Wednesday, August 31, 2011

The News: Balanced?

A recent post by some professors contends that:

We find that, on average, newspapers are located almost exactly at the median voter in their home states. In California, where we have the most data, newspapers are probably slightly to the right of the median voter. We find no evidence that the US press exhibits a liberal bias.

Our second finding is that newspapers are moderate relative to interest groups and political parties. That is, although newspapers exhibit some variation in their ideological position, they tend to be much closer to the median voter than most interest groups.

 First, what planet do these folks come from. Ever read the NY Times, Washington Post, Boston Globe, Atlanta Journal, Baltimore Sun, and the list can go on. Not to mention any rag in California! But so what, any reasonable person recognizes the bias, it is so blatant and third rate. They make the old yellow journalism rags look like Aristotle.

I am continually amazed at the academics who seem to have the conclusion first and then seek means and methods to justify them. The advantage of the Internet is to some degree self selection. One can reach their own conclusion.

At least it is not MSNBC.

Tuesday, August 30, 2011

No One Knows What to Do

The NY Times had an article which just reinforces what I have been saying for three years since the financial mess began; macroeconomists have no idea what to do, or a corollary is they have no idea about what they are doing. From the far left with Krugman to the libertarian Paul side the positions are all over the place. Nothing seems to work. Imagine if it were engineers and a bridge. Can't do that? Why, because engineering is based upon sound principles. Macroeconomics is religion during the height of the Reformation, or even worse than when they were trying to figure out the Trinity.

As the Times states:

Officials also came to a temporary policy compromise by giving markets clearer guidance on how long interest rates would continue to hover around zero. Some committee members said they wanted to set a calendar deadline, and others preferred to instead peg interest rates to a specific rate of unemployment or inflation. 

The calendar-deadline version won out, and in its public statement the Fed pledged to keep its benchmark short-term interest rate at “exceptionally low levels,” for “at least through mid-2013.” 

There were three dissenters: Richard W. Fisher, Narayana Kocherlakota and Charles I. Plosser.
Not only did they disagree with the mid-2013 language, they all disagreed for slightly different reasons. 

This is worse than the Mad Hatter's Tea Party. No one could make this up. And we expect a recovery? When? Not with these wizards.

Saturday, August 27, 2011

Google and Gleick

Gleick wrote a well written book on chaos, I really enjoyed it and found it often spot on. Then he wrote the book on information theory and gave at best back handed compliments, in my opinion, Norbert Wiener, that I did not like. Now he opines on Google.

He states:

Google is where we go for answers. People used to go elsewhere or, more likely, stagger along not knowing. Nowadays you can’t have a long dinner-table argument about who won the Oscar for that Neil Simon movie where she plays an actress who doesn’t win an Oscar; at any moment someone will pull out a pocket device and Google it. If you need the art-history meaning of “picturesque,” you could find it in The Book of Answers, compiled two decades ago by the New York Public Library’s reference desk, but you won’

 Now I grew up in New York and never ever went to the Library. They never had what I wanted. I went to used book stores, you see I wanted to have the information around permanently, not just find some answer, I wanted to know. By the way, my wife worked at the Boston Public Library, and I met her as a librarian, at MIT. But I digress, since she really was the only thing I remember of value there, and I even took her home!

Now in 1972 I believe, MIT tried to move to microfiche, removing journals. I somewhat blew my top, because you see when looking in journals it is often not what you are looking for that stimulates a new idea but what you pass over by happenstance. You see it is what you are able to connect in the context of your own educated and prepared mind that all too often leads to results, not what someone has ordered for you to peruse.

Thus microfiche allowed targeted search. Now the next thing that came along was Dialog, the on line search company. My wonderful wife went to work there for about a decade. In this case you went to the reference librarian trained to use the system and asked for a search, and she would interrogate you and depending on he well the two of you communicated a few days later came a printout. You then read through it to find the papers you wanted and then again in a few days you finally got them. Better than fiche, not really. By the time you got them you often forgot why you even asked.

Now to Google. Google never ever answers my questions. Google just finds what I ask for, a real time version of Dialog, with instant gratification, downloading a pdf set of files that in real time allow a widening or focused search. I can now get a draft book out in six months or less, depending on other factors. Why, because Google facilitated the search. It was a search, guided by my questions, and all Google did was index what others put on the web. Google did not make any value choices. Thus when I seek "cancer stem cell" site:edu filetype:pdf, I get what they have indexed. I then look through a few hundred and build a pile of 30-50 papers which I then read through. Has Google made a value judgement on what I should see? Doubtful, and I would be the ultimate arbiter in the end anyway.

Gleick continues:

Part of Google’s mission is to make the books of answers redundant (and the reference librarians, too).

 Well yes the reference librarian is obsolete, thank goodness. Yet I did get a wonderful wife. But I get what I need and more much more efficiently now. Never was my wife's fault. But Google is a "free" Dialog with a better interface.

As for Gleick's inference that somehow Google have evil intents. He states:

The business of finding facts has been an important gear in the workings of human knowledge, and the technology has just been upgraded from rubber band to nuclear reactor. No wonder there’s some confusion about Google’s exact role in that—along with increasing fear about its power and its intentions.

Now frankly how will Google do evil in getting me papers from universities on "cancer stem cells". Perhaps if I wanted a sump pump they would sell me one, as does Amazon. But for true search and find one cannot live without Google. Notwithstanding Gleick's views.

M&A in China

The M&A business has always been a way for business to progress, grow, sometime fail, but it is a key element in a capitalist market, allowing success or failure. Now China has promulgated a new law which ex post facto would deny an M&A action if in the Government's opinion it threatens national security.

China Daily states:

If any mergers and acquisitions involving foreign investors are determined to be a threat to national security, those deals should be terminated, according to the regulation.
In addition, any past mergers and acquisitions of domestic companies by foreign investors that are found to have threatened national security will be terminated. As an alternative, the MOC may "take relevant measures such as equity and asset transfers or other methods to eliminate their (mergers and acquisitions) influence on national security," according to the regulation.
The regulation will take effect from Sept 1 of this year, the ministry said.
 This may make further investments difficult.

Tuesday, August 23, 2011

We Are Not California!

We just had an earthquake! A little one but it was in Virginia, a couple of hundred miles away but we had it! So says the NYT.

Sunday, August 21, 2011

Innovation, Russia and the Entrepreneur

Edison was a 19th century US entrepreneur. Above is his desk in his office, a place where he worked and struggled for decades. The US has a long history of entrepreneurs, people who have a dream and struggled against many odds to see it in reality. In the 19th century we had our oligarchs, today we also have them, but the game does have some rules. The FT describes the current status of the intended "Silicon Valley" in Russia. They conclude:

Kristina Tikhonova, head of Nokia Siemens Networks in Russia, says the group decided to invest in Skolkovo because it appeared to offer more transparency and eliminated some logistic barriers. The company considers Skolkovo a “great project”, she emphasises, but also one “that needs the next generation of political leaders to continue and support ...”.

Whether Russia can create the next Silicon Valley is another question. While the country has exported some of its best talent there, including Mr Galitsky, an old friend of Google’s Eric Schmidt from Sun Microsystems, with the current legal environment it is doubtful the Kremlin can replicate the same thing back home, Mr Lasov says.“It’s not going to be like Silicon Valley in five to 10 years. But it could be a place like Bangalore was a decade ago,” he says.

