tag:blogger.com,1999:blog-53750963450595907202024-02-18T20:39:15.924-06:00Jon Shayne's BlogJon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comBlogger181125tag:blogger.com,1999:blog-5375096345059590720.post-8215819556389618222019-02-22T08:37:00.000-06:002019-02-22T08:37:02.738-06:00Cassandra's CurseThis is a particularly nice passage on investing by James Montier, of GMO:<br />
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Now, of course, valuation is an excellent guide to long-term returns, and a terrible guide to short-term returns. This means that in the short term there is observational equivalence between being early and being wrong. I am regularly told either that valuation is irrelevant (or my favoured measures are irrelevant), or asked what the catalyst for a decline would be.</blockquote>
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As I have confessed on prior occasions, I seem to be afflicted by a rare form of Tourette Syndrome, where I am compelled to tell the truth, and so I reply that I have no idea what the catalyst will be. Indeed, think back to the tech bubble of the late 1990s (or any other previous bubble for that matter). Can anyone tell me the catalyst for the market having a Wile E. Coyote realisation? I can’t, even with the benefit of 18 years of 20/20 hindsight. </blockquote>
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In many ways, valuation seems to suffer Cassandra’s curse. For those who may have forgotten the tale, Cassandra was a priestess in the temple of Apollo. Apollo himself took a shine to Cassandra and decided to woo her, or more precisely to seduce her. In pursuit of his fancy, Apollo granted Cassandra the gift of prophecy in an attempt to win her over. However, Cassandra was a very chaste priestess and spurned Apollo’s advances. Being a typical capricious and vengeful God, Apollo didn’t handle rejection well, and cursed Cassandra. Rather than rescind his gift of prophecy, he ensured that Cassandra’s prophecies, whilst true, would never be believed. Valuation suffers a similar curse…just when it is most informative, it is least believed.</blockquote>
Montier thinks well, and writes well. The whole piece, titled "The Late Cycle Lament," and dated December, 2018, is online.Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-26549242814074528652017-12-11T12:44:00.002-06:002017-12-11T12:44:20.849-06:00Biology, not PhysicsI've mentioned <a href="https://www.bloomberg.com/podcasts/odd_lots" target="_blank">the Odd Lots podcast</a> before. It is very smart, and a lot of fun. The hosts are Bloomberg's Joe Wiesenthal and Tracy Alloway.<br />
<br />
<a href="https://www.bloomberg.com/news/articles/2017-12-03/odd-lots-an-mit-professor-explains-his-original-theory-for-how-markets-really-work" target="_blank">A recent episode is one of their best</a>. In it, Andrew Lo, of MIT, describes financial markets as a mix of both the neat efficiency described by neoclassical economics, and the messy emotion and misjudgment described by behavioral economics. Most of the time, market are fairly efficient, but on occasion, emotion takes over and fear or greed become dominant. That may seem like common sense, but I have not heard these two opposing views squared so well before.<br />
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One particular point Lo makes is that biology or ecology makes a better model for markets than physics. In ecology, there are things to count and measure, like the number of animals in a species and their weight, but there are also facts that are soft, and not readily modeled in equations. What does a species of animal feed on? What preys on it?<br />
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Switching back to investing, the advent of ETFs has increased the popularity of index investing, and this needs to be thought of ecologically. The growth in ETFs will hit its limit, as a proportion of the total, at some point. If you look only at price/earnings ratios, for example, it is hard to understand why the stock market has moved as it has. You have to look at the institutional structure of a market, too, which changes over time. Who are the players, at any given point? What are their constraints?<br />
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In other words, financial markets are complex adaptive systems, Lo says. They cannot be modeled fully, and are prone to breaking down. William White <a href="http://www.jonshayne.com/2015/10/is-monetary-policy-science.html" target="_blank">has said the same</a>.<br />
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Anyway, I recommend this episode. I get it on my phone's podcast app, but you can also listen on the web via the first two links above. If you get into it, you will also like the <a href="https://www.bloomberg.com/news/audio/2017-11-22/why-historic-relationships-in-markets-have-been-totally-upended" target="_blank">recent Odd Lots episode with Citigroup's Matt King</a>. King describes quantitative easing in a way that is entirely consistent with how Lo sees things.Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-31222043193611700152017-12-04T13:58:00.001-06:002017-12-04T13:58:57.307-06:00Analyses of the Senate and House Tax BillsTwo very useful sources for keeping up with pending changes in tax law are the Tax Foundation and the Tax Policy Center.<br />
