Demystifying the concept of financial leverage in business
Every business has a balance sheet, which contrasts its assets (valuable things it owns) against liabilities (valuable things it owes to other people). The difference between assets and liabilities is equity.
Financial businesses will frequently have non-financial assets and liabilities. Ignore those for the sake of simplicity. Ignore the nice building, the computers, the payroll due on Friday for work which has already been completed. Focus just on the financial assets and liabilities, things like "mortgages our bank owns" (asset) and "deposits from customers" (liability).
Leverage is the ratio of your liabilities to your equity. Simple division. Fourth grade math. If you have $110 million in assets and $100 million in liabilities you, by subtraction, have $10 million in equity against your $100 million in liabilities. You are said to be levered 10:1.
The entry also used a word I had to look up, "impecunious." - From context and also looking at the word I thought it was about "having no money," which as it turns out, I was right.
This post was clearly inspired by the current events around FTX and what happened to cause its apparently sudden filing for Chapter 11. The author, who works for Stripe, goes on to discuss his own bit of interactions with Crypto currencies at the time, turning a small profit because of the chaos and opportunism and an understanding of the financial mechanisms at play.
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Apparently some people take installment plans when buying designer puppies at 199% interest rates!
Insane. Thankfully the article is about states beginning to go after stores which do this.
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"Engaging with History" on the importance of history and context
Marcus Aurelius said, "We all love ourselves more than other people, but care more about their opinion than our own," which to be honest sounds like something you'll find written on an $11 IKEA poster today. Part of the value of reading an Aurelius quote like that is that he said it almost 2,000 years ago. Its age is the important part. If it was true then, and it's true today, then it's a fundamental part of how humans work and of course it's going to be true for the rest of my life. So I should pay close attention to it.
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"Tedros: Tigray, the Triple Billion, and a second term"
As Ukraine's coverage grew I recall seeing a few call outs that the media was hammering on Ukraine while there were a number of other countries undergoing invasions / wars / crises which got nowhere near as much coverage. This editorial highlights Dr. Tedros' calling attention to the Ethiopian crises and calls out the lack of western news coverage.
"Maybe the reason is the colour of the skin of the people in Tigray." Dr. Tedros confronted world leaders last week for their neglect of "the worst disaster on earth"—a storm of conflict in Ethiopia, extreme weather across the Horn of Africa, and soaring food, fuel, and fertiliser prices exacerbated by Russia's invasion of Ukraine. Tedros is not politically neutral, given his Tigrayan background and former high-level roles in the Ethiopian Government. But his suggestion that racism underpins the world's apparent indifference is worthy of consideration, by both the political and health communities.
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"The Dystopia of São Paulo Holds the Key To Brazil's Transformation"
São Paulo is a dystopia. Society here has failed miserably in making a dignified life possible for everyone. The resulting dissonance has produced a radical form of dehumanization. Catholic Priest Júlio Lancellotti, an icon for the city’s marginalized population – a man who has personally taken a sledgehammer to the boulders the city administration installed under bridges to prevent the homeless from sleeping there – calls it "aporofobia," the hatred of the poor. Can such a perverse place be transformed into a city that is livable for all?
This article looks at a handful of people and projects underway trying to improve the lives of the poor in Sao Paulo.
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While the US economy might be about to enter a recession, the rest of the world is struggling too, making the US Dollar the strongest it's been in decades - and why that's bad for corporations
I'm not sharing this as bemoaning the suffering of corporations, but rather as I found it enlightening as something I don't normally think about in my day to day life.
The value of the U.S. dollar is the strongest it’s been in a generation, which means Americans planning vacations to Europe or wiring cash to family in Latin America are not upset. However, if you happen to be a U.S. company that earns a decent percentage of your profits abroad, this climb to unseen heights unfortunately isn’t great news for your bottom line.
The dollar is having a record run for 2022. It’s up roughly 15% against the euro (hitting 1-to-1 parity for the first time since 2002), 15% against the Japanese yen, 10% against the British pound, and 5% against the Chinese renminbi. The Economist‘s annual Big Mac Index just dropped last week, and this year the magazine noted, “Nearly all currencies are undervalued against the dollar.”
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Panama Papers Whistleblower Grants Interview After Six Years
After six years, two reporters for Germany's Der Spiegel were able to interview the anonymous whistleblower who leaked the Panama Papers. Here are just a few excerpts, though I heavily encourage you to read the full interview.
Notably the German daily Süddeutsche Zeitung, which broke the story of the Panama Papers, was not the whistleblower's first outlet that they reached out to: "I corresponded with many journalists who were uninterested, including at the New York Times and Wall Street Journal. Wikileaks, for its part, did not even bother answering when I reached out to them later on."
Another notable longer excerpt which delves into why the whistleblower has remained quiet since the leak:
DER SPIEGEL: So, you have remained silent now for six years. Why do you want to speak up now?
