Felix Salmon

The twitchy, volatile stock market

Felix Salmon
Aug 12, 2010 03:06 UTC

I did my best to ignore the stock market fall today, but it was certainly important enough to grab the attention of Mohamed El-Erian, who has an interesting theory of why it happened:

As Rich Clarida and I recently argued in the FT, sharp risk-on/risk-off swings in markets are to be expected given the reality of today’s macro context.

A couple of weeks, Fed chairman Ben Bernanke called the outlook “unusually uncertain“. We went further, arguing that expectations of outcomes have evolved in an interesting manner – from the more familiar bell curve (a dominant mean and thin tails) to a much flatter distribution with fatter tails. In such an expectation world, short-term news can have a disproportionate impact on market valuations.

Essentially, El-Erian is saying here that the markets have gone from driving a boring family sedan to driving a twitchy, ultra-responsive sports car. And that’s nothing to do with high-frequency algorithmic trading, or anything like that — such things only serve to exacerbate the underlying fundamentals.

Think about it this way: In the 1950s, or even in the 1980s, the range of possible outcomes was (or was perceived to be) pretty narrow. As the macroeconomic situation evolved in a relatively simple and continuous manner, markets evolved to reflect the new realities. Even the bout of high interest rates and inflation in the 1970s was something that equity markets, in particular, could take in their stride — stocks are, after all, one of the world’s better inflation hedges.

Today, however, we live in a much more discontinuous and uncertain world. If stocks are pricing in a 10% chance of a devastating bout of deflation and that perceived probability rises to 20%, the risk-adjusted present value of those stocks can plunge dramatically — much more than 3% — even if everything else remains the same. We don’t really have a model of how the economy works (or doesn’t) — but insofar as we do, it’s one of those models where small changes in initial assumptions can and do result in very large changes to outputs.

As a result, the long-term volatility of equities is going to continue to rise, I think, as it has been rising of late. (Does anybody have a dataset here? I’d love to see a chart of at-the-money implied 10-year or 15-year volatility for the S&P 500, and not just because it has important implications for Warren Buffett’s equity puts.) The implication of that is that the “long run”, in the concept of “stocks rise over the long run”, is going to continue to get longer and longer. It’s clearly not 10 years, any more, or even 15. But how long is it? 35 years? 50? And at what point is that long run so long that it’s of practical purpose to pretty much no one?


billuk, there is enough money (and brains) chasing short-term returns these days that I doubt there is any profit to be made there for retail investors.

Instead, you need to LENGTHEN your horizon. Ask yourself, “What companies are almost certain to be more profitable in 2020 than they are today?” That’s a long enough time frame that with today’s peripatetic markets you are likely to see at least one bull market and at least one bear market. Surely a major recession or two, somewhere in the world.

But at today’s valuations, if you can be certain that the company will be 50% more profitable in a decade than it is today (CAGR of 4%), then you can assure yourself of at least a LITTLE capital appreciation over that time, with nice dividends between now and then.

People have forgotten that approach because it didn’t work — couldn’t apply — at the valuations we saw between 1998 and 2008. We have an entire generation of investors trained to look short and trust that rapid growth will take care of the future. When that rapid growth eventually stalled (as it always does), those bets failed.

Now we are awash in stock investments that make sense at simple 4% earnings growth. I’m betting they can achieve THAT target, on reinvested earnings and inflation alone.

Posted by TFF | Report as abusive

Rebuilding HP’s board

Felix Salmon
Aug 11, 2010 20:17 UTC

One of the interesting things about the fall-out from Mark Hurd’s ouster at HP is that no one is happy with HP’s board. On the one hand, critics like Nell Minow, saying that Hurd “falsified his expense accounts in a tawdry series of incidents”, say the board should have fired Hurd for cause, rather than allowing him to resign. On the other side of the argument, Hurd defenders like James Stewart and Henry Blodget point out that Hurd was cleared of the sexual-harassment charges against him, and didn’t do his own expenses, which makes the claimed violation of HP’s Standards of Business Conduct hard to find.

Both sides, it seems, would agree with Michael Schrage that the board itself bungled the whole affair horribly, largely on the advice of panicked PR advisers at APCO.

