StreetEYE Blog

The Top 100 People To Follow To Discover Financial News On Twitter, May 2016


It’s been a year since we posted our last list of people to follow on Twitter for financial news. Time for an update!
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A possibly ill-conceived rant

There is no racial bigotry here. I do not look down on niggers, kikes, wops or greasers. Here, you are all equally worthless. – Gunnery Sergeant Francis Hartman

Against my better judgment, here’s a quick rant about race.

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Stories Are Powerful, But Check the Math

The first principle [of scientific inquiry] is that you must not fool yourself – and you are the easiest person to fool – Richard Feynman

In God we trust; all others must bring data. – attributed to W. Edwards Deming (ironically without any primary source backing up the attribution)

This Amy Cuddy TED talk was electrifying.

Video spoiler: If you adopt a “power pose” for 2 minutes, Amy Cuddy says it will not only change your posture, image, and attitude, but even your body chemistry, with more production of testosterone and anti-stress hormones.

It’s a great story, which is probably why it’s currently the second most-viewed TED talk.

Unfortunately, the published study study had only 42 participants. And other studies haven’t replicated the results on hormone production. Andrew Gelman even uses the opprobrious term p-hacking: data-mining to find a spectacular result.

The curse of dimensionality: the more things you measure, the more things will significantly deviate from the median.

The math can be counterintuitive.

Take a sample of apples. Grade each apple with a single number, like weight. For a contrived example, let’s say weight is uniformly distributed between 0 and 1.

What percentage of objects lie between 0.25 and 0.75 (the middle 50%?).

50% number line

Obviously, the blue line is 50% of the orange line.

Let’s grade apples along 2 dimensions, e.g. weight and redness.

What percentage of objects lie in the middle along both dimensions? Assuming weight and redness are uncorrelated, the answer is 50% squared, i.e. 25%.

How big a circle do we have to select to get to 50% of objects? We have to solve

    \[ \Pi r^2 = 0.5 \]

which gives r = 0.3989.

We see that we need a circle with almost 80% diameter to capture 50% of the square.

Number square

Let’s grade apples along 3 dimensions, e.g. weight, redness, and sweetness.

What range do we have to select to get to 50% of objects? We have to solve

    \[ \dfrac{4}{3} \Pi r^3 = 0.5 \]

which gives r = 0.492373.

We need a sphere with almost 100% diameter to capture 50% of the cube.

Sphere in cube

The point is, as you add more variables, the central 50% (or any x%) contains more and more extreme values. As you add dimensions, the outlying regions get bigger faster.

We can extend to higher dimensions which we can’t visualize, and chart the width of the 50% hypercube as we increase the dimension:

Capture

If you have 14 dimensions, the 50% hypercube is 95% of the length of the unit hypercube.

With enough features, anything or anybody is an outlier on some dimension.

Suppose you do an experiment measuring the variation of testosterone after assuming a power pose.

Suppose the power pose in fact has no effect on the level of testosterone (the ‘null hypothesis’).

If you observe a change due to chance variation, 95% of the time it will be statistically insignificant at the p > 0.05 level, and significant (p < 0.05) 5% of the time.

If testosterone and corticosteroids both exhibit no effect, the measured change in both will be statistically insignificant 0.95 * 0.95 = 90% of the time (assuming no correlation between them). As you measure more variables, the chance of one of them being significant goes up rapidly.

If you measure 14 insignificant variables, there’s a 50% chance one will be significant at the p < 0.05 level.

If you measure 50 insignificant variables, there’s a 92% chance one will be significant. 92% of that 50-dimensional ‘hypercube’ is in its outermost 5% region.

That’s how you get a prank paper to go viral showing chocolate helps people lose weight.

This sort of thing could be avoided if it was standard practice to hold back some test data, and do an out-of-sample test on any scientific finding. The methodology as practiced, to assume errors are unsystematic, and report p-values and significance on that basis, even on small samples tested for multiple relationships, seems weak and unscientific.

Returning to Amy Cuddy, you can interpret this a couple of different ways.

One interpretation: Statistics do not back up her story, that power poses raise hormone levels.

Another interpretation: Statistical methods are weak at finding complex stories, and you have to come up with a story to understand the world, and look for statistical confirmation where you can find it.

Acting with confidence and joy is contagious, to your own psyche and how others view you. That’s a story. Stories let humans understand and remember very complex phenomena.

