Hate Speech Hysteria

"John Spartan, you are fined five credits for repeated violations of the verbal morality statute."
--Moral Statute Machine (Demolition Man)

Peter Klein notes the absurdity of sophistry floated to justify laws proposed to protect people against purported 'hate speech.' The WaPo editorial proposes that the First Amendment was written under the assumption that, in a 'marketplace of ideas,' truth would always triumph. The argument then claims that in modern venues such as the on-line world, truth does not always win. When hate, or negative, speech does rule the day, violence may result. As such, we need hate speech laws to protect against the potential for violence.

This critique of free speech gets the 18th century context entirely wrong. The 1A was justified not by a utilitarian argument that truth necessarily wins in the marketplace of ideas, but by the idea that false speech does not violate anyone's natural rights. https://t.co/tpE5PGD4CY

— Peter G. Klein (@petergklein) October 31, 2019

The premise is simply wrong. Our founding ancestors wrote the First Amendment to keep government out of the way of discourse, however full throated and vulgar it might be. Hate speech violates no one's rights. The framers understood the 'sticks-and-stones' axiom--negative words do not equal physical aggression.

Violence can only result from negative speech if a choice is made to act on it. It is the act, if taken, that constitutes aggression and upon which good law is built to protect against.

The founders understood that inserting government as an arbiter of what constitutes offensive speech is certain to compromise freedom over time.

Going Global

"I have learned how to live--how to be in the world, and of the world."
--Sabrina Fairchild (Sabrina)

Liz Ann Sonders presents a series of charts suggesting that, in the most recent quarter, companies with more international exposure had worse earnings. Just one quarter worth of date, of course, but we expect that going global should increase returns?

Higher global exposure = worse earnings/earnings (most pronounced in tech & materials) @FactSet pic.twitter.com/TTEj9dTxUK

— Liz Ann Sonders (@LizAnnSonders) October 28, 2019

One view suggests yes. Companies expand production to other countries because they sense higher returns on capital. But data such as the above demonstrates that may not be realistic.

Another view suggests that, instead of increasing returns, going global smooths them out. When returns are low in, say, Asia, they may be high in Europe or in the US. Diversification--in securities, in skills, or in markets--hedges risk of being too exposed to a single set of circumstances in an uncertain world.

Pensions

Give me your answer, fill in a form
Mine for evermore
Will you still need me, will you still feed me
When I'm sixty four?
--The Beatles

Throughout much of the 20th century, an attractive employee benefit offered by corporations was the pension. In its most common form, pensions are monthly payments to employees after they retire. The payments kick in at a certain age (often age 65) and last until the employee dies.

Pensions are known as 'defined benefit' plans because employees know exactly how much they are supposed to get on a monthly basis. The amount of the payment, which in most cases remains constant through the life of the benefit, is calculated based on age, earnings, and years of service.

My first employer offered a generous pension benefit. Employees became 'vested' in the plan after 5 years of service. When I left the company after 12 years of service, I took with me the promise of a modest monthly pension that I could begin collecting at age 65. There is an option to take those payments earlier, beginning at age 55, but for a lower monthly amount.

Until recently my intent was to wait until age 65 before drawing the full pension amount. Since I'm still working, there is no acute need for a supplemental income stream. Moreover, the monthly payment appreciates 8-9% annually if I wait until age 65 before collecting it. Few fixed income investments that I know of currently possess that kind of return profile.

However, a couple weeks ago I received an offer from the pension plan for what is known as a 'lump sum buyout.' Instead of paying the monthly annuity until I die, the plan is offering me a single, relatively large payment today. If I accept the lump sum offer, then this legally relieves the pension of any future payment obligation to me.

Why would a pension plan do this? To fund pension plans, companies must set aside portions of their profits today to pay for obligations in the future. Determining just how much to set aside is tricky--just as it is tricky for each of us to figure out how much to set aside to fund our individual retirements. Many companies are realizing that they may not have reserved enough funds to pay their future pension obligations. To manage the risk of having chronically 'underfunded pensions,' many companies dangle one-time lump sum payouts in hopes of getting some of pension liabilities off the books.

Difficulties with managing defined benefit pension plans have driven many organizations to phase them out in favor of 'defined contribution' plans. Defined contribution plans, known to many as 401(k) plans, commonly involve the employer kicking a fixed amount of money into a tax-deferred retirement account for each employee on a monthly basis. The employee is then responsible for managing those funds for retirement. The employee loses the certainty of a fixed monthly retirement payment (defined benefit) in exchange for receiving a fixed amount of money today to save/invest (defined contribution).

Today, defined contribution plans far outnumber defined benefit plans. Those defined benefit pension plans still remaining are mostly legacies of the past that, like mine, are in the process of being wound down.

So, should I accept the lump sum buyout now, or wait six years to draw my scheduled monthly pension when I turn 65? Is, as they say, a 'bird in the hand' worth more than 'two in the bush' in this case? We'll discuss the pros and cons of each alternative in an upcoming post.

Off We Go

There used to be a greying tower alone on the sea
You became the light on the dark side of me
--Seal

Just like that, gappy futures popped the SPX to all time highs out of the gate this am.

Need to hold those gains, of course. A reversal would quickly prune the bloom off the rose.

Negative, Not Positive

"Why should I trade one tyrant three thousand miles away for 3,000 tyrants one mile away? An elected legislature can trample a man's rights as easily as a king can."
--Benjamin Martin (The Patriot)

The quote below comes from a large thought stream of that Prof Williams has dedicated to the subject of democracy and liberty. These pages have reflected on these thoughts from time to time.

