From the desk of Mindles H. Dreck:

Enemy of my enemy

From the 9/11 report - another nail in the coffin of the old conventional wisdom that warring or ideologically opposed camps would never cooperate in terrorism against the U.S.

Even after bin Laden approved funding for Mohammed's plot in late 1998 or early 1999, Mohammed resisted invitations to swear loyalty to bin Laden and formally join al Qaeda. He resisted in part, he told interrogators, because he had a prior allegiance to Sayyaf, the Afghan warlord, who was in turn allied with the Northern Alliance, led by Ahmed Shah Massoud.

Bin Laden was allied with the ruling Taliban, which was actively at war with Massoud. In fact, to aid that war, al Qaeda plotted the assassination of Massoud, which occurred just two days before Sept. 11. Mohammed eventually did join al Qaeda, Mohammed told interrogators.

Of course KSM's connections go everywhere.

From the desk of Jane Galt:

Question of the day

According to news reports, the steepest part of the Tour de france is a 10% grade. Can some of the engineers, hikers, or amateur surveyors in my audience translate this for the uninitiated? What angle are they biking at? Because there's really nothing more pathetic than a bunch of journalists sitting around trying to do math.

From the desk of Jane Galt:

It depends on what the meaning of "inadvertent" is . . .

I have absolutely nothing useful to say about the Sandy Berger brou-ha-ha. I did want to note, however, that this morning I heard one of our resident Democratic spin-doctors explaining that the removal of all of these documents was "entirely indavertent, as Mr Berger has explained." This is not, in fact, what Mr Berger has said, but what I'm more entranced by is that someone actually had the guts to go on the radio and proclaim that Clinton's former national security advisor had "indavertently" stuffed a large number of classified documents down his trousers.

But perhaps we should not be so sceptical. I recall that someone, who shall remain nameless, was unfairly subject to a similar investigation while we were in high school. This person had, entirely inadvertently, stuffed some things into their trousers while browsing in their local supermarket. Unfortunately, they forgot to take them out again to pay, resulting in the sort of grossly unfair investigation that Mr Berger is now suffering, although in their case it was conducted by a bystander who turned out to be an agent of the NYPD. The story was then "maliciously leaked" to our hapless victim's parents, resulting in much embarassment as they attempted to explain how they had 'forgotten about" a pack of bologna, two one liter bottles of soda, one jar of Vlasic Extra Large Dill Sandwich Pickles, and a can of whipped cream. The years have not dimmed the fallout from this malicious smear, perpetrated by a store owner who was no doubt a member of the Vast Right Wing Conspiracy. As this stories develop, we need to keep in mind that many Americans use their underwear to store things when they have too much to carry. Innocent until proven guilty ain't just a river in Egypt.

From the desk of Jane Galt:

Tee-hee!

Laugh of the day. It's almost as good as the immortal Donald Rumsfeld Karate Technique.

From the desk of Mindles H. Dreck:

Hey, it goes with the tie....

We mustn't judge Alexander Hamilton by his biographer's clothing:

Now there's a jacket that could provoke a duel.

Oops, I suppose the title of Hamilton's biographer belongs to Ron Chernow at the moment.

Don't miss the additional..er...color in the comment threads.

From the desk of Jane Galt:

Another "global warming isn't caused by carbon" story

This time in The Telegraph.

A study by Swiss and German scientists suggests that increasing radiation from the sun is responsible for recent global climate changes.

Dr Sami Solanki, the director of the renowned Max Planck Institute for Solar System Research in Gottingen, Germany, who led the research, said: "The Sun has been at its strongest over the past 60 years and may now be affecting global temperatures.

"The Sun is in a changed state. It is brighter than it was a few hundred years ago and this brightening started relatively recently - in the last 100 to 150 years."

Dr Solanki said that the brighter Sun and higher levels of "greenhouse gases", such as carbon dioxide, both contributed to the change in the Earth's temperature but it was impossible to say which had the greater impact.

This is, as I see it, the real problem with global warming research: you've only got one atmosphere to study. All the research is mostly looking at the warming over the last 150 years, which is, though certainly worrisome, well within known geological variation.

The problem is that that 150 year period, when we've started to emit serious carbon, could also coincide with other things. It coincides neatly, for example, with the widespread introduction of thermometers across the world, which means that for earlier, non-carbon-emitting periods we're relying on proxy data. Some of which, like tree rings, may respond to both heat and carbon presence--tree rings grow thicker both in times of elevated carbon, and elevated heat, making it much more difficult to get an accurate historical proxy.

Because the period is short, and things liike the sun's heat can vary, it's much harder than it otherwise would be to establish causation from the correlation between carbon emission and warmer temperatures. That means we have to be sceptical about the studies. But then we have the risk that we might scepticise ourselves right into an early grave.

