Thoughts on a Low Return Environment

The U.S. stock market valuation is at an extreme. According to NASDAQ, the ratio of the median stock price to revenue (price to sales) is at an all time high; higher than the internet euphoria of 1999 and the real estate boom of 2007. Federal Reserve policy is the primary reason for these high prices. A series of Quantitative Easing (QE) programs and Zero Interest Rate Policy (ZIRP) helped create record low yields. The slow growth economy creates few opportunities for corporate growth and innovation. Instead, corporate boards have been borrowing cheaply to repurchase their stock in record amounts, pushing market valuations to the current peak.

A recent Callan study highlighted in the Wall St. Journal focused on how these valuations may impact investors. In 1995, investors could expect a 7.5% average return from a simple portfolio of 100% bonds. By 2005, the same 7.5% return would require roughly 50% bonds and 50% stocks. At the end of 2015, the same 7.5% expected return would require 41% U.S. stocks, 22% foreign stocks, an 25% combined in real estate and private equity. Despite better diversification, the goal of a typical market return now requires much more volatility. Taking volatility as risk, this means the REWARD/RISK ratio is only 1/3 as attractive now as it was in 1995.

Higher overall volatility means a less certain, wider range of outcomes for investors. Variation in returns has two drawbacks. First, investors hate losses more than they love gains. Behavioral psychologists have labeled this mental bias MYOPIC LOSS AVERSION. “Myopic” because we are all hardwired to worry about the short-term effect of our actions. And “loss aversion” because we regret losses, two to 2 1/2 times more than we enjoy gains of a similar size. Second, outcomes depend on compound returns, not average returns. The returns in the Callan example are average annual returns, whereas compound returns are the net result of multiple years of returns. Here, a shortcut reveals the problem. Compound returns are roughly equal to average returns minus half the volatility. In the Callan study, average return is constant, but expected volatility is nearly three times higher today than 1995.

This is why protecting the downside is so vital. If you miss out on the upside it is not as detrimental as missing to the downside (psychologically or financially). One of my favorite fund managers, Eric Crittenden of Longboard, has a great example of the importance of absolute returns over beating or matching a benchmark. Given the following choices, which would you pick? Choice A: Outperform S&P 500 by 10x.
Choice B: Underperform S&P 500 50% of the time. Choice A is the obvious answer. In reality, both are the same strategy, that of Warren Buffett's Berkshire Hathaway. From 1985-2015, it crushed the S&P 500 yet trailed the index over 50% of the time on a daily basis. At one point during the streak, Buffet was 60% behind the index. Great long-term compound returns require investors to ignore the market benchmark in the short term, especially when valuations are high.

Short Review: Louie CK in Atlanta

Louie CK performed at the Fox Theater in Atlanta last night. The show seemed to be sold out, as one would expect. Louie CK is very popular, he only scheduled one show in Atlanta, and he hates for others to profit from his success, so he keeps ticket prices low and actively thwarts secondary markets.

Getting to the Fox was a hassle, because Atlanta mismanages street parking. Getting inside the Fox was a hassle, as they were screening for weapons, and cameras. The beer lines were long, partly because the barkeeps didn't seem to know what they were doing. However, they did well enough for some folks to be shit-faced. On a trip to the bathroom late in the show, I encountered a young man puking. I've seen that plenty at music shows, but never a comedy show, until now.

The show advertised an 8PM start. The lights dimmed about ten minutes after eight, and three unknown comics came out to warm up the crowd. The two guys were decent, but the woman was not funny. She was smart, and her jokes were clever and interesting. But not funny. Perhaps there's some psychology at work in my opinion. Both male comics (also white) primarily told self-effacing stories. The female comic also made fun of men. Psychologically, we let those like us joke or criticize us, but not outsiders. I don't claim to be immune to psychology, just honest in that she didn't entertain me.

The crowd was very diverse, except racially. There were very few blacks, which is interesting given Louie's start. And Louie did what he always does, he made fun of everyone. He told a racist joke, in order to mock those who tell racist jokes. He made fun of gays, in order to mock homophobes. He had a long series on teachers and education, in which he mocked teachers while praising them. When the crowd tried to applaud for teachers, he mocked the crowd. 

