April 2007 Archives

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John Adams at Carnegie Hall

Last night was great: Michelle and I went to an ACO celebration of John Adams's 60th birthday at Carnegie Hall, with the composer conducting three of his own works. The second half was a positively blistering and wonderful performance with Leila Josefowicz of the Violin Concerto – that girl can play! Tickets were cheap, for Carnegie: they ranged from $16 to $43, and our seats right in the front row (once a Prommer...) were $35 apiece.

And yet the hall was far, far from being sold out, the presence of a lot of the composer's friends notwithstanding. I don't think this is a problem with Adams, or with contemporary music; I do think it's a problem with Carnegie Hall. I get lots of mail from them telling me what's happening in May 2008, and there are lots of concerts coming up which look great but which don't go on sale for months. (Unless you buy a subscription.) But when individual tickets do go on sale, Carnegie never seems to let me know.

Posted by Felix at 12:59 EST | Comments (1)

On the road

I had a glorious 35th birthday in Chicago on Saturday. The weather was absolutely perfect all weekend: bright and sunny without being too hot – great for architecture tours, bike riding along the lakefront, or just wandering around.

Not that just wandering around is a particularly Chicago thing to do, it would seem. It's not a walking city, really, and it's hard to get lost there – lord knows there are more than enough skyscrapers by which to orient yourself. The streets are big and wide and don't have a lot of street life – I didn't see a single street vendor, or sidewalk cafe. Presumably because of the bitter winters and hot summers, everything seems to happen indoors. And there seemed to be very little in the way of shops or restaurants outside their own designated corridors.

I'm hardly an expert on Chicago, of course – but I did like it enough that I'm definitely going back. I don't think I'll be staying at the W Lakeshore again, though. In fact, I'm not sure I ever want to stay in a self-consciously hip hotel ever again: I haven't liked the other trendy hotels I've stayed in, either. I think that now I'm 35, I'm officially old and boring – Groove Armada and purple lighting in the elevators just doesn't do anything for me.

Right now, I'm in the Hyatt Regency Century Plaza in Beverly Hills, and although I've only just got here, it seems much more my cup of tea. Good in a big, old-fashioned sort of way. Michelle and I had a less-than-fabulous experience at the Park Hyatt restaurant in Chicago, but their Gerhard Richter was fabulous, and in general I think I like the understated-luxury aesthetic.

As of tomorrow morning, I'm attending the Milken Institute Global Conference, and I'm quite excited about it. I'll be blogging it over at marketmovers.org – do come over and say hi!

Posted by Felix at 10:56 EST | Comments (3)

Alice Rawsthorn loves Nick Knight

The NYT is running an article about Nick Knight today, written by Alice Rawsthorn. It's a big sloppy wet kiss of a profile, complete with gushing quotes from Nadja Swarovski, who's not only a major Knight client but who is also the lead advertiser on Knight's website, showstudio.com. Rawsthorn herself can't say enough wonderful things about the site:

In 2000, Knight founded the Web site SHOWstudio as a laboratory where he could experiment with interactive technologies. SHOWstudio has since produced more than 250 projects by Knight and others, placing him at the forefront of developments in 3-D scanning, digital sculpture, interactive film and a raft of other innovations...
Despite the beauty of his still images, SHOWstudio may yet prove to be Knight’s most influential project. He has bankrolled the Web site since 2000, at considerable personal expense. As well as enabling Knight to experiment, it has nurtured a new generation of multimedia stylists, designers and digital artists. When a famous face, like Moss’s, is featured on SHOWstudio, as many as 500,000 people log on in a day.

First, about that 500,000 figure: I don't believe it. Half a million unique visitors in a day? I just don't buy it. But I have a couple of friends at the website, and I'll ask them if it's remotely realistic, or what it's referring to. I guess it's conceivable that if Kate Moss gets naked on the site and it's picked up by the gossip blogs, then traffic might spike. Lord knows sex sells on the internet. But that kind of traffic hardly represents the "new generation of multimedia stylists, designers and digital artists".

And second, don't you think that Rawsthorn, when writing for the New York Times, might have disclosed that she was a founding editor of showstudio.com? This is America, where some people actually care about those kind of journalistic ethics.

Posted by Felix at 17:24 EST | Comments (0)

On that illustration

There's been a bit of interest in the cartoon of me on the Portfolio website, but no one's worked out where it comes from. In fact, the source is my Christmas mitzvah from December 2005, when I drove a Zipcar around Manhattan giving lifts to people who were inconvenienced by the transit strike. What you can't tell, of course, from the line drawing is the fact that my suit is purple...

Posted by Felix at 13:04 EST | Comments (4)

Market Movers

It's live! Up until now, I've been crossposting to felixsalmon.com, but now that portfolio.com has finally been unveiled to the world, you'll have to go there to read most of my finance blogs. You can always get there by going to marketmovers.org, in case you don't want to navigate through the Portfolio home page.

The RSS feed is here; at the moment it's truncated, but I've asked them to change that and serve the full content. In any case, if you subscribe to my "All blog entries" RSS feed or my "Finance and economics" feed, you don't need to do anything: the Portfolio blog entries should be shuffled in there among the (now necessarily much less frequent) felixsalmon.com entries.

Posted by Felix at 20:58 EST | Comments (3)

When Free Isn't Good

Anil Dash has a wonderful piece of contrarian thinking up on his blog – it's actually a week old, but it's really timeless.

A little while ago, my friend Michael Sippey, whom I had the pleasure of interviewing the other day, sent me a link to the new Google Voice Local Search...
Now, this new services seems like a good product, and I know I'm supposed to say "Wow, cool! Nice work, Google!" But... my initial response wasn't positive. My gut feeling was "Why the hell aren't they charging for this? That sucks!"

Now, I hate websites which make you pay money. And a constant problem for bloggers is wanting but not being able to point to articles which are hidden behind subscriber firewalls. But Anil's point is a bit more subtle than that:

Having paying customers would help focus the product team... If your product "may not be available at all times and may not work for all users" (as it says on the product's homepage), then either fix it or get yelled at by angry users. Either one is a good option. Don't hide behind a "well, shucks, we said it was beta, and it's free..." excuse. Being accountable to your users makes your product better...
Connecting people via VOIP or sending them an SMS, two of the key features of the new service, cost money. At Google volumes, they cost a lot of money. I want to have a service I can rely on -- which again means I need to invest in it...
Google's made the leap here before, by starting to charge for Google Apps. Even people who use the service for free were reassured by the fact there was a paid version.

Anil also has bad memories of great web products such as MSN Sidewalk which disappeared because they didn't make money. Me, I have bad memories of iname.com, which promised me free mail forwarding for life and then broke its promise.

As a rule, companies which give things away for free care much less about their free products and about their users than do companies who charge. This tax season, if you were given a choice between a free tax-preparation tool and one which cost say $20, which would you choose? Many people, quite sensibly, would choose the latter, just because it cost money.

Nothing makes me happier than services which are cheaper and better than the alternative; free-and-better, is, in theory, the best combination of all. But it still makes sense sometimes for people like Anil to want to pay a bit of money.

Posted by Felix at 17:21 EST | Comments (1)

FS vs GS in the ES

The only thing better than writing blog entries about how Goldman Sachs should be taken private? Having a journalist from the London Evening Standard phone up a Goldman flack and ask for a response. Genius.

Posted by Felix at 13:53 EST | Comments (0)

Vincent Price for Citigroup CEO?

The New York Post has a wonderfully gossipy piece by Paul Tharp today on who might take over at Citigroup if and when Chuck Prince gets the boot.

Tharp concentrates on the fight between Vikram Pandit and Robert Druskin, which isn't much of a fight yet because Pandit doesn't even work at Citigroup (yet), and because even if he did it's far from clear that he'd actually want the CEO job.

Personally, I'd love to see Druskin get the job. Not because I think he's particularly great at whatever it is that he does, necessarily. But more because Citigroup is considered an Evil Multinational in so many quarters that it would be great to have a man in charge who can literally twirl his mustaches as he plots and plans. Just check out his photo -- definitely the kind of person that Hollywood loves to accessorize with an ankle-length black leather trenchcoat.

Pay no attention to the kindly, avuncular Druskin. It's the mustachioed hatchet-man we want in charge!

Posted by Felix at 13:46 EST | Comments (0)

Wolfowitz Must Go

L'affair Wolfowitz has been trickling out for some time now, but today I think it finally reached the point at which Paul Wolfowitz can quite clearly no longer lead the World Bank effectively. When you read the report of the World Bank's ethics committee, it's abundantly clear that Wolfowitz was intimately involved in getting his girlfriend as much money as he possibly could.

Wolfowitz was very upset that he couldn't simply recuse himself from matters concerning his companion, and that instead she was being forced to leave the Bank and work on secondment elsewhere. He then directed the Bank's human resources department "to compensate her for both the lost opportunities related to promotion and the pain, suffering, and damage to her professional reputation that has been involved in her forced departure".

Which is the first we've heard of such pain, suffering, and damage.

What's more, Wolfowitz tried his best to engineer not one but three promotions for his partner, which helps explain how she ended up the best-paid person at the State Department, before even taking into account that her $193,590 salary comes tax-free.

Sebastian Mallaby also points out today that the scandal extends to Wolfowitz's closest aides:

Kevin Kellems, an unremarkable press-officer-cum-aide who had previously worked for Wolfowitz at the Pentagon, pulls down $240,000 tax-free -- the low end of the salary scale for World Bank vice presidents, who typically have PhDs and 25 years of development experience. Robin Cleveland, who also parachuted in with Wolfowitz, gets $250,000 and a free pass from the IRS, far more than her rank justifies. Kellems and Cleveland have contracts that don't expire when Wolfowitz's term is up. They have been granted quasi-tenure.

Wolfowitz's fate now hangs with the Bank's board, and many board members dislike him. However, the US is likely to fight reasonably hard to keep him in place, if only because the convention that the president of the World Bank must always be an American now looks increasingly anachronistic. If and when Wolfowitz leaves, there's a good chance that his successor will not be an American at all.

That said, the Washington Post reports today that "few bank insiders suggested that Wolfowitz's job is in jeopardy". It's possible that Wolfowitz will hang on, an unpopular lame duck. Which would be the worst possible outcome in terms of energizing the Bank's staff to do its vital work of fighting poverty.

