November 17, 2008

Conspiring Failure

Print More

Boy has the past week been a roller coaster ride – we’ve had everything from pandemic jubilation about the American election to acute depression over the glut of lost jobs at Circuit City, the American Automakers and other companies. However, I’ve decided to play devil’s advocate and analyze our current situation from the perspective of a pessimistic conspiracy theorist – leading me to choose the word “setup” as my acronym for the week. The words chosen were:

* S – Saturday Night Live
* E – Endowments (or soon-to-be lack thereof)
* T – Treasuries
* U – Unrest (mainly racial unrest)
* P – Paulson, et. al

How do these words relate to conspiracy theories?

If you read my last column, you may remember that I discovered the majority of people searching for the phrases, “McCain Letterman” and “McCain Leno” were from so-called “battleground” states. My hypothesis was that people from battleground states were so thoroughly undecided, that they let the late-night comedy shows help them make their presidential decisions. Not surprisingly, some of you may have wondered why I didn’t look at the relationship between the election and Saturday Night Live (SNL), which has been parodying the election to much acclaim. Well, the main reason I didn’t look at SNL’s search pervasiveness was because I wanted to compare the effects of SNL pre- and post-election, as Senator McCain was a guest on SNL the weekend before the election. However, as the American people have elected Barack Obama to the highest office in the land, I feel that the time is ripe to delve into theories about SNL’s effect on the election.

Since the acronym “SNL” has a rather predictable Google Trends graph (one can generally guess that the graph will have roughly be constant, except for when there are popular skits, which increase the number of YouTube/Google searches dramatically), I decided to filter some of the results of the acronym “SNL” by looking up the following phrases:

o “SNL Obama”
o “SNL McCain”
o “SNL Palin”

The query, “SNL Obama” returned a graph that had a gigantic spike in Marh 2008 (when Obama appeared on SNL) and a moderate spike in Late-September/Early-October. However, it’s the geographic data that turns out to be interesting – liberal cities such as Washington D.C., Austin, Seattle, Boston and Philadelphia had the highest number of searches for “SNL Obama.” I conjecture that this is because those in “battleground” states were making their viewing decisions based on how McCain and Palin were portrayed, as opposed to Obama, whereas those in more liberal areas tended to care more about Obama’s portrayal. To my bewilderment, the query, “SNL McCain” returned the exact same cities of high search volume as the phrase, “SNL Obama”! Even more damning evidence contrary to my hypothesis is the fact that the search graphs for “SNL McCain” and “SNL Obama” were identical. Moreover, McCain’s appearance on SNL before the election did nothing to increase searches associating him with SNL as opposed to those associating Obama with SNL. Does this mean that SNL didn’t sway voters in battleground states?

Before I rubbish my proposition, let’s look at the phrase, “SNL Palin.” As it turns out, this phrase is a goldmine – just look at some of the cities that showed up for having high search volume:

o Denver, CO – Battleground State
o Reston, VA – Battleground State
o Raleigh, NC – Battleground State
o Minneapolis, MN – Battleground State
o Portland, OR
o Seattle, WA

These are the same cities that showed up last week, in my queries about McCain, Letterman and Leno. Furthermore, the graph for “SNL Palin”, is highly periodic (on a weekly basis, from September 2008 to present), with spikes on the earlier parts of weeks (i.e. immediately after SNL airs) and dramatic drops toward Wednesdays, Thursdays and Fridays. This data concurs with the data from last week on Letterman and Leno – except that we are looking at shows that attract very different age groups. Maybe younger voters on the fence decided to look at SNL to help them decide whereas older voters decided to rely on late-night comedy shows? This really helps buffet the idea that college-age voters tended to shy away from McCain, while enjoying the ridicule that Palin (whom many consider to be a poorly-educated politician) faces on SNL.

