Opinion

Felix Salmon

Davos pusillanimity watch, LGBT rights edition

Felix Salmon
Jan 23, 2014 13:24 UTC

For an organization which loves to talk about the importance of social responsibility and civil society, it’s notable that the WEF has never had a panel on LGBT rights. This year, however, the issue has finally become impossible to avoid. Russia is in the midst of a poisonous campaign against its LGBT citizens; once the Winter Olympics are over, that crackdown is only going to get worse. And in Nigeria, where homosexuality has always been illegal and dangerous, president Goodluck Jonathan — who is here in Davos — recently signed into law a brutal new piece of legislation which makes even supporting gay rights punishable by ten years in prison; a round of arrests under the new law has already begun.

At the same time, the community of LGBT supporters is larger and more powerful than ever, and their message has finally made its way into Davos, if not into the formal WEF program. This morning, there was a classic Davos power breakfast under the title “The Global Fight for LGBT Equality”, which drew some very boldface names, including two US senators (Patrick Leahy and Claire McCaskill) as well as Navi Pillay, the UN high commissioner for human rights. The breakfast was sponsored by a broad cross-section of WEF partners: corporate support came from Credit Suisse, the Huffington Post, Microsoft, and Time Warner, while the main people making the breakfast happen were two big-name hedge-fund managers, Paul Singer and Dan Loeb.

The breakfast took place directly across the street from the forbidding concrete walls of the conference center, and one of the big questions was whether the clear sense of urgency and importance in the room would help the cause receive more official WEF recognition next year. As Miriam Elder says, the answer would seem to be no:

Event organizers said the World Economic Forum (WEF) in Davos had declined to host the LGBT event; the main gathering in Davos this year features guests like Nigerian President Goodluck Jonathan, who recently blessed the world’s most repressive law restricting LGBT rights.

“The organizers reached out to WEF but it quickly became clear that this program would not be regarded as ‘appropriate’ for the official Congress Center program,” a person familiar with the planning of the event told BuzzFeed.

It certainly doesn’t seem to be a simple oversight that the WEF has failed to address this issue so far. The sponsors of the breakfast, as well as other strategic partners like Goldman Sachs and (yes) Thomson Reuters, are very vocal about this issue, and there’s no shortage of WEF staff who are sympathetic to the cause. Panels on the issue have surely been proposed many times — which means that if we’ve never seen one, that’s because all such events have been systematically vetoed at a very high level.

The reason for such a veto is easy to surmise. Heads of state are at the top of the pecking order in Davos, and any LGBT panel would undoubtedly be very rude about individuals like Goodluck Jonathan and Vladimir Putin. The way the WEF works, if someone like Putin makes it clear that he doesn’t want any such panel to take place, then the panel won’t take place. Indeed, the WEF organizers, who constitutionally err on the side of overcaution, would probably veto any such panel just in case a powerful head of state might object.

Still, the issue is alive now, it’s not going away, and it’s causing serious problems for Davos regulars like Nigerian finance minister Ngozi Okonjo-Iweala. I’m a huge fan of Ngozi’s, but this is not her finest hour: every time that she’s asked about LGBT rights in Nigeria, she gives a what-can-we-do answer about how the law is very popular among Nigerians and how therefore the president had no choice but to sign it. As Fareed Zakaria noted in today’s event, that answer misses the difference between a tyranny-of-the-majority democracy, on the one hand, and a grown-up liberal democracy, on the other. Humans don’t lose their rights just because they’re in the minority, and it’s the job of any democratic leader to refuse to support the forces of intolerance and hate within his country. Besides, as Richard Branson said at the breakfast, you can get pretty much any result you like, in an opinion poll, depending on how you ask the question.

There is an enormous gap between what Okonjo-Iweala can and should be doing, on the one hand, and what she’s actually doing, on the other. Firstly, she should recognize that the issue of LGBT rights in Nigeria is a very important one, and work hard to be a voice of reason and tolerance within the Nigerian government. Far from threatening the WEF if it puts on a gay-rights panel, she should encourage it to do so, and she should even volunteer to participate.

Okonjo-Iweala should also embrace the argument that LGBT rights are an economic issue: that the current climate in Nigeria is so hateful that it will certainly have a negative effect on inward investment and the propensity of multinational companies to operate in the country. Instead, when she’s presented with that argument, she sneers at the westerners with their bleeding hearts, and says that if the west doesn’t want to do business with Nigeria, then the likes of China and India surely will. Investors from those countries, she says, would never let the issue of LGBT rights color their investment decisions. She’s sadly correct on that front, but in embracing the investors who don’t care about LGBT rights, she’s giving up a prime opportunity to place herself on the side of the angels.

Finally, and most importantly, Okonjo-Iweala should simply and clearly come out against the law. After all, she’s not an elected official: she doesn’t need to worry about being voted out of office. She’s happy to say that her own children have no beef with LGBT people, but she consistently stops short of personally saying that she believes in gay rights and LGBT equality.

The breakfast this morning featured a panel of LGBT activists from around the world: Alice Nkom from Cameroon, Masha Gessen from Russia, and Dane Lewis from Jamaica. There was no one from Nigeria, mainly because it’s considered too dangerous, now, for any Nigerian to align themselves in any way with the LGBT community. Ordinary Nigerians, even if they’re sympathetic with the LGBT cause, have good reason to keep their mouths shut; that’s exactly why it’s important for someone like Okonjo-Iweala to step up.

At the breakfast, Sweden’s minister for European Affairs, Birgitta Ohlsson, worried out loud that if westerners were too vocal when it came to preaching human rights. She was worried that such tactics might misfire in proud sovereign countries; she also said that it was “silent” pressure from the west which persuaded Uganda’s president, Yoweri Museveni, to refuse to sign a new anti-gay law in the country.

Ohlsson’s argument did not go down well with the panel: while behind-the-scenes pressure can indeed be effective, it is almost never weakened by outside public support. Still, it’s undoubtedly true that if there’s no domestic opposition to a bill, then it’s probably going to end up getting passed. As a result, powerful Nigerians like Okonjo-Iweala have a moral obligation to speak out.

In doing so, Okonjo-Iweala would certainly be on the right side of history. LGBT rights are not confined to countries like Sweden: Argentina, for instance, has the most progressive gender equality law in the world, while South Africa was the first country to enshrine LGBT rights in its constitution. Today, 60 countries ban discrimination against homosexuals; 16 countries have same-sex marriage; and many more have some formal mechanism to recognize same-sex partnerships or civil unions. Those numbers are only going to increase, but progress will not be linear: Nigeria is by far the biggest economy in the region, and there’s a lot of fear in countries like Cameroon that its anti-gay stance will prove contagious.

