2017 Northern Hemisphere Hurricane Activity Pretty Much Totally Normal

Philip Lotzbach of Colorado State University tweeted this summary chart of the 2017 hurricane season.  The numbers in parenthesis represent the historical average.

After an unusual number of years of being missed by major hurricanes, the US was hit by several large hurricanes in an above-average Atlantic hurricane season in 2017.  But as is typical of weather, while the Atlantic had more hurricanes than average, other parts of the world had fewer than average, such that overall for the northern hemisphere as a whole, it was a pretty average year.

Better Measurement of State by State Prosperity

I have always been suspicious of metrics showing that people in, say, San Francisco are way richer than everyone else in the country.  Sure, they have a larger number on their paycheck, but they also very likely have a larger number on their mortgage check.  In a paper by Cletus C. Coughlin, Charles S. Gascon, and Kevin L. Kliesen, the authors publish this map of state per capita income, both before and after adjusting for local cost of living (Link via a long chain that started at Maggies Farm).  As usual click to enlarge.

Starving Public Services to Pay More to Government Workers

On several occasions, I have wondered why progressives continue to be so supportive of paying too many government workers too much at the cost of reducing the government services they seem so passionate about.  This is something I seen in the public parks world all the time.  Arizona State Parks, for example, has about half of its employees in headquarters buildings rather out in the field serving the public while at the same time paying these headquarters staff very high salaries.  This is despite the fact that the agency has tens of millions of dollars of deferred maintenance it refuses to address.

I see this story repeated over and over in the public parks world -- when forced to choose, government agencies will cut back on maintenance and services to protect total staffing numbers, pay, and benefits.

The New York Times found something similar in the New York Subway:

An examination by The New York Times reveals in stark terms how the needs of the aging, overburdened system have grown while city and state politicians have consistently steered money away from addressing them.

Century-old tunnels and track routes are crumbling, but The Times found that the Metropolitan Transportation Authority’s budget for subway maintenance has barely changed, when adjusted for inflation, from what it was 25 years ago.

Signal problems and car equipment failures occur twice as frequently as a decade ago, but hundreds of mechanic positions have been cut because there is not enough money to pay them — even though the average total compensation for subway managers has grown to nearly $300,000 a year.

Later they go into more detail about payrolls:

Subway workers now make an average of $170,000 annually in salary, overtime and benefits, according to a Times analysis of data compiled by the federal Department of Transportation. That is far more than in any other American transit system; the average in cities like Boston, Chicago, Los Angeles and Washington is about $100,000 in total compensation annually.

The pay for managers is even more extraordinary. The nearly 2,500 people who work in New York subway administration make, on average, $280,000 in salary, overtime and benefits. The average elsewhere is $115,000....

Union rules also drive up costs, including by requiring two M.T.A. employees on every train — one to drive, and one to oversee boarding. Virtually every other subway in the world staffs trains with only one worker; if New York did that, it would save nearly $200 million a year, according to an internal M.T.A. analysis obtained by The Times.

Several M.T.A. officials involved in negotiating recent contracts said that there was one reason they accepted the union’s terms: Mr. Cuomo.

The governor, who is closely aligned with the union and has received $165,000 in campaign contributions from the labor group, once dispatched a top aide to deliver a message, they said.

Pay the union and worry about finding the money later, the aide said, according to two former M.T.A. officials who were in the room.

They do not mention pensions.  Who wants to be there is also a looming unfunded pension crisis here?

Elon Musk Is The Master of Yelling "Squirrel"

It is hard not to be conflicted about Elon Musk.  On the good side, he is pursuing fabulous and exciting goals  - space travel, high speed transportation, cheap tunnels, ubiquitous electric cars.  Listening to Musk is like riding through Disney's various Tomorrowland visions.  As a consumer, I love him.

As a taxpayer, I am not so thrilled.  Many of his companies (SolarCity and Tesla in particular) seem designed primarily as magnets for government subsidies.

But it is his shareholders I really have to wonder about.  I can't remember anyone in my lifetime who was so good at serving his shareholders Spam and convincing them they were eating filet mignon from a Michelin three star restaurant.  He announces quarter after quarter of failed expectations and greater-than-expected losses and then stands on stage and spins out all new visions and his fan-boys bid the stock to new all-time highs -- in fact to market valuations higher than GM, Ford, Nissan, or Honda.  Tesla's debt priced in the last offering well above what it should have given its rating and risks.   I thought his purchase by Tesla of his near-bankrupt other company Solar City had no strategic logic and was borderline corrupt, but my brother-in-law who is arguably a more successful entrepreneur than I thought it was brilliant, an example of Musk playing chess when everyone else is playing checkers.

So last week Tesla announced a really bad third quarter.  They lost a lot more money than they said they would, and produced a lot fewer of their new Model 3 cars than they promised.  Their manufacturing operations are in disarray and they are burning cash like crazy, such that the billions of funding they just raised will get burned up in just a couple more months.

But Tesla needs to stay hot.  California is considering new vehicle subsidy laws that are hand-crafted to pour money mainly into Tesla's pocket.  Cash is burning fast, and Musk is going to have to go back to the capital markets again, likely before the end of the year.  So out came Musk yesterday to yell

Tesla's main current problem is that they cannot seem to get up to volume production of their main new offering, the Model 3.  The factory appears to be in disarray and out of production and inventory space.  They can't produce enough batteries yet for the cars they are already making.  So what does Musk do?  Announce two entirely new vehicle platforms for tiny niche markets.

A workhorse truck and a new super car are in the works for Tesla, after founder and CEO Elon Musk introduced his company's latest effort to widen the U.S. market for electric vehicles Thursday night. Musk called the Roadster "the fastest production car ever made, period."

Musk unveiled the Roadster toward the end of an event that was supposed to be all about Tesla's new Semi trucks. Taking a page from Apple and other tech companies in using showmanship to wow crowds, Musk surprised the crowd by announcing there was one more thing to add — and the new car rolled out of the truck's trailer.

