Category Archives: Reading List – Books

The Nibelungenlied – Anonymous (trans. A. T. Hatto)

404 pages, Penguin, 1969

Book Blurb

‘No warrior will ever do a darker deed’

Written by an unknown author in the twelfth century, this powerful story of murder and revenge reaches back to the earliest epochs of German antiquity, transforming centuries-old versions of the tale into a poetic masterpiece. Siegfried, a great prince of the Netherlands, wins the hand of the beautiful princess Kriemhild of Burgundy, by aiding her brother Gunther in his struggle to possess a powerful Icelandic Queen. But the two women quarrel, and Siegfried is ultimately destroyed by those he trusts most. Comparable in scope to the Iliad, this skilfully crafted work is one of the greatest of epic poems–the principal version of the heroic legends used by Richard Wagner in The Ring.

Author Blurb

The ‘Last Poet’ (the one who put together the earlier lays into the current epic) is anonymous, so little to say here. There is a short chapter “The Status of the Poet” which speculates on who this ‘Last Poet’ was. The conclusion is that:

The safest guess is, then, that the strange genius who wrote the Nibelungenlied was a semi-clerical poet by profession, technically of the order of vagi or wayfarers, though probably sedentary for most of his life.

There you have it!

The Nibelungenlied

With words like ‘fillet’, ‘wimple’, and ‘bohort’, the Nibelungenlied is a vocabulary enhancing extravaganza. Excellent for Scrabble players out there everywhere! By the way, a fillet is a band worn by unmarried women around the head, a wimple is a cloth headdress worn by married women (still worn by nuns today), and a bohort is a jousting tournament with dulled lances.

In the Nibelungenlied, castles resound with the thunderous and joyous sounds of clashing lances and shields. The men busy themselves in feasts. The women busy themselves in making fancy, gem studded clothing. Men and women are also somewhat sequestered from one another, so they look forward to special occasions when they can intermingle (e.g. when dignitaries come into town) and do the things that men and women do.

In addition to feasting, the men can often be found planning expeditions to neighbouring kingdoms. When planning an expedition, their primary concern appears to be to arrive well-dressed. To be GQ ready, they enlist the women to manufacture gem and ruby studded clothing. Clothing seems to be very important in this era. When Kriemhild bribes the messengers, for example, she offers them, of all things, splendid clothes:

‘Now do exactly as I ask’, she said to the two messengers, ‘Tell them my message at home and you will earn a great reward. If you do this, I shall make you very rich and give you splendid clothes.

And then when they do go on expeditions, there’s always some noble margrave (a sort of count) who can take in a thousand men on no notice:

‘But this is out of the question’ replied Dancwart. ‘Where would you find all the food, bread, and wine which you would need tonight for so many warriors?’

‘No more of that if you please!’ answered Rüdiger when he heard it. ‘My dear lords, do not refuse me. I could feed you for a fortnight together with all your following, since King Etzel has never laid me under any contribution.

What Was Twelfth Century Life Actually Like?

There’s a homeless shelter called ‘Our Place’. From the sound of the sirens and the look of the folks outside, it’s anything but ‘Our Place’. There’s a senior centre called ‘We Care’. From the news reports of all the senior abuse, it’s crossed my mind that ‘We Care’ really means ‘We don’t care’. There’s a law firm called ‘Integrity Law’. Why would they call themselves ‘Integrity Law’ unless they wanted to draw attention away from dealings that lack integrity? There’s company called ‘Coast Environmental’. Sounds nice, no?–the combination of ‘coast’ and ‘environmental’ conjures up images of dolphins and porpoises. Of course they deal with sewage.

How does these examples help us reconstruct twelfth century life? Like ‘Our Place’, a lot of the descriptions in the Nibelungenlied appear to be wishful thinking. The gifts of gold and precious stones that hosts would heap into shields and dispense to guests is a sign that gold and precious stones were lacking. That kings never tax vassals is a sign that vassals were weighed down by the burden of heavy contributions. That knights would wear and ruin their best clothes in bohorts is not a sign of prodigious consumption but that clothes were in short supply. That margraves would stock excess food in their strongholds–enough to feed wandering armies for weeks–is not a sign of well-stocked pantries, but rather a sign that malnutrition and starvation were endemic.

The twelfth century must have been a chaotic era rife with uncertainty and change for the worse. The one redeeming feature is the fantasyland of the Nibelungenlied where food and drink are plentiful, kings do not need to tax retainers, rich veins yield up gold and silver to all comers, and clothing is so readily available that you wear your best shirt when you enter the jousting tournament.

The Nibelungenlied as Tragedy

Since this is a German epic, it seems fitting that the one truly tragic episode goes together with Hegel’s German interpretation of tragedy like bread and butter. The one truly tragic episode?–that would be that of the Margrave Rüdiger, lord of Pöchlarn. When King Etzel sent him to woo Kriemhild, Rüdiger swears an oath to Kriemhild that he would “make amends to her for any wrong that should befall her.” This is Rüdiger’s first mistake, as a powerful knight, Hagen, had wronged Kriemhild by killing her husband Siegfried when Siegfried knelt down by the river to drink. His second mistake occurs years later, when, after Kriemhild and Etzel have married, he escorts the Burgundians into Hungary. Although she herself is a Burgundian, the Burgundians have done Kriemhild a great harm, because their greatest knight Hagen sunk the spear into Siegfried’s heart and their weak king, Gunther, allowed it to happen. When Rüdiger escorts the Burgundians into Hungary, he guarantees them safe passage as their host. This is his second mistake, as when Kriemhild revenges the murder of Siegfried, she will call upon the hapless Rüdiger to slay his Burgundian guests.

No, what did Hegel say about tragedy? Hegel defined tragedy as a collision of moral forces, both of which are grounded in the just and right. And that is exactly what happens with Rüdiger when he realizes he cannot fulfil both his oath to Kriemhild and his obligations to the Burgundians as their host:

[Kriemhild speaking] ‘What have we done to deserve that you should add to my sufferings and the King’s?’ she asked with tears in her eyes. ‘Now you have told us all along, noble Rüdiger that you would hazard your position and your life for us, and I have heard many warriors acclaim you as far and away the best. And so, illustrious knight, I remind you of the aid you swore to bear me when you urged me to marry Etzel, saying you would serve me till one or the other of us died.–Poor woman, I was never in such need of that aid as now’.

‘There is no denying it, noble lady, that I swore to risk my life and position for you: but that I would lose my soul I never swore!–Remember it was I who brough those highborn kings [i.e. the Burgundians] to the festival here’.

‘Think, Rüdiger, of your great debt of loyalty and constancy’, she said, ‘and of the oaths, too, by which you swore you would always avenge my wrongs and any harm that befell me’.

‘I have never refused you anything’, answered the Margrave. And now mighty Etzel began to entreat him, and both he and his queen knelt before their liegeman. The noble Margrave stood there in despair. ‘Alas’, cried that most faithful knight from the depths of his anguish, ‘that I have lived to know this, Godforsaken man that I am! I must sacrifice all the esteem, the integrity, and breeding that by the grace of God were mine! Ah, God in Heaven, that death does not avert this from me! Whichever course I leave in order to follow the other, I shall have acted basely and infamously–and if I refrain from both, they will all upbraid me! May He that summoned me to life afford me counsel!’

This is textbook Hegelian tragedy: damned if you do, damned if you don’t. And, as a German critic, Hegel would have been well-acquainted with the Nibelungenlied, the German epic. Is it a wonder then, that the national character of the Germans, with their fascination of oaths at cross-purposes, would have led to a Hegel’s formulation of tragedy?

And is a wonder then, that, having grown up with works that emphasize risk and the unexpected such as Sartre’s The Wall, Tevis’ The Hustler, and Jessup’s The Cincinnati Kid, I would come up with a particularly American formulation of tragedy as a gambling act? But then again, I am Canadian. Who would have thought that it would take a Canadian to come up with an American interpretation of theatre? The unexpected is truly all around us!

Until next time, I’m Edwin Wong, and I’m doing Melpomene’s work.

The Later Roman Empire – Ammianus (trans. Walter Hamilton)

506 pages, Penguin, 1986

Book Blurb

Ammianus Marcellinus was the last great Roman historian, and his writings rank alongside those of Livy and Tacitus. The Later Roman Empire chronicles a period of twenty-five years during Ammianus’ lifetime, covering the reigns of Constantius, Julian, Jovian, Valentinian and Valens, and providing eyewitness accounts of significant military events including the Battle of Strasbourg and the Goths’ Revolt. Portraying a time of rapid and dramatic change, Ammianus describes an Empire exhausted by excessive taxation, corruption, the financial ruin of the middle classes and the progressive decline in the morale of the army. In this magisterial depiction of the closing decades of the Roman Empire, we can see the seeds of the events that were to lead to the fall of the city, just twenty years after Ammianus’ death. This selection includes the major parts of the surviving books of the history. Walter Hamilton’s fine translation captures the stylish vigour of the original, while Andrew Wallace-Hadrill’s introduction describes the life and works of Ammianus and places the history in the context of its times.

Author Blurb

Ammianus Marcellinus was the last great Roman historian. He was not a professional man of letters but an army officer of Greek origin born at Antioch and contemporary with the events described in what remains of his work. He set himself the task of continuing the histories of Tacitus from AD 96 down to his own day. The first thirteen of his thirty-one books are lost: the remainder describe a period of only twenty-five years (AD 354-378) and the reigns of the emperors Constantius, Julian, Jovian, Valentinian and Valens, for which he is a prime authority. He was a pagan and an admirer of the apostate Julian, to whose career about half the surviving books are devoted. But his treatment of Christianity is free from prejudice and his imparitality and good judgement have been generally recognized. His style is sometimes bizarre, but in all the essential qualities of an historian he deserves the praise accorded to him by Gibbon and is well able to stand comparison with Livy and Tacitus.

Review of Ammianus’ The Later Roman Empire (AD 354-378)

While reading The Later Roman Empire, I feel an affinity with the Roman legions in Tacitus who have wandered far from Italian soil and too far into Germany. The fog is everywhere, the marshlands extends forever, the sun no longer shines. They have reached the edge of the known world. While Tacitus’ legions have wandered too far in space, I feel, while reading Ammianus, that I have wandered too far in time. This is no longer the Roman Empire of old. This is something else. Not quite the Middle Ages, not quite classical antiquity.

In Ammianus’ time, the world is a smaller space. The Roman Empire is sick. This is not Livy’s Rome, which was expanding. Nor is it Tacitus’ Rome, which was consolidating it’s powers. This is an old Rome, sick unto death. In Livy and Tacitus, temporary setbacks due to lavishness, foreign influences, and profligacy (the usual suspects) could be overcome by a return to the mos maiorum, “the way of our ancestors.” No longer in the Late Empire. The corruption is now systemic. Even Valentinian’s attempts at reform are due to cruelty and a desire to see others suffer than the good old mos maiorum doctrine.

In Ammianus’ time, the Empire is split between east and west. The emperor, or the “Augustus” watches over one half, while the prince, or the “Caesar” watches over the other. The barbarians constantly push against the boundaries and the army is constantly pushing back. The Augustus and the Caesar are on a neverending campaign. They themselves ride into battle in a magisterial if perhaps misguided show of noblesse oblige. Perhaps, like the Empire, they are tired of being alive.

In Ammianus’ history, Rome is far away. What is going on in Rome? Are the senators coming up with new policies? Do the masses have enough grain? Who knows. Compared with the hostile frontier, Rome is an insignificant speck. Germans, Gauls, and Persians are the focus of attention. Guys names “Gundomadus” and “Dagalaifus” run around in Ammianus’ history. We are no longer in Kansas, Dorothy.

