Firearms, research, and controlling the narrative

I was happy to see the Wall Street Journal write a staff editorial about my recent paper with Patrick Warren, “Firearms and Lynching“.

I was made aware of the editorial on Saturday and I’ll admit I was a little nervous when I first clicked, only to be relieved to find an accurate summary of the research and a relatively restrained commentary.

But why was I nervous, you may ask. Isn’t media attention something scholars want? Yes. Earlier in my career, that was an unqualified “yes”, but I’ve been doing this long enough now that I appreciate just how little control a scholar has over the conversation that can happen around their work. I’ve had a couple papers get non-trivial media attention over the years and each time it’s a reminder that the research itself is not just the subject of a conversation, it’s a prop that gives people an opportunity to have the conversation they already wanted to have. The findings of the research in question can prove quite immaterial to that conversation.

When I posted a thread about the paper two weeks ago, I was happy to see enough retweets to pass the paper around and get it some attention.

What was less fun was the predictably over-reductive quote tweets and comments excitedly parading the paper as evidence of “guns are good.” Not unlike people excited to reduce a paper to “minimum wages are good” (or “this paper is bad because minimum wages are bad”), it can be frustrating to try to make a nuanced contribution towards understanding a complex context, only to see it reduced to a television debate chyron.

The key to surviving this process is accepting that a scholar, even those of tremendous standing inside and outside of the academy, has little to no control over the narrative that emerges around their work. Holding strong preferences over the surrounding narrative is folly varying only in consequences. You can try to fight the narrative, which typically results in the world either ignoring you or, worse, joyfully inviting you to wrestle in the mud. [Good rule of political discourse: never wrestle with a pig. You can’t win, you end up covered in mud, and the pig loves it.] Some scholars, though not as many as the more skeptical fear, prefer to shape the research to serve a narrative from the outset. This, of course, is no longer research, it’s advocacy masquerading as science. Don’t do this. And lastly, some create great research, only to apologetically bear the burden of the unintended narrative that emerges around their work. If you recognize yourself in this description, my only advice is a) don’t apologize and b) go easy on the sauce.

For what it’s worth, my view of “Firearms and Lynching”, in the context of the broader literature on firearms and public safety, is that things have to be horrifyingly bad before greater availability of firearms make for a safer public. Foreign invasions, institutionalized segregation, pogroms, lynch mobs, these are all contexts where an armed population can make for a better outcome. Probably not a happy ending, but maybe a less tragic one. The Jim Crow South was such a context. That’s how bad it was. That’s the takeaway.

If you want to translate this piece of historical research as evidence that a greater saturation of firearms in modern American society will make for better and safer lives, then I’ll admit that I think you are too pessimistic about the current state of the world. You’ve spent too much time reading about burning cities that actually aren’t burning. If you think that a greater taking up of arms by Black Americans will make their lives safer and better, then I’ll admit I still think that is probably wrong, but maybe less wrong. Black Americans have brought their reality to the eyes of broader America and that reality questions whether or not the police serve their communities or threaten them. It is certainly a legitimate question whether they can rely on police protection to secure their homes and their communities.

It doesn’t take a lot of imagination to make the next logical leap here. If police can’t be counted on, we’ll protect ourselves, and firearms are a tool to do that. That sort of thinking, however, is exactly why making leaps from history to contemporary contexts is so fraught. As bad as things are today, even in the most violent districts with the most contemptable police departments, it’s not the Jim Crow South. Lynch mobs are not roaming the streets and selling photos of their victims as postcards. Groups of young white men are not wandering into homes and stealing from them without fear of retribution. Firearms are tools of death, and their presence bring benefits and costs. To exceed the costs of broadly deadlier conflict throughout your community, the benefits to other dimensions of public safety have to be significant.

And we’ve haven’t even confronted the additional reality that an armed Black man in the United States should probably not feel safe in the presence of a police officer, no matter if that firearm is licensed, registered, and transparently revealed to the officer. In a land of no-knock raids, where police are bursting into homes under cover of night with fingers on triggers, I’m not sure a more heavility armed Black America leads to fewer men and women being killed by police.

I’m sorry, did you think that I was going to close out this post with a solution to modern violence and policing in America? With an answer? The world is complex and difficult, policy for it doubly so. My colleague and I wrote a paper that tried to answer the question of whether a minority living under an indifferent regime that condoned terrorism could better live their lives armed. That’s the question we made a contribution towards answering, and our results point towards “Yes”. If you want me to make big claims about what that means today, well, get used to disappointment.

Saving a Rusted Car with Rust Bullet Paint and Cosmoline RP-342 Coating

Corrosion is estimated to cost about $250 billion per year in the U.S. alone, so it is economically significant. The impact of corrosion hit home for me when I noticed that near the bottom of the right rear wheel well of my little 2007 sedan, a 2-3” hole had rusted right through the metal, exposing some inner chambers to water and salt and sand thrown from the wheel. The rust does not look like it has compromised the vehicle’s mechanical integrity (a real concern, since today’s cars rely on the body sheet metal for strength), but if it keeps on going it could turn my chariot into a junker.

