Author Archives: theusernamewhichismine

Don’t put all your money into bonds

In fact, don’t put all your money into any single investment. I’m not anti-bonds, I’m pro-diversification.

As the Fed has continued to hike interest rates, I’ve been encountering a lot of chatter about buying bonds, and while I agree with some of it I’ve also seen talk saying that anyone with money in stocks is a moron and that everyone should sell everything they own and put it all into long-term government bonds. The benefits of government bonds are clear: they are a risk-free way to protect and sometimes grow your money. A bond is just a loan to the government and the government (whether the Federal government of America or the AA+ rated governments of Europe and the rest of the world) is not going to go bankrupt. Governments like Germany, America, and Japan will always pay their debts so purchasing a government bond is guaranteed to return your money to you at the end of the day. But just because they don’t have risk doesn’t mean they don’t have cost.

Everything in economics has an opportunity cost and this applies especially to bonds. There’s no guarantee that the investment you made was the best way you could have invested your money, even if you made a bit of money through it in the long run. Let me explain some of the opportunity costs you are facing when you buy bonds.

If you buy bonds today, you lock in a fixed interest rate for the length of the bond (let’s ignore I-bonds for now). That means you will receive a fixed amount of money for the length of the bond, plus you will be given back the initial amount you paid at the bond’s maturity. So if you buy a 10,000$ bond, and hold it to maturity, you will have made 10,000$ + 4% interest, it sounds like a great deal. But what other opportunities did you have with your money? Well in December the Fed will have another meeting, and it’s possible that they will once again raise interest rates. If that happens, you could buy a bond with around 4.75% interest instead of around 4%, so one of the opportunity costs you have is that if you just waited another month you could have bought a higher yield 10,000$ bond and made more money.

That’s not the only opportunity cost though, what if you suddenly have to make a big purchase? You could sell that 10,000$ 4% bond you purchased, it’s still worth somewhere close to 10,000$ if you bought it recently, but if you sell it after the Fed has raised interest rates you will find the price you can get for it is much lower than what you may have expected. That’s because your bond is paying a lower interest rate than what people can get buying new bonds, why spend 10,000$ to buy a 4% bond when you can spend 10,000$ to buy a 4.75% bond. So if you buy a lot of bonds then have to sell them after an interest rate hike, you’ll have lost out compared to if you had bought after the interest rate hike or if you had not bought at all.

Another scenario is that the Fed doesn’t hike interest rates but the markets recover. Say the inflation report comes out and shows inflation slowing substantially, in that case the Fed would have less reason to raise rates and the markets would have more reason to rally as people expect better times ahead. You’ve still got your 4% bond but markets on average rise 7% each year, so in an average year the stock market can be expected to give greater returns than buying a bond. In this case you haven’t lost any money but you’ve incurred an opportunity cost by buying bonds instead of stocks, you could have had greater returns buying stocks.

I’m not saying don’t buy bonds, bonds can be a good way to mitigate risk and ensure consistent returns. But I am seeing some people act like current trends will last forever, that the market will stay down forever and thus bonds are the only way to get any kind of return. I’m just saying that every action has an opportunity cost, and while buying bonds are low risk they are still a bet that interest rates won’t go much higher and the market won’t gain too much. Otherwise, you might have been better off putting your money elsewhere.

Every episode of Raw from 1999 is the same

I’m still on-again-off-again watching WWE Raw from 1999, here are my musing on it.

Every episode is the same and it’s killing me. Austin or the Rock shows up at the start with some promo/brawl, midcard stuff happens in the middle, a shot of Austin before each commercial break to let people know “DON’T TOUCH THAT DIAL” but then he doesn’t come out until the very end and he doesn’t always even do anything. Throw in a little of Big Show and Undertaker to the mix and sprinkle with HHH and DX to taste. It’s not great. This was supposed to be the time when Raw was absolutely destroying Nitro in the rating, well either Nitro was just unwatchable (I’ll find out eventually) or Raw was coasting off of 1998 because this just isn’t captivating.