Posted by Felix at 10:30 EST | Comments (3)

There's No Housing Bubble

Chart of the day comes from Deloitte's Carl Steidtmann. You wanna see what a bubble looks like? He'll show you what a bubble looks like.

There's much more where that came from, and of course the comparison isn't really fair: when you consider the amount of leverage that most new homes come burdened with, the return on investment can approach Nasdaq levels. Even so, the chart does put a smile on my face.

Posted by Felix at 14:38 EST | Comments (7)

Pastorini vs Gold Fields: The Plot Thickens

In the FT vs Bloomberg stakes, it's looking increasingly as though the score is 1-0 to the Brits: Bloomberg put out a follow-up article yesterday headlined "Gold Fields Takeover Interest Can't Be Verified", and today's New York Times quotes Bloomberg editor in chief Matthew Winkler as saying that Bloomberg's investigation of "Edward Pastorini," the supposed bidder for Gold Fields, will continue.

But don't count Bloomberg out quite yet. In an interesting factoid which the NYT doesn't seem to have picked up on, Bloomberg is claiming that its information came not from "Pastorini" but from within Gold Fields itself. All very peculiar: Gold Fields is on the record as saying that it has received no such bid, but at the same time Gold Fields executives are leaking the details of the bid to Bloomberg? Something is very smelly here indeed.

Posted by Felix at 14:12 EST | Comments (0)

Mr McDade's Inexplicable Insouciance

Ya gotta love Dan Loeb. Just check out his letter to the board of directors of PDL Biopharma, a biotech company he owns stock in, which is well worth reading in full. Most of it is a full-on broadside directed at PDL's CEO, Mark McDade. Some choice excepts:

It became apparent that the earlier dialogue was a charade intended to stall for time, a tactic we have seen employed many times before by underperforming CEOs. Mr. McDade's inexplicable insouciance towards us... Mr. McDade's management blunders and wasteful spending... McDade's Insincerity and Disorganization... what is truly galling, and what speaks directly to Mr. McDade's lack of character, professionalism, and competence... How can Mr. McDade purport to effectively run a public biotechnology company with a market capitalization of over $2 billion when he cannot even manage his own Microsoft Outlook inbox?... so long as Mr. McDade remains CEO, which we expect will not be much longer, the Company will have no intention of doing the "right thing"... There is no better example of McDade's "empire building" philosophy, pathological selfishness and poor business judgment than his decision to build out PDLI's absurdly large and unnecessary new corporate headquarters (the "Taj Mahal")... Mr. McDade has, from the beginning of this project, apparently been fixated on when his boat slip in the marina adjacent to the new corporate headquarters will be ready... Mr. McDade has made it clear in private that one of the key drivers behind his decision to relocate the Company from Fremont to Redwood City is that the new headquarters location will lead to a far shorter commute... The Company is being treated like McDade's personal science experiment.

The stock market loves this sort of thing just as much as I do, it would seem: PDLI is up 8% today, despite Bloomberg reporting that PDL immediately rebuffed Loeb with a thanks-but-no-thanks letter saying that the company believes in its "current strategy".

Even so, I'm setting the over/under on McDade's ouster at three weeks.

(Via Alphaville)

Posted by Felix at 13:38 EST | Comments (0)

Goldman Traders Make the Top-Paid List

There was much press a couple of days ago when Trader Monthly announced that the top five earners on its top traders listing all brought home more than $1 billion last year. (Of course, "brought home" is a really stupid way of putting it: in fact, the vast majority of these earnings are reinvested in the traders' hedge funds.)

But who lies beyond the top five? The Guardian today has the whole list. They're giving earnings in pounds, so double all the figures to get the dollar equivalents. Interestingly, no fewer than four Goldman Sachs traders are sprinkled in among the hedge-fund managers, and they all made more money than CEO Lloyd Blankfein.

Raanan Agus, Driss Ben-Brahim, Pierre-Henri Flamand, and Morgan Sze all made between $80 million and $100 million last year, we're told. Meanwhile, former Goldman star Eric Mindich – one of those people who says "I can make more money at my own hedge fund" and goes off to start one – is nowhere to be seen. Maybe Agus, Ben-Brahim, Flamand and Sze would do well to stay where they are.

Posted by Felix at 12:01 EST | Comments (0)

Vonage Back Under Citron's Control

Last year, Vonage founder Jeffrey Citron wanted to take his company public. The problem was, he'd been indicted for securites fraud back in 2003, in a case surrounding his previous company, Datek Securities. So he needed someone else to be CEO, and he alighted on a chap named Mike Snyder.

Well, that didn't last long. Snyder is out, and Citron is now "interim" CEO – we'll see how long that lasts. Vonage, of course, is on the losing side of a nasty patent fight with Verizon at the moment, and has the dubious distinction of being by far the worst-performing IPO of 2006.

The good news is that the announcement seems to have helped the stock rise by a very impressive 10% today; the bad news is that that rise is just 31 cents per share. (By contrast, the stock closed on its opening day at $14.85, down $2.15 from the IPO price.)

For the time being, I'm keeping my Vonage service, which I've had for four years now; the alternatives don't seem to be any better, especially when you take into account Vonage's international phone rates. (Calls to UK landlines are free!) But there's no way I'd go anywhere near the stock, even if I were a stock-picking kinda guy, which I'm not.

Posted by Felix at 11:40 EST | Comments (1)

Stern, Sachs, and Stiglitz on the Economics of Climate Change

If you read my entry from last night, you'll know I went to a discussion on climate change at Columbia yesterday, which was kicked off with a presentation from the man himself, Sir Nicholas Stern of the Stern Review on the Economics of Climate Change.

I managed to ask Stern the question I've been wanting to ask him for a couple months now – and, what's more, I got great answers from both Joseph Stiglitz and Jeffrey Sachs as well. My question was much the same one as that implicit in Charles Kenny's recent paper. If you look at Stern's worst-case scenarios, most of them put the population of the future on a much higher standard of living than the population of the present. So the $400 billion we're (hypothetically) spending today on reducing carbon emissions is being spent so that future generations can be even richer still – the whole thing feels a bit like taking from the poor (us, now) and giving to the rich (our great-grandchildren).

Stern replied first by noting that the $400 billion / 1% of GDP cost is only an estimate. It's entirely possible that the cost could actually be negative, he said: "a Schumpeterian tech-driven burst of growth is possible and even likely from zero-carbon sources of electricity". On the other hand, Sachs noted that the 1% of GDP cost is predicated on our developing a workable and scalable method of capturing and sequestering the carbon output from the coal-fired power stations which are certainly going to be built in huge numbers in India and China. If we don't get the CCS (carbon capture and sequestration) right, then the cost of reducing carbon emissions could easily double, or more. So let's split the difference and say that the 1% of GDP cost is realistic, to be borne mainly but not entirely in the form of higher energy prices.

Stern then said that it's also entirely possible that if we do nothing at all, and carbon emissions continue to rise, then in the next century "we could end up a lot poorer than we are now". His models show a 50% chance of global temperatures rising by more than 5 degrees Celsius in the business-as-usual case; when global temperatures were 5 degrees lower than they are now, we were in the last Ice Age and most of Europe was under a mile of ice. That sort of temperature change would be catastrophic on many levels and would transform the planet in very, very negative ways. But Stern did agree that under his models, "most of the time we're better off". So, he says, "you discount for that". An expenditure today is only worthwhile, under his model, if it causes a disproportionate increase in future wealth.

And then came the barrage of very good reasons why it makes sense to spend money today for the benefit of future generations.

First, from Stern: climate change is a stock-and-flow problem. We need to decrease the flow of carbon into the atmosphere now, in order to reduce the stock of carbon in the atmosphere in future. Once it's there, you can't take it out – in any case, it would be utter foolishness to assume that we might be able to do so at some point in the future. So climate change is irreversible. Once coral reefs die, glaciers melt, and cities drown, they're gone forever, and no amount of future wealth can make up for that.

He put this idea in economic terms a few minutes later: think of the world as being made up of two types of capital – physical capital and environmental capital. Since the Industrial Revolution, we've been growing our physical capital at the expense of running down our environmental capital. As a result, what you might consider the "exchange rate" between physical capital and environmental capital has already gone up: we value our environment much more highly now, in real dollar terms, than we did a couple of generations ago. If we continue to grow our physical capital at the expense of our environmental capital, that exchange rate will continue to rise – and even if we're wealthier in money terms in future, we'll find that the cost of that wealth, in terms of spent environmental capital, will be seen to have been excessive. Environmental capital might be expensive now, but it will also never again be cheaper than it is today – so we have an imperative to start using physical capital to invest in it.

Sachs had another take. There's no reason, he said, that spending $400 billion now means that we should reduce our consumption by $400 billion. Economically speaking, you can get exactly the same effect if you reduce your savings by $400 billion. Savings, of course, are the capital that we pass on to future generations in order to help them grow their wealth. "The future would rather have abatement capital than non-abatement capital," he said, adding that you can finance expenditure out of savings rather than consumption through the application of fiscal policy. (I think that this means we just borrow the money.)

"We are stewards of the future," said Sachs – future generations aren't around to speak to us, so we have to act on their behalf. "And they want less capital and a better climate."

Then Stiglitz stepped in, to introduce the distinction between social return and financial return. Not everything, he said, could be measured with GDP-per-capita figures.

And finally, my own answer to my own question, which is that the $400 billion cost will not be borne by all present citizens equally – it will be borne much more by the rich, who are the major consumers of energy. If you compare the wealth of the rich today to the wealth of future generations in general tomorrow, then the increase looks much smaller.

Posted by Felix at 10:36 EST | Comments (3)

Why New York City Property Is Only Going Up

Let me stick my neck out on the future direction of housing prices in the US. I think that we're in the middle of a mildly chaotic move from a pretty flat price distribution to one which looks much more like a power law. Or, to put it another way, housing inequality is on the increase. The whole concept of an "average" or "median" house is going to become useless, because people are increasingly not paying for the house so much as they're paying for its location. Specifically, New York City is a unique property market, which can and will continue to appreciate even if the rest of the US sees a significant slowdown.

