When reading I annotate and highlight. Depending on the book or subject, the end product might be a book where the front and back cover are completely worn off and most pages have been read and annotated on numerous occasions.
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Irrespective of the book or article, I find it useful to have a writing utensil on hand in case I find something of interest. However, there are times when, for some unknown reason, I have found myself without a means of taking notes. In those times of trouble I have (apparently) resorted to using my phone to take an image of a passage. At times I have referred back to those passages for purposes of a presentation or an economic update I was preparing, but more often than not, those images have just been lost to time, buried in the depths of the Photos app, beneath pictures of things that are actually important. Nevertheless,
while without Wi-Fi one evening I was digging through these photo's of
passages going back to the pandemic and here is what I found (in chronological order and with my commentary in red): "Aside from movies, examples of positive-Black Swan businesses are: some segments of publishing, scientific research, and venture capital. In these businesses, you lose small to make big.....In these businesses you are lucky if you don't know anything- particularly if others don't know anything either, but aren't aware of it. And you fare best if your ignorance lies, if you are the only one looking at unread books, so to speak. This dovetails into the "barbell" strategy of taking maximum exposure to the positive Black Swans while remaining paranoid about the negative ones. For your exposure to the positive Black Swan, you do not need any precise understanding of the structure of uncertainty. I find it hard to explain that when you have a very limited loss you need to get as aggressive, as speculative, and sometimes as "unreasonable" as you can be." - Morgan Housel Morgan discusses the barbell strategy as saving like a
pessimist while investing like an optimist. Things will
work out in the long run, but you have to be able survive the
interim period that is chaos, setbacks, recession for your long term optimism
to succeed. Learn the skills to endure risk, rather than completely
avoiding risk. "It was
Strong more than anyone else who invented the modern central banker....how
they are seeking to strike the right balance between economic growth and
price stability, it is the ghost of Benjamin Strong who hovers above
him." - Lords of Finance Learn more about Ben Strong here "At some
level the markets don't make sense anymore. You are playing poker against the
man who can make his own chips. It is a very bad idea." - Unknown I think the moral of the above quote is that the official
sector (government and central banks) can have a major impact on markets. "Obviously
not all crises escalate to the extreme outcome of a sovereign default.
Yet advanced economies have not been exempt from their share of currency
crashes, bouts of inflation, severe banking crises, and, in an earlier era,
even sovereign default." "As Diaz-Alejandro narrates in his classic
paper about the Chilean experience of the 1970s and early 1980s,
"Goodbye Financial Repression, Hello Financial Crash", financial
liberalization simultaneously facilities banks' access to external credit and
more risky lending practices at home. After a while, following a boom in
lending and asset prices, weaknesses in bank balance sheets become manifest
and problems in the banking sector begin. Often these problems are more
advanced in the shakier institutions (such as finance companies) than in the
major banks. The next stage of the crisis unfolds when the central bank
begins to provide support for these institutions by extending credit to them.
If the exchange rate is heavily managed, a policy inconsistency arises
between supporting the exchange rate and acting as lender of last resort to
the troubled institution...the central bank may be more reluctant to engage
in an "interest rate defense" policy to defend the currency than
would be the case if the financial sector was sound....The depreciation or
devaluation of the currency as the case may be, complicates the situation in
three ways: (1) it exacerbates the problems of the banks that borrowed in
foreign currency..(2) it usually worsens inflation...and (3) it increases the
odds of external and domestic default if the government has foreign currency
denominated debt. At this stage the banking crisis either peaks..or
keeps getting worse as the crisis mounts and the economy marches toward a
sovereign default....As regards inflation, the evidence..all points in the
direction of a marked deterioration in inflation performance after a
default" - This Time is Different Not sure if the above is directly applicable to today,
but certainly there are some similarities. Perhaps this is
apropos of the Minsky quote "stability breeds instability" and
a reminder that cycles can turn. "How is
bitcoin different from other pyramid schemes, say those run in penny-stock
boiler rooms? The only distinguishing characteristics are the
record-keeping method - a "proof of work" blockchain - and a large
marketing effort that uses the media instead of the telephone." -
Unknown This one seems to have aged well. "If the
banking system is content at creating checkable deposits for the government,
it's not inflationary, either, because banks must not be interested in the
rest of the zoo, shunning rebalancing into risky activities like credit,
lending, or replacing lost shadow money globally." - Unkown There is a distinction between
"inside" and "outside" money, a topic most people don't
spend any time thinking about. The term "outside" refers to
money that comes from outside the private sector, it is unbacked or fiat.
