Thursday, January 31, 2008

Great Tom Brady mini-autobiography on his days at Michigan

posted by Mike Sando:
In my fourth year, Drew had come in and he was competing and a great player. I'm surprised he is not playing today. And we did pretty good when I was there my last couple years, 10-3 and 10-2, finished fifth in the country one year. There was a lot of teams that didn't choose me coming out and I really feel that I have improved a lot as a player as well and had great coaching, I've had a great system around me and maybe some of the attributes that it takes to be a great professional quarterback aren't really the same things that require a college quarterback to be a great player.

"I feel some of my strengths are my awareness, my decision making. I've never been a great athlete and those tend to be some of the great players in college because when you are playing against linebackers who run 4.9 in college and you run 4.7 in college, you can outrun those linebackers. In the pros, those guys are running 4.5s. so if you run a 4.7 and you are a slow guy, you have to focus on the abilities that there are a lot of ways to be a great quarterback. You can throw it, you can run it, decisions, accuracy, arm strength. I've tried to improve with the coaching I have had and take that coaching so I can continue to find ways to improve your game.
What resonated with me most is the propensity to peak too early (e.g. Drew Henson), and how a second tier performer in one context can be a first tier performer in a higher context. There's a lot of spiritual truth in this, and it remind me of the travails and ultimate victories of Joseph of the Old Testament, who was kicked to the curb by his family, then his employer, and then his sommelier friend, only to be promoted from prisoner to Treasury Secretary in less than a day, which positioned him to save his family from starvation (along with the rest of civilization in that part of the world).

UPDATE: An even cooler bio of Ernie Adams by Wright Thompson. Adams is the "Q" to Belichick's James Bond; the Forrest Gump to the Baby Boomer generation of football:

Who, exactly, is Ernie Adams?

"I don't know what his job title is," linebacker Adalius Thomas says. "I didn't even know his last name was Adams."

"Ernie is a bit of a mystery to all of us," offensive tackle Matt Light says. "I'm not sure what Ernie does, but I'm sure whatever it is, he's good at it."

Finally, I approach receiver Wes Welker. "I'm writing a story about Ernie Adams," I tell him.

"Who?" he says.

"The guy who's always with Belichick who doesn't ever really talk."

"Oh," he says, recognition washing over his face. "Ernie."

Adams and Belichick met in 1970. Adams had been at Phillips Academy in Andover, an elite New England boarding school, for three years. In that time, he'd become a campus legend, famous for his quirky attire and habits. He wore high-top cleats and old-fashioned clothes, looked and talked like something from the 1940s. His three obsessions were Latin, naval history and, strangely, football. So he consumed books, mostly obscure titles, with a scholar's thirst. One he ran across was called "Football Scouting Methods" by a Navy assistant coach named Steve Belichick. As Halberstam details in his biography of Belichick, "Education of a Coach," only about 400 people bought the book: professional scouts and 14-year-old Ernie Adams. So, imagine Adams' surprise when, as his senior year was beginning, he walked out onto the football field and encountered a young man with "Belichick" written on tape across the front of his helmet.

Bill Belichick had recently enrolled at Andover for his senior year, hoping to raise his grades and test scores so he could get into a good college. A few questions confirmed Adams' suspicions. Are you from Annapolis? Are you related to Steve? Yes and yes. Belichick thought it was strange that a kid would have read his dad's book. Adams recognized something familiar in Belichick. He recognized himself. "He actually was pretty good in his judgment of people," says Hale Sturges, the professor in charge of South Adams Hall, where Adams lived.

They've been like brothers ever since, spending hours after practice breaking down film, diagramming famous plays of Vince Lombardi, Adams' idol. They snuck into Boston College practices to "scout." Together, they played on the undefeated Andover team, the first time the two men tasted perfection.

So, every week, the Patriots get the kind of analysis that only high-powered hedge funds or, say, NASA can afford. "Nine times out of 10," Bissinger says, "Ernie sees something nobody else sees."

That memory and those hours of studying film make him an unparalleled resource for assistant coaches. Want to know what a team does, and why? Want to know what a team has done on third-and-short in the red zone in the past 10 years on the road? Ask Adams. He'll know.

Adams' reach doesn't stop there. The Patriots are famous for compartmentalizing: The scouts can't watch practice, the game planners don't know who they are going to draft, and so on. But Adams is into everything. During the draft, according to Michael Holley's "Patriot Reign," he's in charge of running through the team's value chart, figuring out who will best fit their needs. This is the perfect assignment for someone who spent several years in the late 1980s as an analyst and trader on Wall Street and, as an investor, is known for spotting profitable trends shockingly early.

Adams' official title is director of football research, and he does a lot of that, too, trolling the world for things that might offer the slightest advantage. A year or two ago, an Andover teammate ran across an obscure out-of-print book on nonlinear mathematics. He thought Adams might find a use for it, so he mailed it to him. Adams had already read it. Or there's Rutgers statistics professor Harold Sackrowitz, who got a call from Adams a few years back. Adams wanted to talk about some research Sackrowitz had just completed, dealing with how teams try two-point conversions far too often. Adams sent the professor the Patriots' when-to-go-for-two chart, and asked Sackrowitz to tear it apart. Of the 32 NFL teams, the statistician told the New York Times, only the Patriots called.

Obviously, he admires great men. His reading list includes Warren Buffett, featured in Train's cult classic on investing, presidents, czars, prime ministers. Adams seems to enjoy the tiny spaces inside great lives, seeing them from behind the curtain. Could that be behind his close connection with Belichick?

Adams also seems to enjoy not only watching greatness work, but also seeing it fail. Carlisle thinks the central message of Halberstam's Vietnam classic appeals to Adams: that people incredibly well-educated and well-intentioned could be so flat-out wrong about something. It's a helpful notion to keep in mind about the conventional-wisdom-obsessed world of football, where pedigree and tradition dictate many overly conservative decisions. Indeed, when Adams agreed to participate in Halberstam's Belichick book, he did so with this caveat: For every two questions the journalist got to ask Adams about football, Adams got to ask one back about Vietnam. Did that trait allow Adams to make sure the mistakes of Belichick in Cleveland were not repeated? Maybe.

