Interloper

May 25 2012

Behavioral Economics, Finance, Investing

Wherein Finance Arbs Out the Better Angels of Our Nature

Most people who live or work in an urban center have had the disheartening experience of trying to help out a homeless person only to find track marks up their arm when reaching for your dollar. The fact that the money will likely end up in the hands of a local heroin impresario instead of food is one thing, but at this point we are used to being lied to. I submit that the real discomfort comes from the erasure of what we believed was a humanitarian gesture, that an impulse we were secretly proud of has been used against us. In deciding not to help out the next homeless person, our attempted affiliation with the Good Samaritan has been “arbed out”.

At its Utopian best, capital markets are designed to attract savings towards worthwhile investment to the benefit of the economy as a whole (stop laughing, I’ll get real in a second). In this perfect Platonic world, a small number of traders would step in on the occasions where short term sentiment pushed assets to levels well above or below some concept of longer-term Buffett-y value. This is not, however, the world we live in for rational reasons too numerous to recount. HFT combined with the widespread successful use of technical analysis has created an environment where traders and automated scalpers, measured by daily volume, outnumber long term investors by a significant margin. The resulting increase in volatility has “arbed out” a good part of the impulse to invest for the long term, particularly among retail investors.

I swore I would not allow the word Facebook on this blog, but in abandoning that pledge I promise in turm to keep this section short. The NASDAQ’s technical problems and the potential for improper dissemination of information aside, FB’s IPO went largely to type in the sense that MS priced the deal at the highest point the market would stand. This is their fiduciary duty and the fact that the Supply/Demand curves met at $38, if only temporarily, implies that the price was fair according to classical economics. Because FB’s fundamentals do not support the price, however, means that lottery-induced dreaming and ignorance among retail investors went a long way to getting the deal off. Retail optimism, in this sense, has been partially arbed out.

In the efforts to keep things concise, I wont extend this thought into the broader economy beyond noting that Madison Avenue are the uncontested kings of leveraging or arbing any consistent psychological trait, good or bad, into changes in consumer behavior. To date, admittedly, there is not a lot of revulsion beyond grumbling at the constant Orwellian barrage but at some point some kind of Laffer Curve Peak Advertising will be reached. Despite recent positive comments on advertising from Conor Friedersdorf, my belief that advertising in a capitalist society performs the same function as Soviet propaganda – the sanctioned, unconsciously-accepted-through-mind-numbing-repetition lies that keep the wheels turning – remains pretty much unshakeable.

I’m not at the “End of the World” sandwich board stage yet, but do think we’re playing a dangerous game if this trend keeps up longer term. The pervasive testing of the boundaries of our collective gullibility-politically, socially and economically – feels cumulative, a heavier weight over time if collective cynicism (coughJonStewartcough) is any yardstick. The money pouring out of equity funds could definitely represent an ongoing indicator that mom and pop have had enough of playing Charlie Brown with the investment banks holding the football. The Facebook deal’s certainly not going to help – the next time a broker calls a client with a once in a lifetime IPO opportunity, the client’s likely going to remember the junkie’s track marks.

May 07 2012

11 Comments

Uncategorized

The NFL, the Internet and Economic Inequality

[Note: There is an obvious response to comparing NFL players and the average laborer - the multiples of minimum wage made by professional athletes. Hold that thought - I will deal with it tomorrow]

The NFL concussion issue is bothering me more than I would have thought and I’m trying to think through its broader implications as a cultural and economic phenomenon, specifically in light of stagnant overall wage growth and also the evolution that technology has wrought on our broader conception of celebrity. The new ethics of watching football, best elucidated by @tanehisi, is a highly personal matter and I have no argument there – its for every fan to decide for themselves. For myself, I will never stop watching the NFL even if I am already questioning the extent of my preoccupation.

The fact that the NFL gained traction in the 50s and 60s well after the sustained popularity of college football, where the players received no salaries, is only one of the many indicators that the players have historically been treated more as equipment than labor. Every book written by insiders, Meggyesy’s Out of Their League, Gent’s North Dallas Forty, highlight the broad inhumanity (and also frequent, offsetting generosity) of coaches and management. The trade-off between pain and fame and the subjugation of personal goals for the good of the team is thus woven into the fabric of the game, a ruthlessness that for many provides more reason to watch.

