I’ve had many dinner conversations about Apple products recently. I have to say that I’ve never been inspired by them. I readily buy them for friends and family, but not for myself.

I do this out of a sense that being in touch with how computation tools are used is crucial to my long-term happiness, and with respect to that the products which Apple makes are just too perfect. They dull the mind to the realities of computation, and promote a large separation between creator and consumer.

For a toolmaker, Apple products don’t leave you hungry or foolish enough to keep digging for truths. For most people this is not a problem, but then again, most people might see their jobs replaced by computer programs in the coming decades.

http://www.youtube.com/watch?v=eCMmmEEyOO0&t=45s

The explanation given in the video is that ‘the bottom of the slinky doesn’t know someone has let go of the top end’. This is no coincidence – longitudinal waves in a spring under tension will always have a lower speed of sound than a wavefront accelerating at that tension. Now to do the math…

The traditional argument against middlemen: in an ideal world, first seller A would trade with final buyer B, and they split the resulting benefits between themselves. However, in the real world, A trades with C, and C trades with B. Since this trade would have been possible without C, some judge the share of the benefit which C has gotten to be undeserved.

The traditional justification for middlemen: without C, the transaction would have been possible but would in fact have not happened. Walmart, playing the part of C, helps the college student in Boston trade with the sock manufacturer in Datang, China. A used-LP shop, playing the part of C, helps you to find that first-edition copy of A Hard Day’s Night without having to search through dozens of garage sales. In both these cases, C helps A and B trade more, and in doing so amplifies the benefits of trade.

In the case of financial securities, the first seller is the borrower who owns the future cash flows of (and controlling rights to) companies, and wishes to exchange it for cash now as he either wants to consume now or has better rates of return potentially available to him. The final buyer is the saver who has cash now and wishes to exchange it for cash later (at some rate of return). Here, the traditional benefit brought by middlemen would be to figure out the price at which they could shuttle stock in between the originators and the final buyers, maximizing that beneficial trade.

This is not a good description of reality, because the origination of stock doesn’t peak with some optimal price, with higher and lower prices both inducing less trading between savers and originators. This is because final buyers don’t seem to evaluate stocks in relation to their earnings — they evaluate stocks in relation to price trends. What happens in reality is that as stocks become pricier, both first seller and final buyer activity goes up.

This is what windyanabasis calls the boom-bust capital game. People form future expectations of stock returns based on both dividend yield and capital gains, and the capital gains part of this dynamic is a type of Ponzi scheme which ultimately falls apart – when everyone who wanted the stock has bought, the capital gains stop and stock holders sell as they realize that the dividend yield is not enough for them to justify them holding the asset.

Speculators and middlemen serve to increase trading volume in most situations. In normal supply-demand scenarios, this increased volume of trade brings benefits.

In the case of manias and bubbles induced by price action, however, it isn’t clear what the overall effect of increased trading or acceleration of the boom-bust cycle means.

The intellectually motivated is a conversationalist par excellence – he manages to intertwine lines of thought between different minds, having one person pick up a thread where another stopped, with both initiator and receiver fully accepting those thoughts as their own. Those conversations are long and thematic, and continue for months and years, taking on lives of their own.

This is a good life.

1. Investment — one invests to transport cash today into the future, matching a positive cash flow today with a negative cash flow tomorrow
2. Borrowing — one borrows to do the opposite of investment, matching a negative cash flow today with a positive cash flow tomorrow
3. Asset exchange — one exchanges items of lower subjective value for items of higher subjective value
4. Hedging — one hedges to buy insurance, paying a premium to obtain greater certainty in outcomes
5. Risk dilution — one transfers idiosyncratic risk / uncertainty to many different participants, allowing diversification to reduce the net impact of uncertainty on human happiness
6. Gambling — one gambles for entertainment, receiving amusement from the uncertainty of outcomes
7. Speculation — one speculates to profit from predicting future prices
8. Dealing — one deals to profit from matching buyers to sellers

Important dichotomies to be precise about:

• Trade balance: Import vs. Export
  • Having a trade deficit does NOT mean you are incurring debt.
• Financing: Equity vs. Debt
  • Debt is NOT necessarily tied to consumption or investment, it is tied to leverage. Debt financing brings cash flow obligations capable of triggering defaults. With equity financing, there is no obligation, just an allocation of returns.
• Production: Consumption vs. Investment
  • This is NOT pegged related to imports or exports, but rather to the decision to benefit now or benefit later. Investment is delayed consumption.

Hugh Hendry @ 55:00: “I don’t know if there is a confucius saying [now] but I certainly know that in the future there will be a confucius saying ‘the wise man not invest in overcapacity’ – the flaw of the Asian business model is that at the center of it is a craving for power as opposed to profit. We have spent centuries dictating their affairs – they want to dictate our affairs. They achieve that through current account surplus – they get to tell us what to do, but that is brought about by the subjugation of profit, the socialization of bank lending. In calling upon history and its portents, I am concerned because there are two previous episodes which cast a shadow over today – there are periods in time which we describe as economic disequilibrium, when a country becomes a creditor to the world and continued to run consistent trade surpluses – that is not meant to happen, trees are not meant to grow to the sky, there are meant to be countervailing forces, mainly the currency rises – that happened in America after the first world war, it became a creditor nation, Europe was bankrupt and America lent the money, and America was the economic powerhouse, the engine, and America liked it, and there was a fixed exchange rate called the gold standard. What happened was that the gold standard was pro-cyclical, and it created liquidity which went into assets and what happened was that first became last – economics is an unkind profession. It took 50 years, but then it happened again – Japan became a creditor nation – Japan ran and continues to run a series of trade surpluses but what happened? The liquidity went into the Nikkei, and Japan has gone from being number one to pretty much last over the last two decades. So I see the Chinese model, and I see its creditor status, and I see the reality of these persistent trade surpluses which are nothing but mechanisms which create credit that goes into asset prices – I fear the consequences, China could go from being first to last – consider that when you look at your portfolios”

In the article, Kevin claims that

Anything anyone can do to make it more costly to produce anything, to increase the amount of money you have to pay to receive a given good or service, or in general to increase the cost of living our daily lives, will show up as an increase in the GDP.

An increase in voluntary non-coerced transactions leads to an increase in both the GDP and the standard of living; the situation depicted above is different because it applies to an increase in coerced spending.

1) This raises a more general question around whether government spending to increase GDP can be considered an increase in coercion. After all, any increase in government spending has to be made up by an increase in taxation, which is redistribution of income under coercion.

2) Consider the case of the mother who starts working and hires a nanny. The amount she makes from work must exceed the amount paid to the nanny, enough to compensate her for unhappiness (let’s say $X) from now being able to spend less time with her children. In this case, the GDP goes up by the amount of the two wages (nanny + working mother) combined, but the actual increase in net benefit is actually the difference in the wages minus some amount X corresponding to the unhappiness.

Edit: case (2) is wrong. I will figure out a way to fix it later.

• As an immediate loss of $50, followed by the same APY
• As a fall in the APY from 10% to 5%

Given the choice between donating $50 and investing to get half the prevailing rate of return on $100 instead, I feel like many people are more willing to do the latter — hence social entrepreneurship.

Although the two options may look identical NPV-wise, in actuality investing $100 and getting half the prevailing rate of return is more flexible, as it allows someone to recall the money in the future if they feel like they need it. This flexibility implies that the social entrepreneurship initiative has to have liquidity management capabilities…

Good average return can cause investors to tolerate high variances in return. High variances in return do not guarantee a good average return.