Despite the book blurb, in style and substance, Ammianus cannot compare with Tacitus and Livy. Part of this may be due to the loss of the all-important prologue, which is, for me, the most interesting part of the text. In the prologue, the historian justifies the writing of his history. He talks of his predecessors’ failings and how he is filling in a gap. He talks up the period of history he concentrates on and why he, and only he, can capture accurately the story of that time. Ammianus’ style isn’t as weird as the introduction makes it out to be (e.g. I didn’t notice instances of what Gibbon refers to as Ammianus’ disorder, perplexity of narrative, false ornaments, and turgid metaphors). All in all, a fascinating look at how the Roman world had changed. If we take the Hannibalic War (218 BC) as the “coming of age” of Rome, and the period covered by Ammianus as Rome’s twilight (AD 378), it looks like, for some reason, Rome maintained her position as the primary Mediterranean world power for close to 600 years. What an amazing achievement. They ask: “Why did Rome fall?” But perhaps the real question is: “Why did Rome dominate for so long?”

Until next time, I’m Edwin Wong, and I’m doing Melpomene’s work.

A Short History of Financial Euphoria – Galbraith

113 pages, Penguin, 1993

Book Blurb

How is it that, with all the financial know-how and experience of the wizards on Wall Street and elsewhere, the market still goes boom and bust? How come people are so willing to get caught up in the mania of speculation when history tells us that a collapse is almost sure to follow?

In A Short History of Financial Euphoria, renowned economist John Kenneth Galbraith reviews, with insight and wit, the common features of the great speculative episodes of the last three centuries–the seventeenth-century craze in Western Europe for investing in an unusual commodity: the tulip; Britain’s South Sea Bubble and the eighteenth century’s fascination with the joint-stock company, now called the corporation; and, more recently, the discovery of leverage in the form of junk bonds. Along the way, Galbraith explains the newfangled types of debt that different generations have dreamt up, and he entertains with anecdotes about the ingenuity with which some of the more notorious charlatans have convinced people to invest in financial ciphers.

Galtraith calls this book “a hymn of caution” for good reason. He wars that the time will come when the public hails yet another financial wizard. In that case, the reader will do well to remember the Galbraithian adage: “Financial genius is before the fall.” The appearance of the next John  Law, Robert Campeau, or Michael Milken may well be, after all, a harbinger of disaster.

Author Blurb

john Kenneth Galbraith is the Paul M. Warburg Professor of Economics Emeritus at Harvard University and was the U.S. ambassador to India during the Kennedy administration. His works The Great Crash 1929, The Affluent Society, The New Industrial State, and Economics and the Public Purpose are landmarks of political and economic analysis.

Quotes from A Short History of Financial Euphoria

Foreword to the 1993 Edition

“Recurrent speculative insanity and the associated financial deprivation and larger devastation are, I am persuaded, inherent in the system.” “In London, tourists going down the Thames to the Tower will extend their journey to encompass the Canary Wharf development, perhaps the most awesome recent example of speculative dementia.” Perhaps in 1992 when Olympia & York went bust. But fast forward nineteen years to 2015 and it’s a different story: Canary Wharf was sold to Brookfield for 2.6 billion pounds. “They think it will be an estimated twenty-six years in Boston, forty-six years in New York and fifty-six years in San Antonio [for real estate to recover from the excesses of the late eighties].” Unbeknownst to Galbraith, who was writing in 1993, the market would recover remarkably quickly, in about twelve years. Then the speculative excess would begin again in the events that would lead up to the Great Recession of 2008.

Chapter 1: The Speculative Episode

“Speculation buys up, in a very practical way, the intelligence of those involved.” “The price of the object of speculation goes up. Securities, land, objets d’art, and other property, when bought today are worth more tomorrow. This increase and the prospect attract new buyers; the new buyers assure a further increase. Yet more are attracted; yet more buy; the increase continues. The speculation building on itself provides its own momentum.

Chapter 2: The Common Denominators

“The rule will often be here reiterated: financial genius is before the fall.” Although Galbraith was writing before the collapse of Long-Term Capital Management in 1998, his words are prescient. Two of the founders of LTMC, Myron Scholes and Robert Merton, would collect their Nobel Prize in economics several months before the fund lost close to five billion dollars. The real loss was an order of magnitude larger, since, assured by their genius of success, they had leveraged their assets, borrowing over 124 billion dollars to jack-up their returns. The Fed eventually had to intervene to stabilize the cascading disaster. “The final and common feature of the speculative episode is what happens after the inevitable crash. There will be scrutiny of the previously much-praised financial instruments and practices–paper money; implausible securities issues; insider trading; market rigging; more recently, program and index trading–that have facilitated and financed the speculation. There will be talk of regulation and reform. What will not be discussed is the speculation itself or the aberrant optimism that lay behind it.”

Chapter 3: The Classic Cases, I: The Tulipomania; John Law and the Banque Royale

First great speculative episode begins with first modern stock market in seventeenth century Netherlands: the Tulipomania. Tulipomania started in 1630 and crashed in 1637. First great speculative episode where we know names happens with John Law in France. In 1716 he establishes the Banque Royale, which issued notes to pay government expenses: Louis XIV had recently died, leaving the treasury bankrupt. The Banque Royale notes would be backed by the Mississippi Company, which would mine the unproven gold reserves in Louisiana. Instead of mining gold, income from the notes went to refinance the bankrupt treasury. The end came in 1720, when the Prince de Conti, annoyed by the ability to buy stock, decided to turn in his notes for gold. When the notes proved to be inconvertible, a run on the stock took place. Term “millionaire” originated with the Banque Royale bubble. In the aftermath of the bubble, “those who had lost their minds as well as their money and made the speculation spared themselves all censure.” The blame fell squarely on John Law and the Banque Royale rather than the spirit of speculation.

Chapter 4: The Classic Cases, II: The Bubble

Robert Harley, Earl of Oxford and John Blunt found the South Sea Company, a new-fangled “joint-stock company” in 1711. Like France in 1716, pressing government debt spurred financial innovation. The South Sea Company took over government debt from the War of Spanish Succession. In return, the government paid the company 6% interest and gave it the right to conduct British trade in the Americas. In 1720, the stock shot up from 128 to 1000 pounds. The success of the South Sea Company led to a rash of joint-stock companies being founded. Like with others bubbles, leverage amplified the losses and deepened the oncoming recession. Nice quote from Charles Mackay book:

In the autumn of 1720, public meetings were held in every considerable town of the empire, at which petitions were adopted, praying the vengeance of the legislature upon the South-Sea directors, who, by their fraudulent practices, had brought the nation to the brink of ruin. Nobody seemed to imagine that the nation itself was as culpable as the South-Sea company–the degrading lust of gain…or the infatuation which had made the multitude run their heads with such frantic eagerness into the net held out for them by scheming projectors. These things were never mentioned.

Chapter 5: The American Tradition

In Maryland and Southern colonies, notes against security of tobacco served as currency for two centuries in seventeenth and eighteenth centuries. A failed expedition in 1690 to take the fortress of Quebec led to Sir William Phipps issuing paper notes backed on gold. State banks begin issuing notes following the War of 1812 and the Second Bank of the United States was chartered in 1816 (the First Bank lost its charter in 1810 due to its refusal to issue easy money) to oversee the boom. In 1819, however, a collapse in housing prices ended the boom. 1837 witnessed the next American crash, which was, again, rooted in land speculation. This bust, did, however, leave behind a useful canal network. Insufficient reserves were a culprit: one New England bank had $500,000 in notes outstanding and a specie reserve of $86.48 in hand.

Chapter 6: 1929

1920s were a decade of excess, beginning with the Florida real estate boon which saw the rise and fall of Charles Ponzi in 1926. New York stock exchange prices started rising in 1924 before finally collapsing in 1929. Leverage was again a culprit, as speculators could chase stocks on 10 percent margin. Again, in the 1929 crash “nothing was said or done or, in fact, could be done about the decisive factor–the tendency to speculation itself.”

Chapter 7: October Redux

Financial memory of bubbles lasts twenty years. After that time, a new generation enters the scene, enamoured of its own innovative genius. After 1929, the next major bubble would surface in the 60s under the name of Investors Overseas Services, founded by Bernard Cornfeld. His pitch was: “Do you sincerely want to be rich?” The son of FDR, Sir Eric Syndham White (the secretary-general of GATT), and Dr. Erich Mende (vice-chancellor of the German Federal Republic) were all swindled. Leverage came back in the 80s in the form of leveraged buyouts, corporate takeovers, and junk bonds. The SEC report of the 1987 crash “found innocent those individuals, speculative funds, pension funds, and other institutions that had so unwisely, in naiveté and high expectation, repaired to the casino.

Chapter 8: Reprise

Individuals and institutions are captured by the wondrous satisfaction from accruing wealth. The associated illusion of insight is protected, in turn, by the oft-noted public impression that intelligence, one’s own and that of others, marches in close step with the possession of money. Out of that belief, thus instilled, then comes action–the bidding up of values, whether in land, securities, or, as recently, art. The upward movement confirms the commitment to personal and group wisdom. And so on to the moment of mass disillusion and the crash. This last, it will now be sufficiently evident, never comes gently. It is always accompanied by a desperate and largely unsuccessful effort to get out.

So, what can be done?

Yet beyond a better perception of the speculative tendency and process itself, there probably is not a great deal that can be done. Regulation outlawing financial incredulity or mass euphoria is not a practical possibility. If applied generally to such human condition, the result would be an impressive, perhaps oppressive, and certainly ineffective body of law.

The Review…

I like his style. Short sentences. Concise. He has thought the issues through for a long, long time. They are worked out in his head. At just over a hundred pages, this book reads fast and can be finished in one sitting. Galbraith writes with a dry sense of humour. It is almost as if he finds it amusing that the cycle of boom and bust will repeat again and again. In the first edition, he hopes that readers of his book will be inured against the cycle of boom and bust. Three years later in the 1993 edition, he is no longer so sure: he had overestimated the power of the rational mind to overcome the allure of wealth. All that glitters is gold.

This is an uncommonly common sense book. With all the soul-searching on the events leading up to the Great Recession, Galbraith’s A Short History of Financial Euphoria has something to say. He would say that: 1) rising house values were based on real factors, 2) once people got wind of how money can be made of flipping houses, the speculation began, 3) as the mania increased, speculators resorted to using more and more leverage, 4) when housing prices fell, as they do from time to time, there was a mad rush to get out, which led to a bust, 5) the blame for the bust falls on the speculators as much as it does on the banks or capitalism, 6) there was nothing that the regulators could have done, and 7) it will happen again, and soon.

What Galbraith doesn’t say is equally as interesting. While he says that busts can depress countries for years, he doesn’t say for how long. For example, take the Great Depression. The commonly cited doom and gloom statistic is that it took the Dow twenty-five years to return to 387, the high point in October 1929. There are many stock charts that illustrate this calamity. But factor in dividends (the stock chart doesn’t include dividends, which amounted to about 14% of the return) and deflation (even though prices were down, the purchasing power of each dollar went up because goods and services cost less), it took the Dow–drum-roll here–four and a half years to recover.

What Galbraith doesn’t say is that, during a bust, the best thing to do may be to do nothing. If you do do something, do not sell. Buy. With some patience, busts may be godsends. Keep some powder dry. Another example of a bust Galbraith gives is Canary Wharf. While Paul Reichman, the developer, did go bust in 1992, the Canary Wharf development recovered to become the main financial centre of UK and one of the main financial hubs of the world. His vision, if not his use of leverage, was vindicated. It’s the same with the Great Recession of 2008 or the Dot-Com bust of 2000: do nothing and investments will recover. While Galbraith’s book focusses on the human tendency to speculate and bust, that negative tendency is counterbalanced by the human capacity to work through crises to emerge stronger. It would be interesting to see how investors would have fared in each of the busts he discusses if they had simply held on and done nothing.

The other thing that Galbraith doesn’t talk about is why people pursue speculative excess. He does say that it is motivated by want of gain. And he does write about the notable incidents since the 1600s when speculators were wrong: Tulip Mania, the Banque Royale, the South Sea Company, and so on. But what if the speculators were not as misguided as he believe?–sometimes speculators win! Since the beginning of the bull market on March 9, 2009, Royal Caribbean Cruises is up 1911%, Apple is up 1715%, Alaska Air is up 1818%, and there are many others. To me, the true question to ask is whether speculation can be, in many instances, justified. If, on every occasion, rapid price escalation ends in a wailing and a gnashing of teeth, the answer is no. But that appears not to be the case. Many instances prove otherwise.

