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Archive for December 2005

Reflexive bubbles

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Paul McCulley of PIMCO discusses the feedback mechanism at work in the housing bubble (and seems to call the top). I recommend the whole article (whimsical as it is), which also touches on Bretton Woods II, Asian and OPEC mercantilism, etc. He also makes an interesting observation that bond markets now assume that the Fed has tamed and will continue to tame inflation, and long term rates reflect projections of the real interest rates necessary to do so.

If Fed-engineered changes in nominal rates no longer reflect changes in long-term inflationary expectations, but rather changes in real rates, then logic suggests that long-dated income-producing assets – bonds, stocks and real estate – will become inherently more prone to bubble and burst.

Accordingly, it seems to me, asset prices inevitably must take on a higher priority in the Fed’s reaction function than during the War Against Inflation. As long as inflation was too high for the Fed’s secular taste, bubbles and their bursting didn’t carry grave harm. They misallocated resources, to be sure, like all good Austrians properly preach.

…when home price appreciation is running higher than mortgage rates, the market booms, if not bubbles, as momentum players chase the market higher, a text book example of what George Soros calls reflexive demand. But once the momentum breaks – and again, Morgan, declining affordability is the fundamental break – reflexive demand becomes reflexive supply, as former speculative buyers become eager sellers.

Reflexive markets – and property is one if there ever was one – inherently tend to have V-shaped tops, not rolling tops. Thus, both volumes in total home sales, particularly existing home sales, and MEW are set to fall sharply in the year head. Not the stuff of recession, I hasten to add, Morgan, but clearly the stuff of a serious slowdown in consumer spending.

MLF: Won’t that be a problem for foreign members of the BW II arrangement? Didn’t you say that they are as addicted to our spending as we are to their financing of our spending?

PM: Yes, Morgan, I did say that. Which implies that when the American property market comes off the boil, maybe turning tepid, the world will feel the impact, not just American homeowners. Such is the nature of globalization, when the ex-USA world has a shortage of aggregate demand or, put differently, runs a surplus of savings relative to desired domestic investment.

Written by infoproc

December 29, 2005 at 7:20 pm

Posted in finance

Orwellian Internet spying

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Some good blog posts on this subject: Bruce Schneier (security expert and author of Applied Cryptography) and some legal analysis by Dan Solove. Quick summary: probably in violation of existing FISA laws, probably not explicitly unconstitutional under the 4th Amendment, but Bush’s justification under Article 2 is weak, bordering on “frivolous” according to one legal scholar.

John Yoo’s memo (the wishful thinking of a thirty-something junior DOJ official, who nevertheless was the strongest intellectual voice on this subject in the administration?!#?) comes close to asserting that there are no limits on Presidential power in the unending “war” on terror. How will we decide when this “war” is over? Was there ever even a declaration of war? Several scholars assert that the 9/14/01 Congressional authorization for use of force falls far, far short of a declaration of war. It is miles away from the declarations of war in WWI and WWII (and the threat is much less serious, as I pointed out in the previous post). If one defines a dictator as a ruler who is beyond the law, then Yoo’s memo seeks to justify dictatorial power for Bush-Cheney.

Nineteen Eighty-Four

“Remember our boys on the Malabar front! And the sailors in the Floating Fortresses! Just think what they have to put up with.”

“The rocket bombs which fell daily on London were probably fired by the government of Oceania itself, ‘just to keep the people frightened’.”

“To tell deliberate lies while genuinely believing in them, to forget any fact that has become inconvenient, and then when it becomes necessary again, to draw it back from oblivion for just so long as it is needed.”




Written by infoproc

December 26, 2005 at 7:43 pm

Posted in Uncategorized

I told you so…

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Confirmation of massive, illegal violation of privacy rights of US citizens through telco and Internet monitoring, authorized by the “war preznit”. The legal position of this administration (I am not kidding) seems to be that the “war preznit” is free to disregard existing US law in “times of war” like these. If Congress pushes the issue, as it should, we may end up with a full-blown constitutional crisis.

