Captain Trump — Making flying Great Again

In trying to find a way to explain that one can be concerned about the state of the nation, from a completely non-partisan position, Sam Harris offered an analogy.

Personally, from what I’ve observed, I think the analogy is a bit unfair to Trump, but I do think it nails the point that in the middle of a pandemic and the greatest economic shutdown in history, one should be able to express concern about leadership without accusation of simply being a shill for the other side:

The Analogy:

Imagine you’re on an airplane, cruising along at 30,000 feet, and at some point on the descent, you see the pilot come stumbling out of the cockpit. He appears just visibly drunk, or insane. Let’s say he gropes one of the attendants.

He gets on the PA system and begins bragging about how rich he is. And maybe he starts castigating the passengers for having insulted him. He might say, “If you want me to land this plane, you have to be nicer to me.” — i.e. something completely out of keeping with the role and responsibility he has to safeguard the lives of the people on that plane.

Then he could launch into a conspiracy theory about how the airline is actually run by a shadowy group of maintenance workers, who’ve been undermining him. He thinks they’ve been monkeying with the instruments in the cockpit.

And maybe he fires the co-pilot, and sends him to the back of the plane, telling him not to move.

He could do a dozen other things like that, in the span of an hour, that prove beyond any shadow of a doubt that this isn’t a “normal” situation. This is not a normal pilot.

So when it comes time to land this plane, the danger has been horribly magnified. And — as a passenger — you’re simply worried about this.

Now, imagine worrying about this out loud, and then noticing there are people on this plane that are actually inspired by this pilot’s antics, and goading him on.

He’s now threatening to punch some old woman in the face, and people are yelling he should do it.

And then people are turning to you, as you worry about this out loud, and accuse you of having “pilot derangement syndrome”, and that you should stop worrying and just enjoy the flight, and that Captain Trump is making flying great again.

So the question is: How much of your concern about dying in a plane crash, is due to partisanship? It should be obvious that that’s not even a variable.

A critical look at the Dr. Erickson Bakersfield COVID-19 video

This video from California Dr. Erickson has gone viral, and is being held up by everyone wishing to argue that the approach the US took to the virus was wrong. I suspected a lot of confirmation bias, and decided to go through the video and take notes.

Within the first five minutes, I already noted four claims that were either misleading, or flat-out wrong—enough to disqualify the source, and any further time spent watching it.

  • He starts off by saying “Our approach has been to look at this by the science”, as if nobody else is doing that. No medical problem in history has received more focused global attention than COVID-19. And since extremely few people are actually qualified to have an opinion on COVID-19 scientifically, then understanding the consensus view is really important.
  • He claims the initial shut down of travel from China, and other early measures, were “good things to do, when you don’t have facts.” That’s simply wrong. We had a LOT of facts. We had observations of the outbreaks in Wuhan, Iran and possibly Italy. We already had a fairly accurate understanding of its contagiousness (R0), to know that this is an exponential growth outbreak. Also, stopping travel has long been known to be important tactic in response to an infectious disease outbreak. These measures are by no means just “stuff you do when you’re blind”.
  • “We quarantine the sick, but we’ve never seen a situation where you quarantine the healthy.” This is so misleading. We didn’t “quarantine the healthy”; we imposed social distancing by mandate, rather than trust voluntary behavior. And the reason that decision was taken, was to ensure the spread was successfully slowed, rather than risk a nationwide repeat of Iran, Italy, Spain & NYC.
  • He claims initial models were “wrong”, because they predicted millions of deaths, “As we’ve seen, that didn’t materialize.” OMG. Duh!? Anyone who listened to Dr Birx reporting the first model predictions will recall, “2M dead if we do nothing. 100k if we take these measures.” The 2M figure was IF WE DO NOTHING! And taking the measures we took resulted in (so far) 60k deaths. Knowing how sensitive models of exponential growth are to input parameters and real-time changing dynamics, the models were pretty good!

With that, I’d had enough. This is a misleading video, but one that will unfortunately be judged by many though confirmation bias. Doing a bit of Googling, I’ve seen that others more qualified than me have condemned the video as well.

