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Tuesday, August 28, 2012

Sunday, August 26, 2012

The Newsroom: Counterpoints (8/26/12)

Let's get crackin'.

1. Newsroom Argument - Raising the government's capacity to borrow doesn't mean it will borrow more money.

Yes it does. And President Obama agrees, which is why his own ridiculously optimistic budget projects at least 600 billion dollar deficits through 2017. Between 1961 (the inauguration of JFK, and the beginning of Kennedy's mythical Camelot) and 2011, the Federal government has run a deficit 46 times and has run a surplus 5 times.

It shouldn't have to be said, but whenever the Federal government runs a budget deficit, it must borrow money. Considering that the government runs a deficit 9 years out of 10, it's pretty safe to say that raising the debt ceiling is tantamount to borrowing more money.

Perhaps the 42% Sloan was talking about in the show were the people who were intelligent enough to realize how hopelessly spendthrift our government is.

2. Newsroom Argument - Many TEA affiliated politicians and (traditional) Republicans say loads of incendiary and incorrect things, which makes them the American equivalent of the Taliban.

No, they say those things because voters are dumb. In the reality of the 24/7 news cycle and the fact that the average attention span grows shorter and shorter by the day, politicians have to say ridiculous and inflammatory things in order to gain attention. Remember the old saw: the only bad publicity is no publicity.

It's not like the Republicans and TEA members are alone in this. There are plenty of Democrats on the other side of the aisle saying the same things. For example:


The only reason why prominent, powerful politicians say these things is because that's the only way they think they can reach out to voters. That's a pretty terrible indictment on the American people, when you think about it.

3. Newsroom Argument - Voter ID laws are attempts by Republicans to suppress votes cast by blacks and other minorities.

I'm actually split on this. On the one hand, it's extraordinarily likely that this will disproportionately discourage black people from voting. On the other hand, there are probably enough stupid voters out there who believe voter fraud is a huge issue.

In the long run, voter ID as a form of vote suppression is a mere blip on the radar. Tennessee law already provides citizens without valid ID a free photo ID provided that they can prove citizenship and residency in the state at their local driver services (DMV equivalent) center. Those type of requirements are not undue burdens on the electorate, considering it's the same requirements you have to go through to register to vote. And nobody is suggesting that's a method of voter suppression.

Let's wind back the clock 19 years ago to 1993 and the Motor Voter law. Republicans decried this as a Democratic attempt to boost voter registration among black voters. And they were probably right. Ultimately, they were probably right. But again, it didn't matter then.

Both parties are gearing up their voter turnout machinery. If Republicans want to implement ways of suppressing voter turnout through legal means, it might not be honorable. But politics isn't about honor. It's about winning. This is the way the world works. Not with a good intention, but a selfish one.

4. Newsroom Argument - 80 million in profit means nothing because of 14 billion in revenue.

Hey, Sorkin. Profit != revenue. The average S&P 500 company has a net income margin of 8%. For a company that does 14 billion in revenue a year, that means a profit of 1.12 billion dollars per year. 80 million in profit means 7% of their bottom line gone. Suddenly that's not chump change anymore, isn't it?

5. Newsroom Argument - Greater fools make this country great.

Only fools say that.

Well, folks. That just about wraps up season 1 of The Newsroom. Assuming this blog is still going strong by the time the 2nd season premieres, I'll be there crafting the counterpoints to Sorkin's political arguments.

The Word "Wonk"

In the political world, a (policy) "wonk" is a guy who has a keen grasp of numbers and loves discussing the implementation and consequences of public policy. In other words, they are losers because they aren't ruthlessly focused on the ultimate goal of politics: winning elections.

I absolutely hate it when sites like Politico and RCP describe certain politicians as "wonkish" or "wonks" because I hate what it implies. That politics is just about winning the next election, and that we'll deal with the real issues at a later point in time when the next election cycle isn't so far away.

For example, the first 100 days of a newly elected President is absolutely crucial. It's when the President has the most political capital and the best ability to get things done. It also happens to be the longest time between a President and his reelection campaign.

I'm not naive about politics. I know that American politics has always been focused laser focused on winning elections since the modern era (post WWII). And that every politician also relies on small ball, stupid distractions that don't represent real issues, to fire up their base and court independent voters.

I've been intensely interested in politics for approximately 2 Presidential election cycles: 2008 and now. And I haven't seen anything substantially different. We're still arguing about stupid stuff. Or we're using stupid stuff and small ball as a proxy fight for issues that are actually important. For example, the fight around Medicare is disgraceful. Both sides are distorting and oversimplifying so they can scare the electorate into voting for their candidate.

Medicare and Medicaid are the two giant elephants in the room. They're growing like gangbusters. Every politician knows that, in their current form, both programs are not sustainable. Every politician knows that both programs need thorough reforms to prevent them from blowing up the Federal fisc. And politicians who are focused on doing exactly that are labeled "policy wonks". Because the political will for bipartisan reform of a popular program can only happen once the program has already reached crisis mode. And we're still at least a decade out from reaching that point.

