Felix Salmon

Competitiveness rankings

Felix Salmon
Sep 8, 2009 17:10 UTC

Another year, another silly fuss over the Davos Global Competitiveness Report. There’s lots of good, substantive analysis in the report each year, and each year everybody (I’m including myself here) ignores 99% of it and concentrates solely on the rankings. Daniel Indiviglio has a pretty good write-up of the report, but he gets the headline stuff wrong:

The rankings began in 2004, and this report marks the first time that the U.S. has fallen from the top spot — replaced by Switzerland, which was ranked second last year.

Actually, the rankings began in 2001; the methodology was then changed dramatically for the 2006-7 report. In which the United States came 6th. By that standard, 2nd place this year is perfectly respectable.

The fact is, of course, that one-dimensional rankings and league tables obscure much more than they illuminate, especially when they’re reliant on crazy two-decimal-places levels of specficity. (The US score of 5.61 in 2006-7, which was good for only 6th place, actually fell to 5.59 in 2009-10, where it was good for second place.) Let’s not get hung up on minuscule differences at the top of the table: it’s much more important to wonder what Uruguay (a/k/a “the Switzerland of Latin America”) is doing in 65th place, or why Croatia is 72nd, or why Argentina is 85th. Those are the countries to worry about and concentrate on.

Update: Lance says that the rankings go back at least to 1996, and he should know, he edited that report. But then there was a schism, and the war between the Global Competitiveness Report and the World Competitiveness Yearbook began. One must, I suppose, only expect competitiveness among competitiveness reports.


Why don’t they call it for what it is: “The list of countries most likely to suck vast wealth from other nations at the expense of millions of human beings and not have any conscience whatsoever at the epic human misery (not to mention the environmental degradation) it causes.”

Seems like the lower you are on the list, the more likely its citizens can wake up not feeling completely filthy about themselves.

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Art museum discount rate datapoint of the day

Felix Salmon
Sep 8, 2009 16:22 UTC

It seems that the Long Beach Museum of Art would rather lose $569,000 in annual operating support from the city of Long Beach than repay the principal on a $3.06 million loan. I find that hard to understand: it should just take the $569,000 and use some fraction of it to pay off the $3 million over time, spending the rest on art and programming. Or is there some good reason why the museum’s implied discount rate is so incredibly high (over 18%)?

(Via Maneker)


I somehow think the art world could survive the closing of a museum at which (apparently) the hot upcoming exhibits are “…exhibitions on baseball-related art and the art of the tattoo…”

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The inflation permahawks

Felix Salmon
Sep 8, 2009 14:14 UTC

Jim Surowiecki has a good column on inflation this week:

Why are people afraid that inflation is about to get out of control? Because they’re always afraid that inflation is about to get out of control.

He’s right: it’s hard to find someone who’s worried about inflation right now who isn’t always worried about inflation. If you stay worried about inflation for decades, of course, eventually you’ll be able to claim justification. But I’d take you much more seriously on the subject of inflation today if you hadn’t told me all the way through the Fed rate cuts of 2007 and 2008 that each one was about to unleash monster inflation and was a Really Bad Idea. If we’d been listening to the likes of Barry Ritholtz, we’d still have Fed funds at 5% today.


“If you stay worried about inflation for decades, of course, eventually you’ll be able to claim justification.”

And why exactly is that a true statement? It’s true because there would be, essentially, undetectible inflation if the gub’mint were not debasing our currency for the last 30+ years.

For the first 150+ years of our nation, there was NO inflation, because the government budgeted within its means, something none of us have ever witnessed.

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Bloggingheads and the placebo effect

Felix Salmon
Sep 8, 2009 13:50 UTC

I taped this bloggingheads conversation with James Kwak last week, a good time was had I think by both of us.

James would like to draw your attention to the discussion of wine at the end; he says that enjoying expensive wine when you know intellectually that there’s no correlation between price and quality is a bit like getting a placebo effect from a drug when you know it’s a placebo. He’s right — and I’d be very interested in seeing any empirical data on the placebo effect under just those conditions. Has anybody done such a study?