After touting the utility and efficiency of what he called a game-changing truck, Musk welcomed the Roadster to cheers from those attending the event at the Hawthorne Municipal Airport near Los Angeles.

You have to hand it to Musk -- no other car company could get a good bump in their stock by displaying what essentially are two concept cars with infinitesimal revenue potential.  Expect Tesla to have a bond or stock offering out soon while everyone still has stars in their eyes from these new vehicles and before anyone can refocus on production and profitability issues.

 

Worker Mobility and Exploitation

The other day I commented on an interview with an author who felt that seniors living in RV's and "work camping" were somehow more vulnerable to exploitation.

Imagine a person in a small town with a home and she works in the local factory, really the only major employer in that small town.  If she thinks she is getting hosed at work, what can she do?  She can certainly quit, but then she likely must sell her house, find a new place to live, move to a new city, etc.  Basically, she has high job switching costs and thus probably would have to put up with more cr*p before she would leave.  Now imagine our work campers.  I once had an employee tell me that I had to treat him well, because he had wheels on his home and could leave any time.  And he was right.   Work campers, being more mobile, have much lower job switching costs.  Economically, this should make them less, rather than more, vulnerable to exploitation.

As a side note, this is one reason (beyond the obvious ones highlighted by the 2008 crash) that I have always thought the government promotion of home ownership was counter-productive.  I call this cargo cult economics -- legislators observe that successful people own homes, so therefore pass legislation on the assumption that having people own a home will make them successful.  But in fact I think for many classes of workers, home ownership is counter-productive because it reduces their mobility and greatly increases their job switching costs.  I personally, between the ages of 24 and 40, had jobs in 7 different cities in pursuit both of opportunity and employment that matched my interests and skills.  Had I locked myself into my first location (Baytown, Texas) I can't imagine I would be as well off today.

Here Are the Two Problem With EV's

There are two problems with electric vehicles.  Neither are unsolvable in the long-term, but neither are probably going to get solved in the next 5 years.

  1.  Energy Density.  15 gallons of gasoline weighs 90 pounds and takes up 2 cubic feet.  This will carry a 40 mpg car 600 miles.   The Tesla Model S  85kwh battery pack weighs 1200 pounds and will carry the car 265 miles (from this article the cells themselves occupy about 4 cubic feet if packed perfectly but in this video the whole pack looks much larger).  We can see that even with what Musk claims is twice the energy density of other batteries, the Tesla gets  0.22 miles per pound of fuel/battery while the regular car can get 6.7.  That is a difference in energy density of 30x.  Some of this is compensated for by heavy and bulky things the electric car does not need (e.g. coolant system) but it is still a major problem in car design.
  2. Charge Time.  In my mind this is perhaps the single barrier that could, if solved, make electric cars ubiquitous.  People complain about electric car range, but really EV range is not that much shorter than the range of traditional cars on a tank of gas.  The problem is that it is MUCH faster to refill a tank of gas than it is to refill a battery with a full charge.    Traditionally it takes all night to charge an electric car, but 2 minutes at the pump to "charge" a gasoline engine.   The fastest current charging claim is Tesla's, which claims that the supercharger sites they have built on many US interstate routes sites will charge 170 miles of range in 30 minutes, or 5.7 miles per minute.   A traditional car (the same one used in point 1) can add 600 miles of range in 2 minutes, or 300 miles per minute, or 52 times faster than the electric car.  This is the real reason EV range is an issue for folks.

Interestingly, Fisker (which failed in its first foray in to electric cars) claims to have a solid state battery technology that gets at both these issues, particularly #2

“Fisker’s solid-state batteries will feature three-dimensional electrodes with 2.5 times the energy density of lithium-ion batteries. Fisker claims that this technology will enable ranges of more than 500 miles on a single charge and charging times as low as one minute—faster than filling up a gas tank.”

Forget all the other issues.  If they can really deliver on the last part, we will all be driving electric vehicles in 20 years.  However, having seen versions of this same article for literally 30 years about someone or other's promised breakthrough in battery technology that never really lived up to the hype, I will wait and see.

Uber Is About To Become A Much Worse Place To Work

Here are some cool things about working for Uber:

  • You can work any time you want, for as long as you want.  You can work from 2-4 in the morning if you like, and if there are no customers, that is your risk
  • You can work in any location you choose.  You can park at your house and sit in your living room and take any jobs that come up, and then ignore new jobs until you get back home (I actually have a neighbor who is retired who does just this, he has driven me about 6 times now).
  • The company has no productivity metrics or expectations.  As long as your driver rating is good and you follow the rules, you are fine.

All of this is going to change.  Why?  Due to lawsuits in most countries that seek to redefine Uber drivers as employees rather than contractors.  One such suit just succeeded in England:

Is Uber a taxi firm or a technology company, and are its drivers self-employed or mistreated employees? These questions are being asked of Uber the world over, and last year an employment tribunal case in the UK concluded two drivers were, in fact, entitled to minimum wage, holiday pay and other benefits. The ride-hailing service contested this potentially precedent-setting decision, as you'd expect, but today Uber lost its appeal. In other words, the appeal tribunal upheld the original ruling that drivers should be classed as workers rather than self-employed.

The appeal tribunal agreed that when a driver is logged in and waiting for a job, that's still tantamount to "working time." Working time they aren't getting paid for, of course. Interestingly, the ruling also noted that Uber basically has a monopoly on private hire via an app. Therefore, drivers are beholden to them and can't reasonably engage in other work while also being at Uber's disposal.

GMB, the union for professional drivers that's behind the original case, is calling it "a landmark victory." Naturally, the law firm representing the GMB and Uber drivers feels much the same. No points for guessing who has a slightly different opinion.

Despite Engadget's usual economic ignorance that this must be all good for drivers, in fact this is going to destroy about everything that makes Uber attractive as compared to 9-5 office jobs.  That is, if rulings like this don't kill the company entirely, as I have previously prophesied.

This is going to add a new cost for Uber, forcing them to pay money to drivers for dead time when they are not actually driving a passenger.  Let's make the reasonable assumption that Uber's first response to this is to A) stay in business and B) attempt to keep prices to customers from rising.  The only way they can do this is to minimize dead time.

