Sunday, 7 December 2014

The Einstein Clones

“Ladies and gentlemen, we can argue all day as to why and remain none the wiser.  What we do know for sure is that the program isn’t working,” the Chairman of the Board made sure to gesture with his hands as he spoke to the assembled stakeholders.  He had heard that the majority of communication was non-verbal, and effective body language at a crisis point like this could make or break his proposition.

“But if we can just understand why, we may be able to salvage the project at minimal cost,” interjected the project’s lead scientist.  “Just think of the possible return on investment you could achieve with another six months of research!”

“If I recall correctly, that’s what you said six months ago, and a year before that,” the Chairman responded, making sure his cufflinks were clearly visible to the drably-clad professor.  “The creditors are past impatient, even for such a long-term project.”

“But what about the latest submissions?  Surely you must admit that the clones are closer to a breakthrough now than ever before?” said the Doctor.

“Please, Doctor, if you can tell me what commercial merit a truckload of fifth-grade modern art and passé sci-fi stories have, I would be delighted to hear them.”

The doctor remained silent.

“The truth is, ladies and gentlemen, that we’re bleeding cash.  This was understandable during the creation and education phases, but now, after eight years in the production phase with nothing to show for it, it’s time we started implementing contingency plans to avoid insolvency.”

“And exactly what is it you would have our one-thousand geniuses do?  Teach tenth grade?” the doctor scoffed sarcastically.

“No,” said the chairman, shifting upright in his chair to give himself every inch of authority.  “In this labour market, I am obliged to propose to the Board that they drive taxis.”

Tuesday, 25 November 2014

Neo Neanderthalis

The year is 2308.  Machines dominate industry.  The muscle mass of the world has been made obsolete.  The six phases of mechanisation are complete.

First came the geometrical tricks, those neat extensions of man’s brute strength.  Levers, pulleys, yokes, wheels and other such magnifiers of raw animal power allowed man to settle and multiply.  Man was released from the limits of his body.

The second phase was the harnessing and direction of energy, which let man and beast burst beyond the barriers of even their magnified output, accelerating progress and making life comfortable.  Man was released from the limits of his power.

Next came processing; unleashing logic at the speed of light.  Now the machines were not only stronger and faster, but they were smarter too, if in a dumb way.  Man was released from the limits of his mind.

Automation was the next logical step.  The machines got smarter.  The machines learned to learn.  There was barely a task they could not complete, once they were self-sufficient.  Man was released from the limits of his management.

Fifth was the development of emotions.  The machines learned to feel.  The creative bastions of humankind were no more.  Man was released from the limits of his art.

Lastly, cognisance emerged.  Or perhaps it is more correct to say that man and machine converged.  Either way, it doesn’t matter.  Man was released from the limits of his ego a long time ago.

Maybe that’s why there are so few humans left.  How could they compete with a super-ego?  I’ve never seen one, but I hear there’s a breeding program to try and save the few remaining in the wild.  Would you like to make a donation?

Friday, 21 November 2014

Transactional v Relational

Every morning The Spear ducks down the road for Crappy Cappy Hour – cheap coffee between the hour of 9:30-10:30AM.  Every morning The Spear is faced with the choice of two coffee shops, side-by-side; one always full and vibrant, the other always empty and stark.  Every morning The Spear chooses the latter.

Actually, that is a lie.  The first few times The Spear became aware of the time-specific sale of discount caffeinated beverages, he went to the much busier shop.  Truth be told, until he got sick of having to wait so long for a coffee in the busy shop, he never even saw the obvious alternative situated right next door.  Since then, he has never looked back.

Same coffee.  Same cost.  No wait.

What The Spear can’t fully understand is why no one else seems to have discovered the café next door.  Every morning the hordes of caffeine lovers jostle in the atrium of the busy shop, seemingly unperturbed by expressos which are anything but express.  Meanwhile next door The Spear is served so quickly he barely has time to read the headlines in the paper.

An obvious candidate for the disparity in business – to anyone who has frequented both establishments - is the staff and experiences they offer.  The busy café is owned by a family of Italian immigrants, talking loudly and joking with their customers, with whom they have clearly established relationships.  The Spear is uncertain who owns the second café, but it is certainly staffed by neat and demure Asian students, who offer little conversationally other than what is necessary.

The Spear, with his technical background and associated social skills, has no problem with the transactional offering.  He is going to the shop for a coffee after all – not a conversation.  Any conversation would detracting be from his objective – a quick coffee.  The empty shop meets his requirements dutifully.

