Felix Salmon

How volatility hits pension plans

Felix Salmon
Nov 11, 2011 17:05 UTC

Nanea Kalani of Honolulu Civil Beat has obtained non-public performance numbers for the Hawaii Employees’ Retirement System, and they’re not pretty at all: in the three months to September 30, the fund managed to lose $1.4 billion, or 11.2% of its value.

What we’re seeing here is the brutal effect of volatility on portfolio performance. Let’s say you start with $1,000. If your portfolio falls by 5% and then rises by 5% — or, for that matter, if it rises by 5% and then falls by 5% — you end up with $997.50 — just a quarter of a percentage point away from where you started. But if it falls and rises (or rises and falls) by 20%, then you end up with just $960, down 4% on your initial investment.

There’s two different lessons to be drawn from the way that Hawaii is investing its money. Firstly, going for active rather than passive investment doesn’t work very well. The policy benchmark — what the fund would have returned if it was passively invested rather than actively managed — has consistently outperformed actual performance. And


Secondly, Hawaii hasn’t chosen its managers very well: it’s also consistently underperforming the median public pension fund. If you’re relatively small (about $10 billion, in this case), it’s hard to outperform. As the Pension Consulting Alliance note puts it, “Relative underperformance can largely be attributed to the Plan’s equity (domestic and international) managers’ combined performance trailing their respective benchmarks”.

But there’s a deeper problem here, I think — and that’s related to the fact that the fund is being asked to return an “assumed actuarial rate” of return of 8% per year — in an environment of high volatility and extremely low interest rates. The right thing to do is to say “sorry, I can’t do that” — but that’s a great way to get fired. So instead, fund managers move further and further out the risk curve, in an attempt to hit their target returns. With predictable consequences.

Sometimes, the strategy works. In fact, the strategy is always going to work some of the time. The note proudly says that “the Plan outperformed the policy benchmark and the Median Plan in three of the last five 12-month periods”. But this is the problem with volatility: if you overshoot on the way up and you overshoot on the way down, you end up underperforming overall.

I’m not particularly picking on Hawaii, here, I’m just using it as an example. Most public pension plans have very similar problems. They take on more risk than they should, just because they’re being asked to hit unrealistic return targets. And the losers, of course, are all of us.


Great Post. I have not been visiting the site recently. Took a visit again and there were some great comments on the site. Excellent post. Keep up the good work.
Belgravia Villas

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A bipartisan proposal for more government spending

Felix Salmon
Nov 11, 2011 15:54 UTC

Now here’s a pair of strange bedfellows: Robert Frank and PJ O’Rourke. They have a bipartisan op-ed in USA Today making the obvious and compelling case for infrastructure investment. Not grand schemes like new high-speed rail lines, but just basic maintenance on which the country has fallen massively behind:

The American Society of Civil Engineershas identified $2.2 trillion worth of repairs needed on bridges, roads, dams, schools and water and sewage systems. And that’s just overdue maintenance, never mind addition or replacement.

Be it stimulus to the good, or deficit to the ill, the case for undertaking these projects immediately is compelling. Postponement is dangerous and expensive. Falling bridges, crumbling roads, bursting dams, moldy schools, contaminated water and leaking sewage are on no one’s agenda for cutting government costs or increasing government benefits.

And to delay infrastructure expenditure is to inflate it. For example, take a badly worn stretch of Interstate 80 in Nevada. The state’s Department of Transportation says fixing it today would cost $6 million, but waiting two years would cause the roadbed to be so degraded by traffic and weather that the price would rise fivefold, to $30 million.

Here’s my question: how did we miss this the first time round?

Here is our proposal: Have Congress create a 12-person bipartisan jury of eminent — or even half-bright — citizens. Give this panel authority to decide which of the American Society of Civil Engineers’ projects should not be begun right away. Greenlight all the rest, and with luck most will get done before the Chinese decide they’re tired of buying our 10-year T-bills at 1.7%. In contrast to the desperately overdue maintenance projects that our proposed committee would identify, the stimulus bill passed in 2009 actually didn’t have all that much infrastructure in it, and a lot of what it did have was new pork projects that were far from shovel-ready.

