Let’s say the rest of the market was undervaluing the chance of UFOs being “something interesting.” What might be the proper trade? David S. emails me, and I will dispense with further indentation but what follows are his words not mine:
“Some potential food for thought:
– Going long volatility or long defense stocks seems like the most conventional answer.
– An even more conventional answer would be that it wouldn’t matter since any apocalypse means that even a correct bet is unlikely to have material redeemable value.
– Rather than framing the payout event as the binary of an actual UFO invasion, an alternative framing would be to bet on further government leaks causing the market to move it’s probability of invasion / apocalypse from 0.00% to 0.01%.
- Should you at least shorten the duration of your holdings on the margin? With interest rates near zero and record(-ish) high PE multiples, shouldn’t you be (marginally) less willing to pay for far-out cash flows? Could this finally fuel a resurgence of the value factor vs the growth factor?
- To take it a step further, should people consume more today and invest less given that the EV/NPV of these payouts will be somewhat lower?
- Other than high-dividend stocks and cash, what other trades are short-duration without going to zero if the apocalypse fails to arrive on time?
– My contrarian approach would be to go very long due to the underrated potential of technology transfer and overrated potential of apocalypse (especially in the near-term). For instance, if we found intelligent life on a planet like Mars (but less intelligent than humans), it would likely be decades between first contact and when humans would muster a military force to extinguish or fully dominate the other species (if ever). Also, based on the continued existence of thousands of species (many of which are flourishing) on earth in parallel with human existence, its not clear why we would assume that a more intelligent form of life that engages with humans would even try to extinguish. Per Steven Pinker, more intelligent species would likely also be more moral and therefore less likely to be focused on zero-sum extinction.”
TC again: Obviously many short positions would be in order. In terms of longs, my intuitions would be to buy a very diverse bundle of natural resources. Presumably the aliens have not brought many minerals with them, and they will need some minerals to do…whatever it is they plan on doing. Maybe lots of minerals. But you don’t know which ones.
Excellent and interesting throughout, here is the transcript, video, and audio. Here is part of the summary:
He joined Tyler for a conversation about which areas of science are making progress, the factors that have made research more expensive, why government should invest more in R&D, how lean management transformed manufacturing, how India’s congested legal system inhibits economic development, the effects of technology on Scottish football hooliganism, why firms thrive in China, how weak legal systems incentivize nepotism, why he’s not worried about the effects of remote work on American productivity (in the short-term), the drawbacks of elite graduate programs, how his first “academic love” shapes his work today, the benefits of working with co-authors, why he prefers periodicals and podcasts to reading books, and more.
Here is an excerpt:
COWEN: If I understand your estimates correctly, efficacy per researcher, as you measure it, is falling by about 5 percent a year [paper here]. That seems phenomenally high. What’s the mechanism that could account for such a rapid decline?
BLOOM: The big picture — just to make sure everyone’s on the same page — is, if you look in the US, productivity growth . . . In fact, I could go back a lot further. It’s interesting — you go much further, and you think of European and North American history. In the UK that has better data, there was very, very little productivity growth until the Industrial Revolution. Literally, from the time the Romans left in whatever, roughly 100 AD, until 1750, technological progress was very slow.
Sure, the British were more advanced at that point, but not dramatically. The estimates were like 0.1 percent a year, so very low. Then the Industrial Revolution starts, and it starts to speed up and speed up and speed up. And technological progress, in terms of productivity growth, peaks in the 1950s at something like 3 to 4 percent a year, and then it’s been falling ever since.
Then you ask that rate of fall — it’s 5 percent, roughly. It would have fallen if we held inputs constant. The one thing that’s been offsetting that fall in the rate of progress is we’ve put more and more resources into it. Again, if you think of the US, the number of research universities has exploded, the number of firms having research labs.
Thomas Edison, for example, was the first lab about 100 years ago, but post–World War II, most large American companies have been pushing huge amounts of cash into R&D. But despite all of that increase in inputs, actually, productivity growth has been slowing over the last 50 years. That’s the sense in which it’s harder and harder to find new ideas. We’re putting more inputs into labs, but actually productivity growth is falling.
COWEN: Let’s say paperwork for researchers is increasing, bureaucratization is increasing. How do we get that to be negative 5 percent a year as an effect? Is it that we’re throwing kryptonite at our top people? Your productivity is not declining 5 percent a year, or is it? COVID aside.
