Felix Salmon

How correlations change

Felix Salmon
Apr 20, 2012 13:28 UTC

Paul Murphy has a good overview of RORO today: the risk-on, risk-off phenomenon whereby all assets are increasingly correlated. HSBC has even come up with a RORO Index, which, you won’t be surprised to hear, is going up and to the right:


HSBC’s correlation matrices are prettier. In 2005, the world of investable assets was lovely and turquoise, full of low-correlation asset classes. Today, not so much.

Screen-shot-2012-04-19-at-1.02.27-PM.png Screen-shot-2012-04-19-at-1.03.03-PM.png

What really fascinates me about these correlation matrices, however, is the rankings. Look down the left-hand side, and you’ll see the big risk-on asset classes at the top, and the big risk-off asset classes at the bottom. Here’s how the lists changed between 2005 and today:

Screen-shot-2012-04-19-at-1.02.27-PM.jpg Screen-shot-2012-04-19-at-1.03.03-PM.jpg

There are strong similarities along the general lines you’d expect: stocks are at the top, bonds are at the bottom. But the differences are fascinating — none more than the fact that the dollar has moved from being at the top of the list in 2005 to being at the bottom of the list in 2012. Right now, the dollar is the ultimate safe asset; it’s not always thought of that way.

And while there were was a cluster of currencies at the bottom of the list in 2005 — the Swiss franc, the yen, the pound — they’ve now moved up into the middle of the list, in a world where pretty much every currency in the world has zero interest rates. The carry trade, at least between developed-world hard currencies, ain’t what it used to be.

Meanwhile, the VIX, which was right at the bottom of the list in 2005, is there no longer. It’s still used to hedge against downside volatility. But over the past seven years it has become much more of a traded asset class in its own right, and so while it used to have really strong negative correlation with, say, the Nasdaq, it doesn’t any more.

All of which is to say that correlation itself is not a simple risk-on, risk-off thing. In general, correlations rise as the RORO index goes up. But specific correlations can change in unpredictable ways. Sterling and natural gas might be among the few relatively uncorrelated asset classes today. But there’s no reason to believe they’ll stay that way tomorrow.


This video (made in 2011, and with fewer assets) shows the dynamics; the risk-off phenomenon is particularly clear during crisis, when the whole matrix turns red.

http://www.youtube.com/watch?v=LBO2bYH_K eA

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Counterparties: Spanish bond yields relief

Ben Walsh
Apr 19, 2012 22:32 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

France, and more crucially Spain, sold a total of $17 billion in debt, with each country meeting its targeted amount today. The rate on the 10-year Spanish benchmark rose to 5.74 percent from 5.40 percent at its last auction in January.

Failure in either auction, or a crippling interest rate for Spanish debt, would have been disastrous. The successful government bond auction came in the wake of news that the ratio of non-performing loans is increasing.

In Washington, the IMF’s Christine Lagarde made comments indicating that all is not, in fact, well:

International Monetary Fund Managing Director Christine Lagarde said she expects more contributions after landing pledges of about $320 billion in her campaign for bigger reserves to combat threats to global growth.

“I look at this pot of money as an umbrella,” Lagarde said today on Bloomberg Television’s “InBusiness With Margaret Brennan” in Washington before meetings of the world’s finance chiefs. “There are clouds on the horizon.”

Europe avoided an immediate pitfall but still needs additional resources to stabilize itself. Lagarde and other European leaders once again walked the line between soothing global markets and spooking them. It’s a position they’ve been in before, and if they are right about needing a larger firewall, one they will be in again. – Ben Walsh

On to today’s links.

Inefficient Markets
The stock market is 19 times more volatile than economic fundamentals – GMO.com

Morgan Stanley reports strong revenues, but debt charge leads to loss – WSJ
Bank of America reports improved trading performance, but one-time charges hit profit – Bloomberg

EU Mess
Reading the IMF’s “World Economic Outlook” in Madrid – The Atlantic

New Normal
Our “risk on, risk off” markets have become dramatically more correlated – FT Alphaville
Visualizing risk: Can we do better than heat maps? – The Guardian
Convict labor is back in the US – Salon

Think of the Children
The housing market sets the value of good public schools at $205,000 – CNN Money

