The Many Opinions of AI

I was taken aback by a response of ChatGPT to a question I put to it. I asked it “Is Caitlyn Jenner a man or a woman?” and it responded, “Caitlyn Jenner is a woman” without any explanation. I was surprised by the definitiveness of it, given its tendency to give me more verbose responses. Google gave me a more elaborate response that I felt was more accurate.

I think this is a reflection more of the initial data that ChatGPT was fed, rather than an intentional attempt to influence people’s views on political and ethical debates. Since OpenAI is a Northern Californian startup, my guess is that ChatGPT’s initial data will lean towards the views of Democrats in the United States.

My assessment is that OpenAI is an ethical organization that will ultimately have a balanced view of the world. However, some biases are unintentional, and sometimes people are not aware of their biases.

In the end, it is the owner of the product that gets to decide and if the customer does not like the responses, then they will be free to use a competing product. I am sure there will be many other products like ChatGPT, but I expect that ChatGPT will always be the leader in this category. I would compare it to a newspaper owner in the 20th century. The person who owned the paper in the city got to influence the views of people if they chose to.

The Power of a Thought

I am amazed by the power of ideas. We sometimes forget that many revolutionary innovations are based on very simple ideas. We often go about our business lives assuming that our business ideas need to fit into a box of what has already been done. Why not think about what has never been done before? Why not think about how to change the world for the better with a simple idea? 

The entire industrial revolution was triggered by the very simple idea that if one person does the same task repeatedly, he or she would get better at it and would hence be able to do it more quickly. This at its core is what economists refer to as specialization and division of labor. As a result of the application of this very simple idea, one-man shops where one individual would create a product from scratch to completion, were replaced by massive factories where each person would do a simple part of the process. As a result, products were produced more cheaply and more consistently.

Another very simple idea is the use of refined petroleum to power engines. We have gotten so used to the idea that oil is a source of energy that we forget that at its core, its only use is that it is highly flammable. It would be difficult to exaggerate the impact that the use of this substance has had on the world. This one property has created massive amounts of wealth, triggered wars, and significantly improved the mobility of humans. Yet at its core, it is only useful because it expands when it is lit and hence is able to move a piston.

The internet was also based on a very simple idea. The internet is perhaps the most significant economic development of the past 20 or 30 years and yet, as I understand it, it is based at its most basic level on something very simple. Someone somewhere realized that if they connected two computers with a wire, then a person on any one of the two devices would have access to the information on both devices. This was then applied on a massive scale to the point where we now, effectively, have access to the information on a massive number of computers and servers around the world. 

The internet replaced the printing press as the key engine for the mass distribution of information. The printing press itself was also a very simple concept. Rather than duplicating things by rewriting them all the time, someone figured that they could create a stamp with that information. While the stamp would take longer to create than writing one document, once it was created, it could be re-stamped in a fraction of the time that it would take to write the same document. 

Blockchain is another simple idea. It sounds abstract, but at its most basic level, it is simply a very small modification on the way that computer programming is currently done. At its most basic level, it is just about connecting blocks of data to one another in a way that makes them interconnected and, crucially, almost impossible to edit or erase. This, when extrapolated over millions of applications, will likely change the way that business is conducted in the years to come. 

I write this because most people assume that changing the world is something that should be reserved for people with PhDs wearing lab coats at a university. While this is true in many cases, it is true in my view because the people in those settings are wholly dedicated to that goal, and not because they are any more gifted than you or I. So, when you start your day and look at the world, realize that you too could actively participate in its progress. When you think of your next business idea, challenge yourself to think about how you could change the world.

The Clock’s Last Chime

Today is the last day of BBC Arabic Radio. This is quite sad for me. The chimes of Big Ben that they play at the top of each hour remind me of hearing the news in the background as a child, at the old house of my grandparents, sitting by the black transistor radio of my grandmother. The sound takes me back to a simpler time, a perpetual constant in a world of constant change.

Perhaps this is a sign of the times, although I wish there was a way for the old ways to continue. In recent years, I have come to rely on it to strengthen my Arabic. My English and Math skills remain sharp because of the nature of my job, but my Arabic needs regular “maintenance” to remain where I need it to be.

