Moontower #58


The last time I watched Curb Your Enthusiasm regularly I didn’t even have a Facebook account. It was was one of my favorite shows, but I’m not that committed to keeping up with TV. So stop me if the following phenomenon is something Larry David has lampooned. It seems like the kind of thing he would. The phenomenon is a very modern form of cringe.

The moment you find a conspiracy theory boosted on your friend’s timeline. You know the feeling. “Ewww. Really? You think 5G spreads coronavirus?”

If this is all too common on your timeline you can just mute them. That’ll take care of the symptoms, but getting new friends is the only cure for that particular affliction. Luckily, this probably isn’t a big problem for most of you. But it’s adjacent to a far more interesting question.

What if the promoter of an awful idea is very smart?

How to think about awful ideas by smart people

Marvel comics’ Thanos strikes me as a brilliant general. He also wanted to see half of humanity die in what sounds like a militantly green agenda. Based on the return of air quality and coyotes during COVID lockdowns, Thanos’ road to hell is not without good intention and grains of truth. There has always been overlap between brilliance and bad ideas. Nazism, religious fundamentalism, the occult have had their share of genius subscribers. The Unabomber’s Manifesto is a fascinating read.

The above examples are extreme. We can lower the stakes and the tension remains. Have you ever dismissed an idea from a person because your entire perception of them is dominated by a bad idea or prediction they had? But you’ve probably heard that “If you are always right, you are not taking enough chances”. Intolerance for bad takes is not compatible with the experiments of progress. So how do we strike an acceptable balance?

Here are a few  ideas on how to come to your own reconciliations:

1) Slatestarcodex on how to Rule Genius In (Link) (With my highlights)

  • On the scarcity of great ideas: “Coming up with a genuinely original idea is a rare skill, much harder than judging ideas is.”
  • On the asymmetry of the problem: “Positive selection – a single good call rules you in – as opposed to negative selection, where a single bad call rules you out. You should practice positive selection for geniuses and other intellectuals.”
  • On “intellectual outrage culture”: “How can you possibly read that guy when he’s said [stupid thing]?” I don’t want to get into defending every weird belief or conspiracy theory that’s ever been [stupid thing]. I just want to say it probably wasn’t as stupid as Bible codes. And yet, Newton. Some of the people who have most inspired me have been inexcusably wrong on basic issues. But you only need one world-changing revelation to be worth reading.”

2) Elon Musk is a lightning rod. From one angle he’s Tony Stark from another he’s a liar in the tradition of P.T. Barnum. Check Morgan Housel on “Natural Maniacs” (Link)

  • No one should be shocked when people who think about the world in unique ways you like also think about the world in unique ways you don’t like. 
  • A mindset that can dump a personal fortune into colonizing Mars is not the kind of mindset that worries about the downsides of hyperbole.
  • Some people are natural maniacs, and you can’t ask for the maniac parts you like without realizing there are maniac parts that might backfire.

My Take

When you meet a person the context gives you a prior about them. If we met in detention vs meeting in a dorm at Cornell I’m going to ascribe a different starting value to your judgment. In all our relationships, we ascribe something akin to Bridgewater’s “reliability scores” to people’s opinions. You continuously update against a prior.

The question is how hard to update. How sticky is the prior? Getting into a selective college is a form of proof-of-work. Same with a strong SAT score. It’s a useful data point. But the usefulness of that data point decays at different rates depending on our own biases or views. There are over 20 years of reasons why nobody cares how a 40-year-old did on a test on a random Saturday morning in a classroom they’d never seen, with a proctor they’ve never met.

Ultimately how I update is usually domain-dependent. If you are innumerate I won’t transfer the demerits to your views on relationships. But I’m probably not asking you for help with my taxes. I am trying to refrain from taking holistic views of people’s opinions. I’ve aged into this approach. My experience of getting older is that empathy usually makes more sense. Once you have controlled for domain-knowledge, it seems that the difference in people’s views is often just path-dependence. Experience. The more dismissive you are, the fewer chances you get to learn from others’ lives. If you start a conversation with “I’m a Capricorn”, I’ll keep listening. But I’ll stop when the subject veers to stock tips (honestly, if that topic comes up you’ve probably lost me no matter who you are — I prefer type II errors in that realm).

