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Wednesday, October 31, 2012

Knowledge is Power

In lieu of a real blog post today, I'm going to have to resort to a link dump. Before you click away to another website, let met say that this particular link dump is extremely useful if you're a stat nerd. If you read all those statistics about unemployment, income, taxes, Federal spending, the national debt and wonder what the real numbers are...just check out the following:

1. Major Foreign Holders of US Debt

2. The US Federal Budget, Fiscal Years 1996 - 2013

3. 2011 Personal Wage Income Statistics (Warning: Very eye opening)

4. The IRS compendium of tax statistics

5. Bureau of Labor Statistics employment statistics

6. Federal Reserve Flow of Funds Report

These are the numbers, straight from the Federal government absent any political spin, bias, or prejudice. You can go through the data and draw up your own conclusions. Or you can wait until I write up a new post that goes over one of these areas. Your choice.

Tuesday, October 30, 2012

The Importance of Fiction

Georgia Tech's Athletic Director, Dan Radakovich, resigned yesterday to take up the AD position at Clemson. There were rumors early on in the summer that Radakovich was seriously considering the move even as he denounced the rumors and reaffirmed his enthusiasm for his current job.

When I was reading that story on the AJC, I couldn't help but think of this guy:

http://972mag.com/wp-content/uploads/2010/08/Iraqi-Information-Minister.jpeg

Remember this guy? Mohammed Saeed al-Sahhaf? AKA Baghdad Bob? This dude was the Iraqi Information Minister under Saddam Hussein who broadcasted grossly unrealistic propaganda stating that the American armed forces were weak whereas the Iraqi army was invincible. His last broadcast was on April 8, 2003 stating that the Americans would surrender. The capital city of Baghdad was liberated (or captured, depending on your perspective) by American and British forces 4 days later.

The reason why I brought this up is because to the outside world, Baghdad Bob was comical in the sense that everybody who had access to accurate reports about the war knew that he was lying in the face of incontrovertible proof that Coalition forces were decimating the Iraqi army. But perhaps to the Baghdadi on the street, his word was truth. After all, Iraq had lived under the tyranny of Hussein for over 20 years and their word was law. Who could say otherwise?

And these are not isolated occurrences. Everybody does this. Back in 2008, when the economy was in free fall and General Motors was hemorrhaging cash, its former CEO, Rick Wagoner, famously stated that "bankruptcy is not a viable option". 7 months later, the company filed for Chapter 11 bankruptcy, almost 101 years after the company was founded.

It was clear to any knowledgeable person that GM was headed for some sort of bankruptcy. The company had been losing billions of dollars every quarter and had huge amounts of legacy costs. So why did the company's top management so adamantly deny that they would file for bankruptcy? Because they didn't want to lose public confidence. The thinking was that if the public thought GM would go bankrupt, they'd stop buying their cars and the company would go into bankruptcy even faster than they did.

The name of the game has always been about reassuring the lay public, even as Rome burns all around them. Because most people simply don't follow these issues, many of them can be fooled by public statements of reassurance. Even as the smart money knows it's time to exit, as long as the majority remains unaware of the true extent of the damage, then some purpose will have been served.

You don't need to fool all of the people. Just fooling some can be enough to buy a little more time, even in the face of worsening odds. Greece is currently in the midst of an economic depression, and its leaders are adamantly stating that they will remain in the Euro zone and that a Greek exit (Grexit) simply "isn't an option".

These are the necessary fictions that we tell ourselves and the public. Because everything is fine and dandy until it isn't. And then you're left to fend for yourself.

Monday, October 29, 2012

People Sorting Algorithm

"So what do you do?"

We've all been asked it. For some, it's a question of dread and foreboding. For others, it's a point of pride. It just depends on where you are in life. Even though it's a relatively innocuous smalltalk question, it can quickly end a casual conversation. Because for some people, it's part of a sorting algorithm for meeting people:

1. Does this person have normal behavior and seems well adjusted?

2. Would I be comfortable being seen with this person in public?

3. Is this person in my same socioeconomic group?

There's this sitcom on Fox called New Girl and in its latest episode, the main character (an unemployed teacher) asks her best friend (a model) a question, "do you think if we met each other today that we'd still be friends?" If you take out your decoder ring and parse through to the actual intent of the question, it'd be something more along the lines of: "please reassure me that our personal compatibility can more than compensate for our difference in socioeconomic status".

In scripted comedies, the main characters often have different personalities and situations. The humor is often derived from the characters navigating through their differences in order to come to a shared destination or objective. The best example I can think of that illustrates this dynamic is the movie Knocked Up. An alcohol fueled one-night stand that results in an unplanned pregnancy forces a driven, meticulous media personality and a lazy, immature, unemployed slacker to come together and find out the best way to raise their baby.

But this isn't how the Real World works. It's not often that individuals from two distinct socioeconomic groups have deep, meaningful interaction with each other. It's gotten worse in recent times because the Great Socioeconomic Sorting is mostly complete and people have cloistered themselves up with people who are of similar backgrounds.

It's a truism that doctors marry doctors and lawyers marry lawyers. But the reason for that cliche is increasingly being applied to everybody else. College graduates marry college graduates, move out to the suburbs that have good public schools, raise their kids, and then send them off to college to repeat the cycle. Meanwhile, the high school dropout knocks up another high school dropout, they (or more accurately, she) raise a kid without the proper emotional and economic support to ensure the child's well being. That kid then matures, goes to high school, drops out, and repeats the cycle.

Statistics bear this out. Last year, all women under the age of 30 were more likely to bear children out-of-wedlock than not. The only exception is those women who are also college graduates (approximately 30% of the population).

Whether we're conscious of this or not, we sort through the people we meet based on how similar they are to us in key factors: education, profession, and net worth. But it's not like we were immune from this type of behavior when we were young. We just had different criteria.

In high school, the smart kids stuck with the smart kids. Football players stuck with football players. The outcasts stuck with other outcasts. We were already learning to sort ourselves into neat, packaged groups as early as middle school based on "shallow" things like physical appearance, what clothes you wore, and how good you were at sports.

This is why we all have a group of friends, friends we made early on, who don't quite fit into our socioeconomic group now. I have a lot of them right now. And I do compartmentalize them away from the friends I've made recently. It's definitely not something I pride on doing, but I do it nonetheless.

If I were creating a people sorting algorithm for how I currently determine who is friendworthy, the pseudocode would look something like this:

function DetermineFriendshipStatus{
var newPerson=Life.MeetNewAcquaintance();

if not (newPerson.HasCollegeDegree() && newPerson.IsSociallyWellAdjusted()) return void;

if not (newPerson.IsEmployed() && newPerson.IsDecentLooking()) return void;

if (newPerson.SharesMyInterests()) return new CloseFriend();

else if(newPerson.LikesSports() && newPerson.LikesAlcohol()) return new DrinkingBuddy();

else if(newPerson.LikesPoliticsAndCurrentEvents()) return new FriendYouDiscussPoliticsWithAtLunch();

else return new SituationalFriend(newPerson.Personality);

Cold, clinical, and vaguely sociopathic? Probably. But everybody does it, and it's no good pretending that people sorting doesn't exist.

The fact that you still have old friends (from high school or even further back) you keep in touch with reveals something fundamentally more important about friendship: it's about having each other's backs. Just showing up matters a lot, and that has nothing to do with how much money they make or what job they have or what neighborhood they live in. That's determined by a person's character, which is much harder to discern than simply asking them "so what do you do?"

Saturday, October 27, 2012

Real Time With Bill Maher: Counterpoints and Retrospective (10/26/12)

We had a decent show. Well, maybe Barney Frank sucked but I just skipped him altogether. The panel was well spoken, polite, and reasonably informed. And there were a number of topics worth litigating. So let's get to it.

1. The 90% income tax trope: Democrats love to cite the 50s and 60s, one of the greatest periods of economic growth in American history, as a model that modern America should emulate. And they always point to the top marginal income tax rate (90%) as evidence that we should have higher taxes on the rich. There's a huge problem with this:

The rich during that time period weren't as "rich" when it came to income, but they were extremely rich when it came to wealth. Those were the days of the exorbitant expense account, where an executive could charge anything and everything to the company account. Because the tax code was structured to favor corporations, the rich simply hid their income and spending through companies.