I called an honest local body shop, and the guy told me it would probably cost more than the car is worth to fix it properly (replace the rocker panels, etc.), and  it might run $1700 just to do a patch job.

Being a (retired) chemical engineer, I decided to read up on ways to deal with rusting metal. Especially, how to arrest the progress of rust. The most serious way is to do major surgery with cutting tools, and cut out all the rust, and weld good metal back in, and paint it all well. That is out of my league. So I looked for coatings that could stop the rusting progress.

I have written an article on a different blog describing the various classes of coatings and rust converters that are available. For my project, I chose to use Rust Bullet, ordered from Amazon.

This can be painted directly on rusty metal surfaced, after scraping away all the loose rust. This stuff chemically reacts with the remaining surface rust to make it more inert, and also forms an impermeable seal over the surface, to block further water and oxygen from reaching the metal. It sticks to rusty and non-rusty surfaces. It seems to get good reviews.

One peculiarity of Rust Bullet is that if many hours have elapsed after application its surface gets so smooth that that that the next layer of Rust Bullet or top coat paint will not stick unless you sandpaper the smooth, hard, silvery surface. It’s easiest, therefore, to leave only 2 hours or so between coats of paint, to avoid the bother of sandpapering.

After two coats of Rust Bullet, I applied a top coat of Rustoleum enamel paint (white on the outside of the car, black on interior surfaces).

Some rust had started on surfaces of the inner chambers of sheet metal that had been exposed by the rusted-out hole. I could not readily reach them with a paint brush to apply Rust Bullet. I wanted to spray something that would form a coating that would inhibit further rusting. I settled on Cosmoline RP-342, ordered from the manufacturer.

This stuff sprays on like a thick oily liquid, that should soak into any rust. After maybe 2 hours, it hardens up to a very impermeable, fairly tough waxy coating. It will keep water off surfaces, though I don’t know about oxygen. Anyway, I sprayed the Cosmoline into the available openings, to try to coat the surfaces of the inner chamber parts. (If I had known about it in time, I might have chosen Eastwood Internal Frame Coating instead of Cosmoline for this step.) I was able to coat most, though not all, of the vulnerable surfaces. This was all with me lying on my side, beside/under the car, without great ergonomic access.

I then used several layers of aluminum foil duct tape (learned this trick from YouTube) to seal up the holes in the car body, then added a final coat of white or black Rustoleum. This has pretty well protected the car body there from further exposure to water/sand/sand. It should give me a couple more years of use, all for two days of picky handwork plus the cost of materials.

Welcome to Wrexam

I want to write about the economics of the Wrexam football club. They have docu-series currently airing on FX weeking until late October. They have two celebrity owners whose level of wealth falls squarely within the range of optimum dramatic tension i.e. rich enough to buy and improve a tiny Welsh football club, but so rich that they can buy their way out of every problem without utterly ruining themselves and their families.

I want to write about it, but I won’t. I’ll be patient and wait until the first season is over. Instead, I want to encourage you to watch all or part of the season with an eye towards the drama and risk there is to be found in solving such a complex economic problem. Pay attention, there will be a quiz in two months:

  1. How do you optimize your committment to an investment whose financial payoff is gaining access to a higher revenue stream via a process as unpredictable as finishing at or near the top in a 24 team football league? How do you cope with that much noise in a system with such poor underlying odds?
  2. How do you optimize your committment to an investment whose payoff has an enormous non-pecuniary element (i.e. joy from the success of the team) and that non-pecuniary element is a true local public good (non-excludable and non-rival) that represents a significant portion of total utility in local households?
  3. How should local stake holders treat their relationship to the team? The supporters group has significant voting power when transitioning ownership. What should they be maximizing when they cast their votes? On what observables should they base their decisions?
  4. In what ways are the owners failing to optimally allocate resources within the team?
  5. In what ways is the manager and coaching staff failing to optimally manage the player resources they have?
  6. Are incentives aligned top to bottom in the organization? Within the team?
  7. How do you measure success and failure with a sports club? Should these metrics, or the relative weights on these metrics, change with the scale of the club, it’s resources, and its fan base?

When the season is over we will revisit these questions and more. Running a sports team is an incredibly complex problem to solve. Most previous inside looks have been pure PR projects for the very biggest clubs, worth billions of dollars. These clubs/teams are enormous enterprises, with vast hierarchies and narrowly divided tasks. They are in many ways simply too big to fit into frame for an intimate documentary. If that’s what you’re interested in, fiction is the better channel because it can abstract away from all the field maintence and beer pricing, and just show you Brad Pitt cutting deals over the phone while stuffing food into his beautiful face.

