Sapiens

Book Review : Sapiens

Author : Yual Noah Harari

My Rating : 5 out of 5 stars

The complete title of the book is “Sapiens : A Brief History Of Humankind”.

Only once in a while a book gets written that is immensely vast in scope, challenges your worldview at a very fundamental level and tackles extremely difficult topics in such an accessible manner that everyone can enjoy it. Sapiens, is such a book.

Ever since Dr Stephen Hawkings wrote “A Brief History Of Time”, there have been way too many books that announce themselves as “Brief history of …”. This book by Dr Yual Noah Harari deserves to be in the same league of the trailblazing book by Dr Hawkings. 

It’s impossible to put Sapiens in one simple category. The twenty odd amazing chapters cover everything from evolution, history, economics, politics, religion, spirituality, science, anthropology, psychology, philosophy and so on. It would have been a great feat just to weave these disparate threads into one cohesive book, but to do it in such an easy to read manner is an astounding achievement.

The book starts at the evolutionary beginnings of Homo Sapiens and ends at a chapter that speculates what might be in store for us as a species. Along the way almost every branch of knowledge gets covered in surprising detail. Now, this book is not an overview or a survey of these fields. Neither is it an introduction to all fields of human knowledge. It travels through these vistas with a singular destination in mind - to explain how we Homo Sapiens have evolved differently than any other lifeform.

What makes the book impossible to put down, is the spicy mix of opinionated commentary with generally accepted scientific theories. The range of topics and author’s fearless discourse almost ensure that everyone is going to be at least somewhat angered and/or offended. True, it will most likely offend religious and conservative readers more, but the liberals and free market capitalists are also likely to find many arguments difficult to digest. And a friendly warning to readers from India, you in particular may not like many discussions, especially if you have a defensive conjecture about how casteism took roots in Indian society. 

I am not saying that the author is deliberately trying to offend. No, not at all. And leaving aside the topics such as religion and social customs, that raise the heat rather quickly, that’s not the primary focus of the debate either. Most of the topics are morally ambiguous to say the least. A simple binary good or bad evaluation misses the really important nuances. For example, are we really happier than our hunter gatherer ancestors? Was the nexus between imperial colonialism and science good or bad? Is industrial animal farming the largest cruelty in the history of mankind? Are our cherished ideals of democracy and human rights, just a myth that exists and works only in our collective minds? The book is full of debates on such thorny issues.

So, before you embark on reading this, and it does get my “must read” recommendation, ask yourself. Do you like to be challenged on your most fundamental beliefs? Do you like to read intelligent arguments even when you don’t agree with them? Do you like to be intellectually stimulated with subtleties of historical analysis? For liking such a book, you have to be welcoming to opinions that make you uncomfortable.  That’s my view. I did agree with most of what the author had to say. But I also appreciated the views that I did not agree with. In the end, I came out with a far deeper understanding of Home Sapiens. And for that, I absolutely loved this book, and cannot recommend this highly enough. Do yourself a favor and read it.

Everybody Lies

Book Review : Everybody Lies

Author : Seth Stephens-Davidowitz

My Rating : 5 out of 5 stars

The complete title of the book is “Everybody Lies: Big Data, New Data, and What the Internet Can Tell Us About Who We Really Are”.

Like I have done for some other book reviews, I must start this review with proper disclosures. I spent a significant portion of my career at Yahoo, where “Big Data” or “Data Science” or whatever you want to call it, is a big part of the strategy. I have myself worked on projects related to this field, and the results of my own code have astonished me by the sheer amount of insight that can be extracted out of sometimes simple techniques. I am not new to this field, and I am very familiar with the potency of such data mining exercises. 

So a lot of insights presented by this book were not surprising to me at all. That includes the techniques explained in the book for finding correlation using statistics, as well as the kinky nature of a lot that people search for. Like many software engineers do, almost a decade ago, I downloaded Apache Lucene to familiarize myself with the search engine technology. This download includes the sample of actual search terms used by internet users, and it felt that almost all the terms were pornographic in nature, and sometimes quite disturbing. So yes, I kind of knew a lot of the findings of this book already.

If you are not from a similar work background, be prepared to be surprised, enlightened, entertained, disturbed and a bit depressed. Sometimes, all at the same time.

