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Thursday, November 30, 2006

Shanghai from an Indian perspective

Indian software engineer Nimbupani writes about his experience as an expat living in Shanghai. He provides some comparative insight on Indian (messy, but democratic) and Chinese (authoritarian, but sometimes very efficient) development models. (See here for related IHT article.) The parts I like best are the small observations; since I know Shanghai they really tell me more about India by comparison. I hope he continues to blog from Shanghai!

Personally, I don't see how India can improve its GDP per capita unless birth rates come down significantly. There will undoubtedly be an upper class of hundreds of millions of affluent, well-educated Indians (and that alone will have a big impact on the rest of the world), but I don't see how things will get better for the average Indians in the villages unless significant changes are made. In China rural people are leaving the farms and heading for the cities, one of the greatest human migrations of all time. This is made possible by manufacturing. While software development and other higher end activities (which have fueled India's development recently) provide much better jobs, they cannot absorb hundreds of millions of low-skill people from the countryside. On the other hand, who knows how stable China is, under the surface.

Let me start with introducing my self, I am an Indian, professionally Process Consultant (six sigma Black Belt) who got a job offer from a Shanghai based company to work on to improve processes of their client in Shanghai. When i told this to my parents, reaction was China..why what will u eat there..how will you sustain, people(from India) usually go to US, UK but China..nnnnaa..Even i was confused..but offer was good, not v good in terms of money but the exposure and as a value add, yes it was worth making an attempt. So i made up my mind, ok i will go, which was not easy ...

One of the costliest city in world, best city of China, more like Mumbai in india, crime rate was low compare to other international cities, language will be a problem, one of the best airport in world, business city of world with lot of skyscrapers..and indian knowledge of china - they are small, hard working, stubborn, dominating, not friendly, difficult to strive there.

But let me tell you Shanghai and China its not as we see them in India..

This is what I can tell you about Shanghai from Shanghai,

About Infrastructure: It is rightly said they have have one of the best airports in world, international airport at New delhi is very small as compared to what they have in Shanghai, in fact in terms of infrastructure they are very advanced, the government here has invested a lot in infrastructure, not only in major cities like Shanghai but even in small towns, even public transport, traffic management, day to day work, its smooth not as complicated as in india, I cant find a car in India without a scratch but here one scratch means a big thing.. They have excellent and still expanding Subway(metro in india) covering Shanghai. Taxi service covers whole of Shanghai, simply day to day work in not complicated.

About people: they are very friendly, they do everything to ensure that they are able to help you even majority do not understand English, although you may some time feel little annoyed but overall its not an hindrance. They don't cheat and not as often as you see in India, at least i have not seen. They are not stubborn, they are polite, but in general they speak loudly and some time it annoys me but its a different culture all together, while eating, lot of noise during chewing, personally it annoys me but some in India have same habbit.

About food: if you love Non veg and Sea food you will love it here, In india i occasionally had Chicken, but here i have tried everything pork, chicken, fish, beef, prawn, crab, small octopus look like thing also, and recently I saw a dish it was like gel but that gel like thing was made up by freezing blood of Chicken and duck, i was not able to try that..and after 3 months, I have finalized on following food- chicken, fish, vegetable, tofu (paneer without fat) as priority dish :). In vegetables they have stems of sea plants, v healthy, generally Chinese food is low in fat as compared to india food. We do have some Indian restaurant and we go their occasionally as we cook food at home, it reminds how difficult it was finding out wheat flour and then getting a 5 kg pack..:))

Overall it's a great place and indian democratic government needs to learn a lot about how to build up infrastructure as this is what drives economy and standard of living, for example, in delhi, we get exhausted by the time we reach work place and home because of traffic and jams and small issues..which is loss of national energy...

Also last but not the least, women are safe here, no teasing and they wear what they want( in terms of fashion they are v advanced), not like india, where everyone is worried about women in their family, however not realizing doing the same act on street. Bottom line its safe...

Tuesday, November 28, 2006

Virtual millionaires

Congratulations to Anshe Chung (in real life: Ailin Graef, a German citizen originally from Hubei, China), the first capitalist whose virtual holdings in Second Life are valued at over a million USD (using current exchange rates from SLDs to USDs).



See this Fortune article which discusses Second Life and how Ms. Chung became a successful real estate developer there (thanks to our correspondent Malcolm for the tip). The lengthy comment section is particularly amusing, with many commenters showing a lack of understanding of the fundamentals of money and value, and a visceral disdain for virtual reality.

While I don't have time to visit Second Life, I wish I did. It seems like a tremendous outlet for people's creativity. Why shouldn't an island or skyscraper designed by Ms. Chung be worth some amount of "real" money? What exactly makes the $20 bill in your pocket valuable, except other people's willingness to exchange things for it?

Sure, there are problems with scarcity -- Linden Labs, the creator of Second Life, could flood the virtual world with copies of any object, or new real estate, but the Fed could also decide to increase the USD money supply as well. (Perhaps to inflate away our $1 trillion in obligations to China!) Among the comments you can find discussion of legal and financial issues: Should the IRS tax virtual profits? (certainly, if they are ever converted back into USD), Will Lloyds insure virtual homesteads? (why not? just compute the expected cost of such a policy and charge a big premium), Can I be sued for killing your avatar? (Unh... not if it's allowed by the rules!)

What I want to know is, when can we start having physics conferences and seminars in (the improved HD, 3D, holographic, immersive) Second Life, so I don't have to schlep around in economy class and deal with baggage screeners all the time? Note some companies already have Second Life offices for meetings and marketing purposes!

Podcast of talk by Linden Labs founder Philip Rosedale. Another, with their VP of product development.

Sunday, November 26, 2006

QuantLogic

Two worthwhile observations from the blog QuantLogic.

