Housing Numbers Not Looking Good

It seems that August was not a good month for new home sales, and sales usually drop off around the holidays, anyway. Sure, Wall Street rallies because they think that the Fed will ease, make credit cheap, and everyone will be happy. I'm not sure that will help on Main Street where people can't pay their new ARM adjusted mortgages. Worse, if the Fed lets inflation get out of control it will make long term rates go up and mortgages more expensive. That won't be good for housing. I'm not pessimistic, but when walking a fine line you need to keep your eyes on the risks.

L'Ecole Number 41 Merlot, 2004

I have to recommend this wine. It's not really cheap, but Merlot has been suffereing from the Sideways effect where Miles screamed how much he hated it. these are my tasting notes:

Dark red with an orange edge. Creamy scent of cherries and cream. Taste of cherries and ripe blackberries with good tannins and structure.

This bottle is worth your $25 - $30.

Gibson J-45 Rosewood

The Gibson J-45 is considered the workhorse acoustic guitar. It's reputation is as a good, solid instrument for professionals. The Rosewood back and sides in this model adds a darker sound. Brazilian rosewood for the back and sides is considered the premier wood for guitar construction. It costs about $2400, so it's probably made from Indian rosewood. It doesn't really look all that spectacular, but it sure sounds nice.

More gPhone Blogging

How did I miss this? Google seems to have purchased a pretty cool cell phone company back in July. It looks like it has some pretty cool features just like the iPhone. Check it out.

Gibson Flying V

In honor of my buddy Dan here is the Gibson Flying V. It is named for obvious reasons and was first issued in 1957. In spite of the killer tone and light weight it didn't sell well at first because it's shape just freaked people out. They just weren't used to seeing something so unusual. Albert King was one of the first people to play one and after the British Invasion guys started using them to copy him it became cool. It was reissued in the late 60's and has been in production ever since. It's a great candidate for a larger size guitar because the body doesn't have much material. Check this one out! Gibson has not stopped the unusual shapes, check out the reverse Flying V!

How Can Swarm Intelligence Turn Into Mass Stupidity?

Here is a cool article on Swarm Intelligence in National Geographic Magazine. In a nutshell, swarm intelligence is a process for making decisions that doesn't have a centralized control mechanism. The effect from these mass actions are called emergent; they arise out of the sum total of the interactions of the agents as a side effect of the individual agents independent actions. The emergent consequences are not the goal of those individual actions but rather the individuals collectively cause an unintended side effect.

It is extremely important for the system that these actions are taken without centralized control or even centralized information. Of course there must be communication, but it can't be centrally controlled. Ants, bees and other social insects use it to a large extent in their decision making process.

I covered swarm intelligence in markets here. A good example is the stock market. At any time, the collective intelligence of the world has processed all the given information and determined a price for the stock. The stock could be going up today so today's seller is wrong from your perspective, but the seller could be hedging or rebalancing their portfolio; each individual must make their own determination of the stock's value through the price. The problem that can occur is that the market may lose the swarm characteristics that ensure correct pricing and cause a bubble or other imbalance.

There is one very crucial part of the definition that I don't think gets enough notice. For the swarm magic to happen

the system has to reach a combined threshold of diversity, organization, and connectivity before emergent behavior appears.

It the tension between connectivity, organization and independence of individual actors that causes the great benefits, but if that balance is thrown off, the market no longer prices correctly. Lots of things can disrupt the works. It's obvious that if the world is in a state of chaos there can be no market and that the ordering of society in general has to allow people to come together and buy and sell safely. Bad actors must be punished to protect the market from fraud. Connectivity can be face to face or over the internet. People have known this for ages but have long missed the hidden role diversity plays in supporting the whole structure. By diversity I mean independent individuals making decisions for their own reasons. During bubbles in particular this mechanism can break down.

Benefits of Swarm Intelligence

1. great algorithm for decision making using many simple nodes. Simple nodes are easier to make and organizing those nodes is easier than creating more complicated nodes.
2. on average extremely effective - makes reasonable decisions most of the time.
3. If you are the individual whose risk pays off then you benefit greatly from the risk.

