thoughts on guns

I get annoyed by the US gun control debate for a few reasons:

1. No one cares until there is a mass shooting

Mass shootings are incredibly rare.  This honest piece counts 150 mass shooting since 1966 killing a total of 1,077 people. There are around 15,000 total murders in the US annually (mostly using guns), so in >50 years mass shootings have accounted for fewer deaths than normal murdering does in a month. By talking about gun control only right after mass shootings gun control advocates come off as shameless opportunists and also manage to accomplish nothing since by the next election everyone has forgotten about the issue.

2. The core conservative argument is terrible  

At some point in every gun control debate cycle conservatives have to actually make an argument as to why they think guns are very important. Guns, they say, are the main defense against tyranny. “The 2nd Amendment makes the Other 9 Possible”  is a typical way of stating the argument. Supposedly, the wise founding fathers knew that without a well armed citizenry, the evil federal government would simply enslave the entire population. Hitler, conservatives will eagerly point out, was kinda sorta a gun control advocate.  The problem with this argument is simply that if the federal government wanted to enslave us and got the military to go along then it could do so easily. Conservatives with their AR-15s are not going to be able to stand up to a helicopter gun ship, let alone a nuclear bomb. Our defense against tyranny is that the military has no interest in enslaving us. If politicians told the pentagon to subdue the US population by force, they would say no. Our deep cultural norms cultivated over centuries protect us, not our personal armories. The world when the US was founded was very different. Then, an armed populace made some sense. We had no standing military and militaries just weren’t that big or powerful back then. It was a poor world, and militaries take a ton of resources to maintain. Total world GDP in 1800 was basically on par with current US military spending! The main threat back then was not the theoretical tyranny of the US government. It was actual hostile foreign powers, like the native american nations, or the British, who burned our capital city to the ground not much later.

3. Gun control advocates advocate nonsense

After the Las Vegas massacre they advocated banning “bump stocks” which are devices to make semi-automatic rifles act more like fully automatic rifles. The were used in Las Vegas but usually mass shooters do fine with semi-auto guns. So banning them will have little if any effect on future mass shootings (let alone future murder in general).  Since the latest mass shooting the focus has turned to re-banning “assault weapons.” Those were banned from 1994-2004 but once the ban lapsed no one much cared to reinstate it. Assault weapons are basically a cosmetic category. They don’t include the majority of semi-automatic rifles or pistols that are all about equally capable of killing lots of people in short amounts of time.

So we are in this situation where one side doesn’t want to do anything based on dumb principles, and the other just wants to do something so at best they compromise and do something completely pointless. That’s how we end up with ethanol mandates!

On an optimistic note there is this proposal to require gun owners to carry liability insurance. If implemented properly I do think this could solve a lot of problems. For non-criminals who are responsible with their guns, the liability cost would probably be minuscule. The angry young men that tend to commit crimes with guns would be completely uninsurable risks. Private insurance companies could do a much better job of discriminating against the people we want to discriminate against than the law ever could.

Trying to Justify Morality Part 1

Morality in general always seems insufficiently motivated to me. People talk about what is right and wrong all the time but usually ground it in intuition or common sense. But we know that in other domains common sense or intuition will often lead us astray so can we do better?

One problem with discussions of morality is that the alternative is often a straw man. People act as if an amoral person would be a sociopath, acting in a way that would quickly and predictably lead to their own harm. But then the dictates of actual moral codes that people advocate tend to go way beyond the minimum that people need to live in society. So let’s try to determine how a rational amoral person would act, and then see if such a person would get anything out of adding in a moral code.

Let’s imagine an amoral person named Joe. He is a male human. Just like any other animal, he has basic needs and desires that he wants to attend to. When he’s hungry he wants to eat. When he’s thirsty he wants to drink. When he has fecal urgency he wants to poop and when he’s horny he wants to have some sex.  Overall, he basically knows what gives him pleasure and what causes him pain and he’s just trying to maximize the former and minimize the latter as much as he can for the rest  of his life. What other people are up to isn’t really his concern except when it intersects or interferes with his own goals. Since he is a rational human he tries his best to foresee what will help him achieve get what he wants and avoid what he doesn’t.

Joe is confident that going to prison will be unpleasant so he obeys all the major laws. He doesn’t steal or kill or rape, even if maybe he has the urge to do these things sometimes he knows that the risk outweighs the reward.

Joe can see that having more money allows him to get more of what he wants than having less money so he gets the best paying/least annoying job he can and puts effort into it until he feels like he is reaching diminishing returns.  He also makes sure to save some of his money since he can foresee that having too little when he needs it would be a bad idea.