When Louie entered the stage, he didn't welcome the crowd or thank them, he simply launched into a bit on abortion. Over the course of his almost 90 minutes, he talked suicide, race, evolution, fucking, cocks, and children. Other than a bit about trying to teach math to teenagers, I had not heard any of the material before. Oh, and he wore a grey suit, white shirt, and a tie. No more black t-shirt and black jeans.

Overall a very funny night. I've seen most of his prior work, but it was nice to see Louie perform live. I recommend you do the same, if you get the opportunity.

Short Trip Report: Parx Poker

Getting There

I was near Philadelphia, in King of Prussia, for a work-related conference. I elected to stay an additional night so as to play some poker. There were other casinos around, but I was primarily interested in poker, and Parx has the largest room in the area.

Staying There

Parx is not a hotel, but there are several nearby, listed on the Parx website. I stayed at a Courtyard by Marriott, because I have frequent stay status there. The casino discount code listed on the Parx website didn't work, but my Marriott status got me almost as good a deal. Hotel staff discouraged me from walking, so I took Uber. When I saw how close it was, I decided I would walk back, unless it looked unsafe. I ended up playing until 3AM. I did walk back, without any incident. The surrounding area is mostly an office park, and it was a ghost town. 


The main casino has slots, table games, sports bar, and several food venues, but no poker. That is in a separate building. So, I registered to get a player's card, then quickly burned through my $10 in free slots. It was for the best that I went to the main room first. I never did see a player's card registration in the poker room, and the food choices are reduced there. I opted for the noodle house for dinner. I enjoyed a cold Asahi beer and good, hot, Pho soup with beef. 

Poker Room

If memory serves correctly, there were $1/2 and $1/3 NLHE games, as well as $5/5 PLO and $6/12 O/E games. At the time, $2/5 NLHE had the most tables running.  The room had a bar, lots of televisions, and over 60 tables. On this day, a Thursday while a tournament series was going on at Borgata, it was less than half full. Parx did run a nightly tourney for about $140. It was essentially a satellite structure, where 10% of the field got paid, but everyone who cashed received an equal split of the same prize money.  The room has food runners who will bring food to your table, but it was a limited menu. At one point in the night, several folks ordered the daily special, a chicken parmesan sandwich. I didn't eat anything there, but I did sample the beer and the coffee, which were both fine. Funniest food experience of the night was watching a pretentious regular try to order sushi for delivery from a local restaurant. It was a 2 1/2 hour ordeal but he finally received his raw fish. 

The Play

I don't play much poker, so normally I play $1/2 when in a strange place, but after circling the room a bit and observing, I decided to play $2/5. I bought chips, got on the list, and was seated within about 20 minutes. The rake at $2/5 was 10% to $5, plus a $1 bad beat drop.

No cash is allowed at the tables, which made adding on after a lost hand a bit of hassle, but I guess that's an incentive not to lose. The regulars were usually prepared for this, having large denomination chips on their person that they could put in play. An early hand at my table saw a big hand go down for about $1500 where a flopped nut flush stacks top pair, send nut flush draw. Afterward, the stacked player attempts to rebuy with an orange $1k chip. He asks the large stack to cash it for him, and there's a discussion about whether these chips are allowed to play at this level. Several players weigh in, outing themselves as regulars at Parx. The dealer declares the chip plays. Since he also periodically works as floor man, his decision is taken as final. As dealers come an go, the question comes up a few times, until the floor is called, and he rules that the $1k chips are not allowed at $2/5. Seems typical for many poker rooms that the rules depend on who you ask.

The most interesting hand of the night happened on a nearby $1/2 table. A regular who prefers PLO, sat to play with the stated objective of chasing the bad beat jackpot. He flops quad 6s. On the turn he gets it in against a straight flush draw, and loses. The bad beat was around $214k. Scuttlebutt put the table share at $13k. 

