Catch-43

Updated links on the sidebar

Check them out!

posted by JM @ 5:31 PM |

Isn't a picture sometimes worth a thousand words?

posted by JM @ 4:49 PM |

Watching Ahmadinejad

So I get home from work, flip on MSNBC, and who do I see?

I'm listening to him speak in an interview with Brian Williams, and I'm struck first and foremost by how calm and rational he sounds. He's looking me in the eye and saying things that are completely untrue, and yet it all sounds strangely believable. I find myself thinking one damning question - "Is this what it would have been like to watch Hitler?"

I once read a book entitled Albert Speer: His Battle With Truth by Gitta Sereny, which I find relevant to this discussion. Albert Speer was Hitler's chief architect and one of his best friends. He was smart, loving, responsible, caring, considerate, etc... A solid guy. The book is about his struggle to come to terms with what was done in his name and how badly he was misled by Hitler.

It's always been tempting for me to think that if I were a citizen of Germany in the 1930's, then by God I would have resisted the SS. I wouldn't have been racist, I wouldn't have condoned bigotry, I would have fought for the rights of Jews and had a clean conscience. However, reading this book forced me to challenge my simplistic assumptions. In Speer you have a shining example of humanity, a person who one would never think would be taken in by a lunatic like Hitler -- and then he is taken in. Which begs the question - "how?"

Hitler is perceived in our culture as the shouting, gesturing madman from the Nuremberg rally (Speer designed the famous Cathedral of Light at the rally) - which is true. However, there was much more to Hitler than just that. That persona worked when he was working a mass audience of uneducated workers and SS men. However, what I find very interesting is that Hitler won over the intellectuals first. To do that, he traveled to their universities, put on his tweed jacket and his eyeglasses, and gave sedate little erudite speeches to the skeptical professors. He was quite successful at it, and this is precisely how he pulled in Speer.

This is where Ahmadinejad comes in. To me, in the interview tonight he was attempting to play the American public. He was attempting to give a quiet, rational argument for his actions. He was attempting to do what Hitler did so well, and it gives me the creeps.

In the photo below, Speer is on Hitler's right. Let's not repeat his mistake, shall we?

posted by JM @ 4:21 PM |

The Definitive Statement on Global Warming

If you haven't seen President Bush's take on the warming of the globe, you haven't lived.

posted by JM @ 5:49 AM |

The Price of Oil

The Energy Information Administration asks "Why Are Oil Prices So High"?

First off, I believe that for reasons of context, it is useful to note that the price of oil was $10 in late 1998. When the price is that low, oil companies have no incentive to invest money in further exploration and new technologies. Major projects in the energy industry, at least the kind that have the power to modestly affect world markets, have a lead time of anywhere from 5 to 10 years. As a result, we are today seeing the results of ridiculously cheap crude oil prices in the late 1990's.

Anyhow, please read the entire article - it is long on facts and short on politics (no pun intended, if I have any readers familiar with the energy trading industry). Here is a summary of the main reasons for high oil prices followed by my commentary:

1) Soaring energy demand - primarily from India and China, and from about 2004 onward; the demand is far outpacing the production of oil; shockingly, the big bad United States with its herd of big bad SUV's driven by obese people who eat McDonalds and got to church and vote Republican is only a small part of the tremendous recent growth in demand; India and China's economies are rapidly growing, with a commensurate demand for new energy

2) Non-OPEC suppy has failed to meet expectations - due primarily to hurricanes in the Gulf of Mexico and a declining investment environment in Russia (to say the least); in turn, OPEC countries are attempting to make up for the non-OPEC decline, causing a decrease in OPEC surplus production capacity

3) Low OPEC spare capacity levels increase the demand for inventories - with OPEC's spare capacity much lower than normal, the market becomes highly vulnerable to price shocks (i.e. very volatile), market participants realize this, and thus demand to hold on to larger stocks of oil inventory than normal (as a hedge against the high price risk) - this increases demand for oil even further, which causes the price to rise

4) Geopolitical issues in major OPEC countries reduce supply - due to chaos caused by terrorists (Iraq, Nigeria) or madmen (Venezuela, Iran)

It is significant to note that the countries who have driven out western oil companies in the name of nationalism (Iran is a great example) do not have the capital or technological know-how to sustain production in their fields. As a result, their production is declining with every passing year. We do not take note of this here in the west because the high price of oil is temporarily disguising the fact that less and less of it is being produced by our enemies. If you take a global view of energy, a good rule of thumb is that state-run oil companies have the vast majority of the world's reserves but don't know how to extract the oil very well, while western oil companies have the capital and technology to extract oil profitably and efficiently but don't have as much reserves to work with.

