Thursday, January 28, 2021

All Aboard!

Apropos of nothing in particular . . . 

Invest with the perspective that we are just passengers on trains. 

We are not the engineer. 

We are not a little kid laying out a model train set. 

We can choose the trains we board and the ones we avoid. 

Some are faster. Some have better safety. Some have more amenities. 

None are perfect, but some combinations are much better at getting us to our destination, and, importantly, we do not all have the same destinations. 

We cannot dictate the trains' schedules, speed, route, etc. 

We just have to accept what the trains before us are offering and decide among that option set--not an ideal, imagined one. 

We do not have to take the most popular trains if they aren't actually the right fit for us. 

Constraints are individual just like goals. For example, even though we both want to go from Los Angeles to Chicago, the Silver Streak may be best for you but not for me because I have a lot more luggage to transport and that train has limited capacity. 

It can be good to have a travel agent to help plan our trip, and a great conductor can help guide the journey. But it is us who have to decide, board, and endure the journey including if the train breaks down forcing us to find alternative options. 

Monday, January 25, 2021

Good Minds Resist Generalizing

Categorization is a natural and helpful way to navigate the world. Yet taken to an extreme it leads to very poor conclusions. Figuring out when the process is benign and helpful versus when it is harmful and nonsensical is high art--there such a fine line between essential black-and-white thinking and destructive stereotyping. 

That is one of my takeaways from listening to Kevin Dutton on The Michael Shermer Show this morning on my drive to work. I might summarize the argument as a distinction between a wise-thinking skeptic and a poor-reasoning lizard brain. 

The lizard brain wants quick, straightforward answers that cleanly divide the world into two dichotomies. It wants jointly exhaustive (all things of this type are found in this model) and mutually exclusive (all things are each in exactly one or the other of the categories). That is not how the world works of course. 

Wise-thinking skeptics adjust their conclusions and update their priors. They allow more latitude for exceptions when the stakes are higher as well as when the evidence is less clear. Consider this graphically:

The lizard brain operates along the red line increasingly generalizing for ever-more important the subject. The wise skeptic is the inverse resisting generalization increasingly as importance rises as shown in the blue line. Notice how the skeptic is not linear as well. For him magnitude matters.

I promise to try to keep this in mind as I go about thinking. 

Sunday, January 24, 2021

The Time of Biden

Now that all the attempts at election stealing are over I feel compelled to put down in writing some predictions about Biden's presidency. Call it political fatigue from the 400 years of the Trump Presidency, but it is hard for me to muster much energy to do this. Still, here goes . . .


There are two kinds of optimism in the case of Biden--relative and absolute. The relative is in regard to the Trump alternative and perhaps the Biden of politics past. The absolute is more genuine if not also more wishful. 

Trade - This one is quite positive even though it is strongly of the relative variety. Biden was never great on trade and many times poor. Still this has changed as he shifts in the political winds. He both wants/needs to be not Trump and the political base is different for Democrats today than it was when he first ran for president over three decades ago. See my Five Tribes theory for background, but Labor is not the Democratic lock that it was in the past. Just a reset to pre-2018 (actual policy) and pre-2016 (rhetoric) would be a great improvement. 

Immigration - There is a strong chance that Biden will be very good on immigration. The development of Democrats getting better on immigration has been building for some time having only accelerated under Trump. So in this case we have relative and absolute improvement opportunities. 

Drug Policy - My optimism is tempered here, but it is present in an absolute sense. At the very least we should get a more hands-off, non-escalating war on drugs policy. This is a BIG improvement from what we would have expected from a 1990s Biden. My baseline expectation is eventual of decriminalization/legalization of marijuana within the next few years.  

Presidential Prestige - I am optimistic that the tone and style of the office will now be back to a civilized place--very much a relative optimism. The office of the U.S. President should be occupied by a person easily described as a gentleman or lady. Trump never fit this description, and his final days were the icing on the top. Yes, I want that same office to be greatly diminished in terms of power and worship. My hope was Trump would deliver the diminishment without going Game of Thrones. Largely my fear of getting the reverse was realized. 