1) A quote from Charles Munger:
I have said that in my whole life, I've known no wise person over a broad subject matter area who didn't read all the time--none, zero. Now I know all kinds of shrewd people who by staying within a narrow area can do very well without reading. But investment is a broad area. So if you think you're going to be good at it and not read all the time, you have a different idea than I do.... You'd be amazed at how much Warren [Buffet] reads. You'd be amazed at how much I read.
I agree with QuantLogic: I can't think of a single person whose [broad] analytical expertise I admire, who doesn't read constantly. (Note, this doesn't include some special cases of narrow expertise, such as in math or science, which may border on idiot savant capability ;-)

Actually, all other forms of communication suffer from much lower baud rates. Think how little information you get per unit time from even the best broadcast news sources or interviews, relative to reading. Focused discussion with a real expert is the only activity which I find as efficient -- which is one of the reasons I'm still willing to travel to conferences, give seminars at other institutions, and schlep down to the valley :-)

2) The following cartoon, which shows unparalleled insight into organizational behavior :-)

A reallocation of human capital

Another article on the theme of rich vs super-rich in the NYTimes. The article profiles an MD and a PhD in economics, each of whom left their original career path to head into finance. It's very much along the lines of recent posts on this blog -- in today's world, financial activities, as opposed to "productive" ones, reap outsize rewards.

...Such routes to great wealth were just opening up to physicians when Dr. Glassman was in school, graduating from Harvard College in 1983 and Harvard Medical School four years later. Hoping to achieve breakthroughs in curing cancer, his specialty, he plunged into research, even dreaming of a Nobel Prize, until Wall Street reordered his life.

Just how far he had come from a doctor’s traditional upper-middle-class expectations struck home at the 20th reunion of his college class. By then he was working for Merrill Lynch and soon would become a managing director of health care investment banking.

“There were doctors at the reunion — very, very smart people,” Dr. Glassman recalled in a recent interview. “They went to the top programs, they remained true to their ethics and really had very pure goals. And then they went to the 20th-year reunion and saw that somebody else who was 10 times less smart was making much more money.”

The opportunity to become abundantly rich is a recent phenomenon not only in medicine, but in a growing number of other professions and occupations.

...Three decades ago, compensation among occupations differed far less than it does today. That growing difference is diverting people from some critical fields, experts say. The American Bar Foundation, a research group, has found in its surveys, for instance, that fewer law school graduates are going into public-interest law or government jobs and filling all the openings is becoming harder.

Something similar is happening in academia, where newly minted Ph.D.’s migrate from teaching or research to more lucrative fields. Similarly, many business school graduates shun careers as experts in, say, manufacturing or consumer products for much higher pay on Wall Street.

And in medicine, where some specialties now pay far more than others, young doctors often bypass the lower-paying fields. The Medical Group Management Association, for example, says the nation lacks enough doctors in family practice, where the median income last year was $161,000.

“The bigger the prize, the greater the effort that people are making to get it,” said Edward N. Wolff, a New York University economist who studies income and wealth. “That effort is draining people away from more useful work.”

What kind of work is most useful is a matter of opinion, of course, but there is no doubt that a new group of the very rich have risen today far above their merely affluent colleagues.

...In an earlier Gilded Age, Andrew Carnegie argued that talented managers who accumulate great wealth were morally obligated to redistribute their wealth through philanthropy. The estate tax and the progressive income tax later took over most of that function — imposing tax rates of more than 70 percent as recently as 1980 on incomes above a certain level.

Now, with this marginal rate at half that much and the estate tax fading in importance, many of the new rich engage in the conspicuous consumption that their wealth allows. Others, while certainly not stinting on comfort, are embracing philanthropy as an alternative to a life of professional accomplishment.

...“It has to be easier than the chance of becoming a Nobel Prize winner,” he said, explaining his decision to give up research, “and I think that goes through the minds of highly educated, high performing individuals.”

...By his own account, Mr. Moon, like Dr. Glassman, came reluctantly to the accumulation of wealth. Having earned a Ph.D. in business economics from Harvard in 1994, he set out to be a professor of finance, landing a job at Dartmouth’s Tuck Graduate School of Business, with a starting salary in the low six figures.

To this day, teaching tugs at Mr. Moon, whose parents immigrated to the United States from South Korea. He steals enough time from Metalmark Capital to teach one course in finance each semester at Columbia University’s business school. “If Wall Street was not there as an alternative,” Mr. Moon said, “I would have gone into academia.”

Academia, of course, turned out to be no match for the job offers that came Mr. Moon’s way from several Wall Street firms. He joined Goldman Sachs, moved on to Morgan Stanley’s private equity operation in 1998 and stayed on when the unit separated from Morgan Stanley in 2004 and became Metalmark Capital.

As his income and net worth grew, the Harvard alumni association made contact and he started to give money, not just to Harvard, but to various causes. His growing charitable activities have brought him a leadership role in Harvard alumni activities, including a seat on the graduate school alumni council.

Still, Mr. Moon tries to live unostentatiously. “The trick is not to want more as your income and wealth grow,” he said. “You fly coach and then you fly first class and then it is fractional ownership of a jet and then owning a jet. I still struggle with first class. My partners make fun of me.”

Friday, November 24, 2006

Hedge fund singularity

More evidence that, in today's gilded age, all roads lead to hedge funds. Ray Kurzweil, inventor and AI optimist, is now running a fund called FatKat! Kurzweil is one of the advocates of an impending singularity caused by accelerating machine intelligence. His recent book is titled The Singularity is Near.

This reminds of the old adage that it's time to sell when your shoeshine boy starts giving you stock tips. When running money starts to suck in a sizeable fraction of all brainpower (as internet startups seemed ready to, in the last bubble), it probably means we've reached a peak. Either that, or it's a secular revolution with the financial machine taking over the whole world :-) In that case, it will only be a matter of time before predicting short term market movements has surpassed the sexiness of any of the Clay Prize problems in mathematics, or quantizing gravity in physics...


Via DealBook: this publishing event is another sure sign of a market top. Tell your shoeshine boy!

NYTimes: Ray Kurzweil, an inventor and new hedge fund manager, is describing the future of stock-picking, and it isn’t human.

“Artificial intelligence is becoming so deeply integrated into our economic ecostructure that some day computers will exceed human intelligence,” Mr. Kurzweil tells a room of investors who oversee enormous pools of capital. “Machines can observe billions of market transactions to see patterns we could never see.”

