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A week in

So, just over a week in of low-limit ($1-$2) NLHE in Vegas. 59 hours. And, after losing $240 in about 15 minutes last night, a grand total of $17 up.

What are the "key takeaways" so far?

The first is that knowing how to win in these games (in the long run) is easy; having the self-discipline to practise it is hard.

Many players sat down and were obviously capable, but two or three hours in (or four or five drinks in) they got bored and started playing many more hands than they should.

Then there are the old regulars. They are tight, have a generally fixed modus operandi (try to get into pots cheaply and then only raise with very good hands) and are probably small losers overall

Third, there are the better regulars. More aggressive, competent but not stellar. Probably small winners.

Fourth, there are the very weak tourists (daytime). Just generally weak with little knowledge of what they should do, let alone the ability to practise it. Can be very hard to put these players on a hand from their actions, but it's fairly easy to narrow their range from their attitude.

Fifth, there are the drunken loud aggressive tourists (evening). As I wrote in a Facebook post, these are dangerous players. You can win lots of money from them, but they can easily spike a hand or two, get $700 in front of them, and then play every hand aggressively. You know that they are rubbish, but the bit of luck at the beginning gives them a kind of laggy confidence. Unlike many players, I prefer to avoid playing against these guys if I have a big stack. Sure, I'm probably positive EV, but a single bad break can wipe out five or six smaller wins. I don't like that kind of volatility.

Finally, there are the good players. Exiled online pros, quality tourists. Can be enjoyable to play against and to chat with, but you won't make much cash out of them.

A second key takeaway is that it's plain to me how self-delusional it is to be in the live game. We know this from the never-ending whinings of the general live poker-playing population of how unlucky they are. I noted to myself yesterday that in three "key hands" (KK v QQ, KK v QQ, AKs v AQs) I had lost two of them. While in the gym this morning I ran some numbers through my head and reckoned that I would win all three about half the time, while I would lose two of them only about 4% of the time. Half the time (if I had won all three - the expected "norm" for many weaker players!) I would have been $500 on those three hands, while as it turned out I was $200 down.

But then I caught myself. Hold on, this could be selective memory. Let's look at the notes I have taken on key hands during the week.

I have been sitting down with 60bb ($120) as kind of a new strategy (it's my current online strategy). The reasoning behind it is that you are left with far fewer "tricky" decisions. As I gain live-play confidence and get a better grip on opponents and their habits (and build up a bankroll!), I can move up to deeper stacks.

So, most of the "key hands" have been either all in pre flop or all in on the flop.

How have they run through the week?

I didn't take notes for the first few games, but looking at my numbers and using my memory, I suspect that I had four to six "big" hands and that I won half of them. (Note, this analysis doesn't really take account of how many times you are on the good or bad side of a cooler. I shall return to that.)

16/12: Won $300 splash pot for $200. My KQ beat 86 for a $200 gain. 30% lose $100. 70% win $200. Won $200. + $90 over EV

16/12: Won $200 pot when opponent misread hand.

17/12: Lost AK v 33 in $140 pot for minus $60: 48% win $70, 52% lose $60. $30 under EV. Running total +$60 over EV
17/12: Top 2 pair on flop loses to flush draw for $210 pot. Win $110 67% of time. Lose $100 33% of time. $60 under EV for hand. Running total, level.

18/12: Won triple-through from $40 with AK. Hard to work out EV. Probably +$40. Running total $40 over EV.
18.12: KK v QQ all in pre lfop held up for $210. $40 better than EV - running total of $80 over EV

19/12: Misread board for $75 mistake. EV on that (I might still have bluffed him off!) prob -$30. Total $50 over EV
19/12: Shoved AQ on flop of A53 and lost $200 pot to A3. about $20 below EV. Total $30 over EV.
19/12: AK v 88 all in pf for $80 loses on board of K8xxx. $40 under EV. Total $10 under EV
19/12: Got lucky on cooler hand of 66 v 34 (v AA v JJ) on board of 652. 5 came on turn. About 30% I guess when everything is taken into account. $190 over EV? Running total $180 over EV

20/12: KK loses to QQ for $120 all in pre flop. About $190 under EV. Running total, $10 under EV.
20/12: KK beats QQ for $130 all in pre flop. About $50 over EV. Running total $40 over EV.
20/12: Q8s beats AA on board of Q82 for $400 pot. About $80 over EV. Running total is $120 over EV
20/12: QQ loses to T2 on T42 board for $240 pot. About $50 under EV. Running total is $70 over EV
20/12: AKs loses to AQs for $120 pot. About $190 under EV. Running total is $120 under EV.