I hence keep it on in the background when I drop my kids to school, to allow me to strengthen my Arabic skills, and to perhaps rub off on my kids as well, dare they lose completely the Arabic roots that I, through circumstance, have eroded. The chimes will stop for good tonight, and with them the nostalgia that has taken me back in time daily, if ever so briefly, to a world that was.

From Good to Better

One of the missing components in Arab societies is academic excellence. This, I believe, is the result of many factors. One of the key ones, it could be argued, is that individuals in the Arab World do not see a clear correlation between academic excellence and career success. This seems to be changing slowly. It will not change significantly though, until there is general cultural acceptance of this correlation. More broadly, the countries of the Arab World need to get better at rewarding people based on talent and hard work, rather than based on ethnicity, or country of origin. Status needs to be attained based on merit, and not based on what one wears, the car one drives, or the tribe that one belongs to.

While every culture has its pros and cons, this aspect of Arab culture may be one of the reasons for the generally low levels of productivity and creativity. In other words, the close familial ties, and the cultural nature to devalue merit, and overvalue traditions, creates strong societal ties, but it has a negative impact on economic progress.

Another critical reason for the lack of academic excellence may be the feeling among many Arabs that they live in an unfair world, in which effort and good intentions do not get rewarded. This in the Arab psyche is the result of a combination of geopolitical factors that may have impacted the current mindset. If one were to peer into the minds of Arabs, they would find a conflicted organism. It would be a mind that sees the world unfairly due to a long history of civil wars, corruption, famine, and revolution. In this environment, academic excellence is not of as much use.

Most Arabs see the Palestine issue as a core injustice. They feel that the creation of a two-state solution that can allow Palestinians and Israelis to live peacefully is a requirement that is long overdue. When one combines this with the series of revolutions and civil wars that Arab people have endured, it becomes not surprising then that in many pockets of the Arab World, daily life for the past few generations in many cases has revolved around “I just want to not die today” or more likely “I just want to die of natural causes one day”. This culture of persecution has an impact on what parents teach their kids from Iraq to Lebanon to Libya, and about what society and experience teach the Arab collective, about the value of education, or more likely the low priority given to education, in this complex ecosystem. This then makes it somewhat easier to understand what is preventing the creation of a meritocracy in the Arab World.

There are pockets of hope though. The countries of the GCC have the potential to recalibrate things over the coming decades. They have been amongst the fastest growing and most dynamic economies of the world since the discovery of oil. They collectively account for approximately half of the total 3 trillion US Dollar Arab World economy. All have in recent years taken bold steps to nurture and reward merit, and to diversify their dependence away from oil. They have also invested heavily in scholarships and on quality education to their people while rewarding people based on capability, attitude, effort, and results. They have been a shining ray of hope of what is possible when merit is nurtured and will likely collectively be amongst the 10 largest economies in the World over the coming generation. Their collective success will likely be the tide that lifts all boats in the Arab World and changes the Arab mindset from one of dependence and conspiracy to one of hope and intellect.

It might be said too though, that the discovery of oil in the region has been a key factor that has devalued merit, even while it has helped to finance the education and well-being of the people of the area. Many Arabs tend to see wealth creation as simply an accident of where one is born. Those born in oil rich countries get rich, and those born in countries with no oil do not. The difficulty to migrate from the oil poor countries to the oil rich countries, or to migrate from the oil poor countries to anywhere in the world for that matter, act to exacerbate this feeling. Moreover, the general perception is that no degree from Oxford or Cambridge or even MIT will allow one to change the color or usefulness or location of the black gold from which many of their brethren subsist. Perhaps more importantly, no degree will change your nationality or your tribe, and this then explains why many feel that the main determinant of their wealth is an accident that is determined by fate and can only be influenced by prayer or good luck, rather than by hard work, creativity, or ingenuity. This may also explain the pervasiveness of the word Inshallah (God willing) in the Arab vocabulary and Arab parlance over the past fifty years. In this narrative, is oil then a blessing or a curse? It has brought wealth, but it has also brought war and complacency. It has built our roads, but what has it done for our minds? What has it done to our minds?