5) Bottlenecks in the worldwide refining industry - lead to increased profit margins for refined products, which increases the demand for crude oil (i.e. refiners want more of it so they can turn it into high margin refined products, and when a group wants more of something the price will rise); I'd just kindly like to point out that the United States has not built a new refinery since 1976, and that virtually all of our refining capacity is located in Texas and Louisiana, which as we all saw last year is prime hurricane real estate

6) Weather - hurricanes in 2005 disrupted both U.S. refining capacity and oil production in the Gulf of Mexico (as well as pipelines to get the oil to shore); the threat of further bad weather pushes prices higher (thanks for your alarmism Al Gore!!!)

Finally, the paper notes that increased speculative activity in the oil futures market, primarily by massive hedge funds, is a symptom of price volatility (and high oil prices) rather than the cause of it. This merits some analysis, because what the paper says is true but it leaves out a few things.

Let me first summarize the paper's (excellent) points - the increase in speculative activity is due to the fact that oil producers perceive "a high risk of uncertainty surrounding the value of future oil prices", and thus want to shed that risk in the marketplace via energy trading. Speculators (read: hedge funds) are eager to pick up that risk in the search for higher and higher investment returns. The paper correctly points out that "in times of ample spare capacity there is little motivation for commercial producers and users of energy to shed risk, or hedge, since there is little perceived risk."

Fair enough. However, it should be noted that hedge funds have increased in size exponentially over the past five years or so, particularly after the bursting of the tech bubble in 2000-2001. Since then, wealthy investors decided they wanted to go with exotic hedge funds to earn them decent returns, instead of an untrustworthy stock market. As the world's economy declined, interest rates were slashed in a bid to turn things around. This helped out the world's economy, but hurt investors - who were forced to throw growing amounts of idle capital wildly around the globe in search of profits.

Hedge funds stepped in, offering returns of 20%, 30%, or more. They grew rapidly, and their power in the marketplace ballooned. Enter extreme price growth of crude oil (reasons outlined above), and the hedge funds suddenly saw a large opportunity to make money in oil futures. I don't believe that hedge funds can truly and substantively swing the market upward on their own (through increase demand for oil futures), but they can sure influence how strongly the pendulum swings. They have an exaggerative effect on the market, albeit in the short-term.

Over time, crude oil prices should closely track the reality of oil reserves and oil production, which Figure 5 in the paper shows.

posted by JM @ 7:13 PM |

PCAOB in trouble?

Kenneth Starr is taking on the constitutionality of the Public Company Accounting Oversight Board ("PCAOB"), which is a snarling pit bull of an agency created by the Sarbanes-Oxley Act of 2002 ("SOX"). It has the authority to set auditing standards for publicly traded companies (related to SOX testing only), to inspect and test any SOX audits for proper compliance, and to devise and enforce penalties against both companies which violate SOX and auditing firms which perform unsatisfactory SOX testing.

Under SOX, public companies are required to maintain, document, and test a rigorous system of internal controls designed to decrease the risks of fraud and/or material misstatement of the financial statements. Accounting firms are required to test the compliance of their clients with these requirements, as well as do their own controls testing and issue their own audit opinion on internal controls.

In the post-Enron environment, both companies and their auditors were highly interested in taking a conservative approach to audit risk. They wanted to know exactly how to comply with this new law. The PCAOB wasted no time telling them, issuing a series of pronouncements which could be interpreted as:
a) draconian, or
b) vague, and thus the only safe interpretation of them was draconian

Either way, chaos and anarchy ruled the day, and there were a lot of 100-hour workweeks.

Next, the PCAOB got to work auditing the work of the auditors - you can see the results here.

Now, they have turned around and said that, in addition to doing terrible work, auditors are milking this whole SOX thing too much. They are running inefficient audits and charging higher audit fees to their clients, as if SOX was the Permanent Employment For Accountants Act. They are currently threatening to punish audit firms that run inefficient audits. If you're keeping score at home, they first chastised auditors for doing too little work and now they are chastising them for doing too much.

However, there is hope on the horizon.

Kenneth Starr's aforementioned lawsuit says two explosive things:

1) The PCAOB violates the Appointments Clause of the U.S. Consitution, which says that officers of the United States are to be appointed by the President with the advice and consent from the Senate. PCAOB members are not appointed by the President, but are instead appointed by the SEC (whose members are appointed in compliance with the Appointments Clause). Given the immense power wielded by the PCAOB, this is a strong argument

2) The PCAOB violates the separation of powers principle because it has "executive, legislative and quasi-judicial functions." In other words, it is judge, jury, and executioner, which equals tyranny. Now, one could make a strong argument that many federal agencies (i.e. the unofficial fourth branch of government) violate this principle as well, but that is for another post!

Further, if the PCAOB is ruled unconstitutional the entire Sarbanes-Oxley Act will be struck down (according to Kenneth Starr).

I am very pleased.

posted by JM @ 5:54 AM |