Opinion

Felix Salmon

The euro zone’s terrible mistake

Felix Salmon
Dec 6, 2011 04:36 UTC

The FT is reporting today that the new fiscal rules for the EU “include a commitment not to force private sector bondholders to take losses on any future eurozone bail-outs”. If this principle really does get enshrined into some new treaty, it will be one of the most fiscally insane derelictions of statesmanship the world has seen — but it certainly helps explain the short-term rally that we saw today in Italian government debt.

Right now, the commitment is still vague:

Ms Merkel agreed that private sector bondholders would not be asked to bear some of the losses in any future sovereign debt restructuring, as she had insisted this year in the case of Greece’s second bail-out. However, future eurozone bonds will still include collective action clauses providing for potential voluntary rescheduling of private debt.

Ms Merkel said it was imperative to show that Europe was a “safe place to invest”.

You can safely ignore the bit about collective action clauses. They’re part of the sovereign-debt architecture now, and taking them out would be far more trouble than it was worth: they have to stay in, no matter what. The important thing is that they won’t be used — because if no one’s going to ask bondholders to bear any losses, then they won’t have any proposals to agree to.

The impetus for this completely insane policy seems to have come from the ECB, which genuinely seems to believe that bailing in private-sector banks, in the Greece restructuring, was the “terrible mistake” which caused the current euro crisis. Talk about confusing cause and effect: it was Greece’s fiscal disaster which caused the restructuring and the necessary bail-in.

To understand just how stupid this is, all you need to do is go back and read Michael Lewis’s Ireland article. The fateful decision in Ireland was to take the insolvent banks and give them a blanket bailout, with the banks’ creditors all getting 100 cents on the euro. That only served to put a positively evil debt burden onto the Irish people, forcing a massive austerity program and causing untold billions of euros in foregone growth, while bailing out lenders who deserved no such thing.

Are we really going to repeat — on a much larger scale — the very same mistake that Ireland made? Does no one in Europe realize that this is the single worst thing they can do?

Markets reflect underlying realities, and up until now, the realities have been clear. Europe’s periphery is sinking under the weight of too much debt, and the result will be inevitable pain for private-sector creditors. The best case scenario is that those countries bite the bullet and restructure their debt now, since to delay is to make any restructuring much more painful and expensive than it needs to be.

The worst case scenario is that the EU kicks the can down the road with one new bailout facility after another, until it eventually gives up throwing good money after bad and imposes the restructuring which was inevitable all along. In that case, as one hedge fund manager was explaining to me last week, private sector creditors get devastated: because the EU and the ECB and the IMF won’t take any losses on their loans, all of the haircut, pretty much, will have to be borne by a private sector which accounts for only a fraction of the debt. So the private sector could end up with very, very little indeed.

Now, however, Angela Merkel has come up with another plan. The details aren’t clear, but it seems to involve the EU guaranteeing the debts of its member states. Why this is acceptable while eurobonds aren’t acceptable is a mystery: a mulit-trillion-euro contingent liability is hardly preferable to a couple of hundred billion euros of real liabilities. But there’s eurologic for you.

The immediate result of this plan is that everybody will rush into the highest-yielding bonds in Europe, which is exactly what seems to have happened today. The other effect of the plan, however, is that every country in Europe is now effectively guaranteeing everybody else’s debt. Which is more than sufficient to explain why S&P is minded to downgrade every country in Europe, up to and including Germany.

In order for markets to work, lenders need to suffer when they make bad lending decisions. If the Europeans didn’t learn from Ireland, couldn’t they at least learn from the Fed’s much-criticized decision to pay off all AIG creditors at 100 cents on the dollar? Blanket guarantees at par are pretty much always a really bad idea — and this one, if it comes to pass, will be the biggest one yet. It won’t end well.

COMMENT

“Are we really going to repeat — on a much larger scale — the very same mistake that Ireland made? Does no one in Europe realize that this is the single worst thing they can do?”