In this fascinating book, the author will give you a grand tour what insights about specific individuals, as well as society in general can be inferred these days. The main source of this information is internet of course. As the book explains, the interaction people have with the various websites, and especially Google and PornHub are much much richer in terms of data mining, compared to the traditional mechanisms such as surveys. Of course the main reason is anonymity - as in people thinking that they are not revealing their identity. So they search for things and visit sites that they would not admit in polite company. They leave anonymous comments that can be analyzed using natural language processing techniques. The quantity of such interactions rise and fall with events that happen in real world. Such trends give far deeper insight into what people are actually feeling, which non-anonymous methods of interactions would simply not reveal.

All this is possible, because people behave differently in public and in private - especially when they are alone and think they are not being monitored. Hence the title of the book - Everybody Lies.

We all know that Facebook posts by users are nothing but advertisements (often false) about what they want their friends to perceive about their life. Reality is very different. But how different? By how much? And what about politically incorrect issues? For example, how racist people really are? What social policies do they really support? And so on.

The author gives a very nice introduction to techniques that have been used by companies, and individual researchers that have access to such internet interactions, what insights we can derive from this research and how valuable this can be.

I will be doing a terrible disservice to this book, if I give an impressions that everything is all dark and gloomy. Or this books is all about interactions on Google, Facebook and PornHub. The author himself takes pains to clarify that this is about “New Data” not just the size of the data. Also included are many many examples of non-internet data that can be as insightful.

This book is not a sales pitch for “Big Data”, and that’s great. You will also learn the limitations of these new techniques, and how mis-interpretations can happen. It’s all written in a very accessible way. No knowledge of economics or computer science is required. In fact, on few occasions, I felt that the author is trying to simplify it too much. Just a quick note : it’s clear that the author’s own stance on many political issues is towards the left. I am fine with it, but some readers may not appreciate it too much.

It’s a wonderful book, very relevant to what’s happening today. It will remind you of the great book “Freakonomics”. If you liked that one, you will like this one too. The findings are sometimes as you expect using common sense, but more often than not, they will be new insights. I highly recommend it.

White Working Class

Book Review : White Working Class

Author : Joan C. Williams

My Rating : 3 out of 5

The complete title of the book is “White Working Class : Overcoming Class Cluelessness in America”.

After the financial crisis of 2008, there was a slew of books explaining what happened, why it happened and how a repeat can be prevented. It was exhausting to even look at the number of books on the same topic. A similar thing is happening after the 2016 election. Everyone is trying to explain the Trump victory which has been a crisis for most progressives. I was shocked myself, and wrote a blog post expressing my dismay.

Honestly I am getting tired of these explanations. They are getting very repetitive. It’s always the same theme - “how the liberal elitist globalists smugly ignored the middle class Americans devastated by changing economics who voted with their middle finger”. Not that it is wrong, it isn’t. But that’s not the complete picture, more about that in a minute.

So why did I pick up this book? The appeal was in the organization. One short chapter each for every important question. Author Williams does not shy away from asking direct questions. After explaining why we should talk about class, she first defines who is WWC (white working class). Then there are chapters on “Is the working class just racist”, “Why doesn’t the working class go to college” and so on. 

All the chapters are short. The author comes to the point quickly, directly and bluntly. It’s a very refreshing approach, irrespective of how much you agree with. These are tricky, controversial and often emotional issues. A complete agreement is nearly impossible. I agreed with most of the analysis, and I think most readers will. 

In spite of the agreements, I still have major objections to the approach. I know the author is trying to simplify, but dividing entire population in two groups, elites v/s working class, is completely lacking in nuances of the real world. Yes, a lot of people do fall in those two sets, but I don’t fall in either category, and I suspect many won’t. 

Another problem is putting all the blame on liberal elites. Of course there is blame, but this working class has made mistakes too. Many areas are deep red Republican, and have been for a very long time. Voting for the same candidate or the same party over and over again and getting angry about economic problems, indicates emotional voting patterns. The issue of police brutality is real. Not properly sympathizing with the angst represented by “Black Lives Matter” is unfair and results in more divide. We can disagree about the solution, but the refusal to admit Global Warming is laughable. So don’t blame the divide just on liberals.

At the same time, some real mistakes by liberals are simply ignored. The extreme liberal stance on immigration, which includes “sanctuary cities” is simply unpalatable to most Americans, myself included, and even to some liberals. The liberal hypocrisy, which routinely criticizes Christianity but fails to criticize far darker sides of Islam, is visible to everyone except the far left. Finally, the topic of guns gets no mention at all. Such omissions make an otherwise excellent explanation, incomplete.  