So, although I'm running about 60bb below EV, this is not running exceptionally bad. I haven't hit a high hand or a high hand of the hour. I reckon I could have expected one of these in the week. So that's another $70 or so of "running bad". But I HAVE hit and won a splash pot, which is probably $100 ahead of EV. On so called cooler hands (AA v KK, or any hand where neither party does anything wrong, but one player is way way ahead) I'm probably a bit ahead of the game. I've ditched QQ preflop a couple of times because I was sure opponent was in the range AA KK AK (with the first two big favourites) so perhaps I have avoided the errors made by other players when I have had KK v QQ. But I think I've had fewer "no way could I have avoided that" than I've had "no way he could have avoided that" kind of hands.

Conclusion? Probably running slightly bad, but nothing exceptional. I reckon that I have made $500 worth of mistakes. That sounds bad, but in 1600 live hands, there aren't many players who make no mistakes. It's eliminating those errors that is the key to being a profitable poker player at these levels, not coming up with "brilliant" plays.

That said, I think I've made some nice plays that have increased my profit on a hand (and my EV). The most important one is not trying to push people off a hand when you think that you are well in front. If I had to name one major error of most weaker players here, it's that they overbet strong hands because they are scared of losing the pot. The result is that they win small pots and then lose big ones. It isn't how many pots you win or lose, it's the size of the pots you win or lose.

I really ought to practise better game selection, but I like playing "good" players because trying to only play bad players is a poker dead-end. You never learn stuff. Take each game as it comes and try to make the best of the material in the game, rather than calling for a seat change because a known fish is at one of the other tables.

I find the daytime games easier. Volatility is lower, ranges are narrower. The mad evening games might have a higher EV (even for me) but they also have far higher volatility. I do not enjoy adrenalin rushes, and I find the excitement and the "high" generated by big gambles that pay off less pleasant than the "lows" generated by bad beats for 200bb or more. As I become inured to the amount of cash, then I would take on the volatility with less concern.

Have I learnt anything in the week? Yes. You can begin to categorize players; see what works against them and what doesn't, predict with greater certainty what they are going to do in a given situation. It's hugely different from the online game and you can get away with stuff that would simply be slaughtered if you tried it online. Whenever I read on Facebook those live players who talk about "it's not about the odds, it's about reading their faces", I just say to myself -- bring 'em on.


(First) few days in Vegas

So, five days into Vegas, and no blog, no photos. What's been going on?

The main answer is, I guess, not a great deal.

I managed to nick seat 36D on the way over with BA. That, as I hoped, snaffled me a three-seater to myself.

I then had to pick up my rental car. I had planned my route from the airport to the Flamingo, but had not allowed for the fact that the airport pick-up was nowhere near the airport terminals! So, after working out how to drive my car, I took the Strip to the hotel. Luckily the traffic was not too bad.

Parked car, checked in, collapsed into sleep until 10pm. Got up, ran well. Won $200.

I should have won more. Because it was my first session I was not quite in tone with opponents' ranges and willingness to call. So I overraised six limpers when I picked up AA in the big blind (raised to 10x, everyone folded). I also left about $30 on the table with KK on a board of Qxxxx, when I was fairly sure opponent had QJ or something similar. But I checked behind on the river.

The last hand was a distinct misplay from me, although I still won more on the hand than I should have.

I picked up 77 UTG, eight-handed in a loose 1-2 game, and made a "defensive" raise to 3x. Called in three other spots, including a loose French guy in the BB and a loose Chinese guy on my left.

Board came J97 rainbow. French guy bets $8 and I raise to $20. Chinese guy calls. French guy calls.