All in all, an excellent book in need of an indexer.

Until next time, I’m Edwin Wong and I’m doing Melpomene’s work.

Deflation: What Happens When Prices Fall – Farrell

228 pages, Collins, 2004

Book Blurb

Deflation is one o the most feared terms in economics. It immediately conjures visions of abandoned farms and idle factories, and streams of unemployed workers standing in breadlines.

In this important new book Chris Farrell explains that deflation need not presage a collapse. In the process he provides new ways of looking at our economic and financial futures. More than an introduction to the subject, Farrell points out that deflation has always been a fundamental aspect of the business cycle.

As they did in 19th century America, deflation and fast economic growth can coexist. However, the impact on business, consumers, investors, policymakers–and you–is the subject of this incisive volume.

Author Blurb

Chris Farrell, contributing economics editor at BusinessWeek, is an award-winning journalist who started writing about the New Economy in the early 1990s. Chris is also economics editor for Sound Money, a one-hour nationally syndicated weekly personal finance call-in show produced by Minnesota Public Radio. He is chief economics correspondent for American RadioWorks, a regular commentator for Nightly Business Report, Marketplace, MSNBC, and CNNfn, as well as author of Right on the Money!: Taking Control of Your Personal Finances.

Deflation: What Happens When Prices Fall Review

Chapter 1

Parallels between the 1920s (automobiles, radios, electric power, appliances) and the 1990s (internet, new economy). Will the bubble pop? Is a Great Recession around the corner? Greenspan is worried. The Fed is worried. Deflation in 2002 affects 13.1% of all countries, quite a rise from 1.2% in 1996. Japan, which functions like a canary in a coal mine, has been, since 1989, the deflation nation. Run to the hills!

Chapter 2

Globalization and the internet encourage deflation by allowing third world countries access to join the global labour pool. Discount retailers such as Wal-Mart and Target wring out cost inefficiencies out of the retail supply chain promote deflation. In the 90s, General Electric CEO Jack Welch structured GE to handle the impending threat of deflation. From 1776 to 1965, price index level in US essentially flat.

Chapter 3

There is no empirical link between deflation and depression: deflation gets a bad rep from one occurrence. Unfortunately, that occurrence was the Great Depression. Prices stable in nineteenth century thanks to gold standard. Monetarism or the quantity theory of money developed by David Hume holds that changes in the quantity of money drive inflation and deflation. 0.8% deflation each year in Britain from 1875-1896. Even more in US: from 1870-1900 prices fell 1.5% annually. But these deflations were accompanied by rapid economic expansion and higher living standards. For example, wages in Britain went up 33% from 1875-1900 and 84% from 1850-1900. China and Japan’s recent deflation (the book came out in 2004) from 1998-2002 was also benign and accompanied by economic growth.

Chapter 4

Three pervasive and structural factor make deflation likely: 1) globalization (worldwide competition in previously insular markets, international trade goes up for 13% in 1970 to 33% in 2002), 2) rise of the information age increases productivity as industry learns how to use computers and the internet, and 3) rise of central bankers who target inflation. By targeting inflation at low levels (e.g. 2%), deflation is always around the corner. The gold standard is replaced by credibility in central banks. BRIC countries, at 6% of the G6 economies (2002), can exceed G6 in less than 40 years.

Chapter 5

Economic growth comes from neither spending nor saving, but innovation says Schumpeter and his disciples. Late nineteenth century politics dominated by monetary policy. Populists wanted inflation, debt relief, and bimetal standard. Free silver moment had high point in 1896 with William Jennings Bryan’s “Cross of Gold” speech: “You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold.” Wizard of Oz is allegory of 1890s monetary policy: cowardly lion is Bryan, cyclone is depression-era foreclosures, wizard is President McKinley. Oz is ounce, the measure of gold and silver. Central bankers fear deflation because it redistributes income from debtors to creditors. Easier for Fed to control inflation (by raising rates) than to control deflation (can’t force nominal benchmark interest rate below 0%–but this conventional wisdom has changed since the writing of the book with negative interest rates in European countries and quantitative easing in the US).

Chapter 6

Money is a standard of exchange and a measure of value. “Credit” from Latin term credere “to believe.” Great moments in financial history: Bank of England established in late seventeenth century, preference shares and debentures aided capital flow for railway building in eighteenth century, investors could access home mortgages in the 1970s through securitization. “Substantial inflation is always and everywhere a monetary phenomenon,” says Friedman. CPI fails to capture improvements in quality. CPI struggles to incorporate new technologies. CPI fails to capture how homeowners are not buying the same basket of goods. If orange juice goes up in price, homeowners may buy apple juice instead. As a result, CPI may overstate inflation by 0.5 to 1.5% (is this an investable idea?–e.g. buy TIPS or real return bonds, which are based on an overstated CPI figure). Federal Reserve Board created in 1913 to address the 1907 credit crunch. J.P. Morgan had ended the credit crunch privately, people wanted the government to take this role.

Chapter 7

The great and often passionate interest that is evoked by practical questions relating to money and its value, can only be explained by the fact that the monetary system of a people reflects all that a people wants, all that it suffers, all that it is; as well as by the fact that a people’s monetary system is an important influence on its economy and on the fate of society in general. – Joseph Schumpeter

US economy fell by a third from 1929-1933. Real rate of interest during Great Depression (fall in CPI + nominal interest rate) reached 15% in 1931 and 1932. What caused Great Depression?–Keynes blames collapse in business confidence, Friedman and Schwartz blame the Fed, Termin blames fall in consumer spending, Schumpeter argues economy plagued by underconsumption, Bernanke credit contraction, Kindleberger fall in commodity prices, and Galbraith the bursting of the stock market bubble. Depression works good by wiping away speculative excess says Schumpeter, Hayek, Robbins, Mellon, and others of the liquidationist perspective. In 1931, 47 countries on gold standard, by 1936 gold standard was abandoned.

Chapter 8

More than half WWII soldiers coming back from war saw another depression. Instead they came back to a roaring boom. 1982 unemployment at 10% and inflation at 14% at 1980. 1970s inflation due to lack of credibility at Fed under Burns and Miller. But who could see inflation coming?–from 1800 to 1970 inflation averaged 0.4%. At Bretton Woods, gold fixed at $35 an ounce (interesting, if we input $35 into a US inflation calculator, $35 in 1944 would be worth $501 in 2018. An ounce of gold today goes for $1281. Gold has done well under a fiat currency). Government spending to GDP 8% in 1913, 21% in 1950 and 31% in 1973 (today, in 2018 it has breached 37%, government is getting bigger in relation to the rest of the economy). Paul Volcker takes a 2×4 to inflation!

Chapter 9

In 1956 the typical American works 16 weeks for each 100 sq/ft of house; in 2002 it is now 14 weeks for each 100 sq/ft of house (in Victoria in 2018, it has gotten worse: it costs about 60 weeks of work for each 100 sq/ft of house). Percentage of American who describe themselves has happy, despite rising economic indicators, has not moved in 50 years: widespread material abundance cannot overcome a sense lives lack purpose.

Chapter 10

Half of US households own stocks making deflation an important issue. Long-term Treasury bonds do well during deflation: Alfred Lee Loomis and Landon Thorne made a killing during the Great Depression by swapping stocks into T-bills. During mild inflation and deflation real returns of stocks and bonds are similar. But during pronounced deflation (>2.5%) stocks tank. In today’s deflationary environment (defined as a world in which central banks target inflation at 2% and technological innovation puts downwards pressure on prices), 3.5-4% economic growth possible. Couple this with a dividend yield of 1.6% (on the Dow), a real return of 5-6% is possible. Mathematics suggests, with bond yields at 40-year lows, little capital appreciation is possible in fixed-income, where a return between 3-4% is realistic. From 1991-1996 the stock market returned 17.9%. Traders who engaged in the highest levels of trading pocketed only 11.4%.

Chapter 11

The world needs more globalization to increase prosperity and keep a lid on inflation. Farmers make up 2% of the workforce today, compared to 20% in the 1930s, yet over last two decades they have gotten 300 billion in aid: why not, for example, outsource farming to developing nations? Reform the social security net by making health care universal. Simplify the tax code to reduce compliance costs.

Some Thoughts…

This is one of the more accessible books on deflation out there. Farrell’s view of deflation, however, is interesting. I think–but am not sure–that he’s claiming that we already experience deflation today. His argument runs something like this: we experience (mild) deflation because: 1) the Fed, to preserve credibility in the post gold standard world, aggressively targets inflation at 2%, which is almost like having deflation, 2) the CPI figure the Fed uses as a benchmark overstates inflation because consumers shop opportunistically and goods have more features, 3) globalization increases competition, driving down costs, and 4) technology wrings out cost-inefficiencies, driving down costs. With this view of deflation, Farrell dispels the commonplace notion that deflation is to be feared, a notion that we got from associating the Great Depression with deflation. Mild deflation (or inflation) contributes to global prosperity.

Is the deflation scenario investable? Farrell advocates holding a diversified portfolio of stocks and bonds, and to continue investing in human capital (learning new skills, taking courses or certificate programs). His advice doesn’t stand out from what the crowd is saying, and I found this disappointing. I had been looking for tips on how to invest during deflation. The lack of specific advice and his definition of deflation (see above paragraph) stood out to me.

How would long bonds, the classic deflation hedge, have done from 2004 (when the book came out) to 2017? Plugging the numbers into the handy online asset mixer, long bonds would have returned 4.9%. How would the TSX Composite (including dividends) have fared?–7.9%. How would the S&P 500 have fared?–8.4%. So, in hindsight, Farrell was right to have advocated a diversified portfolio of stocks instead of the long bonds, the traditional investment of choice during deflation. I do, however, call to question whether the 2000s will be remembered as a deflationary period. As always, Farrell’s book serves as a reminder that the world of finance can always surprise you. In finance, “this time is not different” until it is. Take, for example, the widespread use of quantitative easing and negative interest rates that were, in 2004, unthinkable.

What I liked about Farrell’s book is how it recounts the history of the gold standard and the rise of the Fed when the gold standard ran out of gas. The narrative of how the Fed had to rise to contain inflation caused by profligate government spending makes sense. Before, when gold was the standard, the money supply was limited by the amount of gold. If governments spent recklessly, gold would flee the country. This was a sort of check to government spending. But in today’s age of fiat currencies, governments can print money. In a world of printed money, you have to find a way of making money more scarce so that money doesn’t flee your country: the answer is the Fed, which makes money scarcer by making it more expensive by hiking rates.

Another thing I noticed: it’s hard to make predictions. Farrell predicted that the BRIC countries, which accounted for 6% of the G6 economies in 2002, could exceed the economic output of the G6 economies “in less than 40 years.” Well, as of 2017 (fifteen years later), the BRIC countries already exceed the G6 economies by 50%!

Until next time, I’m Edwin Wong, and I’m doing Melpomene’s work.

Idea Man: A Memoir by the Cofounder of Microsoft – Allen

2011, Penguin, 358 pages

Book Blurb

“The entire conversation took five minutes. When it was over, Bill and I looked at each other. It was one thing to talk about writing a language for a microprocessor and another to get the job done…. If we’d been older or known better, Bill and I might have been put off by the task in front of us. But we were young and green enough to believe that we just might pull it off.”

Paul Allen, best known as the cofounder of Microsoft, has left his mark on numerous fields, from aviation and science to rock’n’roll, professional sports, and philanthropy. His passions and curiosity have transformed the way we live. In 2007 and again in 2008, Time named him one of the hundred most influential people in the world.

It all started on a snowy day in December 1974, when he was twenty-one years old. After buying the new issue of Popular Electronics in Harvard Square, Allen ran to show it to his best friend from Seattle, Bill Gates, then a Harvard undergrad. The magazine’s cover story featured the Altair 8800, the first true personal computer; Allen know that he and Gates had the skills to code a programming language for it. When Gates agreed to collaborate on BASIC for the Altair, one of the most influential partnerships of the digital era was up and running.

