Brickbat: Taking the Long Way Home

Columbus, Ohio,
police have charged school bus driver Tia Denton with operating a
vehicle while intoxicated. School officials became concerned when
Denton was late dropping off elementary
school students
. They turned on her bus’s GPS tracking device
and saw she was missing stops. Meanwhile, someone called 911 after
seeing her driving the bus erratically. Police say when she stopped
Denton had an open container on the bus and blew almost three times
the legal limit when they gave her a breath test.

from Hit & Run http://reason.com/blog/2013/12/06/brickbat-taking-the-long-way-home
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Potato Juice Just Got Upped

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The world has changed immensely and there were once things that were sacrilegiously respected. But, that’s no longer the case. The Chinese were always the baddies ready to overrun us and the dangers came from the East behind the Iron Curtain that had been drawn, leaving the Russians in the dark, while the West went on living the high-life as if it were the roaring twenties still. Now we know that was all a lie. It’s the USA that spies on people while the Chinese criticize the lack of democracy in our shamelessly hopeless quest for an image and a place in the expanding world that is leaving little room for us as we elbow and vie for a place amongst the crowd. The Russians were once notorious drunks, boozing on the potato juice like Bob Marley on weed on a summer’s day where there was no woman, no cry. Now, that is set to change. The Russian government has suddenly come to the conclusion that alcohol is bad for your health and they need to cut down on the hangover treatment. Once upon a time it was if you can’t beat ‘em, join ‘em. Now, the Russians are following suit and burning age-old traditions of vodka boozers, bringing them in line with prohibitionist tea-totalers.

That’s the idea anyhow!

Vodka prices set to increase


Vodka prices set to increase

Vodka

  • Vodka is set to increase in price between January 2014 and August that same year by at least 30%.
  • That means that the cheapest vodka on sale in Russia will go from 170 rubles to 200 on January 1st 2014.
  • It will then increase to 220 rubles in August 2014.
  • That’s the equivalent of $6.65.
  • There is also talk of actually increasing the legal age to purchase alcohol in Russia (which currently stands at 18 years of age) to 21 years of age.
  • According to recent studies that have been carried out alcohol consumption is actually waning in Russia and has been for a number of years now.
  • However, there are some 30% of deaths that are linked every year to alcohol consumption and abuse.
  • The average age of Russian males is 62.8 today and only 76.1 for females.
  • Russia has a surprisingly large disparity between males and females (in fact, the largest in the world).
  • The World Health Organization says that this is primarily due to alcohol consumption.
  • Annual per-capita consumption of alcohol stands at 15.76 liters.
  • 0.4% of the population died from accidental alcohol poisoning in 2012. But, the number of deaths linked as a primary or secondary source to alcohol in Russia is estimated to be much greater.

Remember Boris Yeltsin was asked to be the ambassador for Evian, the drinking water. He declined. Had he accepted he would have made a mint! People love iconic figures that don’t have anything to do with the brand they are selling and Boris probably didn’t touch a drop of the stuff (i.e. water!).

But, to what extent will making alcohol more expensive actually eradicate the problem. Don’t people continue smoking when the prices go up? Don’t they just end up buying their smokes on the black market? Increasing the price of alcohol in Russia was tested in 2010, but it just meant that people started distilling their own vodka in the back bedrooms of their apartments in Russia. That just leads to uncontrollable dangers and even greater problems.

The proof of the pudding will be in the eating (or rather the drinking, in this particular case). We shall see if there will be no woman, no cry. No vodka, no boozing.

Will the Russians be crying over their vodka?


Will the Russians be crying over their vodka?

Maybe Bob Marley was right after all when he sang:

Said said

Said I remember when we used to sit

In the government yard in Trenchtown

Oba, ob-serving the hypocrites

As they would mingle with the good people we meet

Good friends we have had, oh good friends we’ve lost along the way

In this bright future you can’t forget your past

So dry your tears I say

He’s was pretty visionary even back then; he got the first syllable of the President rightat least “Oba, ob-serving the hypocrites’. It’s the weed that must have made him predict the future. Good on ya, Bob. The future might be bright, but we always forget the past.

The Russians will be doing cold Turkey with their price increases on the sale of Vodka.

Will it lead to a change in the consumption habits of the masses? Doubtful! You can’t teach an old dog new tricks, they always used to say, didn’t they? Does that still stand?

ribe to get what you wanted?

Originally posted: Potato Juice Just Got Upped

 Government: Byword for Corruption | Getting Ready for the Big One: February 2014 | Pornvestments | The Stooges are Running the Show, Obama |  Banks: The Right Thing to Do | Bitcoin Bonanza | The Super Rich Deprive Us of Fundamental Rights |  Whining for Wine |Cost of Living Not High Enough in EU | Record Levels of Currency Reserv
es Will Hit Hard
 | 

 

 Indian Inflation: Out of Control? | Greenspan Maps a Territory Gold Rush or Just a Streak? | Obama’s Obamacare: Double Jinx | Financial Markets: Negating the Laws of Gravity  |Blatant Housing-Bubble: Stating the Obvious | Let’s Downgrade S&P, Moody’s and Fitch For Once | US Still Living on Borrowed Time | (In)Direct Slavery: We’re All Guilty |