The Dummies Edition of The New, New World Order

In the midst of this possibly one-in-a-lifetime shock, I’ve been very interested in thinking about and imagining what life will look like moving forward. As input to that thinking, I’ve been summarizing interesting essays and interviews of others, including Raoul Pal’s gloomy economic forecast and Ray Dalio’s socioeconomic outlook.

Today, I’ve come across a fantastic speculative vision put forward by Joe McCann, entitled The New, New World Order. I absolutely encourage you to read it beginning to end, but for the attention-challenged, I’ve tried to summarize the key themes below:

  • Self-suffiency — Self-sufficiency will become a national security interest. Whereas profitability and lower product costs drove manufacturing abroad, this crisis has exposed the risk of moving any critical link in the supply chain outside the country. Expect to see domestic manufacturing, in some areas, return to the US.
  • Socialism — It has started with the direct deposit of $1,200 in to everyone’s bank account, and will not stop, as it would be political suicide for any politician to terminate people’s “stimulus checks”.
  • QE ∞ — In the Quantitative Easing post-2008, the Federal Reserve started buying stuff like mortgage-backed securities. Today, it’s buying junk bonds, and in “unlimited amounts”, meaning we now have “unlimited quantitative easing”. This will completely distort markets, as natural price discovery is no longer possible.
  • Indirect nationalization — By propping up industries financially through bailouts, like the airlines, we are nationalizing them indirectly.
  • National healthcare — The crisis has exposed the US healthcare system as a vulnerability in national defense, and this will now be addressed as a national security issue. We will see regulation stripped away and mountains moved to advance this industry technologically.
  • Proof of health — Just as proof-of-identity is required of so many things, we’ll begin to see proof-of-health (immunity, antibodies, etc.) become a thing, for entering large events, boarding planes, etc. Expect to see technology advancements in this area, including public blockchains to solve the global standards and trust issues.
  • New working-class divide — Remote working will persist, and grow dramatically. This will have impacts everywhere, including real estate. But most importantly, it will create a new social divide, between those whose work happens virtually, and those that happen on land.
  • Education — Online education will grow and thrive. The Ivy’s will remain, but expect to see closures of many of the second tier (and lower) universities. Expect to see vocational training surge, as training related to the repatriation of manufacturing will be in demand. Also expect to see the nature of that training change, as the nature of human involvement in manufacturing won’t look like it did in the 1960s, given automation.
  • eSports and eEntertainment — Expect to see less Hollywood productions, and less live sports, and more user-created content, eSports, distribution channels, video and streaming.

Ray Dalio on COVID-19

Ray Dalio of Bridgwater Associates made a virtual TED appearance to discuss the context and consequences of this current COVID19 crisis. I’ve tried to paraphrase his ideas in this article.

What are the consequences of COVID19?

To imagine who will be affected and how, globally, one has to think in terms of incomes and balance sheets, and realize there will be holes in both.

The response we are seeing, as in similar historical situations such as 1930 to 1945, is the creation of money and credit. Who are the major producers of this money and credit? The United States and Europe. The US Federal Reserve is buying Treasury’s debt, and the Treasury is distributing that money primarily to Americans. The Europeans are doing the same. The European bank is smaller, as the world runs on about 70% dollars.

It’s important to observe that there aren’t many banks around the world, and so the rest of the world will have holes that are not filled. Much of the world will not get the money and credit being created, and this will result in disparities. This question of who gets what, and the resulting wealth distribution is a defining moment.

Defining moments repeat

Such defining moments happen every 75 years or so, and generally occur as the result of four forces that drive economies.

  1. Productivity — This comes from people learning, investing and doing things well. It results in slow growth, 1% to 2% per year. It’s not volatile, because knowledge isn’t volatile. It improves the quality of our lives.
  2. Short-term debt cycle — This is the business cycle. Recessions and expansions, that are about 8 to 10 years in duration.
  3. Long-term debt cycle — These happen with a periodicity of about 50 to 75 years, and whose end are marked by disruption, in which new types of money and credit emerge. The last was 1945, with the end of WWII and emergence of the Bretton Woods monetary system. This created the new world order, the American world order, that we have today, in which 70% of the world runs on the US dollar.
  4. Politics — This is all about how we deal with each other. Internal politics are how we deal with wealth and value gaps. Do we have a common national mission, or do we fight over wealth? Internal struggles lead to revolution, peaceful or otherwise, and shifts in wealth. External politics happen between countries, as rising powers challenge existing ones, producing risk of wars where cooperation isn’t achieved.