While much has been written about Microsoft’s early years, Allen has never before told the story from his point of view. Nor has he previously talked about the details of his complex relationship with Gates or his behind-closed-doors perspective on how a struggling start-up became the most powerful technology company in the world. Idea Man is the candid and long-awaited memoir of an intensely private person, a tale of triumphant highs and terrifying lows.

After becoming seriously ill with Hodgkin’s lymphoma in 1982, Allen began scaling back his involvement with Microsoft. He recovered and started using his fortune–and his ideas–for a life of adventure and discovery, from the first privately funded spacecraft (SpaceShipOne) to a landmark breakthrough in neuroscience (the Allen Brain Atlas). His eclectic ventures all begin with the same simple question: What should exist? As Allen has written:

To me, that the most exciting question imaginable…. From technology to science to music to art, I’m inspired by those who’ve blurred the boundaries, who’ve looked at the possibilities, and said, “What if…?” In my own work, I’ve tried to anticipate what’s coming over the horizon, to hasten its arrival, and to apply it to people’s lives in a meaningful way…. The varied possibilities of the universe have dazzled me since I was a child, and they continue to drive my work, my investments and my philanthropy.

Idea Man is an astonishing true story of ideas made real.

Author Blurb

Paul Allen is the billionaire technologist and philanthropist who cofounded Microsoft with Bill Gates. He is the chairman of Vulcan Inc. and founder of the Allen Institute for Brain Science. He also owns the Seattle Seahawks and the Portland Trail Blazers, and is co-owner of the Seattle Sounders pro soccer team. He lives on Mercer Island, Washington.

Idea Man

A few months ago, me and JS were chatting at work about what we can learn from good role models. I mentioned Warren Buffett and Elon Musk. From Buffett, I learned of optimism. For example, when asked how I’m doing, like Buffett, I answer, “Never better.” It gets the conversation flowing in the right direction. From Musk, I learned how important it is to be a showman when promoting your ideas. Great ideas need great presentation. There was a Tesla AGM a few years back. The issue with electric cars was that they take too long to charge. Musk came up with the idea of Tesla service stations where they would swap out your battery. On the big stage, he had a mock-up of a service station. An actor drove up a Tesla for a battery swap. On the video screen, he had another actor pull up to the fastest gas pump in LA to fill up an Audi. He set it up as a competition. While the Audi was being filled up, the first battery swap was complete. Then the second Tesla rolled up…then the third…the crowd went wild. That’s showmanship!

JS then mentioned his influences. One of them was Paul Allen, who had recently passed away (October 15, 2018, aged 65). JS suggested that we read Allen’s book Idea Man and compare notes. He had been impressed by Allen’s role as one of the founding fathers of the digital revolution and his subsequent ventures into the arts and sciences. I picked up a copy at the library and started reading. By the way, the library is the best resource in the world!

What can I say about Paul Allen’s character? Much of his success can be attributed to his perseverance. He spent three years talking to Bill Gates about the personal computer concept before convincing him to create a BASIC code for the Altair 8080 (in the 70s, the personal computer wasn’t such a sure thing: the standard model was for large institutions to rent out computing power to clients). Another of Allen’s strengths was that he was a good communicator. Till his last days with Microsoft, he would wander the halls and chat with programmers to work out solutions with them.  Allen spends much of the book talking about his fascination with ideas, and this is perhaps his strongest characteristic. It is his fascination with ideas that motivated him to revolutionize how we use computers. It is his fascination with ideas that motivated him to launch the SpaceShipOne venture, one of the first private attempts at spaceflight. It is his fascination with ideas that motivated him to team up with Carl Sagan to fund SETI. It is his fascination with ideas that motivated him to launch the Allen Institute for Brain Science. Allen reminds me of Goethe’s Faust, who defines himself by continually striving. Allen is like Faust, who, up to his dying day, can be found working on monumental projects such as reclaiming land by building a series of dikes to push back the sea.

Allen had his strengths, but he also had his weaknesses. He is not as dominant a personality as his peers and colleagues, such as Bill Gates and Clyde Drexler. As a result, one feels that sometimes he could have done better in negotiations. He comes across as learned, but he does not come across as someone fascinating. Innovators such as Musk, Jobs, or Gates come across as fascinating. Allen seems more down to earth. A good way to put it is that he surrounds himself with people more fascinating than himself. I’d have a beer with Jobs or Musk. But I’m not so sure if I’d like to have a beer with Allen.

Now the book is 358 pages long, and you can say quite a bit in 358 pages. There is one peculiar and glaring omission: nothing about his love life or relationships with women. He’s close with his mom, and quite close with his sister (who also takes leadership roles in his philanthropy projects), but there’s nothing about romantic relationships. From reading the book you’d think that all his life he’s either coding or playing guitar or pursuing space travel. That’s hard to believe. Remember that even Descartes, who locked himself in an attic to come up with the irreducible human axiom upon which to base all philosophy (which turned out to be “I think, therefore I am”) managed to get his maid pregnant. Perhaps his credo could have been modified to read, “I reproduce, therefore I am”? It would have been interesting to have read about Allen’s romantic relationships, and to learn about how they affected his thinking.

The takeaway from this book? Allen teaches us to pursue our ideas. He teaches us how powerful childhood is: it is during his childhood that he developed a fascination for programming, AI, space travel, and the hidden workings of the mind. He talks about mortality in the book (two brushes with cancer), and the book reminds me of my own mortality. His breakthrough year when he started programming BASIC to run the Altair was 1974, the same year I was born. Now Allen is gone. The time to want it all and to do it all is right now. This is something we can all take away from this book.

Until next time, I’m Edwin Wong, and I’m doing Melpomene’s work.

The Cello Suites: J.S. Bach, Pablo Casals, and the Search for A Baroque Masterpiece – Siblin

2009, Anansi, 319 pages

Book Blurb

Part biography, part music history, and part literary mystery, The Cello Suites is a dramatic narrative featuring legendary composer Johann Sebastian Bach, world-renowned cellist Pablo Casals, and author Eric Siblin’s own quest to uncover the mysteries that continue to haunt this musical masterpiece.

Author Blurb

Eric Siblin is the bestselling author of The Cello Suites, which won the Quebec Writers’ Federation Mavis Gallant Nonfiction Prize and McAuslan First Book Prize; was a finalist for the Governor General’s Literary Award, the Writers’ Trust Nonfiction Prize, and the BC National Award for Canadian Nonfiction; and has so far been published in ten territories and seven languages. He live in Montreal, Quebec.

Interpreters, Interpreters, Interpreters!

Artists need interpreters. Composers especially need interpreters. Music is unlike a painting where the viewer can engage with a work directly. And music is unlike a play, where the reader, particularly a reader with a vivid imagination, can engage with the text directly. The composer “paints” or “types” the piece onto a musical score which consists of a series of dots and lines on a five bar line. The case today is that most people are musically illiterate. They cannot read music. For this reason, composers are in especial need of interpreters. Were it not for Felix Mendelssohn, Bach’s St. Matthew Passion would have languished in obscurity. Were it not for Glenn Gould, Bach’s Goldberg Variations may as well have been forgotten. A capable interpreter champions the artist to a new generation of listeners. In light of this, Pablo Casals is the star of Siblin’s book.

In The Cello Suites, Siblin recounts how a young Casals, stricken by the sound of the cello (which, having the same register as a male voice, speaks or sings with a resonant and full sound), began searching for works written for that instrument, and how at age 14, found a dusty copy of six suites for cello solo by Bach in a second-hand shop in Barcelona near the harbour. The Cello Suites were seldom played in concerts. And, for hundreds of years, they had not been performed publicly from start to finish. It was considered to be an etude, an exercise. It was not musical. Casals would change this. Before the first public performance of the six suites with all the repeats, Casals would spend over a decade perfecting his interpretation, mastering each phrase to extract from the notes the soul of the music and the soul of the dance.

Cello Suites Discography

My first recording of The Cello Suites was Janos Starker’s 1965 recording on the legendary Mercury Living Presence label. It was recorded to a 35mm movie film base which offered higher dynamic range than the standard reel-to-reel tape. The film base sounds terrific, but the process of using film base never caught on due to cost. In 1991 Wilma Fine remastered the recording to CD, which is what I purchased. Starker’s recording is an exemplary balance of technicality, rigour, and feeling. He follows the text, yet finds room to let the music speak out. Like many other Mercury Living Presence releases, this is an outstanding recording: quiet background, the full dynamic range is preserved from the pianissimos to the sforzandos.

While reading Siblin’s book, David Watkin’s 2015 recording on the Resonus label arrived at the library. For this recording, he used to period cellos with gut strings and all. It was a very well reviewed recording that won a Gramophone editor’s choice award, so I had high hopes. This is an intensely personal recording. I found the personal elements slow and syrupy. The dance elements (each suite begins with a prelude followed by a sequence of stylized dances) were missing. It would be hard to dance to this recording. There is too much of Watkin’s individuality here. This recording makes me understand why for a long time the suites were not performed in their entirety.

As I finished Siblin’s book, the 2003 Warner Classics remastering of Casals’ recording came in. Casals recorded the six suites over multiple sessions in 1936 (Abbey Road), 1938 (Paris), and 1939 (Paris). Because of the vintage, I had thought it would be a noisy recording with limited range, similar to blues recordings made during this era such as Robert Johnson’s, which were recorded in 1936-1937. Nothing could be further from the truth. You can hear the machine noise in the recordings. But it is not a distraction. The remastering team has done a superb job, and they must have been working with good quality masters. And the playing itself is gorgeous. Very muscular. Intense. Electrifying. It’s also a personal recording. But it’s a personal recording that brings out the dance elements of the music. Listening, it’s easy to see how Casals won over the world. This is music on the calibre that, even if you do not agree with his interpretation, must be listened to. And, if you agree with his interpretation–as I do–then it is absolutely mind-blowing. It’s like listening to Glenn Gould play the Goldberg Variations. Who knew the music could sound like this? Great music, to become great music, needs great interpreters.

Speaking of Interpreters…

I always like tying back the books I’m reading to the theatre project. Tragedies written in other languages are very much like musical works in that, for them to come alive, they need a capable interpreter. My favourite tragedy of them all is Aeschylus’ Seven Against Thebes. My first encounter with the work was Stephen Sandy’s translation, which left me thoroughly unimpressed. After reading Sandy’s translation, I thought the play was unimpressive, and even a little boring. Take a look at the exchange between Eteocles and the chorus after Eteocles finds out he must confront his brother at the seventh gate:

Chorus: In a word, do not go on this way–to the seventh gate.

Eteocles: Set as I am going, words won’t stop me.

Chorus: Gods smile on victory even if won with caution.

Eteocles: No warrior could take such an adage seriously!

Chorus: But shed your brother’s blood? Can you mean it? Surely you would not–

Eteocles: To whom the gods would bring destruction, destruction surely comes.

It sounds like, in the heat of the moment (and this is the moment), Eteocles and the chorus are having a leisurely debate, throwing woolly expressions at one another. The translation fails to capture the desperation and heat of the moment. Compare this Anthony Hecht and Helen H. Bacon’s translation that I fortunately stumbled upon several years later:

Koryphaios: Do not go that road to the seventh gate.

Eteokles: Your words cannot blunt me, whetted as I am.

Koryphaios: Yet there are victories without glory, and the gods have honored them.

Eteokles: These are no words for a man in full armor.

Koryphaios: Can you wish to harvest your brother’s blood?

Eteokles: If the gods dispose evil, no man can evade it.

