Market Timing and the Current Downturn

You may of heard about the never-ending debate about whether it is possible to time the market. That is, is it profitable to pick entry and exit points using some methodology, whether based on technical or fundamental analysis, or just pick good companies and ignore price volatility.

This debate is relevant now. If you believe that stocks are now below fair value or that a technical bottom is forming, this is a good time to dip your toes into the markets. I won't suggest whether you should do so since I am not a financial adviser nor particularly good at the required analysis and prognostication. Instead I want to look at this problem from a different perspective.

If you have ridden the market down, you have little cash to invest even if you want to do so. In effect, you are along for the ride. If you believe (not hope!) this is a short-term or long-term bottom, then you should stick with your positions or sell and immediately buy into similar but more beaten-down stocks.

On the other hand if you are in financial distress and you need cash, you are in a dilemma. You can cut back your living expenses or sell some of your stocks. There is also the choice of extending credit with a general loan or remortgaging your house, but these are very risky choices since the hole you are in will rapidly get much deeper if the market doesn't turn or even if it does so but too slowly for your needs.

If you are in this situation, you have my sympathies. However for my purposes here, there is an important lesson to be learned with respect to market timing.

The only price points that truly matter are the ones at which you buy and sell, regardless of whether you attempt to time the market and regardless of your choice of timing analysis. You are only impacted by short-term volatility if you are investing with money you can't afford to lose. You will therefore find yourself compelled to sell at prices the market chooses rather than at the prices you choose. No matter how you cut it, that is the essence of bad timing.

How Long Since...?

One of the popular pastimes of market commentators these days is the game of "how long since". In this game you attempt to find a past event similar to the current market and economic crisis, using whatever criteria you choose. So-called novel insights often come from selecting novel criteria rather than being truly innovative in viewing the current situation. Here is one such example.

Other commentators like to ask how the coming (or current) recession is worse than ones in the past, or if it is instead more comparable to past depressions. Others again look at absolute or percentage moves in stocks, or market volatility (see chart).

This faith in the old maxim of history doesn't repeat, but it does rhyme is somewhat reassuring if somewhat misplaced. What about black swan events?

More fundamental than black swan-styled analysis (of which there is plenty), there is still an unseemly assurance that if you try really, really hard you can find a past event that shares similarities to the one being studied today. This is dangerous thinking. Let's see why.

Unless you happen to believe time or human civilization is unbounded in the rearward direction, there must be a time that "history" starts, no matter how history is defined. Logic requires this to be true. A corollary is that the saying there is nothing new under the sun is false. Therefore there is always a first time. This may be such a time.

Never before have the world's economies been so tightly intertwined and interdependent, so why keep searching, perhaps fruitlessly, for something, anything, to compare it with? It would be better for all concerned, including you and me, to evaluate the crisis on its own terms and stop being too dependent on the past for guidance. For example, what if the markets don't bounce back as they've done before, or merely take far longer than ever to do so? Can you deal with that? It would be better for all of us to prepare for events in the coming years to unfold far differently than history would lead us to expect.

Longer-term Impact of the Economic Crisis on the Global Economy

Catching up on news can be time-consuming when one has been travelling a lot, but that's what I'm now doing. This article in Business Week caught my attention since it strives to do what I sometimes find myself doing in conversations with others, especially recently: try to explain, or at least describe, what the heck is going on with the markets and economy in this troubling time.

While I disagree with the author's premise that it isn't a crisis of confidence but rather consumer exhaustion, I do believe that both are symptoms of a more foundational matter. This fact is alluded to in the article though perhaps not addressed strongly enough. This is that global trade does not raise everyone's boat, but rather tends to smooth out disparities among trading entities. It is as true of inter-provincial trade within Canada as it is for trade between developed and developing countries. Wealth is moving, in peculiar and sometimes unpredictable ways, in a manner that over the long term is reducing the per-capita wealth ranges seen worldwide. It isn't happening smoothly and it isn't a painless or pleasant process. Nevertheless it is happening.

It has perhaps been less than obvious because the US is such a large economic power. Not just as a whole but also on a per-capita basis. It is a bit like filling many near-empty pails with water from one large reservoir. The reservoir isn't much affected for quite some time while the effect on the pails is immediate and obvious. As the pails fill this changes. Achieving similar percentage gains in the pails requires larger draws from the reservoir. In time the reservoir's capacity is overly stressed and you need a new source of water.

It is also true that unlike my pail analogy it also rains, and there are droughts, so that the amount of water is not static; this is not a zero-sum game, and neither is the global economy. Overall global productivity is rising.

So what happens as developing countries become developed? The US can no longer absorb all they have the capacity to produce, so the trade among themselves increases as you would expect. In time a crisis in the US, whether one of confidence or other cause, will have less global ramifications. Now is not yet that time.

