Felix Salmon

When demand slopes upwards

Felix Salmon
Nov 9, 2009 00:44 UTC

At least between, say, $3 and $6 per bottle:

Supplying wine to sell at $5, $4, $3 or even two bucks per bottle is not that difficult once you set out to do it. Cheap surplus grapes, cheap surplus wines, low-cost winemaking processes and economies of scale all contribute to extreme value supply. Nope, supply is easy. The challenge, until recently at least, has been selling the stuff.

Studies have repeatedly shown that wine drinkers are influenced by price – but not in the way you learned in Econ 101. A lower price does not always produce more sales because insecure buyers infer quality from price. They assume that higher price means better wine.

I’d like to see some empirical data here, but intuitively it’s at least possible that raising a wine from $3 to $6 per bottle might increase rather than decrease sales. That seems to be changing, as Mike Veseth explains in the rest of the article. But let’s say it holds true here, or once did. This isn’t a case of Veblen goods: drinking a $6 bottle of wine hardly counts as conspicuous consumption. Is there a name for this phenomenon? And is it found elsewhere?

Update: “Fred Engels“, in the comments, makes the excellent point that there’s another place this phenomenon is often found: the stock market, where demand often rises as the price of a stock goes up.


Way back when, we were taught that this phenomenon is called “reverse demand elasticity” and applies to many luxury goods — in particular, when a consumer doesn’t have much to go on besides the price, s/he will use a price signal as an indicator of quality.

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Airport security datapoint of the day

Felix Salmon
Nov 9, 2009 00:26 UTC

The GAO reports on the TSA. File under “why doesn’t this surprise me”:

TSA lacks assurance that its investments in screening technologies address the highest priority security needs at airport passenger checkpoints. Since TSA’s creation, 10 passenger screening technologies have been in various phases of research, development, test and evaluation, procurement, and deployment, but TSA has not deployed any of these technologies to airports nationwide… Deployment has been initiated for four technologies–the ETP in January 2006, and the advanced technology systems, a cast and prosthesis scanner, and a bottled liquids scanner in 2008… in the case of the ETP, although TSA tested earlier models, the models ultimately chosen were not operationally tested before they were deployed to ensure they demonstrated effective performance in an operational environment. Without operationally testing technologies prior to deployment, TSA does not have reasonable assurance that technologies will perform as intended.

(Via Fallows)


Last year I tried to hand carry a bag that contained an emperor’s piece of antique out of Shanghai airport. I wasn’t sure if that could be legally done. So I put also a big bottle of Bonaqua flat right under zipper. The security staff felt proud, from facial expression, to have spotted my Bonaqua via their machine. They were not interested to look for anything else. My bag passed, except the water, as I intended.

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Doing due diligence on Galleon

Felix Salmon
Nov 7, 2009 19:49 UTC

I’m late to Sam Jones’s article about investors who did due diligence on Galleon and decided to stay away, but I think it raises a number of silly ideas which ought to be put to rest.

First, it’s worth noting that, ex post, this kind of exercise can be done on any hedge fund. The vast majority of hedge-fund investors, and all big ones, do some kind of due diligence before investing in a fund. There’s no such thing as a fund which receives investments from everybody who does due diligence on it. Therefore, for any fund which fails, there is going to be a certain number of investors who did due diligence on it and who didn’t invest. The same is equally true, of course, for any fund which succeeds.

What’s more, the reasons given for not investing in Galleon are so weak and vague as to be all but substance-free:

“Crudely, there are three ways to make money as a hedge fund manager,” said one large multi-billion dollar asset manager.

“You can take advantage of trading technology, but few do. You can be more intelligent than others, but few are.

“Or you can have some specialised source of sustainable information. Unless that information is from fundamental analysis – and in Galleon’s case it did not all seem to be – then that’s a red flag for us.” …

“People mistake wealth for intelligence,” according to one investor.

“No one pretended Raj [Rajaratnam] was a brilliant stock analyst – he was just extremely well connected.

“And he always made that known.”

Both investors accept unquestioningly that there’s some kind of a correlation between intelligence and alpha — despite a long history of extremely smart guys blowing up, and despite the fact that no one has come close to empirically demonstrating any such correlation. On top of this dubious correlation, they then layer the assertion that Raj Rajaratnam wasn’t actually all that smart. How would they know?

What’s more, if being extremely well connected is grounds for suspicion when choosing money managers, that would probably disqualify pretty much every single Silicon Valley venture capitalist.

It’s not even clear that investors who steered clear of Galleon were smart in hindsight, for all this self-congratulatory slapping of their own backs:

Investors that did put their money in Galleon, however, can take comfort from the fact that, by and large, the companies funds’ are highly liquid and are unlikely to suffer losses as a result of unwinds.