Want to park at your house in an unpromising neighborhood with little business?  Forget it, Uber can't allow that in the future.  Want to work at an unproductive hour of your choosing?  Forget it.  Uber is going to have to set quotas on certain regions and hours of the day that are less productive and find a way to ban drivers from working those times.   In addition, they are likely to institute some sort of productivity metric for drivers, ie something like revenue minutes as a percent of total, and then they are going to rank all the drivers and start cutting drivers from the bottom of the list.  If Uber survives, it is going to be a very different company to work for, and is going to feel much more like a regular office job with a boss hanging around your cubicle pestering you about TPS reports.

Progressives Hate When You Make Job Choices That They Would Not Make Themselves

I must say I was tremendously surprised when a reader sent me this interview and book review, which is summarized thus:

In her powerful new book, “Nomadland,” award-winning journalist Jessica Bruder reveals the dark, depressing and sometimes physically painful life of a tribe of men and women in their 50s and 60s who are — as the subtitle says — “surviving America in the twenty-first century.” Not quite homeless, they are “houseless,” living in secondhand RVs, trailers and vans and driving from one location to another to pick up seasonal low-wage jobs, if they can get them, with little or no benefits.

The book seems to be mostly focused on Amazon, at least from what I can glean from this interview, and I will say that I am pretty much totally unaware of working conditions at Amazon or how happy their employees are, so I cannot comment on them.  I do know that Amazon seems to be starting to eclipse even Walmart as the new target for progressive teeth-gnashing about working conditions.

However, the author seems to be painting with a pretty broad brush here, and is trying to apply her comments to all "workampers," or folks who have given up a settled lifestyle and live a quasi-nomadic lifestyle in an RV.  I am very familiar with this basic concept, as my company hires about 350 of these folks every year to live and work in the campgrounds and recreation areas we operate (this is how the camp host job works).

The article was surprising because I get about 25,000 applications every year from these workampers for about 50 open job positions.  It seems like something people really want to do.  People call me begging me for a job, which includes both physically easy tasks (e.g. checking in campers) and physically more difficult tasks (e.g. cleaning bathrooms and raking).  Most of our employees love the experience, and articles like this one about our hosts and how much they like the work are not uncommon.

Anyway, I wanted to offer a few random thoughts on this interview:

  1.  It is really common, especially among progressives, for folks to say some sort of employment is objectively bad mainly because they would not want that particular job.  This has been a feature of "sweatshop" criticism for years.  Underlying much of the critique is the feeling that "I could never imagine working for $2 a day" so it must be bad.  Of course you can't imagine it, and neither can I -- as Americans we fortunately have many better choices.  But for someone in Vietname whose family has been subsistence farming for generations for less than a $1 a day in back-breaking work where harvests can fail and the whole family perish from starvation, a $2 a day factory job might seem like a gift from heaven.
  2. It is not clear to me why the employers of these older folks are at fault.  The author asserts that no one else will hire these folks, that this is their only choice -- "Few have chosen this life."  If this is so, why place the blame on the only folks willing to hire these people?  I can understand if Amazon were luring people out of comfortable professional jobs on false pretenses that this would be unethical, but why are they to blame if they hire the otherwise unemployable?  I would think that makes them a hero.
  3. It strikes me that 20 years ago, authors like this one were writing pieces about age discrimination and how terrible it is that no one will hire old people.  Now we learn the opposite, that companies are terrible for hiring them.  Forty years ago the author might have been writing about how stultifying middle American suburbs and corporate life were, but now we learn that folks who choose to be nomadic and try some alternative need to go back to the suburbs.
  4. I honestly have no idea what this even means: "We live in a culture where if your number didn’t come up, you’re a bad person, you’re lazy, you should be ashamed of yourself. It eats away at people. It makes them more exploitable."  Let me tell a story.  I do not hire managers from the outside -- everyone I promote to manager has to have worked for me at least a year as a front-line camp host.   Some of the folks that get promoted were managers in their former careers, but most never were.  In fact, I have many managers who never even considered that they could ever manage people, and suddenly discover at the age of 65 or 70 that they can do it.  Seeing this happen is the greatest joy in my job.  I don't know how to reconcile this with the author's statement.
  5. The author wants to blame this all on the 2008 financial crisis, but I guess that is confusing.  I know it took a long time for folks to get jobs back who lost them, and I don't want to minimize the pain of that, but she implies this is a lot about people losing all their savings.  "I talked to one couple, Barb and Chuck. He had been head of product development at McDonald’s before he retired. He lost his nest egg in the 2008 crash and Barb did, too."  I have no doubt this sort of thing happened, but frequently?  All our investments took a hit in 2008 and 2009 but almost everything is higher now than in 2008.  It would have taken some heroically bad choices (or a lot of leverage) to lose absolutely everything,
  6. The one thing I think the author and I would agree on is that the current retirement system is unsustainable.  However, I think we would come to vastly different conclusions.  She says, "We saw in the 1980s a shift from pensions to 401(k)s; that was a raw deal for workers. These retirement plans were marketed as an instrument of financial freedom, but they were really transferring risk from the shoulder of the employers to the backs of the workers."  This is only partially true.  If one is working at Sears with a traditional pension, one likely has way more risk right now (with Sears teatering on bankrupcy and your savings effectively invested all in one company) than if one had a 401(k) invested in the S&P500.  However, I would argue that what is broken in the retirement system is the assumption that everyone has a right to a 30 year mostly-healthy end-of-life vacation.  When pensions were first started, people did not live much longer than they worked.  Now they do.  Good!  But our retirement system and our expectations for it have not changed.  One only has to look at the State of Illinois to see the end game of these mismatched assumptions.
  7. (added as an update):  To the point about "exploitation".    Imagine a person in a small town with a home and she works in the local factory, really the only major employer in that small town.  If she thinks she is getting hosed at work, what can she do?  She can certainly quit, but then she likely must sell her house, find a new place to live, move to a new city, etc.  Basically, she has high job switching costs and thus probably would have to put up with more cr*p before she would leave.  Now imagine our work campers.  I once had an employee tell me that I had to treat him well, because he had wheels on his home and could leave any time.  And he was right.   Work campers, being more mobile, have much lower job switching costs.  Economically, doesn't this make them less, rather than more, vulnerable to exploitation?
  8. Note, when asked to point to true exploitation (rather than just less-than-ideal jobs) who is the one example she can think of:

You write that sometimes the Nomads are exploited. How? 