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Those who believe that nothing is literally dead-center could put the first just to the right side of the line, and the second just to the left. However, both are are serious and non-partisan.<br />
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Here are the links from each that describe the latest on the tax bill that the Senate passed this weekend: <a href="https://taxfoundation.org/important-differences-house-senate-tax-reform-bills-heading-conference/" target="_blank">one post from the Tax Foundation</a>, and <a href="http://www.taxpolicycenter.org/feature/analysis-tax-cuts-and-jobs-act" target="_blank">one from the Tax Policy Center</a>.<br />
<br />Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-71588043956361275782017-03-14T13:11:00.002-05:002017-03-14T13:11:27.366-05:00Hard to Keep Both Populist Voters and the Equity Markets Happy<a href="http://www.economist.com/news/leaders/21718524-it-will-be-hard-satisfy-both-populists-and-businesses-are-stockmarkets-bubble" target="_blank">This well-written, short leader</a>, from the current issue of The Economist, gives an un-bubbly view of the stock market in the U.S.Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-32651479035915365022017-01-05T08:52:00.000-06:002017-01-05T08:52:04.223-06:00Shiller Interview<div class="MsoNormal">
<a href="http://www.fuw.ch/article/robert-shiller-its-time-for-interest-rates-to-start-going-up/" target="_blank">This is a good interview,</a> from last week, with the economist
Robert Shiller. Topics include the current state of markets, the economy, and animal spirits,
post-election. It is in the English version of <i>Finanz und Wirtschaft</i>.<o:p></o:p><br />
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While I'm at it, there was second good piece at the same site last week. <a href="http://www.fuw.ch/article/william-white-central-banks-cannot-reverse/" target="_blank">This interview,</a> on the hole central banks may be in, is with William White, former chief economist of the BIS.</div>
Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-47238060460096580212016-11-22T08:59:00.002-06:002016-11-22T08:59:42.013-06:00Arthur Demarest, on CollapseI am big fan of <a href="http://www.bloomberg.com/podcasts/odd_lots" target="_blank">Odd Lots</a>, a podcast hosted by Tracy Alloway and Joe Wiesenthal. They are editors at Bloomberg.<br />
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<a href="https://soundcloud.com/bloomberg-business/55-here-are-the-signs-that-a-civilization-is-about-to-collapse?in=bloomberg-business/sets/odd-lots" target="_blank">Their latest episode is an interview with Arthur Demarest,</a> an anthropologist at Vanderbilt who spends most of his time living in a tent at an archaeological site in central America.<br />
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Because he does what he does, Demarest has deep insights into what civilizations look like before they collapse.<br />
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One of his ideas is that florescence, which we see in the pyramids of the Maya, and in the art and architecture of the Renaissance, is often a sign of trouble, not health. Grand projects of this kind historically have preceded, and often contributed to, collapse. A related point of his is that even as highly specialized, hyper-connected economies create wealth, they are much more vulnerable to catastrophic disruption than simpler ones.<br />
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Demarest made similar points in <a href="http://www.pbs.org/newshour/making-sense/indiana-jones-collapsed-cultures-western-civilization-bubble/" target="_blank">an interview two years ago</a>. So, no, this is not about politics.<br />
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Recommended listening.Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-61927470754050435992016-11-11T16:26:00.000-06:002017-03-12T09:33:44.777-05:00Warren Buffett's Post-Election Views<a href="http://money.cnn.com/video/news/2016/11/11/warren-buffett-election-donald-trump.cnnmoney?iid=EL" target="_blank">New interview of Warren Buffett</a> by Poppy Harlow, from CNN.<br />
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The topic is the economy, and the world, after the election of Donald Trump as president.<br />
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Buffett has his concerns; he supported Hillary Clinton, and it is clear that he would have preferred that we had her finger on the nuclear button rather than Trump's.<br />
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On balance, however, Buffett is reasonably optimistic. He compares Trump to Harry Truman. Truman was not a great businessman, yet he still made a very good president.<br />
