Central Perk: 10 mar. 2014

luni, 10 martie 2014

Mish's Global Economic Trend Analysis

Book Review: The Money Bubble (What to Do Before it Pops) - Two Thumbs Up
Culture of Greed and Arrogance: Minutes Show Bank of England was Aware of Currency Rigging Eight Years Ago
War Talk Roundup: China Has "No Room for Compromise with Japan"; Spotlight on China, Japan, US, Iran, Russia, Ukraine, North Korea

Book Review: The Money Bubble (What to Do Before it Pops) - Two Thumbs Up

Posted: 10 Mar 2014 12:51 PM PDT

James Turk, founder of GoldMoney, and John Rubino who runs the popular DollarCollapse website got together for the second time in writing The Money Bubble.

The authors claim the current financial bubble is even bigger than the one in 2007.

I agree. But how does it end?

No one knows and importantly, Turk and Rubino don't claim to know either. Rather they outline a number of possible scenarios including a "Debt Jubilee", "Crypto-Currencies", a flight to tangible assets in general and gold in particular, currency wars, capital controls, wealth taxes, and bank bail-ins.

The book makes for interesting reading with historical references on fraction reserve lending, goldsmiths, and the evolution of the "Paper Money Experiment".

The authors intersperse a number of excellent quotes in each chapter, starting off with an important one: "The secret of freedom lies in educating people, whereas the secret of tyranny is in keeping them ignorant." - Maximilien de Robespierre

I have a number of minor quibbles with the book regarding some inflation stats, and also an alleged short-squeeze in gold or silver that I see as unlikely.

Also, I do expect at least one more asset-bubble deflationary collapse is coming up. Whether that happens before, after, or in conjunction with a huge global currency crisis is not knowable.

If that collapse happens before a crack-up-boom, as I strongly believe, debt-free is the way to be.

Actually, I was very pleased the book was not a huge hyperinflation rant from front-to-back that one might have expected.

Indeed, Turk and Rubino explicitly state in chapter 27 ...

"After reading the preceding 26 chapters of this book, a very reasonable conclusion might be to borrow as much fiat currency as possible and use the proceeds to buy hard assets ... This is a seductive thought, but it rests on a flawed assumption that powers-that-be will simply let debtors walk away from their obligations... It becomes easy to envision bankers arranging to have debt contracts rewritten to have debt paid back at fair value, not depreciated currency".

That's a good point, even if my expected deflation collapse does not happen. Moreover, it was one heck of a good call.

I noted yesterday that Spain modified laws in exactly that direction. See Spain Modifies Bankruptcy Laws to Prevent Corporate Liquidations. That step is just a down payment on the bank bail-out and bail-in ideas that will come.

All-in-all, I wholeheartedly endorse the book's main thesis, that a major currency crisis is coming and you need to protect yourself from it. Even as a deflationist, I give the book two thumbs up.

Do yourself a favor and read the book.

Disclosure: I do have an affiliate relationship with GoldMoney. However, it's equally fair to point out that I have been a fan of gold, even as a staunch deflationist, long before that relationship began.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Culture of Greed and Arrogance: Minutes Show Bank of England was Aware of Currency Rigging Eight Years Ago

Posted: 10 Mar 2014 10:35 AM PDT

Bank of England head Mark Carney faces a grilling from lawmakers tomorrow as Minutes Show Bank of England was Aware of Currency Rigging Eight Years Ago.

Bank of England Governor Mark Carney will face his toughest public testimony to date as he seeks to defend the integrity of an institution that's become embroiled in the currency-manipulation scandal.

Lawmakers will grill Carney tomorrow after the BOE suspended an employee and released minutes of meetings showing officials knew of concerns the foreign-exchange market was being rigged almost eight years ago. The central bank said last week that an internal review has found no evidence so far that staff were involved in collusion.

It's the second rigging scandal to hit the central bank following its entanglement in 2012 in the manipulation of the London interbank offered rate. Lawmakers criticized how it handled that affair, calling it naive.

"The statement on the internal review is only an early staging post in what is likely to develop into a very significant issue," said Simon Hart, a lawyer at RPC LLP in London. "The statement left open as many questions as it answered. It was noticeably silent on what the Bank knew about other FX market participants."

