Long and short of bubbles -- Grumpy podcast with Owen Lamont

The long and short of bubbles. A conversation with Owen Lamont on Gamestop and other matters. See my  last post for background and great papers by Owen. A direct link in case the above embed doesn't work. 

Owen views the current situation more as a classic short squeeze than a replay of 3com/Palm and similar affairs in 1999. These are established companies with short markets, and there is little technological news about them.  We talk a bit about bubbles in general, short sales, supply responses, the puzzling lack of liquidity -- people willing and able to take the other side of crazy stuff, and the state of the market today.  

The review of "Famous First Bubbles" that Owen mentioned is here.  

Gamestop. 1999 déjà vu all over again?

In case you haven't noticed, Gamestop and a few similar stocks are in a classic bubble. At least it was at 8 AM pacific when I read the print WSJ, possibly not at 9:30 AM as I write. What's going on?

It's not the only time. This sort of thing has happened over and over again through history, most recently in the late 1990s. It's too easy to just say "people are dumb," and move on. That can explain everything. Instead, we can and should as always look at a repeated phenomenon like this and try to understand how the rules of the game are producing a weird outcome, despite pretty smart players. 

The best and most prescient analysis I know are Owen Lamont's "Go Down Fighting: Short Sellers vs. Firms," (last working paper, ungated here) Owen's classic paper with Dick Thaler, Can the Market Add and Subtract? Mispricing in Tech Stock Carve‐outs and of course my "Stocks as money" which offered (I think) a different and more cohesive view of the Add and Subtract event, and extended it to other situations.

There are four essential characteristics of these events, along with a few corollaries spelled out in my paper:  

1. Securities are overpriced. 
2. Trading volume is enormous. There is a big demand for short-term trading. There is some fundamental news and a lot of talk about the stock.  
3. There are constraints on short sales, limiting the ability to take a long-term bet on the downside.
4. There are constraints on the supply of shares,  among them the same short sale constraints. 

The first is obvious. The second through fourth however sharply limit our view of what is going on. Simple irrationality, people get attached to a stock, can explain overpricing, but not mad turnover, why they would sell it a day later. 

Jay Bhattacharya on good fellows; tests vaccines and more

Podcast:

Link in case the above embeds don't work. 

Stanford Doctor and Professor Jay Bhattacharya joins the GoodFellows for an engaging discussion of covid, vaccines, tests and more. He starts off with a view directly contradicting the conclusion I have come to: he thinks the vaccine should be deployed first to protect old people, not to control the spread of an exponentially growing and mutating virus. I love it when very well informed people disagree with me. Was I wrong?  Then Niall goes on to challenge the Great Barrington Declaration, and maybe consider that lockdowns might not be so dumb. Then the conversation gets really interesting! 

On Tuesday, I also recorded an Econ Talk podcast with Russ Roberts on the same issues. I'll post when up. 

Open smart, redux

Open smart, I and other economists argued back in March. Don't just shut lock down the whole economy willy-nilly. An auto-body paint shop (they wear masks and respirators anyway) is not likely to spread covid-19. Parks too. Test widely, randomly, to stop the spread of the disease, not just to diagnose the sick. 

At last, perhaps, we may be headed this way, reports the Wall Street Journal 

Scientists are settling on a road map that can help critical sectors of the economy safely conduct business, from meatpacking plants to financial services, despite the pandemic’s continued spread.

After nearly a year of study, the lessons include: Mask-wearing, worker pods and good air flow are much more important than surface cleaning, temperature checks and plexiglass barriers in places like offices and restaurants. And more public-health experts now advocate wide use of cheap, rapid tests to detect cases quickly, in part because many scientists now think more than 50% of infections are transmitted by people without symptoms.

We have a long way to go before vaccines stop the spread of the disease. Tests could do it now, if the FDA would get out of the way. Yet

 a year later, sufficient testing remains a critical issue.

Test detail

One of the largest studies of asymptomatic transmission to date showed that frequent testing was essential in identifying infections among a group of nearly 2,000 Marine recruits...

The study looked at cases identified with lab-based tests that search out and amplify the genetic material of the virus, but those tests aren’t as easily scaled as so-called rapid antigen tests, which search for viral proteins.

Results from lab-based tests can sometimes take days, while results from rapid tests are usually available in less than an hour...