BLOOM: COVID aside. Yeah, it’s hard to tell your own productivity. Oddly enough, I always feel like, “Ah, you know, the stuff that I did before was better research ideas.” And then something comes along. I’d say personally, it’s very stochastic. I find it very hard to predict it. Increasingly, it comes from working with basically great, and often younger, coauthors.
Why is it happening at the aggregate level? I think there are three reasons going on. One is actually come back to Ben Jones, who had an important paper, which is called, I believe, “[Death of the] Renaissance Man.” This came out 15 years ago or something. The idea was, it takes longer and longer for us to train.
Just in economics — when I first started in economics, it was standard to do a four-year PhD. It’s now a six-year PhD, plus many of the PhD students have done a pre-doc, so they’ve done an extra two years. We’re taking three or four years longer just to get to the research frontier. There’s so much more knowledge before us, it just takes longer to train up. That’s one story.
A second story I’ve heard is, research is getting more complicated. I remember I sat down with a former CEO of SRI, Stanford Research Institute, which is a big research lab out here that’s done many things. For example, Siri came out of SRI. He said, “Increasingly it’s interdisciplinary teams now.”
It used to be you’d have one or two scientists could come up with great ideas. Now, you’re having to combine a couple. I can’t remember if he said for Siri, but he said there are three or four different research groups in SRI that were being pulled together to do that. That of course makes it more expensive. And when you think of biogenetics, combining biology and genetics, or bioengineering, there’s many more cross-field areas.
Then finally, as you say, I suspect regulation costs, various other factors are making it harder to undertake research. A lot of that’s probably good. I’d have to look at individual regulations. Health and safety, for example, is probably a good idea, but in the same way, that is almost certainly making it more expensive to run labs…
COWEN: What if I argued none of those are the central factors because, if those were true as the central factors, you would expect the wages of scientists, especially in the private sector, to be declining, say by 5 percent a year. But they’re not declining. They’re mostly going up.
Doesn’t the explanation have to be that scientific efforts used to be devoted to public goods much more, and now they’re being devoted to private goods? That’s the only explanation that’s consistent with rising wages for science but a declining social output from her research, her scientific productivity.
COWEN: What exactly is the value of management consultants? Because to many outsiders, it appears absurd that these not-so-well-trained young people come in. They tell companies what to do. Sometimes it’s even called fraudulent if they command high returns. How does this work? What’s the value added?
By Donald J. Harris, here is the abstract:
Focused on the emerging conditions of industrial capitalism in Britain in their own time, the classical economists were able to provide an account of the broad forces that influence economic growth and of the mechanisms underlying the growth process. Accumulation and productive investment of a part of the social surplus in the form of profits were seen as the main driving force. Hence, changes in the rate of profit were a decisive reference point for analysis of the long-term evolution of the economy. As worked out most coherently by Ricardo, the analysis indicated that in a closed economy there is an inevitable tendency for the rate of profit to fall. In this article, the essential features of the classical analysis of the accumulation process are presented and formalized in terms of a simple model.
We exploit changes in U.S. visa policies for nurses to measure brain drain versus gain. Combining data on all migrant departures and postsecondary institutions in the Philippines, we show that nursing enrollment and graduation increased substantially in response to greater U.S. demand for nurses. The supply of nursing programs expanded to accommodate this increase. Nurse quality, measured by licensure exam pass rates, declined. Despite this, for each nurse migrant, 10 additional nurses were licensed. New nurses switched from other degree types, but graduated at higher rates than they would have otherwise, thus increasing the human capital stock in the Philippines.
Formal pre-doc programmes have burgeoned, especially in elite universities such as Harvard, Stanford, the University of Chicago and Yale. Participants clean and analyse data, write papers and do administrative tasks. In exchange they may receive free or subsidised classes, a salary in the region of $50,000, potential co-authorship of the papers they work on, and, most prized of all, a letter of recommendation to a top programme.
In part pre-docs show how economic research has changed. “Economics has become more like the sciences in terms of both the methods and the production process,” says Raj Chetty of Harvard, who directs the Opportunity Insights team, a group with a reputation for working its pre-docs hard. When analysing tax records that gave access only to a certain number of people, he switched away from using part-time research assistants to a lab-like team, inspired by his own family of scientists. As bigger data sets, new techniques and generous funding made such collaboration worthwhile, others followed.
Here is much more on pre-docs from Soumaya Keynes at The Economist. I suspect this development is inevitable, but I see at least two things going on here. First, letter writers are internalizing the very high value of those letters in the form of personal services received. Second, this will push out “weirdos” and make the profession more homogenized, more obedient, more elite, more dependent on school of origin, and less interesting. I do understand the value of the training received, and don’t propose any mechanism to “stop this,” but overall it does not make me an entirely happy camper.