For instance, attach a story related to their personal experience, and people solve tricky logic problems easily. Show them the same version as an abstract math problem, they fail miserably.

Feynman, quoted above about not fooling yourself, also said you must develop your intuition, thinking through examples and understanding the story of how things work as more than mathematical abstractions.

Stories are powerful. The more interesting things in the universe are complex interactions, like stories: evolution, the Big Bang, the French Revolution.

The curse of dimensionality means that as you absorb more features of the world, the possible states and explanations and oddities rise according to factorials and exponents. Things get curiouser and curiouser. There are complex interactions that can’t easily be explained. Stories are how humans make sense of a complex world.

Stories can mislead. A great story can be spurious, T. H. Huxley’s “great tragedy of science – the slaying of a beautiful hypothesis by an ugly fact.”

Stories are a powerful shortcut (Kahneman’s ‘thinking fast.’). But they are a shortcut that can lead you astray, so you also need to stop from time to time and make sure you know where you are going (Kahneman’s ‘thinking slow’).

So use your evolution-given power to understand complexity through narrative — but check the math.

Even if poses don’t elevate hormone levels, Superman and Wonder Woman were depicted that way for a reason. Don’t slouch through life due to lack of statistical evidence you shouldn’t!

(Mathematica notebook.)

iPhone Backdoors for the FBI, a blockchain approach for transparent due process, and why it’s a bad idea

So, the security complex is putting on the full court PR press for encryption back doors. See here and here.

Basically this is about giving someone a TSA lock to your phone and promising to keep it really really safe unless a legit law enforcement request is received. Of course, legitimacy is in the eye of the beholder.

One place where the real-world analogy breaks down is that any backdoor, in theory, enables industrial-scale exploitation. Potentially, it’s not just making it possible to open a car trunk that contains a body but more like requiring cars made out of material that’s transparent to the state. And then counting on due process to make it not infringe on the 4th Amendment and freedom from constant state surveillance.

The problem is, the folks at the NSA, CIA, DIA are in the deception business, and feel they have a moral imperative that demands deceiving the enemy, which in turn demands deceiving (lying to) the public.

I don’t even blame them, they have a job with a lot of risk, no real glory. Their job is to do what they can with the tools they’re given, and probably take the fall for ‘not connecting the dots’ even when they pretty much connected the dots.

Hillary talks about a Manhattan Project for cybersecurity…the truth is there is no way to create a magic bullet that can only be fired by the good guys, and there has been a $10b annual Manhattan project for years to enable the NSA to undermine and exploit the tech industry’s security.

So, I really thank Tim Cook for standing up to useful idiots who say Apple enables terrorists.

But with the current level of stupidity, there’s a very real possibility it’s a losing battle against that accusation, especially if there actually is a terrorist attack that hits an investigation roadblock due to iPhone encryption.

If you go down the backdoor road, there has to be maximum real-time transparency and due process. That’s kind of what the blockchain is: a secure, open public ledger of transactions. They can be money transactions, or transfer of ownership of other rights or responsibilities, or any bits, really.

So anyway, here is, as a thought experiment, how you can use the blockchain to enable transparency and due process in a key escrow scheme.

1) When Apple generates keys to encrypts your phone, they keep a copy. The copy is kept in such a way that the only way to release it is through due process.

  • Records of keys to be kept in one location, e.g. basement vault at Apple HQ.
  • They are kept only on physical media.
  • There is no network access to that storage
  • The location is electromagnetically shielded, physically secured per DoD standard for most secret information.
  • The keys are generated and conveyed to that storage securely, and any copy outside the room is destroyed. How to actually guarantee that is another giant bag of worms that is beyond my pay grade. But it has to be done per a checklist like generating nuclear launch codes, and the process audited regularly, and e.g. Tim Cook to certify annually under criminal penalty that the procedures were followed, and any shortcomings or attempts at circumvention publicly disclosed.

2) When law enforcement wants access to a phone for a criminal investigation, they post the request on public blockchain that is jointly maintained by all the interested parties, including watchdogs like the ACLU. The request records

  • requestor (state attorney general, US attorney, etc.)
  • target device
  • specific major felony accusation
  • specific individual or witness

3) Judge approves the request and posts approval on the blockchain.

4) There is a reasonable delay e.g. 72h to allow challenging/appealing the request.

5) Public signature by e.g. Tim Cook that he personally authorized access after finding it was legit and all necessary information was public on the blockchain, and appeals/challenges exhausted.

