10/7/2021
Incentives > Constraints; A Few Observations on Housing; Longevity; Gasprom is Reducing Gas Supplied to Europe
Incentives > Constraints
The Facebook disclosures continue to provide a treasure trove of risk management lessons. In testimony, Frances Haugen got to the heart of the matter:
“Peoples bonuses were tied to MSI1”
Why did people in Facebook ignore the findings that showed the problematic and damaging results of its algorithm?
“Peoples bonuses were tied to MSI”
Those who’ve worked with me (or read the old Vivid) know that I believe that Risk Management is only effective if it can effectively employ a blend of incentives and constraints, and that control over incentives is the more important of the two.
In the absence of proper incentives, leadership must strongly support effective constraints with severe penalties (to create a countervailing incentive). But this is a second-best solution.
And at Facebook, the recommendations of their unit on civic integrity, which essentially was the control put in place, was ignored by management. The revenue side of the business had the power, and the leadership did not support the control function.
“Until incentives at Facebook change, we should not expect Facebook to change.”
Haugen would be a good risk manager. This is a real simple story; a failure of the leadership. If they were a bank, I know what I would have recommended as a Supervisor.
A Few Observations on Housing
The Atlanta Fed finds that housing affordability fell 11.9 percent in June, as home sale prices were up 23.8 percent over the past year. Affordability fell to its lowest level since 2008 and in many key markets a median-income household can no longer afford to own a median-priced home on the market.
Inventory remains low
However, unless the Fed takes away the punchbowl, it looks like prices may only accelerate. Underwrite accordingly.
Longevity
I found this chart from @MaxCRoser interesting (but probably obvious to the actuaries in the audience. Much of the old wives tail about increasing longevity has stated that it is because of the decrease in the rate of infant mortality; see for instance the large improvement in survivability at the 5 year mark from 1911 to 1951.
What’s interesting to me is that this affect has run its course, and the increase in survivability is now being driven in the 70 & 75 year old cohorts. In the 75 year old cohort, eyeballing, it looks like survivability increased from 60% to about 75% over the 20 years between 1991 and 2011.
Profound implications for financial markets, government retirement and medical obligations (which links to demography discussed below) and government policies such as immigration.
Chinese Demographics
Demographics is one of the largest drivers of economic growth and global fund flows. Those who know me know that I have been somewhat obsessed by the coming Chinese demographic ‘bust’ for the last 20 years. The aging in China and the increase in its dependency ratio, and the boom in the working age population in India and Sub-Saharan Africa, will drive many geopolitical and financial developments.
China is at, or just past, the point where its dependency ratio is the best. This observation from The Economist and Noah Smith points to how quickly the ‘bust’ is occurring.
Perhaps relatedly, we now see China acting increasingly belligerent towards Taiwan.
Taiwan "very concerned that China is going to launch a war" to take over, foreign minister says
Is this China feeling they need to move while at peak strength before the cost of aging hits? This has to be flashing red on your geopolitical radar at this point.
Gasprom is Reducing Gas Supplied to Europe
Of interest is Russia playing a bit of hardball with Europe. Now that Gasprom has announced that the NordStream 2 pipeline to Germany is complete, they have begun to cut gas supplies to Europe through the Ukraine, Poland and Belarus. It appears Gasprom wants to squeeze Europe and drive the prices higher to add pressure for Nordstream 2 approval. Gasprom has even begun loading the Nordstream 2 pipeline with gas. Russian gas prices at an ATH.
Watch this space.
Errata
What I’m listening to: LISA - 'LALISA' M/V by Blackpink
What I’m reading: Why Do We Think That Inflation Expectations Matter for
What blog post caught my eye: Ten Commandments for Aspiring Superforecasters
Best tweet of the week:
MSI stands for Meaningful Social Interaction, which is essentially a scoring system.