Hecht and Bacon is so much more direct: compare their blunt “Do not go that road…” to the effuse “In a word, do not go on this way…” in Sandy. Eteocles’ rejoinder is equally blunt in Hecht and Bacon’s translation. Sandy’s translation gives the unfortunate impression that although words don’t stop him this time, on another occasion, perhaps words could stop him. Similarly, Eteocles’ “These are no words for a man in full armor” seems more natural than the artificial “No man can take such an adage seriously.” Hecht and Bacon also preserve the image of Ares harvesting lives on the battlefield; this is missing in the Sandy translation. And finally, Sandy’s “To whom the gods would bring destruction…” sounds too cliché. It was only after I stumbled upon Hecht and Bacon’s translation that I could fall in love with this play. It went from being my least favourite to my favourite. That is how powerful the role of the interpreter is. Just like how ancient societies rose and fell by how their interpreters interpreted the omens, we rely on modern seers such as Casals, Hecht, and Bacon to interpret our modern signs.

In the spirit of Casals and Gould, who brought two forgotten works by Bach back into the limelight, I have attempted to draw attention to the dramatic power of Aeschylus’ Seven Against Thebes in my forthcoming book: The Risk Theatre Model of Tragedy: Gambling, Drama, and the Unexpected. Along with Shakespeare’s MacbethSeven Against Thebes is my “exemplar” tragedy. In the same way as Aristotle championed Oedipus rex and Hegel championed Antigone, I will champion Seven Against Thebes.

Until next time, I’m Edwin Wong and I’m doing Melpomene’s work.

Skin in the Game: Hidden Asymmetries in Daily Life – Taleb

2018, Random House, 279 pages

Book Blurb

From the New York Times bestselling author of The Black Swan, a bold new work that challenges many of our long-held beliefs about risk and reward, politics and religion, finance and personal responsibility.

“Skin in the game means that you do not pay attention to what people say, only to what they do, and to how much of their necks they are putting on the line.”

In his most provocative and practical book yet, one of the foremost thinkers of our time redefines what it means to understand the world, succeed in a profession, contribute to a fair and just society, detect nonsense, and influence others. Citing examples ranging from Hammurabi to Seneca, Antaeus the Giant to Donald Trump, Nassim Nicholas Taleb shows how the willingness to accept one’s own risks is an essential attribute of heroes, saints, and flourishing people in all walks of life.

The phrase “skin in the game” is one we have often heard but rarely stopped to truly dissect. It is the backbone of risk management, but it’s also an astonishingly rich worldview that, as Taleb shows in this book, applies to all aspects of our lives. As Taleb says, “The symmetry of skin in the game is a simple rule that’s necessary for fairness and justice, and the ultimate BS-buster,” and “Never trust anyone who doesn’t have skin in the game. Without it, fools and crooks will benefit, and their mistakes will never come back to haunt them.”

Author Blurb

Nassim Nicholas Taleb spent twenty-one years as a risk taker before becoming a researcher in philosophical, mathematical, and (mostly) practical problems with probability. Although he spends most of his time as a flâneur, meditating in cafés across the planet, he is currently Distinguished Professor at New York University’s Tandon School of Engineering. His books, part of a multivolume collection called Incerto, have been published in thirty-six languages. Taleb has authored more than fifty scholarly papers as backup to Incerto, ranging from international affairs and risk management to statistical physics. Having been described as “a rare mix of courage and erudition” he is widely recognized as the foremost thinker on probability and uncertainty. Taleb lives mostly in New York.

Great Writers Give You Great Ideas

Taleb, as assiduous readers will recall, planted the idea in my mind that a theory of tragedy could be based on risk. While wandering around the big Borders bookstore in Providence Place Mall one evening, his book Fooled by Randomness jumped out at me. Around this time, I had been reading a pile of economics books: A Random Walk Down Wall Street by Malkiel (recommended) and various books by Jeremy Siegel (less recommended). It was at this time I discovered concepts like the efficient market hypothesis and that finance is really quite interesting. There was also a personal reason to learn about investing. My seven year fairy-tale run in academia was coming to an end and it was time to become a civilian again. I still had an investment portfolio that, believe it or not, I had still been adding to while in university (to the tune of $25 or so a month–saving is a hard habit to break). I hadn’t really done anything with it since the Bre-X and Dot Com crash of 1999, but I figured it was time to get back into the game.

1999 was a bad year for investing. My Royal Bank advisor had steered me into tech (it’s the new economy) and precious metals (another hot sector) mutual funds. In addition to exorbitant management fees (round 3% those days), both sectors crashed. Panicked and bummed out, I sold and, by selling, locked in my losses. I lost interest in investing for six years. After which time, I decided if I was going to get back into the game, I would learn how the system worked and do everything myself in a self-directed account. So, I picked up Taleb’s Fooled by Randomness to become a better investor. But the unanticipated outcome was that I would also base a theory of tragedy around the impact of low-probability, high-consequence events. But hey, that’s another story. Back to Taleb.

Hidden Asymmetries in Daily Life

The book’s subtitle is “Hidden Asymmetries in Daily Life.” What does that mean? Taleb’s argument is that symmetrical situations in which risk and reward are balanced are preferable to asymmetrical situations in which rewards can be had without risk. Take, as an example, building a house. The best case scenario is if you build the house yourself because you’re taking on the risk (if could go over budget, the design could be faulty, etc.,) and reaping the potential reward (if it goes well you save a bunch of money). When you take on risk for a shot at a reward, you have skin in the game.

But let’s say you don’t know how to build a house. You’d have to hire a general contractor (GC) to frame the house and look after the plumbers, electricians, glazers, and other subtrades. The good thing is that you have a pro to build your house. The bad thing is that the risks and rewards to your pro are less symmetric: he doesn’t realize the upside. If the house: a) comes in under budget, b) is built to higher standards, or c) is built three months ahead of schedule the GC doesn’t realize the benefits. To him, the risks and rewards are asymmetric. In other words, he doesn’t have as much skin in the game. Taleb’s solution: incentivize the GC with a performance bonus. That way the homeowner and the GC align their risks and rewards. They place their goals on a less asymmetrical and a more symmetrical footing.

That’s the gist of the book: have skin in the game. Talk is talk. Talk is cheap. You have to walk the walk. Don’t ask someone what hot stock to invest in or what their investing philosophy is. Simply see what they have in their portfolio. And beware of asymmetry: if you get advice where you, but not the person giving the advice, is exposed to the harm should the advice fail, run away.

Unsurprisingly, Taleb’s praise is directed to people who have skin in the game. He singles out the Roman emperor Julian the Apostate, who fought in the front lines on the eastern front. In a more recent example of noblesse oblige, during the Falklands War, Prince Andrew also fought on the front ranks, where the danger was the greatest. By taking responsibility for their privilege, they had skin in the game. Martyrs (who die for their beliefs) and businesspeople (who stake their own funds) are further examples of those who have skin in the game. Whistleblowers who face smear campaigns while protecting the public also win Taleb’s praise. In fact, one of the dedicatees of the book is Ralph Nader, who was a victim of an intimidation campaign when he called out General Motors for defective products.

Also unsurprisingly, Taleb’s ire is directed to people who, by gaming asymmetrical situations, profit off the system without putting skin in the game. Journalists, politicians, and academics (especially economists) win his ire. He singles out journalists on BNN or Bloomberg who recommend stocks while they themselves don’t hold positions. The situation is asymmetric because viewers are exposed to harm if the recommendation fails while the journalist gets a paycheque either way.

Taleb singles out politicians who bail out failing institutions: the politicians take the credit for saving the world while it is the taxpayers who fund the bailouts, not the politicians. Taleb devotes significant attention to Bob Rubin, a former Secretary of the United States Treasury. As Secretary of the Treasury under Clinton, Robert Rubin had opposed regulating collateralized debt obligations (CDOs), credit default swaps, and other derivative instruments that Warren Buffett would later refer to as “financial weapons of mass destruction.” After his tenure as Treasury Secretary, he received over $120 million from Citibank, which was rolling in the cash by offering these selfsame derivative financial instruments. But when these derivative instruments led to the 2008 financial crisis and banks needed to be bailed out, the bailout money came out of taxpayers’ pockets, not the pockets of folks like Bob Rubin who had made a fortune by promoting them. To Taleb, this “Bob Rubin Trade” showcases asymmetry: heads I win, tails the taxpayers lose.

Taleb also singles out academics, mainly economists. To Taleb, they come out with fancy economic models and give their models the stamp of approval with their academic credentials. But since academics are divorced from reality (one of his quotes runs: “In the academic world there is no difference between academia and the real world; in the real world there is”) their models seldom work. Economists create asymmetry because real world traders are exposed to harm if they use the economists’ models while economists continue to collect their salaries no matter whether they are right or wrong.

The Lindy Effect

An interesting concept that gains prominence in Skin in the Game is the Lindy effect. The Lindy effect (named after the New York delicatessen where the idea began) states that the longer something survives, the longer it is likely to survive. A Broadway play, for example, that has been playing for 400 days is likely to play for another 400 days. A religion that has been around for a thousand years can be expected to be around for another thousand years. A book that has been in publication for fifty years is likely to be in publication for another fifty years. If, after fifty years it is still in print, then it will likely last another hundred years. If after another hundred years it is still in print, then it will likely survive another 200 years. And so on.

What is the relationship between the Lindy effect and the idea of skin in the game? According to Taleb, concepts and ideologies also have skin in the game. The role of a writer, for example, should not be to please book reviewers (who are not experts and do not have skin in the game) but to please future readers. Time, to Taleb, is the ultimate arbiter. You can fool some of the people today, but if it stands the test of time, it’s legit. Take, say, a fashionable diet, something like the Atkins diet. It’s new, so who knows if it’s good or bad for you. But take fasting days. Many religions have had fasting days for a long, long time. Fast days are “Lindy proof.” They stand the test of time. Because they stand the test of time, they are very likely to be good for you. Consider also coffee (which has been around 600 years) versus today’s latest energy drinks (which have been around a decade). Which do you think will stand the test of time?

I’m not sure about this point, but what I think Taleb is saying with the Lindy effect is this: when you take risk, you have skin in the game, which is good. Risk and volatility is sort of the same thing: if the ride gets too volatile, it’s game over for your endeavour. Volatility and time are also sort of the same thing. So, when you’re taking risks to put skin in the game, you’re actually going one-on-one against time. If you have an idea, to put maximal skin in the game, you want to go against all the other ideas that were and will be out there. It’s a tough game, but there is a reward: the Lindy effect. If you make it to the top, chances are you’ll (or your idea) will stay alive. Not sure if that’s it, but that’s my interpretation of the Lindy effect as it relates to this volume.

Now, this is the fifth volume of Taleb’s Incerto series and it seems with the Lindy effect he’s come full circle. So, the Lindy effect says that something which has survived a long time will likely keep surviving. Unless, of course, this something runs into a black swan. Assiduous readers of Taleb will remember that the second volume of Incerto was called The Black Swan: The Impact of the Highly Improbable. The black swan phenomenon is when highly improbable events happen that change everything. Take the very idea of the black swan. The idea came from the Roman poet Juvenal, who said that “a good person is as rare as a black swan.” The punchline is, of course, that black swans don’t exist. So, for hundreds of years, the phrase “black swan” came to denote something that doesn’t exist. And, what is more, the Lindy effect made the “black swan” analogy more and more prevalent as time went on. Until of course, an actual black swan was sighted in Australia by a Dutch sailer in 1636. So, it was a black swan event (sighting a creature that was not supposed to exist) that brought an end to the Lindy effect on the original use of the term “black swan” as understood by Juvenal. It will be very interesting if, in a future work, Taleb pits these two contrasting phenomena against one another.

Does Risk Theatre Have Skin in the Game?

It’s always interesting to tie the books I’m reading back into what I’m doing. This keeps things real. It gives reading a purpose. Here’s a quote from Skin in the Game that confirmed I was on the right track:

The deprostitutionalization of research will eventually be done as follows. Force people who want to do “research” to do it on their own time, that is, to derive their income from other sources. Sacrifice is necessary. It may seem absurd to brainwashed contemporaries, but Antifragile [the previous title in the Incerto series] documents the outsized historical contributions of the nonprofessional, or, rather, the non-meretricious. For their research to be genuine, they should first have a real-world day job, or at least spend ten years as: lens maker, patent clerk, Mafia operator, professional gambler, postman, prison guard, medical doctor, limo driver, militia member, social security agent, trial lawyer, farmer, restaurant chef, high-volume waiter, fire-fighter (my favorite), lighthouse keeper, etc., while they are building their original ideas.

