The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

Jason Zinoman analyzes Louis C.K.’s narrative technique in his latest Internet-only comedy special.

Source: Louis C. K.’s Blue Collar in First Class

Ron Paul Pulls Into the Lead

The Atlantic notes:

A new poll from Public Policy Polling shows that Ron Paul has taken the lead in the Iowa caucus race, while Newt Gingrich’s support is fading fast. A different Gallup poll shows Gringrich still holding the lead, but slipping, while The New York Times has Paul in the lead as well.

Gingrich has seen his numbers in the PPP poll drop from 27 percent to 14 percent in just three weeks, while his favorability rating is now split at 46 percent for to 47 percent against, the worst of any candidate not named Jon Huntsman.

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Perhaps the most telling secondary question was, “Do you think Newt Gingrich has strong principles?” Only 36 percent say that he does, but for Paul that number was 73 percent.

While the popularity of other candidates has risen and crashed.  Paul’s popularity has steadily and consistently risen:

Ron Paul Is Now the Republican Frontrunner

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Why is Mr. Paul so popular?

As I pointed out in September, Americans overwhelmingly want:

• The Federal Reserve to be reined in if not abolished
• The never-ending, open-ended, goalpost-moving wars to stop and the troops to be brought home
• Our liberties to be restored, and the martial law indefinite detention idiocy to be reversed

Paul has consistently championed these three American wishes for three decades. None of the other Republican (or Democratic) candidates are on the right side of history on any of these issues.

We need to Occupy our own minds before we can become empowered.

Specifically, people all have built-in bugs in our brains. If we learn to spot them,we will be able to think in more powerful ways an become more successful in our lives (including doing better as investors).

Bug Number 1: Forgetting that We Don’t Live in Tribes

I noted last year:

Biologists and sociologists tell us that our brains evolved in small groups or tribes.

As one example of how profoundly the small-group environment affected our brains, Daily Galaxy points out:

Research shows that one of the most powerful ways to stimulate more buying is celebrity endorsement. Neurologists at Erasmus University in Rotterdam report that our ability to weigh desirability and value doesn’t function normally if an item is endorsed by a well-known face. This lights up the brain’s dorsal claudate nucleus, which is involved in trust and learning. Areas linked to longer-term memory storage also fire up. Our minds overidentify with celebrities because we evolved in small tribes. If you knew someone, then they knew you. If you didn’t attack each other, you were probably pals.

Our minds still work this way, giving us the idea that the celebs we keep seeing are our acquaintances. And we want to be like them, because we’ve evolved to hate being out of the in-crowd. Brain scans show that social rejection activates brain areas that generate physical pain, probably because in prehistory tribal exclusion was tantamount to a death sentence. And scans by the National Institute of Mental Health show that when we feel socially inferior, two brain regions become more active: the insula and the ventral striatum. The insula is involved with the gut-sinking sensation you get when you feel that small. The ventral striatum is linked to motivation and reward.

In small groups, we knew everyone extremely well. No one could really fool us about what type of person they were, because we had grown up interacting with them for our whole lives.

If a tribe member dressed up and pretended he was from another tribe, we would see it in a heart-beat. It would be like seeing your father in a costume: you would recognize him pretty quickly, wouldn’t you.

As the celebrity example shows, our brains can easily be fooled by people in our large modern society when we incorrectly ascribe to them the role of being someone we should trust.

As the celebrity example shows, our brains can easily be fooled by people in our large modern society when we incorrectly ascribe to them the role of being someone we should trust.

The opposite is true as well. The parts of our brain that are hard-wired to quickly recognize “outside enemies” can be fooled in our huge modern society, when it is really people we know dressed up like the “other team”.

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Our brains assume that we can tell truth from fiction, because they evolved in very small groups where we knew everyone extremely well, and usually could see for ourselves what was true.

On the other side of the coin, a tribal leader who talked a good game but constantly stole from and abused his group would immediately be kicked out or killed. No matter how nicely he talked, the members of the tribe would immediately see what he was doing.

But in a country of hundreds of millions of people, where the political class is shielded from the rest of the country, people don’t really know what our leaders are doing with most of the time. We only see them for a couple of minutes when they are giving speeches, or appearing in photo ops, or being interviewed. It is therefore much easier for a wolf in sheep’s clothing to succeed than in a small group setting.

Indeed, sociopaths would have been discovered very quickly in a small group. But in huge societies like our’s, they can rise to positions of power and influence.

As with the celebrity endorsement example, our brains are running programs which were developed for an environment (a small group) we no longer live in, and so lead us astray.

Like the blind spot in our rear view mirror, we have to learn to compensate and adapt for our imperfections, or we may get clobbered.

Grow Up

The good news is that we can evolve.

While our brains have many built-in hardwired ways of thinking and processing information, they are also amazingly “plastic“. We can learn and evolve and overcome our hardwiring – or at least compensate for our blind spots.

We are not condemned to being led astray by Madison Avenue advertisers and ruthless dictators and scientific frauds and fundamentalists.

We can choose to grow up as a species and reclaim our power to decide our own future.

Read the rest of this entry »

All of the Big Picture conference videos are now available.

Here is the latest video posted: Markets in Turmoil: A Macro, Quant & Technical View

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Watch all of the Big Picture Conference for $39.95 or choose just the speakers you want to see on FORA.tv

Playing the Market? Prepare for a Fall ’11 Market Melt-Up from The Big Picture Conference on FORA.tv

As the world’s attention focuses on the death of Kim Jong Il and shorts keep piling up in the Euro,  China’s real estate bubble appears to have finally burst.   This is the one macro swan that could really smack developed markets in 2012 as few are focused even though the Shanghai composite and Hang Seng are down over 25 percent from their highs earlier in the year.  Both are down 21 percent for 2011 with Shanghai closing at its lowest weekly close for the year on Friday.

