27 August 2016

Do You Want Some Cheese With That Whine?

Ordinary investors who are paying attention understand that aggressively managed mutual funds almost always under perform the market over any significant time horizon.

These same investors also understand that you pay more in fees for this lackluster performance, and so they tend to invest in passive investments.

You cannot continue this, because it is worse than Communism:
The rise of passive asset management threatens to fundamentally undermine the entire system of capitalism and market mechanisms that facilitate an increase in the general welfare, according to analysts at research and brokerage firm Sanford C. Bernstein & Co., LLC.

In a note titled "The Silent Road to Serfdom: Why Passive Investing is Worse Than Marxism," a team led by Head of Global Quantitative and European Equity Strategy Inigo Fraser-Jenkins, says that politicians and regulators need to be cognizant of the social case for active management in the investment industry.

"A supposedly capitalist economy where the only investment is passive is worse than either a centrally planned economy or an economy with active market led capital management," they write.

High fees and subpar returns, coupled with the creation of a plethora of relatively inexpensive exchange-traded funds that track major equity indexes have helped fuel a massive shift in asset flows away from active management in favor of passive. While policymakers are quick to praise the benefits of these low-cost options for retail investors, Bernstein argues that this is a short-sighted view that doesn't take into account the potential downsides involved with the increase in passively-managed assets.

………

The social function of active management, in a capitalist society, is that it seeks to direct capital to its most productive end, facilitating sustainable job creation and a rise in the aggregate standard of living. And rather than be guided by the Invisible Hand and profit motive, capital allocation under Marxism is conducted by an oh-so-visible hand aimed at producing use-values that satisfy each member of the society's needs. Seen through this lens, passive management is somewhat tantamount to a nihilistic approach to capital allocation.
No.

The mutual fund is a relatively new phenomenon.

You are having a kitten over this because, to quote Blazing Saddles, "We've gotta protect our phony baloney jobs!"


26 August 2016

I Am Not Sure What This Means

ITT Educational Services, you've probably seen their ads for ITT Technical Institute, has been prohibited from enrolling new students using any federal aid

It sounds like a big deal, but the educational chain has been circling the drain for a while, so it's not like the Depoartnebt if Education went after a major going concern.

It has been showing signs of financial distress for some time, and its accreditation has been problematic as well:
The federal Department of Education imposed strict new rules on Thursday on one of the nation’s largest for-profit education companies, ITT Educational Services, barring it from enrolling new students who use federal financial aid and ordering it to pay $153 million to the department within 30 days to cover student refunds if its schools close down.

John B. King Jr., the secretary of education, said the department took action to protect both ITT’s students and the taxpayers who are on the hook for losses when students default on their federal aid. “Looking at all of the risk factors, it’s clear that we need increased financial protection and that it simply would not be responsible or in the best interest of students to allow ITT to continue enrolling new students who rely on federal student aid funds,” Mr. King said in a statement.


The action threatens the viability of the beleaguered company, which like most for-profit education entities relies heavily on government financial aid programs for students to fund its operations. As of June 30, according to a regulatory filing, ITT had only $78 million in cash on its balance sheet.
Dead School Walking.
ITT operates 137 campuses in 39 states, providing career-oriented programs to 43,000 students at ITT Technical Institute and Daniel Webster College locations. ITT was once a highflying stock, trading above $75 a share in 2012. On Thursday, its shares closed at $1.40.
Ouch.
The company has been under increased scrutiny by the Education Department since 2014 and has been accused by both federal and state regulators of misleading students about the quality of its programs and their employment potential upon graduation. The Consumer Financial Protection Bureau filed a lawsuit against ITT two years ago, accusing the college chain of predatory student lending.

In addition to the enrollment restrictions imposed by the Education Department, ITT is also prohibited from awarding raises to employees, paying bonuses to its executives or paying special dividends without department approval. In recent years, ITT has not paid bonuses to its executives. Still, Kevin Modany, its chief executive, received total compensation of $1.4 million last year, the company’s proxy statement shows.

The Education Department also required ITT to develop “teach-out” plans for current students, allowing them to finish their programs at other colleges if ITT shuts down.

ITT, based in Carmel, Ind., must also inform its students that its accreditor, the Accrediting Council for Independent Colleges and Schools, has determined that the institution is not in compliance with its criteria. That determination was made this month. Earlier this year, ITT said it believed its schools were in compliance, but it also acknowledged that if the schools lost the accreditation, they would no longer have access to government loan programs.

