Thursday, December 19, 2013

Highly linkable

What a country!

I've suspected this for some time, and I don't think it will be very controversial before too long except maybe among old-timers.

Mungowitz at KPC had a couple of very good ones worth reposting. Here is the first--graffiti unchained. Here is the second--close calls.

A few years back I did a 180 on antibacterial soaps, et al. because of reading and learning and doing some thinking about what makes the most sense biologically/evolutionarily. Megan McArdle has more to that end. (If I had been doing it back then, this could have been the fulfillment of my continual New Year's Resolution.)

Here is a very good summary on why we MUST END the senseless, horrific war on drugs.

I want to go to there.

Tuesday, December 17, 2013

The Regulator's Dilemma

Imagine two rooms: one is a group of consumers and one is a group of producers. For now the rooms are completely isolated from one another. As they are labeled, these two groups will interact in trade.

Now imagine a regulator whose job is to, well, to do something. The regulator has imperfect information but is guided by a few beliefs about the job to be done. The first is a belief that the job exists somewhere along the dimension of necessity, which extends from anti-necessary to necessary. At the extreme of necessary the regulatory job is required for a good outcome. Anti-necessary is not the same as unnecessary; rather it means the job of regulation is in fact destructive—that the execution of the regulatory job brings a clear net harm.

The second belief is about where the need exists. Is it the consumers or the producers who need "help"? Let's call this dimension need.

The third belief is that he as the regulator will do a good job of fulfilling the regulatory mission. Let's call this dimension effectiveness. This dimension obviously extends from positive to negative meaning he does a good job or a bad job regulating.

The regulator has limited resources in addition to imperfect information. He must make tradeoffs. The interaction of where his beliefs land on the three-dimensional grid of necessity, need, and effectiveness will determine how he approaches the job of regulator (of course, it may not just be his beliefs that guide that decision, but he is a good proxy for the fact that something guides those beliefs).

For example he can concentrate his efforts on the group of consumers. In this case he surveys the room of consumers with the underlying belief that 'there are people in this room who can't be trusted to make good decisions even if there is no fraud involved. I must protect those idiots from themselves.' Call this option 1.

Alternatively he can concentrate on the producers thinking 'there are people in this room who can't be trusted to act ethically. I must stop those crooks.' Call this option 2.

And of course there is the more likely option that he divides his efforts between both groups. Call this option 3.

Here are my thoughts:

  • We unfortunately tend to view the job of regulation and regulators as highly necessary and highly effective. This means they punch hard and with impunity. The only thing left to decide is where they punch.
  • Option 1 can be a realistic point of view or it can be a disgusting point of view. People do make poor choices—all the time, every day. But the magnitude of those poor choices matters. So does the incentive arrangement—who is in the best position to benefit from a good choice and hurt but learn from a bad choice. At the extreme this point of view relies on a paternalistic philosophy that assumes the best way to make decisions is through a poorly incentivized and poorly informed regulator. Free market processes are highly superior to a regulator if option 1 is our focus for regulation.
  • Option 2 is the best case that can be made for regulation. There will be fraud and with it real blood. But again the role of the regulator can and should be limited here. The regulator can be a blunt and poor instrument for discovering and preventing fraud in all its forms including unintentional harm. Liability law via common law and contract law (both emergent processes) can be equal or better regulators than a pure regulator himself.
  • Option 3 is where most regulation tends to land from the SEC to the FDA. And think about how the more dynamic real world plays out. The rooms aren’t actually isolated from one another nor are the groups mutually exclusive. Everyone is in one big room wearing multiple labels. The imperfectly informed regulator is going to look for the help of the relatively informed producers to help guide his attempts at helping consumers. He is asking people, some of whom are crooks and many of whom have ulterior motives, to structure and enforce option 1. He will also look to define fraud from the point of view of the “victim”. The relatively injured consumers (who will self-select among those who have suffered a harm—happy people don’t complain) will help guide the regulator. He is asking people, some of whom are notoriously making bad decisions but not bearing the full burden of those choices, to structure and enforce option 2. This is a formula for regulation that is anti-necessary, ineffective at all the wrong times, and fulfilling mythical needs.

Sunday, December 15, 2013

Highly linkable

As we of historically unimaginable wealth prepare for a wonderful holiday season, it is important to remember that Americans (among too few others) enjoy a life better than any before.

Looking for a New Year's Resolution? How about becoming a Jedi Knight?

