Friday, May 30, 2008

Textbook pricing

Economics of Money, Banking and Financial Markets plus MyEconLab plus eBook 1-semester Student Access Kit, The (8th Edition) (MyEconLab Series) (Hardcover), Mishkin, List Price: $153.13 Price: $129.67

Principles of Economics, 4th Edition (Student Edition) (Hardcover), Mankiw, List Price: $193.95 Price: $146.35

Macroeconomics (Hardcover), Mankiw, Price: $140.95

I remember as a TA in a Principles class that the then professor (who shall remain unnamed) who had his own textbook said that he was not accountable for the price of his textbook and that it was the publisher's decision. Having said that, he then outlined a theory as to why as an author he would like the textbook to be cheaper thereby earning greater royalties as sales expanded.

While, it's true that the "value" of a $200 textbook may be greater than ten $20 hardcover bestsellers, it's "value" to me is how much I "value" the course - "I have to take this course to satisfy my distribution requirements" versus "I am going to major in this so this book is going to last a life time".

This, from Real Time Economics (circa 2007) shows that you don't have to give it away to earn large royalties:
As governor of the Federal Reserve, Frederic Mishkin pulls down $168,000 a year. He could argue he’s undercharging.

Mr. Mishkin’s financial disclosure report, released Tuesday, shows that in the year before joining the Fed last September, he made a tidy sum dispensing advice to central banks, governments and business groups around the world. He collected a $134,858 consulting fee from the Icelandic Chamber of Commerce; $63,188 from the Riksdagen, or Swedish Parliament, who hired him to co-write a report on the Swedish central bank; $15,600 from the Central Bank of Chile, $15,575 from the Bank of Korea, $9,161 from the Bank of Spain and $4,250 from the Bank of Canada. That’s all in addition to his salary from Columbia University.

The disclosure also shows that while he isn’t quite at Alan Greenspan’s level, Mr. Mishkin is no slouch in the book business, pulling down $434,000 in royalties from Pearson Publishing, whose imprints publish Mr. Mishkin’s popular textbook: The Economics of Money, Banking, and Financial Markets. Pearson also paid him a $75,000 advance and grant for an as yet unwritten textbook. (Penguin, an affiliate of Pearson, paid Mr. Greenspan an advance of more than $8 million for his memoir, due out this fall.)

Chairman Ben Bernanke, like Mr. Mishkin, was a noted academic economist before joining the Fed in 2002 (he was chairman of Princeton University’s economics department.) He co-wrote a book with Mr. Mishkin on inflation targeting, but like other academics, his most lucrative works have been textbooks. His disclosure form reported between $100,000 and $200,000 a year in textbook royalties from Pearson and McGraw-Hill.

Randall Kroszner, the Fed board’s other academic (he taught at the University of Chicago), reported more modest royalties of between $200 and $1,000 for Economic Nature of the Firm: a Reader, published by Cambridge University Press.

But all are starving artists in comparison to Harvard University’s Greg Mankiw, author of some of the best selling economics textbooks in the country (and now one of its most widely read bloggers). In 2005, when he stepped down as chairman of President Bush’s Council of Economic Advisers, Mr. Mankiw reported royalties of between $1 million and $5 million on one book alone: Principles of Economics, published by Thomson Learning. He reported between $100,000 and $1 million in royalties on his book Macroeconomics, published by Worth Publishers. –Greg Ip

How lucrative is academia?

Apparently, very.
From WSJ's Real Time Economics:
The Federal Reserve announced today that governor Frederic Mishkin plans to step down at the end of August and return to academia. ... Meanwhile, Mr. Mishkin may be giving up a say in monetary policy, but his return to the academic world will surely be more lucrative. His financial disclosure report, released in 2007, shows that in the year before joining the Fed in 2006, he made a tidy sum dispensing advice to central banks, governments and business groups around the world. He collected a $134,858 consulting fee from the Icelandic Chamber of Commerce; $63,188 from the Riksdagen, or Swedish Parliament, who hired him to co-write a report on the Swedish central bank; $15,600 from the Central Bank of Chile, $15,575 from the Bank of Korea, $9,161 from the Bank of Spain and $4,250 from the Bank of Canada. That was all in addition to his salary from Columbia University.

