In Search of Negative Carry
One working definition of a professional investor is: somebody who needs to care about “carry.” The classic carry trade is the mid-90’s best against the Yen (I’m going to borrow from this Mark Dow writeup, because I am a macro tourist—literally, my main macro trade is that I avoid traveling to Europe when the Euro is strong). The Yen bet: the BOJ intended to keep rates low; rates in the US were high. So a smart person could borrow Yen, invest in USD, and pocket the difference. A smart person with risk tolerance could do this several times over, and make a very nice return indeed.
As it turns out, one risk of carry trades in FX is that they are a pretty good deal most of the time, so lots of hedge funds get involved, so when something else blows up, they unwind their carry trades, too. So at any given time: a) the carry trade is earning a positive return from the interest rate differential, b) the trade also has a tailwind from more people making the trade (ie every new “borrow Yen / short USD” transaction, but c) at any given time, there’s a possibility of a sudden and painful reversal.
Fortunately for anyone involved in such a trade, you earn your 2 and 20 on performance at a specific time, not on the expected contours of future performance. So for someone who wants pretty good odds of a pretty good return, a carry trade is a pretty good bet. Read the rest of this entry »
Chicken-and-Egg Disruption: Misunderstanding YouTube, Uber, and AirBNB
AirBNB offers ubiquitous illegal rentals, says New York’s Attorney General. Uber gets shut down or hobbled in new markets around the world. Viacom’s legal department could have wiped out YouTube for ripping off their content.
At one level, you have to ask why somebody would build a business that’s either always illegal or probably going to be used illegally. If you want to be really contrarian, you could try asking that but not rhetorically. Read the rest of this entry »
You Say “Viral Content” Like It’s a Good Thing
Here’s a fun new game to play with the news: log on to Facebook. Find a story somebody has posted with an absolutely shocking headline. Next, try to guess what important fact the writer omitted to turn the story from something boring into a newsworthy event.
Try it!
- BREAKING: Politician says incredibly upsetting thing [as a self-deprecating joke].
- Student expelled for incredibly petty reason [after lots of other disciplinary infractions culminating in one that was, technically, grounds for expulsion].
- Pope says anything. [Catholic doctrine is well to the left of the average Catholic on pretty much all economic issues, and well to the left of its public perception on social issues].
- Lawmaker Claims… [When I read “Lawmaker,” I read it as “This headline writer would have said ‘Congressman’ if that were true, but it isn’t.”]
- Look at this gross thing some Internet nerd said [in an obviously self-deprecating way].
But it gets worse. The big growth area in online media isn’t incremental reporting. It’s incremental repackaging. Three TV channels plus a local paper can pitch the same story to four segments. Buzzfeed alone manufactures new segments constantly. And of course the point of writing something Only People Who Dislike Children Will Understand is that one person who dislikes kids will share it with their kid-disliking friends. The share doesn’t mean “this is interesting.” The share means “you are one of us.” And if that’s the case, what does disagreeing mean?
It’s a weird self-created Cordyceps: we all express group affinity by saying things that make our ingroup dumber. Nobody needs to be particularly cynical; we all just need to be in a hurry. You’re going to share something if it strikes an emotional chord. And you can watch the evolution in nearly real-time by reading about a story in fairly sober publications, and then on click machines like Business Insider. (An excellent example of how the most emotionally impactful word moved from “not” in a study to “maybe” in an early headline to “Study Says” on the blogs.)
I have three cures, two of which are expensive and one of which you can’t affect, but which is the best option because it’s inevitable.
- Buy a Bloomberg. Bloomberg, the product, not just something produced by Bloomberg, the company (if it’s not a terminal, it’s an ad for the terminal). How do you know the Bloomberg Terminal and Bloomberg TV are in the opposite business? A Bloomberg TV story goes something like this “A stock market stalwart’s latest announcement shocks investors–more after the break.” The Bloomberg headline is more like “IBM misses revenue estimates by 4%, rescinds 2015 guidance; stock drops 7%.” That’s pretty much word-for-word the best way to inform someone of what happened.
- Subscribe to The Economist or something: The Economist has a feedback loop, just like any viral content producer. Their feedback loop takes a little bit longer, because it goes like this: They write something; a large number of smart and important people read it to know what all the smart and important people think; and then they all act as if it’s true. This keeps The Economist mild, but also makes them a good leading indicator that’s not too tied to the outrage cycle.
- Wait for Facebook, Twitter, etc. to crack down further. A virus needs a host. It’s hard to strictly draw a line between the host as your attention, or the host as the share of your attention that Facebook controls. But either way, Facebook has an incentive to construct a memetic immune system for you, so you don’t spend all of your time repeating things your friends say. Not that they’re public-spirited—it’s just easier to sell big brand advertisements against bland but fun content, rather than engaging and enraging stuff.
The first option is a big monetary investment. The second is a big time investment. But the third is inevitable. Facebook already explicitly demoted clickbait headlines earlier this year. But they’re not done with Upworthy yet. And Upworthy is definitely a threat to Facebook’s iron grip on the average Internet user’s idle attention. Their business model is, basically, “Notice how everyone under 30 constantly mocks people for sending sappy email forwards? Clearly sappy stories are a universal human need. Let’s trick cool kids into like them.” And it worked! Until the host’s immune system kicked in.
It’s natural to slip into biological metaphors: the term “viral” is apt because it’s a small and self-copying chunk of information. But it’s also apt because a virus can only thrive given raw material from a host, and the host has a strong incentive to stop it. If the best metaphor for a business model is something that kills people, maybe that’s not the model to bet your business on.