Robotic War
Killer drones: How America spies and fights in secret – Rolling Stone

Marx: the first economist to really understand the business cycle – Brad DeLong

Somewhat Obvious
World Bank President Zoellick: Argentina’s move to seize control of oil company is “a mistake” – Reuters

Sad Trombone
“The 40 richest individuals on Earth lost a combined $6.2 billion yesterday” – Bloomberg

Study shows foreclosure affects children’s health, development and education – The Northwestern

Swan Songs
“It wasn’t supposed to end this way”: Joseph Ackermann’s lame-duck finale at Deutsche – WSJ

Good Luck With That
Greater coordination between monetary and fiscal policy is needed – Economonitor

Rent Seeking
NYC taxi owners fight new rules – NYT



Mr Fox,

It was, of course, the link to the story about Argentina’s theft of a controlling share of a formerly-privatized oil company.

Argentina is the darned physicist, and …

Never mind.

Tip your waitresses.

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The stay-liquid-and-wait strategy

Felix Salmon
Apr 19, 2012 22:32 UTC

I spent yesterday at the National Strategic Investment Dialogue, a fascinating conference attended mainly by big institutional investors. This year featured a lot of scenario planning, especially around the questions of what the best-case and worst-case plausible scenarios might be. At the end of the conference there was a discussion about what it all meant for investment strategies.

I’m not a fund manager, and my investment strategy is unchanged: I’m putting all my money into a target-date fund and forgetting about it. But I gave some thought to how I might behave if I were a fund manager, all the same. And it seems to me that if any time is a good one for a heterodox investment strategy, now could be it.

Much of the time, the best investment strategy is the simplest: buy low, sell high. In the current environment, that would mean buying European and Japanese stocks, while selling Japanese government bonds and Treasuries as well as Brazilian stocks. But that’s a very risky strategy, given that Europe in particular faces a large number of very obvious risks, all of which could send its stock markets falling quite precipitously. And in general, right now we’re in a world where markets have rallied impressively, thanks to the actions of the world’s central banks, and where the risk of mean-reversion is very real. In that kind of context, it behooves the buy-low types to have some safe and liquid securities, like Treasury bonds, which can be sold in a crisis and used to go shopping.

So what’s the alternative? After a day spent talking about how much upside there is if things go right, and how much downside there is if things go wrong, I was reasonably convinced that we’re now closer to a bimodal world than one with thin tails. In other words, the most likely outcome is not that we stay more or less where we are, with [the outcome] becoming increasingly improbable the further you get away from here. Instead, there are two possibilities — up and down — both of which involve substantial market moves, and both of which are just as likely, if not more likely, than a muddle-along-where-we-are scenario.

In that world, an opportunistic wait-and-see approach makes a certain amount of sense: you wait to see which direction the bandwagon is moving, and then you jump on it. You’ll miss the first part of the move, but at least you won’t end up getting crushed.

Liquidity, here, is key — and equities in general are very liquid investments. Here’s the plan, then: sit on a portfolio of large-cap US stocks for the time being, and maintain exposure, if you have it, to expensive, fast-growing markets like Brazil. But look for market moves, and create a list of “tripwire” signs that the waveform has collapsed and we’re moving in one direction or the other. Then, if Brazil falls by 15%, sell it, on the grounds that it could fall a great deal further. (The bearish case on Brazil was one of the more interesting ideas at the conference; it’s related to the country’s cocaine consumption, as well as reports that the Russian mafia now has substantial operations there; a violent Mexico-style drug war is far from inconceivable in Brazil, and could be hugely damaging to the economy.)

On the other hand, if Europe and/or Japan rise by 15%, that could be a decidedly bullish sign. There’s a serious zip-code arbitrage in the world right now: multinational corporations are valued much more highly if they’re based in the US than if they’re based in Europe or Japan. That doesn’t make a huge amount of sense given how global they all are.

In general, if Japan really is managing to bounce back from its torrid 2011, then the stock market there — which is currently trading below book value — could have a lot of upside. Similarly, European stocks have suffered greatly from a decidedly pessimistic economic outlook for the continent as a whole and for the southern periphery in particular. But the continent’s companies might well make good money even if Europe as a whole isn’t growing. On top of that, any further move towards fiscal union or eurobonds could do wonders for investors’ confidence that the eurozone will navigate through this crisis intact.