Since he wants to continue to feel good rather than bad and do things that he enjoys for as long as possible, Joe make sure to eat relatively healthy and exercise regularly. He doesn’t overindulge at any one time even though that feels good in the moment because he knows that it won’t feel good over the longer run. When some people tell him that eating meat is immoral or that the animals he consumes suffered in their lives he wonders why they care. Its not like they can experience the suffering of those animals, especially if they choose not to think about it.

As a human, Joe knows he is a social animal. Being alone all the time doesn’t feel good. He likes to talk to people. He likes to laugh and have discussions about movies and whatever people like to do. So he puts some effort into meeting people and being friendly. He knows that if he is too selfish with others then they won’t want to be around him and then he will feel lonely. When he has sex he puts some effort into providing pleasure to his partner so that she will want to do it again.

If one of the people that Joe knows tries to tell him how much he should care about distant strangers who are suffering for some reason or other he doesn’t feel anything about it, but he doesn’t go out of his way to appear “heartless” to that person.

For all appearances Joe is a normal, conscientious and friendly person. He doesn’t cause anyone harm. It could reasonably be supposed that if everyone was more like Joe then the world might even be a better place.

To me this is the strongest vision of what an amoral person is like. An amoral person could also be irrational or impulsive or dangerous but they don’t have to be. So, then the question is what is Joe missing? Is there anything more to life than Joe currently has and would the addition of some sort of moral code make Joe better off or worse off?  And if morality would make Joe better off, what kind of morality would it be?

I think I may have an inkling of some answers to these questions but the purpose of this post is just to set up how difficult the question really is. If you have an idea please leave it in the comments otherwise stay tuned for part 2.

Let’s Start Watching the Watchers

In my business there are laws that everything I do electronically must be recorded. Every order that gets placed into the market has to tagged with a responsible individual’s name. Every chat and email needs to be stored for years or else there are legal consequences. If these protocols are not followed its called “failure to supervise” and the management of my firm can be fined huge amounts. The only possible consequence of breaking these rules is some people might lose some money.  The FBI is responsible for people’s lives. But apparently they are just like “If you see something, say something and then maybe we’ll do something if we get around to it. Fuck you!”

I bet we never hear a word about any consequences for anyone who received this tip or should have been responsible for forwarding it on or acting on it. Just like we never heard anything about consequences for the error the Air Force made that allowed the Sutherland Springs, TX shooter to buy a gun.

Why do we allow the government to hold itself to such a lower standard than it demands of us. That is the #swamp. That is what needs to change. Its our government. We can make it do better.

Let’s Be Cops

Yesterday there was a bad mass shooting in Florida. There is evidence that law enforcement knew about the shooter well ahead of time but didn’t pursue it. As usual, there are calls for gun control but the evidence shows they are futile. Perhaps its time for a new idea on the subject of preventing violence in our society?

Here’s a question: What should the government do, in general? What is its proper function? Lots of people have different answers to that question but at the intersection of those answers tends to be that they it should maintain public order. Keep the peace. Prevent violence in our society! If you read “Better Angels of Our Nature” that is one of the big takeaways. The better the government is at preventing violence the better a society tends to function.

Given the fundamental importance of preventing violence why does the US spend so little on law enforcement? Overall we spend around $100 billion/year on law enforcement and there are a little under 1 million police officers in the US. Law enforcement consumes about  0.5% of GDP while government as a whole spends something like 36% of GDP. We spend about 7 times as much on our military than on police even though foreign enemies kill virtually no Americans (aside from soldiers we put in foreign war zones) and criminals kill about 15,000 Americans every year. There are over 22 million people employed by government at all levels in the US. So less than 5% are law enforcement.

I also read this yesterday. Men are not doing very well, relatively, in the labor market. Police officer is a highly respected, middle class and male dominated field. If we increase the demand for police, the supply is there to meet it.

Lets aim high. Lets imagine that we could get from less than 1 million police officers to say 5 million police officers. That would still only consume about 2.5% of GDP. Still well under what we spend on the military let alone on the civilian parts of the government. We could probably save that much just by increasing government efficiency. We could save way more than that if we got our healthcare spending down to levels comparable to other developed nations. The money is definitely there if we want to find it. Imagine what 5 million police officers could do. There are <100,000 public schools in the US. So, it would be trivial to have police at every school whenever children are there. Most crime happens at night anyway, so they shouldn’t be too busy during school hours. Having police at every school would have to decrease the likelihood and severity of school shootings. Every major public area could have an abundant number of police. Every crime ridden area could be absolutely blanketed with police. The costs of growing up around crime, afraid for your safety are profound.  Removing that stress from all those children would be well worth the cost in terms of greater long term productivity, lower long term crime and government dependency.

Most criminals are basically sane and rational. If you increase the chance that they will get caught by dramatically decreasing the distance to the nearest cop then they will commit less crimes. If crime visibly works less well then fewer people will decide to pursue it.  The idea is not to round up all the bad guys, it’s to convince them to stop being bad. This would also have the effect of helping with the problem of mass incarceration over the long run. The less the police have control over an area  the more criminality there is going to be and the more it will have to be punished. If criminals simply lay down their arms knowing that continuing makes no sense, then they don’t need to be arrested.





