Cuban Sanctions Have Done Such a Good and Speedy Job at Removing the Castros We Are Going To Try The Same Thing in Venezuela

Another of the issues I have moved a lot on in life has been trade sanctions.  Back in the day, I was all for sanctioning the cr*p out of any country run by bad people, which is a pretty long list.  Now, I am convinced this approach is totally counter-productive.  First, the story via WSJ:

The U.S. is evaluating whether to impose tougher sanctions against Venezuela’s military and vital oil industry, a senior Trump administration official said Monday, as it seeks to ratchet up pressure on authoritarian leader Nicolás Maduro to hold free and fair elections.

The Trump administration is considering a range of measures including curtailing the flow of Venezuelan oil to the U.S., the official said, in what could be the harshest blow to the country's money supply. No final decision has been made.

The U.S. has already penalized a host of Venezuelan government heads, its gold sector and has blocked investors from renegotiating Caracas’s defaulted debt. The U.S. administration has held off on more draconian efforts like an oil embargo, weighing the humanitarian cost for economically devastated Venezuela, which depends almost entirely on crude exports. The U.S. also has been analyzing any potential harm to American businesses that buy Venezuelan crude.

Now, however, the Trump administration aims to up the ante after Mr. Maduro last week defied international calls to resign and was sworn in for a new six-year term following a May re-election that some 60 countries deemed fraudulent.

“Until now, we have been going around the edges,“ the official told The Wall Street Journal. “Now it’s a new dynamic. We are no longer going to be tinkering along the edges. Nowadays, everything will be put on the table.”

This is pretty much the same approach we took for years in Cuba to "punish" Castro and get him removed.  For over 50 years these sanctions have made zero progress on their intended effect of regime change, and have instead:

  • Increased the socialist-created poverty and distress for ordinary people while Castro and other leaders partied it up on private islands and in total luxury
  • Given Marxist apologists like Bernie Sanders cover to claim that Cuba's obvious economic failure is not due to socialism, but due to American sanctions
  • Cut off business, economic, tourist, and cultural exchanges that might have brought liberal and enlightened thinking to the country.

There is No Crisis at the Border -- What I Think is Really Broken in Immigration (and Both Parties are At Fault)

Kevin Drum has a good roundup of immigration statistics that really help to demonstrate that there is no new crisis at the border, and in fact with the exception in a rise of asylum requests, the border has been getting quieter for 10 years.

I think there are clearly elements of immigration that are broken.  I will highlight three that will likely alienate both sides of the political aisle. By the way, none of the three has to do with a wall.

  1. I don't think we let in nearly enough legal immigrants each year -- all the Conservative talk that they just want people to follow the legal immigration process is all so much BS.  The legal immigration numbers are such that it is simply impossible for many to qualify.  But all this is unnecessary for many as they are not actually after permanent residence or a life of leisure on welfare.  A lot of the people who cross the border illegally just want to work temporarily and go back home.  We need a far larger guest worker program where workers can go back and forth as much as they like.  Ironically, a lot of permanent settlement here by illegal immigrants is due to tougher border controls, not lax ones.  They would rather go back and forth and just come over to work, but given the risks in crossing the border they have incentives to stay on this side.
  2. A lot of the bad things Trump is trying to do at the border can trace back to the sanctuary city movement.  I initially was sympathetic to the sanctuary movement, as I support more immigration and know illegal immigrants who are good people just trying to make a life for their family.  I have turned against it as I have seen the reaction it has created.  I think a lot of the impetus behind the stupid wall proposals is that Republicans feel like the traditional immigration defense-in-depth enforcement approaches have all been undermined fatally by the sanctuary movement and that the only way to stop illegal immigration is right at the border.  The detainment and family separation issues last year seemed to be directly tied to the sanctuary movement, as Republicans most feared (probably rightly in many cases) that any border-crossers released waiting hearings would just run for a sanctuary city and be impossible to process at that point.
  3. For years I believe we had a national consensus that admitting refugees is a good thing, and that consensus seems to be broken.  Stories from Europe of violence and other issues stemming from the wave of mostly Muslim immigrants the last few years (the media is so polarized on this I still cannot figure out if these issues are real or imagined) have turned Conservatives against admitting refugees.  I will say the Left has not helped at all by expanding the definition of what constitutes a refugee and by weaponizing Central American refugees in their resistance to Trump.  We waste all kinds of money on foreign aid and other programs that, at best, don't work.  But we have an incredible power to help the world.  First and foremost by trade and dropping our trade barriers.  But second by admitting a good number of the world's stomped-upon and destitute to this country.  Our historic numbers of such folks admitted I would argue have always been miserly, but as a minimum we need to at least stick to those levels.

As with many of my posts, I am still thinking through this.  I grew up an immigration restrictionist but today simply cannot think of a reason why (welfare state and public services aside) we have a right to restrict people's movement across borders.  I don't have a problem limiting public services for some time period and voting rights, but if someone from Mexico and I contract to rent a room in my house or work for my company, I don't think the government can restrict that.  I understand that there are perhaps limits to how many immigrants can be accomodated in a year for a variety of practical reasons, but we are way below those limits (as proven by our experience in the 19th century).

Disclosure: Like pretty much 100% of the Americans reading this, I am from a family of immigrants.  And like pretty much every other immigrant group, at one time or another my group has had the exact same language used against it that Conservatives use against Hispanic immigrants today.  My family happens to be German, and escaped the Kaiser in the late 19th century.  We have had it pretty good as far as immigrant groups go, but we had our time in the barrell in WWI.  I was at a party a while back and a woman who was a 2nd generation immigrant was railing at Mexicans for not being like other hard working immigrants who integrated into America.  I asked her where her family was from, and she said Hungaria.  I told her that early in the 20th Century Eastern Europeans like her family were treated to EXACTLY the same critiques and the strong immigration restrictions early in the century were mainly to stop eastern and southern (read: Italian) Europeans who were considered "bad" immigrants.  Replacing the Chinese who were the previous "bad" immigrants.  Replacing the Irish who were the "bad" immigrants before them.

Postscript:  I did not mention it above because I was talking more about the Mexican border and I don't think there are a lot of PHD's swimming the Rio Grande, but we for sure should be raising or perhaps waiving entirely any restrictions on talented, highly educated people from coming to this country.

Postscript #2:  I know folks have criticized me for my calling it a Berlin Wall on our border.   Sorry, but I have seen the Berlin wall from both sides and the wall prototypes look like the Berlin Wall to me.   I honestly am not sure why a border wall is immoral when set up by one side but moral when set up by the other.  Its the same wall restricting the same movement.  People respond that "its OK to wall people out of your house but not to be walled in."  But the house analogy for immigration is totally flawed and drives me crazy.  The country is not one property unless you have a Marxist definition of property.  If you want a better analogy, the county is not a house but is an apartment building with 100 million apartments.   I want to welcome people from outside up to my apartment to visit me or maybe live with me or work with me. You want to change the door code and keep my visitors out.

More on the Government Shutdown and Keeping Parks Open

I discussed the shutdown and its effects on the parks my company operates here (spoiler:  all are still open).  Shawn Regan of PERC has a good article in the National Review on the same subject:

....under new shutdown guidelines established by the Trump administration, our parks have been rightfully spared from serving as pawns in Washington’s partisan budget battles as they did in the past.

Under a contingency plan created by the administration, park officials are allowed to keep sites accessible to visitors during the shutdown with skeletal staffs, rather than being forced to close them as was the case during the 2013 government shutdown presided over by President Obama. That means many important visitor activities and park operations — from snow-coach rides in Yellowstone run by private concessionaires to guided battlefield tours of Gettysburg — can continue yielding economic benefits for the surrounding communities. This week, the National Park Service also announced it will begin tapping unspent visitor-fee revenues to bolster operations at some parks.

These new plans are attracting criticism in the familiar anything-Trump-does-must-be-bad vein. Theresa Pierno of the National Parks Conservation Association slammed the administration’s decision to keep parks open, calling it “unrealistic and dangerous,” even though the NPCA repeatedly called for parks to be reopened during the 2013 shutdown. Representative Raúl Grijalva, the new Democratic chairman of the House Natural Resources Committee, pledged to hold hearingson the administration’s decision to support park operations with fee revenues....

The Trump administration’s approach is sensible. Why unnecessarily ruin visitors’ plans or jeopardize the millions of dollars in revenue that local communities receive from park visitation? If visitation begins to pose significant health or safety concerns, the contingency plan gives park superintendents the option to close areas or shut down parks entirely, as some parks have already done.

He goes on to make the very logical point that the vast majority of BLM lands and US Forest Service lands -- whose acreage dwarfs that under management by the National Park Service -- mostly all remain open in every shutdown.  The large amounts of government staffing on NPS lands are needed to handle large visitor concentrations in small areas, something that really is not an issue in most parks in January.