The Most Miserable U.S. Cities, according to Forbes

1. Detroit, MI
2. Stockton, CA
3. Flint, MI
4. New York City
5. Philadelphia, PA
6. Chicago, IL
7. Los Angeles, CA
8. Modesto, CA
9. Charlotte, NC
10. Providence, RI
Kurt Badenhausen wrote the article and offers links to photos and misery factors (via Mark Perry). New York's breakdown:
Commute times 150
Income tax rates 150
Superfund sites 78
Unemployment 99
Violent crimes 105
Weather 86
where 150 is the worst score and 1 is the best. Providence, RI (near where I grew up) has the second worst income tax rates, and people are still leaving in droves.

Quote of the day

Democracy is a very blunt instrument--Tyler Cowen
He goes on to say:

I believe that we should revere democracy as one of the modern world's greatest achievements. We should step off a British Airways flight with a tear in our eye, in appreciation for all that country has done to promote democratic government (sorry, former colonies, but perhaps you are democratic today). This is no exaggeration or blog tease: I want to see you crying at Heathrow. The future is far more likely to have "too little democracy" than "too much democracy." I do believe in checks and balances, but within a broadly democratic framework, such as we have in the United States.

That all said, we should not demand from democracy what democracy cannot provide. Democracy is pretty good at pushing scoundrels out of office, or checking them once they are in office. Democracy is also good at making sure enough interest groups are bought off so that social order may continue and that a broad if sometimes inane social consensus can be manufactured and maintained. We should expect all those things of democracy and indeed democracy can, for the most part, deliver them.

But democracy is very bad at fine-tuning the details of economic policy. Democracy is very bad at bringing about political solutions which are not congruent with the other sources of economic and social influence in a country. The solution is not to be less democratic, but rather to appreciate democracy for what it is good for. And the excesses of democracy should be fought with ideas, albeit with the realization that not everyone will be convinced. Those are the breaks, as democracy needs all the friends it can get.

Just as I love democracy, so do I love Chiles in Nogada. But I do not ask that Chiles in Nogada can solve most of the world's problems or for that matter get me to work in the morning. Social democrats and progressives often view democracy as a potential instrument of control, and as a way of giving us "the best policies." I do not, and that includes for my own economic views as well.

Wednesday, January 30, 2008

Intrade beats Zogby in predicting McCain as the Florida winner

on election eve. It turns out that Zogby was calling a statistical dead heat between McCain and Romney, given it's stated standard error rate, so Intrade wins this round.

Also, after these 9 head-to-head contests, the average Intrade election eve predicted winner percentage is 65%. My hypothesis that Intrade's winning percentage will converge with it's average election eve percentage.


Wins Losses Ties Pct Contender

3 2 4 0.556 Intrade
2 3 4 0.444 Zogby


Score Date
State Party Intrade Zogby Winner

3-2-4 29-Jan
FL Rep McCain 2-way-tie McCain
2-2-4 26-Jan
SC Dem Obama Obama Obama
2-2-3 19-Jan
SC Rep McCain McCain McCain
2-2-2 19-Jan
NV Dem Obama Clinton Clinton
2-1-2 15-Jan
MI Rep McCain 2-way tie Romney
2-0-2 8-Jan
NH Dem Obama Obama Clinton
2-0-1 8-Jan
NH Rep McCain McCain McCain
2-0-0 3-Jan
IA Dem Obama 3-way tie Obama
1-0-0 3-Jan
IA Rep Huckabee 2-way tie Huckabee

Freakonomic online dating anecdote

from Steven Levitt:

A recently divorced friend of mine just dipped her toes into the online dating world for the first time. She entered her information: lives in a large city, late thirties, divorced, well-educated, loves to dance, etc. Then she let the algorithm find her soul mate.

I’d love to say that it was like the old “Pina Colada” song by Rupert Holmes and the perfect match the system spit out was her ex-husband.

Nope, it was her boss.

25 jobs paying over $50,000 per year that don't require a 4 year college degree

here (via Andrew Roth). Here's the Top 10:
1. Air traffic controller: $102,030

2. Funeral director: $79,517

3. Operations manager: $77,839

4. Industrial production manager: $73,000

5. Transportation manager: $72,662

6. Storage and distribution manager: $69,898

7. Computer technical support specialist: $67,689

8. Gaming manager: $64,880

9. First-line supervisor/manager of police and detective: $64,430

10. Nuclear power reactor operator: $64,090
Yes, each of these roles do require significant amounts of trust, dependability, testing, competence, customer focus and/or self-learning. Still no free lunch--if you want one of those, look at a place like the UN.

Corn ethanol

is forcing some of the Bottom Billion to eat dirt.

I told you so.

Russ Roberts on his unabashed love of the Patriots

rivaling only the passion of Maria Menounos:

I remember the first Patriots championship appearance. It was January 1964 and I was nine years old. The Pats suffered a 51-10 blowout at the hands of the Chargers. The next championship game was a 46-10 shellacking by the Bears, at the time, a Super Bowl record for the largest margin of defeat. Then in 1997, a loss to the Packers gave the Patriots a perfect record in championship games -- 0-3.

OK, the Pats are no longer the Patsies. They've won three of the last six Super Bowls. But thinking historically, a victory on Sunday will merely push them over .500 for the first time.

But that's my perspective. Yours is different. Even my friends confess they're rooting for the Giants. Some are Dolphin fans hungry for Schadenfreude. Some just hate the Patriots the way any morally upright, decent human being hates the Yankees. And when you add in the recent success of the Red Sox and the Celtics, it's an embarrassment of riches for Boston sports fans. The Patriots seem perilously close to becoming the Yankees of football.

But not really. First of all, no Yankee fan is ever embarrassed by the riches of those 26 titles. An embarrassment of riches is an oxymoron for a New Yorker.

But the real reason to root for the Patriots is the triggerman of the greatest offense in football history, Tom Brady. Maybe his girlfriend is a little more attractive than yours, but put that aside for a moment. Brady is Joe Pendleton in "Heaven Can Wait." If you're unfamiliar with the movie, Joe Pendleton is the quarterback mistakenly taken before his time by an overeager angel. He gets put back in the dumpy body of Mr. Farnsworth, an unathletic businessman. Through an incredible training regimen, passion for the game, and his innate football smarts, Pendleton manages to take his team to the Super Bowl, Farnsworth body and all.

Isn't that Tom Brady all over? He's a sixth-round draft choice who didn't always start in high school or at Michigan. His 2000 combine workout video surfaced this year, and it showed he had a lot of Farnsworth in him -- an unimpressive physique and a sloth-like 40-yard dash. His high-school coach says "I've had better natural athletes than Tom Brady," and you have the feeling he's being kind.

