30 April 2020

Who Survives and Who Dies After Shipwreck

COVID-19 fatalities
Days to hit
10k - 41 days
20k - 5
30k - 5
40k - 5
50k - 4
60k - 4

I still don't understand two things.
1. What makes people so confident that we don't hit 100k before mid-May?
2. What makes people think that - other than our fondness for groups of 10 (says the guy typing with 10 fingers) - this will pause or even slow down at 100k? Particularly if we loosen regulations.

I'd love to think that it will take 6 days to hit 70k, 10 more days to hit 80k, another 30 days to hit 90k and 100 more days to hit 100k. That is, I'd love to think this is slowing down.

But is there anything to support that expectation? Other than some combination of hope and fatigue? Am I missing something?

Meanwhile, a study of shipwrecks is revealing about which sort of communities thrive.
In 1864, two ships wrecked onto the same island near New Zealand within months of each other. Neither knew of the other.

The survivors of the first wreck found themselves at the base of a cliff that one was too weak to scale. The rest left him behind to die.

The survivors of the other wreck, by contrast, risked their lives to save the life of another in the effort to first get to shore.
One community was founded with the clear philosophy of, "We're all in this alone." The other with the clear philosophy of, "We're all in this together."
After being cut off from civilization for 12 months, only 3 of the original 19 shipwreck survivors from "we're in this alone" group were still alive. By contrast, every one of the "we're in this together" survivors were still alive 19 months later.
Willingness to sacrifice to help others made a difference. In another wreck from the mid-1800s, a crew member was bringing the captain's chest of gold to shore, an amount equal to $23 million today. The captain ordered him to leave the chest and rescue a girl instead. This visible sacrifice set the tone for how the survivors would look out for each other. The captain and many of the survivors were LDS and the whole group was cooperative and caring. 2 months later, all 51 of the 51 were still alive.
Cooperation and care for each other turns out to be a great predictor of how well these involuntary social experiments in shipwrecks do. There is probably a lesson there.

28 April 2020

When the Ignored Predictions Have the Best Chance of Coming True

Sometimes, your prediction has to be ignored in order to come true.

Someone predicts that a stock will skyrocket in price over the next few years. So, its initial price when it goes public is very high. Because it is so high when it is first available, not only does its price not skyrocket, it hardly goes up at all. The prediction that everyone acted on is made a lie.

Someone predicts that a company is over-priced, so few people buy it when it first goes public. Its initial stock price is very low. Because it started so low, its price rises over time as it performs okay and investors who bought when it first went public see a good gain. The prediction that everyone acted on is made a lie.

Experts warn that hundreds of thousands of Americans could die from a pandemic. They are taken seriously, special measures are taken (people stay indoors and interact with almost no one), and the experts' dire predictions do not come true. The prediction that everyone acted on is made a lie.

Advocates for life as normal argue that the pandemic is overblown and we should go about life as normal, ignoring the panicked advice of so-called experts. They are taken seriously and hundreds of thousands of people die from a pandemic. The prediction that everyone acted on is made a lie.

Predictions and policies here in the US will be volatile. To make it even more complicated, the predictions will change what happens - in the opposite direction of what was predicted.

What is my prediction? Our behaviors, policies and the predictions about it will look like a murmuration of birds.

24 April 2020

In the Long Run We Are All Rich: What Negative Interest Rates Mean for Good Policy

The Dutch have records that go back to the time of Martin Luther - 500 years. In that entire time, including the European settlement of continents, 30-year religious war, the end of knighthood, serfs, industrial revolution, the car, telegraph, telephone, TV, computer, modern medicine, introduction of democracy .... interest rates never went negative. Until about 2 years ago.
Now the Dutch, the EU, Japan and even the US (for the US still only briefly and after adjusting for inflation) have all had and / or have negative interest rates.
This is huge.

One of the things I've not seen anyone talk about is how valuable it makes investments.

Imagine that you start with $100 income. Each year that income grows by 5%. You want to price this income stream for the next 50 years.

If you assume that interest rates are +1%, then you discount next year's income by that amount. $100 next year is worth only $99 this year. You discount the amount by 1%. And of course the further out in time, the more you discount that income stream.

If you assume that interest rates are negative 1%, -1%, you actually increase next year's income. $100 next year is worth $101.

What is the price of a 50 year income stream growing at 5% a year when interest rates ....
are 1%? $1,903.
are -1%? $1,014,861,688
It's the difference between two thousand and one billion.