The good thing about investing in a fund which makes large short-term bets on individual stocks is that such bets are unlikely to be crowded trades which suffer enormous losses when everybody tries to exit at once. Anybody who invested in Galleon received healthy returns over the length of their investment, and got out unbloodied at the end. The principals won’t be as lucky, of course, but the investors have nothing to regret.

(HT: Manham)


Felix – you are as bad as them!
You can’t give smart guys blowing up as evidence that there is no correlation between intelligence and alpha; even worse when you link to just one example.

Plenty of funds blow up, the question is whether a disproportionate number of smart funds blow up relative to dumb funds.

More interesting would be the Nobel prize you would win for achieving a useful definition of “intelligent”.

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Felix Salmon
Nov 7, 2009 03:24 UTC

“The Volkswagen Beetle did far more damage to the environment than the Hummer ever did, or will” — TBM

Wherein Brad DeLong changes his mind on the intelligence and ability of Alan Greenspan — BDL

Wherein Brad DeLong changes his mind on what happens to productivity in recessions — BDL

Awkward Metaphor of the Day goes to Jim Cramer “Bears Run Out of Ammo” — TSC

The unemployed face the same odds of getting a job as an applicant faces getting into Harvard — CNN

How not to deliver bad news to Wall Street — Matthews

“The Galleon gang is doing little justice to the term ‘white collar’ crime. Specifically, the collar part.” — NYM

Sorry, Kyle, you were second choice: Kushner wanted Sorkin for Observer job — NYM

Life among the business journalism watchdogs: Dean Starkman, CJR, thinks CAGW’s “obscure” — Stoll

7-11′s own-brand Yosemite Road wine is $3.99/bottle — Dallas Observer

Do you believe in IMF forecasts? If so, you’re a turkey! — Taleb/Huffpo

Mega-hedgie Julian Robertson has never checked his voicemail, ever — NYM

Banksy fever reaches Kurdistan — Meyer


Ferdinand Porsche and Adolf Hiller (sic) designed the VW, I wonder who designed the Hummer ?

odograph, you are correct, another example of providing free (delayed) content, then again, ‘free’ is the most powerful word in advertising, so let’s keep advertising, it is free and eventually pays dividends.

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Mutual fund fee datapoint of the day

Felix Salmon
Nov 6, 2009 20:41 UTC

What happened to mutual-fund fees and expenses in the wake of the financial crisis? Lipper has crunched the numbers, and it seems that the tumble in the stock market didn’t have much effect on expenses:

Surprisingly, the median management expense for most asset classes was largely unchanged from 2008 levels; most exhibited changes of +/- a few tenths of a basis point.

Fees, on the other hand, are a different kettle of fish entirely:

70% of equity funds realized increases in total expense ratios from their most-recent annual report to their most recent semiannual report. Of those funds with increases, the average increase was +8.2 bps, while for the funds with expense decreases the average decrease was only -2.4 bps.

There’s even a helpful chart:


The reason for the fee hike becomes clear at the end: it’s being implemented in a desperate attempt to keep income from plunging along with the stock market.

Despite the increase in management fee ratios for many asset classes, the revenue derived from those fees has plummeted. We estimate that total revenue over the period examined by this report is down more than 40%…

The total dollar amount of fees collected by open-end funds appears to have declined by approximately 31% over the period examined by this report. This value is in spite of increases in realized expense ratios for many funds.

The lesson here is simple: Stop trying to beat the market, and move to index funds or ETFs instead. (Index funds weren’t included in the Lipper survey.) Mutual funds are moving away from being a mass-market product, and becoming more of a niche product aimed at elderly investors who don’t know any better and who don’t worry much about total expense ratios. The smart money’s moving out of mutual funds, to the extent that it was ever invested in those funds in the first place, and the dumb money that’s left over is largely price-insensitive. Expect these fees to continue to rise for years to come.


I’m curious as to what qualifies someone to blog on financial advice these days. From your picture, you strike me as someone with enough market experience to have been in school during the previous bear market. The power of the mouse these days is hilarious. You sure do seem qualified to dissect a $4.5 Trillion industry. Maybe next week you can type one out on all of your worldy investment experience.

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John Reed apologizes

Felix Salmon
Nov 6, 2009 19:00 UTC

John Reed wasn’t even on the list of people who I thought should apologize for their role in creating the bubble which led to the financial crisis. But good for him for doing so:

John S. Reed, who helped engineer the merger that created Citigroup Inc., apologized for his role in building a company that has taken $45 billion in direct U.S. aid and said banks that big should be divided into separate parts.

