Are You Better Off Than You Were Four Years Ago?

Jeremy Horpedahl4 Comments

In the October 1980 Presidential debate, Ronald Reagan famously asked that question to the American voters. His next sentence made it clear he was talking about the relationship between prices and wages, or what economists call real wages: “is it easier for you to go and buy things in the stores than it was four years ago?”

Reagan was a master of political rhetoric, so it’s not surprising that many have tried to copy his question in the years since 1980. For example, Romney and Ryan tried to use this phrase in their 2012 campaign against Obama. But it’s a good question to ask! While the President may have less control over the economy than some observers think, the economy does seem to be a key factor in how voters decide (for example, Ray Fair has done a pretty good job of predicting election outcomes with a few major economic variables).

Voters in 2024 will probably be asking themselves a similar question, and both parties (at least for now) seem to be actively encouraging voters to make such a comparison. We still have 12 months of economic data to see before we can really ask the “4 years” question, but how would we answer that question right now? Here’s probably the best approach to see if people are “better off” in terms of being able to “go and buy things at the stores”: inflation-adjusted wages. This chart presents average wages for nonsupervisory workers, with two different inflation adjustments, showing the change over a 4-year time period.

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Stock Options Tutorial 1. Options Fundamentals

Scott Buchanan4 Comments

Put simply, a stock option is a contract to buy (if it is a call option) or to sell (if it is a put option) a given stock at some particular price (“strike price”), by some particular expiration date.

Example: Buying Apple Call Option Instead of the Stock


In a little more detail: if you buy a call option on a stock, that gives you the right to buy that stock at the strike price (“call” the stock away from some current stockholder).
For most American stocks the option holder can exercise this right at any time, up till the end of the expiration day. (For so-called European options, you can only exercise the option on the expiration date itself.)
Let’s jump into an example. As of late morning 11/27/2023 when I am writing this, the price of Apple stock is $190 per share.  Suppose I have a strong conviction that within the next month or so, Apple will go up by 10 dollars (5%) to $200/share.

One thing I can do is plunk down 100 x $190= $19,000 to buy 100 shares of Apple, and wait. If Apple does indeed reach my target price of $200 in some reasonable timeframe, and I sell it there, I will make a profit of 100 shares x $10 / share = $1000 on my initial investment of $19,000. That represents a 5.3% return on my investment.


But suppose because of some unexpected factor (Taiwan invasion?), that the price of Apple plunges by say 30% to $133/share, and remains there for the indefinite future. If I want to get my money out of this affair and move on, I would face a huge loss of 100 shares x (190-133)= $5,700 dollars on my large $19,000 investment.

Instead of buying the stock outright, I could buy a call option. There are a number of specific strategies and choices here, but to keep it simple, I could buy an Apple call option with a strike price of 190 (the current price of Apple) and an expiration date of say December 29, 2023. At the moment, that call option would cost me $3.80 per share, or $380 dollars for a standard options contract that involves 100 shares.


If Apple stock hits my price target of $200 sometime in the next month, I could exercise this option and purchase 100 Apple shares for $19,000 dollars, (100 x $ 190 strike price) and immediately sell them into the market 100 x $200/share = $20,000 dollars. That would give me a net profit of: (profit on stock buy & sell) minus (cost of call option) =  100 x ( ($200 – $190 ) – $3.80 ) = $620. That is a return of 163% on my $380 investment. Woo hoo!
(If I did not want to actually exercise the call, I could have sold it back into the options marketplace; the value of the call would have risen by somewhat less than $10 dollars since the time I bought it, so I could take my profit that way, without going through the cycle of actually buying the shares and immediately selling them.)

If Apple stock fails to rise by more than the $3.80 dollars a share that I paid for the call option, I will lose money on this trade. If Apple stays at or below 190, this call option expires valueless, and I will have lost 100% of my option purchase price. (If say two weeks goes by and the share price is hovering just below 190, this call option might still be worth something like $1.90/share, and I might choose to sell it and bail on this trade, to recover half of my $3.80 instead of risking the loss of all of it; there are many, many ways to trade options).

Now, in the event that Apple shares plunge by 30% and stay low indefinitely, I would only lose the $380 that the options cost me, instead of the $5,700 dollars I would lose if I had bought the stock outright.