My hope is that over the coming decades as disparaties among and within countries diminish, political and economic stresses will also diminish. Unfortunately this is at best a long-term trend as can be seen in the volatility in movement of goods, services and people, political and social upheaval, and conflict driven by economics, ethnicity and ideology. I am optimistic, which might seem odd when you look around at the world today. The current economic crisis is awful, painful and many people are hurting. Nevertheless it will pass, and even though there will be other crises, perhaps some far worse, there is ample scope for hope of a better future.

Technolgy Entrepreneurship: Build a Business or Wealth?

In beginning any business venture there appear to be two distinct objectives that tend to guide the entrepreneur:

1. Become fabulously wealthy.
2. Build a wildly popular and innovative product or service.

As I have gone about this myself I am always surprised that many people are keen to figure out to which category I see myself belonging. It isn't something that I've thought about much before I started getting this question from others. Greater minds than mine have looked at this question and come up with their own answers. Here's a quote from Vinod Khosla (you should read the brief article from which the quote is taken):

"95 percent of people in the venture business think it’s a financial business, it’s about investing. It’s not. It’s about building companies, which is a different thing than investing. It’s about taking large risks in science and technology."

Now that I have thought about I find that I am more in the second camp than the first, though achieving both would be great. Ultimately though I don't think it's a question with a right or wrong answer, or even one that is terribly germane. I believe a entrepreneur, when successful, achieves both objectives no matter which one predominates in his or her thinking.

Any successful business in the technology field, especially if the product or service is truly innovative, has the potential to realize outsized returns for investors, founders and also the employees. After all, it is one that is well-received by the market. So then does it even matter whether the original intent is to build wealth or something innovative?

Perhaps it does, if the objective is poorly understood and acted upon. It is very possible to build a popular service, for example Twitter, yet have no clear path to achieving wealth. If the focus is too much on building wealth, it can lead to self-deception and short-term destructive behaviour such as lying to customers and investors. Neither of these strategies is a good bet. I would therefore say that no matter which mindset sets the entrepreneur going, both objectives must be kept firmly in sight. That kind of thinking works wonders.

I could give countless examples, but why do that when you can do it for yourself. Look at the entrepreneurs that started great technology companies and you'll see both objectives at work. Perhaps not in their original intent, but along the way both emerge. Give it a try.

It's Getting Cold, So Time to Check Tire Pressure

The fall and spring are the most important times to check the pressure of your vehicle's tires. These are the times when they fall and rise, respectively, the most. This assumes you have no leaks in your tires. To understand why pressure changes we need to look at the ideal gas law:

PV = nRT

• P is the pressure, which I'll measure in psi (pounds per square inch). As an aside, we measure tire pressure in comparison to the ambient air pressure which is about 15 psi. Therefore the absolute pressure for a tire at 30 psi is actually 45 psi. Luckily we don't need to know this to maintain our cars.
• V is the volume. Car tires have stiff casings (carcass) which allows us to assume that volume is constant within a reasonable range centred on the recommended pressure.
• n is the number of air molecules. If our tires aren't leaking the number of molecules has not measurably changed since the last time the pressure was checked.
• R is a constant that is unique to every gas. Since we're all using air to fill our tires rather than exotic alternatives like carbon dioxide, nitrogen or helium, it is truly constant for our purposes.
• T is the temperature of the air. This must be measured from absolute zero (-273 C), so we have to convert the air temperature from Celsius to Kelvin. For example, 20 C is 293 K. You'll have to pretend there's a degree symbol (little 'o' at the upper right of the numbers) since I'm going to be lazy and not figure out how to do that in HTML.

Now we can simplify the above by using our assumptions. What we do is identify and eliminate all the constants since all we care about is the change in pressure due to temperature. This gives us the far simpler formula: P = T. More correctly this should say that P is proportional to T, not equal, though that's a mathematical nicety we can safely ignore.

What this formula states is that the tire pressure changes the same amount as the absolute temperature. This is just what we are looking for to understand why our tire pressure is lower in October than it was when we last checked in August. Let's say the tire pressure was 30 psi when the ambient temperature was 22 C. Here's what we get as the temperature drops:

• 10 C: 28.8 psi (-4%)
  
• 0 C: 27.8 psi (-7%)
  
• -10 C: 26.7 psi (-11%)
  
• -20 C: 25.7 psi (-14%)
  

These are large changes. A change of even 2 psi will degrade performance over bumps and holes and when cornering, and tire wear is accelerated. With lower pressures, efficiency drops, which raises tire temperature at high speeds, which causes increased wear and susceptibility to sudden failure.