I used to work for a small Belgian based IT company. And my boss at the time said once you reached a certain level of the company, you actually left the official company payroll and incorporated yourself into a business. Since the corporate tax rate in Belgium was much lower than the top individual tax rate, wealthy individuals would create shell companies that would invoice the company they worked for, and then purchased assets and services under their personal shell company to use in the company's name.

That was the exact same dynamic at play in the 50s and 60s. The rich weren't paying anywhere close to 90% of their income in taxes. They simply owned a company and the company paid for their lavish lifestyle.

2 Mutual fund fees:  This was an issue discussed in the Overtime segment, and it's something that I think is a solution in search of a problem. Former New York Governor Elliot Spitzer said he'd go after mutual funds that charge "exorbitant" management fees and cited bad performance, betrayal of fiduciary duty, etc as reasons why. But there are a few problems:

First off, mutual fund managers can easily explain their fiduciary duty. They think they can beat the market. Enough of them do beat the market in any given year (although very few of them can do it consistently over an extended period of time) to lend credence that maybe that particular fund is worthy of its higher expense ratio.

Second, we're already seeing many investors move away from actively managed funds to passively managed funds which have vastly lower expense ratios. The market is already moving in the direction that Spitzer wants them to move, so why do it via government mandate?

3. Racism: The Democrats on the show love to accuse Republican politicians and supporters of being racists. But I don't think it's racism. It's classism. Republicans are quick to denigrate people on welfare, who don't pay income taxes, but it's not because they're black. Although black people are disproportionately reliant on things such as SNAP (food stamps), Medicaid, TANF, and other forms of welfare, that doesn't mean that the Republican Party is specifically thinking of a black person when they think of "moochers".

The reason why probably isn't what you think it is. But the American people have never been more segregated by class and color. And color doesn't become a factor unless we get some cross-demographic interaction. For the most part, that doesn't happen. When it does, it's sensationalized, like the Trayvon Martin controversy. So for the TEA partier in a predominantly white suburb, they're not thinking about some black guy on the public dole, they're probably thinking about white trash on the public dole. It's not the most politically correct defense of racial prejudice (seeing as it's instead class prejudice), but that is what I legitimately believe.

4. Nate Silver and 538: For those of you who don't know, Nate Silver runs an excellent blog in the New York Times online portal which aggregates polling data and then spits out the probability of electoral outcomes. He currently has President Obama as a 75% favorite to win the electoral college and that's based on the state-by-state polling that has him as a slight favorite in the pivotal swing states of Ohio, Nevada, and Iowa.

Polling is not an exact science. There is always going to be margin of error. But they are better than anything else we have when it comes to prognosticating the outcome of an election. One thing that always bothered me about the people who criticize polls is that they do it when the polls go against their own preference. It's selective bias at its worst.


5. Abortion:
Recently I've had to reexamine my thoughts on abortion for a reason similar to what Freeland cited: it's hypocritical to say that human life is sacred and should be protected and at the same time grant an exception for something like rape.

I'm still conflicted on abortion. I do believe that people are terminating human life when they undergo abortions, but there is still the issue of the value of human life. And we assign different values to different humans everyday via insurance payments, court judgments, organ transplant committees, etc.

I think I'm increasingly coming to the conclusion that abortions done out of economic convenience or rape are wrong. Although rape is a terrible tragedy and should be punished severely, the unborn is completely innocent. As a society, if the person who was raped does not want the child, they can give it up for adoption or have it become a ward of the state. The state can also provide for any expenses incurred while the mother is carrying the child to term.

If it threatens the life of the mother, then the judgment is much more simple. A more fully developed life is more valuable than a less developed one. In which case it makes sense to terminate the pregnancy because there's something more at stake than one's convenience or emotional health.

Friday, October 26, 2012

You're Projecting

One thing that humans are notoriously bad at is predicting the future. And the reason is very simple: they tend to project the present into the future. So if you're only predicting what might happen tomorrow, there's a 98% chance that the following will happen:

1. ~40 billion dollars worth of goods and services will be produced.
2. ~6500 people in the US will die.
3. The S&P 500 will lose or add less than 2.5% from its current value.

How did I arrive at those numbers? For the first two, I simply took the official estimate for GDP and deaths per year and divided it by 365. The third number? I looked at a distribution of single day stock market changes.

In other words, I looked at what happened in the past and then projected it into the future. But even if I'm right 98% of the time, it's the 2% of the time that I'm wrong, when something doesn't go as expected, that really changes the whole equation.

Think about it from the perspective of a teenage driver. Just about all of them read and write texts while driving.The vast majority of times that they do it, nothing out of the ordinary happens. But the one time out of a million that they do it and get into a fatal car wreck, their life is permanently altered. And suddenly, their life trajectory changes from one likely scenario to another.

This is what drives me absolutely insane about studies on proposed policy in Washington. All they do is project the present into the future, making a series of assumptions that are unlikely to hold up over any reasonable period of time. It's easy to say, "oh if we just raise/reduce rates by a certain amount, we can expect revenue to change by this amount over 10 years", but it's highly unlikely that that will be the case. We simply don't know how things are going to change in 10 years.

The difference between 2% annual growth and 3% annual growth is substantial. In relative terms, it's a pretty big change. In absolute terms? Not at all. These kinds of changes are, from day to day, relatively small but they have an incalculable effect on various people. Those intangible effects become tangible realities. The game changes and then our models, based on things that happened in the past, get wrecked.

If you ever look at an investment prospectus, the number one thing that they try and impress on you is this: past performance is no guarantee of the future. That phrase, or some variation of that, appears at least 50 times in any Federally regulated prospectus. And yet, we can't help but look at past performance to gauge how the stock will do in the future. Even the people who set up the investment fund do the exact same thing.

Long Term Capital Management was a hedge fund that traded based on a complex mathematical model based on the history of asset price movements. For a period of 3 years in its 5 year history, it produced outsized returns on investment. But the fund completely collapsed 2 years after that. Why? The Asian Financial Crisis happened and made price movements happen in such a way that the model couldn't predict.

The model then recommended actions that proved financially disastrous in the new reality, and it took a consortium of Wall Street's biggest banks to sort through the ruins. Whenever a person develops a trading algorithm, the first thing they do is test the algorithm by feeding it historical data on the stock market. Most of these algorithms tend to do very well, until they don't. And then they get completely screwed up by an unplanned event and everything they worked for gets wiped out in the space of 2 weeks of bad trading.

This is why life is so unpredictable. Because it only needs to get messy once before your life gets permanently altered, even if the vast majority of time, things proceed as planned. But as generals are always eager to fight the last war, governments are always eager to regulate the last problem.

Collectively, we as a society have to accept the fact that shit happens. It's such an immediately obvious truism but we don't follow it. Enron and Worldcom happen and we get Sarbanes-Oxley. The 2008 financial crisis happens and then we get Dodd-Frank. Modern society seems intent on trying to remove as much uncertainty as possible by regulating every possible action. That is ultimately a futile and self defeating task, as new rules inevitably beget new rule evaders and changes the incentives and actions of millions of people.

Ideally, government should operate by a fixed, transparent, and universally recognized set of rules. And when bad things happen, sometimes they have to shrug their shoulders and say "tough luck, kid". If that bad thing happens repeatedly, then it might be worth regulating at a later time when heads are cooler and minds are clearer. Reactionary policy is usually the worst type of policy.

Thursday, October 25, 2012

My Resolve is Gone

I've just opened up an Intrade account. Once they verify my ID, I'm going to transfer in some money and get in on the action. I'll post my holdings and returns on this blog.

I sorely regret not having been on Intrade sooner. And with less than 2 weeks before Election Day, it looks like I'll only have caught the tail end of this election cycle. But better late than never.

Wednesday, October 24, 2012

The Fear of Being on the Outside

It is completely unfathomable how prosperous modern society is today. Things that even the poorest of society take for granted today would be considered exorbitant luxuries not that long ago. Less than 150 years ago, the fleets of Imperial Russia would travel halfway around the world just to provide fresh oranges to the House of Romanov. 10 minutes working at the average national wage would buy 3 of them today.

Thomas Hobbes, an English philosopher, once opined that life without government was "solitary, poor, nasty, brutish, and short". And that was back in the 1600s. But to people today, living under the House of Stuart (or the Lords Protector for that matter) would be just so.

