Sunday, April 29, 2012

A slow post...  

Somehow, around two weeks ago, I strained? pulled? twisted? some thew or something in my left shoulder. Driving a tractor with all the controls on the right became a real hassle, and putting on my pants a challenge. Needless to say, posting one-handed wasn't fun either.

So I didn't.

But it's getting better in that casually glacial pace I now realize is how geezers heal.

So let's talk irrationality. It seems fitting just now when a new farm program is taking shape.

As many of you know I have been fascinated with efforts by cognitive psychologists to understand why we make irrational choices, indeed how we choose in the first place. A considerable body of research has piled up on the odd ways our mind works.

All of it is pretty damning when it comes to imagining our species as having anything at all in common with say, Vulcans. We are persuaded by the trivial, attention-grabbing, or emotional in the face of hard facts to the contrary.

In fact, it all seems pretty futile.
The last several years have seen many popular psychology books that touch on this line of research. There’s Ori and Rom Brafman’s Sway, Dan Ariely’s Predictably Irrational and, naturally, Daniel Kahneman’s Thinking, Fast and Slow. If you could sum up the popular literature on cognitive biases and our so-called irrationalities it would go something like this: we only require a small amount of information, often times a single factoid, to confidently form conclusions and generate new narratives to take on new, seemingly objective, but almost entirely subjective and inaccurate, worldviews.
The shortcomings of our rationality have been thoroughly exposed to the lay audience. But there’s a peculiar inconsistency about this trend. People seem to absorb these books uncritically, ironically falling prey to some of the very biases they should be on the lookout for: incomplete information and seductive stories. That is, when people learn about how we irrationally jump to conclusions they form new opinions about how the brain works from the little information they recently acquired. They jump to conclusions about how the brain jumps to conclusions and fit their newfound knowledge into a larger story that romantically and naively describes personal enlightenment.
Tyler Cowen made a similar point in a TED lecture a few months ago. He explained it this way:
There’s the Nudge book, the Sway book, the Blink book… [they are] all about the ways in which we screw up. And there are so many ways, but what I find interesting is that none of these books identify what, to me, is the single, central, most important way we screw up, and that is, we tell ourselves too many stories, or we are too easily seduced by stories. And why don’t these books tell us that? It’s because the books themselves are all about stories. The more of these books you read, you’re learning about some of your biases, but you’re making some of your other biases essentially worse. So the books themselves are part of your cognitive bias.
The crux of the problem, as Cowen points out, is that it’s nearly impossible to understand irrationalities without taking advantage of them. And, paradoxically, we rely on stories to understand why they can be harmful. [More]
Currently, I'm reading Jonathon Haidt's The Righteous Mind, which could be the best of the bunch. And despite the warnings voiced above, I think it has been remarkably helpful, especially in this election season.

But I agree about the "narrative bias". The reason farmers watch USFR is hear a story about the commodity markets that has all the elements of any good yarn. Good guys and bad guys, a range of motives, and nearly miraculous abilities to shape events.

Most of all it transforms a raft of transaction details (sales) into an living entity - The Market. This entity goes shopping for acres, gets confused, and tries to persuade farmers to do various things like hold crops or shift acres. It is this enduring fairy tale that takes a mess of dry data and turns it into something we think we understand. In reality it is little different from seeing a pony in the sky when looking at water vapor accumulations.

The bigger question is if we can or even should override this predilection to choose a narrative over say, a statistical summary. Currently, I still hold out hope we can, but it's so much hard work with often little reward, we don't.

Regardless, just knowing our thoughts are riddled with inconsistencies should enable us to proceed with more caution, especially when demanding we know The Truth.

Sunday, April 22, 2012

Much like my tax return...  

 The math for budget-cutting is tricky.  I have been studying the Romney/Ryan hybrid proposal and agree with most econobloggers who are not sure where he can find the loopholes/deductions to pay for his tax breaks.

