Gulf Stream and the climate

Ocean currents The Berkeley group does depart from the "orthodox" picture of climate science in its depiction of short-term variability in the global temperature. The El Nino Southern Oscillation (ENSO) is generally thought to be the main reason for inter-annual warming or cooling. But by the Berkeley team's analysis, the global temperature correlates more closely with the state of the Atlantic Multidecadal Oscillation (AMO) index - a measure of sea surface temperature in the north Atlantic. There are theories suggesting that the AMO index is in turn driven by fluctuations in the north Atlantic current commonly called the Gulf Stream. The team suggests it is worth investigating whether the long-term AMO cycles, which are thought to last 65-70 years, may play a part in the temperature rise, fall and rise again seen during the 20th Century. But they emphasise that anthropogenic global warming (AGW) driven by greenhouse gas emissions is very much in their picture. "Had we found no global warming, then that would have ruled out AGW," said Prof Muller. "Had we found half as much, it would have suggested that prior estimates [of AGW] were too large; if we had found more warming, it would have raised the question of whether prior estimates were too low. "But we didn't; we found that the prior rise was confirmed. That means that we do not directly affect prior estimates." The team next plans to look at ocean temperatures, in order to construct a truly global dataset. Follow Richard on Twitter

Capitalism and its critics/ The Economist

Capitalism and its critics Rage against the machine People are right to be angry. But it is also right to be worried about where populism could take politics Oct 22nd 2011 | from the print edition FROM Seattle to Sydney, protesters have taken to the streets. Whether they are inspired by the Occupy Wall Street movement in New York or by the indignados in Madrid, they burn with dissatisfaction about the state of the economy, about the unfair way that the poor are paying for the sins of rich bankers, and in some cases about capitalism itself. In the past it was easy for Western politicians and economic liberals to dismiss such outpourings of fury as a misguided fringe. In Seattle, for instance, the last big protests (against the World Trade Organisation, in 1999) looked mindless. If they had a goal, it was selfish—an attempt to impoverish the emerging world through protectionism. This time too, some things are familiar: the odd bit of violence, a lot of incoherent ranting and plenty of inconsistency (see article). The protesters have different aims in different countries. Higher taxes for the rich and a loathing of financiers is the closest thing to a common denominator, though in America polls show that popular rage against government eclipses that against Wall Street. Yet even if the protests are small and muddled, it is dangerous to dismiss the broader rage that exists across the West. There are legitimate deep-seated grievances. Young people—and not just those on the streets—are likely to face higher taxes, less generous benefits and longer working lives than their parents. More immediately, houses are expensive, credit hard to get and jobs scarce—not just in old manufacturing industries but in the ritzier services that attract increasingly debt-laden graduates. In America 17.1% of those below 25 are out of work. Across the European Union, youth unemployment averages 20.9%. In Spain it is a staggering 46.2%. Only in Germany, the Netherlands and Austria is the rate in single digits. It is not just the young who feel squeezed. The middle-aged face falling real wages and diminished pension rights. And the elderly are seeing inflation eat away the value of their savings; in Britain prices are rising by 5.2% but bank deposits yield less than 1%. In the meantime, bankers are back to huge bonuses. History, misery and protest To the man-in-the-street, all this smacks of a system that has failed. Neither of the main Western models has much political credit at the moment. European social democracy promised voters benefits that societies can no longer afford. The Anglo-Saxon model claimed that free markets would create prosperity; many voters feel instead that they got a series of debt-fuelled asset bubbles and an economy that was rigged in favour of a financial elite, who took all the proceeds in the good times and then left everybody else with no alternative other than to bail them out. To use one of the protesters’ better slogans, the 1% have gained at the expense of the 99%. If the grievances are more legitimate and broader than previous rages against the machine, then the dangers are also greater. Populist anger, especially if it has no coherent agenda, can go anywhere in times of want. The 1930s provided the most terrifying example. A more recent (and less frightening) case study is the tea party. The justified fury of America’s striving middle classes against a cumbersome state has in practice translated into a form of obstructive nihilism: nothing to do with taxes can get through Washington, including tax reform. Worryingly, politicians are already in something of a funk. The Republicans first denounced the occupiers of Wall Street, then cuddled up to them. Across Europe social democratic parties have tended to lose elections if they move too far from the centre ground, but leaders, like Ed Miliband in Britain and François Hollande in France (see article), still find the anti-banker rhetoric enticing. Why not opt for a gesture—tariffs, a supertax on the rich—that may only make matters worse? A struggling Barack Obama, who has already flirted with class warfare and business-bashing, might well consider dragging China and its currency into the fray. And it will get worse: austerity and protest have always gone together (see article). Tackle the causes, not the symptoms Braver politicians would focus on two things. The first is tackling the causes of the rage speedily. Above all that means doing more to get their economies moving again. A credible solution to the euro crisis would be a huge start. More generally, focus on policies that boost economic growth: trade less austerity in the short term for medium-term adjustments, such as a higher retirement age. Make sure the rich pay their share, but in a way that makes economic sense: you can boost the tax take from the wealthy by eliminating loopholes while simultaneously lowering marginal rates. Reform finance vigorously. “Move to Basel 3 and higher capital requirements” is not a catchy slogan, but it would do far more to shrink bonuses on Wall Street than most of the ideas echoing across from Zuccotti Park. The second is telling the truth—especially about what went wrong. The biggest danger is that legitimate criticisms of the excesses of finance risk turning into an unwarranted assault on the whole of globalisation. It is worth remembering that the epicentre of the 2008 disaster was American property, hardly a free market undistorted by government. For all the financiers’ faults (“too big to fail”, the excessive use of derivatives and the rest of it), the huge hole in most governments’ finances stems less from bank bail-outs than from politicians spending too much in the boom and making promises to do with pensions and health care they never could keep. Look behind much of the current misery—from high food prices to the lack of jobs for young Spaniards—and it has less to do with the rise of the emerging world than with state interference. Global integration has its costs. It will put ever more pressure on Westerners, skilled as well as unskilled. But by any measure the benefits enormously outweigh those costs, and virtually all the ways to create jobs come from opening up economies, not following the protesters’ instincts. Western governments have failed their citizens once; building more barriers to stop goods, ideas, capital and people crossing borders would be a far greater mistake. To the extent that the protests are the first blast in a much longer, broader battle, this newspaper is firmly on the side of openness and freedom. from the print edition | Leaders