From Bloomberg:
... like most recent Fed governors, Mishkin took a pay cut to join the central bank. His salary is $172,200 this year, compared with $300,000 at Columbia in 2005. Mishkin also earned $434,000 in royalties from Pearson Plc in the 18 months ending June 2007, according to a financial- disclosure filing last year. Pearson publishes Mishkin's best- selling textbook, "The Economics of Money, Banking and Financial Markets,'' now in its eighth edition.
In the same filing, Mishkin said he received a $75,000 "advance and grant'' from Pearson for a not-yet-written textbook.

A modest proposal on loyalty cards

This post on MR got me thinking since I am one of those with a lot of loyalty cards: Giant, Safeway, Borders, Best Buy, Neisha Thai, American Plant Food, Staples, Office Depot and probably some others that I have now misplaced.

The inconvenience of having to carry all the cards on me (since I never know when I might swing by one of these places) seems to cry out for a centralization and who better to do this than Federal Government. Retailers sign up with the Federal Government who then offers one card to all who want one. For simplicity, let's call this a Federal Loyalty Card. Those who want to card simply check off on a form all the retailers they would want to participate with. (The default could be all retailers who sign up.) For security purposes, the Federal Government could require a finger print or some other biometric pattern on the card. Therefore, if I lose the card or forget to carry it, I can still get my discounts by offering my thumbprint.

This is the win-win situation of all time:
1. Retailers win by having a streamlined version of a loyalty program. They could also "share" information with the Federal Government by letting the Federal Government know what the customer has been buying.
2. The Federal Government wins by having a centralized database of buyers.
3. The customer wins by not having to carry all the loyalty cards around. Plus, if the retailers choose to "share" information with the Federal Government (with the approval of the customer, of course), the Federal Government will contribute 1% of all total spending to a retirement account held in trust for the customer.

Excess liquidity

This paper, "Can Excess Liquidity Signal an Asset Price Boom?" available here was an interesting attempt to measure excess liquidity using a broad money to GDP ratio for 18 industrial countries.
This paper analyses the relationship between the prevailing liquidity conditions (such as measures of money, credit and interest rates) and developments in asset prices from a monetary analysis perspective. After having identified periods of sustained excess liquidity, we analyse under which conditions they are more likely to be followed by an asset price boom. The results from a descriptive analysis of the developments in a number of macroeconomic and financial variables suggest that periods of sustained excess liquidity that are accompanied by strong economic activity, low interest rates, high real credit growth and low inflation have a higher likelihood of being followed by an asset price boom. This conclusion is also confirmed by a logit analysis.

1. I would have liked to see some plots of the raw data.
2. I'm not sure if the results are sensitive to the HP filter and some plots may have been useful.
3. Maybe it's just me but I wasn't sure from reading the paper whether the booms/busts were defined on a country by country basis or overall for all countries over the entire sample period.

Tuesday, May 20, 2008

Price anomaly of the day

Confessions of a Jane Austen Addict: List Price: $24.95 Price: $24.95 + $906.05 sourcing fee

Comparative advantage in carbon trading

Do developing countries have a comparative advantage in carbon trading?
This is one of the questions raised by NGM's article Forests of the Tides on mangroves. (Incidentally, there was an excellent exhibit at the KL Aquaria on mangroves which we got to see last summer).
1. "Wherever they live, they share one thing in common: They're brilliant adapters. Each mangrove has an ultrafiltration system to keep much of the salt out and a complex root system that allows it to survive in the intertidal zone. Some have snorkel-like roots called pneumatophores that stick out of the mud to help them take in air; others use prop roots or buttresses to keep their trunks upright in the soft sediments at tide's edge."
2. "Bangladesh has not lost sight of that logic, putting a great premium on the ability of mangroves to stabilize shores and trap sediments. A low-lying country with a long, vulnerable coastline, Bangladesh is also land starved, with a crushing population density of 2,500 persons per square mile (2.6 square kilometers). By planting mangroves on delta sediments washed down from the Himalaya, it has gained over 300,000 acres (120,000 hectares) of new land on the Bay of Bengal."
3. For more than 25 years Jin Eong Ong, a retired professor of marine and coastal studies in Penang, Malaysia, has been exploring a less obvious mangrove contribution: What role might these forests play in climate change? Ong and his colleagues have been studying the carbon budget of mangroves—the balance sheet that compares all the carbon inputs and outputs of the mangrove ecosystem—and they've found that these forests are highly effective carbon sinks. They absorb carbon dioxide, taking carbon out of circulation and reducing the amount of greenhouse gas.