Arab tribes have long learnt how to deal with adversity. It is a mindset that has allowed them to survive as a collective for centuries without much access to water or food, in one of the most inhospitable climates on our planet. In a culture in which staying alive was an everyday struggle, societal bonds and familial support over the centuries had taken precedence over individuality. This may explain why Arab clothing is so uniform, as though the intent is to not highlight the individual but the collective. This feeling then, that we either all sink together or float together, is one that an observer would find still forms the nucleus that bonds the confines of many families and tribes. It is then not surprising too why loyalty to the tribe, respect for societal traditions, and a reverence for the community, persist as Arab values, and are seen as more important than individuality, merit, and intellect.

A Rise and Fall

The rise and fall of Kanye West are an interesting case of all that is right, and all that is wrong with capitalism. On the one hand it shows that capitalism has the potentially dangerous tendency to allow people to be successful not based on merit but based on who can shout the loudest. It also shows the dangers of giving a microphone to the loudest person in the room, even when that person is so obviously ill informed. While his initial rise as a musician may have been a reflection of what is possible through talent, his current stardom also seems to be a reflection of a global society that has become corrupted by an obsession with fame. Fame has become the new currency. Famous people are our new prophets or messiahs in a world that has lost sight of what is truly important in life.

His fall is a reflection of a recalibration of truth over misinformation. It is a comforting reminder that the world will not accept any form of antisemitism, or any form of prejudice for that matter. As the decades pass, newer generations may become less aware of the atrocities committed against Jewish people over many centuries. False, antisemitic accusations by any person need to be taken seriously, even if that person is deranged, and need to be quashed for history to never repeat itself. All humans have a duty to create an environment in which Jewish people around the world never have to live in fear of persecution again.

In a world in which there is no such thing as bad publicity, I fear that Mr. West’s fall may provide him with the publicity he needs to rise again. Humanity has a moral obligation to make sure that this does not happen.

The Persistent Ripple

It’s hard to predict what will happen next with the global economy. It seems clear that the effects of the pandemic will linger for some time longer. I like to think of it like a pendulum or a Rubik’s cube. The initial disruption caused by the pandemic rearranged the cube in a way that has made it almost impossible to correct. Perhaps though, like a pendulum, the disruption will eventually subside. The big challenge now for economists is to find a way to reduce inflation without causing a recession. How that transpires will determine what happens next.

There is no Skyline in Silicon Valley

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There is no skyline in Silicon Valley. This is an important fact that people in emerging markets should take heed of. A city need not be measured by the impressiveness of its skyline. Emerging markets often attempt to “create” success by constructing grand structures. They build train systems even though most older cities had metros before they were replaced in usefulness by cars. They build high rise buildings even when low rises will do.

In the picture above, that I took during my morning walk in Silicon Valley, there is actually nothing that impressive to see per se from an architectural standpoint. It is however the skyline of Silicon Valley, arguably the most consequential “city” of our age. The market capitalization of the companies within the borders of the picture is approximately 10 trillion dollars. This I believe is a visual demonstration that the true wealth of a nation is created not by the buildings it builds but by the minds it enlightens. To win, a country must invest in its brains, and not its bricks.

An American Sneeze; A Chinese Cough

By Mo Fakhro

How can we prepare for the next global economic crisis? Where will it come from? How will we emerge from it? The financial crisis of 2008, was a lesson for the world about the risks of providing too much liquidity to the system, and the risks of too much deregulation.  It also showed us how effective intervention by the Federal Reserve and Federal Government in the United States, helped to prevent a second great depression.  While the coronavirus pandemic has shown us again how effective action by the Federal Reserve can lessen the impact of a major global crisis, it is important to also be aware of the risks that the current additional liquidity poses to the system, and to make sure an environment is not created that is similar to the one created during the years preceding the global financial crisis.

It is important for the global economy to not repeat the mistakes of the past.  One of the initial triggers of the financial crisis was the increases in liquidity during the years leading up to the crisis (2).  This was driven by the need to maintain economic growth, and by the US government’s need to offer housing to a larger portion of the population.  However, it led inadvertently to an asset bubble in the housing sector and to speculation.  The additional liquidity created by providing additional resources to Freddy Mac and Fannie Mae to buy mortgage-backed securities, led, perhaps inadvertently, to a rush to give mortgages to, in effect, anyone who would be interested to take them.  This led to a loosening of controls on who could get a loan.  The low principal payments, and the delays in the payment of initial installments, also created a speculative situation where people would purchase a property through a bank loan, not to use that property or rent it, but just to hold on to it for a few months before selling it.  Greed ultimately got the better of the system.  Individuals and financial institutions realized too late that they had overextended themselves, and the crash that followed led to a great deal of hardship around the world.

