Double Blind

The Federal government released their 380 page budget document last Tuesday. I proceeded to read it all before looking at the media analysis (since I didn’t want my thoughts to be biased by what I read in the typical knee-jerk reactions that are posted) and after going through it, I figured it was a “do-nothing” budget that was designed for the next upcoming federal election. It has a little to appeal for fiscal conservatives (a plan to have debt-to-GDP down to 25% in 10 years, and the lowest spending increase over the past three years), and the socialists get some spending increases in health and education. I’m still peeved by the fact that if the government managed to keep spending at inflation for the last five years, we could have paid off $60 billion more of the debt than we have.

Despite how incompetent I think our government is at spending our money, they at least have managed to keep the budgets relatively balanced – although interest-bearing debt has not really decreased over the past few years, our accumulated deficit has. Annex 3 of the budget shows our performance compared to other nations of the G7 and we look rather good by comparison – we’re the only guys pulling surpluses and we’ve done a good job reducing the debt and spending relative to GDP (but not on a nominal or real basis!). Also, we have a solvent pension plan compared to the mess that the USA is going to have to face sooner or later.

Despite the quasi-pyramid scheme that the CPP is, we have a solvent pension plan due to the fact that we’ve decided to heavily tax the people today and accumulate assets instead of having to suffer more pains of pension liabilities tomorrow. This time around, the money does not get embezzeled (err, spent) by the government, instead its assets administered by a pension board.

I should take this moment to point out that Australia’s finances put ours to shame. They have about 10% of the debt burden that we do.

Looking in the future, I would prefer to see spending stay flat and half of any excess revenues be poured into reducing interest-bearing debt and the other half to be returned back to Canadians in the form of tax decreases. The socialists would all but declare war against the government. But one can always dream, right? Debt is a burden to everybody – the quicker you can get it off the books, the quicker that you can use the interest payments that otherwise would have went to debt servicing to pay for all of the goodies.

I’m particularly impressed with Alberta’s fiscal performance. Their 2004 budget includes conservative projections for their oil and gas revenues that have virtually paid the entire debt for them. Their assumptions for oil prices in the next year are an average of US$26 (current prices are US$37) per barrel and US$4.20/mcf for natural gas (current prices are US$5.42). Assuming that prices do not change for the rest of the year, they will achieve CDN$1.8 billion more than they planned to make. This would be sufficient for getting their debt under CDN$2 billion and possible retirement of the entire debt within three years.

As a result of their financial flexibility, they have the capability of jacking up spending on healthcare and education. This is how you run a jurisdiction’s finances – first get the house in order by cutting spending and making sure that you achieve balanced budgets or small surpluses; then you work on getting rid of the debt which chews up capital in the form of interest payments. Finally, when revenues have outgrown spending enough, you use the surplus amount to reduce taxes, spend and pay down more debt. It’s a formula for sustained success and Alberta clearly knows what they’re doing. The rest of the country should take a lesson. I don’t have a problem with spending, providing it’s done efficiently – otherwise, give the money back to the people or pay back the money you’ve already spent.

The opposition party in Alberta came back with a snappy comment at the end of this CBC article – “The government has achieved its debt reduction by withholding basic services from taxpayers” – Apparently the opposition over there never read the budgets. Alberta has increased its spending significantly over the past few years, from 14.3 billion five years ago to 21.7 billion today (52%)! The only reason how this was possible was because of the spending cuts that were made 10 years ago to clear enough fiscal room for tax cuts. It’s ironic that you always have the advocates that want the government to spend more money always complaining that whatever the government does is incorrect. What did they want, a 100% increase in spending instead of 52%?

When walking down the worst parts of Vancouver (specifically Main and East Hastings although there are other unsavoury spots available), I had the following thought:

In countries that have free markets and private property ownership (USA, Canada), the majority of the city is “middle class”. There is also the “upper crust” neighbourhoods (such as West Vancouver or Kerrisdale) but for the most part the entire city looks good except for the drug and crime-infested parts of town. People say that the cause for these parts of town is because of insufficient support from government to subsidize these “victims of society” and they advocate that government should do more.