By measuring photosynthesis, sap flow, and other processes in the leaves of the forest canopy, Ong and his team can tell how much carbon is assimilated into mangrove leaves, how much is stored in living trees, and how much eventually makes its way into nearby waterways. The measurements suggest that mangroves may have the highest net productivity of carbon of any natural ecosystem (about a hundred pounds per acre [45 kilograms per 0.4 hectares] per day) and that as much as a third of this may be exported in the form of organic compounds to mudflats. Mangroves, it seems, are carbon factories, and their demolition robs the marine environment of a vital element.

Ong's team has also shown that a significant portion of the carbon ends up in forest sediments, remaining sequestered there for thousands of years. Conversion of a mangrove forest to a shrimp pond changes a carbon sink into a carbon source, liberating the accumulated carbon back into the atmosphere—but 50 times faster than it was sequestered.

If mangroves were to become recognized as carbon-storage assets, that could radically alter the way these forests are valued, says Ong. If carbon trading becomes a reality—that is, if forest-rich, carbon-absorbing countries are able to sell so-called emissions credits to more industrialized, carbon-emitting countries—it could, at the least, provide a stay of execution for mangroves.

But Ong notes that the financial incentives have to be great enough to make forest preservation economically viable. "Take Indonesia, which has the largest total area of mangroves of any country in the world. It can't afford to save them for nothing," he says. "But if the Indonesians could trade the carbon-storage potential of their mangroves as a commodity, that would create a great incentive to stop bulldozing them for shrimp ponds or chipping them for the production of rayon."

4. Eritrea was reeling from war and famine when Sato first traveled there in the mid-1980s. Since water is such a scarce resource in this arid country, Sato wondered if he could develop some form of salt water–based agriculture on Eritrea's long coastline, to help provide food for the hungry. Mangroves seemed a logical, if unconventional, choice. They occurred naturally, though patchily, along the Red Sea shore, they flourished in salt water, and camels were known to eat the leaves. If camels ate them, why not feed the foliage to sheep and goats? Grow enough mangroves, Sato reasoned, and you could provide food security for thousands.

So, like a maritime Johnny Appleseed, he began planting—and failed. All the saplings died. Undaunted, Sato looked closely at places on the Eritrean coast where mangroves were growing naturally, and he noticed they occurred only where fresh water was channeled during the brief rains that fall on this desert coast. Sato reasoned it was not fresh water the trees needed but minerals the water was bringing from inland—specifically nitrogen, phosphorus, and iron, elements in which seawater is deficient.

By conducting a few simple trials, Sato and a small team of helpers from the Eritrean Ministry of Fisheries assessed how much of the three elements mangrove seedlings needed and devised a low-tech method of supplying them. When the propagules are planted, a small piece of iron is buried alongside. So, too, is a small plastic bag with holes punched in it containing a fertilizer rich in nitrogen and phosphorus.

Now, six years on, 700,000 mangroves are growing on the formerly treeless shore of Hirgigo. Sato calls the project Manzanar, after the World War II internment camp in the California desert where, during his teens, he and his family were relocated, along with thousands of other Japanese Americans. It was the memory of older internees there coaxing crops from the arid soil that inspired him all these years later.

At Sato's Manzanar many of the mangrove trees are now well above head height, and the yellow-green coats of ripe propagules are beginning to split open, showing the plump green leaves within. The mangrove mud is sprouting pneumatophores, as if someone had sown a crop of pencils. Barnacles and oysters have started to settle on them, and crab and winkle trails crisscross the sediment. Plant a few trees, and you usher in an ecosystem. Build nature a house, and she makes it her home.

Since planting began, Hirgigo's fishermen have started to catch small species such as mullet. Ibrahim put the equation simply: "No mangroves, no mullet." And the little fish that make the mangroves their home attract bigger, predatory fish—the kind that snag in Ibrahim's net and sell for good prices in the Massawa market.

