The Premium

The golden rule of the finance industry dictates that the answer to “Why does it work that way?” is almost certainly “because it benefits Investment Banking.” Analyst price targets – always wrong – are a good example. While retail investors remain incredulous as to how the analyst can keep their jobs, and brokers tell them “they don’t know shit” and smile their smug, condescending old white man smiles, the analyst pockets a check for $400K after the secondary offering their optimism help create.

Research has to remain credible to be of any use, but the goal isn’t to correctly predict performance – they don’t even get paid to be correct on that (not directly anyway). Analysts DO get paid – a lot – for generating banking deals. The only real inexplicable thing is that retail investors keep falling for it. Every time a deal happens – and there’s been some doozies in the energy sector lately – they think “maybe this time, the target’s right and I’ll make a fortune.” They want to believe.

The relationship between politicians, the electorate, and economists is similar. Academic economists froth at the mouth in apoplexy when new economic policy is announced as if the pols’ priority #1 wasn’t getting elected. “More free stuff for you and someone else is paying” and “contribute to my campaign and keep your loopholes” are always going to be the most successful policy initiatives and this has next to nothing to do with economics. Each successful test of our collective gullibility – that someone wants to help – ends with the same answer.

Media’s a bit better but the same dynamic is still in play. Journoland is still valuable – without it Rob Ford would still be mayor and Hillary Clinton’s convenient interpretation of public sector transparency would be unknown. But these useful, investigative stories make up, what? 10% of content? 5?

Legacy media can’t afford to fund many of these prolonged investigative reports now that the classified ad revenue’s gone and Google took most of the rest. Revenue’s so thin that even top commentators need to publish four times a week or join their friends on the unemployment line.

Fox News is still “America’s most trusted news source”, through the judicious pulverizing of the days events into easy to swallow conservative pablum. Just like politicians, pandering seems the most profitable route to success. Advertisers hold their noses and pay up for 30 second spots.

Fox is an easy target but CNBC and the rest of the financial newsosphere are often little better, feeding investors’ base lottery impulses with a steady stream of “hot tips” from expertly-coiffed charlatans when everyone, EVERYONE knows at least 90% of investors should just buy the cheapest possible index ETF and get on with the more important parts of their lives.

There are a lot of ethical people in finance who profit from doing the right thing. There are media stories that are a necessary public good. I’m even willing to accept the theoretical possibility of an honest politician.

But when push come to shove in the daily grind, just follow the money and it’s clear that in each one of these cases there’s ongoing and pervasive bait and switch – a veneer of helpfulness masking bone deep self-interest. For an equity analyst, the premium is not on predicting stock prices but generating high margin banking business. He premium on political rhetoric is winning elections, not getting an A plus from Scott Sumner. The premium on media coverage is “time spent” and advertising revenue.

We’ve been asking the wrong questions.



Who’s more afraid of obsolescence, newspapers or the GOP?

It’s ironic that the bandleaders for anti-Tea Party derision form the one group more afraid of the future than the cultural Luddites in the GOP. Or did it escape your attention that newspaper readers are just as old, white and predominantly male as Republican constituents? Or that newspapers and traditional media are far more at risk of obsolescence than the Republican Party?

It’s no secret that I think the most savage, fearless and insightful cultural commentary is found at the Last Psychiatrist blog. In “How does the Shutdown relate to Me” he writes,

The shut down was the inevitable consequence of a government not permitted to compromise, smothered by the oppressive gaze of a kamikaze media that will kill itself and your country just to get a headline today.  …   The media demands partisanship, conflict, opposing sides, but despite having 24 hours to fill will never, ever explain the interplay between complex issues, preferring to feature them in segments while hyping them to a crisis

Within the context of his post, I think this is accurate. But, the implication that the media is sitting in the newsroom, twiddling their moustaches and giggling at what they’ve wrought in terms of public discourse is laughable.

I work in a newsroom.  Outside of a WWI trench its hard to think of a more steadily traumatized, demoralized group of people. I’ve seen three sets of layoffs in 15 months. In short, this is not an environment exuding power and influence – it’s a group willing to do almost anything to hang on.

