Thursday, October 16, 2008

Dark Energy - Evidence for a New Law of Physics?

Before 1998, few if any astronomers had heard of “dark energy”. Rather, “dark matter” had come to the fore with a series of articles in various periodicals, journals (e.g. Physics Today, (1992), Vol. 45, No. 2, p. 28 by S. Tremaine) Dark matter was acceptable to most of us because at least it could be understood easily at some level. After all, Fritz Zwicky in 1933 actually laid the original, observational basis for dark matter. His measurements of galaxy clusters highlighted a 'missing mass'. He found that the mass needed to bind a cluster of galaxies together gravitationally was at least ten times the (estimated) apparent mass visible.

This mass, because it was inferred but not directly detectable, became the first dark matter. Around the same time there were other confirmations, based on observed stellar motions in the galactic plane by Dutch astronomer Jan Oort. He determined there had to be at least three times the mass visibly present in order for stars not to escape the galaxy and fly off into space.

By the time of Tremaine’s Physics Today article, it was estimated that at least 90% of the universe was in the form of dark matter, and barely 10% constituted visible matter – meaning that it either reflected radiation or emitted it at some wavelength. Many of these results issued from the data acquired by the Cosmic Background Explorer (COBE) satellite.

By 2000, this whole picture had radically changed and new assays for the mass-energy distribution for the universe had ordinary visible matter at only 7% of the total, with fully 93% a “dark component” - of which nearly 70% was dark or vacuum energy, the rest dark matter. (See, e.g. Physics Today, July, 2000, p. 17)

This was almost too much to take. Of course, as a physicist (in solar physics at that time) I’d been familiar with the claim of vacuum energy in various crank forums, or via e-mails from cranks. Most of them embraced the notion that empty space was replete with vacuum energy at an almost infinite density level – and accessible if one can only get to it. Free energy without the hassle of infrastructure!

In no way did anyone – even those astronomers least conversant with modern cosmology – expect the most distant objects to exhibit a slowing down, and the closer ones to exhibit a speeding up: indicating the expansion was accelerating, and worse, that a counter (repulsive) force to gravitation might be operating. However, not when two separate groups find supernovae that are dimmer – and thus further away – than they should have been,

But in science, meticulously obtained and plotted data seldom lie. And by early 1998, the type Ia supernova results of two groups: the Supernova Cosmology Project (based at UC Berkeley) and the High- Z Supernova Search - led by Brian Schmidt of Mt. Stromlo Observatory in Australia, began to show tightening error bars.

Why Type 1a supernovae? First, because they’re bright enough to isolate in different galaxies – hence there’s a cosmological dimension. Second, they exhibit a uniform, consistent light spectrum and brightness decay profile (all supernovae diminish or ‘decay’ in brightness after the initial explosive event). This applies to all galaxies in which they appear so they function as cosmic standard “candles”. Third, all Type 1a’s betray the same absorption feature at a wavelength of 6150 Angstroms (615 nm) - so have the same spectral “fingerprint”.

(See Figure 1)

Basically, the majority of plotted Type 1a supernovae data points congregated along the upper of the two plot lines shown in Figure 1. (One sample point is shown) This placed them firmly in the region of the graph (of observed magnitude vs. red shift) we call “accelerating universe”. On the other side of the diagonal is the "decelerating region". An additional feature of the accelerating side is 'vacuum energy'.

While my first instinct was to reject the notion of vacuum energy, this didn’t withstand further examination. The bottom line is that the best fit to the supernova data indicate that the energy density of the vacuum translates into a repulsive force that can counter gravity’s attraction.

To get an insight, we can examine the equation that underpins cosmic expansion and whether it is accelerated or not (cf. Perlmutter, Physics Today, 2003)

R"/R = - {4pi/ 3} G rho (1 + 3 w)

Here R is a cosmic scale factor, R" is the acceleration (e.g. second derivative of R with respect to time t), G is the Newtonian gravitational constant, rho the mass density. We inquire what value w must have for there to be no acceleration or deceleration. Basic algebra shows that when w = -1/3 the whole right side becomes zero. The supernovae plot data constrains w such that it cannot have a value > (-1/2). Most plausibly, w, the ratio of pressure to density is (Perlmutter, ibid.)

w = (p / rho) = -1

This is consistent with Einstein's general theory of relativity - which one could say approaches the status of a 'basic law of physics'. In this case, a negative pressure meshes with general relativity's allowance for a "repulsive gravity" - since any negative pressure has associated with it gravity that repels rather than attracts.

