Friday, November 28, 2008

Turning Crimson

So apparently Harvard's going to take a hit in the economic crisis.  Having put international exposure into my 401k (and watched it get killed) I suppose it is reassuring to know that the best and the brightest got hit the same way.

But wait -- first, these guys had a 23% ROI for 2007.  A 30% hit isn't much fun, but it's only rolling the clock back about 18 months.

But wait -- why are we even asking these questions?  If you are into emerging markets, your time horizon should be really long and your tolerance for volatility should be really high.  I've got this stuff in my 401k - it's about 33 years too soon to be asking the question "how'd we do"? Harvard's been doing this for a long time, and probably isn't looking to liquidate the endowment and cash out any time soon.

If there's a point to this rant it is only this: we (investors) seem to have become obsessed with whether stocks have gone up or down over short term periods (one year, five years, or worse, even months and days).  Have we all forgotten what a stock is?  A stock is a claim on future cash flow from now to the end of all time.  Stocks exhibit enormous volatility and reasonably good long term returns.  If we care about how the market moves, we may not be in the market for the right reasons.

Thursday, November 27, 2008

Economics Isn't Science

So first, this clip is just fun to watch.  I have said before that perhaps the best indicator for how to invest is to do the opposite of whatever the talking heads on CNBC are saying to do.

(And I do have to call out the left wing media where it is full of crap -- the idiotic boosterism being put out on these shows is not particularly "right wing" and this is not a right-wing media issue or a Fox News issue...this is a Wall Street industry issue.  Heck, I've heard both Democrats and Republicans try to blame each other for the current financial mess - I don't buy a word of it. For a blow up of this magnitude, everyone has to screw up at once.)

But while Peter Schiff did seem to call the crash correctly, I don't think that his proposed solution is a very good idea (even though he is right about borrowing money to live beyond our means). His idea is to cut government spending, and the fact that he thinks that this is a good idea reveals a major ideological divide within economics between the Keynesians and the Friedmanites.  (These schools of thought do often correspond with left wing and right wing from a political perspective, Schiff's economics are conservative, or more accurately perhaps libertarian.)

The Keynesians would point out that as everyone braces for a recession, demand is going to fall, and demand falling will cause supply to fall, causing a feedback loop.  I know I might get laid off, so I stop buying corn the guy who works at General Mills gets laid off and stops buying X-Plane and now I am laid off - because I prepared for that event - a self fulfilling prophecy.  The Keynesians say that in this circumstance it is important for governments to spend money to help break the feedback loop.

The Friedmanites would argue that efficient economic activity cannot resume until prices have normalized - in order for us to have real growth, we can't have incorrectly priced (too expensive) houses, etc.  Therefore the best thing the government can do is get the hell out of the way, let prices fall until they make some sense, and only then can we get back to having a productive economy -- until that point, investment will be going in the wrong places and be wasted investment, hurting our long term future growth.

The problem is that the Keynesians and Friedmanites, while both probably at least partially correct, have completely opposite prescriptions about what to do.  You can't really do both. And we can't do an experiment where we try both separately to see which advice works better. This is why no one can agree on which theory might be correct (or at least more correct): we can't do the experiment to disprove the theory.*

How do we reconcile these?  Benoit Mandelbrot points out that market pricing isn't the stable equilibrium we think it is - free market prices simply go completely nuts sometimes.  Behavior Economists are starting to explore why this might happen, but one thing is clear: prices sort themselves out eventually, but in the interim they can show periods of extreme weirdness.

So I would say that in looking at housing prices, government policy has to consider both sides of the economic coin:
  • Housing prices may become very wrong for periods of time.  We saw our houses become very highly overvalued.  I believe they will swing the opposite way and become highly undervalued.  Buyers have a lot of (partly irrational) fear of buying before we "hit bottom"; this means that the bottom of housing prices will be lower than their natural support level and will then bounce back up, as buyers refuse to buy until they see the bottom.
  • On the other hand, houses do need to eventually hit a sane level - there is no other way to have a functioning economy.  No policy that preserves housing prices as they were can make any sense.  (We don't need any more houses - any policy that artificially raises the price of houses and causes more to be built is wasting investment and hurting future useful economic growth that should be happening in other areas.)
I don't think there can be a really good solution to the housing problem, because the only real solution would be to go back in time and stop people from making a number of poor decisions based on incorrect pricing and incorrect assumptions.  But the money has been spent, the houses have been built, and we're stuck where we are.  So all we can do is be pragmatic and try to make the situation as not-bad as possible with very limited tools and a lot of constraints.

* Being a congenital left-winger I am more sympathetic to Keynesian than Friedmanite particular my complaint is this: because in Friedmanite thinking a central bank fundamentally screws up economic equilibrium, Friedmanites will be able to blame the Federal Reserve for all ills, even if Friedmanite policy is enacted, thus their theory can never be proven wrong by actually trying it.  That is, unless we get rid of the Federal Reserve.