The testimony comes as regulators investigate allegations that traders at the world's largest banks worked together to rig the $5.3 trillion-a-day foreign-exchange market. The U.S. Securities and Exchange Commission is investigating whether traders distorted prices for options and exchange-traded funds by rigging benchmark currency rates, according to two people with knowledge of the matter, Bloomberg News reported today.

More than 20 traders from banks including Deutsche Bank AG, Citigroup Inc. (C) and Barclays Plc (BARC) -- the three biggest currency traders, according to a May Euromoney survey -- have been fired, suspended or put on leave since Bloomberg News first reported in June that dealers said they shared information about client orders to manipulate foreign-exchange benchmark rates.

The suspended BOE employee, who hasn't been named, is being investigated and "no decision has been taken on disciplinary action," the central bank said on March 5.

According to minutes of meetings released alongside that statement, BOE officials knew of concerns the foreign-exchange market was being manipulated as early as July 2006, more than seven years before regulators opened formal probes. The minutes also show BOE officials discussed with traders concerns that currency benchmarks such as the WM/Reuters 4 p.m. London fix were being manipulated.

Foreign-exchange benchmarks like WM/Reuters are used to compute the day-to-day value of holdings and by index providers. Even small movements can affect the value of what Morningstar Inc. estimates is around $3.6 trillion in funds.

The allegations drag the BOE into another market-rigging scandal less than two years after it was criticized by politicians for failing to act on warnings that Libor was vulnerable to abuse.

Culture of Greed and Arrogance

Where are the criminal indictments? 20 people fired? Is this it? Are we to presume no one at the top of these organizations knew and approved of this rigging?

This is part of the overall culture of greed and arrogance fostered by central banks globally. No matter what the "too big to fail" banks do they are bailed out at taxpayer expense every time they get into trouble.

Bernanke stated his biggest mistake was letting Lehman fail. The records show Lehman, Citigroup, Bank of America, AIG, Fannie Mae, Freddie Mac and countless other financial institution "did" fail.

It was not a matter of "letting them fail" they already did. It was a matter of bailing them out, and Bernanke wanted to bail more of them out, including Lehman.

On top of it all, no one was held criminally responsible for the collapse in mortgage-backed securities, no one was held responsible in LIBOR rigging, no one has been held responsible for anything to date, and no one will be held responsible for currency rigging either.

To date, all we have seen is a series of fines coupled with high-fives when executives escaped serious charges no matter what any of them did.

Expect more "EH5s" executive high-fives when this too is swept under the rug.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

War Talk Roundup: China Has "No Room for Compromise with Japan"; Spotlight on China, Japan, US, Iran, Russia, Ukraine, North Korea

Posted: 10 Mar 2014 01:04 AM PDT

The global macro picture is bad enough in and of itself. Simmering feuds between rival nations certainly do not help the picture. Here are a few recent stories that caught my eye.

China has No Room For Compromise with Japan

The New York Times reports China has No Room For Compromise with Japan.

March 8, 2014
The Chinese foreign minister took a strong stand Saturday on China's growing territorial disputes with neighboring nations, saying that "there is no room for compromise" with Japan and that China would "never accept unreasonable demands from smaller countries," an apparent reference to Southeast Asian nations.

In the East China Sea, China refuses to accept Japan's administration of, or its claims to, islands that Japan calls the Senkaku and China calls the Diaoyu.

"On the two issues of principle — history and territory — there is no room for compromise," Mr. Wang said in answer to a question from a Japanese reporter on the deterioration of China-Japan relations. "If some people in Japan insist on overturning the verdict on its past aggression, I don't think the international community and all peace-loving people in the world will ever tolerate or condone that."

Tensions between China and Japan have been playing out in diplomacy around the globe. In January, the Chinese ambassador to Britain and his Japanese counterpart both wrote op-ed articles for The Daily Telegraph in which they equated the other country to Lord Voldemort, the villain in the Harry Potter series. The two ambassadors even refused to sit at the same table during a televised BBC interview. Also in January, Mr. Abe told an audience at the Davos conference in Switzerland that the rivalry between China and Japan was similar to that between Germany and Britain before World War I, meaning their differences could supersede their close trade ties.

