Shorting the American economy/Defining “improvement”
ChatGPT Summary:
The author reflects on the concept of improvement and its complexity, suggesting that every action individuals take aims at improvement, albeit often difficult to define. The discussion is prompted by the movie "The Big Short," which portrays hedge fund managers who profited from shorting the American housing market before the 2008 economic collapse. The author questions whether such financial gains qualify as improvement, considering the ethical and moral implications. The article explores the paradox of improvement, acknowledging that it often comes at a cost and involves trade-offs. The author introduces the "4 M’s" framework - Material, Mental Peace, Meaning, and Morality - as a way to optimize personal improvement, emphasizing sustainability, well-being, purpose, and moral integrity. The article provides links to resources related to the movie and financial concepts discussed.
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Yesterday I talked with a friend and collaborator about a new project to showcase our thinking about the consulting work we do. Details to come!
One of the themes we touched on before the end is the concept of improvement. It came up because I was trying to think of what both of our approaches have in common. And I think it’s actually what EVERYONE’s work has in common: that it seeks improvement. “Improvement”, then, becomes what we must define and characterize, so that we know what we’re after.
In short, I think every action any of us takes is ultimately oriented towards improvement, whether or not we are conscious of this instinct and calculation. Think for a second. What do you plan to do after reading this? Whatever it is, you aim to improve something about your life and, by the same process, the lives of others, right?
Improvement, while ubiquitous and saturating the outlook of each and every one of us, is surprisingly difficult to define, characterize, and pursue. But it’s what we’re all trying to do. And in what we call our professional work (business, entrepreneurship, investment, careers, etc.) we can be quite explicit about this, putting our calculations out in the open in ways that would be seen as taboo in other spheres of our lives. Every move we make in business is about improving something or another, and doing so in a way that minimizes compromising this effort from other, competing influences and forces. Our work lives are refreshing, in a way, because we can be so open and honest about the nature of the agreements we make toward these ends. But I know it also happens everywhere else in our lives, that the agreements are simply more implicit, found a bit farther below the surface, and that it’s often socially unacceptable to look for and reveal them, which is why philosophers, clergy, therapists, comedians, and storytellers are helpful.
But, back to the art of improvement. What is it, how do we pursue it, and how do we know when we have found it?
Let’s talk about betting against (“shorting”) the American economy.
I’ve been watching a movie recently. It just left Netflix, so you’ll have to rent or buy it from somewhere else if you want to watch it. It’s called “The Big Short”, and features a star-studded cast including Christian Bale, Brad Pitt, Steve Carell, as well as amusing pedagogical cameos from Margot Robbie, Anthony Bourdain, and Selena Gomez telling the story of the 2008 economic collapse. I remember the time well, even if I didn’t have the awareness of human dynamics to really understand it that I now do, so it’s been interesting to revisit that time in my memory. It is the second of 3 crises I remember living through, the first being 9/11, and the third being COVID-19. These times test us and forge us into wiser, more experienced leaders. But, I digress. I enjoy the movie and have been rewatching many of the scenes, particularly those featuring Steve Carrell and his character’s cynical yet affectionate and compassionate team who run a fund called Frontpoint Partners in the film.
The 2008 crisis was precipitated by a complex and interlocking series of conflicts of interest, perverse incentives, and impoverished regulations. Had it not been for the government bailouts, unfolding during the transfer of power between the Bush and Obama administrations, the American, and much of the world, economies would likely have collapsed and subjected us to an economic catastrophe an order of magnitude beyond the Great Depression, even if it did allow a largely corrupt industry to escape consequences. No one ever said ethics was easy. It’s really damn hard.
But a few savvy hedge fund managers saw it coming. And they were able to bet against the housing market that everyone else seemed to think was so strong and unshakably secure. They did this through a sort of insurance policy called a Credit Default Swap (CDS), which allowed them to benefit financially from the demise of the assets in question, even if they didn’t own the assets themselves. So, when the economy collapsed, these policies paid off in a major way, netting these funds millions and, in some cases, billions of dollars.
My question to you is this: does that kind of return qualify as improvement? Imagine logging on to your banking app and seeing $80,000,000, or even $2,000,000,000 in your accounts that was not there yesterday as some of these fund managers did. Does this qualify as improvement?
It’s not a trick question. And the answer is complicated. To show you how complicated, here is the closing monologue of Michael Burry, the eccentric director of Scion Capital, who was the first to short the US housing market and its derivative securities in the 2000s as his keen analysis revealed the hidden megaliabilities within. This monologue comes after his savvy foresight allowed the fund to increase to almost 500% of its original value, paying out hundreds of millions of dollars to some of its member investors:
In a radio interview I heard with the author of the book upon which the film is based, he described how all of these short sellers suffered extreme symptoms of duress like nausea and anxiety even as the valuation of their portfolios was skyrocketing. This was, after all, premised on the destabilization and practical destruction of the rest of the economy.
Improvement always comes at a cost. But wait, is it really improvement if it comes at a cost? Doesn’t that seem a bit counterintuitive? Why wouldn’t what we call improvement be unconditional, and without downside? Can it really be improvement if there are downsides? Further, can we truly imagine forms of improvement without any tradeoffs?
These calculations are complicated and deep, and we are constantly making them at the levels of our souls and spirits. As we proceed from the present into the future we instinctively realize that every action is an investment in something, and a divestment from something else. We cannot help but to demonstrate our allegiances, and it is in this way our own personal theologies, ie our own personal valuations of life, are spun.
For Burry, if that monologue is to be believed, his theology includes not just money, but something akin to human flourishing (as I imagine it also does for you), which is also counterintuitive and paradoxical, because human flourishing requires problems for us to solve along our growth journeys, once again revealing the concept of improvement to be elusive and difficult to define.
But, I recognize that we are all practical creatures, at least to some extent, and that we do need to proceed through life, taking actions, making these constant investments. So, here’s the best framework I’ve found for doing so, which I call the “4 M’s”. We seek to optimize these 4 areas in each moment. It’s never perfect and we must often draw from each undesirably at times to balance our accounting of the others. But in the optimized union of these you will find what improvement means to you. Let me know if you need help calibrating that personal equation: https://calendly.com/aaronjmarx/30min
“The 4 M’s are:
Material
Mental Peace
Meaning
Morality
Briefly:
1. Material means that our economics must be sustainable
2. Mental Peace means that we should avoid depression, anxiety, and stress as much as possible in doing what we DO
3. Meaning means that we should always ask what we want to DO, with whom we want to DO it, and what our ultimate values truly are
4. Morality means we should DO what is right, only what is right, and all of what is right (as far as we can tell - this is particularly imperfect due to the fraught nature of the topic, but very important)”
-From my new book, The Complete Science of Human Dynamics
Unless you optimize all 4 of those M’s, it isn’t true improvement.
You can read the script of The Big Short here. Burry’s monologue begins on page 163.
I found this YouTube video enjoyable and helpful for explaining the complex financial instruments of the film.