Things we consider necessities now were completely unattainable to the average person just a century ago. Air conditioning in the summer, heating in the winter, cell phones (let alone their landline equivalents), fresh produce available year round, the internet, all of these things were unavailable for even the richest dynasties of Europe 200 years ago.

We worry about 8% unemployment today, but just 8% of the population today could create more wealth in one month than the entire workforce working full time for a year in the 1700s. Expectations have clearly changed. And we are vastly more wealthy and pampered now than we ever were. That goes for every man, woman, and child alive today in the United States.

I think this is something we all subconsciously realize. We have it so good today and that's what makes it even worse when we get fired or laid off. In the span of human history, nobody has it better than the fully employed American worker. And I think we all realize that we're insignificant. That the work we do is, in the grand scheme of things, insignificant.

But we get paid a king's ransom to do insignificant work. This is the paradox of modern life. During the "Great Recession", people clung onto their jobs despite lower real pay, longer hours, and bosses determined to squeeze every last drop of productivity out of them. And that's because they feared about being on the outside looking in.

Because the fact is modern society can easily continue with 8% unemployment. Or even 25% unemployment (just look at Spain). Or even 35% (the modern estimate of real unemployment during the Great Depression). And this is the most stark example of class divide. The people who are employed get to have full access to the luxuries and conveniences of modern life. But the people who are unemployed get stuck in a purgatory between modern life and life as most people in history knew it.

This, I think, is the reason why left leaning Americans favor wealth redistribution. Because life is absolutely miserable when you're unemployed and it gets harder and harder to try and catch up to everybody else the longer you're unemployed. It's a vicious cycle and a few million of the people who are currently unemployed (or who dropped out of the workforce altogether) will never get back to even, through little or no fault of their own.

It's a real issue. One that can't simply be dismissed because as society grows more and more prosperous, it will take even less of us to produce the total amount of goods and services for the entire population. When it seems that these economic cycles are completely subject to the whims of a rich minority, people feel cheated and that feeling quickly turns mutinous. Some unnamed rich person in Kennedy's Camelot once remarked that "I would rather give half of my fortune away than lose all of it (through revolution)".

Welfare is the modern bread and circuses for the unwashed, unemployed (some would say unemployable) masses. And it's the fear of being on the outside (or up against the wall) that drives people to support it.

Tuesday, October 23, 2012

Win the Battle, Lose the War

According to CNN, President Obama won the debate 48% to 40%. It's not that big of a margin. But one thing was readily apparent: in a debate on foreign policy, the commander in chief has a built in, almost insurmountable advantage. And that showed in this debate.

In a strategic sense, I think Romney walked away from this debate satisfied with his performance. He was playing a different sort of prevent defense. His debate strategy was to mollify and reassure the independent while he was content to let Obama play as attack dog.

In my own biased opinion, I thought that was unpresidential. A sitting President should talk about his policies and his deeds, not nitpick the statements of his challenger. He sort of stooped down to a challenger's level whereas he should have been trying to fend off Romney from climbing up to his.

The debate was undoubtedly a tactical victory for Obama. I think it was a strategic victory for Romney. It is extraordinarily difficult to unseat a modern President precisely because the office is overexposed. The President is in front of a camera every day of every week. People get used to watching his image in their television and computer screens. And challengers aren't going to be able to defeat an incumbent until two conditions are satisfied. 1:  voters are in the mood for a change. 2: voters are confident that the challenger represents a safe change.

The first debate was a game changer. The last two were relative draws, much more in line with the history of debates. It's now up to each respective campaign to get out the vote and push their candidate over the top. Currently this is an extremely tight race. It seems likely to remain so all the way to election day.

Sunday, October 21, 2012

Mundane Reality vs Glamorization

Two weeks ago, the division of the IT department I work in had an all hands meeting to discuss restructuring and the general state of affairs within the division. All the directors and the VP gave a presentation. And our tech director showed us a video that featured him and the division that was produced by Microsoft to market its B2B solutions in software development.

The video had astounding production quality. It grabbed its audience immediately with engaging music, quick cuts, and sound byte friendly monologues. By the end of it, it certainly pumped me up and made me want to hit my desk and crush some code. Then I remembered that I was a software developer and my job is incredibly mundane. The director who was featured in the video also joked that "the video makes me look 10 times cooler than I actually am".

And then it hit me. I was seeing the "training montage" of software development. I'm referring to the unfortunate tendency of Hollywood to expedite the training process in a movie so that the main character moves up from scrub to deadly warrior with an inspirational montage of training and upbeat music. The fact that it always takes longer is never really explained to the audience, a point made brilliantly in this article where the author laments how Karate Kid and Rocky ruined the modern world.

I'm going to tell you straight up that, if you can get it, a software development position is one of the plum jobs still available today. And there's incredible demand for people who can write software. The hours are good. The pay is good. And your team is usually good too, because incompetent software developers wash out pretty quickly.

The only problem is that it is harder to become a software developer than, say, a waiter. If you don't have any formal education in the field in high school or college, becoming a self taught programmer is extremely hard. Even if you're being taught in school, you won't be able to breeze by the classes. It takes a decent amount of intelligence and discipline to understand how to evaluate algorithmic performance, create and manipulate objects in memory, and putting together a disparate group of classes together into a gestalt application that's capable of doing something useful.

You need to be good at math. You have to be able to have enough concentration to power through an obstacle. You need to have the discipline and capacity for masochism in order to stare at a block of code for an hour and figure out why it's not giving you what you want. But if you can get through all of that, the job itself is relatively easy and it pays very well. If you have proven work experience in programming, you can expect recruiters to bang down your door to try and place you at a company that's willing to offer you 80k+ out the gate. Very few graduates will even sniff that amount 1 or 2 years out of college.

But it's an exceptionally dull job. Which is why there aren't a lot of developers out there. The most similar position I can think of is a UPS driver. The average UPS driver will pull in over 70k per year and the position doesn't even require a college degree. But many people don't want to be UPS drivers. It's a dull and monotonous job. And it's decidedly unglamorous, just like coding.

I can't help think that people my age want all the perks of a good job without putting in the time or effort to acquire and perform at said job. People watch Jersey Shore and see otherwise unemployable people dance, drink, copulate and get paid millions of dollars per year and think "why can't I have that?"

Everybody wants to be the people sitting on an outdoor patio of a fancy downtown restaurant enjoying lunch, but nobody wants to put in the time and effort. College doesn't guarantee you a good job. If anything, the typical college experience makes it harder for teenagers to make a successful transition into adulthood. In work, you have to show up every day at an appropriate time and do your job. That doesn't happen at most colleges, where people regularly blow off 1 hour lecture classes and figure out how to get a passing grade doing the least amount of work possible.

You still have to put in the time. And that's something that movies and TV never show. Because it would take too long.

Saturday, October 20, 2012

Real Time With Bill Maher: Counterpoints and Retrospective (10/19)

Not a very good show tonight. We had one loud Republican and one loud Democrat with a visibly annoyed Maher. There was a lot of shouting over, but the show had enough substance to do a counterpoints post on. So let's get to it.

1. GMOs: Maher had Gary Hirshberg, chairman of Stonyfield Farm as the pre-panel interview guest and the guy spouted a litany of complaints against GMOs, the companies that manufacture them, and some other standard green stuff. So it bears mentioning a few things.

Norman Borlaug saved a billion lives with GMOs. When Hirshberg tells the audience that GMOs don't increase crop yields, he is flat out lying to American public. There is only so much arable land in the world. It is important to get as much food as possible from it. And that's what GMOs do.

Monsanto is not this huge, wildly profitable company contributing nothing to society. They made 11.8 billion dollars in revenue last year and had a profit of 1.7 billion dollars. That's a profit margin of 14.4%. While it's significantly above the S&P 500 average of 7.8%, there are many big companies that have far bigger margins. And it's not like Monsanto is duping consumers into buying their products. Most of its revenue comes from business to business sales. Obviously their primary customers find value in the products that they offer otherwise they wouldn't buy them.

Hirshberg also took a cheap shot at DDT, the banning of which has led to hundreds of millions of lives lost to malaria and other mosquito-borne diseases. DDT is extremely effective at keeping mosquito populations suppressed and if it weren't for some ridiculous concern of thinning egg shells for peregrine falcons, millions more would be alive today. I'm for the conservation of wildlife, but not at the direct expense of human lives.