6) Keys transmitted to law enforcement by similar nuclear launch code checklist, e.g. all access to the physical location and media where it’s stored by two people who follow the checklist and record that it was followed, under criminal penalty for exfiltrating information inappropriately, or not documenting any attempt at circumvention. And again, procedures and logs subject to annual 3rd party audit, and management to certify that all procedures followed, any gaps or attempts at circumvention publicly disclosed.

The point of this exercise is that once you have a backdoor, you need real, public due process with teeth.

This process will satisfy no one. It’s a huge hassle for e.g. Apple. The security community wants something where they can ask for an inch and take a mile, and blame civil authority when they don’t find the threats. The civil liberties community will rightly suspect there is a hole in there somewhere, or that one will be created at the next ‘national security emergency,’ because that’s what the public raised on ’24’ and ‘Homeland’ expects.

And of course China and Russia will demand their own, much more leaky version of this, and Apple will end up in the Stasi-enabling business.

More and more, your whole life is on the phone. It leaks plenty of information semi-voluntarily about everywhere you go, everyone you spend time with, communicate with, what sites you browse, who you transact with. The security guys can do all kinds of other things to track you, GPS monitors, hack your phone, search your garbage.

Better to not go down this road of giving the surveillance state unfettered access to everything. And maybe it’s time to try to use technology for cryptographically secure transparency and due process.

The most popular keywords and sites of 2015

Here’s a word cloud of StreetEYE headlines in 2015 (click to embiggen).

word cloud

Greece (remember Greece?) beat out China for the biggest headline-bait of the year. Tsipras even beat out Yellen, although Grexit ended up a non-event. (To my surprise actually…Schäuble and Varoufakis were both apparently playing for Grexit, so I thought it would take a miracle. The center held, but the political cost to Europhiles like Merkel, Hollande, Draghi, Renzi hasn’t been counted yet.)

One thing that makes me happy: we posted stories from 1536 unique domains in 2015. We (or you, our readers and curators) posted about 65 headlines a day. About half were from the ‘Big 5’ of Bloomberg, Wall Street Journal, Financial Times, New York Times, and Reuters. The balance were from the long tail of domains (see below).

The most-clicked stories of 2015 were quality features, but sometimes a little click-baity. We’re all about the good headlines.

Details below. Thanks for coming along on this journey. If you have any comments or suggestions, please let us know. Have a great 2016!

1 It’€™s sleazy, it’€™s totally illegal, and yet it could become the future of retirement (Tontines, per Moshe Milevsky (I agree))
2 What the Smartest People in Finance Think You Should Read (books)
3 What is code? If you don’t know, you need to read this
4 The CEO Paying Everyone $70,000 Salaries Has Something to Hide
5 How Two Guys Lost God and Found $40 Million
6 Carly Fiorina failed to register this domain.
7 I Had a Baby and Cancer When I Worked at Amazon. This Is My Story
8 Inside Hunt & Fish, where beauties trawl for sugar daddies (throw’em back!)
9 What The New York Times Didn’€™t Tell You (about Amazon)
10 ‘Shell-shocked’ CNBC staffers had long flight home

Top domains of 2015

1 Bloomberg
2 Wall Street Journal
3 Financial Times
4 New York Times
5 Reuters
6 The Guardian
7 Bloomberg View
8 Business Insider
9 Washington Post
10 The Telegraph
11 VOX
12 CNBC
13 Re/code
14 The Economist
15 European Union
16 Fortune
17 Vox
18 Quartz
19 MarketWatch
20 Project Syndicate
21 Medium
22 SEC.gov
23 Forbes
24 Federal Reserve
25 New York Fed
26 A Wealth Of Common Sense
27 ekathimerini.com
28 ZeroHedge
29 TechCrunch
30 Politico
31 The Reformed Broker
32 New Yorker
33 NY Post
34 Dealbreaker
35 The Verge
36 Calculated Risk
37 mainly macro
38 Marginal Revolution
39 bruegel.org
40 Yahoo
41 Fusion
42 Econbrowser
43 The Atlantic
44 equitablegrowth.org
45 IMF
46 Huffington Post
47 BuzzFeed
48 brookings.edu
49 Stumbling and Mumbling
50 New York
51 fivethirtyeight.com
52 CNNMoney
53 BBC
54 Wired
55 Economist’s View
56 Barron’s
57 Gawker
58 LA Times
59 Yanis Varoufakis
60 ap.org
61 Bank Underground
62 YouTube
63 capitalnewyork.com
64 Noahpinion
65 nber.org
66 USA Today
67 Slate
68 Bank of England
69 The Independent
70 Der Spiegel
71 Worthwhile Canadian Initiative
72 BBC
73 macropolis.gr
74 valuewalk.com
75 Vanity Fair
76 Macro and Other Market Musings
77 Conversable Economist
78 InvestmentNews
79 mashable.com
80 BIS
81 theirrelevantinvestor.wordpress.com
82 alphaarchitect.com
83 variety.com
84 The Grumpy Economist
85 fool.com
86 The Times
87 9to5mac.com
88 ssrn.com
89 Time
90 dashofinsight.com
91 vice.com
92 politico.eu
93 niemanlab.org
94 aei.org
95 bradford-delong.com
96 Foreign Policy
97 The Big Picture
98 whitehouse.gov
99 scmp.com
100 Institutional Investor

