Photo by Jonathan Borba on Unsplash
Hello,
Welcome to Known Unknowns, a newsletter that will help train your brain to take smarter risks.
I wish I could inject this FTX story into my veins
It is just so delicious; it has everything I want in a financial news story. And also, I must admit, I have been rooting for the whole crypto thing to crash and burn. It sounds harsh, since lots of good people will lose money. And I am a techno-optimist, normally humble enough to know we can’t predict which technologies today will change the future. But I just never understood why cryptocurrencies and their derivatives were so valuable and what legal novel purpose they serve.
As an asset class, cryptocurrency also made no sense. It was supposed to be an alternative currency, a hedge against the dollar. And if it was a hedge against the entire US economy, why did it appear to have such a high beta? It makes no sense. If it did, I’d have to give up everything I believe about how risk is priced in financial markets. So, I was rooting for it to fail. I swear it is not because I don’t own any crypto and am resentful that lots of people got rich from it (though maybe sometimes I am). But what annoyed me was the pitch that a risk-free asset also somehow provided extraordinary returns.
Now, FTX may not be the end of crypto, but it will certainly bring it down a peg and should remind people how many scams there are in this space. But lots of very smart, reputable people whom I respect are convinced the technology is valuable and game-changing. And they may be right. One such person recently reminded me that no one could have predicted the Internet would be such a big deal either (though the Internet did seem at least useful to me the first time I used it). But he has a point; the steam engine took more than 100 years to be put to good use. So perhaps there is something world-changing about crypto that we don’t understand yet. But that still doesn’t mean it’s a good investment today. The people who got super rich off the Internet were not the people who invented it, but the people who came up with useful businesses that made use of the Internet, like Jeff Bezos. I can’t think of a crypto- or blockchain-related business that seems equally valuable and legal.
And even if this is the next steam engine, if it takes 100 years to prove itself, you don’t want to be an early investor.
Also, what is it about 8%? It seems like all these scams—Madoff, public sector pension discount rates, and now FTX—always say they can get 8% risk-free.
Pity Gen Z
Every generation thinks they have it harder than anyone before. That is despite the fact that the world gets safer and more prosperous over time. But I feel for Gen Z, they had legit extra challenges: COVID disrupted their high school and college experiences, their entire lives are documented on social media, and now they are entering a job market that, while good now, may turn at any moment. And because they are less rebellious (less likely to drink, drive, and get into trouble), they take fewer risks as children and teenagers, and it turns out that this leaves your brain less able to handle risk and setbacks when you get older. That’s rough.
But the hardest challenge they face is this idea that there can be no mistakes. And in a more high-stakes economy it certainly seems that if you don’t go to the right school and get the right job, you’re doomed. But even if you do all those things there are no guarantees. There is no risk-free 8% return (except maybe I-bonds), and there is no getting ahead in life without facing setbacks.
Dealing with our debt risk
I wrote a column a few weeks ago about preserving Social Security by putting it on a more sustainable path, and lots of people wrote to me saying that I am wrong, there is nothing to see here, and these programs are in fine shape. The Social Security truthers appear to be basing their math on past data, not the projections from the Social Security Administration or the Congressional Budget Office. Their argument is simply that benefits were paid in the past so they will be paid in the future. These people are entitled to their opinion, but they have no place in the Pension Geek Club.
My colleague at the Manhattan Institute, Brian Riedl, certainty does have a place in the club. He knows the budget better than anyone I know, and he also believes projections mean something. We spoke last week about the debt, debt limits, and how little it would really take to get things on track.
Alas, the truthers are being encouraged by people who know better. And that’s too bad because, like many problems, the sooner you fix them the cheaper the solution tends to be.
Until next time, Pension Geeks!
Allison
All is right with the world
I am somebody close to retirement now. The two worst times for somebody to be entering the work force since the Great Depression were 1980-84 and 2008-10. I don't think any other period is even close.
I think this is a time of opportunity. Baby Boomers retirement is forcing employers to completely re-evaluate staffing. A lot of managers want to live in the past but they are not going to be able to.
The "good university" thing is BS for undergraduate degrees unless you are focused on networking with wealthy students. It does make a difference for graduate research work as the best schools provide better research professors and projects. I am in engineering and the school somebody went to is a small fraction of how we select new hires and is effectively irrelevant for anybody with more than 2 years experience. I have seen as many people terminated who went to "good schools" as went to "bad schools". In general, it is not a good predictor of how good somebody will be in the work place. It would be nice if high schools and parents focused more on what the kids will be studying than where they will be studying.
There are a lot of really bright young people out there and it has nothing to do with what school they went to. Good managers can identify them and mentor them to move upward and do great things. Bad managers can crush their spirits and grind them into the dust. If we see a bright young person being ground down by a bad manager, it is incumbent on us to help extract them from that situation since they often don't know what the real opportunities are. This is the big management challenge for American business over the next decade because this is where the replacements for the Baby Boomers are coming from.
Re: Crypto
I am opposed to crypto regulation. Good cryptocurrency is like gold - it is effectively self-regulating. You can't fake it, but it can be lost (gold can be sunk at sea or buried and forgotten; crypto can have a forgotten key or lost hard disk).
The big problem with crypto is that it is illiquid in the modern world like gold or art. You can't walk into the grocery store with a gold coin or Van Gogh and buy your month's groceries with it. Same with crypto in most places. So it needs exchanges to be liquid. That is where the trouble starts because it appears that most of the exchanges have been set up offshore by fraudsters.
So crypto should be treated like art, rare coins, etc. There are laws in place that ban outright fraud, so selling a fake painting through Sotheby's can get you sent to jail, same as setting up an FTX exchange. However, I don't see a need to do additional regulation because crypto is so decentralized it would be like the so-called regulation of the sub-prime mortgage securities where the appearance of regulation made everybody think it was safe. Given the international, decentralized nature of crypto-currency (wasn't that the point in the first place?) I don't see a simple way to regulate it that wouldn't be instantly gamed by Wall Street traders into Frankenstein's monster. Buyer beware is the best regulation for it I think. People losing a few billion on a voluntary risky activity may save a major system meltdown in the future - that is why they had canaries in the coal mine https://en.wiktionary.org/wiki/canary_in_a_coal_mine#:~:text=canary%20in%20a%20coal%20mine%20(plural%20canaries%20in%20a%20coal,in%20its%20health%20or%20welfare..
Amen!!