“I’m sorry,” Reed, 70, said in an interview yesterday. “These are people I love and care about. You could imagine emotionally it’s not easy to see what’s happened.”

Reed is a bit like Gerry Levin, looking back on a merger gone horribly wrong; it’s understandable that he has many regrets and might be more prone to apology. But still, it’s a start. Sandy? You’re up next!


What was the industru activity doing to get the Glass-Steagall Act repealed? Was big money paving the way for the repeal by our “Trusted Lawmakers” like it is being done today?

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Headless BofA

Felix Salmon
Nov 6, 2009 16:57 UTC

Mark DeCambre is right: it seems that BofA is going to remain headless at least until Thanksgiving. No outsider seems to want the job — the list of people who have turned it down seems to include everybody who works or has ever worked at JP Morgan, plus former BofA executive Michael O’Neill, who went on to head up both Barclays and Bank of Hawaii. Meanwhile, the leading insider, Brian Moynihan, can’t conceivably be tapped until after his Congressional testimony on November 17.

It’s not as if Ken Lewis’s reputation needed to take another hit, but here it is anyway: he’s created a monster with no succession plan and no ability to hire a CEO. At least when Hugh McColl was building the monster it was always clear that Lewis would be there if he ever fell under a bus. Lewis, by contrast, made sure to throw any potential rivals out of their top-floor windows on a regular basis. And now the BofA board is struggling with the consequences of those decisions.


It’s too big to fail and it has no head?

It’s a hydra!

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A global problem with no solution

Felix Salmon
Nov 6, 2009 15:22 UTC

Mohamed El-Erian, the CEO of Pimco, sent me a note this morning which sums up the dire straits of the economy, as revealed in today’s employment report, in one sentence:

The problem is that very few people in DC are thinking of this as a structural challenge. Until they do, there is little basis for the sketch of a potential solution.

Here’s the issue: unemployment is at 10.2%, and broader underemployment is at 17.5%. For the foreseeable future, both of them are going to be extremely high — it doesn’t really make much difference, at the margin, whether they’re going up or down. Financial markets are used to looking at first derivatives, but in this case it’s the absolute level which is important.

When you’re unemployed, you don’t spend. So long as unemployment remains high consumer demand will be depressed. That’s going to be true even if the savings rate starts dropping, thanks largely to the enormous debt burden that US consumers have already placed upon themselves. That’s important for the US economy, and it’s also a major sea-change for the global economy. As El-Erian says in today’s FT:

There is one public good that needs to be replaced: the key role that the US has played as the engine of global growth. This role is now constrained by the debt of US households.

The implications of this are huge. If the US no longer drives the global economy, then the rest of the world will be much less inclined to fund its twin deficits to the tune of trillions of dollars per year. Meanwhile, the high unemployment rate means that the Fed is going to keep the Fed funds rate at or near zero, which bodes ill for the dollar. These are huge forces, acting in an extremely complex global financial system, and you don’t need to be Nassim Taleb to know that the end result of such a state of affairs is likely to be large, unpredictable, and potentially catastrophic.

Which brings me back to Washington. Here’s El-Erian again:

The best defence against these outcomes is early recognition and coordinated action. Key economic powers must shape their expectations and policy strategies to the changed contours of the global economy. They must also actively manage policy changes at the national and multilateral level in a way that broadens the provision of global public goods.

They must, yes. But will they? I fear — and clearly Mohamed fears too — that the answer is no. So far I’ve heard nothing out of Washington which says to me that the White House has a plan for addressing long-term structural problems in terms of unemployment, capital flows, and interest rates. A lot of these problems have been around for many years, and most of them have been diagnosed sharply at one point or another by Larry Summers. So it’s not like Washington is oblivious to what’s going on. But we’re at the limits of what monetary policy is able to achieve, and the nation cannot afford to repeat the monster hit to the US fisc which we’ve seen over the past couple of years.

Maybe, then, there simply isn’t a solution: the problem is just too big, too complex, and too intractable. It’s a depressing conclusion, but also a pretty compelling one.


No, the solution is to be rid of the car/oil/military mafia.


Felix Salmon
Nov 6, 2009 13:38 UTC


In October, the number of unemployed persons increased by 558,000 to 15.7 million. The unemployment rate rose by 0.4 percentage point to 10.2 percent, the highest rate since April 1983. Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million, and the unemployment rate has grown by 5.3 percentage points.

Well, at least give the BLS credit for not trying to sugar-coat the data. This is truly awful, and makes it obvious why the Fed will keep rates at or near zero for the foreseeable future. You just can’t raise rates when unemployment is in double digits.


Unsympathetic, I keep telling you, it is all the wine.

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