This example demonstrates some of the benefits of buying stock options: You can make a huge return on your invested/risked capital if your stock price thesis plays out, and you can be shielded from any losses other than the cost of the option. The big weakness of this approach is that your hoped-for stock move must occur within a limited timeframe, before the expiration date, or else you can lose 100% of your investment. Folks who trade options for a living make lots and lots of small trades, knowing that they will lose on a significant percentage of these trades, hoping that their wins will outweigh their losses.

Buying Put Options for Hedging and Speculation

This has been a somewhat long-winded explanation of one way of utilizing options, namely, buying calls. Buying a put option, on the other hand, gives you the right to require that someone will buy a stock from you at the strike price (here, you are “putting” the stock to the person who sold you the option).

Puts are often used as for protective hedging. Suppose I own 100 shares of Apple stock that is currently valued at 190 dollars a share, and I want to protect against the effects of a possible plunging share price. As an example, I might buy a March 15, 2024 put with a strike price of 175, for $2.80. If Apple price falls, I would absorb the first 15 dollars per share of the losses, from 190 to the strike price of 175. However, that put would protect me against any further losses, since no matter how low the share price goes, I could sell my shares at $175. (Again, instead of actually selling my shares, I might sell the puts back into the market, since their value would have increased as Apple share price fell).
Buying puts in this manner is like buying insurance on your portfolio: it costs you a little bit per month, but prevents catastrophic losses.

Buying puts can also be used for speculative trading. Suppose I was convinced that Apple stock might fall well below $175 in the next three months. Without owning Apple shares, I might buy that March 2024 175 put for $2.80 per share, or $280 for a 100-share contract. If Apple share price went anywhere below (175 – 2.80 = 172.20), I would make money on this trade. If the price went back down to its recent low of 167, my net profit would be around 100 x (172.2 – 167) = $520. This would be nearly doubling the $280 I put into buying the puts. But again, if Apple price failed to fall as hoped, I might lose all of my $280 option purchase price.

Where to Find Options Prices

There are lots of YouTube tutorials on trading stock options. Here is quick ten-minute intro: Stock Options Explained, by The Plain Bagel. If you want to check out the prices of options, they are shown on websites like Yahoo Finance, Seeking Alpha (need to give email to sign in; you can ignore all the ads to make you purchase premium), and your own broker’s software.

I usually prefer to sell options, rather than buy them, but that is another post for another time. As usual, this discussion does not constitute advice to buy or sell any security.

I’m not going to write a post this week

mdmakowsky2 Comments

I’ve thought it over and decided not to write a post this week. It’s not that I have writer’s block. I am writing plenty in the dimensions of my profession that dominate my time (and actually pay me). And I have a back catalog of “bigger” pieces I might write later. But there is nothing I am compelled to write today. Which is what I want to write about.

We all share editorials and thinkpieces with each other, whizzing around social media and email, getting discussed over meals and beverages. This content is produced in mass and at breakneck speed. Some people are very good at it. Others less so. Some people, over time, rise to a level of recognition that they are offered plum spots at major outlets, lavished with salaries greater than I will certainly ever enjoy. Their names acquire significant fame, their opinions serving as the substrate for millions of conversations.

And then we savage them.

Sometimes we savage their works because they are signaling the wrong politics and identities. That’s just life. Sometimes we savage their writing because they’re rich and famous, which is annoying, but that’s just the tax a person pays for being eminent (see Swift, Jonathan). But often, more often than they would likely want to admit, we savage their writing as poor and ill-conceived because it is poor and ill-conceived.

Let’s be clear: these people are largely critical thinkers and phenomenonal writers. But they are also on a deadline. Opinions, unlike news, do not appear in our minds fully formed and their subsequent development does not always adhere to a regular schedule. My writings here are essentially an unpaid hobby. I haven’t missed many weeks this last 3 years, but I’ve missed a few. Some weeks I totally mail it in and just write a few paragraphs about a research paper I read that I thought was cool. The New York Times editorial page does not indulge such academic capriciousness.

Would I invest a lot more time in these posts if the NYT was paying me a hefty salary? Of course. I would have stockpiles of evergreen columns, folders of half-written ideas, a corkboard littered with post-its cataloging my every idea that might support a column. But even then I can’t help but suspect that I might occasionally find myself staring down a deadline with nothing I want to say, or with a drafted piece that I know isn’t very good.