As one who has been both an entrepreneur and an entrepreneur in Russia I find the intent to become another Silicon Valley as somewhat a wishful thinking. Russia has always been creators of fundamental technology, great research, but the linkage between that and its implementation has been lacking to say the least. I find the very individualism that is the core to the American entrepreneur is totally absent in Russia. The oligarchs are examples of that. They did not create anything but for the most part via their contacts and associations managed to grab wealth.

So will Russia become a Bangalore? Not really, Indians have along culture of study and business expertise, albeit lacking in the individualism of the US. China, albeit a communist state by name has in the core Chinese soul the independence of the entrepreneur. The Chinese in Singapore, Malaysia, Indonesia, Thailand, the US and elsewhere went out and struck gold with their businesses, independent of any government. The Russians have done so here in the US but nor in Russia. Thus in many ways the Russians in Russia may be akin to the Greeks in Greece. For the Greeks who leave often become quite successful, the leave behind the burden of Greece, and prosper on the soul of the Greek. The same for the Russians.
 Entrepreneurism must at its core be organic. It must come forth from the driven individualism of the inventor, the drive that takes that one person forth as a dream merchant, as the executor of the dream, and generate a following to make it real, a following of workers, customers, and financial backers. This is what Russia, not Russians, lack.The bed above is that of Edison, again an exemplar of what it takes, the 24 hour day, the seven day week, not the 35 hour week of the French, but the full commitment to create, to bring dreams to reality. No Martha's Vineyard here.

My Russian partners were innovative, hard working, honest, but always working around the system. It was the system which in many ways was the problem, as we are seeing today in the US, the burden of too many people who want to promulgate rules rather than create.

So will Russia create a Silicon Valley by mandate, doubtful. But it will get a lot of money flowing into someone's hands.

More on Cancer Stem Cells: A Markov Model

In a recent article in Cell by Guptal et al the authors have built a model and have tested it experimentally in vitro with breast cancer cells. They summarize their work as follows:

We show that subpopulations of cells purified for a given phenotypic state return towards equilibrium proportions over time. These observations can be explained by a Markov model in which cells transition stochastically between states. A prediction of this model is that, given certain conditions, any subpopulation of cells will return to equilibrium phenotypic proportions over time. A second prediction is that breast cancer stem-like cells arise de novo from non-stem-like cells. These findings contribute to our understanding of cancer heterogeneity and reveal how stochasticity in single-cell behaviors promotes phenotypic equilibrium in populations of cancer cells.

Now as we have discussed before, there is a widely held theory that cancer stem cells exist, they may be 1 in a million of them in a collection of other non-stem cancer like cells, and it is these few stem cells which control the growth of cancers.

There are two opposing theories:

1. Uniqueness of the Stem Cell: Namely that there are a few such cells and that they have the ability to reproduce albeit at a limited amount. They have malignant progeny which are not stem cell like. They are unique and one they are created they remain that way. The other malignant cells not stem cells remain as that.

2. Regeneration of Stem Cells: The second school as exemplified in this paper says that there seems to be a balance between percent of stem cells and percent cancerous but non-stem cells. That there may exist some mechanism o,f say inter cell signalling, which turns on and off stem like characteristics.

We would then ask one to consider our argument regarding prostate cancer. Say the HGPIN argument we made a few months ago. Namely, we know that HGPIN often moves to PCa. We also know that PCa may have a stem cell character. We know that there is a certain number of patients with HGPIN who undergo saturation biopsy who on second biopsies are found to no longer have any HGPIN. So where did ti go? Think stem cell, namely if one makes the following assumptions:

1. PCa has a stem cell

2. HGPIN is a precursor to PCa. It too may have a stem cell.

3. Saturation biopsy removes x% of the glands. x% removed contains y million cells.

4. If we calculate the probability of catching stem cells and we calculate the probability of catching all, given the density, then we can compare the percent HGPIN free of HGPIN on second biopsy and the probability of removing the stem cells. We get a close match.

Thus if this is projectable, then it may call into question the results in the breast cancer model. Namely if the stem cells are removed leaving only HGPIN with no stem cells, then the HGPIN regresses, is it from the loss of the stem cell AND the fact that the remaining HGPIN cannot regenerate them?

Interesting question.

Yet there is the more compelling issue of what  pathways have been altered, what mechanism allows a non stem cell to become a stem cell. The observation has interest but without an underlying state model it lacks extensability.

Saturday, August 20, 2011

Scouts, the Left, and the Candidates

The left wing blog, the Beast, has an article comparing two of the presidential candidates on their interactions with the Boy Scouts. There was a time that the Scouts were held high as an organization which fostered loyalty, accomplishment, team work, individual accomplishment, and were considered contributors to America. The left seems to see them as some form of malignant infiltrators seeking to destroy their view of what we should all be doing.

They are not Hitler Youth, quite far from it. But the Beast, aptly named I assume, takes the position that one candidate did the right thing by denying Scout participation in the Olympics and the other candidate is somehow Attila the Hun.

As the article states:

Perry’s view of the outside world hasn’t changed too much since then. He’ll vigorously defend the Scouts no matter who the perceived enemy might be. Besides that turncoat Romney, there are bullies everywhere. Atheists and gay activists are the most threatening.

His biggest bugaboo might be the American Civil Liberties Union, the individual-rights organization, which has been particularly litigious when it comes to the Scouts. Everywhere, Perry sees an assault on his wholesome Scouts; the judiciary and the ivory tower are both stacked with liberal relativists. Psychiatrists are overdrugging America’s kids. Even the whole math movement has apparently run roughshod over, you know, normal arithmetic. Pretty typical of what keeps conservatives up at night.

 It now is clear that one candidate cannot make a decision, somewhat what we have now, and the other can. Perhaps the better candidate has come forth, we shall see.

The Scouts have a valid, necessary and productive cause which they have delivered on for a century. Very few other youth groups can say the same. Yes there are organizations that want to deny the individualism which had made America, the individualism observed by de Tocqueville, and the individualism which survives to this day. That is a major theme of the Scouts.

I have never understood why the left wing is so terrified of the Boy Scouts. Is it the Marksmanship Merit Badge perhaps, or is it Reptile Study? Is it the fact that a majority of the men admitted to the Military Academies were Eagle Scouts, the same men who follow orders and put their lives at risk day after day. My first Scout Master was one of those quiet men, Fred Droste, a veteran, leader, and a quiet man, quiet after WW II. Thus I wonder what this fear is that drives them to truly fear little 11 year old boys who go camping?

As for the ACLU, I would argue it is not individual rights as one would understand the Individualism of many Americans, but the group rights of the Progressives. Does that make a difference, yes it does, for the Progressive's group rights deny the Individualism, the true individual's rights.

Thus is there a difference between these two candidates. There appears to be. One stands for whatever he has to, the other for what he believes. Now I believe in evolution, in fact anyone who works in biology, especially in propagating species and hybrids as I have done for decades, cannot but see the pattern of evolution; either the intelligent design of the hybridizer, really a bit of luck, or the survival of the fittest in the mountain side of my rejects, the plants I just cannot throw on the compost pile, surviving and prospering, and taking over the mountain side. That by the way was a skill learned in the Scouts.