I have to admit that by now I expected to be able to see the real-world effects of the stimulus spending which began in 2009. But America’s infrastructure is just as crumbling as it’s always been, and the National Infrastructure Bank that I expected to see stood up as part of the 2009 stimulus never came close to being created.

We’re living in a world where the NYT writes long articles about how BNDES, the Brazilian national development bank, is so ambitious and powerful — and overspilling Brazil’s borders — that it’s causing demonstrations in Bolivia. But meanwhile, the USA seems to be incapable of corralling funding for urgently-needed domestic repairs, record-low interest rates notwithstanding.

This is a clear market failure, but one driven by the fact that the costs of infrastructure spending fall on the government, while the benefits accrue to private businesses and individuals. Since the government represents private businesses and individuals, such a set-up makes perfect sense in the rest of the world — we all group together to work on projects which benefit everybody. And America used to be great at this: the interstate highway system, the Tennessee Valley Authority, the Hoover Dam.

Now, however, there’s this bipartisan idea that government spending is a Bad Thing which needs to be cut back. Frank and O’Rourke are a rare example of bipartisan consensus in the other direction. I hope we see more of it. But I’m not holding my breath.


I have a family member about to go bankrupt! I’ll tell them to step up their spending as a solution!

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Holding aggregators to journalistic standards

Felix Salmon
Nov 10, 2011 23:57 UTC

Now I’ve got my rant off my chest, let me try to add a bigger-picture point to the noise surrounding Romeneskogate. The unanimous reaction to Julie Moos’s ridiculous piece has held little back: Hamilton Nolan called it “perhaps the most bullshit nonexistent plagiarism case in the annals of online journalism”, while Rem Rieder called her “portentous, not to say sanctimonious” and said that Romenesko “doesn’t deserve to be treated this way”.

So, let’s just declare this Moos 0-1 Romenesko and move on to the kind of thinking which underlies Moos’s post. As Choire Sicha documents very well, Moos likes to write self-contained journalistic stories including lots of links. Many other bloggers — myself included — do the same thing. But here’s the thing: Moos is judging Romenesko by her own standards, when what Romenesko does is not what she does.

Some of the most insufferable prose in Moos’s post comes at the points where she appeals to Holy Writ, a/k/a the Ethics Guidelines for Poynter Publishing:

Our practice is to enclose verbatim language in quotation marks, and to set off longer excerpts in blockquotes. While I have no reason to believe this practice has spread beyond one writer, I will check the work of other contributors to determine for certain whether anyone else has been guilty of the same shortcut…

We spent weeks in 2004 developing explicit publishing guidelines with the understanding and expectation that they would be adopted. How often, how consistently and universally did we articulate our values and standards and confirm that others share them? Not enough. Never enough.

Moos, here, is taking a classic rules-based approach to ethical questions. Here are 1,800 words of ethical rules. If you follow the rules, you’re fine; if you break the rules, you’re unethical. Contrast John Paton’s Employee Rules For Using Social Media at JRC, which make a lot more sense, and which total exactly zero words.

It’s pretty simple, really. Under Moos’s rules, Romenesko did something wrong. Under Paton’s rules, Romenesko did nothing wrong. Romenesko did nothing wrong. Therefore, Paton’s approach wins.

Moos is declaring, here, that she needs to be consistently and universally reiterating explicit publishing guidelines. How dreadful! Being a journalist in such an organization must feel like being a naughty schoolchild, always fearful of being found in transgression of some rule or other. It’s a sad end to the story of a blog which Poynter acquired precisely because Romenesko was doing something wonderful which Poynter was incapable of producing internally.

What Romenesko was doing — to spell this out — was aggregating and curating news about the media. He was not writing stories with lots of links in them: he was putting links together, and occasionally quoting from the articles he was linking to. Eventually, if you read him for long enough, you could start to discern what Choire describes as his “careful and sometimes sly” voice. But when Moos bellyaches about how “the words may appear to belong to Jim”, she’s spectacularly missing the point. The vast majority of Romenesko’s readers never even stopped to think that the words they were reading might “belong” to Romenesko in some way — they were always clearly attributed to the journalist he was quoting. In fact, the more common confusion almost certainly went the other way: when Romenesko put something well, people ended up giving credit to the person he was quoting.

