WAVES OF PERIL

It was a lazy Sunday afternoon and I was rolling in the bed vetoing a 1 hour long debate about getting up or not. Suddenly I heard a knock on the door. I ignored it to be a dream as no one ever knocks my door but the knocking was persistent. I sauntered towards the door and opened it with my eyes and brain refusing to embrace the sad truth that I had actually woken up. And then I saw a man who looked faintly familiar but scary enough to give me the impression that he just walked out of a grave. His hair was long and shabby, his beard must at least be 6 months old and his fashion quotient would evoke the envy of a beggar. Lo behold! It was Professor Eisenkleiftovich. I jumped in joy as I was seeing him after I don’t know how long: eternity probably.

Me: What on earth happened to you Professor? You look terrible. Where were you all this while?

Prof: I was in Taiji and I nearly got myself killed.

Me: Taiji. That’s in Japan right. What were you doing there?

Prof: Yes. I was watching dolphins there.

Me: Why would anyone kill you for watching dolphins?

Prof: I was watching them die.

A shock wave went through me as I floundered for words. His eyes were unperturbed.

Prof: Tell me this. When you sit in that Sea World gallery and see a dolphin splitting the waters and soaring into the sky as it throws in a couple of somersaults on its way back, what do you feel? What goes through your mind when it comes near you and looks in your eye, beams at you and rubs its nose against yours?

Me: I feel elated and out of the world. I can see its happiness and love for us and the deep connect it shares with humans. Most of all, I am awed by its intelligence.

 

Prof: Well, I would certainly agree to your last statement. But you know what; a dolphin’s smile is nature’s greatest deception.

Me: Why do you say that? What is the problem with its smile?

Prof: That’s my point. When a dolphin is jumping and smiling, it is hard to see the problem. Dolphins are acoustic creatures and sound is their primary sense. The most advanced sonar ever build by humans is no match to the dolphin. It can scan and tell if one is pregnant in a minute. Such is its sensitivity to sound. Now you capture it and thrust it into a concrete tank and then you add a gallery full of screaming people to the agony. That dolphin that swims to you with a sweet smile and jumps to your whim and fancy is enduring extreme levels of stress at that very moment and eventually the stress kills it.

Me: I never knew that there is so much desperation behind that innocent smile. I hate you Professor. I will never be able to go to Sea World again. But you didn’t tell why you went to Taiji?

Prof: Taiji is a small town with a big secret. It is the largest supplier of dolphins to marine parks across the world. And do you know how they catch them?

Me: I guess I don’t want to know. But you will tell me anyways, right. So go ahead.

Prof: The fishermen wait in their boats along the migratory routes of dolphins, immerse long poles with a flange on the bottom and bang on the poles with hammers essentially creating a wall of sound to terrify the dolphins. They swim for their lives to the shores of Taiji and they reach the lagoons, shocked, stressed and freaked out, where they are sealed off into captivity. The next day dolphin trainers from around the world line up to select their Bottlenose Bobs. Each dolphin sells up to $150,000. Now that’s a lot of money!

Me: That is so atrocious. No wonder it is a multi billion dollar industry now. How heartless have we become?

Prof: Wait a minute. You haven’t even heard what happens to the dolphins that are not selected by the trainers?

I was almost about to shut my ears off as I could sense what was coming.

Prof: They are slaughtered; not killed; slaughtered and sold for their meat. They are taken around to a remote glistening cove where no one has access to and the fishermen kill them with their spears mercilessly. Well, you may ask me, what’s the big deal? We kill all sorts of animals for food. So why this hoopla about the dolphin? I am not saying man should not be carnivorous. Many animals are, and it is their choice. But show me people in this world who want to eat dolphin meat, can you?

Me: They don’t? Then why this heinous killing? I don’t understand.

Prof: Well, there are very few people in the world who eat dolphin meat by choice. The fishermen though, label it is as expensive whale meat or in some other form of disguise. If they label it as dolphin meat, they won’t find any takers. And the reason for that is dolphin meat is heavily laced with mercury which is highly toxic and lethal to our health.

Me: So just for a few extra bucks, these fishermen are not just killing the poor animal but also endangering a human’s life. Why can’t they just leave them alone!