Relating this to 2016 election should have been done with other observations as well. Apart from the class divide there was another problem - namely Hillary Clinton - a candidate with a lot of baggage. It’s all speculation, but it’s possible to imagine Bernie Sanders winning against Trump, or even Governor Kasich winning against Hillary. I would have voted for Kasich. So not mentioning Hillary’s failure to stay out of suspicion is a flaw. Then praising Bill Clinton as someone who connected with the WWC, but not mentioning the role his legacy played in the election is a serious omission. Of course the class divide is real, but that wasn’t the only factor.

That’s what I meant above. Most such explanations focus only on the class divide, and fail to appreciate the chronic irrationality on both sides and severity of the flaws of the Democratic candidate. 

In the final chapters the author offers her thoughts on how the gap can be bridged. It’s all well intentioned, sometimes accurate but honestly, very weak in places. She is correct in pointing out that “higher minimum wage” is not what will solve economic plight of WWC. But saying that changing the slogan from “Pro-choice” to “Pro-child, pro-choice and pro-family” will have any impact, is just naive. 

It’s still a readable book. Don’t think of it as a complete analysis. Whatever has been analyzed, is insightful. That should be enough, as it’s small, feels just like a very long editorial and can be finished in one seating. 

My thoughts on : Tax Cuts And Jobs Act Of 2017

This is not a review of the new tax law (See full PDF) signed by President Trump today. This is just what I feel about the things that matter to me, and things that I feel are important.

Full disclosure on political views. I am neither a Republican, nor a Democrat and one of the “Never Trumper” guys. I had to vote for Hillary Clinton because of Trump’s candidacy. My views can generally be categorized as “social liberal, fiscal conservative”, but that’s not very accurate either. For example, I strongly oppose “Sanctuary Cities”, and I do want near-free college education for all. So there you go. Whatever prevalent label you attach me, will likely be wrong.

Full disclosure on fiscal views. 

Taxes are necessary. Duh, yes. The point is, “some” taxes are necessary. I do not know what the ideal tax rate should be, and that's not the point of this post.

Simple is good. Duh again, but important to list. Not just because of tax filing headaches, but also for cost of enforcement.

Deductions are unfair. Yes, including, mortgage interest deductions, and even 401K deferred taxes. Due to tax brackets, higher income people get more out of these deductions that lower income people. Most deductions and credits are not universal, they favor one group over another.

Double taxation is unfair. Yes, even when it happens to rich people. 

Now about the things that directly affect  me.

Mortgage interest deduction. I live in the San Francisco Bay Area, where housing prices are, and have always been in the stratosphere. Now mortgage interest only up to 750K can be deducted. It most likely will slow down the increases in home prices. That’s good. My house value may not go up as much, but it’s good for future home buyers. Affordable homes are good for the society. Primary residence is not an investment, or a lottery ticket to retire rich. I support this. 

Changes to AMT. I wish they had repealed AMT. But at least the new law takes a large section of the population out of AMT. My problem with AMT is not the actual taxes paid, but it makes taxes complicated. If higher taxes is what’s needed, increase the tax rate. Don’t complicate the tax code. Again, even if my effective taxes hadn’t changed, I would still support repealing AMT. Well, that didn’t happen, but this is still a big positive.

Changes to SALT deductions. The new law significantly limits how much state and local taxes can be deducted. This one hurts me. It’s very possible that due to AMT changes, tax rate reductions I might come out even. Regardless of the impact on me, I support this. Federal taxes are paid for services received from federal government. Why should state taxes be deductible any ways? Now this will get Californians angry. But I do think California taxes are too high, the state government is too big and there is a huge waste of taxpayers money. Maybe now, people will get more conscious about the taxes paid to their state government and demand lower rates, and more efficiency. It might make California less socialistic, and that would be a good thing. This kick in the gut was needed, and my only complaint is it does not go far enough.

Rolling back of tax rates. The tax rate reductions for individuals is not permanent. If deficit was an issue, then why cut taxes on high income earners? Why not make the tax rate cut permanent for lower income people? Maybe it’s political game of kicking the can down the road, and future congress may make the rate cuts permanent. With the current wealth gap, and a booming economy for the wealthy, the rate cuts should have been done only for the lower income people. I view this as a big negative in this tax law. 