It is a filtering, nonsense-expurgating mechanism. I have no sympathy for moaning professional researchers. I for my part spent twenty-three years in a full-time, highly demanding, extremely stressful profession [he founded a hedge fund called Empirica Capital, which, coincidentally, bet on black swan declines in the stock markets] while studying, researching, and writing my first three books at night; it lowered (in fact, eliminated) my tolerance for career-building research.

For the last eleven years, I’ve been writing a book: The Risk Theatre Model of Tragedy: Gambling, Drama, and the Unexpected. But, the book was not enough. As Taleb would say, writing the book is like “talking the talk.” Like the Efficient Market Hypothesis, the Black-Scholes equation (for pricing options), and other economic models that Taleb disdains, the risk theatre model of tragedy, while not an economic model, is an academic model nonetheless. As an academic model, it could use some more skin in the game.

To give the risk theatre model of tragedy some more skin, I started up, with Langham Court Theatre, the 2019 Risk Theatre Modern Tragedy Competition. We would award cash prizes to dramatists worldwide to write risk theatre tragedies. We would help these dramatists develop risk theatre to the highest levels by workshopping their plays. And, to help offset travel and accommodation expenses, we’d offer a stipend for dramatists to come attend the workshop in Victoria, Canada.

To fund the book and the competition, I work a real-world job as a project manager for PML Professional Mechanical. I oversee $25 million of construction projects: a mixed use commercial building with Save-on-Foods as the anchor and two residential towers above for Bosa/Axiom, a distinctive condo called the B&W (it’s clad in sections of black and white bricks) for Abstract Developments, and two 20-storey towers for Chard Developments. In other words, I’ve got skin in the game. If Taleb’s thesis is correct, the book and the theatre competition stand a greater chance of success because I’m putting my money where my mouth is.  Here’s hoping. Time will tell.

Until next time, I’m Edwin Wong, and I’m doing Melpomene’s work. By the way, this is a great book. Read it. If you haven’t read any volumes in the Incerto series, and are looking for a place to start, you couldn’t go wrong with the second volume, The Black Swan.

The (mis)Behavior of Markets: A Fractal View of Financial Turbulence – Mandelbrot and Hudson

2004, Basic Books, 328 pages

Back Blurb

The (mis)Behavior of Markets offers a revolutionary reevaluation of the tools and models of modern financial theory. From the gyrations of the Dow to the dollar-euro exchange rate, mathematical superstar and inventor of fractal geometry shows us how to understand the volatility of markets in far more accurate terms than the failed theories that have brought the financial system to the brink of disaster. Updated with a new preface on the financial crisis of 2008, Mandelbrot’s insights are more valuable than ever.

Author Blurbs

Benoit Mandelbrot is Sterling Professor Emeritus of Mathematical Sciences at Yale University and a Fellow Emeritus at IBM’s Thomas J. Watson Laboratory. The inventor of fractal geometry, he has received the Wolf Prize in Physics, the Japan Prize in science and technology, and awards from the U.S. National Academy of Sciences, the IEEE, and numerous universities in the United States and abroad. His many books include Fractals: Form, Chance and Dimension, which later expanded into the classic The Fractal Geometry of Nature. He lives in Cambridge, Massachusetts.

Richard L. Hudson was managing editor of the Wall Street Journal’s European edition for six years, and a Journal reporter and editor for more than two decades. He is a graduate of Harvard University and a former Knight Fellow of MIT. Now the CEO and editor of Science Publishing Ltd., he lives in Brussels, Belgium.

A Fractal View of Financial Turbulence?

Fractal (from Latin frango “to break” e.g. fracture, fraction, fragment, etc.,) geometry was invented by Mandelbrot. It is a real-world, anti-Euclidean geometry in that it is the geometry of rough surfaces as opposed to the straight lines and perfect planes of Euclid. You can use fractal geometry to model structures where similar patterns recur in smaller and larger scales: for example cauliflower heads (a small head is a smaller version of a larger head) or coastlines (little nooks and crannies are scaled down versions of fjords). The immediate question than is: what do fractals have to do with financial turbulence? Well, the answer is that, rises and declines in stock prices also recur in similar and recurring patterns in smaller and larger time scales. For intuitive proof, compare one day, one month, one year, and one decade stock charts. Would you be able to tell, were the dates removed, which was which? Wall Street pros can’t. It’s just a bunch of wiggly lines. Wiggly lines that go back and forth like the coastline. And, like the coastline that exhibits self-similarity under 1x, 10x, and 1000x magnification, the stock chart exhibits self-similarity in one day, one month, or one year intervals.

This was Mandelbrot’s key insight, and a momentous one. It’s momentous because the implication is that, even if stock and commodity prices don’t go up and down randomly (they react to news, world events, and investor sentiment), their fluctuations can be modelled by the rules of probability as though they were random.

Late Work

One of the appealing things about The mis(Behavior) of Markets is that it is a late work. He turned 80 in 2004, the year the book came out. Long time readers of this blog will know that I’ve been a fan of late works for a long time: Beethoven’s Opus 111, Bach’s The Art of the Fugue, Mozart’s Requiem (unfinished at the time of death and played at his funeral), Nietzsche’s Ecce Homo, Sophocles’ Oedipus at Colonus (he successfully defended himself in court against charges of senility by citing his play), and Goethe’s second part of Faust. Directness of theme, abandonment of artifice, a brutal sense of honesty, a heartfelt and personal expression, a sense of possibility, and a glimpse of the bigger picture characterize the best late works. There’s an excellent book that talks about late style by scholar Edward W. Said entitled On Late Style: Music and Literature against the Grain. It’s fitting that that work is itself a late work.

Mandelbrot himself was keenly aware that he was himself producing a late work in writing The (mis)Behavior of Markets. Here’s a telling quote from the book (in the prelude written by coauthor Hudson):

In 2004, in his eightieth year, Mandelbrot continues making trouble. He works the same full schedule–including weekends–as he always has. He continues publishing new research papers and books, lecturing at Yale, and traveling the world of scientific conferences to advance his views. Why not? After all, as he points out, Racine’s most enduring play, Athalie; Verdi’s greatest opera, Falstaff; Wagner’s Ring Cycle–all were written in the twilight of life, when the artist, after years of experience and experimentation, was at the height of his powers.

Prejudice against the Speculative Markets

Mandelbrot devotes a chapter of the book to mathematician Louis Bachelier. Bachelier had dared to write base his dissertation on the volatility of bonds at The Bourse at the Paris exchange. His idea was that, although you could never know where future bond prices would end up, you could mathematically evaluate the odds of the fluctuations because bond prices would follow a ‘random walk’. The random walk is based on the random path of pollen grains suspended in water. And just as the path of pollen grains could be plotted on the bell curve, so could bond prices.

Unfortunately for Bachelier, academia deemed The Bourse to be to degraded of a place for true mathematicians. So, instead of graduating with a ‘trés honorable’ honour, he received a ‘mention honorable’. This consigned him to a life of obscurity. It wasn’t until the 1950s, a decade after his death, that his star picked up. Some are born posthumously.

Now it seems that the prejudice against true mathematicians working in finance remains to us today. Since my childhood, I’ve loved reading science books. Inevitably, each one will mention Mandelbrot and how fractal geometry is the best thing since sliced bread. But, you know, I don’t think any of them talked about Mandelbrot’s pioneering work in the 1960s examining price volatility in cotton markets (in the 60s, historic data on cotton pricing was complete, readily available, and accurate). Since then, Mandelbrot has devoted a lot of time and published quite a bit on how markets work. Heck, Eugene Fama was one of his students (he supervised his dissertation). But it wasn’t until I stumbled on this book (probably through a Marketwatch or Bloomberg article) that I had any idea that Mandelbrot had anything to say about the markets. In fact, I was so surprised when I found out, I googled to see if this was the Mandelbrot or another fellow with the same name.

So, You Think You Know What Risk Is…

Risk can be many things. Risk can be loss. Risk can be when something happens that you didn’t expect would happen. These sorts of risk are hard to quantify. But, if risk is volatility, it can be quantified. Take the 52 week high and low of Apple stock. The range between the high and low is the volatility. This sort of volatility can be expressed mathematically, using the laws of probability–that’s why the economists like it. They put in into formulas and win Nobel Prizes.

Beginning with Bachelier, it was thought that, if one graphed the daily movements of a stock, the price data would arrange itself into the standard distribution of a bell curve. The mean price would fill out the familiar bulge in the centre of the curve, and the larger price swings would be captured in the ‘tails’ of the curve. The larger the price swing, the less probable it is to happen. The bell curve is popular because it fits many natural phenomena. Human height, for example, fits a bell curve: 68% of American men are between 68-72 inches tall; 95% are between 66-74 inches tall; 98% are between 64-76 inches tall. The bell curve doesn’t rule out a 10′ giant. But the tail at this extreme is so flat that you would never expect to see one. IQ scores and the returns on betting on a series of coin tosses also fit a bell curve.

The idea of using the standard distribution of the bell curve to represent market risk was so prevalent that when Bachelier was rediscovered in the 1960s, the standard tools of finance all took it up. As a result, the standard tools MBA students learn to model the market are all based on the mild and predictable sort of risk the bell curve predicts. These tools are: modern portfolio theory or MPT by Harry Makowitz, the capital asset pricing model or CAPM by William Sharpe, and the Black-Scholes formula by Fischer Black, Myron Scholes, and Robert Merton. Markowitz, Sharpe, Scholes, and Merton all received Nobel Prizes for their work. Black would have as well, if he had lived another two years (the Nobel is not awarded posthumously).

The question Mandelbrot poses is: what if the bell curve is wrong? What if the odds of catastrophic ‘tail’ events in the market such as the 29.2% decline on Black Monday (October 19, 1987) are a thousand or a million times more likely than what the standard model posits? And, what is more, what if the stock market has a memory?–the standard model is based on a random walk. Like how each flip of the coin, the daily movements of the stock market are independent of one another. But, what if, in the real world, volatility cascades? Cascades in that a 3% drop one day increases the odds that it will continue to fall in the following days? Mandelbrot’s answer? If the bell curve is wrong, then we are like shipbuilders who think gales are rare and hurricanes are myths. We sail into doom. And we encourage others to sail into the storm with the comfort of dead wrong economic models. It’s like if we planned a mission to go to Mars based on old Ptolemaic models of the solar system.

To show how the bell curve is a poor measure of risk, Mandelbrot provides examples from the cotton, commodity, and stock markets: the data doesn’t fit the curve. ‘Impossible’ tail events happen in reality far more frequently than the bell curve allows.

The Solution

This was the most confusing part for me. Mandelbrot himself says that the math isn’t complete. Just as Bachelier had to wait a good 60 years for the math to catch up to his ideas, Mandelbrot’s ideas of fractal turbulence may have to wait another generation or two. He himself says the math is very hard. This book is more a call to arms that something has to be done. He does offer some suggestions, though.

In addition to the standard, bell curve distribution, there appear to be other probability distributions. There’s the Cauchy distribution. And there’s also a whole family of L-stable or ‘Levy’ distributions. These other distributions, from what I gather, have fatter tails. But they too, don’t capture the how real world risk works. It may be that they overstate the odds of catastrophic tail events. And it does not appear possible to insert other types of probability distributions into the standard models of finance (e.g., Black-Scholes, MPT, and CAPM). All the standard model, for some reason that a mathematician would understand, use the bell curve because it fits into the equation. Here I could be wrong, but that’s what I’m gathering.

In the future, the multifractal model of financial turbulence might be able to create a ‘fingerprint’ of a stock’s volatility. Right now, one of our best models of risk is the VaR or ‘Value at Risk’ model (also based on the bell curve). You start off by deciding how safe you want to be. Let’s say the maximum loss you are willing to take in a year is 10%. You then find a stock using the VaR model where, 95% of the time, the losses will be 10% or less. How is this safe, asks Mandelbrot?–the point is that 5% of the time, the losses can be more than 10% and up to 100%. It is only the illusion of safety. But let’s say someone uses the multifractal model to create a fingerprint of a stock’s volatility. This, to me, would still be based on historic price data. If the company hasn’t gone out of business, would the fingerprint capture the possibility of the stock going bankrupt, or, in other words, going down 100%?

