No matter who you vote for...

...the government always gets in. Nowhere is this truer than Japan, where we have a general election today. Koizumi's Liberal Democatic Party has been in power non-stop for the past 50 years, save for a brief aberration in the early 90s, and his victory, if not its precise magnitude, is a forgone conclusion. He'll either gain an outright victory, or lead a coalition.

Of course, one-party rule is usually associated with communism, dictatorships, and the "Axis of Evil" rather than economically-advanced "western-style" liberal democracies. If Japan was not such a strong ally of the USA, we can be sure that the LDP's long-term monopoly of power would be a subject of serious criticism (cf Saudi Arabia etc). But Japan has a way of turning western preconceptions upside down. While it could certainly be argued that I, as a well-off white professional, do not see the soft underbelly of the Japanese system, it is also clear that society here just works in a way that the West sometimes doesn't. Sure, there is corruption, waste, crime, etc etc. But the trains run on time, the health care system is pretty good, and people don't riot at the drop of a hat. Walking through the small village of homeless outside Shinjuku station is a completely non-threatening experience - they sit outside playing shogi by day, and take their shoes off and leave them lined up outside their cardboard boxes at night.

The price one pays for this social cohesion is "freedom" and "individuality". Coming from a western perspective, it often seems like a strange life, but not a bad one.

PS have a listen/read here :-)

Update 12 Sept
Well, the government did win. Easily. According to the BBC, "Japan's general election on 11 September is likely to be the most exciting one for decades". I can only wonder what a boring one is like...

Skill of futures markets

Steve Bloom asked some time ago: "Also, how good are futures markets generally at accurately forecasting future prices, and especially peak prices, while at a peak?"

In order to begin to address this, I'd better start with the "Efficient Market Hypothesis". The most widely-quoted version of the EMH basically states that the current market price reflects all current information (there are also "strong" and "weak" versions which handle technical nuances).

Time for an economics joke. Two economists are walking down the road, and one says to the other "Hey, do you see that? It looks like a 10 pound note in the gutter over there. I'm going over to get it". The second replies "Don't bother, if it really was a tenner someone would already have picked it up". The point is that in a truly efficient market, there would be no point in doing any analysis. But the market price does not exist in a vacuum, and it can only reflect current information if analysts put in the effort to work out the implications of this information, which they would not do if there was no chance of a return! The solution to this paradox is to accept that the market is probably not always absolutely perfect, but it is usually pretty good (very few analysts can reliably beat the market over the long term). EMH is not axiomatically or inevitably true, but is instead a reasonable approximation to what is observed.

The very act of taking advantage of mispriced markets will move the price to reduce the error. So as soon as an inefficiency is spotted, it is liable to be eliminated. However, if the (real or perceived) entry barriers are high enough, and the reward insufficient, it is quite possible that errors will remain over the longer term. For example, the longstanding differential in returns between stocks and bonds takes some explaining. There are also obviously mispriced claims in the FX market - coupons with a guaranteed but distant $1 pay-off trade at a modest but significant discount to that value (which also means that people are paying non-zero prices for coupons with a guaranteed long-term zero pay-off - this can only be because they hope to sell to a "greater fool" within the time frame of the investment). This long-term discounting due to speculation makes it difficult to assess what the market really "thinks" about claims like Slv1 - is its high price really the market players' consensus estimate of the chance of a catastrophe, or just a long-term speculative discount of a claim that is virtually equivalent to "False in 2030"? It seems to be an open question (ie, I don't know) as to how far ahead a futures market can be expected to provide useful information, due to this speculative noise. But over a few months or years in the oil market, I would expect that it shouldn't be a huge problem.

However, even in the case that the market is truly efficient, it still cannot predict an uncertain future, but can only reflect the consensus likelihood of different possible outcomes. If all the players are badly informed, the market will not correct them. Its function is to act as an efficient and credible mechanism for aggregating the opinions of many, and perhaps the real question should not be "is the market accurate" but "is there a better mechanism for prediction"?

Anyway, what about oil prices? All the market traders can do is try to take account of their estimates of the likelihood of various future price-changing events - they have no crystal ball to actually predict the future accurately. The market might well account for the possibility of some disuption to supply in hurricane season, but could not in advance have priced Katrina into the forecasts. Although I would never claim that the market is always right, it is not likely to be far wrong for a long time, and is especially unlikely to be regularly wrong in the same manner. Such a failure would be spotted by traders who would be able to make a profit every time this situation occurred. With hindsight, the market is proven wrong time after time. But at any time, the current prices should simply reflect current expectations. Anyone who thinks otherwise is welcome to re-mortgage their house and make a killing...