The End of the PC? On Intel’s Apple and ARM problems

apple-iphone-6s-live-_0752.0Tim Cook has been running around heralding the end of the PC. A self-serving assessment, but Intel and the PC ecosystem are going to struggle to maintain their traditional relevance. In this post, I will look at 1) the narrowing Intel/ARM performance gap, and 2) what the ‘end of the PC’ might look like.

1. The narrowing performance gap

At the introduction of the new iPhone 6s, Phil Schiller made the claim that the phone’s ARM-based SOC (system-on-chip) is more powerful than chips powering 80% of laptops…in other words faster than the low-end Intel Atoms, Celerons, i3s, and on a par with the Intel’s bread-and-butter Core i5s which powers pricey MacBook Pros.

iPad Pro benchmarks

Benchmarks bear him out (scroll through for Intel comparisons).

Comparing the new iPad Pro to the latest Intel-based Microsoft Surface Pro 4, the new iPad has a bigger screen, weighs less, and has longer battery life than Surface.

The Surface Pro 4 seems to have similar single-threaded performance and higher multicore performance. It seems positioned as a good laptop, which can also function as a tablet.

(Aside: Mystifyingly, no built-in LTE option. For many people having a single mobile plan and tethering other devices via Wifi/Bluetooth seems like the best option, but for many corporate use cases LTE is still a needed option.)

Bottom line: Right now, ARM can’t offer the raw performance of the high-end Core i7 and Xeon processors. But it can hold its own against the bread-and-butter i5, at a superior performance per watt and performance per dollar.

This is a big problem for Intel.

2. How did this happen?

Historically Intel has had a number of key advantages over its competitors in CPUs:

  • Above all, the most advanced chip fabrication. In process, Intel typically was a generation ahead of its competitors like Samsung, TSMC etc. That means smaller chips, lower power per transistor, higher performance.
  • CPU R&D – more advanced architecture design with higher transistor counts, larger caches, out-of-order execution pipelines etc.
  • Scale and network effects – more investment in compilers, tools for the x86 platform.

That added up to a mega franchise:

Investment in fab and architecture
-> most advanced and powerful CPUs
-> market share, volume, industry standards
-> huge margins
-> plowed back into massive investment in fab and architecture
-> rinse and repeat.

Intel had 2 ‘high quality’ problems:

  • Backward compatibility – Acts as a performance tax, requiring legacy features / more transistors/ more power / hamstrings architecture. Unclear how significant due to Intel’s other advantages but it’s there.
  • High margins / innovator’s dilemma. Intel could no doubt have offered an x86 mobile architecture that was cost/performance competitive with ARM. But they could not do it without having it installed in PCs and servers and cannibalizing their PC/server business.

The tick slip: Intel has operated on an alternating tick/tock model. On the tick, they shrink the existing architecture, putting it on a new manufacturing process that runs on smaller chips with closer-packed transistors that draw less power and run at higher clock speeds. On the tock, they introduce a new architecture with more transistors and design optimizations.

These tick/tocks about a year apart have kept them ahead of the competition.

In September 2014, they started shipping Broadwell chips manufactured on a 14nm process.

In August 2015, they started shipping Skylake chips, the new micro-architecture on the same 14nm process. But they also announced the 10nm successor process would be delayed until 2017.

In the meantime, Samsung began shipping 14nm SOCs in the Samsung Galaxy S6 smartphone in early 2015, over a year behind Intel. Apple then released its iPhone 6s, also on 14nm Samsung and 20nm TSMC SOCs, in late 2015.

