the internet's father figures, Google has once again boosted its nerd/geek street cred with the addition of Kurzweil to its roster of science and tech luminaries.

This is definitely a coup for Larry Page & Co. Not quite on the same level as when Princeton's fledgling Institute for Advanced Study landed Einstein. But after the Pope of Science made his way to New Jersey many of the leading physicists, mathematicians and scientists of the day followed. No doubt Kurzweil's arrival in Mountain View should have a similar effect in drawing today's pioneers in the areas where Ray has made significant contributions, such as speech recognition and artificial intelligence.

Ray begins his new gig on December 17. Congrats to Ray and Google, and we anxiously await the results of your collaboration!

When the UK Previously Looked to a Canadian to Run the Bank of England

Just a quick historical note on the somewhat stunning news that Mark Carney, the current head of the Bank of Canada (and a Canadian citizen), has been asked and has accepted the job of running the Bank of England.

Graham Towers and Montagu Norman 

I say 'somewhat' because students of history may know that as Montagu Norman's 24 year reign at the Old Lady of Threadneedle Street was winding down the then head of the Bank of Canada, Graham Towers (also a Canadian citizen), was considered as a leading candidate to replace Norman.

Norman and Towers worked closely together during World War II to support the price of sterling during the Battle for Britain, and much of the UK's gold (as well as France's) was sent to Canada to protect it in the event of a Nazi amphibious invasion of Britain. However, for reasons possibly lost to posterity Towers was either never offered or accepted the job.

Analogies about how England's national football coach is often  foreigner and how the Carney choice really isn't all that different are of course flooding the media airwaves right now. Perhaps the economic, patriotic, and security considerations that come with heading the national football club and central bank aren't really as far apart as one might think?

An issue which isn't under much doubt is that Mark Carney, like Graham Towers in his day, is simply a very good candidate for the job.

Looking ahead, the one thing that is certain is that Mr. Carney will have very big shoes to fill. Even with the financial crisis and the challenges faced by the City of London over the past several years, there can be little doubt that Sir Mervyn King has proven to be one of the finest central bankers of his age. Sir Mervyn recently gave an excellent lecture at the LSE on inflation targeting, which can be viewed here.

Another point is that the Carney choice further confirms London's status as the most welcoming of the major financial centers to foreigners and capital alike. Take that New York!

Upsetting the Apple-cart: Google Just Torpedoed the iPhone's Profit Margins

Google's Nexus 4

Google just released its latest in-house Nexus branded smartphone and if you read the various reviews of this device over at The Verge, All Things D, VentureBeat, etc. you'd likely come away rather underwhelmed.

Mind you, most of these reviews are on the whole rather positive about the Nexus 4's hardware and Android 4.2 (Jelly Bean) software. But many of the reviewers couldn't see their way past the Nexus 4's lack of LTE 4G data speeds.

For example, here's the conclusion of a Nexus 4 review by The Verge's Josh Topolsky, arguably gadgetdom's #1 geek:

The Nexus 4 is absolutely wonderful, but it's also vexing. Frustrating. Annoying. It's easily the best Android phone on the market right now, and has some of the most powerful software that's ever been put on a mobile phone. It's an upgrade from last year's Galaxy Nexus in every way. It's terrific — save for one small thing. 

In the US, a flagship phone without LTE is like a muscle car with no wheels. For other networks in other countries, and for the lucky T-Mobile customers out there that are getting great speeds on its HSPA+ network — great. No problem. Go get this phone. But for others — many others — it's hard to imagine buying this device when you know it's a generation behind in terms of network technology.

For a phone and an OS built for the cloud, I think it's unacceptable to not offer a version that takes advantage of our fastest mobile networks.

That's a pretty damning indictment from the former Editor-in-Chief of Engadget, and not exactly the kind of endorsement one would be looking for if you're interested in making the case, as I will be in this article, that Google's latest offering represents a very real threat to Apple's iPhone business.

Continue reading the full article at SeekingAlpha here.

The Body Clock: Why You're So Tired All The Time

Full disclosure: as a night owl I am actively waging a campaign to 'debunk the social stigma around late risers'.

For more on this topic here's a good read.

h/t Counterparites

Sandy's Key Lesson Applies to More Than Bad Weather

The NY Times is out with a story today chronicling all the warnings about Gotham's vulnerability to storms and flooding.

Loss of life and economic devastation are made all the more tragic when we realize that these losses were at least in part preventable.

But as an anonymous source close the New York government officials put it:

"until things happen, people aren’t willing to pay for it".

Indeed.

As Nassim Taleb, et al have written about, there are deep psychological and evolutionary roots to our species' tendency to ignore seemingly low probability, catastrophic events until it is too late.

Explain this 'insurance' thing to me one more time?

Perhaps as the human species was evolving and facing a daily battle for survival there was a prohibitive cost to planning too far into the future. Now, however, with the hunting/foraging days long gone for most of us, we're still stuck traveling through life with the same 'Cave Man software' of our forefathers.

With Mother Nature having reminded us what she's capable of there will likely be some changes to storm protection systems along the East Coast. But unfortunately I'm not terribly optimistic that we can extrapolate the lessons of Sandy to other systemic risks, such as asteroid collision, climate change, and number one focus of this blog, financial crises.

Sadly, the Cave Man is still in charge of this joint.

A Good Evening to Stay Indoors and Watch a Movie

Dear East Coast, hang in there and hold on tonight! -TPC

Bob Balaban eyes the shifting weather in Moonrise Kingdom

Video: Mervyn King on Twenty Years of Inflation Targeting

A very accessible, excellent talk from the Governor of the Bank of England on the past two decades of financial and central bank history, and the need to rethink the policy of inflation targeting. 

Podcast with better audio quality here.

Speaker(s): Professor Sir Mervyn King

Chair: Professor Craig Calhoun

Recorded on 9 October 2012 in Old Theatre, Old Building.

Since 2008, we have experienced the worst financial crisis and recession since the 1930's. What challenges does this pose to the intellectual foundations of monetary policy? Do we need a new approach?

Mervyn King is the Governor of the Bank of England. Before joining the Bank he was Professor of Economics at the LSE, and a founder of the Financial Markets Group.