Doe: There have been several occasions over the past six years where I have been tempted to speak up. At each one of those points, it has seemed like the world was careening closer and closer toward catastrophe, and so the need to attempt to intervene has always seemed increasingly urgent. At the same time, however, I have had to balance a few factors.
DER SPIEGEL: What exactly are you referring to?
Doe: First, of course, is my own physical safety, and that of my family. And second is the fact that the world is a big place with a cacophony of voices all trying to get their point across. I wanted my words to carry meaning, not to get lost before the next Donald Trump tweet. In 2016, I wrote (Eds: in a manifesto) of my fear based on what I was witnessing, "that severe instability could be just around the corner." I am afraid that instability has finally arrived.
A very good interview both about the realities of being a whistleblower, and also the larger realities of the Panama Papers' importance especially in light of Russia's economic sanctions.
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"Wealth Is a Strong Predictor of Whether an Individual Pursues a Creative Profession" (2019)
Those from households with an annual income of $1 million are 10 times more likely to become artists than those from families with a $100,000 income
A sweeping survey of 160 years of U.S. demographic data suggests individuals from wealthy families are more likely to pursue careers in creative fields than those from lower-income households.
It isn't altogether surprising to see, though I don't think I would have guessed a 10x difference. I'm also curious how this trend compares with other countries to see how much of it is also the comparative lack of economic safety nets in the US.
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Cory Doctorow discusses money, debt, what they are, and why governments are not the same budgetarily as individuals or businesses
Even though I had read Debt: The First 5,000 Years on which the start of the entry is based, the post goes into other areas I understood but did not have as clear a way of explaining. He then turns to Crypto and why seeing it as a form of money is bad.
This article is quite good, definitely worth a read!
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"What's happening in Sri Lanka and what comes next"
Sri Lanka's president, who had announced he would resign Wednesday, has fled the country after months of turmoil culminated in protesters converging on the presidential palace. Here's what's happening in Sri Lanka:
- The country is hurtling toward bankruptcy
- Daily essentials including food and medicine are scarce
- Political corruption has deepened mistrust in the government
- The double whammy of government and economic instability is further complicating recovery
Sri Lanka's prime minister, who said he'll step down after a new government is installed, says the island nation's debt-laden economy has "collapsed" as it runs out of money to pay for food, fuel and medicine. It's been relying on help from neighboring India, China and from the International Monetary Fund.
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Casinos not seeing signs of recession... yet?
In most things, you should always look for multiple view points. This article calls out the gambling industry as not seeing any signs of a slowdown yet, but at the same time Bank of America's economists are predicting a slight recession this year and oil prices took another dip on recession fears and this article in Barron's says a double-dip recession is looking likely.
I personally believe the recession is coming, and it's going to suck for a while. Hope I'm wrong, we'll see!
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When Giving People Money Isn't Enough
An acquaintance of mine, Zvi Mowshowitz, wrote a long post looking at a recent study that gave people around Chicago $500, $2000 or nothing, and compared the economic impacts for them. The results were fairly surprising in that it showed an overall negative impact.
The small size of the grants makes it very difficult to say that there is something structurally different going on in these two situations. It is highly plausible that in Chicago $2,000 simply wasn’t enough money to escape the poverty trap and allow investment, whereas $1,000 in Kenya often was enough. The PPP gap alone makes the grants in Kenya functionally bigger.
It is also quite plausible that financial engineering and the nature of debt makes a big difference here. It’s also less concentrated giving, so the recipients can’t serve as customers for each other, the people around you still have needs that fall upon you and there is no cultural expectation that you must ‘make something of’ this opportunity.
There is comparison with a study done in Kenya which gave people $1,000:
Comparing this grant to the one in Kenya by GiveWell, in Kenya the typical grant is $1,000, and median monthly income is $76, so that’s a little over a year’s income. The median income in Chicago is about $34,000, so $2,000 is good for about three weeks for the median earner, although the paper says it was actually more like two months. This was a poor group. I am still skeptical this is the right comparison, as the earnings in this group sound pretty depressed from normal.
One of the Chicago participants even responded to someone on Twitter and noted they were personally surprised by how not-impactful the $2000 ended up feeling, and in fact that they felt guilt over getting it.
As Zvi is giving his own analysis at the end he shared what was sticking out to him:
The thing that I couldn’t stop thinking about was the idea that getting resources increased scarcity because people ‘became more aware of all the needs they cannot address.’
This is an interesting insight which matches up with something I recently read about why Americans tend to be more unhappy, despite having (in general) more security (less likely to die of starvation, being housed, etc.) in life than those in many other countries. And the reason the author (whom I cannot remember or find at the moment) said was that it was because having that security meant we had come to focus on the intangible concerns in our lives. We became more focused on fear of events that could-be rather than events that are transpiring.
