Thank you!
Benjamin_Todd
Karma: 9,170
Hey, I missed the lottery this year. Do you know when the next one will be?
Is this also the only one running in EA right now? Does it replace the one run by the EA Funds in the past?
That makes sense. It just means you should decrease your exposure to bonds, and not necc buy more equities.
I’m skeptical you’d end up with a big bond short though—due to my other comment. (Unless you think timelines are significantly shorter or the market will re-rate very soon.)
I think the standard asset pricing logic would be: there is one optimal portfolio, and you want to lever that up or down depending on your risk tolerance and how risky that portfolio is.
In the merton’s share, your exposure depends on (i) expected returns of the optimal portfolio (ii) volatility / risk (iii) the risk free rate over your investment horizon and (iv) your risk aversion.
You’re arguing the risk free rate will be higher, which reduces exposure.
It seems like the possibility of an AI boom will also increase future volatility, also reducing exposure.
Then finally there’s the question of expected returns of the optimal portfolio, which you seem to think is ambiguous.
So it seems like the expected effect would be to reduce exposure.
Sorry for making you repeat yourself, I’d read the appendix and the Cochrane post :)
To summarise, the effect on equities seems ambiguous to you, but it’s clearly negative on bonds, so investors would likely tilt towards equities.
In addition, the sharpe ratio of the optimal portfolio is decreased (since one of the main asset classes is worse), while the expected risk-free rate over your horizon is increased, so that would also imply taking less total exposure to risk assets.
What do you think of that implication?
One additional piece of caution is that within investing, I’m pretty sure the normal assumption is that growth shocks are good for equities e.g. you can see the Chapter in Expected Returns by Anti Ilmanen on the growth factor, or read about risk parity. There have been attempts to correlate the returns of different assets to changes in growth expectations.
On the other hand, I would guess theta is above one for the average investor.
What effect do you think an AI boom would have on inflation?
It seems like it would be deflationary, since it would drive down the cost of goods and labour, though it might cause inflation in finite resources like commodities and land, so perhaps the net effect could go either way?
(I partly ask because a common framework in investing for thinking about the what drives asset prices is to break it into growth shocks, inflation shocks, changes in investor risk appetite and changes in interest rate policy. If AI will cause a growth shock and deflation shock, then normally that would be seen as positive for equities, ambiguous for real assets and nominal bonds, and negative for TIPs.)
I think we should go back to having a community tab.
The default front page would be for discussing how to actually use our resources to do the most good (i.e. a focus on the intellectual project of EA and object level questions).
All posts about the nature of EA as the particular group of people trying to work together would go in community. This would include criticisms of EA as a community (while criticisms of specific ways of doing good would go on the front page). It could also include org updates etc.
I think the key point is just equities will also go down if real interest rates rise (all else equal) and plausibly by more than a 20 year bond.
Just a quick addition that I think there’s been too much focus on VCs in these discussions. FTX was initially aimed as a platform for professional crypto traders. If FTX went down, these traders using the platform stood to lose a large fraction of their capital, and if they’d taken external money, to go out of business. So I think they did have very large incentives to understand the downside risks (unlike VCs who are mainly concerned with potential upside).
Thanks!
Yeah I agree that the AGI could also make you want to save more. One factor is that higher interest rates can mean it’s better to save more (depending on your risk aversion). Another factor is that it could increase your lifespan, or make it easier to convert money into utility (making your utility function more linear). That it could reduce the value of your future income from labour is another factor.
Interesting. What would be the theoretical explanation for a negative relationship?
I think the effective duration on equities is roughly the inverse of the dividend yield + net buybacks, so with a ~2% yield, that’s ~50 years.
Some more here: https://www.hussmanfunds.com/wmc/wmc040223.htm
Thanks that makes sense.
So if you implemented this with a future, you’d end up with −3.5% + 2.9% + rerating return = −0.6% + rerating.
With a 2% p.a. re-rating return over 20 years, the expected return is +1.4%, minus any fees & trade management costs.
If it happens over only 5 years, then +7.4%.
Thank you for the post! I’m very interested to see more work on this topic.
I feel a little bit unsure about the focus on the bonds – would be very curious to hear any reflections on the below.
As you say, if real interest rates rise, that should affect all assets with positive duration.
Perhaps then the net effect of having the view that real interest rates will rise is just that you should reduce overall portfolio duration. A 60:40 portfolio has an effective duration of ~40 years, where most of that duration comes from equities. Perhaps someone who believes this should target, say, a 20 year average duration instead (through whatever means seems least costly, which could mean holding fewer equities).
Perhaps equivalently, if real interest rates are going to rise, then all financial assets are currently overpriced, so maybe the effect would be holding fewer financial assets in general, and holding more cash / spending more.