Now for changes that do not directly affect me.

Corporate tax rate cut. Lowering corporate taxes is a good thing. I wish it was tied to job creation, or increased pay for lower salary grades. Especially considering the trillion dollar deficit that’s being added by this law. As it stands, companies most likely will return cash to shareholders via dividends, buybacks etc. That’s perfectly fine from shareholders’ point of view. The issue is these shareholders are mostly in the wealthier section of population. So the country as a whole gets a trillion dollar increase to the already high deficit, and the majority of the population gets nothing much to show for it. That’s my current feeling. If it does spur job growth, pay growth, well, that’s what the Republican congressmen and Trump’s team are promising. Only time will tell. So I am neutral on this right now.

Estate Tax. I will never be impacted by this, but just repeal that thing. If you need higher taxes, just increase tax rates. Do not double tax. The new law does not repeal it, but at least increases the threshold. It's not enough, but still a positive.

Questionable deals. There is a nice provision for pass through businesses, which may be needed. But the way it was added, raised lot of conerns. There is lot of information available on the CorkerKickbacks. Similarly there is a nice concession for private jet owners. That’s what politics has become today. People who write laws, make sure they get benefits out of it.

There is lot more in the tax code, but these are the points on which I have an opinion.

Summary. There is lot to like about this law. Whether the expected economic expansion happens and if it justifies the deficit or not, only time will tell. I am optimistic at this time.

What would be the political implications? This is definitely a great legislative victory for President Trump, and he has delivered on a big campaign promise. It’s also an accomplishment for both Rep Paul Ryan and Senator Mitch McConnell. It would very likely help the Republicans in 2018 midterm elections, because there will be a short term boost to the economy. The deficit concerns are much longer term concerns. The Republicans have taken a calculated risk, or a gamble if you will. I hope they are right and the benefits of this are reaped by lower income people as well. If not, there are always elections where we can vote for candidates that will undo these policies. Just like what the current administration is doing.

Interview With Michael Platt

A very interesting video about the implications of Europe's crisis - interview with Michael Platt, founder of one of the largest asset managers in the world, BlueCrest Capital Management. It's a bit long - 15 mins, but very well worth watching. In case you are short on time, I have summarized the key points, as I understood.

Disclaimers :
1. This is obviously NOT an investment advice.
2. I do not know anything about this person, apart from what I have learned from the interview. So I am taking it at its face value.

Why I think it's worth watching :
1. He seems like a very smart guy. Apparently manages about $30 billion in his hedge funds, which is huge. Claims to have generated positive and hefty returns over last many years. Let's say all that is true.
2. He is NOT shouting from the roof, crying Armageddon. He sees a high probability of a significant crisis due to European debt situation. He is calmly talking about his viewpoints, and his strategies.

Key points he is making :
1. He is worried about the crisis. So he has all his money in the safest and liquidest instruments : short term US and German government debts.
2. No matter what the policy makers are saying, Euro break up is being priced in for, in options and futures markets.
3. Math is against Europe. Example : Italy's debt is already 120% of their GDP. GDP is declining and debt is growing at 5%. Arithmetically, this will blow up.
4. There is no growth to get Europe out of this. Austerity makes it worse. And their is no willingness to transfer money across boundaries to ease the burden.
5. Most of the European banks are now insolvent.
6. As an investor, you do not make money by going into a crisis. You make money in the aftermath of the crisis.
7. Things will get worse in 2012. What's going on is significantly worse than 2008.
8. He thinks that bold solutions - like ECB printing, a fiscal union etc - will solve the crisis. (This is the where I disagree. Printing money does not solve anything. It just changes the problem from high debt to to high inflation. And an European fiscal union is probably a non-starter.)

Quote Of The Day : Peter Schiff on S&P Downgrading US Debt

This man speaks what's on his mind. He has been right about gold, housing bubble and our debt problems.

The only thing they did wrong was, they waited too long to downgrade and they didn't downgrade low enough.

It was really funny to watch Tim Seymour getting uncomfortable with Peter Schiff's rant.

If you want to watch the CNBC video clip, click here.

