OK, humor me here as I continue to think about volatility. Looking at the CBOE white paper on VIX, I see a plot (page 13) indicating very strong correlation between movements in the SP and the implied vol. A change in the SP of about 1% causes a 4% shift in the VIX, but with the opposite sign. Now, SP500 options are widely traded and liquid. They should provide one of the best tests of options pricing theory. But in the usual Black-Scholes model the volatility of the underlying security is a fixed input parameter - it certainly isn't supposed to be path (history) dependent. The simple log normal random walk model has its limitations - for example, there is no reason the vol shouldn't change in time (hopefully slowly) - but I'm surprised to see such clear path dependence. Of course, it's possible that the actual volatility (as opposed to implied volatility) doesn't exhibit the correlations we are discussing. But if so, there is an inefficiency in the behavior of options traders that should be arbed away!
...I've been informed that these issues are addressed using more sophisticated GARCH models. (GARCH = Generalised Autoregressive Conditional Heteroskedastic!)
This paper seems to conclude that implied vol is a good predictor of realized vol, so the correlation between market movements and vol is not a behavioral quirk of options traders (indeed, it is a quirk of the market itself).
Tuesday, November 30, 2004
Monday, November 29, 2004
VIX thoughts
The VIX index tracks implied volatility, using a basket of options with expirations closest to +30 days to compute an implied probability distribution for values of the SP500 30 days hence. The VIX is often referred to as a "fear gauge" because it is anticorrelated with market performance: when the SP goes up the implied vol goes down, and vice versa.
To characterize the prob. dist. with a single volatility value, one fits to a Gaussian. Historically we know that outlier events are much more likely than implied by a log normal distribution. Deep out of the money options are included in the VIX computation as long as there are nonzero bids (and no intervening zero bids at more probable strikes). Looking at the current prices I see this only goes out about 2 sigma into the tail, so the distortion from mispricing of rare events is small. I know Nassim Taleb (author of Fooled By Randomness) makes his living buying mispriced deep out of the money options - I assume he has to buy these directly by calling up market makers, since the widely traded options don't go too far out on the tail.
Why is the VIX anticorrelated with market moves? I can understand why options traders might be psychologically disposed to expect more vol in a down market, but does the observed, historical vol exhibit this anticorrelation? We could check by crunching the data looking for up/down moves to see if the variation in the following 30 days is correlated with the sign of the move. To put it very simply, are downward moves of the market choppier than upward moves? If not, can't I arbitrage by selling vol when the market goes down and buying it when the market moves up?
To characterize the prob. dist. with a single volatility value, one fits to a Gaussian. Historically we know that outlier events are much more likely than implied by a log normal distribution. Deep out of the money options are included in the VIX computation as long as there are nonzero bids (and no intervening zero bids at more probable strikes). Looking at the current prices I see this only goes out about 2 sigma into the tail, so the distortion from mispricing of rare events is small. I know Nassim Taleb (author of Fooled By Randomness) makes his living buying mispriced deep out of the money options - I assume he has to buy these directly by calling up market makers, since the widely traded options don't go too far out on the tail.
Why is the VIX anticorrelated with market moves? I can understand why options traders might be psychologically disposed to expect more vol in a down market, but does the observed, historical vol exhibit this anticorrelation? We could check by crunching the data looking for up/down moves to see if the variation in the following 30 days is correlated with the sign of the move. To put it very simply, are downward moves of the market choppier than upward moves? If not, can't I arbitrage by selling vol when the market goes down and buying it when the market moves up?
Sunday, November 28, 2004
Inflation: goods vs services
If you break the CPI into components, you can see an interesting divergence in the behavior of goods vs services. The former have exhibited deflation over the last 4 years (exported from China?), while services costs have continued to go up. When will outsourcing become widespread enough to affect the rate of inflation in services? Evidently labor still has some pricing power.
(Graph from BusinessWeek.)
(Graph from BusinessWeek.)
BusinessWeek on US-China trade
I picked up the latest issue of BusinessWeek on the flight home, which is largely devoted to US-China trade. The cover story is on the "China Price" that manufacturers are now forced to match.
Meanwhile, U.S. companies are no longer investing in much new capacity at home, and the ranks of U.S. engineers are thinning. In contrast, China is emerging as the most competitive manufacturing platform ever. Chief among its formidable assets is its cheap labor, from $120-a-month production workers to $2,000-a-month chip designers. Even in sophisticated electronics industries, where direct labor is less than 10% of costs, China's low wages are reflected in the entire supply chain -- components, office workers, cargo handling -- you name it.
China is also propelled by an enormous domestic market that brings economies of scale, feverish local rivalry that keeps prices low, an army of engineers that is growing by 350,000 annually, young workers and managers willing to put in 12-hour days and work weekends, an unparalleled component and material base in electronics and light industry, and an entrepreneurial zeal to do whatever it takes to please big retailers such as Wal-Mart Stores (WMT ), Target (TGT ), Best Buy (BBY ), and J.C. Penney (JCP ). "The reason practically all home furnishings are now made in China factories is that they simply are better suppliers," says Janet E. Fox, vice-president for international procurement at J.C. Penny Co. "American manufacturers aren't even in the same game."
An interesting statistic from the article: the US is still the world's largest manufacturer, and 75% of goods consumed in the US (presumably by value) are made here (this is down from 90% as late as the mid-90's). So, very roughly speaking, a 4% trade-weighted decline in the dollar would lead to a 1% increase in inflation, assuming there is no resulting substitution of goods.