Does capitalism cause morals?

This paper by Marion Fourcade, "Moral Views of Market Society" was interesting:
1. Does capitalism cause us to be more virtuous, cooperative, trusting, creative/innovative and free?
2. Does capitalism cause us to be envious, engage in conspicuous consumption, create inequality, corrupt the virtues of some goods such as organs, commoditize goods to a lowest common denominator, and create all kinds of legal obstacles such as copyrights and patents?

This paper also gives a third and fourth view of the market:
3. The realist view where the market/capitalism is only an enabler (the "feeble" view) or part of "governance" and "institutions". There are "good" and "bad" institutions that interact with the "culture" or alternatively, institutions cannot be transplanted and each economy has to find success/economic growth in an institution that is unique to itself, i.e. there are different types of successful capitalism. Or alternativey, one set of institutions can work every where (the voluntarist view).
4. Markets and morals cannot be separated. Institutions and hence markets are created in part with moral judgements - moralized markets. Markets need to governed by morals either by successful recasting of the exchange process or by a change in the views held by the participants.

I may have summarized this incorrectly but this is my reading of it.

French children books

Are very different than American ones:
1. Les Larmes De Sniff
2. Kamillo Kromo
3. Sur l'île des Zertes
4. Ma Vallee
5. Parci et Parla

Some books K1 and K2 have been reading.

Contributing to non-profit groups

We were approached by Progressive Maryland Education Fund for a contribution the other day. I was thinking that it would be nice if there were a database for non profits such as these so that it can help me decided whether to give -- similar to the BBB's database on charities. On an related note, PMEF supports living wage and campaign finance reform but I wonder how much they and others like them such as PIRG, MaryPIRG and other so-called non-profit groups are paying their canvassers to go door to door soliciting funds. I should have asked. Next time I will and I'd suggest that these organizations start registering with the BBB with their financial information.

More telco competition

Given our VZ woes, I wondered why even with competition between cable and telephone service is so bad and perhaps the answer lies in the fact that there isn't enough competition. Local goverments seem to allow cable and telephone to operate using a franchise method that effectively gives the companies a local monopoly over its customers. Laying cables and as well as building up infrastructre for network communications is a capital intensive project which can be risky for public companies with an eye toward the next quarterly earnings. The bust in the telecom bubble where companies which did nothing but build infrastructure using the "field of dreams" model (if we build it they will come) and went bankrupt in the process has no doubt made companies even more averse to building up capacity in infrastructure.

Here is a proposal which may sound radical:
1. Have local, state and federal governments build the infrastrcture the costs shared by some formula financed by floating bonds to the market. The bonds should be able to receive investment grade rating based on the taxing capacity of the government.
2. Because government projects have a reputation for not being delivered on time, plan on rolling out fully functioning network infrastructures at a small and local level (e.g. county or town level) at fixed intervals, say every 5 years. This network is then auctioned off to pay down the debt on the bonds. The buyer of the networks is granted a fixed time to sell the services of the network (DSL, phone, TV) to the public -- again like a local monopoly.
3. Keep rolling out and auctioning off the network and paying down the debt. A parallel bond offering can also be made say, 10 years later to build another parallel network using the same model. This allows the newer network to use the latest technologies as well as build in redundancy in the networks as well as allows more competition over time.
4. Legacy networks can be scrapped or rebuilt and since this system is more or less self financing (assuming the proceeds from the auction can pay down the debt).
5. Companies that are willing to invest in new technologies to accompany a new network can be given preference in the auction (although this will result in some perverse incentives I'm sure).

This model is a little bit like building new roads and then selling the rights to collect tolls (for a limited time). The money collected from selling the rights can be used to build new roads.

Some problems:
1. Who maintains the network after it is sold?
2. There will be an incentive for the successful buyer of the network to charge a lot up front in the beginning because down the road a newer network will eventually challenge its dominance. This might be ameliorated by the current existing infrastructure but is not guaranteed.