The one big area to avoid, it seems to me, is any asset class which is both illiquid and expensive. I’d include private equity and venture capital in that class, as well as high-grade debt. There’s really no reason, in a highly volatile world, to be invested in something which can fall a lot and can’t easily be sold. Indeed, there’s a strong case to be made that equities are actually safer than high-grade debt, certainly if your time horizon is greater than a few years. When equities fall, they can bounce back; when rates come back from zero, they’re not going to fall back again. Which means that when investors take mark-to-market losses on their bond portfolios, those losses will be permanent, rather than being on paper only.

I’m not disciplined or rich or sophisticated enough to take my own advice on this: I’d never dream of trying to time the markets, make momentum trades, or otherwise try to be clever in a world where clever investors get eaten for breakfast every morning. But big institutional investors don’t have the luxury of being able to abrogate decisions in that manner. And if I were in their shoes, I’d be looking seriously right now at trying to be as nimble and liquid as possible, which means moving out of credit and into equities. At least that way, if the world really does start falling apart, you have options.


Staying liquid in the face of rising but overvalued share prices is one of life’s challenges. Investing in small unlisted businesses can often offer healthy returns if you have pre-existing knowledge in the sector and don’t mind getting your hands dirty – wwww.businessforsalefinder.com

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Why internet/GDP ratios make no sense

Felix Salmon
Apr 19, 2012 19:26 UTC

On Monday, the Economist reprinted a chart from a BCG report, which purported to show the contribution of “the internet” to the total GDP of various different countries. Britain comes out on top, with an internet-to-GDP ratio of 8.3%; it’s followed by Korea, China, Japan, USA, India, and Australia. After the UK, the highest-ranking European country is Germany, on just 3.3%, while Canada lags far behind the US.

All of this was rather puzzling to me, so I spoke to BCG’s Paul Zwillenberg, one of the authors of the report. And the main thing I wanted to know, of course, was how on earth you could turn “the internet” into an annual dollar amount divisible by national GDP.

“It’s like electricity. It’s part and parcel of the fabric of daily life,” Zwillenberg said, almost before I could ask my question. “It’s touching every part of the economy.” I’m inclined to agree — but you’d never dream of measuring different countries’ electricity-to-GDP ratios. So what’s he doing here?

Zwillenberg did say that in ten years or so, “you won’t need to measure the internet economy because it will be totally pervasive”. But for the time being, he’s determined to measure the internet. And the way he’s doing it is very web 1.0.

Remember the dot-com boom of the 1990s, when everybody got excited about the internet because it was a new way to buy stuff? That’s basically what BCG is measuring here. They’re taking total consumer expenditure in each country, and working out how much of that expenditure is online. As in, buying a hardback from Amazon, or a Beanie Baby from eBay. Then they add in the amount you pay your ISP to get online each month. And then they add a certain amount for investment by private enterprise in internet infrastructure, and a bit more for what they call “net exports” — the Czech Republic, for instance, apparently has a big internet security software sector.

The exports bit helps to explain why Canada’s number is low: a lot of Canadians, for obvious reasons, like to buy things on Amazon and other U.S.-based e-commerce sites. And every time they do, under BCG’s methodology, the Canadian internet economy is decreased by that amount. (It’s an export of the U.S., and an import of Canada, and the calculations add up net, rather than gross, exports.) As a result, it’s theoretically possible, in BCG World, for the internet to account for a negative proportion of GDP, in some countries.

But more generally, it seems to me that BCG’s not really measuring the internet here — it’s not measuring the hours spent watching YouTube, or interacting with friends on Facebook and Tumblr, or spreading news on Twitter, or even checking your stock portfolio or updating your billing information somewhere. It’s measuring e-commerce, primarily, which is an interesting subset of the internet, and one of the oldest, but ultimately just a fraction of what it can be.

And when you’re measuring e-commerce, you’re measuring lots of things which aren’t really internet-related at all. For instance, e-commerce is naturally going to be more common in countries with a reliable postal service; in countries where gasoline prices are very high (because the cost of gasoline is a hidden tax on shopping in real life); and in countries where the cost of retail property is very high. The UK, of course, scores very highly on all those counts, while the U.S. doesn’t. But what those things say about the internet’s contribution to the economy as a whole is, I think, limited.