If you assume that the whole goal of the ECB/Euro leadership is to ensure that northern European banks get repaid in full (in the short term), and d*mn the consequences, then everything they’ve done makes perfect sense.

Posted by Barry_D | Report as abusive

Ticket pricing datapoints of the day

Felix Salmon
Nov 29, 2011 21:56 UTC

A few ticketing datapoints from recent news coverage:

  • The Leonardo show at the National Gallery in London is sold out through the end of its run, in February, with ticket prices at £16 ($25) apiece. Some sites are offering the tickets for resale at as much as £300, but the National Gallery says that if you have a resold ticket, you won’t get in.
  • Christie’s is selling tickets at $30 apiece (plus tax) to see the collection of Elizabeth Taylor before it goes up for sale on December 13.
  • Broadway shows are nearly all using variable pricing now, with tickets to see Hugh Jackman costing as much as $350 each, while tickets to The Book of Mormon are currently $477 apiece.
  • Thanks partly to such tactics, Spider-Man set a new box-office weekly record for the Foxwoods Theater last week, bringing in $2,070,196. (Back in December, Catherine Rampell said that under a “best-case scenario”, the musical could gross $1,646,991 in a week.)

Rampell’s not wrong on an average basis: Spider-Man is typically grossing something less than $1.5 million a week. But what really interests me about this chart is its volatility:

1128-cul-SPIDERweb.jpg

If you want to maximize total revenues, this is the kind of chart you want to see: one where the box-office gross can rise past $2 million a week in a heavy week, but the show can still play to full houses at a lower gross at slower times of year.

What we’re seeing in London is the failure of the old model, where ticket prices were set in advance and never change. Set them too low, and you wind up with Leonardo-style fiascos, and ticket scalping. Set them too high, and you leave money on the table. And of course the prices are set long before the rave reviews come in, so you can’t be too optimistic or aggressive in pricing them.

What we’re seeing at Christie’s is an example of a company choosing a pretty sensible way of managing the inevitable crowds. Give people timed tickets, and the auction house won’t get mobbed by thousands of people wanting to just turn up and see celebrity schwag. And if you’re selling tickets anyway, you might as well sell them at a high price.

And what we’re seeing on Broadway is the perfection of the variable-pricing model which has long been used in the airline industry. When you don’t need to print tickets in advance with a face value on them, you can change prices dynamically according to supply and demand, and there’s really no limit to how much, in theory, you can charge.

The losers here are the ticket brokers, and no one’s crying for them. People have always paid hundreds of dollars per ticket to go see Broadway shows — they just haven’t paid the theater and the producers. It’s much better this way. I wish that the National Gallery was a bit more commercial in its ticket-selling: I’d pay good money to see the show when I’m in London next year, but I don’t have the ability to do that now.

The optics, though, are dreadful: a state-owned institution can’t go charging $100 per ticket to see a show of nine paintings. Only the rich could then afford to see the show, and the National Gallery is for everybody, not just for the rich.

But there has to be some way to make this work. Maybe market-rate tickets could be sold alongside a £5 option which involved a lot of waiting in line, something like that. Not all tickets need to be market-rate. But there’s no reason some shouldn’t be.

COMMENT

The National Gallery has a different model than Spider Man. It’s not set up to maximize revenue. It’s set up to maximize availability (or something else). The so-called “free market” principles should not be applied to it.

If that were the case, the National Gallery of Art would be open only to the highest bidders. Kind of like the Capitol Building.

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The limits of macroeconomic statistics, Ontario edition

Felix Salmon
Nov 15, 2011 18:19 UTC

I spent this morning at the release of the tenth annual report on “Prospects for Ontario’s prosperity” — you’re jealous, I know. Ontario, if you read the report, is in pretty bad shape, when compared to its peers.

ppp.tiff

The general theme of the report is that the way to fix this situation is to improve Ontario’s performance when it comes to productivity and innovation; there was a general consensus in the room that Ontario wasn’t nearly productive or innovative enough, and that this was a big problem.

