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Archive for November 2006

Shanghai from an Indian perspective

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Indian software engineer Nimbupani writes about his experience as an expat living in Shanghai. He provides some comparative insight on Indian (messy, but democratic) and Chinese (authoritarian, but sometimes very efficient) development models. (See here for related IHT article.) The parts I like best are the small observations; since I know Shanghai they really tell me more about India by comparison. I hope he continues to blog from Shanghai!

Personally, I don’t see how India can improve its GDP per capita unless birth rates come down significantly. There will undoubtedly be an upper class of hundreds of millions of affluent, well-educated Indians (and that alone will have a big impact on the rest of the world), but I don’t see how things will get better for the average Indians in the villages unless significant changes are made. In China rural people are leaving the farms and heading for the cities, one of the greatest human migrations of all time. This is made possible by manufacturing. While software development and other higher end activities (which have fueled India’s development recently) provide much better jobs, they cannot absorb hundreds of millions of low-skill people from the countryside. On the other hand, who knows how stable China is, under the surface.

Let me start with introducing my self, I am an Indian, professionally Process Consultant (six sigma Black Belt) who got a job offer from a Shanghai based company to work on to improve processes of their client in Shanghai. When i told this to my parents, reaction was China..why what will u eat there..how will you sustain, people(from India) usually go to US, UK but China..nnnnaa..Even i was confused..but offer was good, not v good in terms of money but the exposure and as a value add, yes it was worth making an attempt. So i made up my mind, ok i will go, which was not easy …

One of the costliest city in world, best city of China, more like Mumbai in india, crime rate was low compare to other international cities, language will be a problem, one of the best airport in world, business city of world with lot of skyscrapers..and indian knowledge of china – they are small, hard working, stubborn, dominating, not friendly, difficult to strive there.

But let me tell you Shanghai and China its not as we see them in India..

This is what I can tell you about Shanghai from Shanghai,

About Infrastructure: It is rightly said they have have one of the best airports in world, international airport at New delhi is very small as compared to what they have in Shanghai, in fact in terms of infrastructure they are very advanced, the government here has invested a lot in infrastructure, not only in major cities like Shanghai but even in small towns, even public transport, traffic management, day to day work, its smooth not as complicated as in india, I cant find a car in India without a scratch but here one scratch means a big thing.. They have excellent and still expanding Subway(metro in india) covering Shanghai. Taxi service covers whole of Shanghai, simply day to day work in not complicated.

About people: they are very friendly, they do everything to ensure that they are able to help you even majority do not understand English, although you may some time feel little annoyed but overall its not an hindrance. They don’t cheat and not as often as you see in India, at least i have not seen. They are not stubborn, they are polite, but in general they speak loudly and some time it annoys me but its a different culture all together, while eating, lot of noise during chewing, personally it annoys me but some in India have same habbit.

About food: if you love Non veg and Sea food you will love it here, In india i occasionally had Chicken, but here i have tried everything pork, chicken, fish, beef, prawn, crab, small octopus look like thing also, and recently I saw a dish it was like gel but that gel like thing was made up by freezing blood of Chicken and duck, i was not able to try that..and after 3 months, I have finalized on following food- chicken, fish, vegetable, tofu (paneer without fat) as priority dish :). In vegetables they have stems of sea plants, v healthy, generally Chinese food is low in fat as compared to india food. We do have some Indian restaurant and we go their occasionally as we cook food at home, it reminds how difficult it was finding out wheat flour and then getting a 5 kg pack..:))

Overall it’s a great place and indian democratic government needs to learn a lot about how to build up infrastructure as this is what drives economy and standard of living, for example, in delhi, we get exhausted by the time we reach work place and home because of traffic and jams and small issues..which is loss of national energy…

Also last but not the least, women are safe here, no teasing and they wear what they want( in terms of fashion they are v advanced), not like india, where everyone is worried about women in their family, however not realizing doing the same act on street. Bottom line its safe…

Written by infoproc

November 30, 2006 at 4:20 pm

Posted in globalization

Virtual millionaires

with 7 comments

Congratulations to Anshe Chung (in real life: Ailin Graef, a German citizen originally from Hubei, China), the first capitalist whose virtual holdings in Second Life are valued at over a million USD (using current exchange rates from SLDs to USDs).

See this Fortune article which discusses Second Life and how Ms. Chung became a successful real estate developer there (thanks to our correspondent Malcolm for the tip). The lengthy comment section is particularly amusing, with many commenters showing a lack of understanding of the fundamentals of money and value, and a visceral disdain for virtual reality.