The first thing to note is that there are clearly enough tax expenditures to finance the $900 billion cost that the Tax Policy Center reckons Mr Romney’s plan will cost (relative to current law). But as you dig into the list, problems arise. First, these expenditures would be worth a lot loss once Mr Romney has cut income tax rates (see my caveat below). Second, Mr Romney has put several off limits, most notably the preferential rate on dividends and capital gains (worth $91.3 billion) and the ability of corporations to defer tax on foreign income ($19.6 billion), since under his plan corporations would not owe taxes on such income. Third, several will presumably be off limits: is he really going to tax Medicare benefits ($79.3 billion) or eliminate the earned income credit ($58.5 billion)?
But the biggest problem is one not obvious from the table: the distribution of these breaks. Yes, they disproportionately benefit the upper 20% of households because their tax rates are higher. Nonetheless, as this Tax Policy Center paper notes, roughly a third went to the bottom 80% of households (especially tax credits and above-the-line deductions). Since Mr Romney has said he would spare the middle class, most of this money would be off the table. Where it gets really interesting is inside the top 20%. Many deductions are in effect capped. As a result, their biggest beneficiaries are not the top 1% but the next 19%, with one exception: the preferential rate on capital gains and dividends, more than half of whose benefits go to the 1%. By eliminating tax expenditures for upper income families except the preferential rate on capital gains and dividends, Mr Romney’s plan would be a gigantic transfer from the upper middle class to the rich. And keep in mind that the upper middle class is also the group likely to pay most under any reform to Social Security and Medicare. 
Mr Romney’s team defends the feasibility of his plan by noting its similarity to the Bowles-Simpson commission proposal, which like Mr Romney lowers the top rate to 28% and pays for it by closing loopholes. But the comparison does not actually help Mr Romney’s case. First, unlike Mr Romney, Bowles-Simpson eliminates the preferential rate for capital gains and dividends. That is both a significant revenue-raiser and the principal reason the truly wealthy suffer most under their plan: the top 1% sees its after-tax income fall 7.8% and shoulder half the net increase in taxes. Under any plausible version of Mr Romney’s, the after-tax income of this group would rise. Second, it only lowers the corporate rate to 28% instead of Mr Romney’s 25% (from 35%). Third, Bowles-Simpson clearly hurts the middle class; the middle 60% of households see their after-tax income drop about 1.5% each. The reason is that the plan nukes almost all deductions, and replaces only a few with miserly tax credits that are worth less than the current deduction to most taxpayers. If Mr Romney wants to spare the middle class he will have to be much more generous than Bowles-Simpson when it comes to protecting their tax breaks. And there’s the rub: Mr Romney can be revenue neutral or he can spare the middle class but I don't see how he can do both. [More]
From the table above - which has been widely accepted as an accurate account of what tax expenditures cost, farmers should note certain items.
  1. Exclusion of capital gains at death: This "step-up in basis" is a BIG deal - perhaps more important than the actual rate itself. It also looks to be one with a smaller consituency to fight for it. I think it is greatly at risk.
  2. Capital gains: As discussed in the above article, the fact this is largely helpful to the 1% and few others makes it a tempting target. Again it's a big deal for farmers selling land after the recent runup.
  3. Elimination of deduction for health insurance: Depending on the outcome for Obamacare, this could tempt many employers to drop group insurance for simple compensation. At the very least, it will undoubtedly push more of the cost to employees, although that is happening already.
  4. Mortgage interest: I think this applies to homes (reported on Schedule A) - not interest reported on Schedule F, but it's the same 1099, so I could be wrong. [Update: probably not at risk unless a desire to include real estate investors in the revenue makes it a target]
  5. 401K benefits: Not sure how many farmers do this when buying land has trounced these as retirement piggy-banks, but some did.
While it's hard to imagine enough Congresshumans anxious to attack these popular "loopholes", you can't get done what Romney has proposed without hitting many of them. So the bottom line is worrying about the Farm Bill is peanuts compared to the budget debate for my farm.

Prediction: tax cuts might happen, but eliminating enough tax breaks won't. 

Sunday, April 15, 2012

Just stumbled across this...  

I'm not a fan of soppy stories, but I admired Caine's ingenuity.

Saturday, April 14, 2012

Let's form a club...  

I have somehow neglected to get a tattoo. I'm not alone.
But the new extreme inking is by no means confined to the sporting set. Everywhere I look in Florida, I clock old geezers with hammocks and the word “Margaritaville” emblazoned across their burly sun-blasted torsos. Chicks, too: Today I saw a superannuated South Beach swinger boasting a tarantula on her right shoulder. Every time she hoisted her sippy cup to her lips the spider jiggled. And it’s no longer just a class thingy: I even saw tats at the legendarily WASP-y Bath and Tennis Club in Palm Beach. OK, so they were on the leg of the car-park valet, but just you wait. Next year, the old broads in the canasta salon will be sporting radical ink. Mark my words.
In the past there was one reason, and one reason only, to ink up: A tattoo confirmed your status as a scary outsider rebel carny outlaw sociopath. “Don’t mess with me because I am insane,” was the intended message. And it worked. Remember Robert Mitchum in Night of The Hunter? When he cuts Shelley Winters’ throat we are hardly surprised: We knew trouble was on the horizon as soon as we saw the words LOVE and HATE inked across his knuckles. Tattoos meant mayhem.
Cut to today: Having a tattoo has lost its original meaning. Having a tattoo now has no meaning. Having a tattoo means that you have a tattoo. [More]
I prefer to think of it as "like-new" condition.


