Jockeying Begins for IMF Position

Posted on July 10, 2007 by Felix

Is there some kind of rule which says that high-profile international technocrats

have to be French? Sometimes it

seems so:

France has had its fair share of IMF heads as Frenchmen have led the institution

for more than 30 of its 61 years of existence, and also have Jean-Claude

Trichet in charge of the European Central Bank, Pascal Lamy

at the World Trade Organization and Jean Lemierre at the

European Bank for Reconstruction and Development.

The story here is that Dominique Strauss-Kahn, the former

French finance minister, is already heir apparent to Rodrigo Rato as

managing director of the IMF. One point in his favor: he’s utterly failed to

become president of France, so he’s not going to pull a Horst Köhler

and quit to become president of his own country. French president Nicolas

Sarkozy has already started working the phones for Strauss-Kahn, long

before any other country has even so much as come up with a candidate of its

own. As the WSJ drily

puts it, "France nearly always has a stable of candidates for these

international posts."

The Bank of England’s Mervyn King seems to have dropped out

of the running, perhaps because UK finance minister Alistair Darling

has decided to take

the high road and say that the job should go to the most qualified candidate,

regardless of nationality. As if. Darling’s sentiment is noble, to be sure,

but with the US already having said that it will support Europe’s candidate,

the final outcome is a foregone conclusion.

Of course, there are many more countries which count as European these days

than did in 1946 when Belgium’s Camille Gutt became the Fund’s

first MD. Which means that the next leader of the IMF could be a European and

come from a developing country: Poland’s Leszek Balcerowicz,

for instance, is on the

BBC’s list of possible names.

Officially, the IMF is accepting nominations from

any country, just like it did three years ago, when Egypt nominated Mohamed

El-Erian. And it’s quite likely that this time around the non-European

candidate will get more votes than El-Erian did last time, if there’s a strong

candidate put forward. A non-European leading the IMF is a bit like gay marriage:

everybody knows it’s inevitable sooner or later, but it does seem to take an

eternity before we get there. Maybe what’s needed is someone who already has

a job running an international institution, ideally in France. Angel

Gurría would be an excellent choice, I think – the former

Mexican finance minister is now secretary-general of the OECD, in Paris. He

also, according to Wikipedia,

"speaks eleven languages including: Spanish, French, English, Portuguese,

Italian and German." That’s gotta help, no?

In the meantime, the world could do worse than Strauss-Kahn. He’s qualified

for the job, he’s broadly respected, and he fits right in to a tradition of

bold-face French technocrats including Jacques de Larosière

and Michel Camdessus. And from Sarkozy’s point of view, of

course, his appointment would also have the added bonus of meaning that one

of his key political opponents would be shipped off to Washington where he could

do very little harm.

Posted in IMF, technocrats | Comments Off on Jockeying Begins for IMF Position

New York State’s Mind-Boggling Economic Irrationality

Posted on July 9, 2007 by Felix

Michael Bloomberg is an economically rational animal. The

federal government has half a billion dollars or so that it would love to throw

at a New York City congestion-pricing scheme. So Bloomberg put together such

a scheme. Result: half a billion dollars in free money! Or, not so much. For

of course this isn’t just New York City, home of bankers and economists and

billionaires who know a good opportunity when they see one. This is New York

State, home of ridiculously

arcane politics, a place where a personal beef between the governor and

the senate majority leader carries much greater weight than any federal dollars.

This is New York State, where one man, Shelly Silver, whose

constituents almost without exception support the congestion charge, will happily

watch it wither on the vine for reasons which even the New York Times editorial

page can’t

begin to fathom.

Insofar as there’s formal, reasoned

opposition to the congestion charge, it’s being led by assemblyman Richard

Brodsky, who (aside from getting huge campaign contributions from the

owners of Manhattan parking garages) is quibbling

over such minor details as the exact cross street at which the congestion charge

will start, and the exact hours during which it will be in effect.

Of course, if Brodsky actually cared about those details, he’d make sure that

New York got the $500 million from the Feds first, and would then try to use

that money as best he could. But in New York State, there’s precious little

in the way of economically rational thought: much better that the city lose

half a billion bucks than that it should have the opportunity of reducing the

enormous costs in terms of time and money and health that are paid by New Yorkers

every day while negotiating traffic jams and belching cars.

Question for Tyler Cowen, or anybody else who likes to use

economics to explain human behavior: Why on earth would the New York state assembly

leave $500 million lying on the table like this? All they need to do is approve

in a timely manner a plan which will happen anyway. And why is Silver, in particular,

being so spectacularly unhelpful? I said

back in 2003 that New York behaves much like a dysfunctional Latin American

nation. Since then, most Latin nations have got their act together, certainly

in terms of fiscal policy. New York, meanwhile, has gotten precisely nowhere.

Posted in cities, economics | Comments Off on New York State’s Mind-Boggling Economic Irrationality

Blogging Risks in the CDO Market

Posted on July 9, 2007 by Felix

After having my coffee

with Armond Budish this morning, I found myself in the neighborhood of my

old offices at Roubini Global Economics,

so I popped in to say hi. Nouriel

was there, extremely alert and rested for someone who’d made two trips to Singapore

in the space of one week, and so was Brad

Setser, who, being Brad, wanted to talk about the potential systemic consequences

of a rebalancing of Arab states’ foreign exchange reserves. Apparently the blank

stare he got from me is pretty much identical to the blank stare he gets from

Wall Streeters when he brings up the same issue, which probably means that he’s

on to something very important. As a general rule, systemic shocks come from

somewhere unexpected, which means that something like the currency composition

of Middle Eastern oil monies could actually be much more dangerous than the

subprime mortgage mess over which so much ink has already been spilled.

It didn’t take Brad too long to cut his losses and move on to something I have

a bit more interest in: CDOs, especially those made up of subprime mortgages.

Brad and I are both fans of the blog Naked

Capitalism, and Brad brought up an entry

from Friday in which Yves Smith talks about exactly how

such things are constructed. Smith quotes Eugene

Linden:

In recent years, the money funding these mezzanine tranches has come from

a subset of another securitization called collateralized debt obligation or

CDO. To form a CDO that invests in subprime mortgages, a securitizer will

buy up mezzanine tranches from perhaps 100 different mortgage-backed securities,

and then package them in different tranches similar to the way a mortgage

backed security was packaged in the first place. Thus, some CDO’s can consist

entirely of BBB- tranches of subprime mortgage MBS, but still have 95% of

their value rated investment grade.