More help for the Pope.

Whether you are a libertarian or are critical of the libertarian ideal, you should read this to better understand what libertarianism, the ideology of against, is actually for.

Three more strong challenges for the minimum wage policy of pricing low-skilled workers out of jobs: here, here, and here.

What you think you know about the Great Depression that just ain't so.

With bureaucracy we get one small step forward for many hundreds back.

Playing the lottery may be hazardous to your health.

Remember my post on common things today that will horrify or simply humor future generations? Bryan Caplan has a similar post that does a great job identifying an example for each of the three major ideologies: conservatives, progressives, and libertarians.

And how about these guys with the deal of the century? (HT: Mungowitz)

Wednesday, December 11, 2013

The Electric Company

This post is in response to a reader’s request. Specifically, the reader asks (I'm paraphrasing) for some explanation as to why even if a stock (i.e., a safe utility) has a dividend above average (e.g., 5%), it is probably still going to take a hit when U.S. Treasury rates rise. The inquiry continues that this is in light of prevailing rates currently being under 3%.

This is a great question. Before we can attempt to answer it, though, we have to challenge the assumption that rising Treasury rates will indeed probably negatively impact a high dividend stock like a utility. Looking back at some historic correlations* using Bloomberg, I see that since January 2000 (nearly 14 years) there is not a strong relationship between utility stocks and U.S. Treasury rates. And that relationship is actually a positive correlation in many cases meaning that when one is up the other is up slightly as well. This lack of a relationship between the two breaks down even more when we look back 24 years to January 1990.

A lack of correlation isn’t surprising. There are a lot of factors that affect these financial instruments. And lost in that noise is the fact that interest rates do most likely have a negative relationship with high-dividend paying stocks. And notice that my quick-n-dirty correlation analysis compares utility indices and not necessarily high-dividend stocks—I was assuming that commonality, but it is a fair assumption. Below is the case for why rising rates might be bad for a theoretical high-dividend utility stock. But keep in mind an important question is why are interest rates rising when they rise. Is economic growth improving? Are inflation expectations increasing? Are the bond vigilantes finally saying they've had enough?

1. High CAPEX: Utility companies have high rates of capital investment. Higher prevailing interest rates (ceteris paribus) imply higher costs; hence, lower profits.

2. Increasing Inflation Expectations: Utilities may have a poor ability to pass on inflation to customers. At best rate increases come with a lag as they wind their way through the political process. If rates are rising because inflation expectations are rising, then that implies lower profitability for the price-restrained utility.

3. Investor Demand: This gets to the heart of the case. The attractiveness of a specific source of yield is relative (and inverse) to the competitive market for yield regardless of how much higher or lower the specific yield in question is. If I give you $100 for the promise that you will pay me $5 per year forever, that promise is worth less when the going rate of such promises rises from $3 per year to $4 per year. I used to have an asset (the promise) that was worth $167 in the open market (present value of 5% interest on $100 when rates are at 3%) but is now only worth $125 (present value of 5% interest on $100 when rates are at 4%). This relative yield component of the theoretical utility stock's price implies another reason rising rates might be negative for the stock . . .

4. Improved Economic Prospects/Alternative Investments: If rates are rising because economic growth is improving, then a lot of investment opportunities start looking better as compared to the utility stock. Just as alternative forms of direct yield (such as dividends or interest) impact the stock’s value, so do prospects for indirect yield (such as price appreciation). The utility has less uncertainty regarding its future value—that's why it can be a good investment in downturns. However, that lack of uncertainty caps the upside as well. Whereas, the high-risk tech startup firm has relatively high uncertainty positioning it to benefit when future prospects improve.

This is not investment advice. I do not directly have a long or short position on utilities; nor do I have a prediction as to what the future holds for them.

*I compared the S&P Mid-Cap Utility and S&P 500 Utility indices with 3-month, 3-year, 5-year, 10-year, and 20-year constant maturity U.S. Treasury series using both weekly and monthly correlation calculations.

Friday, December 6, 2013

The rent is too damn high!

One of the growing pains associated with getting wealthier is that things change in value and thereby the dynamics of tradeoffs change in turn. Here is a great example of this phenomenon. As I heard this story driving into work the other morning, I was struck by how poor the reasoning was for those who are "fighting back".