Those programs are the lifeblood of ITT and other for-profit education companies. Federal aid accounted for almost 70 percent of ITT’s $850 million in revenues last year, the Education Department said.
It would be nice if it happened when predatory for profit schools were not already in a death spiral.

25 August 2016

Speaking of Defense Procurement Misconduct………

The US Air Force has declared the F-35 A combat ready.

The Pentagon’s director of operational test and evaluation (DOT&E) has declared that it is not even close:
The Pentagon’s top weapons tester is again sounding the alarm over the F-35 Joint Strike Fighter, warning that significant deficiencies with the gun, challenges integrating the short-range AIM-9X missile and unresolved software bugs could delay fielding of the jet’s full capability.

On the heels of the U.S. Air Force’s milestone decision to declare the F-35A ready for battle, the Pentagon’s director of operational test and evaluation (DOT&E) is raising new concerns about Lockheed Martin’s fifth-generation fighter. In an internal memo to Defense Department leadership Aug. 9, the DOT&E warned the jet still has a long way to go before full combat capability and may run out of funds to fix significant performance problems on time if late discoveries delay the end of the program’s development phase.

………

In response to Aviation Week queries, the DOT&E reiterated concerns that the program’s official start date for IOT&E is “not realistic,” repeating the agency’s public assessment that the F-35 will not be ready to begin the test period until mid-2018 at the soonest—assuming the JPO can provide production-representative test aircraft by then.
Late, over budget, and not combat ready.

The internal fun does not shoot straight, there are cracks in the carrier variant's wings, external carriage of ordinance is at least 2 years away.

The Pentagon procurement process at its finest.

This is a Fascinating Concept, But Only if it is Applied Rigorously

The suggestion that defense contractors post performance bonds is intriguing, but, much like the rest of the military industrial complex, the question is that the people who would enforce the terms of this bond would not allow themselves to be swayed by the political and economic powers of the defense contractors:
In Washington, D.C., “military reform” usually means “acquisition reform.” There is a lot of talk about it on Capitol Hill and in the Pentagon. Enough think-tank papers have been written on the subject to clear whole forests. But of the myriad options out there, one has escaped notice.

Performance bonds — money put up by a contractor as insurance to the buyer to make sure the job is done on time and to specifications — are already required for federal building projects under the Miller Act. Prime construction contractors have to furnish a surety to the government to ensure their work is completed properly and to guarantee all subcontractors get paid should the firm go out of business.

These bonds have been used with some success in overseas defense procurement contracts. Using performance bonds is one way the government protects its interests without having to resort to judicial proceedings. In fact, the Congressional Research Service recently noted that performance bond money can be used to “offset the costs of contract completion, which can include delays and finding a new contractor.”

The same idea could potentially be applied to a weapons acquisition project to protect the government’s — and the taxpayer’s — interests. But it has so far been overlooked during the sometimes desperate search for solutions to the Pentagon’s dysfunctional buying process.

One key selling point for this idea is that provisions for using performance bonds for Defense Department acquisition already exist. As is usually the case, improving discipline in weapons spending doesn’t require new rules but using the rules that already exist to better effect.
That last paragraph reveals the weakness of the concept.

The tools are already there, but the Pentagon is unwilling to use them.

If you were to decertify the 4 services, and move procurement to an agency independent of the Pentagon, a structure similar to Sweden's FMV, you might have a chance of making it work, but this would require a catastrophe to generate sufficient impetus to do this.

The Origins of Money

I'm sure that you all "know" how money started.

Societies were bartering, and it became too unwieldy, and so money was created as a proxy for value that reduced the friction in the transactions.

It's an elegant theory. The only problem is that no one has ever found an example of this ever.

No examples in archeology, none in mythology, none.

Also, how does one develop a sufficient velocity to commerce to justify the creation of money?

You need money to create the levels of commerce that justify its creation.

It's a chicken egg thing.

An alternate theory, and one that has some actual evidence behind it, is that money grew out of a system of debts and fines that were driven by the expansion of government.

This origin story actually works the way that human minds do:
Most of us have an idea of how money came to be. It goes something like this: People wanted to exchange goods for other goods, but it was difficult to coordinate. So they started exchanging goods for money, and money for goods. This tells us that money is a medium of exchange. It’s a nice and simple story. The problem is that it may not be true. We may be understanding money entirely wrong.