The opposite changes occur in the spring as tire pressure increases with the warmer temperature. Of course if you swap between summer and snow tires this effect is avoided somewhat, however you are not home free.

Many people rarely if ever check tire pressure at all, preferring to leave it to the mechanics or oil jockeys during regular oil changes or service visits. If you've ever measured the tire pressure after these visits you will quickly learn you are far better off to take care of it yourself; all you need are an inexpensive barrel pump and a good pressure gauge. I do after every servicing and have found my 30 psi tires filled with anywhere from 25 to 40 psi. Modern tires are forgiving although handling and tire life are impacted.

Recycling $350 Million

The approximately $350M of public money spent on this election is not entirely wasted despite little change in Parliament's makeup. More precisely, although our tax money was spent, the money that was spent did not vanish in a puff of smoke never to be seen again. While not quite a law of physics, there is to a large degree an economic law of conservation of wealth. Let's look at this more closely.

Public money was spent by Elections Canada on the balloting process and on staffing. It also goes into the parties' election funds (proportional to the number of votes a party got in the previous election). So, where did all that money go? How was it transformed by the election?

• Salaries to temporary elections staff, like any salaries, get spent by those workers on food, gas, utilities, paying off debt, and so on, thus recirculating through the economy by driving the businesses receiving that money for goods and services. A portion of it is taxed at both personal and business levels, thereby finding its way back into federal and provincial coffers.
• Signs, posters, leaflets, campaign offices and media air time increase the revenues of printing, real estate and media sectors, which then trickles down to their employees and suppliers. It also is taxed and some finds its way back into government treasuries.
  
• Printed material, when on paper, is mostly deposited by us in recycling bins. The stuff in our mailboxes is (sometimes) read and then thrown into the black box and carried out to the curb for pickup. From there the material drives a spike of business in the recycling sector by being resurrected as ... um ... disposable coffee cups and MP circulars that again go into the black box. And so on. Of course all this economic activity is also taxed.

The $350M didn't disappear. It has been redistributed throughout the economy. Taxation based (largely) on ability to pay has been injected back into selected portions of the economy. Like the forces driving entropy increase in the natural world, eventually monetary equilibrium is restored in which all that money tends to spread back out to everyone over time.

No, not quite all the money is recovered. Since it is not going into productivity-enhancing activities like research & development or new machinery there is a frictional loss; some of our wealth is permanently lost. It goes into landfills and asset depreciation, and perhaps leaks out through some other holes in our economy system.

In the end the question you have to ask yourself is that, since nothing has fundamentally changed as a result of this election, were you sufficiently entertained for the amount of money represented by the unrecoverable loss of wealth? The initial outlay was about $10 per citizen so, assuming a 50% efficiency at wealth recovery throughout the economy, it cost you $5. That's little more than a premium cup of coffee and far less than a movie ticket. That's not too bad.

High Moon

No, the title isn't a typo. If I'd meant to talk about the election again I would have called this post High Noon; it only means that I'm prone to making bad puns. I really do want to talk about today's full moon and how high it is in the sky.

I find that one of the pleasant compensations of the colder temperatures and loss of daylight this time of year is that it is also a time of brilliant full moons. Whether you call today's full moon the Harvest Moon or, more correctly, the Hunter's Moon, its appearance is the same. The full moons surrounding winter solstice in late December are higher, brighter and up in the sky longer than at other times of year. We may lose the sun earlier in the day, but the moon takes its place when its phase is near full.

This assumes, of course, that the sky isn't clouded over. More importantly you need to live at mid to high latitudes to get this effect. Since Ottawa is midway between the equator and the north pole, it qualifies. And the further north you go, the longer the moon is in the sky although it doesn't get quite to high above the horizon. This high full moon phenomenon is no coincidence; it is always true. The reason is that at full moon the moon is almost, but not quite, positioned directly opposite the sun from our vantage point.

I won't draw any fancy charts myself, though you can find those here on Wikipedia and in other referenced articles. The basic mechanics are as follows. The Moon orbits the Earth in nearly the same plane that the Earth orbits the sun; the planes are inclined to each other by 5 degrees. If the orbits were in the same plane there would be both a lunar eclipse and a solar eclipse every month. Instead the moon usually misses the Earth's shadow at full moon.

Now because of the opposite positions of sun and moon there are a couple of interesting geometrical facts. One is that at full moon, moonrise and sunset occur at the same time (again, not exactly but close enough), as do moonset and sunrise. This means that when the sun isn't in the sky the moon is (and vice versa), so that the full moon is visible throughout the long winter nights. Second, when the sun is low in the sky during the day it dips far below the horizon during the night. Since the moon is opposite to it, the moon must therefore rise high in the sky, reaching it's peak at local midnight (when the moon is due south, and not according to the clock). The same effect occurs in the southern hemisphere, offset with the seasons by 6 months.