The term "inside" money exist inside the private sector, like a
checking account where your deposit asset is the bank's liability.
In monetarist economic stories both inside and outside money are
inflationary, in other theories only outside money matters. "Initially,
the problem right now is deflation and not inflation, but deflation. There is
too much debt. Growth is too slow and the psychology is wrong because people
are saving and not spending." - Jim Rickards Looks like the psychology has flipped on this one over
time. "The monetary inflation comes from government spending of the
funds raised...QE is increasingly deployed as a means of financing government
spending instead of it being directed to stimulate asset prices....the
prospect of flooding bond markets with more government debt at an
unprecedented scale as dollar bond yields rising they will continue to do
so." - Zerohedge article sometime January 2021 This one seemed fairly accurate. "The classic
definition of an asset bubble was coined by economist Robert Shiller, who
called it an unsustainable condition in which "price increases beget
further price increases. I preferred Warren Buffet's definition:
"It's like most trends at the beginning it's driven by fundamentals; in
the end, by speculation. It's just like the old adage: 'What the wise man
does int he beginning the fool does in the end". - Fed Up by Danielle
DiMartino Booth There is a lot of debate whether or not anything is
actually a "bubble" ever, but the bottom line is sometimes the
benefits of whatever new technology was a "bubble" may come around
and payoff to the economy down the line. "..the Federal Reserve exists so the American public can maintain
faith in its monetary system" "...the Fed was helping too much. Its insistence of the wealth
effect fueled the formation of bubbles...Less intrusive Fed policy would have
allowed for the price discovery so essential to market functionality and the
prevention of the boom-and-bust cycle that worried von Mises in his day" See Bernanke, Ben and "The Courage To
Act" "And they do
one big but destructive thing: Namely, they are used to justify endless
manipulation and falsification of the of the single most important set of
prices in all of capitalism - the price of money and financial assets."
- quote attributed to David Stockman in Fed Up Borio and White at the BIS had repeatedly warned
that ultra-low rates ultimately lead to misallocation of real resources
with consequences for the real economy. One area that economists such as
Borio and White cite as a source of concern during period of low interest
rates is excessive capital allocation to ‟low-productivity” sectors. "...ownership
of stocks is very much a "positive-sum" game. Indeed, a
patient and level-headed monkey, who constructs a portfolio by throwing 50
darts at a board listing all of the S&P 500, will - over time -
enjoy dividends and capital gains, just as long as it never gets
tempted to make changes in its original "selections." "...business
ownership produce wealth - lots of it...All that's required
is the passage of time, an inner calm, ample diversification and a
minimization of transactions and fees. Still, investors must never
forget that their expenses are Wall Street's income.