Here’s an interesting post on the placebo effect from The Situationist:

http://thesituationist.wordpress.com/200 9/09/18/placebo-and-the-situation-of-hea ling/

Where the efficient markets hypothesis never took hold

Felix Salmon
Sep 8, 2009 13:25 UTC

In the wake of Justin’s book and Cadbury’s rejection of Kraft’s takeover offer, it’s probably worth noting that the one place the efficient markets hypothesis never took hold was in corporate boardrooms. It’s commonplace for boards to say that offers significantly above the stock-market valuation “significantly undervalue the company”, or somesuch — with the clear implication that the market is not rational at all. At least when it’s your own company on the line.


Schoolboy error Felix, as pointed out by Sterling.

CBRY was worth £5.70 standalone last Friday, but when you add the potential revenue and cost synergies to that you see a value up to £9-10.
Kraft wanted to keep some of the value-creating synergies for themselves so offered roughly the mid-point: £7.45.

CBRY board is simply stating that Kraft has undervalued the CBRY within Kraft entity, not CBRY standalone.
Without Kraft, CBRY is still worth just £5.70 or so.
By rejecting the offer, the board is hoping to take more than 50% of value of the synergies for their shareholders. i.e. They are negotiating, as is their fiduciary duty.

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The antiquities-on-eBay debate

Felix Salmon
Sep 8, 2009 02:37 UTC

Do you remember Charles Stanish’s article about how eBay was great for antiquities because it meant that there were so many fakes around, it wasn’t worth plundering actual sites any more? Well, Matt Palmquist wrote it up for the rather fabulous Miller-McCune magazine, and now, if you scroll down to the bottom of their latest letters page, you’ll find a strong rebuttal from one Bill Stelzer, of Portsmouth, New Hampshire. Anybody care to adjudicate?

Update: Stanish comments, at length, below.


As a seller on Ebay -the largest supermarket on this planet- I’ve been trying to warn buyers of the dangers of these fakes found on Ebay and the internet. So far, I have been disheartened by the response of buyers and Ebay itself which does a half heartened attempt to put a stop to these ripoffs which hurt consumers as well as manufacturers.
Over the past few years I’ve managed to compile a 2 part Dictionary of Fakes which people can check out and become aware of the fakes on the Internet. A few votes on these guides would help get the word out to more people, and possibly put a dent into the shysters who commit cyberspace robbery on unsuspecting consumers. See my guides and PLEASE VOTE! Only we can put a stop to this. See:

http://reviews.ebay.com/DICTIONARY-OF-FR AUDS-amp-FAKES-ON-EBAY-Part-1-A-thru-D_W 0QQugidZ100000000​05970319


http://reviews.ebay.com/DICTIONARY-OF-FR AUDS-amp-COUNTERFEITS-PART-2-E-THRU-Z_W0 QQugidZ100000000​08141437

Life settlements: Still no dice

Felix Salmon
Sep 6, 2009 16:25 UTC

The NYT has an excellent article on the life settlement industry, explaining its pros and cons in a balanced and clear-eyed manner. If you’re interested in such things, you should read it: it was written by Charles Duhigg, and published in December 2006. He mentioned that Wall Street was getting interested in such things:

Trading in life insurance policies held by wealthy seniors has quietly become a big business. Hedge funds, financial institutions like Credit Suisse and Deutsche Bank, and investors like Warren E. Buffett are spending billions to buy life insurance policies from the elderly…

This nascent market illustrates one way that investors are hoping to make money from a large and wealthy generation of Americans as they reach retirement age.

Today, Jenny Anderson covers most of the same ground but adds little in the way of actual news. What she does add is a much more ominous tone:

Wall Street is racing ahead for a simple reason: With $26 trillion of life insurance policies in force in the United States, the market could be huge…

If a small fraction of policy holders do sell them, some in the industry predict the market could reach $500 billion…

Some financial firms are moving to outpace their rivals. Credit Suisse, for example, is in effect building a financial assembly line to buy large numbers of life insurance policies, package and resell them — just as Wall Street firms did with subprime securities.

