Allison's Ode to the Second Moment


Welcome to the 41st issue of Allison’s Ode to the Second Moment, a newsletter about extreme risk takers, otherwise known as Bitcoin investors.

I just got back from Hawaii. Each year on the North Shore of Oahu, big-wave surfers gather to discuss risk mitigation strategies. I figured there would be some parallels with how we think about risk in financial markets—there were far more similarities than I expected. I had some great conversations and learned many things that changed how I think about regulation and risk technology, I will share more about that soon.

So glad I was on the other side of the earth last week

I’ll tell you what we didn’t discuss at the surfing conference: tax reform. I thoroughly enjoyed a few days where I didn't hear a word about the Senate’s tax proposal. Because once the Senate passed it people, with no knowledge of tax policy, went totally insane. Sure, it is not a great bill, but let’s have a little perspective. It is not that bad, there have been worse tax bills that went into law. It will not destroy America or even its economy. We really don’t know the welfare implications of the bill. Odds are they are not huge. But a few things are worth noting.

  1. You can argue that removing the health insurance mandate, which theoretically forced people to receive government subsidies, is a massive tax increase on the poor. But reasonable people can disagree whether that makes people, who choose to forgo the subsidy, worse off.

  2. Higher earners pay more taxes, tax cuts means they benefit more

  3. Pitting corporations against individuals, in terms of who pays more, makes no sense.

  4. The tax cuts may increase growth, but not enough to pay for themselves

It seems we judge policies on their intention rather than their execution. Take the Affordable Care Act which aimed to expand health care coverage (good intention) but did so in a sloppy, unsustainable way (bad execution). I think people hate the tax bill because they think the intention is class warfare, even though it is really not that regressive. I have a more charitable view of the bill's intention; it appears be aiming for a more efficient tax code and competitive corporate rate, two things I can get excited about. But I still don't like the bill because the execution is poor, there are bigger deficits, claw-backs and new distortions. It is hard to justify tax cuts when the economy growing.

On a more positive note: I am delighted that the Democrats found deficit-hawk religion, and I hope that lasts.

Economists are always the last to know

So far, Bitcoin appears to be another thing that proves economists wrong. Just looking at those prices; it must be a serious thing. Economists remain skeptical that an asset, with no intrinsic value, can be worth so much.

Though some argue Bitcoin is not an asset, it is a currency. I am not sure there is such a clear distinction. Dollars are backed by the goods and services of the U.S. economy; in many ways the dollar is not really, truly fiat. Sure, government-issued currencies are often volatile too, but the fact you can buy goods and services with them preserves their value. I am not buying Bitcoin as a currency because it is far too volatile to be useful.

Of course, it needn’t always be this way. Bitcoin can offer more certainty than a sovereign currency, if a government or central bank debases its currency. Just look at Venezuela. Still, most countries aren't Venezuela. I think it is a little hasty to go all in with Bitcoin in an inflation targeting era.

I try to keep an open mind; I have nothing against tail insurance. Jean Trirole thinks Bitcoin is a bubble with no redeemable social value. Meanwhile, Matt Levine, channeling Gene Fama, questions if it really can be a bubble. If Bitcoin’s value is that people like it just because, then isn’t the price—whatever it is—always the right price?

Maybe we’ll find out from the new Bitcoin futures market. It will create a market for Bitcoin risk, which will mean more transparency. The derivatives market may make Bitcoin more viable as a currency because vendors who use Bitcoin can make transactions with less risk—in my experience, this is mainly Internet drug dealers (to be clear, I’m not speaking from personal experience).

Not sure Bitcoin is a bubble, but Big Data seems over-hyped

In a previous newsletter, I linked to an article that claimed mastering spreadsheets was necessary to stay viable in the age of job-stealing-robots. Now Adobe’s finance chief, Mark Garret, wants his employees to stop using Excel. Why, you might wonder? He is concerned that people actually look at Excel data and try to understand what’s going on with it. He told The Wall Street Journal,

“I don’t want financial planning people spending their time importing and exporting and manipulating data. I want them to focus on what is the data telling us.”

Just because you have data doesn’t mean it is useful, even if it is big. Or maybe it is useful, but it isn’t applied correctly to the right problem.

I am an intuitive sort of empiricist. I spend days or weeks playing with, or manipulating, my data to get a feel for it before I run estimations. This is how I figure out a data set’s quirks and if it is appropriate for the question I am trying to answer. I usually don’t do this in Excel, but that’s a personal choice. I fully support Excel users if that is the tool they feel comfortable using.

I am told machine learning does this now. I think we should be wary that it always works. Mr. Garret may not realize that data estimation is more art than science and human judgement is still necessary for many problems.

In other news

  • Firms aren’t borrowing from banks. This might be because they anticipate a recession is around the corner or they might be raising money from the bond market instead.

  • Fiji water is globalization. If you don’t like that, don’t drink it.

  • You know those sandwiches that come in the triangle plastic containers? Here is the story of how they conquered the UK and the history of sandwiches. I am not sure why the little to-go sandwiches didn’t catch on in the U.S. Maybe they are too small, though they do have their fans here.

  • The world is a risky place. One reason why we love magic is it offers a sense of control and order in a world that is often random and unpredictable. No surprise then that CEOs are easily seduced by magical thinking.

  • Contrary to public perception, there are no rats in midtown Manhattan. But there are uptown and downtown rats and they never see each other. I wonder if the downtown rats are cooler and faster. Or, perhaps the really hip rats moved to Brooklyn and are planning a move back to Manhattan.

Until next time, Pension Geeks!