Norway's Government Pension Fund

Norway started a pension fund in 1990 as a way to invest petroleum income that comes from taxes, licenses, and the state’s direct investment. The idea was to smooth out the income from a highly volatile sector as well as to provide income past the point where Norway’s hydrocarbon resources begin to decline. What an adult thing to do. Today the fund is worth more than $1 trillion (that’s 1,000 billion or a million millions). It’s the largest sovereign wealth fund in the world and it owns 1.3% of stocks worldwide. In short, it's a juggernaut.

There are 5.2 million people in Norway so that’s roughly $195,000 per Norwegian. Norway’s GDP is about $370 billion per year, so the fund is roughly 3x GDP. For comparison, if the US had a fund worth $195,000 per citizen we’d have a fund worth about $64 trillion, and if it were 3x our GDP it’d be worth $56 trillion. I find this interesting for several reasons:

  1. States are the ultimate long term investor. Their size and longevity allows them to make volatile investments which over time yield higher returns, not touch the earnings, and watch the money compound for amounts of time that mortals can't replicate. A fund like this could take some small percentage out every year (say 1%-3%), never touch the principal, and could either greatly reduce taxes; increase investment in roads, schools, technology, etc.; provide a better alternative to Social Security; etc. - all of which would stimulate the economy. Granted, all the investment would have a crowding out effect which would likely reduce returns worldwide since the US is so large, but that’s another story.
  2. It allows the state to exert influence beyond politics, diplomacy, the military, taxes, etc. It literally gives them a seat in the boardroom of both domestic and foreign companies so they can influence things like environmental practices and executive compensation. Call it socialist if you like, but that’s some serious realpolitik. Maybe this is a more contemporary way for governments to generate income without burdensome tax laws, stay up to date with tech/business, and to influence the economy without regulations. It’s an interesting mix of socialism and free market ideas.

Book Discussion - The Four

Near the end of 2017 my friend Kevin suggested we both read a book and discuss it when he was in town for the holidays. I recorded the conversation, so six months later - here it is.

It's a free flowing conversation spanning almost 90 minutes that discusses the book The Four by Scott Galloway. The book is about the market dominance of Amazon, Apple, Facebook, and Google.

I Found Some 30-Year-Old Savings Bonds

I recently cashed in some savings bonds that my grandparents bought me when I was born. They were purchased in 1985 for a total of $100. They came due in 2015 and were worth $460, so nominally it grew 460%. That $100 in 1985 is worth about $220 today, so in real terms (adjusted for inflation) the investment a little more than doubled; not great for 30 years. That same $100 invested in 1985 in a S&P 500 index fund would be worth about $2,200 nominally in 2015 and $940 in real terms. So what's the point?

  1. Compound interest makes a slightly higher rate of return (or fee) a big deal. Doubling the rate of return (5.2% on the bonds, 9.8% on the index) in my example is the difference between having $460 or $2,200 after 30 years.
  2. Diversified risky assets like a total stock market index fund are, in a sense, a safer investment when held for sufficiently long periods of time. Bonds may deliver less volatility, but you're exchanging volatility for returns.
  3. Investment choices for regular people has changed a lot in three decades. Savings bonds don't command the rates they once did, and index funds are now cheap and plentiful. Granted, a savings bond is straight forward. Today you'd have to use a UGMA/UTMA or 529 to buy an index fund and transfer the money to a kid.

Cuba and the Cameraman

I wish my president past, current, and future would speak like this.

This is a clip from the Netflix documentary Cuba and the Cameraman. It's worth your time and I recommend it highly. The filmmaker makes several trips to Cuba over about 50 years and he visits the same people each time; tracking the progress of their lives.

The US imposed a trade embargo on Cuba, so the USSR sent aid consistently until about 1990 when the USSR collapsed. It's incredibly sad to see people suffer, and it's made worse somehow as they're well educated and well adjusted but have absolutely no way to deal with their situation. It's a real life apocalypse movie without the zombies.

The lesson to me is two-fold. Aid rarely has the intended effect. In this case you could see where there was reliance on it and when it went away it took down other healthy parts of the economic system. Two, I wonder if Cuba's situation could have turned out differently if the US had taken a friendlier stance towards the island so they weren't so reliant on aid from the USSR.

The Tendency Towards Entropy

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.

Hayek said this about economics but I think it's applicable to everything we design. As an architect I have a front row seat to the limits of our ability to understand the consequences of our decisions, and I think it's fundamental. We get better at controlling for these unintended consequences, but we also seem to consume any advances by making our designs more complex (i.e. buildings used to be built with two or three materials, now it's literally thousands).

