Cliff Asness Finds Common Cause with Compass on Coin-Flip Capitalism

And more from the past couple of weeks…

Happy new year! Although, if you’re like me, you’ve spent the last week cancelling your kids’ sleepover plans and screaming at them to drum nonstop for America, which can lead to some tension on the home front. Thanks for the advice, Vivek. But we’ll get to all that on Monday. For now, there’s lots to catch up on.

Your one thing to read this week is Cliff Asness’s “2035: An Allocator Looks Back Over the Last 10 Years.”

Asness is one of the world’s best known hedge fund managers and an incisive critic of the foolish herding in asset allocation, the ineffective hedging of most hedge funds, the poor performance of private equity, and the speculative excesses of crypto. Here, he provides a delightful send-up of the many ways his industry will likely fall on its face over the next decade (and be paid handsomely to do so!), with a satirical retrospective sent back from the future.

While he has taken strong issue with American Compass’s work on what we like to call “Coin-Flip Capitalism,” his critique closely mirrors our own and he deserves credit for calling out the absurdity of modern finance from within its richly gilded halls. There’s a reason we keep our very own Cliff Asness Chair of Applied Liberty in the kitchen at American Compass! Maybe we’ll upgrade it to a BarcaLounger.

Where we seem to differ, mostly, is on what to do about the situation. This is a common challenge as the various facades of market fundamentalism crumble. The unavoidable next steps are to clean up the rubble and rebuild something sturdier. Where markets are failing, public policy becomes useful and often quite necessary. But those muscles have atrophied badly on the right-of-center. Satire is fun, but at some point it becomes incumbent on those closest to the problem to begin offering solutions.

BONUS LINK: In the Wall Street Journal, Jason Zweig gives his own brutal assessment of private markets and alternative assets, warning small investors to “hold on to your wallet. Wall Street is gearing up for a sales push that could enrich the middlemen and impoverish you.”

“Often,” he continues:

these investments have been a costly path to mediocrity for even the world’s biggest investors. As the managers of alternative funds have struggled to resell a glut of overpriced assets, they’ve also been stymied trying to convince big clients to add more money. No wonder there’s an intensifying push to strip away the traditional protections for smaller investors.

Good job, financial markets.

BONUS BONUS LINK: Tesla’s market share in China has collapsed and now its worldwide vehicle deliveries have fallen year-over-year. Remind me again why it is worth more than the next ten largest automakers combined? Oh, right. “Musk has sought to refocus investor attention away from car sales and onto its driver-assistance software, which it calls Full Self-Driving (Supervised), and its Optimus humanoid robot—technologies he has claimed could one day boost the automaker’s market value to as high as $30 trillion.” Well that makes sense. Good job, financial markets.

THIS WEEK AT AMERICAN COMPASS

We weren’t publishing over the holidays, but apropos of both your one thing to read and today’s announcement from the Biden administration blocking Nippon Steel’s acquisition of US Steel, may I suggest a classic Compass essay, The Rise of Wall Street and the Fall of American Investment.

The pro-takeover crowd’s framing of the acquisition as “investment” is notable. “Yet another terrible decision by Biden on his way out the door. Blocking $15 billion of foreign direct investment in US-based steel plants from one of our closest allies. Shooting ourselves in the foot for no reason,” wrote Alec Stapp. “President Biden claiming Japan's investment in an American steel company is a threat to national security is a pathetic and craven cave to special interests that will make America less prosperous and safe. I'm sorry to see him betraying our allies while abusing the law,” wrote Jason Furman. (All emphasis added.)

So much “investment” in America sounds wonderful, but of course no real investment is occurring. Assets are exchanging hands. Control is shifting. Nothing productive has been accomplished. As I explain in the essay:

This confusion over the nature of investment is pervasive among economic policymakers and commentators, has bled into the popular culture, and threatens the nation’s future prosperity. Actual-investment, by which I mean the allocation of capital toward the development of new productive capacity—the building of structures, the installment of machines, the creation of intellectual property—has been weakening in America for decades now. By contrast, what we often call investment, and what seems constantly to expand as a share of our economic activity, is merely the trading of assets for profit and power.

Meanwhile, over at the New York Times (and coincidentally published on Festivus), I had a fun little piece on What Economists Could Learn from George Costanza.

And on the American Compass podcast this week, Commonplace features editor Helen Andrews joins me to discuss the state of the conservative media ecosystem and the role we envision for Commonplace as an intellectual home for the New Right.

WHAT ELSE SHOULD YOU BE READING?