Tragically, Okonjo-Iweala has decided instead to simply fall in behind her president. Such pusillanimity is the norm in Davos; we can expect the global corporate sector to similarly ignore this issue. Many companies have a strong record of being gay-friendly in the US, but then turn around and extend no particular protections or benefits to their gay employees in less tolerant countries. Here’s one area where the WEF can be helpful: encourage global companies like Coca-Cola or Citigroup to make sure that all their gay employees are treated equally, including the ones in countries like Russia and Nigeria.

But that’s not going to happen as long as the WEF refuses to give this issue any kind of visibility. A single breakfast on the sidelines isn’t remotely enough. It’s long past time for the WEF to embrace a cause which, I’m pretty sure, is personally supported by a majority of the delegates in Davos. Here’s hoping it happens in 2015.

COMMENT

Most of the world is socially conservative, i.e., not on board with moral and sexual “modernism.” Giving homosexuals/tranvestites/transsexuals equal footing with heterosexuals is seen as a non-starter.

A number of countries do give them a place, but a place apart. That’s the deal, and it’s not likely to change.

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Davos FOMO

Felix Salmon
Jan 22, 2014 00:11 UTC

Andrew Ross Sorkin is a very old Davos hand — he’s been coming for years, he knows the ropes, he knows what happens and what doesn’t. Which is why his column this week is so very odd.

Whatever their reasons for staying away, the leaders of some of the largest and most transformative companies are demonstrating, with their absence, the difficulty of convening a global conversation with all the main stakeholders…

At a time when globalization has so transformed business and economics, and at an event that bills itself as drawing the top stakeholders, it easy to understand why it is so difficult to make progress on the big issues when so many key people are not in the room.

This fundamentally misses what Davos is about. Sure, if you ask Klaus Schwab, the autocratic chief of the World Economic Forum, he’ll tell you that Davos is all about “convening a global conversation” and trying “to make progress on the big issues”. But I don’t think that even he believes his own rhetoric — after all, he never tires of complaining that the Forum is being commandeered by the big companies whose dues have made him extremely rich. It’s entirely possible that Sorkin is the only man in Davos who seems to genuinely believe that the purpose of Davos is to put Schwab’s ideals into practice.

The fact is that there is no global conversation; there is no “room”. (Or if there is a room, it’s the room which holds the IGWEL meeting, which is open only to public officials: the entire private sector is explicitly excluded.) If you’ve ever tried to throw a dinner party for more than ten people, you’ll know that it very soon becomes impossible for all those people to participate in the same conversation — everything fractures very quickly. A highly formal setting with a tough moderator might be able to double that number, but when you’re talking about an event with thousands of delegates, simply being in the same Alpine town as everybody else hardly means that you’re part of some grand conversation which is going to improve the state of the world.

For instance: the Pope made a minor splash, today, by sending a message to the Forum, in which he calls, among other things, for “deeper reflection on the causes of the economic crisis affecting the world these past few years”, which should in turn result in the assembled CEOs adopting a “precise responsibility towards others, particularly those who are most frail, weak and vulnerable”, along with “integral promotion of the poor which goes beyond a simple welfare mentality”. To which I can only say: yeah, good luck with that. While it might be self-evident to the Pope that the global financial crisis was caused by a failure to care about the weakest members of society, that’s not exactly a viewpoint which is going to be forcefully articulated at tomorrow’s panel on the “Global Financial Outlook”, wherein various bank CEOs will talk about “consequences of continued monetary expansion” and the “impact of regulatory shifts and harmonization”.

Of course, the panels themselves are pretty much a sideshow. The secret to Davos’s success is no secret at all: you invite a very carefully hand-picked group of people to travel thousands of miles to a small and remote Swiss town, and then ask them to stay there, generally, for a good four or five days. You remove them from their normal gatekeepers and power structures, and force them to mingle in a space which is too small to fit them all comfortably. The result is a series of more or less serendipitous meetings, and an opportunity for the global elite to get to know each other in a largely agenda-free context. That’s why so many journalists come to Davos every year: it’s not because anybody is committing news, but just because it’s a rare opportunity to talk off the record with extremely important people, and to get a bit of a feel for what they’re like, as people.

The conclusion one draws from such meetings will not come as any surprise: CEOs are pretty normal people, who have a pretty shallow understanding of most things in the news, and who can often be stupid and/or obscene, especially when drunk. Yes, they have money and power, but that doesn’t make them particularly insightful or admirable. Often, the exact opposite is the case.

Why do these CEOs come to Davos? It’s not to reflect painfully on their failure to live up to the Pope’s calling. Instead, Occam’s razor absolutely applies, here: the simplest explanation is absolutely the correct one. They come because they are invited; because they can get their companies to pay for it; because it’s generally considered a hot ticket that lots of people want; and because they get to rub shoulders with heads of state and global celebrities.

Which is not something anybody will say in public, of course. The official reasons for coming are much more serious: Jamie Dimon “one top bank chief executive” told Sorkin that “it would take me an entire year, and I don’t know how many flights, to see the number of people I can in three days at Davos.” That might even be true, or true-ish, for Dimon. But Dimon is the schmoozer-in-chief in a high-touch client-service business: one of the main ways in which he’s managed to stay on top at JP Morgan Chase is precisely his political ability, and the way in which he can charm just about any client in a CEO-on-CEO meeting. Most CEOs don’t have that job, and their meetings in Davos are therefore much less integral to what they do.

Davos is a town of insecurity: everybody worries that they’re missing out on something better than whatever it is they’re doing. But the ultimate missing out is not coming at all.

Are all these powerful CEOs so insecure that they worry about missing out on Davos if they don’t come? Yes, they really are. Once you get that coveted invite, it’s much harder to say no than it is to say yes. The true lesson of Davos is nothing about making the world a better place; it’s that even global plutocrats get stars in their eyes when presented with the opportunity to hang out with Bill Clinton, or when they get an invite to the Google party featuring Mary J Blige. Schwab shouldn’t bellyache so much about such parties: after all, panels on the global mining industry don’t make for much of a junket. The parties and the extra-curricular activities are the real reason that half the attendees even bother turning up in the first place.

COMMENT

Felix, ”

“But Dimon is the schmoozer-in-chief in a high-touch client-service business: one of the main ways in which he’s managed to stay on top at JP Morgan Chase is precisely his political ability, and the way in which he can charm just about any client in a CEO-on-CEO meeting” (snip)

I thought he ‘stayed on top at JP Morgan Chase’ the same way Dick Fuld did @ Lehman Bros: via his supine, submissive board of directors.

