@ Supply Chain Management

Breaking News on the wire about what is about to take place, or at least, what our wise leaders have in store for us – we can thank the Italian PM for at least letting the cat out of the bag – Berlusconi Says Leaders May Close World’s Markets. We all hate big mouths until we really need them to open just a teeny-weeny bit to let us – the people – know what’s going on…

Where are we at: The credit markets are frozen up and therefore there is very little if any lending (interbank or otherwise) going on. So much so that the Fed itself came out earlier this week with a lot of dough intending to "unclog" the credit market – Fed Tries to Unclog Credit Markets With $900 Billion.

The lending lockup is a key reason why the U.S. economy is faltering. Unable to borrow money freely or forced to pay a high cost to borrow, employers are cutting jobs and reducing capital investments. Consumers have retrenched.

To better open the lending spigots, the Fed said 28-day and 84-day cash loans being made available to banks will be boosted to $150 billion apiece, effective Monday. Those increases will eventually bring the amounts outstanding under the program to $600 billion.

Loans that will be made available in November to banks also will be increased to $150 billion each. That makes a total of $900 billion in credit potentially outstanding over year end, the Fed said.

The Fed also said it will begin paying interest on commercial banks’ reserves, another way to expand the central bank’s resources to battle the credit crisis.

I think the Fed created this current round of turmoil and panic – first by bailing out Bear Stearns and then letting Lehman go bust. When they "facilitated" the sale of Bear Stearns, they created a hazard by signalling to many that they were in the business of stemming this tide come hell or high water. The financial markets and super-intelligent and certifiably insane high-finance honchos heaved a sigh of relief as they found out that their shenanigans would be absorbed by – who else – us. When the Fed realized that many of these honchos were counting on such "facilitation", they had to let one fail. And in that game of musical chairs – Lehman came out the cropper.

Now, we’re experiencing the swing to the other side – relief transforms into fear that seems to have taken root not only within the credit markets but also the stock markets – for no good reason, you’d think. But what a tangled web we have woven – I’m guessing that numerous margin calls are being made to institutions and clients unable to unwind their positions in time, as the share prices plummet and no financing to be had to cover the calls, liquidate at all costs will kick in or has already kicked in. If these institutions and brokers have not already shut down their automated trading systems, or have these home-grown (rushed to market without proper testing) systems hiccup, falter and seize up – they’re probably finding out – at their peril, no less.

And so what is the solution – Close the markets -close everything down?

What happened to the bailout plan that had to be passed? It Passed – but is it Passe? Already?

"We need another bailout," says one.

I’m sure that we will hear that, "Capitalism has finally failed." And that "The third way is the only way."

"We need to close the markets down, if only for a day or two," says another.

And before I finish the post, the White House responds – White House dismisses idea of market suspension. It almost makes me believe that this wealth destruction is intentional – not in a conspiracy minded fashion, mind you. Here’s the basic scenario that I’m thinking off –

1. Begins with liquidity (you know, to solve the previous crisis) – all those dollars that went abroad in exchange for the productive capacity of the world – be it IT help desks, computer code or Walmart trinkets and what have you

2. Part of that liquidity went into inflating the real-estate bubble of the last few years. The other part was Fed policy of lowering interest rates post 9/11.

3. A large chunk of those dollars – spent and borrowed, came back into the US as "strategic" investments fuelling the bubble even further.

4. What complicates things further is that oil prices (and other commodities are sent soaring) increase because of greater demand (caused by the increased productive capacity around the world itself), devalued dollars and the disruptions of the Iraq war.

5. A number of investment banks leverage themselves several times over any sensible (What is sensible btw?) limit as they are being flooded with overseas cash – petrodollars as well as other sources. The flow of petrodollars is starting off booms in the middle-east as well.

6. Then the real-estate bubble shows signs of popping. And so does the commodities bubble. It’s crunch time. Highly levered banks are toast. Mortgage players are indeed mortified and subsequently mummified.

7. Wealth destruction takes places because of the crunch, not only stateside (i.e. retirement accounts and home values) but also overseas "strategic" investments are not that strategic anymore.

But my question is – Has the Fed closed the cycle/loop?

8. The Fed takes over all these toasted crisp banks and alleged investment securities for the worthless junk that they represent and burn up all those dollars that they printed in the first place.

And they’re already setting the next inflationary cycle in motion…

Too fanciful – I know!

