Intellectual Ore

There’s a company presenting in a conference room next to me right now touting “100% Customer Success”.  Among their five “representative implementations” are BNP Paribas and Countrywide Financial.  Honestly, couldn’t they have picked more than 5 companies free of major scandals and/or bankruptcy?  I guess it beats lying outright about the identity of your clients - but I’m still rolling on the floor laughing.

UPDATE (7/29): Countrywide has won the Consumerist “Worst Company in America” award.

After work today, Del and I paid a visit to Joel and friends over at Fog Creek Software.  I didn’t bring a camera, but I really like their office.  It’s a bit dingy from the outside, but the inside is new, modern, and downright sexy; it’s hard not to like a place with a community lunch table, fish tank, Aerons, and walls lined with shelf after shelf of high-quality technical books.  Fog Creek is a place that would make me enjoy coming to work.  In stark contrast to the high-stress “grind it out” environment of finance, I felt like a piece of the west coast “chill” culture had been transplanted to NYC.  I really enjoyed going, and with the new office, things should be even better next year; Mark (Joel’s co-founder) was pretty excited about the blueprints.

About three weeks ago, I was walking through TriBeCa, when for no particular reason, it hit me that everything was just…expensive.  From $25 dinners to million-plus housing, I got the sense that the people that lived there must have a lot of money, the way they seemed willing to throw it around.

The funny part is, they don’t.  This article by Forbes gives some statistics on ZIP code 10013, also known as the “Triangle Below Canal” (TriBeCa).  Even with a median house price of $1.875 million, the median income is only $49,314.

Something is very out of whack with this scenario.  Mortgage payments with 20% down on a house valued at $1.875 million would be around 9,000/month, more than double the median income.

With income/house price ratios like these, it’s hard to see how the “mortgage crisis” didn’t come sooner.  Are these people all perpetual renters in an area with an insanely low rental yield?  Maybe a few Swiss bank accounts are at work?  I wonder, is there any literature exploring the correlation between median house price/income versus house price volatility?  With ratios getting into 2.18:1, I can’t understand how the valuations stay as high as they do in TriBeCa.

I have a sort of fascination with self-improvement.  I’ve been reading Steve Pavlina’s blog on and off for about a year; Stephen Covey and I go back at least half a decade.  Over the weekend, I had the good fortune of snagging a copy of How to Win Friends and Influence People (original 1936 printing) for $5 from a street vendor near NYU.

Carnegie’s book, arguably the first self-help book written by an American author, is the most “primary” in its orientation; it’s filled with lucid firsthand observations of daily life, along with a lot of statistics from direct measurement.  Covey’s book, on the other hand, is more longitudinal, presenting what he’s found to be “recurring themes” in other authors’ writing.  Steve Pavlina writes about everything from failure in the video game business, to how to become an early riser, blending what he’s read with firsthand experiments.

In some respects, these three couldn’t be more different.  Behind the facade of similarity put on by being male and white, one finds a Mormon with a PhD, a machine-part salesman from Missouri, and a game-programming atheist from Las Vegas.  Maybe, in a parallel dimension, we could put the three against each other in an ultimate deathmatch over, say, same-sex marriage.  For now, however, I’m content in the knowledge that these three can’t be that far from the truth, given that they’ve managed to arrive at consensus on how to improve one’s life.

I was heading to work on the 2/3 last Thursday when I saw a gentleman perusing Taleb’s Black Swawn.  Being that this is one of my favorite books, I was inclined to ask the gentleman’s opinion of it; as it happens, he was an actuary en route to a discussion about the book.  An actuary reading Taleb is something like a Christian reading the Quaran, so I knew right away that I was speaking to an extremely open-minded person.  He explained that in the course of his work at Standard and Poor’s, he’d seen the insurance industry shoot itself in the foot by systematically underpricing risk.  When disaster strikes, he explained, insurance companies lose a lot of money, but shortly after, premiums go up as disasters seem “more likely” in retrospect.  Faced with a glut of new premium money, the companies seek to expand the business they’ve written, and end up competing each other to a price point below the actuarially-derived zero-profit point, into loss.

When I explained that I was an engineering student, he contrasted his profession with mine, explaining that both, despite the proliferation of highfalutin models, require a pragmatic spirit capable of seeing beyond the limits of models.  It’s rare to meet someone so open-minded, especially over the age of 40; I was thoroughly impressed with this man’s intellectual accomplishment.

Much hype surrounds today’s launch of the 3G iPhone by AT&T, but what does it cost?  The minimum one can pay, as a new AT&T customer: $199 for the phone, plus a two-year contract for $69.99/month.  Over two years, a 3G iPhone customer will pay $1878.96 rock-bottom, but once taxes, “line charges”, “universal service fees”, AT&T’s $36 “activation fee”, “municipal recovery charges”, text plans ($5/month for the privilege of putting some 28,000 bytes of data onto AT&T’s network), and other upgrades are considered, it’s going to run at least $3000 over two years.  Is this phone really worth $1500/year?