And, unlike my monkey. Wall Streeters do not work for peanuts." -
Berkshire Hathaway Annual Report published in 2021 Two simple messages that are often so hard to implement:
(1) over a long period of time businesses will be productive and generate
wealth, but that picking winners and losers ex-ante is very difficult, so own
the index (2) never interrupt compounding unnecessarily "In order to
put industry into motion, three things are requisite: materials to work upon,
tools to work with, and the wages or recompence for the sake of which the
work is done. Money is neither a material to work upon, nor a tool to work
with, and though wages of the workman are commonly paid to him in money, his
real revenue, like that of other men, consists, not in the money, but in the
money's worth; not in the metal pieces, but in what can be got for
them." - Adam Smith, Wealth of Nations "Goods can serve many other purposes besides purchasing money, but
money can serve no other purpose besides purchasing goods. Money
therefore, necessarily runs after goods, but goods do not always or
necessarily run after money. The man who buys, does not always mean to
sell again, but frequently to use or to consume whereas he who sells always
means to buy again...It is not for its own sake that men desire money, but
for the sake of what we can purchase with it." - Adam Smith, Wealth of Nations A good reminder as to what money is worth given the
rise of inflation. "Based both on how things have worked historically and what is
happening now. I am confident that tax changes will also play an important
role in driving capital flows to different investment assets and different
locations and those movements will influence market movements. If history and
logic are a guide, policy makers who are short of money will raise taxes and
won't like these capital movements out of debt assets and into other
storeholds of wealth assets and other tax domains..these tax changes could be
more shocking than expected." - Ray Dalio Remember the calls for wealth taxes? Given the
Fitch downgrade and the level of deficits will we see tax increases in the
future, or is the government so divided that nothing will ever get done? "They dispense culture the better to rule. Beauty? They
promote the beauty which enslaves. They create a literate ignorance - easiest
thing of all. They leave nothing to chance. Chains! Everything they do forges
chains, enslaves. But slaves always revolt." -Frank Herbert, Dune
Messiah "At the center of each island is a man. Men learn how to gain and
hold personal power. Men are jealous." - Frank Herbert, Dune Messiah "Between depriving a man of one hour from his life and depriving
him of his life there exists only a difference of a degree. You have
done violence to him, consumed his energy. Elaborate euphemisms may conceal
your intent to kill, but behind any use of power over another the ultimate
assumption remains: "I feed on your energy." - Frank Herbert, Dune
Messiah "People aren't concerned with love, it's too disordered.
They prefer despotism. Too much freedom breeds chaos...how do you make a
despot loveable? ...Ahh, laws. Law filters chaos...Law- our highest
ideal and our basest nature. Don't look too closely at the law. - Frank
Herbert, Dune Messiah Who is feeding on your energy? What are the power
structures that keep you from being truly free? What exactly is freedom? "The trouble with massive debt levels is that for every one
auction which goes well, there is always another one just around the corner
that risks going badly and repricing the entire asset class." - Matt
King, Citi A now timely reminder. "...spending
beyond a pretty low level of materialism is merely a reflection of ego
approaching income, a way to spend money to show people that you have (or
had) money....People with enduring personal finance success - not necessarily
those with high incomes - tend to have a propensity to not give a damn what
others think about them." "Every bit of savings is like taking a point in the future that would have been owned by someone else and giving it back to yourself." - Morgan Housel,
The Psychology of Money The rise of social media certainly makes it hard for
people to resist the need to "keep up with the Jones" at the
expense of building wealth. Housel likes to remind people that the
ability to save money gives you options that include the flexibility and
control over your time. "Man and his machine intelligences. Which is a parasite on the
other? Neither part of the symbiote can now tell. But it is an evil thing, a
work of the Anti-Nation. Worse than that that, it is an evolutionary dead
end" With the rise of AI and
quantum-computing the Hyperion books are worth a read. "The idea that delayed gratification confers some socio-economic
advantage to those defer was eventually debunked. The real world is a bit
different. Under uncertainty, you must consider taking what you can now,
since the person offering you two dollars in one year versus one today might
be bankrupt." So what this idea is about isn't delayed
gratification, but the ability to operate without external gratification - or
rather, with random gratification. Have the fortitude to live without
promises." - Taleb Alternatively this might lead one to
question whether you are applying the correct discount factor to future
promises. "Rhetoric is the art of the incomplete argument, a 'heuristic'
device, or story, to point the mind in the right direction. In a sense
all the social sciences are rhetorical. This simply means that he conditions
required to make them universally true do not hold, or only hold under
special conditions. They are only partially true." "From this perspective, economic modeling is a persuasive
undertaking: it does not aim to discover truth, it tries to persuade people
of the truth of its own 'text'. All reality is 'socially
constructed'" ...There are three valuable implications of this approach.