Some might argue that cosmic repulsion shows a "new law" of physics, but it's merely extending the existing concept of gravitation to show it has a repulsive as well as attractive aspect, and has always been consistent with Einstein's general theory of relativity.

This brings us to the question: What’s to become of the cosmos if the acceleration is ongoing? Clearly, photons emerging from whatever cosmic object (star, nebula etc.) can never catch up to the (too) rapidly expanding space-time. This means that over time, fewer and fewer objects will be visible to any sentient observers. Eventually, all cosmic objects will “vanish” from the scene and all observers – if any remain- will be plunged into featureless skies.

(To be continued)

Do Mom & Pop Really Belong in the Stock Market?

As the continued volatility in the stock market gets more attention, and many oldsters saving for retirement have already lost nearly 40% in their 401ks, the question arises: Do ordinary small fry, whose only money is being saved from nearly stagnant wages, belong in the stock market?

Of course, the endless parade of gurus and pundits of high finance (e.g. Jim Cramer of 'Mad Money' fame on CNBC, until a couple weeks ago) have always issued the same mantra: Just invest and "dollar cost averaging will take care of the rest". When the stocks and whatnot tank and you buy on the dips, you get more shares! What's not to love?

Actually a lot! As the authors of The Great 401 k Hoax have noted, it is living in a fool's paradise to believe that if the companies you invested in are only increasing their profits at 2-3% a year, that you can be earning 7% or even 10%. In fact, what one has then is an aberration in which the gains are out of whack with reality. (This is one reason why real stock investors demand dividends, and refuse to forego them so fund companies etc. can use the money to do "stock buybacks" thereby artificially inflating the share price!)

Further, a Stanford University study some years ago- based on the median return of 62 mutual funds- showed that $1 invested in 1962 would have grown to $21.89 by 1992, on a pre-tax basis. The study disclosed that the $1 would have grown to only $9.87 on an after-tax basis. And the investor would have had to come up with $12.02 to pay the taxes.

By contrast the study showed that a “conservative” investor who put assets into a U.S. Savings Bond in 1962, had every $1 become $10.93 by 1992. It is easy to work out from these numbers which investor actually fared better over the thirty-year interval according to the study. Hint- hint: it wasn't the sucker in stocks.

Unless mutuals investors do the math and watch the numbers they cannot be aware of how little they're actually taking home. (A point also made emphatically in The Wall Street Journal, Nov. 27, 2003, page D1, 'A Harsh Truth: Most of Your Investments Won't Make Money- Even in the Long Term, after assessing stocks, bonds and mutuals).

It is also well for small investors to understand that, to a large degree, they are in a game with a 'stacked deck'. Not only that, but under current laws their investments are almost entirely blind. Like buying a pig in a poke.

This point was emphasized in a London Financial Times article (‘A Metaphorical Proposal’, Mar. 13, 2002, p. 11A) by Michael Skapinker. He cited remarks by Joseph Berardino – chief exec of Arthur Andersen- who noted how the current reporting system “fails to communicate essential information about the real risks facing companies” to the small investor.

If you don't KNOW what you're getting into, how the hell can you have any confidence that you will get anything back? You can't!

Skapinker quotes Berardino as noting how accountants can only issue ‘pass’ or ‘fail’ judgments on companies – but cannot disclose the red ink being bled by a company that’s been passed. (What's referred to as a “bleeding edge” company wherein auditors are actually resigning). As the author notes, to do so would precipitate a collapse in share prices.