Technical Analysis: Bear Expanding Triangle | Bull Expanding Triangle | Bull Falling Wedge Bear Rising Wedge High & Tight Flag 


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/AgJjkh_cfhE/story01.htm Pivotfarm

Japanese Bonds Tumble Most In 3 Months As Ito Says GPIF Should Cut Holdings

JGB Futures prices are dropping in a manner eerily reminiscent of the May period of debacle before the BoJ started to regain control. The catalyst for today’s biggest bond price drop in 3 months is Takatoshi Ito’s comments demanding the Government Pension fund starting greatly rotating from bonds to stocks:

  • *JAPAN’S GPIF NEEDS TO START SELLING BONDS NOW, ITO SAYS
  • *GPIF SHOULD REDUCE LOCAL BONDS TO AS LITTLE AS 35%, ITO SAYS
  • *GPIF SHOULD RAISE JAPAN STOCK HOLDINGS TO 18% NOW, ITO SAYS

Stocks bounced higher initially but are losing most of those gains as bonds hit low prices of the session (and fears re-arise that the BoJ is not in total control after all). As we warned before, the JGB market is “dead” for all intent and purpose and there is simply not enough liquidity to support any significant selling pressure.

JGBs starting to look a lot like May’s debacle…


 

and intrday as the Nikkei collapses so bonds are now following suit…

 

It’s deja vu all over again as we have suffered weeks of daily jawboning the JPY lower (and stocks higher) and now comes the JGB Halts…


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/eUFoqEsuhcM/story01.htm Tyler Durden

Donate to Reason! Because What Other Magazine Was Interviewing Eldridge Cleaver About Nelson Mandela in 1986?

Mark Skousen sighting! |||We’re finishing up Day Two of Reason’s annual
webathon, in which we
ask our humble, disloyal, and rakishly attractive readers to
toss a few
dollars
or
Bitcoins
in our cup so that we can bring you even more
hard-hitting, intellectually engaging journalism advancing the
cause of Free Minds and Free Markets. We’re more than halfway to
our
new goal of $150,000
for the week, so please make your tax-deductible
donation
right the hell now!

Don’t know about you, but I’ve been spending this death-day of
Nelson
Mandela
–one of Reason’s “35
Heroes of Freedom
” in our 35th anniversary issue 10 years
ago—re-living the anti-apartheid politics and controversies of
mid-1980s America, when the protest kids were building
pro-divestment shantytowns, William F. Buckley was writing about
how
Mandela belonged in his jail cell
, and Ronald Reagan was trying
(and ultimately failing)
to
find wiggle room
between rhetorical anti-racism and practical
anti-communism. (As in many things Reagan, checking the original
video is always a fascinating
trip
.)

It’s hard to exaggerate just how massive and distorting was the
Cold War lens through which we all inevitably judged—and often
affected the outcomes of—every faraway controversy. The apartheid
struggle was a proxy war of communism vs. capitalism, Soviets vs.
Americans, and for many of the most serious proxy warriors, it was
more important that Mandela was on the wrong side of the divide,
and that the African National Congress mixed some communism and
violence with its anti-totalitarianism. Sure, he was a political
prisoner of a horridly unjust regime, but the man sometimes talked
about nationalizing factories!

Seriously, go watch that C-SPAN video. |||I was trying to put into words just how
wrong I find that approach, then and now, but then I conducted a
“Nelson Mandela” search in the Reason
archive
, and discovered that former Black Panther Eldridge
Cleaver said it much better, in a fascinating cover interview he
gave to Lynn Scarlett and Bill Kaufmann in 1986. Relevant
excerpt:

REASON: A lot of the Panthers seem to be, personally, pretty
strong individualists, like you, and yet you espoused revolutionary
socialism, collectivism. Did you notice the inconsistencies?

Cleaver: At the time I didn’t notice it. It’s one thing to study
Marxism on paper, living in a capitalistic country where you have
individual freedoms and so forth—you don’t really see the
relationship between the ideology and the form of government that
comes out of that ideology. Now, when I had a chance to go and live
in communist countries this individualism came into conflict with
the state apparatus, and that’s when I recoiled against it. But
when I was here I was looking at Marxism-Leninism as a weapon, as a
tool, to fight against the status quo, and you know, it’s just a
quality of human beings that when they are trying to tear something
down they don’t pay enough attention.

Just like in South Africa right now. They went to visit Nelson
Mandela, and they asked him, “Would you prefer apartheid to
communism?” And his attitude was, Communism is better than
apartheid. Because apartheid has him in prison and has had him in
prison for 20 years. Well, you get a guy in a communist country who
has been in prison there for 20 years, and he will tell you, “I
would rather live under apartheid,” because he could leave. But the
truth is that any form of constraint on our freedoms is not
acceptable.

You can't spell "Hayek" without "Hay"! |||And in fact Mandela cut it out
with the nationalization talk once he left jail, and will be
remembered for something almost no politicians outside of George
Washington are ever noted for: choosing not to exercise the power
he had. I think Hugh Hewitt said it most
succinctly today:

John Podhoretz tweeted out that Nelson Mandela could have chosen
to be–had the power to become–an even greater monster than Mugabe.

