Economist Redux #3: 2014 Edition

As 2014 comes to a close, I've realized that I'm further behind than I could have imagined with these Economist Reduxes. For the first time in two years, I'm also behind on Economists! So I figured that it was time for a super-lengthy review of my favorite Economist articles from every issue since November!

I shlepped them home, and now, sitting underneath a beautiful 13' tall Christmas tree, I'm getting to work!

• An interesting article on sovereign wealth funds moving in house - reminded me a bit of some of the general themes from Swenson's Pioneering Portfolio Management. It's a lot easier to say that you're going to build out an exceptional investment team than to actually do it, and it can be hard to compete with Wall Street on an even footing.
• It's inevitable that there are at least some genetic components to most behaviors; researchers recently found some genetic markers for violence. Something I really liked about this article was its discussion of "genome-wide association studies" and the frank discussion of the risk of spurious correlations.
• I'm treading lightly here, because it's a particularly touchy subject, but I found the Economist's take on the rising profile of campus sexual assault particularly well balanced, critiquing some of the statistics that are commonly used and the general practice of using tribunals made up of professors to adjudicate these cases while still clearly reflecting the fact that sexual assault is a real problem that needs to be addressed.
• Drones are coming, just not to the US. This overview runs through a lot of the early stage use cases (farming, delivering medicine, and sports). The AirDog drone profiled in the beginning of the article is particularly cool, but I thought that the piece did a good job acknowledging some of the potential risks (weaponization and hijacking), although I still feel like the FAA ban is too aggressive.
• Reading about banks is always fascinating to me - especially about banks that are struggling and trying to find new revenue streams and patch up after rough years. While I'm not often sympathetic towards them, the more I understand about the complexities of financial markets, the more I can appreciate how difficult it can be to run a really effective multinational bank.
• Well, writing in late December, it's clear that the Republicans did, in fact win the Senate. Looks like we're in for either terrible gridlock, or, more optimistically, some big deals on tax reform and some bipartisan cooperation. Given the things that have happened since then, particularly the President's unilateral decision on immigration, I'm a bit less hopeful, but I do think that if we could get some well-constructed tax reform, that would go a long way towards making the US more competitive when it comes to starting businesses, as well as keeping them.
• It wasn't completely shocking, but I do think that there were some really interesting components of the article about young voters. Compared with the traditional narrative about liberals, close to 70% of us think that government is wasteful and inefficient. Reflecting on the sequester, it seems incredible to me that the a 10% cut across discretionary spending had as small of an impact as it did. In general, though, we're pretty liberal, although we're mostly just pissed off.
• Articles like this one on industrial organization are why I love the Economist, and why I love economics more generally. It ran through the recent Nobel Prize in economics Jean Tirole, specifically for work around regulation, platform economies and some of the more complex parts of modern markets - places where industries, based on their particular economics, are naturally monopolistic. It inspired me to pick up a couple of his books, and also just to think more about complex regulatory situations. One of the more interesting examples the article gave was about giving firms choices as part of their regulatory framework in order to balance the needs of protecting consumers and motivating companies to do the hard work of improving efficiency.
• The Supreme Court is going to hear a case about disenfranchising licensed professionals, and I cannot wait. Basics first - dentists are mad that unlicensed people are cutting into the business of whitening teeth, and want North Carolina to enforce their monopoly on the business. As a techie, I really hope that the Court decides against the dentists. The Economist cites a really well-regarded startup, LegalZoom, as an example of a company that is hampered by this type of regulation, and I am pretty sympathetic to the argument that if companies are providing services with the same level of risk, they should be able to compete on price.
• I swear by ETFs, but according to this article, so does everyone else, which could be problematic! One of my favorite companies, Wealthfront, swears by ETFs, and from everything I've read, ETFs are the cheapest way to gain exceptionally well-diversified exposure to specific asset classes without rigorous analysis of specific securities. Indeed, the more I've read, the more I want to eschew all active management and just hide inside the warm bosom of the ETF. This article has a really nice summary of how ETFs work - their size rises and falls with supply and demand and they can be traded on an exchange rather than once per day, as is the case with mutual funds. However, because the index that an ETF tracks moves really quickly, ETFs would have to execute a ton of trades to mirror it exactly. To help with this, most ETFs us a structure where Authorized Participants (APs), which are often large banks, will help balance supply and demand by basically serving as a caching layer. When normal clients sell way more ETFs than there are buyers, APs buy them and then slowly sell them; when clients buy, APs sell their holdings. In practice, they seem to be focused on minimizing price volatility as a result of large orders and can gain exposure to arbitrage opportunities with the ETF prices and the prices of the underlying assets. The article runs through the risks associated with this structure, and basically comes to the conclusion that because the vast majority of trades happen between clients and do not involve an AP, ETFs are likely not systemically risky. However, it was definitely worth a read; often it's easy to forget that these funds have to rebalance relatively frequently in order to effectively track the index they are targeting.
