Sage Words March 18, 2008Posted by shubber in gauntlet being dropped, investment, NASA, public service announcement, PYMWYMI, Wasting Money.
Remember Andy Beal?
Now firmly back in his industry of expertise, he penned this letter in today’s Wall Street Journal. Read it and think.
To: Mr. Ben Bernanke
Please DON”T PUT GARBAGE in the FEDERAL RESERVE
“Dear Mr. Bernanke:
I was afraid that if simply wrote you this letter you might never see it. I thought this message was important and worthy of effort to attract your attention.
I am sure that you are hearing from the Wall Street crowd about how stupid the marketplace is because the market won’t buy all the great loans that Wall Street has produced and how stupid or illiquid the market is because AAA RMBS are being offered at 60 cents on the dollar with no takers. First mortgage synidcated bank loans are offered for 70 cents on the dollar and Wall Street simply cannot believe buyers aren’t standing in line to buy.
Consider for a moment that many corporate bonds are trading at premiums above par value. How can this be? If the market is so stupid and there is no liquidity, who is buying those good corporate bonds at 105 cents on the dollar??
Many AAA mortgage bonds are actually extremely high risk because of little-considered nuances in the hundreds of pages of trust indentures and servicing agreements. In addition to widely understood mortgage default and other concerns, these contracts permit the loan servicers to advance payments on behalf of defaulted homeowners for years and years and years at interest rates of 12% and more. These “servicer advancements” put funds back into the trust to be paid out to junior security holders. The “servicer advances” are subsequently repaid FIRST from foreclosed home sales. Therefore, foreclosed home sales may result in little or no proceeds, or even a liability, to the AAAs. This mechanism effectively transfers funds that really should belong to the AAA securities to junior securities. Servicers that own junior securities are incredibly motivated to drag their feet resolving defaulted loans, which results in great loss to the AAA holders. This is not a misprint: Defaulted first mortgage home loans may become a net liability, not an asset, to some of the AAAs. This is still not widely understood.
Simlarly, “first mortgage syndicated bank loans” issued since about 2004 are routinely garbage and not traditional first mortgages on anything determinable at all. Many, if not most, of these loans permit the borrowers to sell the collateral, keep the money, and reinvest in almost anything they want to, including stock, junk bonds, defaulted loans, or perhaps ice cream cones. MAny, if not most, of these syndicated bank loans also permit UNLIMITED amounts of additional swap debt that is either senior to or of equal priority with the syndicated loan. These provisions are also no widely understood and are sometimes even disguised in the loan documents.
Falling prices for these type assets reflect people finally reading the hundreds of pages of fine print, not a problem with the marketplace. Prices should continue to fall as people wake up to the true nature of these assets. Mant “last out” AAA RMBS are still overvalued at 60% of par. Many first mortgage syndicated bank loans are overvalued at 70% of par. Smart buyers won’t touch any of this garbage at any price remotely close to what it originally sold for.
The Fed may be walking on very slippery ground. My fear is that the Fed has little more undersanding of the stench of the garbage than many of the current owners who bought all these debt instruments issued about 2004.
Is the US Governmenttaking some of this garbage on its balance sheet as collateral for Federal Reserve loans? The AAA rating means absolutely nothing. Garbage is garbage even in a fancy wrapper that the ratings agencies love.
I do not pretend to know how the Fed is collateralizing loans. Perhaps I am naive in underestimating the insightfulness of the Feb, but many intelligent people were caught up in complacent decisions involving these assets. I know nothing more than what I read in the media about collateral for these Fed loans, but it sure sounds troubling.
6000 Legacy Drive
Dallas, Texas 75024
I want my $2!!! March 16, 2008Posted by shubber in Uncategorized.
Apparently, the little paper boy has grown up and now works for Bear Stearns. Good thing, too, since they’re going to need his help to get their $2/share that they’ve been offered by JPMorgan in a last minute bailout.
