# Reading 8/29/2014 – End Of The World?

Here are the big stories of the day/week/month from the president’s suit to the (maybe) start of WWIII.

International Politics

Finance/Economics

Legal

• In case you find yourself trying to donate a skull to Goodwill, here are a few tips. (Lowering the Bar)
• Proof that you can be scum without working in finance, follow the link to the Time article and the past coverage at Overlawyered. (Overlawyered)
• Ken White is writing about free speech and the Streisand effect. I feel like he touched on those topics once or twice in the past. (Popehat)

Other

1. Translated from dog-whistle language: Russia invaded Ukraine.
2. I'll leave it as an exercise for the reader to decide what the word "significant" means in this context. Please limit your answer to one blue book.

• It appears that the alleged “best and brightest” students are going for tech rather than finance. Not all that surprising, to be honest. I don’t see this as much of a loss for the financial industry. Going to Harvard doesn’t mean that you are automatically the best and in my experience it had a stronger correlation with being a pompous asshole than being intelligent. (The Epicurean Dealmaker)
• Dear math haters, math is important. (Bloomberg View – Barry Ritholtz)
• Disclaimer: I am not responsible for anything that happens because you click on the following link to an article about a funny warning sign. (Overlawyered)
• Make sure there is no ironic link between your name and your crime. (Lowering the Bar)
• Answers to life’s deepest questions at XKCD. Aiming infinitely strong lasers in random directions. I’ll try to get a grant. (XKCD)
• Finally, can you trust the media to get anything right? Hahaha! Of course not. At least, not when it comes to finance or law. (Popehat)

That’s all I have time for today (see busy).

# Busy

So, with the semester about to start, it’s going to be hard for me to make regular updates. This is for the benefit of the 3 or so regular readers I have so far.

P.S. I’ll try to post when I can, but it will be irregular for a while.

# A few more Wednesday Reads – 8/20/2014

I had more free time than I expected today and having nothing better to do, got a lot more reading in. Here are the highlights.

• Writing code can be a pain, so it is often tempting to take shortcuts. Here’s a tip, when you are creating a risk model for complicated derivative trades, don’t be lazy when writing the code. It could only cost \$2 billion or so (see London Whale)….(The Importance of Excel – The Baseline Scenario)
• Shocking, you mean to tell me that a phone that you carry everywhere, that tracks your location at all times, can “present anonymity risk.” I’m in total disbelief. But it’s not like any of the tech companies out there would actually do something like that. You know, invade your privacy so they can market crap too you. They’re the good guys, unlike Wall Street. Trust is an interesting concept. (BBC)
• I don’t like Rick Perry, but I suppose we should be somewhat skeptical of his indictment. Given that I call out people for taking stands on finance topics they don’t have a clue about, I’ll defer to those who know about legal issues on this topic. (Vox)
• Today’s lesson “stock prices at all-time highs $\neq$ imminent crash.” At some point, you figure out that there is no such thing as predicting the future, but that will not stop anyone from guessing. That’s for the casino people. (A Wealth of Common Sense)
• Apple is again trading near its all-time high price, you shouldn’t give a damn. Really, another lesson I learned really quickly was to never let yourself get wrapped up in a stock’s narrative. Last time it was “Apple is so innovative and will always be able to disrupt the industry and and and and…” I don’t follow Apple, I am not too into their products. Sure, the quality is nice, but I don’t think it’s worth the price they want. In any case, if you love Apple’s product, do yourself a favor and stay the hell away from their stock unless you can put your emotions aside. (Dan Nathan’s Tumblr, I found the link on Abnormal Returns. Lot’s of finance blogs provide links to interesting articles on most days and I’m trying to get in the habit. If you’re looking for more to read, I strongly recommend Abnormal Returns. It is daily reading for me, I don’t know how Tadas Viskanta is able to find that many interesting articles every day.)
• Also, Barry Ritholtz has posted an interesting chart showing asset class returns from 2005 to now. There are a lot of interesting conclusions we can draw from the chart. You have 2 hours, please write all answers in one blue book. No partial credit. (Bloomberg View – Barry Ritholtz)
• This is a bit more technical, but worth reading. Cullen Roche’s comments on a global investment portfolio. (Pragmatic Capitalism) Also, see his post about the contradictions of saying you use a totally passive investing strategy.
• The final article related to finance is by Josh Brown. I really can’t do any better than the title of his post. (“How can you have euphoria when nobody gives a sh*t?” – The Reformed Broker)
• I have a hard time finding words on the topic of James Foley’s murder. It’s hard to accept that it’s real. Maybe it’s because I’m young, I don’t know. I expect most anyone reading this has already seen several pieces on this topic, but I’ll link to a few anyway. (Vox – a town in Syria’s tribute) (BBC – Obama’s statements on the subject) My sincere sympathy to his friends and family.