A theme I've noticed this year across multiple disciplines is the tendency of systems to be exploited in ways their designers didn't foresee. Informal agreements go by the wayside and once exposed become part of its regular use. I've noticed this in politics, legal contracts, games, the news, internet forums, etc. Historically a popular example of this is the gentleman's agreement that US presidents abided by - the two term limit that George Washington imposed upon himself - then FDR was elected to a fourth term; something no president had ever done. After his death Congress passed the 22nd amendment which limits presidents to two terms. Examples from 2016 might include: news organizations inability to convince readers of their legitimacy in contrast to fake news, the US Congress's unwillingness to review the president's Supreme Court nominee or Federal Reserve appointees, reddit's inability to deflect gaming of their algorithm, and internet service providers willingness to become 21st century robber barons. It almost appears that it's en vogue to break with convention and subvert anything that isn't specifically stated or enforceable legally.

If there's a take-away from me writing this it seems to be that as a culture we seem to be more accepting of this than previously. The spirit and intent of our contracts, systems, etc. seems diminished in relation to our ability to bend these systems to our will using their semantic deficiencies.

The tendency of a system towards entropy is also a law of thermodynamics - which may also be why life exists, so maybe this is actually more typical than the reality we've been living in?

Having a Kid - Notes at One Year

Today is my first child's first birthday. I thought it'd be nice to document some of the changes in my attitudes and views over the last year while I'm still mentally straddling the line somewhere between not having a child and being a parent. Soon I won't reliably remember what not having a kid felt like in the same way that I can't really recall what being unmarried felt like.

The love thing - it's taken time to develop. I'm skeptical of the claims of others to the contrary.

My concern for children's safety and empathy towards parents who have kids who have been harmed or killed is greatly magnified. I'm surprised more parents don't retaliate violently against those who harm their children.

Having a kid is surprisingly similar to having a pet - not a polite topic of conversation. The key differentiator is the ceaseless rapid progression with no plateau in sight.

Kids are less homogeneous than previously thought.

There's a strong possibility that we work too much.

Irreducible Knowledge

I've been noticing lately that I spend a sizable portion of my workday conveying information that gets misunderstood. Not just misunderstood like one of us didn't read the entire email, but literally the party I'm trying to convey information to doesn't have the requisite knowledge to really understand what I'm trying to get across. It sounds condescending - it's not meant to be. We all exhibit this, just in different knowledge areas. 

Below is a clip of the physicist Richard Feyman explaining the issue to a journalist who's just asked him a question the journalist can't understand the answer to because they don't understand basic physics, so instead of answering the question Mr. Feyman (a bit pedantically) explains the difficulty of conveying answers to someone who doesn't posses the requisite building blocks of knowledge in that area.

Most of the articles I read everyday are on subjects of which I'm not an expert, but often they touch on knowledge areas that I've studied and have a degree in - which isn't that important but it's to say I've taken all the foundational classes. What strikes me is that often these articles that deal with technical subjects, the two most notable offenders are economics and nutrition articles, will deal with fairly high level concepts - the stuff of 400 level classes, but they often do so while misunderstanding the basics, the irreducible facts. You can't write a piece on a low carb diet if you don't deeply understand macronutrients. It'd be disingenuous. It's like me writing an opinion piece in a law case when I barely understand the difference between criminal and civil law.

The internet is a boon for the intellectually curious but I often wonder if it gives us a false sense of knowledge. The traditional model of schooling is largely outmoded. Yet, it's difficult to accumulate the basic building blocks of a subject purely through our own research. That's changing with outlets like the Khan Academy and similar. It still leaves me wondering why we're so prone to this this type of error and how we can convey ideas to those outside of our knowledge areas.

The piece that inspired this article, which I missed the boat in commenting on, is an article on economic inequality by Paul Graham. I admire Mr. Graham very much. His essay How To Disagree is essential reading, but I think he misses some basic points of macroeconomics in his inequality article. That someone who is so clearly highly intelligent and deeply introspective troubles me because it suggests this is something we are all prone to.

Two Predictions: Self Driving Cars and Solar

The other day I was attempting to find photos and videos of me playing paintball. I played my last pro tournament at the end of 2007 and it's surprisingly difficult to find much evidence of it. I think it's largely because smart phones didn't exist then. Their adoption has been relatively recent and it's difficult to remember a time before them; the first iPhone was release midway through 2007 with the first Android phone, the G1, trailing at the end of 2008. This isn't news to anyone. My point in bringing this up is that two more shifts like this are underfoot, and much like smart phones everyone knew they were coming several years in advance. Once they happen it'll seem as obvious as the arrival of smart phones. The shifts I see are self driving cars and the dominance of solar electric energy sources coupled with a more distributed power grid. This is in opposition to other renewable sources and our current centralized generation system.

