Tuesday, April 17, 2007

WIll you be my friend?

While we may never know the true motive of the killer, many find it convenient to attach the label of "loner" to Cho Seung-Hui.

We feel it might help us to understand just a little about how someone could do something so horrific.

But you have to wonder just how much we can ever know about a "loner" and whether he was truly lonely or not.


When you ask someone how many friends they have the answer of course depends on who you ask and how old they are.

If you ask your grandparents they may have a list of people who they've known for a number of years, if not decades.

If you ask your parents, they will have a lot of people they've known either since childhood or over a number of years.

But if you were to ask me, I could show you a list of contacts on MSN, Skype, Yahoo, different email accounts and people I know through work. This doesn't even include the websites designed to reunite past shoolmates or online dating.

I literally have more friends than I can remember.

But I don't spend a lot of time going to parties , meeting for dinner or going to nightclubs. I tend to spend most of my time at home. You might even call me a bit of a "loner".


While Cho Seung-Hui will forever remain a mystery to so many people, it's too convenient to attach a label and use this to help explain his motives for doing what he did.

At best it will misrepresent the life he truly led and at worst it may prevent us from ever being able to understand what truly led him to kill so many people or help prevent it from ever happening again.

Saturday, April 14, 2007

Last ray of hope

I hearby declare that Sunshine is the last movie I will ever pay to watch at the cinema.

I was close to making this decision after seeing Children of Men, but my latest experience left me no doubt in my mind.

A number of reasons have led me to this conclusion, most importantly:

1) The movie (like so many I've paid to see in the past) was rubbish (no doubt the book was better);
2) The people sitting behind me kept whispering audibly to each other and continuously kicked the back of my seat after arriving late;
3) The popcorn made me feel bloated;
4) I drank so much that I wanted to use the bathroom halfway through but didn't want to miss anything important, so sat in agony for the last 30 minutes;
5) I could enter the cinema and walk directly to my seat without anyone checking to see if I had a ticket.

The last point was the most telling of all. The fact that nobody checked to see if I had a ticket proves how pointless it is to pay for the experience in the first place!

I doubt you could ever walk into a concert or play without someone checking your ticket. After all, these are still valid forms of entertainment.


My decision to stop paying to watch a movie at the cinema is of course partly explained by the fact that there two perfectly viable alternatives: waiting for a DVD release or, if you can't wait that long, downloading.

Either allows you to enjoy the movie on a widescreen TV, plasma or projector, proving a similar viewing experience with the option to eat whatever you want, whenever, without having to worry about the people behind you ruining it.

While many can argue that downloading a movie is wrong, it can now be justified on the basis that it allows you to avoid the unpleasant experience of seeing it at the cinema!

Cinemas are a relic of the past, providing a deteriorating service that has been replaced with a superior alternative at home.

It's time for these buildings to be torn down and replaced with affordable housing, just like shops on the high street, as I've argued before.

Wednesday, April 11, 2007

An inconvenient fact

Browsing YouTube (whose slogan should be changed without delay to "Just broadcast it") I came across an ambitious attempt by one Danish economist to solve the "big problems of the world" in the most immediately beneficial order of priority.

Listen to what he has to say before I rip it apart piece by piece...

I know what you're thinking. Blue T-shirt?? Where's the grey hair and grey suit??? Surely he isn't a real economist, is he?!? Well, if he talks like one, the chances are, he is one. And he seems to have some older, greyer friends, which always helps.


The ideal that he and every other economist aims to achieve is a system that ensures the self-motivated actions of each individual be consistent with the interests of everyone else. A good example of this would be to charge customers for plastic bags at the supermarket so that they have an incentive to re-use old ones thereby helping them save money AND the environment.

Of course, it's easier to achieve this ideal scenario on a small scale. But when you begin to try and solve 'bigger' problems you run into obstacles that ultimately prove practically impossible to overcome.

To see this you need simply to ask: why hasn't what he suggests been done already? The answer lies in the different interests of the various groups involved.

