Known Unknowns

Value is sometimes performance art


Welcome to Known Unknowns, a newsletter that thinks sometimes what happens in the market is just performance art.

Some exciting news

I am a new columnist at Bloomberg Opinion. They have such an impressive stable of writers, and I’ve been a regular reader since it was the Bloomberg View. I am thrilled to join them and work with their wonderful editors. I am also back on the terminal. So much data, I feel like a turbocharged economist now.

It feels appropriate that my first column 1. Involved terminal data 2. Is on my favorite topic: retirement finance.

Early reports indicate an increase in early retirement since the pandemic. One reason is that the stock market is up 30%, which makes people feel they are closer to their retirement goals.

BUT your account balance is not the only number you need to worry about. After all, you save money to spend it – and how much you can spend depends on real interest rates. This is especially important lately with rising inflation fears.

Now we’ve been hearing a lot about rising rates, but what gets less attention is that real rates haven’t moved up, they’ve even fallen a bit. The whole TIPS curve is negative. Which tells us a lot about inflation expectations and the value of inflation insurance.

In any case, I used the terminal(!!!) to calculate annuity factors (yes, I wrote about annuity factors) over the last 10 years, and retirement has become a lot more expensive as real rates fell. It became even more expensive in the last year.

So even if the market is up, retirees have a lot less than they think they do – at least if they want protection from inflation and the market.

Art and crypto

I don’t understand crypto currencies. It is not from lack of trying or financial literacy. I just don’t get why something with no intrinsic value can be so expensive. Enthusiasts explain to me that crypto’s value derives from the fact it is scarce. Or there’s a finite number of coins. Really, though, isn’t everything in finite supply? That’s one of the central assumptions of economics. But everything isn’t valuable.

If crypto was a store of value or a usable currency, then it would have intrinsic value – but neither of these things are true. I think I finally made some sense of it last week. Because, really, crypto is a lot like contemporary art. Contemporary art (art that has never been sold before by living artists) also does not have an intrinsic value, but it is fun to talk about and collect. Its prices would also be subject to extreme volatility too, if dealers did not manipulate prices. Any commodity with no intrinsic value can only be of interest to speculators, which means its market will always be extremely volatile or crash, unless it is heavily manipulated – like art.

Most people don’t care that art prices are manipulated (by actors with a financial interest) and have no meaning, because only rich people buy fancy art. But lots of smaller investors have crypto, so there isn’t a scope for the same kind of manipulation. I don’t see the SEC tolerating it.

Even traditional currencies are volatile – and they have intrinsic value and are also manipulated by monetary policy. So, I don’t see how crypto will ever break this cycle. But who knows, maybe we’ll get a better crypto derivatives market and that will create stability.

In the meantime, if you invest in it, think of yourself as a patron or investor in performance art.

Global minimum tax

Is it just me or are people obsessed with tax compliance lately? I suppose it is part of this fantasy that high earners and corporations have enough money to pay for all our new spending – we just have to force them to pay up.

You know what might be simpler than jacking up taxes and doubling the size of a government agency? A broader base and simplified tax system that doesn’t leave so much room for getting out of paying taxes. Take the idea of a global minimum corporate tax. Sounds sensible enough; after all, you can’t increase the corporate tax rate too much because it is so easy to send profits overseas where taxes are lower.

But anyone who studied public finance can tell you there’s the tax rate and there’s the tax base. Generally, it is better to have a broader base and a lower rate. You get more revenue that way, and it causes fewer distortions and enhances transparency. Maybe we can convince OECD countries to set a higher corporate rate, but that creates a new race to the bottom to degrade the base. Countries will compete to offer more loopholes and deductions. And that seems worse to me.

But what can we do? We live in crazy times where meaningless gestures matter more than raising revenue.

Risk is good

I’ve been thinking a lot about how important risk-taking is to the economy and our lives lately. We tend to favor policies that remove risk or discourage it. But people often respond well to uncertainty. Offering risky payouts can induce all sorts of good behavior. See lottery savings accounts where people save more. States are now entering people into lotteries if they get a vaccine! And it’s encouraging people to get vaccinated.

Maybe this push to eliminate risk from people’s economic lives is misguided.

In other news

Interesting video of investing with some of the greats.

More bad news from Chile: We really can’t have nice things.

And speaking of, NYC adopts an auto-IRA program.

Until next time, Pension Geeks!