To make matters worse, the older journos have discovered they’ve been lied to. They were taught in J school that reporting is a calling, similar to medicine or the priesthood. That the very fabric of democracy would be rent asunder if they didn’t do things just so. For them, adherence to journalistic convention has a theological bent that, like the GOP, makes it really difficult to adapt to the new context. Belief in the fifth Estate is part of a wider worldview where they play a central part. They will defend it like cornered rats. Until they get fired.

So there is a feeling of debasement as now the media serves a similar role in politics as margin debt during bull markets – they wait for the wire story from Reuters and then provide the leverage, the outrage and the hype. Desperate for attention, everything must be more momentous, more terrifying, more heartwarming “PLEASE JUST LOOK WILL YOU! WE”LL DO ANYTHING! HERE’S ANOTHER KITTEN ITS GOT A LITTLE WHITE MASK LIKE A RACCOON! – an entire industry chock full of Miley Cyruses only with less focus.

I used to think it was unfortunate coincidence that traditional media outlets are being starved for resources at a time when the body politic is so fractured and angry but really, it’s all part of the same erosion in public trust. Marriage, news media, Congress, the presidency, the financial system – what were considered the institutional pillars of society are either changing fundamentally or almost universally reviled.

The Internet, and the access it provides, has unleashed incredible changes and investors should recognize a familiar pattern  – the extension of innovation continuing until something breaks. The limited liability corporate structure mobilized an ocean of investment capital until the South Sea bubble wiped everyone out. Securitization was another great idea that, extended far beyond the realms of common sense, almost destroyed the global financial system.

The shutdown highlights the bizarre paradox of the Internet access and the likely source of the social version of “something breaking”  – the rise of tribalism in response to broader reach. Confronted confused with ten different perspectives on what’s happening or how to live or who’s fault everything is, and unable to completely trust any of the sources, vast swathes of the population are saying “Fuck it, I don’t like what I’m seeing online, I don’t feeling confused and afraid so I’m going believe what’s emotionally and financially convenient for me and hang on to it like grim death, no matter who gets hurt.”

The Internet means that the local news monopolies and duopolies have been broken and there is no unifying, central source of information. I’m not saying the New York Times is unreliable, by the way, just that a lot of people believe it is. And they’ve reverted to outlets more conducive to their sensibilities no matter how irrational they are. This happens on the left and right.

Longer term, we’ll sort this out. But until then, the death throes of a number of conventions and institutions will likely provide us with a continual series of messy spectacles.

For normal people, Teju Cole’s “The White Savior Industrial Complex” is about Africa. For tunnel-visioned obsessives like myself, only a few words need to be replaced to explain something deeply profound about investing.

The essay is a brilliant punch in the face and I can’t recommend it highly enough. Two excerpts:

“The White Savior Industrial Complex is not about justice. it is about having a big emotional experience that validates privilege.”

and further:

“One song we hear too often is the one in which Africa serves as a backdrop for white fantasies of conquest and heroism. From the colonial project to Out of Africa to The Constant Gardener and Kony 2012, Africa has provided a space onto which white egos can conveniently be projected. It is a liberated space in which the usual rules do not apply: a nobody from America or Europe can go to Africa and become a godlike savior or, at the very least, have his or her emotional needs satisfied.”

The two fragments to remember while I pivot here are “big emotional experience” and “a  space onto which white egos can conveniently be projected” only for my purposes, switch “white” to “rich”.

(How many of you see where I’m going already?)

There’s not a single trustworthy study that suggests that picking individual stocks is a good idea relative to indexing. Not a fucking one.

If Rational Agent were even remotely applicable to investing, and the only concern was generating the highest long term returns, then 90% of investment accounts would consist entirely of SPY and cash.

But there’s no “conquest and heroism”  in that, is there? Anybody can just go along for the ride, taking what’s given like an ovine, medieval peasant. There is no way to, in the immortal words of Ebby Calvin Nuke Laloosh, “announce my presence with authority.”

As with the mythical, colonial, delusional version of Africa described by Mr. Cole, the market offers the chance, albeit infinitesimal, to show up poor and end up not only rich, but powerful and famous. Either way, personal decisions have tangible, monetary outcomes – the ego is at stake and this is a rush in itself.