So, being a bit contrarian, I decided to push back. The first thing I did was point out that the chart above is rather misleading: there’s a very good reason why the two Canadian provinces are at the bottom of the league table. All numbers have been converted using “2010 PPP”, under which one US dollar is worth 1.2 Canadian dollars. In reality, of course, one US dollar is worth 1.02 Canadian dollars. So if you simply use exchange rates rather than PPP, suddenly Ontario looks much better off, with GDP per capita of $54,700 — above, rather than below, the median level of its North American peers.

And if you look at other metrics, those of us who live in New York should probably take relatively little pride in our status atop the GDP-per-capita stakes. Here’s one chart Nick Rizzo put together:

ontario new york median household income.JPG

And of course in lots of other metrics, too, like health outcomes, or the poverty rate, or just general quality of life, Ontario manages to handily beat New York state. GDP masks more than it reveals, much of the time; New York state’s high GDP Is largely a function of the financial industry, and that in turn only serves to make life much more expensive for the overwhelming majority of New York City’s population which does not work in that industry.

Besides, especially during an economic slump, improving productivity is not necessarily a good thing: it often just means that businesses are laying a lot of people off. Dividing GDP by the total number of workers can make for an interesting exercise, but if the number of workers is falling faster than GDP, no one’s going to be happy, even as productivity numbers are likely to look great.

And innovation is not always a good thing either, if the downside of failure is high. Innovation usually ends in failure: the most innovative areas are ones where the cost of failure is low. Before you can become an innovative economy, you need to have a culture of rewarding people who fail. That exists in places like Silicon Valley, but it’s hard to implement in bigger states like Ontario or even, for that matter, New York.

And of course the one area where New York really did innovate was financial services: AIG’s a prime example. It came up with fantastic innovations when it came to guaranteeing super-senior tranches of CDOs, or lending out its securities and investing the proceeds in synthetic bonds. In doing so, it came thisclose to bringing the entire global financial system to its knees.

I ended my talk by asking the crowd to engage in a classic philosophical thought experiment. I’ll give you a choice, the day before you’re born. You can either be born to a randomly-chosen mother in Ontario, or else you can be born to a randomly-chosen mother in New York state. Which do you choose? For me, and for most of the audience, the choice was clear: Ontario. Its PPP-adjust GDP per capita notwithstanding.

COMMENT

Can you please tell me what the source is for the Ontario data in the second chart? Also, has anything been done to adjust the data in the chart? Thanks for an interesting post.

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Krugman vs Summers: The debate

Felix Salmon
Nov 15, 2011 05:53 UTC

x Munk Debates TST-CIA108.jpg

I’m glad I found myself in Toronto this evening, because tonight’s Munk Debate was illuminating and enjoyable. The motion was that “North America faces a Japan-style era of high unemployment and slow growth”; Paul Krugman was arguing for it, while Larry Summers was arguing against.

Krugman found himself with the home-team advantage through being paired with Canadian economist David Rosenberg; Summers had strong rhetorical backup from Eurasia Group’s Ian Bremmer. But at heart, this was Krugman vs Summers, which is an inspired match-up: especially in election season, one of the most important criteria for any debate is that it not cleave easily and obviously along party-political lines. That way people just end up voting their party and rehearsing tired party-political talking points.

This debate, because it took place within a basically Keynesian, leftist worldview, was very interesting. Both Krugman and Summers spent a lot of time saying that they agreed with each other — with one big difference. They both quoted Keynes as diagnosing “magneto trouble” — the engine of the economy is broken, and it needs to be fixed. Summers has faith that, in Churchill’s phrase, “Americans can always be counted on to do the right thing, after they have exhausted all other possibilities” — the right thing, here, being to fix the magneto with expansionary fiscal and monetary policy. Krugman, by contrast, sees political gridlock as far as the eye can see, and says that it doesn’t matter how innovative or philanthropic or demographically attractive the U.S. is — if you don’t fix the magneto, the car won’t start, and America’s magneto ain’t gonna get fixed any time soon.