Moos is using the standards of original journalism, here, to judge a blogger who was never about original journalism. Copy-and-pasting other people’s stories is what Romenesko did, at high volume, and with astonishing speed and reliability, for many years. And the media community, including Poynter, loved him for it.

Moos might have “spent weeks in 2004 developing explicit publishing guidelines with the understanding and expectation that they would be adopted”, but guidelines are always reverse-engineered from already-existing best practice. And Romenesko is a shining example of best practice in the aggregation world. If he’s violating the guidelines, then it’s the guidelines which are at fault, not Romenesko.

Petty bureaucrats like Moos love to codify things, so that they can cite chapter and verse when telling people off. But if you’re running a grown-up media organization, please: follow Paton’s lead, and not Moos’s. Journalists will behave unethically, sometimes. When they do, they should be reprimanded or even fired. But basic common sense is always the best guide to whether a journalist has done something wrong. And when Julie Moos presumes to judge Jim Romenesko by the standards of a Moos-written rulebook, it’s right and proper that the wrath of the Twittersphere come down on her as a result.

Update: I’ve got a few more thoughts on this subject here.


I think reasonable minds can disagree as to whether Romenesko’s methods crossed the line. But what is most mystifying to me is that Moos was shocked, shocked to find this going on in her backyard. Either she is guilty of lax supervison of her underlings (“should have known”) or she did know and was panicked by the impending revelations from the Columbia person. It’s all rather like Reagan on Iran-Contra, she’s damned in both instances. Worse, though, is her pathetic attempt to replace Romenesko with her own plodding pontifications. Seems to me we have a case of: if you can’t hack it in journalism, you go into teaching it.

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Nick Rizzo
Nov 10, 2011 23:35 UTC

“The euro zone is in a death spiral.” — The Economist

The Fed should buy every single Euro bond owned by a U.S. bank. Now. — Brad DeLong

Oops! S & P accidentally downgraded France, then issued a correction — Bloomberg

In the wake of MF Global, all American futures trading firms will be audited — Dealbook

Study shows that banks that received bailout funds soon took on more risk — Credit Writedowns

Congratulations, Jefferson County: you are now the biggest municipal bankruptcy in American history — Bloomberg

Why Americans won’t do dirty jobs — Businessweek

Ringtones are a $2.1 billion a year business — AllThingsD

Research in Motion will keep developing Flash, even after Adobe has abandoned it — Electronista

Zynga to employees: Surrender your stock or be fired — WSJ

Watch out Jamba, Starbucks is in the juice game now — Reuters

The way we were: a decade of anti-Berlusconi Economist covers — The Economist

All these links and many more are available at Counterparties.com


@TFF, we gotta have our iPhones, even if we’re picking crops.

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America isn’t crowdsourcing its policies

Felix Salmon
Nov 10, 2011 17:26 UTC

Anil Dash, of Expert Labs, is very excited about the latest government action on student loans, because he’s convinced that it was driven by the White House petition site he helped to set up.

Something remarkable happened here:

  1. A regular citizen, not a lobbyist or politician or CEO, made a suggestion of a smart idea on the White House’s petition website.
  2. That idea got promoted through social media, filtering its way out through Twitter and blogs and Facebook.
  3. One month later the administration endorsed a variation of the idea, making it actual policy and helping over a million and a half Americans to have more money in their pocket at the end of the month.

Every time these milestones and successes are achieved, skeptics want to scoff. “Maybe this guy’s a plant!” “They’re only gonna accept ideas they already agree with.” “I bet most of the ideas are stupid.” “Why would they really listen to us?”

In this example, we see refutations of many of these objections.

This would be quite amazing and wonderful, if it were true. But it’s not true.

