‚David Stockman Goes Way, Way Over the Top‘

The wingnut of the day award is easy to pick, it's David Stockman:

Cranky Old Men, by Paul Krugman: ... Actually, I was disappointed in Stockman’s piece. I thought there would be some kind of real argument, some presentation, however tendentious, of evidence. Instead it’s just a series of gee-whiz, context- and model-free numbers embedded in a rant — and not even an interesting rant. It’s cranky old man stuff, the kind of thing you get from people who read Investors Business Daily, listen to Rush Limbaugh, and maybe, if they’re unusually teched up, get investment advice from Zero Hedge. Sad.
David Stockman Goes Way, Way Over the Top, by Jared Bernstein:  He has a featured piece in today’s NYT which, while about 11.8% absolutely and totally on target, is mostly a horrific screed, an ahistorical, dystopic, Hunger-Games vision of America based on debt obsession and willful ignorance of macroeconomics and the impact of market failure. ...
David Stockman wants to pee in your cornflakes, Kids Prefer Cheese: Wow. David Stockman confuses cause and effect, goes all gold-buggy, slanders Milton Friedman, and just generally comes unhinged in a massive hissy fit in today's NYT. ...
Update: See also David Henderson's "David Stockman Screeches."

‚Reactions to Mankiw on the Long Run Budget Path‘

Greg Mankiw says the goal for the budget should not be a stable debt-to-GDP ratio as the president has called for, instead the ratio should be falling. But there are a few important qualifiers to this statement that are easy to miss.

Even if you agree with Mankiw that the debt to GDP ratio should be falling rather than stable, he never answers falling to what? (Does it fall forever until it hits zero, then a surplus which gets larger and larger until spending is zero and taxes take everything? I doubt that's what he has in mind.) How fast it should fall? (Do we balance the budget this year or over 100 years?). Should the debt to GDP ratio vary over the business cycle (i.e. can we do countercyclical fiscal policy?). On the latter point, Owen Zidar:

Reactions to Mankiw on the Long Run Budget Path: I agree with most of Greg Mankiw NYTimes piece on long-term debt to GDP but can’t overlook a fairly glaring omission –  he seems to ignore the fact that we are currently experiencing a major economic catastrophe. ...
While I completely agree that we should save in good times (i.e. have a falling debt to GDP ratio), we are not in good times and it’s quite likely that trying to save too much in bad times will be counterproductive. A primary reason why we want to be creditworthy is to have the ability to borrow for times like this. I simply have a hard time understanding why preparing for the next crisis should supersede adequately dealing with the current one.

It's easy to miss, but Mankiw actually covers this when he says " In normal times, when we are lucky enough to enjoy peace and prosperity, the debt-to-G.D.P. ratio shouldn’t just be stable; it should be falling." Notice the key words "normal" and "prosperity". That's what Owen is saying too, we should a surplus in good (normal, prosperous) times. But we should also run deficits in bad times so that on balance the debt load is stable (or hits some target). Mankiw slips in the part about a surplus in good times, though the qualifiers are easy to miss, but fails to address what to do in a recession (these are not the normal, prosperous times he cites as a condition for a falling ratio). That's a big omission because many people are going to conclude he is pushing austerity, i.e. reducing the debt during a severe recession. If he's really saying that (and I don't think he is), he should make it clear. If he's not saying that, if he believes in countercyclical fiscal policy, he should say that as well. Leaving it vague, as he does, is not helpful at all.

PGL comments:

Mankiw’s Mistakes on the Long-Run Debt Issue: Greg Mankiw wants to lecture the President on fiscal sustainability. Alas, his op-ed is full of errors starting with:

Representative Paul D. Ryan, chairman of the House Budget Committee, has a plan to balance the federal budget in 10 years.

Should we just fall out of our chairs laughing at such an incredibly absurd statement? Ryan wants to cut tax rates but assume a level of tax revenues that is over $500 billion a year above what many analysts suggest. And I have a plan to replace Tim Duncan as the center for the Spurs even though I’m only 5 feet 6 inches. And then we get these canards:

With the exception of a few years starting in the late 1990s, when the Internet bubble fueled an economic boom, goosed tax revenue and made President Clinton look like a miracle worker, the federal government has run a budget deficit consistently for the last 40 years.