Bush: One of the worst disasters to hit the US

Found on Snopes

Japanese response to Katrina, and media coverage

The Japanese offer of $0.5 million in aid to the USA following Katrina seems surprisingly small (eg Australia has offered $8 million, the UK has already sent $5 million-worth of emergency rations alone).

I get most of my news coverage from the BBC web site and radio. Over the past couple of weeks it's been pretty much wall-to-wall coverage, which is hardly surprising given the scale of the disaster. In Japan, however, it has hardly rated a mention. A search for "katrina" in the Japan Times yields about a dozen relevant hits (as of this posting date), of which most are either editorialising about the political impact, or talking about the effect on oil prices (leaving a mere 3 bona-fide disaster-related news stories, but none that really go into much detail). The UK's Guardian newspaper, on the other hand, throws up about 160 related articles, and the rest of the UK press is similar.

I asked a colleague at lunch whether they had heard much about it, and they said that yes, it had been on the Japanese news, but she did not seem to think it was that important a story. She was astonished when I described that a whole city had vanished and that the humanitarian and financial cost now looks likely to be worse than the Kobe earthquake.

The only explanation I can offer for this is that Japan gets plenty of typhoons itself, and indeed has one passing over right now. Typhoon Nabi has killed about 20 and temporarily displaced over 100,000. There are some typical pictures of floods and storm damage in this BBC news story on it. Also, parts of Tokyo were hit by a flash flood when over 100mm of rain fell in an hour. But that will pass, and things will get back to normal. Storms and floods are news, but not big news.

So, I don't think it's that the Japanese are stingy or unhelpful....it's just that no-one has actually bothered to tell them, so there is no public pressure to do more.

Tall grasses set to power Europe

Some encouraging news from the BAAS meeting in Dublin this week: Tall grasses set to power Europe. Apparently, some very high yields of miscanthus grass have been reported from trials in Illinois. Their figure of up to 60 tonnes/hectare is at least double the yields previously reported, and at this level it could make a significant contribution to renewable energy generation. I'm always a little suspicious of small-scale field trials - the crop is probably looked after rather better than it could be on an industrial scale, and also the roots can draw moisture and nutrients from the "halo" around the plot. However, even at a production level of 30t/ha, it could be well worthwhile.

Miscanthus has the particular advantages of being a perennial, and not needing much fertiliser, both of which reduce the energy inputs required (some "biofuel" crops require about as much energy input, as you get out at harvest time). It also has a long (and flexible) harvesting season over the winter when farm machinery (and perhaps farmers themselves) are largely idle.

Katrina vs Kobe

It is interesting (to me, at least) to compare the recent disaster in New Orleans to that caused by the earthquake in Kobe 10 years ago. For starters, it looks like both disasters are going to end up with similar human and financial costs (Kobe: 6400 deaths, 300,000 homeless, $100bn losses).

For the background to Kobe, it should be noted that although Japan is a hotbed of seismic activity, this particular area was not considered at risk from earthquakes. Also, following the large-scale damage of the 1994 Los Angeles quake, it was (perhaps rather smugly) claimed by the authorities in Japan that such damage "could not happen here" due to better building standards and preparation. So, when the Great Hanshin Earthquake destroyed a large part of the city at 5:46am on a January morning, the authorities were rather taken by surprise.

The initial response by the government was widely criticised as tardy. According to this article, it was 2 hours before the Prime minister was briefed, and it took the Governor of the region 4 hours (!) to ask for the Self-Defence Force. Wow. 4 whole hours, for a large-scale disaster that was completely unexpected (at least in this area). While not perfect, it certainly puts recent events in context...

It did take a day or so for the authorities to swing into action. These articlesdescribe how over subsequent days there were also bureacratic barrriers to foreign attempts at aid, such as sniffer dogs stuck in quarantine, and foreign medecines considered unsuitable for the unique Japanese consitution. So far, this seems eerily similar in character to the events after New Orleans flooded, although with a significantly more compressed time scale. However, during the initial power vacuum of the official response, private rescue and aid efforts by individuals, NGOs and the yakuza (!) started immediately, and had a substantial impact. It's likely that the Japanese media would have downplayed stories of looting, whereas the US media has probably exaggerated the unrest in New Orleans, but it still seems very clear that there was a major difference between the way the public reacted during the two events.