But seemingly The Spear is in a minority.  It would appear that a relational, rather than a transactional approach to life may be the norm, if coffee shop attendance is anything to go by.

Is one expected to develop a relationship with a modern-day barista?  Do they fill a void previously filled by some other form of relation or community – like a servant or the church?  Is the coffee secondary to the banter and chat which may be had during morning tea?  Is it that the relationships often count for more than the product?

If there’s anything that the world of ‘business’, as opposed to the world of ‘science’ has taught The Spear, it is that ability is important, but relationships are vital.  Without healthy relationships, ability is essentially meaningless.  You can make the best damn coffee or the best widget in town, but unless you are someone that people want to do business with – which may mean knowing the right people, having a charismatic personality or being trustworthy – people will take their business elsewhere.  

Yes, you can achieve in isolation, but it is unlikely you will have anything other than the patronage of the transaction-minded minority to show for it.

Thursday, 6 November 2014

Twisted Memories

The Spear was standing at the urinal today, busy doing his business.  In what is a common occurrence in his predominantly male workplace with limited – and possibly code violating - toilet facilities, one of his colleagues was forced to stand next to him in the other and only urinal available.  In a split second The Spear was bombarded by a childhood memory that seemed too bizarre to be true, and too weird to risk asking anyone other than Google about.

The good news is, The Spear isn’t crazy: there actually was a schoolyard pissing contest in the 1990’s Aussie children’s show Round The Twist.

Round The Twist did some pretty fucked up stuff, disturbing (while thoroughly entertaining) a generation of Australian Children, a large proportion of whom still share a fear of clowns and scarecrows.  You know what he's talking about.

That said, it was one of The Spear’s favourite shows, and always a good way for teachers to wind down on many a Friday afternoon. 

They just don’t make them like that anymore.

Wednesday, 5 November 2014

The Stages of Man

The Spear isn’t what you would call a ‘handy man’, in either the tradesman or cash-for-sex sense.  But last Friday, feeling an inexplicable urge which could not be resisted, he decided to do some odd (that’s odd, not hand) jobs which had been accumulating around the house over the past few years.

If he didn’t know any better, The Spear has changed.  The satisfaction he obtained from successfully – if not beautifully – replacing a few tiles, for instance, was surprising, and the task was much more engaging than he previously would have believed.  It was as if he had discovered a sense of ownership of the problems and the ability and motivation to shape his world as desired, rather than the usual powerlessness of man subject to the forces of nature.

There are few times when one can clearly delineate between a boy and a man.  Indeed, The Spear would think some news reports would be more correct to report “a thirty-two year old boy” in some instances, as the particulars would attest to.  He often hears reports of “men” who are younger than himself, and who, in all but the eyes of the law, are nothing but man-boys.  But alas, The Spear believes there is something about self-sure manipulation of one’s physical world which is a true sign of manhood.

From infant, to whining schoolboy, to lover, to soldier, to justice, to old fool to second-infancy and death.  Shakespeare set out the fluid nature of man’s development in As You Like It in 1600.  Perhaps The Spear has finally managed to ditch the last of the whining schoolboy.

Sunday, 26 October 2014

The Black Holes of Finance

“Ships will sail around the world but the Flat Earth Society will flourish. There will continue to be wide discrepancies between price and value in the marketplace, and those who read their Graham & Dodd will continue to prosper.” – Warren Buffett.

Astronomists can predict the motion of the planets and the stars with incredible accuracy thousands of years into the future, but try to estimate the level of the ASX200 next year, and you’ll get as many opinions as you have analysts.  A 2012 study of more than 11,000 analysts from 41 countries by the University of Waterloo and Boston College found that target price predictions were accurate only to within 18% for a 3-month horizon, and 30% for a 12 month horizon - hardly the type of accuracy necessary to launch a rocket to the moon and back.  Why, when our predictions come to the world of finance, are we seemingly in the dark?

In the realm of science, causality reigns supreme.  Reproducibility - the ability of an entire experiment or study to be reproduced - is one of the main principles of the scientific method.  It relies on the Ceteris Paribus principle (where all other variables are held constant), which typically requires some sort of controlled environment to achieve, such as laboratory conditions.  Given enough information in such an environment, the outcome from a series of physical events is able to be predicted with great accuracy.

