Category Archives: Economics

Energy Efficiency and the ‘Rosenfeld Effect’

Art Rosenfeld passed away two weeks ago. Most people would not remember him, but they have been affected by his simple observation in 1976 that a “proposed nuclear power plant would not be needed if refrigerators were required to be more efficient.”

Here you can see the effects on the energy efficiency in the state of California:

"The Rosenfeld Effect."
“The Rosenfeld Effect.”

Note how the energy expenditure per capita flatlines from the time he made the observation above. It was never one thing, but a lot of little things Turning off lights at night, higher efficiency furnaces and fridges and stoves. Higher efficiency lighting. Better windows.

These are the kinds of things which make a huge difference in aggregate (and he was a master at expressing how much of a difference each of them would make singularly, such as spending 20mins with light switches saves 100 gallons of gas over the weekend). These are the kinds of incremental changes which are slowly reducing the scourge of cancer[1]. These are the kinds of things which can reduce changes to the climate.

Thanks, Art. Let’s keep working and doing things a little more intelligently every day.

Art Rosenfeld, California’s Godfather of Energy Efficiency, Dies at 90

[1]This is a fascinating topic. Check out these graphs: https://www.google.ca/search?q=cancer+mortality+rate+historical

Global Warming is No Longer A Joke

“The Great Barrier Reef of Australia passed away in 2016 after a long illness. It was 25 million years old.”

By now, many of you will have read the obituary for the 25-million-year-old Great Barrier Reef.

From the collapse of the Atlantic cod fishery, to soil erosion, to peak oil, to deforestation, human systems are good at squandering natural resources and bad at understanding how long it takes for them to replenish.

Today, it seems that we can add the Great Barrier Reef to that list. As the obituary poignantly puts it:


The Great Barrier Reef of Australia passed away in 2016 after a long illness. It was 25 million years old.

The reef was born on the eastern coast of the continent of Australia during the Miocene epoch. Its first 24.99 million years were seemingly happy ones, marked by overall growth. It was formed by corals, which are tiny anemone-like animals that secrete shell to form colonies of millions of individuals. Its complex, sheltered structure came to comprise the most important habitat in the ocean. As sea levels rose and fell through the ages, the reef built itself into a vast labyrinth of shallow-water reefs and atolls extending 140 miles off the Australian coast and ending in an outer wall that plunged half a mile into the abyss. With such extraordinary diversity of life and landscape, it provided some of the most thrilling marine adventures on earth to humans who visited.

No one knows if a serious effort could have saved the reef, but it is clear that no such effort was made. On the contrary, attempts to call attention to the reef’s plight were thwarted by the government of Australia itself, which in 2016, shortly after approving the largest coal mine in its history, successfully pressured the United Nations to remove a chapter about the reef from a report on the impact of climate change on World Heritage sites. Australia’s Department of the Environment explained the move by saying, “experience had shown that negative comments about the status of World Heritage-listed properties impacted on tourism.” In other words, if you tell people the reef is dying, they might stop coming.

This last paragraph is perhaps the most damning. That we selected (and continue to select) leadership that actively works to put our collective heads in the sand, and that we fail to take them to task for it.

But maybe, like the cod stocks, we can stabilize the situation, (perhaps also at 1% of the original), and then start to reverse the damage. This article suggests that the Australian government is starting to pay attention, still far less than is actually required, but perhaps a start.

So, what are you doing to make a difference here? How are you influencing decisions that actually make a difference here? Who are you publicly calling out for making short-sighted long-term damaging decisions?

The Great Barrier Reef is dying. Bumblebees are dying.

It is time for us to actually do something about it.

It is time for you to actually do something about it.

Why the Headphone Jack Must Stay

Yesterday, we had a date night, and over dinner, we thought “Wouldn’t it be nice to watch Contact? Neither of us have seen it since it came out, almost 20 years ago.”

First, we opened up Netflix, and searched for ‘Contact’. It wasn’t available there, but Netflix said it could show us movies similar to it. (It also showed us ‘Star Trek: First Contact” as an option, more on that later.)

