Interloper

After the last post I received a bunch of responses along the lines of “why are you so bitter about finance?” and initially taken aback, I looked back at the content of the last few posts.

Oh. I see.

There is one point – good news makes boring copy. If I had written “the saints of finance” instead of “Scumbag Storytime” the page hits would have been cut by 75%. That said, I now accept that I might have a bit of an animosity problem where the industry is concerned.  

Autobiography is a form of narcissism so I won’t try your patience here. It is important, however, to note that my rise in the ranks of finance coincided with a crawl from a deep, dark personal hole. Particularly in the early stages, every promotion was not just a matter of personal finances but existential validation. I viewed the trading floor the way an undersized Division III football player views the NFL.  As an outlook this was twisted and sad, sure, but an accurate depiction.

When through luck and diligence the break finally came – a peripheral job on trading floor – I was not yet a lot stronger in the broken places. But I do remember vividly, half-terrified in my department store suit, swearing that the only way I was leaving that chair was on a stretcher.  I would work the hours, stammer through the humiliating process of learning how to give a presentation, kiss whatever ass was shiniest at any given moment. I would pay the ask.    

Nothing in life is as good or bad as expected so the process of my disillusionment was inevitable. The heroes, and there were a number, were too often pushed aside in favor of the shadiest sales guy elevated by commissions from PMs who would wind up in jail or in Israel to avoid extradition. The details are cliché by now.

To quote one of the funniest monologues in movie history “the details of my life are inconsequential.” The interesting point now is whether, as the details ooze out, the broader culture is undergoing the same process of de-rating the importance and status of the finance industry.

Look at Jack Welch, so stunned by his fall on the Fawn-o-meter that he only leaves his underground lair for the cozy embrace of Joe Kernan. Rubin, Dimon, Steve Cohen, all fighting off the steady assault of Lilliputians pulling on their $3000 pant legs to drag them off their pedestals.  

Much is made, correctly, of the public financial costs of TBTF. Before 2007, I suspect that part of the reason this was tolerated was the misguided belief that finance worked for the greater good, that when your broker or I-banker said they were working in your best interests they at least intended to do so.

In my experience, the vast majority of individuals in finance do try to help their clients although the process of rationalizing takes up steadily more brainpower as time goes on. But the vast majority of the money is controlled by a small percentage of finance employees. A significant percentage of this daily-commute-by-helicopter crowd must constantly, like the London Whale’s boss of the jackasses laundering al-Quaeda money at HSBC, hide what they’re doing and hedge themselves with pitchfork-proof vests.

As to the question as to whether finance is beginning a steady decline in cultural and economic importance in the same way many predict for the concussion-ridden NFL, I’m clearly biased. Odds are that if you’re reading this, you are part of the financial industry which suggests that so are you. So, let’s phrase things objectively in terms we all understand:

The finance industry is currently about 8% of GDP.  If I offer to sell you a 2035 call option on this number with a strike of 6.0%, are you buying?    

For all the ink and pixels wasted on media technology we’ve missed a once-in-500-years sea change who’s primary units of production are two fold: mobile data traffic and impotent rage.

Some will consider it heretical to discuss religion as media but it is impossible to argue that the bible did not provide the narratives around which pre-20th century life coalesced. A bad harvest invoked Job, suffering neighbors were assisted by Good Samaritan. Grace was spoken before meals. The rural population, mostly everybody, took a weekly bath on Saturday and headed to church the next day, the only time they would see non-family members.

The stories changed from the New Testament to Amos and Andy but the purpose and attraction– collective narratives – was the same. Movies, television, again, just an enhanced version of the same thing.

One can argue that internet-based entertainment is just an extension of this trend but one would be wrong.  Church, radio, television were all passive – the audience showed up or tuned in when they were told.  The Internet is a tool of self-selection.

The last time consumers were granted such an upward spike in empowerment – the printing press/Reformation – things did not go well for a couple hundred years. Importantly, the initial reaction was the same then: you lied to us.

But whatever, things will go the way they go. For our purposes let’s turn to what this new Internet-led empowerment was used for, best described in a brilliant essay by Freddie Deboer:

The internet has provided tremendous functionality, for facilitating commerce, communication, research, entertainment, and more. Yet for a comparatively small but influential group of its most dedicated users, its most important feature, the killer app, is its power as an all-purpose sorting mechanism, one that separates the worthy from the unworthy—and in doing so, gives some meager semblance of purpose to generations whose lives are largely defined by purposelessness.