On a totally unrelated note: Anybody need a automatic talc dispenser? It is similarly new-in-box, and too big for our embarrassingly small model of seed tender. Will autograph. Make an offer.

Still sunk after all these years...  

What is it about the Titanic?  I mean, it's not like Spock died.
I wasn’t the only one who was obsessed—or writing. It may not be true that “the three most written-about subjects of all time are Jesus, the Civil War, and the Titanic,” as one historian has put it, but it’s not much of an exaggeration. Since the early morning of April 15, 1912, when the great liner went to the bottom of the Atlantic Ocean, taking with it five grand pianos, eight thousand dinner forks, an automobile, a fifty-line telephone switchboard, twenty-nine boilers, a jewelled copy of “The Rubáiyát of Omar Khayyam,” and more than fifteen hundred lives, the writing hasn’t stopped. First, there were the headlines, which even today can produce an awful thrill. “ALL SAVED FROM TITANIC AFTER COLLISION,” the New York Evening Sun crowed less than twenty-four hours after the sinking. A day later, brute fact had replaced wishful conjecture: “TITANIC SINKS, 1500 DIE.” Then there were the early survivor narratives—a genre that has by now grown to include a book by the descendants of a Lebanese passenger whose trek to America had begun on a camel caravan. There were the poems. For a while, there was such a glut that the Times was moved to print a warning: “To write about the Titanic a poem worth printing requires that the author should have something more than paper, pencil, and a strong feeling that the disaster was a terrible one.” Since then, there have been histories, academic studies, polemics by enthusiasts, and novels, numbering in the hundreds. There’s even a “Titanic for Dummies.” This centennial month alone will see the publication of nearly three dozen titles. [More]

Junkbox, Episode VRIDRI...  

Stuff I saw this week that made me say "huh":
I think our corn will survive the 25℉ nights last week.

Monday, April 09, 2012

An economy of debt...  

I have been struggling to get my mind around the working of the shadow banking system

It's not easy for me.
The shadow banking system is the collection of financial entities, infrastructure and practices which support financial transactions that occur beyond the reach of existing state sanctioned monitoring and regulation. It includes entities such as hedge funds, money market funds and structured investment vehicles. Investment banks may conduct much of their business in the shadow banking system (SBS), but they are not SBS institutions themselves.
The core activities of investment banks are subject to regulation and monitoring by central banks and other government institutions - but it has been common practice for investment banks to conduct many of their transactions in ways that don't show up on their conventional balance sheet accounting and so are not visible to regulators or unsophisticated investors.[1] For example, prior to the financial crisis, investment banks financed mortgages through off-balance sheet securitizations and hedged risk through off-balance sheet credit default swaps.[1]
The volume of transactions in the shadow banking system grew dramatically after the year 2000. By late 2007 the size of the SBS in the U.S. exceeded $10 trillion. By late 2009 the United States SBS had shrunk to under $6 trillion due to increased regulation, changes in business practice, and pressure from investors who in some cases no longer wanted their funds to be used in the shadow banking system. Globally, a study of the 11 largest national shadow banking systems found that they totalled to $50,000bn in 2007, fell to $47,000bn in 2008 but by late 2011 had climbed to $51,000bn, just over its estimated size before the crisis. Overall, the world wide SBS totalled to about $60 trillion as of late 2011.  [More
These complex, interwoven financial contracts are essentially a function of debt of various kinds - mortgages, bonds, commercial paper, and other assorted and newly arrived instruments. As the shadow banking system grows relative the the regular banking system, (avoiding regulation and offering bigger profits) demand for debt grows.

The idea of demand for debt is exactly the opposite of what most of us are conditioned to expect. Our moralistic teachings from the Depression Generation has left us confused about how debt could have any redeeming aspects whatsoever.