Bush is no more a war president than Ronald Reagan or Jimmy Carter, who faced down a much more formidable foreign adversary. You might argue that Al Qaeda is more dangerous than the USSR and eastern bloc, with their hundreds of ICBMs and thousands of nuclear warheads, but you’d be crazy. Let me offer the following analogy. While walking home you are confronted by a man with a loaded shotgun. By staring him down and pointing out that you yourself are armed, you avoid having your head blown off. Continuing on your way home, a small dog bites your ankle. Is the dog really a greater threat, just because it bit you, than the guy with the shotgun? If not, why should we allow Bush to unilaterally claim greater security powers than Reagan or Carter had? (Indeed, contravening the existing FISA law of 1978.)

In an op-ed article published Friday in The Washington Post, Mr. Daschle said he rejected a White House effort three days after the attacks to grant Mr. Bush specific authority to conduct antiterrorism operations within the United States as part of a broader resolution backing the use of force.

In seeking the specific authority for a domestic response, Mr. Daschle said, the White House was effectively acknowledging that the resolution did not cover domestic actions like spying on Americans.

“The Bush administration now argues those powers were inherently contained in the resolution adopted by Congress – but at the time, the administration clearly felt they weren’t or it wouldn’t have tried to insert the additional language,” Mr. Daschle said in the article.

The White House has asserted that the resolution, adopted by Congress on Sept. 14, 2001, freed Mr. Bush from the requirement to get warrants to monitor international phone calls and e-mail of Americans and others in the United States. That resolution authorized the president to employ “all necessary and appropriate force” in response to the attacks on New York and the Pentagon.

But by Mr. Daschle’s new account, which appears not to have been made public previously, the White House sought within minutes before the vote on the resolution to alter it to include new wording specifically granting power to carry out the antiterrorism campaign within the United States.

The White House, Mr. Daschle said, wanted the resolution to give Mr. Bush authority to use “all necessary and appropriate force in the United States and against those nations, organizations and persons” responsible for the attacks.

Mr. Daschle said he had turned aside the White House’s effort to include “in the United States and” in that sentence, leaving the focus of the resolution on fighting terrorism abroad.

Written by infoproc

December 24, 2005 at 5:19 am

Posted in Uncategorized

China tech and innovation

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Nice discussion (Talk of the Nation; sorry no podcast) with John Seely Brown (former director of Xerox PARC) on innovation and technology in China. Brown has obviously spent some time with startups over there, particular in the cellphone sector, where he claims they are ahead of the US and Europe.

This is the kind of media I can still consume while grappling with two babies 😉

Written by infoproc

December 23, 2005 at 7:21 am

Posted in globalization

Sniffing around

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It’s very plausible to me that the latest Bush perfidy – secretly approving widespread spying by the NSA on US citizens in the wake of 9/11 – is not about phone wiretapping at all. It’s about large scale monitoring of Internet communications.

The press has pointed out repeatedly that the 1978 FISA law allows the government to wiretap on short notice, even to wiretap first and then ask a FISA court for permission retroactively. So, the Bush administration’s claim that existing legal requirements slowed things down and “jeopardized national security” is just wrong, and informed people know this.

I suspect what is really going on is that in the wake of 9/11 Bush authorized large scale monitoring of Internet communications, probably by allowing NSA to tap into the backbone. There was a lot of discussion of similar programs, such as Poindexter’s Total Information Awareness (TIA) system. Technically, it would not be hard to sample Internet traffic, looking for email or Web activity with certain key words or patterns. However, 100% coverage is probably beyond anyone’s capability at the moment.

The problem with this is that you only catch dumb terrorists (maybe that’s good enough). As I pointed out before, even widely available communication tools like Skype allow for unbreakable encrypted communication. Don’t all terrorists, even ones who don’t understand how the Internet works, simply assume that it is being monitored (at least in some weak way)? If so, how can Bush claim that whistleblowers jeopardized national security by leaking information about this illegal program?

BTW, good thing Rockefeller (Senate Intel. Cmmte.) kept a copy of the letter he sent to Cheney. The Bushies claim (lying again) that they got congressional approval, conveniently leaving out that Rockefeller protested immediately about the legality of the program (as did Daschle, who claims the briefings may also have been technically misleading).