To really understand this business from the inside, you gotta go small. To places where a small number of individuals are making an inefficiently vast range of decisions. Welcome to Wrexam so far looks to be one of the very best views into that world. I can’t wait to see more.

I just hope they find someone to update their zonal marking system on set pieces. I don’t know, maybe much some YouTube videos or something. Yikes.

Who’s afraid of ranked choice voting?

Alaska had it’s first election with a new voting rule and Tom Cotton is pissed.

I want very badly to be snarky here and make fun of the Senator for being so nakedly Trumpian in an effort to discredit any democratic institution the instant it doesn’t produce exactly the result he prefers. Fun aside, snark at Senator’s expense misses the bigger and more important mechanisms that are in play. I think the current instantiation of the Republican party is afraid of ranked choice voting. The Senator, in his angry little tweet, only lends greater credence to the theory. More broadly, its often worth unpacking when incumbents get upset about legitimate institutions, particularly when that anger is asymmetric across parties and coalitions.

What is ranked choice voting?

Quickly, ranked choice voting is any system where voters are asked to rank some number of candidates, n, from 1st to nth. Those rankings are then used to implement a runoff system, where a winner isn’t declared until a candidate he or she has a majority of the top choice votes. If someone has 50% of the first place votes, they win and it is effectively no different that a standard plurality system (i.e the standard system in most US elections). If no one has >50% of the first place votes, then the candidate with the fewest first place votes is eliminated and all of their votes are then divvied up amongst the candidates based on those voters’ 2nd choices. The process then iterates, tallying up the votes, eliminating the last place candidates, and allocating votes from the eliminated candidates based on their 2nd, 3rd, etc choice preferences. The election isn’t called until someone has greater than 50% of the counted votes.

It’s not a point system, like a Borda count, so it doesn’t grant a specific weight to being a 2nd or 3rd choice, so the balance of outcomes is still heavily tilted towards a voter’s top choice candidate. It’s not explicitly an approval system, though voters are under no obligation to rank all of the candidates i.e. if you only want to choose a 1st and 2nd choice out of 10 candidates, that is fine. What the system is explicitly designed to do is reduce the impact of large numbers of candidates splitting the electorate so thinly as to increase electoral noise while also reducing the impact of otherwise irrelevant candidates. It’s not a perfect system (nothing is), and it certainly doesn’t magically nullify the irrefutable math of Arrow’s impposibility theorem. It’s just another way of counting votes, and one that is in no way controversial or even especially complicated compared to the variety of voting rules used in established democracies around the world.

So why the fuss?

Political fragility

Overspecialization is an ecological trap, just ask the koala. Sure, it’s great if you can digest and subsist off of a food source that no one else can, that sounds like a swell way to avoice resource competition. But if you overspecialize in that food such that you can no longer live off anything else, well, then you aren’t likely to survive any meaningful shift in you environmental context. What someone like Nicolas Taleb extolls the virtues of anti-fragility, a lot of what he is talking about is akin to adaptability to and tolerance for unforecastable events.

At the moment, if we can put aside policy positions entirely for a moment, there is an argument to be made that the Republican party is looking incredibly fragile. A sequence of events, some slow progressions over the last 20 years, others shocking events of the last 20 months, have left the Republicans looking highly specialized. Senator Cotton’s response to the outcome in Alaska leads me to wonder if they are electorally specialized to succeed in a context that doesn’t exactly exist anymore.

When I think of the Republican coalition and electoral base, what stands out in sharpest relief is:

  1. The urban-rural divide
  2. Single-issue voters, predominantly regarding abortion and firearms
  3. Trump

The urban-rural divide, specifically the overwhelming dominance of Republicans in rural settings, is the fulcrum upon which Republicans leverage their advantage through gerrymandered district maps. By cracking and packing districts, they’ve ceded a large number of landslide urban districts to Democrats for the express purpose of leaving them thinner elsewhere. The catch with gerrymandering as a minority party in the broader population, though, is that if you get greedy you can go grow accustomed to lots of predictable, but nonetheless narrow victories. Narrow victores, no matter how previously safe and easy to forecast, do not grant a lot of leeway for absorbing electoral shifts. Like, for example, significant numbers of educated urban voters moving to medium-sized cities in red and purple states.

Abolishing abortion has long been a rally cry to turn out voters, and seemingly a pretty good one at that. While pro-choice voters may be just as passionate, protecting the status quo has rarely the same draw as tearing down a cruel and unjust system. Voters may have remained the same, but the status quo has changed and, with it, the prospects for drawing voters to the polls.

Bizarre as it would have seemed to say this 10 years ago, Trump is a bonafide cult of personality. His people love him and he has as much influence with at least half the Republican party as anyone since Reagan, and probably more than even he did. I wouldn’t have said this 10 months ago, but there is a very real chance that he is going to prison. Even if he doesn’t, though, the investigation and trials are unlikely to put Republicans in a positive light with moderate and independent voters, and without the office of the presidency, Trump lacks the same power to shape the narrative that he previously enjoyed.

