Wednesday, December 15, 2021

The Biggest Obstacle to Texan Independence

Suppose you were a patriotic Texan, planning on how to make your state independent. As Tinkzorg likes to put it, in politics (not just in war), the professionals think mostly about logistics. This comprises two parts. First, the grassroots aspect of how do you build up enough internal support to make independence a concrete aim of a sufficient number of Texans. On this aspect, the people you want are (in Henry Sumner Maine’s phrase) “the wire-pullers”, the successful manipulators of public opinion, and the people capable of building organizations to expand out such messages and grow power. I have no skill nor inclination in that regard.

But there is a second aspect that’s more interesting to me. How do you plan in advance for likely hostile responses from USG? If such responses don’t happen once your Texan mob/democratic expression of sovereignty arises, happy days! In that case, the first step of building support is the only one that matters. But since you probably won’t have too many cracks at this, one needs to plan for how to overcome Yankee resistance.

I suspect that said resistance initially won’t be military. It may not be military at all. The reason this whole thing is interesting is that the level of committed energy seems so low on both sides. This is true across most of the western world. The number of people in Texas willing to die to ensure their state’s freedom is likely very low. But so is the number of New Yorkers or Californians willing to die to keep Texans in the union. So inertia rules the day at the moment. It’s like a market that’s very illiquid in both buyers and sellers. Small changes in demand or supply can result in large price swings in either direction, which is what makes it a live issue. Sure, the Californians hate the Texans. But this version of “Fuck you, Dad!” could just as easily manifest as “Fuck you, I won’t [let you] do what you tell me”, or “Fuck you, you’re not invited to family thanksgiving anymore”.

The default Yankee instinct, however, is probably power and control. It is impossible to have a federal, live-and-let-live model of each state making up their own mind on gay rights, or abortion, or most politically charged issues (including, once upon a time, slavery). And while not every issue resolves itself at the level of the Supreme Court, progressive soft power is directed at solving the monstrous corollary to MLK. That is, if injustice anywhere is a threat to justice everywhere, then only total global domination of the levers of power is sufficient to ensure my security in the Upper East Side, or Georgetown, or Malibu. It’s for my own safety, and the cause of justice, you see, that I must rule you.

If you add this up, the likely USG response is probably to apply unpleasant non-military pressure, and try to make life maximally unpleasant for Texans in a way likely to cause them to either relent, or just blame matters on the independence supporters.

So what are those ways, and how might you circumvent them?

One guide is to look at what they do to foreign states they don’t like, and want to apply pressure to. Of the toolkit they like the most, it’s sanctions, and especially financial sanctions. In the recent case of Russia, USG threatened to cut off their banks from the SWIFT system. This would leave them isolated from US financial institutions, and force other countries’ banks to effectively decide (presumably on threat of the punishment being extended to them too) whether they’d rather do business with US banks or Russian ones. Whatever you think about the long-term consequences of the Fed’s print-a-palooza, right now, that’s not a difficult decision for a Swiss Bank.

(As an aside, if I were the Chinese, I would think about making an explicit threat that if the US cut off Russia, Chinese banks would only do business with Russian banks and not US ones. Let the US find out if it’s actually cutting off Russia from America, or cutting off America from the rest of the world).

But assuming the Chinese gambit doesn’t happen, for Russian banks, being cut off from SWIFT would be seriously inconvenient, but probably wouldn’t precipitate a domestic banking collapse. Inside Russia, their customers can still withdraw their rubles just fine. In the Republic of Texas, cutting off all Texas banks would potentially precipitate a bank run / panic, if people worry that their US dollars are about to be replaced with some new currency that’s worth less. Though if withdrawals are simply frozen or drastically limited (as Greece did briefly in 2012 in the run-up to their vote on whether to leave the Euro), things would probably be okay in the short run.

Weirdly, things would get funky based on the fact that the concept of “Russian banks” is much more coherent than “Texan banks”. Mostly what you have is Texan branches of national or regional banks. The big question is who controls the computer systems. If you’re, say, Bank of America in North Carolina, and the federal men with guns (or just a furious Fed banking regulator) call up and demand that you turn off all the computers of all branches in Texas, you’ll probably comply (unless the systems don’t make that straightforward to do, which is quite possible). Of course, Texas has USAA and Comerica and the rest of the banks headquartered there, which also operate regionally or nationally. Presumably men with guns will be doing the same thing there, dictating what those banks have to do.

The standard way to solve this problem of bank runs in the past was to print up a new currency quickly, and order the banks to start paying deposits only in the new currency, which we’ll call Texars. There is some difficulty in printing sufficient volume of not-easily-forgeable currency in a raging hurry, but presumably you can make do in a pinch. Effectively you confiscate local dollar deposits and forcibly convert them to Texars. People will be pissed, but eventually they’ll adjust.

But I think that it’s a mistake to focus on bank runs and bank stability as the main obstacles in the modern era. These are problems, but they’re manageable problems. Rather, what’s harder to actually solve is payment rails. Most money is already electronic, primarily through credit and debit cards. And for anything online, this is the only game in town. A currency is both a store of value and a medium of exchange, but between the two aspects, the latter is a much more acute problem if it starts to fail. Hurt the banks, the banking industry suffers, and people worry about their savings. But if you cut off payment mechanisms, pretty much all business grinds to a halt. People don’t need to access all their savings immediately, but they do need to be able to fill up their car at the gas station. If they can’t do that, this probably guarantees either capitulation, or military escalation. If you’re Free Texas, you don’t want either. You want to be able to maintain business as usual, and dare USG to go kinetic first, hoping that they don’t have the stones. And every day they wait, you can solidify your local control.