For one thing, it’s worth looking at the original petition, which got 32,008 signatures. Here it is in full:

Forgiving student loan debt would provide an immediate jolt to the economy by putting hundreds and, in some cases, thousands of extra dollars into the hands of people who WILL spend it – not just once, but each and every month thereafter – freeing them up to invest, buy homes, start businesses and families. This past year, total student loan debt finally surpassed total credit card debt in America, and is on track to exceed $1 TRILLION within the next year. Student loans themselves are responsible for tuition rates that have soared by 439% since 1982 and for saddling entire generations of educated Americans with intractable levels of student loan debt from which there is, seemingly, no escape. Relieve them of this burden and the middle class WILL rebuild this economy from the bottom-up!

This is pretty extreme stuff: both the idea that student loans have caused rising tuition rates — which seems to get things exactly backwards — and the idea that a trillion dollars of debt could or should simply be eradicated at a stroke. Yes, it would “provide an immediate jolt to the economy”. But it would do so in an incredibly inefficient way — if you’re going to do a $1 trillion stimulus, there are much better ways of doing so.

Yes, the idea got some traction — enough traction that Justin Wolfers felt the need to comprehensively demolish it in a piece headlined “Forgive Student Loans? Worst Idea Ever”.

So Anil’s first point is simply wrong. Yes, a regular citizen suggested something on the White House’s petition website. But it wasn’t a smart idea: it was a pretty stupid idea.

Anil’s second point is right — the stupid idea did indeed get promoted through social media. Social media can be quite good, it turns out, at promoting stupid ideas.

But what of Anil’s third point? Did the Obama administration indeed sign on to the Worst Idea Ever? No, it did not. Instead, it tweaked something called the income based repayment policy so that certain benefits will go into effect in 2012 rather than in 2014. And it allowed students to consolidate their federal student loans into one loan, to “give borrowers the convenience of a single payment to a single lender”. Which is nice, but hardly a big deal.

It’s a real stretch to call this “a variation of” the original idea, which called for student loan forgiveness. There’s no new forgiveness in the new announcements — and the old forgiveness is the kind of forgiveness which only takes effect after 20 years. Not exactly what “Robert A” of Staten Island had in mind.

On top of that, it defies credulity to suggest, as Anil does, that the White House announcement was in any way of form “crowdsourced policy”. Robert A’s suggestion — which, remember, had none of the elements of the policy that was eventually put into place — was uploaded on September 23; the new policies were announced on October 26.

Earth to Anil Dash: policies like this do not get hatched, implemented, and announced in the space of 23 working days. I can guarantee you that these student-loan proposals were in the works long before Robert A’s suggestion was made, and that they would have been announced anyway, even if the petition hadn’t existed.

It’s pretty obvious what happened here: the administration wanted to make it seem as though the petition site was having some useful effect, and so it took a policy it would have announced anyway, and declared that the policy was in response to some petition. It just didn’t do that very well, since the announced policy in fact bears almost no relation to what the petition was asking for.

So let’s not get cyber-utopian about crowdsourced policies: they haven’t happened yet, they’re unlikely to happen in the future, and insofar as they do happen, the crowds in question will not be virtual crowds on a White House website, but rather real crowds at places like Tea Party rallies or Occupy Wall Street. The internet is a good way of organizing people to turn up in person. It is not in any way an alternative to doing so, at least if you want to change government policy.


“Better to restore support to bring state schools back down within reach of more students.”

An admirable goal, but I would like to see the additional funds spent on education rather than luxury dorms and sports complexes. Can we not find a way to tease these costs out of the core operations? Perhaps make them optional, so that cost-conscious students who are interested in a quality education might not be forced to take out loans to support the Penn State football team?