In the first quarter of this year, the New York City housing market boomed even as the rest of the country saw some nasty falls in house prices. And I suspect that the same trend might continue for quite a while. Partly, that's because precious few Manhattan homeowners have subprime mortgages. But on a much larger scale, it's because New York is one of a handful of global cities which are the winners in the location stakes. The set of things you buy when you buy an apartment here can't be measured in square feet.

At 11:18am this morning, I got an email which told me that the Committee on Global Thought at Columbia University was having a discussion about the economics of climate change. The discussants? Jeff Sachs, Joe Stiglitz, and Nick Stern. Said discussion was happening at 4pm, and was free and open to the public. Of course, I went. I was even fortunate enough to be able to put to Stern directly my single biggest question/problem on the subject of climate change. He gave a great answer – and then Sachs answered the question too, and then Stiglitz gave his answer, and then Stern came back and added to his answer. (I'll blog it in a minute.) It was a wonderful moment, and I thank New York City for it.

After the event, I bumped into a friend of mine who I hadn't seen in a while, and we had an impromptu couple of bottles of wine between four of us at a cafe on the Upper West Side – her, me, and two very interesting scientists. I also got caught up on her cousin, who I'd lost track of, and who, it so happens, is arriving in New York tomorrow for a week.

The climate change event took place one week to the day after I went out for lunch with Nassim Nicholas Taleb, and had a fascinating and wide-ranging conversation with him. In between, I went to the movies, discovered a cool underground club in Dumbo, had a long conversation about transfiguration with a chap called Victor from Malta, hosted an impromptu barbecue where my friend Amy met my upstairs neighbor Dan, looked after a dog named Coco for a few days, went to a Mozart opera directed by a South African artist, and suffered a hard drive failure which was made much easier to bear by the fact that the Apple Store is in easy walking distance. This morning, before heading uptown to the Columbia event, I helped Dan and Amy move the couch he's been trying to get rid of for ages into the back of a pickup truck belonging to another friend.

On the subway uptown, I listened to Decasia on my iPod, while reading Nick Paumgarten's article about commuting in the New Yorker:

"I was shocked to find how robust a predictor of social isolation commuting is," Robert Putnam, a Harvard political scientist, told me. (Putnam wrote the best-seller "Bowling Alone," about the disintegration of American civic life.) "There's a simple rule of thumb: Every ten minutes of commuting results in ten per cent fewer social connections. Commuting is connected to social isolation, which causes unhappiness."

I have a wonderful job: blogging is something I can and will do from anywhere, and my commute literally couldn't be any shorter, since I work from home. On its face, it's quite a lonely lifestyle: I can very easily get up in the morning and never leave the house or have any visitors all day. I have no colleagues to gossip with over the water cooler, and I'm not paying a premium to live near my work. Given the economics of commuting, as laid out by Paumgarten, I should be jumping at the opportunity to sell my convenient-for-a-commuter place in Manhattan and move out to some bucolic rural town.

But of course I can't imagine living anywhere other than Manhattan, because it's unique in so many ways. Everything I've done over the past week is just as much a function of where I live as it is a function of who I am. And I'm pretty sure I would never have got my blogging gigs, first at RGE and then at Portfolio, had I lived anywhere else. Robert Putnam is right, it would seem: the density and vibrancy of New York forces social connections onto people whether they like it or not. And it's impossible to replicate.

Anybody can build a suburban McMansion; if it has a lot of square feet, and money is cheap, then it might well sell for a lot of money. On the other hand, if demand for space goes down, or money gets more expensive, then the value of large homes in the suburbs is certain to fall. New York is different. When people buy here, they're buying something you can't get anywhere else. If you want to live in one suburb, you might well make do with another suburb. But if you want to live in New York, nowhere else will do.

And because New York is a global town, demand for property here is global as well. Every time the dollar falls, New York property becomes that much more appealing to millions of Europeans and Asians who have visited and dreamed of living here: it's not even expensive, by London or Hong Kong standards.

I wouldn't be at all surprised were someone to tell me that Sachs, Stiglitz and Stern were all having dinner tonight with Bill Clinton, maybe at the house of Mike Bloomberg or George Soros. It's the kind of thing which happens in New York – and in precious few other places. Davos, maybe, once a year. As such people move to New York, other such people follow them here, in a self-perpetuating virtuous cycle.

Taleb says, in his latest book, that there's no particular reason why New York rose and Baltimore fell. But now it has happened, it can't be stopped. Baltimore will never again be a leading global city. And – I feel comfortable in saying – New York will never again (not in the next few decades, anyway) be a crime-addled drug den like it was in the 1980s. The road from there to here was not foreseeable. But the road ahead is clear: New York City is pulling away from the pack, and the bigger a lead it takes, the faster it goes.

Posted by Felix at 23:48 EST | Comments (7)

Pay Scale, fine dining edition

There are few stories as popular as the ones ogling the multimillion-dollar paychecks of the business and finance honchos who eat at swanky New York eateries such as Balthazar and Telepan. I wonder what those masters of the universe would think if they knew that the reservationist at Balthazar makes $12 an hour, or that the waiters at Telepan not only earn just $4.60 an hour, but the managers take a "huge portion" of their tips as well. Just askin'.

(Via Eater)

Posted by Felix at 21:55 EST | Comments (2)

How home prices can be steady even if median home prices fall

The lead headline on CNNMoney.com right now is "Home prices headed for historic drop": we're told this will be "the first annual decline in nearly 40 years of tracking."

The headline comes in response to news from the National Association of Realtors: while it thought in February that 2007 prices would rise by 1.2%, apparently it thinks now that they will fall by 0.7%. Apparently all the pain will be concentrated in a few markets:

The group estimates that about three-quarters of the markets nationwide could still see a narrow increase in median sales prices during 2007, but that those gains will be outweighed by the declines in the markets that saw big gains in sales and prices during the record sales years of 2004 and 2005.

This surprises me, since the data I've been looking at shows the biggest declines in more depressed, industrial areas such as Michigan and Ohio. But this doesn't surprise me at all:

The group's forecast sees an even bigger slowdown in the new home market, as it is forecasting new-home sales will come in at 904,000 this year, down 13 percent from the 1.05 million sold last year.

There's no doubt that new-home construction is slowing down. But couldn't that alone explain a large part of the median-price drop? Reader Glen Lineberry emails me:

Everyone assumes this means that houses are selling for less. Isn't an equally logical explanation, given all the media coverage of the housing slump and mortgage problems, that people are simply buying less expensive houses? Wouldn't that also shift the median price, if people decided they could live without an additional bedroom, or weren't willing to pay the freight for someone else's kitchen renovation?

Now, instead of "less expensive houses," just try reading "fewer brand-new McMansions". It's a well-known fact that the average new-home size has been growing steadily for years, and positively booming of late. So if those new homes bear the brunt of the slowdown, and are sold in much lower numbers, that could do nasty things to the median sales price even if any given existing home doesn't fall in value at all. The new homes don't even need to be sold at a lower price, there just needs to be fewer sales.

For even more fun 'n' frolics, check out CNN Money's list of the 100 largest housing markets in the US, complete with forecasts for how those housing markets will do over the next 12 months. The forecasts were obtained by rolling dice from Fiserve Lending Solutions. Apparently McAllen Texas is in for a big boom, San Francisco will see a modest uptick, New York City will fall by almost 4%, and poor old Phoenix, home of Glen Lineberry, will see a 5.5% collapse. Not that Lineberry is particularly worried:

The growth here is just beyond belief. More than 60,000 new housing starts in 2006. It's down to half that this year, but that's still the third highest number on record.
A massive light-rail project is underway, to open December 2008, and both ASU and the UA Medical School are building new campuses in downtown Phoenix, so we're seeing a return to central parts of the city. Lots of infill projects, from single-family homes to condo and apartment complexes, are springing up and median prices are firm or slightly higher.
It's in the giant tract developments on the outskirts of the city -- often an hour's drive from downtown and the airport -- that houses aren't selling. The builders are holding inventory, investors who'd put down small deposits have walked away, and the only way for a seller to compete is on price.
In the more central neighborhoods, it takes a little longer to sell, but houses offered at last year's prices are selling. When you remember that prices here went up 25% last year, and doubled over the last three years, that's no so bad.

Posted by Felix at 13:13 EST | Comments (2)

FT vs Bloomberg

Ooh, this is juicy! The FT's Alphaville blog has come out and declared that one of Bloomberg's biggest stories today is a hoax.

The story, headlined "Gold Fields May Receive Bid From Pastorini-Led Group," is very long, very detailed, and has helped drive up shares in Gold Fields by 11% in one day.

Whether or not the Pastorini of the headline even exists is far from obvious. As Bloomberg's Stewart Bailey concedes in his story,

Pastorini's name didn't appear in a search under U.S. Securities and Exchange filings. There was no trace of his name in a Google search. He declined to name his previous employers or provide details of his track record.

But Bailey does quote a lot of people in his story, all of whom at least implicitly are taking his story seriously.

One way or another, it seems, either the FT or Bloomberg is going to end up with a certain amount of egg on its face.

Posted by Felix at 12:32 EST | Comments (2)

Kerkorian: Out of the running for Chrysler?

Bloomberg's Doron Levin gets off a nice one-liner at Kirk Kerkorian today, and his bid for Chrysler – which, as you'll recall, is contingent on the United Auto Workers taking on a huge chunk of Chrysler's liabilities and risk. The bid, he says,

is a bit like proposing a manned mission to Pluto, subject to the invention of a spaceship that can traverse the solar system.

Certainly the noises coming out of Frankfurt and Detroit are unlikely to bolster Kerkorian's spirits. Dana Cimilluca points us to an article by Tim Higgins in the Detroit Free Press, saying that both DaimlerChrysler and its unions can't stand the idea of selling to Kerkorian:

Canadian Auto Workers President Buzz Hargrove said he opposes the Tracinda offer.
"I am not interested in Kerkorian's style. His whole history has been to make money by taking advantage of throwing a lot of people out of work," Hargrove said. "He's the guy I am totally opposed to."