What does this mean? The lower interest rates are, the bigger the reward for investments now. What kind of investments will pay off long term? R&D. Education. Startups. Infrastructure.

As we come out of this incredibly painful downturn, we should invest money as if we were drunk or billionaires. This will do two things. One, it will employ a lot of people right now in construction of infrastructure, R&D, teaching and working in or managing startups. Two, it will generate future income that is worth more than it ever has before.

Negative interest rates signal a wonderful thing. It means that the future has never been more valuable and with capital so cheap, never a better reason to invest in this future. In a twist on Keynes, in the long run, we are all rich.

19 April 2020

Popularizing Systems Thinking

Models of complex behavior increasingly sit at the background of vital political discussions like global warming and pandemics. It is time to make them a more integral part of our political discussion. Until voters can understand and participate developing models to predict the behavior of systems, we will have unstable politics, particularly in a country like ours that puts so much stock in the opinion of everyone. This country was defined by a way of thinking. It’s time to expand that.
Our founding fathers did not pioneer Enlightenment thinking but they were the first to create a community organized around it. The Enlightenment shifted people from a reliance on authority and tradition (church and king) to reason and debate (science and democracy). Our founding fathers popularized education – most notably, Thomas Jefferson founded the University of Virginia – with an emphasis on rhetoric and analysis as essential to creating smart voters. They generally believed that education was necessary to freedom and democracy. But as it turns out, rhetoric is a poor way to understand or communicate complexity. We need to update what constitutes a good education.
Today we have expert systems thinkers but we haven’t popularized systems thinking, made it a part of the way we organize and act or even a part of what we include in education. Analysis focuses on parts at one point in time; systems thinking focuses on interactions over time, like how viruses spread at different rates depending on how we behave or how CO2 builds in the atmosphere depending on our technology. Systems thinking is as important to an effective democracy in this 21st century as Enlightenment philosophy was to an effective democracy in the 19th and 20th centuries. We can’t coherently debate systems as varied and crucial as our financial, environmental, education, and healthcare systems with fluency in systems thinking.
Hearing Bill Gates talk about a pandemic in 2015 and how serious it will be, he mentions what "our models told us." Listening to California governor Gavin Newsom in press conferences, he, too, references "our models." Models have the potential to explain futures we haven't yet experienced. Models will never be perfect; they can, however, be sufficient to inform good policy.  Once you understand compound interest, you may not be able to predict how much wealth you’ll have in 30 years but you know what to do: invest early and often to maximize that wealth. Once you understand how rapidly the coronavirus can spread, it informs policies like shelter-in-place. Even though models are sensitive to changes in assumptions and inputs, they can still point us in the right direction. The better people understand them, both their limits and the insights they provide, the more credible and helpful these models.
I work with really bright scientists and engineers to plan – or model – their projects to develop new products like drugs, medical devices and computer chips. Two benefits inevitably follow. One, each person gets insights into what others are doing and how that impacts them. Good models are key to coordination. Two, they learn more of what is possible as they play with the model, play a game of “what if” to see how they might accelerate launch. “What if we hired one more circuit engineer?” “What if we doubled the number of clinical trial sites so that we could enroll patients more quickly?” The models let them answer what-if questions and become tools for making really smart people even smarter, in the same way that a spreadsheet can help a financial planner to get and communicate insights. Models that a group jointly creates and maintains could be used to inform an entire populace about their policy options on issues like economic stimulus, global warming, or the spread of a pandemic. Even very simple models can help to illustrate important dynamics more clearly than rhetoric.
Democracy depends on education. Change is accelerating. We’re increasingly dependent on systems. Education needs to include system thinking. In a crisis like a pandemic, we have to react to what the models predict about consequences because if we wait to react to actual consequences or rely on our intuition (intuition informed by completely different circumstances) our actions will be tragically late. Models let us learn from the past and from possible futures. The AI that recently beat the world champion Go player Ke Jie was able to make a move no one had ever before seen, a move learned from millions of game simulations it had simulated play even before playing its “first” game with Ke Jie. When a community encounters something like the coronavirus, it would be nice to be at least as prepared as one might be for a game of Go.
There are a variety of ways to popularize systems thinking. One way might look like video games. Imagine kids learning about global warming or economic development by getting exposed to simple models that play out over time. They first learn to turn the knob on this variable and then that variable. They see which variables are akin to the butterfly's wings in Brazil that causes a snowstorm in Minneapolis and which are akin to a hundred moths beating their wings uselessly against a light bulb. Over time they begin to introduce their own data, their own variables, or even change the structure of the model. The class as a whole could build a model that represents their collective insights and predicts outcomes few – if any – minds are sophisticated enough to foresee.
Good education changes life outside the classroom. Eventually democracy might mean that we have collective, online models that represent our best knowledge and are as widely understood as an op-ed or debate. Policy could come out of millions of simulations that are largely transparent and contributed to and understood by millions of citizens. Perhaps working on models will become as much a part of citizenship as working on campaigns or reading and arguing about op-eds. In the same way that a car lets us travel further than we could on foot, good models can let us create better policy than we can with debates.