Where’s the creativity with Austin? With Foley? They’re great in creative segments but it feels like there’s none to be had. Austin and Foley showing up in Vince’s hospital room, that was to me absolute PEAK Attitude Era from the comedy to the drama to the catharsis of Vince chasing away the only man who could save him before getting a beating from Austin. Raw episodes from 1999 just aren’t creative in the slightest.

There is an element of this setup that I understand. Austin is THE star, he’s the absolute peak of the WWE, so they want to use him to draw in the viewers and keep them tuned in. That means constantly teasing him throughout the show but not actually showing him until the very end. Every single commercial in some of these episodes will be immediately preceded by a shot of Austin to trick the viewers into thinking he’ll be on for the next segment, but as someone watching these episodes without ads in 2022, this just gets tiring.

Even some of the catch-phrasing is boring this year. Between Royal Rumble and Wrestlemania of 1999 there was a stretch where no one updated their catch phrases, it was the exact same promo every week from people like Rock and Road Dogg. And to be fair it was great catch phrases and the audience would chant along, but that gets old eventually and at least after Wrestlemania they kind of started adding new bits again. Austin is a breath of fresh air because he never got completely fossilized, he would always give his Austin 3:16, he’d always talk about kicking a sombitch’s ass, but he didn’t just rattle off catch phrases and call it a day.

So yeah, what happened in 1999? Why did the program feel like it was in a holding pattern for most of the year? The big stars coming in and even the big story changes just aren’t as entertaining as anything that happened in 1998, and I’m not entirely sure why. I hope 2000 is better.

People are always fighting the last war

We live in a time of high inflation and rock bottom unemployment, but I remember less than a decade ago reading the prognosticators of economics talk about how low inflation and high unemployment (or underemployment) were the inevitable future of our economy. It was said with as much certainty as could be mustered that the Financial Crisis had fundamentally changed the nature of our economic reality, no more could we expect governments to bail us out (they all had too much debt), instead we were going to keep suffering for a long while for the profligate lending of the banks. Of course that wasn’t true, and neither is it true that inflation and low employment are a certainty for the rest of time.

What’s crazy to me is that both predictions were made with the same data. Our population is aging, globalization inevitably moves certain jobs overseas and forces American workers and companies to compete with those in foreign nations. Our government has high debt, real wage growth is anemic or negative, and the job of fixing all this has landed solely on the head of the Federal Reserve since the rest of the government can’t or won’t do so. This describes 2012 as much as 2022, and yet this evidence is used just as confidently by the takemongers of 2012 who predicted an eternal low-growth as the takemongers of 2022 predicting eternal inflation. It reminds me of all the sci-fi books and movies from the 70s and 80s predicting a far future of the 21st or 22nd century in which the Soviet Union still existed, people routinely project their current reality onto the future without any further thought. If pressed they’ll then use any evidence at all to defend their predictions, even if the same evidence could be used for an entirely different conclusion.

The 2010s were a period of low growth, low inflation, and high unemployment/underemployment. The 2020s have so far been a period of higher growth, high inflation, and very low unemployment. Both decades have challenges, and many of the challenges are the same. But I see no reason to believe that the trends of today will last forever.

How do bonds work

Seriously. I don’t get it. People are telling me “buy bonds, the market will explode” but when I went onto my brokerage I couldn’t understand a damn thing about what I was looking at. If anyone understands bonds, feel free to tell me what I should be doing.

Note: this post was made almost entirely in jest, I understand how bonds work but was miffed at how poor the front-end for buying them was at my brokerage. I’ll have a better post on bonds up later.