Icahn, Cooperman, Druckenmiller, Soros  – these are the Great White Bwanas of  Money Africa. The role of ignorant savages (again, we’re talking the fictional, self-aggrandizing Kipling version of Africa not the inconvenient real one) is played by retail investors who conveniently provide the late rally bids so the Bwanas can take profit.

The metaphor breaks down here, though. Given the chance, a real life poverty-stricken African would gladly opt out for a wealthier existence. But the average investor plays the stock picking game despite knowing that passive indexing is far more likely to generate higher returns. Why?

There’s the same aspirational delusion that sells lottery tickets, for sure. But i also suspect that investing has become Real World Las Vegas – a form of emotional pornography that satisfies the need for what Cole called “a big emotional experience”.

Pornography is the right term, i think – nothing except money can rival sex in the “things that can most fuck up your dopamine levels” category.

Investing is a much more convenient option that stowing away on a steamship bound for Cape Town, moreso because its pretty much the only form of adventure where you can sit on your ass the whole time.

In a virtual, sedentary sense the market does provide high stakes entertainment. The setbacks are truly disheartening and  big wins are truly ego-boosting – there is the feeling that you’ve outsmarted the majority, pitted yourself against the jungle and won.

But it’s a joke in the end. Pure chartists betting with their own money last two cycles at best. Long term, the vast majority of big winners are those most adept at convincing the shmucks to keep playing. Everyone jokes about “Where are the customers yachts?” while scanning charts for the next good set-up.

There has to be something deeply psychologically ingrained here. Cole’s White Saviour Industrial Complex is a grain of sand next to the scale of Financial Disneyland.

We all need adventure, I suppose. An endless cycle of waking up tired, commuting, pushing paper, commuting, eating, watching tv, sleeping, dying, is too bleak to bear.

“Every man”, wrote Saul Bellow, “has his own book of poems” in what is my favorite description of the basic need to mythologize and storify our lives to keep going. When it comes to investing though, another Bellow quote should also be kept in mind:

“A great deal of intelligence can be invested in ignorance when the need for illusion is deep.”

Teju Cole explains investor delusions while writing about Africa

The economics of Generation Hate

Picture an efficient frontier with labor’s share of GDP – including benefits, safety standards, whatever – on the Y-axis and GDP growth on the X-Axis.

The bottom right side of the curve we’ll call The Panama Canal Era. Something like 30,000 people died building the Panama Canal while making next to nothing in wages. This is indicative of late 19th Century economic and social policy policy that valued “things” and growth over the welfare of people. It was completely inhumane but by the standards of the time, generally acceptable. Confront TR with the human costs of the Canal, or the railroad barons using Chinese slave labor, the response would likely have been a smug smile and “Shit got done, didn’t it?”

This brutality extends into the political realm and thankfully exhausts itself in two world wars. Haunted by memories of mass slaughter, the pendulum swings upwards along our efficient frontier in an entirely welcome humanist direction – civil rights, Great Society, wealth redistribution, all that.

The fact that I chose an efficient frontier shape rather than a Laffer Curve model infers my personal beliefs but before anyone fires up the Outrage Machine, Im not going to guess where we are on the curve – a man’s got to know his limitations.

Where we are on this curve is, I think, the crux of the current economic debate. I suspect the vehemence and insoluble nature of the argument means we’re close to the inflexion point, with growth-related gains in sight in both directions.

The bigger problem is that we’re all narcissistic idiots currently motivated by hate.

“WTF, Interloper? Why did you make us endure that history lesson if this was your point?”

Because the move away from the economic dominance of “Things” has made the debate more subjective. When all a culture cares about are Things, social policy is frightfully easy – How do we get more and better things? The argument is over means, not ends. We have,  rightly and with the best intentions, added a far larger degree of complexity into political discourse.

Backtrack for a second. Let’s posit that the greatest social achievement of the 20th Century was empowerment – generally through media technology (remember that I think tv was the primary cause the social unrest of the 60s and 70s) – and politically for women and minorities.

It was inevitable that the combination of broad empowerment and complexity would create Generation Hate. Empowerment breeds narcissism, complexity breeds anxiety and fear. Bigger ego + fear = hate.