The shift toward using frequent, inexpensive and rapid tests on the same people multiple times a week to screen entire populations—instead of one-time tests on individuals who have symptoms—will be important to efficiently break transmission chains, epidemiologists said.

“Unless we’re doing really broad, frequent screening of the people at large, we’re completely missing the vast majority” of infections, said Michael Mina, an assistant professor of epidemiology at the Harvard T.H. Chan School of Public Health. “We have to change how we’re doing this.”

I'm sure Paul Romer is saying, great, now the scientists finally get it. Well, they do. Next the FDA. 

Ventilation

Indoor ventilation has been on my mind. Why is outdoor dining safe and indoor not? Is it really safe to dine "outdoors" in a plastic tent, as has become the hilarious practice around where I live? If outdoors is safe, but indoors is warm, can we not make indoors as safe as outdoors with ventilation, HEPA filters, and UV light? 

Fresh air and effective filters indoors are important because they can remove virus particles before they have time to infect.

So this is a non-grumpy post. We have a long way to go with covid, and the next one after that. To see some durable wisdom breaking out is refreshing. 

Libertarian pandemic

 "Libertarians in a pandemic" is a good essay by Jacob Grier expanding on many themes I've written about here, whether markets though imperfect might do a better job, or at least help on top of government. And if freedom might be better in a pandemic, where all the econ 101 market failures are present, just think how well markets might allocate, say toilet paper. 

There are libertarians in a pandemic, and it turns out they have some good ideas and insightful critiques.

Tests

Let's start with the testing snafu. Tests, of course, should be run by the government because there is a big externality. I want you to get tested so you don't give me the disease. How did the the government do, relative even to a free market? 

The American pandemic response was beset by government failure from the very beginning. In February of 2020, the most urgent priority in the United States was deploying COVID tests to identify cases, survey the extent of the virus’s spread, and attempt to contain it. Although the World Health Organization had already developed a working test, the Centers for Disease Control designed its own from scratch. The CDC test turned out to be unworkably flawed, reporting false positives even on distilled water.

Around the same time, Health and Human Services Secretary Alex Azar declared a public health emergency. Ironically, one effect of this declaration was to forbid clinical labs from creating their own tests without first obtaining an emergency use authorization from the Food and Drug Administration. Bureaucratic hurdles — which included pointless requirements to send files by mail and to prove that the tests would not return false positives for MERS and the original SARS virus — slowed development. The early outbreak in Washington was uncovered in part by researchers simply defying the CDC to test samples without permission.

Grumpy economist podcast: free market tests, vaccines and more

The Grumpy Economist podcast is back, and we're going to aim for a once per two week schedule. This week we talk about vaccines, tests, masks, and how free markets would do better than the government, or at least can usefully complement the government. 

I wanted to get to the larger point, at least can we have a free market in toilet paper? Price controls in crises are one of those econ 101 questions that divide economists from everyone else. Don't transfer income by rationing toilet paper in a crisis. Let prices allocate it to who really has got to go, and give the natural disincentive against hoarding. Next time. 

 Link here if the embed above doesn't work. 

Portfolios for long-term investors

Portfolios for long-term investors is an essay that extends a keynote talk I will give Thursday Jan 21 at the NBER "New Developments in Long-Term Asset Management" zoom conference. The link takes you to my webpage with pdf of the essay and the slides for the talk. I'll blog the next draft of the essay, as I want to do it once and I'm sure I'll get lots of comments. 

The conference program is here. You can listen to the conference on YouTube here.  I'm on Thursday 12:30 ET, but many of the other papers look a lot more interesting than mine! 

Abstract: 

How should long-term investors form portfolios in our time-varying, multifactor and friction-filled world? Two conceptual frameworks may help: looking directly at the stream of payments that a portfolio and payout policy can produce, and including a general equilibrium view of the markets’ economic purpose, and the nature of investors’ differences. These perspectives can rationalize some of investors’ behaviors, suggest substantial revisions to standard portfolio theory, and help us to apply portfolio theory in a way that is practically useful for investors. 

Sanity in CA housing?

As reported by the Sacramento Bee, its city council voted unanimously to allow four-plexes across the city overturning one-house-per lot zoning. 

It's couched somewhat in the language of diversity, 

City officials said the proposal would help the city alleviate its housing crisis, as well as achieve equity goals, by making neighborhoods with high-performing schools, pristine parks and other amenities accessible for families who cannot afford the rising price tags to buy homes there.