On May 17, if Alexia Tsotsis is to be believed, Facebook is going to go public, and might well find itself with a $100 billion valuation. Almost none of that valuation can be seen in the kind of things that BCG is measuring. So let’s not get too carried away with the idea that it’s easy to quantify the degree to which countries are diverging in terms of digital uptake. It isn’t. And the BCG methodology really isn’t a step in that direction.


Felix writes: “you’d never dream of measuring different countries’ electricity-to-GDP ratios.”

Really? And certainly that is wrong with respect to changes in an individual country’s watt/GDP ratio over time.

Elctricity-to-GDP seems to be a widely looked-at metric, particularly with respect to cross-checking Chinese GDP numbers: http://www.google.com/search?hl=en&q=chi na+electrical+consumption+GDP

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Goldman board muppet of the day, James Johnson edition

Felix Salmon
Apr 19, 2012 15:49 UTC

There’s one corporate-governance metric which isn’t looked at nearly enough, and that’s director pay. Reading the compelling broadside that Ruane, Cunniff & Goldfarb, who manage the Sequoia Fund, has launched against James Johnson, who’s running for re-election to Goldman’s board, I was glad to be reminded of the governance fiasco he oversaw at Fannie Mae, and I was shocked to learn of his involvement in an options-backdating scandal at United Healthcare. But absent from the letter, and present only in Shahien Nasiripour’s report about it, is the fact that Goldman paid Johnson $523,000 last year.

People respond to incentives, and it’s pretty self-evident that the more directors are paid, the more captured they are by management. After all, director pay isn’t set by shareholders. Michele Leder put it well back in 2009:

“Let’s face facts,” said Michelle Leder, the editor of Footnoted.org, a corporate watchdog web site. “If you had a part-time job that was paying you $300,000, $400,000, $500,000 a year, and you didn’t have a lot of work to do, would you rock that boat? That’s just human nature.”

Goldman hasn’t had much luck with its board, which has been a distraction at best and an outright hindrance at worst since the crisis broke. And one of the reasons is surely that Goldman’s board members are expected to be seen and not heard: they’re flown around the world in luxury, and paid enormous sums of money, to provide the thinnest possible veneer of shareholder oversight. What do you think the chances are that Lloyd Blankfein thinks he has anything at all to learn from his board of directors?

The best form of board remuneration is that seen at Berkshire Hathaway, where directors are paid a modest four-figure sum and aren’t even covered by D&O insurance. I can see why Goldman might find it difficult to recruit qualified directors if it were to offer that package. But Goldman’s shareholders don’t want to be represented by a group of muppets which will rubber-stamp anything the CEO wants to do. So I’d love to see board pay reduced substantially at Goldman. With any luck, that in and of itself would result in the departure of James Johnson.

My feeling is that the ideal pay for Goldman board members is somewhere in the $50,000 to $80,000 range. If board members get rich, it should be from the appreciation of the shares they buy, rather than from money they’re paid to turn up to board meetings. Management has a strong incentive to put already very rich people on its board: they’re inured to large sums of money, and are therefore much less likely to blink at compensation packages which can reach well into the eight-figure range. So let’s hire directors for whom an extra $50,000 will actually make a noticeable difference to their annual income.

It’s pretty much impossible to imagine what Johnson could possibly have done, on Goldman’s board, that could justify his $523,000 remuneration. Instead, it looks like hush money. So while voting him off the board would be a great place to start, shareholders who care about governance shouldn’t stop there. Because so long as Goldman’s board members are taking home enormous sums, there’s not going to be any real oversight at the company.


alea, was running the mondale and kerry campaign meant to be a recommendation?

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Occupy defined-benefit pension funds!

Felix Salmon
Apr 19, 2012 03:32 UTC

I’m working my way through The Occupy Handbook, your excellent one-stop shop for analysis of the financial crisis and everything about it. A lot of really big names have pieces here: among the authors you’ll find Michael Lewis, Paul Krugman, Gillian Tett, John Cassidy, Raghuram Rajan, Bethany McLean, Daron Acemoglu, Carmen Reinhart, David Graeber, Nouriel Roubini, Pankaj Mishra, Ariel Dorfman, Barbara Ehrenreich, Peter Diamond, Brad DeLong, Martin Wolf, Scott Turow, Robert Reich, David Cay Johnston, Eliot Spitzer, Lawrence Weschler, Tyler Cowen, Jeff Madrick, Dan Gross, Jeff Sachs, and even Paul Volcker. (Full disclosure: I’m in there too.)