Zvi touches on the same thought:
This explains why people think things are so much worse in America today than ever, along dimensions where this plainly isn’t true. But it is true if you only consider the problem to be the gap between reality and expectations, or alternatively the gap between reality and what is considered acceptable.
The same things at work in the study and about happiness are, I believe, the things which drive the capitalist climb. As we make more money, we become aware of opportunities to spend it and "upgrade" our lives, which we now strive for and can (hopefully) attain. But in attaining them we now want more and to reach higher, etc.
My point is not to undercut or say I'm against UBI concepts. I think the study here shows that one time payments don't work as a tool for getting people out of poverty unless they are of significant size (perhaps on the scale of the Kenya study, a year's income) but even then - capitalism is a slippery slope and it is very easy to misappropriate the windfall for things which seem to be needed vs. what is actually needed.
The 2020 US Median income was $67,000. What would you do with it if you received it in a lump sum?
For me, someone who is thankfully in a decent position economically. I'd probably use it to pay off debt first off. My car, credit cards, etc. To pull numbers out of the air, let's say that leaves me with $40,000. The rational choice is to address other needs, health wise? Home repair? Etc. At what point do I save it, or even invest it? I could use a new computer... there's some larger house work that my wife and I want to do. The smart thing would be to invest it.
But, again, this is for me. I'm not fighting out of poverty. I have debt, but it is manageable and is not a looming threat.
So, then is the choice to make these larger contributions, but to mandate on how they can be spent? What if you had the $67,000 but it was mandated to only be spent on housing, debt relief, food, etc? Based on this study, I suspect that would cause a new level of awareness the other areas in your life that have needs. I've got this chunk of money, but I can't use it to pay for new clothes needed for an interview, etc.
Ultimately, it's a surprising result from the study, and it doesn't say that these payments are bad - it seems to say they are bad as a vehicle to create lasting change in the majority of participants.
Zvi's wrap up:
Mostly I conclude that small one-time transfers are likely to get offset due to a combination of poverty traps, including perception of need but centrally hyperbolic discounting. When you give a one-time payment or even simply have money in the bank at all, most cultural norms involve acting richer than you are, and heavy pressure to spend, usually not efficiently. There isn’t proper appreciation for how much that money will be worth to you when things get tough again, but then again that is only valuable to you to the extent you can resist the pressures to spend. Part of the trap is that once you’re in the trap trying and failing to get out of it doesn’t help you much, so traits that would help in abundance don’t have a hill they can climb.
Thus, one wants to focus on either giving people money continuously, in ways that don’t create a false wealth effect that causes overspending, or to give them enough at once to outright escape the trap. Either way seems plausible.
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Inflation, Scarcity and the Road to Survival
Originally brought to my attention via this blog post, this article raises some good points which I had - admittedly - taken for granted or overlooked altogether.
We are now trapped in what I have called “the poverty of two narratives” that pits the business-as-usual crowd against the green transitionists. This supposed debate avoids unpleasant realities such as rising global consumption and growing rates of energy use in a finite world. Moreover, both groups believe unlimited economic growth is the only answer to our multiplying emergencies.
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"Up like a rocket, down like a feather" - A quote I remember my father using in regards to gas prices back in the 90s.
Reading this morning I realized that the gas price movement described above is just a flipped Seneca effect. And I don't think this is limited to gas, it's just the most easily observable in this way.
Seneca, the philosopher, stated in the 1st century AD:
Increases are of sluggish growth but the way to ruin is rapid.
I don't think these are directly related; more of an interesting thought I wanted to share. What is actually going on is corporations take the first opportunity to launch prices up to the max they can, and then will slowly let it fall down as people's willingness to spend dwindles until the next reason to drive prices upward.
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Science Fiction Is a Luddite Literature
Cory Doctorow (futurist and author) dives in on the large misconception when people think of Luddites. Below was a highlighted passage on Medium and it's just, exactly the issue we deal with today. Capitalism drives greed and rewards the haves and not the have-nots.
Instead, the owners of the factories — whose fortunes had been built on the labor of textile workers — chose to employ fewer workers, working the same long hours as before, at a lower rate than before, and pocketed the substantial savings.
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Everywhere basic income has been tried, in one map: Kenya; Iran; Alaska; Stockton, California; and more
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Excellent thread about why the Chinese yuan is car from relaxing the US Dollar as the de facto currency of trade
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A look at very early computer games for business simulation
A fascinating look at some of the very early (1950s) mainframe computer games used for execs and college students to study business models.
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$1.9 Trillion Covid Relief package passes Senate with VP Harris casting tie-breaking vote
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Biden revives push to put Tubman on the $20
Let's get Jackson off the currency and hopefully we can start adding more contemporary American heroes to US currency. Scientists, inventors, civil rights, suffrage movement, etc. Plenty of people important to honor beyond the founding fathers and Presidents.
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