In completely socialist countries (the former USSR comes to mind), when reading about these places and the standards of living that the people have there, it reminds me that people in socialist countries ALL (unless if you’re in government) live in conditions that we associate with the “bad” neighbourhoods we have in countries with relatively free markets. The only exception is that the crime rates (specifically that caused by the drug trade and usage of drugs) in these countries are typically non-existent for reasons I won’t get into.

In countries run by dictatorships, it’s even worse. The classic example is North Korea, where a small group of people control most of the country’s wealth while the majority of the people suffer.

So if by some miracle that you are a North Korean native and you manage to escape to Vancouver, the whole place will look very rich by comparison. Even walking through Main and East Hastings, the place will look good by comparison (ignoring the fact that people in dictatorships get executed for doing any crimes, let alone having the freedom to do drugs).

The next time you hear anybody complaining about the concentration of wealth in capitalistic countries, point no further than North Korea, where the top guy practically controls 100% of the wealth. I’d like to think that we’re safely far away from that.

ING Direct’s historical 5-year fixed mortgage rates – as bond prices continue to rise, long-term interest rates have come to an all-time low. It’s funny to hear the news talk about the low interest rates being a good excuse to buy housing, but the cold reality is that buying real estate in a low rate environment is the worst financial decision you could possibly make since the prices that you pay are excessively high. The best time to buy real estate is when interest rates are sky-high, but will drop in the near future. It also helps if the market is flooded with supply due to bank foreclosures.

Anybody considering buying a place in Vancouver should continue to rent since rates are dirt cheap with repsect to the capital costs of purchasing a place and then save up/invest their cash until rates rise. Real estate is a really easy market; you purchase when interest rates are high and about to drop, while you sell when interest rates are low and about to rise. Unfortunately, this leaves the question of predicting long-term interest rates, which is something that bond traders make their careers doing.

If you look at the historical Bank of Canada interest rates versus long term real estate values, you see that there is an inverse correlation between interest rates and real estate value. The reason for this is credit – people do not buy as much ‘house’ when interest rates are high since they cannot loan more money from the bank.

Supplying some real numbers will give you an example – at a 5% interest rate and 20 year amortization period, a $1000/month payment stream will be good enough for a $150,000 mortgage ($90,000 interest paid in total). This same $1000/month payment stream at an 8% interest rate will be good enough for a $120,000 mortgage ($120,000 interest paid in total). Heaven forbid, if rates go up to 10% (last seen briefly in 1995), then you can afford a $105,000 mortgage. Theoretically, when rates rise, you shouldn’t have to pay the interest rate differential (i.e a place that originally cost $150,000 in a 5% rate environment should head down to $120,000 in an 8% rate environment). This is financially advantageous because you don’t have to pay interest on the marginal interest savings. As a practical matter, markets typically oscillate beyond their theoretical price levels – so in our example, when rates shoot to 8%, the markets will typically sell the place for less than $120,000. This works in the other direction if you wish to sell the place again.

My intuition suggests that we’re going to see an increase of interest rates in the next 2-3 years that should be sufficient to depress real estate markets by about 30-40%. Those buying yet-unbuilt 600 square foot condominums in downtown Vancouver for $300,000 are going to get a negative rate of return on their investments.

I very rarely have comments about the sports world, but the Vancouver Canucks played a hockey game on March 8, 2004 that involved them being defeated 9-2 against Colorado. The big talk of the game, however, was not the score, but rather the fact that Todd Bertuzzi intentionally knocked out Steve Moore in the third period. This was performed by punching Moore in the back of the head and then diving on him to plant his face in the ice. Bertuzzi was immediately ejected from the game for intentionally injuring another player and suspended by the NHL office indefinitely while they investigate the incident.

