May 30, 2014

CFA Institute - Double, Double Toil and Trouble: If inflation metrics are wrong, mischief could be brewing for markets 5-15min

Statistically speaking, 2013 was a strange year indeed. The US reported very modest consumer price inflation of 1.5%, whereas the European Union and Japan came in even lower, at 0.86% and 0.36%, respectively. But during the same period, a painting by Francis Bacon called “Three Studies of Lucian Freud” sold for $142.4 million, the highest price ever paid for a painting at auction; a 59-carat diamond sold for $83.2 million, the highest price ever paid for a diamond at auction; trophy real estate prices in Manhattan, London, Sydney, and many other places soared past previous records; a limited-edition batch of Kentucky sour mash whiskey sold out at nearly $4,000 per bottle; and, of course, most developed-world equity markets marched in lockstep to new highs. ... The emergence of so many bubble-like niches in an ostensibly low-inflation world is curious. For instance, if the value of such major cur- rencies as the dollar and euro is stable, why were all these assets becoming so much more pricey? That is, after all, the same thing as saying that when valued in fine art or London penthouses, the world’s major currencies were actually plunging. Either those hot asset classes were simply random bits of foam in a vast, otherwise calm, disinflationary sea or the generally accepted definition of inflation is, in some fundamental way, flawed.

PIMCO - The New Neutral​​​​​​ 5-15min

Over the past 15 years, the global economy has operated under two different growth models. Between 1999 and 2007, the growth model operated through ever larger trade imbalances between emerging market and commodity exporting countries – who ran larger and larger surpluses – and a group of rich countries – first and foremost the U.S. – who ran larger and larger trade deficits. Global imbalances were then seen as a problem by some, but they were really a symptom of the global geographic distribution of aggregate supply and demand, with excess supply in the high-saving emerging market countries and excess demand in some low-saving rich countries (and with energy exporting countries doing quite well as they exported to both). These supply-demand and saving-investment imbalances generated huge international capital flows that were sufficient to bring global demand into line with abundant global supply of goods at something approximating the full employment of global resources. ... That growth model obviously broke down in the global financial crisis years of 2007–2009 as global imbalances shrunk in line with global aggregate demand. From 2009–2014, the global economy has operated under stimulus from “nontraditional” monetary policies that pushed policy rates to zero and ballooned central bank balance sheets through massive “chunks” of quantitative easing. Also, the global policymakers “went Keynesian” for a couple of years during and following the crisis by delivering a large dose of fiscal stimulus. The good news is that, as a result, the global economy avoided depression and deflation. But that’s all they did or could reasonably do. The reality is that now, five years after the global financial crisis, average growth in the global economy is modest and the level of global GDP remains below potential. The global economy has not as of today found a growth model that can generate and distribute global aggregate demand sufficient to absorb bountiful global aggregate supply. Unless and until it does, we will be operating in a multi-speed world with countries converging to historically modest trend rates of potential growth with low inflation. 0% neutral real policy rates for many developed and some developing countries will likely be the investment outcome.

Forbes - Is This How We'll Cure Cancer? 5-15min

Nothing except a crazy experimental treatment never before given to a child: Blood was taken out of 6-year-old Emily’s body, passed through a machine to remove her white cells and put back in. Then scientists at the University of Pennsylvania used a modified HIV virus to genetically reprogram those white cells so that they would attack her cancer, and reinjected them. ... commercializing June’s cancer-killing cells would be like no drug development program ever. Scientists call them chimeric antigen receptor T-cells, or CARTs. T-cells are the immune system’s most vicious hunters. They use their receptors to feel around in the body for cells with particular proteins on their surface and destroy them, targeting infected cells and cancer. With CARTs scientists add a man-made receptor–the chimeric antigen receptor–assembled from mouse antibodies and receptor fragments. A gene code for the man-made receptor is inserted into the T-cell’s DNA with a virus, usually a modified HIV. If the receptor sees cancer, not only does it kill it, it starts dividing, creating a cancer-killing army inside the body. ... Downsides: “So far, it’s only blood cancer, it’s high technology, it’s customized therapy, it’s going to require major investment,” warns Clifford Hudis, president of the American Society of Clinical Oncology, who is nonetheless excited about the cells. The current CARTs kill not just cancer cells but any B-cell, the type of white blood cell that goes wrong in leukemia. Patients are likely to get injections of a protein that B-cells make, called gamma globulin, for the rest of their lives; if the treatment becomes popular there may not be enough gamma globulin to go around. ... “It’s a little early to know whether or not the remarkable results we’re seeing will show us whether these are the drugs we’ve been looking for or whether these are the first powerful signals that we’re headed in the right direction,” says Louis M. Weiner, the director of Georgetown University’s Lombardi Cancer Center . Though the cells are “amazing,” says Charles Sawyers, the past president of the American Association for Cancer Research and a Novartis board member, “what we don’t know is how broadly does this scale?”