In the South China Sea, China has been trying to stake sovereignty to islands and waters that are also claimed by Southeast Asian nations. Vietnam, the Philippines and Malaysia are among the opponents to China's claims. The United States has said it takes no side on sovereignty issues but will maintain freedom of navigation. More recently, it has asserted that the so-called nine dashes map that some Chinese officials say defines China's ambitious claims in the South China Sea violates international law because the territorial boundaries are not based on land features.

Japan, U.S. Differ on China in Talks on 'Grey Zone' Military Threats

Reuters reports Japan, U.S. Differ on China in Talks on 'Grey Zone' Military Threats

Mar 9, 2014
As Japan and the United States start talks on how to respond to armed incidents that fall short of a full-scale attack on Japan, officials in Tokyo worry that their ally is reluctant to send China a strong message of deterrence.

A group of disputed islands, Uotsuri island (top), Minamikojima (bottom) and Kitakojima, known as Senkaku in Japan and Diaoyu in China is seen in the East China Sea, in this photo taken by Kyodo September 2012. Credit: Reuters/Kyodo

Washington takes no position on the sovereignty of the islands, called the Senkaku by Japan and the Diaoyu by China, but recognizes that Japan administers them and says they fall under the U.S.-Japan Security Treaty, which obligates America to come to Japan's defense.

But even as Asia-Pacific security tensions mount, U.S. officials have made clear they do not want to get pulled into a conflict between the world's second- and third-biggest economies.

Prime Minister Shinzo Abe's government is alarmed at China's rapid military buildup. Beijing in turn accuses Tokyo of being a regional threat, citing Abe's more nationalist stance, his reversal of years of falling military spending and his visit to a shrine that Asian countries see as glorifying Japan's wartime past.

Underlying Tokyo's concerns are worries that Washington might one day be unable or unwilling to defend Japan, despite President Barack Obama's strategic "pivot" toward the Asia-Pacific region. This fear is adding momentum to Abe's drive to beef up Japan's forces while loosening constitutional limits on military actions overseas.

If Washington does not get involved in specifically addressing the China threat, "it would undermine the credibility of the alliance and might end up encouraging China to be bolder," said Michishita, a professor at the National Graduate Institute for Policy Studies in Tokyo.

"U.S. policy makers will have to walk a thin line and try to strike a balance between maintaining credibility and deterrence, and preventing excessive involvement in the situation."

China Draws 'Red Line' on North Korea

Yahoo!News reports China Draws 'Red Line' on North Korea

Mar 8, 2014
China has declared a "red line" on North Korea, saying it will not permit chaos or war on the Korean peninsula, and that denuclearisation is the only way to achieve peace.

Beijing's patience with Pyongyang has been wearing thin following three nuclear tests and numerous bouts of sabre rattling, including missile launches.

The last of such incidents took place on March 7, when China voiced "deep concerns" to North Korea following reports that a missile launched by the latter passed by a Chinese civilian plane, according to a Reuters new agency report.

"The Korean peninsula is right on China's doorstep. We have a red line, that is, we will not allow war or instability on the Korean peninsula," Chinese Foreign Minister Wang Yi told reporters on Saturday, on the sidelines of China's annual largely toothless parliament.

DF-21D Missile Could Sink US Aircraft Carrier

ChinaTimes reports DF-21D Missile Could Sink US Aircraft Carrier.

The People's Liberation Army Navy's DF-21D anti-ship missile has a range of 2,000 kilometers and has the capability to sink a US nuclear-powered aircraft carrier, according to the Hindu, an English-language Indian newspaper on Mar. 5, citing a recently published report.

The idea of hitting a moving aircraft carrier with a ballistic missile had been unheard of, said S Chandrashekar, one of the authors of the report, adding that the Chinese have come up with a very innovative system based on well-understood components.

China Outraged as Japan Revamps Defense Plan

RT reports China Outraged as Japan Revamps Defense Plan

China's Defense Ministry on Friday issued a strongly worded statement criticizing Japan's plans to increase defense spending, accusing Tokyo of turning up the temperature on regional tensions.