# The Fed and Social Security – connected, but it doesn’t matter

The problem with journalism is that people don’t care about facts. People are not looking for well-reasoned analysis or for you to change their beliefs. Few will read long articles that take a nuanced view on a complex issue; however, idiots are more than happy to take absolutist views on said complex issues. Today, Al Jazeera1 decided to cover the fun topic of Social Security’s finances and how to fix the projected shortfall.

To be specific, I object to the idea that the Fed should not raise interest rates to help Social Security’s finances. First, the argument is weak. Yes, raising rates usually causes some sort of increase in unemployment. And yes, generally lower unemployment gives some workers more bargaining power. I’d agree that for middle class workers, it is indeed true that they gain some bargaining power. However, low-income workers will be unlikely to benefit from low unemployment. Low paying jobs are too easy to fill, even if the unemployment rate is 4%. While the changes in the unemployment rate undoubtedly impact Social Security’s future shortfall, how would the author propose that be measured and dealt with? I’ll even leave aside the massive assumption that by leaving rates near zero, unemployment will eventually fall to around 4% or 5%2.

According to the most recent projections from the Social Security trustees, average hourly compensation in 30 years will be more than 60 percent higher (after adjusting for inflation) than it is today. If the tax rate were increased by 1 to 2 percentage points in order to prevent cuts to scheduled benefits, workers would still pocket close to 60 percent more for each hour of work in 2044 than they do today, assuming the gains from growth are evenly shared.

Whether most workers share in the gains from economic growth or we continue to see the massive upward redistribution of income of the last three decades will depend largely on the policies of the Fed. If the Fed allows the unemployment rate to fall back to the levels we saw in the late 1990s, then workers could anticipate substantial wage gains in the decades ahead. Covering the cost of Social Security will pose little problem.

Yes, the projections do say that. That’s about the only true statement in those paragraphs. For homework, try to list every assumption that was made in this analysis. To get you started:

1. Making assumptions about future inflation.
3. That all gains from future growth will be equally shared.
4. That unemployment falls and continues to stay low. Really? As if there will not be a recession between now and 2044.
5. The idea that Congress will not completely invalidate the entire analysis by changing laws in the next 30 years. The projections always assume a static universe and we don’t live in a static universe. Tax rates change, the cap on the tax changes, economic growth is dynamic….

The most annoying part is this:

On the other hand, if those pushing for higher interest rates get their way, then most workers will not see their wages rise by much. In that case, paying for Social Security through the current payroll tax could be a problem.