It's easy to get depressed over the state of American politics. Haphazard cries for civility and intelligent discourse are immediately drowned out by vulgarity and rhetoric. And the reason why is simple. American voters are dumb as rocks. Politicians give us slop because, collectively, we want slop.

So the wonks are doomed to obscurity and marginalization. Because nobody wants to deal with the real issues until no alternative is left to them. 

Saturday, August 25, 2012

Real Time With Bill Maher: Counterpoints (8/24/12)

Just kidding. I actually was gonna kick off another counterpoints post series for Real Time today, but I didn't find too much to argue with. At least not to a degree that would be worth of a Full Blog Post. But after watching Overtime segment of the show on HBO, the panelists got into a decent discussion on alternative energy.

One of the panelists, Avik Roy, argued that the world isn't going to be powered by solar panels. Maher countered with something to the effect of "100 years ago, nobody thought horses would be replaced by cars". And I hate that rhetorical device (the "science will deliver us" trope) because Maher's belief in technology is almost as blind as a zealot's belief in his religion. Just because we've made incredible progress in applied sciences in the 20th century doesn't mean we can achieve the same magnitude of progress in the 21st. Especially in politically relevant fields.

Solar energy is never going to replace fossil fuels or nuclear power as a main source of power generation. Here's a breakdown of our electric grid by power source:

Source: Energy Information Agency




Solar and wind, which make up the vast majority of the renewable category, account for 5% of US electricity generation. It's very small. The only major category that's less than that is oil, and only because we use petroleum almost exclusively for gasoline and plastics.
 
You might be wondering why we can't significantly increase that amount. The answer is simple: output stability. Energy output by solar and wind are highly dependent on the weather. If it's cloudy outside, solar panels don't generate as much power. If the wind doesn't blow, the wind turbines won't spin. At night time, solar has zero output. 
 
But electricity demands are very predictable. We have peak hours in the morning (once everybody has arrived at work) and in the late afternoon (once everybody gets back from work). In order to satisfy peak demand, the electric grid has to have more energy flowing through it. That means increasing output. With coal, gas, hydro, and nuclear, this is very simple. Shove more coal through the furnace. Pump more gas into the generator. Activate another reactor at a nuclear power complex.

You can't do that with solar or wind. Even if anthropomorphic global warming is real, we still don't have the ability to force the sun to shine stronger or make the wind blow harder. There's no way to increase output at a solar or wind plant. So if the majority of our electricity was generated by wind or solar, we'd have rolling blackouts and brownouts during peak hours. That effectively turns us into a third world country.

Now take a look at this next chart detailing natural gas prices:


See that huge drop between 2008 and 2009? Part of that was caused by the recession. But as you can see, through 2012, we're at 2002 level prices for natural gas. And we certainly aren't at that level for oil, otherwise gas would be less than 2 dollars at the pump currently (the national average is currently 3.70).

What happened was a new technology was developed for the extraction of natural gas. It's called hydraulic fracturing. It's dramatically reduced the cost of extracting natural gas and dramatically increased reserves (the amount of natural gas that can be extracted economically). It has currently made natural gas the cheapest form of electricity generation in the US (at about 4 cents per kwh delivered to the end userT), and we have enough of it to last over a century.

Currently, the environmental lobby is embroiled in a huge fight with the energy sector over hydraulic fracturing. The claims are mostly bunk, despite documentaries like Gasland trying to provoke a dramatic reaction. Natural gas is cheap, abundant, and clean burning. It will substantially reduce air pollutant emissions as more and more coal fired power plants are currently being retrofitted to use natural gas. 

So now you might be saying "well what happens in a century when even that stuff runs out?" The answer is nuclear fission, and eventually, nuclear fusion. Unlike solar and wind, nuclear is a proven source of electricity. It is the cleanest, safest, and (if regulation weren't such a big deal) cheapest form of energy on the planet. We have enough nuclear fuel to power the world effectively in perpetuity.

Solar, on the other hand, is just incredibly expensive electricity. So is wind. In 2010, the government spent 6.12 billion dollars on subsidies for solar and wind. Another 6.82 billion dollars was spent on coal, natural gas, and nuclear subsidies. 6.12 billion dollars in subsidies for an energy category that only produces 5% of the country's electricity. The government spent only 11% more on subsidies for 3 sources that produce 86% of the country's electricity.

This might all seem academic if it weren't for one simple fact: the modern economy is dependent on cheap energy. Think about it. One gallon of gasoline can propel a two ton car 35 miles down a highway. Next time, just try pushing your car up against a slight 8 degree incline for 100 feet. If you're the average American, that gallon of gasoline only cost you 1/6th of an hour's work to buy. But if you were to try and push your car for 35 miles, it'd take you at least a day's labor to do so. And that's just moving your car. That's nothing to say how much effort it'd take to build a car without electricity.

There's no point in throwing our capital into a sector that isn't economically viable. Wind and solar are not the answer to the country's energy needs and never will be.

Friday, August 24, 2012

The Dreaded Recommended Reading List

I hate it when blogs do this, but these last few days have been really busy for me, so I haven't had time to craft a semi-decent post in a while.