Instead, Mandela chose to become a saint. 
A great leader,
a great Christian, a great example. The world cannot honor him
enough as it should hope that all people offered the complete power
he was would act as he did.

Anyway, Reason’s long-form Q&As are my single favorite part
of the archive. We published an
eBook collection
a year ago of some of the classics:
Ronald Reagan
and
F.A. Hayek
in 1975, Timothy
Leary
in 1977, and more. Since our last webathon, we’ve
conducted some barn-burners with the likes of
George Will
,
Jeremy Scahill
, Judge
Alex Kozinski
and Rep.
Justin Amash
. Debating and testing out the philosophies and
tactics of public figures is one of our best tools for representing
your views in the national discussion. You know what makes that
easier to do? MONEY MAKES THAT EASIER TO DO.

So please donate whatever
you can, whenever you can (by which I mean THIS WEEK), and in the
comments tell us who we should interview in 2014!

from Hit & Run http://reason.com/blog/2013/12/05/donate-to-reason-because-what-other-maga
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Food Poverty In The UK Has Reached “Public Health Emergency” Levels

Submitted by Michael Krieger of Liberty Blitzkrieg blog,

This tragic story emanating from the UK just doesn’t seem to go away. Probably because it’s true. The food crisis across the pond first came to my attention in earnest back in October when the Red Cross announced it was set to provide food aid to the UK for the first time since World War II.

The latest twist to this unacceptable saga comes via a letter send by a group of doctors and senior academics from the Medical Research Council and two leading universities to the British Medical Journal calling it a “public healthy emergency” and accusing the government of covering up the problem by delaying a report on the subject.

 

More from The Independent:

Hunger in Britain has reached the level of a “public health emergency” and the Government may be covering up the extent to which austerity and welfare cuts are adding to the problem, leading experts have said.

 

In a letter to the British Medical Journal, a group of doctors and senior academics from the Medical Research Council and two leading universities said that the effect of Government policies on vulnerable people’s ability to afford food needed to be “urgently” monitored.

 

A surge in the number of people requiring emergency food aid, a decrease in the amount of calories consumed by British families, and a doubling of the number of malnutrition cases seen at English hospitals represent “all the signs of a public health emergency that could go unrecognised until it is too late to take preventative action,” they write.

 

Despite mounting evidence for a growing food poverty crisis in the UK, ministers maintain there is “no robust evidence” of a link between sweeping welfare reforms and a rise in the use of food banks. However, publication of research into the phenomenon, commissioned by the Government itself, has been delayed, amid speculation that the findings may prove embarrassing for ministers.

 

Chris Mould, chief executive of the Trussell Trust, the largest national food bank provider said that one in three of the 350,000 people who required a food bank hand-out this year were children.

 

In their letter, Dr Taylor-Robinson, Professor Whitehead and colleagues cite figures recently released by the Government which revealed a surge in the number of malnutrition cases diagnosed at English hospitals since the recession – up from 3,161 in 2008/09 to 5,499 in 2012/13. They also draw attention to reports from the Institute for Fiscal Studies which found a decrease in the number of calories purchased by families, as well as “substitution with unhealthier foods, especially in families with young children”.

Fortunately for the UK, they are blessed with a concentration of oligarchs with supposedly extraordinary capabilities so they should be able to sort this all out in now time. Isn’t that right Boris Johnson?

Full article here.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/fw_ywAG9iUs/story01.htm Tyler Durden

Food Poverty In The UK Has Reached "Public Health Emergency" Levels

Submitted by Michael Krieger of Liberty Blitzkrieg blog,

This tragic story emanating from the UK just doesn’t seem to go away. Probably because it’s true. The food crisis across the pond first came to my attention in earnest back in October when the Red Cross announced it was set to provide food aid to the UK for the first time since World War II.

The latest twist to this unacceptable saga comes via a letter send by a group of doctors and senior academics from the Medical Research Council and two leading universities to the British Medical Journal calling it a “public healthy emergency” and accusing the government of covering up the problem by delaying a report on the subject.

 

More from The Independent:

Hunger in Britain has reached the level of a “public health emergency” and the Government may be covering up the extent to which austerity and welfare cuts are adding to the problem, leading experts have said.

 

In a letter to the British Medical Journal, a group of doctors and senior academics from the Medical Research Council and two leading universities said that the effect of Government policies on vulnerable people’s ability to afford food needed to be “urgently” monitored.

 

A surge in the number of people requiring emergency food aid, a decrease in the amount of calories consumed by British families, and a doubling of the number of malnutrition cases seen at English hospitals represent “all the signs of a public health emergency that could go unrecognised until it is too late to take preventative action,” they write.

 

Despite mounting evidence for a growing food poverty crisis in the UK, ministers maintain there is “no robust evidence” of a link between sweeping welfare reforms and a rise in the use of food banks. However, publication of research into the phenomenon, commissioned by the Government itself, has been delayed, amid speculation that the findings may prove embarrassing for ministers.

 

Chris Mould, chief executive of the Trussell Trust, the largest national food bank provider said that one in three of the 350,000 people who required a food bank hand-out this year were children.

