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Weekend reflections

June 21st, 2008

It’s time once again for weekend reflections.Feel free to write at greater length than for a standard comment thread. As always, civilised discussion and no coarse language.

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  1. Martin
    June 22nd, 2008 at 02:09 | #1

    Has anyone read “The Black Swan”? I’ve just read it and I am trying to work out whether it’s really profound and important but not very clearly written, or just a very simple idea blown out to 366 pages.

    Taleb /does not like/ the Gaussian (normal, bell curve) distribution. He prefers the ‘power law’ distribution eg for daily movements of stock prices. And he comes from Amioun, Lebanon (he mentions this a lot).

    Taleb, Nassim Nicholas. The black swan: the impact of the highly improbable. Penguin, 2007. ISBN 978-0-1410-3459-1.

  2. swio
    June 22nd, 2008 at 16:02 | #2

    Martin,

    I haven’t read “The Black Swan” but I have read Benoit Mandlebrot’s “The (Mis)behavior of Markets”. Its basically about similar ideas but from the point of view of chaos theory. Among many other points he also makes a compelling case that a Gaussian distribution of price movements is not realistic, but makes it more from the point of view of the independence of day to day price movements. For example; if the odds of a 5% price drop in one day are 1 in 1000 then in (gaussian) theory the odds of two 5% price drop in two consecutive days are 1 in one million (1/1000 * 1/1000). A casual look at market charts shows that big price moves often cluster closely together far more often than aGaussian distribution predicts. In fact this clustering together of big moves is typical of phenomena in nature that can be modeled using Chaos theory.

    Another factor that suggests markets are Chaotic processes is their fractal nature. If you bring up 4 charts that show, a day, a month, a year and a decades worth of price action, you’ll see that it is impossible to tell which is which if you remove the numbers and dates from the x and y axis’. No matter how much you magnify or zoom out on the price chart the general nature of the chart (period to period price moves, clustering of price moves) looks exactly the same just like a Mandlebrot set.

    You’ll probably be aware that if prices are non-Gaussian then it has implications for the Efficient Market Hypothesis and suggests that catastrophic market collapses are likely to be a normal part of market behaviour.

  3. Lord Sir Alexander “Dolly” Downer
    June 22nd, 2008 at 16:42 | #3

    I have a question for people who understand carbon trading etc.

    Am I correct in understanding that including petrol in the carbon trading thingamagic will put price up perhaps by 20c (I think Quiggers once wrote this number)?

    Another question: will governments get dosh for the things? That 20 cents will go to government coffers in the first instance?

    This sentence is not a question but a statement: There is no way this government (nor any that wants to survive, particularly given the way politics is played in this country) will put petrol up 20 cents.

    Given that, you can make an argument that if you were having the discussion a year ago, say, and said petrol needed to increase by 20 cents, then of course since then it’s already done that several times over. There is an element of arbitrariness about it all

    So: would it be possible for the government to, when introducing the trading scheme, simultaneously take 20 cents of the fuel excise, so that prices don’t move on the day. Or would that just be pointless, and the same as not including petrol in the scheme at all?

    Any help on this matter would be appreciated. I realise I’m operating at a low level of understanding.

  4. SJ
    June 22nd, 2008 at 20:45 | #4

    Lord Dolly:

    John’s post is here: Carbon taxes and fuel prices.

    John said that carbon taxes of $20, $50 and $100 per ton of CO2 result in petrol taxes of about 5, 12.5 and 25 cents/litre.

    If a carbon tax is implemented, then yes, the government will collect this money. There’s no reason why they couldn’t simultaneously reduce the excise by the same amount, in which case the price to consumers of petrol would not change, but the price of other fuels, e.g. coal, would increase.

    There’s probably not much need to increase the price of petrol any further. In effect, the oil exporting nations are taxing our oil based carbon enough already. Of course, the oil importing nations would have been much better off if they’d introduced the carbon tax on oil years ago.