The best way to learn something is to just use it

Short post today, but as I’ve tried to teach things to people I’ve found the best way for them to learn is to just use the knowledge. We work with amino acids in our lab (the 20 building blocks of all proteins), and many new lab members have come up to me asking how I know so much about amino acids and how they can learn. What class did I take, what class should they take, is there a book I studied? The honest question is I learned by doing. When I studied the amino acids I was told to learn their shapes by drawing a protein which would spell out my name, but since half the letters in my name don’t have a corresponding amino acid I dropped that idea pretty quickly. For the rest of the semester I vaguely knew just enough to do well on the test but couldn’t exactly list the amino acids off with any fluency. Once I began working in a biochemistry lab though, it all fell into place. Suddenly, having to remember every day that Lysine and Arginine are positively charged helped me remember their structures, and eventually I could remember the side chains of most amino acids with little difficulty. This never would have happened if I had only studied them in a class, I had to learn by using.

Liquid-liquid phase separation

I don’t have a deep topic to write about today because I’m busy at work, but I thought I’d write on a subject that I’ve been studying myself, partly in order to make sure I understand it.

Phase separation is a common and easily understood way that matter segregates: when water boils the gaseous vapor and the liquid water are separated from each other due to differences in their density. A liquid-liquid phase separation is the same thing, only it’s two liquids separating and not two different states of matter. One example of this is oil and water, as everyone knows oil and water will separate from each other when placed in a glass. This is in part due to their preference to aggregate with each other, water is hydrophilic and so interacts strongly with water and not well with hydrophobic things, while oil is hydrophobic and interacts strongly with itself and not well with hydrophilic things. What’s less understood is how liquid-liquid phase separation is also important in cell biology.

If you remember what a cell looks like from a high school textbook, you can probably remember that it has things like a nucleus, a mitochondria (the powerhouse of the cell!), and some weirder things like an endoplasmic reticulum. These are all examples of membrane-bound organelles. Just like our organs all perform special duties within the body, so too do organelles perform special duties in the cell. The membranes that surround these organelles spatially separate their inside contents from the outside cell, and so allow them to more efficiently perform their functions. But there are also specialized parts of a cell that do not have a surrounding membrane. The nucleolus in particular is a specialized area of the nucleus that has its own special functions, but it is not separated from the nucleus by any membrane whatsoever. So how does the nucleolus prevent all its contents from diffusing into the nucleus and ruining whatever process it is performing? It does so through a liquid-liquid phase separation.

It’s a bit too technical to explain here, but just as oil and water have chemical properties that separate them in a glass, so too does the nucleolus have chemical properties that separate it from the wider nucleus. And it turns out that a large number of cellular functional areas segregate from the cell through liquid-liquid phase separations, all segregated not by a membrane-defined boundary, but by the physical properties of the medium in which their reside. These phase separations allow many different areas of the cell to undergo their own specialized functions without needing to constantly make and remove cell membranes around them, and thus allow for more efficient activity inside the cell.

So that’s an overview of liquid-liquid phase separation, I’m still learning it myself so I hope I got everything correct. But if I miswrote anything, cell biologists out their feel free to correct me.

Are passive ETFs creating market inefficiencies?

Yesterday I wrote about how the YOLO memesters might be creating market inefficiencies, today I thought I’d look at the other side of the coin with the more mature, more upscale passive ETFs.

For those who don’t know, a passive ETF is just a pile of money that you can buy into like a stock. When you hold a stock of $VTI for example, you own a tiny percentage of that big pile of money. The money in turn isn’t just a bunch of cash, it’s invested into the stock market according to the ETF’s prospectus, from which the ETF is not allowed to deviate from by law. $VTI’s prospectus says for example that it will seek to track the performance of the whole US stock market by investing in a representative sample of companies in that market. In this way, $VTI isn’t making a decision on the worth or value of any individual stock, it is merely buying every stock and assuming the market will do the hard work. Since the value of the total US stock market grows at an average rate of between 5% and 10% every year (with some down years like 2022), this means that $VTI is expected to grow at that pace as well and an investor in $VTI can make 5% to 10% returns without any of the stress or hassle of picking their own stocks. The only things $VTI asks for in return is a tiny amount of money in the form of it’s expense ratio, just 3¢ for every 100$ of investor’s money is taken for expenses, which seems to be a reasonable deal for everyone involved.

