Imagine that your stockbroker - or the friend who’s always giving you stock tips - called and told you he had come up with a new investment strategy. Price-to-earnings ratios, debt levels, management, competition, what the company makes, and how well it makes it, all those considerations go out the window. The new strategy is this: Invest in companies with names that are very easy to pronounce.

This would probably not strike you as a great idea. But, if recent research is to be believed, it might just be brilliant.

One of the hottest topics in psychology today is something called “cognitive fluency.” Cognitive fluency is simply a measure of how easy it is to think about something, and it turns out that people prefer things that are easy to think about to those that are hard. On the face of it, it’s a rather intuitive idea. But psychologists are only beginning to uncover the surprising extent to which fluency guides our thinking, and in situations where we have no idea it is at work.

{ Boston Globe | Continue reading | Thanks James! }

photo { Helmut Newton, Nova magazine, Paris, 1973 }

When does a potential crisis become an actual crisis, and how and why does it happen? Why did most everyone believe there were no problems in the US (or Japanese or European or British) economies in 2006? Yet now we are mired in a very difficult situation. “The subprime problem will be contained,” said now controversially confirmed Fed Chairman Bernanke, just months before the implosion and significant Fed intervention. I have just returned from Europe, and the discussion often turned to the potential of a crisis in the Eurozone if Greece defaults. Plus, we take a look at the very positive US GDP numbers released this morning. Are we finally back to the Old Normal? There’s just so much to talk about. (…)

Before we get into the main discussion point, let me briefly comment on today’s GDP numbers, which came in at an amazingly strong 5.7% growth rate. While that is stronger than I thought it would be (I said 4-5%), there are reasons to be cautious before we sound the “all clear” bell.

First, over 60% (3.7%) of the growth came from inventory rebuilding, as opposed to just 0.7% in the third quarter. If you examine the numbers, you find that inventories had dropped below sales, so a buildup was needed. Increasing inventories add to GDP, while, counterintuitively, sales from inventory decrease GDP. Businesses are just adjusting to the New Normal level of sales. I expect further inventory build-up in the next two quarters, although not at this level, and then we level off the latter half of the year.

While rebuilding inventories is a very good thing, that growth will only continue if sales grow. Otherwise inventories will find the level of the New Normal and stop growing. And if you look at consumer spending in the data, you find that it actually declined in the 4th quarter, both annually and from the previous quarter. “Domestic demand” declined from 2.3% in the third quarter to only 1.7% in the fourth quarter. Part of that is clearly the absence of “Cash for Clunkers,” but even so that is not a sign of economic strength.

Second, as my friend David Rosenberg pointed out, imports fell over the 4th quarter. Usually in a heavy inventory-rebuilding cycle, imports rise because a portion of the materials businesses need to build their own products comes from foreign sources. Thus the drop in imports is most unusual. Falling imports, which is a sign of economic retrenching, also increases the statistical GDP number.

Third, I have seen no analysis (yet) on the impact of the stimulus spending, but it was 90% of the growth in the third quarter, or a little less than 2%.

Fourth (and quoting David): “… if you believe the GDP data - remember, there are more revisions to come - then you de facto must be of the view that productivity growth is soaring at over a 6% annual rate. No doubt productivity is rising - just look at the never-ending slate of layoff announcements. But we came off a cycle with no technological advance and no capital deepening, so it is hard to believe that productivity at this time is growing at a pace that is four times the historical norm. Sorry, but we’re not buyers of that view. In the fourth quarter, aggregate private hours worked contracted at a 0.5% annual rate and what we can tell you is that such a decline in labor input has never before, scanning over 50 years of data, coincided with a GDP headline this good.

“Normally, GDP growth is 1.7% when hours worked is this weak, and that is exactly the trend that was depicted this week in the release of the Chicago Fed’s National Activity Index, which was widely ignored. On the flip side, when we have in the past seen GDP growth come in at or near a 5.7% annual rate, what is typical is that hours worked grows at a 3.7% rate. No matter how you slice it, the GDP number today represented not just a rare but an unprecedented event, and as such, we are willing to treat the report with an entire saltshaker - a few grains won’t do.”