Actually, let’s revisit the Trump as Republican icon for a quick moment.

One of Seventeen

In the aftermath of Trump’s surprising win of the Republican presidential nomination in 2016, there was floated the possibility that Trump was a Condorcet loser. That is to say, in a head to head election he would have lost to every other major candidate. A retrospective analysis challenged this idea, suggesting that Trump had far broader support in the party than just a loyal and dedicated minority, but I’m not sure how much of that is a product of post hoc endogeneity.

What is not argued is that the 2016 Republican primary still had a lot of candidates late in the game. Seventeen candidates qualified for the first debate. By the fifth debate there were still 13 candidates sufficiently viable to claim a spot on stage. Even if we can’t perfectly adjudicate who Trump would or would not have beaten head to head, the outcome of the eventual election was highly sensitive to the voting rule given the sheer number of candidates. If the primary had been subject to anything other than standard plurality rule voting, it is highly possible, if not probable, that a different winner would have emerged.

The thing about a polarizing candidate is that you are that much less likely to be anyone’s second choice. Under a plurality system you rely on the people who love you, attack the ones that hate you, and comfortably ignore the rest. But some voting rules increase the cost of those you ignore.

About that Alaska Primary

Did I mention that Alaska didn’t just change the voting system for the general election? They had an open primary (meaning candidates from any party competed to be one of the final four candidates). Through a simple plurality rule election, everyone voted for their favorite candidate and the top 4 advanced to the general election where the ranked choice rule was employed.

What would have happened if such a rule were applied in the Republican primary of 2016? What would happen if such a rule were applied across the country where

  1. Roe vs Wade has been overturned
  2. Trump may very well be going to prison.
  3. A lot of people are moving from big blue cities to low housing costs and adequate amenties of medium size cities in purple states

A Democrat hadn’t won a statewide election in Alaska since 2008. Less than a week ago they did it in an election against a former Alaskan governor and Republican vice presidential nominee who’s been on Saturday Night Live. In the second round of vote counting, the eventual Democratic winner received 29% of the votes redistributed from the Republican who finished in 3rd place. There are, it seems, a lot of Republicans who preferred a Republican to a Democrat, but nonetheless preferred a Democrat to Sarah Palin.

Cotton is right. Republicans should be freaked out

I don’t expect ranked choice voting to sweep the nation (though I do think it is better than a standard plurality rule). But I think it is one more sign that Republicans have become overspecialized as a party and are not well-suited to adapt to changing political landscapes. Big things, like Roe being overturned, happen. The public can turn on any celebrity, including your party’s talisman. Rural voters might still mathematically individually be weighted more in the broad political calculus (cough Senate cough), but there’s still the problem that fewer voters live there, which means it only takes a small percent of the population moving to break your map. And what happens when the baby boomers don’t dominate electoral math anymore?

No, the Republican’s aren’t doomed to irrelevance. Yes, they will adapt and rebrand…eventually. But the reality is that there is no greater sign that a party is forecasting electoral difficulty for themselves than declarations that the system is rigged against them, regardless of whether they are railing against fictional corruption or actual institutions that really do work against them. In both cases, however, they are signaling the same thing: we’re in trouble. The Republican strategy of recent decades has been to terrify and pander to the base, attack and ignore the rest. And it’s worked. Ranked choice voting is a threat to that strategy because it increases the cost of attacking and ignoring voters outside of your base.

Maybe that alone is a sufficient argument for ranked choice voting – it increases the cost of attacking people outside of your political base. Given the evidence of political polarization and associated social fracturing, anything that shifts the balance of political incentives from outgroup antipathy to big-tent inclusion is proabably a good thing for all of us in the long run.

“Superabundance” Review

Are resources becoming scarcer as world population increases and per capita consumption increases? Are basic goods becoming more expensive relative to wages in the face of potential resource shortages? These are some of the main questions that are addressed in the just released book Superabundance by Marian Tupy and Gale Pooley. The authors were kind enough to provide me with an advance copy, which is why I’m already able to review this book on its release date (I’m not really that fast of a reader).

The author take a very optimistic view of the issues surrounding those opening questions. Properly measured (one of the key tasks of their work), resources are becoming more abundant, not more scarce. And properly measured, almost all consumer goods are becoming cheaper relative to wages.

The authors use the approach of “time prices” throughout the book. They are not the first to use this approach. Julian Simon (their inspiration for this project) used it in various places in his work. William Nordhaus famously used it is in paper on the history of the price of lighting. And Michael Cox and Richard Alm have used the time-price approach in many of their writings, from the 1997 Dallas Fed annual report, to a full-length book a few years later, as well as updates to the original 1997 report. And if you follow me on Twitter, I like to use this approach too.