The New York Times - Can the Nervous System Be Hacked? 5-15min

Conceptually, bioelectronics is straightforward: Get the nervous system to tell the body to heal itself. But of course it’s not that simple. “What we’re trying to do here is completely novel,” says Pedro Irazoqui, a professor of biomedical engineering at Purdue University, where he’s investigating bioelectronic therapies for epilepsy. Jay Pasricha, a professor of medicine and neurosciences at Johns Hopkins University who studies how nerve signals affect obesity, diabetes and gastrointestinal-motility disorders, among other digestive diseases, says, “What we’re doing today is like the precursor to the Model T.” ... The biggest challenge is interpreting the conversation between the body’s organs and its nervous system, according to Kris Famm, who runs the newly formed Bioelectronics R. & D. Unit at GlaxoSmithKline, the world’s seventh-largest pharmaceutical company. “No one has really tried to speak the electrical language of the body,” he says. Another obstacle is building small implants, some of them as tiny as a cubic millimeter, robust enough to run powerful microprocessors. Should scientists succeed and bioelectronics become widely adopted, millions of people could one day be walking around with networked computers hooked up to their nervous systems. And that prospect highlights yet another concern the nascent industry will have to confront: the possibility of malignant hacking. As Anand Raghunathan, a professor of electrical and computer engineering at Purdue, puts it, bioelectronics “gives me a remote control to someone’s body.”

The New Yorker - The End of Food 5-15min

Has a tech entrepreneur come up with a product to replace our meals? ... Rhinehart, who is twenty-five, studied electrical engineering at Georgia Tech, and he began to consider food as an engineering problem. “You need amino acids and lipids, not milk itself,” he said. “You need carbohydrates, not bread.” Fruits and vegetables provide essential vitamins and minerals, but they’re “mostly water.” He began to think that food was an inefficient way of getting what he needed to survive. “It just seemed like a system that’s too complex and too expensive and too fragile,” he told me. ... What if he went straight to the raw chemical components? He took a break from experimenting with software and studied textbooks on nutritional biochemistry and the Web sites of the F.D.A., the U.S.D.A., and the Institute of Medicine. Eventually, Rhinehart compiled a list of thirty-five nutrients required for survival. Then, instead of heading to the grocery store, he ordered them off the Internet—mostly in powder or pill form—and poured everything into a blender, with some water. The result, a slurry of chemicals, looked like gooey lemonade. Then, he told me, “I started living on it.” ... One of Silicon Valley’s cultural exports in the past ten years has been the concept of “lifehacking”: devising tricks to streamline the obligations of daily life, thereby freeing yourself up for whatever you’d rather be doing. Rhinehart’s “future food” seemed a clever work-around. Lifehackers everywhere began to test it out, and then to make their own versions. Soon commenters on Reddit were sparring about the appropriate dose of calcium-magnesium powder. After three months, Rhinehart said, he realized that his mixture had the makings of a company: “It provided more value to my life than any app.” He and his roommates put aside their software ideas, and got into the synthetic-food business.

Wall Street Journal - How to Trick the Guilty and Gullible into Revealing Themselves < 5min

Imagine you've been accused of a crime. The police say that you stole something, but the evidence is murky. So the judge comes up with a creative solution: He decrees that you must plunge your arm into a caldron of boiling water. If you come away unhurt, you will go free; if your arm is disfigured, you will go to prison. ... This is what happened in Europe for hundreds of years. During the Middle Ages, if a court couldn't determine whether a defendant was guilty, it often turned the case over to a priest who would administer an "ordeal" using boiling water or a smoking-hot iron bar. The idea was that God, who knew the truth, would miraculously deliver from harm any suspect who had been wrongly accused. ... As a means of establishing guilt, the medieval ordeal sounds barbaric and nonsensical. But according to Peter Leeson, an economist at George Mason University, it was surprisingly effective—because it let the garden weed itself. ... how can a Nigerian scammer tell who is gullible and who isn't? He can't. Gullibility is, in this case, an unobservable trait. But the scammer could invite the gullible people to reveal themselves. ... How? By sending out such a ridiculous letter—including prominent mentions of Nigeria—that only a gullible person would take it seriously. Anyone with an ounce of sense or experience would immediately trash the email. "The scammer wants to find the guy who hasn't heard of it," Dr. Herley says. "Anybody who doesn't fall off their chair laughing is exactly who he wants to talk to." Here's how Dr. Herley put it in a research paper: "The goal of the e-mail is not so much to attract viable users as to repel the nonviable ones, who greatly outnumber them."