I filed a Freedom of Information Act request with the Forest Service and learned that some of their workers aren’t getting paid for all their hours. They weren’t allowed to invoice.

A few years ago one branch of the Federal government, the Department of Labor, decided that it was a morally urgent to make sure everyone working in a Federal campground operated by a private company like mine should make at least $10.15 an hour, and imposed this special minimum wage.  And we complied.  But then another branch of the Federal government, the US Forest Service, decided that it could now run the campgrounds cheaper themselves because they could staff it with volunteers and not pay this minimum wage.  Apparently it is not morally urgent for them to pay the minimum wage.  While the USFS sometimes pays hosts a stipend, this stipend, as the author notes above, is well below even state minimum wages and certainly well below the campground concessionaire minimum wage set by the DOL.  I find it not at all surprising the best example of true exploitation comes from the government.  However, how much do you want to bet this author asks that we rely on government to eliminate imagined exploitation in the private world?

Postscript:  It reflects classic middle class snobbery to call these folks "homeless".  I have hired nearly thousands of work campers over the years and have yet to meet one who considers themselves to be homeless.  They would say they have a home -- and it has wheels on it.

Rockets Blow Up... How Often?

On reading this article about a SpaceX rocket engine blowing up during testing, I thought to myself that rockets sure seem to blow up a lot, even with 60 years of experience.   If I had had to guess, I probably would have guessed 10-20% of the launches fail.

But it turns out that this is an exaggeration, probably due to the summer of the shark effect I have discussed before.  One problem with the data is that I would define failure rate from a customer point of view -- did my payload survive and was it inserted into the right orbit where it can do what I want it to do.  A lot of the data on failure rates uses other bases.  From this page, in 2016, the failure rate by my definition would be 3 out of 86 launches, or 3.5%  (that site reports a failure rate of 2 out ob 85, but do not count the pre-launch explosion of a SpaceX rocket that destroyed the payload).    This page has answers to the failure rate question in the 6-8% range for unmanned rockets over the history, with a bit of a trend downwards recently.  Apparently the failure rate on manned launches is much lower.

I guess my reaction is that the failure rate is lower than I would have guessed, but I think my perception that it had not improved a lot over 50 years may be correct.  I don't have the data but my sense is that air travel experienced a much faster rate of improvement in catastrophic failure rates, though the engineering calculus between manned (most air travel) and unmanned (most rockets) travel may be different.  Certainly if it cost $100 million per rocket to reduce the failure rate by a percent or two, it might not make financial sense if there are no people on it.

Reasonable People Will Disagree -- The Tesla Example

Too often people today in public discourse assume that those who disagree with them are bad people, or have bad motivations.  Or at best, they assume others don't have all the facts and have been influenced by some biased media source.

But perfectly well-motivated people with the exact same data can reach stunningly different conclusions.   A while back I signed up for a (free) investing website called Seeking Alpha.  In doing so, they asked me to list some of the stocks I followed, and they send me email alerts when those stocks have new articles on the site.  One of the securities I put in there was Tesla, so I have been watching the flow of articles on this one company.

It has been an amazing exercise!  Most all the authors are working with the exact same data set, in this case the financial reports and public statements of the company.  And each time new information comes out, there is an absolute flood of articles from different authors.  Many of which have completely opposite reactions to the data -- one says its wildly positive for x and y reasons, another says it is wildly negative for z reasons.  The timeline of articles on Tesla is here.

As a disclosure, I was short Tesla until the other day when I covered at the bottom of their big price drop.  Yay!  I finally made money on a short.  I think Tesla is a mess, and its merger with SolarCity borderline corrupt.  My brother-in-law, a successful entrepreneur in the tech space, thought the merger was brilliant and part of a grand strategy with Musk playing chess when everyone else is playing checkers.

Though It Would Benefit Me Greatly, the Proposed Pass-Through Entity Tax Cut Is A Bad Idea

In the most recent version of a tax "reform" proposal in Congress, there was a provision for a reduced personal income tax rate on income from pass-through entities.  A pass-through entity is usually an S-corporation or an LLC, where the entity fills out a corporate tax form but pays no income taxes -- instead the income passes through to the individuals who own the entity, and taxes are paid on the individual return.  This was a great innovation because it provides an alternative to the double taxation of income that still exists with traditional C-corporations  (ie tax is paid by the corporation on income and again on the same income when it is passed through as capital gains or dividends to the owners).

I own an S-corp and would benefit greatly from a reduced tax rate on S-corp pass through income.  But I oppose it.  The basis of this tax proposal is a familiar one -- there is some type of economic behavior that Congress thinks is either meritorious or counter-productive, and there is a great urge to tweak the tax code to promote or hinder these behaviors.  We get sold on the idea that owning a home is better than renting and thus we have the mortgage interest deduction.  There are thousands of such tweaks in the tax code, and most have little to do with economic reality and more to do with some special interest rent-seeking with Congress.

Someone in Congress thinks it's good that business people own small businesses and they should get a lower tax rate.  That's me, so thanks. But we end up with craziness, exactly as we do every time Congress tries to pick winners and losers.  Here would be effective tax rates (corporate + individual) for income earned in different ways under the new plan:

  • The lowest rate would be for income to a passive investor in a pass-through
  • The next lowest rate would be for income to an active investor in a pass-through -- yes, from a tax point of view it is less meritorious to actually work at the pass-through entity than just collect checks.  The logic is that part of one's pass-through income is for "labor" and thus needs to be taxed at the higher regular income tax rate.  How anyone can separate how much of my profits are from my labor and how much is from -- what?  unicorns? -- I have no idea
  • The next higher rate would be paid on passive income from a C-corporation like ExxonMobil, which would be taxed at the corporate rate and then taxed at the dividend rate (currently 15%) on the individual return but the combination would likely be less than the maximum personal rate.  For people without a lot of other income, this might be the highest taxed activity.
  • The highest rate would be for people simply working and earning income, assuming they are in the upper tax brackets.

