He’s a naive person’s idea of what a businessman looks like

The title of this blog post is a little quip I came up with (1). People seem to like it.

[OK, I’m not keeping up this blog. I should keep on using it as a place for thoughts and fun.]

Anyway, here are two fantastic TRUMP articles that are must-reads in their entirety. Even some of Pettis’s lengthy replies in the comments are excellent (2). Both happen to be from economists, but they aren’t economic analysis in the typical sense. Neither of them are what you are expecting.

Note that Pettis is dripping with sarcasm throughout this piece, though it can sometimes be tough to draw the line between the intentional sarcasm and a creeping elitist arrogance. That’s OK with me, this guy is really smart.

I do disagree with a couple of his lazier points – hey he did write this in one take on a long airplane trip without proofing it.

First, he ends up saying that even if we did end up with POTUS TRUMP it wouldn’t be that bad, because Congress would stymie him. To me that’s saying that our choice of POTUS really doesn’t matter that much. It does. A lot.

Second, he gets lazy on immigration (3), saying that because it’s always worked out, we should just keep doing it the way we’ve been doing it until we’re sure it no longer works. He’s abandoning his own call for historical analysis and deeper thinking in favor of simple trend following without considering the underlying drivers. There is no cost-benefit or trade-off analysis to consider whether we could enter a phase in which likely benefits are marginal but possible (even if unlikely) negative outcomes could be very large. It strikes me as a reckless hedge fund-y way of doing things – one of those funds that does some leveraged narrow arbitrage or carry trade year after year, getting amplified benefits until things go x-sigma in the wrong direction one year and it blows up. Like that hedge fund, Pettis suggests an approach that guarantees that a large negative outcome would fully evolve before it could be addressed. That’s not responsible, intellectually honest, or insightful; that’s superficial social media “we’ve always been a country of immigrants” memery.

Side note: In addition to teaching economics at Peking University, Pettis founded and runs a record label in China.

Minsky was a somewhat marginal economist during his lifetime, but has enjoyed a large resurgence in the wake of the GFC. His main thing is that stability breeds instability and that the capitalist financial system necessarily amplifies it and so you’ve got to do something about that, because it’s a feature, not a bug that can be eliminated. One of his vignettes is that finance goes in cycles from “hedge finance” to “speculative finance” to “ponzi finance” to bust, which we call “The Minsky Moment”. Hedge finance is fully amortized borrowing against operating cash flows. Speculative finance is borrowing against operating cash flows to pay interest, but the debt likely needs to be rolled over. Ponzi finance relies on capital appreciation to even pay off all interest due – increasing debt levels are often needed unless (usually outside, macro) events happen to favor the borrower. Minsky is calling out Trump as ponzi borrower that macro events favored… and who knew when (or was lucky) to take money off the table and leave others with the smoldering remains. And Romney. I love the smell of externalizing costs and survivorship bias in the morning!



1 It’s a riff on the old line “He’s a stupid person’s idea of what a smart person sounds like.”

2 A taste from one of his comment replies “The worst of them is the lover of all cultures who leaves his home in the US (or Europe) to find the authenticity that he believes cannot exist there, and has decided that he wants to help protect the culture of whatever developing country he chooses to live in from rapacious western agglomeration… For these people the “authenticity” they want means a slightly more sophisticated set of cultural stereotypes… I am infuriated by the way they insist on discrediting these Chinese musicians if they make music that sounds like it was made by people who live in huge, polluted, traffic-jammed cities, who get to school by subway and spend hours on smart phones and computer games, which is exactly what they are, but celebrate them as heroes defending authentic China if they, many of whom have never even seen a farm animal, make music that sounds like it was composed by nomadic horsemen who roam the Gobi Desert or by cheerful peasant girls from river villages in Yunnan.”

