Hal O'Brien

"Investors brace for dramatic accounting change. That sounds like a fantasy headline from one of the great geeky professions, but it's almost true."

That was the lead on the Lex column in the FT on Tuesday the 17th, when I started my new job. (We found a way to get a year's subscription to both the FT and the Economist using airline miles, so I'm reading them again.)

It's a fairly big deal. As Lex goes on:

"New rules announced yesterday on lease accounting will increase the average company's debt load by 58 per cent, according to PwC, the professional services firm, and Erasmus University.

The issue: with the right kind of lease contract, companies currently keep assets off the balance sheet that are both durable and vital to operations - for example airlines' aircraft and retailers' stores. But accountants are on the way to banning these operating leases. Almost all leases will see their assets and corresponding discounted present value of future payments put on the balance sheet. The result: the average retailer can expect a three-fold increase in debt levels. For Tesco, an extra £15bn of lease liabilities will be included into a pool barely £200m deep.

The results of the new rule, a joint project of the International Accounting Standards Board and the US's Financial Accounting Standards Board, may surprise many investors. But not lenders and credit rating agencies, which already make similar calculations. They will have to decide whether the new measure of the value of leases is better than their existing rule of thumb, multiplying rental expense by seven. PwC believes the official measure of the liability will be lower in more than nine out of 10 cases.

Uniform lease accounting will make balance sheet comparisons more accurate, but there is a wrinkle. The prevailing interest rate on which each lease's value is based will be set on the day the contract is signed. An unusually low discount rate translates into an unrealistically high liability for the duration of the lease, sometimes 25 years. In big portfolios, the distortions may cancel out. But investors reading financial statements still cannot afford to rest in lease."

There have been few "matchers" out there in the world. That is, few outlets have been picking up the story. One of them was Reuters, with this piece, estimating global impact at "$1.2 trillion in leased assets."

Another was this breathless piece at the Economist, describing the proposed changes as "shocking" in the headline. However they did make the timetable more clear: "(The changes are) up for public comment until December, but could be enacted as soon as June next year."

Why am I telling you all this?

Well, mostly because I can see political implications afoot. Mainly I see the possibility, if these changes take effect, that as corporate debt is then stated on balance sheets to skyrocket, we'll hear the refrain from the Republicans leading into 2012, "Of course Obama's bad for the economy! Look at how corporate debt has soared because of his policies!"

I want to plant my flag here and now, and tell you when you hear that, someone is either lying or misinformed. These changes are being driven wholly by the private sector, and reflect the market giving furtive borrowers their due.

Odds are I'm not exaggerating where I say this: You read it here first.

So, John King of CNN just walked through a scenario. Since CNN has called Ohio for Obama, the question was, Can John McCain get to 270 from here?

He gave McCain every remaining state except the Pacific Coast, and Hawaii.

266.

{blink}

That's it. It's all over except for the counting and the recriminations and blame on the Republican side.

Also, local races and issues. If you're on the West Coast, and you haven't voted yet, PLEASE do so... There are many highly important issues still contested.

But if Red Auerbach was Obama's coach, it would be time to light the cigar.

With one week to go before the event, here's the state of play in the election as of today, according to simulators and markets. Comparisons are to my previous roundup, on October 8th:

Princeton Election Consortium: Obama 363 electoral votes, McCain 175 (Formerly Obama 353 electoral votes, McCain 185, so Obama +10)

FiveThirtyEight.com: Obama 348 electoral votes, McCain 190 (Formerly Obama 347 electoral votes, McCain 191, so Obama +1)

Electoral-Vote.com: Obama 364 electoral votes, McCain 157, Ties 17 (Formerly Obama 349 electoral votes, McCain 174, Ties 15, so Obama +15)

Iowa Electronic Markets: Dem .86, Rep .14 (Formerly Dem .81, Rep .19, so Obama +.05) (one way to think of that is as percentages, but it represents the price of contracts out of a $1.00)

Intrade does both:
* Obama 364 electoral votes, McCain 174 (Formerly Obama 338, McCain 200, so Obama +26)
* Obama .88, McCain .12 in the contracts (Formerly Obama .71, McCain .29, so Obama +.17)

*^*^*

At this point, the changes are flat enough the question becomes, Are the polls accurate? (The one exception has been Intrade going from being a laggard to joining the consensus.)

Everyone else has noticed this, too:

Nate Silver of FiveThirtyEight.com, today: "Stop me if you've heard this one before."

Sam Wang of Princeton on 22 October:"In which I write of paint continuing to dry. There's just so many posts like this a guy can write. Today, Obama is still crushing McCain. Still. Crushing. McCain."

Perhaps the greatest irony: The numbers stopped drifting after the second debate, in McCain's much favored Town Hall format. The electorate saw him in that format, found him wanting, and haven't seen anything to persuade them otherwise since.

Thus, be careful what you ask for.