I hasten to add, all 14nm chips are not identical. For instance, the iPhone you get may have either a 14nm Samsung or a 20nm TSMC chip: they are dual-sourcing the SOC. Some testers and pundits proclaimed the TSMC iPhones on the larger die/older fab process actually used less power and performed better, contrary to what one might expect. Samsung’s 14nm may not be higher density than Intel’s, and clearly not even a knockout punch vs. TSMC’s 20nm.

Nevertheless, right now Intel’s competitors are nipping at Intel’s heels. And Moore’s law is running out of room. At this point each transistor is a few dozen atoms. We have maybe 6 50% ‘shrinks’ before we hit a single atom. People have been saying Moore’s law has reached its limit for a long time…but perhaps Intel’s struggles to stay ahead are the real deal this time.

ARM is big in cheap, high performance, PC-incompatible Chromebook laptops. But ARM servers haven’t had an impact yet. Nevertheless, for loads highly distributed across numerous servers like Google and Facebook’s immense Web server farms, they would appear to make a lot of sense. Companies like Calxeda have tried before and failed. But the ‘tick slip’ seems to create a window of opportunity where the Intel fab edge is limited, for the next year or more, and could get closed entirely if ARM fabs improve further. (Both Samsung and TSMC say they will match Intel’s roadmap, but talk is cheap.)

The key metric in massive web farms is performance/watt. If ARM OEMs can achieve fab parity with Intel, the case appears to be compelling. Intel would then have to cut margins to compete. It would seem incumbent on the Googles, Facebooks to be testing ARM and developing standards for ARM servers via the Open Compute Project.

From there you might see ARM start showing up in corporate server farms, cloud infrastructure providers like Amazon AWS. Eventually, ARM CPUs with larger caches, more execution pipelines could be designed to compete with Xeon and make inroads in the largest single-server applications, like databases.

It’s also worth pointing out this rumor that the next iPhone will be on an Intel-manufactured ARM SOC. That would be a huge Intel hedge against a decline in its x86 business. Dell’s purchase of EMC and attempt to sell its PC business can also be seen in this light.

3. The phone as PC

The other issue is…the phone is the primary computing platform for more and more people.

On many dimensions your phone is more advanced than your PC. It features

  • 20+ radios communicating on any mobile network known to mankind, WiFi, Bluetooth.
  • A phone properly integrated into the OS and messaging, which PCs never really got working right.
  • Voice control and input with Siri, Google, Cortana
  • Touch screen UI with multi-touch and Apple’s pressure-sensitive 3D Touch, biometric fingerprint ID.
  • Integration of watches, fitness trackers, internet of things; sensors galore (2 cameras, multiple mikes with noise canceling, GPS, accelerometer, gyroscope, digital compass, ambient light detector, proximity sensor)

The mobile phone is ludicrous technology, the nexus of a technology singularity. It may not have as much RAM, or a competitive equivalent to an Excel or Powerpoint. But if most of what you do is email and Web browsing, and you can make do with Google apps, you’re in good shape when you just have your phone/tablet.

It’s perfectly fair to say that a lot of office workers could do all their work on their phone/tablet. A lot of sales guys just need a phone and a CRM app on a tablet.

The Mac was a miracle to my generation in college. A generation raised on an iPhone and iPad may well view a Mac as a step backwards.

With the iPad Pro, Apple is aiming at content creators. Give the iPad Pro a decent keyboard, stylus, and mouse and you can use it as your main screen, even if you’re a power user. I’m kind of expecting it to bomb, near term. Not enough apps or a large enough market for those users.

But Apple is just one killer app away.

In offices, as iPhones became popular, most companies went to BYOD – bring your own mobile device for email. This makes users happy, and to some extent, system administrators.

A few companies have gone to VDI – virtual desktop infrastructure. The actual PC runs on a virtual machine in the cloud, users view it on a local thin terminal display. Your Excel and Powerpoint, even Bloomberg and trading systems live in the cloud, you connect over the internet, just like RDP you may be familiar with (Remote Desktop Protocol).

VDI is a far better disaster recovery posture. Sit anywhere with a terminal and a network connection, get all your apps and data, everything backed up to the cloud.

Both BYOD and VDI are a far better security posture. Harder for malware on your phone to spread throughout a company, since it’s basically a foreign device outside on the Internet. Get an infection on your VDI image, restore it immediately from a pristine image.

