Advisor EQ vs IQ

The man, myth, and legend, Carl Richards, recently tweeted:

And I could not disagree more.

Richards is right, that there are plenty of otherwise good advisors who can’t communicate expert ideas at a beginner level and fail to connect with (especially) their less financially-fluent clients.

But there is another side, and I’d argue at least as important and more numerous, which is made up of advisors who are great at sounding convincing, but couldn’t calculate for the time value of money if a financial calculator hit them on the nose with NP, PMT, INT, and FV already punched in.

These are the kinds of shucksters who make calculations for 60 years out and don’t bother to discount the number for inflation or opportunity cost. I’ve talked with many of them, and frankly I think it’s less of a Sinclair problem and more of an intellectual firepower and technical skills problem.

To be fair, I think EQ has probably been underrated for a long time in most advisory professions (tax, law, finance, etc.), but it doesn’t seem to me to be the case any longer.

Somebody Asked Oxfam Questions

And Oxfam (which sounds like what millennial gym-friends might call each other) answered. They did not disappoint. That is to say, came off sounding one-toned and ignorant of their obvious disconnect from reality.

If it turned out that Oxfam was a strawman propped up by multinational firms just to make their detractors look incompetent, it wouldn’t be a surprise.

4. Oxfam talks about inequality but you pay your bosses’ fat-cat salaries – isn’t that hypocritical?

Oxfam is a confederation of 19 member organizations. The salary that each Oxfam pays to its own Executive Director differs – reflecting the size of the organisation as well as national market realities. In each case, the salary paid is entirely consistent with the individuals’ responsibility for running an organisation that is part of a major international humanitarian and development campaigning NGO.

As Tyler Cowen would say, market-based compensation for me but not for thee.

Next up, Oxfam conflates giving to charity and tax-dodging.

F#$% the Home-mortgage Interest Deduction

H/t to David Henderson for his link to this WSJ post from Hugh Hewitt on why, though he admits it is bad in theory, he thinks in practice eliminating the HID as the GOP seems to be posturing to do is a bad idea.

I’m here to put my stake in the ground in the “F!@# the HID”-camp.

Hewitt’s point is a little bit subtle, but to my reading basically boils down to two points:

  1. An immediate elimination of all or most of the HID would be unfair to recent homebuyers, or at least perceived that way.
  2. Eliminating the HID in such a way would harm the GOP.

I think its far more unfair to everybody in the country to continue a policy of economic distortion that tends to favor the wealthiest (and most creditworthy) than it would be to reverse such a policy. In fact, I would make the argument that the risk of HID elimination is priced into the market, and we would see even further distortions with a long range phase out like the kind Hewitt mentions.

There are far better ways to subsidize home purchasing than through a deduction that helps those with access to credit, which has increasingly been the very wealthiest.

In economic policy, it seems to me that ripping off the bandaid is almost always preferable to setting up a slow future change if only for the reason that most things that should happen in politics never do, and getting something done, even if the optimal solution was to do it over 10 years instead of 1, is better than the probability weighted chance that you get the optimal outcome versus, for instance, the next administration repealing your plan within 10 years.

Kevin Erdmann has a good post that touches on the HID as he discusses the arbitrary advantages that exist today for owning a home.

If eliminating the HID forces some people into homes they can afford with smaller mortgages, that will push prices down, which will be a benefit to renters, either through lower costs to buy a home or lower rents.

I do not find the argument persuasive that we should continue a policy that creates distortion simply because people have taken advantage of that distortion and would now be harmed if it were undone.

Stock Markets in a Clinton vs. Trump World

Tyler Cowen has a very stimulating piece on doomsayers missing an opportunity to sell short the markets. I think his (perhaps strawman) argument is correct for those whose views he portrays accurately.

However, I think most people are thinking about Clinton vs. Trump more like this:

Meaning: a Trump victory heralds a wider range of stock market outcomes. Tyler might argue that someone who believes that has an opportunity to trade volatility through VIX, but VIX measures a very specific kind of volatility which is far from a necessary condition for a decline in markets.

Another possible answer to Cowen’s question about why people aren’t putting their money where their mouths are is that most of the people merely expect worse outcomes for the stock market, but not negative returns. If we knew for a fact that for 4 years under Clinton the market would go up 10%/year and for 4 years under Trump the market would go up 8%/year, what would the appropriate strategy change after a surprise Trump election be? Probably not much.