The Root Of Knowledge

Imagine you are faced with some kind of system that is too complex to be understood reductively and that you have some sort of goal you want to achieve. All you can do is try to interact with the system via some set of strategies, see which ones seem to kinda work and which ones don’t at all, then discard the ones that don’t and tweak the ones that do to make them work better.

If you are nature then your strategies are living organisms and the process is called natural selection.

If your goal is knowledge then your strategies are called hypotheses and this is called the scientific method or bayesian inference or induction. They are all the same thing.

If you are an economy then the strategies are called businesses and the process is the “invisible hand” of the market pushing resources towards more efficient businesses with better products. The result is innovation and growth.

This process happens in our brain. Neural connections that are used are strengthened while those that are not are broken.

A normal person trying to just get something done will probably call this process trial and error. It is the source of all knowledge and all progress. How efficiently and effectively you use it as an individual will determine your success in life. How efficiently and effectively your society uses it will determine its wealth and success. The goal of all social policy should be to promote this process and anything which interferes should be stripped away.

The Parable of the Altruist God

Once there was a minor god. She didn’t have all the powers of God but she had a few tricks up her sleeve and one day she was given a planet to look after. It was a beautiful little world teeming with life. Since she was but a young god she was given a planet of plants to start. From a distance the world was an Eden but as the god looked closer she was dismayed with what she found. When she looked close she did not see a paradise, she saw a war.  She saw tall trees fanning out large leaves to take all the sunlight while small bushes, ferns and grasses withered and suffered below trying to find small pockets of light for nourishment. Every day while some plants flourished and grew others were dying of starvation or thirst. The suffering of the young was greatest. The vast majority of baby plants died before they reached maturity.

Seeing all this suffering and inequality, the god knew she must act. She did not have the ability to make nutrients out of nothing, but she was able to reallocate. She said to herself, “Those that have much should give to those who have less. Surely that will be more just and would increase total utility.”  So the god put a spell on the planet such that every living thing that had an excess of nutrients would have some of them magically transferred to those that were the most in need. Then she sat back to watch her little planet thrive and flourish.

Immediately the young saplings that were dying in the shade started to perk up and grow. The great trees gathered the sunlight but it was now distributed to all. Without excess energy they could grow no further but that was just a wasteful competition. Now so many more plants could live.

All the plants continued to age and die as was their nature. The god could not prevent that and even if she could, it was important to make room for the new on her little world. Since no trees could gather enough excess energy to reach great heights the tall forests of the planet were gradually replaced by a vast grassland. This was good, the god thought, since millions of little blades of grass could live in the sun that was once hogged by one great tree.

As millennia passed and the plants lived their lives the blades of grass that dominated the world grew thinner and thinner. For each little blade the work of growing their one leaf to capture as much sunlight as possible did not make much sense. If they could not support themselves then other blades with wider leaves would support them. They could spend their energy making more seeds since their offspring would also be aided by whatever grass still generated more energy than it absolutely needed to survive. Finally, grasses started to evolve that produced no leaves at all. Relying on the now ancient spell to provide them with enough nutrients to survive they simply put all their energy into growing more seeds.

While the total number of lives on the planet continued to increase the total energy captured from the sun declined.

When the end came it was swift. Suddenly, there was simply not enough energy left to support the lives of most of the plants. The spell worked furiously to transfer what energy that was available to those who were closest to starvation but it was only able to extend their starvation by mere seconds. The few remaining plants that could feed from the sun had to starve to support the multitudes that could not. In one final gasp the planet died as the last calorie was consumed faster than the next could be produced.

The little demon looked at her dead planet and said “There, now all is just. All is equal” and moved on.

Eulogy for XIV

This week we lost a truly special financial product. XIV was an Exchange Traded Fund (technically ETN but who cares) that sought to provide a daily return equal to the inverse of the daily return in the vix index. The vix index is an index constructed from the implied volatility of SPX options. So, basically vix is a measure of how volatile traders expect the stock market to be, or alternatively how nervous people are about stocks.  When volatility or expectations of volatility of general nervousness went down then XIV went up and vice versa. That seems pretty boring until you consider the unique features of volatility as a trade-able instrument.