Tired of hearing about the 50 touchdown passes? Then think on this: Last year, Brady's top receiver was Reche Caldwell. The year before? Deion Branch. The year before that? David Givens. None of those guys are going to the Hall of Fame. Their production dropped -- plummeted, sometimes -- after they left the Patriots.

In 2005, Brady signed a long-term contract for less money than he could have received on the open market, in hopes of helping the Pats sign a better supporting cast. When the team then signed bargain-basement receivers, he didn't complain. While Peyton Manning was throwing to Marvin Harrison and Wayne Clark last year, Brady was throwing to Caldwell, a 35 year-old Troy Brown, and Doug Gabriel. But Brady kept his mouth shut, did his job and came within four points of going to the Super Bowl.

There are other nice stories on this team. There's Wes Welker, the undrafted wide receiver who has flourished. Tedy Bruschi, the stroke victim who still plays the game he loves with élan. Brown, who played defensive back when the team needed him to. (I just have a feeling Troy will contribute somehow, on Sunday.) How can you not like those guys?

As for the humorless guy in the hoodie, I even like him too. (Sorry.) I like his injury reports: Brady's injured shoulder makes him only "probable" week in and week out. I like his sartorial splendor. I like his no-nonsense commitment to excellence. I like that he's been successful even as his assistants come and go.

Is Bill Belichick a cheater? Well, I'd like to know if he's the only coach to tape another team's signals -- or just the only coach to get caught. I'd like to know if it helps a lot or a little to have video, rather than the legal photographs. Either way, he broke the rules. He has paid -- and will pay, via that lost draft pick.

Besides, Belichick majored at Wesleyan in my favorite subject -- economics. And no one understands one of the fundamentals of economics -- the importance of tradeoffs -- better than Belichick and his partner in playing the salary cap, the unsung but essential VP of Player Personnel, Scott Pioli.

In today's WSJ.

Don Surber is more sanguine on McCain than me

He posits:

Congratulations, John McCain.

The baggage we know well. From the Keating Five scandal to campaign finance deform to immigration amnesty, McCain has a lot of baggage. But he also carries his own luggage, does he not?

There is a lot to be said for humility and he’s been knocked down a few times. I see he has regained his legs each time.

Many conservatives no doubt will freak.

My wise counsel in this is the philosopher who pens under the pseudonym Basil.

Bush was not his first choice in 2000. Dole was not his choice in 1996. Reagan was not his first choice in 1980.

I can do him one better: I voted for Carter. Maybe I should wear a T-shirt: “What do I know? I voted for Carter.”

Basil advises people keep their options open: “So, now that Fred’s out, it looks like I’m going to end up voting for someone who wasn’t my first choice.”

That’s how the game is played. You try your best, you lose, you shake the winner’s hand, and you play again.

You do not take your ball and go home.

Look at Al Gore. Rather than gracefully accept a close defeat in 2000 and come back later, he got all angry and sued. Look at him now. He has all these awards but he knows he’s a fraud. He knows global warming is a myth. If he really believed that crap, he would not burn up 20 times the electricity of mortal men.

But hey, what do I know? I voted for Carter.

History may provide some guidance. In 1932, FDR was all the rage. But 28 years later, JFK did not run as an FDR Democrat. He said it was time for a new generation.

It has been 28 years since Reagan was nominated.

What he stood for as president included being pro-life, pro-gun, limit the government, cut taxes, cut spending, help the truly needed, and stand up to communism. At various times in his life, Ronald Reagan stood at the opposite ends of some of those positions.

But he learned. And by age 70, Ronald Reagan was finally a Reagan Republican.

I'm thinking about voting for Obama. While he could end up like Jimmy Carter (my least favorite president of my so-called life), his oratory sets higher aspirational goals. Plus, Austan Goolsbee is pretty good for an advisor, and I think he understands economic policy better than he lets on (given his voter base).

I'm just worried that, like Carter's appeasement approach to foreign policy, Obama could reflate global threats against democratic nations.

UPDATE: McCain is looking to punish my family and friends? This is the worst thing I've read today:
I think there are some greedy people on Wall Street that perhaps need to be punished.

Mondrian or Warhol?

Consumerist art, or artistic consumerism, via Stephen Dubner:

Arnold Kling blogs personally and poignantly about his frustrations with the healthcare system

What I want for my father is the best possible combination of dignity, lucidity, and absence of pain. The operative word is possible, because what is attainable is limited. Moreover, there are trade-offs among these goals.

But what you deal with are people who are doing their job. For example, the cardiologist's job is to make sure his heart does not give out, even if it means he lies on his back for so long that the prospects for restoring diginity recede. Everyone wants to shunt him around, giving him more Hansonian medicine, which detracts from his ability to remain lucid.

For the larger goal of trying to do the best with his remaining life, nobody is in charge and nobody is empowered. Particularly in that big hospital. I'll probably be back there soon, but I don't know what medical decisions would best serve our goals and I don't know how to get the system to work for us.
My mom has had plenty of health issues, and I feel similarly to Arnold. I'd like folks to step back and see the bigger picture, but they get paid to focus in narrowly, and they get paid in such an intermediated way that there are all these invisible interests between the families of the sick and the health service providers.

ADP Payroll reports 130,000 new jobs

90,000 more than forecast. S&P 500 futures jumped 0.5% on the news.

Why, we were just talking about this yesterday!

UPDATE: 4th Quarter GDP was reported out at 0.6%. The Intrade recession contract will only expire at 100 with 2 successive negative quarterly GDP numbers, and they are the final numbers (not the first two numbers reported). While there is a chance that 4Q could revised below zero, the buyers of this recession contract must be a little disappointed (unless, like me, they sold higher):


Tuesday, January 29, 2008

The most interesting thing I read today

was about the inspirational merits of translation, via How The World Works:

Only a handful of people in the world can read Tocharian; mastering the language is not a path to notoriety. But Ji, the author of numerous books and monographs, has other claims to fame. Perhaps most amazingly, he secretly translated the entire Indian epic, "The Ramayana," from the original Sanskrit into Chinese, while experiencing the travails that afflicted nearly all Chinese intellectuals during the Cultural Revolution.

Earlier this week, the Indian government bestowed one of its greatest honors, the Padma Bushwan award, on the 97-year-old Ji, in honor of his contributions to cross-cultural understanding. In the realpolitik of Chinese-Indian diplomacy, the move was immediately interpreted as as indicating a positive direction in the relationship between the two countries.

HTWW also has a fresh perspective on C.S. Lewis here.

History (on so many levels)

via Don Surber.