And that’s why I think we get the so many big-name editorials that social media descends on like gleeful hyenas, merrily yanking and ripping until the every vacuous subject and failed predicate has yielded it’s final LOL. Why do columnists collectively produce so much dreck? Because they write too much. Scratch that. Because they publish too much.

Which is why I’m not writing a post this week.

(To be clear out of an abundance of caution, this observation does not pertain to those glorious blogs and substacks that mostly produce data-driven analysis and subject-matter deep dives, rather than bloated opinions designed to foment clicks. You are god’s perfect children, never change.)

Thanksgiving Links

Joy BuchananLeave a comment

Asked for its methodology, the White House pointed us to a Nov. 15 blog post by Jeremy Horpedahl, an associate economics professor at the University of Central Arkansas.

https://www.politifact.com/factchecks/2023/nov/21/karine-jean-pierre/fact-checking-karine-jean-pierre-on-this-years-tha

“When people ask what Civilization VI’s “cultural victory” condition would look like in the real world, this is it. Write it in the manual.”

And new from Cato: Food Globalization Puts the World on Your Plate

Growth of the Transfer State

Zachary Bartsch1 Comment

I’ve written about government spending before. But not all spending is the same. Building a bridge, buying a stapler, and taking from Peter to pay Paul are all different types of spending. I want to illustrate that last category. Anytime that the government gives money to someone without purchasing a good or service or making an interest payment, it’s called a ‘transfer’. People get excited about transfers. Social security is a transfer and so is unemployment insurance benefits. Those nice covid checks? Also transfers.

Here I’ll focus on Federal transfers, though the data on all transfers is very similar if you include states in the analysis. Let’s start with the raw numbers. Below is data on GDP, Federal spending, and federal transfers. Suffice it to say that they are bigger than they used to be. They’ve all been growing geometrically and they all exhibit bumps near recessions.

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Happy Thanksgiving from EWED

James BaileyLeave a comment

I am thankful for food abundance and for general prosperity.

Sometimes it’s easy to take for granted the good things you’ve always had; you don’t know what you’ve got till it’s gone.

In that spirit, after lacking it for much of the last month, I am extremely thankful for reliable indoor plumbing. Our clay sewer pipes that had lasted 100+ years finally started to crack, which made for a big mess and took $8000 to repair. But we’re now back in business, and thanks to the magic of pipe relining we didn’t have to dig through our deck to do it.

Hopefully this lets you all appreciate your plumbing too without having to go through the whole experience yourself.

Let’s Be Thankful for Food Abundance

Jeremy Horpedahl3 Comments

Despite recent increases in prices of food, we should still all be very thankful this Thanksgiving for the abundance of affordable food available in the modern world. Looking back at my past few blog posts, I notice that I have been very food-centric in my choice of topics! And last week I also showed how the Thanksgiving meal this year will be the second cheapest ever (only behind 2019). While it’s absolutely true that food prices are up a lot in the past 2 and 4 years, they probably aren’t up as much as you have heard.

It’s always my preference to take as long-term perspective as possible when thinking about economic progress. So here’s the best way I’ve come up with to show how cheap and abundant food is today: food as a share of household spending fell dramatically in the 20th century.

Most of the data in this chart comes from the BLS Consumer Expenditure Surveys. This survey was done occasionally since 1901, and then annually since 1984. I also use BEA data to estimate personal taxes paid as a percent of spending (the CEX Surveys have some tax data, but it’s not reliable nor consistent). I picked as close to 30-year intervals as I could (with a preference for showing the earliest and latest years available), and I chose spending categories that are 90-100% of total expenditures in most of these years. Keep in mind also that these are consumer expenditures. As a nation, we spend a lot more on healthcare and education than this chart suggests, but most of that spending is not directly from households (of course, it is indirectly). Think of this chart as an average household budget.

I hope the thing that jumps out at you is that the amount money households spend on food has fallen dramatically since 1901, from over 42 percent to under 13 percent of household expenditures. To be clear, this data includes both spending on food at home and at restaurants (after 1984 we can track them separately, and groceries are pretty consistently about 60 percent of food spending). And you may be wondering about very recent trends too, such as before the pandemic. In 2022, household spent slightly less on food than they did in 2019, falling from 13.5 to 12.8%.