Politico - The Phantom Menace 5-15min

How an unproven, widely mocked technology scared the Soviets into ending the Cold War. ... For decades, Ronald Reagan’s Strategic Defense Initiative (SDI)—an ambitious ground- and space-based “shield” to protect the United States from nuclear ballistic missiles—has been mocked and criticized. First proposed by the president in 1983, it was immediately dubbed “Star Wars” by the mainstream media and dismissed as unscientific, infeasible and even counter-productive. The Union of Concerned Scientists, 100,000 members strong, was fierce in its opposition. The Arms Control Association declared that SDI would end arms control, while some Soviets felt SDI would end the world. Domestic critics became furious, and the Kremlin went ballistic. But while Reagan’s critics might not have taken his pet technology seriously, the Russians certainly did. Even though SDI was decades away from being implemented, if not beyond the reach of technology altogether, the threat the shield presented—along with Reagan’s dogged commitment to it—was enough to scare Soviet leader Mikhael Gorbachev into reforms that would eventually bring down the Soviet Union. In short: “Star Wars” never worked as Reagan wished. It worked even better. And I should know, because I saw it happen.

SB Nation - A beautiful corpse: An oral history of the fast life and quick death of the XFL 5-15min

The XFL jumped off the top turnbuckle in 2001 and landed with a blow equal parts short-lived and long lasting. A merging of the schlocky promotions of Vince McMahon's World Wrestling Federation and the passion and violence of football, the league died after one season, its demise hastened more by a failure of an ill-advised and ultimately doomed business arrangement than a repudiation of the product on the field. ... The XFL's brief life has relegated it to a footnote in American sports history. Yet McMahon's sound-and-fury vision for football echoes in today's NFL, from super huge screens in every stadium to sleeker uniforms to the way networks broadcast the games on TV, with cameras zooming overhead and microphones creeping into every corner.

The Economist - Asian business: A world to conquer < 5min

Asian business is reforming. Its emerging multinationals will change the way we all live ... BUSINESS power follows economic power. In the 1920s British firms owned 40% of the global stock of foreign direct investment. By 1967 America was top dog, with a 50% share. Behind those figures lie cultural revolutions. The British spread the telegraph and trains in Latin America. American firms sold a vision of the good life, honed by Hollywood and advertising. Kellogg’s changed what the rich world ate for breakfast, and Kodak how it remembered holidays. The next corporate revolution, as we describe in our special report this week, is happening in Asia. This too will change how the world lives. ... rules that have governed Asian capitalism for the past two decades are changing. Asian firms are having to become brainier, more nimble and more global. ... The immediate motivation is underperformance: growth has slowed, and Asian shares have lagged American ones by 40% in the past three years. Three deeper trends are also at work. First, labour costs are rising, not least in China, and East Asia’s workforce is ageing. Second, Asia’s middle class is becoming more demanding. They are no longer satisfied with fake Louis Vuitton handbags; they want clean air, safe food and more leisure, and are madly in love with the internet. Third, competition has intensified from Western multinationals, which have invested $2 trillion in Asia. They also now use the same cheapish labour, and they generally have much more sophisticated supply chains, brands and R&D.

The Economist - Health-care fraud: The $272 billion swindle < 5min

Why thieves love America’s health-care system ... INVESTIGATORS in New York were looking for health-care fraud hot-spots. Agents suggested Oceana, a cluster of luxury condos in Brighton Beach. The 865-unit complex had a garage full of Porsches and Aston Martins—and 500 residents claiming Medicaid, which is meant for the poor and disabled. Though many claims had been filed legitimately, some looked iffy. Last August six residents were charged. Within weeks another 150 had stopped claiming assistance, says Robert Byrnes, one of the investigators. ... Health care is a tempting target for thieves. Medicaid doles out $415 billion a year; Medicare (a federal scheme for the elderly), nearly $600 billion. Total health spending in America is a massive $2.7 trillion, or 17% of GDP. No one knows for sure how much of that is embezzled, but in 2012 Donald Berwick, a former head of the Centres for Medicare and Medicaid Services (CMS), and Andrew Hackbarth of the RAND Corporation, estimated that fraud (and the extra rules and inspections required to fight it) added as much as $98 billion, or roughly 10%, to annual Medicare and Medicaid spending—and up to $272 billion across the entire health system.