Turn was a 3, creating a diamond flush draw. Check from French guy. Bet of $65 from me, leaving $130 behind. Call from Chinese guy, leaving him $55 behind. Call from French guy, leaving $60 behind.

River brings Q of diamond. Checked round. French guy shows J9o. I show set of sevens, Chinese guy mucks.

I can't believe the French guy's play here on the flop, although it meant that I won more money off the Chinese guy on the turn. But I should still bet the river, simply because I have to call a bet from anyone else.

Thursday I lost a bit, and it rained. I drove to the airport to pick up my friend Barb. Her plane was late. I hung around the airport. On the way back (about 11.30pm) Las Vegas seemed basically to be underwater. It was a bit of a frightening drive.

Friday I lost, mainly dribbling money away. Saturday I lost, mainly dribbling money away. By now I was down $150 for the trip. I was cursing my failure to fully exploit my hands on Wednesday night.

Friday night we had a fantastic meal at Mon Ami in the Paris. Wonderful value, gorgeous steaks.

We then came back to the Flamingo and I got my first experience of a hot craps table. Barb was playing the chips, but I was half-staking it. When she got $100 up, I "cashed out", taking my half. She carried on and won another $200. The table was smoking – people were coming along asking if they could "squeeze in" (Barb thought they wanted to get onto a hot table – I thought it was because they just wanted to be seen to be "part" of the winning table, even though they themselves hadn't won any money). I guess I'm just a cynic.

Today (Sunday), I drove Barb to the airport for her flight back to Peoria. I came back to the Flamingo to take advantage of the best bonus of the week.

They "splash" the pot on one table every time a score is made in a selected football game. This time it was Dallas v Pittsburgh. I got lucky with KQ in the small blind after our table got the $100 splash. It was limped round to me, so I shoved my $100 (I have been sitting down with $120 rather than $200 this trip). Everyone folded round to the guy on my right who felt obliged to call with 86o. My King high held and that was $200 up.

An hour later a more bizarre hand occurred when I flopped the second-nut spade flush on the turn on a board of KQJ4 all spades. Opponent bet $30. I can't see him having Ts9s, so I guessed my As was good. I thought, decided he probably had QQ or 44, so shoved for $200. He snap called and said "I have Ace flush". Since I had an Ace flush, this raised some interesting questions. In fact, he had the Ace of Clubs. Right colour, wrong suit. Kerching. $450 up.

Muddling through

There was an interesting piece from James Mackintosh in the FT on Saturday, where he acted the grim reaper for equities. He observed (and I paraphrase here) that if we recovered and interest rates went up, the appeal of equities relative to gilts would collapse, whereas if the economy did not recover, current dividend levels were unsustainable, and so, therefore, equity prices would also decline. His final rider was that the only way equities could sustain their current healthy position would be if the current, non-sustainable muddle, were to continue for the next few years.

Meanwhile, Merryn Somerset-Webb in the FT also predicted the collapse of London house prices which, she said, with a great deal of justification, had only been held up compared with the rest of the country by foreign cash.

After reading those two pieces yer average sophisticated investor might be wondering what on earth he or she COULD do with their money.

Well, my response would be, keep calm and carry on. The flaw in Mackintosh's argument is in his final paragraph, where he says that the only way that equities can carry on rising is if the current temporary muddle continues.

But, as all poker players know, the short-run is always longer than you think. And what Mackintosh does not explain is how, or indeed, why, the current "unsustainable" situation should not continue until there is absolutely no alternative. Indeed, what we now have is a strong argument for the muddle continuing even longer.

That argument is just a mite technical, but that does not make it any more forceful. You may recall that the Treasury is planning a raid on the surplus funds built up by the Bank of England during Quantitative Easing. Those funds are not "permanent". They would have to be given back as QE was unwound. What the Treasury and the BoE claim is that it doesn't really make any difference, except in accounting terms, where that surplus is kept.

But in fact (and the Office For Budget Responsibility makes just this point -- possibly to the great irritation of the Chancellor) that difference "in accounting terms" is of great significance. What it means that if, under the old regime, the BoE put interest rates up by 1%, then that would make no difference to the government's headline budget. However, if it takes those gains onto its own books, any rise in interest rates of 1% would bash the government's borrowing requirement higher by nearly £4bn.