UPDATE: Josh Hendrickson has coverage of Herbert Hoover's 1929 stimulus package.

Monday, January 28, 2008

2008 Recession odds down to 16%?

There have been some recent posts about how unemployment remains low, where in previous recessions, unemployment spiked up sharply. This WSJ Economics blog post talks about Tim Kane's model, which is predicting a 16% chance of recession. A few days ago, Mark Perry had this graph at his blog:

Of course, all this could be a warmup for Bush's last State of the Union address.

Here's the latest Intrade recession chart:


UPDATE: Greg Mankiw links to another Kane paper, which focuses on unemployment insurance predictiven power of coming recession, and which is currently pricing a 35.5% chance for recession.

The Republican Florida Showdown: Intrade v. Zogby





Someone else

Not Sure


If McCain (agreed winner) or Paul (within Zogby error) wins, the contest will end in a draw. If Romney wins, Intrade will take the contest. If any other candidate wins, Zogby will take the contest.

UPDATE: It turns out that Zogby was calling a statistical dead heat between McCain and Romney, given it's stated standard error rate, so Intrade wins this round.

Intrade and Zogby end in a draw for the SC Democratic primary


Wins Losses Ties Pct Contender

2 2 4 0.500 Intrade
2 2 4 0.500 Zogby


Score Date
State Party Intrade Zogby Winner

2-2-4 26-Jan
SC Dem Obama Obama Obama
2-2-3 19-Jan
SC Rep McCain McCain McCain
2-2-2 19-Jan
NV Dem Obama Clinton Clinton
2-1-2 15-Jan
MI Rep McCain 2-way tie Romney
2-0-2 8-Jan
NH Dem Obama Obama Clinton
2-0-1 8-Jan
NH Rep McCain McCain McCain
2-0-0 3-Jan
IA Dem Obama 3-way tie Obama
1-0-0 3-Jan
IA Rep Huckabee 2-way tie Huckabee

The election eve prediction was posted here.

Friday, January 25, 2008

Jed Christiansen with a fanastic primer on prediction markets and elections

Read the whole thing, via Chris Masse.

Jed points out the weakest point of my Intrade v. Zogby Showdown contests: Intrade contracts are winner-take-all, while Zogby poll statistics are linear probabilities. I attempt to normalize the "predictiveness" between them by looking first at the clear leader, if there is one, and then compare candidate probabilties to break ties. I also take snapshots on the eve of each election, a T-1 approach.

However, he also affirms points which I've made in the past:
What this also means is that prediction markets have to be “wrong” in order to be right. If all of the contracts trading at 80% actually occurred, the market would be incorrect; 1 in five contracts trading at 80% has to lose!

So when do we judge how accurate a prediction market is? Do we take the price from the week before an event? The day before? For an election, do we take it when the polls open? When the polls close?

In my opinion, it all comes down to your goals. InTrade lets traders trade contracts until a winner is settled, because they want an active and accurate marketplace. This has allowed contracts to swing wildly through the day, perhaps most notably in the 2004 Presidential election when leaked exit polls in the afternoon indicated a strong showing for Kerry, only to see actual results not match up with these polls. Other markets look to generate forecasts, so they would end at the point where the information from the forecast was required.

A binary contract is either correct or it isn’t; there’s no good way to assess the quality of a single data point. What we do is assess the calibration of the marketplace. Of all the contracts judged with a 20% probability, do they happen 20% of the time? Of all the contracts judged with a 95% probability, do they happen 95% of the time? With sufficient data we can draw a calibration curve to determine accuracy in this manner. Prediction markets typically do quite well here.

Prediction markets should be compared to other forecasting methods, and not perfection. Let’s match up prediction markets against the cable-news talking heads and see who’s better. (I haven’t done so, but I would suggest that prediction markets would perform well.)
I hypothesize that individual contests will look quite bumpy. Across the entire set of data, which will approach 100 data cohorts, we'll be able to establish some clear trends and contrasts, and perhaps have a better designed experiment in 2012.

David Brooks, the journalistic Eli Manning?

David Brooks is not on my list of reads, but thanks to a thumbs up from Tyler Cowen, I read his latest and it is good:

The Greed Narrative goes something like this: The financial markets are dominated by absurdly overpaid zillionaires. They invent complex financial instruments, like globally securitized subprime mortgages that few really understand. They dump these things onto the unsuspecting, sending destabilizing waves of money sloshing around the globe. Economies melt down. Regular people lose jobs and savings. Meanwhile, the financial insiders still get their obscene bonuses, rain or shine.

The morality of the Greed Narrative is straightforward. A small number of predators destabilize the economy and reap big bonuses. The financial system is fundamentally broken. Government should step in and control the malefactors of great wealth.

The Ecology Narrative is different. It starts with the premise that investors and borrowers cooperate and compete in a complex ecosystem. Everyone seeks wealth while minimizing risk. As Jim Manzi, a software entrepreneur who specializes in applied artificial intelligence, has noted, the chief tension in this ecosystem is between innovation and uncertainty. We could live in a safer world, but we’d have to forswear creativity.

When a new instrument enters the market, it takes a while before people understand and institutionalize it. Whether the product is high-yield bonds or mortgage-backed securities, there’s a tendency to get carried away.

In the first stage of this adolescence, investors look around and see everybody else making money off some new instrument.

Then there’s a moment when people realize how stupid they have been. They’ve bought a pile of subprime mortgages without really knowing what they’ve purchased. The ratings agencies suddenly don’t look so reliable. The cycle of overconfidence becomes a cycle of underconfidence because nobody knows who is holding worthless paper.

Then, finally, maturity sets in. Those who have lost great gobs of money get fired. People still find the new product useful, but within parameters and with greater safeguards.

The lesson of the Ecology Narrative is that, in most cases, the market corrects itself. Maybe this year banks will change their pay structure so there’s not so much emphasis on short-term results. Maybe companies will change their boards to improve scrutiny over complex new instruments. In short, markets adapt.

People who embrace the Ecology Narrative don’t like the offensive bonuses that get handed out on Wall Street. They just don’t see any way the government can curtail them without rending the fabric of the ecosystem. They don’t like the periodic crises, but don’t see how government can prevent them without clamping down on innovation. The challenge is to give people the means to withstand the perturbations.

The Ecology Narrative is not morally satisfying. I wouldn’t bet on its popularity as a backlash against Wall Street and finance sweeps across a recession-haunted country. But the Ecology Narrative has one thing going for it. It happens to be true.