The single biggest obstacle to Free Texas right now is the hegemony of Visa and Mastercard. The extent of the power that these firms have over everyday commerce is colossal and not widely appreciated. They run your credit cards and debit cards, which have moved from being ways to extend credit to ways to pay for anything, anywhere. Not only that, but the US has past form on successfully pressuring these companies to cut off foreign businesses they don’t like (Pokerstars, Tradesports, etc.). They would absolutely do this with Free Texas, probably as their opening salvo.

The challenge is that any electronic payment system needs both a digital currency in question, a mechanism for transferring that currency between buyer and seller, and the technology in each store and consumer’s wallet to make such transfers. When you spell it out this way, you can see why this is incredibly difficult to conjure up in a hurry. Much, much harder than printing up new banknotes and forcing everyone to take them. This also poses a problem even to people who want to use things like Bitcoin. Even if you did everything on the lighting network so there were very low fees and short confirmation times, how long is it going to take for every gas station or website in Texas to be set up to accept this kind of payment? How long is it going to take to get every boomer or retirement home resident to get a wallet capable of spending it at said gas station? How long is it going to take them to get the actual bitcoin to spend? What happens if you're the last grandma in line to convert their dollars over to bitcoin, and the price of bitcoin has gone up 50% from the massive influx of demand?

In some sense, you need the incredibly hard ask of a payment system that can be turned on at the drop of a hat once you declare independence. The crude version is just reverting to cash under newly printed Texars. This will probably work for an initial period of emergency, but you need some way of rolling things out, and it’s not clear that the task gets obviously easier after a few weeks. Not only that, ideally the system can be developed with plausible deniability for its true purpose.

I have only vague ideas about how to do this, and I don’t know which one is best. But I am strongly convinced that this honestly may be the single most important problem to figure out a solution to.  A significant part of the challenge is that many of the initial steps look like a huge needless expansion in wasteful reporting and intrusive data collection.

One such component is that you probably need to set up daily reporting requirements for all bank branches in Texas to a parallel system. You could maybe do this through some local institution you had control over (the Dallas Fed, maybe? Probably too converged), or some new regulatory agency. Every day, banks must report their closing balances for all customers to the State of Texas. This ensures that when you declare independence, you at least have a snapshot of what amount to credit everyone’s account with in Texars. You would probably want to also measure people’s equity holdings too – it’s doubtful you can stop USG expropriating these, but at least if you have records, you can figure out some kind of compensation scheme. Most likely, I would reassign expropriated Yankee-owned shares in every publicly traded Texan firm to Texas residents that had lost equity holdings from the Yankee confiscation. People might not be thrilled that their shares in Microsoft have been converted to shares in Texas Instruments or whatever, but it’s sure better than nothing.

From there, you’ll need to decide what the payment system is. This is where I’m less sure. There are various options, with their own levels of difficulty.

You could try to repurpose the existing Visa and Mastercard networks. The advantage here is that the tech is already out there, both in terms of cards and payment machines. Existing bank relationships with national banks (both cardholder and merchant) could be set up with existing Texas banks. The problem is the Visa and Mastercard networks, which is how the banks communicate with each other. You could create your own one of these and somehow repurpose the machines to transmit through it. Maybe I’m wrong here, but I suspect that reverse engineering this stuff as the State of Texas may be harder than reinventing things from square one.

My guess is that the easier setup (though still extremely hard!) is to actually just set up a central bank digital currency from scratch. In other words, the Texas Central Bank keeps a central database of all dollar amounts that people have in bank deposits (which, remember, it has records of already). A “central bank digital currency” in its most minimal form is just a computer at the Texas Central Bank (TCB hereafter) that anyone can open up an account with. If the Fed let you and I open up the same kinds of Fed accounts with it that Citibank has, America would already have a central bank digital currency.

In other words, we currently have an extraordinarily cumbersome payments processing system because we launder the entire thing between thousands of banks that all need to communicate with each other, verify balances, etc. But if you were redesigning the system from scratch, and especially if you need a system that you can get up and running quickly, you don’t want to duplicate all this stuff. Just let the TCB store all the accounts. Then payment processing is just transferring trivially from one register in a database to another register in the same database.

In this framework, the process is at least simplified – instead of trying to run things through the combination of every bank’s existing legacy IT infrastructure, you just need a way for each consumer and merchant to communicate with the TCB. The simplest way to do this is with an app. Download it, and use the camera to take photos of your Texas drivers license, plus your face next to your ID, plus whatever sequence of random requirements are selected (e.g. take a photo with your ID where you close your left eye, put your right index finger on your nose etc.). Then you’ve got access to your existing bank balance.

Want to pay for a purchase? The vendor generates a QR code that contains the amount of the purchase, and the account to have it credited to. You use your phone on the app to take a photo of the QR code. An alert comes up – do you wish to send $12.95 to “McDonalds Plano, TX”? Click yes, take a photo of your face to confirm your identity, and the purchase is complete.

