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That was the intentionally shocking opening remark from Sheila Kalkunte at the CAS course on professionalism I attended this week (one of the last hurdles to clear for my ACAS). Professionalism in this context means a lot of things but for my purposes we can take it to mean doing your job competently and honestly. A bad grade here strikes home.

So who gave us the C+ and why? Having got all our attention she changed the subject, going through a fairly boring explanation of the process of the discipline hearings at the ABCD. Maybe she felt (maybe correctly) that we were all feeling pretty smug about ourselves and we needed some cold water. Fine, but what exactly is the problem? I approached her after her talk to get the real story.

First, the ABCD covers ALL actuaries, not just P&C actuaries. The real whipping boys right now are the pension actuaries who are getting swept up in the approaching annihilation of state public finances from underfunded pension liabilities (see this podcast if you’re interested).

Sheila was quick to point out that when she started in her position 8 years ago it was casualty actuaries that had the bullseye painted on their chests. This coincided with the final stages of a hard market so it’s understandable that the public was very upset with increases in premiums associated with the cyclical upswing. Perhaps we can say that normally we sweep most problems under the rug but when some degree of incompetence coincides with real costs people start pining for pounds of flesh.

The other driver is regulators. Sheila mentioned that she has attended meetings with regulators who were visibly and vocally angry about the work they receive from actuaries in rate filings. Lots of swearing, apparently. It’s ironic that the most vocal of these ‘shouters’ were apparently also actuaries who, through this behavior, were violating several precepts of the professional code themselves (act with courtesy and first contact the actuary you have a problem with directly before complaining formally to the board).

The key here is that when regulators get angry, they respond with more regulation. The threat that Sheila felt was approaching was formal government regulation of the actuarial profession which up to this point is entirely self-policing*. Sheila didn’t shed much more light on the substance of the regulators’ complaints. Perhaps, not being an actuary, she didn’t fully understand the core problem. She understands the phrase “shitty work”, though, so she’s spreading the word.

So there’s a regulatory relations problem, here, and I’m pretty irritated that I didn’t know about it and that that the CAS isn’t doing anything about it, as far as I can tell.

*I didn’t realize this and it blew my mind. Maybe this is why the profession doesn’t require some specific university degree like every other profession I know of. When government is charged with regulating a profession is their first instinct to send it to the universities? It costs something like $5,000 to become an actuary (plus all the hours of studying). It would cost SO much more if we required a degree as well. As someone who would have been denied access to the profession if this were the case, I get a cold feeling in the pit of my stomach at the thought.

Now, a groundbreaking new study finally puts what we’ve instinctively thought into hard numbers — and the truth is worse than we imagined.

A quarter of all public company deals may involve some kind of insider trading, according to the study by two professors at the Stern School of Business at New York University and one professor from McGill University. The study, perhaps the most detailed and exhaustive of its kind, examined hundreds of transactions from 1996 through the end of 2012.

The professors examined stock option movements — when an investor buys an option to acquire a stock in the future at a set price — as a way of determining whether unusual activity took place in the 30 days before a deal’s announcement.

The results are persuasive and disturbing, suggesting that law enforcement is woefully behind — or perhaps is so overwhelmed that it simply looks for the most egregious examples of insider trading, or for prominent targets who can attract headlines.

The professors are so confident in their findings of pervasive insider trading that they determined statistically that the odds of the trading “arising out of chance” were “about three in a trillion.” (It’s easier, in other words, to hit the lottery.)

More here. From MR.

Here’s a troubling thought: what if ALL sustained stock market outperformance is either a ponzi scheme or an insider trading scheme?

I’ve blogged this in brief before, but I keep thinking about this:

Another point worth making is that people die for other reasons than health. For example, people die because of car accidents and violent crime. A few years back, Robert Ohsfeldt of Texas A&M and John Schneider of the University of Iowa asked the obvious question: what happens if you remove deaths from fatal injuries from the life expectancy tables? Among the 29 members of the OECD, the U.S. vaults from 19th place to…you guessed it…first. Japan, on the same adjustment, drops from first to ninth.

And here’s the chart*:

I’m from Canada and one (of the many) complexes Canadians have over the US is that the US healthcare system is evil and exploitative.

Try this Mankiw article on one favorite whipping post, the millions of uninsured:

To start with, the 47 million includes about 10 million residents who are not American citizens. Many are illegal immigrants. Even if we had national health insurance, they would probably not be covered.

The number also fails to take full account of Medicaid, the government’s health program for the poor. For instance, it counts millions of the poor who are eligible for Medicaid but have not yet applied. These individuals, who are healthier, on average, than those who are enrolled, could always apply if they ever needed significant medical care. They are uninsured in name only.

The 47 million also includes many who could buy insurance but haven’t. The Census Bureau reports that 18 million of the uninsured have annual household income of more than $50,000, which puts them in the top half of the income distribution. About a quarter of the uninsured have been offered employer-provided insurance but declined coverage.

Of course, millions of Americans have trouble getting health insurance. But they number far less than 47 million, and they make up only a few percent of the population of 300 million.

*And here’s a footnote on the chart, which I don’t totally understand:

A number of mathematically astute readers have asked why some countries have increased average life expectancies once you take out fatal injuries. I asked Robert Ohsfeldt about this, who responded that the adjustment factor was based on fatal injury rates relative to the average. Hence, the adjusted numbers shouldn’t be seen as hard numerical estimates of life expectancy, but rather as a way of understanding the true relative ranking of the various countries on life expectancy excluding fatal injuries.

Reading Buffett ‘s latest letter, I liked this little passage on value (from his 2013 shareholder letter, page 18):

• Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.