3 From one of his comment replies “But we’ve had a winning strategy for 250 years. Let’s keep doing it until the first time we actually fail. Let’s wait to see if there ever is a time that is different. Once we’ve encountered a group of immigrants — a nation, race or ethnic group — that truly has failed to live up to our standard immigrant success after two or three generations, then we can discuss changing our strategy”

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I’ll Take the Guaranteed Loss Please

I’ve said for years that you could sum up the motivations of many mainland Chinese buyers of U.S. assets – in particular residential real estate – as “if you could provide a guaranteed 10% loss they’d invest in a heartbeat”.

From FT Alphaville, a piece about how “art” and investment vehicles are used to transfer assets.

Companies with offshore sister companies find it easiest to launder cash. Strong if not obviously bloated valuations are not signs of a naive buyer, as analysts often conclude, but evidence that the acquisition is constructed to move as much cash as possible.

Overpayment is analogous to a tax or, alternatively, an investment in and of itself. You’re buying access to strong property rights and diversification, not to mention a foothold for the kids in a prestigious educational domain and a place to land if the dàbiàn hits the fan.

More generally, certain markets cannot be understood using simple fundamentals. The motivations and interests of market participants must be considered. For example, don’t look at historical real estate valuations for guidance in real estate markets with high mainland Chinese cash buying. And if you hear about any new locales they’re getting ready to hit, let me know 😉

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Testimony Redaction

Count me as surprised that judges in a criminal case can order the redaction of witness testimony because it includes “offensive and inflammatory” language. The Ninth Circuit recently confirmed this practice even when the omitted language reflected a possible witness prejudice towards the accused.

I had no idea a judge could remove words from witness statements. Perhaps this could make sense if there were lengthy witness ramblings that had no bearing at all on the case or the witness’s potential biases. Such “testimony” could be a ploy to create mountains of nonsense. But in this case a witness had used a racial epithet involving the accused’s race and in the context of the allegations.

The court’s rationale is that certain language could make it difficult for jurors to perform their duties, because it would create strong emotions that would override their ability to think fairly and rationally.

It’ll be interesting to see if the U.S. Supreme Court hears this on appeal.

It’s no wonder the media seem so attracted to the most inflammatory and divisive statements. It does seem to keep people agitated. In whose interest?

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The Kennedy-Obama Connection


Over 50 years ago a campaigning John F. Kennedy had to defend his Catholicism against suspicions that he would have mixed allegiances and even defer to the Pope. He later presided over an intense period of conflict between Cuba and the United States, including the ill-fated Bay of Pigs invasion and the Cuban Missile Crisis.

Yesterday, President Obama announced the restoration of full relations with Cuba. It turns out that he made this decision in consultation with the Pope. In the Vatican.

Funny thing is, it seems like the folks who were most suspicious of Kennedy’s Catholicism then were from the same places where today people call Obama a Kenyan-Muslim-socialist-fascist. So there’s a long conspiracy in there somewhere.

More seriously, I’ll also note the deafening silence from the American left regarding Obama’s meeting with the Pope on this historical U.S. foreign relations shift. Imagine the response if it were a Republican President who consulted with a religious (more specifically, Christian) leader. I have to think that instead of cheers there would be endless tirades against this dangerous mixing of religion and government. And, of course, there would be denouncements regarding how little the president demanded of the Cuban government regarding human rights, while opening the door for U.S. corporations. The right would figure out some way to praise this shift as brave, a show of strength and enduring American compassion. And millions of Americans would have a completely different understanding of the same event, essentially swapping beliefs based on the president’s political party. That’s my opinion.

UPDATE: Corrected typos and a reader alerted me that the original had the wrong DK. Updated to reflect JFK.

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Hector on Charlie

Charlie Rose does many good interviews. I liked this one with Hector Monsegur, a computer hacker from New York whom the FBI tracked down an turned informant.

It begins about 31:30 on the slider (about 22:15 left in the episode).