IQ Isn't as Fixed as Once Believed, Research Suggests / Robert Lee

A teenager's IQ can rise or fall as many as 20 points in just a few years, a brain-scanning team found in a study published Wednesday that suggests the intelligence measure isn't as fixed as once thought.

The researchers also found that shifts in IQ scores corresponded to small physical changes in brain areas related to intellectual skills, though they weren't able to show a clear cause and effect.

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University College London; Nature
"If the finding is true, it could signal environmental factors that are changing the brain and intelligence over a relatively short period," said psychologist Robert Plomin at Kings College in London, who studies the genetics of intelligence and wasn't involved in the research. "That is quite astounding."

Long at the center of debates over intelligence, an IQ score typically gauges mental capacity by measuring the relative difference between mental age and actual chronological age through standardized tests of language skill, spatial ability, arithmetic, memory and reasoning. A score of 100 is considered average. Barring injury, that intellectual capacity remains constant throughout life, most experts believe.

But the new findings by researchers at University College London, reported online in Nature, suggest that IQ, often used to predict school performance and job prospects, may be more malleable than previously believed—and more susceptible to outside influences, such as tutoring or neglect.

"A change in 20 points is a huge difference," said the team's senior researcher, Cathy Price, at the university's Wellcome Trust Centre for Neuroimaging. Indeed, it can mean the difference between being rated average and being labeled gifted—or, conversely, being categorized as sub-standard.

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Nature, University College London
Researchers found that dramatic changes in verbal IQ corresponded to changes in an area of the brain associated with speech, whereas nonverbal IQ changes were related to an area involved in hand movements.

To better understand intelligence, Dr. Price and her colleagues studied 33 healthy English teenagers whose IQ scores initially ranged from 80 to 140. They tested the volunteers on standardized intelligence exams in 2004 and again in 2008, to encompass the peak years of their adolescence, while also monitoring subtle changes in brain structure using functional magnetic resonance imaging.

By analyzing verbal and nonverbal IQ performance separately, the researchers discovered that these fundamental facets of intelligence could change markedly, even in cases when an overall composite IQ score remained relatively constant.

"One fifth of them jumped one way or the other," Dr. Price said. One teenager's verbal IQ score rose from 120 at age 13 to 138 at age 17, while her nonverbal IQ dropped from 103 to a below-average score of 85. Another's verbal IQ soared from 104 to 127 in four years, while his nonverbal performance stayed the same.

