Ross Douthat Having a Meltdown on Twitter

Ross Douthat is having a pubic meltdown over Trump, frenetically posting dozens of tweets in the span of just 24 hours…in 2008, it was ‘Palin derangement syndrome’ for the ‘left’…now it’s ‘Trump derangement syndrome’ for some of the ‘right’.

Here are some of them:

It’s kinda surprising how much he is emotionally vested in the outcome. A couple times he has hinted at holding or sympathizing with ‘reactionary’ beliefs, and he has spoken out against faux cosmopolitanism, so why is he so ardently anti-Trump?

Ross likes the idea of being reactionary, but he fears populism of the form of Trump will possibly diminish his own personal social standing, so he’s sorta conflicted – a form of cognitive dissonance. Ross, who himself epitomizes the intellectual elite, is fine with reactionary government provided people like him, not the uncultured masses, are still able to call the shots.

This is the small dilemma that Ross, Andressen, Thiel and the rest of the financial and cognitive elite face: choosing between leadership that they more closely ideologically aligned with in exchange for possibly lesser social status, or choosing leadership they (the elite) ideologically oppose but are able keep their high social and financial status. In many instances, personal interest (money and status), which tends to be quantifiable, supersedes political and ideological ones, which tend to be vague and unquantifiable, and this choice is understandable because self-interest and self-preservation are powerful forces. Thiel would probably not be happy seeing his stock holdings take a major hit as a consequence of a wight-wing populist crackdown on free trade, for example. If Hillary becomes president, everything continues as it left off, but the the financial elite can still feign outrage, etc. That’s probably why Andressen is actually voting for Hillary, and I don’t begrudge him, because that is the perfectly rational choice for someone of his high financial status.

Ross doesn’t mind Hillary winning because, from the perch of the NY Times, Ross can continue to espouse his somnolent and nuanced, yet slightly edgy and subversive, brand of conservatism as Trump and his emotive, barefaced brand of conservatism exits stage left. Even though this post is slightly critical of Douthat, I actually prefer his rhetorical style over Trump’s.

2004, after the defeat of Kerry, were the halcyon days of the neocon establishment, before everything when to pot in 2006-2008. Buoyed by a steady economy and domestic complacency, in many ways America was close to an autocracy or monarchy of sorts, as Bush, belated heir to his father, was more like a figurehead, who deferred to his staff, particularly Cheney, on the most important matters. Now it’s Obama, the empty suit in the Oval Office, and his invisible VP.

Artificial Intelligence…or Just Software?

AI holds a lot of promise, that may never be realized or live up to its hype. And then there is always the demarcation problem of what separates an actual intelligence from merely an advanced software program (Chinese Room thought experiment). A lot of things that may be classified as AI are merely productivity-enhancing software. If I want to play chess better, a software program can assist me by telling me the optimal move (within certain time constraints) against a hypothetical opponent, but is that intelligence?

– Clinical diagnostics (all types of diagnostics, really,) can easily be performed by AI. In fact, AI is uniquely well suited to that sort of task. Most diagnostic scans — like FDG-PET — can be accurately interpreted by narrow and simple artificial intelligences. Simple complaints — for e.g., a rash like pompholyx — can be very accurately diagnosed via a combination of reverse image search and questionnaire. AIs can interpret blood chemistry and suggest medication. If they have large enough datasets, they can also run meta-analyses, post-marketing statistical surveys, and much more.
…It’s not that they AIs are unable to diagnose disease — to the contrary, I’m convinced they can already do a better job than most physicians — but that there are a hell of a lot of red tape and legal liability issues.

Hmm but is that intelligence…or just sophisticated statistical software that is making an inference from inputted data, and choosing the best outcome when constrained by a pre-determined threshold of statistical significance?

Also, many tasks have not been automated by AI. As for diagnostics, when someone with rectal bleeding (I chose this as an example because it’s a pretty common complaint) goes to the doctor, the doctor defers to a ‘risk profile’ based on the patent’s symptoms, age, medical history, and family history. This profile, which is extrapolated by prior patient data that is complied in a large database, determines the most appropriate course of action for the doctor. But due to litigation, most doctors will error on the side of caution. More or less, a middle-aged man with bleeding, even if there are no other symptoms, will still have to have an invasive diagnostic test performed, the colonoscopy – a long flexible tube that is inserted under anesthesia and connected to a camera. A century ago…and then all the way up to the 80′s, doctors used a short, metal rigid tube. But still, despite decades of technological advancement, including AI, diagnosing still involves direct visualization. Same for diagnosing lung cancer. Or bladder cancer.