Now Linden, if we can believe his blog entry, is chief investment strategist

for a hedge fund that specializes in distressed and bankrupt situations. Which

would mean he’s not a typical innumerate journalist, prone to getting things

very wrong. But Smith is loathe to take Linden at face value. Here’s what he

writes:

From what I have read, it seems more typical for CDOs to have a mix of paper

(unless they are CDO-squared or cubed, which hold only other CDO paper, I

can’t generalize about them), which can include commercial mortgages and LBO

debt along with residential mortgages. One of the reasons to buy a CDO rather

than an MBS is to get diversification.

Brad, too, was confused. If a CDO is comprised of the mezzanine tranches of

lots of bonds all of which are backed by subprime mortgages, how can most of

that CDO be rated investment grade? An investment-grade credit rating on such

an animal would have to come from the supposed diversification benefits of owning

lots of different subprime-backed tranches. And maybe that’s what happened:

the people putting the CDOs together persuaded the credit agencies that because

the subprime-backed bonds came from all over the country, say, they wouldn’t

all go sour at once. And maybe the ratings agencies, who were making shedloads

of money rating these CDOs, didn’t ask too many questions. So maybe it’s true

that people who think they’re holding AA-rated CDO paper are in fact holding

something which should be trading much more like junk.

But maybe it’s not true. After all, ratings agencies might be stupid, but they’re

not normally that stupid. And it’s not even clear that there was remotely

enough mezzanine-rated subprime-backed paper to go around in the first place,

which is why a lot of CDOs ended up making leveraged bets on AA-rated paper

(just like the younger Bear Stearns fund) rather than investing directly in

hard-to-find BBB-rated paper. And it would certainly make a lot of sense, if

only to help boost its credit ratings, for a CDO to diversify its holdings out

of residential mortgages and into, at the very least, commercial mortgages.

In other words, when you start hearing horror stories about CDOs and other

magical pieces of financial engineering, approach with extreme skepticism. Smith

finds quite a few other holes in Linden’s story, as well, which only serve to

make the whole thing more suspect. He’s part of a wonderful vanguard of bloggers,

including Tanta at Calculated

Risk, who are very good at seeing through the hyperbole of media reports

to the often much less sensational realities underneath. Both Smith and Tanta

are very worried about the effects of the housing market on the market in mortgage-backed

securities and thence to the credit markets in general. But they don’t exaggerate

for effect, and they call out people who do. And that’s something all of us,

trying to pull a signal from all of the noise, should be very grateful for.

Posted in bonds and loans | Comments Off on Blogging Risks in the CDO Market

Control Your Money Even After You Die

Posted on July 9, 2007 by Felix

I had coffee with Armond Budish this morning, who’s plugging

his new

book on estate planning. It’s called "Why Wills Won’t Work (If You

Want to Protect Your Assets): Safeguard Your Estate for the Ones You Really

Love," and, yes, it does italicize the "Really". That’s one of

Budish’s points: it turns out that people love to play favorites when they decide

who they’re giving their money to, and they’re often particularly keen to give

their money to their their own direct descendants rather than to people who

simply married into the family.

Budish has been an estates lawyer for many years, and has had a lot of clients,

so he knows how people really think. "The biggest concern people have is

that they don’t want their money to go to the spouse," he says. "I

hear that all the time." In his book, he even talks about ways of setting

up a trust so that not only does your son-in-law or daughter-in-law not benefit

from it, but in some circumstances that person doesn’t even find out about the

trust’s existence, even during a divorce proceeding.

The book goes into a lot of detail about all the different types of trust that

people can set up to perform all manner of functions. These trusts all avoid

the hassle of probate, but they also can’t be seized in those divorce proceedings;

they can’t be attached by creditors; they can be structured so that they don’t

count towards one’s wealth for purposes of Medicaid eligibility; etcetera. There’s

a lot of talk about how best to avoid paying taxes in general, and estate taxes

in particular.

So it came as a surprise to me that Budish is not only a Democrat, but is actually

the State

Representative for District 8 in Cleveland, Ohio. He sounds quite Republican

in his book – he refers to the "death tax" rather than the estate

tax, for instance – but it turns out he’s all in favor of the estate tax,

calling it "probably the most fair tax". He spends a lot of the book

talking about how to protect assets from frivolous lawsuits, but he’s also opposed

to tort reform, and will admit, if pushed, that protecting assets from frivolous

lawsuits also protects assets from entirely justified and proper lawsuits which

he thinks people should be able to bring.

Of course, there’s no real contradiction here. Budish is a good lawyer, and

like any good lawyer he puts his clients’ interests first when he’s representing

his clients; on the other hand, when he serves politically, he puts the greater

good first. But it’s still very interesting to me that a Democrat wrote this

book. The main theme of the book is that people can and should target their

estates very carefully, making sure that their assets trickle directly down,

vertically, if you will, to their direct descendants. The book is full of the

nasty things that can cause money to be distributed horizontally, away from

direct descnedants: lawyers’ fees, litigation, divorce, taxes, and so forth.

But a large part of the difference between Republicans and Democrats is that

Republicans like to keep wealth where it is, while Democrats are more inclined

to favor horizontal redistribution.

We did talk a bit about one of my favorite examples of horizontal redistribution

of wealth: the multi-millionaire John Kerry. Kerry became so rich by marrying

Teresa Heinz, who became dynastically wealthy by marrying the late senator and

ketchup heir John Heinz. Did Budish really want to prevent this kind of redistribution?

That’s certainly the impression one gets from reading his book, although really

all Budish does is enact the desires of his clients. If they’re happy for their

money to be able to flow first to their wife and then to their wife’s second

husband, that’s fine. And if they’re not happy about that possibility, they

can prevent it.

And it turns out that rich people – people in general, most likely –

have a desire to control things even from beyond the grave. They can’t spend

money at that point, but they can try to ensure that their money benefits certain

individuals and not others. The trusts in the book are all essentially ways

in which people can live, or at least enact their wishes, after their death.

No one, it seems, is ever happy just letting go.

Posted in personal finance | Comments Off on Control Your Money Even After You Die

Whither the UBS Investment Bank?

Posted on July 9, 2007 by Felix

What with all the recent upheavals over at UBS, it probably made sense for

chairman Marcel Ospel to go

on the record saying that the bank won’t spin off its underperforming investment-banking

arm. Quite the contrary, he says: UBS intends to put in "additional investment"

he’s quoted as saying, "with the goal of strengthening the group’s position

among the top five in investment banking."

