Friday, May 22, 2015

Warren Buffett's Op-Ed on the Earned Income Tax Credit

In my mind, the country’s economic policies should have two main objectives. First, we should wish, in our rich society, for every person who is willing to work to receive income that will provide him or her a decent lifestyle. Second, any plan to do that should not distort our market system, the key element required for growth and prosperity. 
That second goal crumbles in the face of any plan to sizably increase the minimum wage. I may wish to have all jobs pay at least $15 an hour. But that minimum would almost certainly reduce employment in a major way, crushing many workers possessing only basic skills. Smaller increases, though obviously welcome, will still leave many hardworking Americans mired in poverty. 
The better answer is a major and carefully crafted expansion of the Earned Income Tax Credit (EITC), which currently goes to millions of low-income workers. Payments to eligible workers diminish as their earnings increase. But there is no disincentive effect: A gain in wages always produces a gain in overall income. The process is simple: You file a tax return, and the government sends you a check. 
In essence, the EITC rewards work and provides an incentive for workers to improve their skills. Equally important, it does not distort market forces, thereby maximizing employment. 
The existing EITC needs much improvement. Fraud is a big problem; penalties for it should be stiffened. There should be widespread publicity that workers can receive free and convenient filing help. An annual payment is now the rule; monthly installments would make more sense, since they would discourage people from taking out loans while waiting for their refunds to come through. Dollar amounts should be increased, particularly for those earning the least. 
There is no perfect system, and some people, of course, are unable or unwilling to work. But the goal of the EITC—a livable income for everyone who works—is both appropriate and achievable for a great and prosperous nation. Let’s replace the American Nightmare with an American Promise: America will deliver a decent life for anyone willing to work.

[H/T Linc]


How Do You Utilize 2nd Level Thinking? (LINK)
Related book: The Most Important Thing
Are declining businesses good shorts? (LINK)

Carson Block At Baruch Talks Short-Selling In China (video) (LINK)

Ian Bremmer: Geopolitics Is Unstable and Dangerous Now (LINK)
Related book (released this week): Superpower: Three Choices for America's Role in the World 
Related link (video): Ian Bremmer on Charlie Rose
Rob Arnott: Does Unreal GDP Drive Our Policy Choices? (April 2011) (LINK)

Mark Buchanan summarizes Nassim Taleb's latest paper  (LINK)
Violent warfare is on the wane, right? Many optimists think so. But a close look at the statistics suggests that the idea just doesn’t add up
An explosion in artificial intelligence has sent us hurtling towards a post-human future, warns Martin Rees (LINK)

Global ocean trawl reveals plethora of new lifeforms (LINK)
But most interesting — in Gilbert’s view — was how the team used the genetic data to predict interactions between individual organisms. In one example, they predicted that a flatworm belonging to the genus Symsagittifera would have a symbiotic interaction with a photosynthetic microalga of the genus Tetraselmis. To check, the team identified specimens of the worm and studied them under a microscope. Sure enough, they saw algal cells inside the worms and matched the DNA label of these algae to the ones predicted to be symbionts. “It was a beautiful study that shows you what network analysis, or ‘interactive-omics’, can actually achieve,” Gilbert says.
'Stable' region of Antarctica is melting (LINK)
Related video: Cosmos A Space Time Odyssey - Season 01 - Episode 12

Vaclav Smil video: Energy Transitions

Link to video


Related book: Energy Transitions: History, Requirements, Prospects [For other books by Vaclav Smil, go HERE.]

Thursday, May 21, 2015

We Need A Modern Origin Story: A Big History

Link to: Edge #441 - A Conversation With David Christian
In modern science, and I include the humanities here, science in a German sense of science—rigorous scholarship across all domains—in modern science we've gotten used to the idea that science doesn't offer meaning in the way that institutional religions did in the past. I'm increasingly thinking that this idea that modernity puts us in a world without meaning—philosophers have banged on about this for a century-and-a-half—may be completely wrong. We may be living in an intellectual building site, where a new story is being constructed. It's vastly more powerful than the previous stories because it's the first one that is global. It's not anchored in a particular culture or a particular society. This is an origin story that works for humans in Beijing as well as in Buenos Aires. 
It's a global origin story, and it sums over vastly more information than any early origin story. This is very, very powerful stuff. It's full of meaning. We're now at the point where, across so many domains, the amount of information, of good, rigorous ideas, is so rich that we can tease out that story.
That is the key to what makes us different. You can ask what it is that allows us not to be locked within a limited, metabolic repertoire, but to keep expanding that repertoire. There may be a very simple answer. One should expect a simple answer because, on Paleontological time scales, this happens in an eye blink. It happens so fast that arguments that say, well, humans are different because of this, and this, and this, and this, and this, they don't work. There's got to be one thing that, like a key, unlocks a door. I suspect it's linguistic.                

