A trillion in the balance

Via Calculated Risk. If house prices return to historical norms, mortgage credit losses will be roughly $1 trillion.

From Jan Hatzius, Goldman Sachs chief US economist, presented at the Brookings conference, Beyond Leveraged Losses: The Balance Sheet Effects of the Home Price Downturn. Here is a short excerpt on estimating mortgage credit losses (note that Goldman is now forecasting prices to decline another 10%):

If nominal home prices remain at their 2008 Q2 level until mid-2009, before reverting to a +3% annualized trend, our model implies that mortgage credit losses realized in the 2007-2012 period will total $473 billion. If nominal home prices fall another 10% through the middle of 2009, the model projects losses of $636 billion. Finally, if prices drop another 20%, predicted losses increase to $868 billion. Moreover, the table suggests that losses peak in the third quarter of 2008 if home prices are flat going forward; in the fourth quarter of 2008 if prices drop another 10%; and in the second quarter of 2009 if prices drop another 20%.

Credit crisis: half way through?

Case-Shiller is down about 20% since the peak in real terms, and we have another 20% to go before the metrics are back in normal range. This would give back all the housing gains since the late 90s. Commercial real estate and consumer debt crises have yet to materialize but are likely to follow.

10 million Americans are underwater on their mortgages. The UK is in even worse shape, with a 70% drop in mortgage approvals.

Bear is gone.

Paulson and Treasury looked closely at the GSEs and decided it would be better to move now than to pay more later. Was there a trigger event? Were there scared Chinese bankers on the phone with Paulson? (Who do you think are the biggest holders of GSE paper?)

The Korea Development Bank looked closely at Lehman and took a pass. Lehman's stock is now in free fall.

Merrill financed 75% of its recent sale of $30B in mortgage securities at 22 cents on the dollar. The counterparty is a straw man, so Merrill will have to take the securities back if the price falls even further. That means Merrill could still go the way of Bear and Lehman eventually.

No mark to market, no resolution in sight.

Socializing losses after privatizing gains in the fat years.

Of related interest: great podcast interview with Robert Shiller. Act now, because Bloomberg has a tendency to take these down after a while.

Anathem

Neal Stephenson has a new book out. I discussed it briefly with him at Scifoo -- he was remarkably modest in his description, given the ambition and scope of the 900 page novel, which early reviews compare with classics like Dune and the Foundation Trilogy.

Check out this video trailer (complete with jiujitsu-inspired combat sequence :-), and this bibliographic list of influences, which include J.S. Bell, many worlds quantum mechanics and Kurt Godel...

Fraa Erasmas is a young avout living in the Concent of Saunt Edhar, a sanctuary for mathematicians, scientists, and philosophers, protected from the corrupting influences of the outside "saecular" world by ancient stone, honored traditions, and complex rituals. Over the centuries, cities and governments have risen and fallen beyond the concent's walls. Three times during history's darkest epochs violence born of superstition and ignorance has invaded and devastated the cloistered mathic community. Yet the avout have always managed to adapt in the wake of catastrophe, becoming out of necessity even more austere and less dependent on technology and material things. And Erasmas has no fear of the outside—the Extramuros—for the last of the terrible times was long, long ago.

Now, in celebration of the week-long, once-in-a-decade rite of Apert, the fraas and suurs prepare to venture beyond the concent's gates—at the same time opening them wide to welcome the curious "extras" in. During his first Apert as a fraa, Erasmas eagerly anticipates reconnecting with the landmarks and family he hasn't seen since he was "collected." But before the week is out, both the existence he abandoned and the one he embraced will stand poised on the brink of cataclysmic change.

Powerful unforeseen forces jeopardize the peaceful stability of mathic life and the established ennui of the Extramuros—a threat that only an unsteady alliance of saecular and avout can oppose—as, one by one, Erasmas and his colleagues, teachers, and friends are summoned forth from the safety of the concent in hopes of warding off global disaster. Suddenly burdened with a staggering responsibility, Erasmas finds himself a major player in a drama that will determine the future of his world—as he sets out on an extraordinary odyssey that will carry him to the most dangerous, inhospitable corners of the planet . . . and beyond.