Internet bubble? Mankiw really seems to hate that the Clinton years, which started with the 1993 tax rates increases, had better economic performance that either the Reagan-Bush41 years or the Bush43 years. As far as the deficit being positive for all these other years, he should read what both Milton Friedman and Robert Barro were writing on the deficit back in 1979 and 1980 – that the debt in inflation adjusted terms was falling. Hey – I don’t mind a conservative economists lecturing the President on fiscal policy if he gets the facts right. This op-ed, however, fails to get a few key facts right.

Confused Americans want to know: Does Greg Mankiw believe in countercyclical fiscal policy in deep, prolonged recessions or not?

‚GOP’s Future Lies in Heeding Women’s Concerns‘

My daughter Amy in the SF Chronicle "on how the GOP can better talk to women":

GOP's future lies in heeding women's concerns, by Amy Thoma (open link): The Republican Party needs help. That might be the understatement of the past two election cycles. It seems that we're hemorrhaging voters - especially young women. Registration numbers released this month only underscore the party's need to expand its base. We're not giving women my age enough reasons to stay or join.

As a 30-ish young professional, I don't see much coming out of the party that resonates with me. We didn't lose twentysomething and thirtysomething women in the last election because our digital efforts lagged (though they did) or because some crazy white guys said ridiculous things about rape (though they did), but rather because no one bothered to ask what we think or care about. I don't see any women on the national scene I relate to, and I don't hear any politicians addressing issues I care about.

I want the Republican Party to succeed. A successful two-party system is necessary to enact reasonable public policy, and I still believe that entrepreneurship, personal responsibility and freedom make the United States great. And Republicans are best positioned to promote these ideas. ...

The Education of an Investment Risk Manager, Part III

There’s kind of a rule of thumb in Asset-Liability management, that you match liquidity over the next 12 months, and match interest rate sensitivity overall.  I would do more than that, creating my own randomized interest rate models, as well as a new way of creating structured randomness in simulation models.  For a brief period of time, I had one of the best multivariate randomness programs out there, eliminating the problem of correlations in higher dimensions common with Hammersly points.  (My work was not theoretical, but intuitive… once I saw how the randomness was created, I figured out how to de-correlate the higher dimensions (since it was based on prime numbers, create more number than you need, and use a higher prime number to select observations.)

Anyway, when I brought my full-interest rate curve scenarios to the investment department in 1994, they said to me, “These are the first realistic interest rate scenarios we have ever seen.  Did you constrain them?”  I told them “No, just weak mean reversion.  Noise dominates in the short run, mean reversion dominates in the long run.”

As a result, for the lines of business over which I had oversight, we measured our interest rate mismatch in terms of days, weeks, and months, but never years.  Please ignore this incident where things drifted, but worked out exceptionally well (really, that should be a part of this series).  We published a document to show everyone how well we managed interest rate risk in Provident Mutual’s pension division.  We used scenarios far beyond what was required to show how well we did our work.  The regulators never complained.

At that point in time, the ability to integrate residential mortgage-backed securities into cash flow analyses was rudimentary at best.  But I found ways to make it work, most of the time.  That said, I remember joking with the MBS manager in late 1993, and saying there was a new term for a well-protected PAC bond.  He asked, “What is it?”  I replied, “Cash.”  He sarcastically said, “Oh, you are so funny.”   That said, I pointed out to the investment department that some of their bonds that they thought would last another four years would disappear in 2-3 months.

Then there was the floating rate guaranteed investment contract project that I eventually killed because it was impossible.  You can’t argue with expectations that are unrealistic.  Even better, I beat the Goldman Sachs representative.

In running the GIC desk at Provident Mutual, I had to review a lot of strategies because making money on short-term bonds/loans was difficult, and difficult the degree that I doubted as to whether we were in a good business.  On the bright side, I protected the firm until the day that we  could not write any more  GICs, because our credit quality was too low.  That was the fault of the less entrepreneurial part of the company, so I couldn’t so much about it, except close my operations down.  I asked the senior management team to provide a guarantee to my GICs, but they refused.