$VTI and other ETFs like it are easy, low-risk investment vehicles, so it’s no wonder they have exploded in popularity. Not only that, but studies have demonstrated that passively managed ETFs almost always outperform their actively managed peers. But is this “$VTI and chill” mindset of investors creating market inefficiencies of its own? Remember that passive ETFs invest in the whole market, regardless of if an underlying stock is any good or not. Not all ETFs are as broad as $VTI of course, some seek to track a certain market segment or a certain type of stock, but all passive ETFs share a commitment to obeying their prospectus and investing in valid companies without precondition. This means that they cannot participate in price discovery which is seen by some as the primary purpose of markets, including stock markets. If company A is growing, profitable, and well run, then it should be rewarded with having a higher value than it’s competitor, company B which is shrinking, unprofitable, and poorly run. We would expect that the stock market would perform price discovery on these two companies, investors would buy stock in the A and sell the stock in company B, raising and lowering their stock prices in turn. This then rewards company A for its success, and lets it use its high stock price as a tool to further expand the company, hopefully rewarding investors in the process and creating a virtuous cycle of success breeding success.

But passive ETFs don’t participate in price discovery, they don’t sell bad companies and buy good ones. Passive ETFs buy a representative sample of companies according to their prospectus, and they keep their expense ratios as low as possible in part by not doing the kind of deep dive on their investments that you would expect from an active investor. If company A and B are both worth 5% of the total stock in a passive ETF’s market, then it will hold 5% of its total value in both A and B. And if every investor in the market was a passive ETF, then there would be no way for the price of A and B to move relative to each other, because there would be no sell pressure on one relative to the other. Indeed some have claimed that the rise of passive ETFs is making the market less efficient, and tipping the scales towards large companies that will get bought up by the most popular ETFs simply because they are large and thus make up such a large portion of the market. If this is the case, then the erudite bogleheads are doing as much damage as the memesters.

Are stocks-as-memes creating market inefficiencies?

Stocks have long been the investment vehicle of choice for people with small amounts of excess cash.  Bonds are confusing, bank interest doesn’t pay much, and property requires high amounts of cash that most people don’t have.  But stocks are easy to understand, potentially give jackpots, and require such a small amount of upfront investment that almost anyone can afford them.  In ages past stocks were still usually bought through a specialized broker, and while the shoe shine boys in New York giving out stock tips may have been seen as a signal of a price crash, most people not living in major cities didn’t have access to a broker who could help them buy.  The brokers were therefore a barrier to entry that prohibited a lot of people from owning stocks who otherwise might have.  These days buying a stock can be as easy as installing the app, so quite literally anyone can own one at the push of a button.  This has democratized the market, but may have led to some unexpected consequences.

It seems that these days, stocks have become more than an investment opportunity.  Some stocks can be a badge of honor, a feeling of belonging, or a source of self-actualization.  You may invest in nuclear power because you want to help fight climate change, you may invest in Manchester United because you love the club, you may invest in GameStop because you believe you’re destroying the short sellers and want to be part of something greater.  None of these feelings have anything to do with the stock’s financial value.  They aren’t a dividend, they aren’t growth, they are a feeling you have when you own the stock and those feelings are often irrational.  In some ways these feelings call into question our understanding of stocks and investors generally.  