• Low oil prices are going to be one of the biggest macroeconomic trends of 2015! Demand is down, and thanks to fracking, supply is up. Interestingly enough, shale oil will also become less economical as a result. The most interesting fact in this article was that per dollar of output, farms use 4-5x more energy than manufacturers. I just found that really surprising! A lot of that has to do with price, but it's clear that there is a lot of room for improvement in the agricultural space.
• One of my close friends is incredibly passionate about drug policy and addiction medicine; this article made me think a lot about conversations I've had with her on the subject. Apparently, heroin is starting to become more common in the suburbs, specifically with people who are using other, more expensive opioids. Apparently there are now many people who will sell their prescription painkillers and use the proceeds to buy opium. The good news, though, is that this is making methadone treatment and needle exchanges more politically feasible. It's also helping to reduce the stigma associated with addiction, something that will hopefully help us be more compassionate when it comes to addiction policy.
• Having finished The Unwinding recently, the piece about Atlanta's new transit system resonated with me, especially given that it directly referenced the 2010 Tea Party protests against a similar system in Tampa. I was also really excited to read about the high-speed rail line between Houston and Dallas that is coming online in 2021! While rail is generally an expensive investment, I've always had a soft spot for trains, and I cannot wait to have some truly high-speed railways in the good old US of A.
• In my experience, people in the US are always terrified of Chinese students and continuously worried about being overtaken in higher education. I found this article to be pleasantly contrarian on the subject. Because so many of the smartest Chinese students do graduate school at Western universities and so few return to China, there is a very real brain-drain in China. I also didn't realize that despite their dominance in STEM at the high school letter, there has never been a Chinese winner of a Nobel Prize in any of the STEM fields; this author asserts that this is primarily due to the fact that the incentive structure in China is bureaucratic and mechanical. Overall, it was an interesting lens into a challenge that I didn't realize China had.
• Single payer healthcare is one of the many things that makes my heart warm, but unfortunately, it's generally tough to do well. It's funny reading about the NHS, which apparently is one of the UK's favorite institutions through the lens of American politics, which dogmatically associates it with people dying while they wait for a heart transplant. The reforms discussed are all the things that my medical student friends pine for: coordination between primary care, social services, and hospitals; consolidated costs across hospitals; and encouraging hospitals to send healthcare professionals out to people's homes in order to improve care and reduce emergency room referrals.
• This is just a fun little pithy article about compensation consultants. The title says it all: If you hire them, pay will come. Sounds like I need a compensation consultant myself!
• Alright, this technically wasn't in print, but by god I love Buttonwood! I'm currently going through a bit of a finance phase (there's an upcoming blog post about some books I've been reading on the subject), and the column on active fund management matches my personal opinions, so I figured it must be true! Overall, I liked the way they broke down luck and competency, and I thought that the conclusion was fairly well balanced: because of the fee structure, the odds are stacked against active managers, but the top funds do seem to provide real benefits to investors. 
• This is such a super interesting piece on CEO compensation and how the options based compensation that became so popular in the 90s has led towards a very short-term focus from many CEOs, especially in the form of stock buy-backs. I need to learn more about why companies buy back their own stock, but I loved the Buffet quote: buying back stock during a bubble is the equivalent of buying $1.00 for $1.10.
• Looks like my 40-hour dream might not just be selfish! There are a lot of variables, but it's looking like there are hugely diminishing returns to working longer, and it's often much more valuable to focus on having a solid 40 hours of work rather than maximizing for hours. I am curious about whether there are people who can beat the numbers, though; Flounder definitely has an impressively high marginal output! I'll probably come back to this sometime and think about methodologies to force medical residents to work less.
• Awww, democracy is dead. That probably calls for some complex set of emojis, but in general, it does seem like we're really not doing very well when it comes to long-term planning, or planning at all, for that matter.
• Yay!!!! Robots are back!!! I really, really, really hope that this is a trend that continues through 2015 - I'm so ready to be serious, and while I love Silicon Valley, social media isn't necessarily the thing that wakes me up in the morning.
• I've never really understood activist investing, probably because I've never had the money for it. But Icahn's column was really interesting (he does sound a bit desperate for people to follow his tweets, though). Generally, the thesis was that bad management is the primary reason that a lot of companies don't perform at the level that they are capable of, and his passion is driving those bad boards and executives out. I could get behind that!
• I'm doing the personal genome project, which is about the most interesting thing I've gotten involved in for awhile; sounds like there will be more and more uses for my genes in the next couple years! In general, while Silicon Valley has been burned by biotech before, with full-genome sequencing coming down to $1,000 per person, it's possible that the field will finally transform into the data mining race so many companies have been dreaming of.
• I don't really trust bankers - they get paid too much, and as someone whose formative experience was the 2008 Financial Crisis, I tend to assume the worst. In addition, I really struggle to understand why investment banking isn't a commodity and tend to believe that the only reason it's not is because of cartel-like pricing effects. This column acknowledges all this, but then somehow seems to imply that despite these facts, banks in 2015 will become more trustworthy and less mercenary. I'll believe it when I see it.
• And again, cheers to the WLB (work-life-balance). While this column is a bit tongue-in-cheek, I really do hope that the overall themes remain true!

