Jesse Livermore Bangers
The Curse of the Reserve Currency
Trying Too Hard
- Speech by Dean Williams (Link)
- Steve Randy Waldman's Home Is Where The Cartel Is (Link)
Excerpts from “Breaking Smart”
- Venkat Rao's Breaking Smart (Link)
Markets Will Permanently Reset Higher (My Sacrifice to the Delta Gods)
- Lyall Taylor's Why I Worry More About A Melt-Up Than A Melt-Down
Trade-Offs In Tax Policy
- Howard Mark's It's All Very Taxing
OSAM Deconstructs Factors From Scratch
- Chris Meredith, Jesse Livermore, Patrick O’Shaughnessy's Factors From Scratch (Link)
Minsky Moments in Venture Capital by Abraham Thomas
Paradox of high prices is they imply low risk which further attracts more inflows.
The key idea of Minsky cycles isn't that rising prices attract capital; that's just standard trend dynamics. The key Minsky idea is that increasing capital inflows reduce perceived risk.
This is the Minsky boom. Money entering a market boosts returns and reduces volatility, leading to very strong (realized) performance. This attracts more money, which improves performance even more. A positive feedback loop ensues.
And this is perfectly legit! Economies can and do reallocate resources all the time. This is how it works; this is how it’s expected to work.
The problem with feedback loops is that they tend to overshoot.
True Risk vs Measured Risk
One way to understand Minsky cycles is that they’re driven by the gap between ‘measured risk’ and ‘true risk’.
When you lend money, the ‘true risk’ you take is that the borrower defaults3. But you can’t know this directly; instead you measure it by proxy, using credit spreads. Credit spreads reflect default probabilities, but they also reflect investor demand for credit products. A subprime credit trading at a tight spread doesn’t necessarily imply that subprime loans have become less risky (though that could be true); the tight spread may also be driven by demand for subprime loans. Measured risk has deviated from true risk.
Similarly, when you invest in a startup, the ‘true risk’ that you take is that the startup fails. But you can’t know this directly; instead you measure it by proxy, using markups. Markups reflect inverse failure probabilities (the higher and faster the markup, the more successful the company, and hence the less likely it is to fail — at least, so one hopes). But markups also reflect investor demand for startup equity. Once again, measured risk has deviated from true risk.
During Minsky booms, measured risks decline. During Minsky busts, measured risks increase. The flip from boom to bust occurs when the market realizes that true risks haven’t gone away.
The Destination, Not The Journey
So now let’s rephrase the question. Has the true risk of venture investments changed? More rigorously:
Does the compression of timelines in venture change the distribution of terminal outcomes for venture-backed companies?
On that question, the jury is still out. It’s not obvious to me that accelerated markups change the power-law dynamics of venture portfolios. Markups change the journey of a business, but do they change the destination?
If the answer is yes, then there’s no Minsky dynamic at play; what we’re seeing is a rational evolution of the venture industry. Maybe startups are truly less risky now; maybe the market truly has matured. More capital, lower returns, safer investments4.
If the answer is no, then venture is very possibly in a Minsky boom, and we’re just waiting for the moment when it turns into a Minsky bust.
“Incentives to produce” are incentives to rig the game by Interfluidity
This essay contends that the cost of mitigating inequality is likely small compared to its benefit. Rent-seeking behavior is inevitable but incentive to capture rents or grift is stronger if the potential prize is bigger (I'm not so sure that any reasonably capitalistic society would escape this problem at any level of naturally occurring inequality — something we must live with anyway as a consequence of humans’ endemic differences which we happily agree to entertain when we reject communism)
- Starts with allusion to the ever present efficiency vs equity tradeoff: Reducing rewards to those at the top of the wealth/income distribution might blunt their incentives to produce. But the cost of that might be offset by utilitarian benefits of transfers to the less well off...But at current margins, I suspect there is no tradeoff. There might be a tradeoff in measured GDP, but GDP happily tallies economic coercion and rent-capture along with genuinely productive activity...Causing a disease and then expensively treating it does not in fact make the world richer. But it may well inspire economic activity — the mass production of a new drug, visits to doctors, extra hours people choose to work in order to afford the treatment, etc. In aggregate, we work harder just to stay in place. But the distributional effects of the operation are very real.
- Rent capture increases as a natural defense to technology’s unseating effects: We should expect the prevalence of rent capture (or worse) as a source of economic profit to increase with technological progress. Why? Because, absent chicanery, technology increases the ease of production and the efficiency of distribution. As Schumpeter pointed out, the source of profit in real-life capitalism is the fact that monopoly power is ubiquitous because of natural barriers to competition...Technological progress renders moats that derive from nature harder to come by. Instead, successful businesses — and successful people (since under capitalism, a human is just a small business) — must rely increasingly on moats that result from social and political arrangements....The distribution of profits is determined by social choices rather than by natural scarcities.
- This is not necessarily wrong but if you care about social cohesion it's problematic because it creates incentives to side with the winners....But the distribution of affluence is less and less a matter of direct attachment to production, and more and more a function of winning social games and political contests that determine to whom the fruits of production will be allocated. There’s no conspiracy in that. Nor is it an answer to say “capital” now determines who enjoys wealth. As technology improves, capital goods become mere commodities like everything else. Financial capital, whatever it is, is not an input into any material production process. It is a construct and artifact of a huge and ever-changing array of social and legal institutions. “Human capital”, “social capital”, and “organizational capital” are things we impute ex-post to winners of distributional contests as explanations of observed returns. They do not straightforwardly exist in the world...high dispersion of outcome creates a strong incentives to be on the side of winners.