Folks who have been hunting for pictures of overflowing trash cans to paint the current opening of parks as a bad idea could find just as many in the summertime on government lands when the government is not shut down.  Remember, for all the love folks want to throw at the National Park Service at these times, it is an agency that has allowed many of its parks to fall apart, with perhaps $20 billion in deferred maintenance and very little new investment in the modern infrastructure visitors are demanding.  And it has a labor model that is well suited to counting wolves but poorly suited to efficiently cleaning bathrooms and emptying trash cans even when the government is open.  This shutdown is the least of the problems faced by public recreation lands.

I think people get confused about the purpose of the government shutdown.  It is not a punishment, or a timeout, meted out by the law when Congress can't agree on a budget.  It is a mechanical (and logical) requirement that spending on certain activities stop when that spending is no longer legally authorized.  The media acts like it is supposed to be painful, and that Trump is somehow breaking the rules by making it less so.  I often criticize this President, but this is one area Trump should be applauded.  I think the wall funding issue is a dumb reason to go into budget gridlock, particularly when he had 2 years of Republican Congresses to get this done, but given the fact of the shutdown he should be applauded for attempting to reduce its impact on ordinary Americans.  President Obama, for all his reputation of caring and hope, was to my mind overly callous in explicitly trying to make the shutdown more painful for average people.

The Proposed Emergency Decree to Build The Wall is An Awful Precedent

Dear Republicans:

The last thing we need now is even more expansion of executive power.  I remember when, gosh it was like only two or three years ago, you Republicans were (rightly) bemoaning Obama's executive actions as unconstitutional expansions of Presidential power.  You argued, again rightly, that just because Congress did not pass the President's cherished agenda items, that did not give the President some sort of right to do an end-around Congress.

But now, I hear many Republicans making exactly the same arguments on the wall that Obama made during his Presidency, with the added distasteful element of a proposed declaration of emergency to allow the army to go build the wall.

I personally think the wall is stupid, will solve nothing, and will be a moral blight on this country -- its ugly to think of use having our very own Berlin Wall.  But forget all that, for now I am not arguing against the wall, but against the proposed process.

I can pretty much guarantee you that if Trump uses this emergency declaration dodge (and maybe even if he doesn't now that Republicans have helped to normalize the idea), the next Democratic President is going to use the same dodge.  I can just see President Warren declaring a state of emergency to have the army build windmills or worse.  In fact, if Trump declares a state of emergency on a hot-button Republican issue, Democratics partisans are going to DEMAND that their President do the same, if for no reason other than tribal tit for tat.

Postscript:  Now that I am handing out political advice to Republicans, what is the deal with your Ocasio-Cortez fixation?  I hear many folks on both sides of the aisle who attribute some of Trump's electoral success to the media fixation on him that kept him in the news constantly.  I am reminded of the old Pepsi challenge, where Pepsi showed people choosing their product over Coke.  But the thing was, while Pepsi's sales increased, so did Coke's because the commercials kept Coke's name prominent in people's minds and established it as the product to which everyone else compares themselves.  Do you really want to do the same thing with Ocasio-Cortez?

The Dumbest Tax -- Business Small Equipment Property Tax

There are a lot of reasons a tax can be dumb.  It can be too damn high.  It can create incentives for counter-productive behavior.  But I want to propose another category of stupid taxes -- taxes that cost WAY more to do the paperwork than the tax actually collects.  For this category I propose the dumbest tax award to the property tax many counties charge on business small equipment and moveable property.  Here is one page from a sample county return we have to fill out.

This is just one page of many -- assets have to be reported in multiple classes -- but you get the idea.  Every single business asset down to trivial things like office and cleaning supplies, screwdrivers, etc all have to be individually listed with year acquired and purchase price.  We have nearly 150 locations across the county and waste a staggering amount of time staying on top of this.

AND, the real punch line is it raises about zero dollars in tax.  Take something we have a lot of, a hand push mower.  Let's say we bought a good one at $500 about 3 years ago.  The property tax process generally discounts this -- the taxable value might be $200 or less today.  Then they might charge a half percent annual tax, which would bring in a whopping $1.  So tracking this mower and entering it on this form every year probably costs me more in labor and software we have to license than the tax itself.  I would be willing to pay a higher amount of tax if when they sent the forms they said, "Fill out these forms by March 1 or you can alternatively pay $500 and be done with it."

I understand they want to be able to tax the crap out of the Exxon refinery, but there really needs to be some minimum cutoff.  Florida did this years ago and it is great -- there is a card that you sign to certify your total personal property is under some number and you avoid the process altogether.

PS, we are tired of the old asset management software we have -- if someone out there knows a package that works well for this kind of thing, email me at the link above.

Why First-Mover Advantage in a New Industry Isn't Always An Advantage

I have written in the context of both the new marijuana stocks (e.g. Tilray or Canopy) and Tesla in EV's that the market is putting a whole lot of value -- in some cases 90+% of their current market value -- on these companies being first movers in potentially large and lucrative new industries.

It is hard to predict early on where in an industry's value chain the profits will be, or if the industry will be profitable at all.  Who will make money in marijuana -- the growers?  the retailers?  the folks that package the raw material into consumer products?  The early marijuana entrants are focusing on cultivation, but in tobacco do the cultivators or the cigarette makers who buy from them make the most money?  And as anyone at Myspace could tell you, being first is not always a guarantee of success, and in some ways can be a disadvantage.  Second movers can avoid all the first-movers costly mistakes.

I though of all this seeing the infographic below on changing leaders in the Internet world.  Almost all the top 20 companies in the first year are largely irrelevant today -- AOL and Yahoo are technically still in business but only because they have been bought up by Verizon in a group of other dogs they seem intent on collecting.

 

Silicon Valley Begged for Government Intervention in Their Industry, and They May Soon Get It Good and Hard

Readers of this blog know that I have always been skeptical of the value of net neutrality rules.   I see the Internet just like any other vertical value chain with multiple players, which we might oversimplify as content providers who hand off to bandwidth providers to get in front of the customer.  Nearly every industry has these vertical value chains with multiple players -- think Coke and Pepsi fighting for floor space and margins through Wal-Mart.  What is amazing to me is how the large content streamers, particularly Google, Netflix and Facebook, have somehow convinced the public that the whole future of the Internet depends on the government hamstringing the bandwidth providers in their relationship with the content producers.

When Youtube wants to stream at 4K rather than 1080p, the majority of the instractructure hit is on the bandwidth provides, and Google/Youtube wants that bandwidth to be there but does not want to have to pay for any of it.  That is why these companies are the main supporters of net neutrality, but they are smart enough not to say this, but to instead flog some mythology that bandwidth providers might block or discriminate against certain providers.  Even supporters of this meme are forced to agree that it is wholly hypothetical, that no one can really point to any good examples of it happening (I have always suspected that general public hatred for Comcast in particular has created more support for net neutrality than anything else).

This argument for net neutrality is even odder as clear discrimination and deplatforming is happening on the Internet apparently everywhere BUT with the bandwidth providers.  Or as I wrote on Twitter:


This is my usual long-winded lead in for a very good article I read a while back and forgot to link.  It's from Drew Clark at Cato and is titled "Seeking Intervention Backfired on Silicon Valley".  I recommend the whole thing but here is a small piece:

The companies that drove the engine of America’s information technology machine essentially argued as follows: We provide the good stuff that you — the American consumer — want. You go to Google to get your searches answered. You want Facebook to keep up on posts from friends, families, and trusted content providers. Access to the content in the Apple iTunes store or to Amazon Prime streaming video subscriptions doesn’t need to be regulated because we tech giants compete vigorously among ourselves. But Washington does need to step in and regulate the telecom market because of a lack of competition among ISPs. And the FCC agreed in 2015 with what was officially dubbed the Open Internet Order. ...

Major content companies like Google, Facebook, and Netflix feared that ISPs would seek to throttle their services as a way of extracting payment for prioritization. Particularly for data-intensive video- streaming services like Netflix and Google’s YouTube, this concern had a certain economic logic, even as it remained hypothetical. Having long courted Silicon Valley as a key constituency and facing a highly visible public demand with enthusiastic grassroots support on the left, Obama complied....

Silicon Valley’s regulations-for-thee-but-not-for-me attitude has come back to bite them. They want the strictest form of regulation for telecommunications providers but no scrutiny of themselves, and now the tables have been turned.