In this version, the role of banks is significantly scaled back. You go to a bank if you actually want to deposit your money into a savings product with a higher rate of interest, with the money being lent out to borrowers. If you want an actual credit card, you have some arrangement with the bank where they pay for your stuff at the TCB using their own funds, and you pay them back on whatever arrangement you negotiate with the bank. I suspect the demand for this service specifically is actually quite low, and a lot of current credit card demand is really just demand for easy electronic payments. Sure, there are airline miles and other reward programs, but this is just a roundabout way to maintain the duopoly of Visa and Mastercard by effectively fleecing cash-paying customers by a small amount. If all this nonsense disappeared, the system would probably be better off. 

In the medium term, you're going to have the problem that taking all this money out of the banking system will likely increase interest rates, by reducing the amount of funds banks hold at any time that they can loan out. That's a problem (unless you're an Austrian economist, in which case it's a feature), but it's not an immediate problem, and can be mitigated down the line with TCB monetary policy or direct lending to banks. There’s nothing to stop consumers keeping more money in an actual bank earning interest by making risky loans. But if you just want to make and receive payments, you can now do it without a bank. There’s also a longer run risk of centralisation of all money in the hands of the new Texas government. I suspect this already exists with current banks, but people just don't think about it much (ask Conrad Black, when they froze all his assets before his trial which made it difficult to mount an expensive legal defense).

At first, there will be a challenge figuring out the various anti-fraud measures, dispute resolution stuff that banks have worked out for ages. Even getting the whole thing into the hands of consumers is hard, and making sure it scales But it’s at least feasible. The challenges are basically:

-Design an app

-Design a database that stores all the balances.

-Design an API for stores to generate transactions  

-Get customers and businesses to download the app

Then every transaction just requires two people holding smartphones, which they already have. Figuring this out from the business end might be a little complicated, but the consumer end at least doesn’t require sending plastic cards to every person in Texas, or new payment machines to every business. The minimum viable product is that each restaurant has one guy holding a smartphone that implements all their transactions until they can redesign their IT systems to make it smoother.

I mean, this is a several year project! I don’t mean to minimize how hard it is. It's also a long way from the core competency of any government, let alone a future government. It seems likely that you'd need to develop it in secret with some rich, sympathetic Texan fintech CEO or something similar. But the hard work is all doable beforehand. Once it’s go time, you just need everybody to download the app (though you should assume that they’ll also prevent you pushing it to App Store or Google Play, and have plans in place for that).

This isn’t the only variant on the plan. I’m sure crypto boosters can imagine some kind of crypto version where you fork Bitcoin and airdrop tokens to all the existing bank account holders. I suspect the challenges of getting this up and running are quite a bit harder than my version, but who knows.

I am actually less wedded to the specific solution that I propose than I am sure that the problem is probably the most important problem to be solved. As far as I can tell, there hasn’t been a new breakaway country that set up in the age of digital finance against the wishes of USG. If you want to be the first, you would do well to ponder the paraphrased version of Jonathan Swift:

“They have his soul,
Who have his payment rails.”

Sunday, July 25, 2021

Moving Porn

[Meta disclaimer: When I look back at some of the posts I've written that I think I got wrong, they're often in the category of what I'd call "therapy posts" - trying to universalise or rationalise some thought process of my own as a general life lesson, especially if I'm trying to convince myself that my actions make sense. I resolved at some point to try to stop writing those. I don't think this is one, but I'm not always a good judge of these matters, at least at the time.]

As Covid worries seem to fade into the rearview mirror, and life slowly gets back to normal, I find myself reflecting on the the strange way that being at home for a long period of time strongly exacerbated the idea of moving porn. Not as in emotionally touching depictions of sexual acts, but the fantasy, sometimes followed through on, that a better life awaits if only we move to somewhere else. 

This is always a hard one for me to think about. I don't want to say that everyone should just stay where they are. It is obviously, trivially false that every place is as good as every other place. So there really are changes in life happiness to be had for certain people in moving somewhere else. Indeed, I've had at least one myself, that I'm very glad about. 

In my case, after enough months of roaming around the same apartment, I had a strong desire to just get out. Maybe temporarily, but probably permanently. I started writing this post back when these feelings were still there fairly strongly, but already subsiding. From the number of stories about this, I don't think I was alone in this. Covid seemed to really send this urge into overdrive among a certain class of aspirational mobile white collar worker. 

There are two stories that can be written about this. The first, and most discussed, is the role of remote work. Covid made lots of educated people's jobs suddenly remote, so they could now move anywhere, at least temporarily. The big obstacle to moving is generally the coordination aspect - a city you want to live in, where you know people, where you can get a good job, where your husband or wife can also get a good job. Take away two of those conditional statements, and the choice set gets a lot bigger. 

But the second part is the one that I think is more interesting. The professional class were also, as a rule, more likely to comply with lockdowns and general social distancing. The net effect was a whole lot of people who hadn't actually spent any time in person with many (or any) of their friends or relatives, for maybe a year at a stretch. The effect of this was to enormously crank up the background sense of ennui and isolation that seems to be a large part of modernity. 