Prof: You see man is the weirdest paradox that has ever walked the earth. We all have this desire to watch them, swim with them, hug them, kiss them, hold them and love them to death. And this endless desire is the ticket to their death and misery. Some people love and kill them while others love to kill them. You told me that you are awed by its intelligence. But don’t we always associate intelligence with humans and some aliens living in some far off wonderland we will never get to. Now, when you understand this non human intelligence of the dolphins, you will realize that they don’t really belong in captivity.

God had created a perfect universe: until he made man. And from that day on, God has never looked into the mirror.

P.S: About 23,000 dolphins are being killed in Japan every year. To learn more visit http://www.takepart.com/cove. And to witness the poor plight of the dolphins and the nefarious crime that goes on unnoticed, watch this documentary: http://topdocumentaryfilms.com/cove/

FUEL-O-NOMICS

One question that has been in the minds of most of us: Why are gas prices so high? There is also another thing that has puzzled me quite often: Why are they so different? Yesterday evening we were almost out of gas (me and my car) when I started from office. I checked the gas station nearby and it read $3.89 per gallon. I remembered seeing $3.79 somewhere near my house, so I kept driving. I was about to fill my gas at that station when my iPhone informed me that 4 miles away, gas was $3.72. I live in Chicago suburbs and Gas Buddy tells me that fuel costs $4.09 in downtown. So within a radius of about 15 miles I was able to see 4 different prices for fuel. And we are just getting started here. If you look at US national averages: Gas costs around $3.9 on average in the West Coast, Mid West comes close with $3.7, Utah/Colarado being in the center come in at about $3.5  whereas if you go down South to Texas, gas is relatively cheap at $3.1. Now that is a $1 differential for just 1 gallon and it is fairly significant. And within regions too the prices fluctuate as much or more over the year. I wanted to make sense of all this and was going crazy. So I decided to catch Professor Eisenkleiftovich again and pick his brain on this topic.

Me: Professor. Why are you looking so dejected?

Prof: Err… Did you hear that a few neutrinos have outpaced the speed of light by 60-billionth of a second? I never imagined Einstein could be proved wrong.

Me: But Prof: That could just be a false alarm. There have been quite a few of them before.

Prof: Hmm.. you are right. And I hope so too. Otherwise I will have to revisit and redo all my research again as they all have the theory of relativity as the foundation stone. Either way, an interesting space to follow! You tell me kiddo. What are you upto?

Me: These fuel prices have been intriguing me for a while now. I have always thought that they are based mostly on the price of crude oil but I don’t believe that theory supports the fact that different regions in a country have different gas prices. Could you shed some light on this?

Prof: Sure. You have the common misconception that most people have. To be precise, today you are just 65% correct when you say fuel prices swing exactly with prices of crude oil. There is more to it.  Gas is just like any other consumer product and there is a supply chain that sets the price of the product. Here is the entire pie which tells you where each dollar you spend on gas goes:

 
    Crude oil                      :    68 cents
  Taxes                            :    14 cents
  Refining                        :    10 cents
  Distribution/Marketing  :    8 cents

Me: Hmm…. That is interesting to know. But still it doesn’t solve my confusion about global price fluctuations and regional differences in fuel costs.

Prof: Patience, my boy. Let me take up your global confusion (err..fluctuation) first. As you see the biggest slice is still crude oil and its price is controlled by the classic supply and demand principle. Demand here is straightforward: World Economic Growth. It is driven by the increase in the number of people who drive! Developing nations like China and India have an expanding middle class who are likely to use more gasoline over time. And don’t forget the US which has a whopping 86,000 miles of interstate highways and consumes 178 million gallons of gasoline each day. Which is precisely why you will be surprised to note that US imports around 11 million barrels of oil and petroleum products per week and still happens to be the 3rd largest producer of crude oil!

Me: Whoaa… I didn’t know that. No wonder the Strategic Petroleum reserve is a big thing. But my heart goes out for the Arctic National Wildlife Refuge. Anyways, what is the supply side story?