If Wall Street is really “racing ahead”, it’s been doing so for well over a decade now, and doesn’t seem to have got very far. There have been people on Wall Street trying to securitize and trade life settlements for as long as I can remember, and nothing much ever seems to happen. Is anything different now? Not really: Anderson has managed to find exactly one securitization of life settlements, and even that one she only mentions in passing:

Standard & Poor’s, which rated a similar deal called Dignity Partners in the 1990s, declined to comment on its plans.

In fact, Dignity Partners launched in March 1995, and was the grand total of $35 million in size. “Could” the market “reach $500 billion”, as “some in the industry predict”? Well, anything’s possible. But so far it’s managed to go from $35 million to zero over the course of the past 14 years. Wake me up when something happens: for the time being there’s nothing at all.

None of the big three ratings agencies is involved right now: the closest thing to a news hook in Anderson’s story is that DBRS, which she describes as “a little known rating agency in lower Manhattan”, is thinking about applying ratings to these things. Is there any evidence that investors are going to trust DBRS on this one, in the event that anything gets off the ground? No.

In general, Anderson seems to be at pains to overstate the degree to which there’s anything to worry about here. Not only does she repeatedly say that life settlements could be the next subprime, she also says that they could be damaging to America’s seniors:

“Predators in the life settlement market have the motive, means and, if left unchecked by legislators and regulators and by their own community, the opportunity to take advantage of seniors,” Stephan Leimberg, co-author of a book on life settlements, testified at a Senate Special Committee on Aging last April.

The quote could have used a bit of context. Leimberg thinks that life settlements are a good thing, in principle, and is looking for legislation to ensure that the industry grows up in a healthy and well-regulated manner, rather than being rife with predators. (And please, NYT, if you’re going to quote Senate testimony, would it kill you to link to it?)

The fact is that life settlements can be wonderful things for seniors who get seriously ill. At the same time, however, that’s not what life insurance was designed to do, and trying to make it perform that function has a raft of nasty potential consequences. For one thing, it could mean life insurance premiums rising substantially, since the price of life insurance currently is kept down by people who let their policies lapse. If they sell those policies instead of letting them lapse, that’s very expensive to the insurer.

But there’s another reason, too, why life settlements are potentially very bad for the insurance industry — and neither Duhigg nor Anderson mentions it. Life insurers, unlike most investors, pay no tax on their investment gains. That’s why buying a life insurance policy is generally a very tax-efficient way to invest money you want to leave to your heirs. But if these policies start being traded on the secondary market, with the benefits going not to heirs but rather to hedge funds and traders, then there’s a serious risk that the life insurance industry will lose its tax-sheltered status. The Wall Street banks looking at securitizing life settlements should be very worried about this: if they start showing signs of success, Congress could, at a stroke, kill their golden goose.

Update: I love Blossom’s idea of calling these things “Collateralized Death Obligations”.


MPK2, you are correct in stating that life settlement investments are not suitable for retail investors. There has been some bad behavior in the business with providers selling individual policies to investors. Of course, that leaves the investor with an undiversified investment of unknown duration. Not a good position to be in.

However, there is also some very good behavior in the business with firms building funds comprising many policies which mitigates the longevity risk. Institutional investors are taking multi-million dollar positions in these funds and realizing consistent annual double-digit returns with low volatility. Best to look for a fund whose general partner owns a meaningful position in the fund. When they “eat their own cooking” the tend to follow best practices of the industry.