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How Tumblr and GitHub could be the future of education

Felix Salmon
Jan 21, 2014 09:24 UTC

I’m at DLD, in Munich, where on Monday I moderated an enjoyable discussion with Georg Petschnigg, the co-founder of FiftyThree, and David Karp, the founder of Tumblr. FiftyThree is the company which makes Paper, Apple’s iPad App of the Year in 2012, and also Pencil, the beautifully-weighted stylus which makes Paper even more of a pleasure to use. Tumblr is deeply embedded into Paper; it’s more or less the default way in which people using Paper share their creations.

Petschnigg and Karp get on just as well together as Paper and Tumblr, so this was never going to be one of those panels where the idea is to spark lively debate. Instead, we talked about a topic right in the DLD sweet spot: the intersection of technology and creativity.

It’s a topic I’d been thinking about anyway, in large part because I spent a few hours on the plane to Munich reading The Second Machine Age, the new book from MIT’s Erik Brynjolfsson. Brynjolfsson is a fan of the work of education researcher Sugata Mitra, whose research was featured heavily in Joshua Davis’s wonderful recent Wired cover story — the one which used the story of a single great teacher in the unprepossessing city of Matamoros, Mexico, to illustrate an important point about self-directed learning.

The lesson being taught by Mitra is not a new one: it dates back at least as far as Maria Montessori, whose Pedagogical Anthropology first came out more than a century ago. But Brynjolfsson, along with his co-author Andrew McAfee (himself the graduate of a Montessori school), makes the case that Montessori-style education, with an emphasis on creativity rather than rote learning, will be especially powerful and necessary in the coming decades.

Brynjolfsson cites work by the complexity scholar Brian Arthur and the economist Paul Romer, both of whom argue that the primary driver of economic growth is what Brynjolfsson likes to call “ideation”: the creative combination and recombination of ideas into something powerful and new. As Arthur puts it: “to invent something is to find it in what previously exists”.

Meanwhile, Petschnigg makes a compelling case that if you look at just about any creative industry — anywhere that ideation happens, from advertising to architecture — ideas generally germinate in exactly the same way: with creative individuals scribbling on a piece of paper. Petschnigg’s apps are, at their best, a way of turbocharging those scribbles — a way of allowing inspiration to flow, with the fewest possible bottlenecks, directly into the powerful networked computer known as an iPad. Then, when those ideas are shared on Tumblr, they can start mating with other ideas. This process, too, is almost effortless, thanks to Tumblr’s “reblog” button.

Don’t even bother trying to calculate the resulting increase in the number of potential combinations of ideas: it’s almost infinite. One of the reasons that Tumblr was valued at $1.1 billion when it was bought by Yahoo is that it naturally spawns millions of creative communities, most of which simply never existed before. The majority of the value created by those communities will not flow back to Yahoo, of course, but that’s fine: so long as Tumblr continues to be the foremost place where creative individuals congregate to share their ideas and creations, it will remain an extremely valuable property.

Tumblr does not appear in Brynjolfsson’s book; neither, more surprisingly, does its equivalent in the world of coders, GitHub. Yet there is undoubtedly trillions of dollars of potential economic value on GitHub right now, and every day coders unlock some of that value by combining its existing resources in innovative ways.

The power and value of combinatorial platforms can be seen elsewhere, too: just look at LinkedIn (market capitalization: $25 billion), which attempts to do for people what Tumblr does for creative output and what GitHub does for code. After all, companies like FiftyThree and Tumblr aren’t built by individuals working alone: they’re built by teams, working in a collaborative manner. Petschnigg teaches at NYU, and told me the story of one student he ended up hiring: not necessarily the most brilliant, but rather the one who could be counted on to be able to persuade just about anybody else in the class to join his team.

Brynjolfsson’s thesis, and I think he’s right about this, is that we’re only just beginning to glimpse the possibilities of a world powered by an unprecedented level degree of connectivity between people, ideas, and code. In such a world, educators will have to radically change the way they work. While schools once produced computers (the word originally referred to people, rather than machines), they will now have to produce creative individuals skilled in ideation, pattern recognition, and opportunistic team-building. Those things aren’t easily measured by standardized tests. But the children who are taught them are surely the ones who will build the future. One possible way to start: ask every child in the class to sign up for Tumblr and GitHub.

COMMENT

It always makes me laugh this idea that ‘the future is only about creative people’… the hive only needs one queen, a few consorts and a tonne of drones to make it run.

Quite a bit of automation is wasteful, but it’s cheaper because human labour is quite expensive. Looking forward what the world needs is FAR LESS waste and more people that actually know how to do things. I wonder how many people read this blog could do some work on their car, fix minor electrical or plumbing problems, hell even troubleshoot computer problems. People are helpless and dependent totally on functioning society for survival, and being wistfully creative as a rule is no way to live life or improve that state. People love to laugh at hardcore Libertarians (myself included on occasion) that would be happy living off the land completely off the grid… but one must admit at least they could do it and survive – me? not so much. And becoming utterly dependent on computer systems for absolutely everything is a step in the wrong direction, and that’s what I hear (read?) from this post.

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Adventures in art-market commodification, enhanced hammer edition

Felix Salmon
Jan 17, 2014 18:46 UTC

Back in 2012, I wrote a post with the headline “How Larry Gagosian is like Goldman Sachs”. The general idea was that both of them use their relationships and their balance sheet to make money off and/or with their clients. Since then, as Christian Viveros-Fauné says, the art world has become even more coterminous with the art market:

“Business art” has arguably come to be the dominant form of art in our time. Today, this juggernaut of commodity-based art drives not only the way art is made, but also the way it’s promoted, marketed, sold, and, ultimately, understood both by experts and the vast public.

This explains why the NYT, when it recently decided to beef up its art-reporting team, turned to Graham Bowley, whose knowledge of art was rather slimmer than his knowledge of high-frequency trading. Bowley’s fresh eye on the market has proved illuminating: thanks to him, a lot of what used to be art-world rumor and gossip is now public knowledge. It was Bowley, for instance, who revealed that the official numbers coming out of China’s auction houses simply cannot be trusted: it is commonplace, in China, for the high bidder on an item to simply refuse to pay for it. And now, Bowley is naming names (and numbers) when it comes to the shadowy practice known as “enhanced hammer“.

Officially, if you consign an artwork to Christie’s, and it is hammered down for millions of dollars, then you owe the auction house a piece of the action — known as “seller’s commission”. In practice, however, the art world’s biggest rollers never pay seller’s commission. For big-ticket items, the auction house is entirely reliant, for its revenues, on the buyer’s premium — the difference between the hammer price and the actual price paid.