State of play in the election as of today, according to simulators and markets. Comparisons are to my previous roundup, on September 30:

Princeton Election Consortium: Obama 353 electoral votes, McCain 185 (Formerly Obama 313 electoral votes, McCain 225, so Obama +40)

FiveThirtyEight.com: Obama 347 electoral votes, McCain 191 (Formerly Obama 331 electoral votes, McCain 207, so Obama +16)

Electoral-Vote.com: Obama 349 electoral votes, McCain 174, Ties 15 (Formerly Obama 286 electoral votes, McCain 225, Ties 27, so Obama +63)

Iowa Elctronic Markets: Dem .81, Rep .19 (Formerly Dem .69, Rep .31, so Obama +.12) (one way to think of that is as percentages, but it represents the price of contracts out of a $1.00)

Intrade does both:
* Obama 338 electoral votes, McCain 200 (Unchanged!)
* Obama .71, McCain .29 in the contracts (Formerly Obama .64, McCain .36, so Obama +.07)

*^*^*

The second most obvious change (the most obvious being Obama's improvements): The spread between the different analysts has tightened from 52 electoral votes to 15. That implies the news has been so uniformly good for Obama that algorithms are becoming less of a distinguishing factor.

Intrade, by staying unchanged, has gone from being the most optimistic for Obama to the most restrained.

The title says it all: "Women View Palin More Skeptically than Men".

Basically, it's a breakdown by FiveThirtyEight.com of recent polling data regarding Palin. As I predicted, the guys are much more positive than the women about her. Nate Silver, the webmaster, professes to be mildly surprised. After scanning the (long) comment thread, I noticed no one had mentioned my angle, so I added my previous LJ post as a comment.

Back when Robin Cook resigned from the Blair government in the UK, I thought it was a turning point... Mostly because I thought Cook had the possibility of being someone around whom a new government could form, if Blair lost the confidence of the House.

So as I was thinking about this, I mentioned to Ulrika that Blair could probably count on Jack Straw, despite Straw's relatively recent (at that time) backpedaling on whether the UK would tag along on a war against Iraq if the UN Security Council voted against it. Which meant, I said knowingly, that Gordon Brown, the Chancellor of the Exchequer, was pretty much in the position of kingmaker. (as it, um, were)

So. So imagine my reaction when I read the following in yesterday's Financial Times:

"The political dynamic in the cabinet is less predictable. The spectacular non-resignation of Clare Short, the international development secretary, threw a lifeline to the prime minister. But it was the support of Gordon Brown, finance minister, that really mattered. A month ago the relationship between the two men was icy. During the past few days the body language between them has occasionally seemed almost affectionate. Once the war is over Mr Blair can remake his cabinet as he will. But he owes Mr Brown."

I would say, you read it here first, but I never got around to posting it. Still, not a bad call by an ignorant Amurrican.

...was a copy of the New Yorker.

Malcolm Gladwell has one of his think pieces, and as usual, it's well done. It's titled "Connecting the Dots", and it talks about the difficulty intelligence services have in making forward predictions. In particular, the article talks about a pattern: Intel makes a prediction/recommendation. Some catastrophic event happens (in the article: the surprise attacks of the Yom Kippur War and Pearl Harbor, 11 Sept 2001, Germany's attack on Russia). In the post-facto analysis, a "failure to connect the dots" -- that is, an incomplete use of the information in front of the service in question -- is damned as the reason the attack wasn't seen as coming.

Gladwell's big question about such a pattern is this: "Was this pattern obvious before the attack?" To quote a bit at length:

"This question -- whether we revise our judgment of events after the fact -- is something that psychologists have paid a great deal of attention to. For example, on the eve of Richard Nixon's historic visit to China, the psychologist Baruch Fischhoff asked a group of people to estimate the probability of a series of outcomes about the trip... As it turned out, the trip was a diplomatic triumph, and Fischhoff then went back to the same people and asked them to recall what their estimates of the different outcomes of the visit had been. He found that the subjects now, overwhelmingly, "remembered" being more optimistic than they had actually been... Fischhoff calls this phenomenon "creeping determinism" -- the sense that grows on us, in retrospect, that was has happened was actually inevitable -- and the chief effect of creeping determinism, he points out, is that it turns unexpected events into expected events."

This fascinates me, because at the same time, we keep hearing a mantra that, somehow on 11 Sept., "everything changed". The truth is, very little changed in general, even if much has changed in particular. What I mean is that the risk from terrorism is about the same today as it has been at just about every time since the fall of the Soviet Union (the former bankroller of the early Muslim/Arab terrorists). I was even in a series of posts about Iraq and Cuba on Slate. This is what I posted on 31 Aug 2001 (I'm responding to the italics):

Saddam, Castro, and others like them are operating with a few bricks shy of a full load.

These types of people are the very definition of unstable. If this country drops it's guard now it would only be a matter of days before the forces these facist leaders control will be on our door step."