The listeners, attendees of a conference sponsored earlier this month by the Capital Group Companies, are slightly skeptical. Some have heard that Mr. Kurzweil, 58, who takes more than 150 vitamins and supplements a day, believes people will eventually live forever. Others know he has said that in 2045, man and machine will achieve “singularity,” and humans will hold their breath for hours thanks to nanomachines in our bloodstreams.

But some are aware that a former Microsoft executive and chairman of the Nasdaq stock market, Michael W. Brown, is an investor in Mr. Kurzweil’s new hedge fund, FatKat, and that Bill Gates once described him as “the best person I know at predicting the future of artificial intelligence.”

More important, many of them have seen Mr. Kurzweil’s ideas used by stock speculators. So, they want to learn more about his brave, new world.

“These ideas are the future,” said David Atkinson, a private investor who attended another lecture later that day by Mr. Kurzweil. “I’m not really sure I understand them, but they’re making some folks rich.”

Complicated stock picking methods are nothing new. For decades, Wall Street firms and hedge funds like D. E. Shaw have snapped up math and engineering Ph.D.s and assigned them to find hidden market patterns. When these analysts discover subtle relationships, like similarities in the price movements of Microsoft and I.B.M., investors seek profits by buying one stock and selling the other when their prices diverge, betting historical patterns will eventually push them back into synchronicity.

Today, such methods have achieved a widespread use unimaginable just five years ago. The Internet has put almost every data source within easy reach. New software programs, like the Apama Algorithmic Trading Platform, have made it possible for day traders to build complicated trading algorithms almost as easily as they drag an icon across a digital desktop.

“Five years ago it would have taken $500,000 and 12 people to do what today takes a few computers and co-workers,” said Louis Morgan, managing director of HG Trading, a three-person hedge fund in Wisconsin. “I’m executing 1,500 to 2,000 trades a day and monitoring 1,500 pairs of stocks. My software can automatically execute a trade within 20 milliseconds — five times faster than it would take for my finger to hit the buy button.”

Studies estimate that a third of all stock trades in the United States were driven by automatic algorithms last year, contributing to an explosion in stock market activity. Between 1995 and 2005, the average daily volume of shares traded on the New York Stock Exchange increased to 1.6 billion from 346 million.

But in recent years, as algorithms and traditional quantitative techniques have multiplied, their successes have slowed.

“Now it’s an arms race,” said Andrew Lo, director of the Massachusetts Institute of Technology’s Laboratory for Financial Engineering. “Everyone is building more sophisticated algorithms, and the more competition exists, the smaller the profits.”

Saturday, November 18, 2006

A New Class War

The Haves against the Have Mores. Pity the poor doctors, lawyers and management consultants. Even the I-bankers, now that hedge fund management has become the ne plus ultra of capitalism. The only guys that the hedgies envy are the super-lucky entrepreneurs who can make their centi-million all in one pop!

As far as doctors and lawyers, I once asked a friend of mine in finance, who lives in a 3000+ sq ft apartment on the upper east side, who else lived in his building. After counting all the money guys, he let slip -- "Oh, I guess there are some doctors and lawyers as well. I don't know how they can afford it." You're so money, and you don't even know it! I like how Lemann hints at the social discomfort from occasional interactions between the rich and super-rich. Taking the whole family first class is justifiable, but a private jet is over the top ;-)

Note, I'd be a bit careful about the average numbers used below for top 1% and .1%. Averages are very misleading here and are dominated by the far tail. Numerically the bulk of each group are at the threshold rather than average value for each tranche, which is substantially lower. IIRC, the threshold income for top 1% is about $275k, much lower than the average of almost $1M for that group. What's a little innumeracy, this is America after all!

Note added: This topic is hitting the zeitgeist bigtime! The Times has a sequel to the first article, this time situated in Silicon Valley, here. See also this earlier article about all the "working class millionaires" in the valley.

NYTimes: ...Let’s define the terms first, or at least make some attempt to. The merely rich are those whose income puts them in the top 1 percent of the population. According to a recent study by the Center on Budget and Policy Priorities in Washington, the average real income for the top 1 percent of American taxpaying households was $940,000 in 2004 — a difficult group to feel pity for. But to stand for a moment on its shores (let’s pretend) and look toward the rapidly growing ranks of the superrich is to stare across a vast chasm indeed.

The superrich might be the top tenth of 1 percent (average real household income for 2004: $4.5 million) or the top hundredth (the $20-million-a-year households). Income inequality is growing fastest the higher we go up the chart. While the percentage change in average real household income between 1990 and 2004 was an increase of 2 percent for the bottom 90 percent of American households, it was 57 percent for the top 1 percent; and shot up to 85 percent for the top 0.1 percent; and up to 112 percent for the top .01 percent. That is, the richest are getting richer almost twice as fast as the rich.

Class warfare has been hypothesized by various publications, including the online magazine Slate, New York magazine and Matt Miller in Fortune last month. Mr. Miller calls the bigger and poorer group, which consists largely of professionals — doctors, lawyers, management consultants, the vast majority of Wall Street soldiers — the “lower-uppers.” The targets of their resentment, he says, are by and large hedge fund managers and certain astronomically paid C.E.O.’s.

“The problem is that there’s all this wealth at this new strata that feels unrelated to merit or achievement,” Mr. Miller says. “When a C.E.O. whose leadership has caused a company’s stock price to fall gets a $100 million golden parachute, or when a guy’s running so much money that his commission — even if his picks are only getting an 8 or 10 percent return on his client’s money — is $100 million, that’s crazy.” He says that such compensation “goes against the notion of a meritocracy.”

Or maybe not. “A meritocracy increases inequality — by its very nature, it has to,” says Nicholas Lemann, whose book “The Big Test” explored the history of the SAT and the American meritocracy. “The goal was equality of opportunity, not equality of result.”

Part of the problem may lie with the fact that the members of both classes went into their respective lines of work with the goal of making a lot of money, and one just happens to make several times more of it.

Take the lawyers. “Lawyers are an odd group,” says the novelist Louis Begley, whose day job for several decades has been practicing law with the white-shoe firm Debevoise & Plimpton. “Lawyers at the great law firms earn a lot of money. But for a good many of them, it’s impossible to do so without accepting anything but cases involving huge corporate deals that generate a great many hours they can charge for. But these deals are repetitive. And the lawyers in these transactions often play second fiddle to the bankers.”