Of course, the Canadian Auto Workers aren't going to be particularly influential in this deal, but with Frankfurt analysts saying that Kerkorian "is the last person on Earth [DaimlerChrysler] would be willing to sit down and negotiate with," and Kerkorian being kept out of meetings between DaimlerChrysler and its bidders this week, the odds of Kerkorian winning this battle would seem to be slim-to-nonexistent.

Posted by Felix at 11:26 EST | Comments (0)

Citigroup layoff math

To read all the press about the Citigroup layoff plan of late, it seems there are two main planks: first, fire about 17,000 people. Then take another 10,000 jobs or so, and move them out of New York to cheaper parts of the US, or move them out of the US entirely to cheaper parts of the world. Finally, take some untold number of extra people – in the tens of thousands – and simply don't replace them when they leave for whatever reason.

But take another look at the story now that the announcement has actually been made:

Roughly 8 percent of Citigroup’s 327,000 workers, from entry-level consumer bankers to senior executives in the investment bank, will be affected by the restructuring. All five of its major business divisions will face cuts. About 1,600 jobs will be eliminated in New York City, where Citigroup currently has 27,000 employees.

If 8% of the total workforce is affected altogether, and if New York City is the most high-priced location, then one would expect much more than 8% of New York City's employees to be affected.

In fact, however, it seems that Citigroup's New York payrolls will only fall by 6% – which is less than the corporate average.

Is there less to this story than meets the eye? If payrolls aren't being slashed in New York, it's not clear where they are being slashed. Maybe in places like Tampa, Florida, where Citi has a big office with 3,000 people servicing Latin America; or in O'Fallon, Missouri, where CitiMortgage employs 4,750 people. If those places are hit more severely than New York, then maybe some of the rhetoric about cutting where costs are highest will sound a little hollow.

Posted by Felix at 9:45 EST | Comments (3)

The NYT's rent vs buy calculations

David Leonhardt's Economix column has finally been promoted from the front of the Business section to the main front page! Congratulations to him. And the subject matter is dear to my own heart: rent vs buy calculations. In fact, by far the best thing about the article is the online rent vs buy calculator – bookmark it, and use it whenever you or your friends are thinking of buying a place. It's great.

Given his space constraints, one can forgive Leonhardt not going into gruesome detail about all the different variables which go into such calculations. But I would still take issue with a large chunk of how his story is framed.

To read the article, the main variable in determining whether or not you should rent or buy is the amount by which property prices are going to rise in future. Most of the calculations hold everything else constant, and then wonder how many years it will take you to break even given different rates of property-price increase.

But spend a bit of time fiddling around with the calculator, and you realize it's not nearly as simple as that. For instance, the NYT's calculations have a default rate of rent increase of just 4% per year. That seems low to me, given the fact that rent increases haven't remotely kept up with price increases in most of the country. If the two come closer into line with each other, some of that might come from prices going down – but a large chunk of it might come from rents going up. It's hard in the rent vs buy calculator to account for the risk that your rent will suddenly go up by 15% next year.

There are lots of other variables you'll probably want to change, too, like your marginal tax rate (the NYT assumes it's only 20%); the upfront costs of renting, in terms of broker's fee and whatnot (NYT assumes zero, and, it seems, also assumes that renters won't move house any more frequently than owners); and the inflation rate – which has a surprisingly large effect on the rent vs buy curve, for reasons I don't fully understand.

There are three main points I'd make which Leonhardt ignores. The first is that he assumes you have your entire down payment sitting around in a brokerage account compounding at 5% per annum for as long as you have your place. I don't think that's entirely realistic – check out my blog on buying as a commitment device for much more along such lines.

The second point is that when you look at the y-axis, your potential downside is pretty small compared to your potential upside. What the rent vs buy calculator can't do is assign various probabilities to various outcomes and then come up with a net expected return. If it could, buying would become more attractive because of the small chance of a big windfall.

Finally, it's worth noting that the maximum downside is normally pretty much equal to the combined buying and selling costs of owning. The NYT assumes that the cost of buying a house is 4% of the purchase price, and that the cost of selling a house is 6% of the purchase price. When you add those two up, they account for essentially all of the advantage that renting has over buying.

In other words, take your eyes off the house-price appreciation at the exclusion of everything else, and definitely ask yourself what might happen if, for example, the internet helps drive selling costs down to 2% from 6%.

Posted by Felix at 8:58 EST | Comments (0)

Mike Bloomberg earns $1 billion a year

Add Michael Bloomberg to the billion-dollar-a-year club. DealBook reports that Fortune's Carol Loomis has had an inside look at the books, and found 2006 profits of $1.5 billion on revenues of $4.7 billion. Given that Bloomberg personally owns more than two-thirds of the company, his share of the profits would seem to be in the ten-digit range.

Which makes the following all the weirder:

Fortune speculates that Mr. Bloomberg might instead try to leverage up the company to pull out some cash, a scenario that would become more likely should he decide to run for president, which a number of people have reportedly urged him to do.
As for Mr. Bloomberg’s stake, Ms. Loomis writes:

One sticky fact about the $13 billion or so: Right now it’s in the company, not handy if Mike were soon to decide he needed cash for a campaign or philanthropy. So how to create liquidity? The probable answer is debt. Mike may not as yet have taken any on, but a source close to the company says he surely will.

Both political campaigns and philanthropic contributions can certainly consume a lot of cash. But $1 billion a year? Even by today's presidential campaign standards, it would be mind-boggling if anybody spent more than that. So why can't Bloomberg just continue to campaign and donate using cashflow rather than debt?

Posted by Felix at 18:30 EST | Comments (1)

Get Paid to Drive an Electric Car!

One reason why energy traders can make $2 billion in a year is that energy prices are crazy, crazy things – they often behave more like hotel rooms than like normal assets like stocks or bonds or 2-bedroom apartments. Back in October, for instance, the spot price for natural gas in Britain was briefly negative.

The problem is that it's really, really hard to store electricity – which is the main reason why electricity, at least if you're a reasonably large consumer of it, costs a lot more during the day than it does at night. What consumers and electricity companies both need is a massive network of electricity storage devices, from which electricity could be drawn down during periods of high demand.

Now, electricity storage devices are better known as batteries. But batteries don't generally connect to the mains – unless they're in electric cars! Now we're getting somewhere:

A utility's electric meter spinning backwards, pulling power from souped-up batteries in a modified Prius, drew Silicon Valley leaders to a Sunnyvale, CA parking lot today.
At an event put on by the Silicon Valley Leadership Group at the headquarters of chipmaker AMD, local utility Pacific Gas and Electric (PG&E) gave what it called the first-ever Vehicle-to-Grid (V2G) public technology demonstration.
The plan: drivers, who charged their vehicles at night when power was cheap, could commute by day, plug their vehicles in at their destinations, and receive rebates if the power grid needed electricity at time of peak demand and pulled power from their batteries.

This is a really good idea – David Neubert calls it "Electricity 2.0" – although it won't happen in reality until well into the next decade. And it might even help smooth out energy costs so that we consumers get lower prices and people like John Arnold have to make do on a couple of hundred million a year.

Posted by Felix at 16:35 EST | Comments (0)

Kentridge vs Grindhouse

I went to see William Kentridge's production of the Magic Flute at BAM last night, and boy was it disappointing. It's not that I have anything against Kentridge: I think he's a great artist, and I reckon his next production, of Shostakovich's Nose, might be excellent. (He could be really good designing sets for Lulu, say, or The Turn of the Screw.) But the Flute? Let's just say that a black-and-white Magic Flute is as wrong in practice as it sounds in theory.

I don't seem to have a lot of luck with opera at BAM. The cast last night was woefully underpowered, the pace that the conductor set was positively glacial, and there wasn't a hint of joy or happiness all night. It takes a lot to screw up the Flute, but this team managed it – they even put Papageno in a beige suit, ferchrissakes! When Monostatos recoils from Papageno, thinking him the devil, it makes no sense at all.

And although Kentridge's white-on-black drawings are beautiful, I still can't forgive him for including footage of hunters killing a rhino in the middle of the opera for no obvious reason. The Flute is meant to be upbeat, but everything about this production made it depressing.

If you want a hugely enjoyable three hours, go see Grindhouse instead. It's had a slightly disappointing run at the box office so far, probably because The Kids These Days don't want to see movies about movies. But it's more than worth it for the car chase alone, which is truly one of the greatest of all time. The Magic Flute was Grindhouse-style popular entertainment of its day. Julie Taymor understands that; William Kentridge, I'm afraid, with his ominous symbolism, doesn't.

Posted by Felix at 14:16 EST | Comments (0)

Why did Mexico's peso fall today?

It's not often that currency moves have an obvious explanation. But every so often, you can apply the laws of supply and demand to FX. For instance, when Citigroup announced that it was buying Mexico's Banamex for $12 billion, the Mexican peso rose because of all the money expected to flow into the country. Today, the flows are the other way around: Mexico's Cemex is buying Rinker, which is mainly based in the US, for $15 billion. So one would expect the peso to fall.

Or, you know, you could just blame the housing market:

April 10 (Bloomberg) -- Mexico's peso fell the most since March 13 on concerns a housing-led slump in the U.S. will curtail dollar flows.
Subprime mortgage defaults may temper U.S. economic expansion, a Bloomberg survey of economists today showed. The U.S. buys about 80 percent of Mexican exports.

Now, I'm not saying that the peso fell because Cemex is buying Rinker. I think all such attempts at causal reasoning are silly, and in any case we know very little about how much of the acquisition price is going to come out of Mexico. But I am saying that if you're going to insist on some kind of reason for the fall in the peso, the Rinker announcement has to be much more compelling than a bunch of old news about the US housing market.

Posted by Felix at 13:17 EST | Comments (0)

Barney Frank declares war on... securities?

It was probably inevitable, but that doesn't make it any less depressing. Barney Frank has now come out and said that investors in mortgage-backed bonds should be liable for the underlying loans.

"More money was being lent than should have been lent,'' Frank said in an interview from Washington. Frank, who last month predicted that the House would approve such a bill this year, said growth in the market for mortgage bonds "provided liquidity without responsibility."...
Lenders this decade have increasingly relied on mortgage-backed securities to fund new loans rather than tap capital from federally insured bank deposits. Frank called the process flawed, saying that as a subprime financing mechanism, banks' exposure to the risk of default is excessively diluted.
By dispersing risk, the bonds fueled reckless and unscrupulous lending and compromised underwriting standards, he said. "There should be a decrease" in the money available for subprime mortgages, he said.