In short, “time prices” tell us how many hours of work it takes to purchase a given good or service at different points in time. How many hours would you have to work to buy a pound of ground beef? A square foot of housing? An hour of college tuition? It’s the superior method when you are looking at the price of a particular good or service over time, compared with a naïve inflation adjustment, which only tells you if the price of that good/service rose faster or slower than goods or services in general, not if it’s become more affordable. Inflation adjustments are really only useful when you are trying to compare income or wages to all prices, to see if and how much incomes have increased over time. Of course, which wage series you choose is important (and you need to have a consistent series over time, or at least the end points), but as the authors point out (which they learned from me!), if you looking at wages after 1973, the wage series you use doesn’t matter much. Median wages, average wages, wages of the “unskilled” — these all give you the same trend since 1973. We don’t have all of these back earlier (especially median wages), but there’s not much reason to believe they’ve diverged that much. And the authors also present their data using multiple wage series in many of the charts and tables.

What do the authors find?

Continue reading

High Yield Investing, 2: Types of Funds; Loan Funds; Preferred Stocks

Types of Funds: Exchange-Traded, Open End, and Closed End

Some investors like to pick individual stocks, while others would rather own funds that own many stocks.  For bonds, investors usually own funds of bonds rather than taking possession of individual bonds.

A straightforward type of fund is the exchange-traded fund (ETF). This holds a basket of securities such as stocks or bonds, and its price is constantly updated to reflect the price of the underlying securities. You can trade an ETF throughout trading hours, just like a stock. If you simply hold it, there will be no taxable capital gains events. Many ETFs passively track some index (e.g. the S&P 500 index of large company stocks) and have low management fees.

An open end mutual fund also trades close to the value of the baskets of securities it holds, but not as tightly as with an ETF. You can place an order to buy or sell an open end fund throughout the day, but it will only actually trade at the end of the day, when the share price of the fund is updated to the most recent value of the net asset value. A quirk of open end funds is that buying and selling by other customers can generate capital gains for the fund, which get distributed to all shareholders. Thus, even if you are simply holding fund shares without selling any, you may still get credited with, and taxed on, capital gains. Also, if a lot of shareholders sell their shares at the bottom of a big dip in prices, the fund must sell the underlying securities at a low price to redeem those shares. This hurts the overall value of the fund, even for customers who held on to their shares through the panic.

Some open end mutual funds offer skilled active management which may meet your needs better than an index fund. For instance, the actively-managed Vanguard VWEHX fund seems to give a better risk/reward balance than the indexed junk bond funds.

Closed-end funds (CEFs) are more complicated. A closed-end fund has typically has a fixed number of shares outstanding. When you sell your shares, the fund does not sell securities to redeem the shares. Rather, you sell to someone else in the market who is willing to buy them from you. Thus, the fund is protected from having to sell stocks or bonds at low prices. The fund’s share price is determined by what other people are currently willing to pay for it, not by the value of its holdings. Shares typically trade at some discount or premium to the net asset value (NAV). The astute investor can take advantage of temporary fluctuations in share prices, in order to buy the underlying assets at a discount and then sell them at a premium. CEFs are typically actively managed, and employ a wider range of investment strategies than open-end funds or ETFs do. CEFs can raise extra money for buying interest-yielding securities by borrowing money. This leverage enhances returns when market conditions are favorable, but can also enhance losses.

Bank Loan Funds

One type of debt security is a loan. Banks can make loans to businesses, with various conditions (“covenants”) associated with the loans. Banks can then sell these loans out into the general investment market.

Most commercial loans are floating-rate, so the interest received by the loan holder will increase if the general short-term commercial interest rate increases. Thus, the loan holder is largely protected against inflation. Loans typically rank higher than bonds in order of payment in case the company goes bankrupt, and some loans are secured by liens on particular company-owned assets like vehicles or oil wells. For these reasons, in the event of bankruptcy, the recovery on loans is higher (around 70%) than for bonds (average around 40%).

Various funds are available which hold baskets of these bank loans, also called senior loans or leveraged loans. One of the largest loan funds is the PowerShares Senior Loan ETF (BKLN), which currently yields about 4.5%. Most of its loans are rated BB and B, i.e. just below investment grade.   There are also closed end funds which hold bank loans, which yield nearly twice as much as the plain vanilla BKLN ETF, by virtue of employing leverage, selling at a discount to the actual asset value of the fund, and expertly selecting higher yielding loans.  For instance,  the Invesco Senior Income Trust (VVR), which I hold,  currently yields 8% , which is enough to keep up with inflation.      

High-Dividend Common Stocks

Most “stocks” you read about are so-called  common stocks. Most company common stocks are valued for their potential to grow in share price or to steadily keep increasing the size of their dividend. The average dividend yield for the S&P 500 stocks is about 1.6%, which is lower than the current yield of the (risk-free) 2-year Treasury bond.