You may also notice that taxes have increased, though not much since 1960. Housing cost have been consistently high, and also a bit higher than 1990, going from 27 percent to 33 percent in 2022. And housing is now the single largest budget expenditure category, but for most of the first half of the 20th century, it was food that was the largest. And since people aren’t changing their housing situation more than once a year (if that), it would also have been food that dominated weekly and monthly budget decisions and worry about price fluctuations.

This year there will be lots of complaining about prices around the Thanksgiving table. And much of that is warranted! But let’s also be thankful on this food-intensive holiday for how cheap the food is.

And if some smart-aleck youngster tries to tell you that they learned on TikTok that things were better during the Great Depression (yes, people are really saying this!), have them watch this video by Christopher Clarke. Or show them that in the mid-1930s an average family spent one-third of their budget on food in my chart above, or how much labor it would have taken to buy that turkey in the 1930s (about 40 times as much time spent working as today).

Mutiny in Silicon Valley:  OpenAI Workforce May Quit and Join Microsoft If Board Does Not Resign and Bring Back Former CEO Sam Altman

Scott Buchanan1 Comment

The bombshell news in the tech world as of late Friday was that, in a sudden coup, the board of OpenAI fired CEO and tech entrepreneur Sam Altman, and demoted company cofounder and former president Greg Brockman. The exact grounds for their decision remain somewhat murky, but apparently Altman wanted to move faster with AI deployment and monetization than some board members were comfortable with.

The OpenAI organization burst on the scene in the past year with the release of advanced versions of ChatGPT. This “generative” AI technology can crank out computer code and human-like text articles and reports and images. Naturally, students have taken to employing ChatGPT to write their essays for them. And so, professors now use AI to detect whether their students’ essays were machine written or not.

Fellow blogger Joy Buchanan has addressed the rising problem of erroneous information (“hallucinations”) that can appear in AI generated material. There is a movement to slow down the development of AI, for fear it will lead to The End Of The World As We Know It (TEOTWAWKI).  (Interestingly, all of the business commentators I listened to today dismissed the alleged world-ending dangers of generative AI as largely deliberate hype on the part of AI developers, to create a buzz – which it has.)

Having hitched itself technically to OpenAI technology, and having poured something like $13 billion into funding OpenAI, giving it a 49% ownership stake in part of the business, Microsoft was obviously concerned about the effect of Altman’s dismissal on its own AI plans.  As it became clear that the board action would lead to substantial dysfunction at OpenAI, Microsoft carried out its own coup, by hiring Altman and Brockman to run a big in-house AI research initiative, and making it clear that anyone else who wanted to resign from open AI could have their old jobs back, under their old leaders, in Seattle.  And indeed, as of late Monday, nearly all of OpenAI’s employees had signed an open letter stating that unless the OpenAI board quits, they “may choose to resign from OpenAI and join the newly announced Microsoft subsidiary.”

Investors are still trying to figure out what all this means for Microsoft. A pessimistic take is that the corporation has to take a big write down on a $13 billion investment, if the OpenAI organization  (valued a month ago at $90 billion) loses its momentum. An optimistic take is that Microsoft may get the human capital crown jewels of this leading tech outfit for simply the cost of salaries (and signing bonuses), instead of shelling out to buy the enterprise as such. Also, having the technology all in-house would remove the vulnerability of Microsoft currently faces with having a key piece of its future in the hands of a separate organization. There is debate on how much the intellectual property held by OpenAI would inhibit Microsoft from forging ahead with its own version of ChatGPT.

According to Wikipedia:

Shares in Microsoft fell nearly three percent following the announcement.   According to CoinDesk, the value of Worldcoin, an iris biometric cryptocurrency co-founded by Altman, decreased twelve percent.   After hiring Altman, Microsoft’s stock price rose over two percent to an all-time high.  

According to The Information, Altman’s removal risks a share sale led by Thrive Capital valuing the company at US$86 billion.   A potential second tender offer for early-stage investors is also at risk.   Altman’s removal could benefit OpenAI’s competitors, such as Anthropic, Quora, Hugging Face, Meta Platforms, and Google.  The Economist wrote that the removal could slow down the artificial intelligence industry as a whole.  Google DeepMind received an increase in applicants, according to The Information. Several investors considered writing down their OpenAI investments to zero, impacting the company’s ability to raise capital. Over one hundred companies using OpenAI contacted competing startup Anthropic according to The Information; others reached out to Google Cloud, Cohere, and Microsoft Azure.