Um, Earth to Barney? There already has been a whopping great decrease in the money available for subprime mortgages. Apparently subprime MBSs are now trading at 550 basis points over Libor, up from 150bp over in early February. What you want to happen? Has already happened – without any legislation at all!

Barney seems incapable of understanding that sometimes markets can self-correct without any help at all from Washington. Underwriting standards have tightened up. The most egregrious lenders with the worst track records have gone out of business. The mortgage market is now pretty much where it ought to be, having overshot in the direction of too much liquidity about a year or so ago. We've made our mistakes, we've paid for them, and the worry now is not that there's going to be too much liquidity but rather that there's going to be too little.

Frank's not going into much detail about what his proposed legislation is going to look like. But anything which penalizes bondholders is a really bad idea. The existence of the MBS market has made the US mortgage market much more efficient than any other mortgage market in the world. That's a good thing. Let's not break it.

Posted by Felix at 12:53 EST | Comments (3)

When income is measured in billions

It's not easy to become a billionaire – making a billion dollars over the course of just one lifetime. On the other hand, if you're a hedge-fund manager, it seems that making a billion dollars over the course of just one year is entirely doable. Indeed, according to Trader Monthly, Centaurus Energy's John Arnold made as much as $2 billion last year.

My favorite part of the Trader Monthly listings is that they bucket income in increments of half a billion dollars: Arnold made between $1.5 billion and $2 billion, as did James Simons, while Eddie Lampert, Boone Pickens, and Steven Cohen all made between $1 billion and $1.5 billion.

Arnold is still only 33 years old, and in the space of one year he has become dynastically wealthy to the point where he couldn't spend all his money if he tried. So what's he going to do for the rest of his life? The depressing but most likely answer is that he's going to try to make even more money. Which is one reason why John Arnold made $2 billion last year, and you didn't.

Posted by Felix at 12:33 EST | Comments (0)

How Blogging Can Send You Round The Bend

Or, How A Throwaway Blog Entry Can Sap Your Will To Live... it all started with one of those silly little articles the WSJ runs in its Career Journal section, this one headlined "How Blogging Can Help You Get a New Job". It got picked up by Barry Ritholtz, which gave it some semblance of relevance, so I thought I'd point out that the big headline on page B7 of the paper WSJ was actually "How Blogging on the Web Can Help You Get a New Job". Yeah. Blogging on the Web. Which struck me because Steven Weisman of the NYT today had this to say about Paul Wolfowitz:

The highly unusual message sent out by Mr. Wolfowitz, a former deputy defense secretary who was appointed to the bank presidency by President Bush, came after weeks of discussions, both within the bank and, following an article about the subject in The Washington Post, elsewhere around Washington and in the world of Internet blogs.

If you're a blogger, two=trend, and so I had myself a nice little throwaway blog entry there. So I tried to scan the WSJ page, and the scanner kept on crashing Photoshop. So I took a digital photo of the WSJ page, and tried to upload that to my computer, but halfway through the upload my external hard drive stopped responding. And so I've spent roughly the last 90 minutes trying to troubleshoot my HD problems, to no avail, and I'm now reduced to hoping that if I take it into the shop they will at least be able to back it up for me somehow.

Now, realistically, none of this had anything to do with my blog entry – it just so happened that the photo which seemingly broke the hard drive was a photo I wanted for my blog. But I'm blaming the blog anyway, because blaming the HD itself (a Western Digital MyBook, since you ask, which I bought because it was meant to be much more reliable than most external hard drives) is so boring.

Posted by Felix at 12:18 EST | Comments (0)

ABN Amro speculation heats up

Merrill Lynch announced last month that it was severely restricting the distribution of its research to journalists. How's that working out for them? Well, Alphaville today has got its hands on Merrill's latest ABN Amro report, and is happy to give us the juicy details.

The problem with the Barclays bid for ABN Amro, as we all know by now, is that Barclays can't offer the savings that other suitors, such as RBS, might be able to find. So where's Barclays' comparative advantage? Maybe it's financial and regulatory. Here's Merrill's John-Paul Crutchley:

We find it interesting that the only formal announcement from Barclays, other than the confirmation that discussions are occurring was to announce that the Head Office and Lead Regulator would be Netherlands based. We are aware that Netherlands corporate law allows for differing classes of equity. This might give Barclays a financing option which may not be available to other bidders who are less willing to either relocate their domicile or submit themselves to a Netherlands based regulator.

The idea is that Barclays would pay for ABN using a new class of non-voting, fixed-dividend shares. This gives more upside to Barclays shareholders, and more certainty as to price for ABN shareholders.

And while we're in the world of speculation, Alphaville also offers this:

Investment bankers believe, for example, that RBS could afford to pay more for ABN, if it then sold the bank’s Brazilian operations to another lender, such as Spain’s Santander.

ABN's Brazilian operations are the only part of the bank showing any growth, so any buyer might be loath to sell them. But RBS has no strategic interest in Brazil, and there's surely no shortage of potential buyers for Banco Real. Santander is only one: another obvious candidate would be Citigroup, which has proclaimed an interest in a big Brazil acquisition for years.

Posted by Felix at 10:35 EST | Comments (0)

Could Goldman Sachs be a private-equity target?

John Carney and Thorold Barker agree: Goldman might be a glorified hedge fund, but it sure ain't valued like one. (If you can't get past the FT subscription firewall, there's a decent summary here.) Carney's solution? Goldman should spin off its trading business. That would solve at a stroke any number of conflicts of interest, as well as do wonders to the valuation of the whole.

Barker doesn't go quite as far as Carney, but he does reckon that more transparency from Goldman on where its profits are coming from could mean the bank's multiples moving up towards the kind of levels seen at Fortress and Blackstone.

Let me throw in my own idea: Blackstone, or KKR, or Silver Lake, or someone along those lines, should just buy Goldman already. People have been talking about the first $100 billion private-equity deal for some time now – and this could be it. Goldman is a great PE target: an undervalued company with highly-paid managers who historically have hated the idea of a public listing, with all the disclosure requirements associated with it.

Goldman's market capitalization right now is in the region of $85 billion. Any buyer would obviously have to pay a significant premium over that sum. But in theory, there's no reason why it shouldn't happen. And maybe under new management Goldman's funds will do even better.

Posted by Felix at 10:06 EST | Comments (0)

Cemex sees the finish line in $15.3 billion Rinker takeover

It's taken five months, and the fat lady (a/k/a Sydney-based Perpetual Investments) hasn't sung quite yet, but it very much looks as though Mexican cement company Cemex has finally snagged Rinker. Cemex is arguably the best-run company in Latin America, and has been growing through acquisitions for decades – it knows how to play this game. But this was a tough one, mainly because Rinker is headquartered and listed in Australia. Rinker's operations are primarily in the US, and so Cemex is valuing the company in US dollars. But the Australian dollar is so strong these days – it just hit a 17-year high – that any price in US dollars seems underwhelming in Aussie terms.

But the deal seems to be all but done, and the markets like it: Cemex's shares are up, and Rinker's shares are trading below the Cemex offer price, which means that no one expects a better offer to come along. Count this as a triumph for Cemex CEO Lorenzo Zambrano, who's paying a sum substantially lower than Rinker was trading at last year.

Posted by Felix at 9:44 EST | Comments (0)

Anything PE shops can do, pension funds can do better

Index funds are a smarter bet than mutual funds for retail investors, just because their fees are lower. So why do big institutional investors invest in private-equity companies which charge enormous fees, and which in turn hire investment banks which charge their own enormous fees, rather than simply buying companies themselves?

Ontario Teachers Pension Plan seems to have decided that enough is enough – and has decided it's going to make its own bid for BCE (a/k/a Bell Canada). Private-equity shops such as Providence Equity Partners might be invited to join the buyout party, but then again so are real-money investors such as Caisse de Dépôt et Placement du Québec and the Canada Pension Plan Investment Board, according to the NYT.

This is very much a welcome development: it shows that institutional investors are beginning to realize that their own investing skills have a pretty good chance of outperforming any PE or hedge fund, once those enormous fees are taken into account. (Hedge funds do generate alpha; they just pay nearly all of it to themselves in the form of fees.) So whether or not the BCE takeover ever happens, an important precedent has already been set. Pension funds can be in deals from the beginning, rather than being brought in at the end to provide that last chunk of equity finance.

Posted by Felix at 9:21 EST | Comments (2)

Illegal immigrants are good for the US economy

Gordon Hanson is causing quite a stir with his study for the Council on Foreign Relations entitled "The Economic Logic of Illegal Immigration". (Press release, WSJ op-ed, abstract, paper.) Economically speaking, he concludes, there's really very little reason to believe that legal immigration is preferable to illegal immigration – and illegal immigration has a small but positive net economic effect.

To the extent that the US spends a lot of money keeping illegal immigrants out of the country, that's likely to damage the economy as a whole. Much better to deal with security concerns in other ways, such as licensing global temp agencies who could fill US jobs with employees from anywhere.

Clearly, the present system of temporary work visas isn't, well, working – this year's quota of H-1Bs, for highly-skilled immigrants, "sold out" in a matter of hours. What's more, the number of visas is necessarily larger than the number of legal immigrants, since many legal immigrants end up with three or more temporary visas while working here. Much smarter, says Hanson, to let legal immigrants switch jobs much more easily, and also to give them a path to citizenship.

Of course, the chances of anybody in Congress taking up Hanson's cry are slim to nonexistent – but with any luck his paper can help move the debate in the right direction.

Posted by Felix at 8:50 EST | Comments (35)

Monday remainders

Brad Setser notes that Brazil just issued a new 10-year bond at 122bp over Treasuries. "I remember when..." he writes – I'll finish the sentence for him – "Brazil was at 2,400bp over Treasuries". The official JP Morgan Brazil index now stands at 164bp over.

Chase wants its borrowers to pony up $295 plus $5.42 per month for the privilege of paying down their mortgage more quickly. "Only a bank would figure out a way to charge you for something you can do yourself and make you think it’s a smart decision!"