 

In their letter, Dr Taylor-Robinson, Professor Whitehead and colleagues cite figures recently released by the Government which revealed a surge in the number of malnutrition cases diagnosed at English hospitals since the recession – up from 3,161 in 2008/09 to 5,499 in 2012/13. They also draw attention to reports from the Institute for Fiscal Studies which found a decrease in the number of calories purchased by families, as well as “substitution with unhealthier foods, especially in families with young children”.

Fortunately for the UK, they are blessed with a concentration of oligarchs with supposedly extraordinary capabilities so they should be able to sort this all out in now time. Isn’t that right Boris Johnson?

Full article here.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/fw_ywAG9iUs/story01.htm Tyler Durden

Citi: Bitcoin Could Look Attractive To Reserve Managers As A Complement To Gold

Bitcoin and other Internet currencies are viewed by some as a Beanie baby fad and, as Citi's Steve Englander notes, by others as revolutionizing the financial system. Market acceptance of alternative currencies now looks to be growing a lot faster than the pace at which the supply of Bitcoin and Bitcoin wannabees is expanding the Internet money supply. The responses fell into five categories which we feel are well worth considering before trading or utilizing the digital currency (including Bitcoin's role in reserves management).

Englander's previous "Bitcoin as a currency" report generated a lot of comment. In the note, he argued that something as replicable as Bitcoin would generate a lot of imitators and that there was an infinite supply of Bitcoin-like competitors at low marginal cost. The responses generally fell into five categories:

Citi's Steve Englander Addresses 5 key responses to his previous more negative view on Bitcoin.

1)    Bitcoin is a generic payment system as much or more than a specific store of value and has tremendous advantages over current payments systems

2)    Its run-up in price represents dissatisfaction with central banks and money printing and the desire for a currency not driven by political opportunism

3)    First mover and networking economies of scale advantage will make Bitcoin and a couple of other internet moneys dominate Internet money in the future

4)    It can keep growing as long as there was a group of individuals and businesses willing to accept it

5)    It’s a tulip bubble and will collapse

 
1) Bitcoin as a payments vehicle

Many commented that Bitcoin was revolutionary as a payments mechanism, rather than as a store of value. The run-up in the price of Bitcoin could be viewed as speculative but its impact on the payments system would be durable, even if the price stabilized or fell.  Bitcoin’s competitors are credit card companies, wire transfer companies, weak fiat currencies and the like. Its advantage was that that its secure cryptography gives it strong security with respect to falsifying transactions and the transactions cost is almost zero.  So you would not have to hold Bitcoin in order to transact in it, at least not for very long.

Anonymity was also viewed as a plus by many, but whether governments can, will and should get some handle on internet transactions is under debate. Some also argue that its decentralization is an advantage. The ‘ledger’ that keeps track of Bitcoin transaction seems resistant to fraud, but there have been issues with Bitcoin exchanges and other elements of the transactions process.

Investors who focused on the potential Impact of Bitcoin on the payments system sometimes saw  the Bitcoin appreciation as a distraction. Bitcoin’s sharp price run-up is attracting more involvement now, but could be a disadvantage if price ever took a big fall.

2) Bitcoin as an alternative to fiat currencies

When G3 central banks are expanding their balance sheets like there is no tomorrow, you can understand the search for alternative stores of value. Some make a ‘wisdom of crowds’ argument that monetary management is likely to be better if it reflects the judgment of a diffuse constituency of users rather than a central bank governor or board. In short, this is the gold standard, but with a lot more portability and ability to transact. That said, Bitcoin protocols are decided by a group of programmers, and their goodwill is taken for granted.

To some investors it is perfectly clear that the combined judgments of individuals across the globe will be superior to the centralized policies made by central banks. To many holding this viewpoint, the ineptness of global central banks has made the bar for outperformance pretty low. This view  probably appeals to you if you think the panics of 1837, 1873 or 1893 were preferable to the Great Recession of 2008 (http://en.wikipedia.org/wiki/Panic_of_1837, http://en.wikipedia.org/wiki/Panic_of_1873, http://en.wikipedia.org/wiki/Panic_of_1893). In those times the absence of a central bank did not preclude private sector speculation from generating bubbles and panics. Admittedly, some of those panics started because of failed attempts to manipulate or corner certain markets, a feature Bitcoin’s proponents may feel it is immune to.

Bitcoin started as an experiment in a currency that was neither commodity-based nor backed by a governmental authority. There is a risk that participants in the Bitcoin ecosystem may become more self-interested over time, the way broadcast television started with Paddy Chayefsky and quickly morphed into The Beverley Hillbillies. Even now it is unclear to what degree the ‘miners’ out there should be seen as public servants.

We are left with the possibility that the properties of a Bitcoin ecosystem that comes to be driven by individual self-interest will differ from its intended properties. Greed and panic could enter as a significant part of the ecosystem. By contrast, central banks have a mandate to stabilize the economy and financial system, even if you see their performance as inept in practice. Nevertheless, it is not so obvious that a good system driven by individual self-interest will produce a more stable economic and financial system than an imperfect system of central banks trying to stabilize economic and financial markets. Many supporters of Bitcoin argue strongly that this is the case, however.