I remember this being one of the stranger aspects of educated Americans when I first moved here. If you grow up in Europe or South America or Asia, you are generally from somewhere. Your sense of place is typically a city. Whereas I'd meet quite a number of Americans whose story was something like "Well, I was born in Cleveland, and lived there for the first two years, then I was in Chicago until age 8, then we moved to Phoenix, then I went to college in Atlanta...". The typical educated American, by the time they reach graduate school, might be on their fourth set of friends, between high school, college, and first work stretch. Their parents may or may not still be living in the place where they were when they were born. 

In other words, the background feeling for a lot of people in the educated classes is already a vague sense of social isolation. Your friends, even your good friends, might pack up and move in a year or two's time. You have to keep investing in new friendships in order to maintain a steady state inventory. 

I can only guess, but I think this feeling is rather widespread, at least to a certain extent. But if it is, then moving cities to try to escape the sense of ennui you've developed is a very high risk strategy. You feel isolated and unhappy because you don't have enough close friends and family. It might indeed be hard to make friends where you are. But when you move to somewhere new, you go back to square one. Rather like changing lines in the customs queue at the airport, you'd better hope the new one is faster, because you start out at the back. 

I don't know how to balance out these two stories in terms of their prevalence. The first one is just a good news story - people can finally leave San Francisco (a city that is desperate to disprove the Lebowski dictum that the bums always lose) and go somewhere less shambolic, while still keeping their tech job. The latter is much less obvious. If your problem was that being rootless made you unhappy, digging up what shallow roots you currently have is not obviously going to help matters. Ironically, it resembles San Francisco's way of dealing with the homeless - the ameliorative steps to solve the current problem in fact just lead to the problem getting worse.  

In terms of telling these two versions apart, one aspect that is striking is the sense of where all these newly mobile people actually wanted to go. It tended to be the same places. Austin, Miami, or sometimes Nashville.

Don't get me wrong, I like all these cities! But still, it's striking that these form such a focal point for a large number of people who are all starting somewhere quite different. To hazard a guess, the main linking factor seems to be "better weather, some fun nightlife, increasingly trendy so my friends won't look at me too weirdly, but still cheaper than NY, SF, or Boston." They are always cities that are described as fun. Which seems to be a shorthand for sociable and full of interesting people to hang out with.

But if the problem you faced in Dallas or wherever is that you weren't able to meet people to hang out with, how exactly do you plan to find your fun circle of friends once you get to Austin? I'm not saying it's impossible. I'm just saying that most of the credible plans you would implement to solve this problem in Austin could also have been implemented to some extent in Dallas. 

The only exception to this rule is if the place you're moving to already has more old friends and relatives in it than the place you're at (and they're likely to stay there). To me, I think this is generally the only good reason to move to a place to escape ennui. 

The fact that all these people wanted to move to the same places tends to imply that this wasn't what was at stake. Maybe Austin helped a ton of people suddenly solve the coordination problem of where to live at the same time. But I don't think that's what's going on.  

If I'm right (and I'm not sure I am), I suspect a bunch of these people are going to wind up disappointed.

How can one tell if this seems like a credible description of one's mindset? I suspect that one telling aspect is the question of how specific and detailed are the ideas of what exactly you plan to do differently when you get to Austin. It's a Saturday. You're in your somewhat larger house, now that you don't live in the Mission any more. You've got the whole day ahead of you. What are you going to do that you can't do in San Francisco? Next day is Sunday. Same question. Then the weekend after. And so on.

I have a feeling that if you don't have a clear answer to that question, you are probably going to find that Austin does not make you as happy as you imagine. 

I would be delighted to be wrong. Austin, Miami and Nashville are all in fact cool cities. I hope everyone who moved there finds it awesome, and pities us saps that stayed put. But I can't help but wonder about the Last Psychiatrist's description of some of how change is often not really change at all

The unconscious doesn't care about happiness, or sadness, or gifts, or bullets.  It has one single goal, protect the ego, protect status quo.  Do not change and you will not die.  It will allow you to go to college across the country to escape your parents, but turn up the volume of their pre-recorded soundbites when you get there.  It will trick you into thinking you're making a huge life change, moving to this new city or marrying that great guy, even as everyone else around you can see what you can't, that Boulder is exactly like Oakland and he is just like the last guys.

Lest this all sound like meandering, there is a concrete prediction that can be made here. If I'm right, I expect the number of relocations to drop fairly quickly as life gets back to normal. If you haven't packed up and moved by now, I'll guess that you're not going to. Because as people actually start hanging out with their friends again, they'll slowly remember that the place they're in isn't actually as bad as it seemed in April 2020 when it felt like we were going to be locked up forever.

If you're still on the fence, take advantage of the warm weather to invite all your friends over for a party first. It did me a world of good. 

Sunday, March 28, 2021

The Lessons of Bitcoin

Bitcoin is, without any question, one of the most remarkable financial stories of our lifetimes. Simply by running some code on your laptop back in 2010, or putting a few grand into the earliest bitcoin markets, you could be worth hundreds of millions or billions of dollars today. Even quite a bit later in the process, a bold bet that you hung on to could have easily brought you life-changing amounts of money. 

Did you make life-changing amounts of money from Bitcoin?

I didn't. 

I think about that quite a lot.