Awhile back, Dan Luu wrote a post about AI, using healthcare and customer service as an example:

While replacing humans with computers doesn’t always create a great experience, good computer based systems for things like scheduling and referrals can already be much better than the average human at a bureaucratic institution2. With the right setup, a computer-based system can be better at escalating thorny problems to someone who’s capable of solving them than a human-based system. And computers will only get better at this. There will be bugs. And there will be bad systems. But there are already bugs in human systems. And there are already bad human systems.

If AI is defined to mean ‘a computer performing a cognitive-type tasks’ then, yes, AI has made huge strides and likely will continue to do so, but there are still enormous gaps that may likely never be filled.

Reign of Terror Begins: Twitter Bans Milo

Twitter Bars Milo Yiannopoulos in Wake of Leslie Jones’s Reports of Abuse

This is unprecedented because it’s the first time Twitter has banned the account of a major public figure for alleged ‘TOS violations’. Usually it’s ‘one strike and you’re out’ for accounts with fewer than 10,000 followers, whereas much bigger accounts have a lot more leniency. And celebrities can do anything they want, proving that not all users are equal under the TOS, as if that is a surprise.

Ms. Jones in particular has borne the brunt of the online abuse in recent days, especially since the release of “Ghostbusters” in the United States on Friday. Hundreds of anonymous Twitter commenters hurled racist and sexist remarks at the star’s Twitter account, rallied and directed by Mr. Yiannopoulos this week.

This seems to imply Milo actually dispatched these ‘mobs’ against her, which given the bias of the NYT, is probably false.

All over the internet, and especially on Twitter and Reddit, people are rallying in support of Milo.

In a brief interview on Tuesday evening, Mr. Yiannopoulos said, “This is the beginning of the end for Twitter.”

“Some people are going to find this perfectly acceptable,” he said. “Anyone who believes in free speech or is a conservative certainly will not.”

The problem is Twitter is not a platform for ‘free speech’. Their TOS gives them the right to ban accounts for any reason. Same for Facebook, Instagram, Blogger, Gmail, and others.

My advice if you have a huge twitter account: dial it down. Getting banned and losing all the followers you spent years accumulating is never worth it.

Vox has their own spin: Milo Yiannopoulos’s Twitter ban, explained

n 2014, Gamergate — the anti-feminist harassment movement that surfaced in gaming culture and spread into larger internet culture — also fought against many gaming franchises that sought to be more diverse.

Hmmm….mean comments on the internet, versus actual physical assault against Trump supporters.

Or that Leslie Jones has a history of racist tweets against white people.

Since then, the movement has effectively become a cornerstone of the alt-right, and still continues to influence everything from the presidential election to major tech conferences. It overlaps with large swaths of 4chan, men’s rights activism, the online atheist movement, pickup artist culture, Reddit, and Tumblr.

So now it’s atheism too…because Richard Dawkins and Sam Harris acknowledge the enemy of western civilization is not Christianity but Islamic terror.


Though multiple attempts have been made to paint the Ghostbusters backlash as a product of what is perceived (largely inaccurately) as a more general trend of fan entitlement,

According to the left, criticism of a shitty movie and its actresses becomes racism. The left thinks they can impose their values on society, and no one is allowed to push back? The Vox article goes on and on. The author, Aja Romano, who is a ‘Web Culture Reporter’ obviously abdicated any journalistic integrity as a ‘reporter’ in her obviously biased coverage, but this is not too surprising either.

Finally, some decent reporting: The Verge questions Twitter’s Orwellian ‘anti-harassment system’. This is similar to the equally arbitrary and draconian YouTube ‘copyright’ rules, which are often invoked not to protect legitimate copyright claims but to suppress content.