Economically speaking, the Nobel laureate largely had the better of the technocrat. We’re already four years from the beginning of the U.S. recession, and we’ve certainly been going nowhere over that time — the question isn’t whether the economy is lost, so much as whether there’s something which can help it back onto its feet in the next few years. As Rosenberg said, if you look at employment, or the stock market, or median income, or house prices, all of them are back to where they were years ago. Things might improve in the future, but they sure aren’t healthy right now. And Japan is proof that economies can stagnate more or less indefinitely — it’s now, as Krugman pointed out, 19 years into its “lost decade”.

And Summers made a couple of surprising rhetorical missteps, for someone who cut his teeth on debate teams. At the very beginning he praised the debate’s sponsors, Peter and Melanie Munk, holding them up as an example of how North American philanthropists help to keep the continent vibrant. But the gesture rang a little hollow, coming as it did from a man who was being paid extremely handsomely to turn up and do the bidding of the Munks’ charitable foundation. Summers is many things, but he’s hardly top of the list of people in need of large philanthropic donations.

Summers also tried to defend inequality, at least in part, by saying that “suppose the United States had 30 more people like Steve Jobs” — that, he said, would be a good thing even as it increased inequality. “So we do need to recognize that a component of this inequality is the other side of successful entrepreneurship; that is surely something we want to encourage.” This might have been received better had Summers not earlier praised America, while pointing to Bremmer, as “the only country in the world where you can raise your first $100 million before you buy your first suit and tie”.

Bremmer is undoubtedly a rich and successful entrepreneur — and one who never wears a tie, to boot — but he’s making money entirely from the 0.1%, and at heart Eurasia Group’s business model is one which does better as the ultra-rich get richer. In the context of a debate about how to rescue the economy for the other 99% of us, it doesn’t much help to point to One Percenters like Jobs and Bremmer who have managed to do well for themselves in an otherwise stagnant economy.

For his part, Bremmer had one theme, and he was sticking to it: the U.S. might be in a mess, but it has stronger fundamentals than other regions, especially Europe and Japan. But Bremmer never explained how being not-as-bad-as-Europe was going to help drag the U.S. out of its current slump, especially when, as Krugman pointed out, every single country to successfully recover from a financial crisis has done so by means of exports.

But here’s the thing: Summers really is a formidable debater. He met Krugman’s gridlock argument head-on, saying that Barack Obama’s legislative achievements in 2009-10 were greater than those in any two year period since 1965-66, or possibly even 1933-34. And in his concluding remarks, he declared that “things are never as bad as you think they are when things are bad”, adding optimistically — and accurately — that in politics, “the transition from inconceivable to inevitable can be very rapid”. Summers’s optimistic sentiment went down well with the well-heeled Toronto crowd: people who are wealthy and healthy and happy, like the Munk Debate audience, tend to be attracted to arguments saying that there’s no need to feel guilty or fearful.

And so, in the end, host Rudyard Griffiths declared a “technical victory” for Summers and Bremmer. They didn’t win a majority of the votes — in fact, they were beaten by Krugman and Rosenberg, 45% to 55%. But Krugman and Rosenberg started the debate with 55% support, while Summers and Bremmer started with just 25%: basically, the undecideds all plumped for Summers over Krugman.

As for me, I entered the debate torn, and I exited it that way as well. There’s something very un-American about doom-mongering, and it’s fair to say that any given economist, at any given point in time, is more likely to be wrong than right. In order for Krugman to be right, he has to be right — right in his analysis, and right in forecasting what the macroeconomic implications of that analysis might be. But the Krugman-Rosenberg teams couldn’t even agree on the analysis: while Krugman was convinced that a bunch of borrowing and spending would fix what ails the economy, Rosenberg was convinced that we’re at the beginning of a massive deleveraging and that you can’t fix an over-indebted economy by piling even more debt onto it.