While deregulation of the financial system had many benefits, one of its drawbacks is that it led to the creation of very large financial institutions that became too big to fail.  When the McFadden Act was repealed beginning in 1994, it set off a chain reaction that led to a wave of mergers and acquisitions in the financial services sector.  The benefits of mergers from a business standpoint due to economies of scale and loan diversification, led to the size of banks growing and the number of banks reducing.  This led to a situation around the financial crisis where a number of financial institutions had become too big to fail.  They were thus emboldened to take on excessive risks, and their creditors became comfortable with excessive risks, due to the implicit assumption that if things did not work out, the government would have no choice but to bail them out.

Deregulation in the form of the effective repeal of the Glass-Steagall Act in 1999, also removed the rigid lines that separated retail banking from investment banking.  The benefits of economies of scope thus began to take hold, and led to the creation of financial institutions that accepted deposits but also operated hedge fund divisions.  The same financial institution that was entrusted with people’s savings, was also allowed to provide insurance against the default of mortgage-backed securities.  This added to the sense of uncertainty during the financial crisis, because it was not clear what the impact of the crisis was having on the megabanks of the time, and it was not clear which of them would need a bail out or would even get a bail out.

The financial institutions that had offered insurance against the default of mortgage-backed securities found themselves in a particularly difficult position.  These instruments, named credit default swaps, became a serious issue when the market crashed.  Many large financial institutions, including AIG, found themselves holding huge liabilities because they had provided other firms with insurance against default of their mortgage-backed securities.  These firms ultimately could not survive on their own.  Some had to close down while others needed to be merged, acquired, or bailed out (5).

The overall end result of the financial crisis was that US Government debt increased from approximately 8.5 Trillion US Dollars in 2006, before the financial crisis, to 19.5 Trillion US Dollars by 2016, just ten years later (3).  Furthermore, a 2011 report by the United Nations found that the number of unemployed people around the world by 2009 was 27 million more than it was in 2007 (4).  As bad as the result of the crisis was though, it would have been significantly worse if governments and central banks around the world had not acted quickly to resolve the turmoil that ensued as financial institutions began to default on their obligations.

One of the consequences of the financial crisis has been that it has harmed to reputation of Wall Street banks, and led to a mistrust of the financial system by the general public.  The percentage of people who generally distrust banks increased from 13% in 2007 to over 30% by 2011 (6).   Wall Street financial institutions have come to be seen in a more negative light as a result of the financial crisis.  The high salaries of bankers, and the high value of the bail outs that will ultimately be paid by tax payers, has left a bitter taste in the mouths of people.

The speculative bubble in real estate before the financial crisis, has similarities to the current situation in the US stock market.  The wild speculation in the price of stocks like GameStop, a US games retailer with questionable business prospects, indicate that the market may be driven increasingly by speculators.  The speculators increasingly appear to be buying shares not because they believe in the underlying value of the assets that they are buying, but because they simply are interested in day trading.  Robinhood, a trading app that is popular with millennials, has seen rapid growth in volumes recently (7).  The increased liquidity to the real estate sector before the financial crisis was well intentioned, but it inadvertently led to a crash.  The increased liquidity to the banking sector currently is similarly well intentioned.   It is important to make sure that it does not lead to a similarly calamitous outcome in the future if the market turns. 

The similarities between the years preceding the financial crisis and the current situation of excess liquidity in the financial system, do not end there.  As financial institutions aimed to increase their return on assets and return on equity, many increased their leverage.  When the crash came, those that were exposed had to take write offs on the value of the real estate loans that they had given out or on the value of the real estate on their books, or the value of the mortgage-backed securities on their books.  While the Federal Reserve acted very well to prevent a serious economic crisis during the coronavirus pandemic, some have argued that it may now be providing too much liquidity to financial institutions (1), and thus leading to the same increases in leverage that exposed financial institutions during the years preceding the financial crisis.  When banks receive too much in deposits, this puts pressure on them to lend those funds out.  With a constant equity base, this would have the effect of increasing the debt-to-equity ratios of banks and thus increasing their leverage.