There are three main approaches that UBS could use here. The first is to spend

a lot of money on hiring the very best professionals. UBS has tried this in

the past, with relatively little success, largely because the very best professionals

tend to understand that they will have better careers overall if they stay at

Goldman Sachs. What’s more, hedge funds are now able to outbid any investment

bank, making poaching bankers even more difficult.

The second approach is to grow by acquisition – which is essentially

the route that UBS has taken to get to its present position. It’s bought various

investment banks along the way, including SG Warburg and Dillon Read (via its

acquisition of Swiss Bank) and PaineWebber. There are certainly a few investment

banks which are small enough to be swallowed easily by UBS: Lehman Brothers

and Bear Stearns are both talked of often as takeover candidates. But according

to Reuters, "Ospel said acquisitions in the U.S. market were more likely

to be in the wealth management field than in investment banking." So we

can probably rule this one out for the time being.

Which leaves the third approach, which is to give the investment bank much

greater access to UBS’s enormous balance sheet. This is the approach which Citigroup

has taken to rise to the top of the M&A league tables, and it’s tantamount

to winning by brute strength, rather than any particular skill. Still, if you’ve

got that kind of strength, it does make a certain amount of sense to use it.

By all accounts, fomer CEO Peter Wuffli found it difficult

to allocate more capital to the investment bank. Maybe his successor,

Marcel Rohner, will have more luck. Or maybe the attempt to grow the

investment bank will turn out to be more theoretical than real. Rohner is a

veteran of UBS’s buy side; it’s not yet clear that he has a lot of love or understanding

for the sell-siders in New York.

Posted in banking | Comments Off on Whither the UBS Investment Bank?

Monday Morning Links are Feeling Charitable

Posted on July 9, 2007 by Felix

I’m going to be travelling for a large part of this morning, and then having

coffee with an expert on estate planning, so here’s a few links to keep you

going until I can get up and running.

If you invest your money well and give some of the proceeds to charity, are

you really doing a good thing? Tim Harford says

yes, but he’s talking about donations on the order of a thousand bucks or

so. What would he think about TCI’s Chris Cooper-Hohn, whose

idea of giving money to children seems to be to give away £5.1 million

in disbursements, while investing about £200 million back

into his own hedge fund? We’re assured it will all find its way to good

causes eventually, and indeed so far the hedge-fund investments have worked

out very well indeed for the charity. But if those monies aren’t actually making

their way to children, who really benefits here?

Of course, you don’t need to be English to be a successful hedge-fund manager.

Kim Mikkelsen, "a golfer who enjoys Spanish wine"

according to Bloomberg’s Anchalee

Worrachate, has been making a killing in Danish mortgage-backed securities.

Factoid of the day: "Denmark, with a population of 5.5 million, has Europe’s

second-biggest mortgage market behind Germany." And trust me, there’s nothing

more boring than the German MBS (or Pfandbrief) market. Go Denmark!

Also, Go Norway! Lance Knobel finds

an FT article in which Knut Kjaer, the manager of Norway’s

$350 billion public pension fund is revealed to make less

than $500,000 per year. (If he was making just, say, 1% of assets, that

would put him on $3.5 billion a year.) Also, Wal-Mart won’t answer his questions,

so he won’t buy their shares.

On the subject of Wal-Mart, BusinessWeek’s Pallavi Gogoi asks whether the retailing

giant should be allowed

to start a bank. The magazine also hosts a debate

on the subject. I hope to have more on this subject later this week, but ultimately

it’s simple: of course Wal-Mart should be allowed to offer banking services.

And of course it won’t be allowed to do so, because fearful banks and credit

unions will do everything in their power – and that’s a lot – to

stop it from happening.

Finally, Colin Oakes left a very interesting comment on a

blog entry

of mine from early May, on the subject of when the investing profits of

charitable organizations are tax-exempt. If you’re reading this, Colin, send

me an email – I’d love to delve deeper into this subject, since it

has very interesting implications for a lot of university endowments.

Posted in remainders | Comments Off on Monday Morning Links are Feeling Charitable

Who Will Get Acquired On Monday?

Posted on July 7, 2007 by Felix

Cotten

Timberlake has been looking at action in Macy’s and Target shares, and reckons

it’s consistent with the kind of insidery

trading which often precedes an acquisition announcement or a shareholder-friendly

spinoff. So maybe Macy’s will be bought on Monday, or maybe it won’t: "It

was the third consecutive Friday that the shares rose on the possibility of

a buyout," Tiimberlake says.

A more likely takeover candidate is UK marketing and advertising agency Adventis.

Capital Chronicle’s RJH Adams notes that shares

in Adventis surged 5.6% in the last two hours of trading on Friday, on volume

of 1 million shares. Which doesn’t seem particularly shocking until you learn

that typical volume in Adventis is 250,000 shares a quarter.

Adventis is a very strong candidate for some kind of big announcement, then,

while Macy’s and Target are strong possibilities. After all, we do know that

insider

dealing is rampant, and rarely successfully prosecuted.

(Via DealJournal)

Posted in stocks | Comments Off on Who Will Get Acquired On Monday?

Why Dell Won’t Get Delisted

Posted on July 6, 2007 by Felix

In the staredown between Dell and Nasdaq, it’s the stock exchange, not the

computer company, which blinked

first. Dell hasn’t

filed any of its last three quarterly reports, nor its annual report for

2006, which means that, by rights, the Nasdaq should delist its sorry ass. And

the Nasdaq surely would – if it wasn’t dealing with, you know, Dell.

The legendary PC maker trades tens of millions of shares a day, and

has a market capitalization of over $60 billion. Which means, basically, that

Dell is too big to delist.

Nasdaq has now given Dell another fortnight – until July 16 – to

get its act together, and Dell has said, noncommitally, that it is "moving

toward the completion of the reports". In other words, "don’t hold

your breath".

What happens if the reports aren’t filed by July 16? I’ll wager that Dell simply

gets another extension. I mean, if you were running the Nasdaq, would you

pull the trigger? I didn’t think so. Corporate governance is all well and good,

but ultimately delisting the company would mainly harm the shareholders you’re

purportedly there to protect.

(Via Valleywag)

Posted in governance, stocks, technology | Comments Off on Why Dell Won’t Get Delisted

The World Bank vs China in Africa

Posted on July 6, 2007 by Felix

Jeff Sachs tells

Robert Zoellick, incoming president of the World Bank, that

there are "four areas where the bank can have a quick and dramatic success".