2a) Bitcoin as a reserves alternative

Reserve managers are likely wondering whether Bitcoin is the answer to their most perplexing problem – where to find a pure store of value, how to avoid currencies backed by erratic central banks  and how to dethrone the USD from its perch in the international monetary system. Bitcoin is much more interesting than the IMF’s SDRs from a reserve manager perspective because it is independent of major currencies. The reserve manager operational problem is two-fold: 1) how to sell a truckload of USD, and to a lesser degree EUR and JPY, without excessively depressing the value of the USD that they are selling and 2) what to buy when there are few attractive, liquid alternative. Bitcoin doesn’t avoid 1) but addresses 2) to some degree.

Bitcoin with its inelastic supply and deflationary bias would look attractive to reserve managers as a complement to gold, and in contrast to fiat currencies in unlimited supply. As a group, reserve managers are conservative and probably would like to see how Bitcoin evolves.  Given the reserves management problem discussed above, there is some incentive for the biggest reserve managers to encourage development of this market to see if it is viable in the long term. Even if it ends up just as a transactions vehicle, countries may choose to transact in Bitcoin or the like, if it enables them to reduce the overhang of USD that they need to hold because of its role in international trade and finance.

Conclusions: i) Reserve managers will not be the first to adopt Internet currencies but they have incentives not to be the last; and ii) The USD would likely be undermined on its international role, were this to occur.

3) First mover advantages

This may be the most contentious area. Bitcoin fans argue that being the first in any area where there are networking economies gives you an immense advantage. Replicability is not an issue because potential imitators will find that businesses and households will sign up with the network that gives them the greatest ability to interact. The analogy is drawn to Internet retail and social media businesses where the business model can be copied but where a couple of companies at most dominate the space. (On the other hand, I still have my login/passwords to a variety of ‘first movers’ services that no one under 40 would even recognize.)

With respect to money, households and businesses will choose the one with the greatest acceptance, so the first mover has a big advantage even if the technology can be copied. This is a very important argument for entrepreneurs involved with Bitcoin and the few other currencies that are leading the charge to commercialize it..

Where diseconomies of scale enter Bitcoin is through the price exposure. The maximum amount of Bitcoin is predetermined and looks likely to be hit in the 22st century. The supply of Bitcoin is set to grow relatively slowly, arguing that the price should keep rising. You can argue that the price of Bitcoin is irrelevant, since it simply reflects the unit of account for transactions. You can also see that there is a host of alternatives that may have some modest advantage over Bitcoin. Both holders of Bitcoin and transactors in Bitcoin have to assess whether the Bitcoin network advantage is strong enough to outweigh the benefits from Bitcoin alternatives. You can find examples of both, but networking situations in other domains are less dependent on reputation than are Bitcoin and other Internet currencies. And such reputational equilibria are very fragile, and probably will not survive any unaddressed issues of theft or fraud.

Moreover, if you transact in Bitcoin,  you likely will choose to hold some to facilitate transactions. The speculative surge in Bitcoin may be a disadvantage if you can find a substitute that has similar characteristics but less of a speculative component. The question is how expensive is it for a business or individual to have more than one internet currency and how much of a disincentive is it to hold a Bitcoin if the price is high, when there are good substitutes with lower prices.

4) The Bitcoin ecosystem is growing exponentially

There is a short to medium term Bitcoin argument that goes something like this. We are just scratching the surface of payment system/alternative currency development. Whatever the competitive environment, in a market that is growing exponentially fast, any reasonable player will get bid up. Ultimately when market growth flattens out, there will be a sorting out of winners and losers, but that flattening out is not visible anytime soon, barring disaster. If this is a repeat of the Internet bubble, we are in 1997, not 2000, so the gravitational pull of the technology will mask small warts and crevices in individual applications.

This is not an argument most of us feel comfortable with, because there is the risk that our calculus is wrong or that some disaster either through fraud, government interference or some breakdown in the system occurs before the market flattens.  However, many investors feel so confident that we are just in the takeoff stage, that they see themselves with a margin to invest. They also have incentives to advocate forcefully the widening of the market because that enhances the value of all existing applications.

5) Tulip bubbles

About 40% of the comments I received argued outright that Bitcoin and similar internet currencies were bubbles, or tools to evade taxes, or conduct illegal activity. Basically, the view was that the Bitcoin appreciation reflects a mixture of greed and optimism, as in Boileau (1674), “A fool always finds a greater fool to admire him." The major issues have been touched on above – replicability, susceptibility to government interference, security vulnerabilities outside the ‘ledger’ level, inability to reverse any transaction, dependence on reputation, fragility and so on. Those who think this is the internet in 1997 should recall that the NASDAQ was back to 1997 levels in 2002, and even briefly touched 1996 levels, so getting in early may mean getting in really early. Just as with the railroads and Internet, it may revolutionize society more than it makes money for investors.

Some investors argued the reverse of most of the pro-Bitcoin commentators, seeing it as most likely a bubble but on the off chance that it wasn’t, it was worth buying a couple in case the price kept shooting up. It was viewed as the high risk, high return investment, with compensation that it was good cocktail party conversation.