I made good money from it, in the category of "moving some moderate financial milestones forward a couple of years", which is great. I bought it around the time I wrote this, which still summarises my thoughts on it pretty well. I sold it in February 2018, not long after I wrote this, which I also still like. Short run, the sale was a good call. Longer run, it was a catastrophe.  

If I'd played my cards better and more boldly, at earlier times, I could have ended up with "fuck you" money. For someone writing a pseudonymous blog in 2021, that sure would be handy.

This may sound like a humblebrag, but I promise it's not meant that way.  Internally it feels much more like failure. Chances to make life-changing amounts of money do not come along very often. This was one, and I missed it.

Bitcoin was almost unique in the sense that, to become fabulously rich:

i) you didn't need to have very much money early on (in fact, at the start, you didn't need any at all, just some kind of computer)

ii) you didn't need to risk very large amounts of your wealth to make it happen

iii) everything you needed to do it was publicly searchable on the internet

iv) chances to wind up happily rich persisted for years, including after you probably first heard of bitcoin.

Assuming you didn't make fuck you money from Bitcoin, it's worth pondering what the lessons of this are.

The most obvious instinct, which I fall into from time to time, is essentially just "if only" fantasies. If only I could somehow travel back in time and tell 2010 Shylock to start mining bitcoin! Or to put his life savings into it as soon as possible (and not sell it, and not store it on Mt Gox).

This is the worst kind of loser mentality, taking nothing but fantasy and daydreams from the story. Imagine I had all the future knowledge! Imagine I won the lottery!

But, as it turns out, you don't need to actually transform the question very much for it to be profoundly useful. 

Instead, one is much better off asking "what changes in behavior, mindset and reading habits would I have needed so that I would have actually discovered bitcoin on my own early on and invested in it?"

The reason is that this might actually help you find the next bitcoin. It's possible that buying bitcoin now will still make you rich, but it probably won't make you life changingly-rich (certainly not without risking your whole life savings on it).

The bad news is that it probably will require some hard work and luck. 

It's useful to break the question into two parts:

1. What realistic changes could I have made that might have caused me to come across bitcoin-like ideas earlier than I did?

2. What realistic changes might have shortened the time between first hearing about it and investing (or investing more, or holding it longer)?

At a high level, the answer to #1 is that you need to be reading weirder, different stuff. If you wait to read about an investment idea in the New York Times, it will be long after all the major gains have been made. 

To have been reading about it really really early, you had to be both technically very adept, and reading widely outside the box. Like this guy. Or this guy. Are your reading lists as varied and out there as blog.jim? Somehow I doubt it.

Strangely enough, you might have done extremely well multiple times over since bitcoin became popular even if you just learned the rather narrow lesson "I should learn up to the absolute cutting edge of cryptocurrency, so that I can meaningfully contribute to the small group conversations about what might be the next development in the crypto space". You might have gotten in at the ground floor on Ethereum, or Polkadot, or Chainlink, or a number of others. You might still get in on the next shitcoin to explode. 

In my case, the thing that tipped me over the edge for investing was in 2017 I finally got around to reading Moldbug's essays on bitcoin. I'd read through most of his archives starting in around 2013, but to my great regret, looked at the vaguely finance stuff and decided "eh, I already understand finance, I'm going to skip it." Ha! If there's a single lesson from Bitcoin, it's that in 2009 nobody much understood how money worked. As it turns out, Moldbug's description of bitcoin was entirely correct, he just seemed to me (certainly by 2017) to be wrong about the likelihood of the US government shutting it all down. It seems like hard work, and it's easier to just tax it and enforce know-your-customer requirements on fiat exchanges (which is what happened). 

A related lesson is "you should read more Moldbug, and consider investing in things he talks about, though still take what he says with a grain of salt". That still might yet be a highly lucrative lesson in the fullness of time. 

But I think the real place to improve is actually in #2. 

There are many people who heard about bitcoin back in, say 2013, and thought it sounded pretty weird, and probably likely to collapse. But if they were pushed on the issue at the time, you could have likely gotten them to agree that it was at least worth a punt for a few hundred bucks. 

The question is, how many people actually had that subsequent thought themselves? And moreover, how many actually followed through on it?

Smart people with all the information in front of them frequently fail at both hurdles. They fail to recognise the investment implications of the things they already know, especially when what they know to be true seems strange and unpopular to most people, and thus less likely to be priced in. And they fail to pull the trigger on it in a timely manner. 

The same is true, incidentally, from Covid. A few days after I wrote the post linked, I bought put options on the S&P 500. The thought process initially was "Huh, Covid could be a huge problem, I should buy N95 masks.". It took a couple of days for the follow-on thought (which should have been obvious) to occur "Wait, why am I hedging extreme left tail outcomes in goods markets, but not also hedging (and profiting from) moderate left tail outcomes in financial markets?". That also made me a decent but not life changing amount of money too, about a quarter of which I lost by holding onto my short positions too long instead of buying back in once I sensed that peak panic was passed (the losses are much larger in alpha terms, since you should include the opportunity cost of not being long in April and May 2020, which was huge).   