The first is food production: Sachs is a big fan of a Malawian voucher scheme

which he’d love to see rolled out across the continent, providing fertilizer

and high-yield seed. The second is, of course, anti-malarial bed nets. But it’s

the last two which interest me:

  • It can help Africa achieve electrification by 2015. It is a cruel myth

    that development without electricity is possible in the 21st century. Rather

    than helping countries ship their oil abroad and then remain dependent on

    wood for energy, the bank should be helping Africa develop its hydrocarbons

    to support regional power grids.

  • The bank urgently needs to help Africa finance roads and rail upgrading,

    starting with a major highway (rather than a two-lane, broken- down road)

    linking the port of Mombasa in Kenya with Nairobi and Uganda, Rwanda, Burundi,

    and eastern Congo. A road and rail network would enormously expand trade between

    Africa and the world.

The Bank certainly could get involved in major African infrastructure

projects, building roads and power plants. But if I were an African leader,

the World Bank would definitely be my second choice for such things. There’s

a new development power throwing its weight around Africa, and it’s called China.

The Chinese, I’m quite sure, could build roads and railways and power plants

much more quickly and much more cheaply than the World Bank – in fact,

they’d probably have started importing workers and actually building things

before the Bank had even got halfway through its process of environmental impact

assessments.

There are downsides to letting the Chinese fund such things. For one thing,

China has a habit of using Chinese, rather than local, labor – which of

course doesn’t help the local population very much. And the Chinese don’t have

the same corruption controls and other checks and balances which are now part

of every World Bank project, which means that Africa’s physical infrastructure

would be improving much more quickly than its institutions were becoming grown-up

and sustainable. But Africa’s need for infrastructure is urgent, and any African

government should jump at whatever the quickest, cheapest option is. Right now,

that’s much more likely to mean looking east than looking west.

Posted in development | Comments Off on The World Bank vs China in Africa

Crazy Leverage in the Hilton Deal

Posted on July 6, 2007 by Felix

Russ Winter notes that Blackstone’s acquisition of Hilton

hotels doesn’t make

a lot of sense from a cashflow perspective:

Typifying just how loonie these transactions have become, HLT has operating

income of about $1.2 billion, or a mere 4.1% of the take out price. Assuming

$25 billion in debt, that would place debt service at about $2 billion a year.

Blackstone plans no divestitures, so the math is straightforward, and the

presumption is as well, just borrow the balance. This is definitely the Terminator

roulette school of business economics.

In some ways, this is actually worse than the notorious "exploding ARMs"

which caused such damage in the subprime mortgage market. At least in that case

the borrower’s income was high enough to cover interest repayments for the first

two years. In this case, Blackstone could boost Hilton’s operating income by

50% overnight and it still wouldn’t have enough money to pay the interest

on its debts. (But hey! At least this means that Hilton won’t make any profits

– and no profits mean no taxes!)

Lenders, in this situation, are essentially taking equity-like risk. They’re

looking at Blackstone’s track record, which is stellar, and counting on Steve

Schwarzman being able to raise the value of the Hilton brand so much

that he can sell it off in five years’ time and repay the loans in full. This

is dangerously close to the "greater fool" theory of investing: my

loan might not make any sense on its own, but somewhere down the line someone

with an even bigger credit line will take me out. As far as I can make out,

no one has the slightest intention of actually paying down any of the principal.

The crazy thing is that the lenders aren’t even being well compensated for

all this risk. $2 billion of debt service on $25 billion of debt works out at

8%, which might be high by debt-market standards but is a pittance compared

to the returns that Blackstone’s limited partners are expecting. And the amount

of debt that Hilton is taking on – $25 billion – dwarfs Hilton’s

book value of about $3.9 billion. In other words, don’t expect much recovery

value in the event of a credit crunch, default, and liquidation.

Now Winter might be off on the exact specifics of Hilton’s future capital structure,

but the broader point remains. LBOs have long since passed the point where operating

income can cover interest payments – hence the increasing popularity,

over the past year or two, of payment-in-kind notes. (Never mind the interest,

I’ll just take more debt instead!)

And these kind of structures are more dangerous than CDOs and subprime mortgages,

because at least in those cases most of the debt being issued was A-rated or

higher. Even if the investors in the equity tranches of CDOs and mortgage-backed

securities are wiped out, most investors will continue to get the interest payments

they were promised.

In the case of junk bonds, however, it’s all junk. Which could be very bad

news for lenders. The only silver lining is that a lot of these junk bonds have

been rolled into CDOs, which can help bring their credit rating up a few notches.

I’d be much happier holding a triple-A tranche of a CDO loaded to the gills

with CCC-rated debt than I would be holding the junk debt itself. Of course,

I could still lose money, especially on a mark-to-market basis. But between

the CDO’s natural diversification, on the one hand, and the protection of lower-rated

tranches, on the other, I’d still be better off than unprotected bondholders.

Posted in bonds and loans, private equity | 1 Comment

Payrolls: Unhelpful, As Usual

Posted on July 6, 2007 by Felix

With the Independence Day holiday behind us and a sunny weekend in front of

us, this is going to be a quiet day even by summer-Friday standards. As a result,

the jobs report

which came out this morning is bound to get a large chunk of what little attention

the market is paying to what’s going on. And that’s a pity, since, like most

jobs reports of late, it has increasingly little credibility.

Barry Ritholtz today does a good job of taking

the jobs report apart, saying that a lot of it just doesn’t pass the smell

test, including the 4.5% unemployment rate, the rise in construction employment,

and the boost of 156,000 jobs due to the birth/death adjustment. Calculated

Risk, too, is puzzled.

And, as is increasingly normal on the first Friday of the month, past jobs reports

got revised massively, which should be enough to make traders wonder why they

should take this month’s numbers seriously.

My take on the jobs report is that once upon a time it was useful, but that

nowadays, with a large increase in self-employment and with the margins of error

dwarfing the actual numbers reported, it’s becoming largely irrelevant. The

only useful thing you can do with it is look at it through squinted eyes and

try to discern vague trends: in that respect, one might be able to say that

weakeness in the housing market has not visibly fed through to weakness in the

broader economy, at least as far as employment is concerned. But this report

is far from dispositive: if you think that, contra the report, there actually

is weakness in the US jobs market, you might well be right. With the

quality of statistics we have to work with, there’s simply no way of telling

for sure.

Posted in statistics | Comments Off on Payrolls: Unhelpful, As Usual

Bono Bashing

Posted on July 6, 2007 by Felix

Does anybody have a nice word to say about Bono?