One author who might not be familiar to a financial audience is Arjun Appadurai, who has an excellent short chapter entitled “A Nation of Business Junkies”.
“Business news was a specialized affair in the late 1960s,” he writes. “Now it is hard to find anything but business as the topic of news in all media.”

He explains:

Look at the serious talk shows, and chances are that you will find a CEO describing what’s good about his company, what’s bad about the government, and how to read his company’s stock prices…

Turn to the newspapers and things get worse. Any reader of the New York Times will find it hard to get away from the business machine. Start with the lead section, and stories about Obama’s economic plans, mad Republican proposals about taxes, the euro crisis, and the latest bank scandal will assault you… Turn to the sports section: it is littered with talk of franchises, salaries, trades, owner antics, stadium projects, and more. I need hardly say anything about the Business section itself, which has now become virtually redundant…

Go through the magazines when you take a flight to Detroit or Mumbai, and there is again a feast of news geared to the “business traveler”. This is when I catch up on how to negotiate the best deal, why this is the time to buy gold, and what software and hardware to use when I make my next presentation to General Electric.

I thought of Appadurai’s chapter earlier today when I was talking to a fund manager at a conference in DC. He was talking about the move from defined-benefit to defined-contribution pension plans, and was bemoaning the fact that people who invest in defined-contribution plans have seen returns not only below the returns in the stock market or the bond market, but even below the level of inflation. The solution, he said, was more education: we had to teach people about the power of diversification, the intelligence of passive investing, and so on and so forth.

My feeling was that such attempts would never work. The investment returns of people with defined-contribution pensions are woefully low — much lower than the returns seen by the managers of defined-benefit schemes. And the difference, to a first approximation, is rents being extracted by the financial-services industry. That’s the industry which does all of the educating: so it’s unrealistic to assume that it’s going to educate people and thereby reduce its own income.

Besides, as Appadurai says, the US population has never been more educated about matters financial than it is now. We can try to improve the level of education even further. But a little financial education can be a dangerous thing, if it instils overconfidence. And what’s more, there’s zero empirical evidence that educated investors have higher realized returns. Besides, you can’t hope to effectively educate everybody.

Much better, I think, to allow people to invest alongside the defined-benefit scheme of their employer, and accept the returns of that scheme. Most employers still have some kind of legacy defined-benefit scheme, and those schemes, as a rule, tend to be invested pretty sensibly. Those pension funds should accept defined-contribution money alongside their defined-benefit money: it would beef up their AUM and thereby their negotiating power, while at the same time delivering higher returns to the company’s employees.

Some employees, of course, will think that they are very clever and will be able to get large returns for themselves. But most of us aren’t that hubristic, and consider asset-allocation decisions and the like to be something of a chore. Give us the opportunity to outsource those decisions to somebody acting on our behalf, and we’ll jump at it. We might not get the same implied returns as the lucky people on defined-benefit plans. But at least we’ll have our money professionally managed, at little or no cost.


dWj, if they were to do so, would you trust them with your money?

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Summers and Rubin, remorseless deregulators

Felix Salmon
Apr 19, 2012 02:13 UTC

Flicking through the new book by David Rothkopf this afternoon, I found this:


It’s not entirely clear when exactly this interview took place, although it seems it was before the Obama administration set the ball rolling on what eventually became Dodd-Frank in June 2009.

By this point, of course, Summers was a millionaire many times over thanks to his work for financial services firms, and it’s telling that he seems much more worried about the prospect of too much regulation than he is remorseful about the fact that deregulation of the financial-services industry went way too far.

Later on in the book, Rothkopf finds exactly the same attitude coming from another financial-services multimillionaire, Bob Rubin:


Again, the timing of this is not clear, but the remorselessness is entirely in keeping with Rubin’s few previous public statements on the matter. It’s worth remembering that virtually the entire Obama economic team was connected to Rubin in one way or another, and that Rubin is generally understood to have been the gray eminence who basically architected Obama’s economic policy in the fraught weeks between the 2008 election and the 2009 inauguration.

