Moontower #152 Highlight
One of the Substacks that I started reading recently is Moontower. It came to my attention about a month ago when he cited one of my posts…and my subscription numbers started jumping. Hey, if you have 160 subscribers and the number jumps to 200+ in a week, you’re probably wondering what the heck just happened. So, first of all, thanks Kris for the big plug. If you haven’t looked at this one, it is worth a look. I’ll be honest, a lot of it goes over my head. Not issue #152, but take a look at issue #148 for a better indicator. This one goes pretty deep into macro policy and MMT (with the following disclaimer):
Macro is the raw material for story-telling. For marketing. It’s a political battering ram for both sides. But macro is a ball of yarn. The discourse that’s consumable is reduced so much to aid absorption that the logic, by necessity, ends up sounding unassailable. It must. The logic is solving for convenience. Not understanding.
So I don’t write about it because I don’t think it’s especially useful. It’s more likely to give you brainworms by beefing up your priors. It will calcify hunches into commandments when the evidence only merits “things to learn more about”
So, let me return the favor with a link to a great video in his current podcast. Ideally, subscribe to his Substack. It’s well worth the price (did I mention that it is exactly $0.00?). Here is the video (with full credit to Kris for finding it). Before you watch, it is a great article on the role of luck and talent. The video shows talent/hard work is important, but we as a society greatly understate the importance of luck (and there is a lot of it out there) in our success.
Take special note of the story on NASA astronauts (about 3:30 in) where each candidates score is based on 5% luck and 95% skill. On average, out of 11 astronauts about 1.6 are make it based on their skill and anywere from 9-10 make it based on luck! Which means if your life is turning out positive, take the time to remember that you’ve probably experienced quite a bit of luck in your outcome (along with your talent/hard work). As mentioned in my previous pod, there’s a reason that faculty members are 25 times more likely to have faculty members for parents!
When Better Is No Longer Good
Last week I was reading a news article (something that happens less and less frequently over time as “news” has taken on a big promotional view) and came across a story titled “‘‘Everything Is Terrible, but I’m Fine’”. It talks about the growing chasm between our personal well-being and what we think society is facing.
Note the huge dropoff in 2020 as the general perception was “I’m doing well”, but our impression was that the local/national economies tanked. The same held for 2021 (although interestingly the local economy bounced back a bit, but national economy grew worse). There are reasons for this such as COVID, stock outages, inflation, battles over “to mask or not to mask”, and a general sense of dread. Heck, we even had the murder hornets kick in.
The point is that the general sense was the economy was collapsing. It did (temporarily). Then bounced back relatively strongly. Here you can see a chart of Real GDP Growth (real is preferred to nominal to control for inflation) over the past 5 years. The purple line represents an approximate (as in a 30-second eyeball sketch) trend of growth which we are only slightly below.
So, is the economy a little worse than in 2019? Sure. Is it a lot worse? Probably not. One of the things potentially holding things back is a lot of people (and this is not a judgment call) have reprioritized their need to work (says the guy who retired earlier than he planned) which is creating a bit of a labor shortage (or labor opportunity). The “Great Resignation” shows that a lot of people are quitting their current job…to get a better one!1 From the article, we have this quote:
The data suggests people aren’t quitting their jobs to exit the labor market and sit on the sidelines, economists said. Instead, the high level of resignation indicates a strong job market for workers with ample opportunities, they said.
There were almost 11.3 million job openings in January, just shy of December’s record, according to the Labor Department.
The high labor demand is pushing employers to pay higher wages as they compete to attract talent, and that higher pay is luring workers away from their current jobs.
From the original article, you may remember the original quote from 2016
The Fed asked respondents how they would pay for a $400 emergency. The answer: 47 percent of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all. Four hundred dollars! Who knew?
Now we read this
Self-reported financial well-being increased to the highest percentage in the nine-year history of the survey. As for that $400 emergency payment, more than two-thirds of adults now say that they can make it. This key measure of financial security improved 40 percent, during a pandemic.
We also see this:
So, we have more job opportunities and more money, but there is still a malaise that causes us to view OUR situation as good, but everyone else is struggling. What is the cause of it? A big part of the answer is human nature. Remember my philosophy (borrowing from the great Jim O’Shaughnessy)…you’ve got a hot shower and aren’t eating cold rice and beans for a week, life is really pretty damn good. That said, human nature is fine-tuned to be on the lookout for danger. Consider a recent post by Gurwinder (edited for brevity)
Offence and outrage once served us well, but as time has gone on, many new personal, social, and political boundaries have been created, and with them, the list of things to be offended and outraged about.
Firstly, the online attention economy ceaselessly barrages us with new outrages, from news of injustices to awful opinions.
Secondly, society is constantly inventing new injustices, typically for political reasons. Take, for example, the word "retard." Many people find this word deeply offensive, and if you ask why, they'll say because it was historically used to classify people with mental disabilities. That sounds like a perfectly reasonable explanation, until you ask them if they have a problem with the word "idiot" or "imbecile" or "moron" or "cretin."
The combination of the digital age constantly exposing us to new outrages and cultural elites constantly creating new outrages out of nothing has skyrocketed the number of outrages we now face.
Notice all the ways in which we can be easily outraged that are probably a bit more difficult than the world of 150 years ago (before radio, TV and the Internet/Social Media). In 1873, how outraged was the average person in Minnesota (which became a state in 1858) about the Bloody Benders (and seriously, take a look at the article if you aren’t familiar with the grisly details) in Kansas? My guess is that most of them never even knew about the case.
