The Juicy Stuff Doesn't Hit The Pit
I didn’t get a chance to write the essay I wanted to this week. I allude to why in the From My Actual Life section.
Instead, you get links with grouchy commentary.
It struck me that I don’t feel “relaxed” unless I’m working. Many people would explain these tendencies by referring to the inherited trait conscientiousness or something. But that’s far from the sole factor…I attribute my shift in habits to two different factors. One is a change in my social circle. I still have friends from my old life. But I have left many habits of that old life behind. My new social circle is largely comprised of strivers. People who work relentlessly. And, for better or worse, I have adapted to this. But there’s a related factor. There’s this impending sense that I have to make up for lost time.
In 1963, 20 percent of Americans lived in poverty. Today it’s 2.3 percent. In low-income neighborhoods, the problem is not primarily economic. In low-income neighborhoods, the problem is not primarily economic. I will never tire of highlighting this simple and profound finding: Sociometric status (respect and admiration from peers) is more important for well-being than socioeconomic status. In his powerful book Status Anxiety, Alain de Botton writes: "Provided that it is not accompanied by humiliation, discomfort can be endured for long periods without complaint. For proof of this, we have only to look to the example of the many soldiers and explorers who have, over the centuries, willingly tolerated privations far exceeding those suffered by the poorest members of their societies, so long as they were sustained throughout their hardships by an awareness of esteem in which they were held by others."
There’s been a renewed discussion about the role luck plays in life outcomes. Much of this has been sparked by a new book titled The Genetic Lottery. A key idea is that none of us chose our particular endowments. IQ, personality, and other variables that predict life outcomes. Thus, the author of the book and many others argue that we should favor redistributive policies to help those who got the short end of the stick. I’m not opposed to financial assistance. But the focus on economic redistribution overlooks something. There is more to life satisfaction than money. The renowned behavioral economist Daniel Kahneman has written: “Income is an important determinant of people's satisfaction with their lives, but it is far less important than most people think. If everyone had the same income, the differences among people in life satisfaction would be reduced by less than 5%.” Giving people a bunch of money isn’t suddenly going to improve their lives. But since highly-educated people primarily understand value in terms of dollars, it’s worth noting the following: -In terms of the effect on happiness, having a friend you see regularly is worth $100,000 a year -Being married is also worth $100,000 -Seeing your neighbor regularly is worth $60,000 -Other research suggests that income doesn’t have a lasting increase on happiness because people usually adapt to money. In contrast, marriage, family, and health have lasting increases on happiness and are immune to hedonic adaptation. Compared with not attending any religious service, attending a religious service once a week has the same effect on happiness as moving from the bottom to the top quartile of the income distribution A poor person with a spouse, a close friend, a relationship with a neighbor, and who attends a religious service can achieve the same level of happiness as an affluent upper-middle-class person. Today, poverty is lower than it’s ever been in the U.S. And yet happiness is falling. The idea that material circumstances are the primary determinant of our subjective emotional states and the organization of our social lives is a weirdo Marxian theory. But it somehow became the conventional wisdom among educated people.
As I pointed out in the above findings, our relationships are at least as important to life satisfaction as money. Yet our elites are reluctant to promote marriage, friendship, social bonds, neighborliness, etc. The non-material factors that give rise to a rich and fulfilling life. Somehow we’ve become reluctant to publicly endorse any sort of value that lies outside of economics. Governments are paying people to take vaccines. Cities are paying residents not to shoot people. Leaders have become reluctant to appeal to higher ideals or principles. The belief seems to be that all that matters is economic incentives. In a 2019 New York Times op-ed, two Nobel laureates share research findings indicating that people overestimate the strength of economic incentives. The authors report that “status, dignity, social connections” are more powerful drivers of behavior. So why the focus on economic redistribution? Many reasons, some noble.
[Kris comment: I have an essay in my drafts that argues for a specific version of redistribution and I’m waiting for a mood when I’m ready to lose a bunch of subs to publish it]
But one is that promoting friendship and marriage doesn’t hurt one’s enemies. Malicious envy is the strongest predictor of support for coercive redistribution. Rich people want to hurt people richer than themselves. If the richest 90-99th percentile of people discovered that marriage among the poor would inflict pain on the richest 1 percent, then that 9 percent would be matrimony’s strongest supporters.