Pablo Halkyard has a round-up

of recent articles and blog entries attacking the Irish rocker and humanitarian,

which appeared just before William Easterly published an op-ed in the LA Times

headlined "What

Bono doesn’t say about Africa". Even Marc Andreessen,

in something of a running joke, has a series of blog entries entitled simply

"Bono" (1,2,3),

and I can assure you that none of them is flattering.

Is this the same man who is going to receive the 2007

Liberty Medal in September? The man whose DATA

nonprofit is extremely highly regarded among development wonks? What has he

done to become the whipping boy for people who thinks he’s concentrating too

much on Africa, at the expense of non-African solutions to African problems

(Jagdish

Bhagwati), as well as people who think he’s arrogantly imposing non-African

solutions on Africans who don’t necessarily appreciate his efforts (Brendan

O’Neil)?

I honestly have no idea why this should be, although I think we can rule out

the theory that all these individuals bought U2’s Pop album in 1997

and are still sore about it. I also don’t think it’s tall

poppy syndrome, given the number of Americans who count themselves among

the Bono bashers.

It does seem to be the case that Bono is much more popular among people who

have met him and been surprised at his grasp of policy debates (Paul

O’Neill, famously) than he is among people who think he’s simply grandstanding

on the cover of Vanity Fair. As for me, I’ve never met the chap, but I’m hesitant

to bash him too much, even though I don’t agree with everything he says. The

administration of George W Bush, for instance, has been much more generous and

constructive towards Africa than that of any previous president – and

I think that Bono deserves some of the credit for making that stance politically

possible. So I’m tempted to ask if it isn’t time to give the man a break.

Posted in development | Comments Off on Bono Bashing

Adventures in Technical Analysis, Apple Edition

Posted on July 6, 2007 by Felix

Every so often, one comes across a piece of technical analysis mumbo-jumbo

so glorious in its meaninglessness that one can only stand back in admiration,

as though it were a Leonardo painting or perhaps a magnificent skyscraper. Yesterday,

Mark

Gongloff found a

true classic of the genre:

Tuesday’s Large Range Extension on substantial volume left a buy signal

on Apple. On the heels of Monday’s slight break of the afore mentioned

triangle, Tuesday’s convincing breakout above the top of the pennant

triggered a Triangle Pendulum Buy Signal.

Note that the upper end of a Parallel Channel is in the low 130s.

This Square of Nine chart shows how 50, 83 and 123 resonate…

I’m particularly impressed by the Square of Nine charts (isn’t that a character

in some Star Trek spin-off?), if only because they really are indistinguishable

from astrology. If only these things had been combined with a double evening

star, or an exclamation

point on a doji star – but then there would be nothing left to look

forward to, I suppose.

Posted in stocks | Comments Off on Adventures in Technical Analysis, Apple Edition

Wuffli Out at UBS

Posted on July 5, 2007 by Felix

The UBS press

release announcing "senior executive management changes" (aka

the firing of CEO Peter Wuffli) is a classic of the raises-more-questions-than-it-answers

genre.

The news stories generally just recycle the press release, with some of them

adding in some color about the recent travails of the UBS investment bank. But

there’s a whole bunch of things here which don’t make a lot of sense and which

a troubled investment bank can’t necessarily explain.

For one thing, just how effective a chairman of the board is Marcel

Ospel? Here’s the language of the press release:

A year ago, as part of UBS’s systematic management succession planning, Marcel

Ospel expressed a wish to initiate a generational change of management at

UBS and therefore retire from his function within the foreseeable future.

He also proposed that Peter Wuffli be nominated his successor. After careful

evaluation, the Board of Directors decided not to accept his proposal. It

does not view the succession of the CEO to the position of Chairman as automatic.

Instead, the Board identifies independently the composition of the leadership

team which, in its opinion, suits the bank the best. In this context, it asked

Marcel Ospel to serve for at least another term of three years as Chairman

of the Board of Directors.

The Board of Directors and Peter Wuffli therefore decided to institute generational

change only in UBS’s operational management. Peter Wuffli will transfer all

his functions, effective immediately, to Marcel Rohner, his deputy.

There are three big questions here. Firstly, if UBS has "systematic management

succession planning," what on earth is the CEO doing relinquishing all

his duties overnight in what is clearly a surprise announcement?

Secondly, if the board of directors holds its chairman in so little regard

that it is happy to overrule him on something as big as this, why do they want

him to serve for another three-year term?

And thirdly, is firing a 49-year-old CEO really the best way to "institute

generational change"?

It’s also worth noting that UBS stock hit an all-time high at the end of April.

The company might not be a massive outperformer, but it’s definitely doing a

lot better than, say, Citigroup.

I’m unconvinced by all the stories drawing a direct causal relationship between

the failure

of John Costas‘s Dillon Read Capital Management, on the one

hand, and the ouster of Peter Wuffli, on the other. The Costas debacle might

have meant a bit of egg on Wuffli’s face, but not enough for an outright firing.

So I suppose we’ll just have to wait a bit longer for the full story.

Posted in banking, defenestrations | Comments Off on Wuffli Out at UBS

Edward Pastorini Unmasked as Theodore Roxford

Posted on July 5, 2007 by Felix

Back in April, Bloomberg’s Stewart Bailey reported on a possible takeover in

the gold mining industry: "Gold

Fields May Receive Bid From Pastorini-Led Group". The story was met

by guffaws

in London, and now the other shoe has dropped: "Edward Pastorini"

has been unmasked.

His real name, it turns out, is Theodore Roxford, and he makes

something of a career out of bogus takeover bids:

U.S. securities regulators on Friday sued a partnership and one of its founders,

alleging they made bogus offers to buy such well-known entities as Sony Corp.

and Playboy Enterprises Inc. in an effort to manipulate their stock prices…

Roxford also made offers for Zapata Corp., Edgetech Services Inc. and PeopleSupport

Inc., according to the complaint.

Even Theodore Roxford is a made-up name, it turns out: "Pastorini"

was born Lawrence David Niren, and has sometimes answered as

well to Theodore Vakil.

I’m glad that Roxford is being brought to justice. Memo to the SEC, in case

you care: I have eight emails from "Edward Pastorini," sent between

April 17 and April 22, during which he sent me details of his Gold Fields offer

and offered to set up an interview between me, him, and his mining-company "partners".

Interestingly, Bloomberg hasn’t published anything about Pastorini since its

editor in chief, Matthew Winkler, told the New York Times back

in April that he would continue

to investigate the story. What more are they waiting for?