So, we try iTunes. We’re trying it on my computer, because S’s Mac has mysteriously stopped talking to our USB speakers. Fast-forwarding through the standard iTunes bad user experience[1], we eventually figure out how to rent ‘Contact’, the movie, in HD for $4.99. It starts downloading. We hook up the projector, start the movie, and we see the following screen:

This is what happens when you try to use iTunes with your projector.  (Not shown: Our USB speakers stopped working just then, too.)
This is what happens when you try to use iTunes with your projector. (Not shown: Our USB speakers stopped working just then, too.)

The movie that we just paid money to rent will not play on a display that iTunes was more than happy to play on just a couple of years ago.

Think about what just happened here. We went to the extra effort of purchasing a movie rental, and it is treating us like we’re trying to pirate it.

Doing some quick googling, we determine that we might be able to get the SD version to work with our setup, but iTunes won’t let us change from HD to SD (and keeps trying to download the HD version, despite the fact that this will overfill the hard drive).

So, back to Netflix. We eventually settle on Firefly (a really interesting concept, more on this in a later post). Netflix just works.

Or at least Netflix tries to work. Somewhere during this process, my Mac has silently decided that it should no longer talk to the USB speakers. There being no useful way to debug this in the ‘System Preferences’ menu, we end up lugging my sound system from my computer, which has a headphone jack connector like so:

Headphone jack to RCA adapter.  The best way to get sound from your computer to serious speakers.
Headphone jack to RCA adapter. The best way to get sound from your computer to serious speakers.

The headphone jack connect works. We finally start to relax, I start watching Firefly for the first time, then we watch the masterpiece which is Star Trek: First Contact, and go to sleep happy.

Apple has a lot of power, through its massive market share and avid user base. This power can be used for good, such as when it is used to push for selling DRM-free music, but it can also be used for evil, such as when Apple Music deletes music that you have composed.

With the iPhone 7, Apple is using this power to no longer include a standard headphone jack. Now all music, audio, Stripe payments, what have you, will be streamed digitally. It will probably work, it might even work perfectly and for a long time. But at some point, someone will decide to add DRM to that stream, and all of a sudden your music will stop working.

All because Apple decided to remove your headphone jack.

Cory Doctorow also has some thoughts about this.

[1]iTunes standard bad experience:
– You have to search twice in the search bar for it to actually search
– The search function has a pre-defined list of types of media, and it will always show them to you in that order. Compare with the Google search for ‘Contact’.
– If you start downloading a rented HD movie, you can’t switch to the SD version, even if you realize you don’t have enough hard drive space, or the HD movie won’t play because of the HDCP DRM.
– And don’t get me started on how slow it always is.

Trolley Problem Memes

Trigger warning: Conversation and possibly dark humour about fictional (and possibly not-so-fictional) people dying in car and train accidents.

How do you design a self-driving car to appropriately value human life? Can you use a Facebook group to speed the development of philosophical discourse?

The ‘Trolley Problem‘ is a problem in ethics, first known to be described in its modern form in the early 1950s. Basically, it boils down to the question:

If you have a choice between action and inaction, where both will cause harm, but your action will harm fewer people, is it moral to perform that action?

Interestingly, people answer this question differently, based on how active the action of harm is, the ratio of people hurt between the choices of action and inaction, and other reasons.

The astute will notice that this type of decision problem is a very common one, the most obvious being in military applications, but also vaccines (and invasive health procedures in general), firebreaks, and perhaps the canonical example, automobile design and manufacturing.

This type of decision making has become even more important with the advent of self-driving cars:

Would you drive a car that would choose to drive you into a brick wall rather than run over five pedestrians?

Overall, you would think that this would reduce your risk of fatality, but few people would choose that car, likely because it is a classic prisoner’s dilemma[1][2].

What is your self-driving car's ethical system?
What is your self-driving car’s ethical system?

Personally, I think that much of this conversation is sophistry[3]. If one is truly interested in preserving life, the solution is not to convince self-driving cars to kill different people, but perhaps to have more stringent driving training requirements, to invest in fixing known problem intersections, to invest in better public transit.

So, if these conversations are not useful for anything else, they must be useful in and of themselves, and therefore must be Philosophy[4]!

One of the places that these conversations are occurring is the ‘Trolley Problems Memes Facebook page‘[5].

Now, you can argue that this page is purely for entertainment, but I think there’s a lot more hidden there. There is a fomenting and interchange of ideas, much faster and more fluidly than at any time in history. The person who writes the next book[6] on the ethics of decision making could well be influenced by or be an avid user of a site such as this one.