Chimps, we know have language. We know they can communicate ideas. We know that chimp mothers can teach their young to use sticks to extract termites from mounds. We also know that information does not seem to accumulate generation by generation in other species. If it did, we would see evidence of it. We would see a species that was gradually widening its niche. We don't see that. Humans have crossed a linguistic threshold. It's as if suddenly human language is more efficient. It's crossed a threshold beyond which information accumulates faster than it's lost. That means something profound. It means we're the first species in 4 billion years in which information accumulates across generations, through the cultural mechanism, not through the genetic mechanism. The cultural mechanism, of course, is orders of magnitude faster than the genetic mechanism.                

Here, you have a species where information can accumulate across generations. That's it. That is the foundation for explaining everything that makes us different. If you add in that more information for a living organism gives you more control over resources and energy flows, then what you're doing is watching a species whose control over the energy flowing through the biosphere increases, and increases at an exponential rate. As information accumulates, some of that information speeds up the process of the accumulation of information. Printing is an obvious example, or the Internet. And basically that's it.                 

Related recent post: Davos 2015 - How Did We Get Here? Big History 101

Related link: Big History Project

Related book: Maps of Time: An Introduction to Big History


Oaktree’s Marks Says Europe Better Bet Than ‘Highly Priced’ U.S. (LINK)
“We are at a point in the cycle where we feel virtually all assets are trading above their intrinsic value; some are in ‘highly priced’ territory, and there are few absolute bargains available,” said Marks. “However, on the basis of our history with cycles, we believe there’s somewhat further to go before we reach peak exuberance, and thus peak prices.”
Sanjay Bakshi discusses contrarian investing (LINK)

Sanjay Bakshi discusses buy and hold (LINK)

Sanjay Bakshi discusses investing practice (LINK)

A Dozen Things Learned about Value Investing from Jean Marie Eveillard [H/T Abnormal Returns] (LINK)

Nassim Taleb: World is NOT more peaceful (video) [H/T ValueWalk] (LINK)

Latticework of Mental Models: Gresham’s Law (LINK)

First Hanergy Now Goldin: Hong Kong Stocks Drop Like Stones (LINK)
Hong Kong’s best-performing stocks this year are tumbling even faster than they rallied. 
Goldin Financial Holdings Ltd. and Goldin Properties Holdings Ltd., controlled by billionaire Pan Sutong, plunged more than 60 percent in Hong Kong trading Thursday. There was no immediate explanation for the drop. Before the rout, the two stocks surged more than 300 percent in 2015 for the biggest gains on the Hang Seng Composite Index. 
The tumble follows the mysterious 47 percent plunge in 24 minutes by Hanergy Thin Film Power Group Ltd. on Wednesday, which erased $19 billion in market value before trading was suspended. The companies have other similarities. Hanergy is also controlled by single billionaire owner -- Li Hejun. Almost no analysts tracked Goldin Financial or Hanergy even as their market values swelled to more than $30 billion, making them among Hong Kong’s biggest listed companies, while doubts over the sustainability of the rallies increased.
Future of Humanity: Nick Bostrom supports Stephen Hawking’s AI predictions [H/T Will] (LINK)
Related book: Superintelligence: Paths, Dangers, Strategies 
Related link: TED Talk - Nick Bostrom: What happens when our computers get smarter than we are?
Book of the day (released a couple of days ago): Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money

Wednesday, May 20, 2015


Three brief company updates from our Boyles portfolio (LINK)

Andrew Smithers: Bad information is bad for the economy (LINK)