    The more important thing to do now is to alter the relative prices of coal/natural gas/renewable electricity.

  5. observa
    June 22nd, 2008 at 20:50 | #5

    “I have a question for people who understand carbon trading etc.”
    Shhh Dolly, just accept the emperor’s robes aren’t really transparent to you and you’ll be fine son.

    “Am I correct in understanding that including petrol in the carbon trading thingamagic will put price up perhaps by 20c”
    Nobody really has a clue how much petrol will rise, or gas and electricity bills and everything dependant on them for their production. The only thing we could agree on is they sure as hell won’t fall in price with cap and trade. If you don’t believe me ask John Quiggin why Iemma wants to privatise NSW power in such a hurry, completely flying in the face of his political base. Basically-is Iemma nuts? I’d be fascinated to hear John’s answer.

    “Another question: will governments get dosh for the things?”
    What a question? You might like to ask Wayne Swan how much he’s holding in Treasury at present from all those past MDB water extraction rights. Never mind, let’s clear away the past and focus on the future. Let’s introduce a teensy weensy ceteris paribus here to concentrate the mind and clear away the pea soup. Let’s suppose we are all agreed we have to reduce CO2 emissions by 60% over the next 30 years, starting Monday morning (hold that thought)ie simply 2% reductions p.a. to put it nice and neatly.

    Once you’ve made those heroic assumptions you’re ready to get down to the nitty gritty of cap and trade theory. Firstly you have to decide that imputing CO2 to fossil fuel use and capping it at the source (well head, mine, etc) is all too hard and it’s better to do it after it’s dug up or pumped out and shipped all around the globe, burnt and issuing out of every non-Chinese/Indian/etc exhaust pipe and smoke stack in order to achieve our agreed goal more rationally and simply.(again hold that thought) Now the cap and traders are really cooking it boils down to 2 extremes of choice or somewhere in between. Firstly you could auction a tonne of CO2 emissioins, tomorrow morning, whereby that tonne permit reduces automatically by 2% a year, tradeable, until the final owner owns it as a 0.4 tonne permit. Naturally all the wise, omniscient bidders tomorrow morning have full knowledge of the answers to all the silly, naive questions you asked and Bob’s your uncle, abracadabra, welcome to their new constitutional marketplace by week’s end. At the other end of the spectrum might be our wise and omniscient Govt who have decided the aforementioned are not so wise and omniscient and it’s best to keep the final 0.4 tonne permit in wiser hands. They decide to charge say $30 a tonne annual licence fee in the morning, which is tradeable by the recipient in the full knowledge that next year it’s 0.98 of a tonne and so on reducing by 2%/yr until the Govt is left licensing 0.4 tonne permits in 30 years time, albeit they might be charging a bit more for them, a bit like your licence to drive, car rego, etc. I’ll leave it up to the really wise, omniscient cap and traders to explain what the hell they can cook up within that spectrum and on that note, I’m as wise as you are Dolly. Waiting for Garnaut. He’s apparently on top of all that secret cap and trade business.

  6. Lord Sir Alexander “Dolly” Downer
    June 22nd, 2008 at 21:00 | #6

    Thanks SJ.

  7. Hermit
    June 22nd, 2008 at 22:12 | #7

    I think a prudent approach to carbon trading would be to tax everything and exempt nothing. Then hand out lollies on the side for everybody to see. For example the aluminium smelting industry have said they would be hard hit and could they have some time out to establish ‘world’s best practice’. I’d tell them no but they can have their lollies in different forms such as an import tariff, preferential government purchasing or grants for hi tech.

    The big danger with excluding petrol is that it could set loose a monster like coal-to-liquids (with 80% more emissions) or oil shale. There has already been one lolly in the form of a supposedly cheaper Toyota hybrid car. Other sweeteners (with State Govt help) could be use of bus lanes or cheaper rego for ‘green’ cars. In other words take with one hand and give with the other. Lower carbon then becomes a personal as well as a social benefit.