And indeed there’s a case to be made that Hurd paid the price, not for his own sins with Jodie Fisher, but for the board’s own prior sins. Here’s Minow:

in order to do any business with the government (including eligibility for certain licenses to do business abroad), companies need to be able to demonstrate that they have “tone at the top” ethics and compliance in place. It says a good deal about our system of corporate governance — and our media and ourselves — that the announcement a few days ago that HP was settling a false claims charge with the government for $50 million did not result in either disciplinary action against the CEO or headlines in the financial press or mainstream media.

When the government investigates companies in these cases, the authorities have to decide whether to prosecute criminally or settle for a civil fine. They also have to decide whether to target the company as a whole or just some lone, unauthorized employee. To make such decisions, the government has said it will look to see whether the top management — starting with the CEO — has sent unambiguous messages that noncompliance will not be tolerated. Has misconduct been punished in the past? Have people been fired for violations? Or does management turn a blind eye for the sake of business expediency? If it’s the latter, the government says the whole company will be penalized…

The HP board has been a serial corporate governance offender, so we should not be surprised that they have bungled this one… This is the board that mis-handled the hiring, direction, and firing of Carly Fiorina and then mis-managed the “pretexting” scandal following the investigation of a leak from the boardroom. This is the board that TCL has rated as high-risk for its inability to manage incentive compensation.

And this is the board which, now, decides to roll out the cool and trendy board member as its official spokesperson, in a failed attempt to make its latest fiasco marginally more palatable to the investing public.

It seems to me that the board’s first duty is to shareholders, and that one look at the HP share price will show that on that front it bungled matters atrociously. I can understand that the board might want to set a zero-tolerance precedent when it comes to CEO shenanigans, especially in the wake of the other recent scandals. I can also understand that it doesn’t want to get into a public fight with the Hurd camp, especially now that the decision has been made and can’t be undone. But it’s hard to see, at this point, why shareholders should have any faith at all in the HP board. Marc Andreessen is a good guy, but while he’s searching for a new CEO, maybe he should search for a new chairman at the same time. Who ideally won’t be the same person, and who will be able to bring a bit more credibility to a tattered board.


hi cummedgeon,

You are obviously not a technology journalist. Were you one, you would not have singled out the one person that was perhaps most vicitmized unfairly by the pretexting scandal–Patricia Dunn. Read The Big Lie rather than wasting your time venting over things your know nother about….

I think Patricia Dunn should be asked to return to the HP BOD

Posted by bigstick1 | Report as abusive

A spinal-tap test for hedgies?

Felix Salmon
Aug 11, 2010 18:44 UTC

Financial services companies can take advantage of the cognitively weak in general, and the elderly in particular — especially elderly people suffering from Alzheimer’s disease. More generally, people who want to be in full control of their finances today might well want to put in place protections which remove them from full control of their finances in future, if they know that they’re going to get Alzheimer’s.

So now that a test looks likely which will predict with high accuracy whether you’re going to get Alzheimer’s or not, will we find people lining up to find out if they’re going to get the disease, and creating structures for other people to take control of their funds before symptoms appear? It seems reasonable to me. And will we find hedge fund managers, especially once they get to be a certain age, publicly releasing the results of their spinal-tap tests?

This is all very murky, in bioethical terms, but in financial terms it’s crystal clear: no investor wants someone with Alzheimer’s running their money, and few of us even want to be control of our own money once we come down with the disease. Whether that’s enough to make us find out whether we’re going to get it, of course, is another question entirely.

Chart of the day: TIPS yields

Felix Salmon
Aug 11, 2010 17:25 UTC

Paul Krugman notes today that 5-year TIPS are trading with a negative real yield, which prompted me — with the help of the great Frank Tantillo — to navigate the Fed’s data download program to generate this. (Bigger version here.)


Both 5-year and 10-year TIPS yields are trading at or near their all-time lows right now (the chart only goes up to the close of business yesterday, and yields have fallen again today).

I’m a bit stumped, however, on what exactly this means. The last time that TIPS yields dropped below zero, the cited reason was “investor speculation that inflation will quicken as the U.S. economy slows”. But that doesn’t seem to be the case right now, with the 5-year Treasury at 1.44% and the 10-year at 2.71%.

So what’s going on? Scott Grannis has his own ideas, which don’t bode well for the medium-term future of the economy as a whole:

You can think of real yields on 5-yr TIPS as a good proxy for the market’s expectation for real GDP growth, mainly because there should be some reasonable connection between the risk-free real yield an investor can earn on TIPS over the next 5 years and the real yield on cash flows tied to the economy’s performance via generic equity exposure. For example, if expectations for economic growth were healthy (e.g., 4-5% real GDP for the next several years), then an investor would be foolish to put his money in 5-yr TIPS that promised a zero real return. Cheerfully buying 5-yr TIPS with a guaranteed real yield of zero only makes sense if one has very grave doubts about whether the economy can generate any real growth at all in the coming years.