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Friendliness isn’t insider trading

Felix Salmon
Sep 5, 2009 17:24 UTC

Joe Nocera this week looks at eBay’s sale of Skype, and wonders who would pay $2 billion for a company with a massive lawsuit hanging over its head. With apologies for quoting at some length, here’s the nub of Nocera’s thesis:

The Skype founders’ essential complaint is that eBay tampered with their software, and in doing so, violated the terms of the licensing agreement. They were demanding that Skype be forced to stop using the technology, which, for all intents and purposes, would mean shutting down Skype itself…

The founders would have been willing to come up with a price that suited eBay — if they had been able to enter into negotiations. What is clear is that the bad blood that had developed between eBay and the founders was infecting the potential negotiations over a buyback of the company…

Not long before Index Ventures became interested in Skype, it brought on board a man named Michelangelo A. Volpi, a highly respected former Cisco executive who — hmmm — once sat on the Skype board. In fact, he was so well liked by the Skype founders that they hired him to run Joost…

Mr. Volpi told me that not long after he arrived at Index Ventures, he discussed the possibility of making a run at Skype — and he and another Index Ventures partner, Danny Rimer, in turn rounded up Silver Lake and Mr. Andreessen, who — hmmm — sits on the eBay board.

So another theory: because of his friendship with the Skype founders, Mr. Volpi believes he’ll be able to settle the lawsuit…

It is, alas, unsatisfying to delve into a mystery like this and not be able to solve it. But over time, it will become clear. Either the case will linger, and we’ll know that Silver Lake, Andreessen et al. do indeed have nerves of steel.

Or it will quickly go away, which will provide an answer of a less seemly sort.

The problem I have here is with the “hmmm”s and the “less seemly”. Nocera is clearly of the opinion that if Skype’s buyers have a tacit agreement to settle with JoltID, that would be pretty scandalous. But why?

From the point of view of eBay’s shareholders, the existence of any such agreement would clearly be a good thing: they managed to sell Skype for $2 billion as a result. More generally, it’s clearly Pareto-optimal that Skype and JoltID are on good, non-litigious terms with each other. And it’s obvious that they were never going to be on such terms so long as eBay owned Skype. If Adam Smith’s invisible hand were doing its job, then, eBay would sell Skype to someone who had much friendlier relations with JoltID. What’s unseemly about that?


eBay made a mistake by not buying the technology

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The value of a college education

Felix Salmon
Sep 5, 2009 16:46 UTC

For all that Harvard president Drew Gilpin Faust likes to talk about the “worrisome impact” of “America’s deep-seated notion that a college degree serves largely instrumental purposes”, she’s still happy coming out with stuff like this:

A widespread perception of the value of universities derives in no small part from very pragmatic realities: a college education yields significant rewards. The median earnings for individuals with a B.A. are 74 percent higher than for workers who possess only a high school diploma.

This is the kind of lying-with-statistics which academics should be debunking, not propagating. If you want to know what the rewards are of going to college, you need to compare the lifetime earnings of people who went to college with those who could have gone to college but didn’t. It’s trivially true that the kind of people who go to college will earn more than the kind of people who don’t. What’s interesting is whether the kind of people who can go to college benefit financially from doing so.

Here’s Rolfe Winkler:

How much more will you make if you go to college than if you don’t? Are those extra earnings enough to pay back your loans with interest, along with the opportunity cost of forgoing full-time wages while you’re a student?

A common misconception is that a college degree is worth a million dollars over the average working lifetime. But a paper published late last year by the National Association of State Universities and Land Grant Colleges pegs the value at close to a tenth of that, $121,539.

The study I’d love to see is the one looking at the lifetime earnings of Harvard dropouts, and comparing them to the lifetime earnings of people who graduated from Harvard. If you include Bill Gates, it’ll seem as though dropping out of Harvard makes you more money than completing your studies there. Even if you don’t, it’s far from obvious what the results of such a survey would be.

There are good non-financial reasons to go to college, as Faust says. But as the cost of going to college increases, the purely financial cost-benefit analysis is becoming non-trivial, especially if you end up having to take out enormous student loans.


I believe in higher education, however, the way things exist at this moment, it’s higher education just for the sake of it. It is not necessarily the contributing factor in most people’s sucess or failure, but rather a false measuring stick, used to include or exclude certain people from the job pool… It would make sense if there were some better guidlines formed by an association of hiring managers to help people hire employees on qualifications versus degree.