The ongoing Debt Crisis - at State Level

Meredith Whitney is feeling even more confident about her call on the coming crisis in Muni Bond Market. The States are in deep financial troubles. The apparent cause is economic downturn, but the real cause is unrealistic retirement benefits and huge inefficiencies. It's not clear when the day of reckoning will come, and when it comes what the repercussions might be. Greece is serving as a test model for the debt crisis. Using that model and common sense I can say that,

1. Politicians will try as hard as possible to kick the can down the road. "If the crisis hits when I am gone from office, then I won't be blamed" is how they think. Fixing structural issues is hard. Printing money to create an illusion of prosperity to buy time is easy.
2. Hope springs eternal - which helps us humans survive tough times, but often makes us blind to a future crisis. Americans will continue to be completely sanguine. No one was willing to believe how bad the credit bubble was, and similarly, no one is ready to understand the implications of the debt crisis. Debt at Federal level and debt (including promised future retirement benefits) at State/Municipal level, is simply unsustainable. There is no way to grow out of this.
3. No real solution (like a hard reset via bankruptcy) will ever be attempted unless the market forces it upon us in an unpleasant way. Why ? No one likes to be the bearer of gloom/doom news. No one with vested financial interest (e.g. unionized government workers) would prefer to lose a big chunk of their entitlements, and no politician in his/her right mind would offend the voting blocks. 

This cannot end well.

There is no inflation

I can keep ranting about the absurdities of  current economic policies in US forever. But videos like this capture the essence perfectly. Only the budget deficit drama theater in Washington is comparable.

Somehow, people - when in very large groups like a nation - are completely incapable of fixing the root cause. Sad. Too much debt, too much money printing, too much entitlements are the root cause of our current economic malaise. Nothing will be fixed until it's too late. Because no policy maker wants to be the tough guy administering a bitter medicine.

This cannot end well.

The Big Bank Theory

The only real financial journalist in the country happens to work for the comedy channel ! Why is it only Jon Stewart's responsibility to catch someone lying ? This time it's The Bernanke who is lying about "printing money".

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They Really Said It ! [9]

Love him, or hate him, you have to hand it to Peter Schiff on how correct he was and how well he handled all the slander and ridicule he received.

This is a compilation from 2006-2007. Some choicest statement from Peter Schiff's opponent Art Laffer
- US Economy has never been in better shape
- The monetary policy is "spectacular"

The next one have an "expert" proclaiming a return to "only" 10% annual appreciation as that's how the "normal" market works ! Another one shouts "what artificial lending standards you are talking about" and starts laughing at Peter Schiff.

Then we have the famous Ben Stein claiming that the "credit crunch is way overblown" and "subprime problem is a TINY problem". He further advises us as "buying opportunity of the lifetime" when Dow was over 13K. It dropped nearly 50% from there and even today is 15% below his lifetime buying opportunity. Peter Schiff retorts - "The party is over for US". Then everybody proclaims, "Worst is over" and only Pter Schiff says, "the worst is yet to come". Oh, and it gets even hilarious - everyone loves financial stocks - and only Peter Schiff says, "they are toxic".



The following video is just too brutally hilarious. What else can you expect when a Realtor goes against Peter Schiff ?

Click here for previous installment in this chain.

Your next crisis

This century has began with a series of crisis on the economic front. From the dot com bust to the housing bubble to financial crisis and to sovereign defaults.  I think the US Govt debt - as bad as it is now - is dwarfed by the political and economic crisis that will be brought upon us by the financial disaster waiting to happen at state levels.

This is NOT something that will happen in distant future. It's going to happen soon. See this story on Bloomberg ...(emphasis mine)

California, which has the largest U.S. public-pension fund, faces liabilities that may exceed its annual state-tax revenue fivefold within two years unless lawmakers rein in benefits, according to a study.

To keep their promises to retirees, the California Public Employees Retirement System, the biggest plan, the California State Teachers Retirement System, the second-largest, and the University of California Retirement System may have combined liabilities of more than 5.5 times the state’s annual tax revenue by fiscal 2012, according to the study released today by the Milken Institute. Levies are forecast to reach about $89 billion in the year that began July 1. 

... 

This will not be just a financial problem for the pension funds. This will be an economic issue due to tax implications and a polarizing political issue with potential social unrest. Why ? Because every California resident - is either paying for these pensions or receiving these pensions. A neutral stance is unlikely to be available :-(

California is not the only state in this situation. And this hasn't even started catching the attention of the masses. I have no idea how this is going to play out, but I suspect, it won't be pretty.