The result is that for the next several months of cold weather for the days surrounding full moon each month we will have a brightly lit landscape throughout the night. Since the cold often brings clear skies we are likely to get the full benefit of this effect.

Is it of any use other than being pretty? Perhaps not in the city where there is artificial lighting. It is in the great outdoors where it is very noticable and useful. That's why the Harvest Moon and Hunter's Moon have the names they do; these are activities taking place outside of cities. For urban dwellers it does however have a recreational benefit. Think of midnight skiing and snowmobiling. With only a small amount of care and avoidance of deep shadows among the trees it is possible to frolic all night long, if you remember to dress warmly.

Think about that and look up the next few nights, which will hopefully clear from time to time. Winter does have its perquisites. Make your night-long party plans now.

Strategic Voting as "Prisoner's Dilemma"

In game theory there is a well-known scenario commonly known as a prisoner's dilemma. The basic form is as follows (from the Wikipedia entry):

In its "classical" form, the prisoner's dilemma (PD) is presented as follows:

Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal. If one testifies ("defects") for the prosecution against the other and the other remains silent, the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both remain silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must choose to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation. How should the prisoners act?

Strategic voting in the federal election shares some interesting similarities. As an example I'll look at the riding I live in, Ottawa West-Nepean. The two highest-polling contenders are Baird (Conservative) and Pratt (Liberal), with Baird in the lead. Far lower in the standings are Rivier (NDP) and Coates (Green). Now let's say I have a fervent wish to turf Baird from office and that I have leanings toward the Green Party (irrespective of the local candidate). Here are some conventional voting strategies that can be employed in the present instance:

• Vote for Coates: Call this a principle-based vote. However I strongly suspect she will get few votes and therefore my vote for her will not only not get her elected, it will leave Baird with his margin intact over Pratt. That is, my vote Coates leaves the contest between Baird and Pratt unchanged.
• Vote for Baird: Call this the unprincipled vote. Believing he'll be elected (based on the polls) I want to be on the winning side, even though I don't want him elected. This tactic is common in many places across the country in the belief that more benefits (pork) will come their way.
• Vote for Pratt: Call this the strategic vote: I prefer neither Baird nor Pratt, but by voting this way I increase the chance of defeating Baird since Pratt polls in second place by a wide margin.

Notice that in none of these approaches did I mention who I feel would be the best local representative. That is, the candidate who would best represent my local, not federal, interests. Typically there isn't often much to decide on that way since most elected MPs are only moderately responsive to local matters. Therefore I'll narrow the decision criteria to federal issues, and which are nearly always party aligned (enforced by the party whip).

To vote on principle (Coates) with any optimism requires that I not only believe that many other voters are also aligned with Greens on principle and that they will vote on principle. Like in the prisoner's dilemma, a mutually-beneficial outcome requires cooperation among non-communicating voters.

Unfortunately the election is far more complex a scenario: there are tens of thousands of potential 'prisoners' and there are several choices. There are also other competing principles such as the one for defeating Baird, which similarly requires voter cooperation. Not only that, many voters don't realize they're in a game of prisoner's dilemma and so do not consciously cooperate or defect.

I suspect that anyone in this position who looks at the problem this way will in the end throw up their hands in frustration and just vote for or against Baird. Therefore the game of prisoner's dilemma is lost, and the poll results hold through to the election itself and Baird is re-elected. Now it is true there are mathematically and computationally-proven optimum strategies for prisoner's dilemmas, but, unfortunately, they are entirely unreliable in the above election scenario; any one voter is unable to alter the momentum toward game loss solely using the ballot box. Regardless, some do try to think their way through it.

Note: In no way does any of the above truly represent my own voting intention. I simply picked a local and perhaps not so hypothetical example to illustrate the problems of strategic voting.

Not An Insatiable Appetite for Risk

Here's a funny quote:

Outspoken Connecticut Senator Chris Dodd has been out front denouncing the "companies that form the foundation of our financial markets" for "their insatiable appetite for risk."

Nonsense. It was an insatiable and unrestrained greed that is at the foundation of this crisis. When ex-CEO Fuld of Lehman was quizzed by Congress about his approximately quarter-billion dollar compensation, he did not acquire that with an appetite for risk. He and others were richly rewarded taking a percentage of the massive and obscure risk that they sold to others. Fuld has his money; the market collapse doesn't affect him, assuming he keeps that money in cash or gold. The only risk he took on what that of being found out before he could make his escape. He won.