The thing that may or may not be surprising to you is that I know a fair number of people who read about Covid in early February 2020 and didn't act on it financially at all. I actually understand this. It took me several days to think of it, and I may easily have not done it, or not had the stones. Even when I did, I did it in a panicked and dumb way, just shorting the market. Not airlines, or cruise lines, or buying Zoom. Or, what would have been even better, credit default swaps (if you were one of the big boys ) or call options on the VIX if you weren't. I also managed to predict the wrong thing about Covid, namely that it was going to have a massively high death rate, and managed to screw up most of the market timing decisions I made over the course of 2020. One big good decision, managed to outweigh a considerable number of smaller bad ones, but I definitely didn't come out of 2020 thinking that I needed to do more market timing.

To be honest, the regular reading of weird twitter feeds is one of the things I miss since giving up twitter. It was a complete sewer, a cesspit of aggravation deliberately made to encourage rage-clicks and anxiety, run by people who hate me, and you, and everyone reading this. And yet, there is still material on there that you just can't find anywhere else. 

If you read the same things as everyone else, you will think the same things as everyone else. Not many of those people acquire life-changing amounts of money, except by pure chance.

Thursday, January 28, 2021

Some Thoughts Occasioned Upon Recent Fatherhood

Friends, I’m very happy to report that my daughter and firstborn child recently arrived into this world. The acute feelings of anxiety and then great relief at the birth itself slowly become replaced with the pleasant slight haze of the everyday. But since this journal is as much for myself as for my readers, I wanted to write down the thoughts I recall before they slip away.

Most people are more alike than they think. This is part of the reason why most heartfelt sentiments - whether joy at birth, sadness at the death of a loved one, celebration of someone’s birthday, and many others – end up sounding like clichés. The more important something is, oddly the more likely your feelings are similar to everyone else’s. Because of this, sometimes the repeated forms are okay for the important sentiments. As a friend’s priest said about Christmas sermons – if you’re hearing anything genuinely new in it, it’s probably heresy.

I learned this the hard way when emailing friends about the birth. I said something about how she’d been sleeping well and eating a lot so far, and joked that one could obviously extrapolate this out indefinitely. From one or two slightly snarky responses, I realized too late that, even in jest, this is a little like the newborn equivalent of those ghastly “My child is on the honor roll at XYZ Elementary” bumper stickers, but for a much more emotionally fraught subject. (Which painful door would you rather open? “I’m a bad parent” or “My beloved child is just difficult, and experiencing misery that I can do nothing about”? Por que no los dos!) I’ve refrained from bring up the subject since then, and just instead reflect on the ancient Greek observation that no man should be declared happy until he is dead. You have a well-behaved child once they’re married with children of their own. 

Nonetheless, there was one part about my wife’s period of late pregnancy and birth that was quite striking, in a way that I wasn’t expecting.

There is a certain level of narcissism and egocentrism that is inherent to everybody. The way the Last Psychiatrist put it is quite memorable:

“The essence, the defining characteristic of narcissism is the isolated worldview, the one in which everyone else is not fully real, only part a person, and only the part the impacts you.”

I, like a lot of people, always wake up in my dreams just as I’m about to die. There is some fundamental stumbling block that cannot quite comprehend a world without me in it. If the only part of everything else that is real is the part that interacts with you, then your death is literally the end of the universe.

This much gets commented on quite a lot. One can intellectualise death, and imagine the world going on without you. But one cannot really feel it. It just doesn’t compute.

But the strange part, that I hadn’t really  appreciated, is that something similar happens (at least to me) at the early end too.

Having my own child was literally the first time I’d been forced to contemplate in concrete detail what my parents’ life might have been like around the time I and my siblings were first born. The standard way this is described is that until one has children oneself, one doesn’t quite realise how much thankless work goes into changing thousands of nappies and not sleeping properly for months on end.

But at least for me, it’s more than that. I just hadn’t given much thought to the subject. I have images of my parents’ life before me, pieced together from photographs, and stories they’d tell with my uncle sitting around the dining room table after dinner. But these tended to mostly focus on the period when they first met, before they got married. There were some stories after that, about their lives, living with my grandmother, buying a small shack in the countryside and planting trees there, and things like that. But then there was a large gap, a chunk of the map shrouded in cloud, of what it might have actually felt like when we children were first born.

And I think part of the reason for this (at least with me) is the narcissistic tendency. People are only real to the extent they interact with you. And the part of you that counts is the part you can remember. In my case, the earlies memories are from around age 3. When I’m forced to contemplate it, I simply have no empathetic concept of me before that time. To consider myself as a one-year old, or as a newborn breast-feeding, or while in the womb, is every bit as alien to the actual narcissistic self-conception as to think of myself as being dead. I can imagine it. But there is simply no capacity to relate. Without memory and capacity for self-conception, the chain of "I"-ness gets broken. 

Take away this inherent interest and understanding, and the parts of the characters immediately before I mentally appear on the scene simply don’t quite register. The stories my parents explicitly told me register, and those I feel warmly about. And indeed, I can think about times before I was even an idea, what my parents were like as children or teenagers. But the part that interacts with me, in the period where “me” is not something I instinctively empathise with, tends to be a strange and glaring gap.

