I offer this week’s note in tribute to my one-time professor: the late, great, Nobel Laureate George J. Stigler. To whom I owe multiple debts of gratitude, because in addition to reviewing and approving my (somewhat mediocre) Master’s Thesis, he was actually the speaker at my entirely anticlimactic MBA commencement ceremony. My parents didn’t come, and I myself almost didn’t attend, but I’m glad I showed up, mostly because of Stigler’s talk. Which was all about uncertainty: an unambiguously bittersweet topic, but one that, as the fates would have it, formed the basis of my entire career.
Stigler is best known (but inadequately appreciated) for something called The Economic Theory of Regulation, which holds that Regulatory Services are simply another sector of the economy, much like Health Care or Industrials. If one accepts this premise, it follows that the purveyors of this product sell their wares (as well as, it can be argued, themselves) to the highest bidder (don’t we all?). As a result, according to the theory, because the regulated are always more organized and incentivized, and therefore willing to pay a higher price for these services than are their customers, throughout history, it is in fact the enterprises subject to regulation that always call the net beneficiaries in the regulatory game.
Stigler backed up his theories with empirical data across a wide swath of regulated industries, including Air Travel, Logistics and Financial Services. In each case, he was able to demonstrate that regulatory schemes unilaterally worked to the benefit of those subject to the rule-making, invariably at the expense of the rest of us. Through such devices as creating impenetrable barriers to entry, establishing minimum pricing, etc., regulation arguably exists for little else but the purpose of aiding the great ships of industry to traverse their waters — unimpeded by stowaways and riff raff that might be dilutive to their agendas.
Stigler published his seminal work on this topic in the ‘60s and ‘70s, and, for the better part of the next generation, the world largely ignored it. But one person who was paying attention was Ronald Reagan, and, when he took over the helm at 1600 Penn Ave, he put this theory into practice, deregulating a large number of industries, including those named above. The corporate fats cat howled with outrage, but the result was four decades of largely unimpeded growth and prosperity. For example, when Reagan deregulated the formerly rigid, rigged and overpriced universe of stock market commissions, the chieftains of America’s brokerages descended, en masse upon Washington to issue dire warnings that the move would crush the equity market. It now trades at twenty times the levels that prevailed when they first laid out their big bitch. AT&T prognosticated frightful consequences if – god forbid – it lost its monopoly on long distance telephone calls. Anyone looking to travel round trip from JFK to LAX in 1975 would be hard pressed to do so for less than $1,500. Now? Smart shoppers can ride for about $200.
I’d encourage my readers to bear this in mind – in the modern world where in certain jurisdictions, due to the dynamics that Stigler identified, a woman wishing to become a manicurist must spend thousands of dollars and wait up to 18 months to gain certifications to engage in the potentially hazardous act of painting someone’s nails. Her would-be competitors unilaterally benefit. Her customers? Not so much.
But on that hot summer day of celebration in 1987, Stigler didn’t come to speak about regulation. Instead, he encouraged his robed audience and their well-wishers to understand, indeed to embrace, the ambiguities of the world in which we live. The one line that stuck with me from his speech didn’t even come from him; it actually is a phenomenon called Segal’s Law: “A man with one watch always knows what time it is. A man with two watches is never sure”. And boy oh boy is that ever true. Case and point: no one even knows who this Segal character is. Or was. Apparently, he was a jeweler of sorts, and the original quote was first published in 1930. In the “San Diego” Union of all forums.
But his point: that taking a double measure of anything pertaining to human affairs virtually ensures a diminished confidence in the associated accuracy, is resonant through the ages. And I’ve been feeling this in acute fashion my entire life. Take, for instance, metrics of options sensitivity, such as deltas. I have often been fond of telling the following joke: “Options deltas are like snowflakes – no two are exactly alike”. And, despite it’s being stone cold hilarious, almost no one ever gets it.
And right now, as I take stock of my professional world, it feels as though I have more than two watches. In fact, I have at least six; maybe as many as eight. So, as long as I’ve wasted this much of your time anyway, let’s review them, shall we?
I have, for instance, two political watches. One of them tells me that we’ve got a rogue, would-be dictator in the White House, who must be removed at all costs before he goes full Stalin on us. He’s shredded the Constitution; he’s put us on the brink of Armageddon, he cannot take a single breath without committing a heinous crime. If he does not belong in the slammer, it’s only because his appropriate destination is at the end of a rope. My other political watch sees a guy who has been attacked by a mob since he first descended that golden escalator in his own building to announce his run for president. He’s boorish beyond measure, and unambiguously narcissistic. But, despite an onslaught of assault (mostly ad-hominem, or, if you want to go the whole homonym route, ad-homonym) on his character, persona and policies, he has presided over an interlude of relative peace, prosperity and (under certain paths), visible hope for its continuation. As I type these words, he’s being impeached, and, while one of my watches says that this is necessary, the other tells me that the, er, high crimes and misdemeanors of which he is accused are nothing more than Standard White House Operating Procedure. Anyone who doesn’t think that presidents always muscle other foreign leaders in a manner consistent with their political agendas is just being naïve. Heck, I have it on good authority that even George Washington used to dial up guys like Louis XVI all the time, and he left office a century before the invention of the telephone.