Note Added: Administration officials are very careful to state that only “communications” between the US and foreign countries are being monitored. I suppose this means that if your packets don’t leave the US, they aren’t sniffed. However, all Blackberry users should be aware that their email likely travels through servers in Canada, so is potentially subject to monitoring 🙂 This Times article seems to confirm that email is intercepted.

TalkLeft: Why do Gonzales and Condi Rice keep mentioning the “technical” aspects of the program as a dodge around FISA?

Why this seemingly inconsequential parsing by Bush of the difference between “monitoring and detection”? Bush says they use FISA if they’re monitoring, but this is about “detection.”

Why, in his letter, does Rockefeller state that he’s “not a technician.”?
Why the mention of TIA in Rockefeller’s letter?
And why the mention of “large batches of numbers all at once”?


These are not phone numbers we’re talking about…These are IP addresses, email addresses.

A system is in place that basically filters on certain triggers (text, phoneme, etc.) within Internet “conversations.” This is “detection” or at least its tortured definition that was placed in this idiot Bush’s mind. “Monitoring” would be recording an entire conversation, like in a phone conversation.

That system then collects information on those conversations including…ta da…source and destination IP addresses. Those IP addresses can then be stored for further investigation on other “conversations.”

Written by infoproc

December 20, 2005 at 6:18 pm

Posted in Uncategorized

The next wave in India outsourcing

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Nice summary from the economist. The point that legal services, like accounting, can be outsourced rings particularly true to me. Most legal services (from IP to contracts to employment law) that we consume as a startup are delivered over the phone or Internet, at exorbitant prices ($300 per hour is what you are charged for an associate; a partner bills even more). The effectiveness of the attorney is largely driven by raw brainpower, once some basic knowledge is acquired. I can easily see a model with a US-based partner and half or more of his or her staff (including associates) based in India. $30 per hour would be very good compensation for a highly intelligent Indian attorney.

Should we be concerned for the future of our young friends in law school? See here for related discussion.

ASKED for a sound-check at a function in Delhi this month, Bill Gates eschewed the “1,2,3…” favoured by ordinary mortals. “One billion, 2 billion…,” he counted. They think big, these IT moguls, and especially, these days, in India.

Microsoft later announced plans to invest $1.7 billion in India over the next four years, about half of it in adding to its existing research and development (R&D) and technical-support operations. “The only thing that limits us in India,” Mr Gates told the local press, “is the speed at which we can recruit.” A few days earlier, Intel, a giant chipmaker, had unveiled plans to invest more than $1 billion over five years, much of it in expanding its R&D centre in Bangalore. In October Cisco Systems, the world’s largest maker of the routers and switches that direct internet traffic, announced its own plans to invest $1.1 billion in India.

The euphoria is confined neither to American multinationals, nor to information technology. It also encompasses India’s own IT industries, and the expanding range of other back-office services that can now be performed remotely. The three biggest Indian IT-services firms—Tata Consultancy Services (TCS), Infosys and Wipro—are each recruiting more than 1,000 people a month. And to take just one example of the other services now moving to India, J.P. Morgan Chase, a big investment bank, this month revealed it is to double, to about 9,000, its staff there. Anyone who assumes J.P. Morgan will simply be doing low-level “back office” tasks in the country—a bit of data entry and paper-shuffling—would be flat wrong. One task for the new recruits is to settle complex structured-finance and derivative deals, what one insider calls “some of the most sophisticated transactions in the world”.

All these investments illustrate that a third stage of the great Indian services-export boom is well underway. In the first, firms such as TCS developed world-class expertise in software “application development and maintenance”, and their low-cost developers became the preferred partners of many Western IT firms. In the second, Indian firms and the local “captive” operations of multinationals started offering low-end back-office services that could take place a continent away—telephone call-centres, transcribing medical records, processing insurance claims and so on. In the third, in both IT and the broader spectrum of other “business processes”, ever-more sophisticated functions are happening in India.

So strong are the forces driving this shift that what seemed improbably rosy projections by NASSCOM, the Indian software- and service-industry lobby, and McKinsey, a consultancy, back in 1999, are coming true. This week NASSCOM and McKinsey produced the second full-scale update of their study. It argues that exports from India’s IT industry and from “Business Process Offshoring” (BPO)—both from services “outsourced” to Indian firms and those performed by captives—are on track to reach $60 billion a year by 2010.