Pai has not hesitated to point out the hypocrisy as he has moved to undo the net neutrality rules. In a November 29 speech in the lead-up to his net neutrality rollback, he said that the tech giants are “part of the problem” of viewpoint discrimination. “Indeed, despite all the talk about the fear that broadband providers could decide what internet content consumers can see, recent experience shows that so-called edge providers are in fact deciding what content they see. These providers routinely block or discriminate against content they don’t like.”

Yes, The Federal Campgrounds We Operate Are Open During the Government Shutdown

Several readers have been nice enough to write me and ask how my business is doing during the government shutdown.  As background, my company privately operates public recreation areas, mostly campgrounds, under concession contract.  We manage public lands for many different government agencies, but many of the campgrounds we run are in the Forest Service.  Typically the Forest Service (and National Park Service) must close in this and most other shutdowns.  In fact, public parks are often a significant pawn in budget battles, so much so the term "closing the Washington Monument" has become shorthand for using popular public facilities as a leverage point in spending fights (the fact that politicians always threaten to close the MOST popular public services when money is tight rather than the most useless is exhibit A in why we shouldn't trust our money to Congress).

But all the Federal facilities we operate are still open right now through the government shutdown.  The reason for this is that our company does not receive a dime from the government -- all the money goes the other way.  We operate the facilities essentially under a (very restrictive) lease.  We collect visitor use fees and then pay a bid percentage of those fees back to the Feds as our rent -- this is a huge advantage to the government as before our management they typically lost money even after collected visitor fees and now they are gaining money**.  Since the government does not have to fund these locations, and since their daily operation requires no federal employees, the parks we operate are typically not closed during government shutdowns.

Long-time readers will be familiar with one exception -- in 2013 during the Obama Administration we were forced to close during a Federal shutdown.  Originally, the agencies we work with (particularly the US Forest Service which is part of the Department of Agriculture) gave us the usual guidance, that we were to remain open.  Then, suddenly, our company and those like it were told to shut down.  When I and my trade group attempted to protest the decision with whatever official in the agency made the decision, we were told it came from "above the Department of Agriculture," which narrows the field of possible decision-makers pretty substantially.  My hypothesis, though I can never prove it, was that the Obama Administration wanted to put as much pressure on Congress as possible, and closing the Washington Monument doesn't work as leverage if some damn private company is keeping it open.  My competitors and I banded together and took the US Forest Service to court (past articles here) and were in the process of winning our case when the shutdown ended, but ever since then the US Forest Service has allowed us to stay open in shutdowns.  If you have WSJ access, they actually covered our effort here; I made an early morning appearance on Fox & Friends; Reason TV did a nice piece; and Hans Bader of the CEI was all over the story and a big help in getting the issue some visibility.

Christmas and New Years are popular times for folks to visit in places like Sedona and Florida where we run Forest Service recreation areas, and we are happy we have been able to stay open and serve them this time around.

**Postscript: This private concession management model also has a benefit in state and local budget battles, though it is slightly different.  I can tell you from loooooong personal experience that the public really does not like recreation use fees on public lands.  My taxes should pay for that!  But now, and certainly in the future, our taxes go mostly to fund programmed expenses like healthcare and welfare plus our bloated military.  Anything else is going to be starved -- which leads to the estimated $114 billion in deferred maintenance in federal / state / local public recreation areas and parks ($20+ billion in the National Park Service alone).  Seeing this happening, most of the public has become reconciled to user fees for recreation as long as the recreation fee is used to support the local park they are visiting.

To this end, one reason folks are sometimes leery about private management of these lands is they wonder if their fees are being sucked away to some corporate equivalent of Scrooge McDuck's gold vault rather than supporting operations at the park.  It's the reason I keep this chart up on our web site:

In fact, it is the government agencies themselves that often sweep user fees out of the parks and into general revenue funds.  The Arizona legislature did this for years to the state parks agency.  The result in this situation is that the infrastructure crumbles while the user fees that should be fixing these issues actually has just become another general revenue tax.  I think of deferred maintenance in government facilities -- parks, subways, roads, etc -- as a kind of shadow borrowing where government officials borrow against the infrastructure.  This borrowing is almost invisible, at least on an incremental basis, and often the debt is eventually defaulted on as the infrastructure is never repaired and has to be closed or torn down.  By putting parks under concession management, user fees can no longer be swept away from the management and maintenance of the park, and private companies can often be held accountable for poor maintenance more readily than agencies are able to hold themselves accountable.

On The Continuing, Pervasive Hatred of Short-Sellers

Readers will know that I have somehow been sucked into the Tesla vortex and spend too much time watching Tesla and Elon Musk's antics.  I tried to explain some of the reasons for this fascination here.  Every time I swear off following Musk, he does some new nutty thing, like his joke of a demonstration the other night of his Boring Company tunnel in LA  (as usual, Musk has come up with another idea that would look cool on the cover of a 1970's Popular Mechanics or Boys Life magazine but fails almost every engineering, physics, and business logic test).

Anyway, I am going to mostly resist writing about Tesla and discuss the strange bias many Americans (really, many Westerners) have against short-selling.  Here is a tweet from a random Tesla supporter that demonstrates what I see every day from Tesla fans:

This notion that short sellers are not doing anything legitimate, that they do not deserve legal protections (or else should be banned entirely), and that they prosper only by spreading false information are not just a staple of hard core Musk fanbois, but are actually quite common attitudes.  I saw it just the other night watching the movie The Accountant again (a family favorite in part because a streak of OCD and Asperger's runs through my family).  In this scene, the guy talking is called Brax and he is a gangster and a mercenary, but for a variety of reasons the film-makers need to make him more sympathetic than the average thug.  Watch the justification he gives:

The movie-makers are expecting that the average viewer will discount his thuggery here because he is beating up a short-seller, and we all know those guys are unethical and destructive (by the way, I too would be tempted to short a company that has stuffed its workers' pension fund with its own stock, that is a big red flag to me).

Short selling, in which one is betting the value of an asset will go down in the future, is a perfectly legitimate and valuable way to participate in markets.  For those who are unsure what short selling is, here is how it works.  People who own large blocks of a stock, let's say Exxon-Mobil or XOM, can lend their stock, for a fee, to other people.  They do this as a way to generate extra income for their portfolio, particularly if they intend to hold the stock for the long term.  The people who borrow the stock then immediately sell it.  I know, this seems weird -- your neighbor who lent you his mower might be ticked off if you immediately sold it.  But folks who lend their shares know you are going to sell it.

So I borrow and sell 100 XOM shares for, say, $90.  If the price drops to $70, I can buy the stock back at that price and I make a $2,000 profit.  The risk, though, is that if the price keeps going up, I am going to have to buy back at a higher price and lose money.  If the price goes up too much, the broker is going to issue a margin call and likely force me to pony up more cash or buy back at the unfavorable price to cover my position.  If I had to sell at $110, I would lose $2000.

Note that short selling has a more dangerous risk profile than going long, or buying the stock.  If you buy 100 shares of XOM at $90, the most you can lose is $9,000 -- your losses are capped.  On the other hand your upside is unlimited -- if XOM goes up to $500, you make a fortune.  For short-selling, this is reversed.  The short-seller's gain is limited -- the most they can ever gain is $9,000 if the stock goes to zero.  But their losses are uncapped -- if XOM goes up to $500, they will have lost over $40,000.  And even if the stock shoots up to $500 and eventually falls to zero (as do many bubble companies that get shorted), it may be hard to ride the short position to the end, either due to margin calls or failure of intestinal fortitude.

Short selling makes a ton of economic sense in part because it HAS to improve markets.  First, it increases the liquidity of the market and the number and diversity of participants.  The more subtle reason is because markets and pricing are information discovery tools.  Short selling allows more people with information about a security to participate in this information exchange, which almost by definition improves the market.  As Don Boudreaux wrote years ago:

To ban short-selling of stocks is to short-circuit an important mechanism through which people share their knowledge and expectations with others.  Banning a mechanism that better allows share prices to reflect the expectation that the underlying assets are not worth as much as current market prices suggest does nothing to change the underlying reality.  Such a ban merely distorts knowledge of this reality

I like to think about economics and business issues but I am not an economist.  My layman's way of thinking about short selling was outlined in a post 10 years ago, written in reaction to a temporary ban in short selling during the market turmoil of 2008.

Someone noticed that just before certain stocks crash in value, there is a lot of short-selling.  So the US government has banned short-selling, at least temporarily.  Classic cargo-cult logic.

Boy this sure makes perfect sense in a time when we are concerned about speculative bubbles -- let's ban one of the most important tools that exist for bubbles to be shortened and made less, uh, bubbly.  Here is why (very briefly and non-technically) short-selling takes the edge off speculative excesses.