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Nick Rizzo
Nov 9, 2011 23:48 UTC

Some of the links today from Counterparties.com:

Why the ECB couldn’t save Italy even if it wanted to — WSJ

Echoes of pre-crash Japan in China today — Chovanec

The huge Chinese loan-sharking industry has lead to suicides and disappearances — Bloomberg

Some MF Global customers may have to “share cash” — Businessweek

Krugman: The return of secular stagnation — The Conscience of a Liberal

Bruce Bartlett: The Fed has an obligation to do more about unemployment — NYT Economix

Oil companies have ex-military “psy ops” experts fighting anti-fracking “insurgency” — CNBC

Goldman raised its lawsuit allowances thirty-fold — Reuters

Yelp is planning an IPO, at a $1 to $2 billion valuation — WSJ

And Raj Rajaratnam will pay a $92.8 million dollar penalty, or more than five Kardashian weddings’ earnings — Dealbook

Market inefficiency of the day, Maple syrup edition

Felix Salmon
Nov 9, 2011 23:27 UTC

Maple syrup is made by boiling down the sap of maple trees. Early in the season, there’s lots of sugar in the sap and it only takes 20 or 30 gallons of sap to generate a gallon of syrup. Because it hasn’t been boiled down very much, that syrup lacks intensity. Later on in the season, however, there’s less sugar in the sap and it can take as much as 60 gallons of sap to generate a gallon of syrup. And that syrup is much darker and more flavorful.

Obviously, more effort is expended generating each gallon of dark syrup than is expended on making the early-season light syrup. And the dark syrup tastes better too. So you’d expect it to be much more expensive.

And you’d be wrong.

Nick Rizzo went to Whole Foods in Union Square last night to get the numbers. The most expensive maple syrup on the shelves was, interestingly, the Whole Foods own brand — the 365 Organic line which ostensibly offers cheap, everyday prices. But the 365 Organic Grade A light maple syrup sells for $7.99 per 8oz jar — that’s $64 per half-gallon.

And “Grade A light”, remember, means the early-season stuff with the least maple taste or flavor.

If you stick with the 365 Organic line, the next one down is Grade A medium, at $9.99 for a 12oz jar, or $53 per half-gallon. Then there’s Grade A dark, where a 12oz jar is just $7.99. That’s $43 per half-gallon. And finally there’s Grade B — the tastiest of the lot, and the hardest to make — which comes in a 32oz jug for $19.99, or $40 per half-gallon. For good measure, it’s labeled “cooking”, just to hammer home the idea that this stuff isn’t designed for direct ingestion.

Other Grade B maple syrup at Whole Foods is even cheaper — a different 32oz jug was selling for just $11.99, or $24 per half-gallon. That’s just 37% of the price of the top-end stuff. I’ve been to Vermont; everybody there told me to buy Grade B if possible. Not because it was cheaper, but rather because it was better.

And some purveyors are working this out. At Amazon, the Shady Maple Farms Grade B is $32.89 for 32oz — a whopping $66 per half-gallon — while the Grade A is slightly cheaper, at $30.08.

But more generally, the trend is very clear: the lighter, cheaper-to-make, and less tasty maple syrup is also the most expensive, being presented lovingly in small glass jars rather than being moved in bigger plastic jugs.

And the maple syrup industry seems to be entirely complicit in this, happy to slap a “cooking” label on the really good Grade B stuff, which by rights should be its premium product.

This weirdly inverted state of affairs won’t last forever — under “new standardized grades and nomenclature”, the grading is going away. But for the time being, now’s your opportunity to take advantage of a curious historically-driven arbitrage. Grasp it!

Update: Apologies for betraying my European roots by not knowing how many ounces there are in a gallon. I originally was giving prices per gallon here; in fact, they were prices per half-gallon. Oops.


Next up, please investigate extra virgin olive oil. As the New Yorker reported a couple years back, it’s likely that a fair percentage of EVOO isn’t really even olive oil. But my gripe is that EVOO isn’t what you always want. It has a flavor that you may not want to add to the food.

What you want is “pure” grade, which is a later pressing, and no lower in quality. Rather, it has much less taste and is enormously cheaper, typically.

However, I have gone through incredible journeys to find “pure” olive oil in the last 3 or 4 years. Rachel Ray spread the gospel of EVOO, and in Whole Foods and other markets, I can find 40 brands of EVOO, and no pure. Trader Joe’s has had (and sometimes still does) have a single lonely “pure” shelf item.