First, it emphasizes that stories or narratives are the ways in which people
try to make sense of complex situations....Second, it points out that belief
in the story rests on confidence in the story-teller...Third, whiles stories
are not the engines of prediction..they illuminate problems which escape
formal modelling. The question, then, is, whether economic modeling can
improve significantly on story-telling or whether it is part of the story-telling." "Economist should spend less time working out the
consequences of rational behaviour under conditions of certainty, and more
trying to understand what is reasonable to do in conditions of
uncertainty. This would bring out the rationality and indeed moral
worth of forms of behaviour they are now bound to condemn as
irrational. They should also take more care to distinguish situations
of imperfect information in which information is contingently incomplete,
from situations of uncertainty, in which no complete information is
obtainable under any circumstances" - What's Wrong With Economics?, Skidelsky In a paradigm where central bankers are outright telling
you that they don't know if their models work or where variables central to
their models, such as r-star, are valued at present, it's a good reminder
that there are some valid questions and critiques around economics as a
field. It's also an important reminder of the power of parables and
story-telling and perhaps in economics the role of expectations. "The ideology
of homo economicus together with digital technology suck people out of local
communities, and even nations into a 'global village'. The student of
economics needs to balance the economist's enthusiasm for ever-widening
markets against the sociological insight that this can be highly disruptive
to settled ways of life." Fast forward to 2023 and reading Slouching Towards Utopia
by Brad DeLong where a central theme of the book is the contrasting of ideas
of Hayek and Polanyi. Where Hayek's general message was the market
giveth and the market taketh away, Polanyi was a believer that the market
economy was extremely good at economizing production, but made all other
societal rights subservient to property rights, upending the very society the
market is made to work for. "Moses Finlay..argues the rapacity of the upper classes was dictated by conventional expenditures for political and military careers, not by a 'maximizing' logic. Finlay's work brings out the fact that human societies are to a large extent constituted by their 'social imagination'. This means that they cannot be understood in terms radically alien from those in which they understand themselves. If Ancient Greek craftsman didn't think of themselves as maximizing profit, who are we to say that was what they were 'really' doing?" "..history should not surrender the uniqueness of its own vision to the econometricians. As Solow writes, in the new economic history you find 'the same integrals, the same regressions, the same substitution of t-values for thought' as you do in economics proper, but with worse data...so we reach a point where 'economics has nothing to learn from economic history but the bad habits it has taught to economic history." - What's Wrong With Economics?, Skidelsky An
interesting conjecture. "Technological progress is exogeneous and unpredictable...no clear
pattern of improvement..swings backwards and forwards along familiar
pathways..does not repeat itself exactly, but it rhymes...like pendulums
between alternating phases of vigour and decay..each outward movement
produces a crisis which leads to a reaction..equilibrium is hard to achieve
and unstable...history cannot be used to predict the future, but it can
indicate the trends and inevitable reactions against them. Arthur Schlesinger Jr. defined a 'political economy cycle' as a
'continuing shift in national involvement between public purpose and private
interest'...Liberal periods when private interest determine policy succumb to
the corruption of money; collectivist periods dedicated to public purpose
succumb to the corruption of power." This sounds very "Fourth Turning" and familiar
with today's political economy. "As Keynes well put it, the error of economics lies not in its logical
inconsistency, but in the 'lack of...generality in its premises.' There
is a large gap between the account economics gives of human behavior and
behavior as it is actually exhibited... Mainstream economists have not looked
deeply enough into the 'mind of the horse'. ..uncertainty as both Keynes and Knight define it, but which the
mainstream denies: a situation where we have no scientific basis for
calculating a ratio (probability)." So much to ponder as it relates to the assumption of 'rationality' and expectations in economics. i would venture to guess most people don't think about differences in rational vs. adapative expectations, but some economists do think about differences in rational expectation modeling. |
"This methodological invidualistic approach cuts economics off from understanding a large part of human behavior, as a consequence of which it often gives faulty advice."
"As long as people want more than they've got, economics has no purpose other than to show them how to get the cake to grow more efficiently. This is its only religion. Beyond this it has no gospel to preach."
"We can identify three answers to the 'growth of the cake' question. The first is that the cake just needs to grow without end, since people are permanently dissatisfied with what they have."
"The second, left-wing, position holds the argument that with greater income equality the cake needs to grow less fast. People are dissastified with their share of the cake they are getting....This introduces an explicit moral argument. It roots the feeling of dissatification not in individual psychology (envy) but in the social demand for fairness."