My favorite bit because it explains why I grew up on 3rd base even if not financially: You and I might know something about what it means to live a satisfying life. But we didn’t “earn” whatever traits we have that led us to this understanding (and the associated happiness). So, the logic goes, we should share our knowledge with those less fortunate than ourselves. We can give money to people to help them out. But we can also promote wise choices and strong norms to help them out. The fortunate among us can share our wealth, sure. But we might also share our values—steps we have taken to live fulfilling lives.
I have 2 links for you to check out this week.
Economic Misconceptions Of The Crypto World (8 min read)
by Noah Smith
Crypto is simultaneously fascinating and frustrating. The frustrating part of watching “number go up”, has been watching:
a) legalized grift and pumping. This can range from sewer-dwelling spammers to podcast-darling VCs who spout new-age word salad and clever analogies from the same set of sci-fi books.
b) newly flush financial tourists speaking like experts on matters of investing and economics. A charitable classification of this group is honest but not yet competent. Their confidence is just “beer muscle” (I realize this would hit harder if I wrote it 9 months ago, but just look at a 3-year chart of BTC and it holds as long as you don’t know the difference between time-weighted and dollar-weighted returns).
The “a” group knows who they are. They can jump off a bridge. Incompetence is one thing, but being smart and dangerous gets you negative respect and a forever loss of trust in my book. (There is a path to redemption: you can always donate your dirty gains to charity and unwind the Bay Area home price increases you spurred with the fiat you exchanged for bags of coal. If your eventual attempt at penance is nothing more than a “ReformedVC” Substack where you litany all the “story-telling” and “narrative-building” persuasion tactics you employed it isn’t gonna make the @ladder_is_kicked_crypto_is_my_only_hope Twitter anon feel any better.)
The “b” group, if they care about learning, should read Noah’s post. It explains 2 important economic concepts:
Cash is not savings
Scarcity doesn't necessarily create value
Noah is an economist so I’ll let his post explain those ideas but I’ll add a bit that seems intuitive to me for no other reason than I’ve played Monopoly. The fact that the money supply grows whenever you pass GO is a clue. This is totally unacademic so feel free to correct me:
Money’s primary purpose is liquidity — to reduce transactional frictions. The money supply needs to increase with the population.
Imagine an island economy with coconuts, hut-building labor, and surf instructors…they could use seashells as a medium of exchange to solve the double coincidence of wants problem. If the seashell supply were fixed, then as the economy grows the seashells would be deflationary (meaning everything of value in the economy would go down in value relative to the seashells). And crucially, liquidity would dry up. Money would not fulfill its promise of facilitating trade because islanders would horde seashells.
When the population grows there is more supply and demand for goods and services. Population growth means economic growth. GDP increases. (Note that for GDP per capita to grow, which is what we ultimately desire to raise standards of living, productivity needs to grow. For example the ability to grow more coconuts with the same labor. We call that agriculture.)
BTC ultimately has a fixed supply. It’s like the seashells. If the technology known as “money” is useful because it creates frictionless transactions, aka liquidity, then a fixed supply is a counterproductive design.
[I’ve heard people argue against this by saying BTC is divisible into tiny amounts.
Brb, lifting a 4-slice pizza so I can cut it into 8s and sell it to you for a profit.]
To be complete, BTC’s scarcity can make it a store of value even if it’s not great as a form of money. Cash is a store of value, but only temporarily, and that’s ok because, well, read Noah’s article.
(One last parenthetical from me…gold and silver are somewhat divisible and scarce. They maintain some collective acceptance as money. They have also been stores of value. But they have satisfied these roles as “stores of value” and “money” in uneven ways. I can’t buy bread with silver at the store. Its volatility in dollar terms is much higher than the annual standard deviation of CPI and as long as I need to convert silver to USD to buy stuff, this volatility spread matters. As a store of value, gold and silver real returns have beaten inflation on the centuries time scale, but since your life is lived in decades there’s a lot of tracking error. Unless you’re a cat, the experience of your life happens once so you need to decide how problematic that tracking error is.)