  8. June 23rd, 2008 at 04:43 | #8

    Black Swan never worked for me, since I have known for as long as I can remember of their existence. “Black Cockatoo” might work though.

  9. FreeAndStrong
    June 23rd, 2008 at 06:27 | #9

    Need help from the housing economists.

    A person in Belfast emailed me recently with the following:

    “Currently there are a high number of apartments, flats and houses of multiply occupancy in Belfast that are empty for a long period of time. These were bought up by speculators hoping to cash in on the markets. They bought up homes previously used by working class families who could not compete with the investors. These are empty while families remain homeless.�

    Apparently one of the ideas floated is to impose a Home Tax of a £1000 per month on any apartment or house empty for six months or more.

    I said that a tax raises the cost of supply. So a property owner faced with a £1000 per month tax will seek to recover the additional cost of that tax through higher rents. If a large proportion of the properties for rent are subject to the tax then there most certainly will be a rise in the average rent paid. Alternatively, owners can withdraw from the market, by selling their properties and putting their money into investments that provide a higher net return. This would reduce the supply of available properties and therefore rents are likely to rise, as renters chase a smaller pool of properties for rent.

    I also said that even if such a tax worked as is claimed, it would be trivially easy to avoid: the investor just has to claim that the property is actually not vacant but is being rented (say to a friend or associate). Only by intrusive inspections of each property would you be able to ascertain the truth. And even then if the property was furnished how would you be able to tell that someone was not living there?

    Is my reasoning OK or could it be that such a tax actually gets owners to rent their properties to avoid paying the tax?

  10. June 23rd, 2008 at 12:09 | #10

    I wrote:

    If it turns out that there are some unjustified levels of feather bedding, then why shouldn’t the NSW public, rather than a private corporation, be the beneficiary of any efficiencies to be gained?

    derrida derider wrote:

    But selling it is exactly how the NSW public gets that benefit – the potential efficiency gains will be reflected in the sale price.

    This seems to me to be a dishonest evasion of the point it should have been obvious that I was trying to make. I was challenging the free market extremist dictum that if there exists unjustified feather-bedding (and I am not conceding that there was) that the only way to eliminate it is to hand the responsibility across to corporate hitmen and turn the workforce into slaves as they have by Telstra.

    Also what needs to be challenged is the implication that, even assuming a fair market price is obtained, that the value of a government utility to a private investor will exactly match or exceed its value to the NSW public, if we take into account, the expense of privatisation (including the NSW government’s taxpayer-funded propaganda in favour of privatisation), the additional layer of bureaucracy necessary to regulate the private supplier, the loss of direct control and accountability by the NSW public, etc.

    Derrida derider would presumably also have us believe, in the face of the overwhelming evidence of previous experience that the Iemma government will prudently spend the proceeds of the sale.

    It seems typical of privatisation advocates that they only focus on a few perceived weaknesses of the anti-privatisation case and completely ignore the massive holes in their own case as well as its moral unconscionability no matter how often these are pointed out to them.

  11. June 23rd, 2008 at 12:18 | #11

    My apologies. My previous post should have been posted to The Power of Persuasion

  12. observa
    June 23rd, 2008 at 21:32 | #12

    The plain facts are that any serious cap and trade system would see energy prices rise substantially. We can see this with petrol prices right now largely because world refining capacity has fallen from around 111% to 103% of consumption in the last few years and you only have to compare that with rental vacancies and what’s happening to rents right now. The Saudis can pump more oil, but you can’t fill the tank with it and the industry knows it. Petrol refiners are enjoying a welcome return to economic refining margins which will incline them to look at new refineries in the longer term. They’ll need to wash away a few years of low returns that ate into their precious capital, before they venture there again, bearing in mind it takes an absolute minm. of 3 years to build a refinery. With demand rising steadily you can guess where petrol prices are going.