Video: Nobel Prize Winner Al Roth On 'Repugnant' Transactions

Congratulations, Al and Lloyd Shapley!

The below presentation by Al Roth, whose work on kidney exchanges you might recognize from Freakonomics, was made at Google in 2007. The presentation introduces you to Roth's work on repugnant transactions and market design.

Be warned that parts of Roth's presentation are a bit wonkish, but you can skip ahead to 28:12 mark if you're interested in his kidney work.

Adventures in Alternative Currencies: Bitcoin Goes Mainstream

Continuing on with our series covering adventures in alternative currencies, many were quick to proclaim the death of Bitcoin, particularly following the June 2011 bursting of the Bitcoin bubble. For example, here is some doomsaying from the normally reliable Tyler Cowen; and for a pessimistic economic historian's take see here.

But following an undeniably rocky road the little digital currency that could appears to be having the last laugh. A good read can be found here on how Bitcoin is beginning to go mainstream.

At this stage the obvious first question is why has the decentralized, 100% digital currency proven so resilient? Scientific American provides one good answer:

When they (a merchant) finalize a deal in Bitcoin, they do so knowing that the transaction can never be reversed. The Bitcoin network doesn't edit its ledger. As such, merchants no longer have to worry whether they are charging a stolen credit card. 

"'The fraud mitigation is big for Internet merchants, because they are all handling card-not-present transactions. And the business has to eat the loss if the payment is reversed later on,"' Gallippi says. "'Using Bitcoin, a business can receive a payment from any country on the planet, instantly, with no risk of fraud."'

In addition to helping cut down on fraud costs for merchants, Bitcoin is chic. Using Bitcoins to transact business is a mark of digital savvy for both tecno hipsters and the merchants who cater to them.

What the future ultimately holds for Bitcoin is less interesting to me than a more general issue, which is the apparent growing trend in alternative currencies coming into existence.

We have already seen some Congressional saber rattling about Bitcoin prior to its flash crash. Will governments continue to tolerate it, Bristol's new pound note, etc., while they remain small? Or will we see a more formal move in the not too distant future to stamp out these fledgling alternatives to government fiat money? As the article points out, government's might have a hard time shutting down Bitcoin:

But perhaps most consequential for the future of Bitcoin—in order to shut down a peer-to-peer currency exchange, one would have to terminate every node on the network. The few lawyers who have studied Bitcoin all agree that the currency inhabits a legal gray area. No one really knows how governments would react if it gains traction, but many consider the exchanges to be the easiest target for people who want to regulate Bitcoin. Decentralizing the exchanges would make that job nearly impossible. Bitcoin developers are quickly proving that they can design decentralized alternatives to even the most sophisticated financial institutions. 

"It's the asset prices, stupid"

In a good post titled 'Why Obama is Winning' Harold James points out that political strategist James Carville's famous "it's the economy, stupid" quip from the 1992 U.S. presidential election campaign has gained a new twist:

...the lesson about the economy’s electoral salience is being subtly reformulated. It is no longer the real state of the economy, but rather the perception of asset markets, that is crucial. And the perception can be far removed from reality, which means that the more the prevailing political wisdom assigns decisive electoral importance to the economy, the greater the temptation to view monetary policy’s impact on asset prices, and not on long-term growth, as crucial.

What James is basically saying is that people feel wealthier when asset prices - stocks, bonds, real estate, etc. - go up in value. This phenomenon -- the so called 'wealth effect' -- can make those who don't read The PolyCapitalist and the other recommended sites listed on the right side of this blog feel like the real, fundamental economy is doing better than it actually is. Or so the theory goes. 

Further, positive feelings about how the economy is trending due to rising asset prices can in turn drive higher consumer consumption and business investment, which in turn can increase GDP. At least in the short (and possibly) medium run.

For how long can this wealth effect ponzi-esque scheme go on? In other words, are programs like QE3 nothing more than an macroeconomic cheap trick?

No one knows for sure because, like much of modern macroeconomic theory, we are conducting a live, empirical test of the theory. And this test has arguably been running since at least 1987 (the year Alan Greenspan became Chairman of the Fed), if not 1971 (the year Nixon severed the U.S. Dollar's anchor to the price of gold).

What this means longer-term, according to James, is further politicization of the Federal Reserve and other central banks around the world:

Republicans will blame their defeat in November on the Fed’s monetary stimulus (if not on the ineffectiveness of Mitt Romney’s blunder-filled campaign). 

Meanwhile, in Europe, many national leaders, looking at Obama and the Fed, may conclude that they would do better with more direct control over the central bank. Given the difficulty of establishing such control over the European Central Bank, the euro’s next great challenge may be growing sentiment in favor of a return to national currencies.

In other words, expect central banks to remain in the politial bullseye following the 2012 U.S. and 2013 German elections, regardless of the their outcomes.

Will major reform be applied to central banks? For example, there has been open discussion of terms limits for the Federal Reserve Chairman.

Perhaps changes like term limits, greater Fed transparency, etc. are in the cards longer-term. But I am personally skeptical that any significant reforms will be enacted at the Federal Reserve prior to the end of the U.S. dollar's global hegemony.

Why Italy Isn't In Such Bad Shape, But the U.S. and UK Are

Bill Gross runs PIMCO's huge flagship bond fund which, having engaged in an untimely shorting of U.S. Treasuries, has hit a bit of a rough patch in recent times. Some have suggested that the 69-year old might be a few years past the recommended portfolio manager retirement age and that it's no longer as useful as it once was to read his monthly investment newsletters.

Think again.

While Gross's timing on shorting U.S. treasuries has been poor, and his revealing in this month's column of memory issues is a little unnerving, his analysis of the fundamentals and medium to long-term sovereign fiscal picture remains sound.

Take his updated 'Ring of Fire II' chart, the first version of which he first published a few years back. The chart (below) plots countries by both their annual public sector deficit (y-axis), which is the difference between government spending and taxes, and what is termed a 'fiscal gap' (x-axis). The fiscal gap takes into account future expenditures, which in the U.S.'s case include entitlements such as Social Security, Medicare, and Medicaid.