The rise or fall in verbal IQ scores appeared to be connected to changes in an area of the brain associated with speech, whereas shifts in nonverbal IQ related to an area involved in motor control and hand movements.

In recent years, scientists have determined that experience can readily alter the brain, as networks of neural synapses bloom in response to activity or wither with disuse. Expert musicians, circus jugglers and London cab drivers studying maps—even Colombian guerillas learning to read—have all shown brain changes linked to practice, several brain imaging studies have reported.

Until now, though, researchers had considered general intelligence too basic to be affected by such relatively small neural adjustments. Dr. Price and her colleagues don't know what caused the changes in both the brain and the IQ scores they documented but speculated that they could be a consequence of learning experiences.

Several brain specialists said the brain changes could just as plausibly reflect the pace of normal growth, and the shifts in IQ scores could be due to people's inconsistent performance on tests.

The varying IQ scores could also indicate the test itself is flawed. "It could be a real index of how intelligence varies or it could suggest our measures of intelligence are so variable," said neuroimaging pioneer B.J. Casey at Cornell University's Weill Medical College, who wasn't involved in the study.

Even so, the size of the new study was too small to warrant broad conclusions about adolescence and learning, a time when the brain is normally in flux, experts said. Studies seeking the genetic origins of intelligence, for example, have encompassed thousands of test subjects across decades and still been unable to conclusively identify the genes that shape intelligence, said Dr. Plomin, the Kings College psychologist.

Other experts were confident the IQ variations were evidence of the neural impact of experience, for better or worse.

"An important aspect of the results is that cognitive abilities can increase or decrease," said Oklahoma State University psychometrician Robert Sternberg, who is a past president of the American Psychological Association and wasn't part of the study. "Those who are mentally active will likely benefit," he said. "The couch potatoes among us who do not exercise themselves intellectually will pay a price."

Confianza

Principles to Remember

Do:

Be honest with yourself about what you know and what you still need to learn
Practice doing the things you are unsure about
Embrace new opportunities to prove you can do difficult things

Don't:

Focus excessively on whether you or not you have the ability - think instead about the value you provide
Hesitate to ask for external validation if you need it
Worry about what others think — focus on yourself, not a theoretical and judgmental audience

Los problemas de los desequilibrios en el tipo de cambio

The Big Mac index
An indigestible problem
Why China needs more expensive burgers
Oct 14th 2010 | HONG KONG

A WEAK currency, despite its appeal to exporters and politicians, is no free lunch. But it can provide a cheap one. In China, for example, a McDonald’s Big Mac costs just 14.5 yuan on average in Beijing and Shenzhen, the equivalent of $2.18 at market exchange rates. In America, in contrast, the same burger averages $3.71.


That makes China’s yuan one of the most undervalued currencies in the Big Mac index, our gratifyingly simple guide to currency misalignments, updated this week (see chart). The index is based on the idea of purchasing-power parity, which says that a currency’s price should reflect the amount of goods and services it can buy. Since 14.5 yuan can buy as much burger as $3.71, a yuan should be worth $0.26 on the foreign-exchange market. In fact, it costs just $0.15, suggesting that it is undervalued by about 40%.

The tensions caused by such misalignments prompted Brazil’s finance minister, Guido Mantega, to complain last month that his country was a potential casualty of a “currency war”. Perhaps it was something he ate. In Brazil a Big Mac costs the equivalent of $5.26, implying that the real is now overvalued by 42%. The index also suggests that the euro is overvalued by about 29%. And the Swiss, who avoid most wars, are in the thick of this one. Their franc is the most expensive currency on our list. The Japanese are so far the only rich country to intervene directly in the markets to weaken their currency. But according to burgernomics, the yen is only 5% overvalued, not much of a casus belli.

Related items
Currency wars: Fumbling towards a truce
Oct 14th 2010
China's reserves: In need of a bigger boat
Oct 14th 2010
If a currency war is in the offing, America’s congressmen seem increasingly determined to arm themselves. A bill passed by the House of Representatives last month would treat undervalued currencies as an illegal export subsidy and allow American firms to request countervailing tariffs. The size of those tariffs would reflect the scale of the undervaluation.