Chinese Solar Maker Plunges, Losing Nearly $19 Billion in 24 Minutes (LINK)
The decline of Hanergy Thin Film Solar Group Ltd. was as spectacular and inexplicable as its ascent. 
Just 24 minutes of Hong Kong trading erased $18.6 billion of market value and wiped out almost four months of gains that made it more valuable than Sony Corp. of Japan. Those increases came as analysts and investors questioned why, exactly, this stock was increasing in the first place. 
The maker of solar equipment controlled by Li Hejun suspended trading after the stock plummeted 47 percent in the morning.
Tuesdays with Zinsser (LINK)
Related link: 10 Writing Tips from Legendary Writing Teacher William Zinsser, May He Rest in Peace  
Related book: On Writing Well
Scott Adams talks to James Altucher (LINK)
Related book: How to Fail at Almost Everything and Still Win Big
PBS FRONTLINE investigates the spread of dangerous pathogens in meat - particularly poultry (video) (LINK)

Audiobook of the day (currently only $0.95): The Practicing Mind: Developing Focus and Discipline in Your Life

Bill Gates: Beach Reading (and More) (LINK)
The books: 
Hyperbole and a Half  
The Magic of Reality 
What If? 
On Immunity
How to Lie With Statistics 
Should We Eat Meat?

Tuesday, May 19, 2015


The book Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future was released today.

Dan Ariely's latest book was also released today: Irrationally Yours: On Missing Socks, Pickup Lines, and Other Existential Puzzles

James Montier: The Idolatry of Interest Rates - Part I: Chasing Will-o’-the-Wisp (LINK)

Frank Martin's 2015 Ivey Business School Value Investing Conference (video) [H/T Santangel's Review] (LINK) [And for a bunch of great past videos from The Ben Graham Centre, go HERE.]

Video Highlights of the Sears 2015 Annual Meeting [H/T Santangel's Review] (LINK)

Bill Ackman's Q1 Conference Call (LINK)

A $200 Million Hedge-Fund Trade in Your Bond ETF Is Normal Now (LINK)

EXPD's latest answers to selected inquiries (Feb. 27th, May 8th)

Charlie Rose's Georgetown University commencement speech (video) [H/T ValueWalk] (LINK)

Missing the forest for the trees...

A few related quotes...

From Garrett Hardin in Filters Against Folly (a book Peter Bevelin mentioned as one of the two things he re-reads every year in his 2007 interview):
It is unfortunately true that experts are generally better at seeing their particular kinds of trees than the forest of all life. Thoughtful laymen can become very good at seeing the forest, particularly if they lose their timidity about challenging the experts. When I speak of laymen ("laypersons," if you prefer) I am talking about everyone, because the expert in one field is a layman in all others. In the universal role of laymen we all have to learn to filter the essential meaning out of the too verbose, too aggressively technical statements of the experts. Fortunately this is not as difficult a task as some experts would have us believe.
From Nassim Taleb in Antifragile:
I once testified in Congress against a project to fund a crisis forecasting project. The people involved were blind to the paradox that we have never had more data than we have now, yet have less predictability than ever. More data—such as paying attention to the eye colors of the people around when crossing the street—can make you miss the big truck. When you cross the street, you remove data, anything but the essential threat.
From Chris Begg:
One of the most limiting biases for individuals attempting to make sense of complex systems is that they are a part of the systems. When you are part of the system it becomes increasingly difficult to see the forest for the trees. Each individual tree’s uniqueness and complexity can lead to confusion and ambiguity. The key is to attempt to step outside of the system and see the forest and trees for the essence of what they are.
From Howard Marks:
Information and knowledge are two different things. We can have a lot of information without much knowledge, and we can have a lot of knowledge without much wisdom. In fact, sometimes too much data keeps us from seeing the big picture; we can “miss the forest for the trees.”

Monday, May 18, 2015


The Untold Story of Silk Road (Part 1, Part 2)

Sanjay Bakshi: Seven Patterns of Inefficiency in Pricing of Quality Businesses (LINK)