Amid ongoing territorial tensions between Beijing and Tokyo in the East China Sea, Japan this week announced a five-year defense plan that has attracted an uncharacteristically outspoken response from China.

China "resolutely opposes" the five-year defense plan adopted by Japan on Tuesday, Defense Ministry spokesman Geng Yansheng said in a statement posted on the ministry's website.

Ukraine Prepares for War with Russia

On March 1, CNN reported Ukraine mobilizes troops after Russia's 'declaration of war'. Yesterday, Zerohedge had images and videos of mine deployment, SAMs, Tanks and troop movements in Ukraine.

China Warns US, Neighbors

On March 4, the Financial Times reported China Warns Neighbours on Territorial Disputes

China has called on the US to accept its growing security presence in east Asia and warned its neighbours that it would "respond effectively" to safeguard its territorial integrity amid simmering maritime disputes in the region.

"If the US cares about peace and prosperity, it should support China's aspirations for safeguarding territorial integrity and regional peace," said Fu Ying, spokeswoman for the National People's Congress, China's rubber stamp legislature, on Tuesday.

"The US has stated publicly that it has no plans to contain China and that its 'pivot' to Asia is not directed at China," Ms Fu said. "We want to see if words are matched by actions."

Ms Fu said that if any country "provokes or undermines security" in the region China would "respond effectively to safeguard its territorial integrity and regional security".

Last November, China angered the US, Japan, South Korea and other countries in the region by unilaterally announcing the creation of an "air defence identification zone" in the East China Sea.

During a recent visit to Beijing, John Kerry, US secretary of state, warned China not to establish a similar zone in the South China Sea. The US also recently said for the first time that it did not accept China's "nine-dash line", a demarcation on Chinese maps that Beijing uses to justify its claim to most of the South China Sea.

Ultimate Tragedy

Most in this country are sick of war. Senator John McCain isn't.

On March 7, McCain actually stated 'It's Tragic' There's No U.S. Military Option In Ukraine.

Sen. John McCain (R-AZ) on Friday lamented the lack of a military option for the United States in Ukraine against Russia and criticized President Obama for thinking the Cold War is over.

During a segment on MSNBC, McCain said that the Obama administration does't understand Russian President Vladimir Putin. "They have been near delusional in thinking that the Cold War was over," McCain said referring to Obama officials. "Maybe the president thinks the Cold War is over but Vladimir Putin doesn't and that's what this is all about."

Later in the interview, when host Andrea Mitchell asked if there is a military option for the U.S. in Ukraine, the Arizona Republican sounded despondent. "I'd love to tell you that there is Andrea, but frankly I do not see it," he said, adding, "I wish that there were. … I do not see a military option and it's tragic."

McCain Laments over Tragedy of No War Option

While McCain laments the lack of a military option, he does want US missiles in the Czech Republic, acceleration of more countries in NATO, and military exercises with Baltic countries.

Had McCain beaten Obama in 2008, we most certainly would have bombed Iran by now and likely would have started a war with China.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Damn Cool Pics

When Leonardo DiCaprio Was a Total Badass

Posted: 10 Mar 2014 11:33 AM PDT

The 2015 Budget Whiteboard

Monday, March 10, 2014

The 2015 Budget Whiteboard

In case you missed it, the President released his Fiscal Year 2015 budget last week.

Brian Deese, Deputy Director of the Office of Management and Budget, is pretty handy with a dry-erase marker, and he took some time to sketch out the nuts and bolts of the President's budget.

Want a better sense of exactly what's in the budget? You should probably watch this whiteboard video.

Want to know how the President's budget will continue to steadily bring down the deficit for the next ten years? You should watch this whiteboard.

Take a look, pass it on, and stay tuned for more.

Happy Monday.

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How to Set Up Meaningful (Non-Arbitrary) Custom Attribution in Google Analytics

Posted: 09 Mar 2014 04:15 PM PDT

Posted by Tom.Capper

Attribution modeling in Google Analytics (GA) is potentially very powerful in the results it can give us, yet few people use it, and those that do often get misleading results. The built-in models are all fairly useless, and creating your own custom model can easily dissolve into random guesswork. If youâ€™re lucky enough to have access to GA Premium, you can use Data-Driven Attribution, and thatâ€™s greatâ€"but if you haven't got the budget to take that route, this post should show you how to get started with the data you already have.