I don’t think that the TIPS market is pricing in zero real GDP growth over the next 5 years. But I do think it reflects worries over stock-market valuations. A stock-market investor only gets exposure to the economy’s performance via investing in equities if p/e ratios don’t fall, after all, and I can easily imagine a scenario where the economy grows modestly, or enters a shallow recession, while stocks fall significantly.

So my feeling is that this is the “there’s nothing else to buy” trade: a desperate lunge for safety in a world where everything else — including stocks and property — looks decidedly risky. Although with yields this low, even these long-dated TIPS stand to drop quite a lot in value if they revert to their mean yields.


DanHess, China is going into this with open eyes. They understand the situation at least as well as you and I do.

Their growth was initially built on exports. Over the last decade they’ve been funneling much of that back into infrastructure. Consumption is increasing — quite rapidly — but not nearly as fast as production. They need a market for that production, and so they purposefully drain money from the economy to prop up the dollar and US bonds.

Eventually their economy has to be rationalized, with domestic consumption rising and (perhaps) production falling. They are supposedly backing off from their currency manipulation, while taking some of their less efficient production facilities off line. Meanwhile their domestic consumption will continue to grow.

They are walking a fine line to keep things moving in the right direction, while not pushing them too fast. Keeping that balance is far more important to them than whether or not they see a profit on those Treasury bonds. If they misstep, you’ll see a crash in exports, falling GDP, and widespread unemployment. While that would effectively increase consumption as a percentage of GDP, it isn’t the desirable solution.

For this reason, I have zero fear that China will dump their Treasury holdings any time in the near future. They could conceivably do that AFTER they’ve transitioned to a sustainable domestic economy, but for now their economy is dependent on ours.

Posted by TFF | Report as abusive

Why small-scale bike sharing won’t work

Felix Salmon
Aug 11, 2010 15:26 UTC

SoBi, short for social bicycles, is a gutsy startup trying to make bike-sharing more accessible by reducing the up-front infrastructure costs. Don’t create dedicated parking spaces: allow bikes to be parked anywhere. Don’t commission custom bicycles: design a gizmo which attaches easily to any bike instead. And store information in the cloud, allowing what I think is the smartest new idea of all: rather than paying contractors to move hundreds of bicycles every night from where they’re not wanted to where they are wanted, simply pay the bike riders themselves a bonus of a buck or two if they leave the bike in an area where they’re in high demand.

But I still don’t think this’ll work, and not just because SoBi was silly enough to demonstrate their first real-life prototype on a fixed-gear bike with no rear brake. Something less suitable for sharing can hardly be imagined. People come in a large range of shapes and sizes, and need to be able to adjust their bikes easily when they find them: that’s easier said than done. Standardized bikes also make repairs a great deal easier and cheaper: being able to install this system on any old bike is not much of an advantage, really. And more generally, it’s pretty hard to find suitable bike parking if your only option for locking the bike is to find a rack which you can attach the bike to from one position over the real wheel.

The big problem, however, is in the ongoing costs of running the system — finding broken bikes, repairing those bikes, maintaining the information infrastructure, etc etc. Where bike sharing exists already, in cities like Paris, Munich, and now London, it’s institutionalized with a lot of corporate sponsorship and advertising: a very large chunk of money in those cities, for instance, has come from JCDecaux, Deutsche Bahn, and Barclays, respectively. Big corporations like that want standardization and predictability and on-message branding: they don’t want to be associated with users locking their bikes illegally to any old railing or pole, irritating merchants and pedestrians.

Bike sharing is something best done city-wide, at large expense, by a big corporation risking its reputation to at least some extent, with a lot of public money and support as well. Small local schemes are likely to start with great enthusiasm and then run out of steam or money pretty quickly, no matter how clever they seem. I look forward to a big public scheme paying its users for returning bikes to high-demand areas. But beyond that I’m not very optimistic about SoBi.

Update: SoBi’s founder, Ryan Rzepecki, responds in the comments:

1. We have no intention of launching a SoBi system using fixed gear bicycles. That pic is of a foam model attached to our industrial designer’s bike with a clothes hanger. It wasn’t meant to be representative of the actual bike or mount.

