War of wits on BP Exxon

Reading this makes me wonder... On one side BP spins the Deepwater blowout disaster as an industry wide issue - it just happened to them.  On the other side, Exxon Mobil spins it as a BP issue and not an industry-wide systemic matter.  Time will tell.  But odds state I believe there is some truth on both sides.  I don't think it was all an industry matter- management oversight was an issue.  But that it cannot happen to Exxon, is a stretch of faith that only the foolhardy can take.

Dynergy - waiting for a better deal?

All the saga that has been going on with Dynegy (with Blackstone and Icahn) leaves me with one curious point.  The deal did not go through with Blackstone is because Dynegy thought they can get a better deal.  Alas, it is yet to come through.  Wonder -  if companies cannot get this correct, what about individuals.  FT has an update

US Corporate Tax

In this article, Martin Feldstein gives few key points of problems with higher US corporate taxes.  Higher taxes causes
- a shift of capital to sectors such as, housing where there are tax benefits
- companies tend to raise capital more with debt than equity
- less foreign capital flowing into US for corporate investments

Even foreign income by US corporates are taxed in a manner that puts US companies at a disadvantage relative to other countries.  Income is taxed at a rate equal to difference of US tax rate and foreign country rate.  End result is - companies prefer not to bring in foreign income into US but use it in the foreign country itself.

This is quite interesting - come to think of it - in India, where I grew up, under the protectionist era - restrictive policies were used on foreign companies to prevent capital from flowing out.  Seems like US tax policy is quite the reverse - or as they in DC - an "unintended consequence"  

Frustrated with Office 2007

Just got a new laptop with Windows 7 and Office 2007. I now believe Microsoft has gone over the tipping point now and heading for doom. Way over-designed, feature over-load, and just a hogger for time that is killing my productivity. I don't need the option of 20,000 fonts or 2000 options as features staring at me. This is a bread and butter software that has to lean and easy to soft through its use. It is like a store offering 60 cereals when I just buy one, at the most two. If you have to go smart with choices, I should have the option of dumming it down to what I am comfortable. How about a feature that makes my Word look like 2003. And for those folks who like the look and feel of anything new ... they are happy too. Hope someone in Redmond is listening.

BP's dividend policy

Another day with the oil spill disaster. BP stated that they might not payout divdend. In response, are we supposed to look down on this company -- something as a really bad sign. Should shareholders view that something seripously has gone wrong. Well not quite... Public perception with dividend provides all kinds of such perception. Never mind. If I were BP, I wont touch the expected divident policy. After all -- dividends transfer value from firm to the shareholder -- so if BP does not payout dividend -- they are just keeping the value rather than paying out -- alternatively, shareholders can sell the shares -- but perception does not follow corporate finance theory all the time. BP should be knowing more than the grandpa down the street -- so go ahead and payout the dividend.

The Big Short by Michael Lewis

Michael Lewis's new book "The big short" is already making some news. I have not read it, but I am tempted to pick up a copy to read it. Stephen Gandel has written in Time with Lewis about how Goldman's CDOs were not as bad in performance as people have made it out to be. There is some further light in this debate from Janet Tavakoli. Interesting read. I don't know enough to make an opinion yet. Will post more once I get to that point.

Obama to increase loan guarantees to $54 billion

... from $18 billion. Here is a report from businessweek. Large reactor based nuclear plants are just too expensive for "sanity" to help build them. I was intrigued by one comment by Mr McKenna of MWR Strategies that demand for electricity in going down. These plants will take 5-6 years to come online. Can MWR predict that far and will demand still be lower... I doubt.

China factor...

China had double digit growth last quarter. With large demand for raw materials - commodity prices have already shooting up. This includes Aluminum, Coking coal, iron ore... Many are saying it is panic buying. China has $2.4 trillion foreign reserves due to currency peg. Earlier this month, China increased the level of reserves banks were required to set aside, curbing their lending ability. Asian stock markets and commodity prices fell on the surprise move, which sellers feared could slow the country’s growth and its buying of raw materials. The shares of UK mining groups also tumbled...

I wonder....not so much as the tightening of banks or whether it is a panic issue. I wonder on how do we know that all this massive infrastructure spending on rails, power grids, highways, are going to pay off. On one side I am biased to view -- there cannot be anything wrong with building infrastructure... but on the other side... I pause for a moment.