 2. Private Equity and LBOs: The second interview guest was Matt Taibbi, who is an extremely effective writer although he always plays fast and loose with the facts and never hesitates to put a left-leaning spin on his articles. And he went in and trashed Bain Capital for its private equity practices. But let's examine the main claim of PE firms saddling up firms with debt to pay dividends and fees to make money regardless of whether the firm is successful or not.

There is only one way for a PE firm to make money on a leveraged buyout no matter whether if the bought out company is successful or not: if they buy the company at a value less than the proper value of the company.

For example, Consolidated Widgets has a thriving operation selling various doodads. It owns 20 factories, employs 15000 employees, and last year it made 1 billion dollars in profit. It's projected that it will make more this year. It currently has no debt and over 5 billion dollars in cash or near-cash reserves.

If Bain Capital comes in and says "we wanna buy your company for 10 billion dollars", the current owners of the company would be idiotic to sell their company for that amount. Using traditional valuation models, Consolidated Widgets would be worth at least 20 billion dollars. And buyouts of companies are always done at a price premium, which means a company like Bain would have to pony up more than what the company is worth.

Bain Capital's mission is to make money. Their current business model is to buy out companies, make them more valuable, then sell those companies at a profit. There's no way they can go in, buy a company, saddle it with debt, issue dividends to themselves, reap management fees, and completely run the company into the ground and still make a profit unless they bought the company at a value less than what the company was worth. In which case, the previous owners were idiots.

This isn't to say that saddling a company with debt and issuing dividends isn't a sound strategy. The Wall Street Journal today just reported that many PE companies are doing so because interest rates are so low (negative real interest rates for companies with sterling credit grades).

What you have to remember is that the people who are lending that money also expect to make a profit on it. Everybody is looking out for themselves and if bondholders didn't think that money was going to be paid back, they wouldn't have lent to those companies in the first place.

I'm going to close with this: there are many things in the business world that are very confusing to the average person. Trying to reduce a complex business operation into a simplified explanation is even a bigger disservice.

Most people hate collections agencies (and I'll be the first to admit that some of them have very unscrupulous tactics), but they also serve a purpose in the economy by making credit more widely available. If credit card companies couldn't sell off bad loans to those agencies, they'd be less willing to extend credit in the first place. And credit, when managed responsibly, is a good thing.

3. Obamacare and Papa John's: When John Schnatter, in a conference call to investors, said that the PPACA would raise the cost of their pizzas by 15-19 cents, many people were like "I'll pay that much more to provide those employees insurance". While that may be true at an individual case, it's not true for the economy as a whole.

If the PPACA raises pizza costs by 15-19 cents, how much will it raise costs for other consumer goods. It affects every company in the US, so what happens if everything suddenly becomes 15-19 cents more expensive? Cents start adding up to dollars. And dollars start adding up to significantly less purchasing power, especially for low income households.

Government regulation has real costs that businesses have to deal with. Some of them pass the cost onto the consumers; others try to avoid the activities that engender regulation. As a secondhand example, the lead software developer on my team rewrote some billing software my company uses. They spent a lot of time dealing with SOX (Sarbanes-Oxley) compliance.

Lead software developers cost a lot of money for a company. Every hour that my boss has to spend writing code to deal with a government regulation is an hour less than he has to write code to deliver real business value to the company. During lunch today, one of my friends (who is a forensic accountant) remarked that if it weren't for SOX, he probably wouldn't be in the industry that he's in.

Government regulations imposes costs onto certain parties in order to produce benefits for other parties. But today, many regulations oftentimes have no net benefit to society. Health care is the most heavily regulated sector of the economy and has numerous cost control provisions. But it still doesn't stop health costs from rising much faster than the general rate of inflation.

It's a truism that actions have consequences. Government regulation has consequences too. Many of them negative. But it seems like the Democratic Party and its supporters feel that there's still too little regulation.

Thursday, October 18, 2012

The Coming Technology Revolution and the New Economy

I have a Samsung Galaxy S3, and it's an awesome smartphone. It's fast. Incredibly light. Incredibly thin. It has a vivid, large display. And it does just about anything I want it to do. But I almost never use it to call people.

Our smartphones aren't phones anymore. Hardly anybody my age ever uses the actual phone portion of the smartphone. According to my billing cycle, I used 113 minutes last month. That works out to less than 4 minutes a day. That's maybe 5% of the total time I spend using my phone.

In the rush to declare the PC dead, tech journalists apparently forgot that things like smartphones and tablets are nothing more than smaller computers in a different form factor. The things we used to do on our desktop and laptop computers we now do on our smartphones and tablets.

We are fast approaching a time when we can integrate our smartphone with anything. We're going to stop carrying our keys and wallets, because our phones can store them. Your IDs? Just open your digital wallet on your phone. Cash and credit cards? You can store your bank and credit card information on your phone and conduct transactions using NFC.

What about your home and car? Soon enough we'll start unlocking doors and starting up engines with our phones using NFC as well. Televisions and home computers? Control them using your phone. We have the technology to do it today. But it'll take a few years to make it effortless and widespread.

There's already a term for this phenomenon, when anything and everything can be controlled via a tiny chip. It's called zero compute, and Intel thinks we're going to arrive there in 8 years. Because computer chips are getting smaller and cheaper, we'll be able to jam them into anything. Doors, TVs, lights, AC units, cars, cabinets, furniture, you name it, and it'll probably have a chip put in. Even our clothes will have chips in them.

This is what's going to spur economic growth in developed markets like the United States. Everybody is going to rush to make our lives easier and more convenient with more and more "smart" consumer electronics. So who's going to profit off of this?

Industrial designers, software developers, electrical engineers, computer engineers, and the entrepreneurs and venture capitalists willing to bankroll and develop the ideas of the aforementioned.

Apple got onto something big. It's no longer a "computer company" or even a "technology company". It's a consumer electronics company. And as the smartphone and tablets rapidly become commoditized, Apple is going to have to find new products and services in order to continue making obscene profits. And that means building things like iLamps and iBlenders and iTVs with all of it controllable via your iPhone.

The next company or companies that find a way to seamlessly standardize and integrate everything with computer chips is going to be obscenely rich. We're already starting to see examples of the future with things like Nest.

The next 10 years is going to be special. And it will turn us all into lazy idiots.

Wednesday, October 17, 2012

President Obama Decisively Beats Romney

I'm calling it like I see it. And President Obama beat Romney in an ugly brawl. I think both candidates dragged each other down, but Obama's attacks were generally more effective. There were a ton of attacks and I'm sure many "fact checkers" will be very busy, but Obama has his base fired up, fought a successful rearguard action, and now it's up to Romney to regain the initiative in the third and final debate.

Tuesday, October 16, 2012

This Election Cycle's Buzzword Is...

Low information voter. The term always existed but ever since Bill Maher used it two months ago, I see it cropping up fairly regularly in the usual left-leaning publications.

The Debates: Part Two

The second of the Presidential debates will commence tonight and it's a town hall format. Questions, screened by the moderator, will be asked by undecided voters picked by the Gallup polling organization. The candidate will have a two minute response. And then a follow up 1 minute response from a moderator prompt.

Because of the different format of "debate", the candidates are going to have to do a tricky dance. It goes as follows:

1. Thank the questioner. Praise the question and rephrase/repeat it as a stall tactic.

2. Speak in generalities related to the question.

3. Explain what's needed to answer the question. Give examples.

4. Pivot to the other candidate and explain why the other guy's answer is worse.

5. Closing statement. Thank the questioner again.

And then they have to do it in a way that makes them look good. This is especially important for Romney, as he is still perceived to be a rich, out-of-touch, old white guy.

So for example, one of the people might ask, "Governor Romney, my name is Joe Sixpack. I'm currently underwater on my house and I'm struggling to make payments on the mortgage. And there are millions of people in America in my same situation. What would your administration do to help people like me?"

His answer should be something along the lines of this:

"Well, Joe. First off I want to thank you for your question . It touches on a very important subject in America right now. And that's this: home prices have plummeted in the recession and people are struggling to get by (1).

And in order to find a solution, we first have to identify the problem. And the problem is this: we have a weak economy. And a weak economy means there aren't enough jobs to go around. Less jobs means there are fewer people with money to spend, and that lowers demand for things like homes, which in turn lower prices (2).