2. We intend to launch city-wide systems with government support and major sponsorship. This isn’t a peer-to-peer or grass-roots solution. I think sponsors will particularly appreciate the ability to connect to users with opt-in real-time promotions and advertising.

3. We are developing advanced fleet management tools for tracking not only the position of the bikes, but their repair schedule and other information to help system administrators.

4. Users must lock to approved racks – parking that is illegal or offensive will be flagged and the most recent user can be held accountable.

5. The idea is not to create a mismatched fleet of old beater bikes, but to allow each city to choose a bike that is right for their needs given the local conditions and budget.

6. Yes, suitable bike parking is a problem in most American cities. By choosing the SoBi system, a city can expand parking opportunities for all cyclists by installing new racks. These racks benefit not only bike share bikes, but private bikes as well.


It seems like finding broken bikes and fixing them would be much easier if each had a GPS system on board. A member could file a trouble report from his/her smartphone when a bike has a problem.

Mr. Rzepecki, I recommend that you put a bar-code or some other smartphone readable unique code on each bike to make it easy to send trouble reports. Take a photo of the barcode, check the appropriate problem, and send.

In regards to the bikes, no sane person would put a fixie into bike-sharing service. The bikes need to be sturdy, easily adjusted bikes. But I see nothing in the SoBi model that obviates the use of appropriate bikes.

Go SoBi!

Posted by mharrigan | Report as abusive

Internet dystopia of the day, Paul Graham edition

Felix Salmon
Aug 11, 2010 14:00 UTC

Paul Graham, one of the visionaries of the Internet’s early years, has a decidedly dystopian view of its future, and that of society itself:

Increasing numbers of things we like will be transformed into things we like too much… At the extreme end of the spectrum are crack and meth… Checkers and solitaire have been replaced by World of Warcraft and FarmVille. TV has become much more engaging, and even so it can’t compete with Facebook…

The world is more addictive than it was 40 years ago… and it will get more addictive in the next 40 years than it did in the last 40…

You can probably take it as a rule of thumb from now on that if people don’t think you’re weird, you’re living badly… we’ll be increasingly unable to rely on customs to protect us… It will actually become a reasonable strategy (or a more reasonable strategy) to suspect everything new…

I’ve avoided most addictions, but the Internet got me because it became addictive while I was using it. Most people I know have problems with Internet addiction.

I think this is exactly wrong. For one thing, it’s trite and far too easy to blithely compare “Internet addiction” (whatever that might be) to real physical addictions like those to heroin or cocaine. Graham would surely consider me an Internet addict, but I can testify from the past two weeks, when I went on a largely off-the-grid vacation, that the withdrawal symptoms don’t last for more than 24 hours. After that, going offline is easy, and lots of fun, and any necessary email checking feels like a chore: it triggers no rush of immediate pleasure.

And I’m far from convinced that the rate of adoption of highly-addictive things is increasing. Graham mentions that cigarette use is down; he doesn’t mention that crack cocaine use is down too. He does suggest that “the recent resurgence of evangelical Christianity in the U.S. is partly a reaction to drugs” — but I doubt it would be possible to find any correlation at all between the rise of evangelical Christianity and the prevalence of addictive drugs in those communities. And even television is, I think, much less addictive than it used to be: when I do watch it, I generally want to turn it off, rather than keep it on.

What’s more, the Internet is in many ways anti-addictive: there’s always something else, something better, to move on to. It’s not some monolithic entity to which one can become addicted; it’s a vast range of sites and usages which wax and wane in our days. Google replaces Yahoo, Facebook replaces MySpace, Twitter replaces RSS, and ever onwards. It’s a great tool for living life fully — especially for young people in, say, small evangelical communities, who find friends and peers they could never have been in touch with pre-Internet.

“Addiction” is a term which gets bandied about far too loosely. I daresay that Graham is right that when he wants to think deeply about one specific thing, it’s good for him to take a long hike rather than sit in front of his Internet-connected computer. But that doesn’t mean he’s addicted to the Internet, it just means that the Internet isn’t particularly conducive to helping people think deeply about one specific thing. (On the other hand, it’s excellent at helping people make connections between ostensibly different things.)

And for all of Graham’s anecdotes, he provides no quantitative data backing up his claim that the world is becoming increasingly addictive, at an accelerating rate. I suspect what we’re seeing here is much closer to curmudgeonliness than it is to accurate diagnosis. And that Tyler Cowen is right: the Internet, even at the margin, is something to be embraced, rather than something to be feared, suspected, and best avoided.