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Worth watching.<br />
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POSTSCRIPT of March 12, 2017: I was holding back my own views when I wrote this. Buffett's optimism after the election, which I do not share, surprised me.Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-84658030801480392642016-08-11T21:16:00.003-05:002016-08-11T21:16:50.556-05:00A Face in the CrowdI recently re-watched <i><a href="https://en.wikipedia.org/wiki/A_Face_in_the_Crowd_(film)" target="_blank">A Face in the Crowd</a></i>, the classic 1957 film. Elia Kazan directed. It is about how American society might react to the rise of a populist.<br />
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Wow! So much of it speaks to what is happening in the current presidential election. A great example of how good art gives us true insights.<br />
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Highly recommended. You can find it <a href="https://www.amazon.com/Face-Crowd-Andy-Griffith/dp/B008QCQG7K/ref=sr_1_1?s=instant-video&ie=UTF8&qid=1470765866&sr=1-1&keywords=a+face+in+the+crowd" target="_blank">streaming at Amazon</a>.Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-13102266014683015532016-07-07T16:30:00.001-05:002016-07-07T16:30:50.389-05:00Everyone Else is Doing ItA thought that is semi-deep, and a bit dark:<br />
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Normally, in finance, when “everybody is doing it,” it’s a bad
idea. For example, if everyone is piling into internet stocks, it’s a bad idea to buy them (because they will be overpriced). If everyone is selling, it’s a bad idea to sell (the shares will likely be underpriced).<o:p></o:p></div>
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But there’s a big exception to the wisdom of contrarianism, in the case of credit risk. If
everyone is taking a certain credit risk, you might want to go ahead and take
it. Why? Because if it goes bad, the government will bail you out in order to
prevent societal collapse.</div>
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If only a few people will be hurt by the collapse of money market funds, they are not safe. If everyone will be hurt, then they are safe not in the first instance, but in a second order way: because of the implied federal guarantee that their widespread use has brought into being. So because something is unsound enough (and big enough) to be a threat to the system, it is safe!</div>
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This is the sort of insight that almost physically repulses me. I do not recommend factoring it into an investment approach. Yet the world does work this way, sadly. At least in some areas, at some times.</div>
Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-22695783501399514292016-05-03T09:39:00.001-05:002016-05-03T09:39:07.465-05:00VCs and "Dirty Term Sheets"A recent blog post by Bill Gurley, <a href="http://abovethecrowd.com/2016/04/21/on-the-road-to-recap/" target="_blank">"On the Road to Recap,"</a> has been getting shared lately. It is well worth reading. The topic is the current excesses in venture capital, which appear to be in the process of deflating.<br />
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In particular, Gurley explains "dirty term sheets," which keep up the appearance of high valuation for a so-called unicorn.<br />
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There can be clauses in the terms of later-round capital raises that beggar earlier rounds, if certain contingencies come to pass. For example, the ownership percentage of those investing in the last round can go up (costing earlier investors) if the company does not make a public offering by a certain date. Such terms make valuation look higher on paper than it really is, because it is hard to make appropriate (downward) adjustments to a company's value for the presence of such contingencies. Human nature is to overlook them, as the post explains.<br />
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Gurley is saying that terms of this kind are a form of structured finance -- but for venture capital, rather than for mortgages. That is a really interesting way to think of this.<br />
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This is a likely area in which more problems will surface. Also, the post makes a persuasive case that there is pent-up demand for going public in Silicon Valley.Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-41275207333633398972016-04-20T12:16:00.002-05:002016-04-20T12:19:53.890-05:00Nice Global Shiller CAPE Tool<a href="http://www.starcapital.de/research/stockmarketvaluation" target="_blank">This page</a> from Star Capital in Germany is a great tool that shows the <a href="http://www.investopedia.com/terms/p/pe10ratio.asp" target="_blank">Shiller 10-year CAPE</a> (and more) for markets all around the world.<br />