Post-2008 Wealth Creation: A Guide, Part 4

This is the penultimate installment of the post-2008 wealth creation guide. In part three, I discussed shorting inverse leveraged funds like SPXU and SPXS, which are 3x inverse versions of the S&P 500. As of 7/20/2016, SPXU is trading at 23.50. Shorting $10,000 worth would require shorting 425 shares. If it drops 20% to $18.8, your unrealized profit is $2,000. However, because it’s a 3x fund, if the S&P 500 were to drop 5%, you would lose around $1,500 ~ 435($23.5*1.15-$23.5). The ‘decay formula’ given earlier will give a more exact answer. There is a high degree of path dependency that typicality, over many months, helps the short seller, which is why shorting these leveraged inverse ETFs good strategy in most market conditions.

So the big problem, though, are large loses should the market fall a lot. There is a way around this, to some extent. It’s far from perfect but it helps a lot.

The solution is to buy treasury bonds such as TLT (an ETF proxy for the 30-year treasury bond), which tend to be inversely related to equities. This means if the S&P 500 falls 1% for the day, maybe the 30-year bond will rise .6%, offsetting some of the loss. This results in smoother returns and smaller dips, as shown below:

In 2008, the hypothetical bond-stock portfolio only lost 20-25% vs. a 40% loss for the S&P 500.

Like the S&P 500, bond ETFs pay dividends (about 3% a year for the 30-year bond proxy TLT), and this compounding affect helps immensely. This also helps when you are shorting inverse leveraged bond ETFs like TMV, the inverse 3x version of TLT. Since 30-year bonds pay 3% a year, TMV decays 9% a year just from the yield alone.

Like SPXU and SPXS, the ‘decay formula’ gives an annual decay of around 13% for TMV. Adding the yield decay, and the total is around 20% per year, even for a flat bond market.

Like SPXU, TMV is in a state of constant decay. It cannot retain any of its gains for very long and keeps going lower:

Same for PST, an ETF that is a 2x inverse of the 10-year treasury bond:

Its decay is even smoother than the 30-year one…strait to zero.

So what happens if someone shorts, allocating 50% of the portfolio value to short SPXU and 50% to short TMV, and then rebalancing it quarterly?

Turned $100 into $1,300 after seven years. The sharpe (a measurement of risk-adjusted returns) is about 1.7, twice as good as the S&P 500. This is about as good as any strategy that does not involve exceedingly high leverage. This assumes that bonds and stocks both perform well, but even if they are flat, the 20% annual decay still gives a total compounded return of 250% over seven years. This also ignores transaction costs. When those are factored in, the performance diminishes a little bit.

A common retort is that ‘stocks and bonds have been in a bull market since the early 80s’ but, going as far back to the 1930′s, 10-year T. Bond produce positive yearly returns 80% of the time, according to Annual Returns on Stock, T.Bonds and T.Bills: 1928 – Current.

Robert Shiller…Wrong About Real Estate

Whether it’s Joseph Stiglitz, Paul Krugman, Daniel Kahneman, or Obama (the Nobel committee took a huge dent in credibility after that), even Nobel laureates are not beyond reproach. Now it’s Robert Shiller, another liberal Noble Prize recipient who has been wrong about wealth inequality and other matters, writing in the New York Times: Why Land and Homes Actually Tend to Be Disappointing Investments.

As to be expected, this is a vague article with sparse evidence and is easily refuted.

Here is the crux of Shiller’s argument, to save you the effort of having to read through hundreds of words of filler, ‘For home prices, a good part of the answer comes from supply and demand. As prices rise, companies build more houses and the supply floods the market, keeping prices down.’

Hmmm…let’s see….Bay Area real estate has doubled since 2011, and has outpaced the S&P 500, even going back 30 years. So I guess all those people should feel like fools.

Although prices fell briefly in 2006-08 before rocketing higher in 2011-2015, there are many factors that bode well for Silicon Valley real estate: scarcity, huge demand by rich foreigners, private equity, and millionaire techies, and floods of capital – both cognitive and financial – into the region.

As they say, ‘location location location’ , which Shiller ignores, in favor of the quote that fits his thesis, ‘they can’t make more land’. A lot of people buy land or property in the hope of renting it and or developing it, neither of which are accounted for by Shiller’s index. It’s not like buyers are just throwing darts at a map.

Shiller (what an appropriate name because he shills for the left) also ignores the role of leverage. If someone buyers a home worth $100k, putting $30k down, and the price rises by 10%, he makes $10k or about 33% off his initial $30K – a very good return. I’m ignoring the interest on the mortgage for this example, but leverage is how people get rich (and sometimes ruined) with real estate. Also, there are more options for homeowners who use leverage vs. stock traders who use leverage and are at the mercy of the awful brokers. For mortgages, payments can be deferred.