Basically, the priorities of those with the money and resources to solve the big problems of the world are very different to those without it. In other words, rich countries want to solve their problems first.

This isn't as inappropriate as it sounds. After all, rich countries can cause far bigger problems than poorer ones who currently suffer with diseases that are relatively easy to contain. While you can limit the spread of disease, you can't limit the spread of global warming or the collapse of the global financial system.

This is why the richest nations in the world poor billions of dollars each year into trying to solve their own problems.


While it is useful to prioritise problems (or solutions) in terms of their largest short-term gain, this doesn't take full account of the potential short- (and long-) term cost of leaving other problems unsolved.

In principle it makes sense to solve the problems of poorer countries first but in practise we live in a world where solving one problem literally creates another.

Ultimately, all we can do is try and solve as many problems as possible given the resources we have available. Anything else would be aiming for the ideal and living with something far worse than it otherwise would have been.

Monday, April 09, 2007

Epilogue of a boom

As I mentioned last month, the world economy is booming. In many ways, things just couldn't get any better.

If you've been investing in any stock market around the world over the past few years, you've done very nicely indeed.

Of course, if you're a long-run investor or aware that there is a business cycle (or even better, both!) then you've done very nicely over the past few decades and no doubt will continue to do so.

However, you're still only as good as your last investment. After all it can only take a few days or weeks to wipe out an entire year's worth of gains.

Now is one of those times when you really have to wonder if it's the time to sell.

I'm not saying this as an economist or as an investor, but as an observer of three simple facts.

These facts help explain why now is one of the riskiest times to be actively investing in the stock market.


Fact #1: There is a bizarre range of opinions about whether the US Federal Reserve is about to raise or cut interest rates.

Some economists believe a further hike is still a distinct possiblity while others are adamant that the next move will be down either within the next few months or at the latest by year-end.

Of course all of these economists have at some time or another been wrong about the Fed's next move(s), so their opinion (or difference of it) is not something to take too seriously.

What should be taken seriously is the prospect of the Fed actually having to cut interest rates at some point in the near future.

History is not usually the best guide for the future, especially in the stock market.

However, when it comes to the relationship between when the Fed cuts interest rates and the subsequent performance of the stock market, it's all we have.

US interest rates (red) and stock market growth (blue)


... 1996-2007

As both charts show, whenever the Fed has had to cut interest rates (and even when it hasn't) the stock market has fallen sharply.

One thing we often hear about is how interest rates are "historically low". From the first chart it's clear to see how low the red line has fallen and still remains in the second. This is why some economists still believe there is further room for a further hike or two.

At the end of the day, when the Fed does start cutting, it will already be too late if you're exposed to the stock market. As the second chart shows, the stock market (blue line) falls before the Fed starts cutting in anticipation of a slowing economy.

Fact #2: There is an even more bizarre range of opinions about whether the US economy will experience a recession either this year or next.

Most (in)famously, former Fed Chairman Alan Greenspan said recently that he saw a 30% chance of a US recession in 2007. As always, his comments have helped to sharpen the debate among other economists about the probability and timing of the next recession.

Given their poor record at predicting the direction of interest rates, it's not surprising that any forecast of a recession should be treated with more skepticism than respect. If they can't predict the actions of 12 people sitting around a table (deciding the direction of interest rates) it's unlikely they can forecast the consequnces of the actions of millions of people and thousands of businesses.

But again, given the frequency of past recessions in the US (shown by the shaded red areas in the charts above), we're due one soon.

Fact #3: Nobody seems to know if the US housing market will continue to deteriorate.

The consequences of a sharp correction in the US housing market for the rest of the world are extremely severe for one simple reason: if US real estate valuations fall further, US consumers will stop spending and the world economy loses one of its engines of growth.

I say "one of" because these days China and India are also fuelling global growth at an unprecedented rate.

Still, it's US consumers who still remain the biggeset spenders out there and what they do will be as important, if not the most important, determinant of global growth for years to come.


What these three facts all have in common, is that they reflect the fact that the US economic cycle has reached the stage where a sharp slowdown is not only inevitable but likely.

