Keys Corner

Jean-Philippe Bouchaud and staff at Capital Fund Management in Paris studied the news feeds from Dow Jones and Reuters that provide real-time reports of items of potential interest to investors. Looking at over 90,000 news items in a two-year period, they investigated how sudden movements in stock prices were linked to the ticker reports. The interesting thing is that they couldn’t find any correlation at all between the two (Report in this week’s New Scientist – unfortunately you’ll need to buy the magazine or get a subscription to read the full article). Here’s a link to the research paper (200 KB PDF file), but be warned – it is pretty technical!

The conventional economic theory is that stock prices move close their “fair” price based on the collective knowledge of the companies which issued the stock. If news about a strike at a factory is published, you would expect the stock price of the affected company to fall as they won’t meet their production targets, for example. So news ticker items are expected to influence stock prices directly – how often have we heard “The markets fell today on news that ….”? Well, it appears that the theory and practice simply don’t match.

The research by Bouchaud and his colleagues indicates that instead, market psychology places a large role – prices continue to rise or fall long after they have reached the “fair price” because of the prevailing expectations in the marketplace. When a correction does occur, it can be triggered by a random piece of news, which then becomes amplified by social feedback.

Another group of researchers has been playing with models which take account of the positive feedback effect between traders that occurs in the financial markets:

Things go smoothly until the amount of leverage reaches a certain threshold, at which point the model shows the market undergoing a sudden change, loosely akin to a physical phase transition, like water freezing into ice. Increasing levels of credit create stronger links between market players, heightening the chance that the failure of one can put an unsustainable burden on others, triggering further failures. In the simulations, once the level of leverage passes a certain threshold, it becomes overwhelmingly likely that a single chance failure will send waves of trouble through the entire market. Avoiding future crises will mean identifying where the real-world market’s “freezing point” is – and keeping levels of leverage low enough to steer clear of it.

Unless the central and national banks take these models into account, it is likely that the next crash is already waiting off-stage, waiting to catch us unawares when the current property crash has played out.

In Germany, if something is ridiculously expensive for what it is, we refer to it having an Apothekenpreis (pharmacy price). If you’ve seen a typical Germany pharmacy (or chemist), you’ll understand why. They are usually fitted out with the top-of-the-market shop fittings and very well-staffed. Which means that we pay 2 or 3 times as much for common drugs such as aspirin in Germany compared to the UK or the USA.

That could be about to change. Medco Health Solutions have just acquired a majority interest in the Dutch internet company Europa Apotheek Venlo, who sell medication and drugs on the German market. Europa Apotheek provides a centralized dispensing-by-mail service through drop-off locations in Drogerie Markt stores, Germany’s second largest drug store chain – a distribution model similar to Medco’s system, pioneered in the United States.

Medco had net revenues of 17 billion dollars from its internet business last year, and will very likely shake up the staid German market, which would be no bad thing – unless you happen to run a pharmacy.

The Economist thinks that although last year was terrible for the music industry, things will soon be even worse:

IN 2006 EMI, the world’s fourth-biggest recorded-music company, invited some teenagers into its headquarters in London to talk to its top managers about their listening habits. At the end of the session the EMI bosses thanked them for their comments and told them to help themselves to a big pile of CDs sitting on a table. But none of the teens took any of the CDs, even though they were free. “That was the moment we realised the game was completely up,” says a person who was there…

More >

Downside 1:

When the cheapest source in Germany for two CDs by Gianmaria Testa (an Italian singer) ships the CDs from New Zealand (with a packing slip printed with an address in New Jersey, USA).

Downside 2:
The demand for cheap meat results in keeping chickens in overcrowded, insanitary conditions. Free-range birds cost about three times the price of battery-raised chickens, but the conditions they are kept in are considerably better. I remember as a child, we didn’t eat as much meat as families do these days – it was too expensive. But we probably were healthier as a result.

As a society, we need to look more critically at the logistics of producing and shipping consumer goods – it shouldn’t be cheaper to literally ship goods half way round the globe, rather than delivering from local suppliers. And the cheapest food is not necessarily the best, either for the consumer’s health or for the factory-farmed animals.

The US lobby group for the music industry, the RIAA, has excelled itself this time in its heavy-handed dealing with a customer. They are suing a customer who bought 2000 tracks on CDs and copied them to his computer for his own use. He didn’t upload them to the internet, just listened to them on his own computer.

I can’t imagine anything more stupid that RIAA could do. The only thing we can do as consumers is to switch from buying CDs to downloading tracks directly from the artist’s websites and their online download services, cutting out the established music industry completely.

Here are a some possibilities that cut out the greedy record companies and pay their artists fairly:

• CD Baby
• Magnatune
• Or use the RIAA Radar to check if the album you plan to buy is issued by an RIAA member company (And yes, you can find music by artists who don’t release their music via RIAA members!).
• Or chose from the RIAA Radar Amazon Top 100 chart list and support the top artists whose labels are not RIAA members (updated daily).

Update (2008-01-01):
Looks like the original story may have been wrong, although the RIAA has shifted its position to claim that MP3s ripped from legally owned CDs are illegal copies.

The Economist has its regular table showing how property prices world wide have developed:
Graph from this week’s Economist
As you’d expect, given the US sub-prime crisis, the US prices have dropped by around 5% in the last 12 months. More surprisingly, the UK prices, despite the concern in the British press about their property prices, gained by about 7%.

Meanwhile in Germany, the DAX has continued to hover at near-record levels for months and hardly a squeak has been heard in the press about the development of property prices locally, although they fell by 4% in the last year. I suppose, since the majority of Germans still rent rather than buy property (Germany has the lowest rate of home ownership in the EU - around 40%), that is not considered newsworthy.

On a related note: there is an interesting paper comparing the German and the Dutch property markets, which are surprisingly different, here (PDF file, size 124 KB).

Bought DVDs drive me nuts already with the unskippable beginning where the film company warns you that copying or broadcasting the DVD is illegal. But things can get worse – IBM has patented a way to stop the films periodically and disable the DVD controls, forcing you to watch canned adverts:

...15 minutes or so into the movie—right as the action is building to a crescendo—the movie fades to a commercial. For the next minute, you’re forced to watch the commercial as the fast-forward button has suddenly stopped working. The unhappy experience is repeated two or three more times before the movie ends…

I can’t think of a better inducement to load ripped films from the internet to view instead.

While the New Yorker pontificates on whether more fuel-efficient cars will ever happen, and the British government appears to be about to go back on recent commitments to increase the use of renewable energy, the European Commission has published several papers and maps on their website showing how they expect the average precipitation, average temperature and crop yields in Europe to change over the rest of this century if no action is taken to reduce emissions. Things could get pretty uncomfortable in southern Europe – drier, hotter and much poorer crop yields. Additionally, around half of all plant species in Europe could be threatened with extinction if nothing is done to reduce emissions.

The front page in today’s Observer:
‘Housing boom over’ as UK bank chaos grows

Britain’s house price growth will be halved next year as the global financial crisis exacerbates the impact of rising mortgage rates, according to Nationwide, the biggest mortgage lender.

After the dramatic bail-out of high street bank Northern Rock underlined the impact of the American ‘sub-prime’ mortgage crisis on Britain’s financial sector, Fionnuala Earley, Nationwide’s group economist, said she expected house price inflation to slow to around 3 per cent next year.

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The Economist has a short article with the graphic above showing the additional costs and fees associated with buying property in different countries. Britain and Denmark are cheap, costing under 5% of the purchase price; Korea, Italy, France, Greece, Spain and Germany are expensive at 12% – 22%.