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There is a <a href="http://www.starcapital.de/research/CAPE_Stock_Market_Expectations" target="_blank">related page</a> that turns the valuation into expected long-term returns.Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-55204924033385246442016-04-07T08:42:00.000-05:002016-04-08T16:03:18.731-05:00Wisdom on Sanders and Trump, from 1837History doesn't repeat itself, but it rhymes, as the saying goes.<br />
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American politics today is a decent rhyme for events from 180 years ago. When you read the following, replace "Republican" for "Whig," and think of the financial crisis of 2008:<br />
<blockquote class="tr_bq">
There were immediate reasons for youthful rhetoric and high drama in 1837. Throughout the spring, just as Martin Van Buren inherited the presidency, a terrible panic gripped the American economy. The price of cotton fell precipitously in the South, while banks suspended specie payments and unemployment climbed in northern cities. The panic severely shook public confidence and galvanized Americans to take sides, defining themselves both politically and in a generational sense. Whigs and Democrats bitterly blamed each other for the disaster. But for many young Americans, the Panic of 1837 exposed the bankruptcy of all American politics, and an older generation conducting its affairs selfishly.</blockquote>
The text is from the book <a href="http://www.amazon.com/Young-America-Flowering-Democracy-York/dp/0195140621" style="font-style: italic;" target="_blank">Young America</a><i>, </i>by Ted Widmer, published by Oxford Univesity Press. I am quoting from the 1999 edition. Ted is a smart guy: he got his Ph.D. at Harvard, is formerly the librarian of Brown University, worked in the White House, and is <a href="https://www.americanprogress.org/about/staff/widmer-ted/bio/" target="_blank">currently a fellow at the Center for American Progress</a>.<br />
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For a more timely view, I recommend Paul Solman, the economics correspondent for the PBS NewsHour. He recently interviewed Robert Reich, a liberal, and Charles Murray, a conservative, about the economic forces behind the rise of Sanders and Trump. What Reich and Murray say is consistent with 1837: there is now a general disillusionment with the establishment, grounded in economics, that transcends party, and that helps explain why the two breakout candidates are off to either side of mainstream. Paul's interviews with Reich and Murray, linked <a href="http://www.pbs.org/newshour/bb/is-economic-anxiety-fueling-trump-and-sanders-supporters/" target="_blank">here</a> and <a href="http://www.pbs.org/newshour/bb/why-economic-anxiety-is-driving-working-class-voters-to-trumpism/" target="_blank">here</a>, are well worth watching.<br />
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By the way, returning to the quoted text: Ted Widmer, its author, who is a friend of mine from college, used to play heavy metal guitar for a semi-famous rock band, <a href="https://youtu.be/ZRJlczjmTqE" target="_blank">The Upper Crust</a>. In the linked video, Ted is in the red coat, singing the second song. The band may be the answer to the musical question, what would <a href="https://youtu.be/84L7wRSg2Vk" target="_blank">Paul Revere and the Raiders</a> sound like, if they had graduate degrees? Recommended listening.Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-58297948442150750562016-02-16T12:34:00.002-06:002016-02-16T14:49:20.979-06:00Jamesian PlatonismThis is post is going to be at the wholesale, rather than retail, level. It applies to investing, and to anything else that requires understanding.<br />
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I would describe my philosophical stance these days, for the past decade or more, as Jamesian Platonism.<br />
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This is a school of thought that, to my knowledge, contains only one adherent. He happens to be the guy who blogs here.<br />
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So, what do I mean by the name, Jamesian Platonism?<br />
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From Plato, I take the idea that what we see and experience is perception, which only dimly, and only in part, reflects reality. Reality itself is always beyond our reach. And probably, reality is abstract and more like math than like daily life. If it makes any sense to speak of "ideas in the mind of God," I imagine them to be more like equations than prose. That is a way of thinking about something that is really beyond what our brains are capable of handling, so, do not take me too literally.<br />
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From William James, I get the idea that there is no reason to commit to any one school of thought. Somewhere, but I don't recall (or much care) where, James or one of his adherents says that philosophy is best thought of as a hall with classrooms on either side. We should not spend all of our time in one classroom. Use idealism when it helps; materialism when it works better. The whole idea of pragmatism is the willingness to use each philosophy insofar as it is useful, but not farther. Poke your head in and out of the various classroom, if, when, and as they are relevant.<br />