There are some regular (C-corporation) stocks which are not expected to grow much, but which pay relatively high, stable dividends. These include some telecommunication companies like AT&T (T; 6.5%) and Verizon (VZ; 5.9%), electric utilities like Southern (SO; 3.5%) and Duke (DUK; 3.7%), and petroleum companies like ExxonMobil (XOM; 3.6%). Investors might want to buy and hold some of these individual stocks, since these are among the highest yielding, high quality stocks. Broader funds which focus on large high-quality, high-yielding stocks tend to have lower average yields than the stocks mentioned above. For instance the Vanguard High Dividend Yield Index Fund (VHYAX) currently yields only about 3.2 % .  

Preferred Stocks

Companies, including many banks, issue preferred stocks, which behave more like bonds. They  often yield more than either bonds or common stock. Like bonds, most preferreds have a fixed yield; some convert from fixed to floating rate after a certain number of years. Unlike bonds, most preferreds have no fixed redemption date. Fixed-rate preferreds are vulnerable to a large loss in value if interest rates rise, since the shareholder is stuck essentially forever with the original, low rate. On the other hand, if interest rates drop, a company typically can, after a few years, redeem (“call”) the preferred for its face value (typically $25) and then issue a new, lower-yielding preferred stock.

Preferred shares sit above common stock but below bonds in the capital structure. Companies have the option of suspending payment of the dividends on preferred stock if financial trouble strikes. However, a company is typically not permitted to pay dividends on the common stock if it does not pay all the dividends on the preferred stock.

The largest preferred ETF is iShares US Preferred Stock (PFF). It yields about 5.8%, but holds mainly fixed-rate shares. The PowerShares Variable Rate Preferred ETF (VRP; 5.9%  yield) holds variable or floating rate shares, which helps insulate investors from the effects of interest rate raises. The First Trust Intermediate Duration Preferred & Income Fund (FPF) is a closed end fund with more than half its holdings as floating rate. Due to use of leverage and selling at a discount, the fund yield is a juicy 7.9%.

My favorite class of high yield investments is business development companies, discussed here.

Happy investing…

Papers I’ve been reading

In no particular order:

Moonshot: Public R&D and Growth by Shawn Kantor and Alexander Whalley. Whether its going to the moon or vaccinating a country, government spending sure seems to have a much better impact when there is a big, bright, and highly-specific outcome target.

The Economic Consequences of Being Denied an Abortion by Sarah Miller, Laura Wherry, and Diana Greene Foster. Being denied an abortion leads to significant financial distress.

Preferences for Firearms and Their Implications for Regulation by Sarah Moshary, Bradley Shapiro, and Sara Drango. Different types of guns serve as strong substitutes for each other, which will likely temper any regulatory effects from limiting one or more specific strata of firearms. As with any regulation, narrowly identifying what it is you want and expect from the policy remains the key to making an evidence-based argument for it.

A panel-based proxy for gun prevalence in US and Mexico by Daniel Cerquiera, Danilo Coelho, John Donohue, Marcelo Fernandes, and Jony Pinto Junior. Using “percent of suicides committed with a firearm” remains a the best proxy for firearms. Regional variation across the US remains exactly what you’d expect in the US. Is the same true of Mexico?

BONUS PAPER. From twitter this morning:

How Much Should We Trust the Dictator’s GDP Growth Estimates? by Luis Martinez

I’d seen this before, but I think about all the time. We don’t give nearly enough time consideration ro the endogeneity of results to the incentives behind data creation/recording anywhere, let alone autocratic countries. I get why – it invites the dismissal of any data inconvenient to your status quo thinking, but ignoring it completely is foolish.

High Yield Investments, 1: Some Benefits of High Yield Stocks and Funds

A Case for High-Yield Investments

The data I have seen indicates that if you don’t need to draw down your investment for twenty years or more, you may do well to put it all in stock funds and just leave it alone. For reasons discussed here  the average investor will likely do better to buy an index fund like the S&P 500 rather than trying to pick individual stocks. The long term average return (including reinvested dividends) in the U.S. stock market has been about 10 %  before adjusting for the effects of inflation. (All my remarks here pertain to U.S. investments; hopefully some aspects may be applicable to other countries).

However, particularly as you age, financial advisors typically counsel investors to allocate some portion of their portfolio to more-stable fixed-income securities that generate cash to spend and keep you from having to sell stocks during a market downturn. Historically, long-term investment grade bonds have been used to provide steady cash, and to serve as an asset which often went up if stock went down. Thus, a 60/40 stock/bond portfolio was considered prudent. That model has been less useful in recent years, since bond yields have been so low, and since long-term bonds sometimes fall along with stocks, e.g. if long-term interest rates rise.

Another driver now for allocating some savings into non-stock investments is that after the large run-up in stocks last few years, which has far exceeded gains in actual earnings, the market may well muddle along flatter in the coming decade. In regular stock investing, you are banking primarily on stock price appreciation – you are counting on someone else paying you (much) more for your shares some years hence than you paid for them. But what if the “greater fools” don’t materialize to buy your shares?