    To return to the cap and traders’ problem of not knowing what their scheme will cost consumers, the writing’s is on the wall. Climate Institute guesses are way off the mark, but have the Govt running scared already-
    http://www.abc.net.au/news/stories/2008/06/23/2283055.htm
    (listen to the audio link with Penny Wong too)
    Notice the CI’s estimate of $200 extra per household just in power bills and petrol. Absolute nonsense when you think of an average household driving around 15000km/yr. At a reasonable average consumption of 10L/100km, that’s about 1500L per year and at PQ’s 20c/L extra cost, that’s $300/yr before the power bills kick in, let alone the cost of goods and services that will feed. The Govt is now running scared of their ‘working families’ with cap and trade and with good reason. Add the inevitable interest rate hikes chasing a 2-3% margin above inflation and mortgage interest rates could be back to ‘recessions we have to have’ levels again. Expect a self-preserving Ross Garnaut to have plenty of OTOH but OTO recommendations for the Rudd Govt now. I wouldn’t be the human sacrifice by recommending tough C&T measures under the circumstances either.

  13. observa
    June 23rd, 2008 at 21:54 | #13

    And it’s all because these moral badge wearers haven’t done their homework in Opposition and have ridden into power on grossly conflicting central narratives. You can’t tack C&T feelgood onto the current mish mash and it’s glaringly obvious now watching these panicking phonies. Blowtorches to the Saudis eh Kevin? Give me strength!

  14. observa
    June 23rd, 2008 at 22:32 | #14

    Meanwhile Exxon Mobil have just leased their tired and defunct Port Stanvac refinery site to Mr 60% reductions for his desal plant that runs on Kyoto promises and these are the very corporates the oxymoron left greens want to auction future carbon taxing powers to. It’s enough to make a bloke check the Zimbabwe real estate market for a bit peace and sanity away from it all.

  15. observa
    June 24th, 2008 at 14:53 | #15

    To really appreciate Zimbabwean RE, it is remiss of me not to bring potential investors up to pace with the recent goings on in the Adelaide marketplace. Here’s the gist of it- http://www.news.com.au/adelaidenow/story/0,22606,20911874-2682,00.html
    Basically Mobil was faced with a tired, aging oil refinery and given tight refinery margins at the time decided it was time to shut up shop, much to the consternation of the usual suspects. Now Mobil and everyone else knew it was sitting on a prime bit of Adelaide RE, but with a small problem. To do anything commercial with it meant biting the bullet with that already amortised item on its books and cleaning up the site, since a hot refinery is bound to have nasties like benzines, asbestos, etc floating about the place. A pissed off Govt that had lost some of its union base was continually hectoring Mobil to clean it up, but Mobil’s barristers were aware that if Mobil was still toying with the idea of opening the refinery again, there was no such obligation under Mobil’s carefully constructed terms of operation. Basically Mobil could toy with the idea forever, much to the Govt’s annoyance. They were even more annoyed when a late Singapore petrol tanker threatened the State’s petrol supplies subsequently. They even huffed and puffed a lot about storing a safety fuel reserve there themselves, if Mobil wouldn’t. Well, until they did their sums and realised that doing so might be another State Bank debacle, which the just in time oil majors knew implicitly of course. Well the Big Bad Wolf could huff and puff all he liked but the house wasn’t coming down, nor was the yard about to be cleaned up to his satisfaction. Well since this is a fairy tale with a happy ending for the clever piggy you can guess the rest now that Mobil is leasing Stanvac to Mr 60% reductions for that shiny new desal plant. Yes children, I’ll give you one guess as to what waiver the Big Bad Wolf had to give the clever piggy in order to get the keys to the joint after he’d huffed and puffed himself into an exhausted heap. And let that be a salutary lesson to you all children. Never listen to the BBW telling you he can put one over on the piggies and be very very frightened when they’re all holding hands and dancing around some new enterprise together. That will no doubt cost you lots of lolly. Better to have the BBW fenced off where you can keep an eye on him and your lolly.

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