Brooks reminds me of Eli Manning, in that he might be popularly underestimated.

Too worried over Social Security?

I've been worried for more than a decade about how the ratio of payers into Social Security moved from 40-to-1 at the program's inception to 3-to-1 today (and projected to be 2-to-1 when the last of the Baby Boomers start collecting benefits).

Bryan Caplan raises a different ratio from payers-to-collectors: Workers-to-Dependents, which is actually rising from 1.05 in the Sixties to 1.27 in 2030.

The decrease of children is offset by the increase of women in the workforce.

UPDATE: Bryan has provided a nice graph in a subsequent post:

The Democrat SC Showdown: Intrade v. Zogby





Someone else

Not sure


If Clinton or Edwards wins, Zogby will be declared the winner. If any other candidate wins, the contest will be called as a draw. The Intrade snapshot was taken at 2:20pm today.

For each contest:
1. Look at the highest value Intrade contract and the highest Zogby poll (beyond error rate) to determine each source's predicted winner of a state contest

2. If neither Intrade nor Zogby predicts the winner, the candidate with the higher value between Intrade and Zogby (beyond the Zogby error rate) will win that contest.

Gates & Buffett: Conflicted Capitalists?

Don Boudreaux talks about about Bill Gates' Davos speech that dilutes capitalism:
I'm delighted that Bill Gates is reading the important work of the late Julian Simon ("Gates Calls for Kinder Capitalism," January 24). When he digests Mr. Simon's central idea - that human beings in market economies are "the ultimate resource" - Mr. Gates might then recognize that there is no need to change capitalism so that it becomes "creative." Capitalism has always been creative. It is inherently creative.
He also links to this John Tamny piece. I've posted several times in the past about Buffett's take, which is similar to Gates', and seems proven in his large charitable donation to the Gates Foundation.

Both Buffett and Gates were born to wealthy parents. On the other hand, Larry Ellison and Paul Allen (also americans on the Forbes top 20 billionaires list) grew up with parents of more modest, middle-class means. And while they are active in charitable works, I don't seem to hear them wanting to take more money from working families and distributing that money--through the inefficient intermediary of government--to families who are working less.

I think there's strong pathology of guilt that drives the children of the rich. Maybe that's a good thing, but please keep your hands off everybody else's money. Thanks.

A yield curve undulation of Shakira proportions

via Eddy Elfenbein, who posits:

This is the point I'm trying to get across. I believe the Fed's rate cut was NOT a cut to prop up equity prices, but a response to the turmoil in the bond market. If anything, it was to pop the bond bubble--and as you can see from the post below, the Fed's job includes promoting "moderate long-term interest rates."

I'm not saying I agree with it, but try to look at this from the Fed's point of view. In just a few months, a flat yield curve completely unraveled.

Hips don't lie. Or maybe only as much as the bond market.

Thursday, January 24, 2008

More Krugman deconstructed

Krugman has been deconstructing himself a lot lately, but when he tries to revise Carter / Reagan history, I'd like to post some points by Tom Firey:

In short, Krugman makes four criticisms: Reagan’s policies resulted in (1) stagnant middle-class incomes, (2) an increase in the poverty rate, (3) stagnancy in productivity growth, and (4) stagnancy in “American business prestige.”

Are those claims true and do they show that Reagan’s economic policies “did fail”? Let’s look at the data. (Hyperlinks connect to the relevant federal data sets.)

From 1981 to 1988 (which roughly corresponds with Reagan’s tenure), median real family income grew 11.1 percent while real household income grew 10.3 percent. Those growth rates are in the top third of the 30 eight-year periods from 1968–1975 to 1998–2005.

Poverty topped out at 12.3 percent for families and 15.2 percent for individuals in 1983. From there, though, poverty under Reagan moved downward steadily, reaching 10.4 percent for families and 13.0 percent for individuals in 1988.

Krugman is correct that the data show productivity growth under Reagan was around 1.4 percent a year, not much higher than the previous period 1973–1979 (1.2 percent) and a little less than the subsequent period 1990–1995 (1.5 percent). Those numbers are all considerably lower than the 2.8 average annual increase for 1947–1973 and the 2.5 percent for 1996-2000.

Krugman does not mention the productivity rate for 2000–2006; at 2.7 percent, productivity growth is even higher under the George W. Bush administration than it was in the best of the Clinton years. Again, curiously, Krugman does not credit G.W. Bush with being even more successful economically than Reagan or Clinton.

This raises a question: If the average productivity growth rate increased over the last five years of the Clinton administration, and that growth continued (at a slightly higher rate) through the first five years of the G.W. Bush administration, then does policy (or politics) have much to do with productivity?

Krugman’s claims about the Reagan record are misleading and, in the case of middle-class income, outright false. But more significantly, the concept underlying Krugman’s column is facile.
and his colleague Daniel Griswold:

Krugman wrote in a January 21 column for the New York Times that the economic record of President Reagan was one of failure. The Reagan years did encompass a recovery from a steep recession, he acknowledges, but then, “By the late 1980s, middle-class incomes were barely higher than they had been a decade before — and the poverty rate had actually risen.”

Let’s bore in on the poverty numbers and the operative phrase “a decade before.”

As everyone knows, Reagan was in office for exactly eight years, from January 1981 to January 1989. To compare his last full year in office (1988) to “a decade before” would take us back to 1978, a period that would include the last two years of Jimmy Carter’s single term. Those two years, it turns out, were absolutely brutal for America’s poor.

The last half of Carter’s tenure was marked by double digit inflation, record high interest rates, and a sputtering economy that fell into recession in the first half of 1980. That stagflationary mix caused the poverty numbers to soar. From 1978 to 1980, according to the Census Bureau, the number of Americans living below the poverty line rose by 4.8 million and the poverty rate jumped from 11.4 to 13.0 percent.

The poverty rate continued to climb under Reagan as the nation labored through a steep recession in 1981-82, a recession largely caused by the Federal Reserve Board’s efforts to slay the Carter-era inflation. After peaking at 15.2 percent in 1983, the rate declined steadily through the rest of Reagan’s time in office. By his last year in office, the poverty rate was exactly the same—13 percent—as it was in Carter’s last year in office. That’s nothing to crow about, but neither is it an increase or an obvious sign of failure.

To compare the last year of Reagan’s presidency to 1978 has the effect of saddling the Reagan record with the last half of the Carter presidency—a neat statistical trick worthy of the current presidential campaign season.

C'mon, Professor. Even Carter's aides have embraced the truth.