Increasingly, however, the hammer price has become completely meaningless. It used to give a pretty good indication of how much money the seller took home; no longer. Top clients, it turns out, aren’t just paying zero seller’s commission: they’re now paying a negative seller’s commission, and earning much if not all of buyer’s premium on top of the hammer price.

Bowley has persuaded art collector Peter Brant to go on the record about enhanced hammer. This was surely no mean feat, and it’s a big deal: it’s important that these practices come out into the open. In November, Brant sold a Jeff Koons sculpture for a hammer price of $52 million, towards the high end of Christies’ presale estimate of $33 million to $55 million. With buyer’s premium, the total amount paid for the shiny object was $58.4 million. (Don’t ask whether the presale estimate is a guide to hammer prices or to final price: the auction houses always try to have it both ways, encouraging bidders to treat the estimate as a guide to where they should bid, while then happily including the buyer’s premium when they say that the final price beat the estimate.) And of that $58.4 million, it turns out, Christies’ take was approximately zero.

I’d heard the rumor — but only a rumor — that Brant had negotiated an enhanced hammer of 112%: that Christies had promised him 112% of the hammer price. The reality is probably a little bit more complicated than that, since Bowley says there was a third-party guarantor. But Brant clearly told Bowley that he got to keep all of the buyer’s premium: Christie’s had the ability to make some money on the sale, but only if the sculpture sold for even more than the final $58.4 million price. Given the astonishing marketing push that Christie’s put behind the piece, it’s probably safe to say that the auction house ended up losing money on this particular work.

More invidiously, if Brant got to keep all of the buyer’s premium, then that opens up the possibility that he bought his own work — that the official sale price wasn’t a real sale price at all. The sculpture that Christie’s sold for Brant set a new record for Jeff Koons (and, indeed, for any living artist); it was sold aggressively to buyers around the world; and it elevated both Koons and Brant himself as art brands in the eyes of the market. If Brant was the high bidder, the total cost to him of selling the work would have been tiny, compared to the benefit he got in terms of personal reputation and the increased value of other works in his collection.

Now I’m not saying that Brant did buy his own piece. But it’s possible; and in general, the more common the practice of enhanced hammer, the more likely that such shenanigans are going on, and that US auction results might not be all that much more trustworthy than their Chinese counterparts.

Auction skeptics have been complaining for years that auction prices can’t really be trusted: that certain artists are being artificially bid up by small groups of dealers and collectors with large holdings of the artist in question, in an attempt to increase the value of their holdings as a whole. In a world where the buyer and seller between them pay commissions of as much as 25%, that’s a very expensive strategy. But in a world of 112% enhanced hammer, it’s almost a no-brainer. Even if Brant didn’t actually buy his own sculpture, there’s no way that Christie’s would know if he had a side deal of his own to rebate some of the ultimate sale price to the eventual buyer. After all, if they’re both big collectors, it’s in the interest of both buyer and seller for the piece to be seen to have sold for the maximum possible amount.

That said, the enhanced-hammer system was probably inevitable given the commodification of the art market. As the market becomes deeper and more liquid, it’s only natural that bid-offer spreads — the difference between what the buyer pays and what the seller receives — are going to narrow, and that we’re going to see more high-frequency trading in the art market. Even if that means commissions going down, it’s ultimately good news for Christie’s and Sotheby’s, which are essentially the art world equivalent of the NYSE and Nasdaq.

Both of the two big houses are moving aggressively into private dealing; Christie’s has a stated ambition to be larger even than Gagosian in that market. And while they don’t represent artists directly, yet, that too might change: indeed, some might say that it already has.

There’s a credible bull case for this strategy: as the art market becomes increasingly liquid, investors are willing to pay more for art: an asset class which used to be very hard to sell is now much easier to turn into cash. That makes it more valuable. Of course, there will still be volatility, but there’s a game afoot now. On Wall Street, it used to be called “pump and dump”: find a cheap stock, talk it up, sell it at a massive profit. That’s illegal, on the stock market. But in the art market, people put out press releases boasting of their prowess in such matters:

The Hort Family Collection, of which Peter Hort is a part, invested early in each of these artists. The Hort Family has a reputation for creating more value for works they collect.

In regular finance, if you have insider information about a stock, it is illegal to invest in that stock. In the art world, it is not only legal, it is done regularly. Peter Hort, along with his wife and family, are the people who create the insider information.

The trends in the art world are clear: newer money is gravitating towards newer art, which is considered a store of financial value and even possibly a source of significant profit. In order to make money in this world, connoisseurship doesn’t particularly help: what you need is “insider information” and the ability to hype certain artists to the type of collector who doesn’t know whether he’s buying a painting or a photograph. The only barrier to entry is money — which means that lots of rich people have decided to play. Most of them will end up losing, but all markets need losers, and — most importantly — all markets need a marketplace. If Christie’s can become that marketplace, then it will effectively have become the platform responsible for turning the informed appreciation of beauty into a greater-fool game where it doesn’t matter how much you pay, just so long as Christie’s can persuade someone else to pay even more in the future.

I hope it fails.

COMMENT

Felix, this isn’t the stock market, where institutional investors drive up prices and it’s the little guy left holding the bag. When the stock craters. This is a LUX market for rich guys — the money actually flows from the top down. You and CVF are worried about the Steve Cohens of the world … and that’s ludicrous.

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Why banks aren’t lending to homebuyers

Felix Salmon
Jan 15, 2014 16:53 UTC

“Despite the confluence of promising signs,” write Peter Eavis and Jessica Silver-Greenberg today, “little in the vast system that provides Americans with mortgages has returned to normal since the 2008 financial crisis, leaving a large swath of people virtually shut out of the market.”

This is absolutely true, and it’s a significant problem. To get a feel for just how sluggish the mortgage market is, my favorite chart comes from the Mortgage Bankers Association. Every month, the MBA releases its Mortgage Credit Availability Index, which makes it easy to concentrate on minuscule differences: in December, for instance, the index rose to 100.9, from 110.2 in November. But in order to see the big picture you need to zoom out and look at what credit availability was like before the financial crisis. And if you do that, the chart looks something like this:

Screen Shot 2014-01-15 at 11.49.43 AM.png

Of course, mortgage availability was way too lax in 2006-7, and the new index doesn’t have historical data going back before the end of 2010, so we can’t really see what was normal before things went crazy. But anecdotally, it’s much harder to get a mortgage now than it used to be. In the NYT article, the Center for American Progress’s Julia Gordon says that “a typical American family” with a credit score in the low 700s is “being left out”: that’s a very long way from subprime, which is what you’re considered to be when your credit score is below 620.

Meanwhile, here in Manhattan, no one in my condo building has been able to sell or refinance for the past couple of years, thanks to an ever-shifting series of rules at various different banks, all of which are clearly designed to just give them a reason to say no.