Major League Baseball provided a strong reflection of the waxing power of organized labor in the 70s, beginning with the Curt Flood case in 1969. The NFL, as a league, has done a far better Reaganesque job of crushing player bargaining power and thus constitutes a worthwhile, through exaggeration, window into the current era of wage inequality. The NFL owners group provides an unequivocal depiction of the 1% as the investors of capital, only with even more stringent (for now) control over labor. I can see no remotely feasible circumstance under which 95% of NFL owners do not support Mitt Romney’s trickle-down, “I got mine” policies as a lot of us, whether we admit it or not, would in their place.

If the profit-oriented incentives of league owners are easily intelligible no matter what the issue, the mindset of huge segment of fans is much, much less so. The key factor here is that I’m a Detroit Lions fan, bred in the bone. One would think that the Rust Belty Lions fandom would, along with Browns and Steelers supporters, side vehemently and overwhelmingly with players and the NFLPA with respect to player safety and salary growth. Stunningly, this does not seem to be the case. My impression from Twitter is that Lions’ fans are divided on cases like that of Cliff Avril who is currently semi-holding out while negotiating a new long-term contract. More interestingly, the fans that do not support Avril’s position are angry, enough to tweet “get to work you ungrateful jackass” to a complete stranger who, if so inclined, has the physical tools necessary to pummel them into pink mist.

Initially mystified by this seemingly self-defeating outrage, I’ve come to credit the Internet and the marketing success of the NFL for much of it. The 24 hour coverage on the NFL Network, CNNSI, the amazing new camera angles, the (frequently abused) generosity of the players on Twitter, all of these allow for fans to become fully immersed in their favorite game. This addiction, however, is completely sanitized and carefully designed for your consumption. As the Last Psychiatrist is fond of saying, “If you’re reading/watching, its for you.” My hair stands on end when before a big game the Steadycam and audio capture the ecstatic, warrior scream of the physically-colossal Ndamukong Suh as he runs out of the tunnel. There are no cameras, however, documenting the poor bastards living in storage lockers after being cut from the practice squad, unable to hold a job because of headaches and the spine of IED victim. Importantly, we wouldn’t watch the latter footage if it were available as it is a function of the web culture that we only see the version of reality we want to see. We do not confront, and in the same way an alcoholic is enraged by advice to cut down their drinking, we get pissed and circle the wagons if someone starts chipping away at any of our virtual cocoons.

To some extent, the same phenomenon is present in the broader economy with financial celebrities like Jamie Dimon and Steve Cohen replacing current NFL stars. The pornographic thrill of a BI slideshow of Dimon’s $8 million, rarely-visited Boston townhouse, is enough distract us from the unemployed who, like the suffering ex-NFL players, are unpalatable collateral damage that makes the pornography possible. The technology, combined with careful editing, has offered the seductive, drug-like option of projecting ourselves into a perfected form of the lives of our heroes, athletic or financial, and we have taken too-full advantage.

Apr 30 2012

9 Comments

Behavioral Economics, Investing

Bull/Bear = GOP/Dem and Why Being a Good Teammate is a Bad Investing Strategy

Framing market behaviour as a battle between bulls and bears has always made me cringe, appealing as it does to some of our least productive psychological tendencies. Our first, automatic response to finding out that a confrontation is underway is to self-identify with one side or the other, a hardwired subconscious process arising from the herding impulse developed deep in our evolutionary past. Psy-Fi blog does a typically brilliant job describing the negative aspects of herding on trading performance HERE, saving me from elaboration.

Imposter that I am, I don’t just write shit down and expect people to believe me, I co-opt respectable people without their permission for support. Thankfully, in this case there exists what I think as the best general-focused blog post ever written on how to think healthily (you read that correctly), The Wrong Lesson of Iraq by The Last Psychiatrist written in 2007. Ostensibly about the masses’ response to the alleged manipulation of popular opinion by the Bush administration, the post is much more about the dangers of “splitting” – the broad brush psychological tendency to choose sides – and the resulting laziness and poor analysis that logically results. Conveniently, the GOP/Independent/Democrat trialectic has a close market analog in Bullish/Neutral/Bearish which will make comparisons easier.

The Last Psychiatrist writes as follows:

Splitting says: Bush is all bad, period. Nothing he does is good, and if it is good, it is from some malicious of selfish motivation, or an accident related to his incompetence to even be self-serving. Similarly on the other side, liberals are weak, corruptible, treasonous.