How about renting? Home ownership is about creating wealth for yourself instead of making the landlord rich. There are many millennials who are living with their parents instead of pissing away money every month for rent, and then using the saved money from their job to buy a home, achieving financial independence. With renting, you’re never are able to achieve independence, since you’re constantly draining money, and the rate of rent, especially since 2011, for most locations has far, far exceeded inflation. Over the long run (>5 years), the data suggests buying is better than renting

So tired of the generalizations and lazy thinking that passes for journalism these days, and even NYT writers and Nobel Prize laureates are not immune.

Some on the left argue that home prices are too high and that there is a conspiracy to keep prices too high, ignoring the role of supply and demand and other contravening evidence, just like how the left wants to believe police are systematically targeting blacks, that wealth inequality is bad for the economy, or that institutional racism is to blame for certain groups falling behind.

Some favor a ‘land value tax‘ (LVT), because real estate speculation encourages rent seeking activities rather than other, more productive investments. The tax, in theory, reduces the speculative element in land pricing, thereby leaving more money for productive capital investment:

The owner of a vacant lot in a thriving city must still pay a tax and would rationally perceive the property as a financial liability, encouraging him/her to put the land to use in order to cover the tax. LVT removes financial incentives to hold unused land solely for price appreciation, making more land available for productive uses. Land value tax creates an incentive to convert these sites to more intensive private uses or into public purposes.

There are several problems with the LVT:

Proponents of LVT argue that there are better investments than real estate, because real estate is an ‘unproductive’ use of capital. If entrepreneurship is so productive, why is the failure rate so high? Entrepreneurship has a 90-95% chance of failure…Bay Area homes have doubled since 2011…the choice seems obvious to me. It’s rational to not gamble on entrepreneurship.

Renting and building is often fraught with difficulties and expenses such as building and ordinance codes, dealing with potential disability and discrimination lawsuits, damage to property by renters, insurance, cost of upkeep and repair, and processing evictions. If landlords, already burdened by costs and regulation, cannot collect on the underling appreciation of the land, there may be no incentive to offer housing. Also, businesses often lease real estate. A LVT would probably cause a major supply shortages and distribution as landlords close shop and renters, both tenets and businesses, are forced to pay higher prices or have nowhere to go. This hurts the very people that the left wants to helps.

Also, where is the incentive to invest in urban development if there is no return. If private equity wants to buy a bunch of blighted homes in a bad neighborhood and improve them, why should these investors not profit from the appreciation in land value?

It’s theft, not much different than the Soviet Decree issued between 1917 and 1924 as a consequence of the October Revolution, as private property (businesses, bank accounts, land) was sized and nationalized. Homes owners would lose significant equity from a LVT.

Malcolm Gladwell – Bait and Switch

Don’t bother me with the details, man, I’m just telling stories

It’s understandable why Malcolm Gladwell has kept a low profile in recent years, giving fewer talks and writing fewer columns and books.

After a lucrative career as a public pseudo-intellectual spanning 15 long years – beginning in 2000 with his best-seller The Tipping Point and ending, in 2013, with the critically panned David and Goliath – the jig is up.

In 2013, in response to growing criticism, Gladwell quipped, ‘If my books appear oversimplified, then you shouldn’t read them.’

In other words, if you’re smart enough to challenge my assumptions, don’t read my books.

Apparently though, Gladwell’s assumptions, when challenged, dissolve like Alka Seltzer.

This has forced Gladwell, in order to save face, to issue ‘corrections’ and ‘amendments’ to the 10,000 hour ‘rule’, that, no, it’s not his fault for being wrong; instead, it’s our fault for misinterpreting him.

From Salon Malcolm Gladwell got us wrong: Our research was key to the 10,000-hour rule, but here’s what got oversimplified

This puts the ten-thousand-hour rule in a completely different light: The reason that you must put in ten thousand or more hours of practice to become one of the world’s best violinists or chess players or golfers is that the people you are being compared to or competing with have themselves put in ten thousand or more hours of practice. There is no point at which performance maxes out and additional practice does not lead to further improvement. So, yes, if you wish to become one of the best in the world in one of these highly competitive fields, you will need to put in thousands and thousands of hours of hard, focused work just to have a chance of equaling all of those others who have chosen to put in the same sort of work.