To tide you guys over (all 5 of you), here's a list of links that I think you'd enjoy:

1. Megan McArdle on Arbitrage and Why We Love Being Conned: Megan McArdle is probably the most entertaining highbrow blog writer on the internet. I'm glad she's returned to writing and this is just another excellent piece she's written. It's on human nature, specifically the reason why people keep seeking shortcuts to prosperity. Hint: humans are greedy.

2. Slugfest - Does Romney Have What It Takes to Debate Obama?: A writer goes through all of Romney's debate tape and breaks down his strengths and weaknesses. Personally, I think both candidates will fight the debates to mostly a draw, with Romney coming out slightly ahead, so long as the fight is primarily about the economy.

3. The Rules of College Football Fandom: Since football season starts in just one week, I figure this is a good time to introduce you guys to the rules of college football fandom. Oh, and if you're an Ivy Leaguer and you follow a big football factory, you are not a college football fan and never will be. Just thought you should know.

Sorry, I know this is a quick copout. But I can't let two days past without an update. Hopefully you'll never see me resort to this again.

Wednesday, August 22, 2012

The Man in the Street

There's this TV show called Louie, which is an extremely weird but oddly satisfying series. One of the episodes this season, the main character, Louis C.K, goes on a date with a manic pixie dream girl called Liz. After Liz introduces Louis to a new deli shop, they walk out of the store and Louis places a bag of food he bought from the store by a sleeping homeless man.

Liz asks Louis why he did that. And he replied something like, "it's better than throwing it in the trash." Liz then pressures Louis into helping the hobo out. The hobo reveals that he has a psychological problem in which he hallucinates bugs crawling all over his skin, and that the only thing that makes it stop are expensive drugs. After he lost his job and his health insurance, he started living out on the street. Liz and Louis help the guy out by buying him those anti-hallucination drugs and directing him to a homeless shelter.

In most major cities, people tend to ignore homeless people. Since there are so many people around, and because cities tend to have stronger government safety nets, the diffusion of responsibility kicks in and whenever we see a man on the street, sleeping or wallowing in squalor, we just walk right on by, trying not to make eye contact with him.

This has always been a dilemma that sorely tests my political beliefs, that government should stay out of the affairs of people as much as possible. What do we do with the people who genuinely can't take care of themselves? I'm a libertarian. But I'm not the kind of libertarian who answers "YEAH!!!!" when asked whether we should let a person die because they lost their job, got sick, and needs intensive medical care.

The vast majority of people born in the US are born capable of fending for themselves once they reach adulthood. For an unlucky few, they will develop sicknesses, when combined with other unfortunate events, that will render them unable to take care of themselves.

So the question is, what do we do about the man in the street?

I'm starting to think that the best answer involves garnished combined with a generous safety net. For example, if an adult consents to become a ward of the state, they will be afforded a minimal standard of living and treatment for any diseases they might have. In exchange, they sign a contract saying that if they leave their wardship, their wages get garnished, first by a fixed amount (as a penalty for becoming a ward), then by a percentage that depends on how much care they received while becoming a ward.

So under this system, if a young man around the age of 25 works and decides to forgo health insurance and gets very sick, loses his job, and doesn't have a network of family and friends he can rely on for help, he can submit himself as a ward of the state. As an adult ward, he's entitled to 3 meals a day, access to clean water, a sleeping bag in a safe, covered area, medical care, and a per diem allowance that is 25% of the Federal minimum wage at full time hours (currently, this would be about 10 dollars a day).

Under wardship, he receives the necessary medical care to become healthy. He decides to exit wardship. He gets a new job. The government then garnishes a fixed amount of money (let's say...1500 dollars at 15% of his paycheck or 50 dollars per biweekly pay period, whichever is less) to pay for the administrative costs of ward care. Then, he consumes say....10,000 dollars of care under wardship, he has his wages garnished at an additional 15% of his paycheck (or 50 dollars, whichever is less) until that amount gets paid back.


That would provide enough incentive for potentially productive people to not abuse the welfare assistance of the state (unless they want to live at the poverty level forever) and still render assistance to the people who are truly unable to take care of themselves. 

Tuesday, August 21, 2012

The Best Show Nobody's Watching

The advent of cable television has led to a new golden age of television. With so many channels and so many choices, it's easy to find high quality shows with intelligent writing, fantastic acting, and compelling plots. HBO is the golden standard for TV, but you can find many HBO quality shows out there on basic cable.


But television is still a business. And low ratings and media buzz means that scripted shows, which are extremely expensive to produce, have to get cancelled. The shows that I like tend to have a small audience. I'm not trying to burnish my TV hipster cred, because I wish the shows I liked were more popular. But I realize the fact that most viewers aren't watching television for high quality drama.

That being said, there is a show that I watch that has criminally low ratings. And it's pretty easy to see why. It's not a feel good show. There is no escapism. The characters are unlikeable and intensely flawed. And it's about local politics. There is nothing that suggests that this show would have ever been a ratings hit. But it is damn good television.

