Friday, March 30, 2018

"Investing with Icarus"

From Epsilon Theory:

The wind blows where it wishes, and you hear the sound of it, but cannot tell where it comes from and where it goes.
The Bible, John 3:8
As Narrative abstractions — cartoons — become our short-hand for things that used to have meaning, our models become more and more untethered from the reality they seek to reproduce. When wind becomes the thing-that-makes-the-leaves-move, then wind becomes a bear rubbing his back on the bark.
He that breaks a thing to find out what it is has left the path of wisdom.
The Lord of the Rings, J.R.R. Tolkien
Pursuing better returns by uncovering absolute truths about the companies and governments we invest in is not a serious enterprise in the face of markets rife with Narrative abstractions. It is a smiley-faced lie, a right-sounding idea that doesn’t work, and which we know doesn’t work. Selling the idea that it does to clients is the territory of the raccoon and the coyote. We can pursue it, or we can do the right things for ourselves and our clients. But not both.
Disneyland is presented as imaginary in order to make us believe that the rest is real, whereas all of Los Angeles and the America that surrounds it are no longer real, but belong to the hyperreal order and to the order of simulation. It is no longer a question of a false representation of reality (ideology) but of concealing the fact that the real is no longer real…
Simulacra and Simulation, Jean Baudrillard (1981)
How does Wall Street maintain the respectability of dishonest businesses? By declaring victory over straw men — active management is dead! Hedge funds lost the Buffett bet, beta won! Risk parity / vol-targeting / AI funds / quant funds are to blame! If you must sell that L.A. is real, you must create Disneyland.
“All right,” said Susan. “I’m not stupid. You’re saying humans need… fantasies to make life bearable.”

REALLY? AS IF IT WAS SOME KIND OF PINK PILL? NO. HUMANS NEED FANTASY TO BE HUMAN. TO BE THE PLACE WHERE THE FALLING ANGELS MEETS THE RISING APE.

“Tooth fairies? Hogfathers? Little—”

YES. AS PRACTICE. YOU HAVE TO START OUT LEARNING TO BELIEVE THE LITTLE LIES.

“So we can believe the big ones?”

YES. JUSTICE. MERCY. DUTY. THAT SORT OF THING.

“They’re not the same at all!”

YOU THINK SO? THEN TAKE THE UNIVERSE AND GRIND IT DOWN TO THE FINEST POWDER AND SIEVE IT THROUGH THE FINEST SIEVE AND THEN SHOW ME ONE ATOM OF JUSTICE, ONE MOLECULE OF MERCY. AND YET — Death waved a hand. AND YET YOU ACT AS IF THERE IS SOME IDEAL ORDER IN THE WORLD, AS IF THERE IS SOME…SOME RIGHTNESS IN THE UNIVERSE BY WHICH IT MAY BE JUDGED.

“Yes, but people have got to believe that, or what’s the point—”

MY POINT EXACTLY.
 Hogfather, Terry Pratchett (1997)
So long as the government requires financial markets to act as a utility, and so long as it makes more sense for big tech companies to hire evangelists than CEOs — until the farmer comes out with his gun – we have only a few choices:
  1. We can be raccoons: We can recognize the overwhelming influence of abstractions and continue to sell products and ideas that don’t.
  2. We can be coyotes: We can recognize the overwhelming influence of abstractions and DESIGN new products and ideas that don’t.
  3. We can be victims: We can let the raccoons and coyotes run rampant over the farm.
  4. We can insulate: We can push back from the table and try to do the things that aren’t abstractions. Real things. Physical things. Things that put spendable currency in our accounts.
  5. We can engage: We can do our best to think about how to change our investment strategies and processes to respond to abstraction-driven markets.
These aren’t mutually exclusive, although only two are worthwhile. Ben’s DNA is long vol, so he wrote about how to insulate. My DNA is short vol. This note is first in a series on how to engage.

Speaking of DNA, there are few fields of study I find as thrilling as the intersection of anthropology and genetic geneaology. What I mean by that is how people lived, died and moved, and how their cultures and lineages moved with them. Yes, if kicking off notes with the old King James didn’t give you enough of a hint, I’m a big hit at parties.

Some of the appeal of genetic anthropology comes from the simple pleasures it offers, like the satisfaction of watching white supremacist idiots discover that they are mutts just like the rest of us.
The second appeal is the grand scale of ancestry and human movement, even over cosmologically infintestimal periods of time. This appeal is timeless. For example, in a legend common to three of the world’s great religions, God promises to multiply Abraham’s descendants as the stars of the heaven and as the sand on the seashore. It’s a pretty attractive promise, but temper your excitement — it was a reward for being a hair’s breadth away from murdering his son. The promises are poetic, of course, but the scope of the two is surprisingly different.

There are somewhere around 100 billion to one trillion stars in the Milky Way, an estimate which would vary based on how you estimated the galaxy’s total mass through the gravity it exerted and based on what you assumed was the average type of star. We’ve discovered a Wolf-Rayet star in the Magellanic Cloud with mass perhaps 300 times that of our sun, for example. It is so much larger than our sun that its surface would reach almost a third of the current distance to Mercury. Icarus wouldn’t stand a chance. On the other hand, we’ve discovered a red dwarf only 19 light-years away with less than 10% of the mass of the sun. But the 100 billion to one trillion range is a fair estimate. Earth has already seen 100 billion human lives. It will (hopefully) see its trillionth at some point between the year 2500 and 3000, if y’all could stop killing each other. Still, if you’re willing to ignore that we can see stars from other galaxies, too, I think we can prematurely give this one to Abraham.
As for the sand, there are about seven or eight quintillion grains on the earth. There’s just no way, even if Elon manages to get us off this planet before the next mass extinction event.

Interestingly, if you look backward, that isn’t quite true. When it comes to lineage, exponential math doesn’t always work going forward. One couple dies without any offspring, while another has a dozen children. But it always works going backward. Everyone has two parents and four grandparents. Based on most of those traditions holding that Abraham lived around 2,000 BC, we can estimate that the average living person has about 1.5 quindecillion ancestors from that time. Given that there were only about 72 million people alive at the time, that means that each of those individuals, on average, shows up in your family tree about 20 duodecillion times. That’s a 20 with 39 zeros. Congratulations! Math is amazing, and you are inbred.

The third appeal is that the really interesting findings are new. Very new. Anthropologists, of course, have theorized about the propagation and spread of cultures through comparative review of ancient art, tools, jewelry, burial sites and artifacts for centuries. Linguists can lean on anthropological techniques, but can also compare similar or derived grammar, vocabulary, and the like to identify how languages originated and spread. Maybe even some sense of where they came from. DNA has been used to develop and cultivate theories about human migrations and the spread of cultures for a shorter time, but in earnest starting in the late 1990s into the early 2000s. These studies have principally relied on the DNA of living individuals. Scientists examine current populations and theorize how ancient populations would have had to migrate to create the current distribution of various genetic admixtures — archetypes of varying compositions that can be generalized, like “Near Eastern Farmers.”...MORE