Also, the inflation genie has been let out of the bottle, and it may be tough to get inflation back under say 4%; investment grade bonds are yielding appreciably less than inflation these days, so you are losing money to buy regular bonds.

Finally, if your stock is cranking out say 8% cash dividends, and you are holding it for those dividends rather than for price appreciation, when the market crashes (and this particular stock goes down in price, along with everything), you can be blithe and unruffled. In fact, you can be mildly pleased if the price goes down since, if you are reinvesting the dividends, you can now buy more shares at the lower price. Trust me, this psychological benefit is important.

Some High Yielding Alternative Investments

In this blog over the coming weeks/months we will identify several classes of securities which generate stock-like returns (around 7-10 % returns, if the dividends are continually reinvested) via dividend distributions rather than through share price appreciation. These securities often have short-term volatility similar to stocks, so they should be treated in the portfolio as partly as stock-substitutes rather than as substitutes for stable high-quality bonds. However, the better classes of high yield investments maintain their share prices over a long (e.g. 5-year) period, similar to bonds, but with much higher yields.

We will discuss High-yield (“junk”) bonds , senior bank loans, preferred stocks, Real Estate Investment Trusts (REITs), Business Development Companies, Master Limited Partnerships,   and selling options (put/calls) on stocks.  

I’ll close today with three examples of these high yield securities, which I have happily held for many years. They yield 8-9%, and their share prices have held relatively steady over the past five years:

Cohen&Steers Total Return Realty Fund (RFI). Current yield: 8.0 %

Ares Capital   (ARCC)   Current yield:  8.1%

Eaton Vance Tax-Managed Buy-Write Opportunities Fund (ETV). Current yield: 8.8%                    

(Charts from Seeking Alpha)

Don’t just be an input, be an investment

As we sit here with both historically low unemployment, but also a labor force participation rate that hasn’t yet recovered from covid, I expect that we will start to see workers lured back not just with the prospect of high wages, but the prospect of re-tracking their careers. I expect to see a bump in field and industry switching, as well an interest in educatonal programs that might enable such a switch. Since we’ve already wrung our hands over the fields (teaching, nursing, etc) that are mired in labor shortages, we should start thinking more about the opportunity to re-track their careers that workers are grabbing with both hands. And with that, I’d like to give my one piece of universal career and education advice: be an investment, not just an input, and never customer.

This works in a lot of ways. First, and this isn’t trivial, it will keep you out of scams and traps. They want to hire you, but you have buy $300 worth of training videos? Scam. You can start immediately, but you have to buy your sales stock from the partner who recruited you? Ponzi scam and trap. You’re admitted to the professional degree program, but you can’t find any evidence that recent placements are earning at least double the tuition immediately after graduating? Trap. Your incoming cohort seems wildly underprepared given your expectations for the program? Sorry to be the bearer of bad news, but you’re not there to bring presige to the school with your subsequent exploits. You’re there to write checks and wait for your degree in the mail. You’re not an employee or a protege, you’re not even a product. You’re a customer and, I promise, you’re not getting your money’s worth.

Avoiding drains on your wealth isn’t sufficient, of course. You’re trying to pay your bills and hopefully build a career. Well, if you wank into an office filled with uniform, impersonal and undecorated cubicles filled with nothing but recent graduates and temps, you should be on immediate alert. Decent chance you haven’t stepped on the first rung of a corporate ladder – you’re entered a mill that does the grunt work for the people actually on the ladder. Your job, on the other hand, will be to execute monotonous tasks until boredom or a loose labor market pushes you out the door, while a rotation of temps ensures that your exit proves esssentially unnoticeable for your employer. You’re not an team member, you’re barely an employee. You’re a commodified cog, one that they expect to wear out before any improvement in your capacities or value could possibly pay off.

What you want to be is an investment. Whether it’s school or an entry-level job, the most important thing to find is firm/school that has a stake in your long-term success, incentive to invest in your human capital, and a structure within which this investment can in you can reliably flourish. Easily advised, harder to pull off, especially as a job applicant on the outside. There are, however, signs and signals to look for.

A mixture of employee ages is a good sign that people are sticking around because they see a payoff to long-term employment. While a program of temp-to-hire can actually be a great sign, a constant rotation of temps to backfill in a perpetual exodus is a huge red flag. Training and education reimbursement programs? Great sign, doubly so if they come with built-in time off. It might seem counter-intuitive, but I consider it a better sign if the company requires continued post-training employment i.e. you have stick around for at least x years or pay the company back for the training. It might seem like a limitation on your career, but it’s also a really good sign that your employer anticipates significant value in the labor market for your training. They’re not just looking for good PR, they’re looking to protect their investment in you.