Splitting is always polar; once something is declared “all bad,” an opposite is necessarily declared all good. Importantly, this isn’t a comparison between the two– he is bad, but she is better; it’s perceived to be two independent, unconnected, assessments, even though to anyone else looking from the outside, they are so obviously linked. So hatred of, say, liberals is thought to be independent of your preference for Bush, but in reality it is only because you hate liberals that you like Bush. The hate comes first. And this splitting makes it nearly impossible to acknowledge any of Bush’s faults.

Yes, this will take some unpacking. A decent start would be the equivalence of the terms “permabull and permabear” with “far left and far right” as in each case the namecalling is simultaneously a statement of affiliation and an invitation to dismissal. If I’m bullish, there’s no way I need to read Dylan Grice because the term “permabear” identifies his reports as a market strategist version of Mein Kampf, the ravings of a lunatic. The same is true in reverse of China sceptics and Jim O’Neill (*raises hand sheepishly*). Note the defensive nature of these decisions – branding an opposing view as insane or misguided saves us from testing our own theories, market or policy-oriented. Paragraph two of the excerpt suggests also that the basis of our market outlook may be intensified, or even formed from, a general, personality-based dislike of either optimism (“that idiot always has the pom poms out”) or pessimism (“the bond market has predicted 45 out of the last 3 recessions so i don’t follow it”).

Now the key part:

But splitting is rarely about the target, it’s a convenient heuristic to get the subject out of having to accept the complexity and totality of the other, and of their own emotions about their environment. In short, when things get heavy, it’s easier to just label black and white and work from there.

Splitting is the reaction to intense anger and frustration in those people who discover themselves to be powerless.

Since it’s all Bush’s fault, there isn’t actually any underlying problem to deal with.

Change “other” to “market” in the first sentence and we can pretty much print out and frame it as one of the best pieces of trading/investing advice ever written. Psychologically it is much, much easier for unsuccessful traders to claim the market is fixed rather than recognize that it is merely (at that stage of their trading career) beyond their comprehension, that more boring, tedious studying must be done and that ignorance is “the underlying problem to deal with”. The emphasis on “their emotions about the environment” is also clearly applicable to trading and investing, as numerous commentators detailing the unproductive nature of investing emotionally have pointed out.

No metaphor is perfect and there are limits to the GOP/Dem Bull/Bear comparison. The limiting aspects of labelling and framing, however, are evident in both areas. Knowledge of how markets actually function will be limited by self-identifying with any group – bull, bear, inflationista – in the same way that ideologues will always be incapable of producing effective foreign policy beyond bombing the living crap out of people until they submit, likely temporarily, to force. Persistent success in investing and trading requires a nuanced, detailed understanding of factors affecting asset performance that is not generally possible by just being a good teammate with fellow bulls or bears.

Apr 24 2012

4 Comments

Finance, OWS

Askers vs Guessers in Finance: Askers are Annoying, Rich

Any follower of @Real_Interloper is aware of my fixation on the issue of Extroverted versus Introverted personality types and the possibility that Introverts will be devalued in a service-based, technology-heavy economy. * There is a subset of this discussion which relates closely to relative success in the financial industry – Askers versus Guessers – which is helpful in understanding the frequent annoyances experienced by clients and prospective clients of investment banks.

The popularization of the Asker/Guesser Paradigm began with a blog post by Andrea Donderi quoted by the Guardian HERE:

We are raised, the theory runs, in one of two cultures. In Ask culture, people grow up believing they can ask for anything – a favour, a pay rise– fully realising the answer may be no. In Guess culture, by contrast, you avoid “putting a request into words unless you’re pretty sure the answer will be yes… A key skill is putting out delicate feelers. If you do this with enough subtlety, you won’t have to make the request directly; you’ll get an offer.

The most obvious general manifestation of Asker/Guesser are the dudes that internalize the dating scene as a numbers game, and will spend an entire night at a bar getting shot down until some definition of success is achieved. The necessary psychological equipment for this practice is incredibly thick skin, an ability to soldier through mass rejection that would emotionally cripple a Guesser.

The stereotypical retail broker is virtually the Platonic ideal of the Asker. Successful brokers are often immune to rejection, criticism or introspection. To provide a specific example, I was once involved with a merger where the retail wing of one company combined with the capital markets department of another. About a month in, a broker sent an email to all capital markets staff informing them that they would be required to switch all of their investment accounts into the new retail division, and since this was the case, they might as well sign up with him. No such policy was ever discussed or established. When confronted, the broker just said, “Oh, sorry, I must have made a mistake” and went on with his daily routine. Didn’t work, on to the next.