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The euro breakup thrill ride begins

Felix Salmon
Nov 9, 2011 21:48 UTC

It’s important not to read too much into today’s mid-afternoon stock-market wobble. But in the wake of the news that Germany and France have been talking for months about creating a “core” euro zone with real fiscal union, markets sure as hell didn’t go up. And one anonymous diplomat gave a succinct explanation of why:

This will unravel everything our forebears have painstakingly built up and repudiate all that they stood for in the past sixty years,” one EU diplomat told Reuters. “This is not about a two-speed Europe, we already have that. This will redraw the map geopolitically and give rise to new tensions. It could truly be the end of Europe as we know it.”

I’ll go out on a limb here and guess that the diplomat in question isn’t German. But whoever it is, they have a point. There is no way that the European periphery will go quietly, resigned to their second-tier fate and their third-tier currencies. And without their consent, this idea is going to get very messy, very quickly. Even if it never happens, simply debating it could suffice to cause enough intra-European mistrust and vitriol that the markets simply cease lending to all but the very safest borrowers. And the ECB can’t lend to everybody.

Meanwhile, Silvio Berlusconi has turned himself into a lame duck, and is being as obstructionist as possible with respect to allowing his successor to do his job. In fact, it seems at the moment as though new elections won’t take place before February — which is far too long as far as impatient markets are concerned.

If you haven’t read it yet, you should really check out Mark Carney’s speech from last night in London, on the subject of global liquidity — something he describes as “the Keyser Söze of international finance”.

If you die, the proximate cause of death is always the fact that blood has stopped flowing to the brain. Similarly, if you’re in a crisis, the proximate cause of the crisis is liquidity, or rather the lack of it. You can be insolvent for as long as you like, so long as the money keeps flowing; it’s only when the money stops that things come to a head.

And we’ve reached the point, in Europe, at which the money has stopped flowing. Barclays has already declared that Italy is “beyond the point of no return”, and Greece hasn’t been able to fund its deficits either domestically or in the international markets for ages now. This is what happens in crises: the money stops, and then governments and central banks are faced with a choice. Do they step in, lending freely where private actors fear to tread? That’s the right thing to do if what you’re facing is merely a liquidity problem. But if it’s fundamentally a solvency problem, then layering on extra debt just makes matters worse.

And in Europe, of course, the governments are as likely to be part of the problem as they are to be part of the solution — if there is a solution, which is looking increasingly improbable.

All of which is to say that there are going to be many more days like this. Europe is becoming increasingly unpredictable: the crisis has claimed the scalps of two prime ministers in the past week, and they surely won’t be the last.

Martin Wolf says that the eurozone is unlikely to survive. Paul Krugman is saying the same thing. I’ve been saying it too. But one thing’s for sure: a euro breakup is emphatically not priced in to markets. So fasten your seatbelts: it could come sooner than you think.


France is a muslim state now so they should be able to get some help and further influence from the middle east! I wouldn’t want to be a French women about now!

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Globalization datapoint of the day: Organic isn’t locavore

Felix Salmon
Nov 9, 2011 19:27 UTC

Organic World has a series of charts about organic agriculture, from which these two stand out:



Clearly there’s a huge disconnect here — there’s basically no overlap at all between the countries producing the most organic food, on the one hand, and the countries consuming the most organic food, on the other.

What that means, in turn, is a real dilemma for the kind of people who want to eat local and organic. I’ve certainly noticed this at my local Whole Foods: you can eat local, or you can eat organic, but it’s very hard to do both. (And when you do, you pay through the nose for the privilege.)

I do wonder how this state of affairs came about — you’d think that demand for organic products would be felt locally, in the first instance. But I guess global agriculture is so global now that demand shows up first in places like Australia and Argentina, where land is cheap — even when domestic demand for organic food in those markets is very small.

And I also wonder how many of the restaurants who proudly source their produce from named farms are getting vegetables which are organic and local. My guess is that it’s not as many as you might think.


“I do wonder how this state of affairs came about — you’d think that demand for organic products would be felt locally, in the first instance. But I guess global agriculture is so global now that demand shows up first in places like Australia and Argentina, where land is cheap ”

Well, yes, you would expect a land hungry process like organic farming to go where land is cheap really.

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