All of this makes zero sense, or to the extent it makes sense to anyone is based on economic theories that likely don't hold a lot of water.  It reminds me of the old efforts to distinguish between the deserving and undeserving poor when giving out relief.  Every person in Congress seems to have a personal vision of deserved and undeserved income.  Just because the current folks have me in the deserving category doesn't mean that the next batch won't put me in the opposite category.

I think the entire corporate tax system needs to be junked.  The amount of effort that goes into compliance, and perhaps more importantly, the number of distortions is creates, make finding an alternative well worth the effort.  My tax plan has always been:

  1. Eliminate all deductions in the individual income tax code except for a single personal deduction
  2. Eliminate the corporate income tax.
  3. Tax capital gains and dividends as regular income.
  4. Eliminate the death tax as well as the write-up of asset values at death

Corporate income all eventually passes through to individuals as capital gains or dividends, so eventually they do get taxed.  The same is true of inherited assets -- because they would not get written up in value at death, they would still trigger large capital gains once tapped by those who inherit the assets.  As far as rates are concerned, I actually don't see a strong need for a flat tax -- I can live with the progressive rates we have now.

I have heard people of late saying that we can't eliminate the corporate income tax because foreign investors would never get taxed.  First, they would get taxed, just in their home country.  And second, who cares?  There have got to be a lot of things worse than a rush of foreign capital into the US.

Goodfellas in Phoenix

It is not very often, at least any more, that I find reporting in our local paper captivating.  But this story about a New York mobster dropped into the witness protection program in Phoenix is fascinating.   I learned a couple of things.  First, the Feds seem to place a disproportionate number of their high-profile mafia turncoats into the Phoenix area.  And second, the portrayal of mobsters in Goodfellas or the Sopranos as people who simply cannot stop scamming seems spot on.  In this case, this particular mobster-in-hiding created an entire restaurant chain (Toby Keith's I Love this Bar and Grill) and used it as a vehicle for scamming tens of millions of dollars out of mall developers, who would pay him millions in up-front build-out money in exchange for signing long term leases he never meant to honor.

Apparently Democrats Applied Blue-State Model To Their Own Finances

I really thought this article (editorial? letter?) by Donna Brazille in Politico was fascinating.  First, it is not that often that partisans of either flavor air their internal dirty laundry in public.  And second, it is a pretty interesting story.  Apparently Obama left the party deeply in debt (that is probably not unusual after a campaign, since politicians do the same thing with public budgets when they actually hold office).  Debbie Wasserman-Schultz "had outsourced a lot of the management of the party and had not been the greatest at fundraising" and thus was doing little to pay down the debt.   Eventually, Wasserman-Schultz and a few other party leaders turned to the Clinton campaign to bail them out, which they did -- over a year before the convention when Clinton became the actual Democratic nominee -- in exchange for an agreement that:

Hillary would control the party’s finances, strategy, and all the money raised. Her campaign had the right of refusal of who would be the party communications director, and it would make final decisions on all the other staff. The DNC also was required to consult with the campaign about all other staffing, budgeting, data, analytics, and mailings.

Apparently Wasserman-Schulz could not be reached for comment in her current location under the bus.

The Irony and Internal Contradiction of Passive Investment Management

My relatively snarky post on hedge fund fees and passive management got a lot of response, including a few of challenging emails from friends and acquaintances.  So I wanted to cover a few followups here.

One of the interesting features of passive investment management is that it doesn't work if everyone does it.  I vaguely remember there is some name for this in the game theory world but I can't for the life of me remember.  Anyway, passive investment is based on the theory that the market for financial products is relatively transparent and efficient.  While one stock will certainly perform better than another, it is almost impossible (or at least really expensive) in a mostly-efficient market for a regular investor, or even an average fund manager, to parse this out.  As a  result, high fees or expenses one might incur to find these opportunities generally don't pay for themselves, and it is better to just invest in a broad basket of securities and accept the average market return.

But note that this is predicated on the assumption that someone, somewhere is actively managing.  Someone must be looking for good stocks and bad stocks and buying the former and selling the latter.  Without these folks actively managing, it would not be an efficient market.  [I am reminded at this point of the old joke about a man walking down the street with an economist.  The economist steps right over a $100 bill on the sidewalk without stopping.  The man asks the economist, "why didn't you stop and pick up that money?" and the economist answers, "in an efficient market it can't really be there."]

I remember a while back reading economic research about shopping.  What percentage of customers have to be active price-shoppers to make a market efficient?  I personally don't price shop for the small stuff.  If I need a bunch of cheap bulk stuff, I just run to Wal-Mart or Costco and buy it with confidence I am getting a pretty good price.  But why can I do that?  Because I trust these large corporations to honor their promise for low prices?  Hah!  No way.  What I trust is that there are people who clip coupons and price every dang item to the penny, and it is these folks who keep Costco and Walmart honest.  Government interventionists like to talk about the free rider problem all the time, but most all of us are free riders on these hard core shoppers.

The same is true with us passive investors.   I like to get snarky about the fees certain active investors charge, but I am still dependent on their work.  And I don't particularly doubt that there are hedge funds and private equity firms that make consistently above market returns, but I do think they are a minority.  I would equate it to max-contract players in the NBA.  No one doubts Lebron James merits a max contract -- any of the teams in the NBA would sign that deal in five seconds.  But a max deal for, say, Chandler Parsons?  Joakim Noah?  The problem with hedge funds is that the few of these folks who merit the two and twenty max contract have very likely been closed to new investors for years, in the same way it is impossible to get LeBron James to play for Memphis.  It is frustrating for me to see public and private institutions chasing yield and continuing to pay 2 and 20 to folks with an unproven algorithm and a marketing plan.  If I am going to pay 2 and 20, its more likely to be to someone in private equity or an LBO fund who is doing more than stock picking.  That's because I do think that stocks are generally well-valued on the market based on their current management, investment plans, culture, etc.  But they may contain opportunities for smart people who can come in and, for example, apply different management and culture and strategy to the people and assets.  A box that is half Kale and half candy corns might not sell for a good price because no one wants the combination, so value can be created splitting it up.