Now, whether the government actually needs to or ought to "raid" this money is neither here nor there for this particular argument. The point is that it immediately makes it "costly" to push up interest rates. The gain achieved today is at the expense of a loss paid tomorrow, rather than any real wealth having been created. "Gains today at the expense of tomorrow" are, of course, what got us into the mess in the first place. What this particular trick does is make it far harder to raise rates from the current 0.5%. It make sustained low interest rates considerably more likely, because the cost of raising interest rates is magnified.

In addition, if the rates are kept at 0.5%, the "surplus" that has been built up by the BoE will continue to accrue -- to the tune of £11bn a year. That's a very big surplus to throw away on the back of a small rise in interest rates. The only thing that would force the government (whatever government that might be) to give it up would be if the alternative was worse – and that would be a run on sterling and an inability to sell gilts abroad at current rates.

In other words, the low interest rates are here in the UK until the eurozone recovers and can start offering more attractive rates in terms of numbers AND confidence. Since the eurozone is still heading to hell in a handbasket, that won't happen until there's some kind of stronger core eurozone in which investors have long-term faith.

The Merryn Somerset-Webb argument against London property prices has greater fundamental strength. New money has been coming in from Greece, from Russia, from anywhere. London property is seen as a particular type of asset (on a par with fine art and big yachts). It's a hedge against inflation and it's a nice thing to show your friends. A flat in Monte Carlo doesn't quite have the same caché. Somerset-Webb's line is that this free flow of money is drying up. Basically, all the money that was going to leave Greece, has left.

However, she doesn't argue that these people who have bought places are going to be selling up. Sure, the number of buyers could decrease, but that will merely prevent the recent surge in prices from continuing. It doesn't put forward a valid argument for a collapse.

Sure, housing needs "new" money, in that there are always some sellers (through deaths, divorces, business disasters), but there are also, even in times of difficulty, successes. And London has not lost its appeal to new money (indeed, one could argue that it specifically attracts new money). The surge in London might be over, but it was not necessarily a bubble. Eventually, yes, London prices will return to a more sensible valuation compared with the rest of England, as opposed to its current comparisons, Manhattan, Paris and Moscow. People like me (if not me precisely) will work out that they can sell up and buy a place for a fifth of the price somewhere else, and live out a reasonably comfortable retirement on the profit. But we won't all rush for the exit at once. A sudden collapse, a panic, it won't be, at least not in the next three or four years.


I went short for rather more than I was positioned on dollar/euro, a move that might require holding my nerve for the next few weeks. I don't see €/$1.29 as lasting beyond the next panic that the market chooses to pick up on. Target of about €/$1.25 this time round.


The true Rome

So, a collection of British tourists, enjoying a quiet drink in a bar in Rome, are viciously assaulted by masked Romans armed with knives, iron bars and clubs. Several were hospitalized and at least one will need an operation.

A decent country would take this as a declaration of war, but the British government has stayed remarkably quiet. Why? Because the victims were football fans and the attackers were Italians.

Lazio chairman Claudio Lotito said today: "Lazio fans have nothing to do with what happened" and he added that there would be "surprises about the real culprits".
Nice line in self-delusion there.

Lotito, people might like to know, was banned from football for two and a half years in 2006 for his part in the local football scandal involving a network of football executives and referees rigging games. He also wears a nice line in expensive suits and fancy shiny black shoes. Hardly a man with much street-credibility, but definitely one of the self-perpetuating Italian elite who have got rich on the backs of mugs like us.

Interesting also that none of Italy's four overpaid and overstaffed police forces, which are well-inhabited with people who hanker after the good old days when Mussolini was in charge, were to be seen during the unprovoked attack on law-abiding British tourists who were minding their own business. There's no such shortage of police loafing around outside political headquarters and parliamentary buildings, polishing their shiny belts and shoes. There's a distinct shortage of Italian police when it comes to proper policing.