This is still just the beginning of a VERY ugly period in the financial markets, folks. So for those who aren’t paying attention, let me take this schadenfreude-laden moment to remind you that the world of space development doesn’t exist in a vacuum (yes, puns intended), and that the macro-forces which are about to rip apart our financial world (recession? what recession?) will be hammering some mighty loud nails into the coffins of NASA manned space, the VSE, and any cracksmoking fantasies you still harbor about going back to the Moon or on to Mars anytime between now and 2030.
I’ll bet a share of Bear Stearns on that.
Dorky Space Cadets: An Hypothesis March 13, 2008Posted by shubber in Uncategorized.
(courtesy of the Old Space Cadet)
A recent article (1) by Davide Marchiori and Massimo Warglien and an accompanying commentary (2) by Michael Cohen describes an apparent human characteristic that could explain the dorkiness of space cadets.
I have often wondered why otherwise intelligent people (space-cadets) can be so obtuse and uncooperative in furthering their goal of getting the human race to be space-faring. The characteristic trash talk describing other space cadets and other efforts by various space cadets has always appeared to be self-defeating and almost descriptive of a circular firing squad. Certainly, there is enough native intelligence and skill for a group of committed space cadets to work together and accomplish their goals, but they invariably fail to do so and discussions ultimately fall into acrimonious arguments about trivia.
John Forbes Nash (the central character in the movie A Beautiful Mind) had postulated that learning is driven by feedback based on optimizing expected gains in mixed-strategy games. His equilibrium predictions provide poor fits to actual data and real players. Apparently, Nash was wrong.
Another class of decision-making strategies is based on regret rather than optimizing expected outcome. That is, minimizing regret. In this instance, regret is defined as the difference between the best possible outcome and a potential outcome.
Consider a highly simplified medical example.
A patient considers which of two proposed surgical procedures to accept. The first has an 80 percent success rate and the second has a 60 percent success rate.
Maximizing expected gain according to Nash would cause the patient to accept the first procedure.
However, assume that the first procedure has a 5 percent mortality rate and the second has a one percent mortality. A person minimizing maximum regret would then accept the second procedure because the first procedure is five times more likely to kill him than is the second procedure.
A person looking to minimize overall regret would have to weigh two relative costs: That of death and that of a failure of the surgical procedure to provide a cure. The patient would weigh the relative consequences and decide accordingly. Procedure One has an 80 percent success rate implying a 20 percent failure rate along with a 5 percent mortality. The second procedure has a 40 percent failure rate along with a one percent mortality. This presents the patient with the following possible outcomes as part of the decision-making process:
Cure the Condition 80%
Live with Condition 15%
Cure the Condition 60%
Live with Condition 39%
Cure the Condition 0%
Live with Condition 100%
If the patient judges that dying is no more than twice as bad as living with a failed procedure, he will determine that Procedure One has a 15 percent live failure and a 5 percent fatality or three to one failure to death ratio. Procedure Two has a 39 percent live failure and one percent fatality or 39 to one failure to death ratio. Based on his judgment that dying is no more than twice as bad as living with the condition, the patient would choose Procedure One. The person seeking to minimize the maximum regret, dying, would be most rational in rejecting both procedures. These are examples of regret-driven decision making processes.
Marchiori and Warglien examined simulated learning by many different neural network models and found that the models that most closely mimicked actual games were regret driven. Therefore, the predictions of outcome are based on learning by looking backwards and being driven by regret rather than by looking forwards to expectations of gains. As stated by Cohen: “Choices in economic games are predicted better by models that look back at what might have been, instead of looking forward to maximum gain.”
This mechanism may explain why space cadets act in a way that seems destructive. Instead of decision-making by forward-looking maximizing of expected gains that is, deciding among options that maximize the rate at which humans approach space-faring capability, their decision-making is regret-driven.
The space cadets look backwards and have a concept of what might have been, or the maximum potential gain that humanity could have had the pointy-nosed spaceships all over the solar system within a half century of space flight. They then compare what might have been to the current state as they perceive it. Their regret is the difference between the ideal potential (fantasy) and a current fantasy based on their perception of reality. That causes them to minimize the regret by substituting their fantasy position for current reality and thereby argue unrealistically for their own fantasy position.