Boss is a show about a powerful and corrupt politician who's dying. The Mayor of Chicago, Tom Kane, has been diagnosed with a horrifying terminal illness. And despite being in office for decades, Kane is determined to hold onto power for as long as possible, even as his body and mind slowly betray him.

http://ctchannel.files.wordpress.com/2011/10/boss.jpg
It's pretty awesome.

It's incredible how the show can make one of its major plot points, the Democratic gubernatorial primary for Illinois (riveting stuff, I know), intensely interesting. But it succeeds. Anybody who follows politics would be fascinated by the realistic depiction of the characters in the show. They swear a lot. They're extremely cynical. Their public and private personas don't sync up at all. It's fascinating listening to political operatives dispense advice (that would be political suicide to say out aloud) with such nonchalance. Here's a few excerpts from one of the characters (who also happens to be the ultimate political pro):

On a description of one of the primary candidates:

"He's ready. His attacks on Cullen are gaining some serious balls....he either doesn't give a shit or he's the most ambitious son of a bitch I've ever seen. He's straight. Goes to church. Family, kids. Camera loves him. He's young, but the game has changed. Nobody cares about that anymore."

On political protesters:

"Despite the crowd outside with nothing better to do than to picket City Hall on a Monday morning, what concerns me is...."

 On the right to privacy:

"Something Homeland Security said about us having the best surveillance of any city in the country. Now the ACLU is up in arms. Usual bullshit. That a camera on every corner, especially ones with facial recognition, is a breach of the right to privacy. I told Myers to counter with..."

I could listen to this guy talk about politics for weeks.

And Kelsey Grammer is absolutely fantastic as Tom Kane. He plays it like a consummate Chicago pol. Tough, determined, fierce, and intensely paranoid about his political opponents. Always with a card to play. Watching him play a hardass politician who's succumbing to a gruesome disease is pretty amazing. It's like watching a modern day Shakespearean tragedy.

I could list some faults of the show. But that'd be doing you a disservice. Go out and watch it. STARZ (good god, I can't believe they actually thought that was a good name) has the first episode of the second season available for free. Watch it. Thank me later.

Monday, August 20, 2012

The Newsroom: Counterpoints (8/19/12)

Oh boy, we've got some good ones this episode.Let's do it by the numbers:

1. Newsroom Argument - Balancing the Federal budget is completely different from balancing a household budget. Please stop equating the two.

I'll be the first to admit that there are many differences between the two. The government doesn't even keep track of its budget the same way it forces public companies to do. The scale is different. So are the means.

But the basic concept is still the same. The differences are at the margin (and, admittedly, they are substantial margins). If a household's expenses exceeds its income, there are three options: decrease the expenses (spending cuts), increase its income (increased tax revenue), or taking on debt to finance its expenses (deficit spending).

For the government, it's the exact same thing. Except the government can compel people within the country to pay higher taxes. It also has an ability to borrow an extremely large amount of money relative to its income at extremely low interest rates (currently, we have negative real interest rates on government debt), and it is absolutely (politically) impossible to cut spending.

For families, it's reversed. They don't have easy access to cheap credit, unless it's to finance an asset that can be easily seized in the event of default. They can't easily increase their income. But they can easily cut spending. If times are tight, little Timmy isn't gonna get that shiny new Xbox or mountain bike he's been wishing for. Nor will his parents take him out to eat as often.

But for the government, the only reason why it's impossible to cut spending is because we've turned our government into the spender of last resort. Because the government is so monumentally large, it's easy for people to shift more and more of society's risks to the government. For example, most catastrophic insurance businesses are ultimately backed by state assets. If the banks go under, the government will bail them out. If a person can't afford health care, the government will pay for it.

For better or worse, the government has assumed ultimate responsibility for society's ills. One can argue whether this is a good thing or not. A household budget is all about personal (and familial) responsibility. Maybe that's what Sorkin meant. But of course, a hot and bothered Sloan Sabbath wouldn't have been able to jam all of that into her angry little rant.

2. Newsroom Argument - The debt ceiling is an important issue because S&P will downgrade the government's credit rating due to Republican obstructionism.

Newsflash: S&P's downgrade didn't do jack shit. Yields on Treasury debt are the lowest they've been since the founding of the Republic. Negative real interest rates means that people are so concerned about capital preservation that they're willing to lend money at a small loss.

Imagine a bank willing to lend you 50,000 dollars today in exchange for paying 59,765 dollars in the future. Of course, with inflation, 10 years from now, 59,765 dollars will be worth approximately 49,027 dollars today. Somehow, that doesn't exactly scream "credit downgrade" to me.

3. Newsroom Argument - The debate formats are a joke and the candidates don't get called out on their bullshit by the moderators.

I actually agree with this completely. But they don't really explain why it's such a joke. The answer is simple: politics is about convincing idiots to vote for you. And you don't need a psychologist to tell you that outrageous, incendiary things grab a person's attention more than normal, reasonable things.

People don't care about statistics. They care about anecdotes. That's why plenty of politicians run on biography. And it's why personal life events can bring down a politician. Intellectually, everybody knows that sexual promiscuity has near-zero correlation to how well a person can perform at their day job. But it'll still bring down a politician.