Friday, August 19, 2011

The Chicken or the Egg?

The US Federal Debt is a concern. It has exploded under the current Administration in an almost wanton fashion. The prior Administration did a "Johnson" by having two wars with no payments for the costs. The assumptions when they started were that they would not cost that much but as anyone who has a semblance of knowledge of history knows they always cost a lot more than we ever thought. Thus there was an increase. The Stimulus of 2009 was an unabashed Keynesian explosion with not positive effect, especially since we were told by Romer that unemployment would go down, it did not, in fact it increased.

Thus to reduce the debt we must do two things; cut expenses and raise revenue. In addition we must deal with the entitlements; Medicaid, Medicare, and SSI. Now Medicaid is a non-contributory entitlement, namely it goes to those having made no contribution. The other two have a contributory element and Medicare actually pays out much more to those with less contributions and thus less income, than they ever contribute.

Now there is a flap about raising taxes on the rich, and to the current Administration that means anyone with a family income in excess of $250,000. Those folks depending on where they live are not really that rich. For example in New York or New Jersey they pay Federal Taxes of say 25-30%, plus 7-9% State taxes, then 10% real estate taxes, and 8% sales taxes. That is just off the top. Thus if we have that group one must also remember that the 8% sales is after tax so we see:

1. We pay $75,000 Federal Tax
2. $15,000 State Tax
3. $20,000 real estate tax
4. 8% sales tax on say $100,000 or another $8,000.

That is a total of $118,000 of the $250,000. Also they pay 14% SSI on the first about $100,000 so that is another $14,000 and they pay 3% of Medicare tax or $7,500.

Total Tax: $139,500
Tax Rate: 55.9%

In addition they pay for college etc.

So we see that these folks are fairly well taxed already. But the billionaires are asking to be taxed more, and they are asking that the ones at the bottom of the "rich" pile get to contribute as well.

The FT has an interesting article describing these generous folks, and it states:

The call for higher taxes on the wealthy – which is shared by President Barack Obama and many congressional Democrats – appears to chime with the desire of most Americans. A CNN poll this month found 63 per cent of Americans favoured higher taxes on businesses and rich citizens to curb the soaring debt. 

 So what are they asking for, expanding the total to say 60%? But should we not reduce spending first? That is the dilemma. You don't buy an addict more junk, you get them to go cold turkey first. This is the political dilemma. The current Administration has no such idea, they just want to tax more.

An Interesting Observation

One interesting fact, I notice that as of today less than 67% of the visits are from the US, more than 33% are from outside the US. That is significantly different than most blogs. I am happy about that since it shows a non-parochial commentary. I invite any comments by email, I refrain from using posts to the Blog since I all too often see some of the strangest postings from unknown characters. Thanks to my distant visitors, perhaps it is because I have lived in so many places.

Yield Curve, August 2011

The Treasury Yield Curve Data is flattening and the spread is getting smaller than ever before. Here is the data for the past year at a few points.

In a sense we are not as bad as last August but it is getting there. Now for the spread:

It is interesting to see the spread going as last August as well and the lower the spread we also see the market drop accordingly. Bu this time the drop in the spread was like falling off a cliff. There appears to be a leading indicator in spread based upon the market, or a flight to safety, with no yield.

The above is a summary of all the data. The 3 month Treasuries are in the tank as also are the 10 year Treasuries. Good for issuing new debt but bad as an indicator of any growth.

The above demonstrates the fall from peak spread, namely we are now down to almost 50% of the peak spread, which is a good measure of the flattening. Thus the long term growth outlook is quite poor.

More to come!

Tuesday, August 16, 2011

Real Names on the Internet

There is a collection of legal entities who have decided that one must use a real name when using the Internet. In a recent positing of Ars Technica they relate the experience of Korea, South, not North, in banning those without real names. Now anonymity is not a right anywhere as is privacy, as one reads our Constitution. However one would like to have a right to be left alone.

Yet there are two forms of anonymity. Firs the type where I just want to be left alone, Walden Pond type if you will. Clearly our current Administration eschews that in toto, one need just look at health care. If I were to live in the woods off the land away from humanity, not having to pay taxes, I would have to find some health plan which in all likelihood I would never use. That type of anonymity has been destroyed. The second type is the type where I just want to throw stones and not have anybody find out, the type that wear a hoodie or face mask. That type is the type where they want to get in your face but do not want any return for their behavior.

The authors of the Federalist Papers were of the latter. They wanted to get in the face of those opposing certain aspects of the Federal form of government. Why? Ask some historians, but they were not the first.

The most entertaining parts of the Internet are often the comments. Here people have the feeling that they can and do say anything, stupid, inane, insulting, and the list goes on. One often laughs at the person who we do not know for their total lack of manners and knowledge. Yet rarely do they find out how bad they are.

Thus is there value to be unknown? Possibly. Yet someone's comments are all too often measured by who makes the comments. It is like Cable, we know most of those speaking are idiots, so we filter it out.

Monday, August 15, 2011

Google and Handsets

In 1985 I was asked to have lunch with Bob Galvin at Motorola. We went to the company cafeteria and he had a peanut butter sandwich, which as I age I also have become fond of, and I had a tuna salad. He asked me for some advice on Motorola getting into the data service business. He said (paraphrased):

"We make a billion dollars of pagers and the paging companies sell a billion dollars of service every year, and we make tens of billion of cell site infrastructure, and hand sets, and the cellular carriers make billions every year. We have this radio data service, and I want to see how we can get Motorola into the service business. Let me know how to do it?"

I spent a few months and discovered several things:

1. In 1985, 1986, data was doable with the Motorola KDT terminal, IBM field service used them, but the problem was one needed an application internally to get it going. I remember talking to Kraft to try to get them on board, but they saw the potential yet it would take a few years an tens of millions of software development. Thus timing was too early. Not that way now.

2. I then met with Motorola sales. They were great, except they sold hardware, instant gratification. You sold the brick, and sold as many bricks as you could. They had no idea about the service business.

These two observations have resonated for years. Timing and culture. Too early, you may be the inventor, but the world forgets. Culture, hardware sales and service sales are often at odds. In one you get instant gratification and in the other you develop a lasting relationship. In fact a good service business is one where you never get a customer service call.

So today I was baffled by the Google buying of Motorola set business. Why would the world's best service provider buy a second tier manufacturer? That puts them into conflict with all others, and they want to get Android out there.

It will be interesting to see what happens, but Bob Galvin's words ring in my head. Bob was a great leader, a great human being. He knew this market better than anyone. Which is why he was concerned mixing apples and oranges, service and products. A worthy concern indeed.

Saturday, August 13, 2011

Fixing the Economy

Imagine going to a doctor whose last set of patients all died from his treatments, not a one lived. And the deaths were horrific.

Now would you rely upon that practitioner the next time? I think not. Well today in the NY Times we have Romer pontificating again, the same Romer whose January 11, 2009 document foretold the wonderful world at the end of the Stimulus. Never happened, we have what we have now.

She bemoans:

The lesson here is that fiscal stimulus can help a depressed economy recover — an idea supported by new studies of the 2009 stimulus package. Additional short-run tax cuts or increases in government investment would help deal with our unemployment crisis. 