As you can see from the chart Italy appears to be in better fiscal shape than several 'Ring of Fire' members like the U.S., Japan and the UK.  How is this possible? Italy has been experiencing what economists refer to as a 'speculative attack' from the sovereign bond market, while the three Ring of Fire countries are currently enjoying record low yields on their government debt. 

Continue reading the full article here.

Boomerang: Apple's "It Just Works" Promise to Customers

iPhone Maps app icon: what's wrong with this picture?

Mapplegate, the PR fiasco surrounding Apple's new iPhone mapping software, doesn't appear to be going away anytime soon. You can read all about the details elsewhere but I wanted to make a couple general observations.

First, flashback to 2008 and Apple's launch of their cloud email/calendar syncing product called MobileMe. From MacRumors and Fortune:

Mr. Jobs called the MobileMe team into a town hall meeting in one of Apple’s auditoriums after the service launched with problems and garnered unflattering reviews from noted tech commentators like Walt Mossberg of The Wall Street Journal. 

Mr. Jobs reportedly asked the assembled engineers and other MobileMe team members, “Can anyone tell me what MobileMe is supposed to do?” When one of those employees then volunteered a satisfactory answer, Mr. Jobs followed up with, “So why the fuck doesn’t it do that?”

He (Jobs) then spent some 30 minutes berating the team, telling them that they had “tarnished Apple’s reputation,” and that they, “should hate each other for having let each other down.” 

He added, “[Walt] Mossberg, our friend, is no longer writing good things about us.” 

Jobs appointed a new executive on the spot to run the MobileMe team. 

The MobileMe story may suggest that the iron fist with which Jobs ran Apple may now be missing, but it also helps explain why Apple's new map software problems are getting so much media attention.

Ever since Jobs returned to Apple the mantra he emphasized over and over again about new products was "It Just Works". What you're seeing here is what happens when, contrary to what you promise customers, something not only doesn't work but actually fails in very unpleasant ways. From NY Times tech guru David Pogue:

99 percent of it (iOS6 Maps), Apple says, is accurate. Unfortunately, when the overall data set is that huge, even half a percent of faulty data means a lot of flaws. And the trouble is, you never know when you’re going to encounter one. One wild goose chase, and you’ll find it hard to trust the software again. 

So Apple has written a beautiful, well-designed app — and fed it questionable data. It’s as though you just got a $1,500 professional coffee maker and then poured moldy beans into it.

The actual map with safe instructions

Whenever Apple stumbles, be it Maps, MobileMe, antenna-gate, Foxconn sweat shops, and my personal favorite (because I experienced it) - the irrecoverable Time Capsule hard drive failure - people pounce. People love to call out hypocrisy and shoot down 'hollier than though' types at the first sign of indiscretion. They did the same thing with Google and its 'Don't Be Evil' motto everytime Google engaged in an anywhere remotely questionable practice. It also doesn't help Apple right now that it's the world's largest company in terms of market capitalization and price to perfection, meaning it can't afford to execute sloppily.

The blow to Apple's promise to customers that everything just works certainly doesn't help the company. But whether or not Apple's maps fiasco figures prominently into this blog's prediction that Apple is nearing its high water mark remains to be seen. For more on the future of Apple, Holman Jenkins of the WSJ also has a good read.

Video: Richard Duncan on The New Depression

Lies, damned lies, and statistics: Spanish and Greek youth unemployment much lower than reported

One of the most commonly cited Eurozone crisis statistics over the past several years has been youth unemployment, which in hard hit countries such as Spain and Greece has been reported to be as high as 50%.

In a recent post over at Project Syndicate Steven Hill dissects Eurostat's unemployment rate methodology and comes up with markedly different figures:

Unemployment estimates also are surprisingly misleading – a serious problem, considering that, together with GDP indicators, unemployment drives so much economic-policy debate. Outrageously high youth unemployment – supposedly near 50% in Spain and Greece, and more than 20% in the eurozone as a whole – makes headlines daily. But these numbers result from flawed methodology, making the situation appear far worse than it is. 

The problem stems from how unemployment is measured: The adult unemployment rate is calculated by dividing the number of unemployed individuals by all individuals in the labor force. So if the labor force comprises 200 workers, and 20 are unemployed, the unemployment rate is 10%. 

But the millions of young people who attend university or vocational training programs are not considered part of the labor force, because they are neither working nor looking for a job. In calculating youth unemployment, therefore, the same number of unemployed individuals is divided by a much smaller number, to reflect the smaller labor force, which makes the unemployment rate look a lot higher.

So what we have here is a simple division problem: the unemployment numerator is accurate, but the labor force denominator has been fudged.

What are the real youth unemployment figures in countries like Spain and Greece?

The youth unemployment ratio – the number of unemployed youth relative to the total population aged 16-24 – is a far more meaningful indicator than the youth unemployment rate. Eurostat, the European Union’s statistical agency, calculates youth unemployment using both methodologies, but only the flawed indicator is widely reported, despite major discrepancies. For example, Spain’s 48.9% youth unemployment rate implies significantly worse conditions for young people than its 19% youth unemployment ratio. Likewise, Greece’s rate is 49.3%, but its ratio is only 13%. And the eurozone-wide rate of 20.8% far exceeds the 8.7% ratio.

Certainly these much lower youth unemployment figures are still a matter for serious concern. And as Hill notes later in his post it is likely that at least a significant portion of young people who are in school are there because they cannot find work.

There is, however, a substantive difference between the 50% shock headline figures and the real picture of youth unemployment, and this difference may explain why we have not seen a full-on revolution in countries like Greece or Spain (at least not yet).

The final question is why has the media only reported the much larger youth unemployment figures and not the arguably more meaningful, lower youth unemployment ratio? Certainly the larger figure is much more sensational and attention grabbing.

At the risk of sounding conspiratorial, another way of asking this question is who benefits by reporting the larger figure? Undoubtedly larger figures aid the narrative of the pro-bailout and pro-stimulus, anti-austerity contingent. 50% youth unemployment sounds pretty drastic, and drastic times call for drastic measures.

As they say, "never waste a good crisis".