You can see where I’m going with this…VDI will potentially be a killer app on an iPad Pro.

All your servers and desktops go into the cloud using e.g. Amazon cloud infrastructure as a service and VDI. Then you give your users a tablet with the keyboard and VDI app. Presto, no more PC desktops or servers in your front office. The end of the PC world as we know it.

I could see quite a few knowledge workers being issued hybrid PC/tablets like Surface Pro and using them primarily as tablets. Over time they may find they don’t need the PC functionality. And departments and even companies go 100% BYOD.

Of course there would be many Intel CPUs in that cloud infrastructure. But over time perhaps not as many, unless Intel retains their fab edge even as they lose a chunk of the revenues that support it.

The phone would displace the desktop PC, while the PC platform would complete its displacement of the old centralized mainframes.

Back in the 80s, who would have thought that was in the original IBM PC’s future. Big iron mainframe guys were laughing at the PC as a toy. But then again so did the the first iPhone. The next big thing often starts out looking like a toy.

Strange times. And possibly risky ones for Intel.

Zombie army

Is China’s sale of Treasurys ‘quantitative tightening’ for the US?

There’s this notion going around that since the Fed buying Treasurys was QE, therefore China selling Treasurys constitutes monetary tightening.

Nope. The root cause of the disequilibrium and resulting capital flows is capital flight from China to the US.

An oligarch wants to buy a condo in New York. He takes yuan to the Chinese central bank and exchanges them for USD. In order to provide the dollars, the Chinese central bank sells some Treasurys.

How can capital rushing into US risk assets be ‘quantitative tightening?’ It’s the opposite. At the end of it, the Chinese foreign sector has exchanged an American safe asset, a Treasury, for a condo at 432 Park, a risky asset. The US has built a big building, generating jobs, demand, maybe a little inflationary pressure.

The Chinese central bank could do nothing, and the yuan will drop until US assets look expensive to Chinese oligarchs and equilibrium is restored.

Or they could intervene to limit the drop in the yuan by buying yuan for dollars, which requires them to sell Treasurys.

The sale of Treasurys is a second-order reaction to partially stem the drop in the yuan and accommodate capital flight. At the end of it, at best, it’s an even swap of Treasury bonds for condos.

It’s possible that a central bank might sell Treasurys to buy non-US assets, gold, etc. In the case of the Saudis selling reserves to support their local economy, pay for imports from a lot of places, there might be some ‘quantitative tightening’, ie capital flight from US assets.

In China, though, it seems that the sale of Treasurys is a second-order effect from flight into US assets.

It’s a good principle in life and in economics that second-order effects partially offset first-order effects. It’s more probable that on balance, the capital flight from China into the US is a stimulus, and the Chinese FX intervention and sale of Treasurys partially offsets that stimulus.

Tontines: strange name, great idea

A huge problem in retirement planning is a safe spending rate, so you don’t outlive your money.

One side of the problem is, how much can you spend and not risk running out of funds in say, a 25-year retirement? See, for instance, our Cat Food Calculator mad science experiment. One can even calculate a spending solution which maximizes your certainty-equivalent spending based on historical returns, and your risk tolerance.

The other side of the problem is, what happens if you live to 105 and have to fund a 40-year retirement? If you plan for 40 years, you are likely to under-spend and leave a large estate. If you plan a 30-year retirement at 65, and it gets you safely to 95, there is still a small but potentially catastrophic possibility of outliving your savings.

tontine can address this problem. Here’s how it might work:

  • Imagine a Kickstarter-like page: “Seeking 1,000 men (or women) who were 50 years old on Jan 1, 2015 to start a tontine.” When we get 1,000 eligible participants commit, we launch the tontine.
  • Each participant funds the purchase of 200 SPY ETFs — at current prices about $40,000. (The math works out if you let people vary their contribution, within limits, but lets keep it simple).
  • The ETFs go into a trust.
  • When the cohort reaches age 801, about 53% of males will still be alive. At that point the tontine begins paying out.
  • We set up a fixed annual distribution of shares to each survivor. The amount is set at, say, 10% of the shares divided by the surviving participants.
  • Let’s hope we get a 4% real return on the SPY, and assume1 that we can re-invest dividends tax-free. After 40 years your initial $1 investment in a SPY has grown to about $4.80.
  • In addition your equity share in the trust has almost doubled because 48% of the original participants are no longer with us. Your $50,000 initial investment has bought you a $366,000 old-age fund.
  • So 10% of the SPYs are distributed. Their value has gone up ~5x. The survivors are about 50% at this point. So you can get a distribution valued at $36,600 in year 1. The trust can afford to distribute the same number of shares to each survivor every year, and never run out of money assuming the current life table. With luck, the S&P continues to appreciate. Your initial $40,000 has bought about that much per year for the rest of your life.
  • If the tontine runs out of money because cancer has been cured and everyone is living to 120, that’s it, it’s out of money. It’s a risk you take, along with S&P fluctuations. As your retirement progresses, you will want to monitor the expected payout from the tontine, plan and adjust accordingly.
  • When there are say 10 people surviving, the remaining SPYs are distributed pro-rata. Saves on administrative costs and gives the lucky ones a payoff and an estate.