First, self driving cars. The current zeitgeist is that this is happening. So much so that writing about it is redundant. The reason I am is that most of the people I've discussed this with don't seem to grasp how this will fundamentally change our world. It's difficult to understate and the incentives for change in this area are absolutely massive considering that transportation is 10% of GDP. Here's some of what will change:

  1. No one will need to own a car. Cars sit idle 90% of the time. The greater the utilization, like any asset, the cheaper its use every time it's used. Related, this is Uber's actual plan. They're not a taxi company. They're a data company and they're building the ride sharing infrastructure for self driving cars. This is why their valuation is many times higher than the entire revenue of the taxi industry.
  2. Self driving cars will almost never crash. Currently about 30,000 people a year die in collisions in the US. Collisions will likely be treated more akin to airline crashes. They rarely occur and when they do they receive lot of media attention and the investigation is thorough. This will be an issue since people tend to have cognitive issues with ceding control and perceived danger.
  3. And no, there won't be a steering wheel. At some point people won't be allowed to drive on public roads because it's unnecessarily dangerous. The right to do so, while legitimate, will prove too costly to continue. Driving a car will be relegated to closed tracks only.
  4. Cars will travel closer together, think inches/centimeters, which means roads will get smaller and traffic will disappear. What will we do with all the excess space? It also means less road maintenance and traffic signals as we know them will go away.
  5. Gas stations, auto body shops, car dealerships, personal car insurance, lawsuits related to car accidents, traditional car companies, the number of mechanics will be reduced, medical personnel responding to crashes, etc.
  6. Cars will travel faster. On the face of it this seems like it'd make outlying suburbs more attractive, but telecommuting was supposed to do the same thing while in fact the reverse happened. Cities became more populated and suburban and rural areas less so. Telecommuting has made it possible to live a more nomadic life and non-privately owned self driving cars will further that.
  7. Cars will be electric. Why? There's a plethora of reasons, but mostly because it's quickly becoming the cheaper option. They'll also use less energy even though they travel faster.
  8.  Parking lots and garages will largely go away. This may not seem like a big deal but they're expensive and take up lots of real estate that can be used for higher value uses. Much as just-in-time-shipping revolutionized logistics by removing warehousing from the equation why would a self driving car company want to idle an asset and pay to do so? Maybe during periods of low usage, but more realistically the cars will charge themselves during non-peak hours. Maybe they'll even flip the equation by acting as storage for conventional power, soaking up cheap excess power generation during off peak hours and flooding the grid during peak hours when it's financially attractive to do so.
  9. Public transportation will become largely defunct. I haven't read anything about this but I don't see how it won't be affected. Trains are massively expensive and public transit in general is a money loser (it's a political issue endemic to public transit). I don't currently see a scenario that makes fiscal sense. It'll be interesting/frustrating to see how entrenched interests fight this, but the coffin is already designed.
  10. Long commutes are proven to reduce life satisfaction. Since self driving cars will travel faster and you won't have to pay attention this should be mitigated to a large degree, so as a whole it'll make people who endure long commutes happier.

Related to all the above is energy production and usage. Solar won the small scale renewable energy contest years ago and few have taken notice because it's happening slowly and there's a stigma attached to solar (PV, photovoltaics) from its early years. It's also been strung along due to backlash from entrenched publicly regulated energy company's outdated pricing models (charging mostly for usage instead of connectivity which is becoming the real product) and the fact that batteries haven't improved fast enough. The competition was and currently is: distributed natural gas, oil, gas digesters (waste to methane), wind power, hydroelectric, and to some extent conventionally distributed electricity but I see that as part of the same system. True geothermal and wave power generation has never been anything beyond niche. All of these systems will remain but solar's growth will eclipse them all by orders of magnitude. Why this is happening is due to a confluence of fundamental physics and cost issues.

On the physics side of things conventional electric power plants have a theoretical maximum efficiency of 42% due to the Rankine cycle and most operate in the low to mid 30s, wind power has a maximum efficiency of 59% due to Betz's Law and current technology is already near that. Distributed natural gas is more viable but poses a myriad of health issues that are becoming less tolerated. Heat pumps are making conventional heating systems obsolete while induction cook tops are doing the same thing to cooking ranges both of which negate the need for running gas lines to buildings. Hydroelectric poses environmental issues which is why they're almost never built anymore in the US. The list goes on, but the point is that solar efficiency is still in its infancy. There are huge gains to be made while contending technologies are already near their theoretical limits.

The real breakthrough in recent years has been the cost of solar. It's plummeted to the extent that the barrier now is the labor to install them and the regulations surrounding attachment to the grid. A real world example of this is Tesla offering its customers free charging by building stations that run on PV. The brilliance of this is two fold. First, a car bought from Tesla includes in its price all the associated energy costs for the life of the car up front. That's not possible with a gasoline car. Second, PV's costs are almost entirely up front since there's almost no maintenance. Energy is a ruthless finance game and PV is a known quantity. Other systems currently have lower costs up front but unknown variable costs during their useful life. This makes them more difficult to finance.

Energy is a much more nuanced discussion than self driving cars, so I'm leaving a lot unsaid since this is already a tome. The time frame for self driving cars is unknown but has already started. They should really start to come online in the next few years. The total dissolution of our current system may take multiple decades. I have no idea. There are a lot of interests that will be made obsolete and they won't go down without a drawn out fight. Solar is harder to predict but that should take far longer. I wouldn't expect anything too noticeable to happen in the next few years. I'll consider this tipped when the majority of conventional homes are being built with PV and net meters as standard. That could take more than a decade but the writing is on the wall.