Mandelbrot says many times that it’s not possible to make money (yet) from this multifractal view of stock market volatility. That may be true, but I wonder…if all the standard models underestimate volatility (because they use the bell curve), then wouldn’t that mean that the market is underpricing volatility? There should be some way of betting on irrational gains and losses and making money. Let’s say the market is saying that the odds of a 10% daily collapse is 1:1,000,000. But the odds are actually higher, 1:100,000 or something like that. There must be some financial instrument you could use to short the market so that when the 10% daily collapse happens, you could clean up since you know the ‘true’ odds and the market, which uses the incorrect model, has mispriced that eventuality.

Another idea to make money: if volatility is greater than commonly thought, would that be an argument for buying an equal weight index rather than a market weight index? With an equal weight index, you would have the same constituent stocks as an index investor (in a market weight index such as the S&P 500). But since stocks bounce up and down from their ‘average’ or ‘mean’ price, each time you invest fresh money, you would buy whichever stock had fallen the most. If you used a buy and hold strategy, because volatility is greater, you should be able to pick up a couple of points over the market weight buy and hold investor. Or?

Of course, these ideas aren’t based on the multifractal model, but rather, on volatility itself. Perhaps the way to make money on the multifractal model would be to market it to a data company such as Thomson Reuters. Thomson Reuters would use the mathematical model to project future growth, volatility, and other parameters of a stock. It might even use the model to draw future stock charts and run them through Monte Carlo simulators. Investors would, in turn, use this information in putting together resilient and efficient portfolios which maximize return and minimize risk.

Betting on Volatility and Turbulence

I should mention that I’ve put money on a sort of equal weight index. In March 2015, I picked 20 small companies in my play portfolio. They were picked somewhat randomly, but not completely at random. Since, for the most part, I’m an index investor, and the Canadian TSX Composite is dominated by financials (banks and insurance), oil & gas, and materials (mining), one rule was that none of these 20 companies could be from these sectors. The idea was that I wanted the small-cap portfolio to zig when the TSX Composite was zagging. So I ended up picking some industrials, consumer staples, healthcare, and technology stocks. Why small-cap? Well, I wanted to capture volatility and small-caps tend to move up and down violently than their more stable large cap brethren. In this small-cap portfolio, the idea is never to sell. But whenever I added money to the portfolio, I would top up the stock that had been most hammered (to keep the portfolio equal weight). This way, when things turn around (which they will do unless your pick goes bankrupt), you’ll pick up a little extra because you’ve said yes to volatility. Why 20 stocks? Well, you have to have enough stocks to have some winners and losers. And you can’t have too many stocks that you’re just replicating the index. Between 20-30 seems like a good number where the losers will hit you, but not too hard and the winners will help you, but also not too much. If you have too few stocks, and just happen to pick the losers, you’re going to get really hurt. But if you have too many stocks, the winners aren’t really going to impact the portfolio that much. It’s a question of concentration.

It seems that some Paris firms are doing something similar and calling this a multifractal strategy. Mandelbrot dismisses such attempts in his book as being far from multifractal: to him, it is just betting on stocks ‘reverting to the mean’. He’s absolutely right. But I can’t help but think that if volatility is so great, and if volatility is the measure of how much a stock deviates from its mean price, then shouldn’t it be easy to pick up a few extra points by a continual buying and holding equal weight strategy? Here were my picks from three and a half years ago and the performance:

AG Growth International (AFN) +17.8%

AGT Food and Ingredients (AGT) -28.0%

Alcanna (CLIQ) -21.4%

Boston Pizza Royalty Income Fund (BPF.UN) -21.5%

Boyd Group (BP.UN) +133.5%

Capstone Infrastructure (CSE) taken private at a gain of +37.6%, used proceeds to buy Cipher Pharmaceuticals

Chemtrade Logistics (CHE.UN) -27.6%

Cipher Pharmaceuticals (CPH) -49.6%

Clearwater Seafoods (CLR) -39.0%

Descartes Systems (DSG)  +126.2%

Great Canadian Gaming (GC) +74.7%

Highliner Seafoods (HLF) -59.3%

Innergex Renewable Energy (INE) +17.4%

Intertape Polymer (ITP) -7.3%

K-Bro Linen (KBL) -20.2%

Morneau Shepell (MSI) +56.2%

NFI Group (NFI) +257.3%

Northwest Company (NWC) +13.7%

Park Lawn (PLC) +4.4%

Premium Brands (PBH) +246.5%

Student Transportation (STB) taken private at a gain of 38.9%, used proceeds to buy Park Lawn

Western One (WEQ) -44.2%

If you look at the returns, I think you’ll agree there’s no shortage of volatility: the best performer was NFI (a maker of buses and motorhomes) at +257% and the laggard was Highliner Seafoods (a maker of fishsticks) at -59%. In the portfolio, two stock more than tripled (NFI and PBH), two other stocks more than doubled (BYD and DSG), and three stocks lost more than 40% (CPH, HLF, and WEQ). The volatility is there.

But the question is, how did the portfolio do? In three and a half years, with dividends, it’s up 26.3%. That equates to a rate of return of 6.9% each year. Compare this to the S&P TSX Small Cap Index (market weight). Total return in the last three and a half years is 20.1% for an annualized return of 5.7%. The little equal weight portfolio has done well compared to the market weight index. But of course the results are statistically meaningless as the two portfolios hold different stocks. You’d have to compare a market cap to a equal weight portfolio tracking the same index to draw meaningful conclusions. Perhaps a topic for a future blog?

One insight, does, however, emerge from this small cap portfolio: the business model really gives you little idea of how a stock will perform. Who knew that a bus and motorhome manufacturer (New Flyer) would triple? Who knew that Premium Brand Holdings, a company that makes Starbucks breakfast sandwiches and the sliced meats you find at grocery stores would be a top performer?–geez, they just make black forest ham! Who knew that a worldwide lentil distributor would be down a third? Aren’t people supposed to be eating more lentils? Who knew that Highliner Seafoods would be down over half? Isn’t seafood consumption up and growing? And why is K-Bro Linen down a fifth?–don’t they have the lock on hospital linen cleaning contracts in all the major cities?

If you had asked ten experts three and a half years ago to predict where these 20 stocks were going, I don’t think any of them would even be remotely close. You would have to have known that India would have frozen out Canadian lentils (AGT). You would have to have known that the government would have stripped CLR of part of their arctic clam license. You would have had to have predicted that oil would go down to twenty dollars a barrel (WEQ). You would have had to have predicted Valeant’s business model would explode, dragging down the whole pharmaceutical industry (CPH). How could anyone have known? And you know, it’s going to be like this going forwards. The things that will affect this small cap portfolio are the things we don’t know yet. Until then, I’ll keep picking up a few points on volatility. That I do know will be there. Funny, the only certain thing is that things are uncertain.

A Mystery

Mandelbrot spends a bit of time talking about power laws. Instead of a bell curve distribution where the tails are imperceptible, cotton prices, wheat prices, interest rates, and some stocks follow a power law distribution which allows for large price swings. Gravity and earthquakes also follow a power law distribution: double the distance or power, and the force of attraction or the frequency is four times less. In a section of the book, Mandelbrot tells the story of Harold Edwin Hurst, a hydrologist who cracked the code of how high to build a dam to tame the Nile.

The problem with calculating how high to build the dam was that the Nile would not only experience really dry and really wet years, but also that the wet and dry years would cluster together in an unpredictable pattern. In his attempt to understand flooding, Hurst looked through any reliable, long-running records on climate he could find, from tree ring growth, sunspot patterns, discharges from Lake Huron, and annual water levels at Lake Dalalven in Sweden. People thought he was a crack, since how could such varied phenomena be related? He looked through 51 different phenomena, and found that everywhere he looked, the range obeyed a three-fourths (0.73) power law. It was as though this three-fourths power law is a constant of nature. Now this is interesting. It makes me want to learn math so that I can figure out why this is. This is one of these questions that you could spend your life looking into.

I have to agree with Taleb that this is “the deepest and most realistic finance book ever published.” I read it three times. And, if I didn’t have a stack of other deserving titles, I would have read it a fourth time.

Until next time, I’m Edwin Wong, and I’m doing Melpomene’s work.

Age of Discovery: Navigating the Risks and Rewards of Our New Renaissance – Goldin and Kutarna

2016, St. Martin’s Press, 304 pages

Back Blurb

Two award-winning Oxford scholars redefine the present day as a new Renaissance–a rare moment of flourishing genius and risk that promises to reshape all our lives. Da Vinci, Columbus, Copernicus, Luther, Gutenberg. These names recall an era in which an unprecedented rush of discovery and disruption broke through long-standing barriers and broke down equally long-standing powers. This rush entangled the whole world politically, economically and intellectually, and reshaped society. Now, the same forces that converged 500 years ago to spark genius and upend social order–great leaps in science, trade, migration, technology, education and health–are once again present, only stronger and more widespread.

In Age of Discovery, Ian Goldin and Chris Kutarna show how we can draw courage and wisdom from the last Renaissance in order to fashion our own golden age out of this New Renaissance. Whether we’re seized by Gutenberg or Zuckerberg; the discovery of the Americas or the rise of China; copperplate or silicon etching; the Bonfire of the Vanities or the rise of ISIS; the spread of syphilis or the Ebola pandemic–a Renaissance moment dares humanity to give its best just when the stakes are highest.

Age of Discovery navigates the crises of our time and helps us all define a legacy that the world will still remember half a millennium from now.

Author Blurbs

Ian Goldin is a Professor of Globalization and Director of the Oxford Martin School at the University of Oxford. He was Vice President of the World Bank, Chief Executive of the Development Bank of Southern Africa and an adviser to President Nelson Mandela.

Chris Kutarna is a Fellow at the Oxford Martin School and an expert on international politics and economics. He was a strategy consultant at the Boston Consulting Group and continues to advise senior executives in Asia, North America and Europe.

The New Renaissance

The first thing that caught my eye wasn’t the Goldin and Kutarna’s exciting thesis that we live in a New Renaissance, but rather, that a book from two Oxford academics would eschew the Oxford comma. This I noticed in the author blurb (see author blurb on Kutarana above): “He was a strategy consultant at the Boston Consulting Group and continues to advise senior executives in Asia, North America and Europe.” Notice no Oxford comma between “North America and Europe.” But if you look at the text inside the book, sometimes the hallowed Oxford comma is there, and sometimes not!–for example, page 129 reads:

Entrepreneurs have made a synthetic version with processes borrowed from the semiconductor industry, and as they tweak it, “gecko tape” will find uses in defense (all-terrain robots), manufacturing (replacing many screws, rivets and glues), and even athletics (fumble-free gloves for American football players).

In this passage, notice no Oxford comma between “rivets and glues” but an Oxford comma is there between “defense, and even athletics.” And then there is also a new device of what I guess can be called the “Oxford semicolon” to separate a list of items. This from page 166:

Chapter Two touched on how the same infrastructure, networks and investments that connect us also make it easier to coordinate crime and violence; disseminate hate; train up would-up hackers, fraudsters and bombers; and trade every illicit good from drugs to fake IDs to child slaves.

So there is a semicolon separating “bombers; and trade every illicit good.” But now compare this passage with the book blurb (printed in its entirety above):

Whether we’re seized by Gutenberg or Zuckerberg; the discovery of the Americas or the rise of China; copperplate or silicon etching; the Bonfire of the Vanities or the rise of ISIS; the spread of syphilis or the Ebola pandemic–a Renaissance moment dares humanity to give its best just when the stakes are highest.

Notice no “Oxford semicolon” separating “syphilis or the Ebola pandemic.” And then, going back to the Oxford comma, notice in the quote from page 166 (above) that there is no Oxford comma between “networks and investments.”