Finance students, on the other hand, are taught that share prices are inherently unpredictable; that they follow a Random Walk.  This unpredictability is said to arise out of the tenets of Samuelson and Fama’s Efficient Market Hypothesis, whereby markets are informationally efficient.  The theory states that in a strong-form efficient market, all relevant information is already incorporated into share prices and thus the only information left to move prices is new, and by definition, unpredictable information.  It is thus the incorporation of this unpredictable information into share prices as it comes to light which results in the random movement of prices.

However, there is ample evidence that the market is not strong-form efficient (which would require all relevant information to be instantly reflected in prices).  Every case of insider trading proves that there is information which is not available to the public which is yet to be reflected in share prices.  And as for instantaneous incorporation of news into prices, there is evidence of sluggish price response to earnings announcements.  Evidence of price momentum up to 90 days after company announcements shown by Rendleman, Jones and Latane in 1982, suggests that the market is not even entirely semi-strong form efficient (whereby all publicly known information is quickly incorporated into prices).

So if the market is not totally efficient, at least in the strong-form case, this would imply that share price movements can be predicted to a degree.  For instance, the executive making an announcement of unexpected windfall gains to the market should be confident that the company’s share price is likely to rise afterwards as a result – he is merely constrained by insider trading laws from acting on this information.  Thus, legal barriers such as insider trading laws create asymmetric information in the market place (which may lead to the deviation of asset prices from their true value), but they are by no means its only cause.

Michael Lewis, in his several of his popular books, exposes in great detail how some of the major market players like investment banks actively try to create market opacity and information asymmetry.

In Liar’s Poker (1989) Lewis details how Over-the-counter (OTC), rather than exchange-based trading in fixed-income securities (bonds) allowed Salomon Brothers and other investment banks to earn obscene profits at the expense of unwitting clients. 

In The Big Short (2010) he investigates how some investment banks (in particular Goldman Sachs) were able to impinge upon the independence of credit-ratings agencies, allowing them to knowingly securitise and re-sell toxic Collateralised Debt Obligations (CDOs) at AAA-rated prices, reaping billions in profit (and coincidently allowing several savvy investors to place huge short-bets on their eventual collapse via Credit Default Swaps (CDSs) at fantastic odds). 

In his latest exposé, Flash Boys (2014), Lewis reveals how High Frequency traders pay investment banks for the privilege of processing client orders in their so called ‘Dark Pools’ (private exchanges).  While the lack of transparency in Dark Pools allows block trading by institutional investors not wishing to impact market prices with their large orders, it also provides the perfect environment for predatory trading practices by High-Frequency Traders (HFTs), and creates an inherent conflict of interest for the investment banks (who are in the pay of the HFTs to the detriment of their clients).

It is clear from the examples above that there is a lot of money to be made from information asymmetry in the market.  If the market was truly strong form efficient, there would legitimately be no way of consistently earning abnormal returns, as prices would always reflect underlying value. 

For instance, if subprime CDOs had been rated correctly and priced for the junk that they were in the years leading up to the GFC, it is logical to think that the severity of the ensuing crisis would have been greatly reduced, or perhaps even averted all together.  Who in their right minds would have written Credit Default Swaps (insurance against default) on subprime CDOs for the measly premiums that AIG did?  Lewis described it as selling discount fire-insurance on a house that was already ablaze.

While there were a small number of investors who could see that the proverbial house was on fire, and loaded up on the cheap insurance, most market players relied on the ratings of Moody’s and Standard and Poor’s.  Unfortunately, these key agencies had significant conflicts of interest, whereby they rated their client’s (the investment banks) products for a fee.  Also, due to the intentionally complex structuring of the products, they were heavily reliant on risk models of the investment banks, who had a vested interest in minimising the apparent risk (and therefore maximising the price) of the products.  Thus, market prices were able to deviate significantly from underlying value.  When the risk had become too obvious to hide and was finally priced-in by the market, the impact on the financial system was dire.

Alas, it would appear that the severity of the GFC was made magnified in part by intentional obfuscation by market players.

The real world is far from a laboratory environment.  There is much information that we do not know, and many external factors that we have no control over.  While the Efficient Market Hypothesis and the notion of random-walk share prices enjoy strong academic support, it is clear that the market is not totally efficient.  Information asymmetry creates avenues for market exploitation, and thus some industry players try to foster opacity and complexity of market products and the market itself, in the pursuit of abnormal returns.  Although the law of cause and effect is surely as much at work in the financial markets as in a science lab, it is the many unknown factors present in the market, both external and created from within, which lead to pricing inaccuracy and contribute to the formation of financial black swans.