From the desk of Jane Galt:

Is Efficient Markets Theory dead?

John Quiggin thinks so:

In 1994, the efficient markets hypothesis (the belief that asset markets invariably produce the best possible estimate of asset value based on all available information) was an open question, and the standard account of the Dutch tulip mania was evidence against it. In 2004, the falsity of the efficient markets hypothesis is clear to anyone open to being convinced by empirical evidence.

We have seen billion-dollar valuations placed on companies that proposed to home-deliver dogfood at prices lower than those charged in discount stores. We’ve seen unimportant subdivisions of profitable companies valued at more than the companies themselves. We’ve seen a dozen different companies simultaneously priced at levels that made sense only if they were each going to monopolise the industry in which they were competing. And don’t even get me started on the US dollar bubble (now burst) or the bond bubble (still inflating).

. . . It’s true that dramatic episodes like the dotcom mania don’t happen all the time. But even one such episode, occurring in a well-developed and sophisticated financial market like that of the US in the late 1990s is sufficient to undermine the assumption that asset markets ever yield the best possible estimate of asset values, except by chance.

In his comments section, the redoubtable James Surowiecki disagrees:

It’s certainly true that the EMT is not right. But if you had a system that offered the best possible forecast 90% of the time, would the fact that it was wrong 10% of the time — even if when it was wrong it was really wrong — mean that its success the other 90% of the time was due to chance?

Take horse-racing. We know that the odds on horses predict almost perfectly how likely it is that a horse will win (over, say, 100 races subjective probabilities are essentially identical to objective probabilities). In the Belmont Stakes, it seems pretty clear that the market overvalued Smarty Jones and undervalued Birdstone. (I don’t mean just that Birdstone won, but that the odds on these horses did not reflect their objective chances of winning.) Should we really conclude from this that the accuracy of odds is due to chance?

There’s no doubt that markets suffer from enormous periods of irrationality. But it seems possible that, although we don’t have the analytical tools to do this yet, these periods are objectively distinct from the way the market works most of the time, and that while they shed light on the potential perils of markets, they don’t invalidate the use of markets to set asset prices. The fact that someone occasionally gets sick is not proof that they’re not healthy.

I’m not sure, in any case, what follows from your conclusion. Every day, the US stock market values more than 7000 stocks, which entails, roughly speaking, predicting what the future will be like for those 7000 companies (and their competitors, etc.) for the next 15-20 years, depending on valuation. That’s a near-impossible task. The difficulty of the task isn’t going to change, but what’s a better way of doing it?

Now, both John Quiggin and James Surowiecki are about a hundred times smarter and more knowlegeable than I, so I tremble to differ with them. But I'm not so certain that EMT is, in fact, incorrect.

I think that what they're saying is that the "strong" version of EMT -- that market prices correctly incorporate all possible knowlege about the stock price -- is incorrect. And in that I concur. But there are also "semi-strong" and "weak" versions of the theory.

The weak version says only that you can't make excess returns--basically, profits above the economic costs of finding the investment opportunities--based on historical financial data. I think it's safe to say that pretty much every economist thinks this is true, and that "chartists", who attempt to predict price movements based on past trends, are doomed to fail in the long run.

The semi-strong version says that share prices adjust instantly to new public information, and you therefore can't make money trading on that information. I think, again, that almost all economists would agree with this.

Now, I was at the University of Chicago Business School, intellectual home of effi cient markets theory, during the stock market bubble. Even the strongest of market advocates among my professors didn't try to argue that we weren't in a bubble; they could read a P/E as well as anyone. About the only people trying to argue that prices were sustainable were my classmates who had taken out $100K of student loans so they could hold on to all of that valuable Webvan stock.

What my strong market efficiency professors argued was, not that prices reflected some metaphysically true value for the stock, but that the prices reflected all the information anyone in the market had, and that you therefore had no hope of being able to consistently generate excess returns.

I say consistently because anyone who brings up efficient markets is told that Peter Lynch or Warren Buffet has beaten the market for years. This is true. But what about all the guys who underperformed the market for years and then went out of business? If you flip 16 million coins 50 times, some of them will come up heads every time. That doesn't mean the coin flippers handling those coins are "outperforming" the others. If you plot all the returns on a line, apparently what you find is a nice normal bell curve (truncated at the left, since underperformers tend to exit the money management business), with Peter and Warren out on the very far right tail of the distribution. If you run a regression on the returns of mutual fund managers, there is a no-better-than-random correlation between their performance this year, and their performance next year. This is why it's such a terrible idea to pick mutual funds based on their recent performance. In fact, it's why Chicago tends to preach index funds as the only sane investment for 99% of investors.