A couple of other thoughts that came up in discussions since yesterday:

  • I am willing to believe that passive investing looks so good vis a vis active investing because central banks have inflated assets and compressed volatility.  If all the boats are rising with the tide of state actions that are raising the tide, then one is less likely to be fussy about which boat he is on.  What's the point of value investing when the market treats stocks as commodities?  But I can certainly see that in markets like the late 70's or pre-market-boom early 80's that stock pickers might have had more room to differentiate themselves.
  • I am also willing to concede that passive investing may turn out to be a terrible trend for corporate governance.  If all your shareholders are just holding your stock as part of a basket of 500 stocks, who is going to hold you accountable?  It is very awkward for a Vanguard agitate for changes in a company, even when they might be the largest single shareholder.  Also, ironically, passive investing may be opening the door for single lone wolf activist investors to impose their will on companies, sometimes to the other shareholders' detriment.  If one person with 5% cares a lot and the other 95% are passive, that one person might be able to raise a lot of hell.

As a final note, I am a screaming hypocrite on the whole passive investing thing, since with most of my net worth I am the ultimate in active investors.  I have most of my savings in one company, the one I run.

Wither the Sports Illustrated Cover Jinx

In retrospect, this is a pretty amazing cover from 2014.  They even had the MVP right.

I will admit to some bias, having grown up in Houston, but I have always loved that striped Astros uniform.

Game 5 was the most entertaining baseball game I ever saw, but probably not the best.  The best probably would have to have things like pitching and defense too.  The best game I ever saw was probably game 7 between the Yankees and the Diamondbacks back in 2001.

Are You Smarter Than A Public Pension Fund Manager

From the WSJ:

Some $333 billion moved into all U.S.-listed ETFs [exchange traded funds] in 2017 through September, a figure that eclipses last year’s $288 billion all-time high with three months yet to be tallied, according to Morningstar.

Of that amount, 73% has gone into ETFs that boast expense ratios less than or equal to 0.2%, or $20 per $10,000 invested, according to Morningstar data through September. Such low-fee funds account for just 15% of the more than 2,000 exchange-traded funds and notes on the market....

The market for low-cost funds, long dominated by BlackRock, Vanguard Group and State Street Global Advisors, is getting increasingly crowded as other players attempt to muscle in. State Street last month slashed management fees on more than a dozen of its funds. Franklin Templeton Investments, a unit of Franklin Resources, this week announced 16 ultra-low-cost foreign stock ETFs that will undercut the management fees of nearly every rival product currently on the market.

“It’s become insanely competitive,” said Ben Johnson, head of ETF research at Morningstar.” Mr. Johnson said that advisers and other intermediaries are feeling the pressure to emphasize the lowest prices available. “This has upped the ante for providers of products that have really been commoditized.”

If you are a typical investor, you too are likely investing in lower-cost funds, and for most of us that is a great choice.  But large public pension funds are still the #1 largest investors in hedge funds, whose absurd 2 and 20 (2% of the assets invested, 20% of the gains, 0% of the losses) fee schedules still exist, incredibly, despite their systematic under-performance of the market.  I have always wondered how these fees don't get competed down.  But beset by under-funding, public pension funds are so desperate for yield to try to close the gap that they will still fall for the hedge fund pitch.  Which is why your local public teacher pension fund probably helped build a number of the mansions in Greenwich.  You do have to sort of respect folks who figured out a financial model for profiting in direct proportion to government fecklessness.  Talk about hitting the mother load!

Confirmation Bias and the Morningstar Story in the WSJ

Like many folks, including Mark Perry, I would tend to agree with the following statements

  • Past performance is not a very good indicator of likely future performance
  • One should generally eschew managed funds in favor of low-cost index funds

However, I think a lot of folks who believe these same things are applying confirmation bias when looking at the data in a recent WSJ story on Morningstar.  Morningstar analyzes mutual funds and rates them based on their past 1/3/5/10-years performance in relation to other funds of the same type.  Funds in the upper quintile of past performance get 5 stars, the next quintile gets 4 stars, etc.

Morningstar is sort of coy about whether the ratings are supposed to have predictive value.  They will say that of course they only measure past performance, but there would be no way to sell these ratings to folks for millions of dollars (as they do) without there being some implication the ratings were at least partially indicative of future performance.

So the WSJ did something interesting -- they went back 10 years and took all the 5 star funds and looked at how they have done since (as measured by Morningstar itself with its star ratings).  So how many 5-star funds ten years ago actually had 5-star performance over the subsequent years, and so on.  And it turns out that a lot of the 5-star funds have not performed very well.  This is a good reminder to us all.

BUT.  Look at their own data:

Yes, the 5-star funds from 10 years ago only average 3 today.   Everything regresses towards the mean, as we random walk folks might expect.

But the 5-star funds did better than the 4, which did better than the 3, which did better than the 2, which did better than the 1.  This actually understates the difference, because many of the lowest performing funds in the lower star categories closed in this 10 year period, so are not in the final metrics, which likely raises the scores of some of the lower buckets because they dropped out (59% of the 1-star funds closed or merged in this period while only 22% of the 5-star funds did so).

This is actually -- to someone who doesn't really buy into the whole stock-picking thing -- a pretty impressive achievement.  I challenge you to take stocks or bonds or mutual funds of roughly the same type and divide them into 5 buckets, rank the buckets by expected performance, and actually have this ranking hold for 10 years.

Terrible Symbolism

I know that many of my readers have more skepticism than I about open immigration.  We will leave that for another day.  But I am not sure how any American who prides themselves on American exceptionalism and our leading role in the world promoting freedom wouldn't cringe at seeing these pictures.  What a terrible image they will make running for thousands of unbroken miles.

