Tuesday, October 28, 2008

WaPo's David Broder joins the Wooster, OH election beat

Well, look at that. David Broder of the Washington Post stopped by Wooster Ohio to discuss the election, too. Welcome to my beat, David ;-)

My Mom emailed me with the story, and told me that she was disappointed that she wasn't in the bustling Obama headquarters when Broder stopped by:
Two local women at the tables -- Cullen Naumore and Catherine Wiandt -- heard Sen. Joe Biden when he spoke in mid-September at the College of Wooster. Naumore had never thought of volunteering in a campaign, and Wiandt had abandoned politics, disillusioned, after working for Democrats in her younger years. Now they are part of a volunteer force that Litt estimates at "100 per week and growing." Two others are Jessica Schumacher of Lexington, Ky., and Sarah Green-Golan of Boston, respectively a sophomore and a senior at the College of Wooster. I met them on campus and heard how they and their friends had persuaded 700 of their fellow students to register in Wayne County, where the Republican presidential margin has ranged from 11,000 to 12,000 votes in the past two elections."It's going to be different this time," they assured me.
Yes, times change. And people change them.

How times change

When I was growing up on a farm outside of Wooster, Ohio, my parents used to gently mock the city values of the county seat, where, astonishingly, a Democrat was mayor. Wooster's population then was about 18,000, and it's the sort of place with a gorgeous courthouse, empty streets, and 'family values' signs in the windows of businesses downtown. Berkeley it ain't. But from the comparative conservative high ground of the countryside, it seemed like a suspicious hotbed of liberalism.

This year, my Mom, now moved to town, is going door to door for Obama.

Times do change. And it's people who change them.

Monday, October 27, 2008

Breaking News: Obama is a socialist, Ethan still voting for him

There's a tempest in a teapot brewing over in right-wing land over this quote from Obama on a 2001 radio talk show:
"One of the I think the tragedies of the Civil Rights movement was because the Civil Rights movement became so court focused I think that there was a tendency to lose track of the political and community organizing and activities on the ground that are able to put together the actual coalitions of power through which you bring about redistributive change and in some ways we still suffer from that."
If you think that the word 'redistributive' means he's a socialist, well, sure, game over, he's a socialist. But then you probably think FDR was a socialist, too, and I think that he and Ronald Reagan were the two greatest presidents of the last century.

The simple fact is that all of society benefits when there's a floor at the bottom and no ceiling at the top. FDR built the floor, and fifty years later, Reagan fixed the ceiling problem. Now, 25 years later, it's time to repair the floor, and in 20 or 30 years, some new Reagan can come along and fix the ceiling which by then will no doubt need repair.

I'd have voted for both FDR if I were alive and Reagan if I were of age, and I'll be voting for Obama and no doubt for Reagan's future successor to come. Management is mostly about pragmatism, and oversight of management is mostly about choosing the right guy for the problem. FDR, Reagan, and Obama are all that guy, and I'm looking forward to contributing my small voice to the process of choice in a week's time.

Wednesday, October 15, 2008

Portrait of a market in distress

If you had any doubt that we live in interesting times, check out this amazing stock chart:
That's Japan's Nikkei 225 average over the past 5 trading days. It looks like it was drawn by a five-year-old who doesn't understand the concept; since when are stock charts made up of straight lines and gaps?

Even more interesting is that this is an *average* of 225 stocks. Isn't diversity supposed to even out fluctuations? The entire world financial system is now learning the painful lesson discovered by Long-Term Capital Management in 1998 -- that in edge and corner cases, entire asset classes, and multiple asset classes, can unexpectedly be deeply correlated, with the result being severe dislocation. Condos in South Florida and the Icelandic Krona -- who knew?

Everyone who hasn't yet read Nassim Taleb's _Black Swan_, get busy. It is well on its way to being book of the decade.

Tuesday, October 14, 2008

Goodbye, Hedgies!

"For the $2 trillion hedge fund industry, a long-feared shakeout is at hand. Some analysts say one out of every 10 funds could fold."

Seriously? News flash, NYT: When an illiquid asset class that grew on excess leverage and irrational hopes of profit collapses, you'll be lucky if one out of 10 survives.

Ask me how I know.

Fortunately, there are useful things for all those unemployed quants and asset managers to do.

