Everyone told us that having two little boys would lead to carnage and destruction. We laughed it off. Honestly, for all our bluster, it hasn’t been that bad. Not with two under two, or any time since then.
That is, until we got a puppy. Like pouring gasoline onto smoking embers, people.
We’re only a couple weeks in, and Winston, Harold and this enormous yellow puppy now traipse about the farm daily hunting for frogs, which the puppy – Jupiter, on account of the red spot on his back – tries and fails to pounce on and eat. I did not know this was a thing. The boys laugh and cheer the puppy on as he chows down on, well, the stuff that flew out of his backside the day before. I did know this was a thing, but had been fortunate enough not to have a coprophagic dog before now. They give him plastic trucks, cry when those toys come back with teeth marks, and then give him more plastic trucks.
The dog has had an influence on the boys, too; he is a beautiful transmission mechanism for all sorts of brotherly disaffection. Encouraging the dog to eat a brother’s Froot Loops, or to jump on him as he runs around, that kind of thing. Some other mischief they are able to manage all on their own. With the help of the puppy, they have discovered the mud at the edge of the creek, the pleasing crack of a fir-cone as it breaks apart on a brothers head, and the wonder of discovering (and causing) cuts and bruises whose origins you can’t quite recall.
In short, our lives right now consist of us watching – and increasingly, not watching, a puppy teach our boys to cause a shocking quantity of minor damage.
We couldn’t be happier.
Oh, sure, one of our jobs is to protect our kids. But they must be more than safe to become men-in-full. Some of what they must be, their biology knows already, and there is little they – much less we – will be able to do to change it. Some of what they must know we can (and will) teach. Some they will only learn by watching us and others. Some they will only learn by exploring more of the world around them (people, things and nature alike) without one of us peering over their shoulders to make sure they’re Doing It Right.
For this reason, I am a big fan of Let Grow and the Free Range Kids movement. It is an organization founded by Lenore Skenazy (“America’s Worst Mom”), Dan Shuchman (PM on MSD Torchlight and board member at FIRE), Jonathan Haidt (NYU professor and co-author of the best book of 2018) and Peter Gray (Boston College professor of evolutionary, developmental and educational psychology). They’re taking on the ridiculous sorts of laws that lead to CPS visits because a kid walked to school by herself, or the cops being called because a neighbor found out a 15-year old was home by herself for an hour or two. They are also a useful resource for parents looking for tangible advice on how to let go of their well-intentioned desire to help kids who could do with a bit less help. Let Grow is a cause worth supporting on its own, I think, for all of our kids .
Part of the idea behind Let Grow is that the narratives about our world don’t align with realities. In almost every way, as we all know by now, the world is safer, healthier and less vulnerable to violent crime than at any point in history. Even if we didn’t believe there was any other reason to favor less helicopter parenting, it is easy to see why we wouldn’t want parents and families who aren’t living in panic of stranger danger myths to be punished.
But we don’t believe in free-range kids just because a safer world means we can. We believe in it because we should. In other words, we think there are important developmental, psychological, civic and philosophical reasons to walk away from constant close supervision of our children. In doing so, we express a belief that freedom from excessive guidance promotes the development of intellectual autonomy. Of adaptivity to changing circumstances. Of self-worth. Of enduring challenges, disagreement and difficulty. Of hearing and seeing disagreeable things without being drawn in or repelled by them in counterproductive ways. Of a rock-solid belief in the autonomy, sovereignty and value of others.
It is this cause that gives me pause, not only about our kids, but about us – about investors.
The transformation of capital markets into political utilities isn’t just similar to helicopter parenting. It IS helicopter parenting.
The power of capitalism that has lifted billions out of poverty is the power of price. It is the power that we have together, when we become a market, to determine what something is worth so that capital can be allocated most efficiently to produce the things and services that make our lives easier, if not always better. There is no avoiding that this exercise invariably becomes an abstraction – smart people figure out quickly that so much of the game is figuring out what other participants think the thing is worth. That has been true forever. But the capacity to exploit our tendencies toward narrative and abstraction by central banks and other state actors through never-before-available communication tools in order to produce price stability and limit permanent capital losses with adverse political outcomes is a powerful new force. It is one of the four main pillars of the emerging Zeitgeist, and a big thing I worry about.
I worry about the transformation of capital markets into political utilities – in part – because of the unavoidable tangible outcomes of that policy. Capitalism made us wealthier and more productive in part because we allowed bad ideas to fail. It made us wealthier and more productive in part because the people willing to take big, short-vol type risks were compensated commensurately. It made us wealthier in part because investors who could identify relative mispricings were paid for doing so.
Nobody today wants to do any of those things – not because they aren’t being rational or ethical, but because they are.
For example, for most companies, the return of capital to investors through buybacks is perfectly rational. AND it is typically a highly ethical determination of management teams who are thinking properly about efficient capital allocation and expected returns on invested capital from their investors’ perspectives. It is also indicative of the various forces – many real economic forces, and many the directed forces of paternalistic nudges – that make it the optimal, ethical choice. In the individual case, a company returning capital when its investment opportunities aren’t amazing is good. But in the aggregate, a lot of companies telling you their opportunities to reinvest cash in R&D, factories, employees and new distribution markets aren’t amazing is…less good.
Likewise, investors are increasingly shunning active management because they should, because it is a perfectly rational and ethical response to the death of private information and the vast fee advantage of most passive strategies. And yes, there are plenty of investors out there still participating in price-setting and market-making. Indexes aren’t that dominant. Yet. But rigor mortis is setting in for active management in a powerful way. A world in which long-term market depth and structural preference biases in equity securities are legitimate concerns is not our world today, but it is absolutely a possible world tomorrow.
Both of these things are outcomes of the transformation of capital markets into a utility. But neither these things, nor the increasingly unproductive hoards of cash being thrown at kinda-sorta-VC, nor the low costs of capital achievable for companies that continually transmute gold into lead, are what worries me. Not really. What worries me is that when this Zeitgeist has grown up, when we’re all done being helicopter-parented by policymakers, we will all be crippled as investors – capable of and conditioned to allocate among asset classes which no longer have the same meaning they once did (e.g. Emerging markets), trained in the art of using shoddy empirical techniques to validate our dispositions (e.g. all you need is US Large Cap!), skilled in the assessment of which Culturally Important Institution policymakers need to leverage asset prices to protect, and utterly incapable of determining whether we should provide capital to a business or government venture, and under what terms.
The greatest threat to capitalism isn’t the AOCs or Bernie Sanders of the world. It isn’t even oligopolistic cronyism (although I suppose I could probably be convinced). The greatest threat to capitalism is a generation of investors and business executives helicopter-parented by policy-makers, a generation of people who haven’t learned how to evaluate, take and endure risk.
It isn’t us today. But it could be us in the future.
What’s the answer, short of daydreaming about a political movement to stop using financial markets to stabilize national politics? No idea. But I think I know the process:
I think two of these will be most important for navigating the Utilitization of Capital Markets: Identifying Abstractions/Categorizations and Practicing Reciprocity.
More of that to come.