While I don’t have time to visit Second Life, I wish I did. It seems like a tremendous outlet for people’s creativity. Why shouldn’t an island or skyscraper designed by Ms. Chung be worth some amount of “real” money? What exactly makes the $20 bill in your pocket valuable, except other people’s willingness to exchange things for it?

Sure, there are problems with scarcity — Linden Labs, the creator of Second Life, could flood the virtual world with copies of any object, or new real estate, but the Fed could also decide to increase the USD money supply as well. (Perhaps to inflate away our $1 trillion in obligations to China!) Among the comments you can find discussion of legal and financial issues: Should the IRS tax virtual profits? (certainly, if they are ever converted back into USD), Will Lloyds insure virtual homesteads? (why not? just compute the expected cost of such a policy and charge a big premium), Can I be sued for killing your avatar? (Unh… not if it’s allowed by the rules!)

What I want to know is, when can we start having physics conferences and seminars in (the improved HD, 3D, holographic, immersive) Second Life, so I don’t have to schlep around in economy class and deal with baggage screeners all the time? Note some companies already have Second Life offices for meetings and marketing purposes!

Podcast of talk by Linden Labs founder Philip Rosedale. Another, with their VP of product development.

Written by infoproc

November 28, 2006 at 7:51 pm

Posted in Uncategorized

QuantLogic

with 6 comments

Two worthwhile observations from the blog QuantLogic.

1) A quote from Charles Munger:

I have said that in my whole life, I’ve known no wise person over a broad subject matter area who didn’t read all the time–none, zero. Now I know all kinds of shrewd people who by staying within a narrow area can do very well without reading. But investment is a broad area. So if you think you’re going to be good at it and not read all the time, you have a different idea than I do…. You’d be amazed at how much Warren [Buffet] reads. You’d be amazed at how much I read.

I agree with QuantLogic: I can’t think of a single person whose [broad] analytical expertise I admire, who doesn’t read constantly. (Note, this doesn’t include some special cases of narrow expertise, such as in math or science, which may border on idiot savant capability 😉

Actually, all other forms of communication suffer from much lower baud rates. Think how little information you get per unit time from even the best broadcast news sources or interviews, relative to reading. Focused discussion with a real expert is the only activity which I find as efficient — which is one of the reasons I’m still willing to travel to conferences, give seminars at other institutions, and schlep down to the valley 🙂

2) The following cartoon, which shows unparalleled insight into organizational behavior 🙂

Written by infoproc

November 27, 2006 at 4:37 am

Posted in finance

A reallocation of human capital

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Another article on the theme of rich vs super-rich in the NYTimes. The article profiles an MD and a PhD in economics, each of whom left their original career path to head into finance. It’s very much along the lines of recent posts on this blog — in today’s world, financial activities, as opposed to “productive” ones, reap outsize rewards.

…Such routes to great wealth were just opening up to physicians when Dr. Glassman was in school, graduating from Harvard College in 1983 and Harvard Medical School four years later. Hoping to achieve breakthroughs in curing cancer, his specialty, he plunged into research, even dreaming of a Nobel Prize, until Wall Street reordered his life.

Just how far he had come from a doctor’s traditional upper-middle-class expectations struck home at the 20th reunion of his college class. By then he was working for Merrill Lynch and soon would become a managing director of health care investment banking.

“There were doctors at the reunion — very, very smart people,” Dr. Glassman recalled in a recent interview. “They went to the top programs, they remained true to their ethics and really had very pure goals. And then they went to the 20th-year reunion and saw that somebody else who was 10 times less smart was making much more money.”

The opportunity to become abundantly rich is a recent phenomenon not only in medicine, but in a growing number of other professions and occupations.

…Three decades ago, compensation among occupations differed far less than it does today. That growing difference is diverting people from some critical fields, experts say. The American Bar Foundation, a research group, has found in its surveys, for instance, that fewer law school graduates are going into public-interest law or government jobs and filling all the openings is becoming harder.

Something similar is happening in academia, where newly minted Ph.D.’s migrate from teaching or research to more lucrative fields. Similarly, many business school graduates shun careers as experts in, say, manufacturing or consumer products for much higher pay on Wall Street.

And in medicine, where some specialties now pay far more than others, young doctors often bypass the lower-paying fields. The Medical Group Management Association, for example, says the nation lacks enough doctors in family practice, where the median income last year was $161,000.

“The bigger the prize, the greater the effort that people are making to get it,” said Edward N. Wolff, a New York University economist who studies income and wealth. “That effort is draining people away from more useful work.”