The money paid to investment bankers, who were once the stronghold of the financial elite, typically pales next to hedge-fund money. “I recently hosted a panel with Carl Icahn at the Core Club where the whole point was that if you’re an investment banker nowadays, you’re kind of a schlepper,” says Michael Wolff, a Vanity Fair writer who has often written about the moneyed classes. “Investment banking is for the C+ students now. Where you want to be is not somebody who’s advising people with money — whose currency is intellectual capital — but somebody whose currency is money itself.”

This, too, may be what irks the professional classes. Managing a hedge fund is the purest abstraction of making money out of money — there is no other product to show for it.

The resentment may be intensified in New York, a city whose physical layout has always engendered a lot of class-mixing. The middle class might have been largely squeezed out of Manhattan over the past decade, but the merely rich and the superrich still live in the same neighborhoods (if not necessarily the same buildings), buy houses in the same Hamptons (just houses of very different scales), and send their children to the same schools.

Mr. Lemann said that the rich versus richer envy factor “assumes that the relatively poor group is bumping into the most upper income.”

He added, “You might only see it at, say, functions that parents go to at certain rarefied private schools — Fieldston, say, or Harvard-Westlake in Los Angeles.”

Even Mr. Begley, who has earned enough to raise a large family in a grand apartment on Park Avenue, said he was astonished by the sheer number of billionaires he has met in recent years.

“I must say, I’ve begun to feel in New York as if I were driving a Volkswagen on the highway when a Greyhound bus happens to go by,” he said. “At which point, I feel a whoosh of air blasting me off the road. These people belong to another species.”

Except, he said, that it’s “these young Wall Street types” buying up the apartments in his building. “There are maybe four or five of us who bought our apartments at some understandable price 30 years ago,” he said. “And then these new people — I must say, with the money seems to come a rather large physical size. Some of them are polite, but the men do fill the elevator cage. And the women always seem to have a bottle of water attached to their mouths.”

He added that he did not feel any need to engage in class warfare against his neighbors. “If I did, they might crush me against the elevator wall,” he said. “The only thing to do is get adopted by them.”

Thursday, November 16, 2006

Mouth bets

Brad Setser and Nouriel Roubini made a call that Bretton Woods 2 - an international monetary system based on central bank financing of the US deficit - would collapse sooner rather than later. I was of a similar view, and still think something bad will happen to the dollar - it's just a question of when. But nothing has happened yet, and Brad is starting to take some abuse on his blog:

You guys are smart, but you're also consistently wrong.

The two of you remind of a couple of trekkies that speak Klingon. This blog is wonderful for showing off how clever you are, but it's not useful at all. Self-conscious mental masterbation.

I mean, one of your bloggers commentators is so pretentious that he writes in haiku. It's perfect for your site.

I'm glad you're 'fessing up to how wrong you guys can be. That seems an impossible task for Nouriel. He responds by writing more and more blogs in his defense.

Written by truthHurtz on 2006-11-16 17:53:09


I agree that you've been wrong, Brad. There's a reason why you guys write papers, give advice, and argue with other "smart guys" - all safely from within the comfort of the fantasy world that theory and academia provides, never having to make money in the big bad real world by betting along the lines of your assertions.

Written by Anonymous on 2006-11-16 19:30:49

Brad responds admirably (look down the page at the comments), and lobs some fair questions back to his interlocutors. While I find the comments pretty nasty, they do get to an important point about academics in general. Traders sometimes use the term "mouth bet" for taking a position without putting any skin in the game :-)

Fault lines in Russia's Far East

The WSJ covers the demographic and economic forces at work in Russia's Far East, where a dynamic and populous China threatens to overwhelm sparsely populated and decrepit Russian territories. Things may go back to the way they were before Russia's eastern expansion of recent centuries.

WSJ: Russia is finding it hard to cope with the emergence of a new global power right on its doorstep, and many Russians fear being overwhelmed by their dynamic and more-populous neighbor. But on the ground, especially in Russia's sparsely populated countryside, Chinese labor is helping to stave off economic ruin.

To the outside world, Russia and China appear to be cozying up like never before. In October 2004, Moscow ceded territory to its southern neighbor to resolve a longstanding border conflict that had sparked a war in the late 1960s. The following year the two carried out their first-ever joint military exercise. China buys about $1 billion worth of Russian weapons every year, making it the Russian arms industry's biggest customer. Altogether, the two countries' trade was valued at $29 billion last year, an increase of 37% over 2004.

Meanwhile, as China scours the world for energy to power its booming economy, it's increasingly looking to Russia's bountiful reserves of oil and gas. Last week, the Kremlin's oil company, state-controlled OAO Rosneft, pledged to nearly double crude exports to China and said it was teaming up with China National Petroleum Corp. to build an oil refinery and operate gas stations in China.

But China's efforts to strengthen its economic ties with Russia have run into repeated roadblocks. Only one of Beijing's state energy companies has so far succeeded in gaining a stake in a Russian oil field, and only when it agreed to relinquish a controlling stake to Rosneft. Despite years of trying, Beijing has so far failed to secure access to a planned pipeline carrying Siberian crude to the Pacific. Russia, concerned about becoming too dependent on one customer, has refused to commit to building a spur that would link the pipeline to northern China, instead hinting that it will rely on rail shipments -- which are much costlier and less reliable.

Even when the Chinese try to invest in less-sensitive sectors than energy, the relationship can be fractious. In St. Petersburg, Russia's second-largest city, local politicians have campaigned to block a $1.3 billion real-estate development by a conglomerate of five Chinese state-owned companies. The concern: that the 553.5-acre project, which would include housing, schools, hospitals, recreation and retail, would become a "Chinatown"-style enclave for illegal immigrants.

...Behind the ambivalence is a fear that once the floodgates are opened, Russia could be swamped by Chinese immigrants. The surrounding tensions over linguistic, cultural and economic differences echo those along the U.S.-Mexico border, where states have to deal with a constant flow of legal and illegal immigrants seeking opportunity. In Russia the concern is heightened by the stark contrast between China's enormous population and Russia's steep demographic decline.