Are we headed towards a global depression?

Yes, but with caveats, because that’s a loaded term, often used for fear mongering. What do we actually mean by a depression?

  • Between 1929 and 1932 we had a large drop in the economy, and double-digit unemployment. Are we like that today? Yes.
  • Back then, they printed a lot of money. Interest rates hit zero. Are we like that today? Yes.

So this is not a recession. It’s a structural breakdown that we’ve seen many times in history, and we’ll see the same four levers used in response:

  1. Cutting spending. Austerity.
  2. Debt restructuring, forgiveness.
  3. Redistribution of wealth through taxation.
  4. Printing of money.

Will those things get us out? How will they be balanced? These are the open questions. What we do know is that the greatest force we have is our capacity for inventiveness and adaptation, if we can cooperate.

We also know that when we emerge after two or three years into a new world order, that the restructuring should make us healthier. The people who haven’t saved, or those who have prioritized luxury over saving will face a reckoning, and society will adapt/evolve towards healthy behaviors.

Has the market failed to recognized this?

This is something we can’t know. What we do know is:

  • Developed markets are off 20%. Emerging markets are off 45%, as they won’t benefit so much from the new money and credit being created.
  • We’ll see a huge restructing, and it will be defined entity by entity. For example, we will some some hospitals go bankrupt. Supply lines will change. What it means to be self-sufficient will change.
  • In the crisis of 2008, we had banks with leverage that faced insolvency when things went south. Governments decide which are systemically critical, and then create money and credit to keep those alive. Those not systemic are allowed to fail. This current crisis is more complex. There are banks, but there are far more affected entities beyond banks. All those little businesses. Who will we save, and how?

What kind of industries have the best prospects going forward?

  1. Those that are stable —The lifelong meat & potatoes industries, that are not leveraged.
  2. The innovators—Those who can adapt and innovate and don’t have balance sheet problems. They will be the big winners.

What should an average investor or 401k holder be thinking?

Investors must understand they will not be successful trying to “play the game”. Being successful in the market is more difficult than winning gold medal in the Olympics. Nobody thinks about competing in the Olympics, but everybody feels they can compete in the markets. This is the very worst thing you can try to do. Don’t try to time the markets, chase winners, or avoid losers.

So what is the most important thing to do? Be diversified. Have some stocks. Have some bonds. Have a bit of gold. Have a bit of what might be found in a new world order.

Are we retreating from globalization?

Yes, and we have been. There is idealism, and there is reality.

Who will write what checks to people in countries that are outside their domain? The reality is a lot of those people won’t be helped. How will people react? Over the last 500 years there’s been a lot of internal rivalries and wars. There’s no global legal system. Power is the currency.

Dalio is a globalist in ideology; a dreamer that the best of the best can work together for the common good. But the reality is that we’re in a fragmented world. Can I depend on someone not taking advantage of me? No, you can’t. Within countries, nor between countries.

China has been helping many parts of the world during this crisis, but to even acknowledge that is dangerous politically. The world is so fragmented, that it’s dangerous to say thank you.

How does capitalism need to be reformed?

Dalio is a capitalist through and through. But there comes a time when reform is necessary, and that’s when we see that the outcomes of the systems in place aren’t what we want, and understanding the system dynamics that lead to those outcomes.

All throughout history, societal systems work for those who control it. The government and entrepreneurs have a symbiotic relationship, and help each other. The consequence trickles down to education; the top 40% spend 5X more on their children’s education, than those in the bottom 60%. It’s self-perpetuating.

The solution is not to give money away, but find ways to expand productivity to those places where it’s low. This is even a psychologically important distinction—earning vs receiving.

The case for owning Bitcoin

In this article, I’m going to make the case for considering to allocate a small amount of your savings to Bitcoin. I’ll do that by explaining what Bitcoin is, along with how and why it might become valuable.

What is Bitcoin?

Prior to the invention of Bitcoin, there were many attempts to create “digital money”, but they all suffered from the same basic problem: How do you prevent a unit of digital money from being copied, the same way you can copy an MP3 file? If you could duplicate a unit of digital money, you could then spend it more than once, making it worthless.