What kind of work is most useful is a matter of opinion, of course, but there is no doubt that a new group of the very rich have risen today far above their merely affluent colleagues.

…In an earlier Gilded Age, Andrew Carnegie argued that talented managers who accumulate great wealth were morally obligated to redistribute their wealth through philanthropy. The estate tax and the progressive income tax later took over most of that function — imposing tax rates of more than 70 percent as recently as 1980 on incomes above a certain level.

Now, with this marginal rate at half that much and the estate tax fading in importance, many of the new rich engage in the conspicuous consumption that their wealth allows. Others, while certainly not stinting on comfort, are embracing philanthropy as an alternative to a life of professional accomplishment.

…“It has to be easier than the chance of becoming a Nobel Prize winner,” he said, explaining his decision to give up research, “and I think that goes through the minds of highly educated, high performing individuals.”

…By his own account, Mr. Moon, like Dr. Glassman, came reluctantly to the accumulation of wealth. Having earned a Ph.D. in business economics from Harvard in 1994, he set out to be a professor of finance, landing a job at Dartmouth’s Tuck Graduate School of Business, with a starting salary in the low six figures.

To this day, teaching tugs at Mr. Moon, whose parents immigrated to the United States from South Korea. He steals enough time from Metalmark Capital to teach one course in finance each semester at Columbia University’s business school. “If Wall Street was not there as an alternative,” Mr. Moon said, “I would have gone into academia.”

Academia, of course, turned out to be no match for the job offers that came Mr. Moon’s way from several Wall Street firms. He joined Goldman Sachs, moved on to Morgan Stanley’s private equity operation in 1998 and stayed on when the unit separated from Morgan Stanley in 2004 and became Metalmark Capital.

As his income and net worth grew, the Harvard alumni association made contact and he started to give money, not just to Harvard, but to various causes. His growing charitable activities have brought him a leadership role in Harvard alumni activities, including a seat on the graduate school alumni council.

Still, Mr. Moon tries to live unostentatiously. “The trick is not to want more as your income and wealth grow,” he said. “You fly coach and then you fly first class and then it is fractional ownership of a jet and then owning a jet. I still struggle with first class. My partners make fun of me.”

Written by infoproc

November 27, 2006 at 4:15 am

Hedge fund singularity

with 6 comments

More evidence that, in today’s gilded age, all roads lead to hedge funds. Ray Kurzweil, inventor and AI optimist, is now running a fund called FatKat! Kurzweil is one of the advocates of an impending singularity caused by accelerating machine intelligence. His recent book is titled The Singularity is Near.

This reminds of the old adage that it’s time to sell when your shoeshine boy starts giving you stock tips. When running money starts to suck in a sizeable fraction of all brainpower (as internet startups seemed ready to, in the last bubble), it probably means we’ve reached a peak. Either that, or it’s a secular revolution with the financial machine taking over the whole world 🙂 In that case, it will only be a matter of time before predicting short term market movements has surpassed the sexiness of any of the Clay Prize problems in mathematics, or quantizing gravity in physics…


Via DealBook: this publishing event is another sure sign of a market top. Tell your shoeshine boy!

NYTimes: Ray Kurzweil, an inventor and new hedge fund manager, is describing the future of stock-picking, and it isn’t human.

“Artificial intelligence is becoming so deeply integrated into our economic ecostructure that some day computers will exceed human intelligence,” Mr. Kurzweil tells a room of investors who oversee enormous pools of capital. “Machines can observe billions of market transactions to see patterns we could never see.”

The listeners, attendees of a conference sponsored earlier this month by the Capital Group Companies, are slightly skeptical. Some have heard that Mr. Kurzweil, 58, who takes more than 150 vitamins and supplements a day, believes people will eventually live forever. Others know he has said that in 2045, man and machine will achieve “singularity,” and humans will hold their breath for hours thanks to nanomachines in our bloodstreams.

But some are aware that a former Microsoft executive and chairman of the Nasdaq stock market, Michael W. Brown, is an investor in Mr. Kurzweil’s new hedge fund, FatKat, and that Bill Gates once described him as “the best person I know at predicting the future of artificial intelligence.”

More important, many of them have seen Mr. Kurzweil’s ideas used by stock speculators. So, they want to learn more about his brave, new world.

“These ideas are the future,” said David Atkinson, a private investor who attended another lecture later that day by Mr. Kurzweil. “I’m not really sure I understand them, but they’re making some folks rich.”