Ok. There are plenty of idiots out there. So many, in fact, that members of Congress keep getting reelected (QED). Now, I would find it perfectly acceptable if the author had written: “person X says rates should be increased soon for reason Y, but analysis of data A and B show that this argument doesn’t hold/is weak/not enough to justify raising rates.” I don’t see much of a reason that rates need to rise immediately, but it is at best misleading and at worst dishonest to not explain why anyone would say that rates should rise. Also, it is cowardly not to give names, who is pushing for higher rates? Readers will not be able to look up what those people give as reasons for raising rates. No offense to Al Jazeera’s readers, but it’s not a finance/economics site. It strikes me as unlikely that the average reader would have the requisite background to understand the debate. That’s why I consider it to be misleading to not give any sort of counter-argument or at least to reference one. I absolutely hate when someone is trying to push what they want as if it is simply a fact that this is the only thing that makes any sense at all, has no downsides, helps the middle class and the poor, and bla bla bla. I may be young, but I have enough experience to know that simple-minded thinking like that only causes problems.

People who are concerned about the future of Social Security, then, should be paying a great deal of attention to what the Fed does. Raising interest rates will not only affect the economy today but also affect Social Security tomorrow.

We should pay attention to the Fed because the Fed makes important decisions. But the Fed’s job is not to fix Social Security. Thankfully, we already have a group of people responsible for doing just that, Congress. If nothing else, this article reflects just how little we think of Congress, we’re not looking for the Fed to solve all the nations financial problems. It’s not going to work. At some point, Congress will have to act. Given the maturity of the average member of Congress, they will act a few weeks after we hit the iceberg, have drowned, and they’ll find a way to kill off any survivors.

1. It's all too rare to find good articles on economics and finance from sources like Bloomberg. There is an endless amount of misleading nonsense from so-called experts who haven't a clue what they are talking about. For non-finance/economics sites, you should expect nearly everything to be wrong one way or another. You'll either be pleasantly surprised or, more often, satisfied that you were correct.

Is that being smug and condescending? Yes, sure it is. But that doesn't mean that those sources are correct about anything. Truth is not what sells, keep that in mind.

2. Why? Well, the Federal Reserve sets interest rates, but the Fed does not have absolute control of all the outcomes. There are countless other factors that contribute to changes in unemployment, it's stupid to assume it all comes down to interest rates. Put it this way, if the answers to such massive economic problems were so simple, it would have been done already.

• If you invest, read this post on why you should avoid easy investing tips. The tl;dr summary is, do the research yourself because there’s no such thing as easy money. (Aleph Blog)
• Fighting in Gaza started again. Really, I admit I’ve given up hope on this issue. (BBC)
• Another shooting in the St. Louis area, but I am withholding judgement on this one until I have more details. I hate when everyone jumps to conclusions based on initial reports from journalists (see CNN’s reporting, for examples of why not to trust the media). (BBC)
• Some interesting points on the age-old question of what gives money its value. (Pragmatic Capitalism)
• Before I provide the link to this next article, I need to clearly state that I think IQ is bullshit as a measure of intelligence. However, bullshit measures aside, this is a good piece about why discipline is more important than intelligence when it comes to investing. (Farnam Street, credit to Abnormal Returns for referring me to this article)1
• Not sure how I missed this article from Noah Smith on the 12th. How counter-productive is name-calling in arguments. (Bloomberg View – Noah Smith)
• An incredibly shocking <sarcasm> article by Barry Ritholtz. How to Spot the Garbage in the News. I’d suggest assuming that what you are reading is bullshit until it proves otherwise, but his approach works too. (Bloomberg View – Barry Ritholtz)
• Damn it! It figures that the industry would become soft before I get out of school. Working less than 100 hours a week!!! Bullshit! I mean, I’d have to get a social life and all that crap. (Dealbreaker)
• I admit, many of these issues go over my head given my limited understanding of the law. However, I’m inclined to say that the anti-discrimination law does not impose an unreasonable burden in this situation. Your private beliefs shouldn’t allow you to cut off services to a group based on racial preference or your views on gay marriage. Again, it’s beyond me to speculate too much, but how would this be different from redlining in a legal sense (aside from not having to do with banking)? (Overlawyered)
1. I try to avoid linking to articles that the biggest aggregators already link to because that doesn't provide anything unique. However, it's hard to avoid at least a little overlap sometimes. I'll only mention the aggregator if I found the article on their site, but not when I find it on my own.