I didn't play many interesting hands, and when I did, I played poorly. I got involved in an unintentional 3-way all-in. I don't recall exact preflop action, but it had been raised and I got to the flop against a loose reg and a more ABC reg. Flop comes low (2d,5d,8x). I have 6d4d. Loose reg bets small, like 1/3 pot, so I raise, around 3.5X, and player on my left flats. Loose player then shoves for around $450 effective. He had done this several times prior, with simple over cards. He was slightly tilted, and was in a mode to bust or double up. He had been short, but after doubling twice, now had around 90bb. The player on my left, whose action seemed strong, was not acting strong. I felt good about calling the loose player and let that dominate my thinking. I called, as did the player on my left. Loose player had Ad3d, so he took all my flush outs. Player on my left had 7d,6s. I was left needing a 4 or 7. After two bricks, the loose player dragged it with A high. In hindsight, I should have adjusted loose player's range for having built his stack back up. I kept thinking the player on my left was just fishing, and he would go away, but he didn't. As Charles Barkley would say, "turrible".

I busted at the end of the night when I raised an opener with KK, at around $500 effective. He called, then donked the KJ8 flop. For some reason I only called. Turn was Ts, which brought a flush draw. Villain leads again. Now, I suddenly am concerned about AQ. I totally didn't think of it on the flop, as I was focused on the fact that OMG I have a set of Kings! Here, I didn't know what to do. Perhaps I should have shoved. I called hoping to see a free river. The river was a low spade, completing the flush. Villain checked, so I got my free card. But now I lose to a straight or a flush. I quickly shoved, but it was too small, only around $220 into about $660. Villain called with AQ. 

I think my player pool was mostly regs this night. I saw one player use aggression well. Otherwise, I saw the same loose passive (lots of limping) play I see at my $1/2 home game. There was lots of poor play, which meant I fit right in.

How to Fail at Almost Everything and Still Win Big

This is the story of one person’s unlikely success within the context of scores of embarrassing failures.
— Scott Adams

Scott Adams, probably best known as the creator of the comic strip Dilbert, has more failures than successes, yet he is still a big winner at life. Scott's latest book, How to Fail at Almost Everything and Still Win Big, chronicles his system for a good life.  This book is part self-help manual, part autobiography, part history of the Dilbert comic. A fan of any of those things will enjoy this easy, fun read. 

I've always been a fan of the Dilbert comic, but I knew very little about Scott Adams until a couple years ago. when he wrote a very provocative post about end of life care and government interference. It's one of the most amazing things I've ever read, and it put Scott's blog on my radar. Last fall, I noticed Adams was blogging on the presidential election, specifically, he was focused on Trump and predicting Trump to win in a landslide. The posts were prescient and intriguing, and they demonstrated Scott's range outside the world of comics. He regularly added a postscript to his posts, mentioning his book. I'm glad he persuaded me to buy it.

In How to Fail,  Adams sprinkles stories and examples from his life with his advice for how to build systems for success. He gives lots of advice, but the core ideas are as follows:

  • Systems vs. goals. Systems are for winners, goals are for losers
  • You can change how you act and how you think
  • Personal energy is the key to self improvement
  • It's unlikely you'll have any one exceptional skill, but if you stack several skills together, you can win. Every skill you add doubles your chance of success, and some skills are more valuable than others (he gives many good examples, including Persuasion)
  • How to be happy? Basically health and freedom
  • You can increase your chances of being 'lucky'
  • How to conquer shyness, be more outgoing
  • Tips on diet and fitness, via systems
  • Simplicity can produce amazing results

Adams writes in a simple style, and makes it easy for the reader to read this book in short bursts, as the chapters are short to the point. The book contains lots of interesting details about Adams' rise to fame, his many failed ventures, and some personal health struggles, all with doses of his humor. Most of his advice seems reasonable, and if you read other pop social science, you'll recognize a lot of his advice. However, this is not a pop science book. This book reads like a conversation with a friend over coffee. 