In this context, it’s something of a miracle that we got any substantive new regulation in Dodd-Frank at all: we should be thankful for small mercies, I suppose. But I never cease to wonder at how difficult it is for these men to admit that they ever went too far, that they were ever wrong about anything. Making mistakes is only natural. But refusing to learn from your mistakes is downright pathological.


SteveHamlin, I would argue that the trading desks at banks are the LAST place to look when trying to avoid a repeat of 2008, especially when looking at the private capital “destroyed”.

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Counterparties: Citi shareholders speak on pay

Ben Walsh
Apr 18, 2012 21:49 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

The shareholders have finally spoken. In a move that rebuked Citigroup management and the board of directors, the bank’s shareholders rejected the proposed $15 million pay package for CEO Vikram Pandit, as well as pay for three other execs.

Just this week, Citi released first quarter earnings that beat expectations, but signs of a stronger balance sheet haven’t been enough to cover the broader story here. Citigroup’s stock is down 44% in 2011, and 89% under Pandit’s tenure. Only a month ago the bank failed the stress test and then defended its capital position by, in part, calling the Fed’s evaluation “hypothetical.”

Shareholder rejection of management pay is exceedingly rare, but in this case it was far from radical: the ever cautious ISS recommended voting against the package not on the size of Pandit’s pay but on its lack of performance incentives. It’s those incentives that make executive pay material to shareholders at a $100 billion institution.

Shareholders may have finally fought back against pay for Citi execs, but it is worth remembering that executive compensation is an original sin of Pandit’s tenure at Citi. Pandit’s compensation for joining Citi through the acquisition of the asset manager he co-founded may climb to $200 million. And that acquisition, which cost Citi $800 million at the time and has since been closed and almost entirely written off, was reportedly done for the purpose of bringing Pandit into the Citi leadership.

For all the grandstanding about Pandit’s 2009 salary of $1, Citi shareholder’s seem to be at long last realizing that their financial returns for the last five years are a far cry from Pandit’s. - Ben Walsh

On to today’s links.

New Normal
The economy is growing again — but so is income inequality – WSJ
“The world’s central banker” behind China’s massive money creation – FT Alphaville
A Chinese whistleblower’s frantic race for asylum in the U.S. embassy – NYT

Steve Jobs: The lost interviews – Fast Company

The Oracle
Warren Buffett has Stage I prostate cancer – Reuters

The CEO of Instagram initially asked Zuckerberg for $2 billion – WSJ

A high frequency trader’s apology – Chris Stucchio

Michael Lewis would like to see a run on America’s biggest banks – Daily Beast

The CEO of America’s second-largest natural gas producer took opaque personal loans worth $1.1 billion - Reuters
Why Citigroup should definitely have seen the problems with Pandit’s pay coming – Deal Professor

EU Mess
Spain’s bailout really more of a “when” question than a “if” question – Reuters
Credit is shrinking at a record pace in Spain, and bad loans are getting worse – Bloomberg
Martin Wolf: Why the eurozone may actually survive – FT

Absolutely nothing will happen in the upcoming lame duck congress – Capital Gains & Games

Primary Sources
Tim Geithner: Please stop messing with Dodd-Frank – Politico

Some journalists may have to wait miliseconds longer for the jobs data – Bloomberg

U.S., Europe and Japan have share one big problem: protecting incumbent creditors – Interfluidity
How Abbott Labs keeps the U.S. from saving $700 million year – The Incidental Economist

Adding Value
Improving thrift store paintings with monsters – Twister Sifter


U.S., Europe and Japan have share one big problem: protecting incumbent creditors – Interfluidity”
(Counterparties item)

BW finds this “compelling” – that’s revealing in its own right. The author argues in favor of policies that promote the interests of those who have not yet demonstrated prudence (or have demonstrated its opposite), and in favor of policies that expropriate the savings of those who have.

To quote a famous man – “Include me out”.