At the start of the bubble, a particular asset (be it an equity or a commodity like oil) is owned by a mix of people who have different expectations about future price movements.  For whatever reasons, in a bubble, a subset of the market develops rapidly rising expectations about the value of the asset.  They start buying the asset, and the price starts rising.  As the price rises, and these bulls buy in, folks who owned the asset previously and are less bullish about the future will sell to the new buyers.  The very fact of the rising price of the asset from this buying reinforces the bulls' feeling that the sky is the limit for prices, and bulls buy in even more.

Let's fast forward to a point where the price has risen to some stratospheric levels vs. the previous pricing as well as historical norms or ratios.  The ownership base for the asset is now disproportionately made up of those sky-is-the-limit bulls, while everyone who thought these guys were overly optimistic and a bit wonky have sold out. 99.9% of the world now thinks the asset is grossly overvalued.  But how does it come to earth?  After all, the only way the price can drop is if some owners sell, and all the owners are super-bulls who are unlikely to do so.  As a result, the bubble might continue and grow long after most of the world has seen the insanity of it.

Thus, we have short-selling.  Short-selling allows the other 99.9% who are not owners to sell part of the asset anyway, casting their financial vote for the value of the company.  Short-selling shortens bubbles, hastens the reckoning, and in the process generally reduces the wreckage on the back end.

If you want to understand the volatility of a stock like Tesla ($tsla), the issue often is not short-selling but the extremely tiny float -- only a very small percentage of the equity in the company actively trades, while the rest sit in hands of folks who are not going to trade or even lend the stock (e.g. Elon Musk).  With such a tiny float, small changes in sentiment lead to huge price swings, making it a hair-raising investment for both longs and shorts.  This situation would likely be worse without the shorts.

As for the supposed false information spread by shorts, I am sure that happens.  But information gathering by shorts is one of the reasons we should treasure short-selling.  Here is my analogy -- one of the few good things about having Donald Trump as President is that the media actually is doing its job and is skeptical of everything he says and does.  It digs into the truth of his every single statement.  And sometimes what the media comes up with is fake or wrong.  But I would still argue we are better off with this sort of accountability than we were with the media as lapdogs to Obama.  Just look at the problems and potential rights violations at the border.  The media ignored most all of this same activity when it was happening under Obama, but is rightly (finally) highlighting it under Trump.

Trump supporters hate the media, and argue that it was "long" Obama and "short" Trump, but whatever the reason, we are learning things we did not know before and knowledge has value.  Shorts play this same role in the market.  For years everyone fawned over Elon Musk and Tesla.  The dedicated EV magazines were basically house organs of Tesla, a sort of Tesla Pravda.  The longs did not want to see or hear any criticism.  Essentially, no one wanted to be skeptical of the Tesla story except the shorts.   The shorts may turn out to be wrong, but they are finding holes in the Tesla love story and that is valuable.

Postscript:  If you do not invest and want a tiny taste of the hate short-sellers engender, go find the hottest, rowdiest craps table in a Vegas casino and start betting the Don't Come line.

San Diego Restaurant Recommendation

I am not a foodie you should normally trust, but if you are in San Diego you need to go to Breakfast Republic.  Yes, I know it is breakfast and brunch only but skip your evening meal and just go.  Most amazing breakfast I have had.  Been there several times to their Pacific Beach location.  If there was justice in the world, their founder would be as famous as Elon Musk.

PS - if you really, really insist on getting a traditional dinner recommendation, try cucina urbana, just a block or two away from the viaduct in Balboa Park.

Does Mounting Famous Heads over Society's Mantle Really Make Us More Ethical?

I thought this was a reasonable question to be asked about the mob action to remove Kevin Hart from hosting the Oscars:

This brings us back to the question that’s been bothering me. What was accomplished by keeping him off the Oscars stage? Because Hart no longer stood by the jokes in question, the Academy’s decision to stick with him could not reasonably be seen as an endorsement of those jokes, or as a sign the Academy accepted them. So how does anybody benefit by keeping Hart from hosting the ceremony? Is the immense pressure supposed to function as a deterrent?

The notion that people must be purged from a given platform for past mistakes (often unearthed at key moments in their lives) seems to be quickly growing into a reflex and becoming our conventional wisdom, and that goes for both sides of the ideological divide. Is it the only reasonable consequence for these perceived transgressions? Is it reasonable at all when, in Hart’s case, a person’s views have changed?

I wrote this on Twitter in response to a different online mob action:

Dear World:

I was an immature idiot in college. When I was there, part of the appeal was providing a safe space to say or do stupid things so that one can test them out and find them wanting. All those who didn't do, say, or believe stupid sh*t at age 20 may cast the first stone.

I don't think I ever used force on someone or stole any of their stuff. I treated a girlfriend somewhat callously and apologized to her years later. Other than that, I am not sure I would even bother to apologize today for anything I said or wrote 35 years ago in college.

If you pointed it out to me I would likely say, "Yeah, that was stupid. I said and believed a lot of stuff then I don't now. So what? It used to be we didn't treat stuff coming out of the mouths of 20-year-olds very seriously for a good reason.

 

Does the New Worpress Editor Suck as Much as It Seems, Or Am I Missing Something?

WordPress 5 changed to an entirely new editor where construction of a post that historically just involved typing now involves pasting together a series of blocks that have to be added, for example, just to have quoted text.  Am I missing something?

This seems ludicrously more awkward than the original editor, which I immediately switched back to by downloading and activating a plugin for that purpose.  My guess is that this functionality is aimed at the large number of folks who use WordPress as a content management system for building websites and not for actual bloggers.  I am guessing that content management for website design is actually a much bigger market for WordPress than blogging, and so development is focusing more on that market.  Maybe someone needs to fork WordPress for a version track focused on traditional bloggers.

Update:  Apparently the WordPress 5 editor is the same as the Gutenberg editor that has been available as a plugin for a while.  A couple of observations.  First, few people every really liked Gutenberg.  It has a 2.5 star rating which is really low for any WordPress plugin with a lot of installs, particularly one WordPress decided to make standard.  And second, this just reinforces my sense that WordPress 5 is a sign that WordPress is leaving the blogging community behind and focusing on CMS.  I have used WordPress as a CMS for our company websites until we mostly switched to ProcessWire, which is an actual CMS from the ground up and not a modified blog engine.  Gutenberg made much more sense as a CMS tool than a blogging tool.

DOS Attack of Some Sort

Having a variety of site issues.  I turned off some of my cache and security to try to diagnose why some folks are not seeing newer posts, and then immediately got a DOS attack that shut down the site.  Working on it but may be the weekend before entirely fixed.

I Am Pretty Sure I Am Not Going to Like What's Going On In This Room

Business Strategy, The Insource / Outsource Decision, And Tesla

I have a confession -- at Harvard Business School (HBS), I loved business strategy cases.   This is a confession because most ex-HBS students have at best a love-hate relationship with cases in the same way that the Band of Brothers, or the 506th PIR, had with Curahee Mountain.  The first 8, 10, 12 cases were fine and you could handle them. But the problem is that they kept coming and coming, two or three a day, like a North Korean human wave attack.

There is a pretty well defined template for B-school cases, at least in my day (I love being old enough to say that).  A typical example begins with the CEO-on-the-Gulfstream-jet trope, e.g.

Jessica Stevens, CEO of Acme Enterprises, leaned back in her seat on Acme's brand new Gulfstream VI corporate jet, thinking about the meeting that lay ahead of her.  She was flying back to her Pittsburgh headquarters for the quarterly board of directors meeting, and the board was expecting real answers and a specific plan for how she intended to deal with Acme's mounting problems.

Over the last 3 years Acme's growth had plateaued at the same time a slew of new companies had entered its industry, putting pressure on Acme's traditionally strong margins.  In addition, Acme had just lost the bidding on two critical government contracts, its largest plant had just burned down, its CFO was under SEC investigation, a strong unionization drive was in the works supported by Antifa protests outside her house, and she had damaged her favorite Chanel purse when she launched it into the face of her lying mancy VP of manufacturing who she had just caught in bed with her husband.

OK, that last sentence is probably an exaggeration (cases were not quite THAT interesting).  But for me, strategy cases were like who-done-its or locked-room Agatha Christie mysteries.  Would the CEO extricate herself, and if so, how?  What would I do?  If someone were to write business strategy mysteries I would eat them up (the closest I can think of is Clavell's Nobel House -- how would the Nobel House extricate itself -- and even despite the absolutely unrealistic Dallas and Dynasty-like portrayals of business, I love that book).  It is telling that the only novel I have written (OK, more accurately, the only novel I have finished) has heavy doses of business strategy in the plot.