The differences are most palpable in Russia's Far East, a vast region bordering on China that has more than a third of Russia's territory but just 5% of its population -- seven million people. Across the border are China's three northeastern provinces -- Heilongjian, Jilin and Liaoning -- with a combined population of more than 100 million.

Inevitably, tens of thousands of Chinese migrants are already crossing over to fill the void, some of them settling down and acquiring Russian citizenship. According to the official count, there are about 250,000 Chinese living in Russia. Some Russian academics say they could become the predominant ethnic group in the Far East and eastern Siberia by the year 2025.

Visiting Blagoveshchensk in 2000, President Vladimir Putin warned that if the authorities failed to develop the region, "even the indigenous Russian population will mainly be speaking Japanese, Korean and Chinese in a few decades."

Yet in the countryside and Russia's provincial capitals, the Chinese are often seen quite differently -- as a potential lifeline for an economy desperately in need of extra hands.

Tuesday, November 14, 2006

1991 Honda Civic, 50k miles

Last week I hosted our colloquium speaker -- a condensed matter theorist who is currently chairman of the Yale physics department. Upon seeing my 1991 Honda Civic, which I've had since grad school, he exclaimed "Steve, you've got to get a better car!"

To me, it's a point of pride that I've only put 50k miles on my car in 15 years, traveling from Berkeley to Cambridge MA to New Haven and back to Eugene. It shows who the real environmentalist is among all the poseurs :-) Ever notice how many "environmentalists" love to haul their 1 ton metal vehicle 100 miles over the weekend to enjoy some rock climbing? Can anyone calculate the atmospheric CO2 produced per hour of climbing?

According to this Times article about a top Goldman trader, I'm in good company with my crappy car!
NYTimes: Managers of billion-dollar hedge funds do not usually drive Hondas — except at Goldman Sachs, that is.

Traders at Wall Street investment banks are now priming themselves for another big bonus haul this year. And Raanan A. Agus, the manager of one of Goldman’s largest internal hedge funds, and the owner of a Honda minivan, will be in line for one of the richer paydays.

More than any other investment bank, Goldman Sachs relies on trading gains to drive its profits. Mr. Agus had a very good year in 2005 — he is estimated to have made $10 million to $20 million — and he will surely get a raise in 2006. His year is further evidence that on Wall Street, the real money is being made not by investment bankers cutting high-profile deals, but by anonymous traders making risky, profitable bets with their firm’s capital.

That Mr. Agus appears to be content to drive a Honda is a reminder that the relatively ascetic sensibility that marked his predecessors, like Robert E. Rubin, the former Treasury secretary, remains in place at Goldman, even in today’s gilded era. ...

Sunday, November 12, 2006

The ugly truth

Daniel Golden reports on discrimination against Asian-Americans in admissions to elite universities. I discussed his recent book here, and the Princeton study which concluded that Asian applicants faced discrimination equivalent to (on average) 50 points on the SAT here. Another article worth reading (thanks to Dave S. for the link) from Inside Higher Ed covers a panel called “Too Asian?” at the annual meeting of the National Association for College Admission Counseling. Particularly telling are the comments of a former Stanford admissions officer about an internal study which found evidence of higher admission rates for white applicants over Asians of similar academic and leadership qualifications (all applicants in the study were "unhooked" - meaning not in any favored categories such as legacies or athletes). Ugly, ugly, ugly.

The mechanism by which this discrimination operates is not overt. Admissions officers at elite universities are generally progressive and pro-diversity. They seek an ideal entering class with just the right balance of ethnic groups, and sprinklings of athletes, violinists, chess champions, junior entrepreneurs, etc. But this goal (especially the ethnic diversity part) conflicts with trying to get the intellectually strongest kids on campus, regardless of race. Of elite schools, only Caltech places the intellectual strength of the applicant above all else. Like it or not, admissions officers at elite schools are awarding preference to candidates based on their diversity goals. Too many high scoring Asians means not enough students from other groups, leading to a higher bar for Asian applicants.

Are individual admissions staffers aware of this consequence? Perhaps some are, but probably others prefer not to think about it. Those that do understand the consequences must be willing to sacrifice the lifelong goals and aspirations of Asian students like immigrant Jiang Li, profiled in the article, on the altar of their diversity agenda.

If, for whatever reason, the distribution of bright, well-prepared students is very different in different ethnic groups, only discrimination against certain groups (Jews in the past, and Asians today) can keep their representation on campuses down. Cheers to immigrant kid Jian Li for challenging the discriminatory status quo, and cheers to Dan Golden for reporting diligently on this issue. See here for an Exeter senior's take on the college admissions process today.
WSJ: Though Asian-Americans constitute only about 4.5% of the U.S. population, they typically account for anywhere from 10% to 30% of students at many of the nation's elite colleges.

Even so, based on their outstanding grades and test scores, Asian-Americans increasingly say their enrollment should be much higher -- a contention backed by a growing body of evidence.

Whether elite colleges give Asian-American students a fair shake is becoming a big concern in college-admissions offices. Federal civil-rights officials are investigating charges by a top Chinese-American student that he was rejected by Princeton University last spring because of his race and national origin.

Meanwhile, voter attacks on admissions preferences for other minority groups -- as well as research indicating colleges give less weight to high test scores of Asian-American applicants -- may push schools to boost Asian enrollment. Tuesday, Michigan voters approved a ballot measure striking down admissions preferences for African-Americans and Hispanics. The move is expected to benefit Asian applicants to state universities there -- as similar initiatives have done in California and Washington.

If the same measure is passed in coming years in Illinois, Missouri and Oregon -- where opponents of such preferences say they plan to introduce it -- Asian-American enrollment likely would climb at selective public universities in those states as well.

During the Michigan campaign, a group that opposes affirmative action released a study bolstering claims that Asian students are held to a higher standard. The study, by the Center for Equal Opportunity, in Virginia, found that Asian applicants admitted to the University of Michigan in 2005 had a median SAT score of 1400 on the 400-1600 scale then in use. That was 50 points higher than the median score of white students who were accepted, 140 points higher than that of Hispanics and 240 points higher than that of blacks.