The Stars Among Us

Today, I’m far more sympathetic to athletes and movie stars who squander their money. This is also Bayesian. Stars who shine bright burn for the same reasons they ever had a chance to shine in the first place. We should probably be surprised when stars don’t go bankrupt. We all benefit when talented pursue their dreams against long odds. We should root for them to get guidance when they succeed. Nothing will have prepared them for that. And most of us sensible people wouldn’t know a thing about what it takes to fly close to the sun. Housel ties this all back to his “natural maniacs” in a great essay Getting Rish Vs Staying Rich (Link).

This gets very hairy when morality comes into play. The 80s rockstars I like all seem like bad dates. Then you get R. Kelly and Michael Jackson. Yinh and I just watched Louis CK special that he released on his website. I’m not putting him in the same category as these other people. But the question remains, how do we separate the artists from the art? What responsibility do we bear? Truthfully, I have always put my head in the sand. Rationalizing the artist as nothing more than a conduit for the art. As if the art was always awaiting a host. Not how I think it works, but that’s why it’s a rationalization. A logic that allows me to keep enjoying the music. My friend Rebecca is the biggest MJ fan I know. And as sick he was, as difficult as his own childhood was, she can’t help but acknowledge how his fans’ support enabled him. Support that led to children suffering.

Open to perspectives if you got them. Especially how you draw your lines.

Lord Acton Quotes
There is no error so monstrous that it fails to find defenders among the ablest men. Imagine a congress of eminent celebrities, such as More, Bacon, Grotius, Pascal, Cromwell, Bossuet, Montesquieu, Jefferson, Napoleon, Pitt, etc. The result would be an Encyclopedia of Error.
Judge talent at its best and character at its worst.

The Money Angle

1) Awesome thread relating how shorting fraudulent companies looks like a short option position. (Link)

  • Pairs well with my essay on the brutal math of shorting (Link)

2) The rally in the stock market seems at odds with the real economy’s woes. This thread shows how it can make sense. No fancy theory. It’s just the math of how correlation can buffer an index’s losses when there is divergence in its components. (Link)

3) This is not my favorite topic but it’s impossible to watch the stimulus plans since 2008 and not think about the meaning of money and credit. This tweet-gif reminds us of what is happening. And this tweet-gif will set the appropriate mood before I continue. Ok, here we go. A friend sent me this post because it was formative for him in how to think about the nature of money from first principles. I agree it’s fantastic.

Enjoy Moneyness. (Link) (With my highlights)

Key points that resonated:

  • The distinction between credit (economy’s money) vs monetary base (bank’s money which credit references) and how expanding the base dilutes the credit which rests on it
  • Money is not wealth
  • The difference between accounting plane vs physical plane and his identity relating deficits to balance of payments
  • Gold is not money. It’s a tradeable asset that references money.
  • Hyperinflation is the catch-up period when prices zoom up to match the expansion of the monetary base which it typically lags in the beginning. Requires feedback loop of lack of confidence leading to expanding base more

4) I have been thinking about hedges to inflation. Not because I expect it but because if it happens it will be painful. Same reason I buy homeowner’s insurance. I don’t expect a fire. In thinking about inflation I maintain skepticism of traditional hedges. Not for a specific reason but just because I’m paranoid about consensus solutions to any macro voodoo.

Let me give 2 examples of why I’m skeptical.

1. Elliott Management’s Q1 letter wonders about the conventional wisdom of commercial real estate being an inflation hedge. Yes, it’s a real asset. Yet they write:

Take real estate, for example. Of course, it is “real,” and you might think that it is a slam-dunk to preserve value in a serious inflation. But commercial real estate is a peculiar asset. It looks real because kicking it can break your toes, but it is generally highly leveraged and depends upon the relationship between rents and costs. If there are rent controls or moratoria, formal or forced by circumstances, and no controls on costs, commercial real estate can produce rapid insolvencies. A little thought will reveal many more examples of the complexities involved in a period of monetary destruction such as the one that is possible in the near future.