Meanwhile, U.S. companies are no longer investing in much new capacity at home, and the ranks of U.S. engineers are thinning. In contrast, China is emerging as the most competitive manufacturing platform ever. Chief among its formidable assets is its cheap labor, from $120-a-month production workers to $2,000-a-month chip designers. Even in sophisticated electronics industries, where direct labor is less than 10% of costs, China's low wages are reflected in the entire supply chain -- components, office workers, cargo handling -- you name it.
China is also propelled by an enormous domestic market that brings economies of scale, feverish local rivalry that keeps prices low, an army of engineers that is growing by 350,000 annually, young workers and managers willing to put in 12-hour days and work weekends, an unparalleled component and material base in electronics and light industry, and an entrepreneurial zeal to do whatever it takes to please big retailers such as Wal-Mart Stores (WMT ), Target (TGT ), Best Buy (BBY ), and J.C. Penney (JCP ). "The reason practically all home furnishings are now made in China factories is that they simply are better suppliers," says Janet E. Fox, vice-president for international procurement at J.C. Penny Co. "American manufacturers aren't even in the same game."
An interesting statistic from the article: the US is still the world's largest manufacturer, and 75% of goods consumed in the US (presumably by value) are made here (this is down from 90% as late as the mid-90's). So, very roughly speaking, a 4% trade-weighted decline in the dollar would lead to a 1% increase in inflation, assuming there is no resulting substitution of goods.
Saturday, November 27, 2004
Japan, China, UK and hedge funds(?)
...are the largest holders of US Treasury debt, in order of holdings. Note Japan still dominates all others.
Is it plausible that hedge funds hold $100B in US Treasury debt? A recent JP Morgan report concludes that hedge funds currently account for $900B in capital, out of a world total capitalization of $74 Trillion in equity and fixed income. So, the notes held by secretive Caribbean entities account for only 10% of hedge fund capital.
Is it plausible that hedge funds hold $100B in US Treasury debt? A recent JP Morgan report concludes that hedge funds currently account for $900B in capital, out of a world total capitalization of $74 Trillion in equity and fixed income. So, the notes held by secretive Caribbean entities account for only 10% of hedge fund capital.
Friday, November 26, 2004
Sino-French TTE largest producer of TVs
WSJ covers TTE, created from the takeover of French TV maker Thomson by Chinese company TCL. This may be the first example of a major western technology company and prominent brand (RCA) taken over by a Chinese firm. TTE produces 20M televisions a year, in a dozen factories worldwide (China, France, Mexico, Poland, Thailand and Vietnam).
The agreement between Thomson and TCL was highly ambitious and seemed to be clearly necessary. TCL, with just 11 years in the TV-making business at the time, produced more sets than Thomson and was profitable as well. But the company was virtually unknown outside China and had little expertise in global marketing. Thomson, keeper of the 85-year-old RCA brand, was being squeezed by cost pressures in developed markets and posting losses in North America. It also had only dabbled in China, which two years ago passed the U.S. as the world's biggest TV-set market in terms of unit sales.
One of the obvious difficulties, covered briefly in the article, is the huge salary differential between TTE employees (including top executives) in China and France.
The agreement between Thomson and TCL was highly ambitious and seemed to be clearly necessary. TCL, with just 11 years in the TV-making business at the time, produced more sets than Thomson and was profitable as well. But the company was virtually unknown outside China and had little expertise in global marketing. Thomson, keeper of the 85-year-old RCA brand, was being squeezed by cost pressures in developed markets and posting losses in North America. It also had only dabbled in China, which two years ago passed the U.S. as the world's biggest TV-set market in terms of unit sales.
One of the obvious difficulties, covered briefly in the article, is the huge salary differential between TTE employees (including top executives) in China and France.
Thursday, November 25, 2004
Kings of capital
The Economist has a nice survey on private equity funds (which include venture capital and traditional buyout funds). For those unfamiliar with the details, most funds have a "2 and 20" reward structure, taking a 2% management fee each year and 20% of profits. For example, a $1 billion fund, run by 5 partners, would split $20M per year in fees, and another $20M in "carry" assuming a 10% return on the fund. (Hedge funds work similarly.) No surprise that everyone in finance these days wants to be in private equity or at a hedge fund. Sadly for investors though, private equity and hedge funds often underperform indices like the SP500, even though they take on greater risk. Jon Moulton of Alchemy, a British private-equity firm, is puzzled: “A lot of people in the industry already make several million a year without having to perform. I can't understand why investors haven't put more pressure on fees.”
One interesting statistic is the divergence in performance by investor class: it seems that some limited partners (LPs, or investors) are much better than others at picking funds. University endowments have been particularly successful, while banks have performed dismally.
One interesting statistic is the divergence in performance by investor class: it seems that some limited partners (LPs, or investors) are much better than others at picking funds. University endowments have been particularly successful, while banks have performed dismally.
Wednesday, November 24, 2004
Minimum length and quantum gravity
There is strong evidence for a minimal length in nature: the Planck length L = 10^{-33} cm. On this scale, quantum fluctuations of the metric are large, and the meaning of spacetime breaks down.
Recently, I and two collaborators at Caltech showed that no device (not even a gedanken experiment) is capable of measuring a distance less than the Planck length. (The paper is published in Physical Review Letters.) By "measuring a distance less than the Planck length" we mean, technically, resolve the eigenvalues of the position operator to within L. (Previous work on this problem had not been very careful in defining minimum length, and to obtain a clean result we had to be a bit careful.) The only assumptions in our argument are the uncertainty principle from quantum mechanics and a dynamical criterion for gravitational collapse from classical general relativity called the hoop conjecture.