I can really grok the appeal of isolation from the booms and busts of the outside "saecular" world, especially as we enter the climax of election season ;-)

Avout = Caltecher!

Hank in charge

This Times article details who is running the show when it comes to the Fannie and Freddie bailout.

NYTimes: ...“Bush was in charge when it was cut taxes, deregulate, have free trade, etc.,” said Representative Barney Frank, the Massachusetts Democrat and chairman of the House Financial Services Committee. “But then the old paradigm broke down, and it fell, frankly, to more serious thinkers to figure out how to cope with the current reality.”

...Mr. Paulson, a former chairman of Goldman Sachs, joined the White House in July 2006 after an intense courtship by Mr. Bush’s chief of staff, Joshua B. Bolten. He demanded clout and got it, in part because “Paulson did not need the job; the administration needed Paulson,” said Vincent R. Reinhart, a monetary economist at the American Enterprise Institute in Washington.

Mr. Reinhart says Mr. Paulson, like Mr. Bush, would ordinarily resist government intervention. “I think the economy is taking Bush and Paulson to a place where they wouldn’t go on their own,” he said. “In a crisis, you start bending principles, and Paulson bent principles.”

By relying so heavily on Mr. Paulson, Mr. Bush is doing more than bend conservative principles. He is taking himself out of public view in the one area of policy making that matters most to Americans: the economy. Mr. Wehner, Mr. Bush’s former adviser, does not see that as a problem so long as the markets stabilize. And Mr. Frank, the Democratic congressman, said Mr. Bush’s reliance on the Treasury secretary is “one of those things that, historically, will be to his credit.”

Do the people who think Sarah Palin is up to the job of President of the United States think she could have been CEO of Goldman Sachs as Paulson was? ("After all, Alaska is a lot bigger than Goldman Sachs! And, it's closer to Russia! How much oil does Goldman have, anyway? Hey, she does have a journalism degree from U Idaho!") Anti-elitism can only go so far...

Who has more responsibility, the President or CEO of Goldman?

Bye bye Fannie and Freddie

On my way back from Europe, I noticed that Fannie and Freddie have been nationalized, with shareholder value going to zero! It's a huge development -- much bigger than Bear earlier in the year. The housing bubble still has further to pop, so stay tuned!

Here's economic guru John McCain on the subject -- his sentiments are right, but the fact that he can't get the exec compensation to within 3 orders of magnitude is a bit worrisome. (I suppose Palin could have nailed it within two orders of magnitude or better ;-)

NYTimes: “It’s hard, it’s tough, but it’s also the classic example of why we need change in Washington. It’s an example of cronyism, special interest, lobbyists. A quasi-governmental organization, where the executives were making hundreds of — hundred some billion dollars a year, while things were going downhill, going to hell in a handbasket,” Mr. McCain said, adding that the two companies need “more regulation, more oversight, more transparency, more of everything, and frankly, a dramatic reduction in what they do.”

But not to worry, McCain / Palin's grasp of economics and finance is every bit as solid as that of our most recent great Republican leader George W. Bush, and look how well he did!

Video: [Bush, blathering off the record on something he doesn't understand -- was that Bush on July 18, or McCain this weekend?] "There's no question about it. Wall Street got drunk ---that's one of the reasons I asked you to turn off the TV cameras -- it got drunk and now it's got a hangover. The question is how long will it sober up and not try to do all these fancy financial instruments."

I'd post the video itself here except it's old news, and, well, nobody wants to talk about GW anymore -- especially not the people (the same ones who are backing McCain and Palin, more or less) who predicted what a great president he'd be. Too bad we don't judge voters on their records like we do traders. I know who I'd fire.

You voted for GW? Twice?!? Your P&L is negative one trillion dollars for the united states. Put your stuff in this box and follow the security guard out the door. No, you don't get to take a position on this election or advise any geneticists on evolution.

Note I'm not trying to blame Bush for the credit disaster -- the trillion dollars is for Iraq alone.

Venice photos

I only spent part of a day in Venice. It's a magnificent relic of a bygone era, but overrun by tourists and the types of businesses that cater to (exploit) them.

Trento photos

If you ever come to this part of Italy try the wonderful gnocchi -- it's apparently a regional specialty. We had several epic dinners compliments of the workshop -- I think the food was actually better than what I had in Paris.

