Wednesday, February 18, 2009

Is Starbucks really a charity? Or a measure of our laziness?

Here's something I wondered about after visiting a few Starbucks in New York City: when you drop in for a cup of coffee, you are paying 2-3$ for something that only has about 10 cents worth of materials in it, and something that you could create yourself in less time than it actually takes you to go to the store. Most people seem not to use Starbucks stores for socializing, and indeed most stores don't even have enough space provided. So you are getting something that is intrinsically worth 10 cents, not saving any time, and not paying for space to socialize.

It seems to me then that you can view Starbucks Coffee from one of two angles:
  1. Starbucks is really a glorified charity where people go to deposit their 3$ every day so that someone out there could have a medical insurance and a minimal wage. Cup of coffee in this context is like a t-shirt you get at local fund-raising event for donating. Or...
  2. The actual value people get out of Starbucks is the excuse to get away from work for 10 minutes. Then the average cost of the cup of coffee is the price people are willing to pay for a break.

Saturday, February 14, 2009

Happy Valentine's Day!

Sign of the times, from New York Times:
[...] on Yahoo, searches for “cheap engagement rings” are “off the charts” compared with a year ago, according to Vera Chan, a trend analyst for the company.Other searches that are up over last year include “cheap lingerie,” “free Valentine’s Day cards” and “homemade Valentine’s Day gifts.”
Cheap engagement rings sounds almost like an oxymoron. But I liked that part:
Personal jewelry is being replaced by personal poems.
Maybe that's good news. So on that happy note, happy Valentine's Day to everyone!

Friday, February 13, 2009

How big is a trillion USD, part II.

Now that times are getting leaner, and bailouts are getting bigger, I decided I needed a sequel to my earlier post about how much a trillion dollars can buy you. That post was about weaponry, but how about food?

So I looked at the world's total agricultural output (1.87$ trillion) and discovered that for a "measly" trillion dollars you could feed entire world for half a year.

This provides a tasty yardstick for the amount of money Congress spent on stimulating the financials (700$ billion plus 800$ billion to be added soon), or the total amount of guarantees that Fed has given to the banks (over 12$ trillion).

Wednesday, February 11, 2009

Projecting the severity of the recession from credit market spreads.

When I was reading about the Great Depression in US I was struck by the following observation: the GDP decline of 28% peak to trough, which took somewhere between 2 and 3 years, correlates very well to the total number of failed companies (30%) and the peak unemployment (25%). After thinking about this for a while, I believe this is not a mere coincidence. In a severe, quick economic contraction, it would make sense that the number of working people directly relates to the GDP, since productivity does not have time to change much. It is also reasonable that the percentage of failed mid-size companies reduces GDP by the same amount, although this requires that the additional contraction among the surviving companies is offset by increased government activity and small businesses started by newly unemployed.

So while the number of failed companies is not a precise predictor of the depth of a depression, it should give the right ballpark number. Since we can deduce company failure rates by their bond spreads, one can therefore estimate market-implied severity of a recession.

From Financial Times:
US investment-grade corporate bond prices, for example, imply a cumulative default rate of 36 per cent over five years, assuming a typical recovery of 40 cents in the dollar, according to analysts at Morgan Stanley. This is more than 7.5 times higher than the worst default rate in any previous five-year period.
5 year default rate is not horribly useful, since a lot can change in 5 years. So let's convert it to a more relevant metric of roughly 8-9% of defaults per year. I think we can safely assume that the rate at which new mid-size companies are created goes down to roughly 1% from the typical 2-4% in 'normal' years. This means that within the next 2 years (typical time-frame for the worst part of recession) we are looking at the number of investment grade companies in US to shrink by roughly 15%.

So the market is pretty pessimistic and investors seem to project a recession with GDP decline in the ballpark of 10-20%, which puts it squarely in the depression camp.

TARP against H1B.

It has been reported that Congress is working on an amendment to the stimulus bill that would prevent TARP recipients from filing H1B petitions (or make it much harder, in the current form). H1B term extensions may be affected as well.

Considering how many companies received TARP money already, and how many more are likely to receive government aid in the future, this may significantly cut into the number of H1B workers.

Hopefully this amendment won't get included. It would severely impact competitiveness of American companies at the time when they desperately need to improve it. It surely isn't going to result in higher employment among American workers, and it will delay any economic recovery.

Monday, February 9, 2009

From bad science department: environmental impact of walking.

I often lament the lack of common sense in many scientists. Today's exhibit is going to be about a crazy piece of research which was even enthusiastically discussed by Freakonomics blog in Be Green: Drive followed up by More Analysis of the Environmental Impact of Walking vs. Driving. The researchers tried to calculate the carbon footprint of walking 1.5 miles versus driving 1.5 miles. Depending on how bad your diet is, walking could generate more carbon. One author then even went as far as recommend driving instead as more environment friendly.

Let me make a few observation which firmly put all of that research into mad science department.
  • Worrying about the carbon footprint of human metabolism is silly for two reasons. First, unless you want to consider killing humans, we cannot do much about metabolism itself. It continues even while we sleep. Second, this carbon footprint comes mostly from food production, so we should work on making food production cleaner, not stop walking around, as the paper seems to suggest.
  • Among those who try to achieve a greener lifestyle, walking is not considered an alternative to driving. Environmentally friendly alternatives to driving are living closer to work, taking commuter trains and using bicycles (which are 3-5 times more efficient than walking).
  • People need exercise to stay healthy. That's why people should take a walk instead of driving (that, and fresh air).
  • Even if all of us walk all day long, we will only increase the pollution levels by a minuscule amount.