This incident likely took place due to an incident against Colorado in a game on February 16, 2004 where Steve Moore took the Canucks’ Captain, Markus Naslund, out on a rather questionable hit. After this, Moore should have been always on his alert playing against Vancouver, but obviously he wasn’t very alert when Bertuzzi got his opportunity. Bertuzzi did take his opportunity with complete impunity – Moore was knocked unconscious and was taken off the ice in a stretcher.

Richard’s analysis of the situation ponders over two items. One is speculating whether the police would get involved. Legally speaking, players are liable for their actions on the ice, although considerably more leeway is given towards the interpretations of various laws (specifically assault comes to mind). The assault laws to a hockey player are interpreted just as libel laws are applied to a politician – with extreme latitude. There is some precedent for legal action in the sports community, specifically when Marty McSorley was convicted of assault when he decided to swing his stick at Donald Brashear’s face in the last three seconds of a hockey game. As there was no stick swinging involved in Bertuzzi’s case, I find it extremely unlikely that there will be any criminal charges laid against Bertuzzi in this instance.

The second item Richard mentions is that Bertuzzi should not be playing the role of enforcer in this instance, as his job is to score goals and create havoc in front of the enemy goaltender. I would agree with this assertion, mainly because there are more expendable people on the Canucks’ roster that the team can afford to be suspended for the rest of the season.

There is a wealth of information that has radiated via this saga and it can easily be explained in the context of game theory.

First of all, the NHL is a closed system with its players and governance. It should be able to enforce rules within its organization and be able to set the culture of the league. For example, to make hockey a “family game”, about 15 years ago management decided to concentrate on penalizing fighting and aggressive action so that they could attract more of a mainstream TV audience. The result is that hockey became an extremely boring sport consisting of neutral zone traps and a lot of clutch-and-grab style gameplay. Average goals a game scored dropped from 6.91 goals in the 1990-91 season to 5.31 goals in the 2002-03 season. I will argue that these changes were bad, but this is not the topic of discussion. What is relevant is that this is a massive change in culture and that the NHL has a lot of influence to affect the nature of the game, including scoring and aggression.

An important part of hockey is aggression. You want your big players to threaten the players on the opposite team so that your star players will be given latitude to score goals. Without the ability of players to threaten each other, there is no adequate method to keeping people off the star players other than using your stick and gloves and hence the number of goals per game is reduced. The only way you can threaten other players on the ice is through sheer physical intimidation which is difficult because there are greater consequences to the ultimate form of physical intimidation, using your body and fighting. Either you keep hitting them, or you fight. If you’ve got the other player outmatched physically, they will give you leeway for your star player to do his thing. With the culture change that the league has adopted, the ability of enforcer players to perform their job effectively has been limited.

On February 16, 2004 when Moore had the perfect opportunity of taking out Markus Naslund, he took the opportunity because he knew he could get away with it with relatively minor consequences. In fact, he did not get a penalty for his very cheap hit, which was a correct call by the referees. What should have happened is that the Canucks should have called in the wolves and go after Moore. There was no obvious opportunity to do so for the rest of that day.

This sent out an extremely bad message for the rest of the league. Specifically, it announced to the rest of the league that Vancouver is willing to sit around while enemy checkers can take out their star players. To a lesser degree, the announcement was also that any star players around the league were ripe for the taking simply because there were going to be no consequences for giving star players concussions.

This changed on March 8, 2004, when Bertuzzi took an extremely cheap shot against Moore for no reason other than what could be referred to as a “revenge killing”. Although Bertuzzi was not the optimal person to perform this act, somebody on the team had to take a fairly substantial and painfully crippling hit on Moore in order to establish that the team was not going to let anybody screw around with their star players. The fact that the player committing the deed would be suspended for the rest of the season was rather irrelevant – the net gain achieved by showing the rest of the league that nobody can screw around with Naslund will be more than worth the loss of Bertuzzi’s suspension for the rest of the season. In effect, Bertuzzi took one for the team.