The silence of the British ruling classes here is not surprising. They are all Italophiles with hidey holes either in Tuscany or, if they haven't feathered their nests yet on the after-dinner circuit, in Puglia or somewhere cheaper. While Greece is hammered for a few years of overindulgence, we have continued to permit Italy for FIFTY YEARS to rob the EU blind with grants for subsidized museums that are never open and subsidized transport systems that never run. The South of Italy (in which I include Rome) is just a cesspit of corruption and patronage, and the sooner the EU tells it to fuck off the better.

Rant over.

Dingly Dell

Dell announced a 47% drop in profits this morning. That's a neat indication to anyone who supports buying "growth companies" as an investment strategy that the important part of that strategy is to know when to get out.

But that wasn't the bit that interested me. After all, one of my contrary investing strategies, one which has done quite well, is to invest in companies for whom the growth story is over (so the stock has fallen out of favour) but the dividend story is very real. The trick is to recognize (and buy shares in) the companies with the common sense to change from growth to mature, and to avoid like the plague companies that keep trying for a "change in strategy" in an attempt to carry on growing.

The bit that interested me was dell's statement that it would focus less on retail customers and more on businesses. It would, in other words, move towards corporate accounts.

This strategy is tempting for the executive of little intelligence. After all, a $2m contract does not cost 1,000 times as much cash to obtain as does a $2,000 sale. It's also a "relationship" rather than a single sale. And Dell might have spotted that a large number of its retail customers had begun to go elsewhere. As is the way, they blamed "price competition" from the far east. In fact, I moved elsewhere not on grounds of cost, but on the grounds that Dell products weren't very good. If they'd made a better product, with fewer mandatory additions (all extra pennies for Dell, that included Norton), then they would have kept customers. But will the bloke who arranged the "add-on" get fired? Oh no. As far as Dell is concerned, he won a big contract. That he lost an indefinable sum through non-replacement will never go down on his CV.

But there is a downside to concentrating on the corporate. For a start, to do so only really makes sense if you are producing a non-commoditized bespoke (and therefore high-margin) product. The high margin comes from the bespoke and non-commoditized nature, not from the market. Shifting a commoditized product (such as the PC) to corporate focus is putting the cart before the horse.

What is "non-commoditized" is the customer service part. Inother words, what Dell is loking to sell corporate customers is not a fleet of PCs. It's a company-wide service product. It's an attempt to de-commoditize a commoditized product. It's an attempt to remain a growth company when you should be settling for being in a mature industry that you can gradually run down, while paying out oodles in dividends.

There's another error in ignoring the retail market while not absolutely quitting it. That is the common error (amongst the challenged of thought) that they are two separate markets.

I'm reminded of a famous weekend at the Royal Angus. The hotel's owners were basically focusing on higher-margin corporate customers in the week and were selling cheap rooms at the weekend to retail customers (such as Midcon attendees) because a room used is worth more than a room empty.

However, the staff one year basically treated the MidCon attendees like shit. Business customers mattered, the MidCon crowd didn't.

This strategy went awry when Walkerdine and others dryly informed the management in what might be termed "a robust exchange of views" that, just because these guys were in jeans and tee-shirts, that didn't mean that they didn't wear suits during the week. Indeed, the management was told by the committee, one of the guys was in control of a particularly lucrative account and the attitude of the hotel staff had just lost them that account to (insert name of well-known rival here).

If you start saying to individuals "you aren't worth our while" then, when those individuals have corporate power (as, statistically, at least some of them will do) they will remember that, and they will enjoy the moment when they say "I wasn't worth your while then; you aren't worth my while now".

Dell should remember that.


Spammer does me a favour

I got a whole load of "replies" to very old posts tonight. They were, of course, all exactly the same. And whatthe point is in replying to posts that a blogger made six years ago, I really don't know.

However, in this particular case, one of the posts was quite interesting. I wrote this on June 28th 2006, more than a year before the first signs that things were going wrong with the US mortgage loan book, and more than two years before Lehman Brothers collapsed.

Here's what I wrote, with the cliff note paragraph right at the bottom:
An announcement went out this morning from Sampo, a Finnish bank. No-one will pay much attention to it. Here's the full text.