My slobbery adulation for The Last Psychiatrist derives from this more than anything else:


Splitting– reducing the other person to a binary abstraction of all good or all bad, is a primitive, or regressive, defense mechanism used when the emotional level and complexity is greater than a person’s capacity to interpret it.  For example, once your boyfriend cheats on you, he becomes a jerk, completely.  Even things he had done that were good– like give money to the poor– are reinterpreted in this light (“he only did that to get people to like him.”) Who splits?  Someone with a lot of unfocused rage and frustration, i.e. the “primitive” emotions.


Splitting says: Bush is all bad, period.  Nothing he does is good, and if it is good, it is from some malicious of selfish motivation, or an accident related to his incompetence to even be self-serving.  Similarly on the other side, liberals are weak, corruptible, treasonous.


So hatred of, say, liberals is thought to be independent of your preference for Bush, but in reality it is only because you hate liberals that you like Bush.  The hate comes first.


Sub in Krugman for Bush if it makes you happier but either way this excerpt encapsulates the current tenor of economic debate – primitive, narcissistic and unproductive.

“But my side is right!”. Whatever. The entire field of economics can’t even agree on first principles and, as Mark Thoma points out, all this posturing and certainty is based entirely on 40 years of data. Macroeconomists remind me of the 17th Century Royal Society. Working on mathematic proofs – 90% of which will be disproved eventually – then sipping claret during a live dog dissection after dinner.  Does anyone think even half of the current ECO 101 textbooks will survive the next 100 years of study?

I still think we’re living through a period that, over the course of human history, will turn out as important and transformational as The Reformation (and for the same media-related empowerment reasons – then it was mass literacy). It’ll work out for the better eventually, but likely after the hate burns out.

i don’t think you invest the way you think you invest

Sometimes you read or hear something and for a long period of time you’re like Kubrick’s chimps around the monolith. You don’t know what it is, but it’s big and you can’t leave it alone. Bashing at it doesn’t help.

Usually its @interfluidity’s fault but in this case the problem is neurobiological. Epicurean Dealmaker linked to a quick interview with neurologist Robert Burton who thinks even brain researchers are still monkeys:

because we have an innate sense of agency and yet simultaneously believe that mental states must have preexisting physical causes, we are left debating free will versus determinism. If we didn’t have a sense of agency, I’m not sure that the free will question would even arise.

I take this to mean that we’re nowhere near the point where any researcher has enough perspective to understand something by using that same thing to analyze it.

Add to this the findings of another neuroscientist, David Eagleman, who wrote a book concluding that:

Brains are in the business of gathering information and steering behavior appropriately. It doesn’t matter whether consciousness is involved in the decision making. And most of the time it’s not. Whether we’re talking about dilated eyes, jealousy, attraction, the love of fatty foods, or the great idea you had last week, consciousness is the smallest player in the operations of the brain. …, most of what we do and think and feel is not under conscious control. Our brains run mostly on autopilot, and the conscious mind has little access to the giant and mysterious factory that runs below it.

I’m not thrilled with this.  I’ve lived my whole life thinking my conscious brain was the quarterback and the subconscious was a combination of reference library and haunted house.

In corporate terms, what it sounds like now is that what I consider “me” is actually a satellite office taking vague orders from an all-powerful HQ based in Liberia or an underground lair or somewhere else deeply foreign and unsettling.

Instead of corporate profits and legal compliance, the subconscious imperatives would include –  basically in this order – physical security, sustenance, acceptance at the highest rung of social status possible because it leads to widest mate selection.

Quick example and, although I cringe, it actually pretty much happened:

You’re in 10th grade. There’s a very cute but quiet girl who sits next to you in math class but you’re obsessed with a girl on the cheerleading squad. At some level, you even know the math class girl is not only cuter more physically attractive – rounder [redacted] and bigger [redacted]. But you want the cheerleader and you don’t know why.

Well, you think you don’t know but your subconscious sure as fuck does. Social status. Bragging rights.  These are head office initiatives, you’re just following orders.

No wonder everyone sucks at investing. Corporate policy is out of date by 20,000 years. What we convince ourselves is a good investing idea – buying Apple at $600 say – is mostly conforming to the HQ’s corporate initiative for acceptance and belonging. The 5 per cent chance of a ten bagger in junior mining is associated with dreams of wealth that will get us laid and provide security for our genes offspring. The bulls versus bears battle of the tape gets the same lights up the same dopamine pathway as protecting the tribe from an onrushing lion.