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OK, those are the ingredients. But, again, what do I mean by Jamesian Platonism?<br />
<br />
I think in some deep sense that Plato is right, that we can't see things as they really are. But because of that, we need all the tools we can to get a grip. So I take a Jamesian approach to trying to get the best grip on reality that I can.<br />
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My friend <a href="http://www.ft.com/cms/s/3/cbef9f6e-bdcd-11e5-9fdb-87b8d15baec2.html#axzz40MDQaOIA" target="_blank">Josh May</a> (gated <i>Financial Times</i> link) tells me that I need to give an illustration or two. Josh is rarely wrong.<br />
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So: an example in daily life would be that if you are navigating, there is no need to attached to any particular map. A map of Nashville is useful only if you are in Nashville, not Miami. And, for that matter, each map of Nashville will have certain flaws, and has to leave things out. Some show you where roads are; some show population density; some show tourist attractions, etc. Nothing can show it all, because the only truly accurate 3-D map of the city is the city itself, and that is too big to carry around in your pocket.<br />
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In investing, an example is the different ways of valuing the stock market as a whole. To pick just a few interesting ones, there is the Shiller 10-year P/E, the ratio of market value to GNP, and the ratio of market value to replacement value (Tobin's q). You can look at each of these assuming that alternative investments in the bond market are rationally priced, or you can assume that bonds may be mis-priced as well. The key is having some sense of the insights and limitations that characterize each method.Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-72823197797116298692015-11-04T09:43:00.001-06:002015-11-04T14:24:29.554-06:00The Other Shoe<span style="font-family: inherit;">My quick-witted friend, Josh May, is a close student of central bank policy in the US and abroad. More than once, he has opened my eyes to something that I was missing.</span><br />
<span style="font-family: inherit;"><br /></span><span style="font-family: inherit;">I told him recently that the </span>side effects of years of super-easy money are not known yet, and that I am expecting the other shoe to drop, some day. This seems, to me, like a pretty safe bet.<br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">He replied, “What if the guy upstairs only
has one leg?”</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">I still think a central bank has two, but, hmmm...</span>Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-33899140015386903802015-10-31T19:43:00.000-05:002015-10-31T19:43:28.640-05:00Quote of the Day: Science is Not Advanced by Polling<blockquote class="tr_bq">
<span style="background-color: white; color: #333333; font-size: 16px; line-height: 23px;"><span style="font-family: inherit;">But such exercises are futile: science is not advanced by polling. If it were, we would still be releasing phlogiston to burn logs and navigating the sky with geocentric maps.</span></span></blockquote>
<span style="background-color: white; color: #333333; font-family: inherit; font-size: 16px; line-height: 23px;">E.O. Wilson, in </span><a href="http://opinionator.blogs.nytimes.com/2012/06/24/evolution-and-our-inner-conflict/?_r=1" style="background-color: white; font-family: inherit; font-size: 16px; line-height: 23px;" target="_blank">this NYT piece</a><span style="background-color: white; color: #333333; font-family: inherit; font-size: 16px; line-height: 23px;"> from 2012.</span>Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-70647954639868452492015-10-07T11:30:00.000-05:002015-10-07T11:30:52.643-05:00Is monetary policy a science?<span style="font-family: inherit;">No, it's not. So says William White, in <a href="http://www.fuw.ch/article/central-banks-are-the-one-eyed-among-the-blind/" target="_blank">an interview earlier this year</a>.</span><br />
<span style="font-family: inherit;"><br />
</span> <span style="font-family: inherit;">White is the formerly the head economist at the Bank for International Settlements, in Basel.</span><br />
<span style="font-family: inherit;"><br /></span><span style="font-family: inherit;">Read the whole thing, but here is a short excerpt:</span><br />
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<i style="background-color: white; color: #333333; font-family: inherit; line-height: 21.4529px;">What would help to improve monetary policy?</i> </blockquote>
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<span style="background-color: white; color: #333333; font-family: inherit; line-height: 21.4529px;">I’ve become more and more convinced that the fundamental problem with the central banks – and for that matter with the broader economic community – is this insistence that the economy is a kind of machine that you can describe with many equations.</span></blockquote>