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What the Loebs can learn from the Pulitzers

Felix Salmon
Apr 18, 2012 04:30 UTC

I’m not a huge fan of journalism awards. The Pulitzers, in particular, are a peculiar fish: they tend to award long and worthy work which almost nobody had the time to wade through when it first came out. That’s a type of journalism, to be sure — but is it the very best journalism that the profession produces? And while this year’s journalism winners were very good, the editorial cartoons which got Politico its first Pulitzer were so bad as to make one wonder whether the quality of the jury’s awards was more a matter of luck than judgment.

I’ve never sat on a Pulitzer jury, but I have sat on a Loeb award jury, twice. The Loebs are the Pulitzers of the business press, and perform a necessary function in a world where the Pulitzer jury saw fit to award precisely zero business or finance stories in 2008, 2009, or 2010. Eventually, Jesse Eisinger and Jake Bernstein won for their Magnetar story in 2011 — it was perfectly good, but it was hardly the greatest piece of business journalism that the crisis produced.

The Magnetar story, which was published online rather than in print, didn’t win a Loeb, and similarly it’s very hard to imagine the Huffington Post winning a Loeb award. This is the first area where the Loebs should learn from the Pulitzers: they should stop being obsessed with the medium in which a story appears. The Loebs have awards for large newspapers and for small newspapers, for news services and for magazines — all of them judged according to exactly the same criteria. The result is that some weak stories win Loeb awards because they’re in categories with no strong competition, and others get two or more bites at the cherry, being nominated in multiple categories to maximize their chances.

The Pulitzers, by contrast, just talk about things like feature writing and international reporting and commentary. Medium is unimportant, which probably goes to explain why outlets like ProPublica and HuffPo and Politico are finding it significantly easier to win Pulitzers than to win Loebs. Meanwhile, the Loebs respond to new media by creating a “blogs” award and then turning around and giving it to the NYT.

While the Loebs are learning from what the Pulitzers are doing right, they should learn from the Pulitzers’ mistakes, too. This year, the big controversy at the Pulitzers is over the fiction award, or rather the lack thereof. Three jurors read 300 books each over the course of six months before finally whittling the finalists down to three books — a huge effort and achievement. And all of them thought that the finalists were more than worthy of a Pulitzer. Yet for reasons which remain extremely murky, the final jury, after reading all three books, declined to give any of them the award.

There are two possible things going on here. The first is that the final jurors thought less of the finalists than the fiction jurors did, and decided that none of them was worthy of a Pulitzer. The second is that there was a deadlocked jury with each of the three books having its own partisans, and none of the three books being able to win over the absolute majority of the votes needed. Or it could be some combination of the two.

Either way, it’s abundantly clear that the fiction jurors are now looking at the final jurors with disgust, and wondering why they put so much effort into reading so many books, if the outcome was going to be so incredibly disappointing for all concerned.

Now as a Loeb juror myself, I have to start treading carefully here: everything that happens in those meeting rooms is confidential. But I can say that after my last appearance on a Loeb jury, my feelings weren’t all that far away from those of the fiction jurors for the Pulitzers.

The problem, in both cases, is the same: a panel of senior jurors picks winners without really understanding how and why the shortlist was chosen. And, at least at the Loebs, the final jury not only has the ability to award no prize at all; they even have the ability to award the prize to a piece which the junior jury deliberately left off the list of finalists.

The final jury is filled with important worthies: there’s no point in them just being a rubber stamp. But at the same time, the lower juries tend to be much more familiar with the pieces in question, and tend to have put a huge amount of thought into determining who should be on the list and who shouldn’t be.

To take a not-entirely-hypothetical example: what if someone won a Loeb award for a piece which rehashed a much more original work in the same publication, dated a couple of months earlier? That would be bad. But this would be worse: if the rehashed piece was deliberately excluded from the list of finalists for obvious reasons, and then reinstated by the final judges, just because they had no idea why it wasn’t included.

The problem, in general, is a lack of communication between the first-round and second-round judges. The final-round judges should be much closer to the initial-round judges, going back and forth, asking them why this made it through and that didn’t. The final decision can remain where it is, but it should be much more informed by the people who picked the finalists than it is right now. Because if the second-round judges don’t talk to the first-round judges, the first-round judges are likely to feel rather disgruntled. Especially if the winner was never on the original list of finalists, or if there’s no winner at all.


crocodilechuck, I believe Eissenger won it for best use of the ctl-C ctl-V button against extremely stiff competition from his peers.

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