And who do we have for presidential candidates this cycle – A change empty suit whose ideas of change were discredited in the last century and a doddering gramps whose notion of governance are well notions whose true meaning might unfold somewhere down the line. Pardon my snarkiness but we are not well served by either gentlemen. Nay, we are ill-served by the notions of leadership that abound.

Meanwhile, sleep easy, eat better – Value is value. It just takes a little time for it to shine through. As long as you’ve been chipping away at real value, the artificial wealth creation and destruction matters little. Run with the herd or use the herd to determine true value and you may not be able to stop at the precipice.

Shut the markets?, Credit Markets, A fanciful history!

Something of a required reading for these times… be it point or counterpoint.

America’s Great Depression

No, we’re nowhere near a depression but forewarned is forearmed as they say…

America’s Great Depression, Mises Institute

I’m sure that you’re drowning in the much bandied about term – Credit crisis or Credit crunch or liquidity crisis or the like. And I’ve come across some explanations of what event or series of events underlie this crisis. For a very good explanation of the problem and the failed bailout by the current Treasury Secretary Paulson, I refer you to this site – Understanding Tax.

As I pointed out in the previous post – Are you ready for the Supply Chain Shock?, a credit crisis is not a laughing matter and a serious credit crisis will send numerous shocks through the numerous supply chains of the world. The author of the article also points that out,

You might think of short-term money as the lubricant that keeps the world’s economic engine turning over smoothly. If there’s no lubricant,the engine freezes. No paydays, no goods on the shelves. Seriously.

So what is the purpose of the bailout bill? Let’s be clear about the probable scope of the current crisis – it’s not going away tomorrow if the bill is somehow passed in the House.

Note that Mr. Paulson’s proposal was not intended to solve the teaser-rate mortgage problem, either now or in the future. In the transactions that created the teaser-rate mortgages in the first place,both parties made bad decisions – the lender and the borrower. Mr.Paulson’s proposal was not intended to help either. One of its unavoidable side effects, however, was to relieve lenders of the consequences of their bad decisions, while leaving borrowers to suffer the consequences of theirs. This made it politically less palatable.
In addition, at least $500 billion more of teaser-rate mortgages are scheduled to reset over the next several years. In all likelihood, they too will go into default and become toxic waste. Nothing in Mr.Paulson’s original proposal was intended to do anything about this next$500 billion installment – or, indeed, to prevent lenders from making more teaser-rate mortgages in the future.
Similarly, Mr. Paulson’s proposal was not intended as a general Wall Street bail- out, although to some extent it would have had that effect.Note that the outstanding overhang of credit default swaps alone is estimated to be between $45 and $60 trillion – three to four times the size of our annual gross domestic product. The requested $700 billion, although the single biggest appropriation request in U.S.history, was miniscule when compared with the toxic waste problem as a whole. Mr. Paulson’s proposed solution was to cost just 1% of the size of the problem and was aimed only at a small part of that problem. (It is unnerving to realize that the U.S. government – the

In praise of mavericks is a short piece by Col. Michael Wyly (Ret.) that can be found at the Armed Forces Journal. The byline reads –

A true professional will strive to do something, not be someone

The colonel’s principal interest is in a single word – professional, in brief terms – the development of the profession and the professional.

It was during the European Renaissance that the professional class emerged and defined itself. It was during the Renaissance that the birthright nobility began to give way to a society led by persons respected for their merits – for what they did instead of who they were. Each profession had standards for entry, they professed something, and their study of it was daily, continual and life- long.They served their society. Medicine, law, the clergy and military leadership became during the 15th and 16th centuries – and still stand as – the classically defined professions.

A profession must be applied for and joined after being accepted,and its moral standards are as important as its philosophy.

So it follows that I ask myself this same question – What is my profession? What professional am I? And the surest answer is that I am not in any profession – of many professions but not in any one. And I don’t find that as troubling as I normally might. Or should I?

Some of the Secretary of Defense’s remarks invoke another Air Force Colonel John Boyd, the OODA loop etc. It has been a long standing desire on my part to study the OODA loop and possible adaptations to what I do everyday. Or maybe the OODA loop itself is the desire.

After they graduate and leave Maxwell, Gates warned the students:

I spent ten days in Istanbul from Jun 18th to Jun 27th and this was a vacation that I’m not likely to forget for a long time. And with the recent attack outside the US Consulate in Istanbul(actually Istiniye), I have a couple of lumps in my throat. That’s because I was at the consulate for three days and I saw, met and talked to some of those guards outside the consulate – I was there to get my visa stamped in order to get back into the US. And a few days later, a gun battle right there where people line up outside the consulate.