A lot of people write me and say, "Coyote, why the fixation on your blog and Twitter with Tesla?"  Unlike what Tesla fanboys guess about me, I actually like electric cars (though I am not thrilled with my having to subsidize them, but that is not a narrow Tesla problem).  I am riveted to the Tesla story because it totally feels like a great HBS case study of the future.

Long-time readers know I think that there is fraud here -- the SolarCity buyout, to my eye, was totally corrupt.  But if I found fraud fascinating, I would write constantly about Enron and Theranos (heck, I worked for Jeff Skilling at McKinsey on the Enron study so I could even be quasi-insider).  But fraud is only fleetingly interesting.  I can think of 5 companies that I am shorting today that I think are engaged in fraud, and I can't remember mentioning one of them on Twitter or this blog.   I find Theranos mildly interesting, but only because my wife is borderline diabetic and really was enthusiastic for Elizabeth Holmes's vision.

But here is the situation a couple of years ago at Tesla.  Think of this as the case study introduction:

  • Tesla has introduced a real, desirable EV in an industry where EV's were basically crap cars no one wanted produced for PR and some regulatory reasons.
  • For the first time ever, Tesla has demonstrated there was a large market for luxury EV's
  • With the model S, Tesla had what has proved to be at least a 7 year lead over competitors (introduced in 2012 and similar products from several companies coming out in 2019)
  • Tesla had the Model 3 ready to be introduced, with projections of topping 10,000 per week shortly, which could be one of the largest selling sedans in the world, EV or no.  Tesla had as many as 400,000 reservations already in hand for this car.
  • Tesla had a founder (sort of, Musk is credited as founder but really isn't) with the Midas touch, sometimes called the real world Tony Stark, with a huge legion of followers who believe that he is the smartest and most ethical (given his green vision) engineer in the world and can do no wrong.
  • Tesla had shareholders almost literally throwing money at the company, giving it a higher total market value than GM or Ford and with valuation metrics orders of magnitude higher than traditional car companies, based in part on visions of world-leading self-driving capabilities and comparisons to Apple.  The closest thing I have ever seen to the Simpson's take my money meme.

I can imagine the case study now -- should Tesla focus on the high-end of the market now and seek an immediate profit and a potentially sustainable long-term niche?  Or should it go all-out to do nothing less than become the major player in the entire worldwide automotive market, taking advantage of its high valuation to raise billions of capital to fund years of cash burn?  These are super interesting questions that I will not address today.  Tesla's apparent choice in this question is ... neither.  It has clearly gone all in, at least in rhetoric, on dominating the automotive market and Elon Musk has announced (at least on Twitter) future new products in nearly every automotive niche.  But at the same time Tesla has refused to leverage its high stock price to raise capital and actually has been cutting back on capital spending and slow-rolling expansion plans. I frankly cannot explain it, and won' try here.

What I want to discuss is the frequent comparison to Apple.   Elon Musk likes to compare himself to Steve Jobs and Tesla to Apple, but I don't think the comparison is very apt.  A big part of this is the differences in their in-source and out-source decisions.

As background, my thinking is shaped by several aspects of my HBS education.  The first is a business strategy curriculum crafted from the very first class to make one skeptical of flashy, sexy businesses.  Our first two cases in first year business strategy were an incredibly sexy electronics company, followed by a dull-as-dirt water meter company.  But it turned out that the water meter company minted money, with little technology change and huge moats against competition, while the electronics company was having to invest billions every few years just to stay in the game and never really earned a return on capital.

Another factor that shapes a lot of my thinking was that in-source / out-source decisions were very much in the spotlight at HBS at the time.  It was a time when the very nature of the industrial conglomerate was in question, and we were constantly made to ask whether a company really had to own function X to be profitable and successful.  Over and over and over, in company after company, we were asked to think about what were the critical success factor for a business, as well as what the most profitable elements of the vertical value-delivery chain were, and to think about structuring companies solely around these key elements, and outsource everything else.

To a large extent, this has been a key to Apple's success.  As I observed in comparing Tesla to Apple:

But as far as the iPhone is concerned, Apple is a design and software house.  It does not build the phones, it has a partner do it for them.  It does not write most of the applications, third parties do that.  And (at least in the early days) it did not [sell] through its own stores, it sold through 3rd parties.  An Apple-like Tesla would NOT be trying to build its own manufacturing, service, and fueling capacity -- it would leverage its designs as its unique value-add and seek others to do these other lower-margin, capital-intensive tasks.

Yes, we have Apple stores now, but this was NOT part of the initial strategy and success.  The initial Apple iPod and iPhone strategy basically had Apple outsourcing everything from manufacturing to sales as non-strategic, and keeping in-house the design and software functions.   As it turned out, they were right, because they certainly made much better margins than anyone else in the vertical value chain.

But for all Tesla compares itself to Apple, it has take a totally different approach.  Like most manufacturers, it designs its products (which it is pretty good at).  It also manufactures them (which it is not so good at).  But unlike other auto makers it also owns its own sales and service network (instead of third party dealers) and it is not very good at this and this activity consumes a lot of capital.  Also unlike other auto makers, it also is building out its own fueling network, something GM and Ford can rely on Exxon for. AND, Elon Musk at various times has said we would in-source building of car carrier trailers, car transportation trucking firms, and body shops.  I have argued for years that one of the things that Tesla fanboys love about Tesla -- that it is so integrated vertically -- is an Achilles heel because it greatly increases the capital it needs to grow, takes it into low-margin business segments, and forces it to do highly-technical functions like auto manufacturing it does not have the skills for.  If Tesla really were like Apple, it would have developed a 3rd party dealer network, it would have partnered with someone else to do the charging stations (as VW has) and it would have farmed out the actual manufacturing to an auto-equivalent of Apple's Foxcon (maybe Kia?)

I wish I had the guys name but the person in this blog said it far better than I have been able to say it to date.  From "Credit Bubble Stocks"

The test of whether you are an electric vehicle “disrupter” is: how many manufacturers are licensing your battery? If you’d actually invented a better electric battery or other EV technology (battery is the only technology that matters though), you could license them and have a 10x book business. Tesla not only did not do a battery licensing model, but they effectively did the opposite. Consider the parts of the vehicle industry that they have decided to in-source versus the ones they have decided to outsource. As we know, they decided to in-source and compete head-to-head on manufacturing. The results have shown that they are worse than their more experienced competition. They decided to in-source the automotive retail, which had not been done before and was not legal in most states. (And still is not legal in eight states). This had been a huge distraction from the manufacturing side and has resulted in abysmal customer service. But of all things to outsource, they outsourced the battery production to a joint venture with Panasonic. What should be the entire premise of an electric vehicle company is not even enough of a competitive advantage to do in house.

I am not totally sure I agree -- I think Tesla would argue the key is in design and software, just like Apple.  But even if that is true, why are they doing all this other stuff that they don't do very well and is a total distraction and sucks up needed capital?

TV Recomendation -- Wolf Hall

I do truly think we are living in the Golden Age of TV.  There are so many great shows -- Game of Thrones, the Crown, Counterpart, even a few guilty pleasures like Outlander.  I wanted to recommend one I just watched and I have not heard a lot about before -- Wolf Hall, a retelling (yes, yet again) of the Henry the VIII era from the perspective of Thomas Cromwell.  I thought it was really terrific, with Mark Rylance's quirky take on Thomas Cromwell and Clare Foy as Anne Boleyn and Damien Lewis as Henry (best casting ever as Henry, but I really like Damien Lewis).  Plus a great supporting cast including folks like Jonathon Pryce and Mark Gatiss.  Only 6 episodes and it seems like the logical season 2 is missing, but I really enjoyed it.  The acting is great, but I must confess I liked Natalie Dormer as Anne Boleyn in the Tudors better, probably because I have a thing for Natalie Dormer (which my wife does NOT understand).  The Wolf Hall take on the protagonists is quirky -- it is probably the most sympathetic take on Wolsey you will ever see and the least sympathetic take on Moore you will see.  Very intelligent and avoids (for good and for bad) the Skinemax aspects of the Tudors series.

On Losing the Thread -- Update on What Actually Remains of the Russia Collusion Tale

I want to thank everyone for all the comments on my thread asking for someone to give me the current, most damning case for Russia collusion.  I am going to try to pull together a best-of version to post here.