The most surreal thing I read today

is by Dan Shaughnessy, interviewing Bill Parcells, on his time with Bill Belichick and Tom Coughlin:
"They're serious-minded guys," says Bill Parcells, the man who brought Belichick and Coughlin together with the Giants from 1988-90. "But both of them have a good sense of humor. You don't always see it, but I've had quite a few laughs with both of 'em."

"Bill and Tom have different personalities. Bill would be a little more reserved. His demeanor is much more laid-back. I would say you would have a lot harder time figuring out what Bill was thinking than what Tom was thinking. These guys are both serious-minded fellas. They're both serious about their job. They both really have a lot of passion for football.

"They both came up paying their dues. Bill was holding cards for [Baltimore Colts coach] Ted Marchibroda, driving him around when he was young, and Tom was lining the fields at Rochester Institute of Technology. He started the program up there, so both of them came up kind of the way I came up. I was at Hastings College doing the wash after practice. I think all of us that came up that way, usually you have a greater appreciation for what the game is about.

"What Bill has done there in New England is remarkable. There's no other word for it. And I was just happy to see Tom win because he'd been taking a bunch of crap here in New York. They're just not going to be able to say anything now."

Belichick, a Parcells protégé for more than a decade, was New York's defensive coordinator in the three seasons that Coughlin worked with the Giants' wide receivers.

Parcells dismisses the notion that one must be a "players' coach" to succeed in 2008.

"I never have agreed with that," he says. "I think players are interested in people that can help them perform. I think you just have to be yourself and I think both of these guys are themselves and I think it comes across. Their teams reflect what they are, and that's a sign of good coaching."

Parcells never let his assistants talk to the media.

"That's just the way it was," he says. "They have rules now where the assistants have to be available. I know the media kind of resents the fact that they can't talk to everyone in the organization from time to time, but if you really think about it - can you imagine the editor of The Boston Globe letting all of his guys talk about policy and why they're doing what they're doing? If you really think about it, it's not that outlandish a policy. I was an assistant for three years [1980 in New England under Erhardt, and '81 and '82 with the Giants under Ray Perkins]. We didn't talk to the media. We tried to stay as far off the radar as we could."

Belichick and Coughlin must not have watched Parcells's press briefings. Much more fun in front of the mikes, the Tuna has no opinion on the podium comportment of his protégés.

"I see two guys that are serious about their team and they're trying to complete their obligatory responsibilities with the media," says Parcells. "They really are, and I don't mean that in a negative way."

What about Belichick's astonishing ability to remain obtuse about the most benign of topics?

"That's the way he does things," says Parcells. "I certainly wouldn't pass judgment on any of that. Whatever the hell he's doing, somebody else ought to copy it, because he's doing pretty good.

"You want to see the people that you know well be successful. And you're happy when that happens.

"I think I'm at the age where I enjoy that more than I used to."

I'm not a big fan of Shaughnessy nor Parcells, but do greatly appreciate Belichick. And I recently posted about how I was the biggest believer of the Giants in NYC, at least from August to December. And the guys in the Tradesports pit can vouch for that belief.

But I've regained a little respect for Curly Haired Boyfriend and Coach Slim Fast today. That was a good interview.

UPDATE: Osi Umenyora is not getting any respect from me right now. He could end up as the Roger Clemens of football if he keeps this up.

In search of insource v. outsource equilibria

via Tim Harford:
So, one day the boss has this crazy thought. He asks himself a question that has never occurred to him before: Why have any employees at all? Why have a building? Why not just sit home, wearing his jammies and bunny slippers, sipping a nice cup of tea, and outsource everything? He can write contracts to buy parts, he can pay workers to assemble the parts, and he can use shipping companies to box and transport the product.

You can tell that this parable is not going to end happily ever after. As Munger argues, there's a balancing act: too little outsourcing and a firm becomes a socialist state, denied incentives or price signals; too much and the problem of coordinating all the contracts becomes impossible.

It's worth thinking about how changing technology may alter this balancing act. The answer is not obvious. Some outsourcing decisions are made much easier to coordinate thanks to the internet and all the rest. At the same time, inter-firm communications also improve. And if the world is full of firms making more complex, intangible products, that may favour more implicit contracts and therefore larger firms. I simply don't know the answer and I'm not sure anyone else does either.

Marxist economics in one minute

by the estimable Steve Conover.

If you have another minute, read the comments, too.

Megan McArdle breaks Democrats into 3 logically exclusive groups

She asks, "Why Isn't this a null set?":
Democrats who believe that the GOP southern strategy is a defining moment that discredits the entire movement

Democrats who think that the Clintons are very deliberately playing up Obama's race in order to drive white voters into Hillary's camp

Democrats who will vote for Hillary Clinton in November once she secures the nomination.
There may be more, but these seem to have significant coverage.

Pelosi, Boenher, and Paulson announce the stimulus package

It sounded like 116 million Americans will be receiving $300 each. That's $35 billion.

I wonder what people will be spending their newly found wealth--3 fill ups of the Hummer gas tank?

I also wonder if consumer inflation spikes up in 2008 (by $35 billion or so).

SI Jinx? How about the Risk Magazine Jinx?

Many of you may have heard about the Sports Illustrated Jinx. I've discovered the possibility of the Risk Magazine Jinx:
The news that a rogue trader at Société Générale, the French bank, somehow ran up a 4.9 billion euro ($7.2 billion) loss in stock index futures without management noticing is provoking incredulity at the World Economic Forum in Davos.

Bankers, speaking anonymously, were amazed and dismayed. One worried this would further damage the reputation of banks for being able to manage their risks.

The news may also be provoking a little embarrassment at Risk Magazine in London. In this month’s issue, it name Soc Gen the “equity derivatives house of the year.” — Floyd Norris

Another 2007 winner was Merrill Lynch. This run extends back to the mid-Nineties when they named UBS the Derivatives House of the Year back in 1996, only to see that bank blow up in 1997.

My full post on Jerome Kerviel, the SocGen trader, is here.

Arnold Kling on the Keynesian emperor and lack of clothes

Once you accept the notion that jobs can be scarce, you can turn the rest of economics upside-down as well.

In macroeconomics, more saving is "contractionary" and more consumer spending is "expansionary."

In macroeconomics, it is bad to have foreign trade in which the value of what we buy is greater than the value of what we sell. Thus, a trade deficit is "contractionary" and a trade surplus is "expansionary."

3. In macroeconomics, a balanced budget or surplus can be "contractionary," while a deficit is "expansionary."

No wonder first-year economics students end up knowing very little economics. What they learn in micro gets canceled out in macro.