Anyhow, though many college students may laughing and celebrating the spoils of a progressive election right now, but they may soon be languishing in melancholy – especially if the bleeding in college endowments doesn’t stop. While endowment losses are generally not reported (as private colleges aren’t liable to anyone), most college newspapers are thought to report somewhat accurate figures, as endowment fund managers tend to not respond when a figure is accurate. Now a natural question to ask is, “Which college endowment has lost the most money in the current economic environment?” Sadly, this question will most likely never be answered conclusively, unless Congress decides to regulate college endowments. Therefore, I offer the next best thing – let’s look at what city is searching for news on endowments the most, so that we can guess which colleges have large endowment problems. A Google Trends query for “Endowments” returns the following cities (ranked in order of search volume):

* Pittsburgh, PA
* Boston, MA
* Edinburgh, UK
* Brentford, UK
* New York City, NY
* Birmingham, UK
* Philadelphia, PA
* Washington DC
* Manchester, UK

Pittsburgh? Huh? I mean, after reading the Bloomberg article on the crash of the Ivy endowments (some suggest that Harvard’s endowment may lose up to 40 percent of it’s last public valuation, due to Harvard’s heavy role as a CDO counterparty), one would think that Harvard, Yale, Columbia or Cornell alumni who have donated to their endowment would have pushed the number of inquiries in the state of their respective endowments. But since Carnegie Mellon University (CMU) is the largest private university in Pittsburgh, I decided to perform a quick Google search on the state of their endowment. A Pittsburgh Post-Gazette article suggested that the endowments of the University of Pittsburgh (June 30, 2008 value: $2.4 billion), Carnegie Mellon University (June 30, 2008 value: $1.03 billion) and Duquesne University (June 30, 2008 value: $166.5 million) may have all fallen close to 10 percent in September alone. However, if this is true, the response is much better than the general market’s(15 percent). Doesn’t it seem weird that a city with a net endowment of $3.59 billion cares more about its endowments than people in Boston (where endowments sum to over $50 billion)?

I suspect that the endowment fund managers in Pittsburgh are letting on far less than they know and that Pittsburgh-area universities are reeling from extraordinary losses. If I were to make a large leap in logic, with apologies to Gödel, I would say that endowment managers in Pittsburgh are heavily invested in the currency market, which has had a volatile year. Stanley Druckenmiller, part of the team that “broke the Bank of England’s back” in the 1990s is the fund manner at Duquesne Capital in Pittsburgh. He is also a prominent Pittsburgher who supposedly attempted to purchase the Pittsburgh Steelers and may be as influential as Ronald Logue (State Street) and Jane Mendillo (Harvard Management Company) are in Boston. Druckenmiller is known to be a rather adept currency trader, who likes to gamble on the large end of currency trades, which is most likely cause of his estimated $1.2 billion increase in wealth between 2006 and 2007. As most endowments in cities tend to have agreements with hedge funds, mutual funds and investment banks that exist within their respective cities, chances are that CMU, Pitt and Duquesne have quite a bit invested at Duquesne Capital and Dreyfus Corporation (which incidentally, is run by Druckenmiller’s wife, Fiona Biggs). But what does this have to do with currency trades? Well, since Druckenmiller specializes in currencies, I suppose that he may have had large trades against the dollar and yen, both of which have surged record amounts since the failure of Lehman Brothers. This surge is supposedly because the liquidation of hedge fund and mutual fund assets (which is purported to be the cause of the large equity market losses) leads to people pouring money into treasuries and the money markets. I estimate that these Universities may have had significant amounts of money in currency trades against the dollar and/or yen, in anticipation of the elevation of the euro and/or reminbi to major depository holdings. Granted, all of this is based on rampant speculation about the flow of money into Treasuries and the collusion of Pittsburgh-area universities and Druckenmiller, which are theories that may be tested by the burgeoning national debt crisis we are soon to face.

Speaking of national debt, it seems as if few in the media have played up the increase in the value of treasuries, while purporting negative news at a rate never seen before. I decided to look at the trends in searches for “treasuries” and news that contained the word “treasuries.” As it turns out, the one-year picture for treasuries shows a somewhat strong correlation between searches about treasuries and news about them. Unsurprisingly, most searches about treasuries were from New York City, Boston and Chicago (the equity, currency and derivatives centers of the American financial system); however, coming in at number three on the search volume list was Singapore. As I mentioned in my first blog, Singapore has a huge commitment to U.S. securities, due to the age of its sovereign wealth fund. Perhaps the rally in treasuries has Singaporeans worried, as the spread between their mortgage-backed securities (which are not packaged into CDOs to the level of their European and American counterparts) and treasuries increases? Regardless of what our Singaporean counterparts think about treasuries, it is clear that Americans tend to follow the news on treasuries, with regards to their values. If one were to look at the graph of searches for the word “treasuries” and superimpose a graph that showed the value of U.S. Treasury-backed bonds versus a market basket of currencies, one would note the very strong correlation between media interest and pricing of treasuries. Perhaps even the currency market, which is supposedly immune to media unrest due to the diversity of market participants, has fallen victim to the 21st century up-to-the-minute gossip bug.