The Great Recession was a deep downturn with long-lasting effects on credit, employment, and output. While narratives about its causes abound, the persistence of gross domestic product below precrisis trends remains puzzling. We propose a simple persistence mechanism that can be quantified and combined with existing models. Our key premise is that agents do not know the true distribution of shocks but use data to estimate it nonparametrically. Then, transitory events, especially extreme ones, generate persistent changes in beliefs and macro outcomes. Embedding this mechanism in a neoclassical model, we find that it endogenously generates persistent drops in economic activity after tail events.
That is for June, Kentucky is at 4.3 percent but West Virginia at 10.4? Here are the underlying BLS data. Here is some description of Kentucky in June. Note that Kentucky cases are now rising rapidly. Here is the case pattern for Idaho. The three states with the highest unemployment rates — New York, New Jersey, and Massachusetts — have been moving toward relative safety after some very tough times early on. One interpretation of these numbers is that serious lockdowns were necessary to stem the virus, but those lockdowns caused high unemployment. More plausible to me is the view that a high initial virus burden led to high unemployment — consumers were scared — but also superior case and death results later on.
Via Nick Clerkin.
We show that increased job demands due to takeover threats and industry crises have significant adverse consequences for managers’ long-term health. Using hand-collected data on the dates of birth and death for more than 1,600 CEOs of large, publicly listed U.S. firms, we estimate that CEOs’ lifespan increases by around two years when insulated from market discipline via anti-takeover laws. CEOs also stay on the job longer, with no evidence of a compensating differential in the form of lower pay. In a second analysis, we find diminished longevity arising from increases in job demands caused by industry-wide downturns during a CEO’s tenure. Finally, we utilize machine-learning age-estimation methods to detect visible signs of aging in pictures of CEOs. We estimate that exposure to a distress shock during the Great Recession increases CEOs’ apparent age by roughly one year over the next decade.
Here is the full paper by Mark Borgschulte, Marius Guenzel, Canyao Liu, and Ulrike Malmendier.
That is the topic of my latest Bloomberg column, here is one excerpt:
The Slave-Free Business Certification Act of 2020, introduced last week by Republican Senator Josh Hawley of Missouri, sounds unobjectionable, maybe even worthy. As the U.S. engages in a worthwhile and necessary reassessment of the role of slavery in its history, the bill would force large companies to investigate and report on forced labor in their supply chains.
In fact, the net effect of the bill — contrary to its stated intent — might be to increase slavery worldwide.
As a general principle, companies should cut off commercial relations with any known sources of slavery. Yet this law calls for mandatory corporate investigation and auditing, backed by CEO certification and with significant penalties for non-compliance. The investigatory process is supposed to include interviews of both workers and management in the supply chain.
Such a get-tough approach has a superficial appeal. Yet placing an investigative burden on companies may not lead to better outcomes.
Consider the hypothetical case of a U.S. retailer buying a shipment of seafood routed through Vietnam. It fears that some of the seafood may have come from Thailand, where there are credible reports of (temporary) slavery in the supply chain. How does it find out if those reports are true? Asking its Vietnamese business partner, who may not even know the truth and might be reluctant to say if it did, is unlikely to resolve matters.
It is unlikely that businesses, even larger and profitable ones, will be in a position to hire teams of investigative journalists for their international inputs. Either they will ignore the law, or they will stop dealing with poorer and less transparent countries. So rather than buying shrimp from Southeast Asia, that retailer might place an order for more salmon from Norway, where it is quite sure there is no slavery going on.
…for every instance of slavery today there are many more opaque supply chains that will be damaged and disrupted if the burden is on large companies to root out labor abuses.
Here are a few points of relevance:
1. The law penalizes opaque supply chains rather than slavery per se. That is unlikely to be an efficient target.
2. Judgments about slavery are put in the hands of businesses rather than the government. Why not just have the U.S. government issue sanctions against slavery-supporting countries when sanctions are appropriate and likely to be effective? What is the extra gain from taxing businesses in this way?
3. There are many forms of coerced and exploited labor, and it is not clear this legislation will target slavery as opposed to simply low wages and poor working conditions as might result from extreme poverty. You also don’t want the law to tax poor working conditions per se, since FDI, or purchasing flows from a supply chain, can help improve those working conditions. You might however wish to target employment instances where, due to the nature of the law, additional financial flows toward the product will never rebound to the benefit of foreign labor. This law (which I have read all of) does not seem to grasp that important distinction.