Not everyone employed in finance is an Asker and self-doubting Guessers are particularly prominent among strategists and economists. Askers however, particularly in their most subtle form of investment bankers, tend to make the bulk of the money. This makes sense in that the asking is generally for money, and Askers rightly demand their cut.

The Asker/Guesser dichotomy operates on a continuum – very few people are 100% oriented either way. However, the differences are so fundamental that communication between the two groups is often fraught with danger. The Guardian article describes this well:

An Asker won’t think it’s rude to request two weeks in your spare room, but a Guess culture person will hear it as presumptuous and resent the agony involved in saying no. Your boss, asking for a project to be finished early, may be an overdemanding boor – or just an Asker, who’s assuming you might decline. If you’re a Guesser, you’ll hear it as an expectation.

I suspect that Asker/Guesser issues form a significant part of anti-finance sentiment. Finance asks to maintain its current privileged status and an audience guesses that this represents a sense of entitlement. Guessers, including politicians and regulators, could potentially be surprised at the extent to which rank and file financial employees would accept a puppy-like smack on the nose or, in more common trading floor parlance, told to go fuck themselves.

*Two aspects of Introvert/Extrovert interest me most. One, that the rise of extroverts corresponds to Professor Cowen’s Great Stagnation thesis. Two the possibility that the necessary skill set for success has made an almost exact 180 degree change from the 19^th and early 20^th.

Apr 16 2012

14 Comments

Uncategorized

Higher Education as The Big Marshmallow Test

This is not going to be an easy post for me to write but I will commit off the top to avoid wallowing in personal travail. The issue however, the signaling component of higher education, is for a dropout like myself fraught with highly defensive emotional bias that will underpin everything I write. The extent to which my dropout status disqualifies me from providing an opinion on the matter is really the pivot around which I want this post to revolve. I should thank professor Cowen yet again for recent posts like this one that provide the window (or cover, depending on your perspective) to write this down and have even an outside chance of anyone reading it.

Some combination of a diligent guidance counselor and a hysterical mother meant that a weeklong battery of IQ testing at the University psych department accompanied my late-high school academic fall from grace. And although I have frequently wished this were not the case, the results were as expected for my psychopathically arrogant teen self. The point, in hindsight, is that the drug-addled misery that was to follow was entirely caused by a lack of maturity and general fuckedupedness.

It is my sincere belief that well over 50% of the population has the intellectual capacity to earn an undergrad degree, particularly if given direction as to where to focus. This is not to suggest that intelligence is not an important factor in the late-teen, early 20s streaming of the population. It does imply that for the middle of the bell curve, the overwhelmingly deciding factor is maturity that for the majority success or failure regarding higher education is in many ways one vast, complicated marshmallow test.

I assume that most people reading this have earned an undergrad and I’m highly curious as to their reaction to the above sentiments. Is it “Well, winners win” as my old friend JC used to say or more popularly “Do or do not. There is no try”? Fair enough, if so. None of this is to demean the consistent hard work and diligence that academics require. It should be a decisive advantage. But for how long?

My question in the end is whether there should be a statute of limitations on the importance of higher education in determining future wealth and status. The issue is entirely hypothetical admittedly – I’m not going to suggest a multi-trillion dollar “No Teen Left Behind” government program nor do I have any delusions that efforts will be made by the academically successful to drain the moat that protects their career advancement from the lesser-washed. But still, one wonders whether the increasing cynicism as to the tangible, ex-signaling benefits of higher education will result in recognition that talent lies elsewhere, with those that failed the Big Marshmallow Test and matured late. As the labor force shrinks, it is conceivable that two 35-year olds with similar work histories will be judged on largely equal footing, without respect to academic achievement that ended more than a decade previously.

As always, I’m exaggerating the case to make a point. I am well aware that hundreds of thousands of people without degrees have a net worth in the millions of dollars. Failure to get a degree is not a guarantee of lifelong poverty, although I can attest that it certainly feels like it at the time. It is also not the case that I’m inviting readers to a pity party on my account – things have turned out pretty well for me and I have been insanely lucky in many regards. I do, however, retain a great deal of sympathy for those that for self-inflicted (my case) or other factors, were distracted at the exact point in time when the academic fork in the road that would go a long way to determine their future success was directly in front of them. I’m biased, clearly, and dramatically so. But I suspect and hope that the current hand-wringing regarding the limits of conventional higher education, combined with demographic factors and the need for constant workplace re-education, will result in more work environments where advancement is determined by proven ability, and less dependent on a maturity test that occurred at a specific point in time.