Complicated stock picking methods are nothing new. For decades, Wall Street firms and hedge funds like D. E. Shaw have snapped up math and engineering Ph.D.s and assigned them to find hidden market patterns. When these analysts discover subtle relationships, like similarities in the price movements of Microsoft and I.B.M., investors seek profits by buying one stock and selling the other when their prices diverge, betting historical patterns will eventually push them back into synchronicity.

Today, such methods have achieved a widespread use unimaginable just five years ago. The Internet has put almost every data source within easy reach. New software programs, like the Apama Algorithmic Trading Platform, have made it possible for day traders to build complicated trading algorithms almost as easily as they drag an icon across a digital desktop.

“Five years ago it would have taken $500,000 and 12 people to do what today takes a few computers and co-workers,” said Louis Morgan, managing director of HG Trading, a three-person hedge fund in Wisconsin. “I’m executing 1,500 to 2,000 trades a day and monitoring 1,500 pairs of stocks. My software can automatically execute a trade within 20 milliseconds — five times faster than it would take for my finger to hit the buy button.”

Studies estimate that a third of all stock trades in the United States were driven by automatic algorithms last year, contributing to an explosion in stock market activity. Between 1995 and 2005, the average daily volume of shares traded on the New York Stock Exchange increased to 1.6 billion from 346 million.

But in recent years, as algorithms and traditional quantitative techniques have multiplied, their successes have slowed.

“Now it’s an arms race,” said Andrew Lo, director of the Massachusetts Institute of Technology’s Laboratory for Financial Engineering. “Everyone is building more sophisticated algorithms, and the more competition exists, the smaller the profits.”

Written by infoproc

November 24, 2006 at 7:01 pm

Posted in finance

A New Class War

with 6 comments

The Haves against the Have Mores. Pity the poor doctors, lawyers and management consultants. Even the I-bankers, now that hedge fund management has become the ne plus ultra of capitalism. The only guys that the hedgies envy are the super-lucky entrepreneurs who can make their centi-million all in one pop!

As far as doctors and lawyers, I once asked a friend of mine in finance, who lives in a 3000+ sq ft apartment on the upper east side, who else lived in his building. After counting all the money guys, he let slip — “Oh, I guess there are some doctors and lawyers as well. I don’t know how they can afford it.” You’re so money, and you don’t even know it! I like how Lemann hints at the social discomfort from occasional interactions between the rich and super-rich. Taking the whole family first class is justifiable, but a private jet is over the top 😉

Note, I’d be a bit careful about the average numbers used below for top 1% and .1%. Averages are very misleading here and are dominated by the far tail. Numerically the bulk of each group are at the threshold rather than average value for each tranche, which is substantially lower. IIRC, the threshold income for top 1% is about $275k, much lower than the average of almost $1M for that group. What’s a little innumeracy, this is America after all!

Note added: This topic is hitting the zeitgeist bigtime! The Times has a sequel to the first article, this time situated in Silicon Valley, here. See also this earlier article about all the “working class millionaires” in the valley.

NYTimes: …Let’s define the terms first, or at least make some attempt to. The merely rich are those whose income puts them in the top 1 percent of the population. According to a recent study by the Center on Budget and Policy Priorities in Washington, the average real income for the top 1 percent of American taxpaying households was $940,000 in 2004 — a difficult group to feel pity for. But to stand for a moment on its shores (let’s pretend) and look toward the rapidly growing ranks of the superrich is to stare across a vast chasm indeed.

The superrich might be the top tenth of 1 percent (average real household income for 2004: $4.5 million) or the top hundredth (the $20-million-a-year households). Income inequality is growing fastest the higher we go up the chart. While the percentage change in average real household income between 1990 and 2004 was an increase of 2 percent for the bottom 90 percent of American households, it was 57 percent for the top 1 percent; and shot up to 85 percent for the top 0.1 percent; and up to 112 percent for the top .01 percent. That is, the richest are getting richer almost twice as fast as the rich.

Class warfare has been hypothesized by various publications, including the online magazine Slate, New York magazine and Matt Miller in Fortune last month. Mr. Miller calls the bigger and poorer group, which consists largely of professionals — doctors, lawyers, management consultants, the vast majority of Wall Street soldiers — the “lower-uppers.” The targets of their resentment, he says, are by and large hedge fund managers and certain astronomically paid C.E.O.’s.

“The problem is that there’s all this wealth at this new strata that feels unrelated to merit or achievement,” Mr. Miller says. “When a C.E.O. whose leadership has caused a company’s stock price to fall gets a $100 million golden parachute, or when a guy’s running so much money that his commission — even if his picks are only getting an 8 or 10 percent return on his client’s money — is $100 million, that’s crazy.” He says that such compensation “goes against the notion of a meritocracy.”