Prof: Hmm… ever heard of OPEC. It is the single largest entity impacting the world's oil supplies: The Organization of the Petroleum Exporting Countries (OPEC), a consortium of 13 countries: Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, UAE and Venezuela. Together, these 13 nations are responsible for 40 percent of the world's oil production and hold the majority of the world's oil reserves. They have the switch to control crude oil prices. When OPEC wants to raise the price of crude oil, it simply reduces production. This causes gasoline prices to jump because of the short supply as well as the possibility of future reductions. When oil production dips, gas companies get nervous. The mere threat of oil reductions can raise gas prices.

And apart from that, world events like military conflicts in oil zones, weather calamities like hurricanes in offshore drilling patterns and seasonality (summer for example where people drive more) can also cause fuel prices to shoot up.

Me: Now I get this completely. But what about the local piece? Why do gas prices vary from state to state?

Prof: There a few reasons, but taxes probably are the biggest factor. Distance from oil refineries can affect prices too. That is why places that are closer to the Gulf of Mexico enjoy lower prices due to low transportation costs. Hence the $3 in Texas compared to a $4 in San Diego.  And then there is regulation that differs across different states. California has stricter cleaner burning fuel requirements while Mid West has the use of ethanol requirement. That explains the higher fuel prices in these regions relative to the rest of US. And last but not least, local competition among gas stations can also drive price down within a region.

And to bust the last myth: most people think that gas stations make a good cut due to fuel price fluctuations. Remember that 8% of the pie is split between distribution, marketing and the gas station. And then there is competition. So now you can see that they typically just add a few cents per gallon (max a dime)!

Me: Wow… that was good stuff. I feel a lot more educated and oil-savvy. Thank you for enlightening me in such an entertaining way. Good luck on your Einstein bet though. You think he will once again stand the test of time (and light)?

Prof: Of course I do. I would go ALL-IN on that one! I don’t want to rewrite all my theories, for Christ sake!

Credits:

http://auto.howstuffworks.com/fuel-efficiency/fuel-consumption/gas-price.htm

http://www.investopedia.com/articles/economics/08/gas-prices.asp#axzz1Z5iP1SdF

http://gasbuddy.com/gb_gastemperaturemap.aspx

THE TICKING TIME-BOMB

It has been 3 years since the 2008 Financial earthquake hit us and recovery still seems to be a long winding road ahead. We have seen a lot of European economies go bust. The American economy has been limping along, unemployment still hurts and houses are available in the flea market. So I decided to understand this better. And luckily I ran into Professor Eisenkleiftovich, the genius, who agreed to give me interesting insights to help me decode this monster.

Me: Professor, I have heard a lot about this Credit Crisis and the devastation it caused around the world. But I never completely understood it. Could you shed some light?

Prof: Sure, my boy. It is going to be a long night. Where do you want to start? By the way, did you know that holiday homes in Europe are currently selling for as low as $200K. Guess you should get one of those!

Me: Well, I am just $190K short. Prof, let us come to the topic at hand. As far as I know, the economy was fairly stable after the Great Depression in 1930s for a long time. But then over the last 2 decades, we have seen a lot of crises from which we haven’t recovered yet! Why is that?

Prof: Hmm..True. These crises were all caused by an out of control industry which was allowed to become a monster starting from the 1980s!

Me: I don’t get that. So what happened in the 1980s?

Prof: De-Regulation! Let me start simple here. There are 2 types of banks: 1) Savings & Loan Banks which lend you money in return for promises (that you make your loan payments) 2) Investment banks that give you promises (of higher returns) in return for money. Now for a long time, regulation managed to keep these 2 entities separate. Investment banks were private and the owners put in a lot of their own money as part of the investments and monitored the returns very closely. But it all changed too soon.

Me: Ohh.. So what did de-regulation do?

Prof: Well, first things first, investment banks went public and started investing with stock holder money. Savings and loan banks were also deregulated and they made riskier investments with depositor money.

Me: Sounds like recipe for trouble!

Prof: No, not yet. We are just getting warmed up. This was the period which saw the rise of one of the most influential groups in American politics: financial lobbyists. In a span of 30 years, Wall Street has taken over Washington and the de-regulation they pioneered is feeding on our economy. Here is a fun fact: In 1972, Morgan Stanley had 110 employees, 1 office and $12M in capital. Today, it has over 50,000 employees, offices around the world and several Billion dollars in capital.