Under such conditions, the small investor risks his money and security, by investing in ANY non-FDIC insured monetary device. Indeed, despite the bevy of risks and deceptions, some investors have been insane enough to take out 2nd mortgages to up the ante in the stock market, yet don't even know the role of NAV (Net Asset Value) in calculating net gains, losses.

In fact, the stock market's sole purpose, As E. Brockway observes (The End of Economic Man, 1990), is to steal capital from the poor or middle class (that can least afford losses) and give it to the rich. The technique hardly varies: Pundits, wags and paid shills hype the various stocks, funds or instigate a "buzz" about them - to get suckers to buy in.

The increasing buy-in inflates the price-to -earnings ratio (P-E ratio) and produces a bubble of high profits. The "Big boys" (large, institutional investors) get tipped 1-2 days in advance and cash out, leaving the little guys to sink. If they're lucky they may earn a few bucks. Not much.

The thievery works eventually because most manjacks are conditioned to "buy and hold" rather than fold when the share price dives below a certain threshold. (Which ought to be the tip off). Thus, there are always ample marks left at the end game to be properly fleeced. Amazingly, they're always ready to play the game again, and pile their newly saved up money in.

Lastly, NO American of any class or station (except possibly the super-rich that can afford stupid or reckless losses) has any business putting money into any investments at all unless s/he can pass with at least a 75% a basic investment test. My own version - developed by myself and a financial advisor brother - includes the following questions (no googling, crib notes or texts!):

1) What is a P/E ratio?

2) What is the maximum tolerable expense ratio, beyond which an investor shouldn’t invest in a mutual fund?

3)Distinguish between front and back loads.

4) Joe has $10,000 to invest and the fund is front loaded at 5%. How much is he really investing? How much must he gain the first year to reach break-even? How much must his fund earn to achieve a REAL 5% gain. (Assume the expense ratio is 2%)

5) Distinguish between bonds and bond funds?

6) How would you recognize collateral debt obligations (CDOs) in a bond fund? Interest only strips? Inverse floaters?

7) When investing in stocks, one of the worst tricks used by brokers or managers is collusion using ‘micro caps’ to keep their clients buying and selling stocks within a closed artificial market. (Source:License To Steal: The Secret World of Wall Street Brokers and the Systematic Plundering of the American Investor, page 211). Explain.

8) Small, individual investors in stocks are usually fleeced by brokers through “crossing”, “churning” and “parking”. Explain in turn how each of these would work.

9) WHY is the ADV form Part II essential before hiring a financial advisor? What key information therein would provide a sound basis for rejecting any FA?

10) Distinguish between money market accounts and money market funds. Why are the latter always riskier?

I seriously doubt 9 out of 10 middle or lower income Americans (particularly seniors putting their hopes in the market for retirement) could answer as many as five of the above correctly. And assuming that is so, its' a damned good thing "only 17 percent of households in the bottom 60 percent of income own any taxable stock."

If stocks aren't the answer, what are? Slow and unsexy saving! Then, take that savings by age 65 (say maybe $300,000) and parcel it into separate immediate fixed annuities to provide a safe, dependable income stream over your lifetime, as opposed to a variable money stream - based on the phantom money in the stock market.

As finance columnist Humberto Cruz has complained - and I do now- for some incomprehensible reason Americans would rather play the stock casino than go with dependable immediate fixed annuities. (Variables are not even on the table, as Suze Ormond has noted, they are "stupid" and a waste of time, as per her MONEY magazine interview). Combined with Social Security, a set of immediate fixed annuities is the sane and sensible answer to funding retirement today.

You certainly won't be rich, but then you won't have to sustain a diet of Alpo and Ramen noodles either, or work until your drop dead in your few years remaining on the planet!

Tuesday, October 14, 2008

Enough Already!

In each presidential election cycle it appears that the hyperbole, distortions and outright lies get exponentially worse than in the previous cycle. And so it is now. The latest claptrap being pushed by the right wing pod-people and pundits is that....lo and behold....POOR people are to blame for the credit crunch!

The gist of it, launched by Rush Limbaugh some weeks ago, is that the "Community Reinvestment Act" is to blame by opening the doors to poor folks (mainly African-American, of course) who didn't have the capital or means to own in the first place. And hence, the genesis of the sub-prime meltdown.