So it appears that the writer of the author blurbs and the book blurb (who doesn’t use the Oxford comma and the so-called “Oxford semicolon”) must be different than the book writers, who do use the Oxford comma and the so-called “Oxford semicolon.” But then again, inside the text of the book itself, sometimes you find the Oxford comma and sometimes you don’t. Is this because the book has two writers, Goldin and Kutarna? That’s one possibility. But the problem with that hypothesis is that even in the same passage (for example the passage quoted from page 129) it’s inconsistent. This inconsistency I found rather interesting and almost added to the pleasure of reading the book.

Great Quotes!

Chapter 9 kicks off with a great quote that’s traditionally attributed to Michelangelo:

If people knew how hard I had to work to gain my mastery, it would not seem so wonderful at all.

Hard to resist a chuckle on reading that. I don’t know enough about Michelangelo to conjecture whether he would have said that, but I do know that painting the ceiling of the Sistine chapel was a debilitating exercise for him. I’d like to believe he said that, as it shows that he had a sense of humour.

For everyone wondering whether we live in an age of unprecedented manufactured risks, here’s a powerful quote from page 4:

Scientists alive today outnumber all scientists who ever lived up to 1980.

Scientists push the envelope. And when they push the envelope, sometimes unintended consequences result. So, it stands that, if there’s more scientists alive today poking the bear than there ever have been in human history, something is going to happen. And that ‘something’ is likely going to be something unexpected.

The Unexpected

Now, my favourite topic: the unexpected. Goldin and Kutarna have written a great book comparing our age to the Renaissance. For example, the Renaissance had Gutenberg. We have the internet. The Renaissance had Columbus sailing to the New World. We have globalization. I like that. Of course, I also wonder whether Goldin and Kutarna could have made a similar argument for any thirty or fifty year period since, say, 1800. It seems that the pace of human development has really picked up steam since the Industrial Revolution.

But, getting back to the unexpected. Goldin and Kutarna identify possible dangers to our modern-day Renaissance: bioterror epidemics, the rise of ISIS and other fringe movements, inequality, and climate change, to name a few. But really, what age in the past has been brought down or cut short by what it had seen coming? Look, for example, at the Great Depression. In the Roaring Twenties, the last thing the prognosticators were predicting was a Great Depression. The stock market, to the pundits of the time (including famed Yale economist Irving) “had reached a permanent high plateau.” Almost immediately after Irving said that, the stock market collapsed. The dangers that we can see coming we will work around. I call that human ingenuity. It is what we don’t know that will hurt us. Or, in other words, unexpected events.

I’ll leave you with that thought. Until next time, I’m Edwin Wong and I’m doing Melpomene’s work.

 

The God Problem: How a Godless Cosmos Creates – Bloom

2012, Prometheus Books, 708 pages

Back Blurb

How does the cosmos do something it has long been thought only gods could achieve? How does an inanimate universe generate stunning new forms and unbelievable new powers without a creator? How does the cosmos create? That’s the central question of The God Problem.

In The God Problem, you’ll take a scientific expedition into the secret heart of a cosmos you’ve never seen. Not just any cosmos. An electrifyingly inventive cosmos. An obsessive-compulsive cosmos. A driven, ambitious cosmos. A cosmos of colossal shocks. A cosmos of screaming, stunning surprise. A cosmos that breaks five of science’s most sacred laws. Yes, five.

And you’ll be rewarded with author Howard Bloom’s provocative new theory of the beginning, middle, and end of the universe–the Bloom toroidal model, also known as the big bagel theory–which explains two of the biggest mysteries in physics: dark energy and why, if antimatter and matter are created in equal amounts, there is so little antimatter in this universe.

Author Blurb

Howard Bloom has been called “the Darwin, Newton, Einstein, and Freud of the twenty-first century” and “the next Stephen Hawking.” He is the author of The Genius of the Beast: A Radical Re-Vision of CapitalismGlobal Brain: The Evolution of Mass Mind from the Big Bang to the 21st Century; and The Lucifer Principle: A Scientific Expedition into the Forces of History.

Tragedy and Decay, Comedy and Creativity

I’m very interested in how nature creates order from chaos. For instance, it’s not immediately obvious why, when carbon, hydrogen, oxygen, and nitrogen come together, they’ll link themselves into amino acids. These amino acids in turn will become proteins, the building blocks of life. Then life itself–from plant to reptile to mammal–evolves towards ever higher levels of consciousness. My dog for example, lacks the consciousness to understand the reflection is an image of herself. Sometimes she tries to play with her reflection. Other times, she goes after her reflection as though it were a rival dog. But I have the consciousness to understand a reflection is a reflection. And I’m higher up evolution than my dog. To be sure, Darwin’s process of natural selection explains why evolution happens. But, as Darwin himself was aware, natural selection cannot explain why mutations should happen in the first place that drives life higher, towards more complexity. Darwin could not explain it, nor could anyone else, for that matter. Bloom has a great quote from the physicist Paul Davies, who sums up the problem in these words:

The central issue … is whether the surprising–one might even say unreasonable–propensity for matter and energy to self-organize “against the odds” can be explained using the known laws of physics, or whether completely new fundamental principles are required. In practice, attempts to explain complexity and self-organization using the basic laws of physics have met with little success.

The enigma of order from chaos goes beyond life. It’s everywhere. Look at a beautiful and complex structure such as the arms of the Milky Way galaxy. Gravity can explain the motions of each of its constituent stars. But it can’t explain why, in the vastness of space, galaxies–local pocket of order–should have arisen in the first place. According to the conventional rules of physics, things should be more spread out, more diffuse. And what is this conventional rule, you ask?–well, it’s the Second Law of Thermodynamics. Here’s the definition of the Second Law from the Libretexts site:

The Second Law of Thermodynamics states that the state of entropy of the entire universe, as an isolated system, will always increase over time. The second law also states that the changes in the entropy in the universe can never be negative. Why is it that when you leave an ice cube at room temperature, it begins to melt? Why do we get older and never younger? And, why is it whenever rooms are cleaned, they become messy again in the future? Certain things happen in one direction and not the other, this is called the “arrow of time” and it encompasses every area of science. The thermodynamic arrow of time (entropy) is the measurement of disorder within a system. Denoted as delta S, the change of entropy suggests that time is asymmetric with respect to order of an isolated system, meaning: a system will become more disordered, as time increases.

So, there appear to be two powers in everlasting opposition. First, there’s the Second Law. It’s the destroyer. Systems begin in highly ordered states. As high grade energy dissipates into heat, entropy increases until the point where nothing is possible anymore and the system suffers a heat death. It’s an ironclad law. Then, there’s this power that creates order from chaos. It’s nameless. We’re not sure how complexity spontaneously arises. But we can see it happening everywhere. And, worse of all, it seems to defy the Second Law. And this perceived contravention of the Second Law is really one of the great holes in twenty-first century science. Bloom’s book tries to fill in this gap.

The God Problem

Bloom begins by inviting the reader to be Bloom. He tells his story from childhood through the second person ‘you’. For example, when Bloom was a kid, he says he wasn’t very good at many things. But he was persistent. Since you are him (for the duration of the book), the book reads ‘you were persistent, and that’s how you discovered corollary generator theory’. What’s corollary generator theory? That’s one of his key terms for how the universe creates complexity: corollary generation is the process of unpacking implicit properties from axioms.

For Bloom, it all begins with the axiom. For example, it could be axiomatic that parallel lines never meet. Or it could be axiomatic that parallel lines meet in the far distance. After the axiom comes the process of unpacking the properties of the axiom, or corollary generator theory, as he calls it. If parallel lines never meet, the consequence is that space is flat. If parallel lines do meet, however, the consequence is that space is hyperbolic, curved like a saddle. So depending on the axiom, different ‘big pictures’ are possible. Yes, Bloom like coining terms.

So, what do axioms have to do with nature’s creativity? It turns out, that with a handful of simple axioms, complex structures are possible. Bloom’s search for how simple rules can produce complex structures leads him to the termite mound. Termite mounds can be built up to 13 metres and are amazingly complex structures. These structures come with a natural air conditioning mechanism that keeps the interior temperature constant. They are one of the wonders of the insect world. How are they built? They are built on a simple rule: when a termite runs across a termite dropping, it picks it up and puts it on top of the tallest pile of droppings in that area. So out of quite a simple rule, complexity is possible. The question Bloom wonders is: what if the universe is like that?–out of a handful of axioms, nature creates fascinating and complex structures.

‘The God problem’ to Bloom is a question of perspective: the natural world looks so complex, it must have been created by a higher power. But, if he is right, and complexity arises spontaneously through a handful of simple axioms, then God is no longer a necessary hypothesis. This serves Bloom well, who is a raging atheist. He points to John Conway’s Game of LIfe, Mandelbrot sets, and Wolfram’s computer simulations as proof that simple sets of rules can generate unpredictable and complex structures, and, with his proof, he asks whether the universe is like the Game of Life.

The God Problem reads like a history of science from Babylonian up to modern times. What Bloom does is he reinterprets scientific discoveries from ancient to modern times through the axiom (simple, basic assumption), corollary generator theory (unpacking the axiom), emergent property (the unexpected result of unpacking the axiom), and the new big picture (fundamental shift in understanding). For example, one axiom might be: what if the speed of light is a universal constant? Then you might use this assumption to ask how light and matter are intertwined. The emergent property would be E=mc squared, or energy equals mass * the speed of light. The new big picture would then be that matter and energy are related: you could make a nuclear bomb, for example. So while the nuclear bomb is quite complex, the idea behind it, the idea that light is a universal constant, is quite simple. So, the end result is that, even though the world appears to be quite complicated, this complexity might be based on simplicity. You just have to find the simplicity.

I enjoyed reading about the history of scientific discoveries through Bloom’s viewpoint. What I enjoyed less was his appeal to authority. Often he would say: this scientist won x, y, and z awards, so she’s very smart and therefore you should believe her. It smacked of someone saying: “Bob Dylan won a Nobel Prize in literature so you should listen to his music.” No, you should listen to his music because he rules. There are some unusual editorial conventions. Whenever he mentions a trade name, the copyright symbol (the little c with a circle around it) appears. So if he mentions iPhone, the iPhone is followed by a copyright symbol. His use of quotation marks is interesting too. Consider this example:

“Discussed” is a very mild word for what these men did. They were , says Proclus “renowned” for their “studies.” So renowned that Plato mentioned them as his “rivals.”

Are all the quotation marks necessary?–maybe the ones around discussed. But surely not around studies and rivals. These are all minor points, of course, but its amazing how jarring such little details are on a reader. My own book is going to the press soon so these little types of details catch my eye.

My major criticism of The God Problem is how the book promises too much. The inside cover, for example, compares Bloom to Einstein, Hawking, Newton, and Freud. I purchased the book believing this. And the book also promises the reader that it contains a proof of how the Second Law of thermodynamics is plain wrong. While it contains lots of example of complexity arising from simplicity, I don’t think it achieves this. And, after reading the book, I conclude that there’s no way Bloom is even remotely close to Einstein, Hawking, Newton, and Freud. It would have been a more satisfying read if the book hadn’t of promised so much. Take Bloom’s “Big Bagel” theory of the universe. It’s right at the end and wraps up the book. The Big Bagel model argues that the universe started from a singularity and is donut shaped. In fourteen or so pages, he explains how it solves the problem of the missing antimatter, the problem of dark matter, and dark flow. He came up with this theory during a brainstorm in 1959. So it’s his theory. But has he published anything on it in a scientific journal? It doesn’t appear like he has. Can he explain why matter went on one side of the donut and antimatter on the other? No. Then he mentions scientists who have published on the donut model in the 80s, 90s, and 00s. The work of these scientists lend credence to his big bagel theory. Wow. Especially the part about the theory being ‘his’. I wonder if the scientists who published on the donut model in the 80s, 90s, and 00s give Bloom credit for this model of the universe. I could look, but I doubt it. An interesting and disappointing read.

Until next time, I’m Edwin Wong, and I’m doing Melpomene’s work.