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Category: Look away – a random thought is coming

How the Collapse of an Economic Bubble Helped Charles Darwin Prove His Theory of Evolution

How the Collapse of an Economic Bubble Helped Charles Darwin Prove His Theory of Evolution

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(It’s probably not a secret that I enjoy finding examples of economic bubbles. So here’s a pretty obscure one, courtesy of some recent readings on chickens.)

Not many people remember the chicken bubble of the mid-1800s. Variously referred to as ‘The Fancy’ or ‘Hen Fever,’ the movement saw thousands of newly-minted middle class families rush to purchase rare varieties of chicken. Those birds came with wondrously exotic names such the ‘Sultans’ imported from Istanbul, ‘Great Javas,’ or ‘Cochin-Chinas,’ which were rumored to resemble ostriches in their size and feathered legs.


  • From Geo P. Burnham’s ‘The History of Hen Fever,’ published in 1855

Hen Fever reached its height by 1849, with breeding pairs of ornamental birds going for thousands of dollars in modern money at poultry shows. Across the U.S. and Great Britain (Where Queen Victoria’s early passion for a couple of of rare chickens had helped ignite the craze) polite parlours were apparently filled with fluffy-feathered talk of hen breeding.

When the bubble burst in 1855, the prices of fancy chickens plummeted — putting them in reach of one Charles Darwin and a host of competing biologists and theologians. By then, Darwin had returned from his famed trip to the Galapagos and was feverishly incubating his ideas on natural selection.

From Geo P. Burnham’s ‘The History of Hen Fever,’ published in 1855


Armed with wild Red Jungle Fowl from Southeast Asia and a newly cheap and varied supply of domesticated chickens, Darwin was able to show that the wild red birds could successfully breed with ‘fancy’ fowl to produce fertile offspring — suggesting that the modern supply of chickens wasn’t a separate species to its jungle cousins and in fact, had probably originated from it. He argued human intervention through generations of selective breeding likely accounted for the many features found in domesticated chickens, be they an snowy white coloring or feathered legs.

Chickens got short-shrift in Darwin’s famous Origins of Species when it was published a few years later, but they helped him firm up many of his ideas on adaptability and genetics.

It’s worth mentioning here that Darwin’s exact conclusions when it comes to the humble chicken are still being debated to this day — with researchers at Uppsala University arguing that grey jungle fowl also donated some genes to domesticated chickens.

Regardless of how you feel about the humble chicken’s origins, it’s fair to observe that an economic bubble almost contemporaneously described as unsurpassed in “ridiculousness and ludicrousness,” helped provide the raw materials for one of the most important scientific breakthroughs of all time.

For more – check out:

Why Did the Chicken Cross the World? by Andrew Lawler, and The History of the Hen Fever : A Humorous Record, published in 1855, and the source of the above images.

Fair wages for robots

Fair wages for robots

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No, seriously.* Hear me out.

Citi’s Willem Buiter offers one possible explanation to stubbornly low-inflation, and by extension, sluggish economic growth. Here’s the excerpt:

“We draw attention to one additional hypothesis: that we underestimate the amount of slack in the economy not primarily because we underestimate the amount of slack in the labor market or overestimate the degree of utilization of tangible capital but rather because potential output can be boosted greatly at effectively zero social marginal cost and without increased use of labor and tangible capital, through the use of new production methods based on recent advances in information technology, machine learning, artificial intelligence, big data, the internet of things, robotics, automation, autonomous machines and nanotechnology.

Because the value added in many of these new activities is mostly pure rents (returns to genius, luck and monopoly power) the distribution of income and wealth created by these activities is increasingly unequal. That weakens the aggregate marginal and average propensity to consume. Unless this shortfall of demand is made up for by increased consumer demand through fiscal redistribution towards households with higher marginal propensities to spend, or by capital expenditure, public consumption or net exports, some of the potential output gains may not materialize but turn into excess capacity and a growing (or at least larger than expected) output gap. Lower-than-expected inflation is the result.”

As Paul Caple pointed out on Twitter, there’s a simple mismatch at play here. Advances in technology mean you can boost potential output without the need for (mere) humans, yet consumption remains a human-driven activity. With more profits accruing to owners of capital — the Piketty-esque element in Buiter’s argument above — consumption drags. After all, there’s only so much a billionaire can spend, much as they might try. Meanwhile, the proximate cause of greater potential output is paid nothing, and presumably contributes nothing to consumer demand beyond potentially making goods more affordable or producing them more efficiently, which may or may not encourage people to by them (As the cycle of improvement continues there’s only so many times you’re going to upgrade your TV. iPhones appear to be the exception here).

The solution is simple: pocket money for robots.

A politically-unpalatable solution for sure, but think of the “fiscal redistribution” that could be achieved. The nuts and bolts spending, if you will. Unlike human beings, robots can also be programmed to spend consistently, thereby avoiding the over-savings problem that has plagued the 2000s. So long as the robot-owners don’t extract the wages as rent. And so long as the robots themselves don’t go off the rails: I can save I I everything else to me to me to me to me to me to me to me to me to me.

http://gph.is/218Fagk

*Readers assume all responsibility for taking this seriously.