What of the idea that monetary and fiscal policy can do little if unemployment is caused by structural factors, like a mismatch between workers’ skills and available jobs? As I discussed in a previous column, such factors are probably small today. 

In place of the tepid budget agreement now in place, we could pass a bold plan with more short-run spending increases and tax cuts, coupled with much more serious, phased-in deficit reduction. By necessity, the plan would tackle entitlement reform and gradually raise tax revenue. This would be the World War II approach to our problems. 

Now she was so far off almost three years ago why should we trust Chuckles now? If she had been an engineer all of her bridges would most likely have collapsed, and yet she wants us to build more.

Remember, marcroeconomics is a political philosophy, each person sees it in their own way, often masked with equations, but then again one can mask a great deal in equations, especially meaningless ones.

CT Usage: The Double Edged Sword

One of the major complaints in the rise of health care costs has been the use of costly procedures. CT, and of course MRI, are often at the top of the list. In a recent Aunt Minnie posting the authors state that there is a substantial decrease in hospital admissions when CTs are performed in the ER/ED.

They state:

Based on data from close to 100 million patients receiving CT scans in the ED, researchers found that CT use increased by 330% between 1996 and 2007 -- most strikingly for patients presenting with abdominal and flank pain. Over the same time period, the likelihood of hospital admission after a CT scan has fallen by half, though the trend toward lower admissions has leveled off in recent years.

However one commentator states:

At our institution, the triage nurses order the CT scans before the ER doctor sees the patient. A recent patient came in one week after an auto accident and was 'triaged' for a CT of the head, cervical spine, chest, abdomen and pelvis. 

The comment is frankly a bit terrifying. First the triage nurse has most likely no clue, second the cost, and third the amount of radiation.

The article ends with:

Much of the increase is probably related to changes in how doctors practice medicine and the availability of CT scanners, said lead author Kocher in a statement accompanying the study's publication. CT scans "provide lots of information quickly, and so doctors and patients see CTs as a means of arriving at diagnoses efficiently and conveniently," he said. "Couple that with the fact that CT scanners are commonly housed in or near the ED itself, and the barriers to getting the test done are lower than in the past."

 Frankly it is the change in the practice as well as the concern for having missed something. So why not do a scan. It throws another set of eyes in the loop. It also increases the costs and the risks. There once was a time before CAT/MRI where listening to the patient and understanding the depths of medicine counted. Imaging is a true improvement, but it has a cost, and it is not always necessary.

Friday, August 12, 2011

Health Care Opinion

The 11th Circuit Court of Appelas issued their opinion on the Health Care Bill. They conclude on p 206 the following:

We first conclude that the Act’s Medicaid expansion is constitutional. Existing Supreme Court precedent does not establish that Congress’s inducements are unconstitutionally coercive, especially when the federal government will bear nearly all the costs of the program’s amplified enrollments. Next, the individual mandate was enacted as a regulatory penalty, not a revenue-raising tax, and cannot be sustained as an exercise of Congress’s power under the Taxing and Spending Clause. The mandate is denominated as a penalty in the Act itself, and the legislative history and relevant case law confirm this reading of its function.

Further, the individual mandate exceeds Congress’s enumerated commerce power and is unconstitutional. This economic mandate represents a wholly novel and potentially unbounded assertion of congressional authority: the ability to compel Americans to purchase an expensive health insurance product they have elected not to buy, and to make them re-purchase that insurance product every month for their entire lives. We have not found any generally applicable, judicially enforceable limiting principle that would permit us to uphold the mandate without obliterating the boundaries inherent in the system of enumerated congressional powers. “Uniqueness” is not a constitutional principle in any antecedent Supreme Court decision. The individual mandate also finds no refuge in the aggregation doctrine, for decisions to abstain from the purchase of a product or service, whatever their cumulative effect, lack a sufficient nexus to commerce. The individual mandate, however, can be  severed from the remainder of the Act’s myriad reforms. The presumption of severability is rooted in  motions of judicial restraint and respect for the separation of powers in our constitutional system. The Act’s other provisions remain legally operative after the mandate’s excision, and the high burden needed under Supreme Court precedent to rebut the presumption of severability has not been met.

Accordingly, we affirm in part and reverse in part the judgment of the district court.

AFFIRMED in part and REVERSED in part.

An interesting read and this should make things move quickly.

We have argued that health care should have some universal coverage, but at a minimum for cat srophic coverage, not for hang nails. The current legislation is everything and the kitchen sink and it creates a massive Government infrastructure. Perhaps it can be rethought.

Thursday, August 11, 2011

Economic Growth

The NY Times questions where growth will come from. They state:

To keep its goods cheap, it has allowed its currency to rise only about 6 percent against the dollar since June 2010, even as the dollar has plunged against other currencies. Last month, the I.M.F. called on China to help global growth by letting the currency appreciate more rapidly, which would make Chinese goods more expensive around the world and give a break to competing manufacturers. 

China has so far resisted that advice. It lashed out at economic mismanagement in Washington after the Standard & Poor’s downgrade, which could potentially reduce the value of its $1.1 trillion stash of American Treasury bonds. Rather than berate Washington, it should abandon its currency manipulation. China’s leaders have said they want to put more money in the hands of consumers through social programs and higher wages, and to rely less on exports. They can do this without stoking inflation by allowing the renminbi to rise significantly. 

 In addition a WSJ piece by two Democrats states:

According to the Bureau of Labor Statistics, the U.S. currently has approximately three million job openings, all waiting to be filled. With so many Americans out of work, what is the delay? Workers want to work, and so many businesses want to hire—but there is a widening "skills gap" that prevents many Americans from filling the jobs of the 21st century economy. If we want to get our economy back on track and get workers back on the job, we will have to address this issue in a better way. 

 The problem is that growth is driven by entrepreneurs building the better mousetrap. Namely making something that someone wants. And in addition if that something actually increases productivity all the better. Thus the PC is an example of something that created tremendous growth and led to an exploding market. One questions whether the iPad will do the same or is it just a form of Soma. Yet it does create growth.

Can Government create growth. We have argued that it cannot. At best it inefficiently transfers wealth. At worst it take capital from real creation and distributes to value destruction spenders.

As for the skill's gap, I am always amazed that somehow Government will solve the problem. We need more engineers, not fewer. The ones we develop go back home for a better opportunity. During the Space Race period the Government did provide funding and to some degree motivation. Yet even that had a double edge. The graduates went to work for NASA or DoD and did not go into private industry. It opened a window for Japan to enter and it did with gusto, letting Japan dominate the 1980s.

Thus Government can help, but it often comes with strings attached, strings that can all too often pull us down again.

Wednesday, August 10, 2011

China, Blue Water and Its Carrier

China launched its first carrier today. The first of most likely a half dozen, enough to crowd the US out of the Pacific. As the People's Daily states:

China's first aircraft carrier, rebuilt from the imported steel platform "Varyag" from Ukraine, is scheduled to make its maiden voyage for a series of sea trial today. The official Xinhua news agency sent a flash early today that the huge carrier sets sail for a testing voyage on Wednesday. Recent pictures on a few Chinese websites show the Varyag, which has been refitted at a shipyard in northeastern China's Dalian port, has removed scaffolding used for construction. Late last month, a spokesperson from China’s defense ministry said that the aircraft carrier would be used for "scientific research and training". The brief information tells the huge vessel is on its way to the blue sea.