Apr 09 2012

3 Comments

Behavioral Economics, Investing

Standing By for the China Growth Hiccough

One of the favorite tactics of the more Gricean, scaremongery strategists in the early 2000s was a chart comparing the post-peak performance of the Nikkei and the S&P 500. There was never a lot of effort spent on the “why” of the seemingly inexplicable correlation between the two, the Japanese and US economies being so structurally different. Japan, with a giant, manufacturing-based trade surplus using the adapted technology of other nations (early 1990s patent reform remains a vastly underrated factor in the tech bubble) was faced by issues, the inbred keiretsu structure most prominently, that Teddy Roosevelt had taken care of for us (or so we thought). The persistence of the Nikkei/SPX correlation was, and is to a great extent, considered a statistical anomaly.

Investor psychology and the profit-driven (but not insidiously evil) influence of the finance industry are the two factors, which are demonstrably unchanged between the bull markets of Tokyo in the 80s and Silicon Valley in the 90s. The pattern is likely repeating itself in China.

My argument, roughly that China is following the same bull and bust pattern found throughout history, is dependent on distinguishing between the two types of market rallies. In the first, the Manic Type most widely associated with the Tulip Bubble craze, is an adolescent version where most professionals are aware that they are just dicking around, playing Greater Fool. Retail-related fads – Krispy Kreme, Crocs, Beanie Babies, Hoola Hoops and likely LULU sometime in the next ten quarters – feature prominently here. Everyone knows there a “best before” date on the whole thing, it’s just a matter of trading it and finding the exit before a fickle public gets bored.

The adult, Structural Economic version of the bull and bust cycle is a much more serious operation. It involves real, tangible change that dislocates economies across the entire planet for the richer: think steam engine, Internet, cotton gin, Ford’s assembly line, global trade (and the insurance business that made it financially feasible at the initial New World stages), China.

Examples of market reaction to the latter, major trends are remarkably consistent and numerous: well over 80% of Britain’s 19th century rail network was built after the collapse of rail stocks in 1846. The hundreds of American auto manufacturing companies active in the mid 1920s bankrupted their way to three. The same pattern will inevitably hold true for post-bubble technology networks in this century. In this light, using a more macro interpretation and a longer time arc, it is not difficult to see the Great Depression as the awkward adolescent stage of America’s technology-driven march to global economic dominance. The Asian Currency Crisis is a quicker version of the same process for the Asian Tigers. The pattern is evident in each case – a legit, undeniably powerful trend attracts far more investment than it can efficiently digest in a short period, inflated asset bubbles collapse, the actual sustainable trend takes hold.

In all likelihood China will eventually become the world’s largest economy but that’s not the point, at least for developed world investors. Economic changes to the degree being experienced in China have never occurred in history without a serious hiccough that makes every investor wet their pants for a considerable period. And currently, each passing month brings signs of structural stress in the Chinese growth engine – NPLs, inflation, social unrest, property price deflation, corruption, suspicious accounting – that make it increasingly difficult to argue that somehow China will be the first entity ever (and the largest by a wide margin) to transition smoothly from mammoth investment bubble to sustainable growth. This argument involves a New Paradigm.

Sell-side China bulls frequently imply that to be bearish on China-related investments is somehow analogous to long-term bearishness on the Chinese economy, an interesting rhetorical flourish designed to sustain investment in the short term. It would be far more interesting to hear the ways in which China will avoid the “investment bubble/collapse/then steady growth” process that economic history teaches us to expect. Indiscriminately shoveling money at legitimate trends until they break is just what we do. The odds, particularly in light of recent data, that we will have another chart to place alongside the 1980s Nikkei and 1990s S&P 500 appear much higher than an extrapolated straight line growth path into the Chinese century. I’ll wait for the hiccough and buy with both hands.

Mar 29 2012

2 Comments

Finance

Defending Analysts: The Mouth of Sauron, Not the Dark Lord Himself

One of the few consistent themes of this blog is that bad things, including client-screwing ethical lapses, happen not because of the rise of individual evil people but as the end result of a steady erosion of principles caused by the temptation of huge pig troughs of potential compensation. In rebutting Josh’s reinforcement of the useless, self-aggrandizing analyst stereotype printed by the FT yesterday we’ll go through how this process works for the typical equity analyst.