Flows before pros?

Flows before pros?

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A recent Barron’s interview with James Montier got me thinking. In it, the GMO man answers a question about lofty valuations across both bonds and stocks that have caused consternation for asset allocators seeking good value in the market. In response, he says: “The US market is at its second or third most expensive point in history. So people are saying, ‘I either don’t understand the world anymore, or I don’t think that valuation matters anymore.'”

I think he has a point but maybe not the one he means. Valuations do matter because in a world of inflated asset prices but suppressed actual price inflation or economic growth, they’ve become the easiest and most surefire way for investors to generate outperformance, and so, that is what they are chasing. I still think Citigroup’s Matt King put it best, when he argued two years ago that something fundamental had changed in the market’s behaviour.

The crux of this argument is that markets used to be self-limiting. Prices of securities would move up to a point where their yields would become unattractive, at which time investors would trim some of their positions, causing prices to go down and yields to recover. Now the intense search for returns has altered that dynamic, with investors chasing inflows as a means of getting higher prices and higher profits.

While the notion that  value investing is disappearing in a market that has moved ever upward for the past five years is not exactly new, King’s presentation here is stark. Investors have been moving in tandem, he says, making markets far more homogenous. The chart below shows investor positioning in credit markets, where the number of longs has vastly outnumbered the shorts, along with the International Monetary Fund’s herding metric. In short, investors across a number of asset classes are going mooo as one-way positioning dominates…

We often say the market can stay irrational longer than you can stay solvent. Maybe the updated version should be that the market can self-perpetuate for longer than expected.

On Twitter

On Twitter

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The short version: I had a busy day on Twitter today.

The long version: About five years ago I had my first existential crisis with Twitter. An old-school American news editor did not seem to like the thing and could not understand his fellow journalists’ fascination with the product. Some six years into my career at that point, and three years on the platform, this was the first time I had heard an editor express a cogent argument about the negatives of social media use.

We were spending too much time on it at work, he said, repeating an obvious critique. But his idea that we were potentially prioritizing our opinions and personal brands at the expense of the wider newsroom was a new one to me. For years, as a young journalist working at a relatively tech-savvy media outlet, we had been told to do just that. Twitter was a way to get your name out there, build up a reputation that would ultimately reflect well on your news organization and – most importantly – maximize the number of people who would read and reflect on your work.

Fast forward to today and my second existential Twitter crisis, caused by watching a fellow journalist accumulate thousands of fake Twitter followers, seemingly with no one but myself actually noticing. This bothered me for a number of reasons which, in true meta fashion, I have tweeted about.

Since we’re talking social media; let’s start with me. I felt that accumulating fake followers undermined other journalists who had worked hard to build up an organic following. It also cast into serious doubt some career advice I had been giving already to younger journalists – namely that they could expand their horizons and job potential by building up influence via Twitter and other platforms. Finally, there’s the more lofty goal. In an age when the credibility of the media is under attack and the lines between ‘real’ and ‘fake’ news are increasingly blurred, it seems unlikely that  journalists teaming with bots to purchase influence will be well-regarded.

Reactions on Twitter ran the gamut from outrage to virtual shrugs.

While plenty of people seemed to share the concerns I had outlined above, many thought purchasing fake followers to be a legitimate social media strategy. A literal ‘fake it ’till you make it’ approach and one that could have a high likelihood of paying off as your robotic followers were gradually replaced with real ones. One person commented that he knew of people who had been rewarded for fake followings with internships.

Many also pointed out that you can ‘tell’ when someone’s purchasing fake followers. I don’t think that’s necessarily the case and, more importantly, I have rarely seen someone follow up the words “they have so many Twitter followers!” with “but their engagement is very low.” (I would probably hate this person but I would also appreciate their thorough social media analysis). Yes, a lack of retweets or likes contrasted with a huge following suggests some sort of discrepancy but nowadays you can buy engagement too. As I was about to find out.

David Taggart, of the Macro Trader, took it upon himself to teach me.

https://twitter.com/DavidTaggart/status/853838933486059521

Using a site called Fiverr, David spent $5 dollars to send a bunch of retweets my way. I still don’t understand how this works. David’s description of the site – “For $5 you can freak people out. I love it” – differs somewhat from what Fiverr itself says: “Fiverr is the world’s largest freelance services marketplace for lean entrepreneurs to focus on growth & create a successful business at affordable costs.” Whatever the thing actually does, I can tell you that within a few hours my original tweet had been retweeted a couple thousand times, making it by far my most popular online musing ever and making my Twitter account guilty of the very thing I had been criticizing.

Who are the retweeters, you ask?

Well, there’s Lori Jean-simon, who seems to like both me and a carpet-cleaning company:

Or Donnette Blondell (great name) seems to be really into me and Mexican actresses.

And, of course, more eggs than you can take a crack at counting.

Here’s the thing. Influence has always been a tough concept to capture and the idea that we would be able to do so through a simple number – such as Twitter followers – is simplistic but enticing given the human mind’s need for certainty. There’s no easy solution to this. My busy day on Twitter meant that I learned an important lesson in the malleability of one of the world’s most popular social platforms (business model much?) while ultimately becoming the thing I so disliked.