An implication of the result is that there may only be a finite number of degrees of freedom per unit volume in our universe - no true continuum of space or time. This means that there is only a finite amount of information or entropy in our universe (or at least in any finite patch of it).
One of the main problems encountered in the quantization of gravity is a proliferation of divergences coming from short distance fluctuations of the metric (or graviton). However, these divergences might only be artifacts of perturbation theory: minimum length, which is itself a non-perturbative effect, might provide a cutoff which removes the infinities. This conjecture could be verified by lattice simulations of quantum gravity (for example, in the Euclidean path integral formulation), by checking to see if they yield finite results even in the continuum limit.
Recently, I and two collaborators at Caltech showed that no device (not even a gedanken experiment) is capable of measuring a distance less than the Planck length. (The paper is published in Physical Review Letters.) By "measuring a distance less than the Planck length" we mean, technically, resolve the eigenvalues of the position operator to within L. (Previous work on this problem had not been very careful in defining minimum length, and to obtain a clean result we had to be a bit careful.) The only assumptions in our argument are the uncertainty principle from quantum mechanics and a dynamical criterion for gravitational collapse from classical general relativity called the hoop conjecture.
An implication of the result is that there may only be a finite number of degrees of freedom per unit volume in our universe - no true continuum of space or time. This means that there is only a finite amount of information or entropy in our universe (or at least in any finite patch of it).
One of the main problems encountered in the quantization of gravity is a proliferation of divergences coming from short distance fluctuations of the metric (or graviton). However, these divergences might only be artifacts of perturbation theory: minimum length, which is itself a non-perturbative effect, might provide a cutoff which removes the infinities. This conjecture could be verified by lattice simulations of quantum gravity (for example, in the Euclidean path integral formulation), by checking to see if they yield finite results even in the continuum limit.
Peg will hold, for now
Financial Times interview with Li Ruogu, deputy governor of the People's Bank of China, who said the country won't be pressured into revaluing the yuan and warning the U.S. not to blame others for its own problems: "Under heavy speculation, we cannot move [toward greater flexibility] and under heavy external pressure we cannot," Mr. Li was quoted as saying. "So the best environment for us to gradually move towards a more flexible exchange rate is when people don't talk about it."
University Ave, Palo Alto
I'm in the bay area for Thanksgiving right now. Today I was in Palo Alto for some meetings with venture capitalists (VCs). The density of funds near University Ave in Palo Alto is only exceeded on Sand Hill Road near the Stanford Accelerator Center (SLAC). You can't have dinner (I wanted Coppola-Niebaum but we ended up having tandoori) or go into Starbucks without overhearing deals discussed by 40ish guys wearing khaki pants, or the interview of a potential VP of sales by a CEO. Activity is still nowhere near peak bubble levels of 2000, but things have been steadily improving since the crash :-)
VIX hits low
VIX - an index computed from the implied volatility of a basket of SP500 options - is at a 9 year low (Jan 1996). Perhaps the SP hitting new highs after Bush's election has led to option selling to lock in gains - this would depress the price of volatility. If you are bullish on equities, now is the time to buy cheap call options. Interestingly, bank value at risk (VAR) is reportedly rising even though the volatility input has gone down - meaning more money at play chasing returns.
Tuesday, November 23, 2004
China climbing value chain
WSJ profiles Matsushita's (Panasonic) activities in China: ...built or invested in five high-technology product development and research centers across China, hiring hundreds of local engineers to work in areas ranging from car electronics to mobile technology, mostly for cellphones... Matsushita President Kunio Nakamura has called China the company's future "engine of growth."
...Matsushita's efforts to go upstream also are partly an attempt to win support from the Chinese government, which is eager for foreign companies to transfer more high-end operations and technology into China.
"Right now, the real competition in China is for human resources," Matsushita HR manager Mr. Nakamura says. As foreign companies engage in more sophisticated activities such as software development and product design, and local concerns try to raise their levels of expertise, companies are fighting over graduates of the top universities.
And then there is the uniquely Japanese hurdle of a reputation for low salaries, long hours and slim career prospects. A survey conducted by ChinaHR, a major online recruiter, ranked Matsushita No. 46 among the most popular companies to work for in China. U.S.-based International Business Machines Corp. and Microsoft Corp. ranked No. 2 and No. 5, respectively, while the highest-ranking Japanese concern was Sony Corp. at 26.
A related article discusses how the Korean government is actively concerned about "essential technologies" like LCD or plasma screen manufacturing finding their way to China via acquisition or industrial espionage.
As discussion usually centers around China's growth as a low-wage manufacturing base, I believe many will be surprised at the rate at which China climbs the technology value chain. Recent WSJ articles have covered Siemens moving parts of their cellphone R&D to China, as well as Vodafone's likely decision to start sourcing 3G equipment from Huawei and others. The Matsushita article makes it clear that foreign companies are under pressure to demonstrate technology transfer and R&D activities in China. Yesterday's WSJ had a piece on outsourcing pharma research to Chinese labs. Korea and Taiwan are in danger of losing their leads in key areas like LCD or semiconductor fab, and other developing countries (SE Asia, Mexico, etc.) have already been leapfrogged.
...Matsushita's efforts to go upstream also are partly an attempt to win support from the Chinese government, which is eager for foreign companies to transfer more high-end operations and technology into China.
"Right now, the real competition in China is for human resources," Matsushita HR manager Mr. Nakamura says. As foreign companies engage in more sophisticated activities such as software development and product design, and local concerns try to raise their levels of expertise, companies are fighting over graduates of the top universities.