California's Debt 6-12X Higher Than Previously Estimated

California Governor Jerry Brown thought he only had a $28 billion 'wall of debt' to deal with, but it turns out it is much larger. From the NY Times:

Directors of the State Budget Crisis Task Force said their researchers had found a lot of other debts that did not turn up in California’s official tally. Much of it involved irrevocable promises to provide pensions to public workers, health care for retirees, the cost of delayed highway maintenance and an estimated $40 billion bill to bring drinking water up to federal standards. 

They also pointed out many of the same unpaid bills from previous years that the governor had brought to light, like $8 billion in delayed payments to schools and community colleges, and $250 million that was raided from a fund dedicated to transportation and treated as revenue. 

The task force estimated that the burden of debt totaled at least $167 billion and as much as $335 billion. Its members warned that the off-the-books debts tended to grow over time, so that even if Mr. Brown should succeed in pushing through his tax increase, gaining an additional $50 billion over the next seven years, the wall of debt would still be there, casting its shadow over the state.

First, $40 billion for drinking water? As a longtime Bay Area resident I've regularly sung the praises of San Francisco's water and had no idea the rest of the state's water was so far off the mark.

Second, it is important to keep figures like California's estimated $335 billion debt in perspective. According to Wikipedia, California has the world's ninth largest economy with a 2010 gross state product (GSP) of $1.9 trillion, or 13% of the United States gross domestic product. Assuming the top end $335 billion debt figure is accurate that works out to only a 17% debt to GDP ratio for the state. Compare that with Japan's and U.S. federal governments's approximately 225% and 100% debt to GDP ratio's, respectively.

Having said that, the significance of these new debt estimates should not be underestimated, particularly when you consider how politically difficult it has been for Brown and the California legislature to address a shortfall which was estimated as a small fraction of the true debt.

Other than the NY Times article, which was cross-published at CNBC, this news is getting zero attention. This is somewhat surprising given that the independent panel includes former Federal Reserve Chairman Paul Volcker. However, I couldn't find anything on either the LA Times or the San Francisco Chronicle's website on this topic.

"Those whom the gods would destroy, they first encourage to borrow cheaply"

Today's must read on the next financial panic.

Adventures in Alternative Currencies - Bristol Launches Its Own

The Bristol ten pound banknote

Here is another reason to love the quirky, iconoclastic south western British city.

From the BBC:

It is a direct assault on global trade. The city of Bristol has launched its own currency, which cannot be used in Bath, never mind Berlin or Bombay. 

More than 350 firms in the city have signed up, making it the UK's largest alternative to sterling. 

Unlike previous schemes which have relied on paper, the Bristol Pound can be used online, even by mobile phone.

h/t Tyler 

The Hyperloop - San Francisco to L.A. in 30 Minutes

Good article here on entrepreneur Elon Musk.

The article briefly touches on his lastest, still relatively secret paradigm shifting idea, the Hyperloop.

Ben Bernanke Cannot Print a New Steve Jobs

Gold bulls rejoice, for open-ended QE is here!

Yesterday's Fed announcement wasn't the long rumored 'QE3', as a '3' implies a beginning and an end like the two prior rounds of quantitative easing.

The Fed has instead committed to not stop printing new money until the economy improves.

What then will the Fed do if the economy never improves, meaning unemployment never gets back below 5%? Will the Fed go on printing forever? We shall have to wait and see.

In the meantime anyone who believes that printing money ad infinitum will fix what ails the U.S. economy, or the global economy for that matter, is living in macroeconomic Willy Wonkaland.

Monetary policy in the form of printing new money and changing interest rates does very little if anything to improve the foundational competitiveness of an economy. The most dynamic economies are the ones which are the most productive and most innovative, and monetary policy has very little if any impact on these two areas.

The kind of GDP growth driven by purchases of products like Apple's iPhone reflects real economic growth. The kind of GDP growth derived from nominal GDP targeting (aka inflation) is fake.

In short, Ben Bernanke cannot create new real jobs. Real jobs are created by the Steve Jobs of the world.

However, it's much easier for central planners to punch a few buttons on a keyboard and print more money than to make the long-term adjustments necessary for fundamental economic improvement.

All About 'The Blob'

Read it and weep.

Who Wants to Break Up Too Big to Fail Banks?

Quite a few former Too Big to Fail bank CEOs, actually.

h/t Simon Johnson.

Video: The Great Euro Crisis (BBC)

A good series of interviews for understanding why many Greeks (and Germans) still prefer that Greece keep the euro rather than return to its previous currency, the drachma. 

Self-confessed Eurosceptic Michael Portillo visits debt-stricken Greece. He believes that the euro crisis must have shaken the Greeks' faith in Europe's single currency and wonders if there'll be a desire to revert to the free-floating drachma. In Athens he meets everyone from a destitute young family to the former finance minister and the outgoing Prime Minister, and is surprised by some of their answers. Meanwhile in Germany, Europe's economic powerhouse, Michael encounters the taxpayers who are paying most towards Greece's mammoth financial bailout while having to watch angry Athenians burning the German flag.

Video: Niall Ferguson on Milton Friedman's Legacy

Book Review: Private Empire – ExxonMobil and American Power by Steve Coll

If you were expecting Private Empire, the latest book by two-time Pulitzer Prize winning author Steve Coll, to serve as a hit piece on ExxonMobil (and 'Big Oil' in general) you’ll be somewhat disappointed.

For anyone unfamiliar with his previous work, Steve Coll’s earlier books include the highly recommended Ghost Wars, arguably the definitive geopolitical account of the activities of the CIA and other national intelligence agencies in Afghanistan and Pakistan from the time of the Soviet invasion up to the eve of the 9-11. Ghost Wars won the Pulitzer Prize in 2004 for general non-fiction and was one of the books a newly elected President Barrack Obama was reported to be reading upon entering office.

Steve Coll describes in an interview with Charlie Rose what lead him to want to write Private Empire and how his original idea for the book was to tell a broader story about the oil industry in the style of Daniel Yergin’s The Prize. He soon realized, however, that he needed a central character and Exxon was for him the only logical choice.