In short, prices may not match the intrinsic value of the stock. But the odds are against you systematically outperforming the market in estimating what that intrinsic value is.

Now, there are a lot of caveats. Efficient markets theory only works as long as a sufficient number of people don't think it does; if we all stuck our money in index funds, the market would lose the information it needs to be efficient.

And I'm acquainted with a value investor, a disciple of Warren Buffet's, who makes a convincing argument that the Uncle Warren School of Value Investing in fact does generate excess returns for those who follow it closely. This may well be true, but it's somewhat recursive: value investing (like efficient markets) only works as long as a lot of people don't think it works. If a lot of people pursue a value strategy, value opportunities will soon be arbitraged away. It tends to work best in thinly traded areas of the market; you are vanishingly unlikely to make money (as Uncle Warren did), by buying Coke because you think it's undervalued.

There's a third problem in the US market, which is that with selling short (borrowing shares of a stock in order to sell them, which is basically betting that the price will go down) severely restricted, many argue that the feedback mechanism in the market is sort of permanently broken, introducing an upward bias into prices.

There are a whole lot more caveats, so many that I can't remember them all to tell you about them. But ultimately, I think what even the Chicago folks are now selling is the not-entirely-crazy idea that trying to beat the market is basically gambling. You might win a lot of money tonight. But in the end, the percentage is always to the house.

From the desk of Mindles H. Dreck:

Your Faithful Correspondent

This letter to the Princeton Packet stands out from the rest and brightened my day:

To the editor:
Three recent Packet articles require responses.

1) What saps New Jersey's media must be to have ever gone along with this Machiavellian (hee-hee-hee) misnomer "millionaires' tax." It is an example of that adage of politics: "Any program that robs Peter to pay Paul will have the enthusiastic support of Paul.

However, I cannot accept the filthy lucre of this McGreeveyist robbery. I think I'll give the increase in my property tax rebate to the first victim of this "millionaires' tax" who contacts me.

My increased rebate is supposed to give me some relief from the profligate spending by my township, school district and county. But I cannot think of any reason that "millionaires" in other parts of New Jersey should be forced by the state to subsidize profligate spending by my township, school board and county.

If my fellow locals and I don't like being gouged by our local governments, we can — at least in theory — kick them out of office. But the "millionaires" who are being tapped by Gov. McGreevey and the Legislature have no say over my local governments. And it's a whole lot harder for them to eliminate profligate state government than it is for us locals to eliminate profligate local government.

2) Our area has a decades-old problem of vandalism that the police have been unable to solve. I have a quick fix. Just one, maybe two incidents in which vandals catch a load of buckshot from their victims would most surely redirect the sociopathic energies of the area's little darlings.

3) Finally, an explanation of why the Legislature doesn't give towns the authority to ban smoking on private property. For the same reason it doesn't give towns the authority to ban liquor: It's wrong. Even New Jersey pols get it right occasionally.

You don't want to eat, drink or work in a smoky room? Then pick a nonsmoking establishment, persuade the owner of the one you like to ban smoking or open your own. It is not government's prerogative to dictate which legal activities you can allow in your business.

Terry Wintroub
Trafalgar Court
Lawrence

Three cheers for Terry! I can only imagine the howls of outrage throughout Mercer County.

From the desk of Jane Galt:

Public service announcemnet

If you are a blogger or journalist coming to New York City for the convention, please shoot me an email at janegalt -at- janegalt dot net. I'm scoping out demand for a blogger event.

From the desk of Jane Galt:

Fun tidbit of the day

All government sites apparently have to have kids sections. Even the site on Yucca Mountain. . .

From the desk of Jane Galt:

The Mystery of Hyde Park

Longtime readers know that before I was the blogger you know and love, I attended business school at the University of Chicago. Apparently, Chicago bloggers have been wondering why Hyde Park, to put it bluntly, sucks. I grew up within shouting distance of Columbia, and attended undergrad at the University of Pennsylvania, which is located in a deeply poverty-stricken area. (Although not--for those who are about to angrily email me--as deeply poverty stricken as other areas in the tragically poor city of Philadelphia.) Hyde Park is uniquely bad for an urban school neighbourhood.

There are no bars. There are no stores where you would want to buy anything more upscale than pet food. There are no high-end restaurants, and only a few decent low end restaurants (Dixie Kitchen, Harold's, and the caribbean place are all that spring to mind, although I also enjoyed my occasional sojourns at the pancake house.) Apparently, undergraduates are theorizing that it is the unique nature of the Chicago student that prevents enterprise from springing up.