Roger Clegg, president and general counsel of the Center for Equal Opportunity, said universities are "legally vulnerable" to challenges from rejected Asian-American applicants.

Princeton, where Asian-Americans constitute about 13% of the student body, faces such a challenge. A spokesman for the Department of Education's Office for Civil Rights said it is investigating a complaint filed by Jian Li, now a 17-year-old freshman at Yale University. Despite racking up the maximum 2400 score on the SAT and 2390 -- 10 points below the ceiling -- on SAT2 subject tests in physics, chemistry and calculus, Mr. Li was spurned by three Ivy League universities, Stanford University and Massachusetts Institute of Technology.

The Office for Civil Rights initially rejected Mr. Li's complaint due to "insufficient" evidence. Mr. Li appealed, citing a white high-school classmate admitted to Princeton despite lower test scores and grades. The office notified him late last month that it would look into the case.

His complaint seeks to suspend federal financial assistance to Princeton until the university "discontinues discrimination against Asian-Americans in all forms by eliminating race preferences, legacy preferences, and athlete preferences." Legacy preference is the edge most elite colleges, including Princeton, give to alumni children. The Office for Civil Rights has the power to terminate such financial aid but usually works with colleges to resolve cases rather than taking enforcement action.

Mr. Li, who emigrated to the U.S. from China as a 4-year-old and graduated from a public high school in Livingston, N.J., said he hopes his action will set a precedent for other Asian-American students. He wants to "send a message to the admissions committee to be more cognizant of possible bias, and that the way they're conducting admissions is not really equitable," he said.

Princeton spokeswoman Cass Cliatt said the university is aware of the complaint and will provide the Office for Civil Rights with information it has requested. Princeton has said in the past that it considers applicants as individuals and doesn't discriminate against Asian-Americans.

When elite colleges began practicing affirmative action in the late 1960s and 1970s, they gave an admissions boost to Asian-American applicants as well as blacks and Hispanics. As the percentage of Asian-Americans in elite schools quickly overtook their slice of the U.S. population, many colleges stopped giving them preference -- and in some cases may have leaned the other way.

In 1990, a federal investigation concluded that Harvard University admitted Asian-American applicants at a lower rate than white students despite the Asians' slightly stronger test scores and grades. Federal investigators also found that Harvard admissions staff had stereotyped Asian-American candidates as quiet, shy and oriented toward math and science. The government didn't bring charges because it concluded it was Harvard's preferences for athletes and alumni children -- few of whom were Asian -- that accounted for the admissions gap.

The University of California came under similar scrutiny at about the same time. In 1989, as the federal government was investigating alleged Asian-American quotas at UC's Berkeley campus, Berkeley's chancellor apologized for a drop in Asian enrollment. The next year, federal investigators found that the mathematics department at UCLA had discriminated against Asian-American graduate school applicants. In 1992, Berkeley's law school agreed under federal pressure to drop a policy that limited Asian enrollment by comparing Asian applicants against each other rather than the entire applicant pool.

Asian-American enrollment at Berkeley has increased since California voters banned affirmative action in college admissions. Berkeley accepted 4,122 Asian-American applicants for this fall's freshman class -- nearly 42% of the total admitted. That is up from 2,925 in 1997, or 34.6%, the last year before the ban took effect. Similarly, Asian-American undergraduate enrollment at the University of Washington rose to 25.4% in 2004 from 22.1% in 1998, when voters in that state prohibited affirmative action in college admissions.

The University of Michigan may be poised for a similar leap in Asian-American enrollment, now that voters in that state have banned affirmative action. The Center for Equal Opportunity study found that, among applicants with a 1240 SAT score and 3.2 grade point average in 2005, the university admitted 10% of Asian-Americans, 14% of whites, 88% of Hispanics and 92% of blacks. Asian applicants to the university's medical school also faced a higher admissions bar than any other group.

Julie Peterson, spokeswoman for the University of Michigan, said the study was flawed because many applicants take the ACT test instead of the SAT, and standardized test scores are only one of various tools used to evaluate candidates. "I utterly reject the conclusion" that the university discriminates against Asian-Americans, she said. Asian-Americans constitute 12.6% of the university's undergraduates.

Jonathan Reider, director of college counseling at San Francisco University High School, said most elite colleges' handling of Asian applicants has become fairer in recent years. Mr. Reider, a former Stanford admissions official, said Stanford staffers were dismayed 20 years ago when an internal study showed they were less likely to admit Asian applicants than comparable whites. As a result, he said, Stanford strived to eliminate unconscious bias and repeated the study every year until Asians no longer faced a disadvantage.

Last month, Mr. Reider participated in a panel discussion at a college-admissions conference. It was titled, "Too Asian?" and explored whether colleges treat Asian applicants differently.

Precise figures of Asian-American representation at the nation's top schools are hard to come by. Don Joe, an attorney and activist who runs Asian-American Politics, an Internet site that tracks enrollment, puts the average proportion of Asian-Americans at 25 top colleges at 15.9% in 2005, up from 10% in 1992.

Still, he said, he is hearing more complaints "from Asian-American parents about how their children have excellent grades and scores but are being rejected by the most selective colleges. It appears to be an open secret."

Mr. Li, who said he was in the top 1% of his high-school class and took five advanced placement courses in his senior year, left blank the questions on college applications about his ethnicity and place of birth. "It seemed very irrelevant to me, if not offensive," he said. Mr. Li, who has permanent resident status in the U.S., did note that his citizenship, first language and language spoken at home were Chinese.

Along with Yale, he won admission to the California Institute of Technology, Rutgers University and the Cooper Union for the Advancement of Science and Art. He said four schools -- Princeton, Harvard, Stanford and the University of Pennsylvania -- placed him on their waiting lists before rejecting him. "I was very close to being accepted at these schools," he said. "I was thinking, had my ethnicity been different, it would have put me over the top. Even if race had just a marginal effect, it may have disadvantaged me."

He ultimately focused his complaint against Princeton after reading a 2004 study by three Princeton researchers concluding that an Asian-American applicant needed to score 50 points higher on the SAT than other applicants to have the same change of admission to an elite university.