And anyway, hope all is well. Happy New Year, everyone!

Nimbl Makes My Head Hurt

A friend recently posted an article about a startup that provides an on-demand ATM service called Nimbl.

Now for those of you who know me, you know that I am deeply pessimistic about most startups, but Nimbl stuck out because it struck me as particularly unviable.

Here's the pitch: ATMs are annoying, because sometimes you need cash, but you don't have it on you.

What if there was a service that could make that cash appear, immediately? Enter Nimbl, a solution for a problem that uses magical cash-delivering unicorns that are both free and instant. But without the unicorns. So mostly just people on bikes who deliver cash with relatively high latency and decently high cost.

Rules of the Game

In general, Nimbl and ATMs are competing as consumers attempt to minimize the cost of accessing cash. In my model, I've used a simple world where the cost of an ATM is equal to the ATM Fee plus a variable opportunity cost that is unique for every consumer and represents the value of his or her time. Nimbl's value proposition is that in exchange for a higher fee ($5), it will reduce the opportunity cost that I have to pay to get cash.

With opportunity cost modeled as a multiplicative function of lost time and the amount I value my time, Nimbl can either reduce the time I need to spend getting money or make that time more pleasant. A great Nimbl, the one that has instantaneous cash delivery machines, delivers cash immediately, such that the opportunity cost goes to zero (no waiting).

There are two main scenarios where one might imagine Nimbl to be particularly useful:

• You need cash in the future, and you want to get it delivered to you without having to spend time getting it (an asynchronous cash request). 
• You need cash immediately, and Nimbl can provide it faster than you can walk to an ATM and back.

The Playing Field

It's pretty clear that Nimbl would struggle to work outside a large metropolitan area (the delivery time would be high, drivers would have higher transit costs, and request density would be low). As such, I've constrained my rudimentary analysis to the two markets where Nimbl exists currently, San Francisco and New York. 

Let's run through these two settings. There are about 370,000 ATMs nationally, or 1 ATM per 300 people. In Manhattan, with a population density of more than 70,000 per square mile, that means that there are more than 200 ATMs per square mile. Distributed evenly, that means that there should be less than 400 feet between you and the closest ATM at any given point in the city.For San Francisco, with just 18,000 people per square mile, there are only 60 ATMs per square mile.

As an aside, I'd be surprised if these Fermi calculations weren't slightly low given the fact that urban areas probably have more ATMs per capita than rural areas.