Blaming “speculators” for stratospheric oil prices seems to be fashionable nowadays in American politics.  Here are two opposite views of what’s going on:

First, an open letter signed by 12 airline industry CEOs:

Since high oil prices are partly a response to normal market forces, the nation needs to focus on increased energy supplies and conservation. However, there is another side to this story because normal market forces are being dangerously amplified by poorly regulated market speculation.  

Twenty years ago, 21 percent of oil contracts were purchased by speculators who trade oil on paper with no intention of ever taking delivery. Today, oil speculators purchase 66 percent of all oil futures contracts, and that reflects just the transactions that are known. Speculators buy up large amounts of oil and then sell it to each other again and again. A barrel of oil may trade 20-plus times before it is delivered and used; the price goes up with each trade and consumers pick up the final tab. Some market experts estimate that current prices reflect as much as $30 to $60 per barrel in unnecessary speculative costs.

The reliably pro-free market Economist sees things differently:

More importantly, neither index funds nor other speculators ever buy any physical oil. Instead, they buy futures and options which they settle with a cash payment when they fall due. In essence, these are bets on which way the oil price will move. Since the real currency of such contracts is cash, rather than barrels of crude, there is no limit to the number of bets that can be made. And since no oil is ever held back from the market, these bets do not affect the price of oil any more than bets on a football match affect the result.

My thoughts?  Check out my comment on the Economist article.  Suffice to say, blaming speculators reflects a fundamental misunderstanding of how futures markets work.  There is always a market for immediate purchase and delivery of oil; economists call this the “spot market”.  That futures prices have tracked spot prices so closely strongly suggests that futures are fairly priced with regard to physical oil.  Even if futures prices were off, the “open interest” of the market has no bearing on how many barrels will be physically sold.  Furthermore, the claim that “the price goes up with each trade” completely flies in the face of how financial markets work.  To borrow a quote, “These guys don’t know the difference between preferred stock and livestock!”

It’s all demand; the data is in my paper.

UPDATE: I forgot to include a link to Bloomberg, discussing a Goldman Sachs report that the fundamentals are to blame for recent oil prices.  (Notably, an Economist reader opined that Goldman Sachs is “Public Enemy #1″.)  One interesting thought that’s since come to mind: if the fundamentals don’t warrant the price, there very well could be a big risk premium built it; but still, this isn’t “speculation”, it’s the market perceiving the risk of a supply disruption, and pricing accordingly.

code grinder: n.

1. A suit-wearing minion of the sort hired in legion strength by banks and insurance companies to implement payroll packages in RPG and other such unspeakable horrors. In its native habitat, the code grinder often removes the suit jacket to reveal an underplumage consisting of button-down shirt (starch optional) and a tie. In times of dire stress, the sleeves (if long) may be rolled up and the tie loosened about half an inch. It seldom helps. The code grinder’s milieu is about as far from hackerdom as one can get and still touch a computer; the term connotes pity. See Real World, suit.

Ben Bernanke opined this morning on the Fed’s ability (more properly, inability) to regulate non-bank financial firms.  A central point of the speech was the need for Congress to give the Fed greater “explicit oversight authority” to regulate clearance, financing, and the credit risk inherent in OTC derivatives contracts.  Additionally, the speech addressed the need for having a process to dispose of a failed institution’s assets in an “orderly” fashion.  The speech took a very even tack between the costs and benefits of increased regulation; it really made for a great start to my morning.

Given how important robust payment and settlement systems are to financial stability, a strong case can be made for granting the Federal Reserve explicit oversight authority for systemically important payment and settlement systems.

I’ve been thinking a lot about Tim Ferriss’s Four Hour Work Week.  In a nutshell, the book explains why most people don’t place enough value on their time.  Instead of our mundane, drab office-space jobs (selling our time), Ferriss explains that we should work to create income-generating systems (sell products, buy rental property, etc.) enjoy life more, and stop “living for the weekend”.

A lot of what Ferriss writes is spot-on.  For one, we Americans need to think harder about lifestyle design, that is, the entire package: work, vacation, time with significant others/kids, where to live, minimizing commute time, etc.  A lot of my friends are moving to take jobs, and the overriding concern seems to be the job itself, and not the lifestyle that comes with it. 

Also, Ferriss is right that the American workplace has a serious problem with information overload.  The “always-on” nature of email and the telephone is largely responsible for the total absence of concentrated, productive time.  I am appalled how frequently I see people “multitasking” BlackBerry use with various activities: driving a car, religious activities, participating in a business meeting, or, my personal favorite, using the restroom at work (I’ve witnessed all of these firsthand). 

So I mostly agree with the book.  However, I have one major gripe: the book talks a lot about getting our lives in order financially, but doesn’t comment much on what to do after we’ve cut our work week to ”four hours”.  And I think this is a big problem.

Right now, I’m craving engagement.  I have a job where I’m making plenty of money, but my day-to-day work is rote drudgery.  This probably seems strange, but in the face of having my material needs fulfilled, I’m bored out of my mind; I’m over-recreated.  Vacations, walks outside, and reading books have all become intolerable.  I can’t wait to get back to Champaign-Urbana and work with my research group; only five more weeks.