I’m not saying re-programming isn’t possible and biology is destiny. There are at least hundreds of professional investors who have hacked the mainframe and changed the code – or at least deactivated it. But Eagleman says that for most of us, our conscious minds don’t have security clearance for the vast majority of the calculations and policy decisions being made – in our own heads. How the fuck are we going to push out the old management?

Dimon’s travels through Lilliput

After the last post I received a bunch of responses along the lines of “why are you so bitter about finance?” and initially taken aback, I looked back at the content of the last few posts.


Oh. I see.


There is one point – good news makes boring copy. If I had written “the saints of finance” instead of “Scumbag Storytime” the page hits would have been cut by 75%. That said, I now accept that I might have a bit of an animosity problem where the industry is concerned.  


Autobiography is a form of narcissism so I won’t try your patience here. It is important, however, to note that my rise in the ranks of finance coincided with a crawl from a deep, dark personal hole. Particularly in the early stages, every promotion was not just a matter of personal finances but existential validation. I viewed the trading floor the way an undersized Division III football player views the NFL.  As an outlook this was twisted and sad, sure, but an accurate depiction.


When through luck and diligence the break finally came – a peripheral job on trading floor – I was not yet a lot stronger in the broken places. But I do remember vividly, half-terrified in my department store suit, swearing that the only way I was leaving that chair was on a stretcher.  I would work the hours, stammer through the humiliating process of learning how to give a presentation, kiss whatever ass was shiniest at any given moment. I would pay the ask.    


Nothing in life is as good or bad as expected so the process of my disillusionment was inevitable. The heroes, and there were a number, were too often pushed aside in favor of the shadiest sales guy elevated by commissions from PMs who would wind up in jail or in Israel to avoid extradition. The details are cliché by now.


To quote one of the funniest monologues in movie history “the details of my life are inconsequential.” The interesting point now is whether, as the details ooze out, the broader culture is undergoing the same process of de-rating the importance and status of the finance industry.


Look at Jack Welch, so stunned by his fall on the Fawn-o-meter that he only leaves his underground lair for the cozy embrace of Joe Kernan. Rubin, Dimon, Steve Cohen, all fighting off the steady assault of Lilliputians pulling on their $3000 pant legs to drag them off their pedestals.  


Much is made, correctly, of the public financial costs of TBTF. Before 2007, I suspect that part of the reason this was tolerated was the misguided belief that finance worked for the greater good, that when your broker or I-banker said they were working in your best interests they at least intended to do so.


In my experience, the vast majority of individuals in finance do try to help their clients although the process of rationalizing takes up steadily more brainpower as time goes on. But the vast majority of the money is controlled by a small percentage of finance employees. A significant percentage of this daily-commute-by-helicopter crowd must constantly, like the London Whale’s boss of the jackasses laundering al-Quaeda money at HSBC, hide what they’re doing and hedge themselves with pitchfork-proof vests.


As to the question as to whether finance is beginning a steady decline in cultural and economic importance in the same way many predict for the concussion-ridden NFL, I’m clearly biased. Odds are that if you’re reading this, you are part of the financial industry which suggests that so are you. So, let’s phrase things objectively in terms we all understand:


The finance industry is currently about 8% of GDP.  If I offer to sell you a 2035 call option on this number with a strike of 6.0%, are you buying?    



Requiem for Investing Twitter

I don’t have a lot of specific investing thoughts lately which is ironic because there’s been more activity than usual in my PA. Two full positions have been added – a brewer with big emerging markets exposure and a maker of giant bespoke valves for oil pipelines. Decisions will be made this week on a big winner in biotech and a big loser in telecom equipment.


One thing I’ not doing is trying to beat the index because I’m more than a little concerned that its infected by twitter or, to be more precise, infected by the same things that have made my timeline so depressing lately.


The big problem in market prognostication currently is that the action has moved beyond the view of most investors. Central bank involvement in yield curves has made currencies the more accurate gauge of regional macro health.  Currencies are notorious for trading away from fundamentals for years at a time and unlike debt, there is no CDS market for a second opinion. To make mattes worse, the world’s second largest economy – the primary driver of commodity prices – has largely pegged its currency while under the surface a misguided Manhattan Project builds a massive bad debt bomb.