Verizon woes

Last week we lost phone service and hence our Internet connection via Verizon DSL. It took them a week to fix it and no one even had to show up. It seemed like all they had to do was flip a switch.
I first called to let Verizon know that we did not have DSL. There was an automated system on the phone that tested the line and said it was okay.
I then called them to say that our phones were out and again, an automated system tested the line and said it was okay. I then asked to speak to an agent who tested the line and said it was okay. But she had me unplug all the phone jacks and plugged them back in to verify that there was no dial tone. Next she asked me go outside the house and plug the phone into the NID unit to call back once I had verified that there was no dial tone. I called back and received the automated system again which now noted that there was a problem log and asked me if I wanted to send out a technician. I responded yes at which the line was tested again and NOW there was a problem.
1. What were the first 2 tests about?
2. Why did it take 1 week to get service restored? I decided to give VZ the benefit of the doubt since there had been several tornadoes in the metro DC area and they might have been a little overwhelmed. Still, some explanation would have been nice.

I called Verizon again several times:
1. To see if I could get credit on our phone bill. I was told it would be prorated to the the number of days there was no service. True enough when I received the bill, it was not prorated.
2. I called DSL to see if I could get alternative service but all they could offer me was:
a. Dial-up (haha - the phone's out dudes)
b. Try to tap into a neighbor's network (excuse me, but isn't Congress about to pass a bill to make this a crime?)
3. I asked for a wireless data laptop card that could be issued for the duration of the outage but they declined to offer me one.

All in all a very unstatisfactory experience with Verizon. We would like to switch to cable but unfortunately, when Comcast came out last year they realized that there was no "cable tap" that they could use to run a line into the house. (Any recourse for me here? Should I complain to Montgomery County or Comcast?) Given my negative experience you'd think I'd know better but what about FIOS? Well, it turns out our next door neighbor as well as our neighbor behind us has FIOS available but not us. What gives? Satellite Internet? I was advised against it due to latency issues so it looks like we're stuck with VZ. Uggh!

Monday, May 12, 2008

Do what you love, the money will follow?

An actual documented case from the National Geographic Arctic Dreams and Nightmares : In the dark of winter, two veteran adventurers slog toward the North Pole while a third battles for his life off the coast of Siberia.
This kind of hell, of course, was exactly what they were looking for. These guys are professionals. They have sponsors—outdoor gear manufacturers, construction outfits, an adventure travel agency, a watch company—and their livelihoods involve doing extreme adventures. They didn't set out for things to fall that way; they were just doing what they loved. But after discovering they could earn a living—writing books, taking pictures, making films, and especially motivational speaking—by following their hearts, what was not to like?

Each had been adventuring since boyhood, practicing at taking incrementally higher and higher calculated risks, and at some point they left their comfort zones and never went back. For them, going to extremes that may seem insane was actually a logical progression.

You don't go to the North Pole in the dark as a first adventure, for instance; you start, as Børge did, growing up skiing and roaming the mountains of Norway. You start your life, get some kind of job. He worked as a diver for an oil company. Wore a copper helmet and big lead shoes and lead weights on his back and chest. Graduated to the depths of the North Sea, sometimes working for weeks at the bottom in a pressure chamber, inspecting oil rigs and working on pipelines. In between, he spent a couple of years in the Norwegian Navy, as a diver with the special forces. He loved training. His first expedition was a trek across Greenland with a couple of diver friends 20 years ago, before GPS and satellite phones. They relied on sextants, cotton, wool, and other equipment similar to that used by Fridtjof Nansen and Roald Amundsen, the great Norwegian polar explorers of yesteryear and Børge's countrymen, in whose large footsteps he follows. That's when he got the bug. On this trip, he was wearing boots that were replicas of the ones Amundsen wore on his 1911 trek to the South Pole.

In Mike Horn's case, the pivotal point in his life, he says, came when he impulsively left his hometown of Johannesburg, South Africa, and moved to Europe. A gifted athlete, who ran track and triathlons and played competitive rugby, he dreamed of competing internationally, maybe the Olympics. But South Africa, shunned by the world community at that time because of apartheid, was not allowed. At 18, he was drafted by the South African Army to fight a communist insurgency in Angola as a commando. Afterward, he went to college, then worked in his uncle's fruit and vegetable business. But the monotony got to him, and he longed to see the world. So he decided to give his stuff away and get on the next plane to the first country that would have him—Switzerland—where he took a job washing dishes in an old hotel. He learned to ski (he'd never seen snow before that) and became a ski instructor, then rafting guide, and paraglider (venturing to Peru and crashing near Machu Picchu). After swimming the Amazon for five months with a kickboard, he became an adventurer full-time.