Now clearly this doesn’t affect Cowen’s main claim and question:

When Donald Trump was elected president, some prominent economists predicted disaster for the stock market.

are Trump doomsayers obliged either to stick with that prediction and short the market or to tone down their rhetoric?

I don’t actually know who any of these people are (are we talking about Krugman?), which is probably some combination of my ignorance and Tyler thinking of people as prominent that I don’t follow closely. (And I’d confidently put myself in the 95th+ percentile of people who follow prominent economists.)

I do know of plenty of people who claimed a Trump victory would be a human rights disaster, and while obviously less measurable than the stock market, I think a ‘correction’ for human rights would be just as damaging to society as a correction in the markets.

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Consumption vs. Investment (and IPO vs. Secondary Market)

Scott Sumner answers what I imagine is an extremely prevalent question about the difference between consuming and investing.

I have read your site for years, but this is the first time I felt compelled to ask a question: some friends and I were discussing the various benefits to society that would accrue from say, my purchasing a product, vs investing the same amount of money in the stock market. While I know, at a high level, that investment is necessary to grow the economy, I had a more difficult time explaining the specific mechanism by which the action of “I buy 100 bucks of index funds on Vanguard” translates to “investment” in the economy. We were easily able to understand that if I buy a 100 dollar widget from Widget Corp, that benefits that company (and the economy), which now has $100 more to spend on wages or machines, but I am having difficulty coming up with a similar concrete sequence of steps for the 100 dollar stock investment.

On a larger point, I think this reflects part of the skepticism and suspicion that people have towards the stock market, particularly from the crowd that throws around terms like “gambling” and “speculation.”

Scott responds by reframing the question and explaining what ‘saving’ really is.

This is a surprisingly confusing subject. Consider the sentence that begins “We were easily able to understand . . . “. In fact, I don’t think they do understand, as money spent on wages and machines is not a benefit to the economy, it’s a cost. The benefit comes from consuming the widget. In the examples that follow, I’ll assume the $100 widget is a meal at a restaurant for the Moore family.

Before considering Brian’s stock market question, suppose he were trying to decide between spending the $100 on a meal, or spending it on materials for a new front sidewalk. The meal is considered consumption, and the new sidewalk is investment, because it’s durable and yields a flow of services for many years, or even decades. The money spent on the sidewalk is called “saving”. In either case, output gets produced and the effect on GDP is roughly the same, in the short run. In the long run, GDP will be a bit higher with the sidewalk investment, as it will continue to produce a flow of services for many years.

One more thing to address is a distinction that Scott doesn’t touch on in the post. Scott goes on to discuss giving $100 to a company that installs sidewalks, and presumably will install more sidewalks because they have that $100. That is confusing to people in the “thanks for the tip”-zone, because most people think of the secondary market when they are thinking of buying and selling stock. In the secondary market, buying a share of XYZ Corp doesn’t put any money in their pocket to aid the building of sidewalks.

Actually, most people confuse these over and over and don’t have a coherent schema for thinking about how the flow of money in markets actually works — evidenced by many people who don’t want to “give money” to companies whose business practices they don’t like. The better reason not to buy shares of a company is that one wouldn’t want to be an owner of a company they don’t like and can’t change, which is fine, but suboptimal in my opinion. I digress.

The point that I wanted to add to Scott’s is that investments in the secondary market, even though XYZ Corp isn’t actually getting your money to build more sidewalks, also (as Scott says) ‘works on average’, because the cash you use to buy the shares go to somebody else who uses that cash to either consume or invest, which also works on average. Those dollars will eventually go either to someone consuming or investing in ‘sidewalks’ directly until equilibrium is reached.

As a brief example, if Scott owns 1 share worth $100 of NGDP Corp, and I can either spend $100 on lunch or buy $100 of NGDP Corp on the open market. I go to buy the stock and Scott is the lucky fellow with his ask price at $100. Scott was selling his share because he was hungry, so he goes to buy lunch. Nothing changed except the ownership of NGDP Corp, and $100 was still spent on lunch.


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Bad Journalism 101

A guy I like to follow, Jon Favreau, recently linked an article from AP titled: “Trump voter lost her home to new treasury secretary”.

There is so much wrong with this article that I scarcely know where to start. First of all, I get it, that headlines are sometimes sensationalized, and that there is a very appealing chance of going viral by having a bit of left-leaning schadenfreude. As far as I can tell from the article itself, the only thing accurate about the headline is that the woman in question voted for Trump.