With equity performance determined by central banks in a big way – God-like, infinitely wealthy exogenous entities – the MarketTwitter has taken to squabbling like medieval clerics. Every data point is held up like pieces of the true cross: You fools! I HAVE THE TICKET TO YOUR INVESTING SALVATION!


The degree of this triumphalism seems to be metastasizing rapidly. There has always been a maddening segment of twitter who’s whole existential value (an extension of academic life, one supposes) was realized by a desperate search for political heresy, after which the trumpets could be blown and the forces of righteousness led to vanquish the heretic.  In investing, this practice was previously confined to the gold bugs.


The predictable danger in market twitter was the acceleration of investing time frames but at first it seemed like the medium was too open, too conducive to correction, to allow a new one per cent to dominate the discussion. But at least in my timeline bullying, both in politics and investing, has become the norm. Being right and living your life the way you see fit is no longer enough – “macro tourists”, “bearshitters” and any random political thoughts not conforming to the orthodoxy must be humiliated and driven off.  Twitter, once a place to connect and ask questions, has given way to the exercise of follower power.


Tadas at Abnormal Returns linked to a piece on the isolation involved in being a value investor and I’ve written about the same thing. It’s odd how well this phenomenon applies to MarketTwitter at the moment.


Nobody wakes up in the morning and thinks “You know, I really feel like herding today. Just joining up with the biggest, most popular group I can find to make myself feel psychologically safe.” But as always our subconscious is driving the bus while letting our conscious minds think they’re in charge. The subconscious will feed the herding instinct to us in delicious, bite-sized portions like “if I say tweet something really funny and someone with 10,000 followers RTs it, then I’ll really belong with the hitters.” The impulse is in no way different then holding a widely-held stock that doubled last year and now trades at 25 times sales.


Ever thus, I guess. Like television, those looking for answers rather than affirmation could desert as Twitter devolves into utter dreck but hopefully not. As long as new centers of influence keep arising, things are likely to stay reasonably healthy. But

I have no idea where the market’s going to be in 12 months and for all the sneering neither does anyone else.  Hopefully all this shit is temporary – everyone’s just Vitamin D-deprived and irritable – and spring finds a more constructive community.

Scumbag Storytime

I’m in a venomous mood so let’s play storytime. Keep in mind I can’t prove any of this in a legal sense. The only way to do so would be testimony from witnesses and victims, which won’t happen for reasons I’ll get to.

Story 1: Friend of mine, broker, starts work at a new firm. One of the established brokers comes in to his office, welcomes him to the firm with the usual backslapping “GREAT TO HAVE YOU ABOARD! WE GOT A GREAT THING GOING HERE!” disingenuous bullshit.

Oh, and established broker happens to mention he is personally underwriting a tax-exempt product and if the new guy really wanted to be a team player, he’d take down AT LEAST a million bucks of it. New guy takes the million, distributes it to clients and two weeks later the thing is trading with a value of exactly $0.  The tax exempt status had been pulled.

Established guy, who collected a check for somewhere around $500K when the deal sold, barges into new guy’s office when he hears questions are being asked and tells him “DON”T BE A PUSSY. YOU PLAYING WITH THE BIG BOYS NOW”.

Story 2: Institutional sales guy has a sideline underwriting his own deals in same way as the asshole in the above example. Two days before a secondary offering in a  (very) junior mining company, he borrows all of the available shares of the company from every major brokerage. Why? So no one can short it when the new shares come out no matter how egregiously priced they are. Smaller check this time, maybe $300K.

Story 3: This is complete hearsay but because I know the broker involved a bit – someone who annually massages government documents to keep handicapped parking priveleges he doesn’t need  – I believe it. Rumor was that one of his clients was one of the top five new issue buyers at the firm (a large one). Problem was that the woman who’s name was on the account had Alzheimer’s disease and had been hospitalized for a decade.

Story 4: The great rare earth metals scam. This was a helicopter drop of free money for a certain type of unscrupulous broker.  China is the source for the vast majority of rare earth metals and when the government slashed exports after a diplomatic spat, the private deal underwriting machine kicked into high gear. “WHAT A GREAT STORY! THE DEFENSE DEPARTMENT NEEDS THIS SHIT! I know this guy with a property way up north with a huge Yttrium and he only needs $10 million to develop it. We can get in on the ground floor.”