Thomas Ulrich, whose expedition we'll get to later, grew up in the mountains around Interlaken, Switzerland, hiking, camping, alpine skiing, and racing. He was rock climbing and paragliding (at one point, he worked as a test pilot for a manufacturer) before the world at large knew much about paragliding. People would ask, why are you doing that? Or say to his parents, hey, you might want to check out your kid here. He seemed extreme. He worked some as a carpenter but felt bored and restless. He would take pictures during his mountain adventures, and one day he sent one to a magazine and the editors published it. That's when he first realized that he might be able to make money doing what he loved. He took an international mountain guide course and started a paragliding school while continuing to build an adventure photography business. When he was about 18, he took his first of many trips to Patagonia, to climb an 11,000-foot (3,350 meters) tooth of rock called Mount Fitz Roy, and that was the trip—the preparation, especially, the new culture, living in a tent—that propelled him into the world of extreme exploring.

The idea that these men have a death wish seems to amuse them. It isn't a desire to be closer to death that attracts them, they will tell you—it's a desire to be closer to life. They've been to the mountaintop. They know that willpower can be built, that ordinary people, like themselves, have abilities beyond their reckonings. They're just the ones who are out there, scouting the wilderness on behalf of the rest of us. Not marking dots on a geographical map anymore—that was accomplished long ago. What they're exploring now is the inner map, the mental and emotional map. What will they learn, about themselves, from being in a position where nothing matters except to stay alive? What, exactly, is the human being capable of? This is what drives them.

Wednesday, May 7, 2008

It's the underwriting

This headline "UBS Faults Blind Ambition for Subprime Miscues" reminded me of the Bank of America crisis in the 1980s.
"The Swiss banking giant UBS, which has written off more debt from the subprime crisis than any other bank, conceded in a report on Monday that a blind drive for revenue led it to take more risks than it should have."

BA wanting to challenge Citibank for supremacy in investment banking, entered late into the Latin American market. In their haste to become the country's biggest bank, management lowered underwriting standards to get the asset and revenue gains that they wanted. By the time they entered Latin America all the best risks had been taken up by Citibank and they were left with the more risky loans. [Not unlike the observation that it is the more recent vintages of subprime securities that have the highest default rates. See the summary at Econbrowser]

In the post, Jim Hamilton asks:
1. ... why did underwriting standards deteriorate?
2. ... why did the "most sophisticated" investors apparently become less and less sophisticated as time went on?

The answer to the first question lies in the incentives of bankers - are they being rewarded by the size of the loans they make, the number of deals they put together or the the size of the securities being floated?
The second question perhaps isn't really a question - here's Robert Rubin in his book "In An Uncertain World":
"In an analytic sense, they thought the market was overvalued but stayed invested anyway, perhaps on the "greater fool" theory that they could profit from an irrational rise and then sell their positions before it as too late. (p. 326) "

And perhaps even the GSEs lowered their underwriting standards:
"WSJ reports:
Some of the problems are surfacing in a mortgage program called "Fast and Easy," in which borrowers were asked to provide little or no documentation of their finances, according to [people with knowledge of a Federal probe] and to former Countrywide employees....

But here's the part that really scared me:
Both Countrywide and Fannie Mae, the government-sponsored company that bought many of the loans, classify the loans as "prime," meaning low-risk.... A Fannie spokesman agreed that the verification of employment wasn't required on all loans, but added that Countrywide was expected to verify employment details on a "sampling" of loans. The Countrywide spokesman said his company fulfilled that obligation.
It's news to me that Fannie was buying no-doc loans and calling them prime.

And finally, Willem Buiter:
Risk taking, remuneration and leverage
"Mervyn King, Governor of the Bank of England, is correct in linking the reckless lending by banks and other financial institutions that, together with the matching reckless borrowing, lay at the roots of the current financial crisis, to remuneration structures that rewarded extreme risk taking on poorly designed financial products. The diagnosis is fine. What to do about it is less obvious. These remuneration packages did not fall to earth from the moon. They are the result of a distorted economic environment. The key distortions, unfortunately, cannot be remedied, because they have highly desirable consequences as well as the dysfunctional ones highlighted by the crisis."