Because we don't think of politicians as people who control the levers of power in government (the most powerful single organization within a country). We think of them as people who we would want to have a beer with. Who would smile and nod and offer words of encouragement to us if we're down. Who cheer and congratulate you when you do well. Even when all the evidence points to the fact that a politician sees people as nothing more than voters and donors.

That's why we have a person like Mitt Romney, who everybody will admit is a smart, capable guy, who will adopt and abandon positions at will to please voters. He wants to be everything to everybody, just like every other politician. The fact that it's so obvious to most people just means he's a bad politician. That doesn't necessarily mean he'll be a bad President. But people don't focus on that. They want "their guy" in office.

The GOP primary campaigns were fun to follow because it revealed how little each candidate (with the exception of Rick Santorum, but I'll deal with that later) thought of the primary voters.

Gingrich's strategy was to bash the media and deliver red meat to the base in the form of snappy, sound bitable zingers. He lived and died by the debates. Romney's strategy was to remind everybody else that his opponents were completely unelectable, undisciplined, unintelligent, and generally unpleasant. He lived and died by carpet bombing his opponents with negative attack ads. Michele Bachmann's strategy was to preach to the Tea Party choir in the most inflammatory and extreme method possible. She lived and died by her own air-headedness. Rick Perry's strategy was to simply show up since he had all of the things that the Republican electorate wanted in a candidate, but he died during the debates simply because he didn't think he needed to prepare.

The one exception was Rick Santorum. He came off as the most genuine person there. I didn't really detect any real hidden agenda when it came to his remarks and campaign activities. He was either the best actor alive, or he really believed in most everything that he said. I'm inclined to believe it the latter.

But the point remains. Most of the politicians (and just about every successful one) got to where they are by deceiving the electorate. They will never agree to a debate format in which they will actually get called out on their rhetoric. Because rhetoric isn't about swaying undecided voters with reasoned argument and facts. It's about rallying the base to get them more pumped about voting than the opponent's base.

4. Newsroom Argument - Casey Anthony is ridiculous and should not be news.

Did anybody else think it was completely ridiculous how Maggie's roommate also happened to go to the same high school as Casey Anthony? This is the second time that the show has seriously stretched the boundaries of credibility, (the first being when Jim had a roommate who became a BP executive at the same time while his sister just happened to be a Halliburton executive) just in personal relationships alone.

Hey, Aaron Sorkin, just because you acknowledged on screen that there is essentially zero chance of this being able to happen doesn't let you off the hook. It just makes your writing lazy and implausible.

5. Okay, this is coming off the rails a bit. But I just wanted to say that I will bet anything that "Help Me, Rhonda" is Aaron Sorkin's way of saying he reads Slate's "Dear Prudence" column quite frequently.*

* Full disclosure: I don't. But I do read Slate. And I always notice their use of over-the-top topic titles to try and lure in viewers to her decidedly mediocre advice column.

Friday, August 17, 2012

IPOs and Corporate Equity

When Facebook debuted as a publicly traded company, the initial valuation of the company was 81 billion dollars. Its current share price (as of 8/16/12 market close) has the company pegged at 42 billion.

Since its public debut, people have come out of the woodwork to criticize and deride the handling of Facebook's IPO. And Facebook's own employee shareholders have voiced concerns about the stock price. And yet, from the standpoint of the company, it's hard to see how it was anything but a resounding success.

It's a rule that a company's executive management should have the company's owner's best interests in mind. That means keeping an eye on the bottom line, making sure that the company is making as much profit as possible. Due to how the current understanding of how companies are valued (based on future earnings), that usually translates into high share prices.

Well the share price has since halved. So it doesn't look like the owners have been well served by Facebook's management team. But the company raised 16 billion dollars by selling about 20% of the company at a share price that was overvalued. So the company made out like a bandit, because it sold an overvalued asset (itself) before people realized that the company was worth much less than the IPO price.

Now the company has around 16 billion in cash reserves, waiting to be invested in a worthy project (that, presumably, will be more profitable than just Treasury bonds). If the IPO valued the company at 20 billion dollars and the share price doubled to what it is now, the public perception of the IPO would be much better. But then the investment bankers who underwrote the IPO would have caught flak for undervaluing the company by a huge margin.

What people lose track of is the reason why companies go public is to raise capital. From the company's standpoint, the goal of the IPO is to raise as much money as possible. So from that standpoint, Facebook's IPO was a resounding success. In nominal terms, it was the 3rd largest IPO in US history.

I think the reason why people have lost perspective on the IPO is because people have lost perspective on corporate equity in general. All a share represents is a claim on a company's future profits. And if the company doesn't redistribute its profits in the form of dividends, then a share in the company is effectively worthless.

Microsoft, the original tech titan (sorry, IBM), went 17 years before issuing its first dividend. Now, if you were playing a long game, then Microsoft's management team was able to deliver tremendous value to its initial shareholders. But if you bought MSFT in 1986 and sold it before ever receiving a dividend, you were essentially relying on a greater fool to buy the stock off your hands because they were hoping to receive a dividend.