Quants

Book Review : The Quants
Author : Scott Patterson
Released : Feb, 2010
My Rating : 3 out of 5 stars

The complete title of the book is "The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It".

The financial collapse of 2008, has generated a lot of information on many facets of Wall Street via books, news articles and TV documentaries.  This book focuses on the secretive world of "Quants", or hedge funds primarily using quantitative analysis as their investment strategy.

The people who run these funds are not in the tradition of Warren Buffet, rather they are Math wizards. They depend on their statistical analysis skills and a deep understanding of probability theory to manage huge sums of money. Their models are built on massive number crunching, rather than fundamental economic analysis.

How different it is than traditional investing philosophy ? How did these funds come to manage such huge sums of money ? Who are these people ? How did they do it ?

The book tells us, that it all started with Ed Thorpe. He literally wrote the book on winning in blackjack, "Beat the dealer". He then extended those ideas about using probability, computer modeling and statistical analysis to beat the stock market - the grandest of all casinos.

Calling Wall Street a casino, is not just a cliché. Many of these quants are very good poker players. Peter Muller has won many poker tournaments. They are obsessed with gaining a complete control over risk, not in just managing it. Understanding probabilities and positioning for various outcomes is what they excel at. In that sense, there is a lot of common mathematical ground on which strategies for both poker and trading can be built on.

This is a fascinating story to say the least. Part history, part rough biographies, and part commentary - the book presents a lot of information in a very reader-friendly style. In spite of the heavy sounding title, this book makes for a very light entertaining read - the target audience is general public like you and me.

The author, Scott Patterson is a journalist, and that style is obvious. Very readable, but often time feels very superficial. There is a lot of research done on the historical aspects, no doubt, and it's very informative. On the other hand if you are interested in finance/investing, you will most likely not encounter anything new on that aspect. I also found the order of presentation a bit distracting. It's almost chronological, but shifts back and forth between different people and the transitions are not smooth.

I can definitely recommend this book to everyone. But it left me wanting for more, and only half satisfied. Is the author blaming the quants for the financial collapse ? Of course they played a part in it and the over-reliance on models is one of the main culprits. But how much blame goes to quants ? What about the over leverage in the entire system ? And outright fraud at all levels starting from borrowers to mortgage originators and to all the steps in securitization. Not to mention the bad regulation (repeal of Glass-Steagall) and failure of Federal Reserve. This context is not mentioned at all.

If you keep that in mind, I think you would enjoy the book.

Jon Stewart Goes Nuclear On Fox News

They are either Evil or Stupid !
And the conclusion is : If you do not want your money to be used for terrorism, stop watching Fox News !!

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Bumper Stickers - 2

Not very politically correct in this economic climate, but in it's own insensitive way, does have a point.

Work harder ! Millions of people on welfare depend on you.

if Furlough then Salary++ ;

The Law of Of Unintended Side Effects, strikes again.

California Watch reported that :

Rather than receiving a 15-percent pay cut as intended, hundreds of state managers and other high-level workers brought home more money than usual during some furlough weeks thanks to an obscure federal labor law, a California Watch review of state records has found.
During furlough weeks between February 2009 and April 2010, state departments paid at least $1.6 million in overtime to salaried state workers who are not typically eligible to receive it, according to data provided by the state controller's office. At least 14 employees took home more than $10,000 in overtime payments during that period.
The payments were allowed because during furlough weeks, federal law requires the state to temporarily classify most salaried workers as hourly employees so their pay can legally be reduced.
But that shuffle has a side effect: It makes employees who are typically exempt from overtime rules eligible for a rare opportunity to collect the extra cash.

Ironically, the department that paid the most was EDD !

Of the three-dozen departments that paid at least some overtime to exempt workers, none shelled out more than the Employment Development Department, which paid more than $488,000. The department is charged with running California’s unemployment programs, which have been swamped in the down economy.
Department spokeswoman Loree Levy said demand for unemployment benefits and information technology projects within the department led to the overtime, which she said was closely monitored and approved.

Be happy, your tax dollars are working overtime !

Is it all about Euro ?

Today the market broke many key levels (including the "devil's number") and is "officially" in the correction mode, at least according to CNBC.  Every journalist is saying the reason to be the trouble with Euro - which not so long ago was touted as the new reserve currency of the world. And once in a while, you would hear the mention of the cute acronym PIIGS. But is it really just about the ClubMed countries ? How about ...