However, I wanted to post a few excerpts from TA Frank at Vanity Fair, in an article titled "IS THIS IT?: A TRUMP-HATER’S GUIDE TO MUELLER SKEPTICISM" that seems to almost perfectly capture my current take on the whole affair:

Certainly, Trump’s ethical standards are low, but if sleaziness were a crime then many more people from our ruling class would be in jail. It is sleazy, but not criminal, to try to find out in advance what WikiLeaks has on Hillary Clinton. It is sleazy, but not criminal, to take a meeting in Trump Tower with a Russian lawyer promising a dossier of dirt on Clinton. (Just as, it should be mentioned, it is sleazy, but not criminal, to pay a guy to go to Russia to put together a dossier of dirt on Trump. This is one reason why the Clinton campaign lied about its connection to the Steele dossier, albeit without the disadvantage of being under oath.) It is sleazy, but not criminal, to pursue a business deal while you’re running for president. Mueller has nailed people for trying to prevaricate about their sleaze, so we already have a couple of guilty pleas over perjury, with more believed to be on the way. But the purpose of the investigation was to address suspicions of underlying conspiracy—that is, a plan by Trump staffers to get Russian help on a criminal effort. Despite countless man-hours of digging, this conspiracy theory, the one that’s been paying the bills at Maddow for a couple of years now, has come no closer to being borne out. (Or, as the true believers would say, at least not yet.)...

Let’s take a moment to consider Mueller himself. The cut of his jib is likable, and the trad Brooks Brothers vibe of his wardrobe is a perfect complement to his job title. But it’s hard to avoid the suspicion that he’s playing a political game at this point. To be fair, I’m vulnerable to confirmation bias of my own in this assessment, since about a year ago I suggested that Mueller was going to drag out his investigation until 2019, when Democrats were likely to be back in charge of the House, and seeing a prediction play out can lead to unwarranted certitude. But the reports we’re starting to see suggest a man who’s fallen prey to the same state of mind that warped Ken Starr—namely disgust over the people you’re investigating and a desire to justify the sunk capital.

He includes this warning, which oddly enough is nearly identical to what I used to tell my Republican friends as they were giddy about a Ken Starr investigation into investment wrongdoing resulting in ... charges of perjury about lying about an extra-marital affair

Partisanship is hostile to introspection, but at some point maybe we’ll look back and think again about what was unleashed in the panic over Russian influence. Trump’s White House has pursued what is arguably the harshest set of policies toward Russia since the fall of Communism—hardly something to celebrate—yet nearly all the pressure, from the center-left as much as the right, is toward making it even tougher. As for those tapping along to S.N.L. songs in praise of Mueller and his indictments, they might want to remember that Trump won’t always be in office. The weapons you create for your side today will be used by the other side against you tomorrow. Do we really want the special-counsel investigation to become a staple of presidential life? It’s a creation with few boundaries on scope and a setup that encourages the selection of a suspect followed by a search for the crime, rather than the other way around. This caused calamities in the era of Bill Clinton, and it doesn’t get any better just because the partisan dynamics are reversed.

New Scam Received Today -- Your Social Security Number is Being Cancelled Due To Suspicious Activity

This is a new one on me, but very similar to the IRS call scams of the last year or two (right down to the odd colloquial language which is entirely inconsistent with how the government speaks in official pronouncements).  Apparently there is suspicious activity on my social security number and it has been suspended and may soon be cancelled along with all my assets unless I call them right away and give them all sorts of private information (starting with my social security number, of course).  Consistent with past observations here that the entire US caller ID system is totally f*cked, the caller ID said it was from a US Government Office in my local area code but the number I was supposed to call was somewhere else entirely.  I forgot to take it down and check it out.

As always, beware.

I Have Totally Lost the Thread Here -- Based on What We Know Now, Someone Please Make the Case for Me on Trump-Russia Election Collusion

Readers know that as far as the Trump-Russia collusion story goes, my position generally has been:

  • I am skeptical there is anything there (aside from a really stupid Trump tweet in the campaign inviting Russia to send him Hillary's emails).  At this point, I don't even know what "collusion"means in this context.  Was it sourcing oppo research (perhaps via Wikileaks) from Russia?  Is that illegal, or just really sleazy and unsavory?
  • I don't understand why Clinton's funding of the Trump dossier which was filled with material from Russia wasn't a similar level of Clinton-Russia collusion (though more intelligently done, through multiple cutouts of law firms and consulting firms)
  • Trump's other business and personal dealings seem to be far more fertile ground for seeking out damning facts about him -- in other words, I am pretty sure there is dirt and sleaze here but if I were in charge of finding it, I sure wouldn't start at Russia

However, intelligent people who I respect and who are more in touch with all things inside-the-beltway still take the Trump-Russia collusion story seriously seriously.  So, in the comments or in an email, I invite someone to change my mind.  As a minimum, your response must define what you mean, exactly, by collusion -- what form it took and collusion to do what exactly.

Knowledge and Certainty "Laundering" Via Computer Models

Today I want to come back to a topic I have not covered for a while, which is what I call knowledge or certainty "laundering" via computer models.  I will explain this term more in a moment, but I use it to describe the use of computer models (by scientists and economists but with strong media/government/activist collusion) to magically convert an imperfect understanding of a complex process into apparently certain results and predictions to two-decimal place precision.

The initial impetus to revisit this topic was reading "Chameleons: The Misuse of Theoretical Models in Finance and Economics" by Paul Pfleiderer of Stanford University (which I found referenced in a paper by Anat R. Admati on dangers in the banking system).  I will except this paper in a moment, and though he is talking more generically about theoretical models (whether embodied in code or not), I think a lot of his paper is relevant to this topic.

Before we dig into it, let's look at the other impetus for this post, which was my seeing this chart in the "Southwest" section of the recent Fourth National Climate Assessment.

The labelling of the chart actually understates the heroic feat the authors achieved as their conclusion actually models wildfire with and without anthropogenic climate change.  This means that first they had to model the counterfactual of what the climate could have been like without the 30ppm (0.003% of the atmosphere) CO2 added in the period.  Then, they had to model the counterfactual of what the wildfire burn acreage would have been under the counter-factual climate vs. what actually occurred.   All while teasing out the effects of climate change from other variables like forest management and fuel reduction policy (which --oddly enough -- despite substantial changes in this period apparently goes entirely unmentioned in the underlying study and does not seem to be a variable in their model).  And they do all this for every year back to the mid-1980's.

Don't get me wrong -- this is a perfectly reasonable analysis to attempt, even if I believe they did it poorly and am skeptical you can get good results in any case (and even given the obvious fact that the conclusions are absolutely not testable in any way).  But any critique I might have is a normal part of the scientific process.  I critique, then if folks think it is valid they redo the analysis fixing the critique, and the findings might hold or be changed.  The problem comes further down the food chain:

  1. When the media, and in this case the US government, uses this analysis completely uncritically and without any error bars to pretend at certainty -- in this case that half of the recent wildfire damage is due to climate change -- that simply does not exist
  2. And when anything that supports the general theory that man-made climate change is catastrophic immediately becomes -- without challenge or further analysis -- part of the "consensus" and therefore immune from criticism.

I like to compare climate models to economic models, because economics is the one other major field of study where I think the underlying system is as nearly complex as the climate.  Readers know I accept that man is causing some warming via CO2 -- I am a lukewarmer who has proposed a carbon tax.  However, as an engineer whose undergraduate work focused on the dynamics of complex systems, I go nuts with anti-scientific statements like "Co2 is the control knob for the Earth's climate."  It is simply absurd to say that an entire complex system like climate is controlled by a single variable, particularly one that is 0.04% of the atmosphere.  If a sugar farmer looking for a higher tariff told you that sugar production was the single control knob for the US climate, you would call BS on them in a second (sugar being just 0.015% by dollars of a tremendously complex economy).

But in fact, economists play at these same sorts of counterfactuals.  I wrote about economic analysis of the effects of the stimulus way back in 2010.  It is very similar to the wildfire analysis above in that it posits a counter-factual and then asserts the difference between the modeled counterfactual and reality is due to one variable.

Last week the Council of Economic Advisors (CEA) released its congressionally commissioned study on the effects of the 2009 stimulus. The panel concluded that the stimulus had created as many as 3.6 million jobs, an odd result given the economy as a whole actually lost something like 1.5 million jobs in the same period. To reach its conclusions, the panel ran a series of complex macroeconomic models to estimate economic growth assuming the stimulus had not been passed. Their results showed employment falling by over 5 million jobs in this hypothetical scenario, an eyebrow-raising result that is impossible to verify with actual observations.

Most of us are familiar with using computer models to predict the future, but this use of complex models to write history is relatively new. Researchers have begun to use computer models for this sort of retrospective analysis because they struggle to isolate the effect of a single variable (like stimulus spending) in their observational data. Unless we are willing to, say, give stimulus to South Dakota but not North Dakota, controlled experiments are difficult in the macro-economic realm.

But the efficacy of conducting experiments within computer models, rather than with real-world observation, is open to debate. After all, anyone can mine data and tweak coefficients to create a model that accurately depicts history. One is reminded of algorithms based on skirt lengths that correlated with stock market performance, or on Washington Redskins victories that predicted past presidential election results.