Unlike the optimism analysis, the pessimism comes basically only in the absolute variety. It is also the areas I tend to be most confident, unfortunately. 

Judicial Appointments - This one is not as pessimistic as one might assume. I don't want judges from the right or the left--that is a silly concept. I want judges that think critically and consistently demonstrating good application of the Law. Certainly I expect Biden's typical nominee will be less desirable than was the typical Trump nominee from my perspective. However, the best judges are impartial and well reasoned, and those include very many Biden will nominate. 

Regulation - The Trump administration was flat out good on regulation compared to any recent president (probably including Reagan!). He didn't as much shrink, though, as he reduced or stopped the growth of the regulatory state. Biden will reverse this trend. There is one area where Trump was certainly bad and Biden will likely continue this just in a different flavor--industrial policy/meddling with individual firms and industries. 

Taxes - Many people are rightfully worried about this for mostly wrong reasons. They don't want their own tax rates to go up. Ignoring the fiscal hypocrisy of this given the spending policies these same people typically demand, it is not a major problem that individual income tax rates (especially at the high end) are likely to increase. What people should be worried about is corporate tax rates increasing and to a lesser degree capital gains rates increasing. These are both much more destructive forms of taxes as they are taxing the creation of resources rather than the use of resources. Additionally, the restoration of the SALT deduction and the reduction in the standard deduction are also bad potential outcomes of coming tax policy.

War - I am hopeful that this ends up being an area like others mentioned where Biden today is different than he has been over the last 40 years. Despite this hope, you'll notice in which category I have placed it. 

Woke Politics and Policies - Think of this item as the inverse of Trump's nationalism. The risks are similar including divisive policies and rhetoric as well as censorship and ostracization. 

Spending - Your first thought should be, "Pessimistic on spending? Have you seen 2020?" True, but in only that limited and aberrational case is the relative comparison optimistic for Biden. The ratchet works in one direction generally, and even the possibility of a republican midterm sweep doesn't leave me optimistic.

Presidential Power & Authority - Here is the other side of presidential prestige from above. Every president in the last 20+ years has looked at the prior administrations' advancement of executive orders and general authority and said simply, "Hold my beer". If we only had another branch of government designed to be the strongest branch and willing to hold presidents accountable and within the bounds of their legal authority . . . 


The Biden years will hopefully be a time of surprise at how good some things are, not so bad other things are, and tolerably bad the balance is. This is how I now view the Clinton presidency. All of it is quite relative of course. Hope aside, I am more optimistic than I would have expected being faced with a Biden administration. Still the pessimistic angles are acute and meaningful. 

P.S. What about COVID-19 and the pandemic? While I expect a lot of theater to emerge and a rewriting of some history in favor of the current winners, the substantive part of this large issue is basically settled. In this way it doesn't matter much who won this election. Most of the decisions to be made are in the same incapable hands of FDA and other government officials along with the capable hands of private firms, organizations, and individuals. And in many ways the die is cast. The trajectory of the virus is set--declining regardless of what comes next but with a trajectory that very much can change depending on policy and actions taken. This is true and basically the same under Biden or Trump and even without vaccines. Vaccines are just a wonderful accelerator of the progress against the virus, which very much means fewer people suffering and dying. 

Thursday, January 21, 2021

Change in Government Means Winners and Losers

While the fact is obvious that changes in regime leadership imply winners and losers, there are subtle, deeper truths that remain underappreciated. 

Government is costly in two very important ways: it wastes resources (cronyism, corruption, inefficient Rube-Goldberg processes, rent seeking, etc.) and it prevents what could otherwise be (the unseen, gains from trades foregone, etc.). I think the former is most important in the short run while the latter is so in the long run. How a government process will lower trend growth rates is insignificant in any one year but dramatically important in the compounded long run. In contrast the effects on those directly impacted by government actions are quite meaningful in the short run but largely avoidable (if avoidance is desired) in the long run. 