A few things stand out:

1) Bored kids get into trouble. Smart bored kids without access to opportunity can cause real trouble.
2) The FBI plays hardball. Your family is in play.
3) Our critical infrastructure is inexcusably vulnerable to devastating cyber attacks.
4) Put #1 & #3 together. A system that promotes and encourages the Hectors out there would be a lot safer. Wasting that kind of talent is a major loss to the nation. (Somehow I doubt Hector would have fit the bill with a two page list of leadership activities and a killer essay to get into Harvard to pursue something like Gender, Race, and Oppression Studies.)

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Adam Smith, TMS on parenting, school of hard knocks edition

A social media acquaintance recently posted an article The One Question Every Parent Should Quit Asking. The article is an objection to competitive parenting and over-programming with constant expectations of excellence. Instead the writer wants us to encourage the kids to be good people and not be too stressed out and like us. Something like that. But it reminded me of a prior article in The Atlantic, How to Land Your Kid in Therapy. That article, written by a therapist, suggested that an over-coddled youth with too many choices can lead to frustration and unexplained unhappiness later in life. She writes:

…my colleagues and I began to wonder: Could it be that by protecting our kids from unhappiness as children, we’re depriving them of happiness as adults?

Paul Bohn, a psychiatrist at UCLA …believes many parents will do anything to avoid having their kids experience even mild discomfort, anxiety, or disappointment—“anything less than pleasant,” as he puts it—with the result that when, as adults, they experience the normal frustrations of life, they think something must be terribly wrong.

Wendy Mogel is a clinical psychologist in Los Angeles who, after the publication of her book The Blessing of a Skinned Knee a decade ago, became an adviser to schools all over the country… said that over the past few years, college deans have reported receiving growing numbers of incoming freshmen they’ve dubbed “teacups” because they’re so fragile that they break down anytime things don’t go their way. … what parents are creating with all this choice are anxious and entitled kids whom she describes as “handicapped royalty.”

Jean Twenge, a co-author of The Narcissism Epidemic… has written extensively about narcissism and self-esteem. She told me she wasn’t surprised that some of my patients reported having very happy childhoods but felt dissatisfied and lost as adults. According to Twenge, indicators of self-esteem have risen consistently since the 1980s among middle-school, high-school, and college students. But, she says, what starts off as healthy self-esteem can quickly morph into an inflated view of oneself—a self-absorption and sense of entitlement that looks a lot like narcissism. In fact, rates of narcissism among college students have increased right along with self-esteem. “Narcissists are happy when they’re younger, because they’re the center of the universe… Instead of feeling good about themselves, they feel better than everyone else. …They grew up in a bubble, so they get out into the real world and they start to feel lost and helpless.

We can try to protect them from nasty classmates and bad grades and all kinds of rejection and their own limitations, but eventually they will bump up against these things anyway. In fact, by trying so hard to provide the perfectly happy childhood, we’re just making it harder for our kids to actually grow up.

In the Theory of Moral Sentiments, Adam Smith writes:

The man of the most exquisite humanity, is naturally the most capable of acquiring the highest degree of self-command. He may not, however, always have acquired it; and it very frequently happens that he has not. He may have lived too much in ease and tranquility. He may have never been exposed to the violence of faction, or the hardships and hazards of war. He may have never experienced the insolence of his superiors, the jealous and malignant envy of his equals, or the pilfering injustice of his inferiors. When in an advanced age, some accidental change of fortune exposes him to all these, they all make too great an impression upon him. He has the disposition which fits him for acquiring the most perfect self-command; but he has never had the opportunity of acquiring it. Exercise and practice have been wanting; and without these no habit can ever be tolerably established. Hardships, dangers, injuries, misfortunes, are the only masters under whom we can earn the exercise of this virtue. But these are all masters to whom nobody willingly puts himself to school.


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Adam Smith, TMS on the effects of bitter partisanship

I’ve been reading Adam Smith’s Theory of Moral Sentiments on and off. (Hey, it’s so old you can get a free digital version for your e-reader at a site like this.)