A lot of really important ideas in that comment. Worth digging into them out a bit:

1. Buy things that make money. If you can’t figure out how much money you can make with it, pass. Valuation is done always with reference to other valuations. If you’re trying to value something the best way is to think of it as a collection of things that you really understand. (What’s a convenience store worth? Well, let’s start by adding up the cost of all the chips and chocolate bars and cigarettes.)
2. No one has the ability to evaluate every investment possibility. You know enough to make money.
3. But omniscience isn’t necessary; you only need to understand the actions you undertake. Others are going to make money and you may not understand why or how they do it. That’s ok! Stick to your knitting.

Buffett goes on to make a few points about how he doesn’t care about price data, which he likes to do (I don’t care if the stock market closes!). Then…

• If you instead focus on the prospective price change of a contemplated purchase, you are speculating. There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.

Again, focus on your independent, unique view of something’s value. Buying something because some day someone else will buy it back is a vastly more complicated kind of bet (who can predict what others will feel in the future?).

• Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)

And the only thing more complicated than predicting the actions of individual people is predicting the actions of millions of people.

 

Today’s teenagers are the best-behaved generation on record – Vox

Isn’t this the whole point of legalization?

Farmers in the storied “Golden Triangle” region of Mexico’s Sinaloa state, which has produced the country’s most notorious gangsters and biggest marijuana harvests, say they are no longer planting the crop. Its wholesale price has collapsed in the past five years, from $100 per kilogram to less than $25.

“It’s not worth it anymore,” said Rodrigo Silla, 50, a lifelong cannabis farmer who said he couldn’t remember the last time his family and others in their tiny hamlet gave up growingmota. “I wish the Americans would stop with this legalization.”

More here. But there are more moles to whack:

With the wholesale price of marijuana falling — driven in part by decriminalization in sections of the United States — Mexican drug farmers are turning away from cannabis and filling their fields with opium poppies.

Mexican heroin is flooding north as U.S. authorities trying to contain an epidemic ofprescription painkiller abuse have tightened controls on synthetic opiates such as hydrocodone and OxyContin. As the pills become more costly and difficult to obtain, Mexican trafficking organizations have found new markets for heroin in places such as Winchester, Va., and Brattleboro, Vt., where, until recently, needle use for narcotics was rare or unknown.

From Vox. Some comments:

• In the linked-to article this is shown, rightly, as a justification for drilling into aggregate statistics and also as an illustration of how regional an economy (and everything else in life) really is. We get excited about headlines but on the ground, life is very different in different parts of the country.
• Look at South Datoka (second from the top in the belt of middle states). There are counties with high unemployment right next to ones with low. How does this happen? Can’t you just drive the few miles to work next door? Possible explanation: probably a small sample of workers there and maybe some recent shock is to blame (a large employer just moved away?).
• That ugly section of purple in the lower-middle-left is part of a nasty bit of US history coupled with an uncomfortable fact of the current economy.
• Up-up-upstate New York is doing better than I’d have thought (I drive through the area regularly). But Vermont is doing awesome. Again, why no mobility?
• TX is crushing it. I was in Dallas recently and holy cow the place is a construction zone.
• Northern Michigan. Illinois. Yikes.
• Why don’t the workers on the left move to the middle? Moving is hard, there are way more people on the left than jobs in the middle and, well, who knows why?

From Tom Sargent:

I remember how happy I felt when I graduated from Berkeley many years ago. But I thought the graduation speeches were long. I will economize on words.
Economics is organized common sense. Here is a short list of valuable lessons that our beautiful subject teaches.
1. Many things that are desirable are not feasible.
2. Individuals and communities face trade-offs.
3. Other people have more information about their abilities, their efforts, and their preferences than you do.
4. Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.
5. There are tradeoffs between equality and efficiency.
6. In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well meaning outsiders to change things for better or worse.
7. In the future, you too will respond to incentives. That is why there are some promises that you’d like to make but can’t. No one will believe those promises because they know that later it will not be in your interest to deliver. The lesson here is this: before you make a promise, think about whether you will want to keep it if and when your circumstances change. This is how you earn a reputation.
8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.
9. It is feasible for one generation to shift costs to subsequent ones. That is what national government debts and the U.S. social security system do (but not the social security system of Singapore).
10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.
11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves).
12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.

I’d probably have ended on a bit of a higher and less technical note than that.

Two things occurred to me as I read this:

1. How right
2. How boring

Lists and straightforward advice make for very poor rhetoric. If he had told 5 stories and left the other 7 points for another day it’d have a chance to be a great speech.

Instead, we get a list.

Good news! A computer has solved the longstanding Erdős discrepancy problem! Trouble is, we have no idea what it’s talking about — because the solution, which is as long as all of Wikipedia’s pages combined, is far too voluminous for us puny humans to confirm.

A few years ago, the mathematician Steven Strogatz predicted that it wouldn’t be too much longer before computer-assisted solutions to math problems will be beyond human comprehension. Well, we’re pretty much there. In this case, it’s an answer produced by a computer that was hammering away at the Erdős discrepancy problem.

more here

I haven’t been paying too close attention to the Michael Lewis furor but I hear it’s all quite entertaining. Here’s a somewhat different perspective:

Information changes markets.  The reason that I mention bond trading, even though my target is stock trading, is that it was a *far* more rigged market because it was dealer-driven, and voice-to-voice.  It was far easier to lose to more skilled brokers, than trading stocks online today.

More here. The key takeaway for me is that in financial markets, ‘rigging’ is indistinguishable from ‘competitive advantage’ and is mostly a question of time and resources.

Tread carefully when incredibly sophisticated market participants accuse each other of cheating and remember the parable of the baptists and bootleggers.

updated: here’s some pro-HFT stuff.