“Everybody should have the opportunity to not only play in Land Park but to live in Land Park,” Mayor Darrell Steinberg said. “That’s the Sacramento that we all uphold, that we love, that we value, and you better believe this drive for inclusion and equity is the driving force of our city and it is going to continue well beyond my tenure here.”

But I applaud that. Yes, the effect of highly restrictive zoning is exactly to drive "diverse" people away. Let's not be hypocrites. 

And ok, we're not waking up in property-rights nirvana either

“We’re going to insist on design quality and scale,” [Mayor] Steinberg said

 in response to comments.  And 

buildings would still have their current height restrictions. There would also be historical protections, limits on how much of a lot size a house could take up and on the amount of square footage.

Ok, baby steps.

Neighborhood association leaders in Land Park and Elmhurs... suggested the city only allow multi-unit houses in certain areas of the city, along commercial corridors and near transit stations.

“No one will have the ability to live in lower-density neighborhoods,” said Maggie Coulter, president of the Elmhurst Neighborhood Association. “The city needs to preserve existing neighborhoods in order to promote home ownership opportunities for everybody.”

Kudos to Sacramento city council for seeing through this complete incoherence, and the obvious flaws of segregating housing to undesirable parts of the city.

The lack of a whisper about "affordable housing" mandates is also refreshing. Maybe sanity can erupt in a one-party state, when discussions are not tinged with partisan derangement syndromes?

Minimum wages. People are not all the same.

The ancient argument over the minimum wage (WSJ) is heating up, another of economics' many perennial answers in search of a question. 

As in the linked article, I think it is a mistake to focus entirely on overall employment of low-skill workers. That is surely an issue. But the wage is one part of a detailed bargain between workers and employers. By putting its thumb on one part of the bargain, the government will ensure that other parts squish out. That's the larger issue. 

Does the job allow flexible hours? Does it provide other benefits -- transportation, employee parking, uniforms? How hard do you have to work? Which workers get the jobs, not how many get jobs overall? 

Vaccines at NR

I repackaged and rethought some of my earlier thoughts on vaccine allocation and markets vs. government for National Review here. Text here, without the lovely pop-up ads: 

Free Markets Beat Central Planning, Even for COVID-19 Tests and Vaccines January 12, 2021 

Surely, we can’t let there be a free market for COVID-19 tests and vaccines. Indeed, tests and vaccines encapsulate many of the “market failure” parables from introductory economics courses.

But the argument for free markets is not that they are perfect. The argument is that the known alternatives are much worse. And we have seen a catastrophic failure of government at all levels around the world to handle this pandemic, especially in delivering tests and vaccines.

The CDC delayed testing for about two months. While it dithered, it blocked private parties from testing. University labs, for example, were blocked from making and conducting their own tests. During those two months, someone could sell you a thermometer to detect a COVID-19 fever, but if someone tried to sell you anything more effective, the FDA would stop them. Once it finally approved paper-strip tests in November, the FDA insisted that $5 paper-strip tests require a prescription and be bundled with an app, driving the cost to $50. Rapid testing that lets people who are sick isolate, and lets businesses ensure that employees are healthy, is only just becoming widely available, held back for six months by the FDA.

Let’s imagine that the government had not prohibited free-market activities. This is not anarchy, just a lightly regulated sensible market on top of whatever the government wants to do.

Private companies would have developed tests quickly and would have worked to make them faster, better, and cheaper. Why? To make money! Lots of people, businesses, schools, and universities are willing to pay for good, fast testing. Medical companies, knowing they could make a lot of money so long as they beat the competition, would have raced to develop and sell tests. We would have had $5 or less at-home paper-strip tests by late spring. And that would have enabled much of the economy to reopen.

Low Interest Rates and Government Debt

This is a talk I gave for IGIER at Bocconi (zoom, sadly) Jan 11 2021. Olivier Blanchard also gave a talk and a good discussion followed. Yes, some content is recycled, but on an important topic one must go back to refine and rethink ideas. This post has mathjax equations and graphs. If you don't see them, come back to the blog or read the pdf version. Update: Video of the presentations. 

Low Interest Rates and Government Debt
John H. Cochrane
Hoover Institution
Prepared for the IGIER policy seminar, January 11 2021

1. Why are real interest rates so low? (And thus, when and how will that change?)

Figure 1. 10 year US treasury rate and core CPI.