Letter reveals fragility of Greek finance (LINK)
Greece came so close to defaulting on last week’s €750m International Monetary Fund repayment that the prime minister warned IMF chief Christine Lagarde he could not pay it without EU aid. 
Athens ultimately made the payment without financial assistance from the bloc but only by tapping a rarely used emergency account Greece holds at the fund — an unorthodox transaction that amounted to borrowing IMF funds to pay the IMF. 
Alexis Tsipras wrote to Ms Lagarde, warning that the IMF repayment would be missed unless the European Central Bank immediately raised its curbs on Greece’s ability to issue short-term debt. 
The letter, first reported by the Greek daily Kathimerini but independently confirmed by the Financial Times, raises questions about how close Athens is to bankruptcy. In addition to payments due to the IMF next month totalling €1.5bn, the Greek government has struggled to meet its wage and pension bills, which must be paid at the end of the month. 
The next €300m IMF payment is due on June 5.
Finance chiefs urge action on bubble fear (LINK)
A group of leading financial executives have urged authorities around the world to beef up their crisis-busting tool kits amid fears that ultra-low interest rates have increased the risks of financial instability. 
The heads of companies including HSBC, UBS and BlackRock will on Monday release a joint statement backing the use of macroprudential tools, but warn that rules, if too narrowly applied, could push risks into the more thinly regulated realm of shadow banks. 
Macroprudential tools are used to guard against emerging dangers such as overvalued property assets, in theory reducing the need for authorities to raise interest rates to rein in investor exuberance. Among the most developed are counter-cyclical capital requirements on banks and caps on the amount of debt customers can borrow relative to their incomes.
Macau Bets $27 Billion on Reversing the Law of Supply and Demand [H/T Matt] (LINK)

Robert Shiller's Inspiring Yale 2015 Presentation (video) [H/T ValueWalk] (LINK)

Dan Ariely: Why The Next Market Downturn May Quickly Become A Full-Blown Panic (audio) (LINK)

Maria Popova discusses Oliver Sacks' memoir, On the Move: A Life (LINK)

Brad Feld: Build Your Life Where You Want To Live (LINK)
Related book: Startup Communities
I was an undercover Uber driver [H/T The Browser] (LINK)

John Mauldin - Secular Versus Cyclical: Notes from SIC 2015 (LINK)
It is hard to say what my “favorite” presentation was, as there were so many excellent ones, but Bill White’s would certainly be on a very short list. He was the former chief economist at the Bank for International Settlements and is now the chairman of the Economic Development and Review Committee at the OECD in Paris. 
Bill may not be as familiar to some of my readers as he is to me, but he is one of my economic heroes. A little history: Bill predicted the financial crisis of 2007–2010 before 2007's subprime mortgage meltdown. As early as 1996 he was one of the critics of Alan Greenspan's theory of the role of monetary policy. He challenged the former Federal Reserve chairman's view that central bankers can't effectively relieve the causes of asset bubbles. On Aug. 28, 2003, White made his argument directly to Greenspan at the Kansas City Fed's annual meeting in Jackson Hole, Wyoming. White recommended to “raise interest rates when credit expands too fast and force banks to build up cash cushions in fat times to use in lean years.” Greenspan was unconvinced that this would work and said, “There has never been an instance, of which I'm aware, that leaning against the wind was successfully done.” If you’re not willing to take a little political heat, which clearly Greenspan wasn’t, then we may never know whether that would work. However, I disagree with Greenspan: I think that Volcker leaned quite successfully. Yes, there were recessions, so you might not see that as successful, but I think the long-term positive results of Volcker’s moves are evident. 
That is the problem with having a monetary policy that is influenced by the political temperament and decisions of a small group of people. What happens is that people look around for scapegoats when a recession comes along, and they will point to a central bank that wasn’t as accommodative as they would have liked and blame the bank, rather than simply understanding that the business cycle is what it is. Bill White is my favorite central banker. 
Central bank models, he told us, are artificial machines. His best quote was, “The basic problem with central banks: they think they know how the economy works.” Their models are built to be gamed and always assume a return to equilibrium. But there is no equilibrium – you are where you are. The problem with equilibrium models is that they don’t reflect reality. 
An economy is like a forest ecosystem, not a machine. We are on a very bad path – debt is unsustainable. Notice the environment since the 2008 crisis: the Eurozone crisis is a limited variant on a global crisis; fiscal and regulatory restraint is not helpful; and monetary policy is the only game in town and is not effective. 
Does White expect better days ahead? The IMF and OECD expect modest expansion – but they have very poor forecasting records. Why should demand suddenly strengthen?

Is low inflation really so great? 
Looking around the world, Bill thinks that Abenomics could backfire. Can China adapt to a new growth model? Can the Eurozone sustain confidence? Political problems are everywhere (which Friedman and Bremmer highlighted!). It is much easier in today’s world for a crisis to spread worldwide because we have increasingly complex systems with far more linkages and rising correlations. 
OECD simulations indicate global fragility. Rising rates still threaten fiscal reform.