"A third, more recent argument emphasizing the long-term cost to the planet, and therefore to future generations, of our relentless pursuit of 'more and more', has led to demands for 'degrowth'"
Perhaps a bit left-wing, but some level of truth to these quotes. If you don't believe the cake needs to grow without end, then you must believe that either there is some sufficient level of wealth upon which happiness is satisfied, or you must believe in one of his other two answers.
"is economics descriptive or prescriptive? This book suggest that it is intended to be both. Insofar as it is descriptive it is plainly inadequate; but is it not possible that description, may, over time, come to resemble prescription? That people may actually behave more and more as economists tell them they do behave?"
"To transform human nature, not just describe it, has always been the dream of social engineers, as today it is that of the techno-utopians. It is the foundation of the doctrine of progress. But how far can it, or should it, be pressed, before humans cease to exist in a recognizable form? And is there something irreducibly human which will resist the ambitions of the engineers of the soul?
Heady to think about the influence economics might have on behavior, but the second quote appears to offer a number of timely questions in the age of AI.
"If economics is to be useful today it will need to modify its belief in the self-regulating market. That free markets contain a principle of order was a huge discovery. It meant that economic life could be set free from state, municipal, communal and customary direction. But to maintain that market competition in a self-sufficient ordering principle is wrong. Markets are embedded in political institutions and moral beliefs. In today's world they are inescapably accountable to voters as well as to the market transactors Market integration across borders is not unworthy goal. But it should be pressed only as far as, and by means which, the condition of political consent allow. This is a matter of judgment, not of demonstrative proof. The only test of good policy should be the Polanyi test: how much disruption and inequality will societies tolerate for the sake of progress?
Political economy questions are extremely interesting.
"we cannot help to remain conscious that for every buyer there is a seller; it is only leveraging, or borrowing, which actually creates new money....in empirical terms we find it striking just how closely asset prices mirror credit creation numbers. Strangest of all, it really seems to be the flow of borrowing which correlates with the level of asset prices"
-Matt King, Citi
See above for "inside" vs. "outside" money.
"The conception of homo economicus underpins their picture of human motives is incomplete. Quite simply it leaves out all the motives for choice and action which fall outside the calculus of human behavior they have set up. As a consequence it fails to predict many outcomes accurately."
"The main target of my attack is 'neoclassical'..or 'mainstream' economics....I distinguish it from 'classical' economics which was a much broader church than its neoclassical successor, both in its view of what social matter consists of and its view of how knowledge is attained. Neoclassical economics narrowed the discipline considerably by claiming that only individuals really exist - organizations are simply constructions of individuals - and their rationality makes their behavior predictable."
"Keynes, one of the greatest economist of all time pointed out the inescapable fact of uncertainty:
'It is as though the fall of the apple to the ground depended on the apple's motives, on whether it was worthwhile falling to the ground, and whether the ground wanted the apple to fall, and on mistaken calculations on the part of the apple as to how far it was from the center of the earth'
The implications of this are profound. Keynes is saying that humans are not 'programmed' to behave like apples. Humans are part of complex systems, whose motions cannot be explained by causal laws on which natural science is built."
"My own view is that physics envy drove economists to think of the social world as a potentially perfect machine."
-What's Wrong with Economics, Skidelsky
Some economists have been advocating that there needs to be more of a realization that the economy is a "complex, adaptive, system" that has non-linearities and interconnections whose interactions leads to emergent properties. Skidelsky goes on to point to non-economic motives for actions such as love, devotion, honor, public service as evidence that not all interactions can be boiled down to subjective calculations and price.
"But people never take the trouble to ask questions, leave alone seeking answers. The average American is from Missouri everywhere and at all times except when he goes to the brokers' offices and looks at the tape, whether it is stocks or commodities. The one game of all games that really requires study before making a play is the one he goes into without his usual highly intelligent preliminary and precautionary doubts. He will risk half his fortune in the stock market with less reflection that he devotes to the selection of a medium-priced automobile." - Reminiscences of a Stock Operator, Lefevre
Seemingly like much of the above, the assumption of rationality is called into question.
"Life is short, and you don't have time to figure out everything on your own. The wisdom of the past was hard-earned and your dead ancestors may have something useful to tell you."
If you enjoyed this post, leave a note in the comments and maybe the next time I lose power I'll see what words of wisdom I saved on my phone from 2022.
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