Earlier this month, more than 200 naval soldiers were seen forming ranks on the warship.
The Chinese Navy Command has appointed 50-year-old Li Xiaoyan, a senior colonel in the Chinese Navy, to command the ship, according to Chinese press reports. Three Navy officials were appointed deputy captains. Li, from northeast China's Jilin Province, was a member of the country's first warship academy class in 1987 mainly for aircraft carrier commanders and among the country's first group of commanders who could both pilot aircraft and sail warships. Cao Weidong, a researcher with the PLA Navy's Academic Research Institute, said the Varyag was a conventionally powered medium-sized carrier that would be equipped with Chinese engines, aircraft, radar and other hardware.

 Now it is worth looking at another article in the same paper:

China's rapid rise has exerted a profound and visible impact on the entire world. British philosopher Bertrand Russell wrote in "The Problem of China" in 1922, "All the world will be vitally affected by the development of Chinese affairs, which may well prove a decisive factor, for good or evil, during the next two centuries."  The world already knows that China adheres to the path of peaceful development. The country has left different impressions on the minds of different people, and more and more people are developing their own unique understanding of China.

The ad screen is close to certain screens rented by major Western news agencies and has been used to display promos for Chinese media, cities and brands over the past nearly 10 days. Placed at "the crossroads of the world," it serves as a window into China and its importance extends far beyond the scope of commercial ads. Undoubtedly, the main purpose of leasing the ad screen is to better introduce China to the world and to improve China's international image.

Now finally another article:

Late last month Irish Prime Minister Enda Kenny stood in parliament late last month and openly criticized the Catholic Church over its role in the long running child abuse scandal. He accused the Vatican of interference in the affairs of a sovereign state. Enda Kenny said the Vatican displayed "dysfunction, disconnection, elitism, (and) narcissism." And then to top it all, he continued that "We're fed up with hearing about canon law. This is a Republic, it's about civil law." …

The remnant of the temporal power of the Church is now concentrated in the Vatican city and it still wields influence that is vastly disproportionate to its diminutive size. It names cardinals in other countries, its senior priests abroad have diplomatic protection and, we have it from the Irish PM that they can interfere in the affairs of sovereign states. … China's history has taken place outside the historical lands of Christianity and its experience is totally different. China can respect the decision of Europeans to allow the Vatican the kind of leeway it has in their countries.

It's the West's historical baggage and frankly its problem. But China is very much within its rights to question the power of the Vatican state to have sole authority in naming priests in faraway lands. The Pope, you see, is not just the Vicar of Rome, which is one of his titles. He is also a head of State, with soldiers who carry real guns, a diplomatic corps and a bank. Europeans may choose to see this as quaint, but China is questioning the principle of letting a foreign state dictate to another what happens on its own territory.

The Church is an admirable institution which brings spiritual comfort to hundreds of millions of people throughout the world, but it is also a pragmatic one and has adapted and changed itself sometimes beyond recognition over the centuries. It must recognize that China cannot be expected to adhere unquestioningly to culturally alien rules that it never participated in creating, let alone ones which actually weaken the Church rather than strengthen it.Why can't the Chinese pick their own bishops, ideally without the interference of any state, whether local or foreign? Excommunicating them was a medieval tool that has no place in 2011 in China or anywhere. 

Consider these three stories. First the expansion of the Blue Water Fleet, a clear move to control the Pacific. Second, a promotional move to show how peaceful the intentions of China are. Third, the battle with Rome, a battle reminiscent of Henry VIII, where China will allow a Catholic Bishop, yet it must be a bishop of its own choosing. In many ways it is also the Gallic Church, but with conflict. Yet the Pope having an army, well the Swiss Guards hardly are a match for that aircraft carrier or the few million PLA troops.

Monday, August 8, 2011

The Guns of August

S&P has also downgraded the GRE entities. Specifically they state:

Standard & Poor's Ratings Services said today that it lowered its issuer credit ratings and related issue ratings on 10 of 12 Federal Home Loan Banks (FHLBs) and the senior debt issued by the FHLB System to 'AA+' from 'AAA'. We have also lowered the ratings on the senior debt issued by the Federal Farm Credit Banks to 'AA+' from 'AAA'. The ratings on the individual farm member banks are  not affected. In addition, we have lowered the senior issue ratings on Fannie Mae and Freddie Mac to 'AA+' from 'AAA'. Our 'A' subordinated debt rating and our 'C' rating on the preferred stock of these entities remain unchanged. Finally, we have affirmed the short-term issue ratings for these entities at 'A-1+' and removed them from CreditWatch Negative where they were placed July 15, 2011. ...

The downgrades of 10 of the 12 FHLBs and the FHLB System's senior debt reflect a one-notch reduction in the U.S. sovereign rating. Before we downgraded the U.S., under our GRE criteria, 10 of the 12 FHLB banks were rated 'AAA', the same level as the U.S. sovereign because they have either 'aa+' or 'aa' stand-alone credit profiles and we classify them as having a very high likelihood of receiving support from the government if needed. The FHLBs of Chicago and Seattle were already rated 'AA+' prior to the  U.S. sovereign downgrade as they have lower stand-alone credit profiles ('aa-' and 'a+', respectively) than the other 10 FHLBs.

This is a firestorm in the making. There appears to be no place to hide and it in effect becomes another way to create inflation. Historically August seems to be a volatile month. I remember 1998 with LTCM and Russian and Thailand, since I was in both countries opening my companies.

Somehow we really need some leadership....

Saturday, August 6, 2011

The Arrogance of the Uninformed

There is a brief note in Science regarding Boy Scout Merit Badges. It states:

Results showed that although these requirements involved factual recall, personal understanding, and application of the material, evaluation and creativity, considered to be higher-level thinking skills, did not receive much emphasis. Although familiarity with scientific terms is not an unacceptable goal, providing only this in informal science experiences is a missed opportunity, and Scouting and other informal education programs will benefit from the addition of more requirements that use evaluation and creation.

Now this statement and the source paper, in my opinion, lacks any understanding of the Merit Badge process. You see I have counseled scouts on Plant Science merit badge. Now we do not get into plant genetics at the DNA level but we do perform some rather extensive field work. Here is where these shall I call them rather uniformed if not opinionated writers dramatically miss the point. In fact the authors do not appear to be scientists, they are what one calls educators, with apparently no professional scientific credentials. But alas they seem fit to opine.

First, the scouts are asked to perform the tasks by themselves with limited guidance. It is not memorization, not a class led discussion with returning the desired answer, not a multiple answer test, but real field work over an extended period of time. They learn about hybridizing, about plant color, about plant growth, about the cellular structure, and a variety of things regarding the hands-on nature of plant science. Hands on doing is an essential element of learning, so also is the personal pursuit.

Second, it is an individual accomplishment. They are personally motivated and personally required to reach a level of understanding based solely on what they can do. Frankly that is what research often is, a personal journey into knowledge. This is not the "team" solution we find pervasive in the country today. Einstein did not do his work with a group. His papers had one name as author, not dozens. If he were forced into the team world educators now praise it is doubtful that he would have accomplished anything. Learning to learn is the key, and individualism and individual achievement is also key.