Now, there are a few things that the government can do to help get the economy moving again. Lowering taxes on the middle class is one way. I believe that you know how to spend your own money better than the government. Government getting out of the way of business is another way. Gibson Guitar Company had its building raided by armed Federal officers on allegations that they were in violation of a law that's over 100 years old about endangered wood imported from India. It's hard to run a business when the Feds can put you out of business for violating any one of the 80,000 pages of rules and regulations in the Federal Register. (3)

During the President's time in office, there have been 42 consecutive months with unemployment above 8%. Prior to that, since 1950, there have only been 39 months with unemployment above that mark. It's clear that this Administration has failed when it comes to the economy (4).

Under my Administration, I'd put into place policies that will help our economy grow again, to get people jobs that pay well. You'll start to see the value of your home go up again. And it'll get easier for you to pay your mortgage. Thank you. (5)"

I clocked that at 1 minute and 50 seconds. Romney is a pretty fast speaker, so he could probably get it done 15 seconds faster. You can use the extra time to continue to lambast the other candidate, or give more examples supporting your answer.

It's still going to be much harder to attack the other guy. Because it's not really a debate so much as a joint Q&A session with the proles. Both candidates will have a balancing act to perform. They need to craft their answers in a way that makes them look better to the TV audience and also answer the questioner without making it look like it's merely something to acknowledge before ripping into the other candidate.

Since Obama had such a disastrous first outing, expectations are going to be lower for the undecided voters but higher for the base. But he can't come out swinging otherwise he'll look phony and inauthentic. A town hall debate isn't a place where you can easily attack your opponent. You have to make sure that it's relevant to both the questioner and make sure it doesn't come off as canned for the TV audience.

As for Romney, because he gained so much ground in the first debate, expectations are going to be higher. He needs to continue looking like a viable alternative for President. But he also needs to show that he can relate to the voters at home and in the live audience. If he does that, he'll gain ground.

Romney is at a disadvantage here. If he fights the debate to a draw, the President stabilizes and will use its superior ground game to eek out a win on Election Day. Because the third debate is Obama's turf, and Romney is a lot weaker in the eyes of voters when it comes to foreign policy. This is his best chance to gain some more momentum.

For Romney, victory hinges on his performance in the second debate.

Saturday, October 13, 2012

Real Time With Bill Maher: Counterpoints and Retrospective (10/12/12)

Tonight we had a panel full of Type As, but at least they were well informed Type As. Good show, but as always, there are a few things to go over, clarify, and rebut.

1. Racism and Ann Coulter: I hate Ann Coulter. To me, she symbolizes the worst elements the Republican Party. She's annoying, rude, boorish, and demagogues every issue. There are legitimate points that she tried to communicate but they got lost in the miasma of her noxious personality.

But I do agree, for instance, that at a state and Federal level, racism essentially doesn't exist if you define racism as the systematic and concerted use of state power to disenfranchise a racial minority. "Intelligence" tests are gone. Poll taxes are gone. Grandfather clauses to shield whites from Jim Crow are gone. Segregation is gone. Any vestige of real racism, where there was a systematic and concerted effort by the government to disadvantage blacks has long since bitten the dust.

The new "racism" today is driven by "disparate impact analysis" and "the legacy of racism". For example, blacks as a whole have trouble obtaining non-FHA insured mortgages. This is not because the banks and mortgage brokers are being racist. It's because, on average, blacks have lower credit scores, incomes, and wealth than the rest of the country. This is where a left-leaning person would say that the legacy of racism disparately impacts black people and that something should be done about it, such as regulating banks to "encourage" them to give mortgages to people they would otherwise deny.

I don't think we should do that. Although I think that the government does have a certain limited responsibility to help people in the lower socioeconomic classes, it doesn't warrant regulating the private sector to encourage a different outcome. It should be a direct subsidy to the person in need, such as the EITC.

 And when it comes to education, we should give families the freedom to choose where they send their kids to school rather than forcing them to go to a certain public school because that's where they are zoned for. That encourages the cloistering of like socioeconomic groups into sheltered and isolated communities and creates tears in the social fabric.

2. Confirmation Bias and the Veep Debate: Maher is utterly convinced that Biden won the debate. But he's suffering from an overwhelming obvious case of confirmation bias. He saw what he wanted to see, Biden aggressively tearing into Ryan and the Republican Party, and assumed that the rest of America wanted to see it as well.

I've already given my thoughts on the issue. Biden was a boorish debater who fought Ryan to a draw on substance. But given the fact that he was so rude, Ryan edges him out slightly only because he acted like a dick while Ryan kept calm and collected. I'm glad that Affleck saw and admitted that Biden was being... discourteous. I think it forced Maher to at least rethink how the rest of America saw the debate.

3. Sheila Bair For Senator: During the financial crisis and the subsequent events, I did not have any strong opinion toward Bair one way or the other. She was a relatively minor player compared to people like Paulson, Bernanke, Bush, Geithner, Obama, and the Congressional leadership. But I was extremely impressed with how she handled herself on the show.

She was level headed, reasonable, incredibly well spoken, intelligent, and informed. She is an ideal government bureaucrat (I mean that in complete sincerity) and I think she was largely wasted on the Federal bureaucracy. She belongs in Congress because of two things I plan on discussing immediately after.

4. Blowing Bond Bubbles: Maher asked Bair what she thought the next bubble was gonna be and she immediately said the bond bubble. She could not have been more correct. This is why: As of today, the yield on the 10 year Treasury Note was 1.663%. That means a dollar invested in a Note today will turn into 1.18 10 years from now.

But interest rates have to come back up eventually. Nobody (not even Bernanke) knows when that time will come, but it will come and when it happens it's gonna be bad. Let's say in order to stave off rapidly rising inflation, the Fed brings the Federal Funds Rate back up to 8% and that's where the 10 year note settles at. That means a dollar turns into 2.16 10 years later.

For the person who invested in a 10 year note at 1.663%, he is in a terrible financial position. Nobody is going to buy a 10 year note yielding 1.663% when the government is issuing them at 8%. In order to get it on par with the government's offering, he'd have to offer it at 54 cents on the dollar. Or if he decides to hold onto his bond, he'll likely see his nominal gains wiped out (and then some) by inflation.

The damage would be even worse in the corporate bond market. Because nobody is going to be interested in corporate debt when the Federal government (who is always going to be more creditworthy than a private company) is issuing bonds that yield far more than the going rate for both investment grade and high yield corporate debt.

Consumer finance experts love to talk about the impending student debt bubble (and make no mistake, that's a bubble as well), but the 1 trillion dollars in outstanding student loans has nothing on the 32 trillion dollar US bond market.

5. Respect My (Bureaucratic) Authority: The other salient point that Bair made was Dodd Frank's outsourcing of authority to the executive branch. Congress, living up to its popularity ratings (~7%), hates making real decisions. This is ironic considering the original intent of the Founders was to give the most power to the legislative branch.

But they keep ducking responsibility. Dodd-Frank was hailed as sorely needed financial regulation. But the problem is Congress doesn't know what it's actually going to do. Dodd-Frank is nothing more than general guidelines that they want the bureaucracy to target. The actual implementation is completely up to the regulatory agencies.

This delegation of practical authority is disastrous because it places too much power in the hands of unelected bureaucrats who only answer to the President. It consolidates too much practical and effective power in the executive branch, making it even more important who is in the White House.

When you have an anti-business President like Obama, this can be a bad thing. It might not even go over well with a pro-business candidate like Romney simply because of the possibility of the executive branch being too unwieldy to effectively manage.

Dodd-Frank (as well as most other recent "reform" overhauls of Federal law) represents nothing more than prosecutorial discretion writ large, which opens the door to corrupt government. For example, state and local governments empower police officers the ability to arrest a person based on their own judgment and interpretation of the law. The less clear the law is, the more effective power the police officer has. If the police officer is virtuous, then this isn't necessarily a bad thing. But let's be real. There are tons of bad eggs in public service. Giving them greater incentive to be corrupt is definitely not in the public interest.

6. Peace Through Strength: Maher, per usual, harped on defense spending again on the show. But this is something I don't get. The government, at all levels, wastes an incredible amount of money. Defense wastes its fair share too. But in terms of dollars spent, defense represents the government's greatest and most effective program. We have the strongest military that no other country can compete with.

We spend more on health care per capita in Medicare alone than entire countries' single payer systems and our health outcomes are much worse. We spend more on education per capita than any other country (barring the super rich and super tiny countries like Luxembourg) on Earth but our math and reading at a K12 level are in the lower lower half of the OECD.