You may have read that a number of early games in the season have been cancelled due to many of the players testing positive for Covid-19. There is talk of the season being unsustainable, but it seems a simple remedy has not yet been tried — dock a player 30 percent of his salary if he tests positive. That should limit the degree of nightclubbing and carousing, keeping in mind that the already-infected are probably some of the worst offenders and they have been “taken care of.” Furthermore, the players would have a strong incentive to monitor each other, not wanting to be on the receiving end of an infection from a teammate.
While that arrangement presumably runs counter to the collective bargaining agreement, that agreement can and should be revised if season cancellation is the true alternative.
If need be, the fines can be redistributed to the players who never test positive, thus keeping total compensation constant.
Incentives don’t always work, but if you haven’t even tried them something is amiss. Do I hear “35 percent”? “Forty”? “Thirty-seven percent and three lashes”?
In chess, new context empowers previously redundant pieces. And one such piece could turn out to be some $1tn-plus (when compound interest is accounted for) of yet-to-be-cancelled pre-People’s Republic of China debt ranging from the Hukuang Railways Sinking Fund Gold Loan of 1911 and the Reorganisation Gold Loan of 1913, to the so-called Liberty Bonds of 1937.
Long forgotten, these bearer bonds — denominated in sterling, Swiss francs, Russian roubles, Deutsche marks or US dollars — exist mostly in people’s private collections or attics. The most relevant were issued either by the former Republic of China or the preceding Imperial Chinese state to raise money for big development and infrastructure projects. Some were secured against revenues from Chinese natural assets like salt resources.
When the People’s Republic of China was founded in 1949, its leaders broke with the tradition of maintaining the debt obligations of previous regimes. But they never formally de-recognised the debt. The bonds instead went into default, taking on mainly antique value.
Mitu Gulati, a professor of law at Duke University who has been studying the bonds, believes a legal argument could be made to revive some of the claims. Some of the old obligations include legal clauses that suggest new Chinese debt cannot be issued until old debt has been dealt with.
The 1912 and 1913 issues continued to trade speculatively on the London Stock Exchange until 1987, when some investor bets appeared to pay off…
George LaBarre, a specialist vintage financial paper dealer, says the price of the 1911 Hukuang bond has gone from $75-100 to about $450.
Here is more from the FT, via Malinga Fernando.
Here is the transcript, audio, and video. Here is part of the summary:
Nathan joined Tyler for a conversation about which African countries a theory of persistence would lead him to bet on, why so many Africans live in harder to settle areas, his predictions for the effects of Chinese development on East Africa, why genetic distance is a strong predictor of bilateral income differences and trade, the pleasant surprises of visiting the Democratic Republic of Congo, the role of the Catholic Church in the development of the West, why Canadian football is underrated, the unique commutes of Ottawans, the lack of Canadian brands, what’s missing from most economic graduate programs, the benefits of studying economics outside of the United States, how the plow shaped gender roles in the societies that used it, the cultural values behind South Korea’s success, and more.
Here is one excerpt:
COWEN: If you try to think, say, within Africa, what would be some places that you would be modestly more optimistic about than, say, a hedge fund manager who didn’t understand persistence? What would a few of those countries be? Again, recognizing enormous noise, variance, and so on, as with smoking and lung cancer.
NUNN: If I’m true to exactly what I was just saying, then southern Africa or places where you have a larger population of societies that historically were more developed. South Africa, you have the Afrikaans, and they have a different descent than others. That’s if I’m true to what I was saying. But that’s ignoring that, also within Africa, you had a very large number of successful, well-developed states, and that was prior to European colonialism and the slave trade. So one could look at those cases.
One area that I worked at, the Democratic Republic of Congo, where you had the great Congo Kingdom, the Kuba Kingdom, a large number of other kingdoms, the Luba for example — that would probably be one country. That country today is pretty much as low as — in terms of per capita income — as you can be, right at subsistence. But if we’re predicting just based purely on persistence and historical state formation, that would be one to pick.
COWEN: What do you find to be the most convincing account of Botswana’s relative economic success?
NUNN: A few things. One is, Botswana is pretty small in terms of population. Anytime you have smaller countries, you can have more extreme outcomes. That’s one, that it’s small. But then related to that, it’s, in general, ethnically homogenous, particularly compared to other countries within Africa. The Tswana are the predominant ethnicity. They also have a historical social structure, and I think that was pretty well maintained and left intact. That’s a big part of the explanation.