Third, the badges are directed to a broad base of young men. Not just those in high achiever academies of the rich, but young men for whom this may very well be the first experience into science and what it means. It is an individual journey into discovery, discovery of what their life may lead them to. It is a journey of exploration and learning open to all. There is no barrier to entry.

This is not the organized educational system. This is for young men ages 11 through 14, grammar school young men, who would not find anything like this in their own schools. The Grammar school teachers of science today are often the detritus of the teaching profession, using picture books and generalizations lacking in any true science. Whereas the scouts have often professionals, mentors and role models of individuals competent in the specific area. Public school science instructors are generally poorly educated if at all. They "teach" to the text, in a read and respond manner. In my experience they are perniciously ignorant. That is the comparison these authors seek?

Thus, I find this article not only lacking in any true understanding of what the process is but highly counterproductive and elitist. Elitist, however, based upon, in my opinion, the overt ignorance and prejudice of the authors. Now let me tell you how I really feel ......

By the way, the ones above are my merit badges from some 55 years ago! Stick that in your pipe and smoke it!

A Reminder

The above is the Philippines in December 1944. Today is the 65th anniversary of the dropping of the first nuclear weapon on Hiroshima. The damage above was done by Japan. In Manila the death toll was well above that of Hiroshima. One should always remember the destruction of total war. And avoid it. My father gave me this picture when he returned. A reminder of what we should avoid. Thus each year I believe the reminder is worth repeating.

How Bad Can You Get?

I just read a piece in the Washington Post. Essentially it blames the old folks for the current mess.

First, as we have been showing for a few years now, Medicare is a payment to the poor and a tax on those not so. I even gather that this was a discussion point in the Post.

But we’ve heard almost nothing of the main problem that makes the budget so intractable. It’s the elderly, stupid. 

Wrong. If all else fails look at the facts. Social Security is well funded and Medicare is really a payment system to the poor. You see those who make money still pay into Medicare after 65 and in fact they most likely are health and do not use the system!

This wonderful author then states:

Meanwhile, Social Security, Medicare, Medicaid and other retiree programs constitute roughly half of non-interest federal spending. 

Well, Medicare and Social Security are collecting massive amounts. Yet it has been Congress which has taken the money from the funds. The genius continues:

Older Americans do not intend to ruin America, but as a group, that’s what they’re about. On average, the federal government supports each American 65 and over by about $26,000 a year (about $14,000 through Social Security, $12,000 through Medicare). At 65, the average American will live almost 20 more years. 

Now to be correct, life span is to 82 not 85 and the $12,000 for Medicare is really $10,500. As for Social Security the average person will have contributed well beyond any payout they receive. Remember it is 14% of their gross salary for say 45 years of their life. For that they get $15,000 per year. Do the math you wizard of Washington, it will not hold up in court! As for Medicare, I did the math, yes for the poor it is a subsidy, for those otherwise it is a tax which keeps on taking!

In my opinion this article starts a real age war! Why not let Granny just die now Sir! You have her money, so take it and redistribute it to those who have contributed nothing! This is the Washington that will drive the United States to the bottom.

Do we need reform, yes. What is it? First, take Social Security out of the hands of the Government, let the money be handled elsewhere. Do not let Congress spend it!

Second, as for Medicare, increase the rate to 4% and move the age to 10 to 12 years before the average death, so if we use 82, we move it to 70 or 72 over the next ten years. Also Medicare should really focus on catastrophic coverage, not every last thing. Yet under the new health care law we have added everything and the kitchen sink to mandated coverage. Dumb.

But why blame those who in good faith contributed? Frankly they are also the ones who vote. In a frightful way this sounds a bit like Germany in the early 1930s, pick a group which is vulnerable and blame them for someone else's stupidity. This is really scary!

I remember walking around Munich and seeing remnants of the beer halls. Echos of the past now call out for the elimination of the elderly! The system is the problem, not a class of people who have little left to defend themselves!

And by the way, if you have $200,000 in cash at say 65, and the interest rate on a 10 year bond is 3%, you get $6,000 in interest. Rich, I think not!

Entering College Today

The NY Times has an interesting piece on students preparing to enter college via spending what appears to be exorbitant funds going places. For example:

....., an 18-year-old graduate of ....., spent the summer after his sophomore year studying Mandarin in Nanjing, China. The next year he was an intern at a market research firm in Shanghai. When it came time to write a personal statement for his college applications, those summers offered a lot of inspiration. 

When back at MIT in the early 60s the students were not Harvard, they were at best lower middle class, lots from New York, and they did what they did mostly on their own nickle.  You had a job in the summer and the money for the job paid for room and board, and even a little left over for books. The jobs were at factories, barrel factories were popular, no air conditioning, lots of sweat. You got to meet all sorts of people, immigrants who came here to make it, telling you in their highly accented speech how grateful they were to work besides a "college boy". They wanted their children to do the same.

We saw America, we also saw Poland, Ukraine, China, Hungary, from the perspective of the gratefulness of being in America.

But in the current story the students leave the US and understand cultures in some structured foreign environment. In my experience, having no structure, when I went and started businesses in 20 countries I had to understand them, I had to fit their culture. It was akin to spending the summer aboard a Greek freighter, not speaking a word of Greek.

The article continues:

For those who lack the means to pay for an essay-inspiring trip, at least one scholarship program exists to help. Ten 11th-grade New York City public school students won the ...., which entailed traveling around Italy for a month this summer to study the culture, philosophy and arts of the Renaissance. The students were required to keep diaries and write a final essay, which the foundation said would be used with their college applications. 

 Again, perhaps they would have been better off in the barrel factory, and if colleges looked to the self starters, value creators, which we seriously lack. That is one reason in my opinion that we have the S&P debacle. Colleges look for glitz, not substance, because those doing the looking in my opinion often do not have a clue of what creates real value.

My latest example is that for reasons too long to explain, I decided to take an Organic Chemistry course at the local New Jersey Community College. In applying, besides have a bit of an age discrimination hurdle, they only admitted students who graduated High School from 1981 thereafter, I found that the demanded my High School Transcript from the 1950s! My MIT degrees were worthless, the rules said they needed a High School Transcript! Now that is a small example of those making these decisions. And we should be worried about the country, and yes, they get tremendous salaries, great benefits, and fantastic pensions!

Friday, August 5, 2011

It's Happening: The Beginning of the End!

We have just been downgraded. The NY Times reports the following:

Standard & Poor’s removed the United States government from its list of risk-free borrowers on Friday night, citing concern about the rising burden of federal debt. The rating on the country’s long-term debt was lowered one notch, from AAA to AA+, with a negative outlook. 

 This by one of the entities who rated the junk mortgages as great has rated the US as negative and with future potential downgrades. This is what we get for having economists. They just was to spend more!

This is truly a sad day. Perhaps the voters may wake up. Perhaps not.

Google, Memory and the Academy

I wonder what some Greeks thought when Vergil wrote the Aeneid. Not that it was a rip off of Homer but is was written, on paper. Homer was memorized, and when spoken, was done in a poetic manner. For those few of us who studied Vergil, and had to translate him, we remember memorizing that introduction, in a sing song manner. But Rome wrote things, lots of things, and copied them again and again.

Arma virumque cano, Troiae qui primus ab oris
Italiam, fato profugus, Laviniaque venit
litora, multum ille et terris iactatus et alto
vi superum saevae memorem Iunonis ob iram;
multa quoque et bello passus, dum conderet urbem,     
inferretque deos Latio, genus unde Latinum,
Albanique patres, atque altae moenia Romae. 