Scientifically the meeting was great for me -- I learned a lot and got to meet a number of people whose papers I've read over the years. I'm not a heavy ion specialist but I got some insight into what the community thinks is going on. On to ALICE and LHC!

Two Italian theoreticians, Francesco Becattini (Florence) and Lorenzo Ferroni (LBNL):



Some pictures of Trento:

Palin, RNC, Romney: the view from Italy

I didn't get to see any of the coverage of the RNC since I'm here in Italy.

Regarding Palin, there is a natural instability in democracy towards anti-elitism. Many voters are attracted to a leader like themselves (a hockey / soccer mom with dysfunctional family and modest IQ), forgetting that they themselves would make a terrible president or vice-president. I do think the Republican base will like / likes Palin, and there is a chance she will appeal to lot of swing voters.

Is Romney the favorite for 2012? I've heard a lot of good things about him, but his RNC speech is pretty thoroughly middlebrow. Not that I disagree with every point, and certainly he had to tailor it to his audience, but I detect no signs of a large brain (unless you normalize to the MBA population).

I know few Americans care, but people in Europe think Palin is a joke. Another thing I've heard is that they don't believe Obama can overcome all the (perhaps hidden) racism to win the election. We will see!

Exciting action photo from Trento:

ECT fun

26 hours of travel yesterday (EUG-PDX-FRA-VCE + train) but so far I feel pretty good, even after seminars from 9:30 AM until 6 PM :-) Trento is a beautiful mountain town -- I will try to post more photos.

Obama 08

His acceptance speech tonight was good, but the best speech of the convention was John Kerry's. See here for more discussion.

Never in modern history has an administration squandered American power so recklessly. Never has strategy been so replaced by ideology. Never has extremism so crowded out common sense and fundamental American values. Never has short-term partisan politics so depleted the strength of America’s bipartisan foreign policy. ...

To those who still believe in the myth of a maverick instead of the reality of a politician, I say, let’s compare Senator McCain to candidate McCain. Candidate McCain now supports the wartime tax cuts that Senator McCain once denounced as immoral. Candidate McCain criticizes Senator McCain’s own climate change bill. Candidate McCain says he would now vote against the immigration bill that Senator McCain wrote. Are you kidding? Talk about being for it before you’re against it. ...

How insulting to suggest that those who question the mission, question the troops. How pathetic to suggest that those who question a failed policy, doubt America itself. How desperate to tell the son of a single mother who chose community service over money and privilege that he doesn’t put America first. ...

A warning from von Neumann

I can't resist reproducing this quote from John von Neumann, which I think applies well to certain branches of particle theory today. Thank goodness the LHC is coming on line soon...

As a mathematical discipline travels far from its empirical source... it is beset with very grave dangers. It becomes more and more purely aestheticizing, more and more purely l'art pour l'art. ...In other words, at a great distance from its empirical source, or after much "abstract" inbreeding, a mathematical subject is in danger of degeneration.

From the opening material of the book John von Neumann and Modern Economics. I highly recommend the chapter by Paul Samuelson.

ECT in Trento

I'm off soon to the following meeting at ECT: European Center for Theoretical Studies in Nuclear Physics, which is located in the mountain town of Trento, in the Italian Alps. The picture above was taken just north of Trento. I'm excited to see the dolomiti!

I'm flying in and out of Venice -- any tips on what to do there or in Trento would be appreciated :-)

Meeting: The statistical model of hadron formation and the nature of the QCD hadronization process

program , poster , slides of my talk.

Dense nuclear matter: intuition fails!

I usually don't get into detailed physics exposition on this blog, but I thought I would make an exception with regard to the paper 0808.2987 which I recently wrote with my student David Reeb. (See earlier blog post here.)

In the paper we conjectured that there might be regions in the QCD phase diagram where the sign problem does not prevent monte carlo evaluation of the Euclidean functional integral. We rewrite the partition function as

Z = Z+ - Z-

where Z+ and Z- are sums with positive weights, and each define independent statistical ensembles. Defining Z+ = exp( - V F+ ), and similarly with Z-, so that F+ and F- are the (piecewise) analytic free energies of the two ensembles, we conjectured that

F+ < F-

is the generic situation. Note Z > 0 so F+ > F- is not possible, but they can be exactly equal: F+ = F- , which is where the sign problem is most severe (see below). Since the F's are analytic except at phase boundaries, we reasoned that if they are equal in a region they must be equal everywhere within that phase region. At mu = 0 we know Z- = 0, so we assumed that there would be a region of small mu where F+ < F- and that this region would extend into the mu-T plane.