As Figure 1 shows, real and nominal interest rates have been on a steady downward trend since 1980. The size, steadiness and durability of that trend mean that we must look for large basic economic forces. “Savings gluts,” foreign exchange reserves, quantitative easing, lower bounds, forward guidance bond market frictions and so forth may be important icing on the cake, but they are not the cake. They cannot account for such a long-lasting steady trend.

The most basic economics states that the real interest rate equals people’s rate of impatience, plus growth times a coefficient usually thought to be between one and two. The interest rate is also equal to the marginal product of capital. In equations*, \[r = \delta + \gamma g \].  

Figure 2. Real potential GDP growth. 

Figure 2 presents the growth of potential GDP, as one easy way to look at long run growth trends. Potential GDP grew 4.5% in the 1960s, 3% in the 1970s, had a spurt in the late 1990s, and then settled down to less than 2% now. This slowdown in long-term growth is the great and unheralded economic disaster of our time. But that’s for another day.

The most natural explanation for the decline in real interest rates, then, is that growth has declined. A coefficient greater than one brings interest rates down faster than growth rates, opening the question that the interest rate r might even be below the growth rate g.

FDA vs. Astra-Zeneca; bureaucracy vs. evolution and exponential growth

 From Alex Tabarrok at Marginal Revolution, quoting Marty Makary, M.D., a professor of surgery and health policy at the Johns Hopkins University School of Medicine:

... the FDA needs to stop playing games and authorize the Oxford-AstraZeneca vaccine.  It’s safe, cheap ($2-$3 a dose), and is the easiest vaccine to distribute. It does not require freezing and is already approved and being administered in the United Kingdom.

Sadly, the FDA is months away from authorizing this vaccine because FDA career staff members insisted on another clinical trial to be completed and are punishing the company for inadvertently giving a half-dose of the vaccine to some people in the trial.

It’s like the FDA is holding out, pontificating existing excellent data and being vindictive against a company for making a mistake while thousands of Americans die each day...

My emphasis. Alex:

See also my post The AstraZeneca Factory in Baltimore. Thousands of people are dying every day. We have a vaccine factory ready to go. The FDA should lifts its ban on the AstraZeneca vaccine.

Alex understates the case. It is not just that "thousands of people are dying every day." It is that we are in the phase of exponential growth, and a new more infectious variant has just arrived bumping up the growth rate further. Every hour of delay means tens of thousands more will die.  

We are in a fight of bureaucracy vs. exponential growth and evolution. Exponential growth and evolution are winning. Just how many thousands have to be on the left side of the trolley switch before the FDA stops allowing Astra-Zeneca to pull it? What's the risk aversion coefficient that justifies months of delay and another clinical trial?  

More deeply, can the FDA ever figure out that the point here is to stop a pandemic? The mentality is traditional: we must provide a perfect vaccine to protect individuals, taking the disease as given, and people who die while we do more studies are worth the cost. That is simply not what's going on right now. The point of the vaccine is to stop a pandemic. The disease is growing exponentially, and mutating and evolving. The externality is everything. I know, it's awfully hard for bureaucracies to innovate and change mindset. Well, sometimes you have to.  

For years the FDA was focused on, don't repeat thalidomide. Drugs must be safe. AIDS forced a hard reckoning. The people who are dying while you wait matter. But this is a third, even harder conceptual change. Stopping the spread of the disease matters. And the FDA does not have the years it took to make the AIDS change of mindset. 

Nothing matters but reproduction rate R

The new strain and the need for speed by Alex Tabarrok on Marginal Revolution makes an excellent point. The new strain is more transmissible. That means the reproduction rate R is higher. For given behavior, the exponential growth is faster. If or where R was a bit below one and the virus contracting, now the virus is spreading exponentially again. 

 "a more transmissible variant is in some ways much more dangerous than a more severe variant. That’s because higher transmissibility subjects us to a more contagious virus spreading with exponential growth, whereas the risk from increased severity would have increased in a linear manner, affecting only those infected."

The recurring failure of our government response to this pandemic has been to get behind exponential growth. Here we go again. Wasted months when the vaccines were known to be safe. Wasted weeks to have thanksgiving dinner rather than  approve vaccine. Snafu after snafu in vaccine distribution. And CDC rationing that is designed to just about nothing to stop the spread.