Ron Davison lives in San Diego County, wrote The Fourth Economy: Inventing Western Civilization and works with teams in Fortune 500 firms and startups to accelerate product launch. @iamrondavison

A Post-Pandemic Stimulus Plan to Quickly Create Jobs

Adding to the trauma of deaths, illness, layoffs, and social isolation, at the end of this pandemic we will find ourselves with tens of millions unemployed. Without quick, bold policy initiatives, the post-pandemic economy will create even more trauma. The millennials in particular – a generation that began its career in the aftermath of the Great Recession and now face this economic wreckage only a decade into careers – are going to be badly hurt by this.
Unemployment has longer lasting negative impacts than does divorce, being widowed, or being laid off.[1] It’s traumatic and ruinous to someone’s long-term economic prospects and any policy we need to adopt to address tens of millions who are unemployed has to account for this.
What would quickly employ people and stimulate wage and productivity growth? Doing for entrepreneurship what policymakers did last century for capital and labor. That is, invest boldly, at unprecedented levels.
Prices tell you what markets think is abundant and what is scarce. Capital and labor aren’t scarce. Entrepreneurship is.
Proof that capital is no longer scarce is simply this: the price of capital has gone negative. How unusual is that? The Dutch have records on bond sales that go back 500 years. In all that time they never had negative interest rates until just a couple of years ago. Growing affluence means that there are more investors than ever looking to build portfolios. (And hundreds of millions more reliant on markets through investments in pension funds.) Because of this, trillions in capital move around the globe in search of returns.
Education seems to also be providing a lower return than it did half a century ago. The price for college graduates is dropping. The Fed recently reported that a college degree no longer offers a wealth premium.[2] Which is another way of saying that market prices for education – like capital – suggest that it isn’t that scarce. And many millennials, struggling to pay for housing in cities on wages that aren’t terribly higher than those from a decade or two earlier are wondering when their return on a college investment is going to yield a return. It might not.

Once upon a time capital and education were scarce, though, and investing in them gave the country phenomenal returns. A look at what past investments in what was scarce did for wages and job creation suggests what could happen if we make similar investments in what is scarce today. That is to say, to get some sense of what a startup stimulus might do for the economy, we can look at what past investments in capital, education and research did for the economy last century.

In his book, The Rise and Fall of American Growth, Robert Gordon reports that output per hour between 1920 and 1970 grew 2.82% a year. Between 1970 and 2014, it grew only 1.62%. If wages had grown at 2.82% between 1970 and 2019, median income would have been $88,000 rather than the $48,000 it actually was. Compounded over a lifetime, a difference of 1 to 2% is huge. You don’t get returns without making investments, though.
During World War 2, the government invested billions in capital equipment for factories building wartime equipment. Between 1940 and 1945, consumption of capital rose from $19 billion to $116 billion[3], much of that coming from the government.  Additionally, it sent experts on production and management – consultants like W. Edwards Deming and Peter Drucker – to help companies make best use of this capital.
The result was dramatic. On D-Day, June 6, 1944, the Germans could deploy only 319 aircraft. The United States and its allies deployed 12,837. American manufacturing was more powerful than a Nazi blitzkrieg.
When the war was over, the government let companies keep the manufacturing and intellectual capital it had funded. Rather than make tanks and planes, they began making cars and TVs – at rates as impressive as the preparation for D-Day.
Next, the government invested an unprecedented amount in education. Between 1944 and 1949, BA degrees conferred rose from 126,000 to 432,000. The rapid rise in the creation of knowledge workers was essential to the emergence of the information economy.
Finally, the government spent more on R&D, funding agencies like DARPA and the NSF. The innovations resulting from this research – as varied as the internet, communication satellites, and genetic engineering –helped to create hundreds of new technologies, thousands of new products, millions of new jobs and trillions in new wealth. Most R&D investments fail to generate any return. The ones that do, though, continue to compound over time to create value that dwarfs the initial investment. (In this way, investment in R&D is very similar to investments in startups: most fail and the few that succeed generate great returns.)