Let’s dig in a bit.

OneWest, a bank formerly owned by a group of investors headed by Mnuchin, had foreclosed on her Los Angeles-area home in the aftermath of the Great Recession, stripping her of the two units she rented as a primary source of income.

Slowly now: a branch of a bank that made her a loan foreclosed on that loan after she couldn’t pay it. Mnuchin and many others, including notably excluded George Soros and John Paulson invested in OneWest after it filed bankruptcy in 2009.

The kicker, this wasn’t even just a primary residence, she rented out two units. On at least some level, this was an investment property.

Interpretation later confirmed, she took on more debt to increase her rental portfolio:

She rented out two of the units and lived in the third. Colebrook refinanced her mortgage in order to renovate the property and help buy additional homes to generate rental income.

So what exactly was the problem?

By the time the financial crisis struck in 2008, she had an interest-only mortgage on the triplex known as a “pick-a-payment” loan. Her monthly payments ran as high as $2,000 and only covered the interest on the debt.

Now, I don’t know the details of the contract that the person in question had with the bank, but let’s assume it was close to market, which would have meant a rate at or below 5% by that point. If she’s making monthly payments of $2,000, she owes about half a million bucks. From earlier in the article:

In 1998, she bought a triplex for $248,000 in Hawthorne, California, not too far from Los Angeles International Airport.

Admittedly, I can’t tell if this is the triplex we’re talking about, because the writing is bad and vague, but I assume it’s not some bait and switch.

So she took out about twice as much debt as the original value of the property to make more investments. What happened next?

“All my tenants lost their jobs in the crash,” Colebrook said. “They couldn’t pay. It was a knock-on effect.”

This has literally been the risk of owning rental real estate since the beginning of time, that your tenants will not be able to pay. It has almost nothing to do with OneWest, who would have much preferred she just pay her mortgage, and even less to do with Mnuchin. This is exactly what banks do.

So what’s the moral of the story? That if you lever up with as much money as anybody will let you borrow to buy more investments that you might get hurt if there’s an economic downturn? That Mnuchin is part of some terrible group of people for being part of a group and buying a bank at auction after the crisis and then running it like a bank?

One final point (the voter talking about Trump):

“He doesn’t want the truth,” she said. “He’s now backing his buddies.”.


In 2004, he founded a hedge fund, Dune Capital Management, named for a spot near his house in the Hamptons. The firm invested in at least two Donald Trump projects and, in one of them, was sued by Trump before a settlement was reached.

I can’t take this garbage form of journalism seriously. It said absolutely nothing, mixed facts with commentary, ignored the economic realities of life, and had a title that bore little resemblance to the facts.

It’s more important than ever to be a critical reader of what articles actually say. Blindly trusting headlines to be accurate has never been a good way to form opinions or consume information, but in 2016 that’s more true than ever. When it comes to ‘fake news’, as far as I’m concerned, pieces with no connection to reality are just as bad as total fabrications, at least lies are easier to spot.

Disclaimer: I didn’t vote for Trump, but don’t have any sympathy for people surprised that the man without a plan isn’t doing things the way they expected.

Thoughts on Things

The always interesting Ben Carlson put out some things he doesn’t understand, and I have thoughts on them, so I figured I might as well put them on the internet. Much easier than coming up with an original post.

Why has the average credit card rate remained at ~15%? Interest rates on mortgage, bonds and car loans have all fallen drastically since 2007. Why not credit card rates? I understand these rates need to be higher but why has the spread compared to other credit instruments not compressed at all?

I mean, from the link provided, it looks like spreads did compress on interest paying accounts (which I think the the metric that matters here) by a point or so. I’d guess it didn’t move as much as other things because many people who became interest payers lost their jobs, and [source needed] those people had the hardest time in the recovery.

What’s the endgame with Bitcoin? I’ve read that it’s going to revolutionize online payments as we know them…or it’s going to be a complete failure as a currency that’s over-hyped by techies who hate the government. I have no idea on this one and wouldn’t be surprised by either outcome.

Now this is a good question. The zeitgeist has been quite certain that bitcoin was the medium through which the panacea of the blockchain would reach the world. My guess is that it is myspace to an unknown facebook as far as currencies go.

Why aren’t there seat belts on every bus in America? I’ve seen the videos where the kids get thrown around like rag dolls when a bus gets into an accident. We have to wear seat belts in cars and kids have to sit in a car seat until like age 15 these days, but they don’t need to wear a seat belt on a bus?