Finally, remember that third-quarter GDP was revised downward by over 30%, from 3.5% to just 2.2% only 60 days later. (There is the first release, to be followed by revisions over the next two months.) The first release is based on a lot of estimates, otherwise known as guesswork. The fourth-quarter number is likely to be revised down as well.

Unemployment rose by several hundred thousand jobs in the fourth quarter, and if you look at some surveys, it approached 500,000. That is hardly consistent with a 5.7% growth rate. Further, sales taxes and income-tax receipts are still falling. As I said last year that it would be, this is a Statistical Recovery. When unemployment is rising, it is hard to talk of real recovery. Without the stimulus in the latter half of the year, growth would be much slower.

So should we, as Paul Krugman suggests, spend another trillion in stimulus if it helps growth? No, because, as I have written for a very long time, and will focus on in future weeks, increased deficits and rising debt-to-GDP is a long-term losing proposition. It simply puts off what will be a reckoning that will be even worse, with yet higher debt levels. You cannot borrow your way out of a debt crisis. (…)

Now, there are bullish voices telling us that things are headed back to normal. Mainstream forecasts for GDP growth this year are quite robust, north of 4% for the year, based on evidence from past recoveries. However, the underlying fundamentals of a banking crisis are far different from those of a typical business-cycle recession, as Reinhart and Rogoff’s work so clearly reveals. It typically takes years to work off excess leverage in a banking crisis, with unemployment often rising for 4 years running. We will look at the evidence in coming weeks.

{ John Mauldin newsletter, January 29, 2010 | PDF | Continue reading | Read more: A Bubble in Search of a Pin }

photo { Alex Gaidouk }

The economist Jovanovic wrote, about a quarter of a century ago, “efficient firms grow and survive; inefficient firms decline and fail”. What he meant is that the market is Darwinian; it will rule out the least efficient firms, with habits and practices that make them perform comparatively badly, and it will make sure efficient firms prosper, so that only good business practices prevail.

Yeah right.

When you look around you, in the world of business, one sometimes can’t help wonder where Darwin went wrong… How come we see so many firms that drive us up the wall, how come we see silly business practices persist (excessive risk taking, dubious governance mechanisms, corporate sexism, grey suits and ties to name an eclectic few), and how come so many - sometimes well-educated and intelligent - people continue to have an almost unshakable belief that the market really is efficient, and that it will make the best firms prevail if you just give it time?

{ Freek Vermeulen | Continue reading }

The heyday for nanotech VC [Venture Capital] likely saw its peak in 2008, when overall investment reached $1.4 billion. Last year, the sector raised only $792 million, signifying a 42% decline from 2008. But while overall nano VC backing is down, it’s not out, according to a new report from Lux Research. Investment in nano-driven healthcare and life sciences increased last year at the same rate that overall nanotech VC dropped — 42%. These two segments attracted $404 million last year, and are likely to lead VC investments in nano for the near future.

{ Lux Research/RD mag | Continue reading }

related { Paul Graham, essayist, programmer and partner in the y-combinator talks with EconTalk host Russ Roberts about start-ups, innovation, and creativity. }

{ Skimmer found Dec. 6, 2009, attached to the front of a Citibank ATM in Woodland Hills, Calif. A skimmer is a device made to be affixed to the mouth of an ATM and secretly swipe credit and debit card information when bank customers slip their cards into the machines to pull out money. | Krebs on Security | more }

Copyright infringement has stirred the souls of artists and publishers since the time of Charles Dickens, who went to the United States in 1842 to ask the Americans to stop pirating his works.

His books were being reprinted there without his receiving a penny, but the Americans told him to jump in the lake.

How the world has changed. Now America’s a bastion for the defence of copyright and the country that once rejected international copyright laws is relentless in enforcing them.

However, 2009 might have marked the year when the enforcers lost valuable ground. (…)

Technology has forced the change, one in which there is no turning back.

{ National Post | Continue reading }

related { confessions of a book pirate }

{ For almost three years now, this has been Ben Huh [the 32-year-old founder of the humor-blog startup Cheezburger Network]’s life: to pore over millions of JPEGs and YouTube clips in search of Internet memes — those absurd running gags that hatch and proliferate on the Web seemingly overnight — and figure out which of these quick-hit laughs might yield long-term profits. | Wired | Full story }

It should come to no surprise that restaurant owners adjust their menus to increase check totals overall and to promote the items that bring in the most profit. We told you earlier today that when there were no dollar signs on the menu, customers spent more.