A few things might be controversial, but he warns throughout that this is a system that worked for him, not something everyone should try. One small example is that he finds peanuts to be a healthy alternative snack. Some might disagree with the choice of peanuts, but it's not a big deal. His point of making small tweaks to your diet, to provide quick energy boosts without a lot of calories, is worth considering. A bigger idea that might be controversial is his practice of daily affirmations. Science is mixed on this, and conventional science is very skeptical. Adams warns of this, and simply says it has worked for him, even if those successes were simply coincidences. Adams has written a couple other books, with some controversial ideas about religion. His blog posts have also stirred controversy at times. This book, however unconventional, is not controversial. I think most readers will find a few good tips, probably more, they can incorporate into their own lives.

A Teachable Moment - Charity is Complicated

Several weeks ago, I had an interesting conversation at my local Rotary meeting. Several friends and I were enjoying lunch, waiting to hear from one of the Home Depot executives, when the conversation turned to the $1 billion PowerBall lottery. A good friend, we'll call him Steve, picked up on the theme and told the story of his recent encounter with an apparently homeless person. Steve was in rural Georgia hunting with his family. He stopped at a convenience store with two of his young sons to get supplies. On the way out, they saw a man scavenging the nearby dumpster. Steve only had 3 dollars cash left, but he gave it to the man before driving off. A few moments later, Steve realized he had paid for a bag of ice, but did not retrieve it from the freezer outside the store. Steve returned to the store, and poked his head in to tell the cashier what he was doing and he spies the vagrant spending the new cash on lottery tickets. After retrieving the ice, Steve shared the new information with his sons, and told them is was a teachable moment, that you can attempt to help people, but you cannot make good decisions for them. 

I told Steve the vagrant's action seemed rational to me, and one of our friendly arguments ensued. Steve thought the recipient should have used his new funds for a meal or something of value. I think the vagrant did that, in his mind.  Here, I'll try to defend the vagrant, and encourage Steve to  give again in the future, regardless of this incident.

Allow me to back up, and touch on the broad question of sovereignty. Once you make a gift of any kind, you have no ownership over the gift. It's common for givers to try to exert ownership, but those actions are what have created our dysfunctional, ineffective non-profit system. As a libertarian, I believe all competent adults are sovereign, capable of making their own best decisions. If I were in Steve's position, I would hand over the $3, and it wouldn't matter to me how the money was spent. It's none of my business. The recipient is the best person to know how best to spend that money. Consider Milton Friedman: 

There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government.
— Milton Friedman, in a Fox News interview in May 2004

Uncle Milty was focused on the inefficiency of government, but his argument applies to large bureaucracies like charities, and for individual decision making. Incentives matter.  The best way to implement this idea is to give directly, without strings attached. There are a number of legitimate charities set up now to do just this, one of which is called Give Directly. All they do is give small amounts of cash to extremely poor people in the third world. They bypass all the inefficiencies, and simply get capital where it is in low supply. Academic research suggests they are far more effective at reducing poverty than traditional giving. 

Coming back now to the specifics of Steve's gift to the vagrant, Steve likely gave the gift without any strings attached, and would have likely felt good about his action had he never seen the person again. However, once he learned of how the vagrant chose to spend the gift, Steve made a moral judgement, one that changed his view of that gift, and possible future gifts. He even went so far as to try to influence the future gifts his sons might make. The key issue is not Steve's gift, but the moral judgement many make when a poor person spends what little capital they have on a highly speculative venture. I think Steve's view is the conventional one. Lotteries are referred to as a "stupid tax" by many. How can it make sense for the poor to spend their money on lottery tickets (or other gambling for that matter)? Mathematically, it doesn't. The lottery is a losing venture, regardless of the financial status of the player. The difference is the utility. For the vagrant, the low odds of the lottery payout are better than his other available options. That may sound unbelievable but it's often true, according to academic research. There aren't any banking options for him to save the funds. Any cash kept on hand is likely to be lost or stolen. The best options involve spending. While it may seem rational to spend the money on food, the vagrant decided his food options were not superior to the hope, excitement, and small possibility of winning the lottery. 