And then there is the uniquely Japanese hurdle of a reputation for low salaries, long hours and slim career prospects. A survey conducted by ChinaHR, a major online recruiter, ranked Matsushita No. 46 among the most popular companies to work for in China. U.S.-based International Business Machines Corp. and Microsoft Corp. ranked No. 2 and No. 5, respectively, while the highest-ranking Japanese concern was Sony Corp. at 26.
A related article discusses how the Korean government is actively concerned about "essential technologies" like LCD or plasma screen manufacturing finding their way to China via acquisition or industrial espionage.
As discussion usually centers around China's growth as a low-wage manufacturing base, I believe many will be surprised at the rate at which China climbs the technology value chain. Recent WSJ articles have covered Siemens moving parts of their cellphone R&D to China, as well as Vodafone's likely decision to start sourcing 3G equipment from Huawei and others. The Matsushita article makes it clear that foreign companies are under pressure to demonstrate technology transfer and R&D activities in China. Yesterday's WSJ had a piece on outsourcing pharma research to Chinese labs. Korea and Taiwan are in danger of losing their leads in key areas like LCD or semiconductor fab, and other developing countries (SE Asia, Mexico, etc.) have already been leapfrogged.
Monday, November 22, 2004
UBS FX report
Received from one of our correspondents, this UBS report is skeptical of the Bretton Woods II hypothesis. There is quite a lot of interesting data on the US balance of trade, historical FX rates, etc.
The conclusion is similar to my own view - the Asian dollar bloc will persist for a year or two at least, with the euro bearing the brunt of dollar depreciation pressure.
The conclusion is similar to my own view - the Asian dollar bloc will persist for a year or two at least, with the euro bearing the brunt of dollar depreciation pressure.
G20 statements and renminbi peg
They seem to be preparing the way for a gradual removal of the peg. As reported by one of our correspondents in finance:
G20 on exchnge rate:
* "We understand the importance of medium-term fiscal consolidation in the United States, continued structural reforms to boost growth in Europe and Japan, and, in emerging Asia, steps towards greater exhcnage rate flexibility, supported by continued financial sector reform, as approprate."
* "Experience has shown that countries seeking domestic monetary autonomy while substantially liberalizing their capital account should increase the degree of exchange rate flexibility accordingly."
Next G20 meeting is in Beijing
China's comments:
Mr. Zhou, the PBoC governor:
* On possibility of exchange-rate changes: "You can read October 2003 Chinese government documents that already clearly mentioned we are going to reform our exchange-rate regime and to try to set our exchange-rate at an equilibrium point and also we are going to gradually reach capital-account convertibility. This is the general direction.'' "Recently, I think, at the end of September and the beginning of October, our premier Wen Jiabao mentioned the policy orientation of that related to the exchange rate. And this is basically all the new progress so far.'' "We are reviewing all our foreign-exchange control systems." (comment: Mr. Wen's view here alluded to is that China had a more flexible currency regime before the breakout of Asian financial crisis and would consiser to have more flexibilty now that the crisis was over).
President Hu's comment after meeting President Bush at APEC meeting:
* China will "push for reform of the exchange rate while maintaining stability in the economy,'' Hu "expressed appreciation for Bush's rejections of applications of some people within the U.S.'' on the yuan exchange rate.''
G20 on exchnge rate:
* "We understand the importance of medium-term fiscal consolidation in the United States, continued structural reforms to boost growth in Europe and Japan, and, in emerging Asia, steps towards greater exhcnage rate flexibility, supported by continued financial sector reform, as approprate."
* "Experience has shown that countries seeking domestic monetary autonomy while substantially liberalizing their capital account should increase the degree of exchange rate flexibility accordingly."
Next G20 meeting is in Beijing
China's comments:
Mr. Zhou, the PBoC governor:
* On possibility of exchange-rate changes: "You can read October 2003 Chinese government documents that already clearly mentioned we are going to reform our exchange-rate regime and to try to set our exchange-rate at an equilibrium point and also we are going to gradually reach capital-account convertibility. This is the general direction.'' "Recently, I think, at the end of September and the beginning of October, our premier Wen Jiabao mentioned the policy orientation of that related to the exchange rate. And this is basically all the new progress so far.'' "We are reviewing all our foreign-exchange control systems." (comment: Mr. Wen's view here alluded to is that China had a more flexible currency regime before the breakout of Asian financial crisis and would consiser to have more flexibilty now that the crisis was over).
President Hu's comment after meeting President Bush at APEC meeting:
* China will "push for reform of the exchange rate while maintaining stability in the economy,'' Hu "expressed appreciation for Bush's rejections of applications of some people within the U.S.'' on the yuan exchange rate.''
Saturday, November 20, 2004
The face of battle in Falluja
Powerful writing by Dexter Filkins of the Times. Reminds me a bit of Hemingway's war correspondence.
...This intimacy of combat, this plunge into urban warfare, was new to this generation of American soldiers, but it is a kind of fighting that they will probably see again: a grinding struggle to root out guerrillas entrenched in a neighborhood, on streets marked in a language few American soldiers could comprehend.
...In eight days of fighting, Bravo Company took 36 casualties, including 6 dead, meaning that the unit's men had about a one in four chance of being either wounded or killed in little more than a week.
...For all the death about the place, one inescapable impression left by the marines was their youth. Everyone knows that soldiers are young; it is another thing to see men barely out of adolescence, many of whom were still in high school when this war began, shoot people dead.
...Like many of the young men in Bravo Company, Corporal Ritchie said he joined the Marines because he yearned for an adventure greater than his small town could offer. "The guys who stayed, they're all living with their parents, making $7 an hour," Corporal Ritchie said. "I'm not going to be one of those people who gets old and says, 'I wish I had done this. I wish I had done that.' Every once in a while, you've got to do something hard, do something you're not comfortable with. A person needs a gut check."