But the real test of such models is to accurately predict future events, and the same complex economic models that are being used to demonstrate the supposed potency of the stimulus program perform miserably on this critical test. We only have to remember that the Obama administration originally used these same models barely a year ago to predict that unemployment would remain under 8% with the stimulus, when in reality it peaked over 10%. As it turns out, the experts' hugely imperfect understanding of our complex economy is not improved merely by coding it into a computer model. Garbage in, garbage out.

Thus we get to my concept I call knowledge laundering or certainty laundering.  I described what I mean by this back in the blogging dinosaur days (note this is from 2007 so my thoughts on climate have likely evolved since then).

Remember what I said earlier: The models produce the result that there will be a lot of anthropogenic global warming in the future because they are programmed to reach this result. In the media, the models are used as a sort of scientific money laundering scheme. In money laundering, cash from illegal origins (such as smuggling narcotics) is fed into a business that then repays the money back to the criminal as a salary or consulting fee or some other type of seemingly legitimate transaction. The money he gets
back is exactly the same money, but instead of just appearing out of nowhere, it now has a paper-trail and appears more legitimate. The money has been laundered.

In the same way, assumptions of dubious quality or certainty that presuppose AGW beyond the bounds of anything we have see historically are plugged into the models, and, shazam, the models say that there will be a lot of anthropogenic global warming. These dubious assumptions, which are pulled out of thin air, are laundered by being passed through these complex black boxes we call climate models and suddenly the results are somehow scientific proof of AGW. The quality hasn't changed, but the paper trail looks better, at least in the press. The assumptions begin as guesses of dubious quality and come out laundered at "settled science."

Back in 2011, I highlighted a climate study that virtually admitted to this laundering via model by saying:

These question cannot be answered using observations alone, as the available time series are too short and the data not accurate enough. We therefore used climate model output generated in the ESSENCE project, a collaboration of KNMI and Utrecht University that generated 17 simulations of the climate with the ECHAM5/MPI-OM model to sample the natural variability of the climate system. When compared to the available observations, the model describes the ocean temperature rise and variability well.”

I wrote in response:

[Note the first and last sentences of this paragraph]  First, that there is not sufficiently extensive and accurate observational data to test a hypothesis. BUT, then we will create a model, and this model is validated against this same observational data. Then the model is used to draw all kinds of conclusions about the problem being studied.

This is the clearest, simplest example of certainty laundering I have ever seen. If there is not sufficient data to draw conclusions about how a system operates, then how can there be enough data to validate a computer model which, in code, just embodies a series of hypotheses about how a system operates?

A model is no different than a hypothesis embodied in code. If I have a hypothesis that the average width of neckties in this year’s Armani collection drives stock market prices, creating a computer program that predicts stock market prices falling as ties get thinner does nothing to increase my certainty of this hypothesis (though it may be enough to get me media attention). The model is merely a software implementation of my original hypothesis. In fact, the model likely has to embody even more unproven assumptions than my hypothesis, because in addition to assuming a causal relationship, it also has to be programmed with specific values for this correlation.

This brings me to the paper by Paul Pfleiderer of Stanford University.  I don't want to overstate the congruence between his paper and my thoughts on this, but it is the first work I have seen to discuss this kind of certainty laundering (there may be a ton of literature on this but if so I am not familiar with it).  His abstract begins:

In this essay I discuss how theoretical models in finance and economics are used in ways that make them “chameleons” and how chameleons devalue the intellectual currency and muddy policy debates. A model becomes a chameleon when it is built on assumptions with dubious connections to the real world but nevertheless has conclusions that are uncritically (or not critically enough) applied to understanding our economy.

The paper is long and nuanced but let me try to summarize his thinking:

In this essay I discuss how theoretical models in finance and economics are used in ways that make them “chameleons” and how chameleons devalue the intellectual currency and muddy policy debates. A model becomes a chameleon when it is built on assumptions with dubious connections to the real world but nevertheless has conclusions that are uncritically (or not critically enough) applied to understanding our economy....

My reason for introducing the notion of theoretical cherry picking is to emphasize that since a given result can almost always be supported by a theoretical model, the existence of a theoretical model that leads to a given result in and of itself tells us nothing definitive about the real world. Though this is obvious when stated baldly like this, in practice various claims are often given credence — certainly more than they deserve — simply because there are theoretical models in the literature that “back up” these claims. In other words, the results of theoretical models are given an ontological status they do not deserve. In my view this occurs because models and specifically their assumptions are not always subjected to the critical evaluation necessary to see whether and how they apply to the real world...

As discussed above one can develop theoretical models supporting all kinds of results, but many of these models will be based on dubious assumptions. This means that when we take a bookshelf model off of the bookshelf and consider applying it to the real world, we need to pass it through a filter, asking straightforward questions about the reasonableness of the assumptions and whether the model ignores or fails to capture forces that we know or have good reason to believe are important.

I know we see a lot of this in climate:

A chameleon model asserts that it has implications for policy, but when challenged about the reasonableness of its assumptions and its connection with the real world, it changes its color and retreats to being a simply a theoretical (bookshelf) model that has diplomatic immunity when it comes to questioning its assumptions....

Chameleons arise and are often nurtured by the following dynamic. First a bookshelf model is constructed that involves terms and elements that seem to have some relation to the real world and assumptions that are not so unrealistic that they would be dismissed out of hand. The intention of the author, let’s call him or her “Q,” in developing the model may be to say something about the real world or the goal may simply be to explore the implications of making a certain set of assumptions. Once Q’s model and results become known, references are made to it, with statements such as “Q shows that X.” This should be taken as short-hand way of saying “Q shows that under a certain set of assumptions it follows (deductively) that X,” but some people start taking X as a plausible statement about the real world. If someone skeptical about X challenges the assumptions made by Q, some will say that a model shouldn’t be judged by the realism of its assumptions, since all models have assumptions that are unrealistic. Another rejoinder made by those supporting X as something plausibly applying to the real world might be that the truth or falsity of X is an empirical matter and until the appropriate empirical tests or analyses have been conducted and have rejected X, X must be taken seriously. In other words, X is innocent until proven guilty. Now these statements may not be made in quite the stark manner that I have made them here, but the underlying notion still prevails that because there is a model for X, because questioning the assumptions behind X is not appropriate, and because the testable implications of the model supporting X have not been empirically rejected, we must take X seriously. Q’s model (with X as a result) becomes a chameleon that avoids the real world filters.

Check it out if you are interested.  I seldom trust a computer model I did not build and I NEVER trust a model I did build (because I know the flaws and assumptions and plug variables all too well).

By the way, the mention of plug variables reminds me of one of the most interesting studies I have seen on climate modeling, by Kiel in 2007.  It was so damning that I haven't seen anyone do it since (at least get published doing it).  I wrote about it in 2011 at Forbes:

My skepticism was increased when several skeptics pointed out a problem that should have been obvious. The ten or twelve IPCC climate models all had very different climate sensitivities -- how, if they have different climate sensitivities, do they all nearly exactly model past temperatures? If each embodies a correct model of the climate, and each has a different climate sensitivity, only one (at most) should replicate observed data. But they all do. It is like someone saying she has ten clocks all showing a different time but asserting that all are correct (or worse, as the IPCC does, claiming that the average must be the right time).

The answer to this paradox came in a 2007 study by climate modeler Jeffrey Kiehl. To understand his findings, we need to understand a bit of background on aerosols. Aerosols are man-made pollutants, mainly combustion products, that are thought to have the effect of cooling the Earth's climate.

What Kiehl demonstrated was that these aerosols are likely the answer to my old question about how models with high sensitivities are able to accurately model historic temperatures. When simulating history, scientists add aerosols to their high-sensitivity models in sufficient quantities to cool them to match historic temperatures. Then, since such aerosols are much easier to eliminate as combustion products than is CO2, they assume these aerosols go away in the future, allowing their models to produce enormous amounts of future warming.

Specifically, when he looked at the climate models used by the IPCC, Kiehl found they all used very different assumptions for aerosol cooling and, most significantly, he found that each of these varying assumptions were exactly what was required to combine with that model's unique sensitivity assumptions to reproduce historical temperatures. In my terminology, aerosol cooling was the plug variable.

When I was active doing computer models for markets and economics, we used the term "plug variable."  Now, I think "goal-seeking" is the hip word, but it is all the same phenomenon.