A startup stimulus could do two things. It could quickly create hundreds of thousands – even millions – of jobs. And it could yield returns as dramatic as the long-term returns to education and research made after World War 2.
While the price markets pay for capital and education seems to be falling, the the price of entrepreneurship – wealth created by successful entrepreneurs – is high and still rising.
In 1987, when he was 31, Bill Gates became the youngest self-made billionaire in history. About a generation later, in 2008, Mark Zuckerberg became the youngest self-made billionaire at age 23. Investments in entrepreneurship could offer high returns.
Big investment in startups – entrepreneurship – will pose as many challenges as big investments in education, research or infrastructure did for past generations. Anyone who knows how difficult it is to identify good startup ideas or to launch a company from scratch will realize that a startup stimulus will be at least as difficult as figuring out how to ramp up production in 1944 to complete one plane every five minutes, launch fifty merchant ships a day, and finish eight aircraft carriers a month. Or land on the moon or launch communication satellites. It won’t be easy but it will yield a great return.
This is a big challenge that promises a big reward. A hundred billion dollars could fund 50,000 startups that employ 700,000 people for 18 months; a half a trillion would fund about 250,000 startups and create 3.5 million jobs. There would be no question about whether a startup stimulus would create jobs. It would be designed for exactly that. We could begin funding startups even as people still shelter-in-place and – depending on how bad unemployment is – adjust the scope of this startup stimulus up or down.
Americans hit by this pandemic could quickly return to work. Rather than a gap in their resume and a hole in their savings, they would get valuable work experience and savings. The trauma of long-term unemployment would be mitigated and their lifetime earnings, productivity and wealth would be greatly different.
What would we get for our return? Tens of percent of these startups will fail as soon as their guaranteed funding is gone, but they will have provided employment at a critical point in the recovery. Tens of percent are likely to continue beyond their window of guaranteed funding for another year or three. Many will become great, viable companies. A few will even become iconic companies, the GE, GM or Apple of their generation. Successful companies mean better products and services for all of us, higher wages and more wealth.
Additionally, all sorts of unexpected benefits came from aggressively investing in capital, education and research. The NSF didn’t start with the idea of genetic engineering or a computer smaller than a pocket protector. The same will happen with great investments in entrepreneurship. As more people become more adept at entrepreneurship, as more communities can at will create new companies able to create jobs and wealth, economies will become more prosperous and less subject to long-term sluggish growth that breeds cynicism and helplessness.
Bold investments in entrepreneurship will not only immediately create jobs but could trigger a steady rise in productivity and wages at least as strong as that of the American economy before 1970. The short and long-term potential of such policy is huge. So is the risk of doing anything less.

Ron Davison lives in San Diego County, wrote The Fourth Economy: Inventing Western Civilization, and helps team within Fortune 500 companies and startups to accelerate product development. @iamrondavison

16 April 2020

Investing in the Apocalypse

The Dow
between mid-Feb and mid-March dropped 38%.
between mid-March and mid-Apr (today) rose 34%.
Since mid-Feb the Dow is down 18%.
(Remember that if the market falls from 100 to 50, it drops 50%. If it then raises 50%, it will only be at 75. It takes a bigger % gain to recover than the % fall that got you into a hole.)

This raise of 34% strikes me as irrational. Our economy will not be the same for at least a year. It could easily take years to get back to normal. Profits will drop more than the 18% that the Dow has fallen.

The dilemma is that if you get out of the market and then get back in, you have to be smart on timing twice: you have to know when to sell (best time was 15 Feb and second best might be now) and when to buy (that may be about mid-summer when people finally realize how abnormal the new normal is or even in February of next year when a new administration awakens optimism).

I don't know about you, but I cannot save enough to retire on the 0.1% return of a bank account, and one of the only certainties in investment is that risk and reward go together. If you avoid risk, you will avoid returns.