# Credit Default Swap ETFs

I have a new article on Seeking Alpha about the new credit default swap ETFs: TYTE and WYDE. Here’s the link.

• A few updates on the Michael Brown story. First, he was shot at least six times according to the medical examiner (BBC). The video below is John Oliver’s take on all this.

• Vox seems to think that this will lead to the end of white political dominance in Ferguson’s government. Honestly, I have my doubts about that. Starting with that Vox misses what the New York Times article they quote is saying will help the situation. The Times article argues that consolidation of the smaller municipality would help empower black residents politically, and I agree with that analysis. What I don’t think will happen is what the article on Vox argues, that the events of the past few weeks have ended the indifference to politics. The idea being that voter turnout will be higher and the balance of power will shift. I doubt that and Vox is nice enough to give the reason they are likely wrong “And while many of the deeper issues in American society exposed this month are unlikely to be resolved any time soon, this one is.” It takes more than just votes to form a successful government, and blacks in Ferguson are disadvantaged beyond simply lacking money for a campaign. The poor often lack the qualifications for many government positions, just another example of systemic inequality. The Times article gives other reasons, so I’ll leave it with one example. It just seems overly optimistic to assume that an entrenched power structure will fall so easily. However, I find myself hoping that I’m wrong.
• Demilitarizing the police (Overlawyered).
• On to a lighter topic, Cullen Roche seems to believe that the theory of “secular stagnation” is overblown (Pragmatic Capitalism)
• Fine, one other article on the Michael Brown story. Does the alleged robbery of a liquor store matter in court (popehat).
• Josh Brown explains everything you can every need to know about the financial media (The Reformed Broker). Hint, think “law of non-contradiction.”
• The deep questions for today: Is it legal to eat a shark? What about if you feed said shark to the homeless? Apparently, there are answers to both questions. Clearly, I don’t know a lot about legal issues (FindLaw – Legally Weird).
• Finally, when you do things that are illegal, don’t post pictures on Facebook. No matter what you did (Lowering the Bar).

• Rick Perry has been indicted for “abuse of power.” I can’t say I’m too upset over this having lived in Texas for most of my life…(BBC) and (Vox)
• “Really, I also find myself accidentally tapping satellite phone calls made by the US Secretary of State” the NSA to the German intelligence agency…(BBC)
• I’ve learned a bit from reading blogs about legal issues, here’s an update on a few of the nice things people do to each other…(Popehat – Ken White)
• If you happen to enjoy quantitative topics, here is some reading about factors driving the performance of momentum strategies…(CSSA – Part 1) (Part 2)
• Why long-term investors beat short-term traders. Hint, think taxes…and beating the market is really hard…(The Big Picture)
• Study says people shouldn’t spend more than 5 consecutive hours together. Total bullshit, 5 seconds is enough to cause long-term health problems…(American Journal Of Medicine The Onion)
• Unlike the supermarket, when stocks are really “on sale” with “huge discounts” it doesn’t mean it’s a good idea to buy. It’s a bit like finding filet mignon selling for \$0.05 per pound. There’s a reason for a low price, figure out what that reason is…(The Aleph Blog)
• I haven’t yet found the capacity to comment on the next two articles, other than to hope to god I’m still sleeping and none of it is real. A man was arrested for an outstanding warrant for a different person, beaten badly, then the officers tried to charge him with bleeding on their uniforms. On top of all that, it was the Ferguson police department. I really can’t find words for this now. (Overlawyered) (Lowering the Bar)
• On a lighter note, XKCD is always there to answer the world’s most important questions, this week: “What would be the most expensive way to fill a size 11 shoebox (e.g. with 64 GB Micro SD cards all full of legally purchased music)?…(XKCD What-If)
• I’m sure you’re holding your breath as you wait for the next piece of news on Argentina’s legal problems…(BBC)