Infrastructure is a platform on which other things in life run. It is where people and companies come and go. It can be market place where people enter and exit. It is a ncessary component for a society to function. The better it is the better adavantage we can take of it. But think for a moment -- if there is big gatekeeper who monitors everything that is entering and exiting this platform. There are rules that discrimintate against foreign and domestic -- against freedom and lack of it. What happens? Less use. People shy away. And the platform withers and tatters.

With recent issue with Google and the continuous sketchy treatment of many companies in China I wonder if the infrastructure will be under used or in worst case.... crumble. That's a real possiblity ... I hope doesn't happen.

Too big to fail problem needs to be put to bed

Good point made in the WSJ article. Risk takers should be prepared to go bankrupt if bets don't play. It is important to see how this safety net is taken away.

Banks Bonuses ? for what...

If banks are too big to fail and they were bailed out for common "public" good their compensation should be in lines with those who provide public utility and public service and not there to reap profits by flying over a saftey net. How about using the compensation that utilities pay their employees. Look at what water, electricity, and gas companies are paying... Look at what police officers and fire fighters get....It is high time something gets done to plug this hole a.k.a moral hazard

UK Offshore WInd Farm Announcement

UK announced massive plans to develop offshore wind farms in the same lines as the North sea offshore development for oil and gas in 1970s. Ambitious plans - yes. Are we in a different world compared to 1970s that allowed the development of offshore oil/gas exploration/development - maybe. Are the business drivers to justify such a high expenditure similar? I doubt. Climate change and cost of carbon cannot be the sole driver to justify such massive investments. People would rather question the validity of man made climate change and look out for cheaper options. Back in the 70s oil crisis and looming uncertainty for middle east oil was hanging as a sword. Today, it is a lot murkier to come up with a slam dunk argument to justify such high costs in the name of climate change and global warming and carbon free world. I am hence skeptical. Wait and see what happens. It is an announcement after all.

The New Yorker on Chicago School of Economics

John Cassidy, in his Jan 11 issue of The New Yorker has a detailed account on the Chicago School of Economics and how it has been the brunt of so much criticism for the credit crisis. Chicago school is associated with -- government intervention is bad except in monetary policy…markets should be allowed to work and left alone because they are self-correcting.

In his article, Cassidy takes on some of the iconic professors and drills down to the point where it appears that in many cases ideology blind-sights reality for many of them. Several professors in Chicago cling to the ideology and when current events don’t match – they will shoehorn any reasoning to sustain the Chicago party line. Cling to almost to the point of being ludicrous. Two examples, that clearly jumps out are that of Fama and Cochrane. While in every forum, lectures, and classes I have attended – I never came across the idea that any one claims that markets are efficient. In fact, that is something that could not be proved – and much of Fama’s work over almost four decades have gone back and forth to tear apart this issue to why we cannot prove markets are efficient. By definition, it is called efficient market hypothesis – not a law or theorem.

In a more general note, I believe the article is a good one. And here’s why:

(1) It talks about that some great ideas in the hands of the uninitiated may get stretched so far that with a combination of right communication headwinds may dilute the subtleties and nuances of the original idea. (Example of Heckman, Lucas is quite pertinent). I find an interesting parallel few years back when revisionist historians, (such as Meghnad Desai) believed that beliefs of Marx were lost in translation over the years to the extent Marx himself does not qualify as a Marxist.

(2) Taking an extreme position is easier than working with nuances and arguments. This is in line with what popular press can grab and run with easily. Nuances and subtleties and exceptions and ifs and buts take more space, discussion, and more importantly understanding. End result, extremes – such as, Chicago believes markets are efficient is what emerges. This is a recipe for formation of a cult where reasoning lapses or converges to support a party line. Whether the belief is in momentary beliefs, Chicago school, Keynesian, etc., does not matter. In this regard, I believe there are people on all sides and their mere existence and the noise they create does not and should not determine the actual beauty and essence of a theory.

(3) Visit to Univ. of Chicago today gives the right perspective what a true learning institution should be. (I say this albeit my own bias). As the article suggests, people as diverse as Fama and Thaler play golf together. Rajan and Posner think differently from Lucas and Cochrane. Posner’s co-blogger Becker openly acknowledges that markets are not efficient. But until we have a better alternative – what else do we have. In summary, what comes out are two key points: Chicago thrives in a constant dynamic of strong ideas. Debate and arguments are a constant part of Chicago and that is what is most respected. On a personal note, it was heartwarming for me to have Rajan as the commencement speaker. If Chicago was loomed into old ideology, I’d expect somebody else.