Until my own child arrives. Then, I'm forced concretely to imagine all sorts of things I didn’t really consider. The scene of sea and sky suddenly inverts to a dizzying new perspective - one in which my parents are fully real, but I am only partially real, and only the part that interacts with them (since the part that is "me" doesn't yet exist). And one sees the whole path of the same scene repeating again and again. My daughter, currently totally helpless, having not the vaguest clue of what my wife and I do to keep her alive, and no real sense of gratitude or even contemplation, until one day, several decades hence, when (hopefully!) her own time comes to pay it forward with her own children, and the cycle repeats.

Thank you, Mum and Dad. At last, just a teensy bit, I understand. I suspect you knew this already.

Welcome to the world, little one. We’re so glad to have you.

Saturday, January 16, 2021

Tether - risky, but probably not for the reasons they keep telling you

I keep being forwarded this article that came out in Medium recently. It poses as a big expose of tether, the stablecoin that powers lots of cryptocurrency transactions. We learn that it's a scam and a fraud, and about to crash the price of bitcoin.

The very short tl;dr on tether is that it's a cryptocurrency whose value is kept at a stable $1 USD. Why would you want this? Well, lots of people want to transact electronically in something that's basically dollars, but without the insanely anachronistic mess that is the actual US banking system. But USG has aggressively gone after money laundering by controlling the interface of the banking system and crypto exchanges. In other words, control the fiat/crypto interface tightly, and the rest of legal compliance will follow (apparently). If you as a company anywhere in the world take money from the banking system, you get aggressive demands from USG officials that you comply with US "Know-Your-Customer" (KYC) anti-money-laundering legislation. 

So some exchanges like coinbase specialize in being places that comply openly with the law, where you can hold your crypto and feel like there's a lower chance that it will be stolen, because coinbase is possibly about to become publicly listed, a good hallmark of establishment reliability. And others specialize in the opposite of this - transact there while being less legible to US regulators, take on massive leverage on your trades, pay lower fees due to regulatory arbitrage of not complying with US financial laws. So far, they've been able to do this, barely, because they follow the golden rule of "never touching actual US dollars". Just exchange one digital asset (e.g. bitcoin) for another (e.g. tether), and you never directly interact with the standard financial system. So tether ends up being the numeraire good, the medium of exchange on lots of these platforms. Hence why there's so much demand for it.

It's important to note that the way tether is priced at a dollar is that tether, the company, will (so far!) redeem them for exactly a dollar. As long as this promise is viewed as credible, they'll trade at $1, and they roughly do. Tether rather speaks out of both sides of its mouth on this - in marketing materials they tend to emphasize that tethers can be redeemed for the same number of dollars, and in practice they pay out your redemptions, but in the fine print they say that this isn't necessarily, technically, something promised.

So far, so good.

Well, what's the claimed problem? Here's the article's summary:

Tether Ltd. also says one Tether is worth exactly one US dollar. Can they do that? Well they say they can, because they hold $1 worth of assets for each Tether. But are those assets actual dollars? No, they are not. So what if the assets go down in value? Don’t worry; they will not. Okay, but can we at least see the assets? No, you may not.

Who in their right mind would use something like Tether? Well, the short answer is that many people use Tethers to buy Bitcoin and other cryptocurrencies. The long answer, though, is astounding — but more on that later.

Because Tether sounds exactly like a currency fraud, it may not surprise you to learn that Tether Ltd. is currently under investigation by the Office of the Attorney General for the Southern District of New York. That investigation was announced to the public on April 25th, 2019.

As an aside, the Office of the Attorney General for the Southern District of New York are a pack of assholes who feel justified in arresting anybody on the planet who so much as looks at a financial transaction in a way they don't like, on the highly compelling theory that a) Manhattan has a lot of banks, and b) Manhattan is the center of the universe. If you are not utterly cynical about their press releases by now, I don't know what to tell you. 

And from there follows a very breathless and interesting read of all the ways that tether has been printing tether coins, and this is pumping up the price of bitcoin, and it's all likely to collapse because it's a giant scam. 

 "Nonetheless, based on this evidence, I concluded my risk was now too great. I was long Bitcoin up to my eyeballs; Bitcoin was clearly correlated with Tether; Tether was clearly being issued at a frantic rate; and that issuance had a high probability of being backed by nothing at all."

Have a read. There are a lot of interesting facts in there. In fact, if you feel yourself well versed in finance, go away and read the article and try and find the big glaring conceptual error in it, then come back.  

I am in two minds about this article. 

On the one hand, the author is likely right that tether has a non-trivial chance of being shut down by USG, that it fuels a large amount of leveraged trades in crypto, and that the loss of tether would likely cause a big deleveraging that would probably be disastrous for bitcoin prices

On the other hand, the reasons he thinks this will happen are moronic, ludicrous and risible. They are a great example of a certain kind of stupidity that is annoying prevalent in crypto communities. 

What is the first order problem with the whole discussion?

The gigantic blind spot is that he, like lots of crypto people, seems to not notice the obvious fact that tether is simply a bank. The tether coin itself is a demand deposit, just transformed into cryptocurrency form. It's hard to think of a cleaner example of the hypothesis that money itself started as debt that began to circulate. The company keeps a certain amount in reserves to fund these possible redemptions, and then invests the rest. This is how basically every bank in the world works.