Do I feel better about the journalist buying fake followers knowing that I could so easily do the same? Not really. There is one thing I do take some comfort in, however, and that is the knowledge that one of my real followers deemed me worthy of a little time and a few dollars.

Ultimately, only your real followers would be willing to buy you fake ones.

(Please don’t buy me any more fake followers though. Seriously).

An experiment

An experiment

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I said earlier that I have a theory that you can replace the term “distributed ledgers” with “shared Excel sheets” in about 90 percent of talk about blockchain and finance. I wasn’t joking.

“A shared Excel spreadsheet is a record of transactions or other data which exists across multiple distinct entities in a network. The spreadsheet can be wholly replicated across participants, or segments can be partially replicated across a subset of participants. In either case, the integrity of the data is ensured in order to allow each entity to rely on its veracity and to know that data they are entitled to view is consistent with that viewed by others entitled to view the same data. This makes the shared Excel spreadsheet a common, authoritative prime record — a single source of truth — to which multiple entities can refer and with which they can securely interact.”

That’s from a certain blockchain paper. You could tweak the language to make it a little more accurate – “password-protected Excel spreadsheets whose earlier entries cannot be edited” or some such, but the point stands. The reason it stands is because it highlights a major issue with blockchain technologies when it comes to finance — what problem are you trying to solve here?

Centralized databases have existed for decades. Blockchain might be modestly more efficient, but the notion that it’s completely immutable and can never be abused seems open to questioning.

Here’s Christopher Natoli and Vincent Gramoli as written up by The Register:

“The problem: if everyone in a consortium trusts each other, they don’t need blockchains to protect themselves; if they don’t, current blockchain protocols have a flaw that allows a bad actor to game the system.”

 

 

The AAA bubble, deflated

The AAA bubble, deflated

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Half a decade ago, I wrote a post with a rather eye-catching lede. “This, we think, could well be the most important chart in the world right now,” it said.

AAAratings
It went on to discuss the disappearance of triple-A rated securities in the aftermath of the U.S. housing bubble and trillions of dollars worth of downgraded mortgage-backed securities. The disappearance was short-lived, however. By 2009, highly-rated government debt had more than filled the hole left by increasingly scarce AAA-rated securitizations.

“The AAA bubble re-inflates and suddenly sovereign debt becomes the major force driving the world’s triple-A supply,” said the 2011 post, written when worries over the eurozone debt crisis were in full swing. “It’s one reason why the sovereign crisis is well and truly painful.”

Frances Coppola has a much more recent post that reminded me of this.

It features a chart from the rating agency Standard & Poor’s, which forecasts that triple-A rated sovereign debt will essentially become an endangered species by 2050 thanks to a rise in government borrowing.

sandp

Coppola makes a good point here. “It’s a great chart. But what it is really telling us is that S&P’s way of assessing the creditworthiness of sovereigns belongs to a bygone age. In the new world, junk is safe, debt is an asset and investors fear governments. So ratings will be meaningless in future, and ratings agencies, redundant,” she concludes.

That said, I do wonder about the need and ability of the financial industry to re-engineer ‘safe’ securities with top-tier credit ratings, given the degree to which such ratings are still (incredibly!) embedded in our financial system – from liquidity buffers to central bank asset purchase programmes. For this reason, I would dearly love to see an updated chart encompassing all fixed income.

Update: A few days after this post, Gary Gorton and Tyler Muir published a related BIS paper on collateral shortages. Check out the write-up here.

The oil bubble?

The oil bubble?

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There are perhaps, two hallmarks of an asset price bubble. Both happen after the fact, or as the bubble is bursting. Actually, one could easily argue that bubbles only ever materialize after they burst; only then is the bubble that inflated under everyone’s eyes transformed into something other than a really “good bull run.”

Back to the hallmarks. The first is that the majority must agree it was a bubble. The second is public outrage and regulatory actions that arise as unsound business practices built on flimsy assumptions begin to unravel (think, for instance, of the collapse of Bernie Madoff’s ponzi scheme in the aftermath of the 2008 financial crisis).

Neither of those has materialized just yet when it comes to the energy sector, but it feels like they are getting closer.

To wit, the subtle change in the narrative regarding oil prices – not from how much further they will fall but to why did they get so darn high in the first place?

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Whatever happened to Europe’s sovereign-bank loop?

Whatever happened to Europe’s sovereign-bank loop?

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Back in 2010 I wrote an FT Alphaville post called “Europe’s grim sovereign-bank loop.”

It was, to my knowledge, the first use of the term and one that has since been employed by many analysts, regulators and policymakers’ to describe the intermingling of Europe’s banking system with Europe’s sovereign debt crisis. Alastair Ryan and John-Paul Crutchley, then bank analysts at UBS, were the first to identify the trend of banks of using cheap financing from the ECB to buy and/or repo government bonds. This carry trade ultimately gave birth to the so-called sovereign-bank loop, in which the deteriorating fortunes of eurozone periphery governments weakened eurozone periphery bank balance sheets and vice versa. Four years later and it’s worth asking what happened to the loop?

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