This is why an increasingly virtual culture needs an economics of social hierarchy. The western world is now wealthy enough that the necessities of life – food, warmth, shelter etc – are provided in extremis and therefore have little economic value.  If practical utility is no longer important what does have value are things that make me feel better/of a higher social strata than you. The Water/Diamonds Conundrum goes away.

Let’s posit that the social hierarchy of the Internet (and particularly social media) is scored not by money but by attention and influence. Twitter followers are not just arbitrary votes of support in this reading – they are currency. So, if love and money are by popular consensus the root cause of all murders, and Twitter followers are the new currency, it is no wonder how vicious the shoutfest gets online.

“That’s stupid”, you say. “I can’t spend Twitter followers so the whole notion is stupid. They have no value”. Fair point – online influence carries no practical utility unless your name is Josh Brown or Joe Wiesenthal. New followers won’t get you fed, but that’s what the government’s for, no? The robots tuk’erjerbs, man. You’re not going to let me starve are you?

Denying  value to social media also understates the normal, human, Pavlovian response to interaction and acceptance. For one, the potential to more or less design a perfect, if virtual, version of ourselves completely independent of physical attractiveness is deeply, deeply tempting. RTs from television personalities are both largely pointless and a perfectly-designed machine for dopamine production. Most of us are just built that way.

Crap, this is getting too long. I intended to guess at more aggregate economic effects of the virtualization of human interaction. It dovetails nicely with Izabella Kaminska’s insanely good work on The New Abundance (will wealth move online?). Kids are already not bothering to get their driver’s lisence and Google has stolen 90% of the advertising revenue that used to go to print media. Mobile data traffic is still doubling every year. The Wii is only five or six steps away from a Holodeck. Jesus, what happens then?

Who’s team are you on:  Republican or Democrat, Hayek or Keynes?

According to The Last Psychiatrist – and he’s a doctor so we have to trust him – the faster you answered this question, the less your opinion matters:

media manipulates you to hate some things by linking them to other things: it polarizes you, which means it makes you irrelevant.  E.g. when an election “is determined by” one particular group of “swing” voters– whom you deride for being too stupid to have made up their minds yet– it doesn’t mean your vote has been factored in but that you are so predictable that you don’t count.  Power never thinks of you as an individual.  Power never thinks of you at all.

I quibble with the idea that “media” or “power” is an all-knowing Wizard of Oz controlling the levers of culture. My personal perception is that no one is in control but some, like surfers, can harness forces that are largely exogenous to their own benefit. Surfers don’t control waves, they just ride them in front of the cameras. Media doesn’t control behaviour, it tries to direct it – most often unsuccessfully – by appealing to base instinct.

But the point about polarization and irrelevance stands and, since polarization and intransigence are arguably the dominant traits of the current culture, we should try and figure out why.

Theory: The failure of scientific method is behind the recent lack of political progress.

You didn’t see that coming did you? Let’s go back a few hundred years to the beginning of the Era of Science and Reason. Technological and intellectual advancement, highlighted by Galileo, led to the widespread questioning of God and our place in the universe. The first order of business, like Adam in the garden of Eden, was to rename and categorize everything.

“Hey Chuck! Mr Darwin! Is this thing a mollusk or crustacean?”

“Two pairs of nerve cords? Mollusk”

“Chuck! WTF do we do with the Platypus? It lays eggs”

“Umm. Leave that one out”

And there’s the problem – leaving shit out. The scientific method proved insufficient to encompass everything, as economists are now painfully aware. Neat categorizations began to pull academics away from the real world rather than promote fuller understanding.

Consider the following model of scientific era thought, originally drawn up by the late professor James Leach, the Smartest of All Time (SOAT):

The all-male thinking brigade of the 17th and 18th centuries assumed that because the natural world appeared to divide between male and female that this was the correct way to start. They shoehorned almost everything into this construct. Inconveniences, occurrences that did not clearly fit, were repressed and ostracized as “other”. To the bigoted minds of the time, homosexuals – who tested the male/female divide – were the obvious examples.

For professor Leach, post-modernism was a process of declassification and re-assembling. (He spent a lot of time on Freud who’s primary achievement was discovering that the mind worked in metaphor. Our brains actually classified things as this AND that, not this OR that).

