Archive for January 2021


Burma is a banana republic

The military in Burma is using baseless allegations of election fraud to overturn the results of a democratic election that did not go their way:

Myanmar military television said Monday that the military was taking control of the country for one year, while reports said many of the country’s senior politicians including Aung San Suu Kyi had been detained.

An presenter on military-owned Myawaddy TV made the announcement and cited a section of the military-drafted constitution that allows the military to take control in times of national emergency. He said the reason for takeover was in part due to the government’s failure to act on the military’s claims of voter fraud in last November’s election and its failure to postpone the election because of the coronavirus crisis.

I wonder where they got the idea?

Chesterton’s Fence and stock prices

John Cochrane has a new post with the following headline:

Gamestop. 1999 déjà vu all over again?

In context, Cochrane seems to be referring to the tech stock “bubble” of 1999, a year when the NASDAQ rose from about 2200 to just over 4000. If you bought a NASDAQ index fund during 1999 at say 3250 and held it until today, it would be valued at over 13,000, even after this week’s drop (and not even including dividend reinvestment.)

So what does 1999 all over again mean? Does it mean that GameStop shares purchased for $325 will be worth $1300 in 22 years, plus dividends? A buy signal? I don’t think that’s what Cochrane means; it seems like he’s rather skeptical of the future prospects of this controversial stock. (Although he wisely refrains from specific investment advice, something I also plan to do.)

I mention this example to remind readers that while 1999 is often viewed as a classic stock price bubble, there’s actually very little evidence that tech stocks were greatly overvalued back in 1999, at least in aggregate.

Bitcoin was about $2 when I first became aware of the topic. All my Bitcoin posts have basically had the same message—it’s probably not a bubble because there is no such thing as bubbles. As Bitcoin became more successful, I also pointed out that in an efficient market, 99% of Bitcoin-type investments should eventually collapse to almost nothing.

That might sound odd, but consider the alternative. Suppose that even 10% of investments such as early Bitcoin, early Amazon, early Tesla, etc., turned out to be wildly successful, rising 1000-fold. The other 90% fell to zero. A diversified portfolio full of that sort of speculative stock would yield a return that is far above the market average, roughly a 100-fold gain.

Investors know that a few of these high risk/high reward stocks will become highly successful. As a result, they all trade at high prices (relative to earnings). Eventually, most of these companies end up doing poorly, which operates via “confirmation bias” to convince most people that they were right about bubbles, even though they were wrong. They remember that they always knew would fail and forget that they refrained from buying Amazon for $7 back in 2001. How could a money-losing seller of books on the internet ever become a huge success?

In the early 2010s, I had no idea what was going on with Bitcoin, and still don’t really understand the investment. But I think I at least understand that I don’t understand it. You say nothing “fundamental” has changed with GameStop in the past week? OK, maybe, but are you sure? Does becoming 10 times more famous and developing a strong emotional connection to many millennials have zero value to a retailer? I don’t even play computer games, so I have absolutely no opinion on this stock. But how confident are you in your opinion?

This is why it’s so hard to test the EMH. The collapse of what looks like speculative bubbles seems like evidence against the EMH, but in fact the theory predicts that the vast majority of speculative “bubbles” will collapse, in order that the expected rate of return on portfolios that include Bitcoin, Amazon and Tesla is consistent with the risk-adjusted rate of return on other portfolios. The statement “speculative stock X is very likely to be lower in a couple years” is not at all equivalent to “speculative stock X is a bad investment.”

This aspect of market behavior is really hard for people to see, and as a result the vast majority of people never see it. Selling people on the EMH is like trying to convince someone that there’s no such thing as objective truth, or free will, or personal identity. If their brains are not wired in such a way as to grasp the idea, there’s no way to make them see it. Vase/profile.

People aren’t even thinking about the EMH question in the right way—they think it can be answered by squinting very hard at some so-called “bubbles” and figuring out whether the market was irrational. The actual question is, “What anti-EMH models are useful to me?”

Don’t bother arguing with me in the comment section; I’m a pragmatist. Do one of these three things:

  1. Short a stock that you think is overvalued.
  2. Go long on a stock you think is undervalued.
  3. Agree with me that markets are efficient.

PS. In 2013, I quoted Tyler Cowen saying the following:

With apologies to Scott Sumner, I say Bitcoin is a bubble.  Outside of war and rebellion, do “normal” new currencies behave this way?

Read my whole 2013 post, and tell me how my claims on everything from Bitcoin to stock prices look today.

PPS. Here’s how to tell if you understood the argument I made in this post. Is the Bitcoin story of the past decade:

A. A single data point against bubble theories?

B. A thousand data points against bubble theories?

The answer is B. It’s an absolutely crushing blow to asset price bubble theories. Devastating. It allows for 999 other asset price collapses in a world totally free of bubbles. NOW how are you going to prove that bubbles exist?


Embarrassed to update your beliefs?

A rational person should not cling to previous beliefs for emotional reasons. They should welcome losing an argument, as that would mean they gained new information. On the other hand, there might be good reason to be embarrassed by the factors that cause you to update your beliefs.

I’m often bemused when I see a news story about someone who begins to question their faith in God after a tragedy strikes someone near and dear to them. Yes, I know this makes me a cold, heartless, bad person, but I can’t help myself. I think to myself “After everything that happened in the 20th century, it’s a loved one getting cancer that makes you think God doesn’t exist?” That’s the new information that leads you to update your priors?

[And don’t lecture me on human nature; I certainly understand that emotion plays a big role in how people view the world. Still, I can’t help noticing the craziness in the way we form beliefs.]