The NYT's flash-based executive compensation chart, nicking its look-and-feel from Gapminder.

Jeff Sachs is giving this year's Reith lectures.

The going rate for Joshua Bell, playing sans name recognition? $32.17, in 43 minutes.

Cassandra Wolos on junk charts in the NYT (Via)

Greg Clayman's luggage was lost by JetBlue, and he discovered that they don't track bags.

Posted by Felix at 15:07 EST | Comments (1)

How does zero-cost default protection work?

Via Alea, a Reuters story about a new Citigroup product where you can apparently buy default protection at zero initial cost, paying only if and when the defaults start happening. There's just enough information in the article for it to be intriguing, but not quite enough for it to make sense.

I understand that if the defaults happen, then the cost of protection is higher than it would have been if you'd bought it up-front. But at that point you don't care – you'll happily pay a lot of money to protect yourself against a certain default. Can someone explain to me how this product works? Can you really buy protection and yet pay absolutely nothing if nobody defaults?

Posted by Felix at 13:55 EST | Comments (1)

Lose money on your house, get a monster tax bill!

Gretchen Morgenson had another dreadful column this weekend: the housing "nightmare grows darker," according to the headline, but Morgenson adduces not a single piece of evidence to that effect.

If Morgenson wanted to find real reasons for worry, as opposed to inchoate doom-mongering, she could have done a lot worse than reading Bill Bischoff's Smart Money article on the taxes people owe when they sell their homes.

In the olden days, things were simple. You took out a mortgage to buy a house, and then when you sold your house it had either gone up in value or it hadn't. If it had, then you made money on the sale, which was a taxable capital gain. If it hadn't, then you didn't have a capital gain, and didn't have to pay any tax.

Nowadays, thanks to the rise in home-equity extraction, things are very different.

Say you paid $260,000 for a home that you can now sell for a net sale price of $300,000. Unfortunately, you also have $350,000 of first and second mortgages against the property. For tax purposes, you'll have a $40,000 gain if you sell, because the sale price exceeds your tax basis in the home ($300,000 sale price - $260,000 basis = $40,000 gain). The IRS doesn't care that you're still $50,000 in the red after the sale ($350,000 of debt vs. the $300,000 sale price). The bottom line is you can have a tax gain without actually having any cash to show for it.

Alternatively, what happens if your mortgage company forgives some of the debt you owe them? It's not good news from a tax perspective: any money written off by your creditors is "debt discharge income", which has to be reported as income on your tax return.

Let's say you buy a house with zero money down for $250,000, you sell it for $200,000, and you find another $10,000 to settle up with the mortgage company. For tax purposes, you've just made $40,000 in income – which you need to pay tax on. Ouch.

There's a lot of muttering in Washington about legislation to reign in predatory subprime lenders. (And yes, you'd be right in thinking that that horse bolted long ago.) Much more useful would be legislation to reduce the income-tax consequences of short sales.

Posted by Felix at 13:26 EST | Comments (2)

Zell doesn't get the web

Employees at Tribune are now the main owners of Tribune, thanks to Sam Zell's innovative ways with ESOPs. Their problem is that although they own the company, they don't control it: Zell does. And so they have to simply cross their fingers and hope that he knows what he's doing.

Judging by comments reported by the Washington Post on Saturday, however, he doesn't.

It's time for newspapers to stop giving away their stories to popular search engines such as Google, according to Samuel Zell, the real estate magnate whose bid for Tribune Co. was accepted this week.
In conversations before and after a speech Zell delivered Thursday night at Stanford Law School in Palo Alto, Calif., the billionaire said newspapers could not economically sustain the practice of allowing their articles, photos and other content to be used free by other Internet news aggregators.
"If all of the newspapers in America did not allow Google to steal their content, how profitable would Google be?" Zell said during the question period after his speech. "Not very."
Newspapers have allowed Google to use their articles in exchange for a small cut of advertising revenue, but search engines also help to distribute their content to wider online audiences.

This is all pretty much garbage, as Jason Calacanis, among others, has done a very good job in pointing out. For one thing, the Washington Post is simply wrong when it talks about Google giving newspapers "a small cut of advertising revenue" – that's not possible, since Google News doesn't have any advertising.

Which also helps to answer Zell's question. If all of the newspapers in America did not allow Google to steal their content, how profitable would Google be? It would be just as profitable as it is today. And Google doesn't steal their content any more than it steals anybody else's content: Google indexes their content, which is something else entirely.

I have a rule of thumb for judging any kind of regularly-updated website which is being run on a for-profit basis. If your business plan looks like this, then it's doomed:

People who want information will come to my site, where they will search for that information and find it, or otherwise be directed to it.

That's simply not how people use the internet. There are maybe one or two websites which fit that bill: Wikipedia and IMDB spring to mind. But I suspect that even they get an enormous amount of their traffic from Google, because they have such a high Page Rank. Wikipedia's traffic really started skyrocketing when Wikipedia started becoming the top search result for hundreds of thousands of Google searches.

If Zell wants to make money online, he has to embrace Google, not fight it.

Posted by Felix at 11:06 EST | Comments (1)

In defense of socially responsible investing

Joe Nocera is not a fan of socially responsible investing, or SRI:

My problem is that socially responsible investing oversimplifies the world, and in so doing distorts reality. It allows investors to believe that their money is only being invested in “good companies,” and they take foolish comfort in that belief. Rare is the company, after all, that is either all good or all bad. To put it another way, socially responsible investing creates the illusion that the world is black and white, when its real color is gray.

Nocera does perform the useful service of pointing out that the main SRI screening company, KLD, has vastly insufficient resources for the job it's trying to do:

KLD is a small firm that constructs socially responsible indexes, including the Domini 400. Its 40-member staff includes about two dozen researchers who supposedly dig into companies and decide which should be included in its indexes — and which should be excluded. Its biggest index, the KLD Broad Market Social Index, uses the Russell 3000 as its universe, which it has whittled down to 2,050 companies it deems acceptable...
Two dozen researchers are monitoring 3,000 companies — and writing in-depth reports? How is that even possible? It’s not. Mr. Kinder told me that the employees almost never go abroad to do on-site inspections, but rely on media reports, blogs, interactions with activist organizations and conversations with the company itself. That hardly seems like enough to make a decision on whether a company is good or bad.

But his conclusion goes way too far:

It would be nice if we could invest our money only in companies that had terrific human rights record, fabulous environmental values and wonderful compassionate cultures.
Too bad it’s impossible.

Let's be very clear, here, about what KLD is doing: it's taking the Russell 3000 as a starting point, and then removing roughly one-third of the most egregious companies. If you don't want to invest in companies that kill people, like arms manufacturers or tobacco firms, then KLD's index is a great place to start. But at no point is anybody at KLD or anywhere else saying that all 2,050 of the firms on their list have "terrific human rights record, fabulous environmental values and wonderful compassionate cultures."

There are funds which seek only to invest in companies which make the world a better place, in firms which have great environmental records, and so on. Such funds have no interest in whether BP or ExxonMobil is a more ethical investment: they would never invest in either. And they also have no interest in Nocera's other example, Nike vs Reebok, for the same reason.

It seems Nocera is judging "negative" funds – those which exclude the worst companies – by the standards of "positive" funds – those which include only the best companies. That's unfair. There are many flavors of SRI, and investors can and should be able to choose between them. Why does Nocera seemingly believe in denying investors that choice?

Posted by Felix at 10:45 EST | Comments (2)

Let's have more bank consolidation

Dan Gross is writing about bank branches in Slate. It seems that in current boom times, the number of branches is expanding even as the number of banks is contracting:

According to the Federal Reserve, even as the number of banking companies falls each year, the number of branches rises steadily.

At the same time, in bust times, the number of branches is likely to contract even as the number of banks... contracts:

When the banking business goes south, or if the economy slips into recession , branches, with their high fixed costs, quickly become a liability. In 1993, for example, the number of bank branches fell by nearly 1,000, according to the Federal Reserve. In 2000, a net 1,859 branches were closed. (The number of branches didn't regain the 1999 peak until 2002.) Indeed, the ability to save money by shuttering overlapping branch networks is one of the factors that helps drive bank mergers during periods of sluggish economic growth.

The main conclusion to draw from all this is that the number of banks in the US is going to continue to fall, no matter what happens to the economy. That is actually a good thing: the US has too many small banks, which consume vast amounts of regulatory time and energy to no particularly useful end. Indeed, the various regulators (FDIC, OCC, Treasury, Federal Reserve, etc) are likely, at the margin, to constrain the actions of the big banks because they're worried about giving similar freedoms to small banks, and want to keep a flat competitive playing field.

In other words, let's have more bank consolidation. Quite clearly, reducing the number of banks has no adverse impact on the number of bank branches.

Posted by Felix at 10:22 EST | Comments (1)

Meme of the week: More debt, less equity

Floyd Norris and Dean Baker and Wcw are all on the case of the good old-fashioned debt arbitrage. As Wcw puts it, either "bonds are overvalued, equities undervalued, or both".

Or, of course, you have to remember the bearish position: equities are overvalued, but bonds are even more overvalued. Which is not very helpful if you're looking for somewhere to invest, but at least makes you feel a little bit better if you don't have any money to invest in the first place.

As a public service, let me explain what all these people are talking about, using a hypothetical company which makes $1 billion of profits every year, which amounts to $1 per share. It pays those profits out in dividends, and the stock price is 15 times earnings, or $15 per share.

Now let's say the company borrows $10.2 billion, at an interest rate of 5% per year, and uses it to buy back its stock at say $17 per share. Now there were 1 billion shares outstanding originally, but the company has bought back 60% of them, which means that the total amount of shares outstanding has dropped to 400 million. It's still making $1 billion per year, but now it needs to repay $510 million per year in interest, so total profits have now dropped to a mere $490 million. It pays those profits out in dividends, and – presto – the dividend has actually risen, to $1.22 per share! That's 20% earnings growth, that is, so the stock price is no longer 15 or even 17 times earnings, but rather 20 times earnings. Which puts it at $24.50.