If you've read up on attribution modelling in the past, you probably already know whatâ€™s wrong with the default models. If you havenâ€™t, I recommend you read this post by Avinash, which outlines the basics of how they all work.

In short, theyâ€™re all based on arbitrary, oversimplified assumptions about how people use the internet.

The time decay model

The time decay model is probably the most sensible out of the box, and assumes that after I visit your site, the effect of this first visit on the chance of me visiting again halves every X days. The below graph shows this relationship with the default seven-day half-life. It plots "days since visit" against "chance this visit will cause additional visit." If it takes seven days for the repeat visit to come around, the first visit's credit halves to 25%. If it takes 14 days for the repeat visit to come around, the first visit's credit halves again, to 12.5%. Note that the graph is steppedâ€"I'm assuming it uses GA's "days since last visit" dimension, which rounds to a whole number of days. This would mean that, for example, if both visits were on the day of conversion, neither would be discounted and both would get equal credit.

There might be some site and userbase out there for which this is an accurate model, but as a starting assumption itâ€™s incredibly bold. As an entire model, itâ€™s incredibly simplisticâ€"surely we donâ€™t really believe that there are no factors relevant in assigning credit to previous visits besides how long ago they occurred? We might consider it relevant if the previous visit bounced, for example. This is why custom models are the only sensible approach to attribution modelling in Google Analyticsâ€"the simple one-size-fits-all models are never going to be appropriate for your business or client, precisely because theyâ€™re simple, one-size-fits-all models.

Note that in describing the time decay model, Iâ€™m talking about the chance of one visit generating anotherâ€"an important and often overlooked aspect of attribution modelling is that itâ€™s about probabilities. When assigning partial credit for a conversion to a previous visit, we are not saying that the conversion happened partly because of the previous visit, and partly because of the converting visit. We simply donâ€™t know whether that was the case. It could be that after their first visit, the user decided that whatever happened they were going to come back at some point and make a purchase. If we knew this, weâ€™d want to assign that first visit 100% credit. Or it might be that after their first visit, the user totally forgot that our website existed, and then by pure coincidence found it in their natural search results a few days later and decided to make a purchase. In this case, if we knew this, weâ€™d want to assign the previous visit 0% credit. But actually, we donâ€™t know what happened. So we make a claim based on probabilities. For example, if we have a conversion that takes place with one previous visit, what weâ€™re saying if we assign 40% credit to that previous visit is that we think that there is a 40% chance that the conversion would not have happened without the first visit.

If we did think that there was a 40% chance of a conversion being caused by an initial visit, weâ€™d want to assign 40% credit to â€œPosition in Pathâ€ exactly matching â€œFirst interactionâ€ (meaning visits that were the user's first visit). If you want to use â€œPosition in Pathâ€ as your sole predictor of the chance that a visit generated the conversion, you can. Provided you donâ€™t pull the percentages off the top of your head, itâ€™s better than nothing. If you want to be more accurate, thereâ€™s a veritable smorgasbord of additional custom credit rules to choose from, with any default model as your starting point. All we have to do now is figure out what numbers to put in, and realistically, this is where it gets hard. At all costs, do not be tempted to guessâ€"that renders the entire exercise pointless.

Tested assumptions

One tempting approach is simply to create a model based to a greater or lesser extent on assumptions and guesswork, then test the conclusions of that model against your existing marketing strategy and incrementally improve your strategy in this manner. This approach is probably better than nothing for improving your market strategy, and testing improvements to your strategy is always worthwhile, but as a way of creating a realistic attribution model this starting point is going to set you on a long, expensive journey.

The ideal solution is to do this process in reverseâ€"run controlled experiments to build your model in the first place. If you can split your users into representative segments, then test, for example,

the effect of a previous visit on the chance of a second visit
the effect of a previous non-bounce visit on the chance of a second visit
the effect of a previous organic search visit on the chance of a second visit

and so on, you can start filling in your custom credit rules this way. If your tests are done well, you can get really excellent results. But this is expensive, difficult, and time consuming.

