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…
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
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
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
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’.
Almost alone in continental Europe, Merkel tried to slow the rush to get Britain out of the EU door. Europe’s most powerful leader made clear she would not press Cameron after he indicated Britain would not seek formal exit negotiations until October at least.
“Quite honestly, it should not take ages, that is true, but I would not fight now for a short time frame,” Merkel told a news conference.
“The negotiations must take place in a businesslike, good climate,” she said. “Britain will remain a close partner, with which we are linked economically.”
Brexit is a Bear Stearns moment, not a Lehman moment. That’s not to diminish what’s happening (markets felt like death in March, 2008), but this isn’t the event to make you run for the hills. Why not? Because it doesn’t directly crater the global currency system. It’s not too big of a shock for the central banks to control. It’s not a Humpty Dumpty event, where all the Fed’s horses and all the Fed’s men can’t glue the eggshell back together. But it is an event that forces investors to wake up and prepare their portfolios for the very real systemic risks ahead.
Some might say that this is essentially the purpose of democracy. That human beings are not going to pay attention and put themselves on the line to solve large problems until it becomes obvious that there is a problem disrupting their day to day life. What democracy offers them is an outlet for their frustration without resorting to violence. They may not always understand what they are voting for (why ‘Hope’ and ‘Change’ as simple messages are so effective), but they can tell when something is wrong.
As far as voting not having an effect, this could simply be because in a modern regulatory-captured democracy, it very often does not have any effect. Engaging with the system on a more personal and regular basis tends to have much more of an effect (especially if you have a few million dollars to throw around). It’s like the voter has been hitting the ‘something’s wrong’ button for years to no effect, so they hit it harder and harder, then finally something gives and they’re surprised.
Note that the Washington Post is a newspaper of the establishment, and another reading of the above is that the establishment is trying to prepare people for some kind of softening or repudiation of the referendum results by trying to convince them that they didn’t really mean it. (Most people will have conflicting emotions to some extent about a topic as large as this one, so they can probably identify with ‘I’m not sure exactly why I voted this way’ to a certain extent.)
They mention that the % of residents with higher education was the best indicator that a riding would vote to remain, suggesting there was frustration and demagoguery at play here. Lower income, higher median age, and higher % born in the UK were all indicators of ‘Exit’, but that might be an effect/correlation with education levels.
(The most surprising to me was the existence of an official or semi-official ‘social grading system‘, grading people:
The classifications are based on the occupation of the head of the household.
Grade Social class Chief income earner's occupation
A upper middle class Higher managerial, administrative or professional
B middle class Intermediate managerial, administrative or professional
C1 lower middle class Supervisory or clerical and junior managerial, administrative or professional
C2 skilled working class Skilled manual workers
D working class Semi-skilled and unskilled manual workers
E non working Casual or lowest grade workers, pensioners, and others who depend on the welfare state for their income
Looking at the Canadian version, it feels less stark, but maybe that’s just because it has all of the job sub-categories hanging off the just-as-classist skeleton.
There’s an interesting commentary from Larry Summers: “Fortunately authorities do not seem overly fussed with moral hazard at a time when the preoccupation needs to be maintaining liquidity and orderly markets.”
(Before you read the above, you should read his bio. I’ll leave it up to you to decide what you think.)
In Canadian federal elections, this ‘votes not counting’ manifests itself as voters in downtown urban centers having no say in how many Conservative MPs are elected, which for many is the main purpose of voting. The converse could be true in Calgary, for example.
11:37EST: 12.45M-11.71M, markets have been reacting significantly for a while
11:21EST: 11M-10.4M, ITV says 85% chance of Exit
11:14EST: Cable down from 1.50 to 1.36, almost 10%
11:00EST: 9.13 Exit-8.67 Remain.
10:32 Cable (GBP/USD) is down 6%, the largest single day drop ever.