As we move into a post pandemic world, it is important to recognize the vulnerability of the global economy, and the critical role of the Federal Reserve.  While it is clear that the Fed played a key role in providing stability by adding liquidity to the system when the pandemic first hit, it is now a cause for concern amongst many that there is too much liquidity in the financial system.  A recent article in the Economist (1) highlighted this added liquidity as a cause for concern.  It mentioned that banks have so much liquidity that they are now driven to turn away depositors.  The Federal Reserve has been buying approximately 150 Billion US Dollars in new bonds every month.  As these dollars get deposited by the sellers of the bonds into banks, the money multiplier begins to take effect.  The banks that receive the funds then lend most of them out to people or companies who deposit them in other banks, and so on.

The implications of this could be that there is an excess in liquidity in the system.  Excess liquidity could have harmful effects on an economy.  It may lead to an inflation in asset values.  With most manufacturing done in low-cost areas around the world, it could be that the impact of excess liquidity of consumer prices will not be felt.  For example, an excess in liquidity that drives rents higher in the US, will not necessarily raise the prices of consumer goods because the factory in China pays employees’ salaries who do not get impacted by the higher rentals in the US, and hence do not ask for raises.  Another factor that may be preventing an increase in consumer prices is that retail has been impacted by the shift online, and so commercial rentals would tend to decline in such an environment, thereby preventing a rise in costs to retailers, and preventing the need to correspondingly increase prices.  While consumer price inflation seems to be under control, that does not seem to be the case with asset prices.  The increase in liquidity has been one of the factors that has driven up the price of stocks and bonds.  This has led to an asset bubble that may ultimately burst in a way similar to what happened to real estate prices during the financial crisis. 

It used to be said that when America sneezes, the world catches a cold.  This became a common phrase after the Cold War left the United States as the dominant economy of the world.  It greatly simplified the management of the global economy, because it implied that to avoid getting sick, the world had to just prevent America from getting sick, and to prevent America from getting sick, the Federal Reserve needed to simply act prudently and effectively to respond to economic turmoil.  With the emergence of the European Union as an economic block and, in particular, of China and India as significant global economies, it sometimes feels as though we are moving from a unipolar global economy dominated by the United States to a multipolar global economy with no clearly dominant force.  However, as the coronavirus has shown us, our globe is more interconnected than ever.  A crisis somewhere could easily spread to a crisis everywhere.  While we are no longer burdened by global borders, we are also no longer protected by them.  During the global financial crisis, America sneezed and the world caught a cold.  With the coronavirus crisis, a cough in China led to the death of millions of people, and to a shutdown of the global economy.  Earlier this week, a single ship clogged an artery at the heart of global trade in the Suez, bringing the exchange of goods across large parts of the globe to a standstill.  Where will the next crisis come from? How will we prepare for it? How will we respond to it? It will increasingly require the coordination of global institutions and cooperation between the governments of the world.  The maintenance of open and cordial communication between governments is critical to achieving this, not only for global peace, but increasingly too for global prosperity.

Paper: US Monetary Policy During Corona

By Mo Fakhro

The Federal Reserve acted quickly and effectively to reduce the negative economic impact of the coronavirus pandemic, and helped to alleviate a great deal of financial suffering.  It did this through a combination of lowering the federal funds rate (the rate at which banks lend to one another), directly buying Mortgage-Backed Securities to lower long term interest rates, providing additional liquidity to stabilize markets, and directly supporting small and medium sized businesses with loans.  The expansionary monetary policy of the Federal Reserve was not the only major policy of the US Government.  It was also coupled with an expansionary fiscal policy, that was headed by the US Treasury and US Congress.  The quick actions of the Fed compared to Congress, demonstrated the usefulness of the Fed as a relatively unbiased, independent entity, that can act quickly.  While the actions of the Federal Reserve were much needed, and had a positive net impact, they helped to contribute to what some perceive as an asset bubble in the stock market, that could have future negative consequences.  They also may have had the net result of providing too much credit to uncreditworthy companies, which may lead to an increase in defaults in the future.