I'll close this excessive post with an anecdote from my business. I provide high level financial planning to wealthy individuals. A significant part of my job is to advise on charitable planning. In my experience, most people do not think about giving they way I've suggested above. They give with strings attached. When they give money to a college scholarship fund, they want some say in the type of student who will qualify, instead of just finding a needy student and giving them money directly. I've also seen a lot of disappointment when clients have made direct gifts to friends and family. When they give money directly, they are sometimes disappointed with the choices the recipient makes following the gift. In short, my clients have often felt the same disappointment Steve felt, despite giving to folks who were not poor, and not unknown. In my experience, it is very difficult to give something away without being emotionally attached to what happens next.  Charity is complicated.



Who's Your Favorite Female Drummer?

Quick, name a female drummer. Don't google it, just answer.

None? Me either. I can name several male drummers, but no females. I'm sure there are lots of them, and that many are among the best in the world. I just don't know about them.  Most popular musicians, whether part of the named group, or simply supporting a named act, seem mostly male in my experience. It's not just popular music. Google the issue of females in symphony orchestras and you'll see they represent about 25% of the population. It appears that women are underrepresented in the musical industries (as musicians, not singers), yet little is being done about it.

Contrast this with STEM (science, technology, engineering and math). Women are underrepresented in these jobs, and everyone knows about it. There is a national policy to change this outcome (plus many private, and semi-private initiatives). 

I don't have any key insights into why these patterns exist. I'm skeptical of claims of institutional bias, but that's not my point. Assume I'm wrong about that. My question is, why is society going all out to change the female participation in STEM, but not in other careers? Society seems to be upset that STEM fields are dominated by men, but they passively accept that other fields, many fields, are mostly filled by men. On the flip side, the percentage of women in medical industries seemed to go from zero to equal quickly and without major governmental programs. So, what's special about STEM?

The most common answer I've encountered is that society desperately needs more STEM professionals, and growing female participation is one way to achieve that goal. That makes sense, but I don't think it fits our history. Before the effort to get more women in STEM, there were efforts to get more men in STEM. But those efforts were unsuccessful, because there continue to be cries that we are short STEM professionals. Perhaps the STEM industry are just good at ubiquitous marketing. Or perhaps, STEM is a good target for social justice campaigns, where motives count more than results. 

If you know the answer, please share.


Trump: The Art of the Campaign

Trump: The Art of the Deal
By Donald J. Trump, Tony Schwartz

The surprising success of Donald Trump's campaign for president spurred me to read his 1987 book, Trump: The Art of the Deal. When originally released, the response was mixed, along the lines of the current reaction to Trump the candidate. The book was a best seller, just as Trump is handily leading in all the major polls. The contents are mostly simple axioms told through exaggerated stories involving Trump and other high profile people. The secret sauce of his success is not complex, which makes it, and him, easy to dismiss. (Disclaimer: I'm a Rand Paul type. I don't support Trump, but I'm impressed by his performance and intrigued by how such an unconventional candidate does so well.)

The premise of the book is a simple recap of Trump's biggest deals to date. It begins with a summary of a week in his life, a series of phone calls, meetings, and consultations. This is followed by the elements of the deal, a summary of how Trump negotiates. This is the most significant chapter in the book. The remaining chapters are merely the behind the scenes names and events relating to his major projects.

I think Trump's chapter on the elements of the deal are the most useful part of the book, and they offer a template for his current run for the White House. Trump opens the chapter with this summary:

"My style of deal-making is quite simple and straightforward. I aim very high, and then I just keep pushing and pushing and pushing until I get what I'm after. Sometimes, I settle for less than I sought, but in most cases I still end up with what I want."

Here's a review of each element:

Think Big - Trump doesn't just want to be successful, he wants to do big, bold, outrageous things. He claims most people are scared to think big. They are afraid of success, afraid of making decisions; by thinking big, he has an advantage.
In the campaign, all the candidates are thinking big, in that they want to hold the nation's most powerful position. However, Trump has made the biggest, boldest claims of any candidate. He'll build a real wall on our border, paid for by our neighbors. He'll wipe out ISIS. He'll tame the Chinese business juggernaut. He boycotted a debate and he's threatening to sue another candidate.