They may have started with Rick-rolling, but image macros are helping the advancement of human knowledge. Stew on that one for a while.

And while you’re thinking about that, something which ties it all together[7]:

"The creator might argue that his robot is an 'individual', capable of his own decisions, while the opposition would say that he (the creator) is responsible for the algorithm that led to the action. Imagine this happening - it would give birth to one of the greatest on-court debates ever." From Patrice Leiteritz via Trolley Problem Memes
“The creator might argue that his robot is an ‘individual’, capable of his own decisions, while the opposition would say that he (the creator) is responsible for the algorithm that led to the action. Imagine this happening – it would give birth to one of the greatest on-court debates ever.” From Patrice Leiteritz via Trolley Problem Memes

[1]If everyone cooperates, overall they will receive a better result, but if any one of them betrays the others, they get an even better result, but everyone else’s result is much worse. This theoretically leads everyone to betray everyone else, leading to everyone having a worse overall outcome.

[2]People also like the feeling of control.

[3]Check out the article. Apparently, the Sophists were the first (recorded) right-wing think tanks.

[4]My undergrad Philosophy 101 prof. made the argument that because philosophy was not useful for anything else, it must be inherently be useful (and that that was better).

[5]Dark humour. You have been warned.

[6]And it might not even be a book! A blog post, even! 😀

[7]Not a deliberate pun.

The Hollowed-Out Middle America

This presidential election has been described as a new realignment[1] of American politics, where social pressures mount so high that demagogues[2] appear, and politicians abruptly shift to actually mirror their constituents for a time.

First Bernie Sanders appeared[3], giving voice to the frustrations and the hope for change felt by Millenials and others who had been left behind by globalization and the regulatory capture by the banks.

Later emerged Donald Trump, who gave voice to the anger felt by blue collar white workers, who felt betrayed by decades of free trade and globalization/outsourcing/immigration[4] policies, exacerbated by trends towards more and more automation.

But they are really railing against the same issues (and these are very real issues), which is some of the reasons[5] why so many Bernie supporters are moving to Trump, even though Hilary and the Democrats[6] have basically adopted Bernie’s platform.

Much of why Trump has found such fertile ground is that *both* parties have been ignoring Middle America for decades, as Michael Brendan Dougherty says:

“To simplify Francis’ theory: There are a number of Americans who are losers from a process of economic globalization that enriches a transnational global elite. These Middle Americans see jobs disappearing to Asia and increased competition from immigrants. Most of them feel threatened by cultural liberalism, at least the type that sees Middle Americans as loathsome white bigots. But they are also threatened by conservatives who would take away their Medicare, hand their Social Security earnings to fund-managers in Connecticut, and cut off their unemployment too.”

To me, it seems that in general, anger comes from frustrated expectations, often expectations that are not conscious, where people are not encouraged to really look at the forces in play keeping their way of life the way it is. Then, when one or more of these forces change, life suddenly changes, and you get anger. (It could also be because people know exactly what is causing things, they’ve been electing politicians who say they will fix things, but never actually do, so eventually the people get angry.)

One thing I’d never really thought about (in such words) was that Middle America was really a class protected by political forces (Michael Brendan Dougherty quoting Francis):


Middle American forces, emerging from the ruins of the old independent middle and working classes, found conservative, libertarian, and pro-business Republican ideology and rhetoric irrelevant, distasteful, and even threatening to their own socio-economic interests. The post World War II middle class was in reality an affluent proletariat, economically dependent on the federal government through labor codes, housing loans, educational programs, defense contracts, and health and unemployment benefits. All variations of conservative doctrine rejected these…

and it was inevitable that this would wane, but it was in few politicians’ interest to actually confront and solve the problems.

So, here we are. Maybe, with Hillary adopting Bernie’s platform, things will get better, and we’ll work together to solve some of these problems. It will be interesting to see how the rest of the realignment works itself out.

(This other linked story talks about how the Democrats are becoming the party of globalization, as the Republicans become the party of isolationism, where):

“This difference in worldviews maps neatly into differences in policy. Nationalists support immigration and trade deals only if they improve the living standards of citizens of the nation. For the new, globally minded progressives, the mere well-being of American workers is not a good enough reason to oppose immigration or trade liberalization. It’s an argument that today’s progressive globalists have borrowed from libertarians: immigration or trade that depresses the wages of Americans is still justified if it makes immigrants or foreign workers better off.

