Most asset allocators take a probabilistic view: they expect returns of x% +/- y%. What do you do when there’s a binary outcome? Usually, you diversify—there are plenty of venture capital funds and private equity shops willing to tolerate a high failure rate, but they usually invest in more than one company. In the case of crypto currencies, most of the bull cases are mutually-exclusive. In Investing in Bitcoin: The Asset Allocator’s Perspective, I take a look at where Bitcoin fits into the typical institutional portfolio, and how to know whether or not the trade is working.
And speaking of regulatory arbitrages, what would insurance look like if you combined the emotional intensity of healthcare with the comparatively relaxed regulatory regime of property and casualty insurance? No need to speculate: that’s how pet insurance works. It’s a market with low penetration, at least in the US, but lots of potential. A friend of mine is incubating a new company in this space, so if you have any interest in the industry whatsoever, and want to build something new, please reach out.
A few broader, thematic pieces: my theory of introverts is that we’re bad at sensing context. This makes us good at digging into abstract ideas, and very bad at having normal conversations. Fortunately for us, we’ve reshaped the world according to our preferences, which means everyone else will have to get used to a world that runs on abstractions rather than relationships. But don’t get too cozy, lest the Meta-Malthusianisms catch up. “Meta-Malthusianism” is the idea that any system ends up running into, and overshooting, constraints. This makes systems hard to model, as Malthus discovered—based on data through 1800, he was absolutely correct that higher crop yields caused higher birthrates, with an r-squared of about .65.
And on the topic of economics and birthrates, I finally wrapped up my study of the macroeconomic impacts of the Baby Boom. While a lot of literature about Boomers is livid about them, I didn’t come away from this project hating anyone. I wound up sympathizing. Boomers were bidding for limited assets—housing and durables in the 70s, equities in the 80s and 90s, housing again in the 2000s—and since there are a lot of them, there was lots of competition. Some takeaways I found useful:
- US corporations have slowly reduced their inventory needs, while houses have gotten bigger and mortgage balances have grown. This has shifted monetary policy’s impact from the supply side (paying companies to restock inventory) to the demand side (getting homeowners to refinance, and to use the proceeds to fill their houses with stuff).
- Old people are overweight equities and real estate. They eat less, drive less, and have heavily-subsidized healthcare, so their effective inflation rate is lower than average. This makes them natural buyers of treasuries.
On Palladium I have a piece on Facebook’s Libra—it’s a half-century late and a navy short. Libra is the kind of idea that the US would have implemented on its own in a post-war context, when we had both the means and the motivation to be the dominant global power. Today, globalization is in retreat, and the US sees entities like Facebook as competitors rather than collaborators.
Finally, and more sentimentally: my wife and I just celebrated our fifth wedding anniversary. In honor of this, I’m reposting this short piece on the economics of marriage. Who says romance is dead?
I finished Adam Tooze’s Crashed, on the 2008 crisis and its aftermath. Crashed came out in mid-2018; we’re lucky this cycle has gone on so long, or this excellent treatment of the last crash would have been swamped by hastily-assembled books on the next one. (If a history of the dot-com bubble had taken that long to get right, it would have come out in 2010 or so.) Tooze is helpful in reframing the immediate crisis—subprime was a catalyst, but the real problem was a dollar shortage. He’s also good at explaining why the consequences reverberated through Europe for so long: European countries can’t have independent monetary policies, so their Euro-denominated debt is functionally equivalent to debt denominated in another country’s currency. This forced Greece, Ireland, Spain, etc. into the same kind of vicious circle that most of the world faced in the 1930s: they cut spending to pay interest, but their spending cuts reduced output, which shrank their tax base and forced further cuts.
It’s an open question as to whether fiscal and monetary policy can change the mean rate of economic growth, or whether they change the expected mean of a small sample by shifting the skew and kurtosis but not the underlying average.
On a related note, I went back and read some of Bernanke’s old papers on how central banks should handle asset bubbles. You can see how this would have left him unprepared for some aspects of 2008, but well-prepared for others: he argues that banks should respond to asset prices as such only insofar as they affect expected future inflation, which is tricky when the asset in question is housing or housing credit. Housing becomes more of a savings vehicle as it gets more expensive, but someone interested in buying a home just to consume future housing still has to pay for both the consumption and the price speculation. On the other hand, Bernanke was exceptionally well-prepared to deal with one 2008-era issue: he wrote that the main macro impact of oil prices was central banks’ overreactions. Exactly the right attitude for dealing with $147/barrel oil prices coupled with a rapidly-worsening recession.
The Bretton Woods Agreements was also worthwhile: Bretton Woods was fundamentally unsustainable, both because currency pegs require immense political will and because the mechanics of this one encouraged every country to accumulate dollars until the US couldn’t conceivably maintain its gold peg. But it’s notable that while the agreement was in force, banking crises were basically nonexistent. From 1945 through the early 70s, it was plausible to elites that the right way to solve most global problems was to have the world’s ruling class meet at a nice resort and hash everything out. Today’s mostly-floating currency regime has lasted longer, but it represents a shift—from the belief that specific people will solve complex problems to the (so far more accurate!) view that hazy agglomerations of central banks, investment banks, hedge funds, and individual savers will take care of it.
One fun detail from the book: I had read before that George Soros’ career as an equity analyst was torpedoed by an unfortunate change in tax laws. In the 50s and 60s, he helped American investors pick European stocks, but in 1963 tax rules changed in a way that made overseas investing significantly less favorable to Americans. Consequently, Soros suffered a sort of lost half-decade before starting an offshore hedge fund. What I didn’t know was that this tax law was one of several stopgaps the US used to keep dollars and gold from leaking abroad. Whether this is a superhero origin story or a supervillain origin story depends on your opinion of Soros himself, but it’s still kind of funny that the greatest macro hedge fund manager of all time got started in that career because he was blindsided by a macro shift.
Upcoming: A Book!
I’m working with Tobias Huber, coauthor of the Manias and Mimesis paper, on a book. We’re exploring the topic of slowing productivity growth, from two directions: asking why growth has slowed down so much in the last few decades, and asking what made some industries and projects—the Manhattan Project, the Apollo Program, Moore’s Law, fracking—so productive for so long. Stay tuned for updates.