Sampo Bank plc, part of the Sampo Group, will securitize approximately one billion euros of the exposure of corporate loans in its balance sheet. The reference portfolio consists of the loans of over 600 Finnish companies. The loans will remain in Sampo Bank's balance sheet and the arrangement will thus not affect the agreements between the bank and its customers in any way. This is a mechanism by which Sampo Bank can adjust its credit risk profile and release capital for future growth.

Securitization will be implemented by a company established especially for this purpose. The company will issue bonds whose final return will be dependent on realized credit losses from the reference loan portfolio, and offer them for subscription by investors. The company will compensate credit losses arising for the bank on the basis of a credit derivatives contract between it and the bank .

So what, you might think. And, indeed, the whole tenor of the announcement downplays any interpretation that this makes any difference at all. Its purpose, says Sampo, is to "adjust its credit risk profile and release capital for future growth".

But, therein lies the tale. This is what a number of banks are doing. In the old days, a bank was kind of a broker between depositors and borrowers. They didn't like being called brokers, but that was what they were. People deposited their money in the bank, and the bank lent it out. If they lent it to the wrong people, they were in a bit of shit. If they got into a lot of shit, then the depositors were in shit, because they might not get their money back. But it was in the interest of the bank to make prudent loans, if only because being an executive at a bank that goes belly-up because of bad loans doesn't look good on the CV.

Indeed, there is a current-day example of this. The Agricultural Bank of China theoretically has 25% "non-performing loans". In fact the figure is far worse than that, because local managers are lying to their regional superiors, who are lying to their national superiors. It's the old Stalinist five-year plan reports in action. Fucking up is not an option, so, if you fuck up, you might as well lie about it, because things couldn't be worse than if you told the truth.

Sampo's manoeuvre changes the rules of banking. What it has done is taken a billion euro of loans, and transferred the risk associated with those loans to another company, which sells bonds. Institutional investors buy these bonds (which can be spliced and diced into different tranches of assumed risk, paying different rates of interest) and, if the borrowers default, the institutional investors don't get their dividends. If things go very bad, they don't even get their capital.

But, and this is the point. The bank doesn't really give a shit. If the loans go tits up, they can point to the rates offered and the nature of the beast.

In other words, we enter the serious world of moral hazard. Sampo, by its own admission, has done this "to release capital for future growth". And what does that mean? Why, to make more loans, of course, which it can then securitize, in order to release even more capital "for future growth". What you have is a bank that seriously wants to lend money, in order to grow. Employed senior executives like to grow. They get higher bonuses, bigger cars, bigger desks in bigger offices with bigger-busted secretaries.

You would think that people would learn from history, from the Savings & Loan scandals of the 1980s in the US. But, well, 20 years is an aeon in financial services. It's going to take one almighty balls-up, a seriously massive default, before the institutional investors realize that perhaps allowing banks to lend money without assuming any of the risk associated with lending that money might not be the best idea in the book.

In other words, if it was blindingly obvious to me in 2006, why wasn't it obvious to the people who mattered? Because, quite simply, it was in their interest to ignore it.

Lyncked in

They are going to install Microsoft Lync on my machine at work. I see that it previously had the snappy name "Microsoft Office Communicator" – a title that might not have sold many copies but which at least did what it said on the tin.

The idea I assume is to encourage video conferencing and instant messaging. As the sages say, 95% of emails are used for communications that shouldn't really be by email.

However, I liked the idea of the video-conferencing. My suggestion to the software guy who came around checking our "host names" ("well, technically it's a host number", I said, "since it's six digits and no letters. You can't have a "name" unless it consists of letters". "Oh yeah?", he said, "then what about Prince?" Fair enough.) was that he should install an additional bit of "Homer Software" for me, which would consist of a 15 minute loop of me looking interested, plus voice-recognition software that would permit me to put in comments such as "Yes, absolutely, but could you expand on that last point?" while nodding sagely and with an interested expression at the response.

This, with luck would lead to entire "virtual meetings" at which no-one was really present at all. Just a collection of avatars making pre-programmed comments. That would allow people to get on with some real work; company production would multiply fivefold. Unfortunately, there are some people whose etire raison d'etre appears to be going to meetings. I'm not sure where these people would fit in with the new paradigm.