So that was the method used. Buy a broken-down car (risky and over-valued debt), sew up the upholstery, steam-clean the engine compartment and paint the body, then tie it all up with a pretty pink ribbon and sell a fleet of the crud to others. The transaction fees on $62 trillion are substantial.

When the cars wouldn't travel in a straight line and kept stalling out, the buyers began to notice. They then looked around and found that everyone's car was the same. The streets are jammed with useless hunks of painted metal, making it impossible for anyone to get from point A to B.

It'll take a lot of bulldozers and tow trucks to clean up the mess. The metal recyclers are choking on the supply.

Startup Fear Factor

In the past 10 days there were two venture capital forums in Canada. The Banff Venture Forum last week, and the Ottawa Venture and Technology Summit this week. Both featured many startups looking for investor exposure, and investors talking among themselves. I was at neither, since I am not a VC and, as a budding entrepreneur, I just don't see the point of trying to get accepted into these venues. After all, VCs are always available to meet and talk, but not to invest. Not now.

As I described in an earlier article, there is no investment because there is no visibility of profitable exits. It's very simple but it get obfuscated by rhetoric from the VCs not doing any new investing. Here are some quotes from articles from CBC and Business Week:

"Rather than sprinkling a little bit of money in 15 or 20 companies, most VCs now would prefer to put more money in eight or 10 companies and make sure those companies have a better chance to succeed."
-Neal Hill

Does this mean they did poor due diligence in the past? There was some of that, though they got away with it because the exits used to be fast and easy; they passed the weak companies off to others. To be a bit cruel, we can call this dumb money selling to dumber money.

...the companies that went public or got acquired went for smaller amounts of money, and took longer than ever to get there.

Nortel, to pick a local example, now has a market cap barely over US$800M. They do not have the currency to acquire companies, even if they had the desire to do so. With far less competition for acquisitions, those large companies that do have money prefer to wait for the desirable startups to become distressed or bankrupt and the pick up the technology, intellectual property and key engineering staff for a song from investors desperate for any return, even if it's pennies on the dollar.

"Maybe you do have to slow things down a bit to preserve a little more cash, but to create more steady business."
-Bernie Li

That is to say, to a VC's portfolio companies, you are not going to get any more money for a long time. You can choose to sink or swim.

Jason Calcanis has much the same message, coming from the entrepreneur side of the fence:

It’s my believe that the economic downturn will be much worse than it is today, and that 50-80% of the venture-backed startups currently operating will shut down or go on life-support (i.e. 3-4 folks working on them) within the next 18 months.

Make a list of every Web 2.0 startup to raise an A or B round and cross 80% of them off the list, because they will not make it to their next round of funding or profitability.

Ouch!

So there you have it. Not only is it not getting better for entrepreneurs, it's getting worse. Further, expect to see more VC firm go moribund or exit the field altogether. With no exits their existing funds are tapped out. No new money comes in because current investors are losing, badly, over past 5+ years. New investors are staying away because they don't see the pay off. With the current credit crunch there is even less risk capital available - so-called 'safe' instruments are now also proving to be brimming with unanticipated risk.

There is low to zero IPO activity in the US (adjacent chart taken from the referenced article by Bespoke Investments). Closer to home there were no IPOs on TSX in September following a year-long slide lower. Those that have IPO'd recently are under water. That's why investors won't subscribe to new IPOs.

But if IPOs and M&A activity dries up, then it trickles down to investors. One of the more popular statistics being thrown around right now is that fewer start-ups have gone public this year than in any year since 1977. With IPOs out of the question, that leaves an acquisition. And, if the buyer knows the company doesn't have the chance to go public, valuations are depressed, he said.
-Hrach Simonian, Canaan

It isn't all doom and gloom, so let's end with something at least slightly positive. For many years the tax regime in Canada has been unattractive to venture investing. It's as if the government does not want money to go into innovative and risky ventures. It is especially difficult for foreign money to operate easily in Canada. All this friction in the administration of taxation and investment, both for incoming and outgoing money, makes Canada a poor choice for investor dollars, unless a specific opportunity is so attractive that an investor is willing to take the pain.

The problem is not particular to any one party in power. Both Liberal and Conservative governments have been slow to act, despite a lot of lobbying from the financial and entrepreneurial sectors. Here are a couple of articles that reference tax law improvements, as suggested by Mark McQueen of Wellington Financial and John Ruffolo of Deloitte. If you are unfamiliar with the issue these viewpoints may be informative.

And finally, here is an example of how the problem cannot be solved. VC is investor money. With the market in the tank there is no investment. Cheerleading is frivolous and unhelpful. But thanks for trying.