1. UK and US having similar debt burdens ?

2. A very real possibility that China may crash ? How many empty cities can you build to pump up the economy ? The commodity prices (see copper and oil for example) have gone down - and it's not because of Europe, but concerns about China.

3. Most states in US are effectively bankrupt, and personal debt levels still very high.

4. The entire multi-trillion dollar web of interlinked derivatives still needs a lot of unwinding.

All this points to deflation and almost no growth prospects, which means P/E ratios for US equities are still very high. That's the reason IMHO for the on-going crash. Of course you will not hear this on CNBC - which can only tell you to buy on the dip so that their real masters can make you the bagholders.

Why is Goldman Sachs being sued by SEC ?

Of course I am cynical - I don't think this is going to result in any meaningful change. All that will happen is the main employee mentioned (Fabrice Tourre) will be let go, GS will not admit to any wrong doing, pay a token file and then it will be business as usual.

Some things are interesting.

• The announcement happened on an option expiration day. Why didn't the SEC do this over the weekend ? Or on Monday morning ?
• GS was the top contributor (over $1M) to the democratic party in 2008 elections.
• GS (not the company, but via employees and PACs) donated about $1M to President Obama's election campaign.
• This is an election year. Maybe the political gods need a sacrifice. Maybe. Most likely not. Most likely, it's just to improve perception.
• The Financial Reform Bill is on agenda. Maybe this is related.

So maybe I am cynical, or maybe not.

In any case, if you want to understand what exactly is the accused wrongdoing here, please see this video by my favorite news anchor Dylan Ratigan. He uses a simple analogy to explain and make this complex matter accessible to all of us.

Visit msnbc.com for breaking news, world news, and news about the economy

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In Dodd We Trust

If there is a journalist who understands the financial mess we created and our inadequate reaction to it, it's Jon Stewart, who on this aspect, is miles ahead of etire CNBC crew combined. Watch this ...

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They Really Said It ! [8]

Book Review : Short History Of Financial Euphoria

Author : John Kenneth Galbraith

My Rating : 5 out of 5 stars

Most of the previous articles I wrote in this "They Really Said It" series were about criticizing people for denying the existence of the housing bubble. All my objections may seem as just another instance of 20/20 hindsight. Was it possible to identify the bubble before ? Were most of the people who warned about the imminent crash like a broken clock that's right twice a day ? Well, how about a book that was written in 1993, that analyzed historical bubbles and gave clear reasoning as to why these phases routinely repeat !

John Kenneth Galbraith was one of the most influential economist in 20th century. He was born in Canada, but lived most of his life in US. An adviser to President Kennedy, he was appointed as The US Ambassador to India. There, he often advised India's 1st Prime Minister Nehru on economic matters. For his service, he received 2 Presidential Medal Of Honors from US, the "Padma Vibhushan" from India and also Order Of Canada.

In "The Short History Of Financial Euphoria" he covers all the well-known bubbles and even some smaller ones - from the "Tulip Mania" to the Crash of 1987. It's a very short book and written in a witty style. Instead of merely reviewing, I would prefer to quote entire passages that I absolutely adore.

How does it start and how does it end ?

Galbraith argues that bubbles always begin on sound fundamentals. Then there are basically two types of participants. Majority are the ones, who believe in a new paradigm and a small minority who is there just for the ride, hoping to get off before the fall. But ...

For built into this situation is the eventual and inevitable fall. Built in also, is the circumstance that it cannot come gently or gradually. When it comes, it bears the grim face of disaster. ...... the speculative episode always ends not with a whimper but with a bang.

Galbraith is saying only disaster is assured in aftermath. Now, does anyone remember that Fed was going to engineer a soft landing ?

What about those who manage to not fall in above two categories ?

Given the pressure of this crowd psychology, however, the saved will be the exception to a very broad and binding rule. They will be required to resist two compelling forces: one, the powerful personal interest that develops in the euphoric belief, and the other, the pressure of public and seemingly superior financial opinion that is brought to bear on behalf of such belief.

He does not shy away from describing the groups as he sees it.

Those involved in the speculation are experiencing an increase in wealth - getting rich or being further rewarded. No one wishes to believe that this is fortuitous or undeserved; all wish to think that it is the result of their own superior insight or intuition. ... Speculation buys up, in a very practical way, the intelligence of those involved.

There are of course some who recognize the "mass insanity" as Galbraith calls it. How are they received ?