For all the money we waste on defense, we still have a military that is the envy of the world and second to none. We can't say the same on education or health care, the two other major public programs that governments are responsible for. That is significant.

Wow, this turned out to be pretty long. I hope you guys enjoyed it.

Friday, October 12, 2012

The Veep Debate

This was a pretty intense debate. Certainly a much more substantive and engaging debate than the one in 2008. It's safe to say that Paul Ryan is the exact opposite of Sarah Palin, who is a simpering dolt.

The quick takeaway? Vice President Biden was a rude, boorish clown who couldn't stop laughing, smirking, and interrupting Paul Ryan. Other than that, they essentially fought to a draw. So overall, I'd give a slight edge to Ryan.

Sorry this post is so light. Busy, early day tomorrow. I'll make it up tomorrow.

Thursday, October 11, 2012

Predicting the Outcome: Fisher v. University of Texas

Yesterday, the Supreme Court heard oral arguments for Fisher vs UT(exas), a case which has the potential of upending racial based Affirmative Action. This would reverse the 2003 decision for Grutter v. Bollinger upholding (on a 5-4 basis) Affirmative Action as a "narrow' consideration (among other factors) for admission.

It's highly likely that this is going to get shut down. Time to whip out the ole' prediction section, because this is gonna be a lock. 5-3 or possibly even a 6-2 decision that repudiates Affirmative Action (Kagan has recused herself from the case).*

* As a basis for being a vindicated prediction, the Supreme Court needs to rule in favor (5 votes or more) of the plaintiff, Abigail Fisher.

Accountability Department:

Predictions outstanding: 2 (Marissa Meyer, this)

Predictions vindicated: 0

Predictions erroneous: 1 (Romney Veepstakes)

Wednesday, October 10, 2012

Causality and Errors in Attribution

We all have good luck charms or rituals that we follow before a big event. Some boxers used to refrain from having sex for a few days before the Big Fight. A salesman might pump himself up in front of a mirror before making the Big Pitch. This is even reflected on a corporate level. Pixar, for instance, has its own good luck charm in the form of John Ratzenberger, who has voiced acted a significant role in every one of Pixar's films.

One of my friends in college was really superstitious when it came to football games. When our team was losing, he'd take off his hat and put his ticket stub in it while muttering something about needing to "change our luck". I've been prone to this kind of sports superstition as well. But every time I think about doing something different to "change our luck", I think about how ridiculous I am for thinking that I could change the outcome of a game being played hundreds of miles away from where I am.


I've also seen Bud Light light commercials lampooning this kind of behavior with the tagline "It's only weird if it doesn't work." I think it's an absolutely brilliant and humorous commercial that really nails down a flaw in human psyche: attributing causality to things that, on second thought, have no way of affecting the outcome to something.

In politics, a politician will keep on the same staff that got in on the ground floor on his career. And as he climbs up the ladder in prestige and capacity, he gets introduced to increasingly talented and experienced political operatives that might be much more effective than his original staff, but he'll stick with his guys anyway.

Some people may attribute that to loyalty. But what good is loyalty if you lose? Today's politician cares only about winning the next election. Losers are shunned and marginalized. Rick Santorum dropped out of the Republican primary campaign right before the Pennsylvania primary because he didn't want the loser label to stick (he had lost his reelection bid by 18 points in 2006). Politicians stick with the guys who have been with them at the beginning because they are the politician's good luck charms.

Once the game or election is over, people love nothing more but to look back on the events and assign attribution. This play was when the game was lost. That debate was when the tide had turned. The decline and fall of the Roman Empire happened, according to Edward Gibbon, because of the adoption of Christianity as the state's official religion. Kennedy won the election because of a sweaty and unkempt Nixon being untelegenic in the first ever nationally televised Presidential debate. And, as a more recent example, the financial crisis and recession happened because....

Because what, exactly? Investment banks bundling up opaque mortgage backed securities? Predatory mortgage lending practices by the banks? Irrational exuberance on the part of prospective and existing homeowners? Or maybe all 3? Or maybe something else entirely unrelated like the spillover effects of the Asian Financial Crisis and the Dotcom bubble prompting a low interest rate policy by the Federal Reserve?

 It's so easy to assign attribution and causality to certain events, but the thing is we can never really know. We grasp for straws and we come up with explanations that, in all likelihood, do a better job of explaining our prejudice and intelligence more than it does explaining what happened and why.

But I'm pretty sure things like good luck charms and pre-game rituals are shortcuts that allow people to function without trying to constantly second guess themselves. You can listen to two "intellectuals" from opposing ideologies argue constantly for hours and be none the wiser. So why not just go with tradition and superstition and see what unfolds?

The day after November 6 will bring forth a host of journalists, writers, pundits, politicians, and the rest of the people who make up the chattering class trying to explain why the election unfolded the way it did. They'll cite past examples in history as affirmation of their own theories. And none of it will be provable.

There's a very good quote on this kind of navel gazing, even though it's mainly used to deride neoconservative ideology:
The aide said that guys like me were "in what we call the reality-based community," which he defined as people who "believe that solutions emerge from your judicious study of discernible reality." ... "That's not the way the world really works anymore," he continued. "We're an empire now, and when we act, we create our own reality. And while you're studying that reality—judiciously, as you will—we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors…and you, all of you, will be left to just study what we do.
But it actually contains some very good advice: Make the best decision possible in the given moment, then accept and live with the consequences. Keep moving forward and don't get trapped in the past.

Tuesday, October 9, 2012

Be the Bank

I first learned about Lending Club via a guest blog post on Megan McArdle's former blog for The Atlantic (she writes for The Daily Beast now). Curious, I googled Lending Club to get more information. And the more I read about it, the more I became convinced that this was the best thing since Dancing Jesus. The concept is pretty damn simple: formalized peer to peer lending.

Lending Club (LC) acts as a broker between individual borrowers and lenders. Borrowers apply for credit and LC underwrites the loan and determines a fair market interest rate. Prospective lenders can then review the loan and decide to invest in it in 25 dollar increments called "notes". Loan lengths are either 3 or 5 years, with the borrower making monthly payments. LC collects the payments and then distributes them to the lenders.

You essentially become a credit card company, because the rates that Lending Club charges are about the same as what credit card companies normally charge. Many borrowers are consumers who consolidate their credit card debt into one monthly payment at a lower interest rate. The debt is also unsecured, which means that failure to pay only means that the borrower's credit score gets hurt.

 This idea is absolutely brilliant to me. I became sold one hour after reading that blog post. I immediately opened an account and invested 1k of my own money into it. 6 months later, almost all of my notes are still current (one potentially unscrupulous individual is currently in his grace period). I'm on track to have an annualized gain of 12.5%.

I don't expect that 12.5% to hold up over the full length of my loans (average maturity is slightly less than 48 months), but LC has crunched the hypothetical numbers and tells me that my overall ROI is going to be somewhere around 8 to 9%. In today's low yield reality, 8-9% is an absolute steal.

 I recently put in another round of funding, and I'm considering doing an additional third round soon. To minimize risk to principal, LC recommends that you have 800 notes (20k) for optimal diversification. I'm nowhere near that amount, but I'm going to try and work my way up to that magic number in the coming years.

It's too soon to tell whether my experiment with Lending Club will be "worth it" or not, but so far so good. There are obviously things that can lose me money, such as another economic downturn (which would hurt a borrower's ability to repay an unsecured loan), but I feel confident that we'll muddle through for the medium term.

This is the kind of financial innovation that genuinely helps people. It's no secret that the modern economy runs on debt. But giving individuals like me the ability to invest their savings to give credit to a person who needs it is a net plus for the economy. It allows borrowers lower rates on their credit, and it gives individual lenders a taste of the same kind of risk/reward dynamic that the banks operate on.

What people need to realize is that there is essentially zero distance between us and big business. Collectively, over half of America works for a business that employs 500 or more people. If more people had significant stakes in business, I think the attitude in Washington would be a lot healthier when it comes to business policy. And good business policy is good for everybody in the United States.

A left leaning cynic might argue that I'm essentially putting a new polish on "what's good for General Motors is good for America", and they'd be right. But that's always been the case. When American businesses succeed and prosper, Americans succeed and prosper.