...Time and again through the week, Captain Omohundro kept his men from folding, if not by his resolute manner then by his calmness under fire... A little later, Captain Omohundro, a 34-year-old Texan, allowed that the strain of the battle had weighed on him, but he said that he had long ago trained himself to keep any self-doubt hidden from view. "It's not like I don't feel it," Captain Omohundro said. "But if I were to show it, the whole thing would come apart."
...This intimacy of combat, this plunge into urban warfare, was new to this generation of American soldiers, but it is a kind of fighting that they will probably see again: a grinding struggle to root out guerrillas entrenched in a neighborhood, on streets marked in a language few American soldiers could comprehend.
...In eight days of fighting, Bravo Company took 36 casualties, including 6 dead, meaning that the unit's men had about a one in four chance of being either wounded or killed in little more than a week.
...For all the death about the place, one inescapable impression left by the marines was their youth. Everyone knows that soldiers are young; it is another thing to see men barely out of adolescence, many of whom were still in high school when this war began, shoot people dead.
...Like many of the young men in Bravo Company, Corporal Ritchie said he joined the Marines because he yearned for an adventure greater than his small town could offer. "The guys who stayed, they're all living with their parents, making $7 an hour," Corporal Ritchie said. "I'm not going to be one of those people who gets old and says, 'I wish I had done this. I wish I had done that.' Every once in a while, you've got to do something hard, do something you're not comfortable with. A person needs a gut check."
...Time and again through the week, Captain Omohundro kept his men from folding, if not by his resolute manner then by his calmness under fire... A little later, Captain Omohundro, a 34-year-old Texan, allowed that the strain of the battle had weighed on him, but he said that he had long ago trained himself to keep any self-doubt hidden from view. "It's not like I don't feel it," Captain Omohundro said. "But if I were to show it, the whole thing would come apart."
VOIP is here
I've been using Voice over IP for some time now. I talk to my physics collaborators in foreign countries using a free service called Skype, which runs on my laptop. The sound quality is incredibly good - often better than an international call on the telco system. The free service is only for PC to PC calls, but you also can terminate the IP connection on the old telco system to reach an ordinary phone for a small fee (about $.02 per minute for Skype, if I recall).
The economics of VOIP are a little opaque to me - some of the cost savings is due to the lack of regulatory fees on IP telephony. (When I look at my QWEST phone bill I am astonished at how much of it is taxes and regulatory fees.) But there is certainly a big advantage to using a packet-switched network instead of a circuit-switched one, once the quality issues are solved. Telephony will soon be priced like bandwidth.
I predict a huge wave of innovation around VOIP. The fundamental unit of the Internet revolution - a linux or BSD server, built from cheap hardware - can now use open source software (e.g., the Asterisk package) to perform PBX functions and voice-data manipulation. That means much of the expensive telco equipment that Alcatel or Siemens or Nortel sell is going to be commoditized in the coming years. Cisco and others are already moving aggressively into VOIP, although penetration rates in both the consumer and Enterprise markets are still very low. As always, the real innovation will come from small startups. It seems to me that the easiest way to roll out low cost Internet-related services and applications to cellphones is via VOIP, rather than depending on 3G. The user I/O is limited to voice or touch-tone, but the connectivity is already there and no special handsets are required.
The economics of VOIP are a little opaque to me - some of the cost savings is due to the lack of regulatory fees on IP telephony. (When I look at my QWEST phone bill I am astonished at how much of it is taxes and regulatory fees.) But there is certainly a big advantage to using a packet-switched network instead of a circuit-switched one, once the quality issues are solved. Telephony will soon be priced like bandwidth.
I predict a huge wave of innovation around VOIP. The fundamental unit of the Internet revolution - a linux or BSD server, built from cheap hardware - can now use open source software (e.g., the Asterisk package) to perform PBX functions and voice-data manipulation. That means much of the expensive telco equipment that Alcatel or Siemens or Nortel sell is going to be commoditized in the coming years. Cisco and others are already moving aggressively into VOIP, although penetration rates in both the consumer and Enterprise markets are still very low. As always, the real innovation will come from small startups. It seems to me that the easiest way to roll out low cost Internet-related services and applications to cellphones is via VOIP, rather than depending on 3G. The user I/O is limited to voice or touch-tone, but the connectivity is already there and no special handsets are required.
Friday, November 19, 2004
Raw Data
From today's Financial Times:
...Within the US political debate, the administration often paints the current account deficit as a success story. The refrain is that the US has an excess of investment opportunities which foreigners want to use. That was true until 2000, when investment as a share of US GDP was growing. But since then the share has fallen and it does not explain the growing current account deficit. Rather, as the US government began to borrow heavily, national savings fell even faster, causing the current account to deteriorate further.
...Net capital inflows in the year to September, at $657bn, exceeded the $445bn trade deficit over the same period. But Ashraf Laidi, currency analyst at MG Financial Group in New York, points out that foreign demand for US assets has been falling. A year ago, the US was importing twice as much capital a month as it needed to cover the trade deficit. The gap has narrowed: the $63.4bn of capital imported in September compared with the $51.6bn trade deficit in that month.
Below you can compare US foreign debt levels to those of other countries during previous currency crises. It doesn't appear to me that we are near a catastrophic collapse in confidence in the dollar - the US is no Argentina, so perhaps the Sweden data point is most appropriate. That gives us a decade to get our finances in order. (On the other hand FT indicates the Norway point from 1977 - if that is a good comparator we will definitely see a crisis while W is still President.)