It didn’t read that way in Outliers where he implied, without preconditions, there is a linear relationship between practice and ability, eventually, after 10,000 or so hours of practice, culminating in ‘world class mastery’ of the likes of Bill Gates or The Beatles. When confronted, he had to offer a clarification clause that the rule only applied to those who already did 10,000 hours, but that thousands of more hours are needed. Suuure whatever you say, Gadwell.

It’s easy to forget that Gladwell is a journalist, albeit a very glorified one – not a scientist, although it’s easy to see how he is often confused as one. But the main problem is there is no actual proven science behind the 10,000 hour rule, which is based on the research of K. Anders Ericsson, a Swedish psychologist and Conradi Eminent Scholar, whose 1993 paper on ‘deliberate practice’ was cited over 6,000 times and was the inspiration for Gladwell’s Outliers, published in 2008, and Geoffrey Colvin’s Talent Is Overrated, also published in 2008. The 10,000 hour rule barely even qualifies as science, even without Gladwell’s treatment of it. It’s impossible to replicate the results in any sort of controlled setting. According to Wikipedia, Anders is credited for ‘…training a student to have a digit span of more than 100 digits. With Walter Kintsch he extended this theory into long-term memory to account for the superior working memory of expert performers and memory experts (Ericsson & Kintsch 1995).’ Wow a sample size of one. I wonder what the student’s IQ was…I’m pretty sure it was above 100, but we can’t let those pesky details get in the way of a nice narrative. After all, a message that gives hope to the dullards everywhere they too can covet the skills of geniuses with just enough practice, is an appealing one.

And addition to anecdotal evidence, flimsy science, sentimentalism, cherry picking (for Outliers: The Beatles and Bill Gates are frequently mentioned as evidence of the supposed efficacy of ‘deliberate practice’ – a sample size of TWO), the rest off Gladwell’s examples – chess champions and musicians – are suspect, too, as research shows:

The psychologists reanalyzed data from six previous studies of chess competitions (1,083 subjects in total) and eight studies of musicians (628 total) for correlations between practice and success, and found huge disparities in how much chess grandmasters and elite musicians had practiced. One chess player, for example, had taken 26 years to reach a level that another reached in a mere two years. Clearly, there’s more at work than just the sheer volume of hours practiced, the study (and a similar one by the same authors published in May) argues. “The evidence is quite clear that some people do reach an elite level of performance without copious practice, while other people fail to do so despite copious practice,” according to the researchers.

My own take is, there are certain tasks where the rule is more applicable, and others were it isn’t. I think music and athleticism involve flow states and muscle memory, whereas math and writing tend to be more cognitively demanding and involve precise structure and rules, and you either have the talent to do well or you don’t, and such talent tends to manifest at a very early age and without much apparent effort or practice, whereas it’s easier to take up painting, golf, or an instrument later in life. 10,000 hours is the amount of practice that allows an already talented person to possibly compete at the ‘world class’.

Here’s a passage from Every Love Story Is a Ghost Story: A Life of David Foster Wallace, that shows how talent often manifests early in life, can be readily identified by peers and teachers, and allows the recipients of such talent – because they are smarter and learn more efficiently – to make gains quicker than those who put in the same amount of hours but still struggle:

In the case of David Foster Wallace, he was talented enough to have an immediately successful literary career, publishing his fist book while in graduate school and getting no ‘pile of rejections’. Many people need a swift kick in the butt that they have no talent, that no amount of hours will suffice to attain mastery or commercial success, and should pursue more fruitful endeavors. Will such a message sell books or fill TED talk auditoriums? No, but it’s the reality.

Another example is Andy Weir, another genius as measured by IQ, who attained overnight literary fame with The Martian despite not even being a writer by trade. But because he is so smart, he was able to leapfrog ahead of aspiring writers who put in thousands of hours of practice to no avail. Luck? Maybe, but you’ll find that even the ‘lucky’ ones have a backstory, often some precocity (such as reading or talking early) suggestive of high IQ, that makes them standout.