There are, however, few matters on which such a warning is less welcomed. In short run, it will be said to be an attack, motivated by either deficient understanding or uncontrolled envy, on the wonderful process of enrichment. More durably, it will be thought to demonstrate the lack of faith in the inherent wisdom of the market itself.

Yes, any critic of the euphoria was trivialized as just sour for "having missed the run". Galbraith gives more detailed account of this elsewhere in the book. He himself was accused as "Galbraith doesn't like to see people making money" !

But why do these bubbles keep happening ?

There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.

That's a classic quote ! Another reason, he argues, that people have blind reverence for those who have a lot of money.  "Money is the measure of capitalist achievement" !

Finally and more specifically, we compulsively associate unusual intelligence with the leadership of the great financial institutions ...

Really ! Often in such episodes there is "financial innovation" involved.

The rule is financial operations do not lend themselves to innovation. ... The world of finance hails the invention of wheel over and over again, often in a slightly more unstable version. All financial innovation involves, in one form or another, the creation of debt assured in greater or lesser adequacy by real assets.

This is simply my most beloved quote in the entire book ! I wish Greenspan had read this book before arguing against any bubble due to financial innovation :-)

What happens after the crash ?

This, invariably will be time of anger and recrimination and also of profoundly unsubtle introspection. The anger will fix upon the individuals who were previously most admired for their financial imagination and acuity. ... There will also be scrutiny of the previously much-praised financial instruments and practices ... There will be talk of regulation and reform. What will not be discussed is the speculation itself or the aberrant optimism that lay behind it.

Now, did he have a time machine in 1993 ? This above does not seem like having been written before, does it ?

Now knowing all this and more, the obvious question is why can't the warnings be taken seriously ? Can these bubbles be avoided ? During the foreword, Galbraith offers his pessimism.

Recurrent speculative insanity and the associated financial deprivation and larger devastation are, I am persuaded, inherent in the system. Perhaps it is better that this be recognized and accepted.

Go read this book ! You will fee like reading Nostradamus.

Audit The Fed : Response From Senator

I had sent a letter supporting the bill to "Audit the Fed" to both my congressman and senator. I had received a response from the congressman very quickly. It took a while for the senator to respond, but it sure did come.

It doesn't look like Senator Feinstein supports this bill.

Dear Mr. Avachat:

Thank you for contacting me to express support for legislation to increase transparency at the Federal Reserve. I appreciate your interest in monetary policy and welcome the opportunity to respond.

The Federal Reserve was originally established in response to the country's need for a sound and independent central bank to manage decisions relating to U.S. monetary policy. I understand your concern with some of the unprecedented steps that the Federal Reserve has taken recently to ease the flow of credit and stabilize financial markets.

On March 16, 2009, Senator Bernard Sanders (I-VT) introduced the "Federal Reserve Sunshine Act of 2009" (S. 604), which would require the U.S. Comptroller General to audit the Federal Reserve System before the end of 2010. This bill has been referred to the Senate Banking, Housing, and Urban Affairs Committee. Representative Ron Paul (R-TX) has introduced a similar bill (H.R. 1207) in the House of Representatives. Please know that I will keep your support for this legislation in mind should it come before the full Senate.

While I recognize the importance of accountability in the operations of the Federal Reserve, I strongly believe that monetary decisions should be made independent of political influence or motives. You may be interested to learn that I supported an amendment to the Congressional Budget Resolution (S. Con. Res. 13) offered by Senator Sanders requiring the Federal Reserve to disclose how it has disbursed emergency economic assistance to financial institutions during this severe economic crisis. Be assured that I am carefully monitoring the actions taken by the Federal Reserve to help stimulate our economy and unfreeze credit for businesses and homeowners.

  

Once again, thank you for writing. I hope that you will continue to share your views with me. If I can be of any further assistance, please contact my Washington, D.C. office at (202) 224-3841. Best regards.

      Also, may I take this opportunity to wish you a happy and healthy holiday season. And may 2010 be a good year for us all.


Sincerely yours, Dianne Feinstein
        United States Senator
Further information about my position on issues of concern to California and the Nation are available at my website http://feinstein.senate.gov/public/. You can also receive electronic e-mail updates by subscribing to my e-mail list at http://feinstein.senate.gov/public/index.cfm?FuseAction=ENewsletterSignup.Signup.