Krugman is certainly outside the economic consensus, and while that doesn’t mean he’s wrong, it’s certainly prima facie reason to be skeptical about his analysis. Besides, Krugman’s been so pessimistic for so long, now, that it’s almost impossible to imagine what kind of evidence could get him to change his mind and declare that we’re not headed for a lost decade after all. Summers, by contrast, doesn’t think in forecasts so much as in probability distributions — a much less constricting way of thinking.

So, do I think that North America faces a Japan-style era of high unemployment and slow growth? I’ll agree with Summers and Krugman on this one: yes, it does. Will it manage to do what’s necessary to avoid that fate? That’s something no one can know with any certainty. But life’s certainly a lot easier if you believe that it will.

(Photo: Sandler via Central Image Agency)

COMMENT

@spectre855, you hit the nail on the head. Corporate corruption and person-hood are ridiculous. And while Krugman’s prescription for our economy might work, it is locked in a debate that seems to go nowhere. The political theater isn’t ready for a change because it’s funded by the o.5%. Change may be coming though, with our own Arab Spring– the Occupy movement.

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Europe’s liquidity crisis

Felix Salmon
Nov 14, 2011 15:33 UTC

I had a long lunch meeting on Friday with a hedge-fund manager with an astonishing ability to navigate the Bloomberg Blackberry app. And there was one chart in particular which he clearly pulled up on a regular basis: the spread on senior unsecured bank debt in Europe. As Lisa Pollack points out, it’s tempting but dangerous to look at the iTraxx Senior Financials index in this context, because it’s an easy index to follow but it also includes non-bank names like Aviva, Axa, and Munich Re. So here’s the 3-month Euribor/Eonia spread, instead, which also has the advantage of going back to 2007. It’s not the best indicator when it comes to measuring banks’ cost of funds, but it’s fantastic if what you’re looking for is a guide to how stressed the Euroland funding market is.

euribonia.tiff

This chart comes from a 40-page note on European bank liquidity published by Daniel Davies and Jag Yogarajah of Exane BNP Paribas; I can highly recommend you try to get yourself a copy of it somehow. And in fact the situation is worse than this chart makes things look, since in the months immediately following Lehman’s bankruptcy, the three-month interbank funding market effectively did not exist, and the numbers being charted here are, in the note’s words, “arguably somewhat hypothetical“. Take out the nonexistent market following Lehman’s collapse, and spreads in Europe are right at their all-time highs.

We all know why this is, of course. European banks have lots of European sovereign debt. European sovereign debt is falling in value. Therefore European banks are insolvent. Therefore, they have greatly increased credit risk. Therefore, spreads are rising.

Except, this isn’t really true. Greek banks are insolvent, it’s true, if you mark their sovereign debt exposure to market. But to a first approximation, no other banks are. Mark French banks’ holdings of Italian sovereign debt down by say 10%, and they’re still fine; their capital drops, of course, as it would with any write-down, but certainly to nowhere near zero.

What is true is that Europe is in the middle of a textbook liquidity crisis. Banks are not lending to each other — and the ECB isn’t stepping in to solve the problem. This is a serious structural issue with the way that the European monetary system was constructed: the ECB is tasked only with guarding inflation, and not with ensuring the health of the banking system. Individual national central banks are meant to do that. But they can’t print money — only the ECB can. So when there’s a liquidity crisis, no one’s able to step in and solve it.

Here’s another chart from the report:

datastream.tiff

The light-blue line is the share prices of US banks. They fell steadily through all of 2008 and the beginning of 2009, with TARP barely making a difference. Who caught that falling knife and stabilized US bank share prices? Not Treasury, but the Fed, with its quantitative easing. As soon as that started (see the dark blue line), US financial institutions suddenly looked as though they’d be fine.

For this reason, the Exane analysts are convinced that talk of European bank recapitalizations is silly — essentially, it’s treating the wrong disease:

There is no reasonable amount of capital that can cure a liquidity shortage. The reason why people are refusing to lend to the banks is not primarily because they fear an underlying solvency problem (although some people do), but because they fear an obvious and immediate liquidity problem. It is rational not to lend to an institution that you believe to be illiquid.