As such, I shut the line of business down.  With clients that were unreasonable over credit quality, and management unwilling to extend credit protection to GICs, the battle over GICs was ended, and I sent the line into runoff.

Five years later, as we were now part of the same firm I stood at the estate of John Dwight, with a young woman that I had sold the last GIC of Provident Mutual to, I said, “The end of the GIC business of Provident Mutual.”  We talked, she smiled, but it was part of the end of an era, because GICs were a minority of the assets in Stable Value funds.

If nothing else, this helps to highlight the impermanence of all that is done in financial firms.  I know this in my own life, but I am sure that it is true for most people in finance.

Bitcoin part 8: Big numbers

(Warning: Again I have indulged in a bit of wine.)

Before attempting to tackle the block chain, I feel the need to atone for the deadly sin of understatement. (You remember the seven deadly sins, right? Understatement, Exaggeration, False Analogy, Non Sequitur, Affirming the Consequent, Reification, and… Oh, crud, I always forget the last one.)

While numbers like “12″ and “37″ make for nice illustrative examples, they are so far from reality that I fear the very essence has been lost. And I want to fix that.

So, let me put it this way. Pick a number between 0 and 115792089237316195423570985008687907853269984665640564039457584007913129639935. That is, between 0 and . That is the range of output for SHA-256, the principal cryptographic hash function used by Bitcoin. The “256″ means 256 bits of output, and a 256-bit value can be interpreted as an integer from 0 to 2256-1.

Go ahead, pick a number. Let me guess: You picked 37 just to annoy me, right? Fine, let’s run with it.

SHA-256 is considered “not broken”. That means nobody has ever found any value whose SHA-256 hash is equal to 37, and nobody has any clue how to find one. The SHA-256 hash of your name is not 37. The SHA-256 hash of your phone number is not 37. The SHA-256 hash of your age in seconds right now is not 37. The SHA-256 hash of the Declaration of Independence is not 37. The SHA-256 hash of the entire fourth season of “Sex in the City” on Blu-ray is not 37.

Take any idea you have, or ever had, or ever will have, encode it however you like, run it through SHA-256… and the result will not be 37.

Am I 100% certain all of these statements are true? In the strictest possible sense, no; in every practical sense, yes. The odds that any of the above are false are lower than the odds that you get struck by lightning on a clear day and then win the Powerball lottery. Twice. In fact, it’s not even close.

Ordinary experience and intuition simply do not prepare us for numbers on this scale. Finding a value whose SHA-256 hash is 37 would be a Ph.D.-worthy (if not tenure-worthy) result1. Of course, there is nothing special about 37. All of the statements above are true for absolutely any number you will ever imagine, unless your imagination involves computing the SHA-256 hash of something else. Indeed, finding any two numbers with the same SHA-256 hash is, as far as anyone knows, literally impossible by any practical definition.

So if I show you a number x, and you compute the SHA-256 hash of the fourth season of “Sex in the City” on Blu-ray and get x, then you will know I came up with x by computing the SHA-256 hash of the fourth season of “Sex in the City” on Blu-ray. You will know this as surely as you have ever known anything.

That is what “cryptographic hash function” means. And this property is the essence of the Bitcoin block chain, and therefore the essence of Bitcoin.

As we shall see next time.

1. and bad news for Bitcoin

Buy Hercules Tech Growth Capital Instead Of OCZ Tech

With the recent deal where Hercules Technology Growth Capital (HTGC) lent up to $30M to OCZ Technology (OCZ) for a load of warrants, investors might be better off investing with the BDC that got the sweet deal. The temptation in this scenario is to buy the low-priced technology stock hoping for a large rebound. With the BDC sector heating up, as investors are attracted to the high yields,

Cheniere Energy Overheats On Another Contract Signing

With a subsidiary of Cheniere Energy (LNG) announcing the signing of another long-term supply contract, the stock has become overheated with a RSI approaching 80. Investors need to be concerned that the newest deal won't lead to sales until 2018 at the earliest and could face a block by the federal government. The company plans to be one of the leading domestic LNG exporters. It owns a 61%
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