What is insurance except a pool of people coming together to share risks? What better product for our era than a crowd-sourced, peer-to-peer, sharing economy life insurance solution.

The great thing about this tontine is, for a small investment you fund a big part of your needs in the event you are one of the lucky ones to live a really long time. You can focus on saving funds for the earlier part of retirement when you know you are likely to be alive. You can plan to spend pretty much your entire nest egg over the first decades and don’t need to worry about the tail risk of living to 105.

There is an existing product which also addresses this problem: an insurance company variable annuity.

The problem with the variable annuity is, it can be quite expensive — it is a market that is a bit of a minefield. Variable annuities are complicated, and are often high commission products. They often have high expense ratios. (Vanguard is a great provider, but if I read it correctly, they charge 0.46% to 0.77% per year on top of the management fees for the funds you invest in. Adds up over 40 years.) The insurance company takes the other side of the longevity risk, ie they keep whatever is left over when people die quicker than expected. There is a small, but potentially non-negligible credit risk. If an insurance company goes broke because, for instance, its overall returns are too low and it takes too much of the wrong kinds of risk, you might not get the expected payoff.

At scale, the tontine should be feasible at index-fund expense levels, like 25bp. Or, possibly, more like account maintenance fee levels. The problem with the tontine is… it’s illegal in the USA.

But it really would be a great product. It’s extremely unfortunate that our system allows all sorts of expensive, gimmicky products, not to mention outright shenanigans, but blocks relatively simple, legitimate, useful peer-to-peer products.

I encourage any renegade entrepreneur to take a crack at it, set up a Kickstarter-like website, and dare the authorities to shut it down. Uber didn’t ask permission. It  takes boldness to disrupt financial services. But regulators may not be sensitive to the public interest, and insurance companies may not be as easily overcome as taxi commissions and fleet operators.

Like Warren Buffett on space exploration and tech stocks, I applaud the endeavour but may prefer to skip the ride.

(Disclaimer: it would be immoral to take Uber-like risks with people’s retirement savings. Perhaps it’s time for a group of willing participants to try a test case and challenge the law. Or maybe some very smart lawyers can identify a workaround. Or maybe there’s a Bitcoin-like solution. That’s a joke, mostly: you can’t keep a large pool of real-world assets like SPYs outside the law.)

1 The tontine could, of course, invest in something besides the S&P, like a bond fund, a balanced portfolio, etc.  It might also make sense to let investors fund the tontine over say, 5 or 10 years. It could also start paying before age 80, for instance it could fund an entire retirement plan starting at age 65. I chose this example because it highlights how the tontine simply, effectively, and cheaply mitigates longevity risk.

2 Unfortunately, an unwarranted assumption: In a taxable account, dividends would be taxable. In an IRA, minimum distributions would be tricky, one might have to start distributing at 70 ½.

God help us

A quickie, light rant on politics <cough> for a Labor Day weekend.

As a jumping-off point, supposedly the majority of Republicans think Obama is a Muslim. That’s probably bullshit. As the Brits say, they are taking the piss. They don’t like Obama and pick the most other and derogatory (in their mind) response. If you asked them to bet $5 on what religion he was raised in, what services he attends, they would not say Muslim.

It says something that you take the most experienced elected officials the GOP has to offer, and they can’t break out of single digits, and Trump is kicking their butt by 20+ points. Poll responders who say they support Trump are also taking the piss. A lot of Republican voters do not like the establishment GOP. Given a free shot, they’d as soon kick’em in “Deez Nutz” as admit to supporting one of them. Whether a lot of voters have actual enthusiasm for Trump in a binding primary, or a general election, or as a President may be a different matter.