The real problem here is simply that banks are hoarding their cash and not lending to each other. Look at the way that bank debt issuance has fallen off a cliff — even the issuance of covered bonds, which to a first approximation don’t have any credit risk.

term.tiff

And the way the banking sector works, banks have to be constantly lending to each other: in nearly every country in Europe, the amount of bank debt coming due every day is higher than the total amount of bank capital in the system. The overnight interbank market is the bloodstream of the European financial system, and the flow of blood is coming to a halt. Or, as the Exane report puts it, “if we think of wholesale funding as commodity input, it is much more like the supply of limestone to a kiln than the supply of flour to a bakery – not only can the banking sector not produce loans without new financing, it cannot shut down for a short period of time either, it needs constant supply.”

And here’s how a recent BIS report put it:

Quantitatively, private liquidity dominates official liquidity… private global liquidity is highly cyclical because it is driven by divergences in growth rates, monetary policies and, above all, risk appetite.

Private liquidity can give rise to international spillovers… This international component of liquidity can be a potential source of instability, because of its own dynamics or because it amplifies cyclical movements in domestic financial conditions and intensifies domestic imbalances.

The liquidity situation at European banks is similar to that at the sovereign level, too, as James Macdonald explains very cogently. Italy’s debt, it turns out, is not particularly high, by historical standards.

macdonald.jpg

Instead, the problem is that Italy is being forced to roll over its debts on a regular basis.

Before World War I, countries considered truly creditworthy borrowed on terms that are unrecognizable nowadays. The vast majority of their debts were in the form of perpetual annuities…

In 1900, for example, France had a public debt amounting to 105% of GDP; but over 96% of it was in the form of perpetual annuities, and less than 4% in the form of short-term Treasury bills. Therefore the country’s annual funding requirement was only 4% of GDP. The credit of a country with such a debt structure was virtually impregnable short of a world war.

Since those halcyon days, however, western governments have raised their debts on a far shorter-term basis… France, with a public debt of (only) 86% of GDP, now has an annual funding requirement equivalent to over 20% of GDP. It is in good company. Belgium Italy, Spain, and Portugal also have to finance 20-25% of GDP each year. The USA has a funding requirement of nearly 30% of GDP, thanks to the folly of the Treasury Department’s decision to stop selling the 30-year T-bond in 2001 in a misguided attempt to shorten the average duration of the debt.

The result is that the sovereign borrowers that the markets have been accustomed to think of as “risk-free” have become a little similar to banks… At any time, a ripple of suspicion about their long-term ability to repay their debts (not unreasonable given the relentless build-up of their off-balance sheet liabilities since the war) could set off a chain reaction which ends up with a self-defeating rush for the exits.

This is what is happening to Italy.

You can see the dilemma facing the ECB here. It’s facing a dual liquidity crisis: not only within the European banking system, but also at European sovereigns. And it doesn’t really have a mandate to address either one.

But it’s liquidity crises which are the most violent, and which can kill a financial system — indeed, an entire economy — more or less overnight. Someone in Europe needs to come up with a plan for how to address the current crisis — now. Because if it gets any worse, it could well be too late.

COMMENT

Spare me the details: how can I make a profit from it? Looking back, fear of “inevitable” inflation kept me from some insured CDs that I wish I had now.

Posted by walt9316 | Report as abusive

Market inefficiency of the day, Maple syrup edition

Felix Salmon
Nov 9, 2011 23:27 UTC

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

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

And you’d be wrong.

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

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

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

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

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

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

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

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

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

COMMENT

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

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

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

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The value of a Nobel prize

Felix Salmon
Nov 3, 2011 22:06 UTC

Dealbook’s Azam Ahmed explains why hedge fund Hutchin Hill has hired this year’s Economics Nobel laureate, Thomas Sargent:

While some of that research is pretty lofty, the rationale for hiring someone like Mr. Sargent is simple — that he can help the hedge fund figure out the effect of policy changes on people’s thinking, a critical element when judging how an economy will fare.