Protect the Downside and the Upside Will Take Care of Itself - Trump is viewed as a gambler, but he views himself as conservative in business. He'd rather own slot machines than play them. In every deal, he anticipates the worst case, and only makes a deal where he can accept that outcome. His many examples in the book focus on how he negotiated terms that required very little up front money from him, and no personal liability. In the campaign, he's following the same playbook. He makes claims that he is self-funding his campaign, but he's received a tremendous amount of valuable media exposure, free of charge. Unlike other rich businessmen who have spent considerable sums to seek political office, Trump has limited his downside by not having to spend much of his own money. His personality, media celebrity, and extreme statements have catapulted him to the top of the name recognition list, without spending a dime.

Maximize Your Options - Trump protects himself by never getting too attached to one deal or one approach. In business, Trump knows how to pivot to ensure a successful outcome and gives many examples related to his past development projects. As a candidate, Trump has been flexible on timing, having considered a run for President on at least two other occasions. He's also been flexible on his policy positions over the years, and even spent time supporting both political parties. In the traditional world, consistency is paramount, but Trump is a master at being flexible and deflecting the criticism it attracts. As he often notes, even Reagan switched parties and policies.

Know Your Market - Trump puts a lot of emphasis on instinct, something he thinks is genetic. But he also promotes the idea of getting lots of the right kinds of opinions. He's a great believer in asking everyone for an opinion before making a decision. He likes to do his own research, and gather his own surveys, rather than rely on paid consultants. He rarely listens to critics. He's shown good instincts in his campaign, despite being a novice. He's correctly noted that Republican voters are angry about illegal immigration and terrorism, and he quickly staked out the most extreme positions on both. Regardless of what one thinks of his policies or his rhetoric, Trump is filling arenas and leading the polls by tapping into the discontent of millions of Americans.

Use Your Leverage - The worst thing you can do in a negotiation is appear desperate to make it. The best thing you can do is deal from a position of strength, and leverage is strength. It means having something the other guy wants, or needs, or cannot do without. You have to convince the other party the deal is in their best interest. In a key example, Trump notes that his leverage came from confirming an impression the other party was predisposed to believe. We see the same in his campaign. Most economists agree free trade is good and beneficial to the U.S. However, the average citizen believes America is getting a poor deal from trade with China and other nations. They believe immigrants take jobs from Americans. Trump uses these beliefs as leverage, and stakes out positions that confirm what Bryan Caplan calls the myth of the rational voter.

Enhance Your Location - Trump deals mostly in real estate, where the golden rule is location, location, location. However, he advocates finding good deals over finding the best locations, because you can enhance locations through promotion and psychology. This one is the least applicable to his campaign, but I do think we see him loosely following this advice. Traditional campaigns fight hard and pay big bucks for the premium resources (consultants, get out the vote machines, etc) in each region. Trump has not. He has a capable but not premium organization, and he supplements it with promotion and psychology. Contrast this with Bush, who has the largest organization and the biggest PACs and SPACs, but is languishing in the polls. Trump is a value investor.

Get the Word Out - Promotion is something that defines Trump. He's very good at it, and he's widely criticized for it's negative connotations. Let me quote Trump extensively.

"One thing I've learned about the press is that they're always hungry for a good story and the more sensational the better. It's the nature of the job, and I understand that. The point is that if you are a little different, or a little outrageous, or if you do things that are bold or controversial, the press is going to write about you."

Trump admits to purposely acting this way, but has no delusions that the press like him personally. He also thinks negative publicity can still be valuable, because it makes the story bigger. His key is to be straight with reporters, and when they ask tough questions, he manipulates them.

"I try not to deceive them or to be defensive, because those are precisely the ways most people get themselves into trouble with the press. Instead, when a reporter asks me a tough question, I try to frame a positive answer, even if that means shifting ground."

Trump also combines his promotion with his mantra to think big. He's going to Make America Great Again. His big plans are hyperbole, not lies. He may not build an actual wall on the border, but the imagery is all he's after to promote himself.