[snip]

Likewise, the current opposition of many Democratic politicians to free-trade agreements like the Trans-Pacific Partnership reflects the residual influence of declining manufacturing unions within the party According to a March 2016 study by the Pew Research Center, by a margin of 56 percent to 38 percent, Democratic voters believe that free-trade agreements have been good for the U.S. Among Republicans, those numbers are almost reversed: by a 53 percent to 38 percent margin, a majority of Republicans believe free-trade has been a bad thing. Among younger Americans, who tend to prefer Democrats to Republicans, support for free trade is high: 67 percent of 18- to 29-year-olds say trade agreements are good for the country. Even progressives who campaign against trade deals feel obliged by the logic of ethical cosmopolitanism to justify their opposition in the name of the labor rights of foreign workers or the good of the global environment.

[1]Or perhaps the end of a 50-year-long realignment.

[2]Trump for sure, but remember that Bernie Sanders appeared first, in his quiet(er) way, giving voice to the frustrations of many. In a way, both sides of the same coin, hope and fear.

[3]Yes, I know he’d been saying the same things for decades, but that was the first I’d ever heard of him.

[4]As Michael Brendan Dougherty writes in The Week:

“Chinese competition really did hammer the Rust Belt and parts of the great Appalachian ghetto. It made the life prospects for men — in marriage and in their careers — much dimmer than those of their fathers. Libertarian economists, standing giddily behind Republican politicians, celebrate this as creative destruction even as the collateral damage claims millions of formerly-secure livelihoods, and — almost as crucially — overall trust and respect in the nation’s governing class. Immigration really does change the calculus for native-born workers too. As David Frum points out last year:

[T]he Center for Immigration Studies released its latest jobs study. CIS, a research organization that tends to favor tight immigration policies, found that even now, almost seven years after the collapse of Lehman Brothers, 1.5 million fewer native-born Americans are working than in November 2007, the peak of the prior economic cycle. Balancing the 1.5 million fewer native-born Americans at work, there are two million more immigrants — legal and illegal — working in the United States today than in November 2007. All the net new jobs created since November 2007 have gone to immigrants. Meanwhile, millions of native-born Americans, especially men, have abandoned the job market altogether. [The Atlantic]


For decades, people have been warning that a set of policies that really has enriched Americans on the top, and likely has improved the overall quality of life (through cheap consumables) on the bottom, has hollowed out the middle.

[5]The other reasons are generally sexism.

[6]This would either be a terrific or terrible band.

How do You Measure Inflation?

Inflation is supposed to be one, measurable number. There’s a number that’s quoted in all the newspapers, and is used all over the place, to help determine how well the economy is doing, to index pensions, to negotiate union contracts, etc, etc…

This is generally known as the ‘CPI’, or ‘Consumer Price Index’. I’ve reproduced the numbers for Canada from Statcan[1] below:

Consumer Price Index, historical summary
(1996 to 2015)   	All-items 	Change from previous year
  	2002=100 	%
1996 	88.9 	1.5
1997 	90.4 	1.7
1998 	91.3 	1.0
1999 	92.9 	1.8
2000 	95.4 	2.7
2001 	97.8 	2.5
2002 	100.0 	2.2
2003 	102.8 	2.8
2004 	104.7 	1.8
2005 	107.0 	2.2
2006 	109.1 	2.0
2007 	111.5 	2.2
2008 	114.1 	2.3
2009 	114.4 	0.3
2010 	116.5 	1.8
2011 	119.9 	2.9
2012 	121.7 	1.5
2013 	122.8 	0.9
2014 	125.2 	2.0
2015 	126.6 	1.1

These numbers should dovetail well with what you read in the news. They even nicely break the CPI down by type of item:

Consumer Price Index, by province (monthly)
(Canada)   May 2015 April 2016 	May 2016 April 2016 to May 2016 May 2015 to May 2016
  	2002=100 	% change
Canada 	  	 
All-items 		126.9 	128.3 	128.8 	0.4 	1.5
Food 			140.8 	143.8 	143.3 	-0.3 	1.8
Shelter 		133.2 	134.9 	135.1 	0.1 	1.4
Household op & furn. 	119.7 	121.6 	122.1 	0.4 	2.0
Clothing and footwear 	95.0 	96.0 	96.0 	0.0 	1.1
Transportation 		128.0 	127.8 	129.4 	1.3 	1.1
Health and pers. care 	120.7 	122.2 	122.3 	0.1 	1.3
Rec, ed, & reading 	109.9 	110.3 	111.7 	1.3 	1.6
Alc. & tobacco products 151.9 	156.5 	156.8 	0.2 	3.2
Special aggregates
All items excl. food 	124.2 	125.3 	126.1 	0.6 	1.5
All items excl. energy 	124.8 	126.9 	127.2 	0.2 	1.9
Energy 			152.4 	143.4 	146.9 	2.4 	-3.6
Source: Statistics Canada, CANSIM, table 326-0020 and Catalogue nos. 62-001-X and 62-010-X.
Last modified: 2016-06-17.

But many peoples’ experience of inflation can be very different.

I’ll use an example near and dear to my heart:

Today, I had the

Vegetable Chow Mein from my favourite food truck: Wokking On Wheels!
Vegetable Chow Mein from my favourite food truck: Wokking On Wheels!

I first visited the Wokking on Wheels food truck sometime during the fall of 1996, when I was working on Calculus with J (Thanks, J!). At that time, they had five daily specials which, if I recall correctly, they were selling for $3.75. These included the special Thursday special, ‘Singapore Fried noodles’, which you could persuade them to add red sweet sauce to. Delicious!

Anyway, the Vegetable Chow Mein was the least expensive thing on their menu today, at $7.

So, 20 years later, how has inflation fared? By the CPI deflator above, you would expect a $3.75 item in 1996 to cost $3.75*128.8/88.9 = $5.43, about $1.50 less than the actual.

Even if you use the ‘food’ number above, you get: $3.75*143.3/88.9 = $6.04, or about $1 less than the actual.

There are a number of reasons for this (which are beyond the scope), but it’s enough for now to note that there are reasons that people have a different feeling of inflation than what is ‘official’.

[1]The numbers for Ontario seem to be about the same to me.

Liveblogging the Berkshire Hathaway Annual Meeting: II

Yesterday, we watched the first half of the Q&A at the annual Berkshire Hathaway meeting. We ‘live’ blogged the first quarter of yesterday. Today, here’s the second quarter:

Q10: Negative rates, and how they affect Berkshire:
Charlie:
1/4 to -1/4 is not very different. Both are ‘painful’ interest rates for investing $60 billion

Charlie Munger looks like a sea turtle.

Charlie seems to drink a lot of Coke, don’t know if Warren does, but that could just because Warren is the one talking most of the time.

Q11: BNSF Decline in commodity prices, and how that might change how much freight is shipped
“We don’t mark up and down our wholly-owned businesses based on motions in the stock market.”

Q12:Harry Potter(?!?) question? (The question asker compared the situation to Hogwarts, etc…)
How should children look at stocks when time horizons for ‘investing’ so short, and IPOs are making so much money?

(On IPOs)
‘If they want to do mathematically unsound things and one of them gets lucky and they put the one that’s lucky on television…’
Think of stocks as a business you own…
Charlie:
‘American business will do fine’
‘But not the average client of a stockbroker.’
‘The stockbroker will do fine’

Q13: NV lobbying against solar (rooftops) where the utility was forced to pay the increased rate to the homeowner instead of the government?
‘Who pays the subsidy’ is the issue… (‘A political question’)
‘If society is the one benefiting, then society should pick up the tab.’

Q14: Low oil prices influence BRK more now (because of various effects on various subsidiaries)?
Warren:
‘We don’t think we can predict the price of commodities.’
Charlie:
‘I’m even more ignorant than you are.’

Q15: Would philanthropic establishment of new universities help with the cost of tuition, possibly by supply/demand?
Charlie:
‘If you expect financial efficiency in american higher education, you’re howling at the wind’
‘Glory of civilization’ (universities)
‘Monopoly and bureaucracy’ (description of universities)

We (USA) spend a lot of money on higher education. Being cheap is not our issue.
Charlie:
‘I’ve made all the enemies I can afford.’