What are our options?
1. Just ride this out and try not to get cute on timing. This probably means looking at some lousy monthly statements during the next 3 to 12 months. (And probably a couple of exciting ones. It seems safe to say that volatility will continue to be high. Also, as the government pumps money into an economy where people are going out less and consuming less, this money might just find its way into investments rather than consumption, oddly driving up asset prices even as the underlying economy of everyday consumer behavior shrinks.)
2. Sell and wait for months to finally buy in later. The risk is that you miss the sharp rise that could easily characterize the uptick or that you simply sell at the beginning of a surprisingly decent year's gain.
3. Invest in countries and states that are having better success managing the coronavirus. Of course if it is a country like South Korea that is so dependent on exports, even getting your own act together might not be enough when your trading partners are in a deep recession or - worse - enacting xenophobic trade barriers. In this situation, having a great economy is like having a beautiful home in a terrible neighborhood; still not that great. Still, I do think that there will be a return premium on communities that are well managed.
And speaking of well managed, California (and possibly Washington) companies are more likely to benefit from a virtual world and from smart government management to enable their communities to be less hard hit than companies in other regions. CA and WA's companies could be as different from the rest of the nation as any foreign companies.Watch your own behavior. What are you consuming more of? Less? This could be a leading indicator of where profits will flow.

All the above should be taken with a grain of salt. Your best bet is to diversify across time (just buy once a day or month or year or decade depending on what you can afford, regardless of whether the market is reaching new highs each day or seeming to drop into the abyss) and companies / industries / and countries. Still, I have trouble believing that the market is going to have a great run over the next quarter or three. We have yet to get handle on this pandemic, much less what it will take to adjust to a post-coronavirus world that could easily run at about 75 to 95% of current levels for quarters or even a couple of years.

12 April 2020

Acting on Forecasts Rather than Proof

The forecasts for COVID-19 deaths are falling. That's wonderful news. It turns out that measuring the cost for exponential growth of a virus has something in common with measuring the value of startups. It is subject to error but can still inform you how to act.

One key lesson is to move first and move fast. By the time you have data proving the value of a startup, you pay far more for it. Similarly, by the time you have data proving the severity of a virus, you pay far more for it.

Number of deaths thru 11-Apr:
San Francisco: 14
New York: 6,898

"[San Francisco mayor London] Breed ordered businesses closed and issued a citywide shelter-in-place policy effective on March 17, at a point when San Francisco had fewer than 50 confirmed coronavirus cases. (California Governor Gavin Newsom followed with a similar statewide order 19 March.) On that date, New York City already had more than 2,000 positive cases. But New York Governor Andrew Cuomo and New York City Mayor Bill de Blasio, reluctant either to shutter schools or issue a stay-at-home directive for the nation’s largest city, didn’t take similar action for several days. By the time New York City fully shut down on March 22, more than 10,000 cases were reported across its five boroughs." [From the Atlantic, "The City That Has Flattened the Coronavirus Curve"]

5 days can make a big difference when facing a virus that spreads or contracts exponentially.

I see people wondering how stock prices can go up when we're still in a pandemic. Stock prices represent an attempt to price an endless stream of future profits. It is true that the Dow is up 30% in the last couple of weeks. It is also true that it is still down 25% from its peak a couple of months ago. Stock prices fluctuate because people are trying to estimate something in the future that is continually changing as events and best estimate methodologies change. Investors still agree that the coronavirus and measures to protect against it have lowered the value of future profits; their margin of error in estimating that means that stock prices are going to fluctuate. A lot.

I see people dismissing the models forecasting coronavirus deaths as being wrong. Models are always wrong but that doesn't mean that they aren't helpful. One catch-22 with models and policy is that the group taken least seriously could be proven most accurate. What do I mean? Let's say that we had ignored the coronavirus warnings from experts and continued as normal - never socially distancing and not changing anything. In that scenario, New York would be a best case for cities and fatalities would be multiples of what they are now. We could easily have 1 million deaths rather than 100,000. The best-case forecasts would now seem tragically naive. On the flip side, if we listened to those who warned of the worst and took serious measures to protect against that, moving fast and dramatically, the worst-case forecasts would now seem morbidly pessimistic. We would have far less than 100,000 dead and would never come close to a million. Even without behavior change, forecasts of anything that grows or contracts exponentially are likely to be off. Hugely. The outcome could easily be 10X or 1,000X better or worse given just small changes in the rate of contagion or mortality.

Early investors in Apple likely never once stopped to think that it could be worth a trillion early the next century. But they didn't have to know it would be worth that much to know it was a good investment. Given the Bay Area is the epicenter for trying to value the future, it is unsurprising that it would become a model for how to minimize the harm of a virus. Among the many things the folks in the Bay Area have learned is that it is better to move first to pursue a possibility - whether that possibility is avoiding fatalities from a pandemic or owning shares of a startup that later make you rich - and then learn from and adapt to reality than it is to wait for the data to come in and by then to have missed your opportunity.

As the future comes at us with increasing speed, the ability to quickly assess what models suggest rather than what data confirms could make all the difference.