Istanbul (earlier Constantinople) straddles the Bosphorous which divides Europe from Asia and for ages been a thoroughfare for trade and culture. Thus, it is no accident that it had been coveted by several empires through the ages. What we call today – globalization et al, is another chapter of the same ol’ story in which Istanbul loomed as one of the players of a bygone era. So visiting Istanbul is like taking a pilgrimage into one of the grand narratives that we traverse – that of trade, of cultures, of peoples colliding, of empires formed and lost etc. As Istanbul is today, so will your favorite city be henceforth – what is to be, already was but we add new pages in our efforts – that is all. All I want to say is that it was beautiful.

I used to love flying – ever since I can remember, I wanted to fly, be a pilot of something or the other. I used to check the itinerary to see how many layovers we’d have traveling back and forth from Africa to India – so that I could "experience" the landings and take offs (As an aside, do you know that English is one of the impossible languages – when I was a kid, I always use to say take-offing instead of taking off because ’to land’ expands into ’landing’, ergo, ’take- off’ expands into ’take-offing’). Traveling to and from Istanbul, we flew Iberia which transits through Madrid and as we were sitting at the gate, I was just watching the jets line up one after the other. I calculated that at the Madrid airport, each jet waited on average 17 minutes before being cleared for take-off. That’s 17 minutes of fuel being burnt for nothing – in other words, WASTE. Now, as you can imagine, the Madrid airport was not really that busy. We flew back into JFK, landed pretty much without circling round and round, all around and round… but after touching down, waited over an hour before getting to the gate at JFK. The flight itself was a little less than 8 hours but the time on the ground was a full 1.5 hours. If you were/are at the short end of the stick of these multiple effects rippling around a busy airport such as JFK – it’s no wonder that flying is a royal pain these days.

Since most of my current work is in semiconductor scheduling these days, I was piqued by these delays. I can almost readily see that transferring/translating my work into airport scheduling and taxiing – it’s pretty much some of the same stuff. So, I looked up similar researchers working on this problem:

An optimisation model for Airport Taxi Scheduling

Airport Surface Movement Optimization (MIT)

And some work that is in progress in the real world:

Surface Movement Advisor

As people around the world fly more, the numbers of flights multiply and airplanes become larger, these problems are going to increase in their magnitude and effects. So here’s hoping for better flying days ahead.

Tags: An Istanbul trip, Constantinople, Flying these days, Airport Surface Movement Optimization, Airport Scheduling

Or rather on my plate. I want to draw your attention to these two challenges that are floating out there in cyberspace – prize money being offered for your (my) troubles as well if one contributes something of value:

1. The first one is the older of the two – The Netflix Prize, which is a problem in improving the accuracy of the movie recommendation system that is used by Netflix (in addition to several other ecommerce sites). This is something that I started working on before I got deluged at work but I hope to pick up the pieces again and make a try.

2. The second challenge is being offered by ROADEF, the French Society of Operations Research – which is to use OR techniques in Disruption Management for Commercial Aviation. I’m sure that if you fly these days, you’d appreciate a little succor from such sources and I’m glad that people are being invited to contribute towards solving this problem. Since I’m working in applying optimization to such problems, this is something I definitely will consider working on.

So, any takers?

Tags: Optimization Challenge, Netflix Prize, ROADEF, Disruption Management in Commercial Aviation

Reducing U.S. Greenhouse Gas Emissions: How much at what cost? is a report put together by the consulting firm McKinsey & Co. (from December 2007) that takes up this issue. The full report can be accessed here. The central conclusion of this report states:

The United States could reduce greenhouse gas emissions in 2030 by 3.0 to 4.5 gigatons of CO₂ using tested approaches and high-potential emerging technologies. These reductions would involve pursuing a wide array of abatement options available at marginal costs less than $50 per ton, with the average net cost to the economy being far lower if the nation can capture sizable gains from energy efficiency. Achieving these reductions at the lowest cost to the economy, however, will require strong, coordinated, economy-wide action that begins in the near future.

Strong, coordinated, economy-wide action that begins in the near future?

Ouch!

Double Ouch!!

. Tags: Reducing US greenhouse gas emissions, McKinsey report, Strong, coordinated, economy-wide action