How does the bill propose to calculate this misalignment? It relies not on Big Macs, but on the less digestible methods favoured by the IMF. The fund uses three related approaches. First, it calculates the real exchange rate that would steadily bring a country’s current-account balance (equivalent to the trade balance plus a few other things) into line with a “norm” based on the country’s growth, income per person, demography and budget balance.

The fund’s second approach ignores current-account balances and instead calculates a direct statistical relationship between the real exchange rate and things like a country’s terms of trade (the price of its exports compared with its imports), its productivity and its foreign assets and liabilities. The strength of Brazil’s currency, for example, may partly reflect the high price of exports such as soyabeans.

Third, the fund also calculates the exchange rate that would stabilise the country’s foreign assets and liabilities at a reasonable level. If, for example, a country runs sizeable trade surpluses, resulting in a rapid build-up of foreign assets, it probably has an undervalued exchange rate.

The IMF has typically assessed its members’ policies one at a time. But the fund’s managing director, Dominique Strauss-Kahn, now proposes to assess its biggest members all at once to make sure their macroeconomic strategies do not work at cross-purposes. He is keen to identify the ways in which a country’s policies, including its exchange-rate policies, “spill over” to its neighbours.

Those spillovers depend on the size of the economy as much as the scale of any misalignments. But the biggest economies are also the hardest to bully. The fund’s last annual report on the Chinese economy, in July, included the government’s rebuttal of every criticism the fund offered. In a decorous compromise the report concluded that the yuan was “substantially” undervalued but refrained from quantifying the size of the problem.

Big revaluations of the kind required to satisfy the fund or equalise the price of burgers are unlikely. A recent study of the Big Mac index by Kenneth Clements, Yihui Lan and Shi Pei Seah of the University of Western Australia showed that misalignments are remarkably persistent. As a result, the raw index did a poor job of predicting exchange rates: undervalued currencies remain too cheap and overvalued currencies remain too pricey.

But since this bias is systematic, it can be identified and removed. Once that is done, the three economists show that a reconstituted index is good at predicting real exchange rates over horizons of a year or more. Since The Economist costs just $6.99 (a little less than two burgers) on the news-stand, the index provides decent value for money for would-be currency speculators, the authors conclude. The Big Mac index may itself be undervalued.

Finance and Economics

The Execution Trap

The Effective Organization: The most brilliant strategy in the world won´t do any good if you can´nt deliver on it.
Drawing a line between strategy and execution almost guarantees failure.
The idea that execution is distinct from strategy has become firmly ensconced in management thinking over the past decade.
Making a distinction between strategy and execution can do great damage to a corporation.
 When workers are made to feel empowered, the whole organization wins.
A cascade of better choices:
 Unlike with the strategy-execution approach, in which leaders dictate set strategies and expect subordinates to mechanically follow, the choice cascade model has senior managers empower workers by allowing them to use their best judgment in the scenarios they encounter. But to effectively enable those individual choices, a choice maker "upstream" must set the context for those downstream. At each level, the choice maker can help his employees make better choices in four specific ways.

1- Explain the choice that has been made and the rationale for it.
   Too often we mistakenly assume that our reasoning is clear to others because it is clear to us. We must take the time to be explicit about the choice we have made and the reasons and assumptions behind that choice, while allowing the opportunity for those downstream to ask questions. Only when the people immediately downstream understand the choice and the rationale behind it will they feel empowered then artificially constrained.

2- Explicitly identify the next downstream choice.
   We must articulate what we see as the next choice, and engage in a downstream discussion to ensure that the process feels like a joint venture that in informed by hierarchy. Those upstream must guide and inform those downstream, not leave them to make decisions blindly.

3- Assist in making the down-stream choice as needed.
   Part of being a boss is helping subordinates make their choices when they need it. The extent of help required will vary from case to case, but a genuine offer should always be a part of the process.

4- Commit to revisiting and modifying the choice based on downstream feedback.
   We cannot ever know that a given choice is a sound one until the downstream choices are made and results roll in. Hence, the superior has to signal that his choice is truly open to reconsideration and review.