Conclusions

Bitcoin and other Internet currencies are viewed by some as a Beanie baby fad and by others as revolutionizing the financial system. Market acceptance of alternative currencies now looks to be growing a lot faster than the pace at which the supply of Bitcoin and Bitcoin wannabees is expanding the Internet money supply. That is unlikely to persist over the medium and long term, but for now it looks as if it would take a major scandal, security breach or heavy-handed governmental intervention to derail it.

Internet currencies suffer from the absence of an anchor to determine their value and from their dependence on reputation and fashion. Replicability is an issue that the Internet currencies will not be able to overcome easily. The role in the payments system is very concrete to investors, although many also see value in a currency in inelastic supply whose value is determined by consensus rather than the monetary authority.  Among skeptics, a minority think that security is a much bigger issue than proponents admit. However correct the longer-term concerns, there is nothing obvious to derail the expansion of Internet currencies in the near-term, as they are meeting both legitimate and illicit economic and social needs.


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/Ujd2mmk6ePA/story01.htm Tyler Durden

GMO’s James Montier Skewers Bridgewater: Risk Parity = “Snake Oil In New Bottles”

Nearly a year ago, we penned “Return = Cash + Beta + Alpha“: in which we performed “An Inside Look At The World’s Biggest And Most Successful “Beta” Hedge Fund. The fund in question was Bridgewater, and Bridgewater’s performance was immaculate… until the summer when the sudden and dramatic rise in yields as a result of the Bernanke Taper experiment, blew up Bridgewater’s returns for 2013 and at last check, at the end of June, was down 8% for the year. As further explained in “”Yield Speed Limits” And When Will “Risk Parity” Blow Up Again“, an environment in which rates gap suddenly higher (and in the current kneejerk reaction market all moves are purely in the form of gaps as risk reprices from one quantum to another in milliseconds) is the last thing Ray Dalio’s strategy wants. Be that as it may, and successful as Dalio’s fund may have been until now, tonight James Montier of Jeremy Grantham’s GMO takes none other than Bridgewater to task, in a letter in which among other things, he calls risk parity “just old snake oil in new bottles”, and sums up his view about the strategy behind Bridgewater in the following equation:

Risk Parity = Wrong Measure of Risk + Leverage + Price Indifference = Bad Idea

and proceeds to skewer it: ‘At a fundamental level, risk parity is the antithesis of everything that we at GMO hold dear. ” Read on for his full critique.

No Silver Bullets in Investing (just old snake oil in new bottles), by James Montier of GMO

As I have written many times before, leverage is far from costless from an investor’s point of view. Leverage can never turn a bad investment into a good one, but it can turn a good investment into a bad one by transforming the temporary impairment of capital (price volatility) into the permanent impairment of capital by forcing you to sell at just the wrong time. Effectively, the most dangerous feature of leverage is that it introduces path dependency into your portfolio.

Ben Graham used to talk about two different approaches to investing: the way of pricing and the way of timing. “By pricing we mean the endeavour to buy stocks when they are quoted below their fair value and to sell them when they rise above such value… By timing we mean the endeavour to anticipate the action of the stock market…to sell…when the course is downward.”

Of course, when following a long-only approach with a long time horizon you have to worry only about the way of pricing. That is to say, if you buy a cheap asset and it gets cheaper, assuming you have spare capital you can always buy more, and if you don’t have more capital you can simply hold the asset. However, when you start using leverage you have to worry about the way of pricing and the way of timing. You are forced to say something about the path returns will take over time, i.e., can you survive a long/short portfolio that goes against you?

Exhibits 10 and 11 highlight this problem. Exhibit 10 shows the value/growth expected return spread over time. I’ve marked three points with red stars. Let’s imagine you had all of this time series history in the run-up to the late 1990’s tech bubble. Given history and assuming you were patient enough to wait for value to get one standard deviation cheap relative to growth, you would have put this position on in September 1998. If you had been even more patient and waited for a 2 standard deviation event, you would have started the position in January 1999. If you had displayed the patience of Job, and waited for the never before seen 3 standard deviation event, you would have entered the position in November 1999.

Exhibit 11 reveals the drawdowns you would have experienced from each of those points in time. Pretty much any one of these would likely have been career ending. They nicely highlight the need to say something about the “way of timing” when engaged in long/short space.

As usual, Keynes was right when he noted “An investor who proposes to ignore near-term market fluctuations needs greater resources for safety and must not operate on so large a scale, if at all, with borrowed money.”

Risk Parity = Wrong Measure of Risk + Leverage + Price Indifference = Bad Idea

At a fundamental level, risk parity is the antithesis of everything that we at GMO hold dear. We have written about the inherent risks of risk parity before, however I think they can be stated simply as the following:

I. Wrong measure of risk

Many proponents of risk parity use volatility as their measure of risk. As I have argued what seems like countless times over the years, risk is not a number. Putting volatility at the heart of your investment approach seems very odd to me as, for example, it would have had you increasing exposure in 2007 as volatility was low, and decreasing exposure in 2009 as volatility was high – the exact opposite of the valuation-driven approach. As Keynes stated, “It is largely the fluctuations which throw up the bargains and the uncertainty due to fluctuations which prevents other people from taking advantage of them.”

II. Leverage

I’ve already discussed leverage in the previous section, enough said I think.