I also have two economic watches. One shows a remarkably resilient environment, a recovery improbably humming along into its second decade. The country is at full employment. Inflation is nowhere to be found. Financing costs are at multi-millennial lows. Overwrought fears to the contrary notwithstanding, the threat of recession does not appear to be on the visible horizon. The other watch sees a world awash in record levels of debt, which is accelerating, and living on the sugar high of cheap financing. Both the military and the overall Federal budget are set to expire this week, but no one is talking about that. Above-mentioned political strife – on both a domestic and global basis – practically guarantees against any sound government action. Watch 1 sees a strong holiday season and the possibility of glad tidings in 2020. Timepiece 2 says that the entire planet will be smoldering cauldron in little more than a decade, and that even if we don’t manage burn the entire planet to the ground, all of its riches will be owned by about a half dozen nasty folks who must be garroted by pitchforks immediately.
And for what it’s worth, the now-casters at the Atlanta Fed appear, at the end of the week, to have lost Watch 1, and to be relying entirely on Watch 2.
I may need to take a trip down there soon to see time it is. I was only there once. Visiting Emery, where I was accepted. But they wait-listed both of my kids, and I’ve not since forgiven them for doing so.
But if they are right on GDP, Watch 2 will have us in a full-scale depression before the Snoopy float blows its way down Central Park West on Thanksgiving Day.
Lastly, and perhaps most importantly (after all, this is an investment blog), I have two market watches. On one wrist, I see our various indices registering one all-time high after another, and showing no signs of reversing course anytime soon. Further investigation of these dials indicates that we have endured, nay, prevailed, through most of the potential buzz-killing news for Q4, and that if the happy talk in the trade negotiations turns into happy action, we could be in for higher elevations. It also informs me that the years following >20% gains in the Gallant 500 (currently up, year-to-date, a spiffy 24.5%) are almost always “up” sequences; the last time we had a down year following such a cycle was 1937, you know, the year that FDR tried to pack the Supreme Court.
Market Watch 2 wonders what all of the buyers out there are smoking. I would’ve been down with a recovery to earlier year highs, at 3,000 and change on the SPX, but I stand in wondrous awe of the last 100 handles or so. Late Friday, Vixen VIX breached into the 11 handle from above, before some at-the-close weekend hedging pushed her up to a still-strumpet-like 12.05. Then there’s all of that debt, Impeachment, the largest political party in the free world espousing full-on redistributive socialism, and big, bad Myles Garret taking a swing at a diminutive-by-comparison Mason Rudolph, using the latter’s helmet as the bludgeon.
Market Watch 1, to summarize, says load the boat here; Market Watch 2 is completely bewildered by all the monetized optimism.
So, does anybody really know what time it is?
Does anybody care (Sorry. I couldn’t resist)?
I think, on balance, the answer is no. We don’t, none of us, know what time it is. Because the truth is that we are, all of us, just dealing with too many watches. As a result, what Jeweler Segal first observed, and what Professor Stigler described as useful perspective, has simply overwhelmed us.
So what do we do now? Well, for the moment, I’d say not much. We shouldn’t, for instance, Uber home alone after a major surgery. If the spirit moves us, we should absolutely order the best cookery we can afford for our new kitchen, but we should probably make sure we’ve contacted Con Edison and had the gas turned on so we can actually use these utensils.
And we should by all means wait and see what transpires in front of us before we make any sudden investment moves. Because things are changing too rapidly for much upfront planning. It certainly makes sense to synchronize our watches, but I should, before taking my leave, admit that I don’t even own such a device, to fit either pocket or wrist. Haven’t for years. And I really haven’t missed it much. Because everywhere I cast my eye, multiple GPS devices are in perfect accord in terms of what time it is.
So times have changed from Segal’s day, and even from that of Stigler. But the latter was still right about so many things. Regulation is still a game rigged to benefit the regulated. And as for my Master’s Thesis, while barely remember the subject matter, I do recall the Professor giving me a grade of B minus, minus on it, and calling it a superficial literature review. That was his only comment. But it was enough. Because I knew he was right.
Like so many others glorified in this space, he’s gone. And while it will be a long day before we witness his like again, his work lives on. At least we should all hope it does. His protests to the contrary notwithstanding, I think he had as clear a sense of what time it is as anyone I’ve ever encountered.
TIMSHEL