Thus, the CRA opened its door unscrupulously to any manjack that wanted to own a home, or needed a mortgage. This take has since been exploited by the likes of Neil Cavuto of Faux News to assert (in mid-September): if banks hadn't been "forced to lend to minorities and risky folks" the Wall Street disaster would never have happened.

George Will went one better in a column, claiming banks were hostage to similar legislation to the CRA which criminalized any refusal to lend as discrimination if the bank didn't make mortgage loans to unproductive borrowers.

This is all nonsense.

First, a few facts, which for the Right usually cause their assorted neurons to melt down:

1)The CRA only applies to banks that get federal insurance, which excludes 75% of those that made the sub-prime loans.

2) No clause, provision or code exists anywhere in the Act which requires any bank to make a sub-prime loan to any borrower. Indeed, 180 degrees opposite, the Act calls on banks in the needy communities to make loans "consistent with the safe and sound operation" of the lending institution.

3)Contrary to other Limbaugh-esque nonsense, a number of studies has shown that the CRA recipients pay their bills on time and ultimately become successful homeowners. Thus, the claim by the right's blowhards - that the CRA unleashed millions of deadbeats - is pure bollocks.

So, if neither the CRA (or ACORN - The Association of Community Organizations for Reform Now) is responsible for the housing implosion and credit crunch than who or what is?

Okay, the "who" are the quants, a gaggle of quantitatively-gifted brainiacs who were unable to get decent paying work in their native mathematics or physics professions, and sought higher remuneration in the halls of finance - usually in investment banks like the late Bear Stearns and Lehman Bros.

These quants devised, configured and invented a whole slew of obscure financial instruments, such as derivatives with the name of "credit default swaps" that were sliced, diced then repackaged into "collateralized debt obligations" (CDOs) then resold to banks who repackaged them with other financial crappola and sold them as SIVs or "structured investment vehicles".

These things are now lying around on the books of thousands of banks, wreaking havoc on their equity and making interbank lending impossibly risky because no bank knows how much of this toxic crap any other bank has. Thus, a loan - any loan - would be fraught with peril to the landing bank if IT has high liquidity and is properly capitalized.

Thus, the "what" that is responsible are mainly the CDS (credit default swaps) and the SIVs into which they were packaged - then sold to trusting counterparties - but with false bond ratings (usually given AAA, reserved for the highest quality, instead of the AA or lower (A) they really deserved).

An excellent recent article that fully backs up my contention is 'AIG's Complexity Blamed for Fall' which appeared in the Oct. 7 edition of The Financial Times.
Another excellent article which backs me up appeared in the October FORTUNE, and is entitled 'The $55 TRILLION QUESTION' (p. 135). Quoted in the piece, a University economics professor (Frank Partnoy) who doubles as a Morgan Stanley derivatives salesman noted: "The big problem is there are so many public companies- banks and corporations, and no one really knows how much exposure they have to CDS (credit default swap) contracts."

Since most CDS contracts are made "on the fly", in no formal mode, and often by word of mouth on cell phones (ibid.) or via instant messaging, no one even knows where all the $55 trillion of this toxic waste is buried. As another hedge fund operator (Chris Wolf) quoted in the article put it:

"This has become essentially the dark matter of the financial universe" - comparing it to the dark matter discovered in astrophysics.

Finally, and most apropos, as the FORTUNE piece observed:

“you can guess how Wall Street's cowboys responded to the opportunity to make deals that: 1) can be struck in a minute, 2) require little or no cash upfront and 3) can cover anything.”

Clearly, the blame – 100 percent of it- is on the Street’s capitalist cowboys and all the quants they suckered into working for them for filthy lucre! The Right wing blowhards now need to give it a rest, put down their mics or typewriters, and get with the program.

That future program requires that all these CDS as they currently exist be banned outright from the world of finance. If they are introduced they must be rigorously regulated as all derivatives need to be. It is long past time that the Republican sympathizing regressives stop blaming poor people for the ongoing credit debacle.