But the effect of what happens in the SBS immediately is felt in the money supply which in turn impacts economic growth in a big way.
The blurring, or even absence, of the line between fiscal policy and monetary policy in the shadow banking system is often ignored.
It’s no longer enough to understand traditional monetary policy transmission mechanisms (money multipliers, federal funds rates, reserves); it is also necessary to understand how the shadow banking system (collateral supply, rehypothecation) affects monetary policy, and vice versa.
And this also seems like the source of the many challenges in working out how to regulate the sector.
Because one thing that’s clear from the note is that the shadow banking system represents a lot of money, and more specifically a lot of credit flowing through the economy. Regulating it won’t be as easy as saying bring it all on balance sheet or higher capital standards (though the latter is probably still a good thing).
How to define, for instance, the appropriate coordination between the central bank and fiscal policymakers when the outstanding Treasury stock affects monetary policy in this way? Or how to go about discovering the right balance between government readiness to respond (as it did in this case) vs the moral hazard it would bring?

… and summary from Credit Suisse:
Crucially, this chart and the shadow money perspective allows one to see that there has been
(1) a huge and necessary change in the composition of the effective money stock,
(2) a big reduction in the velocity of circulation of liquid collateral,
(3) a sharp reduction in the value of illiquid collateral (houses),
(4) an increase in the “haircuts” on illiquid collateral (higher LTV ratios), and
(5) a big increase in the precautionary demand for money by both firms and households.
The net result cannot be reasonably characterized as posing a major inflationary threat – at least until such time as financial system deleveraging is more complete, collateral values, especially house prices have recovered substantially, and overall private sector credit demand is growing strongly…
The public sector is still doing King Collateral’s work. How long it acts as Regent may be the central question for financial markets in the next decade.
This is pretty obscure I know. But when we argue about the size of our federal debt, it is a powerful complicating factor.  The SBS needs an immense supply of US Treasury securities, regardless of whether we think it is a good idea or not to run deficits. This is one reason why despite now-decade long predictions of interest rate increases, it hasn't happened, and doesn't appear likely in the near future.

In order for the massive financial sector which has grown to about 1/3 of our economy - and its outsized rewards to those employed there - to continue, a steady supply of debt/currency is needed to substantiate deals as acceptable collateral. 

Our financial system has evolved from supplying limited capital to enormous demand for investment loans, to chasing limited investment opportunities with wads of cleverly contrived debt-based capital.

I don't see - nor do any economists I read - any way to reverse this trend. The investments the world needs are to a significant degree public investments - infrastructure is a great example - and the political winds are blowing us away from those ideas. Absent massive government spending on roads, schools, locks and dams, etc. we only have industrial production to fund. That's not enough to absorb both public (like China) and private pools of capital.

As a result the financial sector makes money by betting on itself. This produces little other than big winners and losers, and frantic action, to my eye. To make it more complex, it will take us a long time, I think to grasp the idea of a world where free capital is plentiful and places to put it or not.

Strangely enough, we have been in a similar position before: the Middle Ages, after the Great Plague.
Demand had collapsed and the tiny number of nobles with money had nearly zero investment choices. This is one of the reasons they chose to plow money into their afterlife by building cathedrals - it was simply one thing to do with their accumulating wealth.

It is almost impossible for many of us to comprehend debt as an asset, but it has to be for the counterparty, by any accounting system. The stronger we make our guarantees for both public and private debt the more we enable the SBS to spin off derivatives of them to trade in various manners. Aided by new technologies that slice time into tiny segments to extract value, the possibilities seem nearly endless, but I can envision an upper bound to this profit source, as it simply becomes more common.

The demand for high-quality debt, however, may never abate. In other words, it may be a long time before interest rates reach anything like what many of us consider normal.  Bad news for savers and investors, good news for those who can deploy capital profitably.

Wednesday, April 04, 2012

Since "summer" is here...  

We've opened our pool (three weeks earlier than ever) due to nasties growing in the warming water. Danged if it might not be briskly tolerable by Easter! (We don't heat it).

So this timely PSA:
Drowning, it turns out, does not look like drowning. It often looks like nothing at all. From your point of view at the pool side, in the cabana, at the beach, or on the boat, drowning simply looks like this: The person simply isn't there any more because they quietly slipped to the bottom of the water after quietly struggling mostly out of your sight.
The new captain jumped from the deck, fully dressed, and sprinted through the water. A former lifeguard, he kept his eyes on his victim as he headed straight for the couple swimming between their anchored sportfisher and the beach. "I think he thinks you're drowning," the husband said to his wife. They had been splashing each other and she had screamed but now they were just standing, neck-deep on the sand bar. "We're fine, what is he doing?" she asked, a little annoyed. "We're fine!" the husband yelled, waving him off, but his captain kept swimming hard. "Move!" he barked as he sprinted between the stunned owners. Directly behind them, not ten feet away, their nine-year-old daughter was drowning. Safely above the surface in the arms of the captain, she burst into tears, "Daddy!" How did this captain know - from fifty feet away - what the father couldn't recognize from just ten?...
Read that here.
Drowning is the second most common cause of accidental death among children. Between 500 and 1000 Americans under the age of 15 will drown this year, about half of them within 25 feet of an adult who does not see it happening, and in about one in ten cases the parent will be watching as it happens, watching the kid drown, not realizing what they are seeing. [More]