Think back to the nadir of the financial crisis. Everybody is panicking that the economic world is ending. And then what was the policy reaction? We bailed out Wall Street, the insurance industry, and the American automobile industry. The backlash came later when things stabilized and people became more confident that the world wasn't going to end. But when it mattered, the American people and the Federal government instinctively moved to protect the biggest businesses.

Sunday, October 7, 2012

What You Need to Know About the National Debt Right Now

I stumbled upon this article a long time ago and it was an extremely informative essay on what the national debt is and how it affects public policy. The general principles of that piece remain true even to this day, but the facts have changed and so have the numbers. So a new primer on the national debt is needed.

Whenever the Federal government wants to spend money, it can choose to pay for that spending with either tax revenue or borrowed money. It borrows money by issuing Treasury bonds. The initial buyers (the primary market) of Treasurys include primary dealers, various funds (mutual, pension, hedge, etc), individuals, foreign governments, and the Federal Reserve itself.

Because Treasury bonds have essentially no risk but can have long maturities, the initial buyers of Treasurys will sell them to other people and institutions at the market clearing price. This is known as the secondary market. When the maturity date on the issued bonds arrives, the Treasury is required to pay the bearer the full face value of the bond. Longer term Treasurys also carry a coupon payment, which are interim payments made to the bondholder as a form of interest payment.

The face value of all Treasury bonds outstanding represent the entire national debt. Interest paid on the debt is a line item in the Federal budget known as "net interest". At the time of this writing, the total national debt is 16.162 trillion dollars. However, not all national debt is created equal. There are two forms of debt: intragovernmental holdings and publicly held debt.

Publicly held debt represents the Treasury bonds that are in the hands of nongovernmental persons and institutions. This is the debt that the Federal government has to pay interest on.

The other category of national debt, intragovernmental holdings, represent the Treasury bonds that are held by various agencies, institutions, and organizations that make up the Federal government. The biggest holdings belong to the Social Security Trust, the Medicare Trust, and the Federal Reserve. The Federal government doesn't have to pay net interest on these debts, because it would represent the Federal government paying itself.

What taxpayers and politicians need to worry about is the publicly held debt. At the time of this writing, that amount is 11.122 trillion dollars, which is approximately 71% of GDP. Of those 11 trillion dollars worth of debt, foreign holders own about 5.348 trillion of it, which is approximately 48% of the publicly held debt.

Currently, real interest rates on Treasury debt are negative. That means anybody who buys Treasurys off the primary or secondary market will actually lose purchasing power during the time that they own the debt. In 2011, 98.8% of the public debt issued by the Federal government was bought either by the Federal Reserve or by foreign institutions. Because the Federal Reserve has the power to create money out of thin air, this means that the rest of the world is paying the US government to spend money.

Given the fact that the Federal Reserve has essentially committed itself to indefinite quantitative easing (until the economy looks like it can move on its own), it seems likely that the current environment of negative real interest rates will continue until the economy fully recovers. That means the Federal government has a blank check to spend to its hearts content. The majority of the money will be supplied by the Federal Reserve, while the rest gets picked up on a foreigner's tab.

So what's the policy prescription given this extraordinary state of affairs? People in the Democratic Party would likely argue that the Federal government should spend the money instead, but I simply don't think the government could effectively spend that much money. Most of it would probably go to state aid and I don't think they could spend that money effectively either.

So I bet you can guess what I'm going to recommend. Tax cuts. Put more money into people's pockets and let them do whatever with it. The Federal government should make it clear to people that these low tax rates will exist only until the economy picks up. And hopefully by then, the economy will have picked up and we can get some breathing room to tackle the long term fiscal challenges that Social Security and Medicare represent.

Saturday, October 6, 2012

Real Time With Bill Maher: Counterpoints and Retrospective (10/5/12)

Excellent show on HBO tonight. Real Time lives and dies by its panel and tonight it had a good one. Well spoken and intelligent journalist, bog standard Republican, well spoken and intelligent actress. They meshed pretty well. So let's dive into what they got right and what they got wrong.

The Debates: Frankly, I'm surprised that Maher and Washington were so shocked on why President Obama performed poorly in the debates. Are memories that short? Because it was clear in the 2008 election cycle that Obama was not a good debater. He skated through because Clinton had a string of bad luck and McCain was a decidedly below average debater. This is what I remember most from that past election's debates:


Obama had pretty much the same style during these debates. He's not animated. He takes too long to formulate an answer. He looks down a lot. He speaks haltingly and hesitantly, as if he were trying to measure every word, and it shows. What the audience sees is an apparently lackadaisical effort.

The press let him get away with it too. They treated him with kid gloves during 2008 (just google "journolist 2008 obama") and continued to do so after he was elected President. He's not used to being severely challenged. And he was extremely lucky to fight Clinton to a draw in 2007.

In comes Romney in 2012, and there's no denying that the guy is extremely intelligent, very well spoken, and came in with the same type of energy and enthusiasm that belies his corporate consulting background. The difference was palpable and that's why everybody said Romney won. Because it would be blatantly biased to say otherwise.

You have to come to the conclusion that either a. people rarely express their real thoughts in public (I'm sure there were a number of Democrats who were extremely nervous going into the debates precisely because of the reasons I outlined above) or b. people have extremely short and inaccurate memories. Obama was never a good debater. Get over it. He'll be more "animated", "energetic", and "involved" in the 2nd and 3rd debates but he'll still be fighting uphill.

 Republican Strategy: The pre-panel interview guest was Frank Luntz, a veteran Republican pollster and you could tell right away that Maher had an extremely grudging respect for him. Maher hates guys like Luntz because they are the strategists who manipulate stupid people into voting for a candidate that they "shouldn't" vote for. It's a feeling best summarized as the attitude behind "What's the Matter with Kansas?"

Of course, this ignores the very same dynamic with Democrats and segments of their own base. Low information voters (I hate how this term keeps popping up in liberal circles) vote for both parties and both parties do things to court them. There's a reason why the DCCC always puts up a black candidate in urban districts where the plurality of the electorate is black. There's a reason why they wanted Caroline Kennedy to run for a vacant Senate seat in New York.

To pretend one party is full of people who just know better is just plain wrong. The principal difference between the Republican Party and the Democratic Party is the makeup of their elites. Republican elites are businessmen and church leaders. The Democratic elites are lawyers, journalists, and rich people whose jobs aren't mentally or physically strenuous but pay really well so they feel subconscious guilt about their wealth.

There are dog whistle phrases used in both parties. Let's not try and pretend otherwise.

Global Warming: Washington said something to the effect of "even if global warming's effects might not be as severe as predicted, shouldn't we err on the side of caution?" Well the problem is that erring on the side of caution is economically ruinous. Higher energy costs means higher costs across the board. It takes cheap energy to run the modern economy. And the unwashed masses are not going to be happy with 8 dollar per gallon gasoline (the average price in Europe), 20 cents per kwh for electricity, and higher prices for consumer cyclicals and durables.

This is something that I wish Maher would actually talk about: his actual proposals. Let's pretend for a minute that the green lobby had its way. What is its way? The only problem with that is that it opens up those policies to criticism and that's the classic problem with the elites in the Democratic Party: they always complain about a problem but they never do anything about it. "And yet..." is the driving force behind the modern Democratic Party.

Affirmative Action: Make no mistake, the Supreme Court (probably via a 5-3 split decision, although I'm hoping it could be 6-2) is going to strike down Affirmative Action with its ruling on Fisher v. University of Texas. But when Washington defended Affirmative Action and spouted a bunch of platitudes on the wonders of (all kinds of) diversity, it just sickened me.

Affirmative Action seeks to remedy historic injustices (and just give a leg up to disadvantaged minorities in general) by giving something to somebody who didn't deserve it. I agree that we should help disadvantaged people, but I wouldn't do it based on the color of their skin. And I wouldn't "help" them in the manner that Affirmative Action does.

The key to the upper middle class in America is a good education. And a good education doesn't start at college. It starts in our K12 public schools. Most disadvantaged minorities attend public schools that are absolutely terrible. And that's where they fall behind.

If we want to help disadvantaged kids, let's do it where it matters the most. That means allowing kids access to the best primary and secondary schools. Instead of cramming poor blacks and Latinos into poor urban schools, allow them to attend the school of their choice via a voucher system.

We should be preaching equality of opportunity. Not equality of outcomes. We achieve the former by leveling the playing field. Not tilting it in a certain direction for arbitrary reasons.