As Dave Pasegic of the Restaurant Resource Group notes, a menu …

is the only piece of printed advertising that you are virtually 100 percent sure will be read by the guest. Once placed in the guest’s hand, it can directly influence not only what they will order, but ultimately how much they will spend.

And the strategies used to promote high-profit items are very intriguing.

People don’t read menus from top to bottom — or at least, their gaze doesn’t necessarily linger at the top. For example ….

… the National Restaurant Association recommends that chefs place the dishes they want to sell on the center of the inside right page of their menu.

{ Baltimore Sun | Continue reading }

photo { Terry Richardson }

A paper by Mark Grinblatt and two Finnish guys whose names I can’t pronounce (Linnainmaa & Keloharju), took data from Finnish military IQ tests, and combined them with transactional data on the Helsinki Stock Exchange. The paper is cleanly titled, “Do Smart Investors Outperform Dumb Investors?”

From the abstract:

This study analyzes whether high IQ investors exhibit superior investment performance. It combines equity return, trade, and limit order book data with two decades of scores from an intelligence test administered to nearly every Finnish male of draft age. Controlling for wealth, trading frequency, age, and determinants of the cross-section of stock returns on each day, we find that high IQ investors exhibit superior stock-picking skills, particularly for purchases, which earn up to 11% more per year than the purchases of below average IQ nvestors.

{ Falken Blog | Continue reading }

photo { Justine Reyes }

The art boom of 2004-07 saw such staggering growth, particularly in contemporary art, that it is hardly surprising that art is increasingly being commoditised, bundled into funds and flagged up as an alternative asset class.

But while most people can recognise a Warhol or a Picasso at 10 paces, they have far less knowledge of the complex issues inherent in trading something that is almost always heterogeneous, in an opaque and unregulated market. (…)

The editor of this book, Clare McAndrew (…) makes the fundamental point that “one of the most important economic features of the market is that it is essentially supply-driven … increased demand … cannot necessarily increase supply … and instead elevates prices”. (…)

Moreover, how do you assess the price of a painting when four Picasso portraits of Dora Maar, all from the 1940s and of comparable size, can sell for between $4.5m and $85m within a three-year period?

{ Financial Times | Continue reading }

In the 19th and 20th centuries we made stuff: corn and steel and trucks. Now, we make protocols: sets of instructions. A software program is a protocol for organizing information. A new drug is a protocol for organizing chemicals. Wal-Mart produces protocols for moving and marketing consumer goods. Even when you are buying a car, you are mostly paying for the knowledge embedded in its design, not the metal and glass.

A protocol economy has very different properties than a physical stuff economy. For example, you and I can’t use the same piece of metal at the same time. But you and I can use the same software program at the same time. Physical stuff is subject to the laws of scarcity: you can use up your timber. But it’s hard to use up a good idea. Prices for material goods tend toward equilibrium, depending on supply and demand. Equilibrium doesn’t really apply to the market for new ideas.

{ David Brooks/NY Times | Continue reading }

Swinging has taken on a key role among contemporary sexual customs, consequently constituting the subject matter of various contributions in the fields of psychology, sociology and other social sciences. However, in spite of the constant increase in the number of couples involved and in the economic relevance of this phenomenon, to the best of my knowledge no article on the topic has yet appeared in economics journals. The aim of this paper is to cast light on swinging, both empirically and theoretically.

On the empirical side, the paper describes what swinger is, discusses the economic relevance of the phenomenon and singles out the main characteristics of swingers’ behavior. To this end, the Italian situation has been considered as a type of case study. On the theoretical side, the paper proposes some preliminary assessments of the causes and consequences of swinger couples’ behavior. In this respect, some contributions on two-sided markets, hedonic adaptation approaches and equilibrium matching models have proved particularly useful.