<blockquote class="tr_bq" style="background-color: white; color: #333333; line-height: 21.4529px; margin-bottom: 19px;">
<span style="font-family: inherit;">The reality is, that the economy is a complex adaptive system. Like a forest. The distinction between the monetarists and the Keynesians is nothing compared to this. The difference between all of these models and the kind of insights that you get from working with economies as complex adaptive systems are totally different. That is not yet accepted.<span style="background-color: transparent;"> </span></span></blockquote>
<blockquote class="tr_bq" style="background-color: white; color: #333333; line-height: 21.4529px; margin-bottom: 19px;">
<span style="font-family: inherit;"><i>How does a complex adaptive system function?</i></span></blockquote>
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<span style="font-family: inherit;">
If you accept this complexity, then you have to accept a number of things that most central banks have not yet fully incorporated into their thinking. One of them is: these systems break down all the time. If the economy is the most complex adaptive system that mankind has ever created, it will break down on a regular basis.</span><span style="background-color: transparent;"> </span></blockquote>
<blockquote class="tr_bq" style="background-color: white; color: #333333; line-height: 21.4529px; margin-bottom: 19px;">
<span style="font-family: inherit;">
Historically it has broken down on a regular basis. And, like the boy scouts, we should be prepared for it. Fact of the matter is, when we went into this crisis, we were not prepared for it. And it’s not much better now. There was no bank insolvency regime, no deposit insurance, no memorandum of understanding – all these things that should have been in place, but they just weren’t.</span></blockquote>
Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-16360502057545645722015-01-29T18:10:00.000-06:002015-01-29T18:10:09.897-06:00Proving a Theory by Imagining It to be True<div>
A highlight of the American Economic Association humor session, earlier this month in Boston, was a short talk by Zach Weinersmith. You may know his web cartoon, <a href="http://www.smbc-comics.com/">Saturday Morning Breakfast Cereal</a>.</div>
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Weinersmith's talk is to economics what <i>Spinal Tap</i> is to heavy metal rock 'n' roll.</div>
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A couple of key quotes:</div>
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"I only have about five minutes, so I'm only going to propose one structural change to society." (at 1 min. 23 seconds)</div>
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<br /></div>
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"Having
proven the theory both by stating it and by imagining it to be true, I
want to move directly to policy implications." (at 6 min.57 seconds).</div>
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<br /></div>
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It's good, and you can watch the video <a href="http://youtu.be/JZKd2tTReVg?t=1m23s">here</a>.</div>
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<br /></div>
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Full disclosure, I appeared earlier on the same bill, as Merle Hazard. I'm hoping no video surfaces of <i>my</i> bit. Hard to judge from the stage, but I do not think my five minutes went over too well. I had better keep my day job.</div>
Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-61112129389384702542015-01-20T16:21:00.001-06:002015-01-20T16:28:50.013-06:00Zero Interest Rate: Like Quantum PhysicsIt might be, says William White, formerly the wise and prescient chief economist of the Bank for International Settlements.<br />
<blockquote class="tr_bq">
When interest rates cannot go lower anymore, when they hit the Zero Lower Bound, monetary policy might work like quantum mechanics. Take this simple example from the world of physics: Classical Newtonian mechanics only work when the mass of a body is big enough. When the mass is too small, you are in quantum mechanics. These are completely different ways of looking at the world. The Zero Lower Bound might be the quantum mechanics of monetary policy. Things just do not operate in the same fashion. If you think things do operate the same way, you might make a very dangerous mistake.</blockquote>
This is from <a href="http://www.fuw.ch/article/the-monetary-system-is-dangerously-unanchored/" target="_blank">an interview with him last month</a>, in the Swiss newspaper <i>Finanz und Wirtschaft.</i>Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-83839956620603995362014-12-29T17:14:00.000-06:002014-12-29T17:14:00.917-06:00Demarest and Fischer on the Collapse of CivilizationsWhat kind of insights into the frailties of civilization would you get if you were a genius archaeologist, expert on the Maya, with a PhD from Harvard, living in a tent in Guatemala? <a href="http://www.pbs.org/newshour/making-sense/indiana-jones-collapsed-cultures-western-civilization-bubble/" target="_blank">Read this piece</a> in which Arthur Demarest, and his interlocutor, Ted Fischer, both of Vanderbilt, talk about how and why civilizations collapse. Gloomy stuff, with no prediction intended on my end, but interesting and well worth the time.<br />