In other words, it's quite easy, if debt is cheap enough, to raise your earnings per share without raising your total earnings, just by borrowing money. Note that in my example, if the company paid 6% a year on its debt rather than 5% per year, none of the leveraging would work. But at 5%, it can boost the share price by more than 60%.

Posted by Felix at 9:27 EST | Comments (2)

Hedge funds get the New York Magazine treatment

New York magazine loves its special issues, and this week it's alighted on hedge funds. The conceit is "Behind the Hedge," which is illustrated with a picture of... a guy behind a hedge. Really. Is there anything new or interesting here? Not that I can see. But if you're looking for contrarian indicators, this issue could be a good sign of the beginning of the end of the hedge-fund craze.

Posted by Felix at 9:04 EST | Comments (0)

Citi eyes Pandit: Does it still care about retail banking?

Is Citi going to buy Vikram Pandit's hedge fund, Old Lane? According to today's WSJ, yes. The WSJ runs down the list of reasons why such an acquisition would make a lot of sense: Pandit would immediately beef up Citi's alternative-investments arm, which has been headless for a year, and might also make an excellent potential successor for Citi CEO Chuck Prince down the road.

The mooted acquisition price of $600 million doesn't seem ridiculously high for a $4 billion hedge fund: if such a fund makes 2-and-20 and has a 15% return, that would mean income of $200 million in just one year.

If Pandit does pop up at Citi, who would he be up against in the CEO-succession stakes? Here's the WSJ:

If Mr. Pandit joins Citigroup, his arrival could ignite a more vigorous contest among executives who could become potential heirs to Mr. Prince. He could be facing off against Michael Klein and Thomas G. Maheras, co-heads of Citigroup's corporate and investment-banking unit, and Ajay Banga, who runs the international consumer business.

The interesting thing here is that three of the four named potential successors, including Pandit, are investment bankers at heart, even though Citigroup isn't really an investment bank. Which raises one fascinating idea: might Citi, at some point, consider selling or spinning off its retail arm? Its performance certainly hasn't been much to write home about compared to the likes of Wachovia or Bank of America. But without a cheap deposits base, it would be even harder for Citi to succeed in the investment banking business – which these days requires a huge amount of capital.

Posted by Felix at 8:52 EST | Comments (0)

Putting that NYT payrolls chart in perspective

Remember that NYT chart from earlier today? Well, one of my favorite chart-makers, Wcw, or West-Coast Whiner, has helpfully converted it into a line chart, which does kinda put it in perspective. Here's Wcw's chart, with the NYT chart underneath:

As you can see, there is a case to be made that payrolls are falling slowing down on a year-on-year basis, even though they're rising accelerating on a month-on-month basis. But in the grand scheme of things they're actually pretty steady, compared to the wild swings we've seen in the past.

Posted by Felix at 17:56 EST | Comments (2)

Does microcredit work?

Blogs such as MicroCapital and Poverty News Blog are reprinting a Newsweek article by Mac Margolis which is summed up in the standfirst: "Critics put trendy poverty lenders to the test," it says, "and find they're neither a real business nor a real help."

Who are these critics? The main one is Thomas Dichter, a well-known aid-doesn't-work type at the Cato Institute. The others are not clear: is it really a criticism of microfinance to say that most microfinance programs are unprofitable? Many microfinance types would say that their main job is poverty alleviation, not turning a profit, and that they're more than happy to spend grant monies on the poor before trying to set themselves up as a profitable financial institution. I personally sit on the board of a community development credit union (CDCU) in New York – LES Peoples – which isn't "sustainable" unless you count the grants we receive. But we've been receiving them for 20 years, we have assets of almost $20 million, we're the largest CDCU in the country, and we're widely lauded by everyone from Hillary Clinton to Mike Bloomberg. Just because you don't turn an operating profit, doesn't make you a failure. Not by any means.

Margolis also has an interesting way of spinning good news as bad news:

Alex Counts, director of the Grameen Foundation, which is in charge of replicating the Bangladesh-based Grameen Bank around the world, admits that only a tenth of the bank's 7 million clients are "true entrepreneurs" who "started borrowing $100 and are now borrowing $10,000 to $20,000," but says that most are making ends meet.

"Admits"? That Grameen bank has helped only 700,000 clients to move from microloans to loans in the tens of thousands of dollars? If that's failure, let's have more of it!

As for Dichter, Margolis quotes an essay of his entitled "Microfinance Reconsidered," which apparently has been published by the Cato Institute, although I can't find anything of that name on the Cato website. The closest thing I can find is a paper by Dichter called "A Second Look at Microfinance: The Sequence of Growth and Credit in Economic History," which is mainly historical and concentrates solely on the history of finance in developed countries such as the UK, rather than looking at microfinance in the developing world today.

As for the substance of the debate, Margolis is right that there's much more heat than light in all the stuff being written. The big exception, in my view, is a wonderful paper by Shahe Emran, Mahbub Morshed and Joseph Stiglitz, which explains why microfinance works, in practice, in places like Bangladesh. It turns out that the main factor behind all these puzzles is the place of women in society, and especially extreme illiquidity in the market for women's labor: a little bit of credit acts as a catalyst for women outside the labor market, turning them into economically productive individuals.

To put it another way, the interest on a microloan isn't really return on capital, it's return on labor. It's just that without a tiny bit of capital, the labor is nascent and can't be tapped. That's why microcredit works.

Posted by Felix at 13:36 EST | Comments (4)

Are payrolls actually falling?

The NYT has an interesting chart accompanying its payrolls story today. While the text is as upbeat as you'd expect given the excellent figures, and despite the fact that the WSJ is running a story headlined "Economists Wonder if March Is the Peak for 2007 Job Growth", someone on 43rd Street seems to have decided to run a graphic showing payrolls going down.

The chart violates a basic rule of charting, which is that a bar chart like this should be used to show how quantities change from month to month. Looking at the bar chart, you expect the March bar to refer to March figures, the February bar to refer to February figures, and so on. But in fact they refer to a year-on-year differential, which is better displayed with a line chart.

Still, that's a quibble: A line chart would still be going down, even as everybody is talking about the payroll numbers going up. What gives? To be honest, I'm not entirely sure. Year-on-year figures obviate the need for seasonal adjustment, so maybe the real trend is down but is being hidden by the seasonal adjustments. Alternatively maybe the enormous revisions that the BLS has been doing to the time series of late make the year-on-year figures less useful than they otherwise would be.

In any case, it's not immediately clear to me why year-on-year figures should be charted when all of Wall Street concentrates solely on the month-on-month number. If you're going to use these figures, you should at the very least somewhere explain why.

Posted by Felix at 12:35 EST | Comments (6)

Is the US exploiting its military strength in trade negotiations?

The US knows how it likes its trade negotiations. It's a simple rubric: the US puts its proposal on the table, and its interlocutors accept.

In the Doha round of the WTO talks, as we know, this hasn't worked very well. So the US is signing bilateral preferential trade agreements instead, the latest of which is with South Korea. In turn, these bilateral agreements only serve to weaken the case for global trade agreements. Jagdish Bhagwati says that "the whole world has practically collapsed into bilateralism which is driven by sloppy arguments and failure of leadership by the major powers such as the United States." And Martin Wolf hates these bilateral agreements as well. So why do they happen? Robert Wade has an interesting take on Wolf's blog:

Singapore’s prime concern was less with the economics of the agreement than with the military-security impact: the government calculated that the agreement would help to tie the US into the region militarily. Presumably the South Korean government has been making a similar calculation, being only too aware of growing sentiment in the US to “bring our troops home”, including from East Asia, at the same time as North Korea could explode on its doorstep and China-Taiwan could explode to the south.

In other words, this isn't a trade agreement at all: it's a trade-for-security agreement. One could even, if one was feeling uncharitable, characterize it as the US extorting trade concessions from the East Asians in return for keeping a military presence in the region.

(Via Mark Thoma)

Posted by Felix at 9:49 EST | Comments (1)

Payrolls: Great!

There's no one around on the stock market to celebrate, but this morning's jobs report was fantastic. (Unless you're Barry Ritholtz, of course, in which case it's "not a big number".) Not only did March payrolls rise by a very strong 180,000, but both February and January were revised upwards as well, and unemployment is now down to 4.4%; economists had actually been expecting it to rise. Hell, there was even a rise in construction employment, although it didn't quite make up for the fall in February.

Bonds are down half a point or so, stock futures are up a little, and Fed fund futures are rapidly giving up any hope of a rate cut.

Standard disclaimer, here: although the monthly payrolls report gets a lot of press and can send markets gyrating wildly, the margin of error is enormous, and sober observers have started using words like "meaningless" and "random". All the same, the bulls have a smile on their faces this morning. Maybe it's because they've been proved right; on the other hand, maybe it's just because a lot of them have the day off.

Posted by Felix at 8:26 EST | Comments (2)

Do you want biofuels, or do you want to feed the hungry?

Tyler Cowen is an economist with a heart. He thinks he knows that protectionism and subsidies are ever and always a Bad Thing, but at the same time he can't bring himself to say anything too bad about tortilla subsidies in Mexico.

My head knows what is right but my heart is torn. Can Mexico can afford the protectionism which keeps local producers going and gives it the world's best and most diverse corn, the world's best tortillas, and supports a major part of its national identity, most of all for its most oppressed and politically sensitive groups? I am emotionally torn and will not proceed with the question any further.

If you're going to have subsidies, in other words, then subsidizing tortilla prices is a really good way to funnel a much-needed good to the poor. (Tortillas account for half of poor Mexicans' calories, and have been rising in price as corn prices soar in hopes of a future built on corn ethanol.)

In the May/June issue of Foreign Affairs, Ford Runge and Benjamin Senauer say quite explicitly that biofuels in general, and corn ethanol in particular, will "exacerbate world hunger".

The World Bank has estimated that in 2001, 2.7 billion people in the world were living on the equivalent of less than $2 a day; to them, even marginal increases in the cost of staple grains could be devastating. Filling the 25-gallon tank of an SUV with pure ethanol requires over 450 pounds of corn -- which contains enough calories to feed one person for a year.

Meanwhile, the article notes, US corn subsidies were $8.9 billion in 2005 alone. If the US is really serious about moving towards ethanol and biofuels, at the very least it should abolish import restrictions on Brazilian sugar ethanol, which is much cheaper and more efficient than US corn ethanol in any case.