I. Behavior Of Volatility

Unlike a stock or commodity that can go up forever or down to $0, volatility spends most of the time being low and occasionally and temporarily spikes.  Over the long run we see that vix tends to hang out around 12 or so. Sometimes it can be higher for an extended period of time, like during the 2008-2009 financial crisis, its floor seemed to be elevated to more like 20. Sometimes it spends a few years never getting much above 10. When there are big market moves or events, it can spike up into the 30s, 40s or even I think 90 at the peak of the financial crisis. But every time it goes up it crashes right back down again in a short period of time. Now, naively you might think that if it never gets much below 10 and occasionally goes way higher then the smart and obvious strategy is just to buy it when it’s low and then wait and sell when it spikes. After all, if you buy for 10 and a year later its 10, you haven’t lost anything right? Actually that’s wrong and that is part of the magic of XIV.

II. Volatility Term Structure

XIV and other volatility-linked ETFs relied on vix futures listed on the CBOE to get the exposure they wanted. Vix futures have the feature that they expire on a monthly basis so if you want to constantly stay short or long vix you have to frequently roll from the future that is expiring to the next future. XIV would move a fraction of its position from the closest to expiration future to the next future every day. So right now if it was still operating it would be moving a few% of its portfolio from the February future to the March future. When February ended it would start moving the March futures to April etc. By moving I just mean it would need to buy some of the February futures that it was short and sell the same number of them in the March contract. The very interesting thing about the vix futures is that when volatility is low the further out contracts are always priced higher than the closest to expiration contract. Why would this be? Well, it has to do with the difference between median and mean. Median is the value that a variable spends half its time above and half its time below. Since volatility is low most of the time, the median value of the vix is pretty close to its lowest values. The mean is just the average of the values that the variable takes on over time, so the mean value of the vix is higher than the median because sometimes you get those big spikes. The longer a future has before it expires the more likely it is to be worth the mean (in a stationary process like the vix). So when volatility is below the mean (which it is most of the time) the further dated futures will be higher than the closer dated ones. When vol spikes up then you see just the opposite. The long dated futures don’t diverge too much from the long term mean but the short dated ones really rip higher to reflect the short-term spike.

III. The XIV Strategy

So when XIV constantly rolled its exposure from the front month to 2nd month future, it would constantly be buying at a lower price than where it sold. The difference between the months was substantial. In 2017 typically the front month was around 10 and the 2nd month was around 11. So each month as long as volatility and the term structure remained constant XIV would earn about a 10% return just from rolling its position. Over the course of the year XIV earned almost 150%. And for any extended period when volatility stayed low it could earn these amazing returns. Overall from 2012 until the day before it blew up it earned nearly 1000%, vastly outpacing the stock market. So you could buy it and hold it and have a great ride but you had to be aware that the ride was going to end with it crashing into a brick wall at some point. Volatility always spikes eventually and eventually it would have a big enough spike to wipe out all its capital. The long term probability of that occurring was 100%. So, what do you do with a product like that? Its not really that difficult. Suppose that you  put $5,000 into XIV a few years ago, and then whenever your XIV position reached $10,000 you sold off half of it. Over the course of the last 5 years or so you could have sold half your position at least 3 times. So, even though your original $5,000 investment is gone now, you would still have the $15,000 in cash. That still beats most other investments including the stock market over that period.

IV.  The Real Magic of XIV

Now you might say, sure XIV is gone now but there are still vix futures and there is still VXX which is an ETF that positively tracks the vix. You could sell futures or sell VXX. That’s true but its just not as good. Suppose that you are short vix futures on Friday afternoon and they are trading for 10. On Sunday Kim Jong Un’s iphone crashes while he is about the answer the 15th question right on HQTrivia so he decides to Nuke San Francisco.  You can imagine any horrible event you wish. On Monday morning the stock market is down 30% or whatever and vix is up to 100. Now you have not just lost the notional value of your future on Friday, you have lost 9 times that much!  If you don’t have enough capital to cover your losses you could be forced to get out of other positions. If you had 10% of your money in XIV you could go to bed knowing that no matter how much volatility spiked that was all you could lose. If you had 10% of your money short VXX or vix futures you could potentially lose most or all of your net worth.  That is what made XIV a truly magical product.

V. So Who Would Have Ended Up Paying? 

XIV had about $2 Billion of exposure when it blew up. Considering the scenario where vix closed at 10 on Friday and opened at 100 on Monday it would have lost $18 Billion. The holders of the ETFs would be out their $2 Billion but who would absorb the rest of the loss? Someone would have to! I’m not 100% sure of the answer, but it seems like it would either have to be the exchange that offers the vix futures or the financial institution which managed XIV, or some combination of the 2. In any case, those companies were making tiny amounts of money in exchange for shouldering that enormous risk. While an XIV holder could make 10%/month in a low volatility environment, the management company (Credit Suisse) was making something like 0.5%/year! The CBOE was only making the transaction fees on the futures trades which are something like 0.01% of the value of each future. Because of this potential for explosive harm, its amazing that this product ever existed. And now that its gone and Credit Suisse will probably spend most of the money it ever made from it defending lawsuits from people who owned it. So, I’m sad to say that I don’t expect it to come back any time soon.