<br />
The related <a href="http://www.tedfischer.org/category/thinktank/" target="_blank">audio podcast</a> is excellent, too. A highlight is the unusual, but persuasive, way in which Demarest thinks about ideology and religion. This comes up eleven minutes into the conversation.Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-5541560707897429652014-11-13T10:41:00.000-06:002014-11-14T10:00:26.128-06:00Worth reading: Greenspan and Tett<a href="http://www.cfr.org/financial-crises/alan-greenspan-central-banks-stagnation-gold/p33699" target="_blank">This discussion</a>, between Alan Greenspan and the brilliant Gillian Tett of the <i>Financial Times</i>, is well worth reading. It's an interview at the Council on Foreign Relations in New York two weeks ago.<br />
<br />
The former Fed chairman comments on the difficulties he sees when the Fed needs to remove the easing it has applied. His comments on gold are maybe the most surprising of all. (He seems to love it.)<br />
<br />
Surprising and thought-provoking stuff. I sent it to my clients recently.<br />
<br />
(There is a <a href="http://youtu.be/_mmL8X_2Ces" target="_blank">video</a> of the discussion online, too.)Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-33844495244275066392014-10-23T12:51:00.003-05:002014-10-23T12:51:57.236-05:00A Debate with Myself<div class="MsoNormal">
<span lang="EN"><span style="font-family: inherit;">Have the long-term, equilibrium valuation multiples of the stock market increased?</span></span><br />
<span lang="EN"><span style="font-family: inherit;"><br /></span></span>
<span lang="EN"><span style="font-family: inherit;">THESIS: in a fiat
money world, inflation insurance is worth paying a premium for. This raises valuation multiples like the price/earnings ratio and q (price / replacement value). Deflation,
which would hurt equities, is no longer much of a risk, now that it is so easy to create money.</span></span><br />
<span lang="EN"><span style="font-family: inherit;"><br /></span></span>
<span lang="EN"><span style="font-family: inherit;">ANTITHESIS: An arbitrage exists. If companies trade for more than it would cost to create them, <a href="http://www.smithers.co.uk/page.php?id=34" target="_blank">which appears to be the case now</a>, business people will start them, sell shares in public offerings, and pocket the difference. This is more apparent with the q ratio than price/earnings. And there is no limit to number of companies that can be
created and sold off. Prices will get competed back down to replacement value (or in other words, the q ratio will tend back toward a value of 1.0).</span></span></div>
<div class="MsoNormal">
<span lang="EN"><span style="font-family: inherit;"><br /></span></span></div>
<div class="MsoNormal">
<span lang="EN"><span style="font-family: inherit;">SYNTHESIS: </span></span><span style="font-family: inherit;">Fiat money creates the venture capital industry! or at least supports it.</span></div>
Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-73766568193600591732014-09-30T12:56:00.003-05:002014-10-01T09:11:02.757-05:00Advice to a Younger MeI sometimes try to imagine what, in my maturity, I would say to a younger me. What useful advice could the married-with-kids, 52-year-old Jon Shayne give to the me who was in college?<br />
<br />
For one, I could encourage the younger me to trust my own instincts more, and to worry less about what others think.<br />
<br />
Of course, that advice is easier to give than to follow.<br />
<br />
For the most part, I have a hard time coming up with anything useful I could tell a younger me. But recently, I figured out something that might have been useful, back when. A truly insightful bit of advice that the me-of-today could have given to the Jon Shayne of the early 1980s.<br />
<br />
When I was in college at Harvard, the course catalogue was very thick. It was a paper book of perhaps 350 pages. One of the courses was titled, "Compunications," with a <i>p</i>. My college roommate, John Rabinowitz, and I used to laugh about it. We never took the course; we were liberal arts students. We just noticed it in the catalogue. The name struck us as pretty ridiculous.<br />
<br />
This was probably 1981 or '82. The course description said that computing and telecommunications were in the process of merging, so much so that it would soon no longer be useful to think of them as two separate fields. According to the catalogue pitch, we should think of them as one field: compunications. The logic of this was lost on me, because John and I were too busy chortling about how the word sounded.<br />
<br />