While the timing of such a slowdown remains uncertain, it is likely that any investor who remains heavily exposed to equities for the next 2-3 years is unlikely to see any gains over the period.

There are two choices that remain: sell soon or sell now.

Saturday, April 07, 2007

Truth: a false frontier

Research is considered by some to be worthless if it isn't cutting edge, pathbreaking or on the frontier.

But how much do we understand about this so-called 'frontier'? And when do we know we're on it? And why does it matter whether we're on the frontier or not?

Recently, while having dinner with a friend who works as an academic economist, these and other thoughts crossed my mind.

I realise now, looking back on my decision to leave academia and go and work in the private sector, that pursuing 'pathbreaking' research is no longer an option.

So where I am now relative to this frontier? Have I been getting further away from it every year since I left the academic world? And does this mean that my research is worthless?


Research is the act of collecting facts in pursuit of the truth.

The more facts gathered, the closer we get to the truth and the more we understand.

So, 'frontier' research could be considered that which gets us closest to the 'truth'.

However, there is still very little we can say we know for certain.

So, is it possible that we may never know the 'truth', but rather only get as close as possible to it?

If this is the case, then frontier research would be the only research that mattered. Anything else would be a step backwards, right?

But what if frontier research actually took us a step backwards in our understanding? What if the product of frontier research turned out to be at best misleading or at worse just plain wrong? Worse still, what if what we thought was 'wrong' was actually right, but that we couldn't identify it as 'right' because we didn't know what 'right' was!?


In reality, there is no 'right' or 'wrong'. There is simply the addition to our pre-existing understanding. Anything we didn't know before but know now is considered a contribution, or 'on the frontier'.

In reality, anyone is capable of making such a contribution, because there are an infinite amount of things we don't know. Maybe this blog just helped improve your understanding, unless you knew all this already...


Apparently, over 60% of academic research is the 'regurgitation' of previous work. This is worthwhile in either proving or disproving ideas and for suggesting further areas of work. Whether this is worthy of being considered 'frontier' research is of course debatable.

Thursday, April 05, 2007

Blue screen of death

Microsoft can claim to be one of the greatest achievements of all time... and one of the greatest disappointments.

Soon after it was founded in 1975, Microsoft's mission was to have "a computer on every desk and in every home, running Microsoft software".

Mission (near enough) accomplished.

So why the great disappointment?

It's not because of the infamous blue screen of death that frustrated users of Windows will see every time their system crashes.

It's because a company with more than $40 bln in revenue has failed to set itself a new mission.

This provides a lesson for companies like Google, which is currently riding the wave of success that Microsoft enjoyed over 20 year ago.


Watching the share price of a company tells you almost everything you need to know about it.

The stock of Microsoft charts both its great success and recent failures.

Going nowhere fast

Microsoft would seem to represent a typical company that has reached the "mature" stage of development, where growth is a thing of the past and its potential has already been fullfilled.

Not so fast.

Does it really make sense for a company that develops and manufactures computer software to already be past its prime when the 'information age' has only just begun?

I used to doubt it.

I thought, if Microsoft would change its mission to something like "a television in every home, running Microsoft software", then it would stand a chance.

But it never changed.

And then it was 1998 and Google arrived on the scene.

Now that it's competing with the likes of Google (not to mention Apple) it's become a lot more difficult for Microsoft to profitably branch out (e.g. Xbox flop), while preserving the core business.


Google is a company with more than $10 bln in revenue (thank you Microsoft!)

Google's mission is "to organize the world's information and make it universally accessible and useful."

Perhaps intentially, this mission is not much different to Microsoft's.

Perhaps not surprisingly, Google's share price has also taken off in a similar way to Microsoft in its early days.

Look familiar?

Everyone is very excited about Google. After all, it's a great achievement. A dissapointment sometimes perhaps (it doesn't always find what I'm looking for, but hey), but not as great a disappointment as Microsoft... yet!

If Google fails to change its mission as times change then it too will die a "blue screen of death", just like its ancestor.