COWEN: Is it fun to visit Democratic Republic of Congo?
NUNN: Yeah, it’s great. Yeah.
COWEN: Tell us what’s fun. I need to go once I can.
NUNN: Yeah, it’s really, really great. The first time we went as a team — this is James Robinson, Sara Lowes, Jonathan Weigel in 2013 — we were pretty apprehensive. You hear a lot of stories about the DRC. It sounds like a very unsafe place, et cetera. But one thing we didn’t realize or weren’t expecting was just how lovely and wonderful the people are.
And it turns out it’s not unsafe in general. It depends on different locations. In the east, definitely near Goma, it’s obviously much, much less safe. But I think what, for me, is wonderful is the sense of community. Because the places we go are places that haven’t been touched, to a large extent, by foreign aid or NGOs or tourism, I think we are treated just like any other individual within the community.
COWEN: What’s your favorite movie and why?
NUNN: Oh, favorite movie. [laughs] That’s a good question. Favorite movie — in the past it was Dazed and Confused. I must have watched that in university about a hundred times.
COWEN: A wonderful film.
Recommended, interesting throughout.
One part of the mycelium had access to a big patch of phosphorus. Another part had access to a small patch. She was interested in how this would affect the fungus’s trading decisions in different parts of the same network. Some recognizable patterns emerged. In parts of a mycelial network where phosphorus was scarce, the plant paid a higher “price,” supplying more carbon to the fungus for every unit of phosphorus it received. Where phosphorus was more readily available, the fungus received a less favorable “exchange rate.” The “price” of phosphorus seemed to be governed by the familiar dynamics of supply and demand.
Most surprising was the way that the fungus coordinated its trading behavior across the network. Kiers identified a strategy of “buy low, sell high.” The fungus actively transported phosphorus — using its dynamic microtubule “motors” — from areas of abundance, where it fetched a low price when exchanged with a plant root, to areas of scarcity, where it was in higher demand and fetched a higher price. By doing so, the fungus was able to transfer a greater proportion of its phosphorus to the plant at the more favorable exchange rate, thus receiving larger quantities of carbon in return.
We still do not understand how those behaviors are controlled. And that is all from the new and excellent Merlin Sheldrake book Entangled Life: How Fungi Make Our Worlds, Change Our Minds, & Shape Our Futures.
It seems to these days:
We investigate the impact on firms of joining the S&P 500 index from 1997 to 2017. We find that the positive announcement effect on the stock price of index inclusion has disappeared and the long-run impact of index inclusion has become negative. Inclusion worsens stock price informativeness and some aspects of governance. Compensation, investment, and financial policies change with index inclusion. For instance, payout policies of firms joining the index become more similar to the policies of their index peers. ROA falls following inclusion. There is no evidence of an impact of inclusion on competition.
Here is the opening:
These are among the latest symptoms of an economic implosion that is accelerating at an alarming pace in Lebanon as its government, its banks and its citizens run out of foreign currency simultaneously.
The Lebanese pound has lost over 60 percent of its value in just the past month, and 80 percent of its value since October. Prices are soaring and goods disappearing.
Bread, a staple of the Lebanese diet, is in short supply because the government can’t fund imports of wheat. Essential medicines are disappearing from pharmacies. Hospitals are laying off staff because the government isn’t paying its portion, and canceling surgeries because they don’t have electricity or the fuel to operate generators.
Newly impoverished people are taking to Facebook to offer to trade household items for milk. Crime is on the rise. In one widely circulated video, a man wearing a coronavirus mask and wielding a pistol holds up a drugstore and demands that the pharmacist hand over diapers.
“Lebanon is no longer on the brink of collapse. The economy of Lebanon has collapsed,” said Fawaz Gerges, professor of international relations at the London School of Economics. “The Lebanese model established since the end of the civil war in 1990 has failed. It was a house of glass, and it has shattered beyond any hope of return.”
Lebanon’s Western allies long ago made it clear that they won’t help out until the government undertakes efforts to reform the corrupt and bloated public sector. An $11 billion package of loans and investments has been on offer since 2018 — on the condition that the government undertake some limited changes. It hasn’t.
And if you had any doubts:
Staggering amounts are now missing from the banking system — perhaps as much as $100 billion, according to government figures.
Three-quarters of the deposits in the entire banking system were denominated in U.S. dollars, and many ordinary Lebanese may have lost most or all of their savings, said Jad Chaaban, an economist at the American University of Beirut.
Here is the full article by Liz Sly.