This surprises me, because everyone at the business school knew exactly why Hyde Park was such a wasteland. Jacob Levy explains, far more elegantly than I could: it's the zoning.

Just goes to show you: when there's something puzzlingly, inexplicably wrong, you need generally look no further than the government to find out what's causing it.

From the desk of Jane Galt:

Who died and made us the world's policeman?

The ever-brilliant Robert Lane Greene has a piece in this week's New Republic about France's antagonism to the US, and why it's leading France to make a big mistake on its military policy -- France, and Europe, should be building skills complementary to the Global Policeman, not looking for ways to combat it.

This caused me to wonder something for perhaps the first time: why did we agree to be the world/s policeman? The rest of the developed world essentially opted out of military development in favour of building their welfare states--why didn't we? After all, we were perhaps the country least threatened by the Soviet Union.

I don't think the standard imperialist answer holds. Sure, we have done some unsavoury things in order to promote our country's economic interest, but shockingly fewer such things than any other country I can think of. The US has generally pursued its imperialistic expeditions in ways that are fairly altruistic -- either ideological, or in pursuit of broadly stabilising actions such as trying to keep the Middle East fairly peaceful so that oil continues to flow, an action that benefits anpetrological countries far more than the US. Why did we take on the superpower project, and why didn't we exploit our role as much as we could have?

(Answers implying that Americans are just nicer than the rest of the world warm my patriotic little heart, but aren't quite useful in this discussion. Stick to things like specific national values, institutions, or geopolitical imperatives, if you would.)

From the desk of Jane Galt:

Delay, or not delay-- that is the question

The blog issue of the day is the Bush administration's apparent decision to set up procedures for delaying the election in the event of a terrorist attack. Daniel Drezner has the roundup.

My take: on the one hand, this gives me that deeply creepy, "Reichstag Fire" kinda feeling. On the other hand, it is manifestly obvious to me that we could not have had an election on, or within two weeks of, 9/11: the country was simply too shell-shocked. And it strikes me as prudent to plan ahead for how we will handle this.

My criteria: it should require an independant, highly bipartisan commission. The commission should not be able to delay an election without at least a supermajority of its members. And the delay should be time-limited to, say, three weeks or a month.

But I strenuously disagree with Jack Balkin's idea:

The fact that a terrorist attack might influence voters one way or the other is not a reason to cancel an election. Lots of things happen before elections that can influence voters. Rather, the reason to postpone an election is that it is simply not possible to conduct the election in a particular jurisdiction, because, for example, there are dead bodies lying everywhere or buildings have been blown up and local services have to be diverted to matters of life and death. The September 11th attacks shut down large parts of New York and diverted essential services. It was no time to have an election. If a terrorist attack occurred on Election Day, it would make sense to postpone the election in the place where the attack occurred, but not everywhere in the country. (Note that under current law, states may pass new legislation rescheduling the election without Congress's intervention). One can imagine situations in which an election would have to be postponed everywhere, but they would be truly terrible situations, ones that effectively brought the entire country to a halt....

I disagree both because its obvious to me that if there were a large number of "bodies everywhere", the whole country would be affected, and because this seems to violate everything we learned in Florida. The whole point of having strong, before-the-fact laws in place, and simultaneous elections, is that it prevents those running the election from knowing how many votes they have to get in order to turn the thing.

This was why I was against the recount in Florida: the predominantly Democratic canvassing boards knew that by fudging just a very little bit, they could bring in enough votes to throw the whole country to Al Gore. I don't say that they did fudge; only that it is hard to get a legitimate election result -- one that will be viewed as legitimate by the losers -- in this situation. This was, of course, thoroughly reinforced by the sight of the two Democrats continually outvoting the one Republican on the subject of what did, or did not constitute a vote for Al Gore.

Now, imagine there's another squeaker, and we've delayed the election in one state, a swing state. Whichever party controls more of the local party machinery gets to mobilise all its resources to that state, and will probably carry the election. This strikes me as a fundamentally ungood outcome.

Of course, I think that if there were a really serious terrorist attack, we probably wouldn't have a squeaker--either we'd rally round the flag, or throw da bums out. But still, I think the chance of such a thing is worth preventing. If we delay the federal election in one state, I think we should delay it in all of them.

From the desk of Jane Galt:

Tee hee!

Laugh of the day is here.

From the desk of Jane Galt:

Wierdest thing I saw on my vacation

At the Borders bookstore in Newark Airport, where I was forced to wait for an hour due to my complete incompetence at conveying the correct arrival time to my ride, the "Social Science" section is filled apparently exclusively with political screeds, 90% of them of the "George Bush is the Bastard Son of Satan and Adolf Hitler" variety.