...Within the US political debate, the administration often paints the current account deficit as a success story. The refrain is that the US has an excess of investment opportunities which foreigners want to use. That was true until 2000, when investment as a share of US GDP was growing. But since then the share has fallen and it does not explain the growing current account deficit. Rather, as the US government began to borrow heavily, national savings fell even faster, causing the current account to deteriorate further.
...Net capital inflows in the year to September, at $657bn, exceeded the $445bn trade deficit over the same period. But Ashraf Laidi, currency analyst at MG Financial Group in New York, points out that foreign demand for US assets has been falling. A year ago, the US was importing twice as much capital a month as it needed to cover the trade deficit. The gap has narrowed: the $63.4bn of capital imported in September compared with the $51.6bn trade deficit in that month.
Below you can compare US foreign debt levels to those of other countries during previous currency crises. It doesn't appear to me that we are near a catastrophic collapse in confidence in the dollar - the US is no Argentina, so perhaps the Sweden data point is most appropriate. That gives us a decade to get our finances in order. (On the other hand FT indicates the Norway point from 1977 - if that is a good comparator we will definitely see a crisis while W is still President.)
Generalized Turing test
I have a bet with one of my former PhD students regarding a strong version of the Turing test. Let me explain what I mean by "strong" version. Turing originally defined his test of artificial intelligence as follows: a tester communicates in some blind way (such as by typing on a terminal) with a second party; if the tester cannot tell whether the second party is a human or a computer, the computer will have passed the test and therefore exhibits AI. When I first read about the Turing test as a kid, I thought it was pretty superficial. I even wrote some silly programs which would respond to inputs, mimicking conversation. Over short periods of time, with an undiscerning tester, computers can now pass a weak version of the Turing test. However, one can define the strong version as taking place over a long period of time, and with a sophisticated tester. Were I administering the test, I would try to teach the second party something (such as quantum mechanics) and watch carefully to see whether it could learn the subject and eventually contribute something interesting or original. Any machine that could do so would, in my opinion, have to be considered intelligent.
Now consider the moment when a machine passes the Turing test. We would replicate this machine many times through mass production, and set this AI army to solving the world's problems (and making even smarter versions of themselves). Of course, not having to sleep, they would make tremendous progress, leading eventually to a type of machine intelligence that would be incomprehensible to mere humans. In science fiction this eventuality is often referred to as the "singularity" in technological development - when the rate of progress becomes so rapid we humans can't follow it anymore.
Of course the catch is getting some machine to the threshold of passing the Turing test. My former student, using Moore's law as a guide (and the related exponential growth rates in bandwidth and storage capacity), is confident that 50 years will be enough time. Rough calculations suggest we aren't more than a few decades from reaching hardware capabilities matching those of the brain. Software optimization is of course another matter, and our views differ on how hard that part of the problem will be. (The few academic CS people who I have gotten to give their opinions on this seem to agree with me, although I have no substantial sampling.)
I'd be shocked if we get there within 50 years, although it certainly would be fun :-)
Now consider the moment when a machine passes the Turing test. We would replicate this machine many times through mass production, and set this AI army to solving the world's problems (and making even smarter versions of themselves). Of course, not having to sleep, they would make tremendous progress, leading eventually to a type of machine intelligence that would be incomprehensible to mere humans. In science fiction this eventuality is often referred to as the "singularity" in technological development - when the rate of progress becomes so rapid we humans can't follow it anymore.
Of course the catch is getting some machine to the threshold of passing the Turing test. My former student, using Moore's law as a guide (and the related exponential growth rates in bandwidth and storage capacity), is confident that 50 years will be enough time. Rough calculations suggest we aren't more than a few decades from reaching hardware capabilities matching those of the brain. Software optimization is of course another matter, and our views differ on how hard that part of the problem will be. (The few academic CS people who I have gotten to give their opinions on this seem to agree with me, although I have no substantial sampling.)
I'd be shocked if we get there within 50 years, although it certainly would be fun :-)
FX Angst at G20 meeting
The Economist covers the upcoming meeting of G20 finance ministers and central bankers. Who will be next (after Russia) to move to a reserve basket of currencies, shifting from dollars to euros?
...For a country such as South Korea, buying dollars is both costly and possibly inflationary. The country’s excess savings, parked in low-yielding American Treasuries, would earn a higher return invested at home. And the finance ministry’s weak won policy, by making imports more expensive, has hampered its fight against rising prices. In the summer, annual inflation reached its highest rate for three years, though it has since eased.
South Korea’s growing ambivalence about its won policy may be shared by the other post-crisis countries in the region. But their freedom for manoeuvre is limited by China’s dedication to its peg against the dollar. During the financial storms of 1997 and 1998, the peg provided an important anchor for the region. Even as currencies collapsed all around it, China refused to beggar its neighbours by devaluing the yuan. But China’s peg, a bulwark against the financial crisis, is now blocking the “reversal” of the crisis that Mr Jen foresees and the dollar needs. To its neighbours, China is such an important trade partner and competitor that they dare not let their currencies strengthen too far against the yuan. Even Japan is wary.
Much of the G20, then, is now waiting for just one of its members, China, to unpeg its currency. Some speculators can wait no longer. They are already swapping their dollars for yuan, betting it will soon jump in value. To deter such speculation, Chinese banks on Thursday raised the interest they pay on dollar deposits.
...For a country such as South Korea, buying dollars is both costly and possibly inflationary. The country’s excess savings, parked in low-yielding American Treasuries, would earn a higher return invested at home. And the finance ministry’s weak won policy, by making imports more expensive, has hampered its fight against rising prices. In the summer, annual inflation reached its highest rate for three years, though it has since eased.