What impresses me now is that the professor who created this course, whoever he or she was, was completely correct. None of us students had cell phones, nor personal computers. We still used land lines and typewriters at that point. But the professor apparently foresaw, in some sense at least, the internet and voice-over-IP telephony.<br />
<br />
So my advice to the young me: you can pretty much ignore the whole course catalogue, except for "Compunications." It is not as silly as it sounds. Quite the contrary. Master it, and you will have a lot of fun, and will wind up owning a few islands in warm, sunny places.<br />
<br />
Although I guess this rhymes with the advice, "Plastics," given to Dustin Hoffman's character in <i>The Graduate</i> (1967).<br />
<br />
Is there a moral here? Well, perhaps only that outlandish ideas are not necessarily bad. They are sometimes brilliant.Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-26488299353176924712014-08-15T12:40:00.001-05:002014-08-15T12:52:42.379-05:00Quote of the Day"Central bankers have had enormous responsibilities thrust on them to compensate, essentially, for the failings of the political system. And my worry is we don’t have sufficient tools to do that, but we’re not willing to say it. And, as a result, we push as hard as we can on the existing tools, and they may create more risk in the system."<br />
<br />
-- <a href="http://en.wikipedia.org/wiki/Raghuram_Rajan" target="_blank">Raghuram Rajan</a>, Governor of the Reserve Bank of India. In other words, he runs India's central bank. The quote is from <a href="http://www.ft.com/intl/cms/s/2/b049ce16-230e-11e4-a424-00144feabdc0.html#showclipthis-http://www.ft.com/cms/s/2/b049ce16-230e-11e4-a424-00144feabdc0.html" target="_blank">this interview with him in the FT today</a> (registration may be required). He used to be an economist at the University of Chicago's business school, and is former chief economist of the IMF.<br />
<br />
Rajan is famous for a prescient 2005 paper, <a href="http://www.nber.org/papers/w11728" target="_blank">"Has Financial Development Made the World Riskier?"</a> Larry Summers famously <a href="http://www.kansascityfed.org/publicat/sympos/2005/pdf/GD5_2005.pdf" target="_blank">derided</a> him when Rajan presented the paper at the 2005 Jackson Hole conference, but Rajan got the last laugh. (I love stories in which nice guys finish first.)Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-76457502883023147102014-07-25T13:02:00.000-05:002014-07-25T13:02:23.960-05:00How to Reduce the Volatility of Your Stock Portfolio, in Five WordsIt's easy: don't look at the prices.<br />
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<br /></div>
<div>
I was reading a piece about investing in farmland. The measured volatility of returns on land investments is very low compared to stocks, because you only get prices for land when you appraise it. And you don't do that very often.</div>
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<br /></div>
<div>
Hence, my idea, which is surely worthy of a Nobel Prize, or at least a MacArthur Foundation genius grant, on how to reduce stock market volatility.<br />
<br />
Of course, you can afford not to look only if you have not taken out a margin loan. (And that is one more reason not to take out a margin loan.)<br />
<br />
I'm not going to hold my breath waiting for the call from Sweden.</div>
Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.comtag:blogger.com,1999:blog-5375096345059590720.post-21432775874852392672014-07-24T12:08:00.002-05:002014-07-24T12:08:33.122-05:00Shadow Banking, DefinedMatt Levine gives a useful definition of "shadow banking" <a href="http://www.bloombergview.com/articles/2014-07-23/some-money-market-funds-will-have-to-be-honest-with-you" target="_blank">in a recent Bloomberg column</a>:<br />
<blockquote class="tr_bq">
Roughly speaking, "shadow banking" refers to the parts of the world that are <em>regulated </em>according to the capital markets view -- lots of disclosure regulation, much less capital-and-risk regulation -- but <em>treated by their investors </em>more according to the banking view, where the customers try not to think too hard about the risks. You can see why this would be scary: If regulators aren't worrying about the risks (it's not a bank!), and investors aren't worrying about the risks (ehhhh it's a bank!), then ... no one is worrying about the risks? That seems bad.</blockquote>
Levine's column is on money market funds.<br />
<br />
Shades of Donald Rumseld, known knowns, and unknown unknowns. It's o.k. to have a financial product that is regulated. It is also o.k. to have one that is unregulated, and known to be unregulated. But beware the product that is unregulated, but thought by investors to be regulated. That is the problem with retail money market funds.<br />
<br />
Money market fund share prices should float, even for individual investors. Stable values should be the province of regulated banks, not mutual funds.Jon Shaynehttp://www.blogger.com/profile/13077500444938727992noreply@blogger.com