The above story assumes that first there was a market, and then people introduced money to make the market work better. But some people find this hard to believe. Those who subscribe to the Chartalist school [the belief that money originated with the states attempt to influence their own economy] of thought give a different history. Before money was used in markets, they say, it was used in primitive criminal justice systems. Money started as—and still is—is a record of debt. It is a way to keep track of what one person owes another. There’s anthropological evidence to back up this view. Work by Innes, and Wray suggest that the origins of money are more like this:
In a pre-market, feudal society, there was usually a system to maintain justice in the community. If someone committed a crime, the authority, let’s call him the king, would decide that the criminal owed a fine to the victim. The fine could be a cow, a sheep, three chickens, depending on the crime. Until that cow was brought forward, the criminal was indebted to the victim. The king would record the criminal’s outstanding debt.

This system changed over time. Rather than paying fines to the victim, criminals were ordered to pay fines to the king. This way, resources were being moved to the king, who could coordinate their use for the benefit of the community as a whole. This was useful for the King, and for the development of the society. But the amount of resources coming from a criminal here and there was not impressive. The system had to be expanded to draw more resources to the kingdom.

To expand the system, the king created debt-records of his own. You can think of them as pieces of papers that say King-Owes-You. Next, he went to his citizens and demanded they give him the resources he wanted. If a citizen gave their cow to the king, the king would give the citizen some of his King-Owes-You papers. Now, a cow seems more useful than a piece of paper, so it seems silly that a citizen would agree to this. But the king had thought of a solution. To make sure everyone would want his King-Owes-You papers, he created a use for them.

He proclaimed that every so often, all citizens had to come forward to the kingdom. Each citizen would be in big trouble, unless they could provide little pieces of paper that showed the king still owed them. In that case, the king would let the citizen go, and not owe them any longer. The citizen would be free to go off and acquire more King-Owes-You papers, to make sure he would be safe the next time, too. This way, all the citizens needed King-Owes-You papers to stay out of trouble. That made King-Owes-You papers widely accepted, and consequently, also a useful medium of exchange. This lead to the rise of markets.
Not only does this better match the way humanity works, the creation of money is the other is a Kumbaya moment that really hasn't ever occurred in the history of finance.

The author goes on to explain how we actually have relatively recent history to explain this:  The Spanish conquest of the Americas, where the locals saw the need for money only when their oppressors started demanding taxes.

One Week ………

Since ………

I ………

Last ………

Had ………

Caffeine. ………


I ………

Am ………

Feeling ………

So ………

Alive ………

Right ………

Now.


Man, I want a cuppa Joe.

Doing on my own, not on a doctor's instructions.

Linkage


To go along with the Ikea link:

24 August 2016

This Explains Why College Costs So Much

Here is a little sample of the corruption and self dealing that is increasingly at the heart of elite colleges.

The attached link is a series of vignettes, but read the penultimate paragraph, and then read the rest:
So, what we’ve got here is an NYU President handing a New York apartment, meant for faculty, to his son, and what looks rather like powerful faculty members feathering their own nests with cheap housing; we’ve got a Baylor President not wanting to cross a powerful and wealthy football team, even to the extent of failing to handle a rape scandal; and at Penn State we’ve got a President who’s a member of the “innovation cult,” when it’s not at all clear this will benefit the student body as a whole. Have any of these institutions learned from these experiences? No. Are these college Presidents personally responsible for corruption at their universities — for converting a public institution to serve private purposes? Sexton and Start, yes. For Barron, the jury is still out.
Go read.

Irony is Officially Dead

Former Congresswoman "Crazy Eyes" Michelle Bachmann is now advising Donald Trump in foreign policy.

I volunteer for cryogenic stasis experiments from now until the day after the elections.

Hell, I volunteer for tribute.

And Now We Have Very Serious People Coming Out Against the TPP

So, now we have a former Reagan and Clinton trade official and a retired general arguing that the Trans Pacific Partnership (TPP) is a security risk to the United States because it will hasten the hollowing out of American manufacturing, which makes the US dependent on foreign manufacturers in places like China and Vietnam for the crucial building blocks of military equipment.

This is a rather interesting counterpoint to the Obama administration's argument that we have to pass the TPP as a counter weight to Chinese influence in the region.

The first OP/ED appeared in the New York Times. The second appeared in The Hill.

It doesn't get any more establishment than that.

I'm actually beginning to think that Obama won't be able to get it through during the lame duck session.

I hope that this is not irrational optimism.