First, picture a Laffer curve with some measure of ethical behavior on the Y-Axis, “number of retail clients protected from being fleeced” for instance, and potential commission along the x-axis. To simplify things somewhat, we’ll assume that the moving out on the x-axis to higher cake is primarily a function of payments made to an analyst as a result of commission on investment banking transactions in their sector. The peak of the curve, which will be a different for every analyst is the “too much money to ignore” level, where visions of a decent-sized ranch in the Hamptons replace early-career notions of “helping people with their finances” and general adherence to the extensive but flushable CFA ethics guidelines.

It is important to note here that the vast majority of equity analysts toil away in obscurity, even within their own firms. They cover their companies in sectors where investors currently don’t care or where they are overshadowed by a CNBC-friendly, dominant counterpart at another firm. The 5% of analysts you have heard of cover hot stocks like LULU that are “in play”, attracting oceans of daily market liquidity or in sectors where significant M&A activity is apparent.

Interloper’s General Rule of Understanding Finance applies directly here: Whenever something looks fishy, look to how the situation benefits Investment Banking revenue. That’s where the big checks are – new offerrings and M&A consulting. An analyst covering a stock where this activity occurs goes “behind the wall”, generating a fat personal check in the 100s of thousands when a deal is completed.

Now we’re ready to discuss Josh’s Jamba Juice example where the analyst kept hyping the stock as it collapsed into nothingness. For our purposes, the important part of the story is that the analyst in question was the biggest name covering the stock. Why is this important? Because it implies (almost assures actually) that this analysts’ company would be the primary banker on any capital raising, hopefully a number of them over a decade, that Jamba Juice would do to fund its expected growth. Lots of big checks for I-Banking, and enough potential personal revenue for the analyst that they, at some point, reached the “too much money to ignore” peak of our bastardized Laffer Curve after which the permanent pom poms came out.

This happens all the time and Josh is right to call them out. On the other hand, I find the stereotype unfair, not least because it does not reflect the day-to-day efforts of 95% of analysts who diligently follow their companies and answer client questions to the best of their abilities. More importantly, the analyst is not the driving force in these instances – they are just the visible vanguard for Banking. The I-Bankers just quietly move on to shoo-fly another potential big pile of money when things don’t work out and the analyst is publicly hung out to dry. And no, I am not excusing analyst behavior when this happens, just suggesting that blame be apportioned more generally.

As a group, equity analysts in my opinion are the most ethical of all capital markets staff. They are the ones forced to live with their public declarations. Furthermore, whereas the finance industry inexplicably sidestepped regulatory punishment after the GFC, analysts suffered a disproportionate beating and increased legal liability after the tech bubble imploded. The driving force behind Blodgettgate remember, was banking revenue and yet notably few restrictions were put on Banking as a result. The TMT analysts were a much smaller percentage of the problem than most believe, The Mouth of Sauron rather than the dark lord him-or herself.

Again, I am not defending the crappy, client-unfriendly things analysts do all the time. But in my experience, which features hundreds of research meetings, analysts are not routinely dishonest. Bankers, particularly when retail investors are involved, kinda are – they are looking for the highest fees they can possibly get and they could care less what happens after a deal is done. I don’t have space really to get in to Structured Products, but I will note that the term “cesspool” is unfair to outhouses in this regard.

It is really convenient for an investment bank to have public and regulatory focus on the analysts, as if changing or adding disclaimers will do anything to affect research content. They are an effective screen obscuring where the sausage and all the money really gets made. Analysts are just the rock that must be lifted so that sunlight can reach the Investment Banking department.

Mar 27 2012

3 Comments

Finance, Management

Beware the Prince

I’m about as well sorted psychologically as I’m ever going to be but I get to use a shrink as consultant for niggling issues, an arrangement that suits us both. During a recent conversation, we were discussing some completely impersonal topic and after commending my insight, looked at me purposefully and said “But you’re not a Prince”. He started to explain what he meant, but I just raised my hand to stop him. I got it, I just didn’t like it.

As a group we like societal anomalies as long as we can feel superior to someone. The sick fascination with serial killers fulfills a violent prurience with the added benefit of guilty Shadenfreude regarding the victims. Positive outliers that make us feel inferior are less welcome. We don’t like those, to the point where psychological self-defensive concepts like “luck” and “cheating” arise immediately like squid ink.