If they are a "few bricks shy" -- which I agree with -- how are they competent enough to be a threat? Both Saddam and Castro are barely able to control their own countries, and both have just about zero capability to project force, short of terrorism. Castro will soon be dead, and we'll see what happens. Saddam is in power both because we haven't removed him and because the Iraqi people are unwilling to remove him. (One dirty little secret about politics is that every regime, regardless of how oppressive it is, rules with the implicit consent of the governed. No army has ever been able to contain a sufficiently enraged population.)

Readers may have noticed I have an interest in politics. :) Over time, I've made predictions, based on what I knew at the time. Sometimes I've gotten them right (I predicted Gorbachev would be the last General Secretary of the Soviet Union. I was right, but my predicted reason turned out to be accelerated. I thought he'd live as long as Brezhnev, die, and then the USSR would implode because it was basically a paper tiger. Little did I know how flimsy the tiger was... But in the 1980's, this put me at odds with just about everybody.). Sometimes I've been very wrong (Examples: I had no idea who would win the election of 1988, but I was convinced it couldn't be George HW Bush. China would fall apart after the death of Deng Xiao-Ping, for similar reasons as the USSR. [I still think this likely, and the biggest driver of their Taiwan policy -- the Chinese can't afford to budge an inch on their "one China" concept, or else the whole imperial quilt of nations and groups will unravel.] Jeb Bush was going to fail in re-election as governor, because 2000 was going to be as damaging to the Republican Party in Florida as Prop 187 (anti-immigration) was in California.)

But, in the spirit of fighting "creeping determinism", herewith are my predictions about Iraq and Bush:

* Bush has made it clear we're going. So, we're going. Hard to tell what the justification will be, as that keeps changing every 15 minutes, but there you go.

* We'll never find any weapons of mass destruction (WMD) in Iraqi hands. That's because there aren't any.

* We may, however, a la the Rampart Division of the LAPD, plant some, so we can courageously "find" them.

* Bush's approval ratings will be stated to soar. You'll still know very few people who actually like the man or his policies.

* Iraq will be a pushover. Mostly because it doesn't have anything to really fight with.

* North Korea, which does have WMD and an advance position close to one of our allies, will continue to be treated in the wimpiest way possible.

* Despite high ratings -- and possibly even winning the 2004 election -- sooner or later there will be a huge scandal showing Bush to be the hypocite I'm pretty sure he is.

* A contributing factor to the scandal -- speaking of "connecting the dots" -- will be that knowledge is in the hands of one or more journalists right now that could blow the thing open... But it's being held back.

---

Some sidelights about these topics:

First off, our friends at USAToday are good enough to leave their archives online without charge. This means you can read a very interesting article from 10 Dec 2002, "Saudis will stabilize world oil prices if Iraq war begins". Here's the key quote:

"Despite... doomsday predictions, a war in Iraq would have little impact on world oil prices...

Those who argue prices will soar assume:

{among other reasons} Saddam Hussein could launch unexpected attacks on other oil-producing countries.

This cannot be ruled out, but is highly unlikely. Iraq's ability to extend its aggressions beyond its borders has been significantly reduced since the Gulf War, and the memory of Kuwait's burning oil fields has not been forgotten by states in the region. The Saudi government, for example, has devoted about $500 million during the past two years to improve its oil facilities' security and has set up defensive installations at key energy facilities in the eastern province. Even if some Iraqi attacks were successful, Saudi oil installations stretch over an immense area; the loss of a few would not cripple overall production.

This article is by... no, not anti-war activists. It's by a pair of oil industry consultants: "Edward L. Morse, who was the deputy assistant secretary of State for international energy policy from 1979 to 1981, is the executive adviser at Hess Energy Trading Company, LLC. Nawaf Obaid is a Saudi oil analyst and author of The Oil Kingdom at 100. His forthcoming book is Saudi Arabia Since 9/11."

Gosh... Think anyone in the Administration has ties to oil? {cough}

---

OK, Hal... If Iraq doesn't have any WMD, why doesn't Saddam just say so, and/or be more cooperative with the inspectors?

Answer: Iran.

Remember the Iran-Iraq War, if you will. Recall that it was a death struggle. Recall that Iran has a nuclear program of its own, one in which the Russians are helping.

Now, you're Saddam Hussein. Do you really think the West will help you if Tehran begins lobbing nukes your way? Do you think you might want some uncertainty in the minds of other countries in the region, most of whom hate your guts anyway?

Just a thought.

---

And here's a great big question for you:

If the Iraqis really do have WMD... Why is it Israel, who did do a pre-emptive strike against the Osirak reactor in 1981, which probably killed off Iraq's nuclear program right there -- Why is it Israel is doing and saying nothing -- nothing -- about the problem right now? Even though they're much more likely to be retaliated against than we are, come an actual shooting war?

---

There are other thoughts in my mind on this topic, but that's long enough for now...