{ Fabio D’Orlando, Swinger Economics, 2009 | via Perfect Substitute | with link to PDF }

polaroid { Dash Snow }

While I am not a fan of most big firm fundamental analysts, over the years, Merrill Lynch has had some sharp guys in their Chief Strategist/Economist positions. (…)

2. Excesses in one direction will lead to an opposite excess in the other direction.

3. There are no new eras – excesses are never permanent.

4. Exponential rising and falling markets usually go further than you think.

5. The public buys the most at the top and the least at the bottom.


{ Lessons from Merrill Lynch | via Barry Ritholtz | Continue reading }

{ A Billboard analysis of 2009 SoundScan data shows a digital slowdown has arrived. In terms percentage and unit change, digital sales growth slowed immensely last year after three years of steady gains. As the graph below shows, annual changes in digital album and track sales have fallen sharply in the last two years. In other words, there are fewer additional tracks and digital albums purchased each year. | Billboard | Continue reading }

The number of visitors to New York City fell last year for the first time since 2001, but declines in tourism elsewhere across the United States made it the most popular destination in the country for the first time in almost two decades, tourism officials said Monday. (…)

Other hot spots were hit harder, making New York America’s No. 1 destination for the first time since 1990, the mayor said. For nearly two decades, that title was held by either Las Vegas or Orlando.

{ Washington Post | Continue reading }

photo { Alex Tehrani }

Bananas are just a fruit, how are they considered a global issue?

Although bananas may only look like a fruit, they represent a wide variety of environmental, economic, social, and political problems. The banana trade symbolizes economic imperialism, injustices in the global trade market, and the globalization of the agricultural economy. Bananas are also number four on the list of staple crops in the world and one of the biggest profit makers in supermarkets, making them critical for economic and global food security. As one of the first tropical fruits to be exported, bananas were a cheap way to bring “the tropics” to North America and Europe. Bananas have become such a common, inexpensive grocery item that we often forget where they come from and how they got here.

{ The Science Creative Quaterly | Continue reading }

related { Why we slip }

A year ago, we planned to do the entire construction of our new home in 12 months. Everyone told us it was an impossible deadline. Well, almost everyone: Our builder told us from day one that we would be hosting our family in the new home on Christmas day. We didn’t know if he was the last optimist in the world or the best builder in the universe. But we liked his
style.

There have been complications along the way. Man, have there been complications. Every step has been like planning a walk on Mars. For example, the power company wouldn’t give us electricity until the city’s
building inspector approved the home for occupancy. And the building inspector wouldn’t approve the home until the power was on. (Huh?) Now multiply that problem times the 400-or-so people who worked on the project, either directly or indirectly. And imagine Shelly and me trying to pick everything from the color of the outlets to the curvy shape on the top of the baseboards.

For the past month, dust was literally rising from the construction zone. Workers were on top of each other. Our builder, who is the most gifted project manager I have ever witnessed, was solving a seemingly unsolvable problem every ten minutes. All knowledgeable observers told us we wouldn’t be in by Christmas. It simply wasn’t possible. It wasn’t even close to possible.

We scheduled the movers for the weekend before Christmas, and e-mailed party invitations to family members for Christmas eve. We didn’t want our builder to be the last optimist in the world.

Ten days ago, we didn’t have a driveway. Rain was forecast. Lots of it. The sky turned grey. Neighbors saw worker’s trucks lined around the block. They knew we were serious about getting in by Christmas. They also knew it was impossible. The rain alone would be enough to stop us. You can’t move
furniture over mud. You need a driveway.

We started packing our boxes.

The rain came. The driveway guys had huge plastic tarps. They worked between wet spells. The sound of drilling, sawing, and some of the most creative cussing you have ever heard emanated from the property. I guess no one told the crew working on the project that finishing by Christmas was impossible.

About a week ago, in the evening, I got a voice mail from our builder, Dave. He said, in construction lingo, that the panel was hot. We had power. It was the last major obstacle to occupancy. Inspections and approvals would follow quickly.