Thursday, October 4, 2012

Pundits Revel in Bias and Inattentiveness

Quick hit here. After the debate, many bloggers wrote how Romney got away with not being specific with which deductions he would eliminate to make his rate cut be revenue neutral.

Well he just came out and said he wants to limit the total amount of deductions, which essentially gives taxpayers a choice of how they spend their money. You can still, for example, deduct mortgage interest (up to a certain amount), but that means you wouldn't be able to deduct for improvements to your home office. Or vice-versa.

That effectively flattens the tax code and does precisely what Mitt Romney says he'd do, which is to make his rate cuts (more or less) revenue neutral. Only a small portion of households actually itemize deductions (because for most families, the standard deduction is greater than the amount they can deduct otherwise) and an even smaller portion of households deduct a ton on their returns (the richest households).

This keeps in place our progressive income tax system while limiting the tricks that accountants can use to minimize a high income household's tax bill.

Romney Crushes Expectations

In hindsight, I should have made another prediction. I knew going into the debate that people were expecting President Obama to decisively defeat Romney. And those expectations were going to greatly aid Romney.

It's safe to say now that Mitt Romney greatly aided Romney during the debate. He came across as well informed, intelligent, articulate, and Presidential. The post debate narrative (and instant polling) pretty much confirms it. All that's left to do is wait for the polls to come out today and tomorrow. And then wait for the BLS' labor report on Friday.

It's no surprise that Romney did very well during the first debate. The guy isn't a moron. He's hyper competent and extremely intelligent. What's telling is that the Democrats have portrayed him as ruthless, out of touch, and uncaring. What they can't do is say this guy isn't ready to be President.

One thing that I think greatly aided Romney was Obama's praise of Romney's governorship in Massachusetts. To hear it from the horse's mouth that his opponent is actually a reasonable and competent guy will be immensely reassuring to the electorate. This is something that Obama is going to have to work on for the next two debates.

Another issue, which was brought up a few times in the post-debate analysis on CNN (and probably other channels), was that there was so much negative ads directed at Mitt Romney himself. People were treated to a polite, intelligent, and concerned Romney who was focused on getting Americans back to work. It throws into relief a sharp contrast between what the Democrats say Mitt Romney is and what the electorate saw on Wednesday night.

There are three more debates after this. I think the Vice Presidential debate is going to be a win for Paul Ryan and the Republicans while the 2nd Presidential debate will be more or less a wash. The 3rd debate should break in Romney's favor as well.

What focus groups and internal polling probably suggest (although I don't have access to either) is that Americans are looking for an excuse to vote for the challenger. But the first thing voters need to know is that the challenger represents, at the very least, a plausible alternative. I think tonight, Romney showed that, not only is he a plausible alternative, he is an increasingly appealing alternative.

Wednesday, October 3, 2012

Going For Broke

After working slightly later than usual, I left the office, got some dinner to go, walked into my apartment and flipped the TV to ESPN. Standard operating procedure. But SportsCenter wasn't on. ESPN was televising another one of its excellent 30 For 30 documentaries. This particular film was about professional athletes blowing away their fortune through a mix of outlandish spending, laughably corrupt "investment opportunities", parasitic friends and family, and gold digging girlfriends and wives.

People who follow sports know the most egregious examples. Mike Tyson, Terrell Owens, Evander Holyfield, Lawrence Taylor, Michael Vick. These athletes earned tens of millions of dollars in career earnings and endorsements and found themselves declaring bankruptcy after their careers ended.

Most of these athletes grew up in working class families, played sports at an early age, and by the time they were in their early 20s, signed contracts worth millions of dollars. The money they were dealing with were unfathomable sums of money that they weren't used to having. Giving that much money to a financially illiterate person is usually going to end poorly.

"A white man gets wealthy, he builds Wal-Marts and makes other white people have some motherfucking money. A brother gets rich, he buys some motherfucking jewelry, okay? Do you know what the fuck I'm talking about? I ain't talking about rich, I'm talking about wealth. Wealth is passed down from generation to generation. You can't get rid of wealth. Rich is some shit you could lose with a crazy summer and a drug habit."
- Chris Rock
 Substitute "white man" with "financially knowledgeable person" and "brother" with "professional athlete" and you get a rough approximation of what the documentary is trying to convey. There's a very telling portion of the film in which one of the interview guests, a financial adviser, says something to the effect of "investing in mutual funds is not sexy. Turning 10 million dollars into 11.2 million dollars is not sexy. Owning bars, nightclubs, and strip clubs is sexy."

This is emblematic of a larger problem in society. I've harped on about it in multiple blog posts, but it's worth repeating: people are financially illiterate. The real tragedy is that it isn't hard to become financially literate. Skimming the financial section of any national daily and reading one book each on the stock market and the bond market can get anybody up to speed with what's really going on in the country.

Having a lot of money doesn't necessarily mean you're wealthy. When you use your money to make more money, that's when you're wealthy. Wealth is about making your money work for you. Not using your money to buy things that aren't necessary. It's fun to drive a Ferrari, own a ridiculously impractical mansion, or getting bottle service at the swankiest nightclub in town, but it isn't prudent.

One thing that you constantly see in media is the portrayal of an accountant or banker as an utterly boring and uninteresting person. I'll be the first to agree that staring at a balance sheet and trying to get the numbers to add up isn't the most thrilling thing in the world. But if that's the price for financial literacy, the world could use a lot more boring people.

Tuesday, October 2, 2012

I don't normally do this...

I hate link dumps and I don't particularly like posting content on this blog that isn't my own writing, but I do love me some Megan McArdle. In my opinion, she's the most intelligent and well written person in the chattering class. And she came out with a pretty damn good post about the arrogant attitudes of people who aren't in the business of making and operating businesses.

I never created my own firm. But I know secondhand how hard it is to create and sustain a business. I used to work at a very small "branch" of a pretty small IT consulting firm. Our main account (which was more than 95% of our business) was a 6 person graphical design firm who had one main account (which accounted for over 90% of their business). Hearing my employers and clients stress over making payroll and trying to square away the numbers was a humbling experience.

We take a lot of things for granted today. And there is nobody less visible and unglamorous than a struggling small business owner. It's something I think most people don't think about. I do, which is why I have a vastly more sympathetic view toward business than most people. Because most people don't appreciate how hard it is to convince another person to give you money, let alone repeatedly.

Utility Maximization and the Welfare State

Bjorn Lomborg is an unusual kind of academic. He's unusual in the fact that political ideology means less to him than utilitarianism. For example, there are plenty of professors in the faculty lounges across the United States who will support faddish social causes that wouldn't promote as much social good as other causes, but they do so because they implicitly put their political ideology ahead of their ostensible purpose to maximize social welfare.

Anthropogenic climate change (global warming) is the most prominent example. It's almost exclusively the concern of the intelligentsia living in post-industrial markets. The reason why emerging markets are so opposed to global warming is because the policy prescriptions would disproportionately hurt their economies the most.

The reason is simple. The modern economy relies on cheap energy. And the cheapest forms of energy (coal) tend to be the most polluting. Developed markets like the United States and Western Europe already have the capital wealth in place to decrease their reliance on dirty forms of energy like coal power (albeit at extraordinary financial cost). But markets like China, India, and Brazil don't.

Ostensibly, the goal of the green lobby is to reverse global warming to create a sustainable environment that will benefit all of society. There is no doubt that clean energy is a public good. But it takes a lot of money to have clean energy. And that's money emerging markets don't have.

If the stated goal of the green lobby is to maximize the social welfare, then global warming shouldn't be their number one priority. This is where Bjorn Lomborg comes in. He posits that in a world of limited resources, we have to prioritize public policy that does the most good for the least amount of money.

Things like promoting increased food security through micronutrient supplementation/fortification (distributing mineral/vitamin tablets), increased access to high yield GMO crops, and nutrition education can greatly benefit humanity by preventing malnutrition and starvation in countries that are extremely poor.

Spending money on more expensive sources of energy provide very little benefit (which goes mostly to developed markets and the people who need it the least). Norman Borlaug, who pioneered GMO crop development, is estimated to have saved a billion people from starvation. Increasing electricity generation by solar from .01% to .5% would cost the US 1000 times as much money as was spent supporting Borlaug's research, but it wouldn't come close to saving even a thousandth of that number.

The bottom line is social welfare is about human lives. And saving human lives is vastly more beneficial than making human lives marginally more comfortable.