Why are banks so reluctant to lend? It’s not because of new rules about qualified mortgages, or anything regulatory at all, really. Instead, it’s much simpler:

fredgraph.png

To put it another way, would you lend money fixed for the next 30 years at a rate of less than 5%? Mortgage rates might still be well above the rates on mortgage bonds, but on an absolute basis, they’re still incredibly low. If you hold the loan to maturity, you’re never going to make very much money, and if you mark it to market, you run the risk of substantial losses if interest rates move back up to more historically-normal levels.

On top of that, the mortgage business is consolidating even more than the banking business more generally, with Wells Fargo being the big whale. It has the scale and the financial technology to manage all the risks and the regulations, as well as a big enough balance sheet that it can easily cope with being forced to repurchase loans it is currently selling. Most smaller banks have essentially zero competitive advantage over Wells, and it can make a lot of sense for them to get out of the game entirely, as Joe Garrett says:

One of the great myths of our industry is that a mortgage is the foundational product for consumer relationships. With many people having their mortgage payment automatically taken from their checking account, a significant number of borrowers don’t even know who their mortgage lender is. And mortgage borrowers are much more interested in getting the lowest rate than in getting a mortgage from their primary bank.

There are many commercial banks that do just fine not offering mortgages. Some offer it through a private-label mortgage company. Some refer borrowers to local mortgage bankers, and most simply don’t offer it. Mortgage banking does not generate deposits from customers, and to the extent that customer deposits are a major part of what makes a franchise valuable, mortgage banking does not help.

I cannot think of a single banker who was ever criticized for getting out of mortgage banking, but there are plenty who stayed in too long and lost their job and even lost their bank. Yes, mortgage banking can be very lucrative when times are good, but bank executives must know when to cut back, and they must also have the courage to simply exit this business when it no longer adds value to the bank and its franchise.

There are a few possible solutions to this problem, none of which are particularly hopeful. One is to simply wait for mortgage rates to rise back to say 6.5%, at which point a lot more lenders will start coming out of the woodwork. Another is to phase out the 30-year fixed-rate mortgage entirely, since it’s a product no private-sector financial institution would ever offer, were it not for the distorting influence of Fannie and Freddie. Both solutions would probably be accompanied by a decline in house prices, which no one wants right now. And then of course there’s the risk of overshoot — that if conditions loosen up, that will only serve to precipitate another bad-loan crisis.

Still, one thing is clear: for all that the Fed has been pumping billions of dollars into mortgage securities as part of its quantitative easing campaign, all that liquidity has failed to find its way to new homebuyers. I’m in general a believer in renting rather than buying, but the US is a nation of homeowners, and in such a country, a liquid housing market is a necessary precondition for economic vitality. Right now, we don’t have one — and we don’t have much hope of getting one in the foreseeable future, either.

COMMENT

“yours” – was directed to the lenders BTW, lol :)

Posted by Overcast451 | Report as abusive

Sensible data

Felix Salmon
Jan 14, 2014 20:40 UTC

I have an essay in the January issue of Wired about the limits of quantification. In the magazine it’s headlined “Why Quants Don’t Know Everything”, but online it’s been retitled “Why the Nate Silvers of the World Don’t Know Everything” — which is a little unfortunate, since the whole essay is deeply indebted to Silver’s book, which makes substantially the same point.

The initial idea behind the essay was the concept of priests vs quants — the seemingly eternal (but actually only quite recent) distinction between people who trust numbers, on the one hand, and, on the other, people who rely instead on their personal expertise and experience. Think of the difference between Billy Beane, using dispassionate analysis to outperform in baseball, and Bobby Fischer, whose gifts at chess seemed almost god-given. Nowadays, in a world of quasi-infinite data, it seems the quants are in the ascendant, while the priests are reduced to fighting a rearguard action, clinging desperately to some vestige of relevance. Today, if you want to change someone’s mind, you don’t appeal to authority: instead, you bring numbers.

The result is a deep societal disruption, in which quants take on priests and win: the Oakland A’s against the Yankees, the Obama team against Romney’s. It doesn’t take long before the war is won — we’ve all seen this particular movie before, especially the kind of people who sit on boards of directors. Thus does the priesthood wither away, taking with it a huge amount of valuable institutional knowledge.

The rise of the quants is, unsurprisingly, one of the driving forces behind Silicon Valley venture capital: if you start a small company which competes with a huge company, and the small company gets a few significant wins, then there’s almost no sum the bigger company won’t pay to acquire its smaller foe and use those skills against its competitors. The small company never needs to make money: all it needs to do is show disruptive potential, and it becomes enormously valuable.

But the data-rich narrative — the idea that science is taking over the world — has bred its own counter narrative for some 200 years now, ever since Mary Shelley published Frankenstein in 1818. People don’t like the idea that the computers are in control: for a prime example, look at the way Twitter exploded with privacy concerns as soon as it was announced yesterday that Google was buying Nest.

Or, just look at popular entertainment. The dweeby Q, in Skyfall, tells James Bond that “I can do more damage on my laptop sitting in my pajamas before my first cup of Earl Grey than you can do in a year in the field.” But Q isn’t the hero: Bond is. Similarly, it’s incredibly easy to paint Wall Street quants as the big villains in financial-crisis stories.

When the quants come into an industry and disrupt it, they often don’t know when to stop. They’re young, they’re arrogant, they’re rich and powerful – and they tend not to have decades of institutional knowledge about the field in which they have found themselves. They don’t work for the people who know such things, and they don’t listen to them, either. They’re winners, what do they have to learn from dinosaurs?

Put like that, the risks are obvious. Quants are just as blinkered, in their own way, as the priests they replace – even more so, in fact, since they can be quite Spock-like in their inability to understand the deep role that certain institutional functions are playing. Quants are great at coming up with clever ways of analyzing the world. But that doesn’t mean they’re great at managing institutions, or understanding how their employees might end up gaming the systems that they’ve created.

The solution to such problems is not to disdain the quants, as Bond does Q. Rather, it’s to synthesize the best of both worlds. Look at Southwest Airlines, for example: it has some of the most sophisticated operations geeks in the business, governing everything from fuel-price hedging to the most efficient way to board an airplane. But that doesn’t stop it having a much more human face than its larger competitors. Apple, too, is a prime example: quantitative to its toenails, it nevertheless is clearly governed by overarching principles of human-focused design. And why did Nest succeed where Google Power Meter didn’t? Just because it was designed in a way which made it desirable as a consumer product.