"As an Asian-American and a native of China, my chances of admission were drastically reduced," Mr. Li claims in his complaint.

Friday, November 10, 2006

No way out

China's trillion dollars in FX reserves is just too big to diversify out of without moving markets. At the moment, "diversification" means leaving it in dollar-denominated assets, but moving away from Treasuries into CMOs or corporates. For now, helping to depress the yield curve on the long end. One popular theory is no big moves before the Beijing Olympics in 2008 (stability is everything). Shout out to Brad Setser :-)

Economist: ...So long as China runs a large external surplus (the natural result of its high saving rate) and refuses to set its currency free, its stash of foreign currency will probably continue to mount.

How that money is invested has big implications for the world economy, not just for China. Brad Setser, head of global research at Roubini Global Economics, estimates that about 70% of it is invested in dollars, mainly Treasury securities. This has propped up the dollar and reduced American bond yields—by up to 1.5 percentage points according to some estimates. A big shift out of dollars could therefore push up bond yields and hence mortgage rates, damaging America's already crumbling housing market.

China's central bank is thought to be switching from Treasury bonds to American mortgage-backed securities and corporate bonds in an attempt to earn higher yields. Chinese officials have also discussed in private the need to diversify reserves out of dollars in order to reduce exposure to a big drop in the greenback. The bank may be putting a bigger slice of any increase in reserves into euros and emerging Asian currencies, but so far there is little sign of a shift out of its existing stock of dollars. One problem is that China's investments are so big that they move markets. Shifting money into euros would push down the dollar. China would then not only suffer a capital loss on its remaining dollar reserves, but it could also be forced to buy yet more reserves to hold its currency down against a weaker dollar.

Fear of a capital loss, and dissatisfaction with unrewarding yields, have triggered a flurry of ideas on how to put the money to better use. One popular idea is to use some of China's reserves to buy oil and other commodities. The snag is that stockpiling oil would push up prices, yet absorb only a tiny proportion of the sums at China's disposal. Buying the equivalent of six-months' oil consumption, as has been suggested, would take only 8% of total reserves at current prices, but the extra oil bought would amount to three times the growth in global oil demand this year. Buying gold would have similar results: if China invested just 5% of its reserves in gold, it could buy the world's entire annual mine production.

Hedge fund clones

The Economist discusses some proposals for cheap replication of hedge fund strategies. The first paper mentioned below is by Andy Lo of MIT. Recent innovations like ETFs and other narrowly focused instruments allow cheaper exposure to well defined types of risk -- the cost of placing a bet on a particular strategy is lower than ever before. However, this begs the question of how one decides which bet to make, and when. I don't think the difficult part of generating alpha is the mechanics of making an investment (at least, not anymore), but rather the decision making.

Economist: ...But financial scholars are beginning to demystify hedge funds. They think they can replicate their performance using garden-variety financial products. The result could be a cheap competitor for the hedge-fund titans, akin to the index-tracking funds that have eaten into the market shares of active fund managers.

Replication is possible because hedge-fund managers are not as distinctive as they claim. They say their returns are based on skill, or “alpha”, but in fact their performance is largely derived from market movements. A recent paper* by two academics at the Massachusetts Institute of Technology breaks down the returns of 1,610 funds from 1986 to 2005. It finds that six common factors, such as the change in the S&P 500 index and the return on corporate bonds, explained a significant part of hedge-fund returns.

Investors can gain exposure to these factors through widely available liquid instruments. Thus it should be possible to build “clone” portfolios that resemble hedge funds. Such portfolios would not only avoid hedge-fund fees, but would also escape the risk of backing a mismanaged fund, such as Amaranth, which lost 65% of its value in September.

The authors suggest cloning a fund by dissecting its performance over the past year or two. One could sift and sort the factors behind its success, and allocate the clone's money accordingly. A back-tested clone portfolio returned an average of 12.8% a year over nearly 20 years compared with 14.2% for the typical hedge fund. And the copycat portfolio offered investors many of the same benefits of diversification as the fund it mimicked.

Not every academic is impressed by this approach, however. Harry Kat, at the Cass Business School, says that such “multi-factor” models fail to explain a large proportion of hedge-fund returns. But Mr Kat proposes his own cheap alternative†. It may be impossible to know the particular plays hedge-fund managers make. But, he says, you can devise a formulaic trading strategy in the futures markets that would duplicate the overall shape of their returns. His strategies would give investors two of the three things they look for from a hedge: a low correlation with their existing portfolio, at a level of volatility they can tolerate. The return would be out of their hands, but tests suggest profits can be decent: 10% a year in one example.

Thursday, November 09, 2006

Neanderthal-human interbreeding

Bruce Lahn is at it again. Earlier work from his lab showed that the microcephalin gene (MCPH1), which plays a role in brain development, has undergone strong selection in the last 40k years, with a new variant allele reaching a frequency of 70 percent in Eurasian populations. Shockingly to our politically correct thought police, the frequency in some other populations is much lower. Recent results (HHMI press release) imply that the origin of the advantageous variant allele dates back 1.1 million years, suggesting it may have entered the gene pool of modern humans via interbreeding with Neanderthals, already present in Eurasia when modern humans left Africa 40k years ago.

How do we know how old the advantageous allele is? I suppose you look at its detailed structure, and that of the other alleles. By using the roughly known mutation rate (base pair changes per unit time), you can estimate the time at which different versions diverged.

This was briefly covered in the Times today, but the article is lacking in detail. See here for more discussion.

Earlier studies by Lahn's group yielded evidence that the microcephalin gene has two distinct classes of alleles. One class, called the D alleles, is comprised of a group of alleles with rather similar DNA sequences. The other class is called the non-D alleles. Lahn and colleagues previously showed that all modern copies of the D alleles arose from a single progenitor copy about 37,000 years ago, which then increased in frequency rapidly and are now present in about 70 percent of the world's population. This rapid rise in frequency indicates that the D alleles underwent positive selection in the recent history of humans. This means that these alleles conferred a fitness advantage on those who possessed one of them such that these people had slightly higher reproductive success than people who didn't possess the alleles, said Lahn.

