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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"
"Animal spirits, a term famously coined by Keynes in 1936, are catnip to
central bankers...In other words, the instinct to do something, anything, is
powerful. You could see that being played out by the FOMC."
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"
"Safety in stagnation. Where are the revolutions in human thought and
culture and action.." - Dan Simmons, Hyperion
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."
"the attempt to create a 'market society' produced a reaction, as
society resisted incorporation into the market economy...increasing
regulation to contain its disruptive effects....state intervention is not a
disruption of the natural order of the market..it is an attempt to prevent
markets from destroying the very societies in which they are
embedded....Polanyi's critique of market society rests on his belief in the
dominance of the social over the economic....specialisation alienates people
from society and each other...more of our lives are 'commodified',
crowding-out the non-economic values and relations...but human beings are
social animals..so while accepting the gains market exchange brings, they
devise non-market strategies for protecting society.
- What's Wrong With Economics?, Skidelsky
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."
-What's Wrong With Economics?, Skidelsky
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'.
risk refers to all outcomes that can be insured against, uncertainty to those
which cannot. Mainstream economics do not recognize this distinction. They
believe individuals can accurately calculate the odds of any action turning
out one way or the other. This is because they treat the economy like a
closed system.
Keynes, to, looked into the 'mind of the horse', but he didn't see
maximization, rather an attempt to behave reasonably under different degrees
of uncertainty. His key move was to distinguish rational belief (or
expectation) from true belief. Standard rational expectation theory
identifies the two, because to have rational expectation of an event is to
have accurate knowledge of its probability.
..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)."
-What's Wrong With Economics?, Skidelsky 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.
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