As I write this, ‘Leave’ has just taken the lead (~6.2M-~5.9M), and the odds of ‘Brexit' have just hit 75%:
James Hacker: “That’s all ancient history, surely.”
Sir Humphrey Appleby: “Yes, and current policy. We had to break the whole thing [the EEC] up, so we had to get inside. We tried to break it up from the outside, but that wouldn’t work. Now that we’re inside we can make a complete pig’s breakfast of the whole thing: set the Germans against the French, the French against the Italians, the Italians against the Dutch. The Foreign Office is terribly pleased, it’s just like old times.”
So, the cynical viewpoint would ask whether the British Foreign Office has decided that they’ve done all they can to promote a disunited Europe from within.
Other viewpoints include the idea that the people of the UK truly want to leave, or are being convinced to leave by various demagogues.
10:32 Cable (GBP/USD) is down 6%, the largest single day drop ever.
I suspect the momentum would keep it going, along with the large number of expats in each direction (on the order of a few million in each direction). Proximity would keep Britain as a major trading partner with the EU, economics would keep regulations reasonably close, etc…
A larger issue would probably be the threat of Scotland leaving Britain to join the EU.
There are probably also questions of what a ‘Yes’ vote actually means. It might just mean a slight separation between Britain and the EU (which would incidentally meet the goals of the cynical Foreign Office above).
It’s also important to remember that London remains an incredibly important financial capital, and geographically very close, so the ties will still be there regardless.
11:00EST: 9.13 Exit-8.67 Remain.
11:14EST: Cable down from 1.50 to 1.36, almost 10%
What a terrible name. It doesn’t even sound like a good breakfast cereal, more like one of those that tastes uninteresting and has a terrible texture.
For example, you’re giving a speech or lesson, and someone asks you a question. Many of the same tactics are helpful. It’s helpful to know your audience, to have an idea of their background(s), which types of words will work best for explaining things, and to have an idea of what they perceive the relative level of hierarchy is between you and them.
But once you have an idea of these things, what do you do?
This trigger for this post was an article reporting on Jon Stewart talking about how Hillary Clinton pauses for a few seconds between a question and when she answers:
…“It’s — look, there are politicians who are either rendering their inauthenticity in real enough time to appear authentic, and then their are politicians who render their inauthenticity through — it’s like, when your computer … if you have a Mac and you want to play a Microsoft game on it …”
AXELROD: Yes, yes.
STEWART: … and there’s that weird lag.
AXELROD: Yes. No, I mean …
STEWART: That’s Hillary Clinton.
AXELROD: … that’s a big problem. There’s like a seven-second delay and all the words come out in a perfectly …
AXELROD: … politically calibrated sentence.
STEWART: Right. Now, what gives me hope in that is that there’s a delay, which means she’s somehow fighting something. I’ve seen politicians who don’t have that delay and render their inauthenticity in real time, and that’s when you go, ‘That’s a sociopath.’
So, when you’re answering a difficult question, do you pause? Why? For how long?
For me, it depends on the type of question. For emotionally difficult questions, some of it is finding a neutral perspective from which to address the question, to speak to the person(s) asking the question in a positive and useful way. Sometimes it’s choosing the appropriate emotional outlet for whatever I’m feeling at the time.
For technically difficult questions, it feels much more like assembling a mental model in my head, or choosing between different visualizations/places to start. Parts of this can feel similar to emotionally difficult questions (perspectives vs. visualizations), but to me they feel quite different.
 Article is here. In a footnote because the editorializing in the article is outside the scope of this post.
In the emotional perspective sense.
This is often laughter for later when I’m alone. I mean, really, we’re just ape-like creatures who don’t know the first thing about ourselves. Why are we getting all angry about minutiae? This can only be funny.
Now that I say this, I’ll have to watch next time. But something getting my back up really feels different from trying to focus and assemble a visualization. Maybe being able to relax for all types of questions would make them more similar.