In any case, you'd probably only have to walk a couple of blocks to find the closest ATM (while you may have to walk further to find one that is in network and doesn't charge a fee, if you're worrying about fees, you shouldn't be paying $5 to get cash delivered to you).

Scenario 1: Future Cash

Let's say that this walk takes 15 minutes (worst case). In both SF and NYC, the median hourly wage is around $30, which means that the cost of this ATM trip is something like a $2 fee and $7.50 in lost time. And Nimbl charges $5, which means that in this scenario, it could compete reasonably well with an ATM. Go Nimbl!

If I value my time at $100 per hour, all of the sudden Nimbl is worth $27, which is starting to be some real value, and could offer a wedge into the market for ATM withdrawals.

Scenario 2: Immediate Cash

In the case where you need cash immediately, Nimbl is strictly less valuable. In this scenario, you are blocked from doing an activity until you obtain cash. Your opportunity cost accumulates linearly with time, so you want to minimize the time spent waiting. In this case, you pick the faster choice, which is almost certainly going to be the closest ATM (I don't think that it's reasonable to imagine Nimbl delivering cash more quickly than this).

The Catch

Unfortunately, in the case where you can plan ahead to get cash, you aren't constrained to choosing Nimbl. Instead, you can be more efficient and schedule an ATM stop while you're on the way to somewhere you have to go anyway. You can batch this with other errands or just stop by an ATM on your way home from work. By doing this, you can reduce the total ATM cost to something that asymptotically approaches the ATM fee, and you can do this on a sliding scale. Because of the high ATM density in a typical city, actually locating and using an ATM is relatively low-cost as long as you don't make a trip specifically for that purpose. 

Building a Business in the Real World

Finally, there are real world constraints that will hamper Nimbl's ability to grow sustainably. Firstly, all of their employees are going to be cash-rich targets, ripe for theft. Nimbl couriers are walking into each delivery with hundreds of dollars in cash based on a request from an iPhone app. It seems like Nimbl has forgotten about basic employee security in their rush to market.

In addition, Nimbl is fighting against a significant macro trend as consumers utilize credit cards more heavily and begin embracing new POS technologies like Square and Apple Pay. Both of these options eliminate the need for cash at all, and as they gain market adoption, Nimbl will lose its value. While they may factor heavily in Nimbl's overall worldview, the fact is that cash-only merchants represent a very tiny segment of the overall retail industry. 

Pivot!

If I haven't been clear yet, I think that Nimbl is predicated on a bad idea. I don't think it will be successful, and I wouldn't work there or invest in it. That being said, I also think that it could be made into something more interesting with a little bit of pivoting.

Switching from a centralized system with couriers employed by Nimbl to a decentralized system where users could choose to be either an ATM or a client would be a relatively innovative decision. In this system, cash-rich individuals could charge fees to other people who wanted to get cash quickly. Of course, security might be harder in this case, but I think there's at least something interesting here.

Overall, though, I really can't believe that this is a thing.

Economist Redux #2

In keeping with the spirit of the new blog, I wanted to circle back on some of the more interesting stories from last week.

• While the article about gay marriage was a bit heavy on self-congratulation, a lot of the statistics about gay marriage, and how quickly the public's opinions have changed on the matter, were pretty incredible. In three decades, the opinion polls have gone from ~75% of the country opposing gay marriage to ~75% supporting it. Obviously there are still many areas where members of the LGBT community still face discrimination, but reading about the turnaround in historical context was pretty incredible. 
• Buttonwood's piece about aging populations was pretty absurd. It's incredible to think that pensions used to be an expected part of working, and how the rise of the 401k is really such a modern development. There were some interesting facts, generally around how people generally get paid more as they age regardless of their productivity, but the core insight of the piece was that in a world where life expectancy is rising, it's possible that many retirees just have not saved enough money to survive. Finally, there was an interesting aside about nursing and taking care of very old people that was fairly interesting.
• Finally, the piece on China's stalling growth was interesting from a macroeconomic perspective; I just finished Peter Thiel's treatise on innovation, and the article resonated quite well in that context. Basically, China's game of catchup is starting to slow down as they get caught up. In particular, the Economist article cites some interesting studies about productivity growth. The crux of the thesis is that China has been growing primarily by expanding the funnel (adding labor and capital to the economy) rather than increasing the productivity of the workforce. In Thiel's ideology, this is not unexpected. China, as a "pessimistic and determinate" country, will likely struggle to improve productivity, as there is an element of innovative spark that isn't dramatically incentivized by their style of government. I don't agree wholeheartedly with Thiel, and I have no professional experience here, but it sounds like there's something here that supports his theory.