Posted in fraud, stocks | Comments Off on Edward Pastorini Unmasked as Theodore Roxford

How Citi Reached the Top of the M&A League Tables

Posted on July 5, 2007 by Felix

How did Citigroup, which has historically been a second-tier bank when it comes

to M&A advisory, manage to leapfrog the likes of Morgan Stanley and even

Goldman Sachs in the M&A league tables? Obviously, Citi’s sheer size had

something to do with it, as Citi’s M&A head Frank Yeary

is happy to admit to BusinessWeek’s Steve

Rosenbush:

As deal sizes soared, banking clients needed access to many markets around

the world, since no single market — even one as large as the U.S. —

can absorb all the debt generated by a $30 billion or $40 billion deal. Moreover,

multinationals doing cross-border deals required local expertise on issues

such as currency, taxation, and regulation. “We saw an opportunity to

be positioned as an adviser to the world’s largest and most important

companies on their largest and most important deals,” Yeary said.

Interestingly, Yeary himself seems to run a pretty slim team of just 150 M&A

bankers – although of course they leverage the expertise of many times

that number of professionals working in debt, equity, syndication, research,

compliance, etcetera.

Herding that many cats is far from trivial, so Yeary deserves one cheer for

managing to do his job well enough to be considered an automatic candidate for

any M&A deal.

But I suspect that the real reason Citi finds itself included in so many big

deals is that big deals nearly always involve big bank loans. And Citi has long

been the world leader in syndicated loans. If you want Citi to take a large

chunk of your debt – and it will be harder to get your loan away if you

don’t – then the least you can do is throw Yeary a nominal advisory fee

on the M&A part of the deal. It doesn’t cost much, and it makes him very

happy.

A lot of the biggest M&A deals these days are coming from the likes of

Blackstone, which is in many respects an investment bank itself. Blackstone

would never need or want strategic advice from Citigroup. But the fact is that

it neither needs nor wants strategic advice from anyone. The world

of M&A advisory is shrinking, and is being replaced by the world of debt

wrangling. Which is why a shop like Perella Weinberg is having a hard time getting

off the ground, and why would be investment banks like Blackstone didn’t take

long before transmogrifying into hedge funds or private-equity shops.

So maybe it’s not so surprising that Citi is now atop the M&A league tables:

the league tables simply aren’t measuring advisory services any more.

(Via DealBook)

Posted in banking, M&A, private equity | Comments Off on How Citi Reached the Top of the M&A League Tables

Addressing Climate Change at the World Bank

Posted on July 5, 2007 by Felix

"Marshall

Jevons" has been watching the telly, and saw Sebastian Mallaby

telling Fareed Zakaria what Robert Zoellick

should be doing at the World Bank. He thinks Mallaby’s on the right track (see

from about 7:10 onwards):

One of the big, big challenges and opportunities for the World Bank, I think,

is climate change. Because the world has got to a point where it sees there

is a problem: something has to be done. At the same time, a second Kyoto kind

of deal is extraordinarily unlikely and, if you had it, it would not bring

in China and India, which are two of the big sources of carbon emissions now.

And so you need to have something which is global, because it’s a global problem,

but which is short of a kind of huge great treaty. And I think brokering action

through the World Bank, using the World Bank as a convener of countries from

around the world, which has the technical expertise to do projects, which

knows how to manage large sums of money, that is something where the World

Bank can make a big difference.

Mallaby and Zakaria together then cook up a scheme whereby the G7 will give

the World Bank some gazillions of dollars to bribe the Chinese and Indians into

burning clean coal. (They never mention the word "sequestration",

which is disappointing, since even "clean" coal emits enormous amounts

of greenhouse gases, and the World Bank might be very well placed to encourage

China and India to capture and store their carbon emissions underground.)

I’m not convinced that this kind of mission creep is necessarily a good idea

for the Bank: it feels like a desperate casting-around for Something To Do in

a context of increasing irrelevancy for the World Bank. In any case, the idea

that the G7 is suddenly going to find vast amounts of money to simply give to

India and China is, shall we say, even less likely than a second Kyoto treaty.

If Zoellick is going to make his mark on the Bank, I think he might be well

advised to continue to look at development issues and global poverty reduction,

rather than disappearing off on a climate-change tangent, important though the

climate-change issue is.

Posted in climate change, world bank | Comments Off on Addressing Climate Change at the World Bank

Hedge Fund Analysts’ Salaries Soar

Posted on July 5, 2007 by Felix

Mark Malyszko of Institutional Investor says that pay at hedge funds is through

the roof:

A senior analyst with three to four years experience at an investment bank

can earn an average $1 million – $1.5 million at a hedge fund, compared with

an average across various sectors of $800,000-$850,000 at a Wall Street firm…

A senior hedge fund analyst with three to six years of investing experience

in the distressed debt sector can receive up to $2 million a year.

I have a feeling this is not going to last. Right now, everybody agrees that

there are too many hedge funds. As a result, they’re all chasing analysts in

a desperate search for ideas and alpha. But most of the smaller funds will fail

– not because they implode, but rather just because they can’t provide

the risk-adjusted returns that investors are looking for, and what investors

they do have will withdraw their funds. When that happens, hedge-fund salaries

are likely to come back down.

For the time being, however, this seems like a once-in-a-lifetime opportunity

to make a vast amount of money quickly. As blogger Under

the Counter says,

Would you rather work at a bureaucratic bank with over draconian compliance

issues pulling down 800k, or a freewheeling shop where they give you the ball

and pay you twice as much?

That is a no-brainer.

Especially if you know you can always return to the bank if and when things

don’t work out at the fund.

Posted in hedge funds, pay | Comments Off on Hedge Fund Analysts’ Salaries Soar

Economists vs Political Scientists on the Web

Posted on July 5, 2007 by Felix

Ezra Klein wants

to know why economists are overrepresented in the blogosphere, while political

scientists are nowhere to be found. And even Henry Farrell

can’t single-handedly make

the problem go away. It’s deeper than that, and Richard Baldwin,

I think, hints at the answer

when he notes that economists are discouraged from discussing the policy implications

of their work in peer-reviewed journals. As a result, he says, "the discussion

of research results that does not take place in the journals has spilled over

into cyberspace."

Baldwin is not particularly happy about this: the econoblogosphere, he reckons,

operates at a lower level than the discussion sections of learned publications.

On the other hand, as Andrew Leonard notes, it essentially

offers anybody with an internet connection unfettered

access to high-level economics debates at roughly a graduate-seminar level.

Insofar as Leonard and Baldwin disagree, I’m with Leonard. Whatever the economics

profession loses from the lack of policy discussions in refereed journals, it

more than makes up for in the vibrancy of the inter-blog conversation –

which in any case is vastly more effective than any journal in terms of bringing

important research to the attention of economists worldwide.