An anonymous person (or group) named “Satoshi” published a solution to this problem, in which a global network of computers in which anyone (known as “Bitcoin miners”) can participate, compete to process collections (“blocks”) of Bitcoin transactions every 10 minutes, adding those transactions to an ever-growing global database of all transactions, known as the “Bitcoin blockchain”.

Once the database has been modified (a new block of transactions added), the only way it can be changed is for a majority of all miners to agree to modify it. This solved the “double-spend” problem. I can try to spend a Bitcoin twice, but the network of Bitcoin miners will simply reject it, since its original spend is permanently recorded on the blockchain.

Miners are incentivized to compete to process transactions since, anytime they “win”, and get to add a block of transactions to the database, they earn both newly minted Bitcoins, as well as all the fees present in the current block of transactions.

Finally, only 21 million Bitcoins will ever be created, ensuring the “scarcity” that’s such a fundamental characteristic to anything used as “stable money”.

(There is no limit to how many US dollars can exist. Since the United States government can create new money at will, and have always done so, the value of the US dollar, in terms of its purchasing power, can drop as much as 90% over a typical person’s lifetime.)

Once the last Bitcoin, i.e. the 21 millionth Bitcoin, is issued to some miner, future miner revenue will come exclusively from the fees people pay to make bitcoin transactions, and the fees themselves are determine in a free-market process.

In short, Satoshi described, and set into motion, a system of money that runs on the internet, solves the double-spend problem, is permissionless in the sense that nobody can stop you from acquiring or spending Bitcoin, in exactly the same way that nobody can stop you from sending and receiving email, and above all is “sovereign”, meaning that, just like the internet, it’s under the control of nobody and everybody at the same time, such that no state or government can globally stop it.

What gives Bitcoin value?

There is only one thing that gives Bitcoin value, and that’s social agreement. It’s the fact that an ever growing segment of the global population agree that it has value. And since that segment is growing, the demand for Bitcoin tends to exceed the supply (or people willing to sell their Bitcoins) such that, over time, the value of Bitcoin measured in US dollars has increased from zero to (at present), nearly $7,000.

This might seem strange, but there’s nothing to stop society from agreeing to assign value to a scarce commodity. In fact, we’ve been doing that for thousands of years—i.e. gold! With Bitcoin, it’s exactly the same.

Why do people value Bitcoin?

Bitcoin has many of the same money-like properties that make gold valuable, but with improvements:

  • Scarcity — There will never be more than 21 million Bitcoin. If you own 1% of the Bitcoin supply today, you will own 1% of the Bitcoin supply in 50 years from now.
  • Divisibility — The smallest unit of Bitcoin is a “Satoshi”, which is one hundred millionth of a single Bitcoin. With Bitcoin, you can transact in extremely small values, far more conveniently than with gold.
  • Durability — Bitcoin is digital, and therefore doesn’t degrade over time as most commodities do that have been used as money in the past.
  • Transportable — Sending and receiving Bitcoin is as easy as sending and receiving email; far more convenient than gold. Furthermore, given that a Bitcoin wallet can hold any amount of Bitcoin, you could literally cross a border with a billion dollars of Bitcoin stored in your head!
  • Unseizable — If you acquire Bitcoin and choose to hold it yourself (rather than keeping it stored with an institution), no person or government can seize it from you, because no person or government controls the Bitcoin network.
  • Uncensorable — Nobody can stop you from sending Bitcoin to anyone in the world, and nobody can stop you from receiving Bitcoin from anyone in the world.
  • Sovereign — Bitcoin is a truly sovereign network. Just like the internet itself, it can not be stopped by any person, group of people, or government. This is the first time in history that humans have created a truly sovereign form of value, independent of any country. Just as we have international standards for weight and distance, the “Satoshi” (Bitcoin’s smallest unit) could become an international standard of value.
  • Utility — Given the sovereignty of the Bitcoin network, all sorts of innovative applications are emerging that are built on top of the Bitcoin network, which in themselves work to increase its value.

So who does control Bitcoin?

