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Dear Lucy

I was recently introduced to the excellent writing of Lucy Kellaway, from the Financial Times. This post in Dear Lucy seems the appropriate way to introduce you to her writing...

"I have been a fund manager for 10 years and currently work for a large UK institution. The job is great: flexible and well-paid. My problem is that I genuinely don’t believe it is possible to do this job – outperforming other fund managers and equity indices - with any consistency. I believe the industry is based on the lie that fund managers add value through skill, rather than luck. This makes it hard for me to keep motivated. Should I move – even though I can’t think of anything else I want to do – or should I accept the idea that work is not meant to be meaningful? I am married, but have no children. Fund manager, male, 34"

Go look at this Link.

Is negative equity a problem?

The headlines are screaming at us about the cost of housing. This time it's not prices, but interest rates that are the focus. "Negative Equity" is a term increasingly being used - because while averages provide a still comforting mask, the reality is that a number of people are already in trouble.

There will be pain - and some people will lose their homes. It's important to qualify that, however. There will be some people forced out of home ownership into rented accomodation. Some of those people will lose money. Sadly, this is only natural.

To a greater or lesser degree this happens all the time. There is no God-given right to make money in property - although it will be reported that way by some. As a society we try to make sure everyone is housed - and the mechanisms that support that goal need to be prepared to be tested. But most people will cope. This will not be made easier by some of the screaming headlines. Let's examine some of the excesses.

Negative equity. In itself, this is not a problem. The problem is being able to service debt. Anyone who has ever bought a stereo or a car on finance has probably been in negative equity (the item is worth less than the finance outstanding) for the whole period of the loan. What counts, though, is whether they can make the payments.

Renters are hurting 'just-as-much' as landlords. Reported in the Herald. This is rubbish. Yes, rents are now rising. But the cost of renting a house, rather than buying one, is considerably lower.

One-sided reporting. House prices rising was a problem. House prices falling is a problem. When will a retail finance writer point out that this part of the cycle is as necessary as the last? When will someone say that as interest rates fall in a year to 18 months, then we'll have lower house prices and lower interest rates? Just as we had a mere 7 years ago.

The Mathematics of Cluedo

Actuaries and other more amateur number fans may enjoy Cleudo, sometimes known as Clue, the popular murder mystery game in more ways than the average Joe. I have just enjoyed the long weekend in part rediscovering this excellent game -- and even an effort to teach it to my two elder children (aged 7 and 5) which was not a total failure :-)

I quickly figured that mathematics could help. I started down the track of the grids used in popular paper based logic problems. The journey home gave me a better idea - look to the web - and was delighted to find this quote, and a feast of resources.

"Beginning in 2000, the University of Oregon gaming club began holding Clue/Cluedo games three nights a week for nearly a full year. Since most of the players were geeks who had a computer science background, What transpired was a brilliant 'arms race' with players devising new paper systems to get better and better at the game.

The strategies evolved, at first just writing a few known facts on the included detective sheet, but eventually several sheets of paper would be consumed as all players recorded every possible fact, drew every possible conclusion-- during the latter phases of the game, it was not uncommon for ten minutes to pass between suggestions, as players deduced as much as possible.  What started with the provided Clue Detectives Notepads transformed into elaborate custom-printed forms and finally into layers of transparencies so whole sets of data could be both view seperately and conjunctively.  Ultimately, players began simulating not only their own knowledge, but the potential knowledge of each of the other players, in order to avoid asking questions which would help other players. 

An art major become one of the most competitive players. Meanwhile, a true genius computer scientists would inevitably lapse into his explictive of choice, "rassin frassing", each game when he had 'proved' something he knew to be false, thereby signallying that he has made an error.  Another savant refused to use paper, but instead tried to read the faces of those around him to deduce the solution-- with astonishingly succesful results.  Finally, one player had a knack to correctly guess which of the 216 possible solutions was correct on her first suggestion. 

As the paper systems grew in complexity, it became increasingly apparent that the paper systems were both prone to errors and were incomplete.   Users of the systems would often make simple errors which would undermine their entire deductions.  Situations occured where the human players could see something was 'true' which the paper systems were unable to deduce.   All this begged the creation of a perfect and complete solver.  After six years, this is a dream which was finally realized."

Links to the Solver

Cheated or Credulous?

The investors in Blue Chip are, generally, probably right to be aggrieved. The managers of a company should make sure that shareholders bear the brunt of risks - not investors. Although this will depend on the nature of the investment, the amount of risk an investor expects to face should be clear to them - and where this is shared, then the demarcation lines should be known.

All that being said, reading the NZ Herald article from Monday provides some food for thought. Some of the investors must have been credulous, or happy enough to take big risks when the property market looked like a one way bet. Take the option to invest in an apartment which a Blue Chip company would then have the option to buy back just before completion of the development delivering a profit to the investor. Unless outright lies are being told - both verbally and in document - then some of these people were being pretty cheerful about the risks in the face of rising concern about the property market.

If, on the other hand, outright lies were told - and the documentation was solid - then why didn't the documents get read? Maybe here there is an option to pursue the sales people concerned - a hard sell and a dubious 'explanation' of complicated documentation can get in the way of the truth. I hope the investors group looks at this option closely.

Or, perhaps the documents were false too - in which case there may be grounds for the involvement of Police. If this is the case, then likewise, I hope the investors group looks hard at the evidence and the possibility of action.

The difficulty will be to sort the wheat from the chaff though. Some will have been subject to lies and deceit, some a 'hard sell', and some... just to their own desire for gain with disregard to the possible risks.

There will be plenty of direct investors in property who will be hung out to dry by the market - and the virtue of being direct investors means they will have no-one else to blame.

GDP per Capita Basis = US in recession

When looking at GDP per person - and you'd be forgiven for thinking, why don't we always do that - the US is already in recession, and has been for the last four quarters. Now that looks about right, given the general tenor of the news, mortgage arrears, non-farm payrolls and so forth. I'll see if I can look out some NZ GDP per capita figures to give us a local comparison. Link.

Universal Jokes

A typical Joe gets on a plane and finds himself seated next to a rather tired economist. He immediately turns to our hapless adherent of the dismal science and makes his move.

"You know," says Joe to the Economist "I've heard that flights will go quicker if you strike up a conversation with your fellow passenger. So let's talk."

The economist who had just opened his book, closes it slowly and says to Joe, "What would you like to discuss?"

"Oh, I don't know," says the guy, smiling. "How about the current financial crisis?"

"OK," says the economist. "That could be an interesting topic. But let me ask you a question first. A horse, a cow, and a deer all eat the same stuff -- grass. Yet the deer excretes little pellets, the cow turns out a flat patty, and the horse produces muffins of dried poop. Why do you suppose that is?"

Joe is dumbfounded. Finally he replies, "I haven't the slightest idea."

"So tell me," says the Economist "How is it that you feel qualified to discuss the current financial crisis when you don't know shit?"