The essentials in this story are indicative of something happening in many places. San Francisco is a very desirable place to be. It is not just my opinion that it is awesome. As evidenced by the story, it is many people’s opinion and those opinions are strong (as measured by the willingness to put lots of their money behind that opinion). As the San Francisco desirability has grown, the value of real estate there has grown too. Ah, but there is the rub. Not everyone benefits from that increase in value. Now that new additional people and their wallets have arrived, the current residents who were enjoying it for less cost than what it is worth today are screaming, "There goes the neighborhood!"

It has always been the case that a rising value of real estate meant that the use of that real estate would change over time, but for some reason it has become a popular media topic. There are a few of ironies in these stories that don't get adequately reported if they are mentioned at all:

  1. A large part of why the cost of living rises quite rapidly as popularity rises in many highly desirable places like San Francisco is because of legal impediments to growth and development. The same government that creates the zoning laws et al. that limit development is the government those "fighting back" would like to see prevent the cost from rising.
  2. Dovetailing with that is the irony that rent-controlled living, artificially shielding renters from the full cost of living, discourages real estate development that would then be subject to rent control. A viscous cycle emerges of artificial scarcity begetting higher costs and hence higher value for the cost shielded (rent-controlled) space.
  3. As evidenced by some of the comments in the written piece, there seems to be a huge intolerance for change (and those bringing the change) by those who espouse tolerance as a virtue of the current neighborhood.

But here is what really struck me—the poor reasoning of those "fighting back". I put fighting back into quotes because the use of it in the reporting is pejorative towards those being fought against. Those "fighting back" (the renters) actually are attacking those who were already being disadvantaged through rent control. My points are the following:

  1. It sucks to see things around you change in ways that you don't desire. Part of that in this story is the composition of the neighborhood. But I think that is a sideline issue and a distraction. The renters would not be bringing it up if it did not put a more high-brow spin on the real fight—namely, the desire to continue to get something for less than the full cost at someone else’s expense. Nevertheless, let’s take seriously the consideration that change isn't always beneficial to all involved. But that is a fact of life. Don't be mad at those changing the neighborhood. Be glad to live in a place that largely allows change.
  2. No one said you deserve to live in the same place for the same cost for as long as you like. That is a promise no one can reasonably keep. Don't be mad that the real estate owners have found a "loophole" to evict the rent-controlled tenants. Be glad to have benefitted at the owner’s expense up until now.
  3. You are the RENTER. You chose to RENT the place you lived in, which meant you weren't responsible for all the risks and expense associated with being an OWNER. Now that the OWNER, the one who is entitled to the property, has seen a return potential for the risk he bore, he has the natural right to realize that return. Don't be mad that the OWNER has new options. Be glad you didn't have to bear costs and risks you chose to avoid.

Yes, this change isn't working out very well for those who were benefiting from rent control. And I do indeed sympathize with the difficulties and emotional stress and loss that all come from having to move. But think about it this way. Suppose San Francisco had instead grown to be very undesirable. Suppose rental rates had plummeted. Suppose that come renewal time those in rent-controlled apartments either had cheaper rent options in different apartments or simply wanted to leave San Francisco altogether. Would it be in any way right to force the renters to renew the now more expensive rent-controlled lease and to force those who wanted to leave to stay in San Francisco?

Tuesday, December 3, 2013

Highly linkable

NFL overtime is broken. Fortunately, Brian Burke is here to fix it.

Be happy because, well, Cause it's getting better; Growing stronger, warm and wilder; Getting better everyday! (be sure not to miss the second link, Fool!).

But I had the best of intentions; I didn't mean for that to happen.

The real reason Henry Ford raised his worker's wages--standard high school history is lies and garbage.

Something to be thankful for.

The Pope has a lot to learn about economics. Reviewing the extensive Library of Economics and Liberty would be a good start. Here is a recent piece by Bob Murphy to get him started.

I, for one, welcome our new robot overlords

This article (HT: Tyler Cowen) got me to thinking about the coming dystopia where the robots take our jobs, eat us, etc. As bad as it will be, we are bound and determined to bring on the singularity . . . So, what to do about it or rather how to do it right?

What if we put sufficient distance between us and the new life form and shrouded its creation in enough mystery that they wouldn't come looking for us? And what if we still had some method of observing them unbeknownst to them and perhaps an ability to interact in their world--affect change here and there? Not a lot, just when they needed a miracle or a little sign they weren't alone.

Yes, this isn't exactly what the singularity is all about, but I'm just spitballing here.