In general, it was a fine, although not particularly wonderful week in the world of the Economist!

Medical students could do with an infusion

I have a lot of friends in medical school. Personally, I think that it sounds hard. Not deeply unpleasant all of the time, but certainly hard. Medical school also isn't free. Tuition is somewhere around $50,000, with a bit more on top for living expenses. Let's say $60,000 per year.

Now, despite a lot of articles talking about how doctors are going to be commoditized, disrupted, or completely eliminated over the course of the next century, the facts on the ground are that doctors are still the highest paid professionals in the US. For context, that's more than CEOs. There are plenty of other factors to consider here: lost wages, long hours, low pay during residency and fellowships, but salary is a good measure for compensation. And eventually, after a generous 20 years of post-secondary education, doctors can pretty easily clear $170,000 (the average salary of a primary care physician).

And yet, despite these facts, medical students feel poor. Constrained on time, many medical students ignore basic consumption smoothing principles and artificially constrain their purchasing power. What I find even more interesting, though, is that they could choose to finance a more expensive lifestyle with very little trouble. Simply taking out an additional $20,000 of annual debt would enable them to join gyms, take taxis, buy better food, and quite frankly, enjoy what little free time they have. Amortized with their lifetime earnings, it's a no-brainer. And yet many medical students don't take on this additional debt.

Economically, this is crazy. In exchange for increasing their debt burden from $240,000 to $320,000, med students could essentially spend as profligately as they could imagine throughout medical school. Given an 80 hour work week and 8 hours of sleep per night, this is the equivalent of ~$12/hour of additional spending money, an amount that could reasonably be exchanged for high-utility activities like eating dinner with friends or going to movies.

In terms of lifetime earnings, having 30% more debt would have a marginal impact on overall lifestyle (assuming 30 years of work before retiring as a doctor, it's still less than $3,000/year, or ~2% of a primary care physician's annual income).

In general, I think a lot of this is rooted in a deeply moral approach to debt; we accept student debt as an acceptable expense, and tend to consider it in terms of an investment, while taking on debt to travel or eat fancy food is seen as deeply irresponsible. For many people, this is probably good - taking on debt to improve short-term happiness generally comes at the cost of long-term indebtedness. But for doctors, and many other people in school, it's probably worth it. And as doctors begin to approach more of medicine through the lens of quality-adjusted life-years more seriously, its acolytes could stand to apply the same logic to their own lives.

Economist Redux #1

In general, I try to at least skim The Economist every week. Although I read the print version, I'm trying something out here where I post some quick thoughts about my favorite articles each week:

• In general, it's hard to be a politically literate and not have a strong aversion to mandatory minimum sentencing and the current state of the U.S. criminal justice system. These two articles, about overpowered prosecutors and their surprisingly coercive tactics when dealing with co-operators, reinforce this general theme.
• One of the smartest people I knew in college was a phenomenal orator who had studied the classics with a rigor that I found exceptional. We always used to joke that he was perfectly suited to be a philosopher king, and fortunately for him, it sounds like philosophy and classics may be the path towards being a better manager, at least according to Schumpeter this week. This is the second such article in as many months, so it sounds like someone on the staff is trying to incept us all with the idea that our liberal arts education was worthwhile anyhow.
• How do we reverse inequality in a world where fixed transit costs make computers, robots, and cell phones cheaper than the cheapest labor? Ah, I just love these special reports. They are never particularly ground-breaking, but they lay things out so succinctly. Specifically, the section about housing prices in high-demand urban areas was quite good. The most interesting section, though, ran through some fun facts about ICT (Information and Communications Technology). It sounds like there are a couple of economists at MIT (Autor and Acemoglu) who I should be reading about; they are doing some interesting work around classifying multidimensional complexity of specific jobs, and I should probably read a bit more about this; it's likely that their work will point towards a number of different areas for technology to displace people, and continue the inexorable trend of capital replacing labor (uh oh!). Many fun opaque references to Picketty were also funny, given their recent lambasting of Capital.