It turns out this last assumption is probably wrong! We were unaware of results which strongly suggest that even at arbitrarily small (but positive) mu and small T, Z+ does not dominate Z. That is, in the thermodynamic limit F+ = F- exactly even at small nonzero mu. The order of limits matters: taking V to infinity for fixed nonzero mu (no matter how small) leads to large phase fluctuations. The only way to avoid it is to take mu to zero before taking V to infinity. (See 0709.2218 by Splittorff and Verbaaschot for more details. Note their results rely on chiral perturbation theory, so don't apply to the whole plane.)

It is quite strange to me that zero density QCD can only be reached in this way. The case we are most familiar with turns out to be the oddball.

To make a long story short, our conjecture is probably incorrect: what we thought would be "exceptional" regions in the phase diagram are the typical ones, and vice versa -- at least as far as anyone knows.

Note to experts: we used the term "sign problem" a bit differently than apparently it is used in the lattice community. We refer to dense QCD as having a sign problem even though we don't know for sure (i.e., for all mu and T) that Z is exponentially small in V due to cancellations (i.e., a "severe sign problem"). Our usage probably translates to "potential sign problem" -- the functional measure isn't positive, so potentially such cancellations can occur, although we do not know if in fact they do. We got a lot of emails from people who thought we were claiming to have a method for dealing with severe sign problems, but in fact we were claiming something else entirely: that there should be regions in the phase diagram where the sign problem is not severe.

Dense nuclear matter

New paper! Probably too technical to go into here, but it relates to our current inability to directly simulate dense nuclear matter (QCD at nonzero baryon density). When the number of quarks and antiquarks is equal, the functional integral representation of the partition function Z has good positivity properties and can be evaluated using importance sampling (lattice Monte Carlo methods). That is no longer true when the system has nonzero baryon number, as would be the case inside a neutron star or in nuclear matter.

We rewrite Z = Z+ - Z- , where Z+ and Z- have good positivity properties, and conjecture, based on arguments using the analytic properties of the free energy, that at most points of the phase diagram Z+ dominates Z-. At such points one can simulate the theory using Monte Carlo.

http://arxiv.org/abs/0808.2987 (paper available after 5 pm pacific 8.24.08)

Sign problem? No problem -- a conjecture

Stephen D.H. Hsu, David Reeb

We investigate the Euclidean path integral formulation of QCD at finite baryon density. We show that the partition function Z can be written as the difference between two sums, each of which defines a partition function with positive weights. We argue that at most points on the phase diagram one will give an exponentially larger contribution than the other. At such points Z can be replaced by a more tractable path integral with positive definite measure, allowing for lattice simulation as well as the application of QCD inequalities. We also propose a test to control the accuracy of approximation in actual Monte Carlo simulations. Our analysis may be applicable to other systems with a sign problem, such as chiral gauge theory.

The cost of gold

What did all those medals cost China? Billions of dollars and the effort and sacrifice of countless young athletes, most of whom came nowhere near the Olympics, let alone a medal. There are an estimated 400k kids in specialized sports schools in China.

WSJ: ...In the eight years to 2006, the latest set of full-year figures available, China's spending on sports increased 149% to 9.2 billion yuan ($1.35 billion at today's exchange rates), compared with a 36% increase to 7.1 billion yuan in natural-disaster relief. Adding to the budgetary pressure is the need to rebuild after this year's Sichuan earthquake, which will be financed by a 5% reduction in all other government spending. On top of all that, China's Olympic building spree has left the government with 31 new and refurbished stadiums that it now must maintain.

...Because of China's population-control policies that allow most families only one child, they are increasingly reluctant to turn over their offspring to the state sports academies. Much of China's athletic success has been built on vast numbers of athletes from peasant stock who were willing to chi ku -- to "eat bitterness" -- to grind through the state sports system and have a shot at success.