Coll’s portrait of Exxon begins in March 1989 with the Exxon Valdez oil spill in Prince William Sound, Alaska, an event which made the company the most reviled in the United Sates. The book’s timeline spans the subsequent transformation of the company, which was led by CEO Lee “Iron Ass” Raymond, up through its present day stewardship by current CEO Rex Tillerson. Along the way we learn a great deal about Exxon, including its somewhat peculiar cult-like corporate culture, its blockbuster merger with Mobil, its controversial stance and efforts on global warning, the access it enjoyed to political leaders such as Vice President Dick Cheney, its somewhat misleading approach to reporting oil reserves, and the company’s record setting financial success. The book in fact makes for a compelling business case study and students of business history, strategy and management will find much of interest.

The most interesting sections of the book are the ones detailing ExxonMobil’s operations in some of the world’s most politically unstable regions. ExxonMobil’s bread and butter business is to invest billions of dollars drilling holes in the ground in countries like Equatorial Guinea and Chad and then spend the next 30-40 years working to make sure that nothing interrupts the company's return on investment. Coll’s account of the 2004 attempted coup in Equatorial Guinea by a group of British and South African mercenaries, who were supported from some elements within the Spanish government, is one of the most fascinating stories in the book.

Continue reading the full review here.

Video: Michael Burry 2012 UCLA Commencement Address

Greece vs. Germany: Football Showdown Between Europe's Arch Debt Crisis Antagonists Looks Likely

Germany vs. Greece

Greece's national football team just scored to go up 1-0 against Russia. If Greece can hold on to beat Russia and advance as the runner-up in Group A they would play the winner of Group B, which is looking like it will be....Germany!

Anyone following the vitriol which has been spewed in the Greek and German media towards each respective country these past two years can't help but be intrigued by a possible matchup of the two Eurozone debt crisis antagonists on the football pitch.

Will Angela Merkel extend an olive branch and invite Greece's newly elected 'Sexy Alexis' Tsipras to share the spectators box at the match? Will tempers fueled by 2+ years of economic depression and feelings of being cheated and bullied boil over amongst the players? Would a lopsided German victory serve to further engrain in the Greek psyche the notion of a German-dominated Europe?

Or, more optimistically, will sport -- in its unique role in our society -- do what it does when it's at its best and serve as a means to bring disagreeing peoples together to help form the basis for a constructive way forward in the Eurozone crisis?

A more pressing question is how would Greece's advance to the quarterfinals affect tomorrow's national election? One can imagine the euphoria from victory over Russia working in favor of status quo parties such as New Democracy, which appear to have positioned themselves as more pro-Europe, and against protest parties like Syriza, which have benefitted from a frustrated, angry electorate.

If the matchup between Greece and Germany happens it would take place on Friday 22 June at 19:45 GMT.

Update: Greece did their part, beating Russia 1-0. Now if Germany can win Group B tomorrow we'll have our showdown.

Greek ATM Withdrawal Limits Under Discussion

More here.

On the Topic of Financial Collapse Fear Mongering

"Ireland is in a death spiral" -FT

"After the November President election the U.S. is facing a fiscal cliff" -Federal Reserve staff

"Eurogeddon!" -The PolyCapitalist

On and on go the warnings of cataclysm and pending financial doom. Technical jargon and existential risks are bandied about in frightening fashion, leaving the general, less-economically literate with very little ability to understand what's actually happening or just how bad things could really get if say Greece leaves the Eurozone, or another country defaults, or something like this occurs.

This blog is not entirely innocent of this criticism, and this post is a brief attempt to quickly address the question of whether our global financial system is on the precipice of a financial collapse if say something 'really bad' happens in Europe?

The short answer is no.

Now before I expand on that answer I would like to clarify something very important: this post is about financial collapse and not about the extremely high levels of unemployment, which have reached approximately 50% for young people in countries such as Greece and Spain. The youth and general unemployment problems today are serious and something to be very concerned about. But this post is not about that but instead about whether another Lehman-style event could occur where the world's financial system risks implosion if say a country like Greece pulls out of the euro, the current 'bank jog' in Spain accelerates, etc.

So why isn't the risk of financial collapse as bad as some would have use believe?

For starters, we have to keep in mind that our financial world is a virtual world. Today, money is largely a set of numbers on a computer. This means that even in the most extreme scenario of financial disorder, where policymakers completely blow it and the ATMs stopped working and the stock market tanked, that everything that is real and tangible - the houses, the food that is farmed, the physical assets - none of this goes away and will all be here the next day when you wake up in the morning.

Now having said that, a financial implosion would definitely have a major impact on our lives, particularly for those with fewer resources or who are unprepared. But life will go on for nearly everyone and could actually rebound quite quickly given other historical cases. For example, Argentina began recovering within months following its utterly complete financial meltdown in 2001 even though the country achieved the relatively rare trifecta of a currency collapse, a banking crisis, and a sovereign default all at once. Iceland has had a relatively quick turnaround following its 2008 financial implosion. And other Asian countries in the late-90s also turned the corner pretty quickly following major financial crises.

In the case of Argentina, dozens of people died in Dec. 2001 riots, so I don't want to minimize the very real suffering and dislocation which comes with a financial collapse. But Argentina's experience is a far cry from the level of suffering of say a war or severe natural disaster. In short, a 'cataclysm', it was not.

A further point needs to be made about the above examples, which is that they were all relatively isolated, contained crises that did not threaten a systemic collapse in arguably the same way as the current crisis. But this leads me to point number two, which is that a systemic collapse is extremely unlikely, particularly given two facts:

1. what was learned from the recent Lehman-experience in 2008 by the current crop of policymakers.
2. the world's central banks, especially the Federal Reserve, still have loads of financial ammunition.

Regarding the first point, current policymakers got a first-hand glimpse of just how interconnected the world's financial system is and how the failure of a seemingly small cog in the wheel could threaten to topple the whole system. So while yes, Greece's financial implosion could lead to a chain reaction that threatens the entire global financial system, it is utterly inconceivable in the wake of the Lehman crisis that policymakers would sit back and let that happen given what they learned and how they responded in 2008-2009.

So I hear you asking whether all our problems are solved then because central banks like the Federal Reserve are all powerful, financially speaking, and able to contain any crisis which comes its way? Over the long-term, I would say no, they are not all powerful financially. But in the short-term, meaning right now and over the next few months at least, they are all powerful financially, and here's why.

Central banks like the Fed, ECB, Bank of Japan, and Bank of England which operate fiat currencies have an extraordinary power, which is that they can create an unlimited amount of money.