The secret ingredient, I think, is to ensure that managers have a deep understanding of the science being used in the organization — and also of its limitations. Great technology is all well and good, for instance, but if you want it to be broadly adopted, then you need a whole other set of packaging skills as well. And you can’t take technology further than its natural limits, either. It wasn’t really the Gaussian copula function which killed Wall Street, nor was it the quants who wielded it. Rather, it was the quants’ managers — the people whose limited understanding of copula functions and value-at-risk calculations allowed far too much risk to be pushed out into the tails. On Wall Street, just as in the rest of industry, a little bit of common sense can go a very long way.

COMMENT

You can’t discuss this question without talking about short-term vs. long-term thinking.

Most of the problems in the world today, including those related to quantification, can be traced to the glorification of short-term thinking at the expense of long-term thinking.

In essence….maximize profits and damn the consequences.

Posted by mfw13 | Report as abusive

When patient money is big money

Felix Salmon
Jan 14, 2014 07:18 UTC

As a private company, we have concentrated on the long term, and this has served us well. As a public company, we will do the same…

If opportunities arise that might cause us to sacrifice short term results but are in the best long term interest of our shareholders, we will take those opportunities. We will have the fortitude to do this. We would request that our shareholders take the long term view.

With these words, Google went public in 2004 — and they have, since then, been true to their word. They have not been maximizing short-term profits; neither have they been stinting on long-term investments, especially in projects like the self-driving car which might not pay dividends for a decade or more. Today, Google spent $3.2 billion to acquire Nest. Once again, they’re investing for the long term.

On the same day, Suntory spent even more money — a whopping $13.6 billion in cash, plus another $2.4 billion in assumed debt — to buy Beam, a coveted whiskey company. Suntory doesn’t need to worry about what its public shareholders think, because it doesn’t have any. It’s privately held, and can spend its money on anything it likes, while keeping an eye on long-term value rather than short-term profits.

Neither of these acquisitions makes sense if you approach them wielding earnings multiples or net present value calculations. I very much doubt that Nest has made a penny of profit in its entire existence, and the acquisition price works out at roughly $2,900 per Nest-boasting home, based on estimates that there are 1.1 million such homes. Meanwhile, Beam sold for 20.5 times ebitda, and 6.4 times revenue. And it’s not like some huge revenue boost is around the corner: the sale price even works out at 5.3 times estimated 2016 revenue. Neither of these deals are going to pay for themselves any time soon.

But that doesn’t mean that they’re bad deals. Both of them are attempts to, quite literally, buy the future. The case of Nest is pretty obvious: it’s the foremost company in the hot Internet of Things space, and in its short life has already built up a valuable and much-loved brand. Its products are expensive, but they’re very good-looking, and the user experience is fantastic. Nest is basically the OXO of internet-connected household gewgaws, and if it were to release a lightbulb, I’d buy dozens of the things in a heartbeat. Similarly if it offered to replace my alarm system.

Google is drowning in cash: it has more than $58 billion to spend, so this acquisition barely makes a dent in the company’s war chest. And if the price is high, it is also ratified by the market: Nest would have had no difficulty raising hundreds of millions of dollars in new equity at a $3.2 billion valuation or even higher. Most excitingly for Google, it has now poached dozens of former Apple employees, all of whom understand how to design great consumer hardware in a way that Google clearly doesn’t. If just a little of that magic rubs off onto, say, Motorola, that could justify the acquisition price right there.

Meanwhile, from Nest’s point of view, this deal gives the company room to concentrate on developing great products, without being distracted by corporate affairs, patent wars, and the like. Google’s lawyers can now deal with all of Nest’s legal and licensing headaches, and Google’s lawyers are not only very good but also have very deep pockets.

The Beam acquisition is also at heart about brand value: Jim Beam, Maker’s Mark, Laphroaig, Courvoisier, Sauza — these are resonant, deeply valuable brands, and they’re brands which are only going to rise in value over the long term. Bourbon, in particular, is an incredibly hard market to break into, thanks to the many years it needs to spend in barrel before it’s bottled. Beam’s revenues are being artificially constrained, right now, by the fact that it can’t sell more bourbon than it made seven years ago. But it has been ramping up production of late, and will surely continue to do so now it’s owned by Suntory: the Asian market in general, and China in particular, is potentially almost unlimited.

In other words, Suntory isn’t spending some multiple of 2013 earnings, or even 2016 earnings: it’s looking to the 2020s and beyond, and it’s betting that no matter how much it pays now, it’s more than worth it for the advantage of being the first Asian company to own a major bourbon brand, in a world where demand for bourbon is sure to continue to rise inexorably.

The Suntory deal is similar to the Google deal in another way, too: neither company values balance-sheet cash particularly highly. In Google’s case that’s just because the company has so much of it; in Suntory’s case that’s because Japan is — still — stuck in a liquidity trap. A Japanese company with cash is a bit like an American traveler with frequent-flier miles: it’s always a good idea to spend today, because the currency will be of less use to you tomorrow.

There aren’t all that many companies out there which are dominant in spaces which are clearly going to be huge tomorrow, be they the Internet of Things or bourbon. So we’re not going to see a lot more takeovers at these eye-popping valuations. But if there’s one big lesson to be drawn from today’s M&A activity, it’s that there’s still serious amounts of strategic cash on the sidelines if the right target comes along. As Charter’s $37.3 billion bid for Time Warner Cable proves.

COMMENT

Google is a perfect example of a company who takes a long view, amid the most recent acquisitions: Boston Dynamics and Nest. But that´s not the whole story, not by far. As every other big company, Google is constantly facing competition from medium and little companies, most of all startups. The problem lays over the asumption that nobody can foresee the future, accordingly, a small company can disrupt the market and leave a giant like Google out of business. That´s why these giants constantly buy small companies, mainly out of fear that their businesses could be in jeopardy, and not because they intend to develop any new strategy or a long term view prevails. Nest and Boston Dynamics appear on the news because, among other things, they were not cheap, but a closer look into all the companies that Google buys reveals a completely new approach, just last year Google bought 21 companies and none of them were on the news. I have doubts that a big strategy was put in place for each one. So yes, Google takes the future very serious and have made interesting and long term investments, but the facts prove patience is not always the way to go.

Posted by jonathanstahl | Report as abusive

When financiers align themselves against Wall Street

Felix Salmon
Jan 13, 2014 16:25 UTC

It’s more than 18 months since Mortgage Resolution Partners (MRP) first came to general public attention, and since I wrote three substantial posts explaining exactly why, as the headline of the first post says, “using eminent domain for liens is a bad idea”. The idea is still a bad one, but it lives on — and now Shaila Dewan has delivered a 2,500-word piece in the NYT about its status in Richmond, California — the town where it is closest to being enacted.