Q16: On effects of Donald Trump on Berkshire
‘That won’t be the main problem’
Charlie:
‘I’m afraid to get into this area.’
Warren:
‘Business in this country has done extremely well for 200 years.’
Returns on tangible equity have not suffered while those on fixed income have suffered.
GDP/capita has gone up in real terms
‘System works very well in terms of output per capita, as far as distribution (inequality), there are often more issues.’
‘Charlie, give something pessimistic to balance me out.’
Charlie:
‘I don’t think the future is necessarily going to be as good as the past, but it doesn’t need to be.’
‘You’re making free choices that you couldn’t 20 years ago.’

Q17: Norfolk Southern/CP failed merger fallout?
BNSF: Certain tests needed to be passed before a large railroad merger would happen (good for public interest, good for shareholders, etc…). That merger may have been good for the shareholders, but did not meet the overall criteria. Next round of mergers will occur when population makes transportation more scarce.

Q18: How do you feel about investment banks not being able to make as much money?
After 2008-9, regulations to increase capital requirements, particularly on larger banks….
‘You can change the math of banking and profitability of banking by changing capital requirements.’
100% capital requirement means not very profitable, 1% capital requirements causes huge problems
Investment banking not a thing we invest in.
Charlie:
‘Generally, we fear the genre more than we love it.’

Q19: Activist investor targeting if BRK trades at a discount to intrinsic value?
Defend by size, and by having money to buy shares at less than intrinsic value.
‘The numbers involved would be staggering.’
Mid-America does better by not being split up.
1973-1974 very good companies selling at a steep discount to what they’re worth… (When stocks at a discount, money is hard to come by)
Charlie:
We don’t worry about this and others do, they can get attacked by hostile takeovers/etc, and we can’t
‘…and you want a strong ally, how many people would you pick in preference to BRK?’

Q20: Leasing?
Train cars… Bank has lower cost of funds than we do
‘A trillion dollars, at 10 basis points’
Aircraft leasing not interesting…
‘We’re well located now, but I don’t think we have new opportunities.’

Q21: Which competitor would you take out and why
Charlie:
‘I don’t think we have to answer this one.’
‘Widening the moat’ is the goal.
‘Not trying to target competitors, just trying to do the best everywhere.’
Warren:
‘Spoken like an anti-trust lawyer’

Q22: Sequoia, and Valeant position
The guy we trusted and recommended passed away in 2005.
The manager involved is no longer in charge.
‘If you have a manager, and doesn’t have integrity, make sure they’re dumb and lazy.’
‘Pattern recognition is very important in evaluation of humans and business.’
‘Frequently come to a bad end, but frequently looks good in the short term.’
Charlie:
‘Valeant of course was a sewer.’ (And they deserved what they got.)

Just before lunch, they put up the interim results of a wager between Buffet and a money management firm.

Hedge Funds vs. S&P 500 Index Fund results
Hedge Funds vs. S&P 500 Index Fund results

Protege Partners Wager Results (longbets.org)
Hedge funds of funds vs. S&P500 index funds
‘That might sound like a terrible result for the hedge funds, but it’s not a terrible result for the hedge fund managers.’
‘180 million dollars a year, merely for breathing.’ (If Berkshire compensated 2&20.)
‘They can’t believe that they can’t hire someone to make them more money than average.’
‘Consultants can’t change too much year to year, because it looks like they don’t know what they’re doing.’
‘Charlie, do you have anything to add to my sermon?’
‘A tiny group of people.’ (Who can manage money consistently better)
‘Far far far more money made on Wall Street by sales abilities than investment abilities.’

Liveblogging the Berkshire Hathaway Annual Meeting

I’ve been following Berkshire Hathaway’s Warren Buffet’s annual ‘Letters to Shareholders‘ for a number of years now. Amongst other things, he avoided the 1999-2001 tech bubble, and predicted the crash of 2007-08. We were lucky enough to go see him in ‘person’ at the Berkshire Hathaway annual meeting last year. This year, we decided to watch his Q&A on livestream (through Yahoo! Finance). Below are some of my thoughts as the meeting progressed. The format is various people (analysts, journalists, and audience member, in that order) ask questions in rotation until time runs out. This goes from about 9:30 until 3:30 Central, with Warren Buffet and Charlie Munger (his longtime business partner) holding court.