Drawbacks

1. Local Minima. If the coverage of the swarm is too small, it can be deceived by what looks like the correct answer locally, but is not the correct answer overall.
2. Sucks for wrong individuals. If you are the individual who has to pay the price of failure then the system did not work for you. The system falls apart when nodes go along with the swarm instead of doing the hard work of determining their individual path.

There are many reasons why people might not pull their weight.

1. Fear of taking responsibility - scared to take a risk and pay the price.
2. Lazy. 'Nuff said.
3. Deference to perceived authority
4. Going along with the crowd
5. The Bigger Idiot theory. The idea that someone else will come along and make the same mistake you did, except worse, and so save you from your own stupidity. So if, for example, you pay too much for a big house you and figure that can sell it to to the next sucker that walks down the street. Of course, only the biggest idiot actually believes in this theory.

This is the bubble mentality that we've seen lately in the Tech stocks and now the housing market. People acting like they couldn't lose money and just buying stuff without thinking about it or even knowing anything. The swarm turned into a crowd, and we all know how stupid crowds can be.

Updated to add the Bigger Idiot theory.

Housing Crash Goes Mainstream

This whole crash has been like watching a train wreck in slow motion, and it's gotten to the point now where it's in a major publication like Newsweek. What will that do to consumer confidence as the magnitude of the problem seeps into public consciousness?

If you have some schadenfreude you can click through and see that in LA the hit might eventually be in 6 figures. Who's going to jump in front of that freight train? Most places don't have incredibly wealthy residents and geographical limitations that the "superstar cities like New York and San Francisco" have. Manhattan isn't getting any bigger. It remains to be seen how badly this will hurt the rest of the economy, but the real trick is where to invest while everything is hitting the fan. In the worst case scenario, we have to unwind not only the housing bubble, but the dot com bubble, too, and nothing will be a safe haven.

Gazing Into the Abyss

This article is a very interesting look into the economic thinking behind the Fascism of the Nazis. Scary and fascinating, and that's just the review. Perhaps I should add the book to the reading pile when I spend my B&N gift card. Via Brad DeLong.

Emergent Properties of Markets

I have been meaning to write a post on emergent properties of free markets, but haven't had the time. This is an article by Friedrich Hayek, The Use of Knowledge in Society: Library of Economics and Liberty, and it is an excellent explanation of what we all probably know already. In brief, the emergent properties of markets are the fancypants name of the 'invisible hand' of Adam Smith. The term 'emergent' and the related math formulas have since been discovered to describe the phenomenon more clearly.

One of the key paragraphs is H22:

The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement.

The emergent property of a market is price, and through price we individually determine usefulness. The trick is that we are the only ones who know how useful things are to us. In paragraph H30:

The problem is thus in no way solved if we can show that all the facts, if they were known to a single mind (as we hypothetically assume them to be given to the observing economist), would uniquely determine the solution; instead we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge. To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is to assume the problem away and to disregard everything that is important and significant in the real world.

That determination is made through a 'feeling' or some other simplified heuristic device. What we almost never do is think through the math of how much value this purchase will add versus it's cost. It's remarkable that anyone ever thought doing these calculations through a central intelligence would be possible, or even desirable.

The more rigorous definitions of how the market mechanism actually works delineates more clearly when markets fail.

Grove Street Cabernet 2001

Here is a fairly priced bottle of decent cabernet. Here are my tasting notes:

Grove Street, Alexander Valley, Cabernet Sauvignon, 2001 $17 Deep dark purple. Taste of plums and black currant with a nice oakiness. Tannins are smooth and not overpowering. 90

It's already better than it was when I first got it a few months ago. It night not stand up for the next 20 years, but who wants to cellar a wine for that long, anyway? I bought a case because I think that as the tannins smooth out over time the fruit will just get better. If you can find some, you might want to pick some up.