Like most of the discussion of this issue in the press, Dewan’s article fails to make what, to me, is the key distinction here — between seizing mortgages and seizing houses. Seizing houses where the owners are underwater on their mortgages is, at least in principle, a good idea. You buy the house in a short sale at a fair market value. All of the proceeds go to the mortgage lender. You then sell (or rent) the house back to its current owner, for a little more than you paid for it but a lot less than the mortgage was for. The homeowner now has equity again, and a much reduced mortgage, and the risk of foreclosure has gone down substantially. If municipal powers of eminent domain can help you do this, then by all means use them.

Disappointingly, that’s not what’s being proposed. Instead, the idea being shopped around various cities, including Richmond, is that MRP, along with the municipalities, will seize the mortgage under eminent domain. They will then issue a new mortgage to replace the old one, which gives the homeowner back some equity. There are lots of problems with this idea; they haven’t changed at all since 18 months ago. The main ones are, firstly, that the plan does nothing to address the problem of second liens; and, secondly, that the whole scheme is based on a huge lie. The plan only works if the mortgage can be seized for a price which is substantially less than the value of the property. But in fact, nearly all of these mortgages are worth substantially more than the value of the property; indeed, many of them are worth more than the face value of the mortgage. And so the eminent domain plan is not a plan to acquire property at fair market value; in fact, it’s a plan to gift mortgages to a private company, Mortgage Resolution Partners, at prices well below what those mortgages are actually worth.

Why doesn’t Dewan explain the issue this way? That’s easy: it’s because she’s a reporter, she’s reporting what she sees, and that’s simply not the way that the contours of the debate are drawn in the real world. If you travel to a town like Richmond, you don’t find a debate about the distinction between seizing mortgages and seizing houses; you don’t even find a debate about what the fair market value of a mortgage is, if the house in question is underwater. Instead, you find a simple face-off, between poor and angry locals, on the one hand, and well-funded corporate interests, on the other. In that situation, it’s hard not to sympathize — as Dewan clearly does — with the humans, especially when the corporations are churning out misinformation in the form of robocalls about the way the plan would give MRP the ability to “take houses on the cheap,” and bus in fraternity brothers from neighboring towns to demonstrate against a City Council vote.

The difference between the two sides is especially stark in Richmond, where the mayor, Gayle McLaughlin, is a member of the Green Party and an anti-Chevron activist who refused corporate campaign donations and is a veteran of tough fights against faceless corporate interests. And while MRP’s plan is self-serving and unlikely to make a huge amount of difference in any case, it’s easy to see why McLaughlin believes that something is better than nothing:

Homes in the city lost 66 percent of their value, on average, and are still worth less than half what they were at their peak, in January 2006. Some 16 percent of homeowners lost their homes in foreclosure, leaving so many scars on neighborhoods that the city began fining banks $1,000 a day if they failed to maintain their property; the city has collected $1.5 million so far.

This explains why the MRP scheme is still alive, despite the astonishing level of opposition it has managed to elicit. Indeed, it might be more accurate to say that the MRP scheme has managed to stay alive precisely because of the astonishing level of opposition it has managed to elicit. The banks and investors and realtors and financial-services industry groups who oppose MRP’s plan are exactly the people most to blame for the real-estate crisis which devastated towns like Richmond — which can itself seem to be a good prima facie reason to adopt any plan they’re complaining about.

MRP, here, is tapping into a deep vein of resentment and mistrust, and the financial services industry, with its heavy-handed opposition, is in many ways playing straight into MRP’s hand. The problem, for the industry, is that it really doesn’t have any constructive solutions to Richmond’s problems — and as a result, all it can offer is sticks without carrots. (When Richmond attempted a bond offering, to refinance old economic development bonds, it was met with no takers.) MRP itself, of course, is very much part of the financial-services industry, and would love to make an enormous amount of money from its scheme. But it’s not hard for MRP to persuade the likes of McLaughlin that it’s on her side — all it needs to do is point to the squeals of pain coming from banks, investors, and the like. If the plan is bad for them, it must be good for Richmond, right?

In that sense, what we’re seeing here is the current spate of bank prosecutions effectively being played out at the micro-local scale. (In Richmond, for instance, which has a population of more than 100,000 people, a mere 624 homes would be included in the scheme.) For prosecutors, attacking financiers is a move with all upside and no downside: whether you’re slapping JP Morgan with billions of dollars in fine or merely settling a silly case with Blackrock for $400,000, if you’re causing money to flow back to taxpayers from Wall Street then you’re generally perceived as doing god’s work. And the same phenomenon has opened up an opportunity for MRP — which is being supported by the likes of Evercore Partners and Westwood Capital — to paint itself as being on the side of the angels. Municipalities, however, should beware financiers spouting anti-Wall Street rhetoric. The MRP plan might be the only chance that a city like Richmond has to try to address its foreclosure crisis head-on. But that doesn’t make it a good idea.

10 Reasons Barry Ritholtz Is Wrong About Gold

Felix Salmon
Jan 11, 2014 23:24 UTC

Barry Ritholtz has been receiving a lot of praise for his 2,500-word Bloomberg listicle “10 Reasons the Gold Bugs Lost Their Shirts”. Which is weird, because it’s deeply flawed. Here, then, are the top ten places he goes wrong:

1. The title. Ritholtz frames his entire piece as a “post-mortem” examining a “debacle” which resulted in certain investors losing their shirts. But he never identifies a single such investor. The rest of the article is effectively moot if people haven’t lost a lot of money on gold. And so it’s telling that no sooner is the concept raised than it is dropped. Yes, the gold price has fallen from its highs. But without knowing where people bought, and whether they have sold, it’s a case of overstretch to thereby deduce that many gold investors have lost most of their money, as Ritholtz’s headline implies.

2. Any idiot can make money in the past. Every year, the FT’s John Authers extolls the astonishing returns posted by Hindsight Capital LLC, two of whose spectacular 2013 trades involved shorting gold. Hindsight Capital, of course, is a joke: its positions are revealed only at the end of the year, when we know exactly what happened. But Ritholtz seems to be absolutely serious here:

As an investor, I am a gold agnostic: When used properly, the metal is a potentially valuable tool in an investment arsenal. There are times when it makes for a profitable part of a portfolio, as in the 2000s. There are periods when it is a speculative and dangerous trade — such as the 2010s.

The only thing that Ritholtz is saying, here, is that the price of gold went up, and then it went down. His self-identification as “a gold agnostic” basically amounts to saying that it’s a good idea to own gold when it’s going up, and a bad idea to own gold when it’s going down. On that basis, it seems, it was a good thing to own gold in the 2000s, and a bad thing to own gold in the 2010s. To put it mildly, this is not helpful.