There are countless instances in business history where a company past its prime spends a lot of cash in the futile pursuit of outsized profits. All too often, these companies just end up wasting money that could have gone back to shareholders in the form of dividends. But even when this happens, there are still plenty of investors out there who believe that a company that isn't reinvesting its profits (as opposed to distributing it to its shareholders) is past its prime.

Collectively, we've (and by we, I mean the business savvy minority of the country who actually invest serious money in the financial markets) lost sight why equity exists in the first place. Or maybe we (same group) are just trying to game idiotic retail investors.

Thursday, August 16, 2012

A Quick Hit on Intellectual Honesty

Derek Thompson, a writer at The Atlantic, recently wrote about the Soledad O'Brien/John Sununu exchange, and I'm surprised that he didn't join the media chorus over how O'Brien supposedly "dismantled" Sununu. Instead, he strips out the rhetoric, takes a look at the actual argument, and finds that both O'Brien and Sununu are essentially just trying to spin reality. Neither of them are completely correct and neither of them are actually wrong.

It's actually a textbook example of how you can combine rhetoric and spin statistics to favor your own political ideology. It's a rare feat whenever you see someone deconstruct the rhetoric to look at the actual argument, and I'd like to point it out whenever possible.

How Success Happens

Nassim Taleb, known within investment circles for The Black Swan, came out today saying that people shouldn't enter into the finance world. Here's the relevant bit from the article: "[investment professionals] rise to the top for no reasons other than mere luck, with subsequent rationalizations, analyses, explanations and attributions".

I agree. Because what I've come to learn is this: hindsight isn't 20/20. In fact, hindsight is worse than making decisions in real time. I've been in quite a few situations where a person's success happened due to circumstances out of their control. And they walked away drawing bad conclusions about what happened and why it happened the way it did.

There are so many milestone moments in your life that you have very little control over. And when they happen, your life trajectory changes. If Kobe Bryant goes 8/8 on threes one night, we can say with high confidence that the very next game he plays, he most likely isn't going to shoot 100% on 3 point tries again. But life doesn't work like that. We don't play the same game over and over again. Events happen. Things change. And those changes will have a huge impact on the future.

In 2007, when I was working at a temp summer job at Northrop Grumman, one of my coworkers started talking about investment strategy for stocks. And it got me to read my very first book on investing. After that, I started reading the WSJ daily. And then I read more books. And then I used my paychecks earned from that temp job to get me started in investing.

To this day, I have no clue how different my outlook on finances and saving would be if I hadn't talked with that coworker. But I'm pretty sure it'd be a hell of a lot more different.

Wednesday, August 15, 2012

Meta Talking Point - The Problem With 50%+1

Sometimes our political rhetoric can reveal or obfuscate a basic truth. In order to unearth that truth, you have to go beyond the talking point, hence the name of my blog. Today, people have gotten so cynical and intellectually dishonest that it's easy to lose track of what's real. I never want a person to read this blog and leave in doubt of my own opinion or intellectual honesty.

So occasionally, I'll take some rhetoric or talking point, and then break it apart and analyze the underlying truth. This will be the first of what I hope will be many.

Yesterday, Mitt Romney had an excellent rhetorical bit: "[Obama's] campaign strategy is to smash America apart and then cobble together 51 percent of the pieces." Of course, what he neglected to mention is that any politician in the US trying to win an election is going to try and cobble together 50%+1 of the votes.

But that's the fundamental problem with many Western democracies. Having a simple majority of people voting for you means that something that's pretty damn close to a majority didn't vote for you either. In a liberal democracy (in the truest sense of the term), the majority rules while agreeing not to violate the rights of the minority.

With that in mind, can we really call our political system a liberal democracy? Yes, it takes a lot more than a simple majority to take away your freedom of speech, or your right to due process, or even your guns. But what about your money?

One of the central planks of the Obama campaign is to raise taxes on families and individuals that make more than 250,000 and 200,000 dollars, respectively. Let's say that President Obama wins reelection by 51-49%. And that enough Democrats are elected in the House to cobble together a 50%+1 majority (218 legislators).

Most political pundits would then make the claim that the Democrats have an electoral mandate to raise taxes on those high earning families and individuals. But that seems ridiculous to me. Money is extremely important to the vast majority of people, even those making 200,000 USD a year. It seems to me that just cobbling together a simple majority for one election doesn't seem like the government should have the ability to raise taxes on a minority of the country.

Multiple things can affect an election. What day the election is held on, what the weather is like, how a certain sports team in a certain region fared recently, the order in which candidates are listed on the ballot, and multiple things that are seemingly insignificant, that, in aggregate, can swing an election one way or the other. Somebody who wins an election by the barest of margins could have easily lost had the election been held a day later (or a day before).

It doesn't seem right that a simple majority cobbled together over the course of a day should have the right to deprive a minority of a certain portion of their property. But there's really nothing in our Constitution that prevents the House from voting higher tax rates on a certain segment of the population.