III. Lack of robustness

There are no general results for risk parity. That is to say that adding breadth doesn’t necessarily improve returns. The returns achieved in risk parity backtests are very sensitive to the exact specification of the assets used (i.e., J.P. Morgan Bond Indices vs. Barclays Aggregates). Furthermore, decisions on which assets to include often appear fairly arbitrary (i.e., why include commodities, which, as Ben Inker has argued, may well not have a risk premia associated with them). All in all, the general lack of robustness raises the distinct spectre of data mining, and hence fragility.

IV. Valuation indifference

Proponents of risk parity often say one of the benefits of their approach is to be indifferent to expected returns, as if this was something to be proud of. I’ve heard them argue that “risk parity is what you should do if you know nothing about expected returns.” From our perspective, nothing could be more irresponsible for an investor to say he knows nothing about expected returns. This is akin to meeting a neurosurgeon who confesses he knows nothing about the way the brain works. Actually, I’m wrong. There is something more irresponsible than not paying attention to expected returns, and that is not paying attention to expected returns and using leverage!

As with risk factors (and smart beta), risk parity ultimately comes down to portfolio construction. It is implemented via assets, and can thus be priced. Anna Chetoukhina and I have constructed a model risk parity portfolio using just three simple assets: U.S. equities, U.S. bonds, and U.S. cash. We constructed our risk parity portfolio to have the same volatility as a 60/40 equity/bond portfolio. The relative performance of our risk parity strategy against the 60/40 portfolio is shown in Exhibit 12. As per Anderson et al four distinct periods of performance can be identified. In the early sample (1926-1945) risk parity is an undisputed victor in the performance sweepstakes. However, as they say, payback is a bitch: in the period 1946-1982, the 60/40 took sweet revenge. During the long bull market (in both stocks and bonds) of 1983-2000, the strategies were approximately tied. In the more recent period (2001-2010), risk parity is once more faring better.

Of considerably more interest to me than the performance were the weights held by the risk parity strategy over time (see Exhibit 13). On average the strategy held 44% in stocks, 155% in bonds, and was short 99% cash. The weights, of course, varied considerably over time.

Using these exposures we can apply our expected returns to see what risk parity is priced to deliver (an anathema to the disciples of this strange art, no doubt). The results of this assessment can be found in Exhibit 14. Over long periods of time risk parity doesn’t look very different in return space from a 60/40 portfolio. Currently both the 60/40 portfolio and risk parity display the problems we have previously referred to as the purgatory of low returns.

This is certainly a problem for some of its proponents whom I have heard argue that 60/40 is priced currently to deliver a low return, and thus one should follow a risk parity approach!

Strangely enough, when risk parity is priced to do well relative to the 60/40, it does indeed do well. If you lever up cheap bonds you can get good outcomes (assuming you know something about the path those returns will take, of course). Similarly, if risk parity is priced to do worse than the 60/40, it tends to do so. If you lever up expensive bonds things don’t tend to turn out too well. There is no magic to risk parity (see Exhibit 15).


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/zHtxPl1mcCM/story01.htm Tyler Durden

GMO's James Montier Skewers Bridgewater: Risk Parity = "Snake Oil In New Bottles"

Nearly a year ago, we penned “Return = Cash + Beta + Alpha“: in which we performed “An Inside Look At The World’s Biggest And Most Successful “Beta” Hedge Fund. The fund in question was Bridgewater, and Bridgewater’s performance was immaculate… until the summer when the sudden and dramatic rise in yields as a result of the Bernanke Taper experiment, blew up Bridgewater’s returns for 2013 and at last check, at the end of June, was down 8% for the year. As further explained in “”Yield Speed Limits” And When Will “Risk Parity” Blow Up Again“, an environment in which rates gap suddenly higher (and in the current kneejerk reaction market all moves are purely in the form of gaps as risk reprices from one quantum to another in milliseconds) is the last thing Ray Dalio’s strategy wants. Be that as it may, and successful as Dalio’s fund may have been until now, tonight James Montier of Jeremy Grantham’s GMO takes none other than Bridgewater to task, in a letter in which among other things, he calls risk parity “just old snake oil in new bottles”, and sums up his view about the strategy behind Bridgewater in the following equation:

Risk Parity = Wrong Measure of Risk + Leverage + Price Indifference = Bad Idea

and proceeds to skewer it: ‘At a fundamental level, risk parity is the antithesis of everything that we at GMO hold dear. ” Read on for his full critique.

No Silver Bullets in Investing (just old snake oil in new bottles), by James Montier of GMO

As I have written many times before, leverage is far from costless from an investor’s point of view. Leverage can never turn a bad investment into a good one, but it can turn a good investment into a bad one by transforming the temporary impairment of capital (price volatility) into the permanent impairment of capital by forcing you to sell at just the wrong time. Effectively, the most dangerous feature of leverage is that it introduces path dependency into your portfolio.

Ben Graham used to talk about two different approaches to investing: the way of pricing and the way of timing. “By pricing we mean the endeavour to buy stocks when they are quoted below their fair value and to sell them when they rise above such value… By timing we mean the endeavour to anticipate the action of the stock market…to sell…when the course is downward.”