3. He relies on tautology. Ritholtz goes into a lot of detail about the exact movements of the gold price, telling us that it peaked above $1,900 per ounce. “Unless something radically changes in the near future,” he intones, “that may very well be the peak for this secular cycle.” Well, yes. Gold is currently trading somewhere in the $1,250 range: if it shoots back up above $1,900, then I’m pretty sure that would count as something radically changing. But is it reasonable to worry about a sudden radical change, and to therefore hold on to a long gold position? Ritholtz never says. All he tells us is that “some gold fans may argue that the cycle is not over yet, and they may be correct.” Thanks.

4. He criticizes a phantom. Ritholtz says that he has found, in gold, “a teachable moment of what not to do in a trade”. One would think that before you criticize a trade, it is reasonably important to know what that trade is. But that doesn’t stop Barry! Specifically, the standard goldbug trade, it seems to me, consists of putting lots of money into gold, and keeping it there. If you’ve been doing that for decades, you’re still feeling pretty smug right now, and can quite easily ride out the current market downturn. The trade that Ritholtz is criticizing, on the other hand, seems to comprise buying gold at $1,900 and then selling it at $1,200. Although he never quite comes out and identifies it that specifically. Without identifying exactly what (or whose) bad behavior you’re learning from, it’s pretty hard to draw useful lessons.

5. He blames Wall Street for the run-up in gold prices. “On Wall Street, storytelling is a big part of the sales process, and gold was no different,” says Ritholtz in his second lesson. He follows up in the third: “Salesmen always need something to sell. In GLD, they found the found a perfect vehicle to pull in the masses.” The story here — the narrative that Ritholtz is selling, if you will — is that a group of latter-day Jordan Belforts were hitting the phones, telling their schmuck clients to load up on gold ETFs, and making millions in the process. The problem with this story is simple: it isn’t true. The big gold salesmen weren’t Wall Street brokers extolling the efficiency of newfangled ETFs; rather, they were the likes of Glenn Beck and Ron Paul. The Cash4Gold people might have made money from a rising gold price; Merrill Lynch and Morgan Stanley, not so much. Indeed, the main reason for the popularity of the GLD ETF was precisely that it didn’t involve paying substantial commissions to middlemen, be they on Wall Street or elsewhere.

6. He confuses an investment with a trade. Ritholtz quite rightly points to the many periods in the past where gold has gone up and then has gone down. “Everything,” he says, “eventually goes to hell”. But that is not the same thing: the price of gold is still higher than it was during many of the previous peaks. The real lesson here is that in order to be a gold investor, you need a stomach strong enough to withstand these big cycles. Ritholtz’s lesson, by contrast, is the exact opposite: “Everything Eventually Becomes a Trade”. Or, to put it another way, if anything you hold ever goes down in value, then you’re not a long-term investor, you’re just a failed short-term trader. Ritholtz is a trader by profession, so it’s natural for him to think that way. But it’s not how gold investors think.

7. He turns a virtue into a vice. “What would make you reverse your biggest present holding?” asks Ritholtz. “If your answer to that question is, “Nothing,” you have a huge, devastating flaw in your approach to investing.” This is pretty much the worst advice that any investor can receive. To be sure, if you’re putting on a trade, and you expect and hope to take profits by exiting your position in the foreseeable future, then it’s a very good idea to have an exit strategy at the same time that you enter the position. But if, on the other hand, you’re doing something sensible like putting all your retirement savings into a Vanguard target-date fund, then the lack of an exit strategy is a very good thing. You don’t want to panic and sell when the market goes down; indeed, the entire structure of the fund makes sense only if you hold it all the way through your retirement. Ritholtz, like all money managers, complains about fickle clients who withdraw their money at the first sign of underperformance. But if he keeps on writing like this, you can hardly blame them.

8. He encourages market timing. “Every position,” writes Ritholtz, “no matter how compelling the underlying story, should have an exit strategy.” The idea that you should just buy and hold, he says, is “an especially money-losing attitude when holding a commodity” — even though he himself admits that “gold has no fundamentals” and that commodities “lack an objective measure of cheap or dear”. In other words, he’s advocating a market-timing strategy — buying low, selling high — in the absence of any useful information about the best time to buy or the best time to sell. Attempts to time the market are the main reason for the existence of the “behavior gap”: the difference between investment returns, on the one hand, and investor returns, on the other. Here’s a chart from Betterment showing just how big that gap has been estimated to be:

behaviorgapgraph.png

In other words, if you follow Ritholtz’s advice, you’re likely to underperform the asset classes you’re invested in by 1.5% or more. Probably much more, frankly, if you’re the kind of person who likes to play in classes like commodities. I don’t think much of gold as a buy-and-hold investment, but I’m quite sure that attempting to trade in and out of gold is going to be a much worse idea.

9. He shows no conception of hedges, or optimal portfolio allocation strategies. Ritholtz enjoys taking a hammer to what he calls “End-of-World Tales, Conspiracy Theories and Other Such Nonsense”. But while he’s shooting fish in a barrel, he misses the one genuinely good reason for including gold in a portfolio — which is that it’s a reasonably good hedge against various tail-risk events. And indeed, when the entire world imploded in 2008-9, the price of gold helped anybody who owned it as a part of their portfolio to handily outperform the market. Hedges are like insurance: they’re there to help protect you in the unlikely event that a low-probability unexpected event suddenly knocks you sideways. Judging the gold price on its own, as Ritholtz does, is silly — especially in the context of a world where the stock market has been resurgent and portfolios in general have done extremely well. That’s exactly the time when you aren’t reliant on your hedge. And that’s why I’m skeptical that investors in gold have really lost their shirts. Sure, if you’re invested in nothing but gold, then your portfolio will have gone down in 2013, while everybody else’s went up. But for someone with say a 5% allocation to gold, just in case everything goes wrong, then last year was probably a very good one, overall.

10. If all else fails, resort to nonsense:

The concept of situational awareness comes from military theory, particularly aviation, representing the idea that a pilot needs to be fully cognizant of all the elements occurring in three-dimensional space, as well as those about to occur in the near future. For the investor, situational awareness means not getting too caught up in the moment, and understanding the continuum of time. Instead of thinking of any event as a single instance in time like a photograph, consider instead a series of instances more akin to a video.

I have a vision of Ritholtz at his advisory shop, putting an arm around some young protégé’s shoulders, and telling him, “my son, you show promise. But what you lack is an understanding of the continuum of time“. To this, the only reasonable response is a slap in the face.

COMMENT

Interesting, all these comments about be censored out of Barry’s blog comments. I suffered the same fate from Mr. Continuum of Time and am fine with it.

Got to keep up appearances to keep the new Bloomberg gig of his!

Posted by Alex... | Report as abusive
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