Princes, winners of the genetic lottery in exactly the ways that count most, do exist unfortunately. Princes are separate from savants, the latter with skills so focused in one area that they’re completely useless and awkward in others to make us feel better. For the true Prince, as the name implies, the aptitudes and will are so strong and varied that future success is virtually preordained. They are not only capable of breezing through an applied economics final after no lectures and 30 hours of studying, but also know what you are going to do and say before you do or say anything.

Too many viewings of Good Will Hunting, you’re thinking. I wish that were the case but I actually know a Prince well who has operated so well in the back section of the FIRE acronym that having never been anything but self-employed, he personally owns his own jet (money enough not to waste time) and funds a major post-graduate school that has his name on the door. His social skills are legendary, maintaining varied and rarely overlapping spheres including prominent politicians, assorted billionaires, and his friends from high school. He is also a former professional athlete.

There is another business acquaintance whose history may indicate Princedom, but I don’t know them well enough to say for sure. He shares, and here finally we reach the point of this exercise, an interesting set of outwards traits with my friend, marked stillness and a vagueness equal parts camouflage and obfuscation. Whether this represents confidence, focus, strategy or an inability to connect to us regular mortals I have no idea. But, these characteristics make it extremely difficult for even the most observant meeting attendee to know what they’re dealing with.

Princes (of both sexes, I refuse to use “Princesses” here) do exist, which is the first thing to keep in mind. The second, more business-related point which follows, is that it is a very good idea never to be on the other side of the table from them. I’ve seen the advanced negotiation tactics and I will state unequivocally that an attentive person of above-average intelligence will not even know they are being applied. A lot of it is flattery, not sales, with hearty congratulations for coming up with an idea that “I never would have come up with myself”, even though the counterparty has been subtly nudged in that direction for a week and will have to get a cab home because they have unwittingly thrown their car into the deal. (that actually happened, btw). On the other side of the table, you will have brought a knife to a gunfight while being lauded for your impressive strength.

Money attracts talent and despite widespread charlatanism and scumbaggery, finance likely has more royalty than any other field. Beware the Prince.

Mar 26 2012

11 Comments

Behavioral Economics, Finance, Investing

Following Bunk Moreland on Gold, Monetary Policy

There is something about monetary policy that drives significant portions of the investing populace insane. As a guess, it’s possible that the physical act of printing dollar bills, and the virtual act of money creation in the banking sector, is enough like magic to tap into the medieval part of the brain to generate the “BERNANKE’S IN LEAGUE WITH LUCIFER!” reaction so common from those compelled to comment on any story involving aggregate liquidity.

People done digging dog face in the banana patch. I can safely write sentences like that because half of this post’s readers have already closed their web browsers and have started composing 2500 word responses to paragraph one. They will marvel at how I can be flip about an issue that is clearly at the core of our democracy. My answer is: I don’t care. Yet.

The simple fact is that for the next week and next month, the value of global currencies will be largely determined by cross-border asset flows. Political news from Southern Europe will be offset by ECB transfers to maintain bank liquidity levels. As with the yen and the yuan, these are policy questions not theological ones. The veracity of MMT theory or the “hocus pocus” of fiat currency will not enter into it. The believers being fully invested already and any notion of intrinsic value being tossed out the window already, gold will rise or fall based on sentiment and technicals. Again, I don’t care. Yet.

Bunk on Money

The forces of hipsterdom have decreed that any discussion of The Wire as the greatest show in broadcast history are cliche. Nonetheless, I am still following the advice inherent in Bunk Moreland’s Season 5 admonition to McNultey with respect to monetary theory, “That will teach you to give a fuck when it ain’t your turn to give a fuck”. Until bond yields move in some inexplicable degree in one direction, or any signs of a 70s wage/price spiral pop up, monetary theory will have little or no effect on my investing decision making. If either of those things do happen, however, Mosler is going to make some money off me, along with a giant host of other published experts.

Fidelity and Predicting Currency Values

In the mid to late 1990s the consensus economic view was that the US dollar was significantly over-valued, by between 20% and 40% depending on the year and measuring device. At the time, Fidelity Investments built a decent-sized team of macro specialists looking to “add alpha” to the company’s then-famously index hugging portfolios by predicting changes in global currency values. The team was disbanded in five years not due to lack of effort or expertise, but because global currencies trade with complete disregard to economic fundamentals for years at a time. These were all experts in the field, remember, and although I never saw CVs, since we’re talking Fidelity there’s a 98% chance that all of them came from extra-fancy Ivy League schools. They were not, in other words, retail investors attempting to benefit from reading a couple books from the non-fiction bin at Barnes and Noble published by the Smith and Wesson Literary Fund. For me, the primary lesson from this parable is that currencies are not predictable.