Never mind that rare earth metals aren’t rare. The reason they come from China is they are massively un-environmentally friendly to process and China is one of the few countries where they don’t care if the groundwater eventually turns fluorescent purple. Which is why, in developed countries, it takes seven years from groundbreaking to production.  Oddly enough, the “ground floor” investors in new rare earth metals stocks weren’t informed that cash flow was seven years out, long after China would ease export restrictions. Most of these companies no longer trade but there were lots and lots of $300k checks issues to the brokers who underwrote these deals.

These are the worst examples that came immediately to mind but with a few phone calls I could give you 30 more horrific tales.  The reason outsiders don’t hear about them is two-fold. One, companies make a lot of money ignoring these types of things. Some, like the rare earth scam, are mostly legal anyway. The second, and more important reason, is that no other insider is likely to complain because almost all of them, at one point or another, have done something shady themselves. They do not need a regulator going through all their trades over the past decade.

The Daily Mail today published an expose Saturday entitled “The regime of fear inside Barclays” and to be fair the whole thing sounds pretty bad. Shredding a report is a new level of sweeping compliance problems under the rug. But in light of personal experience my suspicion is that Barclays’ (who I never worked for btw) biggest deficiency is an inability to avoid detection.  Horrible shit happens everywhere, every day and it takes a complete and utter moron to get caught.

So my first reaction to the Daily Mail’s tut tutting about the state of the industry is “You have no fucking idea”. Barclays isn’t a company “out of control” its just a run of the mill brokerage company. I have no idea how we got to this point but its going to take a whole lot more than a few breathless newspaper reports to fix it.

Social Hierarchy Economics: Twitter Followers as the New Money Supply

For all the ink and pixels wasted on media technology we’ve missed a once-in-500-years sea change who’s primary units of production are two fold: mobile data traffic and impotent rage.

Some will consider it heretical to discuss religion as media but it is impossible to argue that the bible did not provide the narratives around which pre-20th century life coalesced. A bad harvest invoked Job, suffering neighbors were assisted by Good Samaritan. Grace was spoken before meals. The rural population, mostly everybody, took a weekly bath on Saturday and headed to church the next day, the only time they would see non-family members.

The stories changed from the New Testament to Amos and Andy but the purpose and attraction– collective narratives – was the same. Movies, television, again, just an enhanced version of the same thing.

One can argue that internet-based entertainment is just an extension of this trend but one would be wrong.  Church, radio, television were all passive – the audience showed up or tuned in when they were told.  The Internet is a tool of self-selection.

The last time consumers were granted such an upward spike in empowerment – the printing press/Reformation – things did not go well for a couple hundred years. Importantly, the initial reaction was the same then: you lied to us.

But whatever, things will go the way they go. For our purposes let’s turn to what this new Internet-led empowerment was used for, best described in a brilliant essay by Freddie Deboer:


The internet has provided tremendous functionality, for facilitating commerce, communication, research, entertainment, and more. Yet for a comparatively small but influential group of its most dedicated users, its most important feature, the killer app, is its power as an all-purpose sorting mechanism, one that separates the worthy from the unworthy—and in doing so, gives some meager semblance of purpose to generations whose lives are largely defined by purposelessness.


This is why an increasingly virtual culture needs an economics of social hierarchy. The western world is now wealthy enough that the necessities of life – food, warmth, shelter etc – are provided in extremis and therefore have little economic value.  If practical utility is no longer important what does have value are things that make me feel better/of a higher social strata than you. The Water/Diamonds Conundrum goes away.

Let’s posit that the social hierarchy of the Internet (and particularly social media) is scored not by money but by attention and influence. Twitter followers are not just arbitrary votes of support in this reading – they are currency. So, if love and money are by popular consensus the root cause of all murders, and Twitter followers are the new currency, it is no wonder how vicious the shoutfest gets online.

“That’s stupid”, you say. “I can’t spend Twitter followers so the whole notion is stupid. They have no value”. Fair point – online influence carries no practical utility unless your name is Josh Brown or Joe Wiesenthal. New followers won’t get you fed, but that’s what the government’s for, no? The robots tuk’erjerbs, man. You’re not going to let me starve are you?