I believe the better question is, why not make buses more dangerous?

Why do investors always ask if it’s time to sell stocks after they’ve fallen and then ask if it’s time to buy after they’ve risen?

I actually see a fair mix of this question from clients — it’s the pundits who are most guilty of being completely beholden to following the momentum of the market.

Let’s say you’re a pension invested in Bill Ackman’s hedge fund – How do you explain to your investment committee what your strategy is for that allocation going forward? Ackman’s track record is phenomenal but he obviously has blow-up potential and risk management issues. He’s put his investors in an unenviable position.

Hopefully the investment committee (and the board) were well prepared ahead of time for the potential of something like this. I don’t think there’s an ex post facto answer.

Does premium gasoline really make a difference versus using regular? How about paying $15 for the super car wash versus the $5 express wash? It seems to me that both of these options are the result of marketing over improved quality.

I have no idea if the premiums make sense, but I’m sure there’s a reason race cars and airplanes use different octane gasolines than regular.

How do negative interest rates affect debt-to-GDP ratios? Shouldn’t the debt-to-GDP ratios be going down for all of these countries offering negative interest rate-paying bonds because they’re not paying any interest on their debt?

All else equal, a negative interest rate bond would represent less debt than its interest rate bearing counterpart, but it’s still mostly the same, a -1% bond and a 1% bond are still going to represent something close to face value worth of debt.

Why do people these days think in such extremes? We’re constantly focused on predicting regime changes and black swans. Everything has to be the greatest or worst thing ever. Markets are always either at top or a bottom. Everything is either over- or under-rated. Nothing is ever properly rated these days.

Everyone is a contrarian.

If the 1990s were so great, why were the people still so miserable? The best pop culture movies from that decade (in no particular order) are probably:

  • Reality Bites
  • Singles
  • Beautiful Girls
  • PCU
  • Swingers

Everyone in these movies was unhappy.

The 90s saw one of the greatest booms ever. Markets were up big. Economic growth was strong. Inflation was subdued. Jobs were plentiful. Nostalgia can cause people to assume that the past was much better than it really was, but even when things actually are pretty great, people probably still won’t be very happy.

Clearly the 90s are overrated.

Why haven’t we seen a mutual fund manager who embraces both active and passive management? They could invest something like 75-80% of their assets in the benchmark ETF or index fund and the remaining 20-25% could be used for concentrated stock picks. Wouldn’t this be better than the current crop of closet index funds?

Uh, I think the answer is that if people wanted 80% of their assets in the benchmark they could do that themselves. This seems unnecessarily complicated. Might be better than closet index funds though.

Why is there no robo-advisor in the real estate business yet? Real estate agents are still earning 5-6% commissions and house hunting can now be done online. Why has this industry not been disrupted yet?

Real estate commissions are hilarious, I can’t believe them either.

Why do companies get blamed for “missing expectations” when they release quarterly earnings numbers and not the analysts who create those expectations? Why don’t they ever say, “analyst expectations missed the actual results again”?

Because most people who report on finance haven’t got a clue.

Why isn’t there a national holiday on Thursday and Friday afternoon during the first weekend of March Madness? No one is getting any work done anyways.

Sign me up.

Why don’t more sell-side research analysts practice technical analysis? It seem that they’re all fundamental analysts who set price targets and tell you the value of a stock based on their discounted cash flow models, but they can rarely tell you when it’s a good time to buy or sell the companies they follow. It’s not like their track records could get any worse, right?

Because being a sell-side analyst is all about minimizing the amount of times you’re wrong.

Why are our dogs always so excited to see us when we get home? Every single day it’s like my dog and I have a reunion that feels like my she hasn’t seen me in years.

Maybe because they’re really young? I don’t have any kids, but do they have the same reactions at similar ages? If you’re gone for 10 hours for a 5 year old dog, that’s the same % of their life as being gone for 100 hours for a 50 year old human. And dogs are the best.

Before Google existed, did people just walk around saying, “I don’t know…” all the time?

I assume they must have.

Why aren’t subjects like personal finance, coding, psychology, leadership, problem solving and statistics mandatory in all of our high schools?

I’m thoroughly convinced that having a working knowledge of statistics would do more to get poor Americans out of poverty than almost anything else. It applies to everything.

Why do so many people assume that a politician can either solve or cause all of their problems?

Well because complex problems have complex answers, but if the problem is one person, it can easily be solved.