HBR July-August 2010 pages 63 to 71

De vuelta a la economía de la gran depresión y la crisis del 2008

Libro escrito por Paul Krugman, premio Nobel de economía 2008
El pánico de 1998
En el erano de 1998 los balances de los fondos de cubrimiento de riesgo no sólo eran enormes sino inmensamente complejos. Aun así, había un esquema. Normalmente estos fondos tenían activos a corto plazo que eran seguros (poco probable que su valor cayera) y líquidos, es decir, fáciles de vender si se necesitaba el efectivo. Al mismo tiempo, tenían activos a largo plazo que eran arriesgados e ilíquidos. Por lo tanto, un fondo de cubrimiento podía tener deuda alemana al corto plazo, que es segura y fácil de vender, y títulos hipotecarios daneses (derechos indirectos sobre vivienda), que son un poco más arriesgados y mucho más difíciles de vender en el momento. O podían ser bonos japoneses de corto plazo y deuda rusa de largo plazo.
 Aquí el principio general es que históricamente los mercados tienden a pagar una prima bastante alta tanto por la seguridad como por la liquidez, pues los pequeños inversionistas son adversos al riesgo y nunca saben cuándo necesitan efectivo. Esto fue una oportunidad para los grandes operadores, que podían minimizar el riesgo con una cuidadosa diversificación (comprando una mezcla de activos de tal manera que las ganancias en uno por lo general compensaran las pérdidas en otro), y que normalmente no necesitaban efectivo de repente. Fue en buena parte explotando estos márgenes que los fondos de cubrimiento de riesgo ganaron tanto dinero, año tras año.
 Sin embargo, para 1998 ya mucha gente entendía esta idea básica y la competencia entre los mismos fondos de cubrimiento de riesgo había hecho cada vez más difícil ganar dinero. De hecho algunos fondos comenzaron a devolver el dinero de los inversionistas, declarando que no podían encontrar suficientes oportunidades lucrativas para invertirlo. Pero también trataron de encontrar nuevas oportunidades desplegándose aun más y tomando posiciones que aparentemente parecían muy arriesgadas pero que supuestamente estaban astutamente construidas para minimizar las posibilidades de pérdida.
 De lo que nadie se dio cuenta hasta cuando sucedió, fue que la competencia entre los fondos de cubrimiento de riesgo por explotar oportunidades de ganancias cada vez más estrechas, había creado una especie de máquina capaz de producir catástrofes financieras.
 He aquí como funcionaba. Suponga que algún fondo de cubrimiento de riesgo, llamémoslo el Fondo de la Relatividad, hecho una apuesta grande sobre deuda rusa. Luego Rusia deja de pagar sus obligaciones y pierde unos mil millones de dólares. Esto hace que los inversionistas, que son la contraparte de sus posiciones a corto plazo, es decir la gente que prestó sus acciones y bonos para que les fueran devueltos en el futuro, se pongan nerviosos y exijan la devolución de sus activos. Sin embargo, el Fondo de la Relatividad no tiene estos activos a la mano sino que los tiene que comprar, lo que significa que tiene que vender activos para conseguir el efectivo. Y  como es un jugador tan grande en el mercado, cuando comienza a vender , los precios de las cosas en que ha invertido comienzan a caer.
 Entre tanto, el rival del Fondo de la Relatividad, el Fondo Pussycat, ha invertido también en las mismas cosas. De manera que cuando el Fondo de la Relatividad se ve obligado a hacer grandes ventas repentinas, esto también significa grandes pérdidas para Pussycat y este fondo también se ve obligado a vender para cubrir sus posiciones a corto plazo y al hacerlo caen los precios de otros activos. Al hacer esto, le crea un problema al Fondo Isabelino..... y así sucesivamente.
 En un nivel básico fue la misma clase de proceso que implicó un círculo vicioso de precios en picada y balances en implosión. Nadie pensó que tal cosa pudiera suceder en el mundo moderno, pero sucedió y las consecuencias fueron alarmantes.
 Como se puede ver, resultó que los fondos de cubrimiento de riesgo habían sido tan asiduos negociando primas de liquidez y riesgo que para muchos activos ilíquidos los mismos fondos eran el mercado, cuando todos intentaron vender al mismo tiempo no había otros compradores. Entonces, después de varios años de estar encogiéndose poco a poco, las primas de liquidez y riesgo de repente se elevaron a unos niveles sin precedentes. A finales de Septiembre, los bonos de Estados Unidos a veintinueve años, activos perfectamente seguros en la medida en que si el gobierno de Estados Unidos se derrumba todo lo demás se derrumba con él, estaban pagando tasas de interés significativamente más altas que los bonos a treinta años, que se negocian en un mercado más grande y por lo tanto son más fáciles de vender.

Extracto tomado directamente del Libro.