There is a slight possibility that the open AI board could take a big hit for the team, and bring back Altman and Brockman and then resign in order to keep the organization intact. If that happens, the deployment of generative AI would accelerate – – which might destroy the world.

THIS JUST IN: ALTMAN BACK IN CHARGE AT OPENAI

If there was a prize for “worst board decision of the year” it would have to go to the move late last week to fire Sam Altman. But just when you thought there was no more drama to be milked out of this scene, the news Wednesday is that the OpenAI board is out, and Altman is back in as CEO at OpenAI. Microsoft is presumably happy to have the organization intact, and it seems that those pesky timid souls who were trying to go slow on AI proliferation have been swept aside. TEOTWAWKI here we come…

Stop and Frisk was an Unmitigated Disaster

mdmakowskyLeave a comment

Sometimes we think things have been incontrovertibly been proven, but we really only know them. Other times we think we know them but we really only think them. It’s always interesting when we something we think becomes something we know. We share those beliefs a little more often with a little more confidence. We start trying to tilt the balance of common knowledge one conversation at a time. I’d argue, however, that we would often be better served to wait until something is proven, as much as something can be proven. Or, at the very least, that our conversational was weight shifted far more when truly compelling evidence hits the scene.

I already believed that New York City’s infamous “Stop and Frisk” program was bad. That the bad outweighed the good. I was always careful to soften my language, to hedge my claims, however, because I always suspected there had to be some margins on which the program yielded some benefit to someone, somewhere, in some context. Criminal deterrence is real, after all.

I no longer feel any need to soften my language or claims one iota. There are research papers that change your priors. There are also ones that harden them into granite. Jonathan Tebes and Jeffrey Fagan have a new working paper they are presenting at conferences and quietly circulating that provides the single most compelling research effort into the effects of Stop and Frisk I have come across to date, one which makes the case that Stop and Frisk had now measurable effect at the margin to deter crime while, at the same came, causing significant harm to the young Black men walking the streets of New York City.

Please go through the slides, but let me summarize. Using a credible and clever event study design around the end of Stop and Frisk, Tebes and Fagan are able to identify the effect of stops on crime, finding an impressively precise null effect. They then look the effect of these stops of neighborhood schooling outcomes, specifically interruptions to instruction, persistent absences, suspensions, and graduation. The result, again, is very clear: Stop and Frisk was a disaster for high school age Black Men.

I’m just going to leave it there. Read the slides, read the paper when they release it, update your priors. And when someone tries to tell you at Thanksgiving dinner this year that New York City is going straight to hell because they ended Stop and Frisk, have the confidence to vigorously attempt to update their priors. Will it work? I’ve never met your family…but probably not.

But you gotta try, right? It’s your duty. And then make yourself a drink or take an extra slice of pie knowing that you earned it.

The current alliance to counter digital piracy

Joy BuchananLeave a comment

U.S. Immigration and Customs Enforcement’s (ICE) Homeland Security Investigations (HSI) has joined forces with the Motion Picture Association (MPA) to launch a new initiative aimed at countering digital piracy and protecting a vital sector of the U.S economy.

The initiative is called Operation Intangibles.

Digital streaming services provide quick and easy access to creative works, such as music, television, movies. However, the growth of digital streaming services has presented new challenges when it comes to law enforcement’s ability to ensure vital copyright protection for the industry. This technology that has provided millions of people access to their favorite shows, has also enabled criminals to turn piracy into a crime that is no longer restricted to the hand-to-hand sale of illegally pirated media.

Digital piracy negatively impacts millions of jobs, results in less taxes being paid, and threatens innovation and creativity. Its effects are felt across multiple industries and includes the cost of corollary crimes on consumers such as the potential damage caused by hidden or embedded malware, as well as identity theft and financial crimes, such as credit card fraud.

There exists a National Intellectual Property Rights Coordination Center.

Recall, Napster was shut down in 2001. Limewire was shut down in 2010. Illicit downloading is happening through other channels.

According to this graph, people spent almost as much on vinyl records as they did on CDs in 2018. The Economist provided a nice chart (last updated in 2019) on the rise of streaming revenue and the collapse of traditional records sales.