Postscript, An example with the partisans reversed:  It strikes me that in our tribalized political culture my having criticised models by a) climate alarmists and b) the Obama Administration might cause the point to be lost on the more defensive members of the Left side of the political spectrum.  So let's discuss a hypothetical with the parties reversed.  Let's say that a group of economists working for the Trump Administration came out and said that half of the 4% economic growth we were experiencing (or whatever the exact number was) was due to actions taken by the Trump Administration and the Republican Congress.  I can assure you they would have a sophisticated computer model that would spit out this result -- there would be a counterfactual model of "with Hillary" that had 2% growth compared to the actual 4% actual under Trump.

Would you believe this?  After all, its science.  There is a model.  Made by experts ("top men" as they say in Raiders of the Lost Ark).  Do would you buy it?  NO!  I sure would not.  No way.  For the same reasons that we shouldn't uncritically buy into any of the other model results discussed -- they are building counterfactuals of a complex process we do not fully understand and which cannot be tested or verified in any way.  Just because someone has embodied their imperfect understanding, or worse their pre-existing pet answer, into code does not make it science.  But I guarantee you have nodded your head or even quoted the results from models that likely were not a bit better than the imaginary Trump model above.

Coyote Makes Tentative Steps Onto Instagram

I have resisted Instagram for years because a) they only really allow photo uploads from your phone (not your pc) and b) none of my good photos are on my phone.  It is just really difficult to take a photography platform seriously that only really supports the crappiest end of the camera spectrum (i.e. phones).

However, a couple of things have changed.  One, Instagram is now a powerful social media platform and useful to my business given that I am trying to get young people to go to outdoors locations that are photogenic.  And two, I have gotten comfortable with a couple of hacks to be able to use instagram from my pc (more in a second).

So if you are into Instagram, you can follow me now.  My business instagram for our campgrounds and parks is @camprrm.   My personal instagram mainly to be filled with travel photography is @coyoteblog.   Actually the other reason I have come around on Instagram is that I wanted to follow my daughter Amelia who is a student artist, and instagram is THE way to advertise one's portfolio.  She is at @meliameyer (see what she did there, millenials are much more clever with integrating symbols into an extended alphabet).

The two hacks I use are:  1)  Convert the instagram account to a business account and then use the free version of hootsuite to post to it.  Even works with scheduled posts.  This works well for one account but is hard to make work for two.  2) Open and log into instagram via chrome.  Right click on the white space of the web page somewhere and choose inspect.  I think there is also a keyboard shortcut to do this, maybe cntl-shift-i.  Once the inspect window pops up, click on the little icon in the upper left that looks like a cell phone.  Poof, your browser is in cell phone sim mode and instagram should suddenly give you the + button (refresh page if it doesn't) that will allow you to post pictures right from your computer hard drive.

Relocation Subsidies, Short-Term Thinking, And Why Bezos is Smarter than Musk

I will begin by saying that few things in government aggravate me more than corporate relocation subsidies.  They are an entirely negative sum game.  I believe that subsidies are misguided and lead to a misallocation of capital, but at least things like EV subsidies create an EV industry, even if it is uneconomic.  But relocation subsidies are payments to create nothing -- their entire purpose is to move economic activity that would happen anyway across some imaginary line on a map.  Locally, we had a $100 million subsidy to a developer to move a mall approximately 1 mile.  Pure insanity.

However, it is hard for me to blame the managers of public companies who seek these subsidies.  I own my own company and can easily eschew such pork (if it were ever offered to me) but the CEO of a public company would be failing in their fiduciary duty to their shareholders to not accept government money that the drunken sailors in government are so gleefully trying to stuff in corporate g-strings.

With this money so available, it is important that corporate management make location decisions considering these subsidies but not solely focused on them.  The contrast between Amazon and Tesla (including the former SolarCity) helps explain my point.

In finding new headquarters locations, Amazon's most important considerations were likely

  • Ability to attract great management and developer talent who seem to be more attracted to hipster areas with lots of Starbucks and sushi more than to areas with low cost housing.
  • As they incur regulatory scrutiny, closeness to national government
  • Access to domestic and international partners
  • Access to capital

Note these criteria do not include access to low cost labor and real estate.  These do not really matter much for its headquarters offices.  These DO matter for distribution centers and warehouses, which is why these are located not in the center of high cost cities but in low cost suburban or rural areas.  In this context, then, splitting its headquarters between New York and Washington DC make a ton of sense.

Now let's think about Tesla.  Tesla was looking for manufacturing locations for solar panels and cars.  This is in an era when few even consider anywhere in the US a viable long-term option, but Tesla selected New York state and southern California.  I can tell you from sad personal experience that both these places are among the most expensive and hardest places to do business in the country.  Seriously, in SoCal Tesla took over a facility that Toyota couldn't make work.  These make absolutely no sense as long-term locations for manufacturing, but Tesla came here none-the-less in part for big fat subsidies and in part to ingratiate two powerful sets of state governments (in addition to subsidies, California reciprocated by giving Tesla a special sweetheart deal upping its zero emission vehicle credits).

I am reminded of this because Bloomberg has the whole, sad tale of Tesla in New York here.

I am not much on memes but I thought I would try my hand just this once...

 

Site Issues Fixed, I Hope

We had a problem with the website that folks going to www.coyoteblog.com were getting the correct content but folks going to coyoteblog.com without the www were getting dated and/or unformatted content.  This seemed super odd to me.  I checked all my DNS records, particularly the A and CNAME and they looked fine.  I searched for the issue but no one's issues matched mine precisely.  I suspected that it was an issue with caching but turning off the cache did not fix it.

In the end the fix was simple.  In WordPress Settings - General I had set the domain name as http://www.coyoteblog.com.  It had been that way forever.  Somehow, something on the server or in wordpress or most likely in one of my plugins changed so that calls to coyoteblog.com confused it.  The simple fix was to change the setting for the wordpress site to http://coyoteblog.com.  Now everything seems to resolve normally. I hope.

The Rise and Fall of The ACLU -- Conservatives Start to Lament the Downfall of an Organization They Have Loved to Hate

David Bernstein has a great article on the abandonment by the ACLU of many of its traditional core principles.

Readers know I grew up a traditional Texas Conservative through high school, and then migrated to the libertarian-ish camp through college and beyond.  One of my early disconnects with the Conservatives was their demonization of the ACLU.  I didn't agree with everything the ACLU did (particularly related to economic regulation because then the group's quasi-Stalinist origins showed through), but I did think it did a lot of great work.  It was defending the Bill of Rights in unpopular cases with unsympathetic victims (e.g. Nazis and obvious criminals) in situations no one else would touch.  They were frequently a backstop against bad facts creating bad law.

Ironically, though, just as Conservatives really need the ACLU now they they are targets of things like speech and due process limitations, the ACLU is migrating away from defense of these things.

First, the ACLU ran an anti-Brett Kavanaugh video ad that relied entirely on something that no committed civil libertarian would countenance, guilt by association. And not just guilt by association, but guilt by association with individuals that Kavanaugh wasn't actually associated with in any way, except that they were all men who like Kavanaugh had been accused of serious sexual misconduct. The literal point of the ad is that Bill Clinton, Harvey Weinstein, and Bill Cosby were accused of sexual misconduct, they denied it but were actually guilty; therefore, Brett Kavanaugh, also having been accused of sexual misconduct, and also having denied it, is likely guilty too.

Can you imagine back in the 1950s the ACLU running an ad with the theme, "Earl Warren has been accused of being a Communist. He denies it. But Alger Hiss and and Julius Rosenberg were also accused of being Communists, they denied it, but they were lying. So Earl Warren is likely lying, too?"

Meanwhile, yesterday, the Department of Education released a proposed new Title IX regulation that provides for due process rights for accused students that had been prohibited by Obama-era guidance. Shockingly, even to those of us who have followed the ACLU's long, slow decline, the ACLU tweeted in reponse that the proposed regulation "promotes an unfair process, inappropriately favoring the accused." Even longtime ACLU critics are choking on the ACLU, of all organizations, claiming that due proess protections "inappropriately favor the accuse."

The ACLU had a clear choice between the identitarian politics of the feminist hard left, and retaining some semblance of its traditional commitment to fair process. It chose the former. And that along with the Kavanaugh ad signals the final end of the ACLU as we knew it. RIP.

The 5 Worst Supreme Court Rulings of the Past 50 Years

I am not an expert, but each and every one of these seem pretty bad.

For example:

1. Smith v. Maryland (1979)

The Fourth Amendment guarantees "the right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures." But according to the Supreme Court's 1979 decision in Smith v. Maryland, "a person has no legitimate expectation of privacy in information he voluntarily turns over to third parties."

Lawyers call this the third-party doctrine. Prosecutors and police call it the gift that keeps on giving. Let's say the cops want to know what websites you've been reading. The third party doctrine lets them get that information from your internet service provider without obtaining a search warrant first. So much for that pesky Fourth Amendment and the privacy rights it was designed to protect.