"Democracy and liberty are not the same. Democracy is little more than mob rule, while liberty refers to the sovereignty of the individual.”
―Walter E. Williams (@WE_Williams)

— Larry Elder (@larryelder) October 27, 2019

His central proposition is that associating liberty with democracy, or claiming democratic processes as essential to free society, is sloppy thinking. As our founding ancestors well understood, democracy is more accurately associated with tyranny than with liberty.

A good case can be made that it has been statists who have tried to condition Americans to believe that democracy is rightly associated with freedom and liberty.

Don't fall for it. In the long run the relationship between democracy and liberty is negative, not positive.

Knock Knock Knockin'

Mama, take this badge off of me
I can't use it anymore
--Bob Dylan

Yesterday the SPX printed north of its previous all-time high close marked back in July before closing slightly below the high water mark. The Dow and Nasdaq have been lagging slightly, but both are less than a percent from their all time highs as well.

Despite the negative news stream and environmental uncertainty, stocks are once again knocking on heaven's door.

Good Intel

"Me and the I-Team came up with some fascinating intel."
--Henry Wayne (Exit Wounds)

After a disappointing earnings call in the spring sent the stock lower, Intel (INTC) shares have been building momentum. Last night's positive earnings call popped the stock above resistance.

As it fills the gap from last spring, INTC looks to be eyeing its previous high.

From bad Intel to good...

position in INTC

Theater of Violence

"Now, we don't make policy here, gentlemen. Elected officials, civilians, do that."
--Cmdr Mike 'Viper' Metcalf (Top Gun)

Politics is where hypocrisy thrives.  Another case study being written involves partisans who espouse to be anti-war turning their hats around when it is a foe, in this case President Trump, who wants to dial back the US war machine in the Middle East. Naturally, those who side with the president become targets of wrath as well.

I feel sorry for @BetteMidler

Imagine being this out of touch with reality.

Imagine wishing physical harm on someone you’ve never met.@RandPaul is one of the most decent, humble leaders in DC’s history

This type of rhetoric helps no one. https://t.co/pURxZkR0yy

— Cliff Maloney (@LibertyCliff) October 24, 2019

No need to take it personally, though. Say a prayer for those people, and then stick to the issue--as does Rand Paul below. If it is war that you want, then follow the constitutional channel: debate the issue on the floor of Congress and obtain support legitimately.

"If Democrats want to send our young men and women to fight in the Syrian civil war, let's have that debate. By all means, let's have the constitutional debate today on the Senate floor right here, right now,' @RandPaul said. " https://t.co/gQwZwV6NIV

— Jack Hunter (@jackhunter74) October 23, 2019

Another approach is to become a mercenary yourself. Hire yourself out to the army of your choice and fight for their cause. Don't force others into your theater of violence.

Hedge Funds Hedge

Michael Burry: Lawrence, I found something really interesting.
Lawrence Fields: Great, Michael. Whenever you find something interesting, we all tend to make money. What stock are you valuing?
Michael Burry: No stocks. I want to short the housing market.
--The Big Short

Hedge funds have been under performing major stock indexes. Should this be a surprise? As we have noted before, no.

Hedge funds were built to 'hedge,' meaning that they manage risk by taking positions in assets that are not well correlated. This is why hedge funds themselves are considered alternative assets in the fund management world.

Hedge funds’ decade-long underperformance of S&P 500 pic.twitter.com/DWPxDm1tln

— Liz Ann Sonders (@LizAnnSonders) October 22, 2019

Note from the graph that hedge funds outperform when stocks go down. This is what you want from a good hedge.

If hedge funds did not under perform in strong stock bull markets, they would not be doing their job.

Loss Aversion

"I don't like losses, sport. Nothing ruins my day more than losses."
--Gordon Gekko (Wall Street)

Investors are subject to various biases that can cloud decision-making processes. One of these biases is 'loss aversion.' A concept developed by by behavioral psychologists Daniel Kahneman and Amos Tversky (1979) as part of their Nobel-winning research on 'prospect theory,' loss aversion means we tend to overweight losses compared to gains.

In customer service settings, it is well known that when customers are dissatisfied they tend to share their negative experiences with others at far greater rates than when they are pleasantly surprised by the quality of service that they receive.

When we invest, the effect is similar. when we buy a stock and the investment goes down by, say, $10, we tend to feel more 'psychic pain' than if the stock goes up by that same $10 amount.

Because 'losses loom larger than gains' in our minds, Kahneman and Tversky (1979) found that this bias may drive us toward ill-advised investment behavior. For example, when we realize losses on an investment, we may be more willing to stick with that losing position longer than we should. In fact, we may be anxious to buy more--to 'double down'--so that we might at least get back to even on our original position.

Stated differently, we may be willing to make a bad situation worse by taking even more risk in order to 'save face.'

On the other hand, when we realize gains, we are often prone to sell our winning positions too soon in order to 'lock in gains' before they might turn into losses.

Professional gamblers will tell you that this is precisely the opposite of what they do when putting money at risk in casinos. When you are ahead, that is the time to push your bets because you are 'playing with the house's money.' Conversely, when you are behind, that is the time to consider reducing your risky exposure in order to 'cut your losses.'

While casinos do not present quite the same environment as financial markets, hopefully you can see the implications that loss aversion brings to investing. How we manage winning and losing investment positions is likely to be influenced by a bias toward trying to turn losing positions around at the expense of gains.

Being aware of the negative effects that loss aversion presents is a good first step toward managing this bias in our decision-making processes.

Reference

Kahneman, D. & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47: 263-291.