I can’t fully describe how the news made me feel. It was powerful. When the house became part of the electrical grid, it was if it became alive. The HVAC units rumbled and the structure breathed. Warm water circulated throughout the floors of the home to keep it at the perfect temperature. Soon after, the equipment rack in the wiring closet lit up, and the house had a brain. The brain connected to the Internet and became part of the world. It was a stucco baby delivered by 400 doctors. (…)

The movers estimated that we had 17,000 pounds of furniture and boxes to move from our old home and my old office. We thought we might have time to unpack some of them before our 35 relatives arrived and wondered what they were going to eat for Christmas Eve. We would need to lift and push and pull that 17,000 pounds ourselves about three more times after it got inside the house, and we needed to do it over a weekend. It was clearly an impossible task. Then Shelly told me that we were going to get a Christmas tree and decorate that too. That’s how we roll. If it doesn’t seem at least a little bit impossible, we’re not interested.

{ Scott Adams | Continue reading }

For someone who remembers the old days, the food is the most startling thing about modern England. English food used to be deservedly famous for its awfulness–greasy fish and chips, gelatinous pork pies, and dishwater coffee. Now [in 1998] it is not only easy to do much better, but traditionally terrible English meals have even become hard to find. What happened?

Maybe the first question is how English cooking got to be so bad in the first place. A good guess is that the country’s early industrialization and urbanization was the culprit. Millions of people moved rapidly off the land and away from access to traditional ingredients. Worse, they did so at a time when the technology of urban food supply was still primitive: Victorian London already had well over a million people, but most of its food came in by horse-drawn barge. And so ordinary people, and even the middle classes, were forced into a cuisine based on canned goods (mushy peas!), preserved meats (hence those pies), and root vegetables that didn’t need refrigeration (e.g. potatoes, which explain the chips).

But why did the food stay so bad after refrigerated railroad cars and ships, frozen foods (better than canned, anyway), and eventually air-freight deliveries of fresh fish and vegetables had become available? Now we’re talking about economics–and about the limits of conventional economic theory. For the answer is surely that by the time it became possible for urban Britons to eat decently, they no longer knew the difference. The appreciation of good food is, quite literally, an acquired taste–but because your typical Englishman, circa, say, 1975, had never had a really good meal, he didn’t demand one. And because consumers didn’t demand good food, they didn’t get it. Even then there were surely some people who would have liked better, just not enough to provide a critical mass.

And then things changed. Partly this may have been the result of immigration. (Although earlier waves of immigrants simply adapted to English standards–I remember visiting one fairly expensive London Italian restaurant in 1983 that advised diners to call in advance if they wanted their pasta freshly cooked.) Growing affluence and the overseas vacations it made possible may have been more important–how can you keep them eating bangers once they’ve had foie gras? But at a certain point the process became self-reinforcing: Enough people knew what good food tasted like that stores and restaurants began providing it–and that allowed even more people to acquire civilized taste buds.

So what does all this have to do with economics? Well, the whole point of a market system is supposed to be that it serves consumers, providing us with what we want and thereby maximizing our collective welfare. But the history of English food suggests that even on so basic a matter as eating, a free-market economy can get trapped for an extended period in a bad equilibrium in which good things are not demanded because they have never been supplied, and are not supplied because not enough people demand them.

{ Paul Krugman, Supply, demand, and English food, 1998 | more }

The real reason, I believe, most wealth is acquired is to gain status. You want to spend money, not just to obtain the material objects, but to signal to everyone else that you have the power to obtain them.

The desire to own doesn’t come just from intrinsic wants, but from what our friends want, and what society tells us we “should” have.

People tend to ignore the status benefits of wealth. Most obviously because seeking status is a low-status behavior. Anyone seen grubbing for fame or new toys to impress their friends becomes less impressive.

As a result, I believe many people delude themselves that they want material possessions for intrinsic reasons. This is an unconscious effort to seek material wealth for purely status-related motives, and at the same time, not appear interested in grubbing for status.

{ Scott H. Young | Continue reading }

Advertising is destroying society, according to a new report from thinktank the New Economics Foundation.

The report, which compares the impact on society of groups of people doing six different jobs, concludes that advertising “can create insatiable aspirations, fuelling feelings of dissatisfaction, inadequacy and stress” among the population.

It concludes that ad executives, which it says earn “between £50,000 and £12 million”, “destroy £11 of value for every pound of value they create” - almost exactly the reverse of a hospital cleaner.

{ Campaign | Continue reading }

photo { Maciek Kobielski }