But it’s more than just a protest. There’s a fundamental split between the donor base and establishment candidates, on the one hand, and the voter base on the other. Practically no one in the voter base wants to gut Social Security. But you have to say that as a candidate, or bye-bye PAC money. On the other hand, no one in the donor base is anti-immigration. It keeps wages low. The business establishment played the game of the Reagan amnesty, with the caveat that employers would be on the hook for checking legal status. Then they gutted enforcement. What started off as a fair and humane compromise turned out to be a bait-and-switch. It’s a sad day when the USA acts like Dubai, de facto inviting a foreign worker army that can be taken advantage of with impunity in fruit orchards, slaughterhouses, and Home Depot parking lots. Economic pain, and latent and overt racism and anti-immigrant xenophobia play their role, but righteous anger is there too.

Previous populist Tea Party movements have been a bust. Like grass-roots wack jobs like Sharon Angle or “I am not a witch” Christine O’Donnell. Like the Dick Armey Tea Party scam, where they rile up the base, affinity-scam them for money, and then try to deliver them as voters to establishment legislators. A lot of Republicans would welcome a Trump hostile takeover, if he would deliver an actual populist movement. The question is whether that’s what Trump wants to do, or whether he just wants the attention to inflate his ridiculous ego. Seems equally probable he’s the one taking the piss out of all of them, and us.

The GOP is a strange alliance of pro-business types, a theocratic American Taliban1, libertarians, and nationalist populists. Oddly, they don’t seem to have a credible candidate or shot at taking the Presidency. Meanwhile the Founders’ Senate gerrymandering and a number of states’ Congressional gerrymandering doesn’t give the Democrats much of a shot at taking the legislative branch back for a while. Sounds like a recipe for gridlock. What a total clusterfuck.

I feel sort of the same about Hillary as I do about Tom Brady, Boston’s finest Deflator in Chief. He tampered with the football and covered it up. That is a threat to the integrity of the game, and needs to be nipped in the bud. But it’s not really that different from a pitcher spitting on the ball. Throw him out of a game, slap him with a fine, and get on with it. At most a 2-game suspension and a fine, one for tampering and one for covering up. Same as Ray Rice’s initial suspension. At some point the greater threat to the integrity of the game is a lynch mob against a terrific competitor, or an arbitrary star chamber settling unrelated scores. Fuck Boston and fuck Tom Brady, but let the guy play.

So Hillary placed her own IT guy at State and paid him under the table to maintain her server. Now, Colin Powell and all manner of Bush White House staffers had their own off-government email addresses. This seems to go a bit beyond that. But let’s face it, anything Hillary puts in an email is going to be out in public. Either the Republicans are going to get it via a witch hunt subpoena over some manufactured scandal, the intelligence services domestic or foreign are going to get it, some Snowden type is going to release it. (The White House and State Department systems were both massively compromised by foreign intelligence services and got shut down.)

So she said fuck that, I’m going off the reservation, going full Cheney, doing it my way. If she came out and said she did it that way so she could do her job right and fuck the political consequences, it could even be called a gutsy decision. The problem is, she did it to protect her ass and her political future against perceived persecution.

So slap her on the wrist, tell her that’s not how you do it, set some binding rules on official communication. (FFS, it’s fine to have your personal text messaging or e-mail account, just don’t use it for government business. And maybe, allow a legal purge of official emails for personal or embarrassing irrelevant stuff, as long as a complete record of official business is preserved.)

The problem with Hillary is, she has been subjected to all kinds of insane attacks and witch-hunts her whole life. And unlike Obama2, she hasn’t reacted with mostly good humor and the occasional on-target dig. She gets paranoid. She sounds evasive, entitled, petulant. She fires travel agents and White House staff she thinks might not be loyal. And now this, her own personal IT department to flout government rules.

So, as President would she put the past aside, say she’s attained the equanimity of her years, and work for the future of the country with anyone who was willing? (Which doesn’t seem to count many Republicans.) Or would she go full paranoid score-settling Nixon? I wish I were more optimistic.

God help us.

1 FFS, that Kentucky born-again bumpkin is not in jail for exercising her freedom of religion, she’s in jail for trying to use the power of a cushy state bureaucrat to impose her religion on everyone.

2 Which immediately sets all the assholes puckering up about how un-Presidential and divisive Obama is. Now seriously, on what planet is the guy who can’t shut up about Obama’s birth certificate going to make America great, while Obama is the great divider?


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