Of course, when following a long-only approach with a long time horizon you have to worry only about the way of pricing. That is to say, if you buy a cheap asset and it gets cheaper, assuming you have spare capital you can always buy more, and if you don’t have more capital you can simply hold the asset. However, when you start using leverage you have to worry about the way of pricing and the way of timing. You are forced to say something about the path returns will take over time, i.e., can you survive a long/short portfolio that goes against you?

Exhibits 10 and 11 highlight this problem. Exhibit 10 shows the value/growth expected return spread over time. I’ve marked three points with red stars. Let’s imagine you had all of this time series history in the run-up to the late 1990’s tech bubble. Given history and assuming you were patient enough to wait for value to get one standard deviation cheap relative to growth, you would have put this position on in September 1998. If you had been even more patient and waited for a 2 standard deviation event, you would have started the position in January 1999. If you had displayed the patience of Job, and waited for the never before seen 3 standard deviation event, you would have entered the position in November 1999.

Exhibit 11 reveals the drawdowns you would have experienced from each of those points in time. Pretty much any one of these would likely have been career ending. They nicely highlight the need to say something about the “way of timing” when engaged in long/short space.

As usual, Keynes was right when he noted “An investor who proposes to ignore near-term market fluctuations needs greater resources for safety and must not operate on so large a scale, if at all, with borrowed money.”

Risk Parity = Wrong Measure of Risk + Leverage + Price Indifference = Bad Idea

At a fundamental level, risk parity is the antithesis of everything that we at GMO hold dear. We have written about the inherent risks of risk parity before, however I think they can be stated simply as the following:

I. Wrong measure of risk

Many proponents of risk parity use volatility as their measure of risk. As I have argued what seems like countless times over the years, risk is not a number. Putting volatility at the heart of your investment approach seems very odd to me as, for example, it would have had you increasing exposure in 2007 as volatility was low, and decreasing exposure in 2009 as volatility was high – the exact opposite of the valuation-driven approach. As Keynes stated, “It is largely the fluctuations which throw up the bargains and the uncertainty due to fluctuations which prevents other people from taking advantage of them.”

II. Leverage

I’ve already discussed leverage in the previous section, enough said I think.

III. Lack of robustness

There are no general results for risk parity. That is to say that adding breadth doesn’t necessarily improve returns. The returns achieved in risk parity backtests are very sensitive to the exact specification of the assets used (i.e., J.P. Morgan Bond Indices vs. Barclays Aggregates). Furthermore, decisions on which assets to include often appear fairly arbitrary (i.e., why include commodities, which, as Ben Inker has argued, may well not have a risk premia associated with them). All in all, the general lack of robustness raises the distinct spectre of data mining, and hence fragility.

IV. Valuation indifference

Proponents of risk parity often say one of the benefits of their approach is to be indifferent to expected returns, as if this was something to be proud of. I’ve heard them argue that “risk parity is what you should do if you know nothing about expected returns.” From our perspective, nothing could be more irresponsible for an investor to say he knows nothing about expected returns. This is akin to meeting a neurosurgeon who confesses he knows nothing about the way the brain works. Actually, I’m wrong. There is something more irresponsible than not paying attention to expected returns, and that is not paying attention to expected returns and using leverage!

As with risk factors (and smart beta), risk parity ultimately comes down to portfolio construction. It is implemented via assets, and can thus be priced. Anna Chetoukhina and I have constructed a model risk parity portfolio using just three simple assets: U.S. equities, U.S. bonds, and U.S. cash. We constructed our risk parity portfolio to have the same volatility as a 60/40 equity/bond portfo
lio. The relative performance of our risk parity strategy against the 60/40 portfolio is shown in Exhibit 12. As per Anderson et al four distinct periods of performance can be identified. In the early sample (1926-1945) risk parity is an undisputed victor in the performance sweepstakes. However, as they say, payback is a bitch: in the period 1946-1982, the 60/40 took sweet revenge. During the long bull market (in both stocks and bonds) of 1983-2000, the strategies were approximately tied. In the more recent period (2001-2010), risk parity is once more faring better.

Of considerably more interest to me than the performance were the weights held by the risk parity strategy over time (see Exhibit 13). On average the strategy held 44% in stocks, 155% in bonds, and was short 99% cash. The weights, of course, varied considerably over time.

Using these exposures we can apply our expected returns to see what risk parity is priced to deliver (an anathema to the disciples of this strange art, no doubt). The results of this assessment can be found in Exhibit 14. Over long periods of time risk parity doesn’t look very different in return space from a 60/40 portfolio. Currently both the 60/40 portfolio and risk parity display the problems we have previously referred to as the purgatory of low returns.

This is certainly a problem for some of its proponents whom I have heard argue that 60/40 is priced currently to deliver a low return, and thus one should follow a risk parity approach!

Strangely enough, when risk parity is priced to do well relative to the 60/40, it does indeed do well. If you lever up cheap bonds you can get good outcomes (assuming you know something about the path those returns will take, of course). Similarly, if risk parity is priced to do worse than the 60/40, it tends to do so. If you lever up expensive bonds things don’t tend to turn out too well. There is no magic to risk parity (see Exhibit 15).


    



via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/zHtxPl1mcCM/story01.htm Tyler Durden