Monday, 29 September 2014

Ayn Rand v Wishful Thinking

As you may have gathered from his previous ramblings, The Spear generally leans to the political right.  And, being the human that he is, The Spear tends to read things which he knows he will find agreeable.  Thus he is 9/10 of the way through Ayn Rand’s ‘Atlas Shrugged’.

Ok, The Spear knows what you’re thinking, it is either:
a)      Ayn Rand?, who the hell is that?
b)      Ayn Rand?, you disgust me. Or
c)       Ayn Rand?, don’t you mean ‘Jesus’.

To those in camp (a), Google it.  The Spear would like to think he does not belong in either of the other two categories.

Given her experiences in soviet Russia, it shouldn’t come as a surprise that Rand’s writing is fiercely anti-communist, as with other writers from the former USSR including Arthur Koestler (Darkness at Noon amongst others) and Friedrich Hayek (Road to Serfdom).  Indeed, she and her family suffered first-hand all that the grim reality of communism entails; the property seizures, the displacement, the purges, the desperation.  It is only natural that her position was in favour of the American-style laissez-faire capitalism under which she made her name.

What does come somewhat unexpectedly for a first-time reader of Rand is her style of storytelling.  Subtlety is a tool that has seemingly been sacrificed by Rand to make sure that her message to readers comes through loud and clear.  This in-your-face style of writing has the effect of enthralling supporters and enraging detractors.  It is a shame, really, as there is much to be taken away from this half novel, half philosophy lecture, if one is able to get past the woefully one-dimensional characters it relies upon.

Although one is never fully able to believe that such hyperbolic characters could be real, their traits, in themselves, are accurate representations of the underlying forces at play, which are often hard to grasp and elucidate.

While there may never be someone as totally destructive as James Taggart, or as superhumanly competent as John Galt, if one looks at them instead as allegorical attitudes or characteristics, Rand does as a great job at describing the mindset and value system required to make each possible.

She explores in great detail what value system is required to justify the renunciation of rational thought and self-interest at the behest of a moral debt to an unknowable God or the subjective ‘greater good’; the former which demands sacrifices in return for rewards in the after-life, and the latter which demands sacrifices for promises of a bright but always distant future.  Both require that people feel guilty about enjoying themselves during the present, and idolise ‘need’ over ability.

She also highlights the great hypocrisy of the wishful thinkers who want to have their cake and eat it too; the non-thought of those who want to reap the benefits of something whilst denouncing its means, who want to deny reality by getting something for nothing.
These aren’t just theoretical traits of characters in a novel.  These non-thoughts are held by those close to The Spear.  The Spear knows people who on the surface appear like normal, rational human beings, but who are yet able to extoll these ultimately destructive ‘good ideas’ in the name of ‘morality’ and ‘heart’. 

‘You are heartless’, they say to The Spear.  ‘Don’t you care?’ they say to The Spear.  ‘You are selfish.  All you care about is money’ they say, as if good intentions and ‘heart’ alone allow them to live lives of relative luxury or do anything but hug those in need.

‘Government should be about helping people’ they say, without any thought to the source of this benevolence, or any limit to it.  Meanwhile, productive business, the ultimate creator of all the government’s wealth, is viewed as base commercial enterprise, to be regulated and taxed, but not admired.  A government that only puts in place the services necessary for people to effectively look after themselves is not wanted.

What is wanted is the land of the milk and the honey, but without any of the incentive mechanisms necessary to achieve it; i.e. they are after ‘heaven on earth’, the ever-elusive, forever in the future utopia, that shall one day be achieved if only the people were to sacrifice more for the greater good.  If only the people were made to sacrifice more for the greater good, at the point of a gun if necessary.  It’s for their own good...  The end justifies the means…

Before you label The Spear as a lunatic, all he can say is beware.  Be vigilant.  It may sound hard to believe but THIS HAS ACTUALLY HAPPENED.  This seemingly crazy line of thought has actually overtaken entire countries for decades at a time.  And once it has, it’s the most ruthless who rise to the top.  That’s why people like Rand and Koestler and Hayek and Orwell wrote their books.  They are reminders – reminders to the people of the future – never to be conned by the line of thinking which, yes, sounds like a good idea, but ultimately leads to nothing but death and destruction.

So thanks, Ayn Rand, for another reminder.