For obvious reasons, I'm particularly interested in racism and the treatment of foreigners in emergencies. I doubt whether any country with an immigrant population can honestly claim to be free of racism, and Japan is no exception.

[Now for a small digression: although it eventually signed up to the UN convention on racism, Japan has (uniquely in the developed world?) never actually enacted any legislation outlawing such behaviour, which continues to raise its ugly head on occasion. Victims of racial discrimination can in theory seek redress through the civil courts: after several years of legal battles, they may win compensation, but the authorities do nothing. After the Great Kanto Earthquake of 1923, many foreigners were murdered by mobs - some say with the collusion of the authorities - and the issue of the treatment of foreigners was raised again recently by the Citizen's Protection Law which outlines the response to major emergencies. By referring exclusively to "citizens" (kokumin), foreigners are specifically excluded from its protection.]

Following the Kobe quake, it seems that foreigners didn't fare too badly (certainly in comparison to 1923). There were complaints about a lack of information and some discrimination, but that is pretty much par for the course anyway. Some of the stories coming out of the USA seem just as bad if not worse - I'm not even talking about the way that the poor (who are mostly black) were abandoned in the first place, but the reports in the UK media (eg here) about British and other foreign visitors being deliberately ignored by the rescue efforts.

On balance, it seems clear to me that Japan, although not perfect, comes out well ahead in this comparison. Their quake was unexpected - not only to the government (locally at least), but also to the scientists. The official response was certainly a little slow, but got going within a few days. Most importantly, the people volunteered to help out, and there was very little trouble. In New Orleans, not only had this disaster scenario been known for years (make that decades) beforehand, but the storm itself was forecast a few days in advance. Despite this, there appears to have been essentially no plan, it took several days before any significant rescue operation was mounted, and within this time there was widespread looting and a complete breakdown of law and order.

One overwhelming impression I get from these and other major catastrophes is that any governnment response is liable to be slow and ineffective at first. I'm sure that "lessons will be learnt", but they will also be forgotten. For the first few days, it would be foolish to rely on an efficient governmental response. In Japan, disaster preparation is fairly well ingrained in society, even though there is certainly too much complacency. We are fortunately situated: being right on the edge of town, we have no gas mains supply, which at a stroke both eliminates the major source of post-quake fires, and also means we have a tank of LPG for cooking, heating, and sterilising water. With a stream running off the hillside close to our house, and a bag of rice in the cupboard, we'll be fine holed up at home for a week or so, assuming the house doesn't actually fall down and we are not seriously hurt in the quake. Following the recent Tokyo quake, "disaster maps" are on sale in the shops. I think that the main point of these is simply to show people how to walk home - the vast majority only know of locations with reference to train stations. For those who live too far away, convenience stores have agreed to provide basic ovvernight services in the event of transport shutdown, but there's a limit to how effective that could be in the event of a really massive quake. I'm happy to rely on the humble bicycle.

The rebuilding effort in Kobe has progressed in a haphazard and piecemeal fashion, and people were living in shelters for a long time. This is one opportunity for the USA to do better. Nevertheless, I suspect that many of of those displaced from New Orleans have a long haul ahead of them.

Hurricane Katrina

There's been plenty said elsewhere. But here are a few of my thoughts.

Firstly, it's not got much to do with global warming, and it's especially not about Kyoto or other emission controls. Even if GW has made hurricanes worse, the effect so far is pretty small, and anyway no realistic emission controls would make a substantial difference to the future risks in the short-term. New Orleans was a disaster waiting to happen, and as I said before, the important point about natural hazards is to recognise and plan for them, so as to prevent the consequential human disaster rather than the natural event itself.

(USAToday cartoon)

Living in a zone highly affected by both typhoons (local term for hurricane - the meteorological phenomenon is the same) and earthquakes, I'm not going to throw stones about how silly it is to build a city in such a location. The big problem with New Orleans has been in the planning and response. Everyone knew that a coastal city in hurricane alley, well below sea level and surrounded by water on three sides, was vulnerable: it was only ever a question of when, not if, the existing (decaying and subsiding) defences would be breached if they were not improved.