Despite such heavy spending, China didn't make up very much ground in track and field. Liu Xiang's 110m hurdles gold in Athens was described as "the heaviest" and "the one with the most gold content" of all of China's medals. (Note, cf. Phelps, that they didn't say this about a swimming medal. They have a pretty realistic idea of which sports are the most competitive :-) Liu's failure to compete in Beijing due to injury may have been the single biggest Olympics story in the Chinese media.

On the other hand, Jamaica (population less than 3 million) had a great Olympics on the track: three golds and three world records for superman Bolt, and a medal sweep of the women's 100m.

Bolt is the greatest of all time

19.30 in the 200m, breaking Michael Johnson's record! Two world records, two gold medals. He led by 10m at the finish, and this time there was no show boating.

I remember watching Johnson set the record in Atlanta (on television). I couldn't imagine when -- if ever -- it would be broken.

In the semifinal heat yesterday Bolt looked like he was jogging at the finish, yet placed ahead of Shawn Crawford, the defending gold medalist from Athens who finished third in the final. Bolt destroyed his competition effortlessly. He is a superman among boys.

Hopefully the silly US media will forget about Phelps and focus on the real story in Beijing. Note added: Bolt donated $50k to earthquake relief in Sichuan province. He said he was moved to tears on the night of winning the 200m race, when more than 90,000 spectators in the Bird's Nest sang "happy birthday" for him. Unfortunately, not of interest to NBC.

NYTimes: The margin of victory seemed almost impossible. His finishing time, a sport-shattering moment. Just days after Usain Bolt electrified track and field with a world-record run for the ages in the 100 meters, he might have outdone himself in the 200.

Jamaica’s wunderkind surged so far ahead of a stellar Olympic final field Wednesday night that the final 50 meters inspired sheer awe. Running hard through the finish, Bolt not only ran 19.30, breaking the world record by two-hundredths of a second less than two hours before his 22nd birthday, but he seemed to set new parameters on what humans can achieve.

This time, unlike in the 100 meters, Bolt ran hard the entire race, clearly wanting to show what he can do when he is serious. In the 100, he essentially stopped racing with about 10 meters to go, threw out his arms and slapped his chest before he crossed the finish line. That made his time of 9.69 — .03 better than the world record — that much more astounding because it could have been even lower.

In the 200, Bolt overpowered the field in the turn, entering the straighaway with the only question left being how much would he win by and would he break the world record. That was 19.32 seconds, set by the American Michael Johnson at the 1996 Atlanta Games. Before Wednesday night, Johnson’s record run was the only performance under 19.62. Bolt’s previous personal best was 19.67.

“I didn’t think I’d see under .30 in my lifetime,” said Renaldo Nehemiah, a former gold medalist in the 100 hurdles. “He’s a freak of nature. He did it at 14 and he did it at 17. Most people aren’t surprised he did it. They might be surprised he did it here, but it was inevitable.”

More from George Vecsey of the Times; Michael Johnson agrees with me on the singular nature of Bolt's performance:

NYTimes: ...“It was the most impressive athletic performance I have ever seen in my life,” Johnson said Wednesday, before the next one. “It was amazing to watch — especially since I didn’t have to watch from behind.”

...Usain Bolt has made this a two-athlete Olympics. In two bursts of speed, he has matched much of the buzz for Michael Phelps, who won eight medals in the pool. Bolt’s two gold medals were won out in the open, on two feet. The first one was play. The second was work. But both are records. Kiss the old ones goodbye.

Phelps, shmelps -- Bolt is the man

9.69 -- and he strolled across the finish line while beating his chest with no one even close! Bolt is 6 foot 5 and only 21 years old. I think Michael Johnson's record in the 200m is in jeopardy. Bolt is probably the greatest of all time, assuming he's clean.

NBC: ...With a full seven strides to go, he dropped his arms and let them fall outstretched to his sides, appearing almost to run sideways as he played to the sold-out crowd of 91,000 at the Bird's Nest. Just before the finish line, he started high-stepping and, for good measure, executed a chest-thump.

All that, and still -- 9.69 seconds. Bolt simply ran away from the rest of the best of the world.

"I was just saying I'm No. 1," Bolt said later. "This is what I came out here to do, and I made it."