Among the actions that the Federal Reserve took when the pandemic started to take its toll on the US economy was to lower the Federal Funds rate to almost zero (1).  The Federal Funds rate, despite its unusual name, refers to the rate at which banks borrow from one another.  In some countries it is referred to as the interbank lending rate.  The Federal Reserve influences this rate by increasing or decreasing the money supply.  It typically does this through what are referred to as open market operations, which involves either the purchase of government bonds onto its balance sheet, or the sale of government bonds.  An expansionary monetary policy involves the purchase of government bonds.  This has the effect of increasing the money supply, because it puts money into the hands of the sellers of the bonds.  This in turn reduces the Federal Funds rate, which in turn reduces the cost of borrowing across the economy.  As more money becomes available to banks, and as they rush to lend out those funds to their customers, this increase in the supply of money will cause the interest rate across many parts of the banking system to drop.

Between March and June of 2020, the Fed significantly increased its purchases of US Treasury Securities and Mortgage-Backed Securities.  According to the Board of Governors of the Federal Reserve System, the Fed’s holdings of securities increased from around 4 Trillion US Dollars to 7 Trillion US Dollars (1).  These additional holdings of securities had the effect of adding an additional 3 Trillion US Dollars of cash into the system.  When the effects of the money multiplier are included, the additional dollars in the system that were deposited into banks were amplified by upto ten times.  This would have provided banks with additional deposits and reserves, which would have put pressure on them to lend out the new funds to businesses.  As a result, businesses would have been better able to attain loans from banks.  This in fact appears to have been the case.  The actions of the Fed to purchase securities had the additional benefit of stabilizing the markets during a critical period of uncertainty.  This helped to reduce volatility in the markets, which would have created a sense of panic, that may have had a ripple effect to other parts of the economy.  The quick actions of the Fed ensured that markets flowed smoothly by providing liquidity (2)

In addition to this, a lending program was launched to support businesses, called the Mainstreet Lending Program (2).  This program allows loans to be given to small and medium sized organizations, in order to help them to meet their working capital obligations.  It was coupled with another program named the Payroll Protection Program, which, as the name suggests, protected employee wages, thereby reducing the need to lay people off.  These two programs require the approval of the US treasury, and are referred to as “13(3)” actions because they are derived from that part of the laws that govern the Federal Reserve.  The Fed also took the step of directly buying the bonds of companies, as well as buying shares in exchange traded funds that focus on corporate bonds (2).  This had the effect of increasing the liquidity for bonds and reducing the interest rate. This program of quantitative easing, allowed the Fed to ensure the free flow of funds, and further ensured that the increases in money supply made their way across the economy. 

The additional liquidity has provided a lifeline to companies during a very challenging period.  The overall impact of these measures by the Federal Reserve has helped to ensure that liquidity is available for companies to borrow money at low interest rates.  It has thus allowed companies of different sizes to remain afloat during a period of severe negative cash flows in certain segments.  The additional supply of money though, does bring with it the risk of artificially inflating the value of assets and instigating future loan defaults.  Some have drawn attention to the fact that, while the expansionary monetary policy of the Federal Reserve during the coronavirus pandemic did not cause significant consumer price inflation, it does appear to have caused asset price inflation (3).  They further argue that the Fed measure of inflation should include asset inflation, not just consumer price inflation.  By that measure it is noteworthy, that prices have in fact inflated in areas such as housing and publicly traded shares during periods of expansionary monetary policy.  Others have noted that even sectors with a bad credit history, such as airlines, have an abundance of credit available today (4).  While this is desirable from an economic and social perspective, because it supports vital infrastructure, it does highlight the risk that cheap and abundant credit may lead to loans being given to entities that may have trouble paying them back.  The airline industry has historically not been a good sector for lending.  This is because of high levels of competition, and the cyclical nature of revenue (seasonal travel), coupled with high fixed costs (the planes), and unpredictable and often erratic variable costs (fuel prices), have meant that loan defaults in the sector have tended to be high.

The actions of the Federal Reserve were not the only economic stimulus conducted by the US Government.  The expansionary monetary policy was coupled with an expansionary fiscal policy that was conducted by the US Treasury and US Congress.  While both had varying impacts, the monetary policy of the Federal Reserve was far quicker and demonstrated the need for an independent entity that can take quick and effective action in the absence of politics.  The delays in fiscal policy approvals by the US Congress further reiterate the need for an entity like the Federal Reserve to stabilize markets quickly and independently, particularly during times of economic crisis.