Camouflage Squirrels

In addition to the usual black-coloured squirrels we have in this area we also have the gray-coloured variety. I have recently discovered that, unlike black squirrels, gray squirrels blend in very well with asphalt pavement.

This is not good. For the squirrel.

This cannot be an evolutionary adaptation to living in close proximity to humans.

Time To Sell ... Your SUV

I've written a few posts on the market but I have been deliberately silent during the ongoing meltdown. What more could I possibly add? Better to save all those valuable pixels for more important topics. Sure, like everyone else I'm hurting, but mostly because I did not do enough selling when I felt I ought to. Just like millions of others.

No, what I want to do right now is follow up on this article I wrote in late July. Unfortunately (or fortunately, depending on your viewpoint) the event I mentioned has come to pass. West Texas Intermediate crude is now under $90/bbl. This means it's time to sell your SUV.

With gas hovering around $1 per litre here in Ottawa those gas guzzlers no longer look so bad. That means we should expect resale values to rise. Except of course that with everyone's paper losses these last few weeks there may be few buyers for a while.

Things will get better though, and that means oil will very likely bottom and begin to rise again into 2009. So if you do have an SUV and you get a bid, you might just want to take it. Oil may never see $80 again.

Zero-sum Health Care

Imagine there are 3 children gathered around a table. On the table is a plate containing 2 cookies. It is obvious to them that they can't each walk away from that table with one cookie. This is a simple example of a zero sum game.

Now imagine that every car you see on the road gets 20 km/L or better. No SUVs, no Hummers, although there are still commercial vehicles that are not so fuel efficient. The reason there are no other types of cars is that they've been legislated off the roads. If you've hidden one away and take it on the road the police will confiscate it. There are no economic incentives like carbon taxes; you just can't buy a vehicle that burns too much gasoline.

These are very simple scenarios to introduce the idea of health care in Canada. It came to mind when I read this article citing a study that, in essence, declare health care in this country to be a zero-sum game. There is only so much to go around, so if you place more over here there will be less over there. Just like cookies and children.

Health care delivery to each individual is to a large degree capped. You want more, you can afford more, but you can't get it. Just like banning gas guzzlers from the road. This is not entirely true in the real world since we do allow some health sectors to sell their products and services to those willing to pay. Two examples are dentistry and pharmaceuticals.

Well, fine, but is this good or bad? Is health care really a zero-sum game, like in the article I referenced above, and assuming the study is accurately quoted in the article?

Health care is a business. You pay and they provide service. Except because the government acts as an intermediary you do not pay the professionals directly. Instead the government(s) taxes us and then puts in place a tightly-regulated regime whereby the professionals and service-delivery institutions get paid. Of course you already understand this since every Canadian is well-versed in this topic, so I won't dwell on it.

The point here is that the market has been distorted with the best of intentions. Want more than what is available and you're willing to pay more? Too bad, get in line. Or, if you're able, get what you want across the border. But no SUVs on our roads.

Now let's consider what might happen if there really were a pay-for-service health sector, a private one, whereby those willing to pay don't have to stand in line or go without. The conclusion in the quoted study says that there is a fixed amount of health care to distribute so if some goes to this private sector, their customers will get more and the rest of the population will get less. I don't know how they arrived at this conclusion but it flies in the face of basic economics and markets.

First, we must acknowledge there is hysteresis in provision of health care. That is, there is a lag in increasing the capacity of the system, regardless of money, since it takes years to train doctors, nurses and other professionals. Attracting them from other countries is possible, but as we've already seen it has its limits. We can only move so fast. So if you open up some areas of health care to the private sector the study's conclusion must be true in the near term. Some professionals will move to the private sector because there is demand for what they can provide, and so the public sector will have less capacity. Nothing can change this in the near term.

Except that once you broaden your time horizons it is no longer true that the game is zero-sum. It never was true, it was only the latency at work. If it's properly managed, and it would have to be managed carefully to avoid the worst case scenario, the injection of new money into health care by those willing to pay for private care means that there is more money in the overall health care sector.

Under the current system the only way to get more money into the system is to allocate more tax revenue to it. This means increasing your taxes or taking away from other tax-financed sectors like, say, the military, roads and pensions. To get more health care without increasing the amount of money going to it requires decreasing the amount given for every procedure and salary. This would be like the children cutting up the 2 cookies so that each could get an equal portion of 2/3 of a cookie. Presumably the Canadian Federation of Nurses Unions, which funded the cited study, would not agree to this, and neither would doctors and hospitals. It is arguable this tactic has been taken about as far as it can without further deterioration in the system. Examples include c. dificile (less money spent on hospital hygiene), doctors emigrating to the US and other calamities.