(via Jelveh)


“Internet addiction (whatever that might be)”

wtf #1

“the Internet is in many ways anti-addictive”

wtf #2

Posted by rivelino | Report as abusive


Felix Salmon
Aug 11, 2010 03:18 UTC

Every point the VIX 10-yr implied volatility rises, Berkshire Hathaway loses another $280 million — Clavell

Meet the Prankster Brothers Behind “Jenny”, the Whiteboard-Using, Farmville-Exposing HPOA Girl — Kafka

“The theory of relativity is a mathematical system that allows no exceptions. It is heavily promoted by liberals” — TPM

Ted Olson vs Chris Wallace — YouTube

Cameraphones make you ugly — OK Cupid

The beer popsicle — Urban Daddy

Airfares are now the highest they have been since the start of 2008 — NYT

Broke Britannia! The Musical — Broke Brittania

Liquid pencil — Sharpie

Add water to your wine — NYT

The Riedel wine glass which holds over 1 liter of wine — Wine Enthusiast

In Basel, Eternal Work In Progress — NYT


That TPM page….wow. I wonder how they feel about QM.

Posted by drewbie | Report as abusive

The rise of the unemployable underclass

Felix Salmon
Aug 10, 2010 22:56 UTC

David Leonhardt’s latest column is full of interesting employment datapoints. Among them:

  • In 2008, only 13.2% of the labor force was unemployed at some point. That compares to 18.1% in 1980, and 22% in 1982.
  • Real wages, which normally fall during recessions, have risen in this one. Even nominal wages are up.
  • The mancession is over: “male employment has risen by almost one million this year, while female employment has fallen by 300,000″.

The overriding impression is of most Americans actually doing OK, with an unemployable underclass bearing the brunt of the recession. Maybe we really are all middle class now: there’s the unemployed at the bottom of the pile, and the plutocratic elite at the top, with the overwhelming majority sitting in between, doing OK but hardly great.

The problem is that persistent unemployment at or around 10% is unacceptable in the U.S., especially with the social safety net being much weaker here than it is in Europe. Leonhardt is right that Euro-style safety nets aren’t particularly innovative, but they do at least keep people housed and clothed and fed and living outside poverty — reasonable expectations for anybody to have, I think, in the richest country in the world. If David Leonhardt can’t think of any bright ideas for solving the persistent-unemployment problem, then the chances are such solutions aren’t going to magically appear. Which means we need to help the long-term unemployed, rather than simply ignore and forget about them.


I almost laugh, except for what is happening, has been going on for years, 30 years in the making, america has outsourced jobs and insourced labor, as a population you cannot sustain job growth. Good, bad or indifferent, we’ve have wrapped to much importance into the stock market, while all thier looking for is the bottom line. As a country we need to reward the companies that stay home, invest in alternative energies and nano technologies for the future, even if it’s not good for wall street. Main street and wall street are a parralell universe. We sold out the american worker for graft and greed.

Posted by aussie2390 | Report as abusive

Smart parking becomes a reality

Felix Salmon
Aug 10, 2010 21:43 UTC

I’m very excited that San Francisco has finally launched its new SFpark system. And I love their video introduction to it:

The only thing I have to complain about here is that the parking-meter pricing isn’t nearly as dynamic as I’d like: rates can only change once per month, and never by more than 50 cents. I’d love to see rates change much more dynamically than that, especially on big days where some kind of special event means much higher parking demand than usual.

But the central idea is brilliant, and should be adopted everywhere: reduce traffic congestion by pricing parking according to demand — including pricing garages lower than street parking — so that there’s nearly always at least one free parking space on every block. No more crawling around interminably looking for a spot! Congestion should drop immediately, since a huge proportion of city traffic is people looking for somewhere to park.

The proof of the pudding, of course, will come now that the SFpark system is up and running: I hope that the city planners have been taking detailed congestion and vehicle-speed measurements, so that they can quantify exactly how those things change in the wake of SFpark’s introduction. It’ll take a little while for the rates to stabilize at the right levels, of course, so don’t expect immediate results. But come back in a year’s time, and I’d love to see some numbers on how and whether this scheme works.



It does encourage people to drive, but that encouragement is outweighed by the *higher prices*. The prices encourage people to go where there is parking, and stay away from places where there isn’t.

Posted by davidshor | Report as abusive