Well, that’s the ostensible reason, anyway — the reason given in Hutchin Hill’s September letter to investors. But it’s not the real reason.

The real reason why Hutchin Hill hired Thomas Sargent is — obviously — that he just won the Nobel Prize. After all, he was just as smart, and significantly cheaper, before he won the Nobel Prize, but they didn’t hire him then.

And why would Hutchin Hill want a Nobel Prize winner on their payroll? It’s not so that they can “find tremendous edge in understanding the impact of fiscal and monetary policy alternatives on global growth, risk appetite and asset prices”. After all, the whole reason why investors have entrusted $1.5 billion to the fund is because they reckoned Hutchin Hill was pretty good at doing that kind of thing already, and didn’t need the help of some NYU economics professor.

Hiring Nobel laureates, rather, is essentially a marketing function. They’re very useful people to get wheeled out in front of potential investors, who are wowed by the prize and thereby more likely to invest with the fund.

After all, the overwhelming majority of hedge funds are sold, rather than bought. There’s a famous handful with investors knocking on their door, desperate to invest. But most hedge funds — including Hutchin Hill — you’ve never heard of. But hey! You’ve heard of them now! They just got loads of glowing press in the New York Times! And not because of their returns, just because they managed to get the word “Nobel” into a press release.

Which is not to say that Ahmed shouldn’t have written this story. It raises interesting questions — among them, where the real value in a Noble prize lies, for economists. The prize itself is about $1.5 million, which was split this year between Sargent and Christopher Sims. That means Sargent’s getting $750,000 or so — not bad money, but probably less than he’s likely to get from Hutchin Hill.* (Remember the $5.2 million Larry Summers got paid by DE Shaw in just one year.)

But if Sargent’s imprimatur gets investors to commit say another $200 million to the fund, then that’s an extra $4 million a year in management fees alone — with essentially unlimited upside in terms of performance fees on top of that. He doesn’t need to provide any alpha at all to earn his keep — he just needs to be convincing in front of investors. Which I daresay he’s very good at. Especially now he has this prize.

*Update: I just spoke to Neil Chriss of Hutchin Hill, who explained to me that the deal with Sargent was agreed before he won his Nobel, and that Sargent will not be meeting any investors. (The deal was signed after the prize was awarded, but without any bump in the amount Sargent’s getting paid.) I’m also convinced that Sargent is not being paid anything like Larry Summers money, or even Nobel money, for this gig. For an economist, it seems, Sargent is quite bad at maximizing his profits from this prize.

COMMENT

I am disappointed to report that recent research shows that in many college professors, good honest intrinsic motivations like the pursuit of money are often crowded out by more venal desires such as the longing for the respect of one’s profession or expanding the frontiers of human knowledge. Cynical and mercenary I know, but that’s academia. Shameful.

Posted by LeighCaldwell | Report as abusive

Word clouds done right

Felix Salmon
Oct 31, 2011 17:45 UTC

Jacob Harris is absolutely right to hate word clouds. You take a long and complex text, and then you boil it down to a group of individual words, with the most-used words being the biggest? That’s just silly. “Reporters sidestepping their limited knowledge of the subject material by peering for patterns in a word cloud,” he says, is “like reading tea leaves at the bottom of a cup”. Word clouds are crude, inaccurate, misapplied, and place the onus of understanding onto the reader.

But there’s one place where word clouds are I think both useful and accurate — and that’s when a pollster has asked a group of people to say the one word they would use to describe X. Here, for instance, is the word cloud generated when a Reuters/Ipsos poll asked Republican voters for the first word that came to mind after watching the weird Herman Cain “smoking ad”:

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And here’s the word cloud from the latest Kauffman poll of econobloggers:

Here the size of the words is interesting, but more germane is the overwhelming negativity of the vast majority of words used. There’s a couple of tiny good ones in there — “rebounding” us up by the Canadian border, and “bounceback” is in the Bay Area somewhere — but they’re in a distinct minority.