That would be a huge surge from the $17.2 billion in the year ending in March 2005. But it implies a compounded annual growth rate of 28%—below that achieved in recent years. Moreover, according to McKinsey’s estimates, it requires India merely to maintain its present shares of the markets for offshore IT services (65%) and BPO (46%). This is because the study predicts a massive rise in the size of the overall market, estimated at present to make up just one-tenth of those services that could be sent offshore. The proportion is expected to rise as demography—a western labour shortage—becomes more pressing than protectionism.

In IT the growth in Indian exports is expected to come both from the software market, and from “traditional IT outsourcing”—such as the remote management of whole systems, a market now dominated by the big global IT consultancies. This is expected to rise from 8% of Indian sales now to about 30% in 2010, while software-development’s share will fall from 55% to 39%. In business-process-offshoring, the big industries will remain banking and insurance. But rapid expansion is also expected in other areas, like legal services.

The law, in fact, illustrates how vast is the untapped potential market. About $250 billion is spent on legal services world-wide, about two-thirds of it in America, and as yet only a tiny proportion goes offshore. Forrester, a research outfit, has estimated that, by last year, 12,000 legal jobs had moved offshore, and forecast that this will increase to 35,000 by 2010. India, with its English-language skills and common-law tradition is well-placed to secure a big share of the business. It is not just a question of “paralegal” hack work such as document-preparation. Sanjay Kamlani, of Pangea3, a small Indian firm, calls it “real lawyering”—drafting contracts and patent applications, research and negotiation. His clients are both big law firms and in-house legal teams.

India’s fundamental attraction has not changed since it first drew software developers: fantastic cost savings. With American lawyers costing $300 an hour or more, Indian firms can cut bills by 75%. Across the board, despite climbing rates of pay in IT and BPO, where rapid expansion has brought frantic job-hopping, India remains, say NASSCOM and McKinsey, the lowest-cost of all the main outsourcing destinations. It also has, among these countries, by far, the largest pool of employable people—those with the necessary language and technical skills. On this measure, India, which produces 2.5m graduates a year, 250,000 of whom are engineers, has 28% of the global available workforce, compared with 11% in China.

Yet the supply of talent may be the biggest constraint on the Indian industry’s growth. On these latest projections, the number of people working in IT and business-process exports in India will increase from about 700,000 now to 2.3m by 2010. But on today’s estimates only 1.05m suitably qualified people will graduate from college between now and then, so there will be a shortfall of nearly 500,000, with business-processing the worst affected. McKinsey’s Jayant Sinha believes the education system can be fixed in time to plug the gap. A bigger worry, he says, is India’s creaking urban infrastructure. IT firms in Bangalore, for example, are in revolt against the local government for its neglect of basic amenities. Yet India’s IT and business-process industries will need about 14m square metres (150m square feet) of office space by 2010: “a new Manhattan”.

Hectic building is under way, and not just in the big IT and business-processing centres (Bangalore, Mumbai and around Delhi) or the “second tier” of cities such as Pune, Hyderabad and Chennai (Madras). The industry’s worry over infrastructure, as over education, is that it cannot do everything by itself. Having thrived by keeping government at arm’s length, business now needs help.

Written by infoproc

December 17, 2005 at 7:02 pm

Posted in globalization

Workplace discrimination

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From a recent Gallup survey, as reported by the EEOC.

The Gallup data indicate that 15% of all workers perceived that they had been subjected to some sort of discriminatory or unfair treatment. When broken down into sub-groups, 31% of Asians surveyed reported incidents of discrimination, the largest percentage of any ethnic group, with African Americans constituting the second largest group at 26%.

This finding is probably only surprising to white Americans. Asian-Americans know very well that they are subject to stereotyping (albeit perhaps of the unconscious type) and often passed over for leadership roles. Thanks to Confucian values, they are also less likely to complain about it. You won’t hear them complaining about being shortchanged by affirmative action, either.

Within the context of race filings, 82.5% of charges were brought by African Americans, with Asian/Pacific Islanders filing only 3% — a sharp contrast with the 30% of Asians employees who responding to the Gallup survey that they perceived discrimination on-the-job.