The next-best alternative is asking users. If users donâ€™t remember having encountered your brand before, that previous visit they had probably didnâ€™t contribute to their conversion. The most sensible way to do this would be an (optional but incentivised) post-conversion questionnaire, where a representative sample of users are asked questions like:

How did you find this site today?
Have you visited this site before?

If yes:

How many times?
How did you find it?
Did this previous visit impact your decision to visit today?
How long ago was your most recent visit?

The results from questions like these can start filling in those custom credit rules in a non-arbitrary way. But this is still somewhat expensive, difficult and time-consuming. What if you just want to get going right away?

Deconstructing the Data-Driven Attribution model

In this blog post, Google offers this explanation of the Data-Driven Attribution model in GA Premium:

â€œThe Data-Driven Attribution model is enabled through comparing conversion path structures and the associated likelihood of conversion given a certain order of events. The difference in path structure, and the associated difference in conversion probability, are the foundation for the algorithm which computes the channel weights. The more impact the presence of a certain marketing channel has on the conversion probability, the higher the weight of this channel in the attribution model.The underlying probability model has been shown to predict conversion significantly better than a last-click methodology. Data-Driven Attribution seeks to best represent the actual behaviour of customers in the real world, but is an estimate that should be validated as much as possible using controlled experimentation.â€ (my emphasis)

Similarly, this paper recommends a combination of a conditional probability approach and a bagged logistic regression model. Don't worry if this doesn't mean much to youâ€"Iâ€™m going to recommend here using a variant of the much simpler conditional probability method.

I'd like to look first at the kind of model that seems to be suggested by Google's explanation above of their Data Driven Attribution feature. For example, say we wanted to look at the most basic credit rule: How much credit should be assigned to a single previous visit? The basic logic outlined in the explanation from Google above would suggest an approach something like this:

Find conversion rate of new visitors (letâ€™s say this is 4%)
Find conversion rate of returning visitors with one previous visit (letâ€™s say this is 7%)
Credit for previous visit = ((7-4)/7) = 43%

To me, this model is somewhat flawed (though Iâ€™m fairly sure that this flaw lies in my application of Googleâ€™s explanation of their Data-Driven Attribution rather than in the model itself). For example, say we had a large group of repeat visitors who were only coming to the site because of a previous visit, but that were converting poorly. Weâ€™d want to assign credit for these (few) conversions to the previous visits, but the model outlined above might assign them low or negative credit; this is because even though conversions among this group are caused by previous visits, their conversion rate is lower than that of new visitors. This is just one example of why this model can end up being misleading.

My best solution

Figuring out from our data whether a repeat visitor came because of a previous visit or independently of a previous visit is hard. Iâ€™ll be honest: I donâ€™t know how Google does it. My best solution is an approximation, but a non-arbitrary one. The idea is using the percentage of traffic that is either branded or direct as an indicator for brand familiarity. Going back again to how much credit should be assigned to a single previous visit, my solution looks like this:

Calculate the percentage of your new visitor traffic is direct, branded organic or branded PPC (letâ€™s say itâ€™s 50%)

Note: Obviously most of your organic is (not provided), so I recommend multiplying your total organic traffic by the % of your known keyword traffic that is branded. As (not provided) approaches 100%, youâ€™ll have to use PPC data to approximate your branded organic traffic levels.

Calculate the percentage of your 2nd-time-visitor traffic is direct, branded organic or branded PPC (letâ€™s say itâ€™s 55%)
Based on the knowledge that only 50% (in this case) of people without previous visits use branded/direct, approximate that without their first visit weâ€™d only have seen (100%-55%)*(100/50)=90% of these 2nd time visitors.
Given this, 10% of visitors came because of a previous visit, so we should assign 10% credit for 2nd time visits to the first visit.

We can use similar logic applied to users with 3+ visits to calculate the credit deserved by â€œmiddle interactionsâ€.

This method is far from perfectâ€"thatâ€™s why I recommended two others above it. But if you want to get started with your existing data in a non-arbitrary way, I think this is a non-ridiculous way to get started. If youâ€™ve made it this far and you have any ideas of your own, please post them in the comments below.

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