Knowing What You Don’t Know

Knowing that you don’t know is among the most important aspects of investing, for both professional and non-pro investors. The most financially dangerous response to an information vacuum is to reach desperately for a framework that makes things intelligible. It is particularly dangerous to grab at one that just happens to fit your personal politically ideology. (Your most vicious associates will brand you an economist if you do this too often).

Take it for what its worth, but my advice would be to watch and consider. Read Cullen Roche on MMT. Watch the exchanges between Senator Paul and the Fed Chairman. Look for signs and accept those that are contradictory to your current understanding. Don’t, in other words, paint yourself into an ideological cul-de-sac that may cost you a lot of money to climb out of. It is time to learn, but there will be plenty of opportunity to become a believer when its time to give a fuck.

Mar 16 2012

2 Comments

Finance, Media

Cumulatively Disillusioned: A Partial Defense of Greg Smith

Disaffected ex-Goldmanite Greg Smith clearly possessed a Puritan streak bordering on the Messianic and this led many to immediately, reflexively discount his New York Times op-ed. Particularly tiresome were the “What did you expect? You were playing with the big boys” reactions borne of equal parts chest-thumping self-congratulation (“only some of us really know its a war out here”) and a sense of betrayal (“don’t shit where you eat”).

Binary interpretations are most digestible in the media and the fact that no one’s motivations are unconflicted, least of all Mr. Smith’s apparently, was tossed aside as a matter of convenience. There are, I suppose, a small group of professionals who head to work each morning 100% convinced in the validity of what they do and the commensurate compensation that results. The rest of us mortals consistently measure the balance between the cost of employment – in terms of time, family stress, the shit-eating from senior psychopaths – and the financial and social-related rewards.

Finance as an industry is different from most in its aspirational qualities – few people grow up dreaming of managing a slaughterhouse but tens thousands diligently hit the books dreaming of becoming the next Steve Cohen. Those successful at reaching a major trading floor or investment banking department usually spend the first week in awe of their surroundings, one assumes with a feeling similar to the first time a freshman football player runs out of the tunnel on game day in front of 100,000 screaming fans. It is, or was for me at least, the realization of a dream.

When you bust your ass to achieve something it is extremely difficult not to become fully invested in the mythology that drove you there. Disillusion takes time. In the first couple of years, when the veterans make sidelong cynical comments you sneer back and classify them as bitter old men on their way out. Furthermore, you’re a peon and the worst of the conflicts are hidden from you.

As with any field, with experience the view changes. You take notes in meetings where the sole agenda is how to hide fees from clients, the Head of Retail decrees caveat emptor on triple dip broker strategies stuffing fee-based accounts with products with huge initial commissions. The trade desk openly front-runs big retail orders and this is carefully steered from regulatory view. The negative side of the motivation ledger begins to get filled out but still, on balance you are doing the work you want to do.

In cases where the money climbs in near-perfect inverse correlation with disaffection, this makes things more difficult still. New house, new Merc, new spouse, private school for the kids are all within a responsible budget at current salary levels. Not if you change industries though – there just aren’t that many options where $500K is worst case scenario. This is particularly true if the primary skill set is predicting asset prices in a largely virtual world.

It would be stupid to suggest that the above scenario covers everybody in finance. There is no shortage of satisfied professionals in the industry who correctly assume that they provide an honest, highly difficult and intellectually challenging service in the support of clients and the economy at large. It does seem, however, to cover the experience of Mr. Smith and to some extent my own (although my reasons for quitting the previous position were much different than his). I would argue furthermore that this arc – initial wonderment and satisfaction steadily eroded by cumulative disgust - is extremely common among financial professionals. Most current employees have been fortunate enough to find a position where the visible self-serving skullduggery of their employers remains at low levels acceptable to them. A minority are greedy scumbags who don’t care. But there are a number, larger than outsiders might think, who feel like Greg Smith likely did last year, trapped by circumstance in an environment markedly different form the one they expected. And, for the courage to jump off the bandwagon while accepting the self-immolation of his career, and for publicly doing what he felt was the right thing (misguided or not), I give him credit. Good luck to him.