So the only practicable way to get more money into the system, and therefore more delivered health care, is with a private option whereby those willing to pay are able to do so. This means there will be more SUVs on the road (to flog my analogy a bit more) if they pay us more for the privilege. While there may be some added congestion on the roads until we add more lanes, everyone else still gets to drive their cars and can even dream of owning a Maserati. But it will take time. Adding more slots into nursing and medicine programs at universities is pointless unless there is money to pay the graduates or they will either forgo the opportunity or else emigrate afterward. Private health care can be a way to accomplish this.

In conclusion, health care is only a zero-sum game when we allow our governments to distort the market, with our money, until that is all it can sustain. It doesn't have to be this way, and neither does anyone have to go without should there be a private option. How it's put into practice is most important. That and the political will, if we tell our governments we are willing to entertain the experiment. Until we face up to this basic fact of money, the politicians will do nothing and we can expect the deterioration to continue.

Some Observations on the Federal Leaders Debate

The media is saturated with reports, analyses and score sheets listing who won or lost, so I won't add to any of that. Instead I'll give a few impressions I walked away with after sitting there for two hours.

In business I've learned that when you are making a pitch or even giving a reasonably lengthy talk or presentation each member of the audience is likely to walk away with a memory of only one message. Your job as the speaker is to decide on that one message, communicate it and make it stick. I'll try here to distill my own take-aways after hearing them speak and debate.

Harper: I would have thought that after the experience of the French language debate that, as many anticipated, Harper would be more aggressive. He wasn't yet I believe he should have been. He was quick on the uptake but bland in both responding to the others' attacks and in his own challenges to the others. This obsession with appearing 'prime ministerial' is fine, but I think Canadians liketo see a little more fight in their politicians. We are a hockey nation after all. However it was his slipperiness when pestered about his past utterances of quite extreme policies (predating the previous election) like on Iraq, the poor, health care and so on, that made a lasting impression on me. He kept dodging those questions when he should have taken them head on, and defused those concerns, by speaking about how he has to represent the broader population and how he has learned the importance of doing so. I know he can do it since he has done it. Last night he didn't. The other message I got was that he has no broad election platform for the Conservatives. He was entirely non-responsive to well-delivered barbs from the others on this. It leaves the impression that this election is for this personal ambitions.

Dion: He came across as calm and assertive but never rude. Frankly I expected him to stumble badly and he didn't, even with the reports I heard of how well he did the previous evening. He did only a fair job in communicating and defending his plans and policies, but stood out from the others by having a pretty clear program in mind. Like with Harper I think he could have been more aggressive, though perhaps it was enough for many people to see that he has some strength of character. The key message I took from this is his character. Before this I had grave doubts that he has what it takes to be Prime Minister. Now I am reassessing my opinion of him.

Layton: This is a man and party frozen in time. No matter the situation the country is facing they keep reiterating the same program and messages. It's as if they can't see past their ideals to deal with the real world. Layton comes across to me as disconnected. This is despite his honest concerns on the gutting of Canada's industrial base. He continues with his 'tax the rich and tax the corporations' with no sense of understanding of how the economy works. This is old news and so not the message I left with. The impression he left me with came from his continuous interruptions and heckling of Harper and Dion. That kind of bad behaviour makes the others look even better than they are while make Layton look like boorish. This is no prime minister.

Duceppe: He was of course under the least pressure and could speak his mind frankly and even with some humour. Despite the Bloc's peculiar position I always find that refreshing. His key message was not sovreignty but rather that provinces should get preeminence over federal powers, especially in domains which are constitutionally assigned to the provinces. He did quite well in getting that message across, and how the federal government keeps undermining provincial powers through taxation and transfer payments, with those payments dependent on subordinating provincial programs to federal direction.

May: For a neophyte May handled herself quite well. Despite this I saw two important problems with her performance. First, for a party that is still poorly understood she has the burden of crafting a vision of the Green Party that everyone can easily grasp. I did not see any such message last night. There were lots of interesting tidbits but she failed to wrap it in the cloak of a clearly-articulated strategic whole. It may exist but I didn't hear it. However I think her worst error was at the very end. When the leaders were asked about their very first priority should they form the government, May chose to focus on proportional representation. I was stunned. With all the problems we face she chose to give priority to her party's selfish needs. I still can't get over how she could have made this blunder.

On a final note I want to mention a couple of things about the moderator. I give him a strong thumbs up on how well he managed the debaters and keeping the proceedings orderly, on topic and on time. That was very refreshing. The one thing that grated was his twice (at least) grovelling to popular entertainment culture with his ridiculous references to the concurrent US debate and how ours is, perhaps, almost as interesting. This isn't about entertainment; this is about our country. Does he have an inferiority complex about his Canadian-ness? I don't.