Wednesday, November 26, 2008


I've posted a lot about the roads, because they're one of the first things a Westerner notices in India. (India's driving surpasses China's -- the Chinese stop at red lights.) Before I can really describe some of the other things that happened to us, I need to describe India's pricing system and haggling.

Basically in India, every price is negotiated - imagine that everything is priced like cars in the US. Some goods have an MSRP, which would be the price you should never pay because it's way too high, but most goods are entirely unlabeled (the store has no indication of potential price). The only things that we did not haggle for were restaurant bills and plane tickets. (We even ended up in an argument about what to pay for a metered cab, but that's another story.)

To further complicate things, the merchant can make a pretty good guess about how much money you might based on how you look. Being white, Lori and I scream money to an Indian merchant - whether we're from the US or Western Europe makes no real difference. But our friends in India (who are Indian, but look like they are upper class, with white collar jobs) have the same issue: they go into the negotiation with a handicap. The implications of what it means to have money in India (whether you live there or as a tourist) are complicated enough that I'll devote a separate blog post to them.

Our friend Tanmay has a good rule of thumb: whatever price they offer you, counter with about 1/4 of what they are asking. We had trouble pushing that low, but we were usually able to ask for about 1/3. What we actually paid varied by the situation, was virtually always too high compared to local prices, but was usually a good deal compared to US prices.

A lot of the time I enjoyed haggling, but I think this is because I could haggle while it was novel, then go home to the US and price shop online...having to haggle every day would wear me out, and there were definitely times when we thought "oy, we have to haggle now."

There are some cases of fixed price shopping, but they are invariably expensive by local standards. In some cases it's worth saving the hassle. For example, at a lot of tourist sites, people will offer to be a guide. How much do you pay for this? With strong negotiation you might get a very good price. At some sites the guide rate is posted -- the rate is invariably higher than you would pay if you were a local who could haggle, but it is usually lower than you would pay if you are a foreign tourist who isn't used to pushing on prices all the time.

(For example, the guide rate at many Rajasthani monuments is 100 rp, which is about $2. Guides making $2 for a 30-60 minute tour are doing very well for themselves by Indian standards, but if you're an American you're going to have a lot of trouble getting much below 100 rp, and even if you did, is it worth having an extended haggling session before each monument to save 50 cents?)

I realized a few things about shopping while in India:
  • I really don't know what most things should cost...I am used to getting my pricing information from the context of the store dong the selling.
  • To shop for negotiated items, you really need to be an expert at what you're buying...there are only a few items that I could really haggle for if I wanted to. Our friend Pooja told us that if you want to make a large purchase in India, you need to rely on a web of trust - that is, friends who know more about the material, and merchants with whom you have some relationship.
My favorite haggling moment was when I managed to get under the skin of the manager of a tourist gift shop at a hotel part-way to Jaipur.  Our driver was having lunch and Lori was browsing the gift shop, trying to haggle down the price of a small purse.  I got into an extended discussion about pricing of flash memory for cameras with the manager, and then sprung my proposal: to trade a card that I had (incorrect for my camera) for another, less valuable card. He would owe me about 300-400 rp, but I was willing to make the trade for only 100.

The manager had no desire to take my second-hand flash card (even though it was in plastic), but I kept working on him, pointing out what a great deal it was, until finally I got under his skin enough that he yelled "No Buying!  Only Selling!"  Having been driven nuts by people trying to sell us tourist crap we didn't want for the previous four days, it was a small victory.

Eventually my rantings about the economy and state of finance and my India posts will end up merging, but that can wait a few more days. There's still a lot more to write about! (I did get the camera off-loaded today, so I will try to post some pics soon...we took 764 pics and movies...)

Monday, November 24, 2008

7.4 Trillion Is Not That Much

In a past post I suggested that $700 billion is not that big of a number when compared to the usual cost of bail-outs relative to GDP.

People are now suggesting that we're at $7 trillion +.  That's a big number, but I think it's a "nominal" number, like when people talk about $47 trillion of derivatives.*  Bloomberg has this nice interactive chart showing who has committed what.

Now 7 trillion is a big number, but a lot of that money isn't going to actually get spent.  For example, 4.4 trillion comes from the Federal Reserve, which is guaranteeing low-risk things like commercial paper and money market funds that aren't really at risk in the first place.  To understand how much of this money we might really lose, we need to look at:
  • Panic money: investors are so freaked out that they don't even think the sky is blue is earmarked in the unlikely event that the sky is green and investors calm down.  Since the sky is in fact not green, I don't think we have to worry about this money going anywhere.
  • Screw-up money: companies made really bad investments, and Uncle Sam is guaranteeing them to prop the institution up.  This is where we could really get in trouble, but no one really knows by how much.  Most of this spending is under Treasury, bailing out CitiGroup, AIG, Fanny Mae, etc.
Even if we ignore the panic money and only look at screw-up money, it's still a lot.  As a final thought on this: we have an immovable object (massive spending) pushing the dollar down and an irresistible force (fear) pushing the dollar up (via a flight-to-safety).  I suspect that when the dust settles, we'll lose our fear but still owe a few trillion in bail-outs, and that's going to make for a rough time for the dollar.