Sunday, October 12, 2008

MBA and law students, please do something useful

This is probably the most depressing thing that I've read all week:

For students who set their sights on Wall Street during the boom years, the end has come just as they are getting ready to join the party... But even as the markets spiraled downward, business and finance students at top universities said they were not panicked about their futures and were confident that the financial markets would recover. For the young achievers drawn to finance, expectations die hard. [Kenton] Murray, [a senior at Princeton,] described the mood at Princeton as cautiously optimistic. No one I’ve talked to is worried about moving back home yet,” he said. “But everyone I know is studying for the LSATs right now, people who a month ago had no intention of ever going to law school.

Jian Yang, 25, who is in his second year at the University of Chicago's graduate business school...expects to graduate with $200,000 in student debt.
Ye Gods.

Part of the reason that we got into this mess is that too many bright people are doing relatively useless things like investment banking and lawyering. Another key reason that we got into this mess is that once any entity -- from an individual person to the Federal Government -- gets themself under a massive pile of debt, their options are highly constrained. Prison may be more crushing than debt service; but it may not, because in prison, you don't have to spend your sentence productively.

To all the MBA students out there -- please don't double down on this historic mis-allocation of resources. If you are quantitative enough to consider finance, look into data mining and machine learning for product and marketing design and refinement. Translation: search relevance and ad targeting; but these are only the tip of the iceberg. Soon these disciplines will spread, because they add real value both to consumers and to merchants. Operations research for resource allocation is another huge area. The world is undergoing another historic transition now, which is toward connected, data-driven marketplace of real stuff -- not the fake packaged stuff that has been driving Wall Street for the past seven years. You won't ever get a $500K bonus working in this field, but you'll make a good salary, you'll add to the productive economy, and if you join (or start) the right company, you'll get rich beyond Wall Street dreams of avarice -- and deservedly so.

To all the law students out there -- if you are articulate and nuanced enough to consider law, how about a management or leadership career? The world needs more thoughtful communicators and accomplished managers. Running a team is a lot harder than running a trial, but much more rewarding. Understanding and influencing the people who work for you and who struggle to work together is a lot more interesting than navigating a jury selection pool. Negotiating a business partnership is a lot more fulfilling than a litigation settlement. I see the insides of hundreds of organizations that we partner with, and good management and leadership is all too rare. You too can make an enormous difference to the productive economy by refocusing your talents elsewhere. Are we electing Barack Obama president because he's a good negotiator? Or because he's a great leader, communicator, and manager? You know the answer. Be that answer.

And to all of you - please, please be careful about getting yourself buried under a mountain of debt, such that you end up having to work at a career that you may hate, in an industry that may not really provide anyone lasting value, simply because you are crushed by your debt service. I'm sorry, but if it takes $200K in debt, then whatever your parents told you about getting into that 'top school' is probably wrong. The ROI to your life is negative. I flunked out of one top school and left another before completing my PhD, and I was neither struck by lightning nor am I begging on a street corner. If you're truly smart, talented, motivated, and capable, you'll do fine.

There's a lot of broken economy to fix. Let's get to work.

Monday, October 06, 2008

So where did all that housing money go? You already spent it

The size of the numbers is staggering -- $700 billion here, $900 billion there -- and a lot of people are wondering how it's possible that seemingly every bank and every homeowner is suddenly broke.

There have been clear signs for a while that something was amiss in the housing and consumer consumption market, and one great indicator is Mortgage Equity Withdrawal, or MEW.

This is, quite simply, the net amount of cash that people pulled out of their houses to spend on Other Stuff -- either by a home equity loan or, in the case of retirement, selling an expensive house and buying a cheaper one. The financial blog Calculated Risk reports, buried in an article about the collapse of MEW, that U.S. consumers pulled $2.7 trillion out of of their houses during the five years from 2004 through 2008:
Equity extraction was close to $700 billion per year in 2004, 2005 and 2006, before declining to $471 billion last year and will probably be less than $100 billion in 2008.
While some of that might have been spent on the houses themselves, in the sensible form of new bathrooms or additions, a lot of it was spent on questionable upgrades like granite countertops and flat-out expenditures like flat screen TVs, Hummers, and vacations to Fiji. So the reason that all those Wall Street banks are going bust? Because they thought that you -- or your neighbors -- were actually going to pay back the inflated mortgages that backed up that giant sucking sound of the home ATM in overdrive.

For those of you who protest (as I do) your innocence, realize this simple fact: Even if you didn't do such an extraction yourself, whatever business you are in benefited from the huge increase in consumer spending that this MEW generated over the past four years. Retail, manufacturing, advertising, financial services, construction... we all lived a little or a lot better.

And now, not only is it gone, but we've got to pay it back in the form of systemic collapse, higher taxes, or inflation. None of us were as wealthy as we liked to pretend over the past four years, and now we're all going to be a lot poorer than we're ready to admit.