So maybe, if the political science community wants something similar, they

would have to stop talking politics in their refereed journals. Which, admittedly,

might be hard.

(By the way, a little known fact: Brad Setser, econoblogger

extraordinaire, is actually a political scientist by training, rather than

an economist: his doctorate is in international relations. Which almost certainly

means he’s got a better grasp of economic realities than if he’d stayed in economics

departments for his whole academic career.)

Posted in economics, technology | Comments Off on Economists vs Political Scientists on the Web

Emerging Markets Reach Parity With Developed Markets

Posted on July 5, 2007 by Felix

Helen

Thomas, over at Alphaville, picks up on a piece of research by Dresdner

Kleinwort’s James Montier. The key datapoint? Emerging-market

equities are now trading at the same multiple as developed markets, and "as

far as he can remember, that didn’t even happen during the last great

emerging market boom of the early 1990s." Check out the Alphaville post

for the chart.

I’d be much more worried about this if someone could explain to me why emerging-market

equities should trade at a lower multiple than developed markets. After

all, they generally have much higher growth rates, which would tend to imply

perhaps that they should trade at a higher multiple. And big emerging-market

companies today have no more difficulty raising money internationally than their

developed-market competitors.

Posted in emerging markets, stocks | Comments Off on Emerging Markets Reach Parity With Developed Markets

What (Fake) Steve Jobs Thinks of the Music Industry

Posted on July 5, 2007 by Felix

Could Fake Steve Jobs become the Jon Stewart of the Econoblogosphere?

Yes, he’s funny

– but he also has the most astute

analysis of the simmering tensions

between Apple and the music industry that I’ve seen anywhere.

Essentially, the record labels have finally seen the writing on the wall: they’re

being marginalized by the low cost of music production and the low cost of music

distribution, which together make them increasingly irrelevant. At the same

time, Apple has managed to find a way of making money out of music in the digital

era, which is more than any of the record labels have done. So, in a fit of

pique, they’ve decided that they’re going to try to attack Apple – which

is idiotic, really, because Apple’s their only hope right now.

I very much doubt that the real Steve Jobs – who is perfectly

happy to sell unencrypted MP3s which can play on any music player through

iTunes – has an attitude different in any respect from Fake Steve Jobs.

But Fake Steve is a better writer.

Posted in technology | 1 Comment

Why There Are So Many Frame Stores

Posted on July 5, 2007 by Felix

Bryan Caplan has vacated the guest-blogger perch over at the Economist’s Free

Exchange blog, but he did leave his readers with an interesting puzzle

in microeconomics, lifted from his

own blog:

Why are there so many framing stores? It seems like there is a place that

puts your artwork into frames on practically every street corner. According

to yellowpages.com, there are fourteen framing stores in Fairfax, compared

to only eight Pizza Huts.

What’s the puzzle? We normally see lots of small stores in markets for frequently-purchased

low-price goods. Think 7-11. On the other hand, we normally see a few large

stores dominate retail in markets for infrequently-purchased high-price goods.

Think Best Buy.

The economic logic is simple. Retail has economies of scale, but for petty

purchases, these are outweighed by transportation costs. Convenience stores

cost more, but they’re usually a lot closer. This is especially true for low-price

items. It is probably worth 30 minutes of your time to save 50% on a $100

purchase, but not worth 30 minutes of your time to save 50% on a $4 purchase.

Where does framing fit in? I doubt most people frame more than two or three

items per year. No one gets home at 7 PM and says "My God, we forgot

about our framing! Luckily we can just run down to our corner framing store."

Furthermore, framing is expensive. A custom frame usually runs around $100-$200.

Both of these reasons lead us to expect the opposite of the market structure

that we see.

I think I can answer this one – altough, as in all such cases, the answer

comes ex post, as a rationalization, and I’m not at all sure I would

have predicted this outcome ex ante. For instance, it seems to me to

be a simple contingent fact that there aren’t any strong brands in the framing

space. Maybe in an alternate world someone would have managed to create such

a thing, with profound consequences for the framing industry.

In any case, there’s a huge difference between buying a frame and buying a

television. Frame stores are a low-volume, high-margin business which put a

huge premium on customer service. Television stores, by contrast, are a commoditized,

low-margin businesses with relatively low levels of customer service.

Imagine, if you would, that a big frame store opened up a few miles away from

you. Would you go there, rather than to your friendly local frame shop? There

are a few good reasons why you wouldn’t. Firstly, and most importantly, frames

are custom made, which means that it’s effectively impossible to make price

comparisons. The big store might turn out to be cheaper – or, on the other

hand, it might not. There’s no real way of telling, short of taking the same

piece in to both places, and getting a competitive quote.

Secondly, although frames are indeed expensive, they often have only a fraction

of the value of the artwork they contain. What’s more, the customer has to hand

over his beloved artwork to the frame store for the duration of the job. In

such a context, trustworthiness becomes vastly more important than price. In

general, you’ll get better customer service if you’re dealing with the owner

of the store than if you’re dealing with a spotty teenager on an hourly wage,

who may or may not treat your art with the care and attention it deserves.

What’s more, most people are at least a little insecure in their framing expertise,

and welcome informed and intelligent help from an experienced framer. If such

help comes from the owner of the frame store, they feel that they’re getting

valuable advice for free. On the other hand, if they’re being helped by the

aforementioned spotty teenager, they might not value the advice as highly –

even if the spotty teenager actually has a better eye. It’s the difference between

getting advice on what to drink at a restaurant from a dedicated sommelier,

rather than simply asking the server what he would recommend.

Finally, there’s the whole question of loyalty. People like to have a relationship

with a framer who knows them and has framed many pieces for them. If they do,

they’re likely to recommend that framer to their friends. But such a relationship

is almost impossible to build in the context of a big store, where employees

naturally come and go.

Posted in economics | Comments Off on Why There Are So Many Frame Stores

Blackstone vs KKR: Schwarzman Wins

Posted on July 4, 2007 by Felix

Now that both Blackstone and KKR have lifted their kimonos for the investing

public, it’s pretty obvious that Blackstone has won the face-off. DealJournal

and the NYT

have handy like-for-like comparison breakdowns, and Blackstone beats KKR on

pretty much every metric bar age – although commenters on the DealJournal

piece are already sniping that the comparisons are not very helpful.

