Misled by models

A lot of the recent economic problems were due to believing models.  In his  "Black Swan" book, Nassim Taleb notes that investors are misled by models of risk.

Predicting weather patterns using models is still far from trustworthy.  Here is the prediction for March 2013 versus reality.  The prediction was made only a few weeks beforehand.

Cupcakes crumble

It's the end of the cupcake bubble!  Oh nooos!!

A few years ago, cupcake shops were hot.  They rode on the wave of rapid growth. From a few cupcake bakeries in New York City, the trend spread to other cities and even had a show or two on cooking television channels.

In 2011, Crumbs stock started trading on NYSE. Its market cap exceeded $65 million when the stock traded over $13/share.

Now in 2013, the stock has dropped 90%.
http://finance.yahoo.com/q/ta?s=CRMB+Basic+Tech.+Analysis&t=2y

Wall Street Journal has an article on the cupcake crumble:
http://online.wsj.com/article/SB10001424127887324345804578425291917117814.html

What's next for Bitcoins?

Their price zoomed up from about $15 at the start of 2013 to over $250 in April.

I think that in a year, Bitcoins will be viewed as an innovation on the path to a digital payment system. However, other systems will surpass it.

Like Napster was an early way to get digital music but it was quickly exceeded by competing services, Bitcoin showed the possibility of digital payments that didn't require interchange costs.

Early digital currencies have tried out various exchanges or small economies. Outside of tightly controlled virtual economies like those used in games or limited to single websites like Facebook, digital currencies have failed.

Even earlier were social currencies based on tightly linked money changers.
(http://en.wikipedia.org/wiki/Hawala)

Bitcoins are the first decentralized electronic currency that achieved popularity.  Bitcoin used cryptology techniques to expand its money base but not for secrecy of users or transactions.  Basically Bitcoin is a distributed accounting system that supports signed transactions. Payment networks are an old idea but Bitcoins used the idea of peer-to-peer networks.  Its "block chain" (http://blockchain.info/) data is exchanged so that servers see the transactions.

A next-gen digital currency system to watch is Ripple.

Here's a history puzzle -- why did economies

starting growing at compounding rates?

Before about 1700-1750, economies had short

spurts of growth but didn't continuously grow.

As a result, the average person lived about the

same in 1700 as they did in Roman times.

So 2 millenia of flat economes.

But after 1750, economies grew year by year.
Compounded growth at even 1% will result in
huge gains after a century or two.

I'm really perplexed why this happened.

Was it due to:

- development of corporations?

- better transportation? Sea-faring?

- societal views of money and debt?

- coffee houses (that encouraged trade)?

- stock exchanges?

- energy from coal mines?

- all of the above?

I'm stumped but it looks like the origin

of the change began in the Netherlands.

Whatever the reason, it's power caused the

rise in power of Europe then the USA.

Economic myths

As I read mainstream economic news

stories, I see a few myths that are

repeated without any evidence.

Here's a few:

1) housing recovery is robust

Nope, the market is bouncing off the

bottom without any robust growth.

Average resale price has climbed 6%

last year mainly because fewer houses

were foreclosed.  And the slowdown in

floreclosures was the legal mess caused

by Fannie/Freddie promoting paper-less

mortgage trading and judges requiring

paper documents.
http://www.reuters.com/article/interactive/idUSBRE92Q0M420130327?view=small&type=gc03

2) the Fed is printing too much money

Nope, they injected lots of liquidity back

in 2009 but the money printing has been

relatively slow since then.  Plus velocity
of money has been slowing.
http://jessescrossroadscafe.blogspot.com/2013/03/the-fed-is-printing-money-but-where-is.html

3) companies are sitting on lots of cash

Nope, while the amount of cash is higher

it is not really out of historical ranges when

compared to overall corporate valuations

or debt levels.
http://www.financialsense.com/contributors/neeraj-chaudhary/2011/12/15/the-corporate-cash-myth

Cyprus natural gas

Digging a bit into the Cyprus mess, I think the

key is natural gas.

Cyprus got into trouble by joining the EU, accepting

foreign accounts from Russia when had it had its currency

problems, and then investing the money in Greece.

All three mistakes probably seemed like good ideas

at the time but, as a group, they were dumb.

Now Cyprus needs a bailout of about $10B to cover

the bank losses.  Does it have enough assets?

However ... looking at its natural gas fields, it does

have the possibility of plenty of assets.

So far, the lease held by Noble Energy (NBL) looks like

it has about 5-8 trillion cubic feet of natural gas.

Plus several more areas are under exploration that

could contain 20-30 trillion cubic feet.  Or more.

At current prices, those reserves would be worth

at least 10X its debt.

Sooo, Cyprus could sell its family jewels to cover its

debts.  The question is who will buy it?  Russia

currently makes a lot of money selling nat gas to

Europe and wouldn't like the competition if another

country sells nat gas.  That's why Gazprom wanted

to lease the gas fields but its low-ball offer was

rejected.  Maybe somebody else will jump in.

Is the EU fixed?  Over the past two years, fears grew that the EU was unrecoverable.  However, the sentiment change in late 2012 that the EU would muddle through.

Now in 2013 there is evidence that the twin bulwarks, Germany and France, are not as strong as hoped.  Both nations have economies that are flat or even declining.  Without growth from those two, what will counter-balance the weakness of Greece, Italy, and Spain?