The reason that so few people spot this is that the world is roughly partitioned into 

-people who like cryptocurrencies and who think that all "fractional reserve banks" are scams, and

-people who like mainstream banking, and think that cryptocurrencies are scams.

So as a result, the number of people who are both knowledgeable and agnostic on both fractional reserve banking and crypto is surprisingly few. 

And when you see it this way, a huge amount of the apparent mysteries immediately get resolved. This comparison ought to be obvious, but it’s not, because guys like this tend to have completely moronic ideas about what a bank actually is, and simply think that all banks of any form are “scams”, regardless of how well capitalized they are. He has some huge hard-on of this idea of himself as the narrator in the Big Short, but somehow never learned how a bank actually works. 

Go back to the quote above. Banks are partitioned into two types. Those where every dollar of deposits is backed by 100% literal cash US dollars in a vault, and those where it is “backed by nothing at all.”

Like…did you consider any other possible bank balance sheets? Are these the only two possible cases? 

His idealized type of bank (assuming he even realizes that this is what he's describing, which I doubt) is called a narrow bank. In practice you should be able to set up a bank that just takes investors deposits, in turn deposits them at the Fed, and earns the interest the Fed pays on reserves. Why can't you do that? Well, the Fed has denied licenses to such banks, with largely spurious reasons given as to why, in ways that smell like corruption, even to very mainstream economists like John Cochrane.

So since we don't have that option, every bank is a fractional reserve bank. To a banking agnostic, the crucial question is not "is it a scam engaged in maturity transformation?". Rather, the question is "given how well capitalized the bank is, how likely is it that there will be a bank run that causes depositors to not get paid back in full?".

Suppose tethers are only backed 74 cents in the dollar by actual USD, a claim that’s floated around here. Here’s the question. They took in 100 cents in the dollar in cash. They now hold 74 cents. What does this guy think they did with the remaining 26 cents? Blew it all on coke?

No, what they very likely did is buy the exact cryptocurrencies that the guy laboriously shows that tethers are being used to purchase.

So at the time they bought it, their portfolio was most likely something like 74c cash, 26c BTC or whatever.

Now, a sensible risk weighting would assign a big haircut to these BTC assets, given how risky they are. Sure. But what this guy does, along with places who should know better like Bloomberg, is downweight every single asset that's not cash to a risk-weighted collateral value of zero. This is, to not put too fine a point on it, imbecilic. 

And the reason this is even more egregious is the following. Ex post, what happened to the price of that BTC? It went up like crazy. 

Assuming this much is roughly true, this would make tether among the best capitalized banks in the world. As a betting man, I’d wager pretty strongly that the value of their crypto is way higher than the missing 26c in the dollar or whatever of liabilities they owe, probably by a factor of 2-10.

Buddy, if you think tether is a scam, let me tell you about Citibank. 

So what do you do if you’re now a bank who's crazily over-capitalized, and holding a lot of crypto assets? Well, one option is to say “sod it, let’s print some more tether liabilities, and use those to buy more crypto”.

Absent government regulations, this is an entirely sensible thing to do. The timeline above explains every single “suspicious” fact that this guy points to.

The risk that tether, left to its own business operations, is about to go bust, seems quite low, as long as they’ve likely been using part of their cash to purchase crypto that’s since risen greatly in price. It's true, there hasn't been a proper audit, so we don't know for sure what they've been buying or holding. Maybe they really have just spent it all on hookers. But the strongest bet to me, for a variety of reasons (including those floated by tether skeptics) is that tether has been buying crypto assets. If they've bought some kind of diversified crypto portfolio before March 2020, happy days. Strongly well-capitalized banks do not tend to collapse in bank runs. I would wager quite heavily that, at current prices, they have way more crypto assets than they need to pay off every possible tether holder (even if, as is true, liquidating said assets all at once would cause a big price drop).

So what’s the actual problem with tether?

First, while they are a bank, they don’t say they’re a bank. They tend to imply, falsely, that they’re more like a money market fund, just holding cash and cash equivalents.

Second, if they are a bank, they run the risk of being regulated like a bank, and they sure as hell haven’t been complying with banking regulations, notwithstanding that they’re probably very well capitalized.

Third, their whole business model smells like know-your-customer violations.

All of this means that there’s a decent chance of them getting boned by some up-and-coming NY DA, running the same playbook as for Tradesports, and World Star Poker, and a bunch of others. Freeze assets. Destroy your business because you can't access any of your assets. You dip into some of the reserve cash to stay afloat. They declare you a ponzi scheme, improperly stealing customer funds, and say you collapsed for this reason. Whether you were or weren’t (and in the case of tether, there’s good reasons to think they have more assets than they need, not less), the proximate cause of the collapse is government.

Where this guy is right, is that tether fuels a lot of the levered bets people make on dodgy exchanges. Take away the tether that fuels these exchanges, and you probably get a massive deleveraging. I’d bet on this being a Mt Gox level event for BTC if it happens. If the only demand is now coming from unlevered, KYC compliant bets on Coinbase, that’s a big reduction in likely demand.

At the end, the big irony is that

a) he's right that you should be worried about tether, about the prospect of it being closed down, and the likely impact of this on BTC prices, but

b) the one thing tether gets the most flack for is the one bit that seems least likely to be true - being massively undercapitalized, and unable to pay back depositors.