"The final key to the way I promote is bravado. I play to people's fantasies. People may not always think big themselves, but they can still get very excited by those who do. That's why a little hyperbole never hurts. People want to believe that something is the biggest and the greatest and the most spectacular. I call it truthful hyperbole. It's an innocent form of exaggeration - and a very effective form of promotion."

Fight Back - This is simple to Trump. Try to get along, but if you believe in what you are doing, you have to be willing to fight for it. Trump says there will always be those who lose at life and get a sense of satisfaction from trying to stop others from succeeding. I think this explains his willingness to fight Fox News, and certain TV anchors. He sued Univision, a former partner, but has settled it and will soon give them an exclusive interview (look for him to win lots of Hispanic votes). In the most recent debate, he frequently called the other candidates "liars" and is now threatening to sue Ted Cruz. Trump may not win, but he will not go down without a huge fight.

Deliver the Goods - Here Trump warns that promotion is not enough. If you cannot deliver on your grand plans, people will eventually abandon you. You can't con people for very long. This is the biggest unanswered question about Trump's campaign. Traditional pundits say he's all talk, and unfit to be President. They say he will eventually fail to deliver, and voters will turn on him. Quite possible, and it should be fun to monitor.

Contain the Costs - Trump warns that you'll never be successful with your great dreams if you don't learn how to contain costs. It's critical in large real estate projects. I think he adheres to this in his campaign as well. Again Bush is the bad example, and Trump seems to be running a very lean organization. Consider how other multi-millionaire businessmen have funded past campaigns. Even Romney put lots of his personal money into the effort. So far, Trump has not, or has not been forced to do so.

Have Fun - Trump claims money is not a motivator to him, other than as a way to keep score. To him, the deal itself is the reward. He enjoys competing and winning. Critics claim Trump isn't really serious, and that when things don't go his way, he'll take his ball and go home. That's possible. But if he truly enjoys the competition, he may be in this longer than the pundits think. When I watch Trump, he does seem to be enjoying himself. He revels in having the lead, and speaking to large crowds. He also seems to enjoy needling other candidates, and his critics.

That's it. A long look at Trump's magic. Very simple stuff, but it does seem to explain his approach to campaigning. I think it is easy to dismiss Trump as a bully or buffoon, but that misses the fact that lots of bullies and buffoons run for office, yet none of them dominate the way Trump has. There is some skill here that critics are ignoring. I'll close with my favorite story from Trump: The Art of the Deal, which showcases many of these elements.

Mrs. Annabel Hill from Georgia became a national news story when her sixty-seven year old husband committed suicide, hoping the insurance proceeds would cover the debt on their family farm, which had been in the family for generations. It was not enough, and now the bank was going to foreclose on the widow. Trump makes a few calls, and gets in touch with a VP at the bank. The banker claims the foreclosure process has begun and "nothing or no one is going to stop it." Here's classic Trump:

"I said to the guy: 'You listen to me. If you do foreclose, I'll personally bring a lawsuit for murder against you and your bank, on the grounds that you harassed Mrs. Hill's husband to his death.' ... Sometimes it pays to be a little wild."

Trump succeeded in halting the foreclosure. He and Don Imus raised funds to repay the mortgage, and held a mortgage burning ceremony on Mrs. Hill's farm that Christmas.

Hyperbole, toughness, winning, and celebrating. That's Trump: The Art of the Deal.

Trump is the Godfather

As a small government, small President, small "l" libertarian, I don't endorse most of Trump's proclaimed policies. However, I'm fascinated by his campaign. By all traditional theory, he should be failing miserably. Instead, he is blowing away the competition, and driving political junkies absolutely crazy in the process. Very rational people are losing their shit, and it is very entertaining.

The best explanation I've encountered comes from Scott Adams, creator of Dilbert. He's been writing about Trump since July, and predicting Trump would win election since August. His series on Trump as a Master Persuader is worth the time it takes to read. (If you only read one piece, I suggest this one.) There are lots of layers to Scott's thesis, but the basic idea is that voters aren't rational, they are emotional, and Trump is the only one playing to their emotions. All the other candidates are trying to respond rationally, and traditionally, and are left scratching their heads like Jon Lovitz's version of Michael Dukakis on SNL: "I can't believe I'm losing to this guy."