Classical economics does not allow for such a thing as a "general drop in demand for goods and services." Again, in classical economics, we have unlimited wants. There is never a need to increase demand.

The problem for classical economics is to explain the high unemployment rate of the Great Depression. As the late Nobel Laureate Franco Modigliani said in a famous address, are we to believe that the Depression was a massive outbreak of laziness?

My current view is that what we call "cyclical" unemployment is in fact a severe version of structural and/or frictional unemployment. During the Great Depression, many government policies, such as the National Recovery Administration, served mainly to create structural unemployment. There also was an unusually high level of frictional unemployment, as the spread of motorized road transport greatly altered the efficient structure of production.

Given this theoretical outlook, I would be inclined not to forecast a severe recession in 2008. There have not been any major developments that would have an impact on structural unemployment.

But I may be wrong. There is a chance that the Keynesian story is correct. If unemployment were to spike up toward 10 percent, I would be very sympathetic to attempting Keynesian remedies, including monetary expansion and deficit spending. But for now, the main "crisis" motivating "stimulus" is the fact that this is an election year.


Jesus follower Rick Warren impresses cosmopolitan athiest

Felix Salmon. Maybe it's just the Davos air, but in a crowd of such luminaries, the fact that Warren stands out is impressive.

It's pretty amazing that a bestseller "self-help" author could sell a book called the Purpose Driven Life that starts off the bat saying:
It's not about you.
I mean, what self-help consumer would buy such a book?

Unintended Consequences and the Irrelevant Minimum Wage

both at Cafe Hayek:

Some people seem to have misunderstood the point about this post on minimum wages. A lot of people I speak to, not just "regular" students, but legislators and journalists who I sometimes teach, think that only regulations or unions keep businesses from exploiting workers. They are shocked to discover that less than 10% of the private work force is unionized and that somehow, most workers, something over 96%, maybe closer to 99%, manage to make more than the minimum. Usually half of these groups when I survey them think that at least (at least!) 20% of the work force earns the minimum wage or less and that only legislation keeps it from being lower. But legislation turns out to be relatively unimportant compared to supply and demand—that is, competition. if you try to pay less than the going rate for the skills you want to hire, you can't attract workers.

Meanwhile, Tim Worstall points out something I missed:

Unfortunately, on the page he’s taken his information from he’s missed one thing which makes his case even stronger.

Nearly three in four workers earning $5.15 or less in 2006 were employed in service occupations, mostly in food preparation and service jobs.

That’s your waitron units and barkeeps folks. And what do we know about people who do these sorts of jobs? Well, perhaps you have to have actually done them (as I have, everything from the graveyard shift in a Denny’s to tending bar around the corner from this guy’s place): they all make tips. In fact, so much so that there is (or at least used to be when that BLS report was prepared) a special minimum wage for those in such jobs, one lower than the official Federal minimum wage.

Alex at Marginal Revolution has some interesting things to say on unintended consequences:

The law of unintended consequences is what happens when a simple system tries to regulate a complex system. The political system is simple, it operates with limited information (rational ignorance), short time horizons, low feedback, and poor and misaligned incentives. Society in contrast is a complex, evolving, high-feedback, incentive-driven system. When a simple system tries to regulate a complex system you often get unintended consequences.

Unintended consequences are not restricted to government regulation of society but can also happen when government tries to regulate other complex systems such as the ecosystem (e.g. fire prevention policy that reduces forest diversity and increases mass fires, dam building that destroys wet lands and makes floods more likely etc.) Unintended consequences can even happen in the attempted regulation of complex physical systems (here is a classic example involving turbulence).

Read the whole thing.

Junior SocGen trader Jerome Kerviel manages to lose $7 billion

Pictured here on the left, Monsieur Kerviel must have had more than 5 times his losses in notional futures positions, and was able to hide them successfully for several months.

FT Alphaville update here. WSJ article here.

So maybe that new low made yesterday morning was the Societe Generale unwind, and that VIX spike the day before was not due to economics.

UPDATE: FT has the mugshot.

UPDATE: Commenter etienne asks how this could be covered up for so long? My understanding is that he couldn't have done it alone. A lot of capital needs to be posted to the clearing corporation and as margin. That pledging must be done with the approval of senior officers in the bank. Monsieur Kerviel could be a scapegoat, like Nick Leeson was.

UPDATE: The head of SocGen investment banking, Jean-Pierre Mustier, says:
The specific pattern of his transactions was that they used fake transactions rolled on a permanent basis
Kerviel may have been booking bogus swaps against his futures positions, and someone else in SocGen may have gone to a named counterparty looking for a cash payment.

UPDATE: Bloomberg confirms my theory:
``The transactions that were built on the fraud were simple, positions linked to rising stock markets, but they were hidden through extremely sophisticated and varied techniques,'' Bouton, 67, said in a letter posted on the bank's Web site.

His approach was to balance each real trade with a fictitious one, and his ``intimate and perverse'' knowledge of the bank's controls allowed him to avoid detection, co-Chief Executive Officer Philippe Citerne told reporters. He rolled over his real trades before they reached maturity.

The trades first came to management's attention on the evening of Jan. 18, when a compliance officer found a trade that exceeded the bank's limits, Mustier said. When Societe Generale called the counterparty, they were told the trade didn't exist.

He ``breached five levels of controls,'' Christian Noyer, the governor of the Bank of France, said at a press conference today. He described the trader as ``a computer genius'' and said he was told he was ``on the run.''

Wednesday, January 23, 2008

The 1985 Superbowl Patriots see themselves in the 2007 Superbowl Giants

reports Nick Carfado:

It was long ago, but Steve Grogan, Pete Brock, and Steve Nelson can't help but see the spitting image of the 1985 Patriots in this season's New York Giants.

"There are certainly a lot of things that are similar," said Brock, who was the center on a very good offensive line in '85. "Having to win three playoff games on the road against all odds, to being given no chance to win the AFC Championship - us against the Dolphins and the Giants against the Packers - and now heading into a Super Bowl against a juggernaut like the Patriots. Back then, we were off to face the Bears, who were truly an incredible football team."

The '85 Patriots won three of their last four regular-season games to finish 11-5, tied for second with the Jets in the AFC East and good enough for a wild-card playoff berth. They beat the Jets, Raiders, and the AFC East champion Dolphins on the road in the postseason.