We don’t often hear the “good” news.2 Instead, the fact is that bad news invokes a bigger reaction. From a recent NY Times piece we see the following:
The coverage by U.S. publications with a national audience has been much more negative than coverage by any other source that the researchers analyzed, including scientific journals, major international publications and regional U.S. media. “The most well-read U.S. media are outliers in terms of their negativity,” Molly Cook, a co-author of the study, told me.
When the researchers examined which stories were the most read or the most shared on Facebook, they tended to be the most negative stories. To put it another way, the stories that people choose to read skew even more negative than the stories that media organizations choose to publish. “Human beings, particularly consumers of major media, like negativity in their stories,” Sacerdote said. “We think the major media are responding to consumer demand.”
There’s also this article from the Los Angeles Times (which did a great job of avoiding the WEIRD problem).
To get a more global view, the scientists recruited 1,156 people in 17 countries: Brazil, Canada, Chile, China, Denmark, France, Ghana, India, Israel, Italy, Japan, New Zealand, Russia, Senegal, Sweden, the United Kingdom and the United States.
Each participant was shown seven randomly ordered BBC World News television reports, some of which had a negative tone and some of which were more positive. As the participants watched, the researchers monitored their heart rates and their skin conductance levels (essentially, tiny fluctuations in their sweat levels, which could indicate a person’s fight-or-flight response levels).
The researchers found that, on average, a slight majority of viewers demonstrated a bias toward more negative news. This largely held across countries and cultures, Soroka said.
Interestingly, of the three possibilities (no difference to bad or good news, preference for bad news, and preference for good news), the ratio of perceived preference for bad news (taken from heart rates and skin conductance) showed that about 60% had a bigger reaction to bad news. It would be interesting to see how much of that is internalized to the United States vs. the rest of the world. My guess is that it is higher here.
If We Decide We Want Bad News, Capitalism is Going to Make Sure We Get It!
One thing we’ve discovered from years of capitalism is that what we want is going to be really easy to get. Markets do a tremendous job of figuring out exactly what we want and providing it. This is true in snack foods, derivatives, entertainment, and even news. Innovation can create wonderful products (such as COVID vaccines, cancer treatments, new video games, and even these babies).
It also can create things like synthetic collaterized debt obligations which ultimately becomes a thing that few people understand — even if they are trading them.3
The problem is that CDOs rely on each of the tranches (levels, or pieces) of the underlying portfolio being accurately graded, that is, that one can reliably determine what the credit risk of a given mortgage is. Since mortgages are anything but transparent, it is hard to adequately price the credit risk of a given mortgage.
So, CDOs are, at best, problematic.
So, now enter synthetic CDOS.
What, exactly, is "synthetic" about them? "Synthetic" here is used metaphorically: it is a technique in finance which simulates one kind of asset by using other assets. There are things called synthetic calls, etc. So, a synthetic CDO uses credit default swaps to simulate the underlying mortgages of a regular CDO. As you can imagine, this is even more fraught than a plain CDO because it adds yet another level of complexity to an already-complex financial instrument.
Unfortunately, I don’t have a solution to getting better news. It is a topic that is discussed in quite a few places (as you can see in the above). However, my recommendation is to institute a few basic rules (which are pretty common suggestions):
Don’t get “outraged” over social media posts. Facebook, Twitter, Instagram, TikTok, and countless others all have posts designed to inflame (because the political scandel of the day is much more exciting than another post on arithmetic vs. geometric returns). It generates likes, gets shared, and attracts “engagement” which is a big factor in social media.
Tailor your social media feeds. I hear so much about how Twitter is a cesspool (and I do occasionally see it around the edges). However, the key is to stop following the people that make it a cesspool (shocker, I know). It’s like rubbernecking an accident scene. Clean your feed of toxic trash! My Twitter/Facebook feeds are pretty small, but the news/noise content is much better.
Disengage from the news. The national news is going to make you enraged and there’s not much you can do about it. Don’t like what Trump or Biden are doing? Well, remember to vote, but ultimately you’re going to spend more time upset than accomplishing anything. Do things that make you happy and provide fulfillment. Whether it is going for a hike, enjoying a bike ride, doing woodwork, volunteering to mentor, learning to play guitar, or thousands of other positive activities. We have a limited time here — find things that make you happy, rather than things that make you upset.
If you’re getting your news from things like MSNBC, Fox News, National Review, Rachel Maddow, etc. you are getting skewed news designed to get you upset. Instead, focus on things like AP Reuters, BBC, WSJ, and ProPublica (a little liberal skew, but more analysis).
Like I said, there is nothing earth-shattering in that list. Probably the most important aspect is to limit your news flow and instead focus on doing things that will make you feel better. Anyone want to join me for a 200-mile run in 2023 in Nebraska?
There is some very recent evidence in the last couple weeks that there may be a bit of a slowdown in the “Great Resignation” as a few firms (Walmart, Amazon, Tesla, Coinbase, etc.) may have overhired a bit.
Technically, we may get a “upbeat” story in many news articles, but it is often there to as a counterbalance to the many “scary” stories that we see.
There are people who do understand synthetic CDOs (a lot more than understood them in 2006-07 at least). Trading still exists, but the synthetic CDO is a bit cleaner and trading volume is down. Apparently almost killing the financial system can put a wrench in someone’s trading day.
Thanks for the plug Kevin and thanks even more for boosting luck video. The answer to malaise (at least the only one I can think of) is making gratitude a regular practice. It's worth being conscious about it the same way we eat vegetables and exercise for our physical health.