BBC: ...Michael Johnson described [it] as "the greatest 100m performance in the history of the event".

Johnson, a multiple Olympic champion who still holds the 200m and 400m world records, told BBC Sport: "He shut down with 10m to go. We have never seen anything like it before.

"It's absolutely amazing. Asafa Powell and Tyson Gay cannot run with him. He is a show unto himself."

Remember what I said about Jamaican track a month ago during the Olympic trials...



I was a competitive swimmer from age 7 through college. My high school team won a state title my junior year and conference titles all four years I was on the team. We had numerous All-Americans and state champions. I'm still ranked (barely) on the all-time list. But the best athlete I ever competed against was a running back who had been an LA sprint champion and had turned down Division I football scholarships to attend Caltech (he was 6 foot 2 and around 190-200). I could not lay a hand on him in the open field and he was incredibly strong in the weight room even though he never trained. (Most swimmers are shockingly weak when it comes to lifts.) During our senior year scouts from USFL teams were still looking him over as a free safety, despite his not having played high level ball in college. There is no comparison between the quality of athlete in amateur, fringe Olympic sports and the big money sports like football and basketball.

Phelps, shmelps.

Scifoo 2008 photos

Scifoo 2008 was tremendous fun. Thanks to all the organizers from Google, Nature and O'Reilly who made it happen.

I guess I'm used to meetings with enormous concentrations of brainpower, but usually the attendees share similar backgrounds. At Scifoo the diversity of knowledge is overwhelming.

I didn't take very many photos because I was too busy trying to absorb every bit of information I could during the conference.

Here's a shot of the crowd at the last session, which consisted of 2 minute recaps of some popular talks. Coincidentally, there are a number of physicists in the foreground: Wally Gilbert (a student of Abdus Salam who later won the Nobel prize for work in molecular biology and co-founded Biogen. He was a Senior Fellow when I was at Harvard), Sabine Hossenfelder (Perimeter Institute and blogger) and Paul Davies (relativist and author, looking down into his bag).



In this shot you can see Sara Winge, Tim O'Reilly, Chris DiBona and Timo Hannay at the front of the room.



This is a shot I took at lunch of Shane Carruth, who wrote and directed the movie Primer. I had a great time discussing the similarities between indie film making and tech startups with him. The next day he was off to Hollywood to pitch the script he's been writing for the last 2 years. Good luck Shane! (As is typical of Scifoo, the guys not pictured who were eating with us included an entrepreneur biologist whose company makes stem cells, and the physicist Lee Smolin.)



This one was taken by Esther Dyson. In the foreground are George Dyson, Stewart Brand, Danny Hillis and Neal Stephenson (who attended my high school and shares my interest in jiujitsu :-) George Dyson gave an amazing talk on the history of the Monte Carlo method, focusing on a newly discovered set of telegrams between von Neumann and his wife which spanned the development of the atomic bomb and the first electronic computers. I've always been astonished that no one has written a great biography of von Neumann, but George may be taking on that task.



Here's another nice set at Flickr. And another, which includes this shot of the session boards:

Scifoo 2008

I'm off to the Googleplex tomorrow for Scifoo 2008, sponsored by Google, Nature and O'Reilly.

Here's the Nature web page; maybe I'll show up in some of the photos. This one is from last year:



With all the interesting people and talks (and Olympics going on in the background!), I doubt I will post very much for the next few days!

Strange days

William Bernstein at Efficient Frontier noted back in March that dysfunctional credit markets are exhibiting historically anomalous yield spreads. Aversion to credit risk is at almost irrational levels. Spreads are only rational if you think everything else can / will crash leaving only the US government solvent to repay its debts.

First and foremost, the real yields for Treasuries, at least at the short end, have become negative; it seems highly unlikely that inflation over the next two years, any way you calculate it, is going to be less than the 1.99% yield of the two-year note. (Historical comment: During the Great Depression, because of a quirk in the math, T-bills briefly produced a tiny negative return. However, this occurred during a time of general deflation and thus still resulted in positive real returns.)