Now let’s be clear, there has always been emotions in the stock market.  Some people have always bought a company simply because they “liked” it with no better reason why, and “panics” can be just that: mindless rushes to cash out based on fear without thought.  But when a stock’s price is almost entirely based on feeling rather than actual value, to some extend it forces us to re-evaluate the market as a whole.  Last year, GameStop’s stock rose exponentially for no good reason whatsoever, and while some have considered it nothing more than a bubble, the price remains irrationally elevated even today.  There is no way a stock with no growth, no earnings, and no path to profit should be trading so high, and yet it is. If you took a company that was identical to GameStop in every way, but called it something different, it would  have but a small fraction of GameStop’s market cap.  That’s because GameStop isn’t just a company, GameStop truly is a meme. It seems insane, but there truly is a group of people for whom ownership of GME stock is bringing them no financial value whatsoever, but who continue to hold it out of emotional value.  You wouldn’t think such a group would be big enough to move the market, but last year showed them to be plenty large, and I believe there are still enough of them hanging around, holding the stock, and even buying more to ensure continued upward pressure on the stock’s price. 

If a market is anything, it is a mechanism of price discovery. The stock market should be a mechanism to discover the correct price of companies, and our research assumes that this in turn allows profitable and growing companies to prosper while unprofitable and shrinking companies fail. We know market actors can be irrational, but the average of all market actors, the “wisdom of the crowds” so to speak should have some logical underpinning if the market is to find the correct price of these companies. Stocks becoming a form of self-expression more than an investment vehicle could introduce inefficiencies to this market, and I’ll still trying to come to grips with what the consequences could be. We might imagine a future in which board members will seek out a CEO based not on the value they can add to the company but by whether or not they, like Ryan Cohen, have a ready-made base of support among the memesters. But I don’t have the economic or statistical background to understand how much this would change things, maybe CEO’s have always been picked for dumb reasons. What do you think?

Gas is expensive, isn’t that a good thing?

So this post will be a little political, but laying all my cards on the table: global warming is happening and does need to be fixed. Decarbonization and renewables is a laudable goal that our country and world should be working towards. With that said, why are the environmental champions bemoaning the consequences of their own actions? For a long time, Democrats have been reminding us that raising the price of gas is the quickest way to make people use less of it. And this is absolutely true, as price goes up, demand goes down. In addition to direct carbon taxes, Democrats were proud to campaign on reducing domestic fracking and the production of oil and pipelines for the entirety of the Trump presidency. But now it feels like an “oh no, the consequences of my own actions” moment as the price of gas rises and Democratic administrations struggle to lower the price at the pump. The Strategic Oil Reserve has been emptying in order to reduce prices, many Democratic controlled states have suspended their gas taxes, some states are directly compensating drivers. All these things subsidize the price of gas and therefore increase it’s usage. Which is absolutely contrary to every effort and piece of climate messaging we’ve seen for the past 5 years at least.

I just feel like this should have been obvious, if domestic oil production goes down, then the price of gas will go up. We should have known that people wouldn’t like the price of gas going up, and someone should have thought about “how do we mitigate the harm to consumers if the price of gas goes up?” But instead that question was ignored, and now since the price of gas has gone up due to things outside the Democrats’ control (OPEC, Russia), the only response is to desperately try to bring the cost back down again. It makes a nonsense of all the efforts that came before it. There are ways to mitigate the harm to consumers brought about by the price of gas, but it should have been obvious that this would be the result of pro-climate policies.

Halloween feels bigger than Thanksgiving now

Yard decorations, parties, whole store aisles dedicated to it, I don’t think we’ll have quite so much of that for Thanksgiving this year as we’ve had for Halloween. Halloween has always been a bit of an American tradition, but it feels like it’s exploded in popularity during my adulthood to the point that Halloween parties have now been added to the list of corporate/academic events that serious employees will attend to have a bit of drink and fun and goof off with their bosses and coworkers. What used to be a party mostly for children and collegiates has come into its adulthood and is now a part of the American rolladex of holidays.

I’m not at all sure where this began or when, but I’m wondering if it’s somewhat inevitable for all holidays to expand if the culture allows them. People like goofing off, and having more excuses to do so by turning Halloween into a “season” instead of just a single night of kids asking for candy is something that people will enjoy. I only wonder if Thanksgiving will follow this trend and we’ll have an entire party season from September through January in some distant future.