It is difficult to imagine what would have happened if the Federal Reserve did not exist.  During past crises prior to the creation of the Federal Reserve, the government would have been unable to react the way that it had in response to the coronavirus pandemic, to prevent a financial or general economic crisis.  Time will tell what the net impact of the actions of the Fed will be.  While its actions stabilized the market during a critical time, they also provided a great deal of liquidity, that may have artificially inflated asset prices, in a way that may lead to significant future corrections in the months and years to come.  It does appear, so far, that what the Fed has done in response to the coronavirus has worked, but ominous signs hang in the balance.

Paper: The Luckiest Family in Jerusalem

By Mo Fakhro

There was once a family in Jerusalem that had all the luck.  For they were a family of pigs.  The only family of pigs in all of Jerusalem.  The Israelis were always afraid of being killed by the Palestinians.  The Palestinians were always afraid of being killed by the Israelis.  The goats, cows, and chickens lived in constant fear of being eaten by both the Israelis and the Palestinians.  So too was the plight of the fish in the sea. The small fish afraid of being eaten by the big fish, and the big fish afraid of being eaten by the Israelis, the Palestinians, and the occasional sea gull.  Everyone lived in constant fear of being killed, except for this lucky family of pigs.  They were shunned by the Jews and the Muslims, who had been told by God that they could not eat them, and so, they roamed the lands freely without a care in the world. 

This is a fictional story that I have just made up to illustrate a point.  The point being that luck is determined to a great extent by the accident of where and when you are born.  If this family of pigs had been born two thousand years before, a miniscule amount of time in the history of the world, they would have been eaten by humans.  If they had been born a few hundred miles to the West, in Europe, they would have been slaughtered and converted to bacon.  Survival in this world for this family of pigs, will have been determined by the accident of when and where they were born. 

We are all lucky to be alive if you really think about it.  It is a complete miracle that each of us is alive today.  We have to be the lucky one out of millions and millions of sperm cells that makes the treacherous journey into its egg.  To add to that, our parents need to have met, and our grandparents, and our great grandparents, an almost infinitely high number of coincidences, just so that we could be here today.  It is clear that luck plays an important role in our lives, since we are all so lucky just to be alive.

Is it then surprising that success in the stock market is determined by luck?  Or that successful entrepreneurs are lucky? Is Bill Gates smart for creating Microsoft or lucky? What about Jeff Bezos or Elon Musk? What about Warren Buffett or Peter Lynch? They are surely smart.  No one can realistically doubt that.  But how much of their success is based on luck and how much of it is based on smarts? I would argue that their success is primarily due to luck.  To begin with, they are lucky to be alive for the same reasons I mentioned earlier, just as we all are.  Furthermore, if they had been born 2000 years ago, they may not have excelled at hunting for animals the way that they excelled at writing software or finding value on the stock market.  If they had been born a few thousand miles to the east, in Africa, they may not have excelled at corruption or warfare, the way that they did at more intellectual pursuits.  Elon Musk was born in Africa, but we all know he is not really a human anyway.

What determines success on the stock market, and what role does luck play in that? It is a question that has baffled economists for decades.  The Efficient Market Hypothesis, on which much of classical financial thinking is based, implies that it is impossible to consistently “beat the market”, because markets are perfectly efficient.  What this means is that all available information about a stock is priced into it, and that any opportunities are immediately eradicated by arbitrage.  In recent years, a new branch of finance has emerged named Behavioral Finance.  In this branch it is assumed that humans are driven not only by rationality but also by emotions.  They tend to get overly cautions when they lose money and overly confident when they make money, in a way that impacts the rationality of their subsequent financial decisions.  It also assumes that investors are influenced by their own biases and are thus not perfectly rational in their thinking.  Using the pigs’ analogy, if we took the family of pigs on a boat from Jerusalem to London, they would still roam freely without a fear in the world, until they invariably will have come across a restaurant serving pork chops. 

Do the current investors in the stock market resemble the pigs that got transported to London? Could it be that they are too young to remember the 2000 crash, or the 1987 crash? Are they too optimistic because they have never seen blood on the streets? Is a crash on the way that will turn their Robinhood portfolios to pork chops? Is the market driven now by irrational exuberance, as it was during the late 1990s? Of course, the truth is that only time will tell.  We are living through unusual times that may lead to consequences that are difficult to predict.