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December 17, 2005 at 6:45 am

Posted in Uncategorized

Wall Street

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Wall Street (1987). Directed by Oliver Stone, starring Michael Douglas (Gekko), Martin and Charlie Sheen (father and son Carl and Bud Fox). A classic that fully anticipated our age of hyper-finance. Gekko and company look tame compared to LTCM, Enron and our current hedge fund overlords!

Gekko: Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies and cuts through and captures the essence of evolutionary spirit. Greed in all of its forms, greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA.

Gekko: The richest one percent of this country owns half our country’s wealth, five trillion dollars. One third of that comes from hard work, two thirds comes from inheritance, interest on interest accumulating to widows and idiot sons and what I do, stock and real estate speculation. It’s bullshit. You got ninety percent of the American public out there with little or no net worth. I create nothing. I own.

Carl Fox: Stop going for the easy buck and start producing something with your life. Create, instead of living off the buying and selling of others.

Personally, I followed the Create path, but I’m not sure I came out ahead 🙂

Written by infoproc

December 15, 2005 at 1:46 am

Posted in finance

The view from the PBOC

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From an interview with Yu Yongding, an Oxford-trained economist who sits on the Monetary Policy Committee of the People’s Bank of China. Who can doubt that everyone sees the handwriting on the wall? He clearly understands the inevitability of dollar devaluation, the need for Asian countries to dump those dollars, the prisoner’s dilemma problem that central banks of China, Taiwan, Japan and Korea have, etc. Barring a disaster in Asia (China invades Taiwan, N-S Korea conflict, etc.), I predict a 2x devaluation of the dollar against E. Asian currencies over the next decade. Sorry that prediction is not precise enough to trade on 🙂

(See here for previous posts on Bretton Woods II and dollar devaluation.)

“…in the first stage we must reduce accumulation, then later we should reduce our reserves….[China and Asian countries] don’t need that large an amount- more than $2 trillion- of foreign exchange reserves…. This is a very big problem and I think the Chinese government should take some action to reduce the growth rate of the accumulation of foreign exchange reserves as we’re still facing the possibility of a big devaluation of the US dollar, so the capital losses will be huge. If that happens, it will be tremendous hit to the Chinese economy.”

This is hardly the statement of a gentleman with a benign view toward the US dollar’s valuation. It is instead a gentleman, in a position of authority, with a great deal of concern. He went on: “The trouble is, with such a huge amount of foreign exchange reserves, that there is no way to spend it very quickly and there’s no plan to sell it of course– otherwise that inflicts damage on ourselves. You don’t want to dump shares when the stock market has not collapsed yet and you are the biggest shareholder.” Then, he said “all east Asian countries have tremendous foreign exchange reserves and they all want to get rid of them, but if you do this then you cause competitive devaluation, not of their own currencies, but of the US dollar. So we should do this in an orderly fashion. If Asian countries moved too fast, everyone would lose… It would be utterly unfortunate if Japan sells a proportion [of their reserves, for] that causes problems. Then China panics and China sells a proportion — it would be very damaging.”

The “nicest possibility” for China, Japan and the US to escape this problem was for further “tightening of US monetary policy so that further dramatic devaluation of the US dollar can be stopped. Then, because of the slowdown in the economy, the US current account deficit would reduce and in this way will create conditions for East Asian countries to get off the hook.”

Written by infoproc

December 14, 2005 at 7:27 pm

Posted in globalization

2 percent of the Caltech class

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A friend of mine who runs a derivatives desk made job offers to 2 percent of the Caltech class of 2006. That’s only 4 people, but still a pretty high percentage! 3 have accepted, the other went to a well-known software company. It makes me wonder how many kids who otherwise would have gone on to grad school (e.g., in engineering, math or physics) are heading right into finance these days. Smart move, if you ask me 🙂

Most of my colleagues still don’t take the theory of modern finance seriously at all. Even researchers who work on complex systems (modeling traffic, sandpiles, networks, ants, etc.) show surprisingly little interest. I guess the future belongs to the young!

Written by infoproc

December 13, 2005 at 5:08 pm

Posted in finance, universities