No single person can be current in all aspects of space-associated science and technology. Therefore, every Space Cadet will have gaps in his knowledge base which can be filled with optimized fantasy or rationalization. Since that fantasy position is idiosyncratic and not perfectly correlated with the fantasy positions of other space cadets, they fight vigorously in support of their own positions and reject any effort at cooperating with others to minimize their regret or avoid threatening their view of reality.
If this hypothesis is viable, then the bickering, refusal to cooperate in furthering a common goal, and refusal to accept current reality is hard-wired into the behavior of at least a subset of the human race. That subset seeks idealized frontiers of one type or another. If they are exposed to spaceflight during their formative years as in Heinleins science fiction, they are either driven to or attracted to spaceflight. That is, they dive into their own distorted navels.
A recent article by Chandrasekhar and coworkers (3) reported areas of brain activation documented by fMRI during regret and rejoice. It appears that the medial orbitofrontal cortex, left superior frontal cortex, right angular gyrus, and left thalamus are activated during regret. Furthermore, the right inferior orbitofrontal cortex, presupplementary motor area, and both anterior and posterior cingulates are activated during both regret and rejoice. The authors suggest that the latter areas may be activated by surprise from realization of relatively unlikely events as well. Could this provide a neurological basis for regret-driven decision-making? If the cingulates are activated by surprise as well, space cadets may have theirs lit up markedly by an alt.space success.
My friend and fellow space cadet Sam Dinkin (4) has thrown some alternative hypotheses into the mix. One is that people approach causes in order to belong to a morose support group rather than to solve real problems. A second alternative hypothesis is that both parties know that they are dealing with a low probability game and therefore dont spare the feelings of others because they know it doesnt matter. I might note that these functional explanations are consistent with anatomical findings of the Chandrasekhar study.
Now if we could just define some experiments to perform on space cadets that would allow us to differentiate between these hypotheses.
Davide Marchiori and Massimo Warglien: Predicting Human Interactive Learning by Regret-Driven Neural Networks Science, pp. 1111-1113, February 22, 2008.
Michael Cohen: Comments on Predicting Human Interactive Learning by Regret-Driven Neural Networks Science, pp. 1052-1053, February 22, 2008.
Pammi Chandrasekhar, C. Monica Capra, Sara Moore, Charles Noussair, and Gregory Berns: Neurobiological Regret and Rejoice Functions for Aversive Outcomes NeuroImage 39:1472-1484, 2008.
Sam Dinkin: Personal communication, March 6, 2008.
Haikus in Space (or, “The Cosmos is a Poem”) March 6, 2008Posted by shubber in distracting PR, public service announcement, smack talk, space tourism, Wasting Money.
If only NASA would Leave
It still won’t happen
I wonder if they’ll publish me in the new Space Frontier Foundation online magazine?
BTW, there were a whole slew of posts this week on the Cynic, so please scroll down and get caught up – and thanks for reading!
Kool-Aid of the Year, 2007 March 5, 2008Posted by Thomas Olson in Uncategorized.
While I mentioned this topic on my annual year-end Space Show appearance, last December, I’ve decided to expand on it here, in response to specific pleas by regular readers/listeners. (I also want to do this before 2008 gets completely away from me, as it’s beginning to do already.)
At last December’s Space Investment Summit (SIS-3), an event speaker made two positively jaw-dropping comments – in front of silicon valley investor-types, no less. I considered the comments jaw-dropping due to both their sheer audacity, and their sheer nonsense.
KOOL-AID# (1) The speaker’s first claim – with a straight face – was that there would be, one day, a “100x” space deal. I find this remark, by someone successful in his own right in the business (a rare thing, and hence he should be experienced enough to know better), is either beyond ignorance of market realities, or is simply sinking to gross, self-promoting hucksterism reminiscent of P.T. Barnum.
For those who don’t know, “100x” is venture investor shorthand for the potential return on a deal, “X” standing for the amount of the original investment. For example, VCs are always seeking potential “8x” or “10x” deals every time they evaluate a company. They do this because nearly 40 years of VC history in the tech sector bear it out. On average, they collectively strike this gold just under 20% of the time, that is, for every 10 investments they make, 1 or 2 of them will actually gain, upon exit, eight to ten times return on investment. The speaker, however, claimed that there would one day be a “space deal” that would earn venture investors 100 times their money.