Those are just two examples…without much effort I can think of many more. And that’s just for writing. Examples also exist for math and sports – of the attainment of ‘world class’ success and skill without tens of thousands of hours. High-IQ people people typically learn with fewer repetitions, thus necessitating fewer hours. And by ‘learn’ I don’t just mean repetition, but a heightened ability to make inferences from disparate pieces of data. In the case of writing, a high IQ often entails a richer vocabulary, a strong grasp of grammar, pacing, and sentence structure, and the ability to form a plot that captivates readers.

In fact, Gladwell, in a recent podcast, actually echoed a similar sentiment, that the ‘rule’ works for those who already have demonstrable potential and talent. But then why didn’t he write that in his book? It’s a rhetorical question. It appears his marketing strategy is a bait and switch of sorts: spoon-feed applesauce to his readers, who are paying money, and then when ‘called out’ by actual experts, recant and backpedal and hope that not too many people notice.

Related: The IQ Wars

Image Credit shameproject.com

The Trajectory of America

From Social Matter: SWPLs, Amerikaners, The Alt-Right, And The Coming State

This passage stood out:

The system is decaying and unsustainable. It is increasingly liquidating a limited pool of capital to keep the economic charade going, while all the real productivity, and the culture of hardworking self-reliance that goes with it, goes overseas.

See one of three outcomes:

1. A continuation of what we have now, as the contributions of America’s smartest, most productive are sufficient to offset the decay, or as some call ‘entropy’ vs. ‘order’. In the tug-of-war between productivity vs. decay and parasitism, the former is still winning, although the gap may be narrowing. There is evidence of it narrowing (rising rates of out of wedlock births, growing entitlement spending, etc., for example), but also evidence it isn’t (technological progress, steady GDP growth, etc.).

I predict this will be the most likely ‘trajectory’ – a continuation of what we have now. Although there will more internecine strife and racial division in America, the general economy will remain intact, thanks mainly to the contributions of America’s most economically productive and America’s overall global economic dominance and strength, particularity for intellectual property.

This mistake is some assume that because there is some evidence of decay, that the whole system must fail.

America’s Protestant work ethic, punitive justice system, and culture of individualism that prizes merit, are probably contributing factors for America’s stability and economic success, compared to its peers that seem to constantly struggle with corruption, high inflation, and economic stagnation. Although East Asian countries score well on achievement tests and have high national IQs, their culture is a more collectivist one. Same for Northern Europe, which is also more collectivist than America.

Anatoly Karlin has done extensive research on this.

Related: Explaining America’s Economic and Social Stability

2. Figurative collapse – ‘entropy’ gradually wins, and the American economic and cultural hegemony is significantly weakened. The stock market may crash and fail to ever recover. There may be high inflation due to capital flight out of the US dollar and treasuries, as well as ‘cognitive flight’ of America’s smartest and most productive. In the process, America becomes more like Europe or Japan, as possibly China fills the power vacuum. I don’t see this happening – it could happen but seems improbable. Some argue that America is already in this state, but the actual economic data and other trends suggests otherwise.

3. Literal collapse, possibly due to nuclear war, terrorism, or civil war, resulting in substantial devastation, economic disruption, and loss of life. The Civil War is probably the closest America has come to this.

Liberal Smugness, or Something Else

The smug style in American liberalism

Beginning in the middle of the 20th century, the working class, once the core of the coalition, began abandoning the Democratic Party. In 1948, in the immediate wake of Franklin Roosevelt, 66 percent of manual laborers voted for Democrats, along with 60 percent of farmers. In 1964, it was 55 percent of working-class voters. By 1980, it was 35 percent.

This mirrors the decline of union membership, more so than Americans becoming less liberal. As industrial and unionized labor falls, now it’s middle/lower-income service sector workers filling the ranks of the ‘left’.

But is liberalism really that ‘smug’. If smug is synonymous with elitist, one can argue Sander’s campaign is the antithesis of elitism and is in fact very inclusive and populist, provided you’re not a banker. Despite supposed ties to Wall St., even Hillary’s campaign is pretty inclusive in her pandering to various minority groups and significant minority support (a common criticism of Sanders is that he failed to ‘win over’ minorities).

So what type of liberalism is smug? Or does smugness cross political lines? Is it liberalism, or something else?

It is a way of conducting politics, predicated on the belief that American life is not divided by moral difference or policy divergence — not really — but by the failure of half the country to know what’s good for them.