Or maybe not. “A meritocracy increases inequality — by its very nature, it has to,” says Nicholas Lemann, whose book “The Big Test” explored the history of the SAT and the American meritocracy. “The goal was equality of opportunity, not equality of result.”

Part of the problem may lie with the fact that the members of both classes went into their respective lines of work with the goal of making a lot of money, and one just happens to make several times more of it.

Take the lawyers. “Lawyers are an odd group,” says the novelist Louis Begley, whose day job for several decades has been practicing law with the white-shoe firm Debevoise & Plimpton. “Lawyers at the great law firms earn a lot of money. But for a good many of them, it’s impossible to do so without accepting anything but cases involving huge corporate deals that generate a great many hours they can charge for. But these deals are repetitive. And the lawyers in these transactions often play second fiddle to the bankers.”

The money paid to investment bankers, who were once the stronghold of the financial elite, typically pales next to hedge-fund money. “I recently hosted a panel with Carl Icahn at the Core Club where the whole point was that if you’re an investment banker nowadays, you’re kind of a schlepper,” says Michael Wolff, a Vanity Fair writer who has often written about the moneyed classes. “Investment banking is for the C+ students now. Where you want to be is not somebody who’s advising people with money — whose currency is intellectual capital — but somebody whose currency is money itself.”

This, too, may be what irks the professional classes. Managing a hedge fund is the purest abstraction of making money out of money — there is no other product to show for it.

The resentment may be intensified in New York, a city whose physical layout has always engendered a lot of class-mixing. The middle class might have been largely squeezed out of Manhattan over the past decade, but the merely rich and the superrich still live in the same neighborhoods (if not necessarily the same buildings), buy houses in the same Hamptons (just houses of very different scales), and send their children to the same schools.

Mr. Lemann said that the rich versus richer envy factor “assumes that the relatively poor group is bumping into the most upper income.”

He added, “You might only see it at, say, functions that parents go to at certain rarefied private schools — Fieldston, say, or Harvard-Westlake in Los Angeles.”

Even Mr. Begley, who has earned enough to raise a large family in a grand apartment on Park Avenue, said he was astonished by the sheer number of billionaires he has met in recent years.

“I must say, I’ve begun to feel in New York as if I were driving a Volkswagen on the highway when a Greyhound bus happens to go by,” he said. “At which point, I feel a whoosh of air blasting me off the road. These people belong to another species.”

Except, he said, that it’s “these young Wall Street types” buying up the apartments in his building. “There are maybe four or five of us who bought our apartments at some understandable price 30 years ago,” he said. “And then these new people — I must say, with the money seems to come a rather large physical size. Some of them are polite, but the men do fill the elevator cage. And the women always seem to have a bottle of water attached to their mouths.”

He added that he did not feel any need to engage in class warfare against his neighbors. “If I did, they might crush me against the elevator wall,” he said. “The only thing to do is get adopted by them.”

Written by infoproc

November 19, 2006 at 4:01 am

Mouth bets

with 3 comments

Brad Setser and Nouriel Roubini made a call that Bretton Woods 2 – an international monetary system based on central bank financing of the US deficit – would collapse sooner rather than later. I was of a similar view, and still think something bad will happen to the dollar – it’s just a question of when. But nothing has happened yet, and Brad is starting to take some abuse on his blog:

You guys are smart, but you’re also consistently wrong.

The two of you remind of a couple of trekkies that speak Klingon. This blog is wonderful for showing off how clever you are, but it’s not useful at all. Self-conscious mental masterbation.

I mean, one of your bloggers commentators is so pretentious that he writes in haiku. It’s perfect for your site.

I’m glad you’re ‘fessing up to how wrong you guys can be. That seems an impossible task for Nouriel. He responds by writing more and more blogs in his defense.

Written by truthHurtz on 2006-11-16 17:53:09

I agree that you’ve been wrong, Brad. There’s a reason why you guys write papers, give advice, and argue with other “smart guys” – all safely from within the comfort of the fantasy world that theory and academia provides, never having to make money in the big bad real world by betting along the lines of your assertions.

Written by Anonymous on 2006-11-16 19:30:49

Brad responds admirably (look down the page at the comments), and lobs some fair questions back to his interlocutors. While I find the comments pretty nasty, they do get to an important point about academics in general. Traders sometimes use the term “mouth bet” for taking a position without putting any skin in the game 🙂

Written by infoproc

November 17, 2006 at 4:54 am

Posted in finance