Inflation, diversity and accounting academia
It’s been a rough week in the markets. If you have some time off work this weekend, go outside and have some fun, don’t listen to podcasts. BUT if you are going to listen to a podcast episode, it should absolutely be one of these.
Being responsible for putting a large swath of the population out of work can’t feel good. Paul Volcker was tasked with playing America’s villain in the 1980s. In the process, he laid the groundwork for a period of stability and trust.
This episode is very relevant given our current inflationary woes. Stacey Vanek Smith and Robert Smith walk through the creation of the original central bank(s) and the political climate at the time. Did you know that the U.S. was a late adopter of the central banking system? I learned a lot and would highly recommend listening.
The Nasdaq’s new board diversity disclosure requirements went into effect on August 8th. Some people are really upset about it, including activists that appealed to the 5th circuit to overturn the rule and of course, Vivek Ramaswamy.
If you’re upset, you can take a deep breath. If you’re bullish on diversity disclosure, you can take a deep sigh? My former colleague, Harlan Tufford, now of MSCI, explains that the one woman diversity quota affects almost no companies because the zero gender diversity problem is oh so 2017 (not his words). It’s also a “comply or explain” regime which is a pretty lightweight disclosure requirement. A director can opt to not disclose their personal demographic information. Harlan points out that “the whole board might do that; in which case, the company will publish a diversity table that essentially has no diversity data”.
My unsolicited perspective: Corporate disclosure is where information goes to die. Stop adding requirements until people (other than Harlan) start reading it.
In the past few months, many people, most notably the U.S. president, made uninformed or incomplete statements about gas prices. There’s now a lot of debate on the Twittersphere about what actually causes gas prices to go up and down. Sarah Gonzalez and Nick Fontaine do an exceptional “forensic accounting” exercise, breaking down the gasoline supply chain and the market dynamics. It’s fascinating.
TLDL: Gas companies aren’t at fault.
Okay fine, most people will find this podcast incredibly boring but on the other hand…holy shit it's interesting. Art Wilmarth vehemently believes we should bring back Glass-Steagall. Glass-Steagall was passed in the 1930s and forced big banks to essentially only be banks. It forced the separation of banking, securities and insurance. Under Glass-Steagall, modern day JPMorgan, for instance, could not exist. The act was repealed in the 90s and lost its teeth long before that. The primary argument against Glass-Steagall is that if we impose restrictions on our banks they won’t be able to compete internationally. Wilmarth challenges this assumption and argues that the benefits of separation outweigh the risks. Humour me and listen to it. Let me know what you think.
This podcast is a classic. It’s great and long. Here are my highlights:
Bubbles: Alex argues that irrational markets, hype etc. play a positive, if not vital role in spurring progress. It’s a compelling argument. (Minute 41)
Housing: Alex tells the story of how transportation impacts cities and reflects on how self-driving trucks will impact the way our cities are set up. (Minute 5:21)
Alex Danco is a larger than life character in Canada’s tech scene. Founders love him and VCs quietly hate him for this: Why the Canadian Tech Scene Doesn’t Work. (It’s all true.) He’s currently at Shopify but you may know him from his wildly popular newsletter (no longer active). He’s also the reason I can do lots of push ups and he gave us our first break with this: Fixing Audit Won’t Fix Fraud.
In this episode, Dan Taylor of Wharton discusses two subjects that are close to my heart. The first is a problem that has always confounded me, why is academic accounting research so bad? (NOT his words.) Dan Taylor explains how academics are incentivized and why real life problems are rarely prioritized in research. The second is the role of public vs. private players in enforcing good behaviour in capital markets. Taylor rightly points out that public agencies like the SEC can only do so much, creating a gap that can/should be filled by whistleblowers, short sellers and other private actors.
Taylor also talks about his important work on foreign insider trading rules which shows that foreign insiders not only have greater opportunity to engage in insider trading but also take advantage of that opportunity.
Still obsessing about inflation? Damodaran talks about the “Volcker scenario” and the necessity of toughing out a recession in order to control inflation.
Damodaran shares his thoughts on ESG towards the end of the podcast. Hating on ESG has become pretty popular so his views are less fresh today than they were in March. He is confident that ESG will lose popularity because it is built on something that cannot be measured but he says that because so many people are making so much money it will be a “slow and painful death”. Damodaran goes so far as to call ESG “malpractice”. I spent a significant amount of time looking at ESG frameworks, scoring etc. as part of my previous job. I agree with Damodaran that it's a hot mess but I suspect it will evolve into a more narrow field rather than die completely. The G, at the very least, will survive.
One thing I like about Damodaran is that he encourages investors to pay closer attention to the stories behind companies and assess whether those stories make sense from a long term investment perspective. Need a better way to integrate narrative into your investing process? Sign up for a Bedrock AI trial here.
Carson Block was my first investing crush. When we signed Muddy Waters as a Bedrock AI customer, I told our team that I’d reached the pinnacle of my career and that we should all pack up and go home. No one took me seriously and we’re still an operating business.
Block believes that the US’s Holding Foreign Companies Accountable Act (HFCAA) won’t be an effective anti-fraud tool. The HFCAA would allow the PCAOB to inspect the audits of Chinese companies listed in the US. He believes that the PCAOB will be given the runaround and be “fooled” and “stymied” when given the opportunity to inspect these audits. He asserts that the Chinese will use cultural and language barriers to their advantage.
This discussion with NLP researcher, Nikhil Garg, has absolutely nothing to do with capital markets but it's a great talk. Garg’s research demonstrates both the power and fallibility of language models. Our brand is based on the efficacy of language models so highlighting their tendency to intensify biases may seem like a strange move. I would argue that we’ve only succeeded because we understand and address the limitations of the technology we use.
Interested in learning more about algorithmic bias? Here’s an old but excellent talk by Rachel Thomas.
Upcoming podcast I’m most excited about: The Unraveling of Trevor Milton (Introducing Bad Bets Season 2) - WSJ
Everything Ben Foldy does is gold. Like this - Biotech Wizard Left a Trail of Fraud - Prosecutors Allege It Ended in Murder. Trevor Milton is a real character and we all know how much I like listening to fraud content.
Podcasts featuring members of the Bedrock AI team:
Suhas and I have had the pleasure of chatting with some great podcasters. Despite the fact that I’m wearing the same outfit in every single podcast, they were not recorded on the same day or even the same week. I’m just that boring.
Suhas recently chaired the Toronto Machine Learning Summit on NLP. Unfortunately his talks weren’t taped but you can find highlights here.
I have also had some great conversations with Coffee & Liquidity with Ben Samuels, the Homeroom podcast with Cassius Felicella and A Wiseman Listens with Jonathan Wiseman. All great podcasts and we recommend a listen.
We’re presenting our research on statistical relationships between qualitative disclosure and price decline for the first time in New York City on September 29th. Vision Research and Bleecker St. will be presenting short ideas. If you are an institutional investor, sign up to attend in person. The event is in person only. Space is limited.