I read nearly all of Jared Diamond's The Third Chimpanzee while on holiday, as well as Ian McEwan's Sweet Tooth It takes concentrated effort to read real books these days. It used to be that there was always a bit of spare time here or there, but these days I spend that time checking my email, or Facebook, or Twitter, or reading today's newspapers on my Kindle.

I thought that The Third Chimpanzee was good, but not as good as his later work Guns, Germs & Steel (the subject of which he covers briefly in a small part of The Third Chimpanzee).

Diamond uses some nice points to illustrate evolution, the niches that evolve, and the paradox of inefficiency when it comes to sexual selection beating natural selection. But the book isn't as tight as his later work. However, I'm still looking forward to reading Collapse.

McEwan's Sweet Tooth is a sensational return to form -- his best since Chesil Beach. There were a couple of interesting bits on the journey. One, where the narrator talks of the stories of a writer whom MI5 is going to fund, has her saying that she wished he hadn't spent so much time describing a recipe and the cooking of the meal -- a criticism I remember making myself about Saturday. Then, when our fictional author wins a prize for a short novel, the critics seem to come out with the same words that were uttered at the time of Chesil Beach. So our (fictional) author obviously has things in common with Ian McEwan. Now, google up the cover of the book. Who is that silhouette in the doorway?


I'm not blogging here about holidays any more because, well, I'm not doing it. Uploading the photos to Facebook is so much easier; and there's more people to see it. Maybe I shall return when I am in Vegas, or when I quit Facebook. I just don't know.


Why macro-economists never win the Nobel prize

Alvin Roth and Lloyd Shapley have won the Nobel Prize for economics. It's another kind of gane-theory award. You might as well award the Nobel prize for economics for showing the optimal strategy with two draws to come and a Kxxx badugi against one opponent who is drawing one.

Macroeconomists don't win Nobel prizes these days. One reason is that they don't deserve them. When our brightest examples are the guys at the IMF (predictive capability with reality, negative. I.E., even if they'd picked things at random they would have done better), the Fed and the BoE, it's hardly surprising that the heirs of Nobel say "Thanks, but no thanks".

But there's another reason. That is that any macroeconomist who said stuff that merited a Nobel prize for economics would have to say stuff that was so unpopular that he would be sacked by his employers.

Let's take a hypothetical case for winning the Nobel Prize in a macroeconomic field -- one that provides the best way out of this current mess.

That solution would be one where everyone is a bit worse off, but where the sum of worse-offness is minimized.

Interestingly, this highlights an area where the Nobel Prize has already been won -- Prosepct Theory by Kahneman and Tversky. And it indicates why no macrtoeconomist can win when times are bad.

We all know how Kahneman and Tversky illustrated how irrational we are when it comes to economics. The easiest example is that of how people can be nudged in the direction of a 'risky' option or a 'safe' option, even though the gamble is the same, by the way the question is framed.

Put simply, if people pay $10 for a ticket, and are then offered either a guaranteed $15 or a 50% chance of $20 and a 50% chance of $10, a majority will choose the "guaranteed" $15. The EV gain is $5 either way.

However, if they pay $10 for the ticket and are then offered either a guaranteed $5 or a 50% chance of nothing and a 50% chance of getting their money back, most will take the gamble. The EV loss is $5 either way.

Another example would be a theoretical battle. You ask people "You can save these 300 out of a thousand for sure (show them pictures of mothers and babies and a few blokes) or you can risk these people dying along with the other 700, with a 30% chance that all 1000 will survive."

Usually people take the "certain 300" option.

But if you show people the "other 700" women and children and a few blokes, and say "If these people die, 300 other people will live. Do you want to let them die or do you want to take a 30% chance that all 1000 will survive?" then most people take the "I'll risk it" option.

At the moment the world is prepared to go for a 5% chance that they will get their money back and a 95% that they will lose 80% of their wealth (through war or political upheaval) rather than take the better EV of, say 70% of their money back for sure. Society as a whole cannot work together to split up a smaller cake. Individual governments are incapable of it. Supra-national organizations are incapable of imposing it.