Hmmm… but as an example of elitism on the ‘right’, neoconservatives are also anti-populist and prescriptivist – people should summit to TSA screenings, for the good of national security; people should support tax cuts for high-income earners, for the good of the economy. And for the ‘left’ – people should signup for Obamacare, for or the ‘good’ of public healthcare; people should stop buying guns, for the ‘good’ of public safety.

So perhaps smugness is just another world for ‘prescriptivism’, and is related to anti-democracy – the notion that the masses are incapable rational judgment and decision making and should acquiesce to ‘experts’.

Maybe there is a hybrid ideology that combines neoconservative and neoliberal prescriptivism (people should support free trade, for the good of the economy) with the ethos personal responsibility and individualism (‘culture of self’) that is found in the ‘right’ and various libertarian ideologies (if people fail, it’s because they are either dumb and or lazy), that could be considered smug and elitist.

Post-2008 Wealth Creation: A Guide, Part 3

I intend to make good on my promise of an investing strategy.

In part one, I discuss how we’re in a ‘winner take all’, ‘bigger is better’ economic environment dominated by large entities – be it multinational corporations, large content providers, the S&P 500, and the treasury bond market itself. The investment strategy described here allows individuals to profit from this trend by going ‘long’ arguably the two biggest, strongest markets in the world: the S&P 500 and the treasury bond market.

Part two discusses leveraged ETFs, in review 3x ‘long’ etfs like SPXL (a 3x version of the S&P 500) and TMF (a 3x version of the 30-year treasury bond market). These are hurt by decay.

But there is a way to profit not only from the positive trend of S&P 500 and the treasury bond market, but also from various forms of decay. This requires short-selling levered inverse ETFs (yeah that’s a mouthful to write), some examples being SPXU and SPXL (3x inverse versions of the S&P 500) and TMV (a 3x version of the 30-year treasury bond market). By ‘inverse’, these go up when the underlying goes down. So if SPY (the ETF proxy for the S&P 500) goes down 1%, SPXS and SPXU will rise 3% that day. This property also makes inverse ETFs very prone to decay, more so the than 3x ‘long’ version discussed in part 2.

For example, if the S&P 500 rises and falls 1% for 100 consecutive days, SPXU will decay roughly: ((.97)(1.03))^50 ~ .96

The reason why it’s 50 in the exponent instead of 100 is because each pair of days is treated as a ‘cycle’.

This means SPXS will lose about 4% (1-.96) of its value simply due to the oscillations of the market. Even if the S&P 500 is flat for the entire year, SPXS and SPXU will still fall due to these fluctuations, which can be likened to gravitational radiation in general relativity, except the inverse ETF is decaying with each passing ‘cycle’ that is analogous to an orbit for a binary system.

The ‘cycle’ approximation for decay is crude, and a better approximation can be found using the properties of Geometric Brownian motion, yielding the ‘decay formula’:

The proof is kinda complicated and can be found in Zhang 2010.

S_t = level of the underling index at time t

S_o = present level of the index

r = interest rate

f = expense ratio

b = leverage factor

t = time in years; 1 = one year

λ = borrowing cost

σ = volatility

L_t/L_o = decay rate

For the sake of brevity, most of these variables can be set to zero.

For this example, t=1 , r=0 (interest rates are close enough to zero), f = 0 (close enough), λ=0 (I’ll show to to get a zero borrow cost), b= -3 (inverse 3x etf), σ=.15 (average historical volatility of the S&P 500).

I’m going to assume the S&P 500 500 is flat for the year, meaning that S_t/S_o=1.

Because σ and λ are a constant and not a function of t, the integrals are σ and λ respectively.

Putting it together, it’s simply e^(-.135) ~ .87

This means SPXS and SPXU will decay about 13% a year due to fluctuations in an otherwise flat market.

But there’s more. The S&P 500 pays a 2% annual dividend, and as I showed in part two, this is not insignificant. Short-sellers must pay the dividend. Thus in addition to volatility decay, inverse ETfs also have dividend decay, which for SPXS and SPXU is about 6% a year.

This puts the total annual decay at around 19% – even in a flat market. In 2015, SPXU decayed 17% despite the S&P 500 being down approximately 1% for the year.