2. Since the Fed can control the short end of the yield curve it’s reasonable to think a curve steepener trade via options would be an effective inflation hedge under the dual premise that the Fed will be slow to raise rates and they can’t control the long rate anyway. But then I learned about the Fed Yield Curve Control Policy. That’s a mouthful. From an era without acronyms like TARP. I humbly offer FUCC. Not so much because it fits the words that well, but because what it would have done to a curve steepener.

You see, shortly after the US entered WWII, the Fed pinned the long rate at 2.5% to keep borrowing costs low. To an option trader, this means vol goes to zero. You think you have the right hedge on but forgot to read the rule that says the Fed can change the rules. Nothing like getting a prediction right and losing a ton of money on how it plays out.

Last Call

  • I added 3 more notes to the Moontower Money Wiki Start Here section. (Link)
  • Financial theory dictates that you don’t get paid for taking diversifiable or idiosyncratic risks. You only get paid for systematic risks that not hedgeable. I wrote this post to explain the concept to a non-finance friend. It’s an intutive approach rather than a technical approach which I’m not really suited to write anyway. (Link)
  • I have often approached decisions with a “how I would feel about doing X when I’m on my deathbed”. My friend Steve argues that it’s a flawed framework. Pamela surfaced this post which argues that I’m falling for a “deathbed fallacy”. Steve, this post succeeded in swaying me when you didn’t. So I guess we both eat some crow. (Link)
  • Yinh released an awesome interview with Rana Abdelhamid. Rana’s mission and approach are inspiring. I found several interesting ideas in it. (Link)
    • How institutions not individuals are a vector for hate
    • How the simple training she does with her students is the basic unit of work from which she draws her joy and energy to balance the tedious parts of the mission like writing grants.
    • How she relies on a cabinet of mentors to complement her own skills. Fow example, how she has business-minded friends who help her focus on the economics so she can sustainably execute the social work that really drives her.
    • Her journey from being a more militant minded activist to community-focused. Her loving approach shines through on an interview. I can only imagine how Yinh felt when she met her in person.
  • Thanks to James I read Edgar Allen Poe’s short story The Masque of the Red Death. It’s a quick read and highly introspective as we shelter-in-place. Even Prospero turns out to be vulnerable. (Link)

From my actual life 

My younger son Maxen turned 4 yesterday. We had some family over. I realize we are felons now.

Max is my puzzle. My boys fit a common pattern of families with 2 sons. The older one, Zak, is the sensitive type. The rule-follower and pleaser. I can relate to that child well because I was one. But the second son’s personality is a mystery. He is more destructive, stubborn, and manipulative. Birth order effects in play. He’s more advanced. But what’s plain is Max ends up the center of most of our stories.

He’s been known as El Chapo amongst our loved ones for years. And his total obsession with Thanos and asserting his will on the universe is par for Max. He’s a brute. He is so physical with his older brother. And Zak would never hit him back. Zak would cry from frustration before lashing out.

You get strange glimpses of our nature as people when raising such different kids. Max has a devil’s smile. People gravitate to him in a way that Zak doesn’t quite receive. Zak is such a happy kid. A goofball. A pleasure to be around. But Max evokes more emotion. Like you want his approval. Like you can’t wait to see what he does or says next. My mother finds his personality so magnetic and it’s partly because of his wicked streak.

I think one of the great joys of being a parent is watching how these puzzles unfold. I always use the Chris Rock line that with Max I’m saving bail money not college money. It doesn’t seem fair to me that Max sparks so much interest from others relative to Zak despite not being as nice. I think back to when Max was born and we’d send him to the nursery so Yinh could rest in-between feedings. All the nurses warned us of his will. His Hyde-like nature would come out as he screamed for his next feeding. This animal has been nothing if not consistent.

Don’t let that smile fool you.

Leave a Reply