'Unlimited', meaning a truly infinite amount of money? Yes

What this means is that even if, for example, all the depositors in Spain and Greece withdrew every last euro from their local banks the ECB can supply all the notes that citizens want to hide under their bed mattresses. In short, the ATMs should never, ever run out of money in a fiat money system which is being managed by competent professionals.

But earlier I alluded to the fact that even though central banks can print an unlimited amount of money that they were not in fact financially omnipotent over the long-term, so what did I mean by that?

With the magic that is the computer a central bank could literally go and create and infinite amount of money. But there are side effects with central banks creating a lot of money, namely inflation. Without getting technical, simply put inflation is a rise in prices. Hyperinflation is a very large, sudden rise in prices.

But here is the crucial point to remember: rising inflation acts as a brake on a central bank's ability to create money. In other words, a rise in inflation is perhaps the key to understanding when central banks would be constrained in any effort to bail out the financial system.

Today, most of the world's advanced economies (North America, Europe) have relatively modest inflation, meaning low single digit annual percentage increases in official measures of core inflation. And even though they would say otherwise, the central banks in these advanced countries would be more than willing to trade an increase in inflation to stem the risk of a systemic financial collapse.

So how much more inflation would central banks be willing to tolerate as a tradeoff for not risking financial collapse? As the Bank of England has demonstrated in the past couple years, inflation creeping up towards 5% is not enough of a concern to prompt a significant deviation in policy. So my guess (it is a guess) is that at the extreme central banks like the Fed could tolerate up to 10% if they perceived the risks of collapse to be great enough before they would think twice about pulling another post-Lehman style bailout of the world's financial system. And since we're still in low single digit inflation this gives the Fed a decent amount of runway to maneuver.

This room to maneuver is what is meant when it is said that the Fed, which controls the world's most important reserve currency, and other central banks still have lots of ammunition.

The existence of this ammunition is likely a factor behind why given all the current distress in Europe that the stock markets haven't fallen further. In other words, the markets expect central banks to step in and flood the financial system with money if Greece leaves the euro or a banking run accelerates. Even the supposedly hemmed in by the Germans/hard-money crowd ECB. After LTRO and all the sovereign bond debt purchases, anyone who still thinks the ECB won't step in to save the system if things go completely pear shaped by creating a lot money is living in a fantasy. And this flood of central bank money would likely be very bullish for stocks in the short-term.

Should inflation increase significantly, then the ability of central banks to rush in and save the day could be diminished. But for now, they have the power to act, and that's why (for now) a general financial collapse is not on the immediate horizon.

So in sum, if you want to understand when it might be time to get worried, keep an eye on official measures of core inflation, particularly if it starts creeping up near the 5% level as that is about the time a proper central banker will begin to twitch over fears of runaway inflation.

Now, in terms of how you want to position your investment portfolio given the above, the very first post on this blog just over two years ago argued for allocating some of your portfolio into gold, which is arguably the best hedge against excessive central bank money printing. Even though the price of gold has gone up significantly in the last two years this blog still stands by that recommendation for long-term investors.

On The Problem With Postponing the Inevitable

Today's Eurogeddon must read.

Lagarde Sacrifices Herself to Help Greece's Pro-Bailout New Democracy Party?

The Eurogeddon chess game is getting desperate so don't be surprised to see a few political/PR curveballs over the next few weeks in front of the 17 June Greek election runoff.

Case in point is this weekend's snarky comment from the typically ladylike Madame Lagarde. But before we get to that, some background:

The single worst thing than can happen from the perspective of the Troika (the IMF, EU, and ECB) and Greek elites right now is for Syriza and its 37-year old leader, 'Sexy Alexis', as he's now being called, to do well in the 17 June Greek election runoff.

In the most recent May elections Greek voters turned away from the two pro-bailout/austerity parties, PASOK and New Democracy, as they were seen as tools of the Troika. This rejection by voters sent a shiver up the Troika's spine as they know that should Syriza and Alexis Tsipras prevail he will likely walk away from the terms of the bailout and thereby call the Troika's bluff to either a) cut off Greece's banking system from further ECB funding or b) terminate any further bailout money to Greece's government. Either one of these moves will likely trigger a financial panic and spoil everyone's summer vacation plans.

So the Troika are now desperate to see PASOK and or New Democracy do better in the 17 June election. So how can they help them?

Agent Provocateur: Christine Lagarde, IMF Chief

Angry Greek voters are looking for someone to blame, and as long as PASOK and New Democracy are seen as part of the problem it's unlikely that voters will put them back into power. So one strategy is to try and reshift the political blame onto the external Troika, which would have the effect of diverting negative feelings away from PASOK and New Democracy. This would help the two pro-bailout Greek parties reposition themselves as domestic victims rather than as co-conspirators with the hated foreigners.

And now you understand why the typically politie Christine Lagarde, head of the IMF, probably deliberately roiled the Aegean kettle this weekend with a comment about how it's 'payback time', and Greeks need to pay their taxes.

Queue the Greek firestorm.

And lo and behold, New Democracy, who of course along with PASOK quickly denounced Lagarde's rhetoric, is again rising in the polls.

Nice move, Troika.

And, by the way, Lagarde doesn't pay any taxes on her $551,700 in annual compensation.

Video: Happy Memorial Day

Memorial Day is a time for Americans to say thank you to those who have served and are serving in the U.S. armed forces, and to remember in particular those who have been killed or injured in the line of duty. If you know someone in the U.S. service it takes just a few moments to say thank you and it really is appreciated by those who serve. 

And even if you don't agree with the Afghanistan war or other U.S. military activities that are currently underway remember that as Vietnam General William Westmoreland said, “The (U.S.) military don’t start wars. Politicians start wars.”

Memorial Day is also a good time to reflect on war in general and the tremendous suffering and destruction it causes. While there is still war we should not stop asking what are its root causes, and what more can we do to try and prevent it? 

The question of why war occurs is no doubt complex with many factors, but one component to keep in mind is the sheer size and business of war, and the affect it has on the livelihoods of millions of people.

Many are familiar with President Eisenhower's 1961 farewell address, and his famous warning about the 'Military-Industrial Complex'. If you haven't watched his full speech it is well worth the 15 minutes of your time.