I am not sure why we are going through all this engineering effort when we could just be borrowing from the experts:

Postscript:  Congrats to our local entrants from the Phoenix area firm that submitted by far t

he ugliest design.

Update:  Just to confirm, based on the comments:  Yes, I do not see an ethical difference between stopping people from coming in and stopping them from going out.    Others of you do see a difference, and we will have to disagree.  I don't think the Berlin Wall would have shifted from evil to OK had it been built by the West Germans instead to keep communists bottled up on their side.  I know folks love to use the home analogy, that it is OK to fence folks out of your home but a federal crime to fence them in.  But I have always thought equating a whole country to private property is a bad analogy.  Basically, such an assumption rests on socialist community property ownership assumptions.   A Mexican man wants to drive a car he owns, using gas he buys along the highway, along a road paid for with the gas taxes he just paid, to take a job at my company I freely offer him and rent an apartment I freely lease to him.  Voting, government benefits, holding office -- we don't necessarily have an obligation to offer any of those things, at least initially.  But I don't think it is ethical to erect this wall in his path to exercising free exchange.

Keynesian Economic Stimulation, White Collar Edition

Irony of Phone Design

My last phone was a Droid Turbo (or some variant of that).  It was a tank (and btw the battery was so large it would last a week).  It was also butt-ugly, but you could drop that thing from an airplane and it would probably keep working.  I never bothered with a case.

My new phone is a Galaxy S8.  It is probably, looks-wise, the acme of phone design right now and the polar opposite in attractiveness from the Droid Turbo.  But it is literally almost all glass.  The front is glass.  The back is glass.  The sides, dues to the curved bezel, are mostly glass.  If you drop this thing you are going to hit -- wait for it -- glass.  I was changing cases on it and dropped it from a height of no more than three feet and both the front and back glass shattered.  So you MUST put this expensive phone in a relatively bulky case.  You can have a slim case that may or may not protect the screen and sort of retains some of the feel of the curved bezel or a bulky case that probably will protect the phone but makes the entire phone design moot.

My point is that companies seem to be designing phones for how good they look and feel in the Verizon store**, rather than how they will actually look bundled up in a large case in real life.  Once you provide reasonable life-protection for the S8, all its expensive design features are covered up.

One thing I have learned during this experience is that the vast majority of the millennials who rate cell phones on review sites like Engadget are wildly over-influenced by aesthetics.  For example they all seem to downgrade phones that have larger bezels and metal rather than glass packaging, irregardless of reliability. I am still looking for a site that publishes a good list of drop test results and ratings.  I don't think I will buy another phone without seeing these results (I was considering a pixel 2 until I saw is horrible drop results).  I would also like to see someone who grades phone aesthetics in the sort of cases we are all going to put on them.  Honestly if I had time I would probably start my own review site focused on real-world use, emphasizing characteristics like reliability, repair costs, drop test results, and battery life.

 

** For a long, long, long time, TV manufacturers ruined TV pictures so they would look better in a store.  Every TV you could buy, at least in the pre-LCD era, had super-high color temperatures shifted way up into the blues.  The colors looked like crap in a dark room watching a movie, but the picture appeared brighter in the TV showroom.  Back in the day, one of the first things one would do with a good TV if one was a movie snob was to get the TV color calibrated or look for a TV that had a color temperature setting.

Oppressors, Oppressed, Privilege, and Free Speech

A few days ago I wrote:

Speech codes are written by and for the privileged.  They are written by the oppressor to shut up the oppressed.  George Wallace did not need the First Amendment, black kids trying to go to the University of Alabama needed it.  So the progressive opposition to free speech (e.g BLM shouting down the ACLU over free speech) is either 1) completely misguided, as the oppressed need these protections the most or 2) an acknowledgement that progressives and their allies are now the privileged, that they are the ones in power, and that they wish to use speech codes as they have always been used, to shut up those not in power.  In our broader society the situation is probably #1 but on university campuses we may have evolved to situation #2.

Example of #1 (via Overlawyered)

A woman has been questioned by police and could face a hate crime prosecution after she waved a banner at Belfast’s Pride parade reading “Fuck the DUP”.

In a case that could have consequences for free speech and the right to offend across the UK, the Police Service of Northern Ireland (PSNI) says it will pass a file to the region’s public prosecution service (PPS) after Ellie Evans, 24, held up the placard at the August parade to protest against the party’s policies on gay marriage.

The investigation was prompted by a complaint from DUP politician Jim Wells, who told the Guardian that the slogan constituted “incitement to hatred and potential public disorder”.

Example of #2

A few months later, I received a letter from two Reed students of colour that was being distributed among alumni like a piece of samizdat. The students didn’t reveal their names for fear of being ostracised, but they described a campus that had been overtaken by militants who routinely shamed as racists anyone who didn’t agree with them. One of those singled out had been a freshman named Hunter Dillman who had been branded a racist after asking the organiser of a Latina student group an innocent question. He was ultimately hounded off campus.

The students said the Facebook shaming became even more virulent as the year went on. When another white student apologised to Amanda for being unable to attend a particular protest because he was behind on his schoolwork, Amanda accused him of being the kind of white guy who would ‘laugh at a lynching’. The students felt Amanda’s charge was so outrageous that they decided to take a big step: they would all ‘like’ the student’s apology on Facebook, even though they might be called racists as well. ‘As students of colour we felt that we had to do it’, one of them later told me. ‘It would have been 100 times worse if somebody white liked it.’

 

Most Depressing Thing I Read Today

On the Dell web site, at the head of a no-export agreement I had to sign:

The U.S. government views exporting as a privilege, not a right.

Of course, my home state of Arizona considers every commercial transaction to be a privilege, not a right.

Microsoft is Not My Friend Today

I am working with Dell to create a starting computer image for laptops I buy from them that will have all our computers set up the way we want them to be right out of the factory.  This will save an hour or so of work for me on each computer.