You will see the reaction in front of the media to be rather predictable – everybody in the Canucks organization be apologetic, including Bertuzzi himself. But secretly, they will all be thinking that Bertuzzi did the right action. He had his opportunity and took it.

Just imagine if you were on a team playing against the Vancouver Canucks in a game and you see Markus Naslund in a perfect position to be taken out. Would you think twice before doing it knowing that the last person to try it ended up in the hospital a short month later?

You can probably see now that this is boiling down to a version of the iterated prisoner’s dilemma. The solution to this problem is to apply the tit-for-tat strategy – Vancouver played ‘nice’ until Colorado decided to ‘defect’ by going after Naslund; the response is to ‘defect’ in turn by either going after one of Colorado’s star players, or the player that hit Naslund.

What we are seeing today is a result of the anti-aggressive culture that the NHL has been imposing on the teams for the past 15 years. Aggression is part of the game – the games are getting ugly since this is the only way that teams can adequately protect the star players. Until the NHL can change the culture to accept aggression, messy incidents like this will continue to occur in the future which would make the fights you see on a 80′s edition of Hockey Night in Canada look tame by comparison.

The reason I say this is that all teams, not just Vancouver and Colorado, have to abide by the rules that the NHL give to them. And this means that in response to Bertuzzi’s takeout of Moore, Colorado is obliged to follow on with the tit-for-tat strategy and attempt to take out one of Vancouver’s key players. You can see how this will get ugly unless if the NHL gets smart and decides to allow teams to provide an effective deterrent to taking out star players. It’s just going to be a matter of time before we see somebody driven to a coma before the NHL directors will wake up and smell the coffee: a culture of non-aggression does not work.

I was thinking back to a conversation where a friend said that he thought he could win at Caribbean Stud. I have now modeled the game on a spreadsheet so that you can simulate multiple plays of the game at the touch of a button. The excel spreadsheet is here: Caribbean_Stud_Simulator.xls (350k). Instructions are included in the spreadsheet – just hit F9 to reseed the random number generate which will create a new game.

If you wish to extend the spreadsheet to simulate more than 120 games, just fill down the appropriate fields in the “Results” workbook and also the “Calculations” workbook. The reason why I included 120 games is because this is typically the longest a profile gambler would play around a table for – approximately two hours. The other reason is because a 5000 element spreadsheet would bloat to a megabyte compressed.

In the spreadhseet, I also included the ability to ‘walk away from the table’ given a maximum gain or loss. This also simulates a gambler’s behaviour – either they walk out with their profits or they walk out with nothing left in their wallets. I defaulted this to $200 in profits or losses, although typically a small-time gambler would choose to walk out if they lose $100. I also made the default ante size $5 which is the minimum of most casinos.

For people like me that are really lazy with their theoretical statistics, modeling expected values of games in excel is a way of getting the feel for the statistics. In this case, there are many interesting studies to be performed, such as:

• Assuming you hit the casino once a week for two hours at a time for a year playing exclusively optimally-played $5-ante Caribbean Stud, how much money will you lose on average? Answer looking at charts: Roughly $2,000. I knuckled under and did the expected value calculations – theory says $1,629.
• If you set yourself a ‘loss limit’ of $100, how many games on average do you play before you walk out of the casino? Answer looking at charts: Roughly 200. Theory: about 380. This one was especially misleading since there were some 1000-game simulations that still did not have the equity curve under zero and thus those improbable events lead to an increase in the average. Being human, I am unable to intuitively process the outlier events into my projections correctly.
• If you set yourself a ‘loss limit of $100 and decided to walk out of the casino if you had a profit of $100, how many games on average do you play before you walk out? Answer looking at charts: Roughly 150. Theory: I don’t have a clue.
• Given the above parameters, what is the probability that you will make a profit of $100 instead of a loss of $100? Answer looking at charts: Roughly 40%. Theory: I don’t have a clue. If you stuck a gun to my head and asked me to figure out any of these two points, I could probably piece together an accurate answer.