Who knew? Google in space! Boo yah! But seriously, folks…
The fabled 100x return in the tech sector is quite rare, and presumably we’re talking about software or web services startups, as opposed to hardware (Shubber’s “Atoms vs. Electrons” argument). How many 100x returns have there been from hardware manufacturing? I’m not talking about that guy who invested $5000 in Coca-Cola stock in 1919, and got his grandkids a $600M return in 1995. I’m talking about someone who invested some tens of thousands (or millions) to build up a tech hardware firm from scratch, then took his money out again within a decade, via acquisition, IPO, or private buyout, and made 100x on the deal. Does anyone know? Probably a lot fewer than software companies, I would guess.
Is there any hardware tech under development in the fledgling space commerce sector which is really that transformational, disruptive, or could inspire positively insane market demand (think iPod) to land a 100x investor return? In a word…NO. Is there an 8x or 10x deal out there? Mmmmmaaaayyybbeeee….sooommmeeddddayy….but the investment community is virtually unanimous in its skepticism in that regard. We haven’t seen it yet, I’ll tell you that.
The only 8x or 10x deals that could even remotely be associated with space are what we call “crossover” technologies, i.e., tech that’s primarily being developed for good old-fashioned terrestrial markets, but could be scaled, long term, for use in space. To many, that sounds like a stretch – but focus on crossovers might be the best way to short term investor profit, while still pitching the “space” angle to bring new investors into the fold. A few successes along this line, might encourage them to dabble closer to the edge. I’ve been advocating this as a near-term strategy for about a year, now. (Of course the smoke-mirror-koolaid companies definitely do not want to hear this message, as it limits the pool of new angel-suckers that might be cajoled into coming in.)
KOOL-AID# (2) To add to the fun, there was the second statement by the speaker-who-shall-remain-nameless, who claimed that there would one day (soon) come what he called a “Netscape moment” in space commerce development. This was a reference to tech sector history. In the early-90′s, after the initial success of Netscape in defining “the Web” for millions, angel, venture, and institutional investors had a group epiphany and began throwing billions into web startups. The inference, of course, being that the same pattern would repeat itself for space startups one day soon.
All I can say, given what happened AFTER the “Netscape moment”, is: “I really hope that doesn’t happen.”
WHY? Because after the early 90′s Netscape moment, came another moment, in 1999, that we refer to as: “the peak of inflated expectations.” In those halcyon days of the Web, investors threw caution to the wind and plowed money into every conceivable (and half-crazed) notion that came across the transom. We’ve all heard the urban legends of millions in seed/startup capital being handed out to 19 year-old coders still living in their parent’s basements, on the basis of business plans hastily cobbled together on the backs of envelopes. After 1999, the term “burn rate” became etched into our collective consciousness. IPOs were ratcheting up prices within hours, the fever got so hot. On Dec. 9, 1999, for example, VA Linux began it’s IPO day at $30 par, and was trading at $320 by the close. They thought the party would never end. Until, of course, someone (I think it was Paul Contursi) finally realized you can’t have a P/E ratio with no “E”. By 2001, the NASDAQ had lost $2 trillion in paper value, and billions in hard capital investments were…well…”unrealized”.
While it is true that the firms with rational business models and good cash flow recovered from the shakedown and thrive to this day, the real money was made by brick-and-mortar firms that embraced the web as an additional sales, marketing and communications tool for their customers.
My point is: Is this a scenario we would wish on a future space commerce sector, or its investors?
The other side of the Netscape story is of course, the fate of Netscape itself. Once Netscape was established and more or less a household name, a certain BIG player in the tech sector realized that it had been blind-sided by this “internet thing”, and took steps, committing an insane amount of resources to turn things around. By leveraging its market dominance in operating systems, and bundling its own shiny new browser with each new PC sold, within a few short years, the Microsoft sleeping giant had not only awakened, but marginalized Netscape completely. Netscape was forced to sell to AOL, and it’s core code found its way into the Mozilla project. Browser innovation went back to the profitless “underground” for nearly a decade (but this was the group that ultimately came up with Firefox). This is also a potential scenario for certain players in the space sector, as evidenced by Scaled’s complete acquisition by Northrup last year (getting ahead of the game, perhaps??). Or course, perhaps this is the exit strategy of several “New space” companies – get bought out by one of the big boys. While that’s a great strategy for investors, I think few would believe that it is particularly “frontier enabling”.