Here’s a fun excerpt from the latest issue:
Real estate in the private market exists in between the two preceding applicable stock market concepts: you want to buy quality, and you want to buy it at the price you’d buy distressed assets at. But you’re okay just buying quality- after all the private market real estate investor needs to find an asset to 1031 exchange within 45 days of a sale. Readily available dirt-cheap bankruptcy-remote leverage from commercial lending operations provides the private real estate investor with a nearly-government-guaranteed reasonable return. Buy quality and stay rich (never pay taxes).
Because private market commercial real estate is private, rarely do these quality assets sell at generous prices to counterparties outside of the “boys’ club” or in-network, off-market participants for whom favors have already been traded, country club memberships have been synched, and alumni events have been planned. This is what I would call the System 1A of real estate investing. This is where common misconceptions occur with real estate: generalist laymen see these slam-dunk transactions and the seemingly risk-free returns generated from them. They observe “dumb people” getting rich not knowing these people are actually repeat-players in a multi-generational game. They play nice with each other to stay in the club and stay rich.
Damn, this brought me back to some of the cronyism in the trading pits. On the NYMEX/COMEX floor brokers were also allowed to be traders. They could trade for their own accounts, but they were not allowed to trade against their own flow. Well, if you can imagine the incentive, you can imagine the outcome.
Here’s the scene: market makers stand in a pit while brokers run their business out of surrounding booths. The booths were the phone banks outside the pit where broker clerks would talk to the “upstairs” customer. If a juicy market order, especially one without a lot of risk or deltas such as a tight vertical spread or butterfly, there was a silent feeding frenzy. Sal couldn’t trade against his own flow, but knew that Tony would get him “next time”. You know, like a running bar tab. Better yet, maybe your sister starts her own brokerage competing (cough) for the same flow.
If a 100 lot of butterflies traded in the pit for a credit (you heard that right…the meat of a butterfly trading over the wings) you can safely deduce that several hundred lots never made it to the pit.
It’s worth reprinting the last line of that excerpt:
They observe “dumb people” getting rich not knowing these people are actually repeat-players in a multi-generational game. They play nice with each other to stay in the club and stay rich.
And if resentment to this old word order wasn’t high enough, we had the experience of watching some of these “dumb” people who owned several, sometimes tens of seats on the exchange, receive nearly $10mm a pop for them when the exchange demutualized.
[Side note: I worked for a SIG at the time who owned a bunch of seats. They made a bonanza buying NYSE seats before the stock exchange went public so they were ready for the same trade ahead of the NYMEX IPO. One of our assistant traders spent most of his time going to the admin office in the building to find the bid/ask on seats and get the color on who was looking to buy or sell. Probably didn’t take much more than regular coffee and donuts to keep in the office clerk’s good graces. On a personal note, I got some shares as part of the seat lease agreements that SIG had to (probably begrudgingly, since prop firms are ruthless maximizers) give to the people whose names were actually on the lease. The IPO priced at $59 bucks but the NMX shares opened on the first day at $120. I sold the opening print along with many other traders. It was a free $25,000 or so. The stock closed at $152 that first day so I left a lot on the table, but even worse was that my mind’s comparison monster left me feeling sour. A lot of folks down there became generationally rich.
And if they were smart, took the money and ran. It was a countdown to the end of floor trading.
[Extra salt in the wound — there was some arrangement where you had to sell your free shares through Merrill (I think) and they charged like a $500 brokerage fee. And yes, this was 2006, not 1966.]
Enough story time. Go read The Old Rope. The second post I’d read is:
Fake Life, True Wealth (2 min read)
Here’s a neat Excel feature I happened upon:
I have been color grouping my browser tabs in Chrome for at least 6 months. Just right-click on any open tab and choose “Add Tab To Group”.
(If you find it bogs your machine down see the tweet replies for related tools)
From My Actual Life
I incinerated, or should I say Shitibank, incinerated a day of my life this week. I closed the checking account I’ve had for 22 years.
I switched to First Republic. Here’s the story…
Moontower On The Web