Essentially by definition there are losers in all government actions. This is true even if a given government action is socially beneficial as a perfect correction to a true market failure--if not, then why must it be government (aka, force) that is taking the action? Government is not a magical machine able to create or even simply discover existing free lunches. The market is a magical machine that potentially can create a relaxed notion of "free lunch" whereby an action leaves everyone a party to it better off. 

Mutually-beneficial trades are exactly this despite the fact that resources are used in the process. There might be negative/positive externalities (costs/benefits not borne/enjoyed by those engaging in the trade and therefore a theoretical opportunity for government action to make all of society better off by making parties to the original trade worse off). Just don't be so certain about how easily these can be identified much less corrected.

Those who are benefiting from the status quo (winners) are obviously incentivized to perpetuate the status quo while those who are losers are incentivized to change it. This is true before and after government action. A government action that will create winners and losers comes about because the winners stand to gain more eventually than the losers, and this action will be perpetuated by this same inertia. This is an extension of the public choice lesson of concentrated benefits and diffuse (dispersed) costs. If the losers can see a light at the end of the tunnel via eventual avoidance, they can put up with short-term acute pain knowing they will someday disperse those costs. 

Government's incentives are very poor at best, and it creates strong incentives for bad (socially negative, resource destroying, innocent harming) behavior in others. Its inability or persistent resistance to do the better thing (holding it to a lower bar than the "best" thing) is not for lack of power but for lack of will. This is the major reason why I agree with Caplan on the question of state capacity [here and here].

2020 was sadly the lesson we neither deserved nor will ultimately use to understand this.

Tuesday, January 19, 2021

I'm As Mad As Hell, And I'm Not Going To Let You Take This Anymore!

Partial list of difficult, unsavory (to the third-party at least), or troubling situations that third parties commonly attempt to help or "correct" but end up simply harming the people in the situation: 
  • sex work
  • organ donation
  • child labor
  • drug addiction and misuse
  • pay-day lending
  • immigrant smuggling
  • sudden, high prices in the midst of emergencies - anti-price gouging laws
  • high cost of housing - rent control
  • low-productivity worker earnings - minimum wages
Simply trying to correct the situation by enacting prohibitions or strict limitations does not address the true problems, almost always causes significantly more harm than good, and tramples on the freedom and dignity of those the prohibition ostensibly aims to help.

Monday, January 18, 2021

Understanding Investment Expected Outcomes

Winkler's Law of Investor Risk/Return Trade-Offs: Any time an investor begins a statement affirming they understand the basic risk/return trade-off (high return comes with high risk, low risk implies low return), they are invariably about to implicitly or explicitly argue against it. 

There are specific meanings of risk and return as used here. This is financial risk and return. Risk can be understood as variance or volatility of price. Return is the outcome realized (selling price plus income derived during the time held minus the price paid and costs borne). Once you realize that "high/low" return doesn't mean "good/bad" return but rather means "big/small" return, you'll be a lot closer to understanding what finance people understand about risk/return. Risk and Return are simply two names for the same thing in this framework.

If you buy a share of stock at $100, hold it for a year collecting $2 in dividends, and then sell it, the outcome is going to be high or low. If you sell it for $101 or $95, the outcome was low in either case. In this hypothetical the return and risk were both low. Selling for $10 means a $3 profit ($2 dividend plus $1 price improvement). Selling for $95 means a $3 loss ($2 dividend minus $5 price deterioration). Regardless, the outcome of an approximate 3% return (positive or negative) is a low return.*
When the meaning of "risk" is relaxed to include risk of individual ruin (financial or otherwise), hypothetical scenarios that do occasionally exist move from Low Risk/High Return to High Risk/High Return (extreme example: let's bet on 10 coin tosses in a row where for each one if you choose correctly, I give you $1,000,000 and if you choose incorrectly, you pay me $500,000) or from High Risk/High Return to High Risk/Low Return (fairly common example: concentrating nearly all of one's financial wealth in a single stock). 