But the final and true “Netscape moment” happened only a couple of weeks ago.
And that, dear readers, is why that phrase, and the “100x deal” ranks up there with the trillion-dollar asteroid as “Koolaid of the Year, 2007″. What might 2008 bring? There will always be something. Stay tuned.
A moment of silence… March 4, 2008Posted by shubber in death, public service announcement, thanksgiving.
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A great man has left our ranks – a man who created a world, nay, WORLDS that were accessible to millions, limited by only our imagination, our weekly allowance/pocket money/whatever, and of course how long our parents would let us stay out playing with 20-sided dice.
Yes, my friends, Gary Gygax has fallen.
The legendary creator of the Dungeon Master’s Guide, the tome from which countless hours of imagined explorations, quests, and journeys were spawned – and arguably the wellspring from which World of Warcraft and it’s brethren sprang – has run out of hitpoints and shuffled off this mortal coil.
If anyone knows a good high-level cleric who can do a resurrection spell, speak up…
update: it appears he may still be fighting this one, according to xkcd.com
Who’s Going to Clean Up This Mess..? March 2, 2008Posted by shubber in Congress, distracting PR, hot air, investment, NSS, offworlding, public service announcement, PYMWYMI, smack talk, space.
I recently received an email alert from the National Space Society (NSS) urging me to contact my Senators to strongly encourage them to reject ratification of the Law of the Sea Treaty (LOST).
They lay out a number of interesting, if highly debatable, arguments, including “it can set precedent that would render the even grander resources of outer-space impossible to develop.”
Leave aside for the moment that there are no practical means to recover Bob Zubrin’s Trillion Dollar Asteroid ™, the implication they are making is that hordes of investors that might otherwise pile their cash into the wide range of fund-able space ventures panhandling on the local street corner are instead averting their gaze and shoving their hands in their pockets (to protect their wallets) as they hurry by the seemingly unattractive alt.space companies.
What I found quite interesting was this little snippet in the NSS’s missive:
Nations that sponsor* seabed mining companies are financially liable for damages caused by their citizens. This discourages development, as developed nations are often unwilling to pay for damages of this sort.
*emphasis added by the Cynic
So who does the NSS think *should* be responsible for damage done to the seafloor (and the ecosystem there) if not the sponsor of the company creating the damage? No one? How very anarchist of them.
Further, the NSS seems to have a contradiction buried in their position – on the one hand, they don’t wanted the dreaded black helicopters of an international body in any way having oversight on the activities of individual nations (playing the nationalist card) while on the other hand saying that we need to be able to engage in this sort of exploration for “the sake of our global civilization.”
If you assume some form of regulation should be in place and that the concept of a “free” market still includes a basic level of government oversight, then the question is WHICH government body is the best home for this sort of regulation? We have international regulation for a whole range of issues related to space (such as the ITU and coordination/issuing of frequencies for satellite communications and operations), and they work quite well – perhaps bureaucratically at times, but better than the alternative (anarchistic behavior).
If you think all regulation is bad regulation, perhaps you’d prefer a world without safety standards, drug testing standards, food testing standards (ok, the USDA has become more of a joke over the years, the latest downer cow scandal really making them look like fools in the pocket of big Ag, but at least we’re not in the world of Upton Sinclair any more…) and the like. The tragedy of the commons is a proven phenomenon, and frankly I’d prefer a little regulation than just trusting my fellow man to do the “right thing” when it comes to resource exploitation. Especially if they don’t feel the need to clean up after themselves.
But this is really much ado about nothing, because I believe that if/when we actually have the means to engage in massive development of outer space this issue will be revisited and adjusted as needed. It does make for some great fundraising fodder for the likes of the NSS, though…