What we should be thinking about is what post-modern economics would look like, blowing up the existing structures and re-assembling them. Is it possible to believe simultaneously in smaller government and huge stimulus? Of course – it just doesn’t fit the current template. There’s no team for that.

What we’re doing now – splitting into mobs and screaming at each other – is tragically stupid and unproductive. The banner quote on this blog only hints at the depth of my disgust at the modern shoutfest. The crucible of spirited opposition has rendered every side inflexible, unhappy and desperate enough to seriously consider trillion dollar coins or destroying the legislative process.

And the Last Psych is right – the louder you scream the more irrelevant you are. Not because you’re wrong but because you have fitted yourself so deeply into an outdated template that it is unlikely you are thinking as an individual. Quit it

Every important argument in investing can be reduced to time frame, the speed at which returns can be earned relative to the amount of risk accepted. The now-somewhat disgraced Charles Brandes had the perfect synopsis of this:

What growth investors pay in valuations, value investors pay in time

In other words, growth investors want their returns quicker and they are willing to take on more risk in terms of valuation levels to get it. Value investors, more risk averse, are willing to wait longer.

Psychologically we could build in a marshmallow test/delayed gratification/maturity equation from this, much to the glory of value investors. They would come out as the adults while technicians look like the little kids who refuse to eat their vegetables (fundamental analysis) and want to start the meal with dessert.

If we pull back from the comic dysfunction of Congress it is also possible to frame the fiscal cliff bunfight in terms of time horizon. The Keynesians are the ones in a hurry – the economy needs help now and anyone working to delay huge stimulus is cheering on the starvation and general dissolution of the unemployed. Europe, particularly Greece, is clear evidence that supporters of American austerity at this point are out of touch whackjobs. For most of them, unfortunately, “whackjobs”  seems a charitable description.

Not every opponent of mass fiscal and monetary stimulus are froth at the mouth morons  though. Ray Dalio, for one, thinks the Fed is tapped out and blowing up their balance sheet for diminishing returns is an exercise in economic tilting at windmills. Economist William White, whose criminally under-read paper Ultra-Easy Monetary Policy and the Law of Unintended Consequences got me thinking most about this issue, is another.

Unlike the Keynsians, Dalio and White are less concerned with economic growth next year than the sustainable growth rate five years from now. For them, and admittedly I’m extrapolating here, maximizing economic growth for 2014 through government spending will only increase the eventual hardship, for a far greater number of people, in 2018 or other later date.

For the more sensible of the non-Keynesians, more monetary policy that threatens government fiscal health can be compared to smoking cigarettes. (The Japanese fit in here hilariously – “I dont have to quit smoking, that old Asian guy down the street’s been smoking 2 packs a day for 50 years and he’s still alive.”). Entitlement spending needs to be reigned in in the same way a smoker knows they have to quit. But maybe next year.

Ok, so the metaphor’s not perfect. Unless you want to include the dopamine release that comes from nicotine addiction, cigarettes have no constructive benefit whatsoever while there is ample evidence that stimulative fiscal and monetary policy does. In some ways obesity would work better – food, after all is necessary and constructive in moderation and the current epidemic of fatness raises all kinds of attractive metaphorical possibilities. But the health risks of obesity lack the “wake up one morning and you’re fucked” immediacy of lung or throat cancer, and potentially, a lack of faith in greenback and/or Treasury market.

Honestly, I don’t feel qualified to argue either side here. White’s paper – which focused on the longer term sustainability of subsidies for the auto and agricultural industries – did get me to think about it more. But to side with White and other Hayekians feels too much like a moral “eat your vegetables” argument rather than an economic one.

I also read Dalio’s Principles recently, his general recipe for life success. He emphasized the importance of looking past “first order problems”, using the time sink of physical exercise as an example, and focusing on second order benefits – the added productivity of physical health. This thought as it applies to fiscal cliff economics is harder to shake.

Kevin Ferry wrote a great post equating the current American political debates, in economics, social policy and everywhere else, as indicative of America’s adolescent stage of aggregate maturity. With this in mind, I can’t help but remember that one of the primary signals of maturity is the ability to think longer term – Dalio’s urgency about second order benefits.

Again, I won’t suggest that i know enough to tell you what mature economic policy would look like in this sense although certainly entitlement reform is part of it. But I do know that adulthood involves difficult choices when you realize you can’t just do whatever you want.