It’s quite apparent how quickly this decays…but also, how quickly the price falls every time it tries to go higher:

Shorting $10,000 of SPXS is like going long $30,000 of S&P 500, so there is leveraged involved and a risk of losing a lot of money should the market fall a lot, but this risk will be mitigated to some degree using a second method that will be discussed later.

Although shorting these ETFs is not a new strategy, the mathematics of why it is profitable tends to be ignored.

Part four will discuss the specific shorting strategy, which involves multiple leveraged inverse ETFs.

Fixing the Student Loan Debt Crisis and Reforming Edcuation

From Demos: Why Education Does Not Fix Poverty

The author lists some reasons why poverty has not fallen in spite of the US population becoming more educated:

First, handing out more high school and college diplomas doesn’t magically create more good-paying jobs. When more credentials are chasing the same number of decent jobs, what you get is credential inflation: jobs that used to require a high school degree now require a college degree; jobs that used to require an Associate degee now require a Bachelor’s degreee; and so on. Obviously the supply of good-paying jobs is not a fixed constant of nature, but there is no reason to think that the supply will automatically go up to match the number of people with the necessary credentials. The types of jobs available in a society, and their level of compensation, is determined by many factors (demand, worker power, technology, global competition, natural resources, etc.) that have little to do with the number of degrees that society is minting.

This is compounded by the fact that even after adjusting for inflation, student loan debt is surging:

Student loan debt exceeds credit card debt:

And to add insult to injury, the rate of debt exceeds gains in wages. Debt is up 35% and median annual wages are flat:

Too much debt compounded by poor job prospects – a bad combination. Regarding debt, the system is broken, and the very people who are trying to ‘save’ the poor with ‘good intentions’ are making things worse, by continuing the college/debt cycle in perpetuity. A better solution is to replace costly, time-consuming diplomas with cheap, easy to administer IQ-like tests like the Wonderlic, as well as the SAT, which is also a good proxy for IQ and signaling competence and learning ability. Yeah, there is disparate impact, I know, but these tests would save a lot of time and money, sparing millions of students, particularly low-income students, of decades of debt. Employers want employees who can learn quickly, make inferences, adjust to changes, and anticipate needs – all skills linked to IQ.

Regarding the mismatch of skills and unemployment, another problem is that we’re perhaps in an era of ‘peak school‘, and instead of more education for the sake of education, we need ‘targeted education’ to teach young people the skills employers are directly seeking, sorta like vocational schools. More intelligent students can either undergo a comprehensive formal, liberal arts education or learn high-paying skills like coding while in high school instead of spending tens of thousands of dollars or more to learn it in college and frittering many valuable years. Britain has a program similar to this, Eleven-Plus exam, as I explain in an earlier post Birth ‘Lottery’ Does Not Preclude Meritocracy:

The politically correct approach to education of trying to bring everyone to the same level is flawed; we need to use cognitive screening to ascertain individuals’ strengths and weaknesses, and then create curriculum optimized around this. Beyond the basics like reading and math, higher IQ kids, for example, should be encouraged to learn high-paying skills like STEM at an early age, as well as pursuing other cognitive creative endeavors; lower-IQ kids should learn service work since that’s where the most opportunities, if there any, will be. Britain had a system similar to this, the Eleven Plus exam, which tested kids at the age of 10 for future educational placement, with lower-IQ kids learning vocational work, average-IQ kids continuing with their education, and high-IQ kids going to special schools.

And from Scott Adams How to Get a Real Education:

I understand why the top students in America study physics, chemistry, calculus and classic literature. The kids in this brainy group are the future professors, scientists, thinkers and engineers who will propel civilization forward. But why do we make B students sit through these same classes? That’s like trying to train your cat to do your taxes—a waste of time and money. Wouldn’t it make more sense to teach B students something useful, like entrepreneurship?

He’s right. What we have is a misapplication of resources and ability. Rather then a cold dose of reality that, no, Jimmy with an IQ of 90 should not go to college, teachers would rather (or at least they are forced to) lie to parents and students, sending them down a path of debt that is worsened by a high college dropout rate.

Related:

IQ and SAT Scores as a Solution to the Student Loan Crisis
Breaking the Tuition Feedback Loop
Disparate Impact Litigation Hurts Job Seekers, Students, and Employers
Some Ideas to Reform Higher Education
The Student Loan Charade
An Indebted Generation