After all by the time the bankers have structured the deals and repackaged the securities, it is likely that they'll have moved on to something else. ("IBGYBG" - On Wall Street, a new phrase was invented only a few years ago: IBGYBG. I’ll be gone, you’ll be gone, so let’s do the deal and let the suckers pay for it. )

Nero and I marketed together a fair bit. I provided the technical bits. He smoozed the clients. Nero and I were making a pitch for a new structured product with a portfolio manager from an overseas fund over dinner. Dinner was a 3 martini, 2 bottles of French red wine and cigar and brandy affair. I kept looking for a moment to interject and explain the structure and benefits of the trade. I didn’t get a chance.
Towards the end of the evening, the fund manager turned to Nero and said: “The girls are coming up to my room, right?” I looked at Nero surprised. “You didn’t forget the stuff, it drives the girls wild?” Nero muttered something and carefully steered the conversation in a different direction. After dinner, Nero and I left the hotel. Nero stopped and drew his hand in a cutting motion across his throat. “Remember IBGYBG,” he said. “I be gone, you be gone. Got it kid.” A week later the portfolio manager was on the phone. “Been thinking about your deal. Like it a lot. Send me a term sheet. I think we can do something there.” We closed a juicy trade for $200 million booking profits of over $2 million.

From: Interview with Satyajit Das author of Traders Guns & Money

Tuesday, May 6, 2008

Now for some effects of the increase in gasoline prices

Jim Hamilton shows the effects of the gasoline price increases:
1. Number of miles traveled by vehicles on US roads are down.
2. US gasoline consumption is down 1% from the first 4 months of 2007.
3. Sales of domestic light trucks (includes SUV) is down 20% in April (compared to April 2007)

However, even though I was wrong that the gas price increases have had no effect on consumer behavior, I think it emphasizes the point that an increase of more than 10cents per year for 10 years on gasoline is required to change behavior as was originally proposed here. There is an income elasticity of demand for gasoline that needs to be factored in so that the effect of increases in income do not cancel out the effects of price increases.

Update: Gas Prices Send Surge of Riders to Mass Transit
Gas prices knock bicycle sales, repairs into higher gear
NPR: Paying at the Pump. Among the stories nested there:
1. Public Transit Ridership in Miami Grows
2. L.A. Drivers Ditch Cars for Subway
3. More Commuters Opting for Mass Transit in Boston
4. Big Gas Prices Lure Buyers to Small Cars

Monday, May 5, 2008


These two stories sound contradictory:
1. "Some of Toyota's U.S. plants are now more than 20 years old, and a growing number of its workers are paid the top wage of about $25 an hour. That's less than Detroit's veteran union hands make now, but a contract inked last fall will enable U.S. automakers to replace many highly paid employees with cheaper workers. By 2011, Toyota's cost advantage over Detroit could disappear."
Source: What Could Dull Toyota's Edge, Business Week (Thanks to MR).
2. "But there’s an enigma to the Toyota Production System: although the system has been widely copied, Toyota has kept its edge over its competitors. ... Toyota implements a million new ideas a year, and most of them come from ordinary workers. (Japanese companies get a hundred times as many suggestions from their workers as U.S. companies do.) Most of these ideas are small—making parts on a shelf easier to reach, say—and not all of them work. But cumulatively, every day, Toyota knows a little more, and does things a little better, than it did the day before."
Source: The Open Secret of Success by James Surowiecki in the New Yorker.

Friday, May 2, 2008

I am wrong again on the effects of gas prices

The NYT "As Gas Costs Soar, Buyers Flock to Small Cars" shows once again I was wrong to assume that the increase in the price of gas has not changed behavior. How much has it changed our behavior? The graphic accompanying the article shows some pretty large percentages: 54% for the Honda Fit, 46% for the Toyota Yaris and 32% for the Ford Focus. It would be more helpful if they showed total number of car registrations as well. The hefty increases could well be because these cars started with a small base.

Anecdotally, I also saw 2 Smart cars on the road today. So, should we expect the price of small cars to rise in the near future because of increased demand?