It's like the old saying goes. Democracy doesn't work well when 2 wolves and 1 lamb vote on what's for dinner. Government intervention in a person's private affairs has to be justified. If I deprive a person of their money, there must be a good reason. Did that person steal it? If I deprive a person of their freedom, there must be a good reason. Did that person commit a crime?

Funding the government is an important and worthy goal, but it isn't healthy if the government decides that additional funding should come from a certain minority of the population simply because it is possible. There must be a good reason.

And I don't think "because they make more money than the rest of the population" is a good enough reason for higher tax rates on high earning individuals and households. But that's just one example. I don't think a simple majority should be able to decide anything that deprives anybody of their freedom or property without that individual committing an act that deprives the freedom or property of another person.

Tyranny, whether exercised by a tyrant or a temporary majority, is still tyranny.

Tuesday, August 14, 2012

Paul Ryan Means Romney is Serious

Two days have passed since Romney tapped Paul Ryan to be his running mate, and I am very happy with the pick. It sends a clear message to the electorate, to the Democrats, and to the Republicans. The message is this: It's time to get serious about this nation's problems.

The most notable thing about Ryan's career is his budget, entitled "A Roadmap For America's Future", which is his attempt to change the national conversation about the problems that the Federal government faces. His "Roadmap" specifically addresses Medicare and Medicaid, the two fastest growing Federal programs over the past 20 years.

Specifically, he wants to block grant Medicaid to the states (giving them a blank check). For Medicare, he wants to subsidize private health insurance plans ("premium support" or "insurance vouchers") by the amount that we currently spend per Medicare enrolled (about 16k last year). Both the block grant and the insurance voucher would be capped to grow at no more than inflation plus economic growth per year (4.5-5% in normal years).

If we continue on autopilot absent major reform, we will face a fiscal crisis directly on the scale of the Great Depression within a generation. And it's no longer alarmist to say it. In 20 years (or less), this country could easily find itself in the same hopeless situation that Greece is currently embroiled in.

Here is why:

 

Over the past 20 years (for which official spending figures are available), Medicaid has grown at an annual rate of 9.62%. Over the same time period, Medicare has grown at an annual rate of 9.06%. Those are eye popping numbers considering that, between 1991 and 2007 (I'm purposely excluding 2008 and onward due to the steep decline in Federal revenue because of the recession), Federal revenues have only grown by 5.7% per year. Remember, that's cherry picking the statistics to exclude the precipitous decline in Federal revenue caused by the recession in 2008 and 2009.

Let's put that in perspective. In 2011, Medicare and Medicaid combined to 5% of GDP. Over the past 10 years, Medicare and Medicaid have grown by about 8% on average. Let's extrapolate and assume that it will, barring any meaningful reform, continue to grow at 8% per year while the economy grows at 3% per year (our historical average from 1950-present). Where do we stand in year 2031?

At that point in time, Medicaid will cost us 1.3 trillion dollars while Medicare will cost us 2.2 trillion dollars. Our economy at that point in time will (excluding any negative impact that high health spending could have on the rest of the economy) stand at 27 trillion dollars. Combined, they'd eat up 13% of national GDP, roughly 3 times as much as what we currently spend on national defense. Our current national government spends about 25% of GDP. So those two programs alone (to say nothing of Social Security, which is currently 50% larger than Medicare, although it grows at a slower rate of 5% per year) would total up to more than half the size of our current government.

Remember, that's excluding any negative economic effect that we'd incur by spending so much money on public healthcare. This is why Republicans keep repeating that Medicare and Medicaid represent "the most predictable economic crisis in history". Because if we don't enact any meaningful reform now, the next generation will be completely screwed. The Federal government simply can't pay out those obligations in the future, not without draconian tax hikes or spending cuts in other crucial areas of government (like Social Security, national defense, infrastructure).

The Democrats are determined to demagogue this issue ("Mediscare") to win the next election cycle. They figure they'll kick the can down the road until entitlements reform becomes absolutely impossible to ignore. This is the surest path to fiscal destruction. And unlike the situation in Greece, there is no EU-like entity that we can count on to bail us out. 

Ryan's roadmap budget is why I like him as the VP nominee for the GOP. Because you can't tap Paul Ryan as vice president without debating Medicare and Medicaid. And that's a debate that this country sorely needs.

Monday, August 13, 2012

The Newsroom: Counterpoints (8/12/12)

Okay, we're back with The Newsroom that we all know and love. Tonight's episode was pretty rich on obfuscation and bias so let's get right to it and knock them out by the numbers:

1. Newsroom Argument - The debt ceiling argument in Congress is so important that failing to extend the ceiling would result in the cessation of the dollar being a reserve currency (they kind of beat the viewer in the head with this. It's hard to take Sloan seriously with her hysterical rant).

Counterpoint: Not even close. Everybody knows that paying interest on the debt is paramount when it comes to maintaining the credibility of the US government. But failing to raise the debt ceiling doesn't mean the US won't be able to service its debt.