But there is a humanitarian case for taking a second look at the whole issue of biofuels in general. Back to the Foreign Affairs article:

The production of cassava-based ethanol may pose an especially grave threat to the food security of the world's poor. Cassava, a tropical potato-like tuber also known as manioc, provides one-third of the caloric needs of the population in sub-Saharan Africa and is the primary staple for over 200 million of Africa's poorest people. In many tropical countries, it is the food people turn to when they cannot afford anything else. It also serves as an important reserve when other crops fail because it can grow in poor soils and dry conditions and can be left in the ground to be harvested as needed.
Thanks to its high-starch content, cassava is also an excellent source of ethanol. As the technology for converting it to fuel improves, many countries -- including China, Nigeria, and Thailand -- are considering using more of the crop to that end. If peasant farmers in developing countries could become suppliers for the emerging industry, they would benefit from the increased income. But the history of industrial demand for agricultural crops in these countries suggests that large producers will be the main beneficiaries. The likely result of a boom in cassava-based ethanol production is that an increasing number of poor people will struggle even more to feed themselves.

UPDATE: Andrew Leonard fingers not corn ethanol but Nafta and globalization for the rise in tortilla prices

Posted by Felix at 7:46 EST | Comments (2)

Is Chrysler actually worth more than $0?

Breaking Views analyst Antony Currie has the down-low on the Kirk Kerkorian bid for Chrysler – and if you don''t have access to his ultra-exclusive website, you can get much the same analysis in the comments section of felixsalmon.com for free!

The key thing to bear in mind is Chrysler's unfunded healthcare liabilities, which are currently hovering around the $17 billion mark. As Floyd Norris notes today (also behind a subscriber firewall, sorry), "Kirk Kerkorian is not so much offering to buy Chrysler as he is volunteering to be paid to take it on."

It's here where it starts to make sense for DaimlerChrysler's Dieter Zetsche to choose a union-endorsed bid. As Currie explains,

Kerkorian has made his deal contingent on unions granting concessions. Assume a one-third cut in these worker benefits, a bit more than Ford Motor and General Motors got 18 months ago, and that takes $5.5bn off Daimler's bill. That would still leave Daimler holding some $7bn of Chrysler's bag. But that's significantly less than it's currently stuck with, so the company's shareholders would not be damaged. Moreover, Daimler and Tracinda might even be able to cut that back more by offering the unions an equity stake in Chrysler as part of the deal.

On the other hand, it's early days yet, and it's all but certain that someone else will pop up with a bid to rival Kerkorian's. Currie has one intriguing notion: how about General Motors? If a real bidding war gets under way, Chrysler might even sell for more than $0!

Posted by Felix at 22:15 EST | Comments (1)

Kerkorian's weird bid for Chrysler

Kirk Kerkorian has gone public with a low-ball, $4.5 billion bid for Chrysler. He knows the company well: he had a 10% stake in 1995, when he tried to buy it for $20 billion, and held onto that stake until Chrysler was eventually sold to Daimler for $36 billion. So he's already made $3 billion from Chrysler, and now he's coming back for more.

But why would DaimlerChrysler accept such a low bid, when all the chatter values Chrysler at closer to $8 billion? Kerkorian tugs at the heartstrings in his letter. He tries to paint himself as the "right" ownership, which will "build Chrysler into a robust and lasting, stand-alone entity," and who will make "the necessary investments" in R&D and manufacturing.

All of which might be true. But DaimlerChrysler CEO Dieter Zetsche's foremost obligation is to his shareholders, and he is going to have a devil of a time explaining why it's leaving billions of dollars on the table just because Kirk Kerkorian is a nice guy.

Posted by Felix at 16:28 EST | Comments (2)

Lunch with Nassim Nicholas Taleb

So the lunch with Nassim Nicholas Taleb happened, in a rather pretentious little place on 15th Street, which at least was quiet. I arrived brimming with questions, and left with only a few of them answered, but had a great experience all the same.

I think I'm going to do a more formal Q&A with Taleb when both his book and the first reviews are out – probably by email. But here are a few questions I had going in to the lunch, along with any answers that Taleb gave me, if any. They should at least, give an idea of the kind of questions which get raised by his book.

• Are common economic concepts such as cycles or reversion to mean remotely useful or even meaningful? (I asked Taleb this, and got a general reply about all economics being not only useless but also unethical.)
• What does NNT think of Robin Hanson's blog, Overcoming Bias? (Taleb says he doesn't know it. But he should – there's enormous overlap between the blog and the book. The blogs he likes the most are Arts & Letters Daily and 3 Quarks Daily. He does read newspapers online, but usually through links from these sites. He's not interested in news, per se.)
• The "Black Swan" of the title comes from the idea that you can't confirm a statement like "all swans are white" by observing white swans. Similarly, you can't prove that OJ Simpson is not a murderer by closely observing him all day and seeing him murder nobody. On the other hand, if you give me two paragraphs and tell you they're anagrams of each other, I'm likely to pick a letter at random, probably something uncommon like W or Q or Z, and count its occurrences in each of the paragraphs. If the occurrences match, I'll be more likely to believe you. Is there some kind of real confirmation going on here? Or are all such observations largely meaningless unless and until you've either falsified the claim or proved it outright? (Taleb: Yes, there is some confirmation going on.)
• Housing/property: Would NNT be a buyer or a seller in the current market? (No chance of an answer to that one, despite the fact that Taleb is a good friend of Robert Schiller.)
• NNT's own investments, which he says are mainly in Treasury bills: Why that, rather than overnight cash? (Unasked.)
• NNT calls himself a "skeptical empiricist". Does he think that people he meets think themselves to be skeptical empiricists, but aren't? (Asked. Taleb loves being fooled by randomness, and is not much of a skeptical empiricist in his day-to-day existence. But he certainly is when it comes to investment advice. This led into a broader conversation about skeptics of the past, from Kripke back to Hume and even earlier. Taleb absolutely sees himself in the tradition of the philosopher who destroys epistemic edifices, rather than the philosopher who, after laying out a skeptical position, then tries to overcome it, in the way that Descartes tried to do with his evil demon.)
• NNT draws the distinction between jobs which are scalable – jobs where income can go up a lot without the individual working any harder, such as writing books or trading options – and jobs which are not scalable, such as dentistry or prostitution, where to make more money you basically need to do more work. Taleb has always had scalable jobs, and says that all non-scalable jobs are dull. But what about emergency-room physicians, or homicide detectives, or even magazine journalists? (Taleb conceded this: admitted that, yes, there were non-dull non-scalable jobs. He admires George Soros mainly because Soros is so quick to change his mind or decide that he was wrong about something, and one of the main themes of his book is humility in the face of the fact that we don't really know anything. So it was easy for him to concede the point: despite the fact that Taleb clearly has a very well-developed ego, he isn't wedded to being right.)
• NNT says that Syria and Saudi Arabia are more likely to descend into chaos than Italy is, precisely because there has been so little chaos in those countries of late. He contrasts them with Italy, which is built on chaos, and therefore less at risk of it. So does that mean that other stable countries, such as, say, Sweden, are also at risk of chaos? (Unasked.)
• Warren Buffet – skilled, or lucky, or some combination of the two? And isn't his main business, reinsurance, essentially one big bet against Black Swans? (Taleb said that reinsurers don't make money, although insurers do: insurers live in what he calls Mediocristan, a world where the law of large numbers applies, and the number of car accidents, say, is predictable and therefore can reasonably be insured against. Reinsurers, on the other hand, live in Extremistan, a world with 9/11 and Hurricane Katrina and outbreaks of war and other unforeseeable events – and that's a business Taleb would never want to be in. Ironically, however, he is actually in the business of insuring against Black Swans: that's what the company he's a part-owner of, Empirica, does. As for Buffett, he's made his money not through reinsurance so much as by investing the large amounts of cash which come with owning a reinsurer. Is that luck or skill? Unasked.)
• In Extremistan, the world in which we live, power laws apply where the successful become more successful and the unsuccessful become less successful. We can see this in the housing market right now, where New York City prices are stratospheric and rising, while prices in Detroit are at rock-bottom and falling. A Black Swan could hit New York CIty and hurt prices here. But could a positive Black Swan hit Detroit, and send prices there sharply upwards? (Not asked directly. But Taleb did point out that short-term Black Swans are usually negative, such as Hurricane Katrina or Russia's sudden bond default, while positive Black Swans are usually long term, such as the rise of the internet or even the rise of New York City itself. So if Detroit does become great again, it won't do so overnight: it takes a lot longer to build a house than to destroy one.)
• Black Swans, by definition, are unexpected. But everybody and their mother these days seems to be forecasting or expecting a housing bust, a credit crunch, a disorderly unwinding of global imbalances, or something along those lines. If that happens, and it's so widely expected, does that mean it's not really a Black Swan? Was the equally-forecast popping of the dot-com bubble a Black Swan? (Asked, not really answered.)
• NNT is very rude about the way that finance and economics types measure risk, with things like Value-at-Risk measurements and companies like RiskMetrics. Does that mean that Basel II is actually riskier than Basel I? Does it also mean that the CAPM should be discarded? Is investing money in such a way as to keep up with the S&P 500 with just one-third of its volatility not nearly as impressive an achievement as most financial professionals would have you believe? (Not asked directly, because Taleb was very keen that he hasn't written a finance book. He wants his book to be found in the Philosophy section, not the Finance section, of bookstores, and will volunteer that its genre is "philosophy of history".)
• NNT, in his book emphasizes the "narrative fallacy" and the idiocy of believing that we can really or ever know the cause of any events in the real world. Where does that leave, say, monetary policy? If we can't say that cutting interest rates caused the economy to grow, then what is a central banker to do? (Taleb did inch towards conceding some causality: he said that if a central bank raised interest rates and then there was a recession, you can reasonably claim that the rate hike caused the recession. But he also said that the economic forecasts on which central banks base their actions are worthless, and that even broad economic numbers such as GDP are much less useful than most economists believe.)
• Does NNT buy insurance? (Yes.)

And here's a few other things I learned over the course of the lunch:

• Taleb was a bit mistrustful