So, if a macroeconomist today said "this is the best solution and this is how you calculate it", no-one would give that macroeconomist a prize, because it would entail accepting the "certain" loss that, as Kahneman and Tversky showed, individuals (and, in spades, whole societies) are incapable of accepting.

Indeed, the powers that be simply cannot accept the "smaller cake" argument or, if they do, they cannot accept who should make the sacrifice. The only certainty is that it should be someone else, because either it is that someone else's fault, or it isn't fair, or it would mean that promises would be broken.

The "best" way to divide up the smaller cake is, of course, by stealth. That's why the "German solution" for Greece and Spain is so wrong and, well, just isn't working. By contrast, the "slow inflation" method in the UK and in the US is, for the moment, working quite well. The distribution of the sacrifice is, of course, horribly random in places and is usually unjust. People already retired who are on final salary schemes are big winners. Those on fixed incomes, or about to buy an annuity, are big losers. Those who took out variable mortgages in the early 2000s are in clover (provided they aren't taking this benefit for granted and are just living off the unjust gains, which they probably are). Indeed, the long-term low-interest rate environment is causing a huge redistribution in proportional wealth (although not so great in terms of absolute wealth, because as a nation we are not getting better off) that the beneficiaries are taking for granted and the sufferers are complaining about bitterly.

Of such "solutions", Nobel Prizes are not won.

What would be the most "efficient" redistribution? Clearly, it would be the one that maximized economic output, not the one that maximized consumer (or voter) happiness. That would be a solution that encouraged economic activity and which penalized voluntary leaving of the marketplace. In other words, not a great deal different from what is currently happening. Make it so people can't afford to retire. Try to improve worker efficiency. Add in a few other things as well, such as stopping capital outflows in order to increase the size of the domestic multiplier (I recommend cutting income tax but paying the additional funds in a new second "domestic only" currency that would run in parallel with sterling, but which would not be accepted by the BoE as an internationally tradable currency and which could not be spent on imported goods. A blackmarket rate would soon evolve, but that would be fine).


The scuppering of the EADS/BAE merger by the Germans highlighted something interesting. For all their talk of increased federalism and a more closely united Europe, the Germans seemed mysteriously unkeen on this example of greater unity.

Why? Because the Germans aren't at all keen on greater federalism when they have to take orders from elsewhere. They would only accept this merger if the new company was based in Germany - in other words, if the newly merged operation could be kept firmly under the German thumb. We have seen examples of this before, many times, when it comes to things like "free movement of labour". But it does kind of indicate how hollow and false is the talk from German politicians about a united Europe in any way shape or form, or indeed German criticism when the UK starts standing up for itself.

I used to be one of the great Europhiles. Culturally, I still am. But 1974 was a different era. Europe as it now is, the EU as it has now become, simply isn't working. I can see why British business, on the whole, wants to stay in. Not least because there's a good supply of labour that wouldn't be available to British business if we left. Perhaps that might not be a bad thing -- an increase in the cost of labour capital encourages mechanical innovation.

But the concept of "Europe" and what it aims to do has changed beyond belief in the past 30 years, and at the moment it's seriously beginning to look like little more than a front for German political domination by economic stealth. Its blocking of anything that might leave it in a minority (see EADS/BAE) shows that this Europeanization is not so much a matter of principle as one of convenience. "Yes, we want it to happen, but only on our own terms". That, in a way, is what the UK is saying. So what is it that makes us the baddies and them the goodies? Simple, control of the thought process and political processes in Brussels.

And here there is a big test, because Draghi is, in his own way, causing a bit of a revolution here. A system which the Germans put together, which they thought they could control, is turning against them. The Bundesbank and the ECB are, for the first time, firmly on opposite sides of the fence. If my theory is correct, that should spell eventual doom for Draghi as the Bundesbank finds a way to reassert control. If my theory is wrong, then Draghi's line will win and the Bundesbank will back down. That would mean Germany attempting to rewrite its constitution (the inflation bit) -- something that the German people might not permit.