(4) Arguments have limitations. Fama’s argument soup of joint hypothesis problem which sort of says unless you know the fair value one cannot determine whether the price in incorrect and it presupposes market efficiency. Argument and logical structure has limitations and those limitations are in the language. Who knows the logical structure can break down if we discover another language. (Books on logical fallacy have been written)

(5) Becker’s comment is what comes close to what I personally agree as the most balanced. No one claims the market is efficient. But at the same time, that’s the best bet we have. Even recent examples of China and India prove that believing in market principles, incentives, and less of central planning and government run programs is the road to prosperity.

(6) Posner’s comment to retire Chicago school may be the most sensible thing to do. As a vested personal interest, however, I would rather be a associated with a school whose thinking shapes or forces people to think in a way rather than a proponent of so many things that it makes hardly an impact at an institutional level.

In the words of Booth School of Business Dean Ted Snyder, responding to a question at the “Future of Markets” on why there has not been a unified Chicago response for all the bashing the school is getting in the aftermath of credit crisis, he said, there is no one Chicago thought today. I agree this is what the truth is. In many ways, the term Chicago school has become more of an ideal – a philosophy that has pervaded the thought process not only across the department of economics all over the world, but in our own thinking. To try to find Chicago school within the physical boundaries of University of Chicago is almost like trying to find Marx in London.

Snow in DC

... it is panic time!

Another lovely magazine bites the dust.

National Geographic Adventure Magazine is folding up. Why? Obvious answer. Bad economy, poor circulation, people-no-longer-read... It is sad.

Europeon fund for energy, transport, and infrastructure

New European fund for Energy, Transport, and Infrastructure.

Why don't we see more Googles?

Interesting article on why.

Issues with "$700 billion man" does not end Kashkari

Last Sunday, The Washington Post had an article on Kaskari, the $700 billion man. It took a stab at the world of Washington politics and how it can affect someone. Not a week went by, that it came to light that he is joining Pimco, the leading bond investment fund. Revolving door - certainly. But what are the possibilities? If someone's basic livelihood is based on a certain skills and knowledge base - where else can he go and what else can he do. Rather than focussing resentment on this fact, why not ponder how to make the system in Washington more effective by the influence of helpful special interest (if there is such a thing).

ECB's prelude to exit

ECB today announced that signaled that there is an exit in the horizon. Why can't the Fed do the same. The answer is liquidity. Fed has its money locked in assets that are toxic and troubled assets of Bear, AIG, and MBS. When can Fed get rid of those? Don't know.

India buying 200 tons of gold - what I remember from 1991

Earlier this month India bought 200 tons of gold from IMF. Read here. It was in 1991 that after a severe financial crisis, India had to sell gold, devalue the currency, and open up the markets for foreign investors to a larger extent. I was then on the verge of completing high school and the popular press - not to mention the communist party characterized the event as a "India pawning and selling out to western world." Fast forward 18 years, we view India very differently from that. Whether the present had to happen since the force of nature was aligned in India's favor, we don't know. But to a large extent, opening up the economy has helped. I wish the old communists who try to pull back any constructive idea with their half baked theory of Marx and Lenin finally wake up. Turning things around like buying the gold takes time. But it happens. Free markets, competition, and openness of opportunity brings a better life compared to protectionism of the mediocre.

Steven Pinkler on Gladwell...

Steven Pinker's review of Gladwell's work (more specifically his latest book "What the dog saw") is definitely worth reading. His points are right on the money. I am a big admirer of Gladwell's writing and have enjoyed almost every bit of it. However, it has to be taken for what its worth. Which is - an entertaining read. As Pinkler points out, in many cases Gladwell gets the science or statistics plain wrong. One of the areas I was looking for Pinkler to point out was the area of intuition and decision making, as well as, the role of practice in the making of a genius. For the real substance, I believe Herb Simon needs some credit from Gladwell -- for what Gladwell says sounds very much what Herb Simon figured out over years of research of people especially chess players. I have to admit that reading Herb Simon is not close to as entertaining as Gladwell. In fact, I credit Prof Shraeger who during my days in Chicago Booth introduced me to Simon's work and its relevance to decision making. But again, we have to caution ourselves. Just as reading a good science reporter does not mean that the reporter is as knowledgeable as the nobel prize winning scientist -- nor does a popular writer like Gladwell expected to teach us "Igon" value problems. Goes back to an old Einstein adage - make things simple but not simpler. That's why specialists are required. Advanced studies are required. And popular reading is not always the best source for intellectual enrichment. In all fairness, Gladwell's review is well balanced. And Gladwell will be a writer I will seek out -- it is always worth reading the stuff he writes.