Likewise, the Giants beat Tampa Bay, Dallas, and Green Bay on the road in the playoffs. In fact, they have won 10 consecutive games on the road.

Few gave the Patriots a chance against Miami in the AFC Championship - the Fish hadn't lost to the Patriots at the Orange Bowl since 1966 - but the 31-14 victory culminated an improbable year for coach Raymond Berry's squad.

"The Miami game was so emotional," said Brock. "It broke a 19-year losing streak at the Orange Bowl. It's not an excuse for why we lost so badly [in the Super Bowl], just an explanation. Maybe it'll be the same thing for the Giants, who will have come off an emotional overtime win in frigid weather at Lambeau Field, the same way nobody gave us a chance."

Let's hope The '85 Pats are right, although I have a lot of respect for this Giants team. They almost won their last regular season game against the Patriots. I drafted Eli Manning to be my fantasy QB before Labor Day when none of the Giants fans in the league wouldn't touch him, and wanted Coughlin out. No Giant fan was thinking playoffs, even as late as Thanksgiving. Just a lot of grumbling every time I brought the team up and said how good they were looking.

So this boy from New England was the biggest Giants believer and booster in NY that I've met in NYC.

Until the conference championship games this past Sunday.


Very interesting update on the New York City Bailout during the 1970s

via Stephen Dubner:

I was fascinated by Felix Rohatyn’s story about global leaders urging President Gerald Ford not to let New York go bankrupt in the 1970s (”City to Big Mac: So long,” BTW, Nov. 19). I have another story, one I’ve kept to myself for over 25 years. I was in the middle of this effort, as assistant to Mayor Abe Beame and director of New York’s Washington office. As such, I helped lead the effort to obtain loan guarantees. One night I was in the office of the late Senator William Proxmire (D-Wis.) [then chair of the Senate Banking Committee] along with New York State lobbyists. Proxmire was on the phone with Chicago Mayor Richard J. Daley (the current mayor’s father) and motioned for us not to let on we were there.

After Proxmire hung up, he told us Chicago banks were pushing to let New York go bankrupt in order to hurt the city’s “money center” banks. In those days, banking was not national, and New York and Chicago were in feverish competition. Proxmire told us Daley would publicly support loan guarantees but not help much behind the scenes.

The senator asked us not to tell anyone about this, not even Beame or Governor Hugh Carey, since it would only hurt getting federal assistance. Ford’s stance against New York was bewildering to me, since a former New York governor, Nelson Rockefeller, was Vice-President. Ford’s stance played a role in his losing to Jimmy Carter, whom I joined in the White House as a Deputy Assistant.

Bruce Kirschenbaum

NBER members weigh in on the recession outlook

NBER is the official body that determines official recessions (usually many months after they occur). At the WSJ Economics blog, they have a roundup of NBER members' views:

Robert Hall, Stanford (Committee Chair): The December employment report was a “crystallizing event” that spurred the committee into early discussions of economic data, and monthly GDP figures are “not enough” to signal much. “At best the economy is flat right now. It stopped growing.”

Martin Feldstein, Harvard (NBER President): He says a recession is more likely than not in 2008, up from 50-50 odds last month.

Jeffrey Frankel, Harvard: “The primary concern has to be the domestic U.S. economy, and not the stock market,” he told the Boston Globe. “You have to guard against giving too much weight to Wall Street.”

Robert Gordon, Northwestern: The odds favor a recession starting late this quarter or next quarter, though “the best forecast now, based on guesstimates of first-quarter data, is that we’re not in a recession right now.”

David Romer, UC Berkeley: He’s not comfortable discussing a recession yet and only has “quibbles” with the Fed’s performance over the last six months. “If there are adverse shocks the Fed should do its best to offset them,” he said. “In general it would be good for the Fed to feel freer to move the funds rate a lot.” (Mr. Romer, along with wife and Berkeley professor Christina Romer, took Ben Bernanke’s spot on the NBER committee in 2002.)

Victor Zarnowitz, The Conference Board: Of the four monthly indicators tracked by the committee, two — industrial production and real personal income less transfers — appear to have peaked, in July and September, respectively. But, those peaks “can easily be reversed or moved through revisions,” he said. The other two — real manufacturing and trade sales and payroll employment — have not peaked yet. Monthly GDP peaked in September but “there are all kinds of problems” with that data. “There is no clear evidence of a peak. That’s my judgment. So no recession (yet), but it bears watching very, very closely.”


Howard Kurtz has a roundup of Bill, Hillary, Barack, Mike, and Fred


UPDATE: via QandO, "the first black president" is actually "acting white".

Bruce Bartlett believes that fiscal stimulus is too little too late

stating (via Mark Perry):
The history of anti-recession efforts is that they are almost always initiated too late to do any good. This chart, based on recession timelines from the National Bureau of Economic Research, shows the enactment of stimulus plans is a fairly accurate indicator that we have hit the bottom of the business cycle, meaning the economy will improve even if the government does nothing.

Quote of the day

But interestingly Roubini's predictable bearishness was met with no pushback whatsoever: given the panic in global stock markets and the US central bank, he's sounding positively mainstream at this point. Maybe that's the ultimate buy signal: when everybody agrees with Roubini, you know it can't get any worse.--Felix Salmon, at Davos

Equity markets to open 3% lower today

The good news is that stocks are cheap now. The bad news is they could get a lot cheaper.

The herd tends to overshoot to the upside as well as downside. But this is a cyclical business, not a secular trend.

UPDATE: While I think we are in the 8th inning of the stock market drop, this does not hold true for credit markets. Though $100 billion has been written down off the balance sheets of banks, I think there is at least another $100 billion to go. The financial sector will continue to be a drag on the bigger equity indices.

Tuesday, January 22, 2008

The biggest bull around

could be Brian Wesbury:
To determine fair value for stocks we use a
capitalized profits approach, taking government figures
on profits based on corporate tax filings and then
discounting those profits with a 6% 10-year Treasury
yield. We use a 6% 10-year yield because we believe
bond yields are being held artificially low today by the
Fed. By using a higher bond yield than necessary as a
discount rate, we are taking a conservative stance.

This model suggests that the market is undervalued
by 25% today. With the economy picking up steam in
2008, our forecast is that the Dow moves up as well and
our year-end 2008 forecast is 15,000, with the S&P 500
at 1625.

Once recession fears prove unfounded, US equities
will soar. Those who maintain their appetite for risk
will be richly rewarded sooner than they think.
He's right more often than not; I hope he's right right now. But I'm keeping plenty of powder dry; I suggest you do the same.