The point of this exercise was not to prove that Caribbean Stud is a losing game (that was done in another post), but rather to model the loss of equity that one would undergo if they did play this game. It is indeed clear that people who decide to hop into the casino could be mislead into believing that they are winning players after 10, 100 and sometimes even 1000 hands. After that, regression to the mean ensues and they start inevitably dipping into the red. Using this spreadsheet makes the psychological aspects of my friend’s claim easier to rationalize as his inability to comprehend basic statistics, rather than purposefully lying to me.

A jury convicted Martha Stewart on four counts of obstructing justice and lying in a federal inquiry. Despite this, Martha Stewart was on the record as saying:

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I am obviously distressed by the jury’s verdict but I continue to take comfort in knowing that I have done nothing wrong and that I have the enduring support of my family and friends. I will appeal the verdict and continue to fight to clear my name. I believe in the fairness of the judicial system and remain confident that I will ultimately prevail.

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The fact is that she was convicted of four crimes. She has done something wrong and she still refuses to admit this. This in itself is a sign that she is utterly delusional – believing that she was not guilty of lying to a federal panel concerning her sale of Imclone stock. As such, she has broken the law and deserves to go to jail. End of story.

The more she whines and complains about the trial, the stiffer her sentence will be since it will be obvious to any judge that she doesn’t realize the gravity of the crimes that she has committed. It’s ironic that she talks about how if the justice system is fair that they would release her. The simple matter is that the justice system did its job: Martha Stewart committed a crime and will get punished as such. To do otherwise would be the sign of an unfair justice system where only the rich can buy their way out of the crimes they commit.

Government press release: Tsawwassen Treaty One Step Closer to Reality – Summarizing the press release, the Tsawwassen tribe consists of 235 members located on the southwest point of the lower mainland. The provincial and federal government has negotiated a treaty where we give them approximately $10.1M in cash and the provincial government will contribute 1055 acres of land it presently owns to the tribe’s existing reserve. In addition, we will grant them a degree of autonomy (self-government) and guaranteed fish and bird supplies. In exchange, British Columbia and Canada will be absolved of any future liability concerning treaty matters with the tribe.

You can see a picture of the land that the government will give up on page 12 of the agreement in principle. This will officially become treaty in approximately 18 to 24 months. The area is in close proximity to Ladner and Tsawwassen, both technically part of the city of Delta (population of Ladner/Tsawwassen is approximately 40,000).

For those that do not know why the province is in these seemingly one-way negotiations, they have a site up at bctreaty.net. The history behind these negotiations stem from the argument that 240 years ago, the British Empire proclaimed that only they could claim land from the First Nations and when British Columbia joined Canada, the British Empire had only negotiated with 14 tribes. Fast forward 200 years later, the First Nations took Canada to the supreme court claiming rights under this royal proclamation. Today, we are attempting to resolve the matter by negotiating with the 70+ individual tribes within BC through the treaty process. Approximately 50 of them are actually negotiating; presumably the rest of them are taking it through court.

If you look at a map of tribal boundaries within British Columbia, you will see that most of the province is currently under negotiation. Ever since the Nisga’a Treaty was negotiated, this has opened a total can of worms in that it acknowledges that we’re in a losing position with respect to negotiations.

My big problem with this is that it creates two tiers of people: First Nations and everybody else. If we give away 4 acres of land to every qualified First Nations person, this is 10% of the province. In all other historical contexts (e.g. the territories of Finland, Germany, Japan after World War 2, and post of post-20th century Europe) typically the rule has been “what’s done is done”. Shouldn’t we be integrating and welcoming First Nations into our society and culture, instead of splitting them away and creating another class of citizen?

This is not an easy question to answer.