Those Old Family Ties


Bummer of a Birth Mark, Jim
One of the stories floating around right now is that Mylan Pharmaceuticals jacked up the price of EpiPens by over 400% over the past few years.

Given the state of the American pharmaceutical industry, we've seen something similar from the 3 manufacturers of insulin colluding on price hikes,  it's not a particularly surprising or unique state of affairs.

What is news however is that Heather Bresch, the company's CEO, is the daughter of Senator Joe Manchin (D-WV), and Mylan is one of the most generous donors to him.

In fact, a former Mylan lobbyists, Michael Garrison, appointed  president of the University of West Virginia by Manchin when he was governor had to resign in disgrace when he bent the rules to give Heather Bresch an unearned MBA.

So now this linkup is hitting the mainstream news:
The growing congressional scrutiny of pharmaceutical giant Mylan over the high cost of EpiPens could prove awkward for Sen. Joe Manchin.

The West Virginia Democrat’s daughter, Heather Bresch, is chief executive of the company, which appears to have hiked the price of the epinephrine auto-injector by 400 percent since 2007. The device, which is used to treat severe allergic reactions, now costs more than $600 per dose.

This price increase has become a public relations disaster for Mylan and at least four of Manchin’s Senate colleagues are either pressing the company to reduce the cost of EpiPens, asking it to explain the price increase or requesting federal regulators to investigate the matter. Manchin is not a member of the Senate Judiciary Committee, which has shown the most interest in probing Mylan’s pricing practices, and so far the senator is not discussing the issue.
Manchin has spent his time in the Senate being a Joe Lieberman Democrat, so I have absolutely no sympathy for the fact that he is getting jammed up by this.

Oops!

It turns out that because of sloppy law writing in Missouri, theft is no longer a felony in the Show Me State:
On an opinion that went largely unnoticed, the Missouri Supreme Court issued a ruling Tuesday that had the effect of making most stealing offenses no longer felonies thanks to an apparently inadvertent change to state law way back in 2002. The far-reaching decision sent criminal defense attorneys across the state scrambling.

The case – State v. Bazell – was brought by a woman who had been convicted of multiples felonies for stealing firearms, among other things, in a burglary case. The court said the firearm felonies should be knocked down to misdemeanors because a portion of the state's criminal code designating certain types of offenses as felonies is written in a way that doesn’t make it applicable to the state’s definition of stealing itself.

“If the words are clear, the Court must apply the plain meaning of the law,” the opinion said. “When the meaning of a statute is clear, the Court should not employ canons of construction to achieve a desired result.”

………

Subparagraph 3 covers a whole assortment of stealing crimes, including the stealing of explosives, credit cards, motor vehicles, property deeds, anything worth between $500-$25,000 and in any case in which the suspect physically takes something from the victim’s person. Additionally, subparagraph 8 – which designates stealing anything worth more than $25,000 as a Class B felony – has similar language, and thus is no longer applicable as well, public defenders believe.

Because of Tuesday’s ruling, anyone who was charged with a felony for those kinds of crimes has a chance to get it brought down to a misdemeanor, as long as it’s for a crime after 2002, when the language was added, Flottman said.
Son of Missouri Harry S Truman must be spinning in his grave.

Son of Missouri Mark Twain must be laughing somewhere.

Words to Live By

I came across a Chassidic story related by Martin Buber:
There is a famous story told in Chassidic literature that addresses this very question. The Master teaches the student that God created everything in the world to be appreciated, since everything is here to teach us a lesson.

One clever student asks “What lesson can we learn from atheists? Why did God create them?”

The Master responds “God created atheists to teach us the most important lesson of them all — the lesson of true compassion. You see, when an atheist performs and act of charity, visits someone who is sick, helps someone in need, and cares for the world, he is not doing so because of some religious teaching. He does not believe that god commanded him to perform this act. In fact, he does not believe in God at all, so his acts are based on an inner sense of morality. And look at the kindness he can bestow upon others simply because he feels it to be right.”

“This means,” the Master continued “that when someone reaches out to you for help, you should never say ‘I pray that God will help you.’ Instead for the moment, you should become an atheist, imagine that there is no God who can help, and say ‘I will help you.’”

ETA source: Tales of Hasidim Vol. 2 by Martin Buber.
This has always been my philosophy:  If you have to use God to justify your actions, you are doing something wrong, it turns out that I have some esteemed Jewish authorities who agree.

BTW, I also love it how Jewish stories use "Clever" as a euphemism for asshole.