When the decision was made to evacuate the city, the media was awash with pictures of bumper-to-bumper traffic on the freeways. But what about those with no car (about 30% of the poorest households nationally, which must mean a lot of people in city as poor as NO)? The sick, or elderly?

Once the scale of the flooding was known, I'm astonished that the army was not sent in immediately and on a substantial scale to pull people out ASAP. What did they think was going to happen as food and water ran out? Of course, the Great American Public was never going to loot and riot, was it? At least the whites haven't been...



As far as "finding" food and essentials, of course, I should make it clear that I don't blame them. Such a desperate situation calls for desperate measures. It sure is a good thing that so many citizens have guns and are forming "well regulated militia" :-)

Someone needs to answer some serious questions about why this much-predicted scenario was allowed to develop in such a disastrous fashion. From the erosion of natural wetland protection, through inadequate funding of the levees, to the tardy and inadequate response, it's been cock-up after cock-up. The hurricane may have been natural, but the disaster has been largely man-made. Of course it isn't all the fault of this one man, but he is where the buck stops:



As for rebuilding the city....yeah, right. All of the tertiary industry will already have relocated, or at least be in the process of doing so as the evacuees get back on their feet. I doubt there's much business for banks, lawyers or hairdressers downtown right now. The problem isn't so much the total cost as the fact that the whole city will be uninhabitable for months. Of course all the port trade has to go somewhere, so I'm sure the city will regrow eventually in some form, but it's not going to be like the usual hurricane repair job.

How not to bet on the future

In an interesting coincidence, this article appeared in the New York Times a day or two after my bet was announced. The article, entitled "The $10,000 Question", concerned a $10,000 bet...but not mine. Instead, it was a bet on future oil prices, with one party arguing that the oil price will be above $200 by 2010, and the other arguing that it will be lower. Actually, the bet was only $5,000 v $5,000, so $10,000 in all.

Well, maybe I'm missing something, but we already have a large betting market on future oil prices...and it's helpfully called the "oil futures market". It suggests a price in the region of $60 by the end of 2009 (eg here, I don't really know where the best info is).

Therefore, anyone who thinks that the future oil price will be actually higher than that, can buy a future delivery of oil at that price. They don't need to actually be prepared to take a physical delivery of oil, they can simply sell the future contract nearer the date.

So, it seems to me that the person who bet on an oil price of over $200 was rather silly, because they could have got a much more profitable and lower-risk deal from the existing market. And that's before we even start with put and call options which could probably leverage a very large return on a small investment. If anyone else wants to place such a bet, please let me know - I will take willingly you on, hedge on the existing market and make a large risk-free profit.

A rather more attractive oil bet (from the "alarmist" point of view) can be found here. A drop to $25 by 2010 seems pretty unlikely right now.

Update
Ok, I found some futures and options data here. It looks like you can buy a "call option" for Dec 2010 oil at $70, for a price of say $4 (assuming I'm not misreading the site - it is not entirely clear to me). That $4 gives the owner the right (but not the obligation) to buy oil at the stated price and date. So if the oil price is $100 at that time, that nets a profit of $26 on a stake of $4. At $200, the return is $126. I'm sure that Matthew Simmons (who took the high side of the $200 oil bet) knows all this, so I conclude that he is giving away $5000 as a publicity stunt to push sales of his new book. Or maybe he's just trying to prove that doomsayers are stupid.

Anyway, I have no book to promote - yet :-)

Bet number 2

I'm delighted to announce that a second bet has been arranged, on essentially the same terms as my one.

It's for 500UKP, between Chris Randles (taking the warm side) and someone who posts as "snow hope" on the cold side. I don't know much about the protagonists, except Chris seems to be an active paticipant in the climateprediction.net project.

Some background to the bet can be found on this thread, and astute readers will spot that there appears to be another 500UKP on offer to anyone prepared to back the "warming" side of the argument.

I hope that someone will step forward.

Animal testing in medical research

I'm not a huge fan of animal testing. On the other hand, I can appreciate that it has its uses. So, although I'm all in favour of peaceful protest and even a bit of civil disobedience where appropriate, I'm disturbed to see that increasingly, de-facto policy in the UK appears to be being set by terrorists rather than reasoned debate over the ethical and practical pros and cons.

I wonder how long it will be before someone starts shooting doctors who perform abortions? Of course, the British have long preferred animals over children, so the AR movement probably has broader support than right-to-lifers :-)