The Economist - Demography: Quality time < 5min

Why shrinking populations may be no bad thing ... FATHER, mother and two children: surely the perfect family size. For those concerned, it is neither too big nor too small. For the national economy, it ensures that two new workers will replace the parents in the labour force. And eventually the children will have children of their own and keep the population stable. ... For that happy state to be achieved, the “total fertility rate” (a measure used by demographers for the number of children a woman is likely to have during her childbearing years) needs to be above two: around 2.1 in the rich world and more in poorer countries, because some children, particularly in the developing world, die before adulthood. For many years the United Nations’ population forecasts—the gold standard in the demography business—have assumed that, in the long run, fertility the world over would converge on the replacement level and populations would stabilise. But fertility rates everywhere have been declining for decades. Even in Africa, where large families are still the norm, the number of children per woman in 2010-15 is forecast to fall to 4.7, compared with 5.7 in 1990-95. Global average fertility is already down to about 2.5.

The Economist - Europe’s elections: The Eurosceptic Union < 5min

The impact of the rise of anti-establishment parties, in Europe and abroad ... What will Europe’s leaders do to quell voters’ ugly mood? The quest for the new president of the European Commission is likely to turn into another messy wrangle (see Charlemagne). Its mandate to promote growth, competitiveness and jobs (in that order) is likely to be little more than a pastiche of fine words. And leaders disagree over how growth can be rekindled. As ever, the French want measures to protect industry, the British want more openness and competition, the Italians want a relaxation of fiscal rules and the Germans still see the problem in terms of export competitiveness (principally due to wages rising faster than productivity). ... The European Parliament, hitherto a bastion of European federalism, is set to become the beachhead for all sorts of anti-Europeans. The most strident have roughly doubled to about 100 out of 751 seats. More broadly, anti-establishment parties control nearly one-third of the parliament. Beyond the victories of Eurosceptics in France and Britain, the anti-immigrant Danish People’s Party won in Denmark, the far-right Jobbik came second in Hungary and Germany has its first neo-Nazi MEP. ... The new European Parliament will probably be more sceptical of free markets and less favourable to free trade, particularly the ambitious Transatlantic Trade and Investment Partnership with America. One of Ms Le Pen’s demands is the immediate suspension of these negotiations. Moreover, anti-EU parties are often markedly pro-Russian. Internationally, the loser of these elections could be America—and the winner, Russia.

The Economist - American finance: Risk on < 5min

As crisis-induced fear fades, companies take on more leverage ... Companies are increasing their borrowing for three main reasons. The most obvious is that interest rates are low, meaning a key cost, borrowed money, can be obtained cheaply. That can result in higher returns to shareholders. Moreover, rates are likely to rise, which is encouraging companies to lock in low rates while they can. ... A second driver is the resurgence of activist investors which, emboldened by a benign economic environment, are pushing firms to return to shareholders cash that had been retained for a rainy day. There are weekly announcements of one hedge fund or another pushing a company to buy back shares, as much for short-term reasons—a large buyer in the market might temporarily push up the price of a stock—as for longer-term ones. ... And then, inevitably, there is tax. Many large companies are quietly following the well-publicised example of Apple by issuing debt to fund dividends or buy-backs rather than repatriating cash held overseas that would trigger large tax payments. Aside from the quirk of holding cash abroad, debt itself offers tax benefits: interest payments are tax-deductible and push down taxable earnings.

The Economist - SABMiller in Africa: The beer frontier < 5min

A long-established African firm went global, only to find the fastest-growing market was on its doorstep ... ON A Friday evening in Onitsha, as the beer market is closing, a man carefully straps six cases of Hero lager and two cases of Pepsi to the pannier of his moped. Another rolls away his purchases by wheelbarrow. Coaches parked nearby will soon be filled with day-trippers and their cases of booze. Each day a vast quantity of beer is sold from this closely packed warren of stores. It is part of a sprawl of specialist markets in the city, a commercial hub on the Niger river, which draws in traders from across southern Nigeria. ... It was the bustle of Onitsha that persuaded SABMiller, the world’s second-largest beer company, to set up a brewery here. The market takes a slice of SAB’s local production and sells it on to small traders who are otherwise hard to reach. The company had been late in coming to Nigeria. First it acquired a rundown brewery in Port Harcourt in 2009 and then another in Ilesha before it built a brand-new plant in Onitsha in 2012. Already, its capacity is being increased, to slake locals’ ever-growing thirst. ... What might other consumer firms looking to Africa learn from SAB? It is not an easy place to do business and the results are not uniform. Lager sales are booming in Nigeria and Ghana but shrinking in Zimbabwe and South Sudan. And there are few reliable sources of business information: firms have to learn as they go along. ... South African businessfolk have a phrase for it: paying your school fees.