This is confirmed by the latest TIPS curve. Notice the negative real yield below five years:



Meanwhile, the junk-Treasury spread, depending on how you measure it, is now north of 700 basis points. If we assume that mid-rated junk has a loss rate of 4% per year and a maturity of 10 years, then its expected real return is the +1% TIPS yield at that point on the curve plus the 7% spread minus the 4% loss rate, or 4%. Compounding things even further, because of forced sales by hedge funds, the yields on municipal bonds are now several dozen basis points above that of Treasuries, something that occurs perhaps once in a generation, and usually at times of local government distress, which does not seem in the cards at the moment.

To complete the picture, stocks, if we are lucky, are still priced for a long-term real return of about 3.5 percent. (The dividend yield of the S&P 500 is currently 2.37%, to which another optimistic percent of real per-share growth can be added.)

Conclusion: The debt markets are so out of whack that we are now at a point where credit risk is being rewarded more than equity risk, something that should never happen in a world where equity investors own only the residual rights to earnings. This cannot last for very long: either spreads will tighten rapidly, equity prices will fall rapidly, or both. (Or, chortle, earnings will grow more rapidly.) Stay tuned.

The tidal wave from PRC

Will China's Beijing Olympics performance match their dominance of international science competitions? A reader sends the following information.

Yes, yes, I know -- but are they creative? ;-)

China took the gold medal in 2008 the 49th International Mathematical Olympiad (July 10th to 22nd, 2008 - Madrid, Spain) link

Russians came in 2nd by very small margin. USA came in 3rd with the help of Asian students such as Alex Zhai who got a perfect score of 42, along with other two students from China. (Big surprise is where have the Indian students gone? Maybe in the SpellingBees? :-)

China also took the gold medal in the 39th International Physics Olympiad (2008) - Hanoi, Vietnam (28/07). All of its participants got Gold medals. Canada and US team members are also mostly Chinese. Taiwan is in second place. link

At 2008 the 40th Chemistry Olympiads held in Budapest, Hungary on July 21, 2008, all 4 Chinese students got gold medals, again China in 1st place.
link

Judo in the WEC

Last night's 170 lb title fight had some of the most beautiful judo throws I've ever seen in MMA. We call those "high amplitude" throws: when the legs of the guy getting thrown describe a big arc.

Miura ultimately lost to Condit, but the outcome might have been different if they had been fighting in a parking lot :-)

Note to physicists: WEC = World Extreme Cagefighting, a sister promotion to the UFC, not Weak Energy Condition.

LA Times: no bottom yet for housing

The article Should You Buy A House Now? runs with the figure below, which pretty much summarizes the situation. They should have printed these statistics repeatedly in 2003, 2004, 2005, 2006, 2007 together with patient explanations of what price to income and price to rent ratios mean. Maybe that would have slowed down the bubble. Then again, maybe not :-(

Angry Youth: Chinese nationalism

The New Yorker has a great piece on the resurgent nationalism of young Chinese intellectuals.

A couple of weeks later, I met Tang Jie at the gate of Fudan University, a top Chinese school, situated on a modern campus that radiates from a pair of thirty-story steel-and-glass towers that could pass for a corporate headquarters. He wore a crisp powder-blue oxford shirt, khakis, and black dress shoes. He had bright hazel eyes and rounded features—a baby face, everyone tells him—and a dusting of goatee and mustache on his chin and upper lip. He bounded over to welcome me as I stepped out of a cab, and he tried to pay my fare.

Tang spends most of his time working on his dissertation, which is on Western philosophy. He specializes in phenomenology; specifically, in the concept of “intersubjectivity,” as theorized by Edmund Husserl, the German philosopher who influenced Sartre, among others. In addition to Chinese, Tang reads English and German easily, but he speaks them infrequently, so at times he swerves, apologetically, among languages. He is working on his Latin and Ancient Greek. He is so self-effacing and soft-spoken that his voice may drop to a whisper. He laughs sparingly, as if he were conserving energy. For fun, he listens to classical Chinese music, though he also enjoys screwball comedies by the Hong Kong star Stephen Chow. He is proudly unhip. The screen name CTGZ is an adaptation of two obscure terms from classical poetry: changting and gongzi, which together translate as “the noble son of the pavilion.” Unlike some élite Chinese students, Tang has never joined the Communist Party, for fear that it would impugn his objectivity as a scholar.