(A brief aside. ‘Alignment’ in this context is from Dungeons & Dragons, where each character is considered to be aligned along two axes, ‘lawful-neutral-chaotic’ (respect for the rule of law) and ‘good-neutral-evil’ (good of the many vs. good of the few). This gives 9 ‘alignments’, from ‘lawful-good’ to ‘chaotic-evil.)
Some had him as ‘lawful-good’, or trying to do the best for the many while respecting laws. some had him as ‘lawful-neutral’, where adherence to laws is more important than the good of the many. I can see the ‘lawful-neutral’ interpretation, just from listening to one of his quotes:
So, I would count this as the Prime Directive is a ‘law’ that is mostly ‘good’, and Picard usually tries to move it towards ‘good’ when there is wiggle room. At the same time, when the ‘law’ conflicts with the ‘good’, sometimes (but seldom) he chooses ‘law’, so ‘lawful-good’ seems appropriate.
2) Now, let’s look at truth. Another quote seems to be in order here:
This would suggest that barring violating the Prime Directive above, truth should be ‘good’, specifically the speaking of truth to power. (I think that’s what actually necessitates the Prime Directive, else if truth was pre-eminent, interference to tell people the error of their ways would be a very convenient excuse.)
So, truth is probably ‘good’. Is it ‘lawful’? You could make the argument that adherence to truth is equivalent to a code of honour, and it’s just as important (or more important) to do things the right way as to reach your objective. So, truth can be either or both of ‘lawful’ and ‘good’. The quote above from ‘The First Duty‘ is speaking about the good of the many (Starfleet, the reputation of his dead friend, and the trust between Starfleet officers) outweighs the good of the few (Wesley’s year of school, his reputation), so I’d call this a meeting of ‘lawful’ and ‘good’.
I’d say Picard is pretty firmly ‘lawful-good’, with some ‘neutral-good’ leanings (bending the rules to help people) and some ‘lawful-neutral’ leanings (sometime rules are absolute).
Q10: Negative rates, and how they affect Berkshire:
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?
‘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…
‘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)?
‘We don’t think we can predict the price of commodities.’
‘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?
‘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.
‘I’ve made all the enemies I can afford.’
Q16: On effects of Donald Trump on Berkshire
‘That won’t be the main problem’
‘I’m afraid to get into this area.’
‘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.’
‘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.
‘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)
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?’
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
‘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.’
‘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.’
‘Valeant of course was a sewer.’ (And they deserved what they got.)
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.’
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.
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.’
‘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.’
‘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.’
‘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…
‘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.’
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.’
‘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…
How has diplomacy evolved through the eons? We postulate that humans have changed, but do you think that a Roman senator would feel that out of place in the U.S. Senate? That the job of an ambassador has really changed in the last three thousand years?
It feels like the largest difference has been in the speed of communication. It used to be that the phrase ‘I have to go consult with my government. This may take some days.’ meant travel time. Now it means ‘We need to get used to this idea’ exclusively.
Advances in dentistry and water fluoridation probably mean that people are less cranky because their teeth hurt, advances in chemistry mean that we no longer sprinkle lead on our food. Advances in travel and communications mean that larger empires are more governable and longer-range diplomacy and trade are more viable.
Perhaps the spread of democracy has had the greatest effect. If you look at human history (especially the relatively recent colonialism), those nations or organizations which were the most stable and had the greatest longevity tended to become the most powerful (provided they had the desire and resources/room to expand). But once you control for that, once countries reach that higher stability plateau, they end up competing with each other in very familiar ways.
But most probably, the spread of nuclear weapons has actually had the greatest effect. Great powers have warred with each other since time immemorial. The relative power of offensive and defensive technology has waxed and waned throughout history, but Mutually Assured Destruction was never present absent a larger third party.
Maybe we’ll use this opportunity to talk a little bit more, and understand each other a little bit better.
Diplomacy has remained largely unchanged, except for the use of plastic game pieces in some editions.
Attributed to Daniel Varè an Italian diplomat and author from the early 20th century.