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Archive for November 2009

The Physics of Economics & Climate Change

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This article describes a recent study by Tim Garrett, a scientist in Utah. The study is based on the concept that physics can be used to characterize the evolution of civilization. From the article:

"I'm not an economist, and I am approaching the economy as a physics problem," Garrett says. "I end up with a global economic growth model different than they have."

Garrett treats civilization like a "heat engine" that "consumes energy and does 'work' in the form of economic production, which then spurs it to consume more energy," he says.

"If society consumed no energy, civilization would be worthless," he adds. "It is only by consuming energy that civilization is able to maintain the activities that give it economic value. This means that if we ever start to run out of energy, then the value of civilization is going to fall and even collapse absent discovery of new energy sources."

Garrett says his study's key finding "is that accumulated economic production over the course of history has been tied to the rate of energy consumption at a global level through a constant factor."

One zinger comes towards the end:

"The problem is that, in order to stabilize emissions, not even reduce them, we have to switch to non-carbonized energy sources at a rate about 2.1 percent per year. That comes out to almost one new nuclear power plant per day."

I have no idea how solid this type of analysis is, but it sure is creative! It can't be any worse than some of the other models out there that are currently in use…

Written by DK

November 28, 2009 at 8:18 pm

Posted in Finance

Google Wave is built for sales & trading desks (and a little on Chrome OS)

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I finally got a Google Wave invitation (yaay) and have fooled around with it a bit. It’s tough to really kick the tires when most of the people you would wave with don’t have an account yet. The only other option is to wade into massive public waves that appear a bit chaotic. It’s like when I first discovered usenet and electronic bulletin boards way back when. I had no idea what was going on and the geek factor was kicked up a notch. But it was also sort of cool. Anyway, here’s former Lifehacker Gina Trapani explaining Google Wave at W2E:

Nevertheless, is it just me, or does Google Wave cry out for a trading desk application? I can see an enterprising outfit using Google’s open source Wave protocol to bring trading communications into the 21st century. Between the persistent state of wave “documents” and the extensibility it offers with bots and gadgets, I could see Google Wave replacing many solutions firms currently depend on for internal and external communication. There are good structural reasons why it probably won’t happen, but a little speculation doesn’t hurt.

From my experience, investment banks currently use a patchwork of communication channels. Most have their own internal chat system, Bloomberg messaging/chat, email, AIM (well they used to use AIM), and the telephone. From a research perspective, notes are syndicated via email, Bloomberg, internal chat, proprietary blog-like systems, and (of course) hardcopy.

So what does Google Wave offer? From an inside-the-firm perspective, it’s easy to see Wave helping traders, analysts, and salespeople collaborate around a central hub of information. That’s the whole point of having a “desk” where people sit right next to each other – to improve communication. In a global enterprise, however, it can be difficult to achieve the immediacy market-making demands. Using a centralized waves to manage communications would certainly reduce the number of tools in use and provide a re-playable record of the day’s activity. For example, currency traders in NY could replay or review a shared global wave as they take over for London, etc. Wave gadgets could also be created for the ever popular polls that get sent out to clients and other traders in the bank. In-line responses would also help organize the information in a single place rather than switching from chat to email to bloomberg, etc. etc. throughout the day. I could see a salesperson subscribing to a trading wave (it may be he can make a risk free trade by crossing with another salesperson), and maintaining a client wave (for those who choose to do so).

For firms with strong data infrastructures, I could see Wave paired with plotting and analytical extensions that could be used to share data and potential insights. Before Lehman’s demise, LehmanLive was a great example of a firm moving to the web in a way that allowed the entire firm to leverage its data and analytics. For those of you who remember, imagine LehmanLive, POINT, and Google Wave all wrapped up into a single package, and you get where I’m going with this.

Many of the same benefits could be enjoyed by clients in separate sandboxed waves. And since firms can implement their own Wave system, client accounts could be created that access the firm’s servers rather than Google’s. And compliance will love it since wave’s are persistent (again, see the playback feature). Those who want to do something shady will probably stick to the phone…

Of course, it’s probably a long shot any of this will happen. The Bloomberg network effect has been well-documented. Everyone uses it because everyone uses it! As such, it can crowd out patience for another system. Furthermore, the wave approach isn’t immediately familiar (though I have no doubt Wall Street would adopt the technology if it thought it would make more money). One might argue that, in liquid markets, information is already traveling pretty darn fast (particularly as computers cut humans out of the loop). In less liquid, over-the-counter markets, there’s actually an incentive to fight transparency since it has a direct negative impact on profitability…though the drive to gain volume and market sustainability often drives the market towards transparency in the end. Finally, for structured products, the process is so darn long and complicated, who cares? Just tell the lawyers to hurry up!

A final thought on Google OS. I watched the presentation today and was tickled by a pointed question by a member of the audience that essentially asked “What can I do on Chrome OS that I cant’ do on a regular browser?” The answer was along the lines of “uh, nothing really…but you won’t get the really fast boot-up!” From an IT perspective, however, I could see Chrome OS being a godsend. Again, as an open source project, a firm could build Chrome OS into a netbook for use with a distributed workforce. If you are the aforementioned firm with a strong, web-enabled infrastructure (using Wave even!), an analyst or salesperson in the field could have instant access to most or all relevant data on the road, either using local storage or a wifi connection/vpn. Since all data is encrypted on the netbook (at least according to the keynote), it’s essentially worthless (from a corporate perspective) to anyone who steals it. And netbooks are CHEAP.

Anyway, my two cents…

Written by DK

November 19, 2009 at 11:52 pm

Posted in Finance

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Trefis decomposes stock price

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via TechCrunch:

Started by three engineers and math whizzes from MIT and Cornell (Manish Jhunjhunwala, Adam Donovan, and Cem Ozkaynak) who did time at McKinsey and UBS bank, Trefis breaks down a stock price by the contribution of a company’s major products and businesses. For instance, 51.3 percent of Apple’s stock price is attributed to the iPhone, 25.5 percent to the Macintosh, and only 7.7 percent to iTunes and iPhone apps. Don’t agree? You can change the underlying assumptions by simply dragging lines on charts forecasting the future price of the iPhone, its market share going out to 2016, and so forth. Every time you change an assumption, the price target changes accordingly.

So let’s take a company we all love to hate, AT&T. The screenshot above shows how Trefis decomposes the company’s stock price. You can click through to get a more in-depth breakdown of AT&T’s business. There’s also a social component to the service where subscribers can contribute their own customized models.

There aren’t that many companies to choose from, but Trefis is still in the free period. I imagine users will have to pay for full access in the future. In any case, it seems like a neat toy.

Written by DK

November 17, 2009 at 12:59 pm

Posted in Finance