Denying  value to social media also understates the normal, human, Pavlovian response to interaction and acceptance. For one, the potential to more or less design a perfect, if virtual, version of ourselves completely independent of physical attractiveness is deeply, deeply tempting. RTs from television personalities are both largely pointless and a perfectly-designed machine for dopamine production. Most of us are just built that way.

Crap, this is getting too long. I intended to guess at more aggregate economic effects of the virtualization of human interaction. It dovetails nicely with Izabella Kaminska’s insanely good work on The New Abundance (will wealth move online?). Kids are already not bothering to get their driver’s lisence and Google has stolen 90% of the advertising revenue that used to go to print media. Mobile data traffic is still doubling every year. The Wii is only five or six steps away from a Holodeck. Jesus, what happens then?

Yelling about economics makes you irrelevant

Who’s team are you on:  Republican or Democrat, Hayek or Keynes?

According to The Last Psychiatrist – and he’s a doctor so we have to trust him – the faster you answered this question, the less your opinion matters:

media manipulates you to hate some things by linking them to other things: it polarizes you, which means it makes you irrelevant.  E.g. when an election “is determined by” one particular group of “swing” voters– whom you deride for being too stupid to have made up their minds yet– it doesn’t mean your vote has been factored in but that you are so predictable that you don’t count.  Power never thinks of you as an individual.  Power never thinks of you at all.

I quibble with the idea that “media” or “power” is an all-knowing Wizard of Oz controlling the levers of culture. My personal perception is that no one is in control but some, like surfers, can harness forces that are largely exogenous to their own benefit. Surfers don’t control waves, they just ride them in front of the cameras. Media doesn’t control behaviour, it tries to direct it – most often unsuccessfully – by appealing to base instinct.

But the point about polarization and irrelevance stands and, since polarization and intransigence are arguably the dominant traits of the current culture, we should try and figure out why.

Theory: The failure of scientific method is behind the recent lack of political progress.

You didn’t see that coming did you? Let’s go back a few hundred years to the beginning of the Era of Science and Reason. Technological and intellectual advancement, highlighted by Galileo, led to the widespread questioning of God and our place in the universe. The first order of business, like Adam in the garden of Eden, was to rename and categorize everything.

“Hey Chuck! Mr Darwin! Is this thing a mollusk or crustacean?”

“Two pairs of nerve cords? Mollusk”

“Chuck! WTF do we do with the Platypus? It lays eggs”

“Umm. Leave that one out”

And there’s the problem – leaving shit out. The scientific method proved insufficient to encompass everything, as economists are now painfully aware. Neat categorizations began to pull academics away from the real world rather than promote fuller understanding.

Consider the following model of scientific era thought, originally drawn up by the late professor James Leach, the Smartest of All Time (SOAT):

postmodern blog

The all-male thinking brigade of the 17th and 18th centuries assumed that because the natural world appeared to divide between male and female that this was the correct way to start. They shoehorned almost everything into this construct. Inconveniences, occurrences that did not clearly fit, were repressed and ostracized as “other”. To the bigoted minds of the time, homosexuals – who tested the male/female divide – were the obvious examples.

For professor Leach, post-modernism was a process of declassification and re-assembling. (He spent a lot of time on Freud who’s primary achievement was discovering that the mind worked in metaphor. Our brains actually classified things as this AND that, not this OR that).

What we should be thinking about is what post-modern economics would look like, blowing up the existing structures and re-assembling them. Is it possible to believe simultaneously in smaller government and huge stimulus? Of course – it just doesn’t fit the current template. There’s no team for that.

What we’re doing now – splitting into mobs and screaming at each other – is tragically stupid and unproductive. The banner quote on this blog only hints at the depth of my disgust at the modern shoutfest. The crucible of spirited opposition has rendered every side inflexible, unhappy and desperate enough to seriously consider trillion dollar coins or destroying the legislative process.

And the Last Psych is right – the louder you scream the more irrelevant you are. Not because you’re wrong but because you have fitted yourself so deeply into an outdated template that it is unlikely you are thinking as an individual. Quit it