Tuesday, November 18, 2008

The "Lonely Planet" Problem

Lori and I are in Goa now - Palolem, to be more precise, and we are again seeing the "Lonely Planet" problem. (It's really not a problem for us here, but the principle still holds.) The Lonely Planet problem is this: when the clever folks at Lonely Planet find some wonderful undiscovered nook in India and write about it, approximately a gajillion tourists all go there and discover that the nook is now no longer undiscovered. Doh!

We first hit this in Jaisalmer with camel safaris. The Sam sand dune became overrun with tourists, so people started going off the beaten path to Khurie. Now Khurie is crowded too - we didn't find that out until we were in Jaisalmer - it's hard to plan everything by remote, but we were able to set up a safari using Ganesh Travels. (They're in Lonely Planet too...)

Palolem is one of the southernmost beach villages in Goa - it's a beautiful beach, maybe 1/4 to 1/2 mile long, with two roads nearby filled with a combination of shops and restaurants and some hotels. Near the beach are thatched huts, which provide the lowest comfort (but probably also lowest environmental footprint) lodging. The lonely planet issue is: Palolem used to be an escape from tourists, but now it is just another tourist beach village.

That's okay with me though; seeing seven cities in ten days was exhausting, and the pace in Goa is a lot slower - it's not crowded like Rajasthan, Mumbai or Delhi. After all the traveling, a few days on the beach is just about right.

Tuesday, November 11, 2008

Why Did the Cow Cross the Road?

Well, the answer is: it didn't; cows actually have excellent lane discipline -- they tend to go where they are going and not change directions too much. (Goats are much lses predictable.) And it's a good thing, because cities in Rajasthan are pretty much filled with livestock.

If the first thing an American notices in India is the driving, the second thing is the presence of animals everywhere. Cows are simply left to roam free range - both wtihin the city limits and outside; while driving between cities we had to stop several times to let a shephard and his goats cross. There is something very surreal about the whole experience.

The Rajasthani forts are very impressive - they are like the Grand Canyon, I think, in that they are so big and imposing that even if you've seen a lot of pictures, the real thing is awe inspiring due to shear size and improbable location.

As helpful as the Internet is in planning a trip like this, it is difficult to understand the "situation on the ground" without being here - I will try to write up some travel tips once I get back, so that perhaps others who are trying to use Google to plan a trip can have a slightly better picture of what to expect.

Sunday, November 09, 2008

Greetings From Udaipur

As I sit down to write this, an elephant just walked down the street past this cyber-cafe. Now that is remarkable for two reasons: first, it was an elephant, for crying out loud. We have seen lots of dogs, goats, and mainly cows in the roads, but this is the first elephantwe've seen go by. Second, the streets here are very, very narrow, so getting an elephant (or a car) down one of these streets is no small matter.

We read an article in the paper on the flight from Mumbai to Udaipur where a Russian dignitary described Indian drivers as "very skilled" - and they are - in that they navigate a road network without any kind of lanes, street signs, or anything else to direct traffic. The first reaction any American has coming to an Indian city (Mumbai and Udaipur have both been like this) is that it is truly a crazy driving situation. Driving here makes China look safe and boring and the beltway look like the Queen's tea.

With that in mind, Udaipur is an amazing city - the palaces are all fantastic - I'm not quite sure what to say about them. The city itself looks quite idealic from across the lake in the evening. The streets of the old city are a bit daunting - narrow, crammed with people and shops and cows and motorcycles and an American, it is a constant assault on the senses. Fortunately we started in Mumbai with our friends, which helped a lot. Compared to Mumbai, Udaipur is not so crowded, and our friends live in Mumbai and were able to give us a lot of situational awareness.

As we travel around India, I am constantly reminded of China - while they are very different, they are perhaps more like each other than either is like America. The density and crush of people, the buildings, often packed so close together, often barely standing. I will have to describe Mumbai in a separate post - it is its own beast.

A final note: it is heartening that everyone here knows Obama. :-) It is great to have a president that I do not have to be embarrassed about when traveling.

Wednesday, November 05, 2008

New Chandelier

Lori's parents were in town last week, and as always, did some really wonderful work on the house. Here is our old chandelier, which came with the house. If it looks sort of cheap, that's not because of the picture.

Lori's dad in action!

CC is alwys helpful, particularly when there are heavy things, electricity, and ladders.

The new chandelier:

Monday, November 03, 2008

Warning: Extreme Cuteness Follows

After their morning hyperactivity and bad behavior, CC and Nublet like to snuggle. They both get very sleepy!