I want to try to bring back a rational explanation for Trump. Consider Trump as Michael Corleone from The Godfather. Most will recall, Michael was the youngest son of the crime boss Vito. He was also an outsider, he went to college and fought in the war, never getting involved in the family business until he was forced. His older brother Sonny is the hot head, and Michael is the rational one. When Vito is ambushed, and incapacitated, the brothers gather with their primary advisor to brainstorm how to respond. A classic scene ensues:

It's not personal, it's business. The Corleone response will be very extreme, and outside the normal laws of behavior, even for gangsters. "Where does it say you can't kill a cop?" Where does it say you can't call your competition, or the media, vulgar names? As Michael points out, killing the cop serves others besides themselves; it serves the media and rids society of a terrible being. Trump's immigration and trade ideas seem just as outrageous, but they can be rationally accepted in a world of terrorism and globalization. (I don't think that way, but millions do.) Trump is the Godfather. He's taking rational actions that seem purely emotional to traditionalist, conventional participants. His bluster, profanity, and extreme policy positions generate the same initial response we see from Michael's family and employees: laughter. (By the way, Scott Adams says laughter is a tell for cognitive dissonance.)  However, Michael's plan is what saves the family and catapults him to the top of the pyramid. Just as Michael quickly converted his rational advisor and his emotional brother, Trump is quickly converting millions of Americans to the idea his plans will do the same for America.

Gold and the Market Selloff

The U.S. stock markets began the year with a noticeable decline. It is the worst start to a year ever, although a 10% decline is far from the end of the world or a repeat of 2008. However, these events always get attention and often bring interesting questions from clients, friends, or other professionals. This week, a client expressed confusion that the stock markets were falling, commodities were falling, yet the price of gold was not spiking. Many folks think of gold as a safe haven asset, and expect it to rally when markets are in turmoil. Yesterday, I saw a similar question raised by one of the better professional economists and bloggers. So, here's my attempt at an explanation.

Consider the financial crisis of 2007-2009. Before the crisis began, inflationary forces were at work. As the crisis developed, the Federal Reserve did nothing to combat this inflation, and in some ways, exacerbated those effects (by cutting interest rates). In addition, political conflicts with Russia, Iran, and even China were in the headlines. These risks push up the gold price. As a result, the dollar price of gold rose sharply from August 2007 to April 2008 (news the Fed would stop cutting rates hit in April). So, early in the crisis, gold was rising, but for inflationary and geopolitical reasons. From April to September, the gold price actually declined as policy makers convinced the markets that contagion was unlikely and inflation expectations declined. Then, when the crisis hit its peak, at the bankruptcy of Lehman Brothers, gold did spike. However, this spike was temporary, and the gold price in October was lower than it was before Lehman failed. In other words, the scariest moment of the crises saw a short term spike, but no lasting rise in the gold price. 

Today, conditions are much different. The dollar has been getting stronger (gold price has been falling) for over two years. This is likely due to slowing growth and declining geopolitical tensions.  The recent Fed rate hike and completion of the Iran nuclear deal only exacerbate this trend. So the market selloff is occurring within a context of a deflating dollar (whereas in 2007, it was an inflating dollar). In a deflationary environment, gold is not a safe haven. 

Where's the Republican Outrage?

Republicans are known for questioning the efficiency, and thus the value, of government operations. Well, at least some government operations. They rarely criticize waste and inefficiency in the parts of government they favor, such as defense and law enforcement. It seems, for Republicans, these operations do much with too little resources but all other programs do little with too much. 

My own view is that poor incentives and structural issues make all government programs more inefficient than necessary. I'm willing to point that charge at social programs as well as defense. I view it as the consistent, intellectually honest approach. I wish Republicans shared my outrage. Fiscal responsibility must  include the defense budget.

So far, I've seen no such outrage for this story. 

The Defense Department is a Fiscal Train Wreck

P.S. Not that it matters, but I am a veteran, and I support the armed forces and those who serve.