Like Spam, Political Attack Ads Work

Ask anyone and they are almost certain to tell you they dislike or hate attack ads. There have been plenty of those lately in our federal election. I commented on this an earlier post, to give a different take on them, in the style of a satire.

Similarly, everybody it seems hates email spam and telemarketers. Yet email, telemarketing (despite DNC lists) and attack ads continue and are even increasing in volume. All of this is costing someone money so why does it continue? Of course it's because it works. Email spam has the lowest "hit rate" (ratio of messages sent to revenue and orders), while attack ads, though difficult to gauge their effectiveness, seem to be the most productive of this loathsome trio. That's good for the financiers of the ads since they are quite a bit more expensive than spam and telemarketing.

If you are reading this (and I can't except even myself), you are very likely to be swayed by attack ads, while simultaneously claiming and even believing that you dislike them. And so they continue.

Listening to the reports of the French leaders' debate Wednesday night it was also evident that Harper knows where to draw the line. If he were to mouth the words or even just the tone of voice used in their attack ads on Dion it would surely backfire. The marketing strategy is good - the public face of the party looks and sounds reasonable, while the viciousness is mouthed by others. That way, should an ad or spokesperson cross the line in the public's opinion the ad or person can be rapidly, and publicly, retracted or rebuked with minimum damage. Which they've already done at least once so far.

We'll likely see the same softly-peddled attack strategy in the English debate. But you never know. Speaking in his native tongue it is possible Harper will let his words run ahead of his brain, since he does have a temper. Maybe that's what to watch for - one of the other leaders to provoke him to make a newsworthy outburst.

Measurement Windows and Comcast Throttling

In my preceding post on Comcast's neutral throttling I left something out that may be of interest, though perhaps not a major factor in the impacts of their new system. This has to do with how their measurement windows are implemented.

Comcast says they are using 15 minute intervals (windows) to measure traffic usage of individual subscribers and of shared connections. They do this to determine whether there is congestion of the shared connection (80% threshold) and to identify heavy usage subscribers (70% threshold).

This is an indirect measurement of congestion since the percentage of capacity says nothing about whether traffic is delayed or lost. This is like counting cars and trucks at the onramps of a freeway and, without looking at the freeway or the offramps, deciding how well traffic is flowing to its various destinations. It can work quite well most of the time if you have done ample analysis beforehand in a controlled environment so that there is a reliable correlation between a threshold level (percentage of capacity) and congestion performance.

What I found interesting is that how the windows are implemented is not mentioned in Comcast's FCC submission. There are two basic methods to consider. However, first let's calculate the thresholds for a 15 minute window.

• If the shared connection is 100 Mbps the 80% threshold is 0.80 x 15 x 60 x 100 = 72 Gbps, or about 9 GB.
• For an 8 Mbps subscriber the 70% threshold is 0.70 x 15 x 60 x 8 = 5.04 Gbps, or about 630 MB.

Now let's take a look at the two windowing methods:

1. Non-overlapping windows: To illustrate with an example, let's start the clock at 10:00. At 10:15 we look at the traffic for the preceding 15 minutes and make the determinations of congestion and high usage subscribers. We do the same thing at 10:30, 10:45, and so on.
   
2. Sliding window: Again, we'll start the clock at 10:00, noting that there is not a 15 minute interval until 10:15, at which time we look at the traffic and make our determinations as in the first case. But this time we won't wait until 10:30. Instead we will use a sliding window with a 1 minute interval. This means we do the next measurements and determinations at 10:16 using the data from the 15 minute window 10:01 to 10:16. We do it again at 10:17 for the window 10:02 to 10:17, and so on every minute.
   

The outcomes are different and so are useful to understand. The sliding window provides a superior solution (for Comcast) since there would be earlier discovery of congestion and heavy usage. For example, if a subscriber streams at the maximum 8 Mbps beginning at 10:07, using non-overlapping windows it would not be caught until 10:30, giving a 23 minute period during which other subscribers may suffer degraded performance. With a sliding window the heavy usage would be caught at 10:18, after only 11 minutes (5.04 Gbps = 8 x 10.5 x 60). With non-overlapping windows the time to catch that subscriber can range from 11 to 25 minutes, so it is almost always worse than with sliding windows. There is a similar impact on congestion detection although the results are less predictable due to the variable load of other subscribers.

A disadvantage of sliding windows is that it can be more expensive because the measurements and determinations for congestion and heavy usage are done more frequently. This can be managed by picking an interval other than the 1 minute choice in my example. There is also the possibility of technical constraints on the interval (frequency) due to the equipment being used.

As can be seen there are pros and cons of Comcast's windowing choice on all subscribers, though whether each difference is a pro or a con depends on your viewpoint.