********************************************************************

So again, we see the two (very) old friends up on the screen.

Warren Buffet and Charlie Munger, Berkshire Hathaway Q&A 2016
Warren Buffet and Charlie Munger, Berkshire Hathaway Q&A 2016

Q1: Going from low capital high earnings businesses to high capital moderate earnings businesses (regulated like rail and utilities).

The question asked why Berkshire moved from purchasing companies with low capital requirements and high income to purchasing companies with high capital requirements and moderate income.

The fundamental answer has to do with the size of opportunities available vs. the size of the conglomerate as a whole. (You can read all about it in the shareholder letters.)

Pithy remarks on the subject:

“Increasing capital acts as an anchor on earnings.”

This one I think was a Charlie-ism:
“When our circumstances changed, we changed our minds.”

Q2: Precision Cast, and the huge multiple premium paid
Under Berkshire, Helped make their main asset (the CEO) & made him more productive to the company.
Running a public company distracting vs. being under Berkshire.

“Buy a business that an idiot could manage, because eventually an idiot will have to.”

Q3: What would you do differently?
Warren said he’s ‘doing exactly what [they] like to do with the people [they] love’.

“It’s more fun to do things as a partnership.”

And a Charlie-ism:
“[Learning slowly] is a blessing too. At 92, I still have a lot of ignorance to work on.”

Q4: Munich and Swiss Re divestment
Business is less attractive for the next 10 years, because of low interest rates.

“Supply has gone up but demand has not gone up.”
“Reinsurance is easy to establish a disguised operation in a friendly tax jurisdiction. Couple that with low returns on float…”

Q5: Geico getting ‘whooped’ by Progressive Direct. Why?
Buffet: Diversion to number of car deaths/100M. From 1930 15/100M to 1/100M recently. (40,000)
‘Last year, for the first time, there was more driving, and more distracted driving’
‘Made a bet many years ago on the Geico model over the Progressive model.’
Charlie:
‘I don’t think we have to worry about a competitor having a good quarter.’

Q6: Direct sales -> Search, Push to Pull marketing…
Need to always think about the powerful trend (Amazon) when we make decisions.
‘Doesn’t worry us with Precision Cast.’
‘We were slow on the Internet.’ ‘Mobile and whatever.’
Internet still has much to change…
‘Thought of ourselves as having capital to allocate’, so makes it easier to pivot industries.
‘Amazon has a real advantage, 100s of millions of happy customers.’
Charlie
‘We failed so thoroughly at retail when we were young…[laughter]’ (so not likely to try retail again, and has helped guard them against that particular type of hubris)

Q7: Negative health effects of Coke products, why do you keep dodging the question?
[they dodged the question again]
184k deaths per year…’Declined to invest in cigarettes, why should be proud to own Coke?’
‘I’m about 1/4 coca cola. I’m not sure which quarter, I don’t know if we want to pursue that question.’
‘1.9 billion 8 oz servings per day.’ (Since 1886)
Dodged the question. ‘You have the choice of consuming more than you use.’ Talked about how Coca Cola is not the sole problem.

‘[small town with a constant population] Every time a girl had a baby, a guy had to leave town.’
‘If you want to change your longevity, you should have a sex change.’

Charlie:
‘We ought to almost have a law (I’m sounding like Donald Trump), that you have to say the benefits along with the detriments.’

Q8: Coal vs. renewables
Is your goal to get to 100% renewables?
‘We cannot make changes that are not approved by the Public Utility Commissions.’
‘Iowa’s been marvelous at encouraging renewables.’
In Iowa, we can offer lower rates because of it.
(2.3c/kWh federal tax credit)
‘Benefits of reducing carbon emissions are worldwide…’
‘A benefit that accrues to the world.’
Pay a lot of tax, so worth it to make a lot of investments
Iowa has gotten server farms because of cheaper electricity (from wind)
Vs. more expensive public Nebraska power…

Charlie:
‘If the whole rest of the world were behaving as we do, it would be a better world.’
‘I want to conserve the hydrocarbons’, for chemical feedstock…’I’m in their camp, for different reasons.’