Unlike other rumors, the idea that election of Barack Obama will lead to a resurgance in hate crimes is seemingly becoming a reality. While the popularity of hate groups such as the Ku Klux Klan (KKK) has diminished substantially in recent years, many have suggested that the election of an African-American president will lead to a more tightly knit group of white supremacists, which may lead to their increasing effectiveness. This type of behavior has been parodied on black comedy shows such as Chocolate News on Comedy Central.

Now let’s use the power of Google Trends to see if there is any increase in searches for:

o Ku Klux Klan
o White Supremacy

Interestingly enough, while there was a general downtrend in search for “Ku Klux Klan” over the past four years, there was a spike in searches for the KKK in the last week that was at a level not seen since mid-2004. Moreover, most searches came from international locations such as Norway, Australia and Brazil, even though most of the news results are from the U.S. If we look at the thirty-day trends chart we see that there was an enormous spike in searches for the KKK on November 4 – an ominous sign for the future. The chart for “White Supremacy” is even more poignant – the spike in searches on November 4 was a new record for Google. However, the two search results differ geographically – searches for “White Supremacy” were concentrated in the United States, with most searches coming from the West Coast. On the other hand, if we just look at the KKK results from the United States, we see that a large number of searches come from Indiana, Tennessee, Georgia, Pennsylvania and North Carolina (which are states with active Klan membership). Furthermore, there are only a handful of cities represented:

* Atlanta
* Chicago
* Los Angeles
* New York City
* Washington DC

I wonder if there are more “skinheads” on the West Coast, as opposed to Klan members? This ominous result forebodes dark times ahead for the Obama administration – I sure hope that there is enough money in the bailout plan for GM, so that Obama can avoid a Kennedy-esque assassination attempt.

Speaking of the bailout plan, why do we have such a fickle manager of our taxpayer dollars? Whose interests are really driving Hank Paulson? And finally, why does it seem like everyone who proposes an economic solution seems to be wrong? Before I begin any analysis, I want to make my stance on Treasury secretary Paulson clear – I cannot and will not trust someone in a public office with $700 billion, especially someone who helped orchestrate the dumping of Goldman’s mortgage-backed assets (which he considered to be toxic), while refusing to acknowledge a potential problem while still in public office. This implicit hypocrisy that underlies the foundations of the Goldman-U.S. government relationship is seemingly a violation of the oath taken when one serves the public. I certainly cannot debate the merit of dumping such assets at a time when valuation metrics relied heavily upon empirical models as opposed to the construction of heavily theoretical and economically sound models5 and I certainly agree with the profit-preserving motivation held by Goldman Sachs. But for an official to bring such an attitude to public service is rather unethical, as it predicates macroeconomic decisions on microeconomic management. Regardless of my emotions toward the treasury secretary (and as an extension, the entire Bush administration), however, I am going to look at whether Paulson’s recent reversal in his decision to buy failed mortgage-backed securities and invest in “sound” companies has had an effect on searches for his name. Interestingly enough, most searches for Paulson come from Minneapolis, MN, followed by New York, Boston, Washington D.C. and Philadelphia. Since the smallest Federal Reserve Bank is located in Minneapolis, I propose that much of the Federal Reserves $2 trillion in unnamed security purchases has been done through the Minneapolis branch to avoid national exposure. Seeing as I am in conspiracy theory mode, I propose that this is because Paulson realizes that the $700 billion is not enough to save the mortgage-backed bond industry (which is also weighing on his personal fortune, through it’s effect on Goldman Sach’s stock and bond offerings), so he is spending the $700 billion on projects that buffet the job market (such as saving GM). If this is true it will force many derivatives that value CDOs and other mortgage bond containing SIVs to go through the proposed Fed clearing house for swaps and other derivative securities. If this is true, perhaps Paulson is doing this in order to make it harder for the new administration to unravel some of his policies that may benefit bank holding companies the most.

Regardless of which conspiracy theories you subscribe to (or don’t subscribe to), I hope that I’ve convinced you that Google Trends is a very powerful tool that helps analysts connect various parts of the news to drive certain hypotheses that they come up with.