Just like the US government has three branches to provide for checks and balances (the President, the Legislature and the Judicial), Bitcoin has three fundamental groups that independently and inter-dependently control Bitcoin:

  • Software developers — Bitcoin is open-source software. Anyone can participate, and through consensus, changes are proposed and integrated into that software. The Bitcoin “Core” development community have been extremely conservative regarding changes to the software. They prioritize security, simplicity and stability to features.
  • Miners — Bitcoin miners run the computers that run the Bitcoin software that processes blocks of transactions every 10 minutes, adding them to the blockchain. If miners as a group disagree with a new release of the Bitcoin software, they can collectively choose not to upgrade.
  • Users — These are people like you and I. If our evolving needs are not met by the current Bitcoin network, we can vote with our feet, moving to another crypto currency.

In a famous historical dispute, one group wished to increase the number of Bitcoin transactions that get processed every 10 minutes, thereby allowing the Bitcoin network to function more like the Visa network (high transaction volume, low fees). Increasing the number of transactions per block would result in only those with the most powerful computers being able participate in Bitcoin mining (transaction processing).

The Core community preferred to keep the number of transactions fixed, thereby trading off higher fees (as many transactions compete to be included in the next constrained-sized “block”, the transaction fees get bid up) for ensured broad distribution (minimal centralization) of Bitcoin mining.

The conservatives won that dispute, and the “big blockers” duplicated the Bitcoin software, creating what’s known today as “Bitcoin Cash” (a completely different cryptocurrency.) Bitcoin Cash (known as BCH) has never achieved the value of Bitcoin Core (BTC).

What could Bitcoin become worth?

There are many scenarios that would lead to different values of Bitcoin in the long term:

  • Digital gold — If one-third of the existing gold market moved to Bitcoin, a single Bitcoin would be worth more than 50,000 dollars. However, given the advantages of Bitcoin over gold, if Bitcoin emerges as a “digital gold”, then the market of people interested in holding a state-independent money could well increase beyond gold’s current seven trillion USD market.
  • Increasing utility — Innovative technical solutions are being built on the Bitcoin network. For example, a company called Abra built an app that allows people anywhere in the world to connect a bank account, transfer in money in any currency, and buy US stocks.Unbeknownst to the users, the app is built on top of the Bitcoin network. When a person transfers in 1,000 USD, they are, under the hood buying Bitcoin, and the amount of Bitcoin they own will fluctuate such that the app will always show them that they own “1,000 US dollars”. If they purchase four shares of Apple stock with that 1,000 USD, the app deploys a “smart contract” on the Bitcoin network that tracks the price of Apple stock. In actuality, they own Bitcoin, and the amount of Bitcoin fluctuates up and down to show that they own “four Apple shares”. As far as they can see, they’re working with US dollars and Apple shares, but under the hood, it’s all Bitcoin. Why did Abra choose Bitcoin? Because they considered it the most secure network in the world, and it allowed them to democratize the purchase of US shares without having to get a money-transmitter license in any state or country. Innovative applications like Abra increase the buy pressure on Bitcoin, and therefore its price.
  • Stock-to-flow model — An anonymous economist on the internet has built a mathematical model that predicts the price of commodities like gold, silver, diamonds, palladium, etc. based on something called “stock-to-flow”, and with those commodities the model has been extraordinary in its price prediction. When applied to Bitcoin, the stock-to-flow model predicts an eventual price of one Bitcoin to be worth multiple millions of dollars.
  • Crash and burn — At the other end of the spectrum, a bug could be discovered in the Bitcoin software, or a competitor could emerge, that would cause the value of Bitcoin to go to zero. However, at the time of this writing, Bitcoin is over 10 years old, has been the target of continual, unsuccessful hacking attempts, and has a lead in “network effect” that would be extremely difficult for any other cryptocurrency to overcome.

What we can be fairly certain of, is that in ten years from now, Bitcoin will not be $7,000. It will likely either be worth zero, or much much more than it is today. And as every year passes, the latter outcome appears more probable!

Should you own some Bitcoin?

The dramatic range of possible outcomes for the price of Bitcoin in the long term (zero to millions of dollars) makes investing in it a tremendously asymmetric bet. For that reason, it would seem to make sense (as recommended by successful entrepreneur Wences Casares) that everyone should own a small amount of Bitcoin, perhaps one to five percent of your wealth.

At that level, if it goes to zero, your life won’t be impacted too much, but if it increases by 100 from where it is today, it would have a big impact on your net worth.