This works really well EXCEPT for Microsoft's heavy-handed intervention.   As part of the setup process before I create the default image, I switch the windows default browser to Chrome and the default app for opening pdf files to Adobe Reader.  No matter what we do, when the new computer boots up with this image, windows switches the default browser and PDF app to Microsoft Edge (apparently via 'sysprep".)  I might be able to live with this for the browser, but Edge is defective in opening PDF files, specifically it does not allow pdf's with form fields to be saved in a way that retains the form entry.  My users will never be able to figure out how to reset this themselves so now I have to figure out how to write batch files so I can override the Microsoft override after it runs.  Less intrusive but still irritating is the fact that Microsoft also adds back all their sales spam I deleted, including their "get office" and "try skype" apps.

As an aside, it is really sort of funny nowadays to put Chrome or Firefox on a new Microsoft computer.   If you try to make these other browsers the default, you get this message that says something like "wouldn't you like to try Edge, it is way better than our old browser that we tried for years and years to make you use and then abandoned."  I am paraphrasing of course, but that is the gist.

UNC Avoids Athletic Sanctions By Arguing their African-American Studies Dept. Had Staggeringly Low Academic Standards

Well, it appears the common Conservative critique that many university race and gender programs have really low standards has a new supporter:  The University of North Carolina.  UNC successfully argued that it was not giving its athletes special treatment in the African-American studies department -- they had low standards for all students in that department.

A years-long probe into widespread academic fraud in North Carolina’s athletic program, including its storied basketball powerhouse, reached an unexpected end on Friday when the NCAA announced it would not issue major sanctions against the school.

The prolonged investigation focused on a major at the university, African and Afro-American Studies, where about 1,500 athletes over 18 years took advantage to make good grades with little to no work involved. The university’s defense did not focus on the legitimacy of the courses—the NCAA said “generally, the facts of this case are not in dispute.”

UNC instead argued that any problem was university wide, not limited to the athletic department, because the courses were available to all students. On Friday, the NCAA accepted the university’s explanation. .

“A Division I Committee on Infractions hearing panel could not conclude that the University of North Carolina violated NCAA academic rules when it made available deficient Department of African and Afro-American Studies ‘paper courses’ to the general student body, including student-athletes,” the NCAA said Friday.

Greg Sankey, the head of the Southeastern Conference who was the chief hearing officer on the panel, said athletes “likely benefited from the so-called ‘paper courses’” but that “the information available in the record did not establish that the courses were solely created, offered and maintained as an orchestrated effort to benefit student-athletes.”

Just so we are clear exactly what we are talking about, UNC freely admits, in fact desperately argues, that it was offering courses like this:

UNC’s surprising defense focused on its own systemic shortcomings. It said that the problems were so fundamental at the school, it wasn’t actually an NCAA issue, and therefore wasn’t for the NCAA to govern. One estimate said athletes made up about half of the roughly 3,100 students who participated in the classes.

These classes were generally portrayed and shown to be fake for the most part. The NCAA, in its decision, said the classes did not require attendance. The students rarely, “if at all” interacted with a faculty member. The classes typically required one paper where the person who graded it admitted she did not read them in the entirety. These classes, the NCAA said, had “liberal grading.”

For reference, the entire UNC system (not just this location) consumes about 12.5% of the entire North Carolina state budget.

Update:  I was thinking over the weekend about whether this really horrible level of education for the money could be considered racist, since a substantially disproportionate number of the students in this department are black.  If one argues that the value of college is in the education itself, then it is preposterously racist, particularly since it hurts minorities at other colleges by reinforcing the general stereotype of low academic standards in race studies programs.  If one argues that the value of college is only in the degree itself - the piece of paper - I suppose one could consider this affirmative action.

The Progressive Argument for Free Speech

A reader sent me a link to this critique, sort of, of free speech in the Daily Princetonian.  I say "sort of" because I thought the thinking and logic of the article was pretty muddled, so much so that I am not even totally sure what point they are trying to make, exactly, though it clearly is meant as a critique of Conservatives defending free speech.   Frankly I was pretty depressed that a Princeton philosophy major couldn't write in such a way as to make even their thesis clear.

Anyway, the comments are closed and I still feel enough of a connection to Princeton that I wanted to at least try to engage the students, so I wrote this back:

I didn't find your Daily Princetonian article of 9/25 particularly compelling, in part because you don't engage with defining an alternate regime if you toss out free speech.  "we don't need to hear any more form group x or y" is a fine policy for setting up your personal Twitter block list, but how does it work in a democracy?  Everyone assumes when they advocate for such controls that they and their fellow believers will be the ones controlling, but do you really believe that?  After the last election?  What if a President Lindsey Graham (god forbid) were to take your rules advocating for getting rid of hate speech and define hate speech as advocating for abortion rights?  The ACLU didn't famously defend the speech rights of the American Nazi party because it liked Nazis -- it defended them because they were justifiably afraid that the precedent of speech limitation might someday be used to restrict speech far more dear to them.

This is why I think Progressives are making a huge mistake in opposing free speech, on their own terms.

Speech codes are written by and for the privileged.  They are written by the oppressor to shut up the oppressed.  George Wallace did not need the First Amendment, black kids trying to go to the University of Alabama needed it.  So the progressive opposition to free speech (e.g BLM shouting down the ACLU over free speech) is either 1) completely misguided, as the oppressed need these protections the most or 2) an acknowledgement that progresives and their allies are now the privileged, that they are the ones in power, and that they wish to use speech codes as they have always been used, to shut up those not in power.  In our broader society the situation is probably #1 but on university campuses we may have evolved to situation #2.

The folks who wrote the first amendment were thinking about this dynamic.  Had they instead decided to write a speech code, it likely would not have been good.  It might well have banned the criticism of slavery, for example, if Jefferson and his Virginians had anything to say about it.  But they didn't create a speech code, thank god.  In fact, I am trying to think of any time in history I would have been comfortable with the ruling elite locking down the then-current norms of their society into a speech code, and I can't think of one.  What gives you confidence, vs. the evidence of all history, that you can do so today with good results?