A User’s Guide to Restructuring the Global Trading System | Stephen Miran

President-elect Donald Trump announced Miran as his choice for chair of the White House Council of Economic Advisers, so I highly recommend getting familiar with his heterodox and thoughtful approach to economic issues, which closely mirrors the American Compass view on the global economy in particular: “The burden the overvalued dollar places on the U.S. manufacturing sector drives carnage across the industrial base of the country, and places an enormous drag on our export sector. American workers bear the cost for global reserve provision. Our borrowing isn’t caused by overconsumption, but the reverse—we import too much because we export reserve assets to facilitate global trade and savings.”

Bonus Listen: Last year, Compass advisor Michael Pettis and I had an in-depth discussion of this concept on an episode of the American Compass podcast.

China Has Limited Firepower to Counter U.S. Tariffs | Wall Street Journal

What’s the one benefit of a huge trade deficit? A trade war harms producers in other countries much more than in your own. As the Journal notes here, “Nor is punishing U.S. companies that do business in China the potent threat it once was. China’s sluggish economy and its push to edge out Western brands in favor of domestic rivals mean many U.S. companies are struggling there. As a result, China has become less important to American corporations than it was.”

Bonus Link: The Journal dives further into this point in U.S. Companies Vouched for China During Trump’s First Term. Not Anymore. China’s strategy of rank manipulation and exploitation of western companies, leveraging their short-term pursuit of profit at the expense of their long-term strategic interest, always had an expiration date once the long-term carnage began to unfold… and we may finally have reached it. That gives U.S. policymakers much greater space to take harsh action with benefits that outweigh costs. But policymakers still have to realize that, and take the action.

Bonus Bonus Link: While we’re on the subject, an encouraging report that export controls are in fact working. ASML CEO Claims China's Semiconductor Industry Is 10 to 15 Years Behind.

What Happens When a Whole Generation Never Grows Up? | Rachel Wolfe, Wall Street Journal

This is an important but frustrating piece. It does a nice job focusing on the social and cultural obstacles facing younger Americans, but in doing so it yields more questions than answers. The obstacles often come across as self-imposed—examples of people making poor choices against self-interest, with no one giving them better guidance. I wish reporters in these situations could ask judgmental follow-ups, instead of just presenting the view of the purportedly representative individual and then moving on.

Meet Renata Leo, class valedictorian but still living in her childhood bedroom at age 31. “Renata acknowledges that it’s a privilege to be able to wait for a job she loves rather than take whatever’s offered. But she admits that the longer she stands by, a seeming bystander in her own life, the more hopeless she feels about ever launching at all. “I still feel like a little kid,” she says. This seems solvable!

Bonus Link: In the Deseret News, Alysse ElHage and Brad Wilcox provide a related look at “kinlessness” around the holidays, which is making no one happy. Incredibly, “starting in the past decade, the share of ‘kinless’ prime-aged (18-55) adults — defined here as those who are never married and have no children in the home — exceeded the share of Americans who are married with children for the first time in our nation’s history.”

Three Ways I Have Updated My Priors Since the Election | Daniel Stid, The Art of Association

Dan was longtime head of the Hewlett Foundation’s U.S. Democracy Program and is a keen observer of the philanthropic community. So I was impressed by and excited to promote this piece even before I got to the part in it about me. He recounts “a series of discussions with fellow democracy advocates to take collective stock of the [election] results”:

In a familiar refrain, many participants have lamented the misogyny, racism, and xenophobia they perceive to be the primary drivers of Trump’s support. Others have essentially followed H.L Mencken in suggesting that the people have spoken, the SOBs, and now they deserve to get what they asked for — good and hard. As for the economic challenges and cultural dispositions of working class voters that led a growing and multi-ethnic portion of them to conclude their best option was to take another flier on Donald Trump? Well, nobody has seriously broached that topic.

I am sometimes accused of uncharitably straw-manning my account of how badly the elite misunderstands the nation’s challenges or simply disdains most of the nation’s citizens and their priorities. See, I’m not making it up! This remains an enormous challenge. (Subscribe to Dan’s relaunched Substack here.)

As I wrote the day after the election, in “In Defeat, One More Chance to Get It Right”:

Defenders of Democracy have seemed not to care much about democracy, or its norms and institutions, at all—except when it is helping them to secure and wield power. Their commitment to its defense has been a talking point, perversely intended to avoid any commitment to its actual practice. Vote for us because democracy demands it, the argument went, as if that were a substitute for what democracy actually demands, which is that leaders take the values and interests and priorities of the citizenry as their own.

Quoting that passage, Dan concludes, “This criticism is harsh, but not unfair. Agree with Cass or not, it is hard to see how democracy funders and advocates in civil society can make much headway if they do not correct their course along the lines he suggests.”

And with that, enjoy the weekend!