It is clear, however, that KKR is going to raise much less money than Blackstone,

and will almost certainly have a much smaller market capitalization when it’s

done. For Henry Kravis, overshadowed already by the news

that his rival Steve Schwarzman is dropping $26 billion on

Hilton hotels, that’s got to hurt a little.

Posted in private equity, stocks | Comments Off on Blackstone vs KKR: Schwarzman Wins

Carlos Slim, The World’s Richest Man

Posted on July 3, 2007 by Felix

Carlos Slim is now the

richest person in the world. Congratulations, Mr Slim. In honor of the news,

let’s generalize wildly from this one datapoint.

  • Slim, like the man he ousted, made the bulk of his fortune in what investment

    bankers like to call TMT: technology, media, and telecommunications. Mainly

    the phones. His bank is tiny, his land holdings are negligible; the overwhelming

    part of his wealth is basically on paper, in the form of stock in his companies

    – or, as it’s also known, future profits. You could make a billion dollars

    a year for an entire working lifetime and still not become as rich as Carlos

    Slim: in order to get this kind of wealth, earning money isn’t enough. You

    need to build and own a company, ideally with…

  • A monopoly. But while Microsoft’s monopoly was global, Slim’s monopoly is

    very local – it’s basically confined to Mexico. And a very large part

    of his wealth comes from his holdings in other countries or other industries,

    where he has no monopoly at all.

  • Is it surprising that the world’s richest person is Mexican? Yes. Mexico

    is not particularly huge, nor is it off the charts in terms of inequality,

    nor does it have massive oil wealth. (And insofar as it does have

    oil wealth, that doesn’t seem to have helped Slim very much.) Mexico is not

    a fast-growing emerging market like China, nor is it an established superpower

    like the US. Really, it’s just another second-tier country, from a big-picture

    geopolitical point of view.

  • But what about Nafta? And Mexico’s position neighboring the US? Surely that

    helped Mr Slim? Again, not really. When Slim expanded internationally, he

    looked south, not north. And although he does own some manufacturing companies

    which export to the US, again they’re pretty small in comparison to the rest

    of his holdings. Indeed, by far the single largest portion of Slim’s wealth

    can be put down to one thing:

  • Prepaid, pay-as-you-go cellphones. When the rest of the world was trying

    to lock everybody they could into long-term cellphone contracts, Carlos Slim

    was making billions from Mexicans paying for their calls in advance. It’s

    a business model which has only ever been niche in Europe and

    the US, but it’s huge in Latin America, and it has made América Móvil

    the envy of other cellphone companies around the world.

Which means that Carlos Slim is basically a very astute businessman.

He’s not some kind of synecdoche for the 21st Century Globalized World; he’s

just really smart, as well as (of course) lucky in terms of being in the right

place at the right time when Telmex was privatized. But Telmex alone would never

drive Slim to Number One on the global wealth chart. That position is entirely

due to América Móvil, which was Slim’s creation from day one.

Update: A loyal reader points me to a survey

by the UK telecommunications regulator, Ofcom, which says that in 2003 71% of

mobile phone users in the UK used a prepaid package, while only 26% had a monthly

contract. (The other 3% had an all-in-one package.) So pay-as-you-go seems to

be just as popular in Europe as it is in Latin America.

 

Posted in wealth | Comments Off on Carlos Slim, The World’s Richest Man

Where Hits Come From

Posted on July 3, 2007 by Felix

Chris

Dillow and James

Surowiecki both weigh in this week on the subject of where hits come from.

Surowiecki, as you might expect from a man who wrote a book

called The Wisdom of Crowds, thinks that prediction markets are a good

way of predicting hits. But he’s fair to the other side, too:

The process of predicting whether a product will be a hit remains remarkably

haphazard and erratic.

Many people argue that it’s foolish to expect otherwise, and that no

science of success is possible. In the famous words of the screenwriter William

Goldman, “Nobody knows anything.” The fate of a book or a movie,

the argument goes, is determined by too many factors to be predictable—advertising,

reviews, word of mouth, luck, and, in the case of big hits, a simple desire

to see what all the fuss is about. De Vany, for instance, says that the box-office

performance of Hollywood films is “chaotic” in the mathematical

sense of the term. Three Columbia sociologists recently found something similar

in a series of online experiments in which people were divided into eight

groups, asked to listen to songs by unknown artists, rate them, and then decide

which ones they’d like to download—after being told how often

others had downloaded the songs. The highest-rated songs, it turned out, were

not always the most frequently downloaded. And in each group a different song

ended up topping the charts. In the laboratory, at least, success appeared

to be essentially random.

Meanwhile, Dillow seems to think that success is impossible to predict and

yet in some sense written in the stars:

A lot of success in any venture is impossible to predict. Many best-selling

authors – including J.K. Rowling – were rejected many times by publishers.

Even successful entrepreneurs reject profitable inventions. Decca famously

turned down the Beatles…

How many great-selling books, popular bands or successful companies have we

not had because they’ve been turned down? …

If finance is easier and the costs of printing and marketing are lower, fewer

potential successes should be filtered out. In this way, technical progress

and easier finance can promote economic growth.

I’m not convinced by this. I don’t think that JK Rowling would have been a

success in all, or even most, worlds in which she got published. I think that

success on her level is the result of a myriad of uncontrollable self-reinforcing

mechanisms all coming together in the right place at the right time. Harry Potter

books get read a lot because they’re popular, rather than being popular because

they’re read a lot, if that makes any sense.

If that’s the case, then Dillow’s wrong to assume that the more books and movies

get made, the more hits there will be. If anything, the opposite is the case:

the world hasn’t seen another band quite like the Beatles not because no subsequent

band has had the same amount of talent but rather because the amount of choice

facing consumers has increased so enormously. As a result, it’s increasingly

difficult for any artist or author to achieve lasting, broad-based success and

acclaim. Even the longevity of Harry Potter is far from assured in the absence

of hype about the next book or movie coming out: Harry Potter and the Chamber

of Secrets has a sales rank of 118,787

on Amazon.

Now there are still hits, of course, and some of them are worth billions: Google

springs to mind as one obvious example. But if Google hadn’t been formed, other

companies would have made almost as much money monetizing search. It’s like

the

social value of Microsoft: to find that out, you have to compare the value

of the world with Microsoft to the value of what the world would look like if

Microsoft had never been formed. And that’s a very different calculation to

simply taking the world as it is and subtracting the value of Microsoft in this

world.

To put it another way, all worlds have hits. And I don’t think that the number

of hits is correlated to how much technical progress or financial liquidity

there is in any given world, even if many hits are the direct result of those

two things.

Posted in economics | Comments Off on Where Hits Come From