I’ve read elsewhere that Smith considered TMS his proudest achievement, even though his Wealth of Nations is today much more famous and is held in both the highest regard and lowest esteem, especially by those who’ve not read it. Anyway…

I’ll copy interesting excerpts from TMS from time to time. I’ll say it’s a tedious read at times, but then Smith hits you with such relevant and well-written insights that it keeps you going. It reminds me just how much of contemporary discourse is simply rehashing the classics and relearning lessons with which very few of us are familiar. In the excerpts below Smith considers the corrosive effects on the individual character and the social fabric that comes with heightened factionalism – what we might today call bitter partisanship.

The propriety of our moral sentiments is never so apt to be corrupted, as when the indulgent and partial spectator is at hand, while the indifferent and impartial one is at a great distance

Consider the self-segregation of strongly partisan people into online (and social) echo chambers where they only hear confirming opinions. The most strident and divisive and even absurd and foolish views are cheered on. The impact on manners and reason is all too evident if and when such people engage people outside their tribe.

When two nations are at variance, the citizen of each pays little regard to the sentiments which foreign nations may entertain concerning his conduct. His whole ambition is to obtain the approbation of his own fellow-citizens; and as they are all animated by the same hostile passions which animate himself, he can never please them so much as by enraging and offending their enemies. The partial spectator is at hand: the impartial one at a great distance. In war and negotiation, therefore, the laws of justice are very seldom observed. Truth and fair dealing are almost totally disregarded.

Nothing surprising here. Everyone joins together against a far off common enemy. Truth and justice suffer. In modern times these impulses are guided by propaganda machines. Yet the war creates a sense of unity. But factionalism is something different…

The animosity of hostile factions, whether civil or ecclesiastical, is often still more furious than that of hostile nations; and their conduct towards one another is often still more atrocious. What may be called the laws of faction have often been laid down by grave authors with still less regard to the rules of justice than what are called the laws of nations.

Even though Smith wrote at a time when bitter battles between religious sects had driven many wars and social divisions, he saw secular factions in the same light. This would be well shown in the 20th Century, which saw the most brutal wars and oppressive regimes in history, nearly all under secular banners (Soviet Russia under Stalin, Cambodia under Pol Pot, countless struggles in Africa and Latin America between communists and U.S. allied governments, including fascists).

But more interesting to me is his comment about “grave authors” encouraging their followers to the greatest disregard for justice. It’s impossible to avoid thinking of the partisan and sectarian leaders today who encourage the most strident and least compromising beliefs and behaviors. In the U.S. we have senior political leaders who simply will not utter the word “compromise” and I’ve heard political partisans on “both sides” angrily denounce compromise or even consideration of opposing slightly different views. They are encouraged to think of each new issue as part of some singular battle for the salvation of all mankind. When all issues are invested with such potential for catastrophe, the true believers are inclined to the very worst behavior or to at least excuse it in others. When their numbers are small, they are marginalized cranks, but when factionalism takes hold, it’s members may gain dominance in society to the point where reason itself is trampled as an obstacle. As many of us sense the ascendency of anti-Enlightenment today, Smith wrote:

In a nation distracted by faction, there are, no doubt, always a few, though commonly but a very few, who preserve their judgment untainted by the general contagion. They seldom amount to more than, here and there, a solitary individual, without any influence, excluded, by his own candour, from the confidence of either party, and who, though he may be one of the wisest, is necessarily, upon that very account, one of the most insignificant men in the society. All such people are held in contempt and derision, frequently in detestation, by the furious zealots of both parties. A true party-man hates and despises candour; and, in reality, there is no vice which could so effectually disqualify him for the trade of a party-man as that single virtue. The real, revered, and impartial spectator, there, is, upon no occasion, at a greater distance than amidst the violence and rage of contending parties.

Of all the corrupters of moral sentiments, therefore, faction and fanaticism have always been by far the greatest.

Think about Smith’s words when you listen to partisans. In particular, watch for the telltale signs of intolerance and the relentless marginalization of calm, rational consideration. If there’s one thing the true believer hates more than the opposing sect, it is the heretic.

I, for one, stand firmly against strident, uncompromising factionalism. You’re either with me or you’re against me.

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