Ike, a well respected leader with impeccable military credentials, was in a strong position to offer up such a warning.

One wonders if we'll ever see another Ike, or FDR, or TDR or Truman as U.S. President. One has the impression that they just don't make them like that anymore.

Greece QOTD: "Papadreou was clueless. Papademos was complicit. Where does blame really lie?"

Atta boy, AEP.

Greece Can Physically Print Its Own Euros In Spite Of ECB 'Choke' Efforts

Euro printing press

As the long ago predicted Greek 'bank jog' accelerates there is much talk in the econoblogosphere of the Greek banking system being 'choked off' by the ECB.

If this is in fact the Brussels/Frankfurt plan to force Greece out of the euro there is a perhaps not insignificant obstacle to this strategy: as noted in this post last year, Greece has its own euro printing press. 

The ECB does not print any euro banknotes but actually assigns this task to local member country central banks, with the ECB instructing the local central bank how much of which denominations to print.

So what does this mean?

In opinion polls Greeks want two things: a) to default on their sovereign debt less fiscal austerity and b) stay in the Eurozone. However, European elites (read: Germany) are saying to Greece that you can't have both. But is Germany correct?

An important point to keep in mind here is that there is no legal mechanism to force Greece to drop the euro and readopt the drachma. Hence the idea of choking off the Greek banking system and forcing the Greeks to renounce the euro versus organizing some type of formal action, such as a vote to eject Greece from the euro, which would not be allowed under current EU law.

But in the event of a full-fledged run on Greece's banking system, where Greek banks literally have no cash on hand to give to depositors, it would seem reasonable and (crucially) perhaps legal for the Greek central bank to start printing euro notes even if the ECB disavows this action.

If this were to take place is there anything the ECB could do to stop the Greek central bank from printing euros? Probably not.

It's hard to imagine the situation reaching a stage where the Greek central bank openly revolts against the ECB and starts printing euros. However, Greece need only hint at playing this card for it to have the desired effect, which is to force the ECB to continue accepting Greek bank collateral on reasonable terms. In other words, the fact the Greeks can print their own euros nullifies the ECB's ability to choke the Greek banking system into submission and force a 'voluntary' abandonment of the euro.

Your move, Angela.

Young People CAN and ARE Making a Difference in Europe

Getting more young people (and women) into positions of political power is a good thing.

Alexis Tsipras, leader of Syriza

Whether you agree or disagree with the politics of 37-year old Alexis Tsipras, the leader of a leftist-Greek coalition which surprised in the weekend election, he has demonstrated that not every member of the next generation is politically impotent.

While this blog probably would not be characterized as far left-wing, we do celebrate seeing someone under-40 years of age achieving political success.

Bravo, Alexis!

Happy Free Positive PR for UK Banks Day!

One somewhat peculiar difference between the U.S. and UK is how in the UK (and Ireland) official public holidays are referred to as 'bank holidays'. From Wikipedia:

A bank holiday is a public holiday in the United Kingdom or a colloquialism for public holiday in Ireland. The first official bank holidays were the four days named in the Bank Holidays Act 1871, but today the term is colloquially...used for public holidays which are not officially bank holidays, for example Good Friday and Christmas Day.

I have no idea whether Brits on whole form any positive associations towards banks because of this, but if nothing else it strikes me as some nice free, positive advertising for our friendly, neighborhood Too Big to Fail banks.

Here's an idea: perhaps renaming 'bank holiday' to 'public holiday', or something similar, would allow a pol to campaign on a symbolic, anti-banker message that also poses low-to-no risk to the establishment.

Video: A Simple, 8-Minute Explanation of What's Wrong With Mainstream Economics

Below is NOVA's longer but also recommended explanation of what's wrong with mainstream economics.

 

Video: Ferguson, Rattner, Murray, etc. on What's Happened to the American Dream?

Video: Review of 4-Part Frontline Financial Crisis Series 'Money, Power, and Wall St.'

The PolyCapitalist is kicking May off with a number of must watch videos, and this epic 4-part Frontline special follows the crisis from what is arguably its point of genesis: a 1994 JP Morgan retreat in Boca Raton, Florida which of led to the creation of the first credit default swaps.

Frontline has done an incredible job getting many of the key players and insiders, including a number of top Wall St. bankers, to go on record about what happend. Even if you've read all the books, seen the earlier Frontline financial crisis special, and think you know all you need to about the financial crisis, this is still must watch.

The big new item for me, and I'm a bit surprised this has not received more ink, was the March 2009 battle between Larry Summers and Tim Geithner over what to do with the megabanks. My prior understanding was that Summers and Geithner were two peas in a pod. Not always it turns out.

According to Frontline, in March 2009 Summers, along with fellow economist Chritina Romer, pushed for what was called 'Old Testament Justice', meaning firing a bank CEO and or possibly nationalizing one of the megabanks. In contrast, Geithner, who it would appear is more of a protege of Bob Rubin than Summers, fought hard to treat the banks with kid gloves and use stress tests to help instill confidence back into the marketplace.

Obama ultimately sided with Geithner, which seems to contradict earlier reporting that Geithner had ignored Obama's instructions to dissolve Citigroup. Frontline definitely presents Summers in a better light and Geithner and Obama in a worse one.

I have only a minor gripe with this Frontline series, which is the annoying editing. In a multi-part, complex story, reusing clips to aid telling the story is probably unavoidable. However, I felt they recycled too many from within the four part series, as well as from an earlier Frontline special on the financial crisis from a couple years ago. But this is a minor, forgivable quibble given the extraordinary job the Frontline team did to compile and document the crisis up through present day.

Overall, perhaps the key point made in the series - and one I could not agree more with - is that the financial crisis still has not ended. Where it will go from here is as much dependent now on politics as markets or economics.

Video: El-Erian, Buiter, Warsh, etc. on Economic Growth

This is another excellent panel from the Milken Institute Conference. It has a somewhat more investment focus than the previous one posted with discussion/predictions on the Eurozone (Greece in or out), elections, interes rates, etc.

Video: Raghuram Rajan, Niall Ferguson, etc. on The Future of Capitalism

This video from the Milken Institute Conference unfortunately appears to begin after the panel has already begun and cuts abruptly, but still features a very good discussion of economic issues in the U.S., Asia, and Europe.