Tang had invited some friends to join us for lunch, at Fat Brothers Sichuan Restaurant, and afterward we all climbed the stairs to his room. He lives alone in a sixth-floor walkup, a studio of less than seventy-five square feet, which could be mistaken for a library storage room occupied by a fastidious squatter. Books cover every surface, and great mounds list from the shelves above his desk. His collections encompass, more or less, the span of human thought: Plato leans against Lao-tzu, Wittgenstein, Bacon, Fustel de Coulanges, Heidegger, the Koran. When Tang wanted to widen his bed by a few inches, he laid plywood across the frame and propped up the edges with piles of books. Eventually, volumes overflowed the room, and they now stand outside his front door in a wall of cardboard boxes.

Tang slumped into his desk chair. We talked for a while, and I asked if he had any idea that his video would be so popular. He smiled. “It appears I have expressed a common feeling, a shared view,” he said.

Next to him sat Liu Chengguang, a cheerful, broad-faced Ph.D. student in political science who recently translated into Chinese a lecture on the subject of “Manliness” by the conservative Harvard professor Harvey Mansfield. Sprawled on the bed, wearing a gray sweatshirt, was Xiong Wenchi, who earned a Ph.D. in political science before taking a teaching job last year. And to Tang’s left sat Zeng Kewei, a lean and stylish banker, who picked up a master’s degree in Western philosophy before going into finance. Like Tang, each of his friends was in his twenties, was the first in his family to go to college, and had been drawn to the study of Western thought.

“China was backward throughout its modern history, so we were always seeking the reasons for why the West grew strong,” Liu said. “We learned from the West. All of us who are educated have this dream: Grow strong by learning from the West.”

Tang and his friends were so gracious, so thankful that I’d come to listen to them, that I began to wonder if China’s anger of last spring should be viewed as an aberration. They implored me not to make that mistake.

“We’ve been studying Western history for so long, we understand it well,” Zeng said. “We think our love for China, our support for the government and the benefits of this country, is not a spontaneous reaction. It has developed after giving the matter much thought.”

In fact, their view of China’s direction, if not their vitriol, is consistent with the Chinese mainstream. Almost nine out of ten Chinese approve of the way things are going in the country—the highest share of any of the twenty-four countries surveyed this spring by the Pew Research Center. (In the United States, by comparison, just two out of ten voiced approval.) As for the more assertive strain of patriotism, scholars point to a Chinese petition against Japan’s membership in the U.N. Security Council. At last count, it had attracted more than forty million signatures, roughly the population of Spain. ...

When people began rioting in Lhasa in March, Tang followed the news closely. As usual, he was receiving his information from American and European news sites, in addition to China’s official media. Like others his age, he has no hesitation about tunnelling under the government firewall, a vast infrastructure of digital filters and human censors which blocks politically objectionable content from reaching computers in China. Younger Chinese friends of mine regard the firewall as they would an officious lifeguard at a swimming pool—an occasional, largely irrelevant, intrusion.

To get around it, Tang detours through a proxy server—a digital way station overseas that connects a user with a blocked Web site. He watches television exclusively online, because he doesn’t have a TV in his room. Tang also receives foreign news clips from Chinese students abroad. (According to the Institute of International Education, the number of Chinese students in the United States—some sixty-seven thousand—has grown by nearly two-thirds in the past decade.) He’s baffled that foreigners might imagine that people of his generation are somehow unwise to the distortions of censorship.

“Because we are in such a system, we are always asking ourselves whether we are brainwashed,” he said. “We are always eager to get other information from different channels.” Then he added, “But when you are in a so-called free system you never think about whether you are brainwashed.”

Also, see this Times profile of 110m hurdler Liu Xiang, and this discussion of the Chinese drive for medal dominance. Note, despite a population base of 1.3 billion, a Soviet-style sports system with a budget of billions of dollars, and an acute hunger for success, I predict that the Chinese will be surpassed by Jamaica (3M people with rudimentary training facilities) on the track.



And this: Orville Schell, writing in the New York Review of Books, China: Humiliation & the Olympics.

How Alpha becomes Beta

What will happen to the quants in August 2017?
Andrew Lo
MIT and AlphaSimplex
http://www.nyu.edu/sofie/slides/Lo.ppt



Via Barry Ritholtz.