Incidentally, that Kauffman poll has some fascinating responses elsewhere, too. Check out the sudden enormous popularity of NGDP targeting:

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There’s also a very high degree of skepticism when it comes to how good colleges are at teaching kids useful stuff.

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The bar charts here are again an effective way of communicating information. Things like chart types and word clouds are tools, and you have to know which tools are best used in various different circumstances. And while word clouds are usually stupid, sometimes they can be exactly right.

COMMENT

“How many people really think that you spend 4 years on skills that are actually useful in the job market?”

How many people would really want to hire your average college freshman as an assistant? You would spend more time baby-sitting them than the “help” would be worth.

In college you learn (or should learn):
* The language in which understanding is communicated in a variety of disciplines.
* The discipline to work independently and think critically.
* General literacy, both in writing and mathematical.

Maybe you take a couple courses that teach material you will use specifically in your first job? But even though learning doesn’t end in college, it is still important to lay the groundwork for what is to come.

Posted by TFF | Report as abusive

I am the 99%

Felix Salmon
Oct 26, 2011 16:37 UTC

percent.tiff

The latest CBO report on income trends says nothing particularly surprising, although it does underline quite emphatically what we already knew about the 99% and the 1%. In particular, the key message, both in charts and text, is all about the 1% and how they’ve torn away from the rest of the population in the past 30 years.

And in the wake of the 99% getting tear-gassed in Oakland by their own municipal government, I’m going to get personal for a minute here: I am the 99%. I have an absolutely wonderful life in my favorite city in the world, protected by a large and prosperous centuries-old democracy. I have enough money to eat and to travel just about anywhere I want. My home is filled with fabulous art and features a small collection of equally fabulous wine; I suspect it might even be worth more than I paid for it. I love my job, which pays extremely well, and affords me a huge degree of professional freedom. I have the kind of transferable skills which are in demand by multiple potential employers. I get to wonk out with some of the most interesting people in the world, and I also get to ignore the bores. I have a gorgeous wife, we’re both in good health, and we’re blessed with wonderful friends. In short, I have the kind of life which would be the envy of well over 99% of anybody who’s ever lived, and well over 99% of anybody alive today.

And yet — I’m still in the (upper quintile of the) 99%, and if you boil things down to just their income and wealth numbers, the 1% is as far away from me as I am from a struggling working family with an onerous mortgage and a highly uncertain employment outlook. And there’s no need for them to shower themselves with that kind of money. From me on out, it’s pure avarice. Which is human, and natural, and probably even helps in terms of economic growth. But given the amount of misery and poverty in America, it’s simply unconscionable that I and the people earning vastly more than me — including all of the 1% — are getting such an enormous share of the income and wealth so desperately needed elsewhere.

All of which is to say that my taxes are too low. If my taxes went up and the money was used to reduce poverty and unemployment in America, my standard of living would still be glorious — and millions of lives would be improved. And as for the 1%, their taxes could double and they would still be fabulously well off. I’m not proposing that as a policy solution. But I am trying to put things in perspective here. I’m not in the 1%, and I can and should be giving back much more to the society which is supporting me and making my lifestyle possible. The people who are in the 1% are the most fortunate of the fortunate. The least they can do is pay as much in taxes as, say, I do.

COMMENT

We have observed the fall of communist economic system in Rusia. Now capitalist system is shacking all over the world, because this system disobey economic justice.
China with communist economic system show it can stand in more competitive world, but how long ?
The fall of communist economic system cause by its people that can not stand its economic system. If capitalist system also fall, its also because its people can not stand the system, which is un justice system of economics, where most of the nation wealth embrace by aview people.
So let us together find a new system of economic which is more human, more justice, where all the wealth distribute among most of our people.

Posted by OKTA | Report as abusive
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