Training and education are great, but the absolute best signal that your employer views you as an investment remains dedicated mentorship. If your senior leadership is investing time and energy to prepare you for the next round, great. What you really want, however, is leadership investing in you to eventually replace them. Why is that such a positive signal? Because it means that they don’t see training you as a threat because they’re going to keep moving up too! It means that the firm invests in their employees up and down the ladder, and everyone is anticipating the continuedf acquistion of skills and progression in their careers. If, on the other hand, every bit of process knowledge is a secret fiefdom, every scrap of credit jealously fought over? That’s a sign of employees that feel stuck, desperate only to find an exit while clinging to job security like under-paying driftwood in a storm.

If you’re going to grad school for a doctorate, it’s easy to assess whether you’re an investment or a customer.

  1. Are they paying you or are you paying them?
  2. Is there a defined pattern of how people are trained, granted a degree, and eventually placed within the job market?
  3. Is the program transparent about their students first job placements?

If you’re picking a PhD program, you should obviously go work with professors whose research excites you, but always on the understanding that they view you as an investment. Sure, they’ll get cheap labor our of you with regard to research and teaching assistance, but even those should be investments in your skill sets and experience. At the end of the day, good departments are eager, bordering on desperate, to brag about their former students. They are willing to pay you to go to school there because you will become a valued and hard-to-duplicate input in their research in the short run and a labor market star that further contributes to their own prestige in the long run.

Whatever step you are taking next in your career, especially if you are making a big sweeping change, make sure to find people who’s interests are aligned with investing in you, not just plugging you into their machine or selling you something. Remember, labor is an input, but that doesn’t mean you have to be an easily replaced and interchangeable commodity. Everybody wins if you become more valuable. Make sure you work and study somewhere smart enough to know that.

Six months working a Waffle House griddle and other irreplicable labor market signals

Rather than wade into the long running argument about how much of the value of education is in acquired skills versus the ability to signal ability or aptitude, let’s take a moment to appreciate the majesty of signaling in the wild. I hold the view that education has value far in excess of simply demonstrating to others that you can execute four years of tasks in a structured environment sufficient to warrant a degree. Make no mistake, however, I also firmly believe the labor market is constantly on the lookout for signals of high productivity employees that are entirely orthogonal to education and often values them more than most forms of broad training. To be honest, part of the reason I believe that education must have some training value is that the wage premium remains enormous, but the signal itself is actually kinda, well, generic. Sure, different degrees have different signals (i.e. did you dodge calculus?), but the fact remains that you really don’t learn all that much about a person from their simply having a degree.

If they worked the griddle at a Waffle House for a year? Now that’s a signal.

Perfectly summarized by icookfood42

I’ll tell you straight up – I’d take a faculty job candidate with a PhD from State U and 12 months of Waffle House on their CV over someone who got an Ivy League PhD straight out of undergrad. And not just accept, I’d push hard for them. That person has seen. some. ahem, stuff, and they came out the other side a person that then went and finished their doctorate? That’s the stuff co-authoring dreams are built on.

There are plenty of attributes that certain lines of work leverage. Grit. Attention to detail. Follow through. Resilience. Calm. Creativity. Cleverness. Reliability. I could go on for a 100 more at least, but at some point it just becomes a thesaurus for “awesome person who can accomplish tasks and handle challenges that are hard to define in advance”. And those kinds of things are difficult to ascertain without a) observing them first hand over an extended period of time, or b) those attributes being vouched for by someone whom you trust implicitly, neither of which are options for the typically hiring process, unless you’re “hiring” a 10-time All Star that was once coached by the person who took a knife for you in 5th period study hall 20 years ago.

There are some occupations and life experiences, however, like an extended run paying your bills scattering and smothering the world’s best hash browns, that do manage to signal those incredibly valuable, but hard to credibly observe attributes with at least some degree of reliability. Here’s a few that come to my mind:

  1. Restaurant. Back of House and Front of House are very different signals. Bonus points for BOH in a short order or quick serve setting, you’re basically getting a soldier without a specialization in violence. Any generic FOH experience, short of selling ice cream at a posh beach, is at least useful for stepping out of social bubbles.
  2. Military, especially if they fulfilled their duty, but chose to change careers. This is a person who not only follows through, but can make independent decisions. Immune to sunk cost fallacies.
  3. Flight Attendant. They are emotionally bulletproof.
  4. Hotel. Problem solvers.
  5. Peace Corps or missionary work. Committed and make good on promises.
  6. Delivery (i.e. UPS or FedEx). Big tasks don’t overwhelm them.
  7. Independent Record Label/Zine distributor/Band promoter Utterly unfazed by high risk endeavors, get lots of intrinsic value out of their own labor

Before I wrap up, let me tack on a few specific summer jobs that have signal value to me. I’ve never met anyone who worked construction as a summer job who wasn’t tireless and reliable. Everyone I ever knew who worked at a movie theatre is funny and interesting, though usually a bit introverted. Kids with paper routes grow up to be independent adults. Screenwriters and novelists who never got a foot in the door make good industry creatives. Anyone who’s done an open mic comedy night more than once is probably a good teacher.

What about you? Are there jobs on a resume that let you know something important about a person that you couldn’t learn any other way?