Q9: Derivatives:
How do you value the banks you own?
‘If you asked me to describe the derivative position of the BoA…’
‘The great danger in derivatives is discontuinities’
WWI closed the stock market for many months
1987 almost did, but went on the next day
If marked to market and collateralized, most of the problems are okay…
Large quantities and collateral requirements are the most dangerous…
Kuwait went to a six-month stock settlement process, and caused all kinds of problems because of lack of certainty of ownership.
‘If you took the 50 largest banks, we wouldn’t look at [investing in] 45 of them.’
Charlie:
‘We’re in the awkward position of making 20B from those derivatives.’
‘We would have preferred if those derivatives had been illegal to buy. It would have been better for the country.’

One comment Buffet made which received less attention than it should have is about the issue with having an effective oligarchy amongst auditing firms. The specific issue was that the same person from an auditing firm could be rating or valuating the same derivative from both sides of the deal, and they could easily be rating or valuating it differently…

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Those were the first 9 questions (out of a usual 60-ish). Stay tuned for more, comments below!

Cross-Border Taxation and Money Laundering Incentives

So, there’s an interesting game being played by governments around the world.

From a purely game theory[1] perspective, to optimize tax income, it makes sense for governments to do two things:

1) Find all the people all over the world they can tax and tax them.
2) Convince people from all over the world to move to their jurisdiction for lower taxes

Now, if this is ‘tax avoidance‘, this is still legal[2]. But it seems to often veer into ‘tax evasion‘, which is not legal.

All this is leading up to say that while the United States is talking about tax avoidance and tax evasion around the world, it seems that Congress seems to be one of the largest stumbling blocks to solving the problem[3].

[1]I am informed that from a purely grammar theoretical perspective, ‘From a purely game theoretical perspective’ is incorrect.

[2]Although, when you can purchase laws…

[3]Note that this article tries to get more hits by using the word ‘Rothschild’.

Ethical In-Game Purchases

Throughout the history of computer gaming, people have tried many different business models.

Early on, models included rental and sales of coin-operated machines, shareware, mail-order sales, sales through distributors, and doubtless others that I’m forgetting.

Monthly subscriptions were a more recent innovation, for games such as World of Warcraft, in an effort to find a more consistent revenue stream.

More recently, ‘Downloadable Content’ or ‘DLC’, and ‘in-app purchases’ have become de rigeur.

At their heart, they seem to be trying to solve the same problem as monthly subscription fees, but in a more explicit and a-la-carte fashion.

My recollection is that DLC was first, being a model very similar to the old shareware and multi-episode games. You would try the first one for free, or perhaps pay for it (depending on whether it was shareware), then that would entice you to purchase the next episode, and the next.

You knew pretty much what you were getting, the developers got a more consistent revenue, everyone was happy[1].

DLC then started branching out into partially or mostly cosmetic items, like the Oblvion Horse Armour

This still seems reasonable to me. You were playing a single player game, you wanted more features, the developers gave them to you for more money.

Then the ‘Free to Play’ games started becoming more and more popular. They would start out being free to play, but you would then need to play to continue after a certain point. Almost exactly the same as shareware, no problem. You purchased access after you had tried out the game. Totally reasonable, still very ethical.

But then the ‘Freemium’ games started coming out, the games that which were ostensibly free to play, but you could only play so many turns before you had to wait for your energy or whatever to recharge. However, you could play ‘just one more turn’ if you were to pay a little more money. This has gone from ‘money for content’ to ‘searching out and exploiting addiction‘.

In a somewhat orthogonally unethical category are games which allow you to pay to achieve an unfair advantage over other players in a multiplayer game. One of the games I currently play is an online turn-based strategy game, where you can pay money (about $15CAD) to get unlimited turn undos. This allows you to not pay for scouting units, and know the disposition of all of your enemy’s units, mostly obviating the ‘fog-of-war’ game mechanic. I’m sure it’s also very profitable.

In summary,

Ethical:
– Pay for more content/features
– Pay a subscription fee to keep playing on company-run servers[2]

Not so ethical:
– Pay to take more turns in the game with no ability to unlock as many turns as you want for a reasonable sum of money
– Pay to achieve an unfair advantage over other players

[1]Perhaps not game developers, but that’s a different story.

[2]We haven’t talked about games which stop working when the game company goes under and the server goes down…

A Long Tail of Whales: Half of Mobile Games Money Comes From 0.15 Percent of Players