Bad decision making can move hypothetical scenarios from High Risk/High Return to High Risk/Low Return (example: excessive amounts of slot-machine play--the repetition gives the house a greater and greater advantage . . . start with a 90% payout return, then keep playing . . . 90% times 90% times 90% means the house goes from a 10% edge keeping a dime for every dollar you wager to a 27.1% advantage keeping 27 cents for each dollar through the rewagering). 

The grid is generalized and one should think of these realms as in the extreme. There are certainly examples that would technically fall into the unrealistic realms (hence the name unrealistic rather than impossible). These opportunities (Low Risk/High Return) and pitfalls (High Risk/Low Return) are fleeting, rare, difficult to truly experience, and usually of small magnitude. To good to be true is basically a mathematical and economic fact. 

*Yes, "low" is a relative term--relative to the state of the world. Just assume with me that most returns that are 3% are "low" or change the numbers to make it so in your mind. The amount isn't critical to the point.

The Five Tribes of Politics

Inspired by what Arnold Kling has taught me with his Three-Axes Model as formalized in The Three Languages of Politics, I would like to attempt to explain the actual factions in today’s political arena as defined by their constituents. The factions are:
  1. Crony Capitalists (CC)
  2. Labor (L)
  3. Patriots (P)
  4. Evangelicals (E)
  5. Woke Champions (WC)
Note that to some people at least all five are boo words. I don't mean the labels to necessarily be pejoratives, but I do think it is helpful and instructive that they cut to the core of what motivates these groups. One could easily classify each as a religious movement and analyze within that framework--take that to be as innocuous or incendiary as you like.

I propose that political success (winning elections and maintaining power) largely can be explained by how well parties and candidates gain and retain the support of these constituencies. Getting the support of enough of them allows for electoral success. A key component of that is to figure out which fit together when. 

Notice that the alignments change over time as do the salient forces within each. In the time of George W. Bush the alignment was CC-P-E. During Obama’s time the Woke Champions were tame and not toxic. He enjoyed a successful alignment of CC-L-WC with meaningful support of E. I believe the Great Recession and GFC was a turning point for the CC coalition as Obama's rhetoric was reassuring and McCain seemed rudderless. This left McCain only claiming P as a solid supporting group. 

Trump shifted or enjoyed the shift to where CC-L-P-E was dominant. To the degree he lost favor with CC, perhaps a stronger group for Clinton, he gained L. Before you dismiss this, consider that it is not the CC or L leadership we are concerned with. Those overwhelmingly went to Clinton in the case of L and solidly in the case of CC. Think rather of the membership. Both CC and L share a very common motivation: protection from competition at home and abroad. One big subgroup within CC are all those whose primary political motivation is preservation if not extension of the entitlement-industrial complex (Social Security, Medicare, et al.).

Biden is the leader of CC-L with enough support from P and WC to edge out Trump. There are two ways WC should not be considered a strong faction for Biden: one, there are quite a few WC on the far right; two, he is not the ideal candidate for leftist-WC (the much bigger part of WC). If WC realizes they are on the outside looking in during the next four years, they will turn on him where currying favor with E might be his only refuge (albeit an odd and unlikely one). Notice how this largely but incompletely maps to highly-educated elites (HEEs). 

If you don't find yourself on this grid (I certainly do not), realize that it is not an exhaustive list of political alignment. You are either ignoring your true, primarily political motivations or you are not a member of the significant political class. As a live-and-let-live, small government libertarian I indeed do not have a ideological home within any of these five tribes. Hence, no politician need care about my vote. 

P.S. Yes, I have read Hidden Tribes--I do not find it compelling or complete. Among other flaws, it is two wedded to the left-right duopoly model of politics.