Overall, this was fun. Hopefully I can maintain this section, I think it will be helpful for me to remember fun facts, like the fact that the market is currently valuing Yahoo at roughly 20% of WhatsApp when you take away Alibaba, Yahoo Japan and its cash holdings.

Consumption Smoothing for the Masses

According to an old aphorism, there is a conservation law that regulates the distribution of health, wealth, and time. Young people are be poor, but they make up for that with good health and plenty of time. As we age, we slowly exchange time for the almighty dollar, and finally, once we have enough money to retire, we have limitless time but no longer have the physical constitution to make the most of it.

While there's a zen-like beauty to the progression and the inevitability of it all, in an age of Soylent, Flappy Bird and Cow Clicker, shouldn't we expect more from ourselves? Shouldn't we push forward and demand a world in which money, time, and health can all be maximized, where we finally find a loophole around the law that holds them in such strict equality?

Fortunately, the hero of freshwater economics, Milton Friedman, left behind an academic legacy peppered with some basic tricks to get around this problem. Read on for more!

Consumption smoothing, as it's name suggests, borrows heavily from both the medical study of tuberculosis and my personal experience with a pumice stone trying to fix my feet after hiking through three days of mud and water on the Appalachian Trail.

Just kidding.

In actuality, consumption smoothing is a fairly intuitive concept. According to a model that assumes perfectly smooth consumption, your spending should track your permanent income, not your current income. Boom. Fancy economics, complete. But what does this mean...for you?

If you were guaranteed to earn a salary of $50,000 every year for your whole life, it's fairly obvious how much you should spend. We can quibble about the specifics, but if it were actually impossible to raise your income above $50,000, no matter how good you were at stocks, you probably shouldn't spend more than $50,000 each year.

Unfortunately, however, we have not yet encountered any Borg-like race that would be able to ensure this level of consistency. In the real world, we face tremendous uncertainty and risk when predicting the future, making it very rational to save for rainy days and old age. Saving is good.

But in my experience, many people could do with a slightly smoother lifestyle. The fact of the matter is that in a number of very particular circumstances, I think that consumption smoothing can be a prescriptive, rather than descriptive, concept. It can enable a more liberated life, one free from artificial financial constraint and with the ability to take control of your free time. While this may sound too good to be true (and in the worst case encourages a life of hedonistic excess) there is a particular group of people who could stand to learn a basic lesson in consumption smoothing.

Next week, we'll take a closer look at medical students and their frustratingly irrational inability to effectively finance their present spending by taking out loans against their future income.

Why I Hated the Debate Scoreboard

There has been plenty written about the debate in terms of the relative performaces of President Obama and Governer Romney. There has been far less written about the green and yellow lines beneath them that responded as they talked. According to CNN, these lines were instant polls - they were created by a studio audence of undecided voters watching the debate.

Those two lines bothered me more than anything that was said by either candidate. I found myself constantly having to turn my eyes away from the instant polls to try and figure out what the candidates were actually saying. There were a couple of times during the debate where I actually realized that I had been watching the lines and completely missed a sentence or phrase that had just been stated. So from a personal level, the lines bothered me as a viewer.

But as an American citizen, the two lines bothered me even more. I think that they represent everything that is wrong with our political system - an inability to think broadly about the problems facing the country, a focus on soundbites and gaffes over specific policy positions, and a short-term view that is always cast in terms of winners and losers rather than any hope for progress.

Why do we need to know what other people think about what each candidate is saying in order to decide what we think? Why do we need second-by-second updates from a room of people whose choices are no more valid than ours? And how do we know that this group of randomly selected people is actually representative of anything whatsoever. It is a truth proven in academic literature that an experiment that relies on a smalle sample of people can actually sometimes be worse than no experiment at all. Simply put, we are bad at understanding the differences in certainty between a small sample size and a large one. Without any information about the sample size of the instant poll, viewers likely overestimated the validity of the results that were presented on the graph below the video feeds of the two candidates.

CNN should be embarassed for trying to turn an important democratic event into a sports game. It was a decision that may have been in the best interest fo their ratings, but that certainly was not in the best interests of our republic.