South Korea’s growing ambivalence about its won policy may be shared by the other post-crisis countries in the region. But their freedom for manoeuvre is limited by China’s dedication to its peg against the dollar. During the financial storms of 1997 and 1998, the peg provided an important anchor for the region. Even as currencies collapsed all around it, China refused to beggar its neighbours by devaluing the yuan. But China’s peg, a bulwark against the financial crisis, is now blocking the “reversal” of the crisis that Mr Jen foresees and the dollar needs. To its neighbours, China is such an important trade partner and competitor that they dare not let their currencies strengthen too far against the yuan. Even Japan is wary.
Much of the G20, then, is now waiting for just one of its members, China, to unpeg its currency. Some speculators can wait no longer. They are already swapping their dollars for yuan, betting it will soon jump in value. To deter such speculation, Chinese banks on Thursday raised the interest they pay on dollar deposits.
Thursday, November 18, 2004
Russia moves to EUR FX basket?
OK, not quite an Asian central bank defection, but a major EurAsian one...
From a correspondent in finance:
The Nikkei news is reporting that from 2005, Russia's central bank will adopt a EUR-dominated basket peg for the RUB. The BoR does not have a formal USD/EUR basket, but has a notional basket containing a split of 70% USDs and 30% EURs which it uses when it targets trends in the RUB's REER. Its FX reserve composition tends to reflect this notional basket. The vast majority of FX intervention (roughly USD2bn a week) is conducted via the USD/RUB market given that EUR/RUB is illiquid. The BoR is believed to then convert roughly 30% of its incremental FX reserve growth into EURs. FX intervention in Russia is therefore positive for EUR/USD.
I should have bought more BEGBX!
From a correspondent in finance:
The Nikkei news is reporting that from 2005, Russia's central bank will adopt a EUR-dominated basket peg for the RUB. The BoR does not have a formal USD/EUR basket, but has a notional basket containing a split of 70% USDs and 30% EURs which it uses when it targets trends in the RUB's REER. Its FX reserve composition tends to reflect this notional basket. The vast majority of FX intervention (roughly USD2bn a week) is conducted via the USD/RUB market given that EUR/RUB is illiquid. The BoR is believed to then convert roughly 30% of its incremental FX reserve growth into EURs. FX intervention in Russia is therefore positive for EUR/USD.
I should have bought more BEGBX!
Dollar Loses Luster in China
It isn't just the hedge funds betting against the dollar (WSJ):
...From black marketers to anxious grandmothers, Chinese have become disenchanted with the dollar. The selling has posed problems for Beijing as it tries to keep the yuan pegged to the dollar, adding to pressure China is getting from its trading partners to revalue its currency.
The selling also signals a startling shift that may have damaging implications for the dollar down the line: Many Chinese view the yuan, also called the renminbi, as the safer currency to hold.
"The U.S. dollar is weakening! The renminbi is the hard currency now!" shouts a 40-year old man after pulling $10,000 out of U.S.-dollar-denominated stocks and plunking the sum into yuan deposits. "It's the best choice," he says.
...Meanwhile, China's central bank has scrambled to buy dollars from ordinary Chinese who are selling them, to the tune of $20 billion in the first six months, according to an internal report from the State Administration of Foreign Exchange.
A member of a black-market syndicate in Shanghai, a 35-year old surnamed Lu, says he is doing a booming business converting dollars to yuan... Because Mr. Lu and his colleagues are having a difficult time reselling the dollars, they have lowered their exchange rate below what the banks are offering for the yuan.
..."Hot money," or speculative capital, coming into China is pressuring the yuan. But the return of money through legitimate channels also suggests a rush back to China to bet on a stronger yuan. China's portfolio and other capital inflows stood at $36.3 billion in the first half of the year, a little more than double that of the same period of last year. China's foreign-exchange reserves reached $514.54 billion at the end of September, increasing by about $12 billion a month.
At a closed-door meeting in Shanghai this month, banking regulators expressed concern about these developments. "The exchange rate is facing a lot of upward pressure," said Wang Zili, the deputy director at the central bank's branch in the southern city of Guangzhou, according to the minutes of the meeting. "Foreign reserves are increasing too quickly. A lot of capital is coming in through the black market betting on the yuan."
...From black marketers to anxious grandmothers, Chinese have become disenchanted with the dollar. The selling has posed problems for Beijing as it tries to keep the yuan pegged to the dollar, adding to pressure China is getting from its trading partners to revalue its currency.
The selling also signals a startling shift that may have damaging implications for the dollar down the line: Many Chinese view the yuan, also called the renminbi, as the safer currency to hold.
"The U.S. dollar is weakening! The renminbi is the hard currency now!" shouts a 40-year old man after pulling $10,000 out of U.S.-dollar-denominated stocks and plunking the sum into yuan deposits. "It's the best choice," he says.
...Meanwhile, China's central bank has scrambled to buy dollars from ordinary Chinese who are selling them, to the tune of $20 billion in the first six months, according to an internal report from the State Administration of Foreign Exchange.
A member of a black-market syndicate in Shanghai, a 35-year old surnamed Lu, says he is doing a booming business converting dollars to yuan... Because Mr. Lu and his colleagues are having a difficult time reselling the dollars, they have lowered their exchange rate below what the banks are offering for the yuan.
..."Hot money," or speculative capital, coming into China is pressuring the yuan. But the return of money through legitimate channels also suggests a rush back to China to bet on a stronger yuan. China's portfolio and other capital inflows stood at $36.3 billion in the first half of the year, a little more than double that of the same period of last year. China's foreign-exchange reserves reached $514.54 billion at the end of September, increasing by about $12 billion a month.