Bill was very critical of the seemingly single-minded focus on monetary policy. Monetary policy hasn’t delivered, and more of the same won’t help. He offers three endgames:

  • Endgame 1: global recession, policy and long rates stay low, debt deflation, more aggressive monetary policy and hyperinflation in some countries. Japan is very vulnerable in this scenario.
  • End game 2: Rapid growth with an orderly exit from debt. Rates rise, inflation under control, debt-servicing problems diminish.
  • End game 3: Rapid growth with a disorderly exit: long rates rise sharply, a rush to exit from all risk assets, capital outflows from emerging markets, inflation expectations rise sharply, debt service problems increase, inflation fears fueled by fiscal dominance.
In the Q&A session Bill and I talked about the nature of current economic thinking and why it is inadequate. Independently, we’re both beginning to look at a new way to understand markets called Complexity Economics. It has several sources, but the current center of gravity is the Santa Fe Institute in Santa Fe, NM. I may be “forced” to go spend some time in Santa Fe, burrowing into this new way to look at economics. It is significantly more complex, as you might imagine, than equilibrium models are; and it will therefore be even harder to create models that actually work, but it is certainly a place to start. 
Hussman Weekly Market Comment: The "New Era" is an Old Story (LINK)
Among the recurring features of speculative episodes across history is the appearance of “new era” arguments to justify the elevated prices, coupled with arguments that historically reliable measures no longer apply. In our view, the problem is not that investors search for new, more reliable tools of market analysis – that should always be an objective. The problem is when investors adopt theories and models that embed the most optimistic assumptions possible, run contrary to historical evidence, or embed subtle peculiarities that actually drive the results (see, for example, the “novel valuation measures” section of The Diva is Already Singing). Eventually, the final refuge of speculation is to abandon historically reliable measures wholesale, resting faith instead on the advent of some new era in which the old rules simply don’t apply. 
John Kenneth Galbraith noted this phenomenon decades ago in his book The Great Crash 1929: “It was still necessary to reassure those who required some tie, however tenuous, to reality. This process of reassurance eventually achieved the status of a profession. However, the time had come, as in all periods of speculation, when men sought not to be persuaded by the reality of things but to find excuses for escaping into the new world of fantasy.” 
In late-1929, Business Week observed: “This is the longest period of practically uninterrupted rise in security prices in our history… The psychological illusion upon which it is based, though not essentially new, has been stronger and more widespread than has ever been the case in this country in the past. This illusion is summed up in the phrase ‘the new era.’ The phrase itself is not new. Every period of speculation rediscovers it… During every preceding period of stock speculation and subsequent collapse business conditions have been discussed in the same unrealistic fashion as in recent years. There has been the same widespread idea that in some miraculous way, endlessly elaborated but never actually defined, the fundamental conditions and requirements of progress and prosperity have changed, that old economic principles have been abrogated… that business profits are destined to grow faster and without limit, and that the expansion of credit can have no end.” 
“This time” is not different. There’s no question that investors have come to believe that somehow quantitative easing has durably changed the world – that central banks have (or even can) put a floor under the markets as far as the eye can see. But if you examine the persistent and aggressive easing by the Fed during the 2000-2002 and 2007-2009 plunges, it’s clear that monetary easing has little effect once investor preferences shift toward risk aversion –which we infer from the behavior of observable market internals and credit spreads. Monetary easing only provokes yield-seeking speculation when low-interest money is viewed as an inferior asset. 
It’s not monetary easing, but the attitude of investors toward risk that distinguishes an overvalued market that continues higher from an overvalued market that is vulnerable to vertical losses.

Friday, May 15, 2015


Michael Mauboussin and Dan Callahan: IQ versus RQ - Differentiating Smarts from Decision-Making Skills [H/T ValueWalk] (LINK)

Elon Musk’s Space Dream Almost Killed Tesla (LINK)
Related book (released in a few days): Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future
Horizon Kinetics: The Devil's Advocate Report, March 2015 [H/T @ChrisMayerAgora] (LINK)

Mohamed El-Erian on Charlie Rose (video) (LINK)

Discovered. A fish with a warm heart (LINK)

Leonard Mlodinow on Reddit discussing his latest book, The Upright Thinkers, and other things [H/T Will] (LINK)