Due to extremely low short term and long term interest rates, it has never been easier for the US government to pay its debt obligations. Last year, the US government spent 230 billion dollars paying interest on the national debt. The US government took in 2.3 trillion dollars, or 10 times that amount last year. Debt payments come first. It's that simple. Nobody in the Federal government would put anything else otherwise.

This became evident when President Obama stated that Social Security payments were probably going to be suspended if Congress failed to reach a deal on the debt ceiling. The thing is, while the US government has more than enough revenue to cover its interest payments, it doesn't have enough money to cover all of its other obligations.

The US government would be faced with the unenviable task of fiscal triage, determining which Federal programs are considered most essential to continue regular operations while trimming payments elsewhere. The message was clear from the Democratic Party: reach a debt ceiling deal or granny's Social Security check gets it.

1a. Newsroom Argument - Wall Street says failure to reach a debt deal would be disastrous on the scale of the US Civil War because it would irreparably harm the full faith and credit of the US government.

Counterpoint: Let's get a few things straight. Anything that Wall Street says publicly is self serving. They just wanted the US government to reach a deal and went in full on Chicken Little mode to scare the US government. The real issue isn't about paying interest on the US debt. The real issue is about the absence of Federal spending in other programs.

Basic economics states that GDP equals private sector spending plus private sector saving plus government spending plus net imports minus net exports. If you deprive the Federal government of the ability to borrow money (so it can spend it on things like Social Security checks, Medicare payments, Medicaid payments, national defense, etc), you're looking at 1.3 trillion dollars in lost spending for the year.

That's about 8% of GDP. And it's more than the amount that our GDP contracted in 2008 and 2009, during the worst part of the financial crisis. Wall Street was concerned about a double dip recession. They weren't concerned about the full faith and credit of the US government. Everybody knew that bond payments would be prioritized in the event that Congress failed to reach a deal.

Realistically speaking, it was politically impossible for Congress to refuse to raise the debt ceiling for a time period of over 2 months because the cessation of Social Security checks would have created a political furor that would have resulted in every Congressman losing their jobs. Nobody was really concerned that this deal wasn't going to get passed. Brinksmanship can be a nervous game to watch from the outside, but those in the know know that these things always fall into place at the last minute.

2. Newsroom Argument - Michelle Bachmann (and the rest of the religious right) is insulting ordinary Americans by saying that God told her to run for President

Counterpoint: Disclaimer. I'm not particularly religious, so this is going to be an unorthodox defense. But when somebody says "God told me to do it", what it really means is this: I prayed and after prayer, I decided to do something.

Nobody is claiming that God physically spoke to Michelle Bachmann and told her to run for President. She simply prayed and decided that she should run. When President Bush (43) told the press that he prayed on tough decisions, he was essentially saying the same thing Bachmann said. Claiming "God spoke to me to do x" is really just a codeword for "I'm religious and my opponents probably aren't."

Maggie already got countered in the show by Jim, but I felt like I should just address it here.

3. Newsroom Argument - The NSA is breaking the law. And it's doing things on par with Soviet Russia.

Counterpoint: There is no real counterpoint to this. The NSA has been breaking the law since its inception after WWII. The "Global Clarity" thing that they claimed was spying on Americans? That thing existed since the 1960s. The actual program is called ECHELON.

In terms of intelligence gathering, nothing fundamentally changed at the NSA post-9/11. The real changes happened elsewhere. Of course, I can't actually speak on this subject with any authority whatsoever. The NSA is the most secretive organization in the Federal government. Anybody who could make a credible claim on what the NSA is actually doing would be prosecuted under the Espionage Act (as alluded to in the show).

But it's silly for the show to create a false equivalency between Soviet oppression and our Federal government's activities. The truth is that reality is messy and edge cases will always exist. The extralegal (or at the very least, legally dubious) assassination of Anwar al-Awlaki via predator drone represents the extreme case of the government action against a US citizen. Stalin killed 20 million of his own countrymen in purges and sent millions to languish in political prisons in Siberia. Numbers matter and so does intent. The US government has never come close to Soviet style brutality.

 4. Newsroom Argument - Making Republican Congressmen mad will hamper a media company's efforts to bid on wireless spectrum due to FCC intransigence.

 I know this is Aaron Sorkin's attempt to sound business savvy, but this is just ridiculous. The media companies can't wait to get rid of their spectrum holdings. The biggest players in buying spectrum have been the telecommunications and internet companies. Verizon, AT&T, Sprint, and Google would pay much more money to acquire spectrum than a company like Time Warner or Comcast. The cable and media conglomerates have been selling to the telcos. Not the other way around.

Now, it's true that lawmakers can make their concerns be heard, but the executive branch has final say on approving these types of business transactions. Last I checked, the FCC and the Justice Department belonged to the Obama Administration. AWM under Leona Lansing would be more concerned about Julius Genachowski and Eric Holder (the heads of FCC and Justice, respectively) than Michelle Bachmann and Paul Ryan (I can't believe they had her character smear Ryan. The dude doesn't care at all about spectrum deals.).

5. Newsroom Argument - Sloan Sabbath is a hot mess.

Counterpoint: Huh? I think I ran out of material. Carry on, please.