- This incentive creates inefficiency: a well ordered society depends upon people sometimes making choices opposed to their material interests on ethical or other grounds. Then it is obvious how inequality might be costly. Instead of talking about “incentives to” (produce, extract rents, whatever), we might describe outcome dispersion as a tax on refraining from mercenary behavior. If the difference between economic winners and losers is modest, people of ordinary virtue might refrain from participating in activities they consider corrupt, might even be willing to “blow the whistle”, because the cost of doing so is outweighed by their preference for behaving well. But as outcome dispersion grows, absenting oneself from or even opposing activities that would be personally remunerative but socially undesirable becomes too costly.
- Moloch equilibrium: Wouldn’t it be odd to live in a country where, say, bankers individually acknowledge that their industry often behaves destructively, where insiders perceptively describe the conditions that create incentives for people to take bad risks or fleece “muppets“, but continue to work in those places and do nothing about it? Wouldn’t it be odd to live in a country where doctors privately apologize for the way their services are “priced“, but nevertheless take home their paychecks and pay AMA dues? Or in a country where economics instructors teach agency costs using textbook pricing as a case study, during a course for which students are required to purchase a $180 textbook?... In all of these cases, there really isn’t anything any one individual can do to remedy the bad practices. Making a big issue of them would lead to useless excommunication. Instead we shrug ironically. In our society, an ironic attitude is a token of sophistication (a telling word, which once meant corruption but now implies competence). An ironic attitude towards collective ethics is adaptive. It helps basically decent individuals participate in coalitions that ruthlessly contend for rents. But perhaps we’d have a better society if, rather than turning our ethical discomfort into an object of aesthetic consideration, lots of us worked straightforwardly to remedy it. And perhaps more of us would do so if the risk of losing our place were not so terrible. Ethical behavior is endogenous. “Inequality” renders it costly.
On the Floor Laughing: Traders Are Having a New Kind of Fun by James Somers
- The upshot is that there is a lot of energy on a trading floor. Go to a law firm, Silicon Valley startup, magazine, or corporate headquarters. Even if what they do there shakes the world, even if the staff practically sneezes vibrant creativity, still you can't escape that Office-y undercurrent, the unmistakable intimation of malaise you find wherever adults are stuck inside doing their homework. This place, on the other hand, feels like something closer to an active battleship.
- The more I watch, the more I think I understand the peculiar grip this place has on him -- and, for that matter, the peculiar grip it seems to have on me. From the minute I walked in here I've been sort of dazzled. I've felt almost exactly like I did when I was first invited as a nine or ten year-old into the cockpit of a commercial airliner. There is just something undeniably cool and complicated and a little bit spectacular about both places, each in its own way the frenetic nexus of an intricate machine. It looks fun, basically -- in the one case because you get to fly a plane, and in the other because people take you seriously and pay you lots of money and yet what you do all day is qualitatively equivalent to playing a video game. If that sounds a bit silly, consider for a moment what makes a game a game. The trick seems to be that games are constrained in a way that the real world isn't: there is a board, field, pitch, court, area, table, ring or other enclosure that bounds the action in space; clocks that bound it in time; and rules that restrict the space of allowable moves. In some ways those constraints are what make games mentally satisfying, because they relieve us of what existentialists called "the anxiety of freedom." By giving us obvious, well-defined goals, they save us from having to define success; and with points, leaderboards, heads-up displays, indicators, badges, etc., they tell us exactly when we've achieved it. Humans crave that kind of structure, probably because we get so little of it in real life. It's a lot harder to say whether you "have a healthy romantic relationship" or "are making a lasting contribution to something bigger than yourself" than that you've "lined up the yellow gemstones," "scored more points than the other team in twenty minutes," or "collected forty pounds of silver."
The Origin Of Wealth Book Summary by Taylor Pearson
Traditional neoclassical economics tends to use tools that require it to look at the economy as a static, equilibrium-seeking thing – something akin to a factory or machine. Complexity economics, an outgrowth of complexity science, instead tends to view the economy more like a biological system.
In The Origin of Wealth, Eric Beinhocker introduces complexity economics and argues that “wealth creation is the product of a simple, but profoundly powerful, three-step formula—differentiate, select, and amplify—the formula of evolution”
and “the same process that led to an explosion of species diversity in the Cambrian period led to an explosion in SKU diversity during the Industrial Revolution.”
Evolution is an algorithm for innovation searching the “fitness landscape” of a given system. This could be an ecosystem as in biological evolution or the economy. The environment creates a design space and then selection (natural or otherwise) tests all the configurations in that design space over time and evolves with it.
- Peak California by Byrne Hobart
- Power Laws in Venture by Jerry Neumann
- Dennis Rodman and The Art Of Portfolio Optimization by Chris Cole
- Even God Would Get Fired as an Active Investor by Wes Gray
- Warren Buffett is Wrong About Options (Except) by Jon Seed
- What Explains The Rise Of AMMs by Haseeb Qureshi
- Salary Negotiation: Make More Money, Be More Valued by Patrick McKenzie
- Hitting the High Notes by Joel Spolsky.
- My Top 10 Peeves by Cliff Asness
- The Commoditization of Information by Geoff Yamane