The estimate that all modern copies of the D alleles descended from a single progenitor copy about 37,000 years ago is based on the measurement of sequence difference between different copies of the D alleles. As a copy of a gene is passed from one generation to the next, mutations are introduced at a steady rate, such that a certain number of generations later, the descendent copies of the gene would on average vary from one another in DNA sequence by a certain amount. The greater the number of the generations, the more DNA sequence difference there would be between two descendent copies, said Lahn. The amount of sequence difference between different copies of a gene can therefore be used to estimate the amount of evolutionary time that has elapsed since the two copies descended from their common progenitor.

In the new studies reported in PNAS, the researchers performed detailed sequence comparisons between the D alleles and the non-D alleles of microcephalin. The scientists determined that these two classes of alleles have likely evolved in two separate lineages for about 1.1 million years — with the non-D alleles having evolved in the Homo sapiens lineage and the D alleles having evolved in an archaic, and now extinct, Homo lineage. Then, about 37,000 years ago, a copy of the D allele crossed from the archaic Homo lineage into humans, possibly by interbreeding between members of the two populations. This copy subsequently spread in humans from a single copy when it first crossed into humans to an allele that is now present in an estimated 70 percent of the population worldwide today.

The estimate of 1.1 million years that separates the two lineages is based on the amount of sequence difference between the D and the non-D alleles. Although the identity of this archaic Homo lineage is yet to be determined, the researchers argue that a likely candidate is the Neanderthals. The 1.1 million year separation between humans and this archaic Homo species is roughly consistent with previous estimates of the amount of evolutionary time separating the Homo sapiens lineage and the Neanderthal lineage, said Lahn. Furthermore, the time of introgression of the D allele into humans — about 37,000 years ago — is when humans and Neanderthals coexisted in many parts of the world.

Lahn said the group's data suggest that the interbreeding was unlikely to be a thorough genetic mixing, but rather a rare - and perhaps even a single — event that introduced the ancestral D allele previously present in this other Homo species into the human line.

“By no means do these findings constitute definitive proof that a Neanderthal was the source of the original copy of the D allele,” said Lahn. “However, our evidence shows that it is one of the best candidates. The timeline - including the introgression of the allele into humans 37,000 years ago and its origin in a lineage that separated with the human line 1.1 million years ago — agrees with the contact between, and the evolutionary history of, Neanderthals and humans.

Wednesday, November 08, 2006

Chat with Lisa Randall

Someone at Discover Magazine invited me to chat with Lisa Randall tomorrow -- Thursday 11/9 -- at 2 PM EST. Lisa is a leading particle theorist and author of the book Warped Passages. Her work with Raman Sundrum on warped extra dimensions is one of the most highly cited papers of the last decade.

I'm announcing the chat here since at least some of the readers of this blog might be interested. I'm not sure whether I'll participate yet, but perhaps I'll see you there.

Saturday, November 04, 2006

Taxes and inequality

I don't have a link for the following data, it came in an investment advisory called the Gartman Letter. You can read this data in two ways: as an indication of the extreme concentration of wealth and income in the US, or (if you like Ayn Rand) as an indication of how a small fraction of the population produces most of the value for society :-)

The newest data released by the Joint Economic Committee of Congress is really quite enlightening. Firstly, the top 1% of the nation's wage earners paid in 34.3% of the total taxes paid. The top 5% paid in 54.4%; the top 10% paid in 65.8%; the top 25% paid in 83.9% and the top 50% of the nation's wage-earners paid in 96.5% of the total taxes. The bottom 50%, however, paid in only 3.5%. To have made the grade and be counted amongst the nation's top 1% of wage earners, one had to have an adjusted gross income of $295,495 [Ed. Note: We need to make clear that these figures are all from taxable 2003, and that is in fact that most recent year for which the data is fully available.]. To have made the top 10%, one's adjusted gross income had to be $94,891. The cut off to make the top half was $29,019.

In '01, the top 50% paid in 96.0% of the total taxes. In '02, they paid in 96.5%, and the 96.5% again last year as noted just above. The bottom 50% paid in 3.97% of the total taxes in '01; 3.5% in '02 and the same 3.5% (rounded to the nearest 0.1%) in '03. We note that '99, according this time to the Tax Foundation, the top 1% of the nation's wage earners paid in an even greater portion of the total taxes: 36.2%. The top half of the nation's wage-earners then paid in 96% of the total tax revenues earned by the government, while the bottom half paid in 4%. So since '99, the top 1% are paying a bit less, but so too is the bottom 50%; the remaining 49% are paying more. Oh, and to have made the top 1% of all wage earners in '99 one had to have an adjusted gross income of "only" $293,415. The bottom 50% had an AGI of $26, 415.

Thursday, November 02, 2006

It's cold here

Sorry for lack of posts. I gave a colloquium at University of Illinois at Chicago yesterday, and today I'm headed to Montreal to do the same at McGill University (physics/computer science talk on entanglement entropy and black holes, computer science colloquium on technology startups). They videotaped my talk yesterday, which was on dark energy. If the video appears on the web as promised I'll post a link to it. (Note, links above are to slides. The first two are PDFs and the third a big .ppt file. If you look at the three talks you might understand why my head is about to explode :-)

Tom Imbo, the colloquium organizer who introduced me yesterday, was my officemate at Harvard many years ago. As an old friend he knows a little too much about my past. In his intro he mentioned my not so stellar athletic career as a linebacker on the Caltech football team (Caltech dropped football in 1993; I was also on the swim and water polo teams, which seem to have survived) and ultimate fighter. No, I never stepped in the ring for an ultimate fight, but did spend years training in Brazilian Jiujitsu, including some time with professional fighters in Tokyo one summer. I've trained less and less in recent years, and in my last training session a few months ago was schooled by one of our new graduate students***, a wrestler and judoka who competed at Pacific University. I guess I consider myself retired from the mat for now :-/

*** Perhaps I shouldn't feel too bad -- it looks like the guy who crushed me scored a major decision (12-4) over a 197 pounder on the Pacific team in their alumni vs team tournament just recently.

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