On a hilarious note you'll all enjoy, seconds after I hit the "submit" button for my taxes, I noticed Jan's 1099 for Social Security I had failed to include. Since it was her first year, TurboxTax didn't prompt me to add it. Well, it probably did, but I forget how really, really old she is. 

Filing an amended return is a hassle, BTW.


Missed another rain. Planters are stopped.

I'm calling it the "Dozen Drought*". 

*(2012 - get it? I kill me!)

Sunday, April 01, 2012

This is why...  

I am a leetle bit worried about drought...

At the end of February, this is our soil moisture anomaly (divergence from average)
And here we are today

Coming out of spring with depleted reserves makes every summer day like August.
My weird reason...  

For worrying about a serious upper Midwest drought: I'm going with my gut.

Lookit, I ridiculed Pres. Bush for his "gut" statements, and while still doubtful he was using the best methodology, it now seems likely, that for some complex situations, feelings can help us make decisions.
Here’s where emotions come in handy. Every feeling is like a summary of data, a quick encapsulation of all the information processing that we don’t have access to. (As Pham puts it, emotions are like a “privileged window” into the subterranean mind.) When it comes to making predictions about complex events, this extra information is often essential. It represents the difference between an informed guess and random chance.
How might this work in everyday life? Let’s say, for example, that you’re given lots of information about how twenty different stocks have performed over a period of time. (The various share prices are displayed on a ticker tape at the bottom of a television screen, just as they appear on CNBC.) You’ll soon discover that you have difficulty remembering all the financial data. If somebody asks you which stocks performed the best, you’ll probably be unable to give a good answer. You can’t process all the information. However, if you’re asked which stocks trigger the best feelings – your emotions are now being quizzed – you will suddenly be able to identify the best stocks. According to Tilmann Betsch, the psychologist who performed this clever little experiment, your feelings will “reveal a remarkable degree of sensitivity” to the actual performance of all of the different securities. The investments that rose in value will be associated with the most positive emotions, while the shares that went down in value will trigger a vague sense of unease.
But this doesn’t meant we can simply rely on every fleeting whim. The subjects had to absorb all that ticker-tape data, just as Pham’s volunteers seemed to only benefit from the emotional oracle effect when they had some knowledge of the subject. If they weren’t following college football, then their feelings weren’t helpful predictors of the BCS championship game.
The larger lesson, then, is that our emotions are neither stupid nor omniscient. They are imperfect oracles. Nevertheless, a strong emotion is a reminder that, even when we think we know nothing, our brain knows something. That’s what the feeling is trying to tell us. [Please read the whole post - it's not long]
This whole production season has creeped me out. From too little precip for too long to too high temps too early, my feelings of concern about the growing season are...well, growing. While I have some semi-rational justifications, such as the deepening soil moisture deficit and increased likelihood of warm temperatures due to latent environmental heat now stored in the ground and water, I also realize long-range forecasts really can't be counted on.

So we're giving a little more credence to our uneasiness with assuming weather will return to normal. In fact, judging by some conversations at a wedding last night, there will be more bean acres in Central IL than were planned just last week. Too-dry-to-plant-chiseled-stalk-fields are going to beans.

It's just a feeling, but Jonah suggests it meets the criteria for when feelings should not be totally discounted.


On another topic, a request has poured in for planting pictures from our farm. This is my famous "Clod Cam": planting as seen by a clod in the field on the marker track. Note the dust.

These were taken last Thursday 3/29. We were trying to get a new(to us) 1770 JD planter, a new Case 315 tractor, and a new Precision Planting System all started. As I shared on USFR, it was the worst First Day in my career.

After 3 days, Aaron finally deduced we had double intermittent failures: a shaft speed sensor and planter drive motor controller. The odds of that happening are astronomical. I should have bought a lottery ticket.

After replacing both, the headache finally ended.