How Some U.S. States Subsidize Other States

With the political battle over government spending raging across the globe the story of how some U.S. states are subsidizing others is getting more attention.

Here is a good post on this topic from the NY Times Economix blog with several useful links, as well as the below chart showing how much extra federal spending each state receives beyond each federal tax dollar paid into the federal government by that same state's taxpayers.

(click to enlarge)

And here is a map plotting the above data.

(click to enlarge)

From the chart and map you can see that in 2005 the state of New Mexico received back over twice the amount of money it paid into the federal government. 

In contrast, the state of New Jersey received $0.61 back on every dollar it paid into the federal government. 

In short, the New Jerseyans are subsidizing the New Mexicans via tax transfers conducted at the federal level.

Another observation is that just 17 states received back less than what they paid in while 32 received more back (Rhode Island received back exactly what it paid in). In other words, a minority of states are subsidizing the majority.

More from the NY Times:

Readers contemplating the table will discover in it a certain paradox — that those residents who most often denounce big government and call for sharp cuts in government spending often benefit themselves from such spending or live in regions that receive significant government support. This was also noted by the Tax Foundation. In presenting the data in the form of a geographic map, the foundation wryly observes: 

As you can see from the map, states that get the “worst deal” — that is, have the lowest ratio of federal spending to taxes paid — are generally high-income states either on the coasts or with robust urban areas (such as Illinois and Minnesota). Perhaps not coincidentally, these “donor” states also tend to vote for Democrat candidates in national elections. Similarly, many states that get the “best deal” are lower-income states in the Midwest and South with expansive rural areas that tend to vote Republican.

In other words, there is correlation between the above map and the below map which shows general U.S. Presidential voting patterns for Republicans (dark red solidly Republican, light red leans Republican) and Democrats (dark blue solidly Democrat, light blue leans Democrat), and white states a toss up.

Bottom line: the subject of some states, which primarily vote Democrat in the Presidential election, subsidizing Republican voting states is a topic that could generate significant political friction in the years ahead.

Video: Debt and Redemption Documentary

At the risk of sounding trite it's often helpful to put a face and voice behind the news.

This short documentary by VPRO, which does excellent work overall btw, has some good coverage of the fallout from the dealings by both small and large Italian municipalities in derivatives like interest rate swaps. And if terms like 'derivative' turn you off but you're still interested in learning more and trying to understand the financial crisis, then video is particularly recommended.

Interviews include the Rolling Stone's Matt Tabibbi, Brooklyn based investor-blogger Reggie Middleton, and former IMF Chief Economist and Professor Simon Johnson.

The most interesting fact from the documentary for me was learning how the City of Milan agreed to be on the hook financially to a bank in the event of a debt default by Italy (the nation state).

Are there any other municipalities which have contractually guaranteed the debt of a sovereign state?

'Government Bank Bailout Was Profitable' Myth Receives Another Nail in the Coffin

Bravo to Jonathan Weil of Bloomberg, who uses the U.S. Treasury's own footnotes and figures to dispel the myth that the bank bailouts were profitable to taxpayers here.

Video: Simon Johnson's White House Burning

Why is the U.S. Government Still Hiding Financial Crisis Documents?

Here here to former Lazard partner turned Wall St. author/historian William Cohan and his fighting the good fight to obtain public documents from the U.S. government related to financial firms such as Goldman Sachs.

Enemies: A History of the FBI - Podcast by Pulitzer Prize Winner Tim Weiner

An excellent talk on his new book about the FBI from the author of Legacy of Ashes, the must read Pulitzer Prize winning history of the CIA.

Regarding the FBI, here is Wired's story of one tech company's efforts to prevent the Bureau from obtaining information about its customers, via a National Security Letter (NSL), which legally prevents those customers from being informed by the company that the FBI is seeking information about them. Here is a brief excerpt from Wired's article:

In 2007, a Justice Department Inspector General audit found that the FBI, which issued almost 200,000 NSLs between 2003 and 2006, had indeed abused its authority and misused NSLs. 

The inspector general found that the FBI evaded limits on (and sometimes illegally issued) NSLs to obtain phone, e-mail and financial information on American citizens, and that it had also underreported the use of NSLs to Congress. In 2006 alone, the FBI issued more than 49,000 NSLs, but that number dropped dramatically to 16,804 in 2007 following the inspector general’s report. After the Justice Department claimed it instituted reforms to address the legal lapses, the number of NSLs issued increased to 24,744 in 2008. In 2010, the most recent year for which statistics are available, the FBI issued 24,287 NSLs.

Without any further adieu, here is Tim Weiner's podcast.

Speaker(s): Tim Weiner
Chair: Professor George Gaskell

Recorded on 13 March 2012 in Hong Kong Theatre, Clement House.

The United States is a country founded on the ideals of democracy and freedom, yet throughout the last century it has used secret and lawless methods to destroy its enemies. The Federal Bureau of Investigation is the most powerful of these forces. Following his award-winning history of the C.I.A., Legacy of Ashes, Tim Weiner has now written the first full history of the F.B.I. as a secret intelligence service, Enemies: A History of the FBI| which he will talk about in this lecture. Drawn entirely from firsthand materials in the F.B.I.'s own files, Enemies brilliantly brings to life the entire story, from the cracking of anarchist cells to the prosecution of the 'war on terror'. It is the story of America's war against spies, subversives and saboteurs - and the self-inflicted wounds American democracy suffered in battle. Throughout the book lies the long shadow of J. Edgar Hoover, who ran the F.B.I. with an iron fist for forty-eight years. He was not a monster, but a brilliant confidence man who ruled by fear, force, and fraud. His power shaped America; his legacy haunts it.

Tim Weiner is a Pulitzer Prize-winning journalist at the New York Times, where he has reported from Afghanistan, Pakistan, Sudan and fifteen other nations. He was based for a decade in Washington, DC, where he covered the C.I.A. and the Military - the latter topic being the subject of his Blank Check: The Pentagon's Black Budget. He is the author of the bestselling Legacy of Ashes: The History of the CIA, which won the 2007 National Book Award for Non-Fiction.