At a closed-door meeting in Shanghai this month, banking regulators expressed concern about these developments. "The exchange rate is facing a lot of upward pressure," said Wang Zili, the deputy director at the central bank's branch in the southern city of Guangzhou, according to the minutes of the meeting. "Foreign reserves are increasing too quickly. A lot of capital is coming in through the black market betting on the yuan."
Wednesday, November 17, 2004
Wal-Mart and US-China trade
WSJ. Wal-Mart by itself accounts for more than 10% of U.S. imports from China... Wal-Mart is termed China's eighth-largest trading partner by the government-controlled mainland media and would place ahead of Russia and the United Kingdom on the top-10 list. Other published reports indicate Wal-Mart would be the fifth-largest importer of Chinese manufactured items if it were considered as a nation.
Since Wal-Mart doesn't produce anything for export, the large-scale importing contributes to the gap in U.S. trade. The U.S. is expected to run up a total trade deficit of more than $600 billion in 2004, with the deficit in its bilateral trade with China contributing $150 billion. Thanks mainly to the shortfall in merchandise trade, the U.S. current-account deficit is approaching 6% of gross national product.
According to Amy Wyatt, a spokeswoman for the Bentonville, Ark., retailer, Wal-Mart imported $15 billion in goods from China in the fiscal year that ended Jan. 31, 2004. About $7.5 billion were directly imported by Wal-Mart, the other $7.5 billion came indirectly through suppliers. In the same period, Wal-Mart's total net sales reached $256 billion, with roughly $209 billion coming from U.S. operations.
Since Wal-Mart doesn't produce anything for export, the large-scale importing contributes to the gap in U.S. trade. The U.S. is expected to run up a total trade deficit of more than $600 billion in 2004, with the deficit in its bilateral trade with China contributing $150 billion. Thanks mainly to the shortfall in merchandise trade, the U.S. current-account deficit is approaching 6% of gross national product.
According to Amy Wyatt, a spokeswoman for the Bentonville, Ark., retailer, Wal-Mart imported $15 billion in goods from China in the fiscal year that ended Jan. 31, 2004. About $7.5 billion were directly imported by Wal-Mart, the other $7.5 billion came indirectly through suppliers. In the same period, Wal-Mart's total net sales reached $256 billion, with roughly $209 billion coming from U.S. operations.
Tuesday, November 16, 2004
EU vs US labor and productivity data
Taken from WSJ. French and German workers are as productive, on a per hour basis, as US workers, although US workers tend to work more hours per year, which leads to greater GDP per worker per year. Two effects worth noting: (1) workers who work fewer hours should be more productive per hour, as one's effectiveness tends to degrade over a long workday (2) excluding less productive workers (i.e. having a higher unemployment rate, as Germany and France do at 9-10% vs 5% here) should lead to higher average productivity.
String theory and all that
I was asked to give a talk to the physics students here about string theory. Now, I'm not a string theorist, but am probably the closest thing on campus with the possible exception of a guy in the math department.
I emphasized that quantum gravity is perhaps the most conceptually interesting area in all of physics (perhaps all of science). I think I am not exaggerating here, since questions such as Why is there one time direction and three spatial dimensions? Can our universe be multiply-connected on short distances? or What is the endpoint of black hole evaporation? all involve deep and fundamental ideas.
But I also told them, half joking, that I didn't want to work on quantum gravity (at least not all the time) until someone builds a desktop accelerator that can collide particles at Planck energies or at least make small black holes. What I meant by this comment is that physics generally cannot advance by theoretical ideas or mathematics alone. There is no evidence that a single, unique mathematical structure describes our universe. Consequently, we will likely be confronted with more than one theoretical possibility, and only experimental tests can distinguish between them.
We are barely on the threshold of detailed tests of classical general relativity (e.g., using large interferomenters such as LIGO to detect gravity waves). There are no experiments on the drawing board which will test whether these waves are indeed quantized into individual gravitons, and the current generation of particle accelerators are 16 orders of magnitude away from testing the Planck energy. So, I think quantum gravity will not, in a strict sense, be a scientific endeavor for some years to come.
I emphasized that quantum gravity is perhaps the most conceptually interesting area in all of physics (perhaps all of science). I think I am not exaggerating here, since questions such as Why is there one time direction and three spatial dimensions? Can our universe be multiply-connected on short distances? or What is the endpoint of black hole evaporation? all involve deep and fundamental ideas.
But I also told them, half joking, that I didn't want to work on quantum gravity (at least not all the time) until someone builds a desktop accelerator that can collide particles at Planck energies or at least make small black holes. What I meant by this comment is that physics generally cannot advance by theoretical ideas or mathematics alone. There is no evidence that a single, unique mathematical structure describes our universe. Consequently, we will likely be confronted with more than one theoretical possibility, and only experimental tests can distinguish between them.
We are barely on the threshold of detailed tests of classical general relativity (e.g., using large interferomenters such as LIGO to detect gravity waves). There are no experiments on the drawing board which will test whether these waves are indeed quantized into individual gravitons, and the current generation of particle accelerators are 16 orders of magnitude away from testing the Planck energy. So, I think quantum gravity will not, in a strict sense, be a scientific endeavor for some years to come.
NYTimes on dollar
Nice overview here.
It is surprising to see how, on a trade-weighted basis, the dollar is still pretty strong by historical standards. It looks like a 20% decline would test historical lows.
It is surprising to see how, on a trade-weighted basis, the dollar is still pretty strong by historical standards. It looks like a 20% decline would test historical lows.
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