Now this week in Science some researchers bemoan Google, as I suspect some Greeks bemoaned the Romans and their scribes. they state:

The advent of the Internet, with sophisticated algorithmic search engines, has made accessing information as easy as lifting a finger. No longer do we have to make costly efforts to find the  things we want. We can “Google” the old classmate, find articles online, or look up the actor who  was on the tip of our tongue. The results of four studies suggest that when faced with difficult  questions, people are primed to think about computers and that when people expect to have future  access to information, they have lower rates of recall of the information itself and enhanced recall instead for where to access it. The Internet has become a primary form of external or transactive memory, where information is stored collectively outside ourselves.

And they conclude:

We are becoming symbiotic with our computer tools, growing into interconnected systems that remember less by knowing information than by knowing where the information can be found. This gives us the ad- vantage of access to a vast range of information, although the disadvantages of being constantly “wired” are still being debated. It may be no more that nostalgia at this point, however, to wish we were less dependent on our gadgets. We have become dependent on them to the same degree we are dependent on all the knowledge we gain from our friends and co-workers—and lose if they are out of touch. The experience of losing our Internet connection becomes more and more like losing a friend. We must remain plugged into know what Google knows.

This may be some interesting bemusings that one may hear at a Cambridge coffee house, but frankly is in my opinion misses the mark by a galactic distance. One still remembers Planck's constant, the charge of an electron, the speed of light the length of a carbon bond and even the phone number of ones first girlfriend. Even though that number no longer works and even if it were 55 years ago! Will Google replace all that, hardly, it can enhance that.

A lawyer at trial cannot stop his cross to check a site, a surgeon cannot go check Google to see just where that Trigeminal nerve really goes, and many other things of this sort. Interesting bar talk, but research, in Science, peer reviewed!

Employment: No Real Change

The report today shows no real improvement. The 9.1% is most likely a sampling error from "no change at all" . The chart above shows that the percent employed included in base is still at 42% rather than the 45.5% under the past Administration. That means the unemployment using 2008 base is still above 12%.
This shows what is a true concern, that employment is barely keeping up with the growing employable base. As that grows we will see unemployment grow unless the Administration doctors the numbers again.

The above shows the effects of the changing base.

Thursday, August 4, 2011

Do Economists Ever Deal With the Facts?

I have found Rajan often an clear thinker and cogent arguer for generally good policies. However in a recent post I must differ. He states:

In truth, rising life expectancy and growing health-care costs mean that today's elderly have contributed only a fraction of what they expect to receive from Social Security and Medicare. The government made a mistake in the past by not raising taxes to finance these programs or reducing the benefits that they promised. Unless the growth of these entitlement programs is curbed now, today's young will pay dearly for that mistake, in the form of higher taxes now and lower benefits when they are old.

As we have shown time and time again his arguments are outright wrong for many. Not all, but many. The deal is those who were successful by their persistence and work ethic often pay for those who have done little or less. That seems to be the deal. There are those of us who pay more into Medicare every year after 65 than we may ever collect in our lifetime by benefits. Good living, good genes, whatever. Then there are those who are obese, smokers, drinkers, drug abusers, and bad genes who absorb the resources. 90% of Medicare goes to 10% of the beneficiaries. So Rajan should at least examine the data before spouting the line so many seem to have absorbed. My white paper from a couple of years ago and edited a couple of months ago is a good start. I know, I know, facts are often so difficult because they tend to destroy the myth of policy. But Rajan should remember all those engineers in the Chinese hierarchy, after all he did go to IIT (the one in India).

 Now a second point. He states:

Let's start with why the electorate is so polarized. There are two key divisive factors: incomes and age. Income inequality has been growing in the US over the last three decades largely because the labor market has increasingly demanded skills that the education system has been unable to supply. The everyday consequence for the middle class is a stagnant paycheck and growing employment insecurity, as the old economy of well-paying low-skilled jobs with good benefits withers away.

 It is not the educational system per se. It is the pandemic problem of the filling of primary and secondary education with union hacks, yes hacks. When I attended the first grade back in the 1940s we had 45 students per teacher. Today a primary teacher may have up to 10 but the teacher has a teaching aide, and almost unlimited breaks. We have see an 8 fold increase in teachers per student. In addition the standards have dropped like a brick. I hazard to say that less than 10% of the grammar school teachers know grammar! No less math and science. A high school graduate in 1940 was more educated than a college grad today! Frankly that is why we got through WW II.

The problem is increased expectations, and the assumption that the Government will provide. That assumption is under attack. As it should and must be.

Over the Edge Again?

In December 2008 we created our Baseline Portfolio. Basically it was a set of Blue Chip stocks in unrelated sectors with dividend yields each above 5.5% at the time. Above s the result of performance to date. Our annualized gain is still above 20% from that date but dropping fast as of today.
You can see some of the details above. Still there but dropping.
The above is the daily drop. Today we saw a 4% drop from two days ago. It is the largest drop since the March 2009 period. We believe we may be seeing another 2009 period as we indicated before.

Now the yield curve is flattened and dropped again. It is back to where we were a year ago. Surprising given the debt fiasco.

The spread in 30 year to 30 day is dropping again and it can be seen to be approaching what we saw a year ago as well.

The 3 month Treasury is approaching record lows but the spread is still higher than a year ago.

The above shows this a bit more clearer.

All in all there is a great deal of conflicting data. On Friday we should get the employment news. We await it.

Monday, August 1, 2011

Economics is Science? Huh!

In a recent Science article they speak of changes made in a questionnaire where there is phrasing allowing questioning of evolution.

They state:

For 2 decades, the survey has included two true-false statements: “Human beings, as we know them today, developed from earlier species of animals,” and “The universe began with a huge explosion.” Two expert panels assembled last year by NSF have suggested qualifying those statements with the phrases “According to evolutionary theory” and “According to astronomers.” The board has decided to ask NSF to give the new versions of the questions to half the respondents on its next survey and to analyze the results. 

The change infuriates Jon Miller, a science literacy expert at the University of Michigan, Ann Arbor, and architect of the original questionnaire, which is now used by several countries. “If you are altering the questions in that way, you are doing it for religious reasons,” he says. “We don't make statements like, ‘According to some economists, we had a recession’ or ‘According to the weatherman, we had a tsunami.’”  

Yes we do! Economics is at best a set of political philosophies shrouded in pseudo mathematics. Now I do not want to malign weathermen but they do not call tsunamis either, but that is a nit.

Now evolution can be shown through experiments, analysis, historical data, and on and on. I do a bit of it myself every time I dump daylilies on the hillside. You see the picture above is the result of natural selection, a few hybrids take over and reproduce stronger each time, filling up the hill side, so that centuries from now someone will ask where this new species cam from. Me! Now I am not a god or anything of the sort, I just facilitated a process of natural selection. And in a single decade we see the best coming out. Amazing.

Never see this with an economist, just look at the deficit debate! Perhaps we should just throw them out on the mountain side and see who survives! Frankly I would have used another example, even an alchemist!

Saving Capitalism: A Review

Saving Capitalism by Rappaoprt is an interesting book describing a key source for whay we are where we are now. There are always different sides of the equation but this specific side has substantial value.