Thursday, May 1, 2008

Borders books for sale?

I wasn't sure what to feel when I saw this in the NYT Dealbook. I agree with grumpyoldlady who said that Borders has gone downhill since they went national. Of course, I haven't been in the Ann Arbor store but when it wasn't quite as ubiquitous I thought it was a good bookstore. These days the shelves seem bare, there are more trinkets and toys and candy than a books (just a slight exaggeration) and the selection isn't as good. Most of the time I use it for browsing and if I like it I may buy it on Amazon. Other times I use Borders coupons which works out better than Amazon discounts.

What other "independent" bookstores are there left? I have been to some of these (except for Strand and Powells and that was almost 15 years ago):
1. Cody's
2. Moe's
3. Strand
4. Powells
5. Elliot Bay Books
6. Politics & Prose
7. Olssons

Can they compete with the discounts offered by Borders, B&N and Amazon? I don't know the answer to that one except to note that when I used to work at a bookstore the cost of books to the bookseller is usually 60% of the cover price. Sometimes the discounts are deeper but that depends on the amount ordered. A really well run store can work with a 40% margin but if they start discounting all the books as Amazon does (well perhaps not all books, but most) then the margins become really slim and the costs for a bricks and mortar can really cut into the profits.

I suppose that's why most bookstores sell coffee. You can sit and read a book for free and end up spending more on coffee than if you bought the book and took it home to read.

Mixing new book sales with used book sales. I don't really know much about this except that used book seem really hard to handle in terms of having to separate the inventory. The used book store that I sometimes go to Second Story Books doesn't have a way to look up books (except for its more expensive and rare books) so I end up browsing which I've forgotten how much fun it can be. It's all about time these days.

In the end its time/convenience and price for me. It also seemed to me that once they decided to go public they were doomed to fail. Later on they expanded by buying up Waldenbooks (probably just to satisfy some kind of earnings growth estimate) and it felt like they were just getting desparate.

What else is in our bodies? Or is this more unintended consequences?

In the wake of bisphenol (bpA) fear, I came across this National Geographic article "The Pollution Within". Writer David Ewing Duncan had himself tested at a price of $15,000 (paid for by NGS) for 320 chemicals and what he found surprised him.
My journalist-as-guinea-pig experiment is taking a disturbing turn. A Swedish chemist is on the phone, talking about flame retardants, chemicals added for safety to just about any product that can burn. Found in mattresses, carpets, the plastic casing of televisions, electronic circuit boards, and automobiles, flame retardants save hundreds of lives a year in the United States alone. These, however, are where they should not be: inside my body.
Where did this chemical (PBDE) could have come from? The writer thinks from airlines since he spends a lot of time flying and flame retardants are everywhere in planes for safety reasons.
I don't eat much fish, and the levels of mercury in my blood were modest. But I wondered what would happen if I gorged on large fish for a meal or two. So one afternoon I bought some halibut and swordfish at a fish market in the old Ferry Building on San Francisco Bay. Both were caught in the ocean just outside the Golden Gate, where they might have picked up mercury from the old mines. That night I ate the halibut with basil and a dash of soy sauce; I downed the swordfish for breakfast with eggs (cooked in my nonstick pan). Twenty-four hours later I had my blood drawn and retested. My level of mercury had more than doubled, from 5 micrograms per liter to a higher-than-recommended 12. ...

And that faint lavender scent as I shampoo my hair? Credit it to phthalates, molecules that dissolve fragrances, thicken lotions, and add flexibility to PVC, vinyl, and some intravenous tubes in hospitals. The dashboards of most cars are loaded with phthalates, and so is some plastic food wrap. Heat and wear can release phthalate molecules, and humans swallow them or absorb them through the skin. ...

As unsettling as my journey down chemical lane was, it left out thousands of compounds, among them pesticides, plastics, solvents, and a rocket-fuel ingredient called perchlorate that is polluting groundwater in many regions of the country. Nor was I tested for chemical cocktails—mixtures of chemicals that may do little harm on their own but act together to damage human cells. Mixed together, pesticides, PCBs, phthalates, and others "might have additive effects, or they might be antagonistic," says James Pirkle of the CDC, "or they may do nothing. We don't know."