After 2008, the economics profession mostly abandoned its view that the BOJ was incompetent in allowing deflation, and adopted a new view—the idea that monetary policy is mostly ineffective at the zero bound. When I speak with economists, I almost never get a good explanation for this change. They mention things like low interest rate policies and/or QE coinciding with low inflation, as if we didn’t already know that from Herbert Hoover’s policies, or the BOJ policy of the early 2000s. Where is the new information that would lead you to suddenly doubt the efficacy of monetary policy at the zero bound?

Or how about January 6th finally convincing someone that Trump was a lawless authoritarian demagogue? It took that?

People often ask me if some sort of odd market anomaly has led me to re-evaluate my views on the EMH, as if history isn’t full of odd asset price movements accompanied by wild speculative activity. If someone told me that GameStop led them to question their belief in the EMH, I’d wonder if their belief was ever well founded. Had they ever studied financial history?

I’m not embarrassed to re-evaluate my views on various issues; I do so all the time. For instance, I don’t think our long run fiscal situation is as bad as I had thought in the early 2000s. I’ve revised my views on the likely path of real interest rates during the 21st century. On the other hand, I would be embarrassed to re-evaluate my views on an issue on the basis of information that any intelligent person should have known all along.

Market monetarism on the march?

Back in the old days, Fed officials like Jeremy Stein suggested that there was a trade-off between growth and stability. While low interest rates promote growth, it might come at the cost of financial stability.

Market monetarists warned against reasoning from a price change. Low rates often reflect weak NGDP expectations, and in the long run the best way to avoid financial crises is to make sure that NGDP keeps growing at an adequate rate.

Now the Fed seems to be coming around to this view:

People sometimes tell me that Powell is better than Yellen. Here’s how I’d put it. When Yellen was chair, Powell was no better on monetary policy, maybe a tiny bit worse. But Powell has benefited by observing 4 years of market monetarist critiques of Yellen’s policies. He saw how we warned that Phillips Curve models were not reliable, and that market indicators suggested that inflation was likely to undershoot the Fed’s target. When it did, Powell was a quick learner. In 2019, the Fed didn’t make the mistake previous Fed chairs would have made, they cut rates sharply on market forecasts of a slowdown, even though Phillips curve models said 3.5% unemployment should drive inflation higher.

He learned from market monetarists that it’s not enough to target inflation at 2%, you need to catch up to the previous trend line when there’s a big undershoot, and AIT was adopted in 2020. Going forward, this should allow the Fed to avoid the mistakes of the 2010s, when there was no catch-up. Time will tell.

He learned from market monetarists that financial crises are caused by falling NGDP, and that one cannot assume that money is too easy just because interest rates are low.

So if it ends up being true that Powell’s term has been more successful than Yellen’s (and it’s too early to say) it won’t be because Powell is more talented, it will be because he came later. He had more time to benefit from market monetarist insights.

Or at least that’s what I’d like to believe. 🙂

PS. The same is true of Australia. Mercatus just published a new working paper by Stephen Kirchner with the following abstract:

It’s now completely obvious that the RBA blew it in the years leading up to the Covid recession. In recent years, Stephen Kirchner, David Beckworth and I all pushed back against their policy of allowing inflation to fall below the target range because of fears that ultra low rates could lead to financial excesses. In the long run, contractionary monetary policies push interest rates even lower than what you’d get with a more expansionary policy, with no gain in financial stability.

Who does the GOP choose to expel?

Consider the following two women:

Cindy McCain, wife of John McCain. She voted for Biden out of disgust for Trump. (Note that in 2016, 4 of the 5 living GOP presidential candidates also refused to vote for Trump.)

Rep. Marjorie Taylor Greene of Georgia. She has a history of extreme views:

Greene (R-Ga.) filled her feed with extremist content for years before she was elected in November, becoming the first open supporter of QAnon, an extremist ideology based on false claims, to win a seat in Congress. In a January 2019 post, Greene “liked” a comment advocating “a bullet to the head” of House Speaker Nancy Pelosi (D-Calif.), according to a screenshot published by CNN’s KFile. . . .

In now-deleted posts, Greene “liked” one comment encouraging her to “beat Pelosi’s a–” and another that advocated Pelosi’s ouster “through removal or death, doesn’t matter, as long as she goes.”

In others, she criticized FBI agents not being sufficiently loyal to Trump. She “liked” one comment that proposed capital punishment for those law enforcement officials, reading: “Trump already said there were some great ones working with FBI but some have fallen and quite frankly need to be hung for TREASON!”

Which of these two women was recently expelled from the Republican Party?

Today, the QAnon mindset is increasingly prevalent within the GOP. For instance, the Republican Party of Oregon has publicly endorsed the loony theory that the mob that stormed the Capitol was comprised of left wingers disguised as Trumpistas.

The Northwest office of the Anti-Defamation League issued a statement Tuesday, calling the comparison “offensive” and “absurd.”

“The violence at the US Capitol on January 6th was a large-scale physical assault on our nation’s democratic values and institutions perpetrated by right-wing conspiracy theorists, extremists, and supporters of former President Trump. That is a fact,” the ADL wrote.

The civil rights organization also said Oregon Republicans were misusing history when referencing the Reichstag fire to “advance a baseless conspiracy theory.”

“Such a comparison cheapens one of the most significant moments leading up to Holocaust and is extremely inappropriate,” the organization wrote.

As more people leave the GOP in disgust, the lunatic fringe will gain ever greater control over the party. To answer the question in the post title, it was Cindy McCain that was expelled by the Arizona GOP:

Referencing the more than 9,200 Republicans who left the [Arizona] party since January 6, Hamer fears the political outcome for Republicans. “This party is being run by a fringe, essentially calling for a purge,” Hamer said. “This is a party that lost the White House, two Senate races, and shows no interest in bringing people together and certainly no interest in expanding the base of Republicans. It’s turned into the circular firing squad.”