Me: So Professor, why didn’t anyone oppose this de-regulation?

Prof: Oh, yes. Lots of people did. But the lobbyists were so powerful that any attempt at regulation was promptly suppressed. The US economy and political system was dominated by 5 Investment banks (Goldman Sachs, Morgan Stanley, Lehman Brothers, Merill Lynch, Bear Stearns) and 2 Financial Conglomerates (Citi and JP Morgan) who were all powerful and ushered in the era of de-regulation.

Me: Okay, got that. So what do you think led to the Credit Crisis of 2008? Wasn’t it called the Sub Prime Mortgage meltdown?

Prof: Aha… now we are getting into a very important discussion. Are you ready to hear about the true “Weapons of Mass Destruction”?

Me: Of course. I am all ears. What are they?

Prof: Derivatives, of course. They are such fancy toys to play with. But for you to understand the crisis completely, I need to tell you about mortgage loans, CDOs and CDSs which combined to create what I call: “The ticking time-bomb”.

Me: BOOM!

Prof: Ha Ha! Let me start with the “Securitization food chain”. It is a nexus of Home buyers, Money Lenders, Investment banks and poor unassuming investors. Owning a house has long been the “American” dream and the use of tricky lending programs to lend money to people with “weak” or limited credit history started the sub-prime mortgage crisis. This first started a housing boom wherein even people who could have qualified for a traditional loan fell to the aggressive mortgage sharks who promised simple loans at supposedly rock bottom rates without explaining the stricter repayment terms and higher interest rates towards the latter half.

 Me: Okay, hang on. If you lend money to people with poor credit, the risk of repayment is so obvious. Why would they do that?

Prof: That is where CDOs (Collateralized Debt Obligations) rein their ugly head in. These lenders would have been worried about the borrower’s credit status if they were to collect the money from them. But they instead sold those loans to investment banks which created a complex creature called CDO. Basically they combined different types of loans like student loans, credit card loans and mortgages and packaged them into a CDO. These banks then sold these CDOs to investors who had no clue what they were getting into. Oh, by the way, these banks paid Rating Agencies to evaluate these CDOs and these agencies were happy to provide them with excellent ratings.

Me: Oh.. that is a vicious circle. And I can see it continued to fuel the housing boom for a while before the free fall.

Prof: Yes. The investment banks went crazy and borrowed heavily to buy more loans and created more CDOs. And to further entice investors, AIG came with another genius: CDSs (Credit Default Swaps). Now in plain English, this is insurance for the investors against CDOs if they went bad.

Me: Well, that seems like it solves part of the problem, isn’t it?

Prof: No, it was exactly the other way around. This increased trouble exponentially. Now there were 2 kinds of people who bought these swaps. One: the regular investor who had the CDO. Two: The speculator who bought these swaps to bet against the CDO which he didn’t own.

Me: Okay. But I still don’t see how it multiplies the problem!

Prof: Well, first of all you are allowing someone to buy insurance for something they don’t own. Now imagine how many insurances it could create for 1 single home. And take a moment to think about the chaos that could ensue if that house burns down.

Me: Hmmm… I see what you are saying. In this case, people weren’t able to repay the loan; the CDO failed resulting in a cascade of losses.

Prof: You seem to be getting into your element here. Further more, these swaps were unregulated too and no money was put down to cover the losses. Instead huge bonuses were paid out in AIG. Eventually the bubble exploded, triggered a chain reaction and things went into a downward spiral. The whole system started falling like a pack of cards. And the rest is history. But what pains me is that still no strict regulation has been enforced. Washington still functions as a Wall Street Government. The lobbyist nexus still runs very deep with economists and even some reputed scholars supporting these financial instruments through their academic and literary works. On the other hand, if you see, at least Europe did take a lot of measures to tighten the screws on their financial system. Wish we can take a leaf out of their book. Let us hope for the best. Before I go, let me leave you with a parting thought! And I am going to be philosophical about it. 

Real Engineers build bridges.

Financial Engineers build dreams.

When dreams turned out to be nightmares, other people paid for it!

Good night!