People often do what you have asked them to do, so if you do not like the result examine what you asked for. That in a nutshell is the message of Rappaport and his book Saving Capitalism. The principle he rejects is the short term goals set for management and by which they produce their results, oftentimes at odds with what he sees as true value creation.

For Rappaport, value creation is based upon a discounted cash flow value looking forward ( see Valuation: Measuring and Managing the Value of Companies, 5th Edition by Koller et al). The audience for this work is the more general public and the arguments he makes add to the overall discussion the nation is having regarding changes we must make to our thinking of business, finance, and the economy. In general his arguments are compelling and build on the already recognized deficiencies of short term profit maximization.

One can conclude from the Rappaport model that if the investment bankers had to rely upon the performance of their deals, rather than obtain instant gratification, and if the banks had to live with their loans, rather than hand them off to the Government with no risk, then decisions would have been different. Rappaport clearly demonstrates that people are all too often great optimizers of the rules, and if the rules are wrong, they may very well not pay any attention until it is way too late.

For Rappaport value creation is determined via the discounted cash flow produced by the entity on a going forward basis. Value for Rappaport is not created by short term optimization. Let me give an example of how this had actually applied in the small. When I took over as COO of the cellular company at what was then NYNEX, now Verizon, the churn, or loss of customers, was about 8% per month. That meant we spent 26-28 days of sales just to remain where we were the last month. Why the churn? Simple, the goal was to get new customers, so the sales force got a commission for every new customer, as did the competition’s sales force!

The company thought that just motivating customer growth was the desired result because we wanted more customers. However, customers would sign up, receive a sign up. bonus themselves, and then in a few months switch to the competition. The sales forces on both sides benefitted, the customers benefitted, but the company, and in turn the shareholders paid a tremendous price. Simple solution, as Rappaport states, think long term and think cash flow. Pay the sales force a percent of the revenue from the customer over a reasonable lifetime, not all at once. Churn dropped to 2% and even lower and cash flow increased. That is Rappaport in the small.

Rappaport spends a good deal of time defining and discussing what he calls “short termism”, namely the principle of living quarter by quarter. He spends Chapters 1 through 4 demonstrating how this thinking precipitated the financial crisis and how infects the way business is conducted in both the corporate and financial world. Broadly speaking, it is this short term viewpoint which Rappaport argues drives the decisions which lead to what we see today in business and finance.

Taking actions to meet the quarter’s number is and has in many ways been the bane of managers for the past few decades. Accounting gimmicks and tricks have been applied to maximize returns. The second part of the book by Rappaport suggests ways to remedy the short term view, namely by using discounted cash flow metrics and managing on a truly forward looking basis. Rappaport spends a great deal of time on these topics in various business segments.

Value creation is the cornerstone of Rappaort’s view as it is introduced on p. xviii. By value he means, as one later learns, is the discounted cash flow, DCF, of the business on a going forward basis. In principle, he is correct, in practice this may be a bit more difficult to achieve.

Chapter 1 allows Rappaport to frame some of his discussion as the evolution from self invested entrepreneur to what he calls agency capitalism, the management of the large capital markets by a few who in turn are compensated on short term gains with no dependency on long term performance. There are some misconceptions in his footnotes however. On p. 17 he states that the bubble was somewhat debt independent.

In fact, as one who survived that bubble by not having debt, debt was key to that bubble as well. Telecom suppliers provided 125% to 150% financing of equipment, and the amount of high yield debt was explosive with no reasonable prospect of paying it off. The bubble lost almost $5 trillion in debt and equity value in less than a year. It was the same culprits then who came back in 2007-2008 with housing rather than fiber and Internet facades. In both cases, I believe identical cases, the bankers made their killing. In both cases trillions were lost.

Chapter 2 is a discussion of the recent collapse as per his view. He states on p. 34 that some independent directors had little if any knowledge of the financial concerns. Indeed if one knows some of the principals they were at best “fishing, drinking and smoking” buddies of the management. The problem all too often is that Boards are composed of controllable and socially acceptable and well paid members. Rappaport hits a very key point here. Boards are ultimately responsible, but all too often that are clueless and just along for the ride and to ensure the management gets compensated.

In Chapter 3 on p. 46 Rappaport finally describes his value as discounted cash flow. For the sophisticated reader they may have already jumped on it but for the general reader it may have been lost. But DCF is a truly valuable method except it suffers from three critical potential faults. First it assumes we can project future cash flows. That means revenue, expenses, capital plant, taxes and the like. Risky to do this well. Second it assumes we have a discounting factor, cost of capital. This also depends on capital structure, exogenous factors such as the risk free rate, perhaps no longer a Treasury rate. Third it depends on a terminal value. That factor often dominates the total value. Rappaport makes length and positive arguments on DCF shareholder value throughout Chapter 3 and his discussion is compelling and I believe correct. The short term view he decries is truly the basis of what got us where we are now.

In Chapter 4 Rappaport discusses the finance issues of his concerns. On p. 74 he makes the point of projecting cash flows. I believe he is right. Accounting is history, it just records what has happened. Finance is to some degree looking forward. As most entrepreneurs know who have investors, they always ask how one did last week, and how it compared to plan. It is the plan that they are looking towards, since it was the projections that management gave and it is the ability to meet the projections that are most important.

All too often as Rappaport decries we just look at accounting measures of how things were and not how they are supposed to be. On p. 79 he discusses the capital asset pricing model, CAPM, which incorporates an efficient market hypothesis, EMH. The problem here is that reality and perception may never real mash. There is the concept of the Rowe conjecture that looks at the alignment of the probability of the EMH actually being in play and the probability that people believe that the EMH is a reality. One sees as Rappaport describes that perhaps all the information is really NOT out there and that the EMH does not apply but that people believe it does, or vice versa.

Chapter 5 is an excellent discussion of what should be in the world of executive compensation. The same of course would apply to those in the financial sector. People should be compensated on the long term performance not on the short term.

In Chapter 6 Rappaport lays out several rules he sees as critical for long term management. There are 12 simple rules and each is worthy of a read by themselves. I believe that this Chapter will stimulate much productive discussion. The remaining two chapters bring his argument to completion.

Rappaport argues that Boards should take the long term view, the value creation perspective. However I feel that all too often that such a process is a bit too difficult, albeit worthy of great consideration. The Boards rely on management, and certain Boards are often nothing more than Management’s friends, so collusive behavior is rampant. Furthermore the creation of reliable DCF models requires substantial knowledge and understanding. They are not the simple acts of the accountant. They certainly go well beyond the ken of most Board members, especially those from the public or non-profit sector or academia.

DCF models require a true understanding of the business, in depth. Rappaport has done an excellent job on raising the issues but it is necessary to show how and by whom they can be carried out. Clearly the compensation consultants are generally clueless on this issue, which also goes to the heart of many of the problems facing Boards.

In summary, Rappaport has presented a very worthwhile contribution to a discussion on what should be done next. The recommendations are based upon a clear understanding and analysis of the crises we have just gone through, s crisis of short termism to use his phrase.

DISCLOSURE: The reviewer received a copy of the book from the publisher and was asked to review it for Amazon. There was no compensation provided nor any guidance regarding the review. These are the opinions solely of the author regarding this book based upon a reading of the book.