Foreign Affairs has just posted a must read piece, China’s Real Estate Bubble May Have Just Popped,  which will sound very familiar to Global Macro Monitor readers.

Here are a few money quotes,

For years analysts have warned of a looming real estate bubble in China, but the predicted downturn, the bursting of that bubble, never occurred — that is, until now. In a telling scene two months ago, Shanghai property developers started slashing prices on their latest luxury condos by up to one-third. Crowds of owners who had recently bought apartments at full price converged on sales offices throughout the city, demanding refunds. Some angry investors went on a rampage, breaking windows and smashing showrooms.

Shanghai homeowners are hardly the only ones getting nervous. Sudden, steep price reductions are upending real estate markets across China. According to the property agency Homelink, new home prices in Beijing dropped 35 percent in November alone. And the free fall may continue for some time. Centaline, another leading property agency, estimates that developers have built up 22 months’ worth of unsold inventory in Beijing and 21 months’ worth in Shanghai. Everyone from local landowners to Chinese speculators and international investors are now worrying that these discounts indicate that “the biggest bubble of the century,” as it was called earlier this year, has just popped, with serious consequences not only for one of the world’s most promising economies — but internationally as well…

The next three months will be a watershed moment for a Chinese investor class that has been flush with cash for years but lacking a place to put it. Instead of developing a more balanced, consumer-based economy, an entire regime of Beijing technocrats — drunk on investment-led growth — let the real estate market run red hot for too long and, when forced to act, lacked the credibility to cool the sector down. That failure threatens to undermine the country’s continued economic rise.

This should put the Wukan protests in the Guangdong province in better context,

In a few cities, such as coastal Wenzhou and coal-rich Ordos, the collapse in property prices has sparked a full-blown credit crisis, with reports of ruined businessmen leaping off building rooftops; some are fleeing the country. The central bank’s decision on December 5 to lower the reserve requirement ratio for the first time in three years signaled a broader move to pump money into the economy. Beijing has directed banks in Wenzhou to extend emergency loans to troubled borrowers. Of course, officials could halt the sell-off simply by handing developers enough cheap loans to allow them to carry their inventory. But such a strategy risks re-inflating the bubble.

The impact of a housing downturn would have a significant impact globally. International suppliers who have been fueling China’s construction boom — iron-ore miners in Australia and Brazil, copper miners in Chile, lumber mills in Canada and Russia, and multinational equipment makers such as Caterpillar and Komatsu — could be hard hit. Heavy losses on real estate and related lending could damage investment and consumer confidence, undermining the rising tide of Chinese demand that has been a much-needed growth engine for everything from Boeing airplanes to Volkswagen and GM automobiles to KFC and McDonald’s fast food.

We’re going to be spend a lot time over the holidays thinking how this plays out in China’s financial sector and the implications for markets.

Finally, this should sound familiar as the author, Patrick Chovanec, writes,

Beijing’s response to the global financial crisis added jet fuel to the fire. To maintain GDP growth of nearly ten percent during a massive downturn in global demand, China’s leaders engineered a lending boom that expanded the country’s money supply by roughly two-thirds. Real estate was already the preferred place for the Chinese to stash cash; now, investors had that much more cash to stash. Prices rose accordingly: In many locations, the cost of prime new properties doubled in just two years.

But this run of speculation has bid up the price of housing and left people who actually need a place to live in the lurch. Given the prices prevailing earlier this spring, the average wage earner in Beijing would have had to work 36 years to pay for an average home, compared to 18 years in Singapore, 12 in New York, and five in Frankfurt. The bidding war has further pushed developers to build ever more costly luxury properties that investors crave but few ordinary people can afford.

Take the time to read the piece in full.   It may help as you determine your 2012 strategy.

My afternoon train reading:

• S&P Cut Proves Absurd as Investors Prefer U.S. (Bloomberg)
• China’s epic hangover begins (Telegraph)
• A Banking System is Supposed to Serve Society, Not the Other Way Around (Vanity Fair) see also US investigators join forces in mortgage probe (FT.com)
• Rules Stretched as Green Cards Go to Investors (NYZ)
• The Rise of the NBA Nerd (Grantland)
• Meet the 25 Most Viral People on the Internet (Gizmodo)
• Ron Paul leads in Iowa (Public Policy Polling)
• Apple Plots Its TV Assault (WSJ) see also Why the iPad Is the Most Hated Gadget Ever (Cult Of Mac)
• Confessions of an Amazon elf (The Globe And Mail)
• The Spielberg Face (Fandor) see also video at You Tube

What are you reading?

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Transports (and other indices) right at Trend lines
click for larger chart

Check out this academic paper Econometric Measures of Connectedness and Systemic Risk in the Finance and Insurance Sectors by profs Monica Billio, Loriana Pelizzon, Andrew W. Lo, and Mila Getmansky.

The paper tries to come up with hard definitions of interconnectedness and systemic risk.

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Click to enlarge:

Source: Econometric Measures of Connectedness and Systemic Risk in the Finance and Insurance Sectors
SSRN, November 1, 2011

click for larger chart

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I don’t know about Conservatives, but Republicans should be relieved.

So much for the Gingrich juggernaut . . .

BBC’s hour-long documentary about Steve Jobs with on-camera interviews with Woz, Stephen Fry, Tim Berners-Lee, John Sculley and others.