My understanding is that an important part of the reasoning for a focus on avoiding bonds is that an increase in GDP growth driven by AI is clearly negative for bonds, but has an ambiguous effect on equities (plus commodities and real estate), so overall you should hold more equities (/growth assets) and less bonds. Is that right?
That makes sense to me, but then I still feel unsure about, having tilted towards equities, whether your overall exposure should be higher or lower.
(And tilting towards equities will increase the effective duration of your portfolio, making an increase in real interest rates worse for you all else equal.)
If we use the merton’s share to estimate optimal exposure, that depends on the difference between the expected return of the asset and the expected real interest rate over your horizon. Perhaps with equities you might expect both returns and the interest rate to rise by 3%, which would cancel out, and you end up with the same exposure. But with bonds only the interest rate will rise, so you end up with much lower exposure (potentially negative exposure if your expected interest rate is higher than the expected returns). Is that basically the reasoning?
I want to suggest a bunch of caution against shorting bonds (or tips).
The 30yr yield is 3.5%, so you make −3.5% per year from that.
You earn the cash rate on the capital freed up from the shorts, which is 3.8% in interactive brokers.
If you’re right that the real interest rate will rise 2% over 20 years, and average duration is 20 years, then you make +40% over 20 years – roughly 2% per year.
If you buy an ETF, maybe you lose 0.4% in fees.
So you end up with a +1.9% expected return per year.
This would have a third of the volatility of stocks, so you could leverage it several times, but then you’d need to pay the margin cost of ~4%.
So it doesn’t seem like an amazing trade in terms of expected returns (if I’ve estimated this correctly.
It gets worse if you consider correlations – if we go into a recession, yields might fall 1-2%, which would mean you lose 20-40%, and you make those losses at the worst possible time – when everything else is going down.
In addition, a neutral portfolio is something like 50% equity, 20% real assets and 30% bonds, so that should be our prior, and then you’d want to make a bayesian update away from there based on your inside view.
In effect, in your portfolio optimizer, you could set the expected returns of long bonds to be say 1.5% rather than 3.5%. My guess is that would spit out having say 0-10% bonds rather than 30%, but not actively shorting them.
Tldr my guess is that most investors (if they believe the thesis) should just underweight bonds rather than actively short them.
I’d be very keen to hear more comments on this.
Am I being dumb or do you mean short TIPS? If real interest rates rise, TIPS go down.
Hey Arepo,
I’ve been taking time off work and haven’t been looped into any of CEA’s discussions about media strategy, so here I’m speaking only for myself.
Clearly recent events have been a disaster in terms of media, which means we should reassess our strategies, so at a high level, I agree.
However, I think I mostly disagree with what I understand to be the more specific claims. I’ve tried to split these up as follows:
CEA has a policy of minimising the total amount of media engagement.
EA should have sought even more media coverage than it did in recent years.
CEA’s policy is effectively EA’s policy.
There should be a wider range EA public figures, but CEA has prevented this.
A significantly wider range of people in the community should speak to the media even if they don’t have approval or training from others in EA.
Here are some very brief comments on why I disagree or feel very unsure about these. These are big topics so it’s hard to give much of my reasoning.
On 1) my understanding (not speaking for them) is that CEA had a policy of minimising engagement around 2017-2019 (along the lines of the fidelity post), but my understanding is that from 2020 onwards they became significantly more pro media coverage. EA then received dramatically more media coverage 2020-2022 than it did 2017-2019. This uptick can be seen on 80k’s media page: https://80000hours.org/about/media-coverage/ and then there were also the campaigns for the Precipice, WWOTF etc.That said, with regards to FTX they seem to have reverted to a policy of less engagement. What to do here just seems like a really hard call to me. You point out there’s a high proportion of negative coverage, but I don’t see a straightforward route to drowning that out with new positive coverage in the current environment. A more realistic option would be to try to more to make the coverage less bad (and there is some of this happening) or do more to tell our own narrative about what happened; but that could easily have the effect of EA being given greater prominence in the negative stories, or make whatever narrative the journalist has more credible etc.
On 2) I feel pretty unsure even more media coverage would have been better.
One point is that it seems likely that EA is getting way more negative coverage now because it was fresh in journalists’ minds from Will’s summer media campaign. If there had been less coverage of EA over the summer, I expect there would be fewer negative articles about EA now. So overall I’m tempted to draw the lesson from this that less media is better.
Another point is that most surveys I’ve seen show that only ~5% of people come into EA via the media, but the media is how most people have heard of EA. This means it creates only a small fraction of community members, but perhaps the majority of haters. I think that suggests there’s still a lot to be said for a strategy that involves a small media footprint (i.e. maybe you get 95% of the recruitment but with only 20% of the haters).
On noisy fuckers, I think the EA Hotel is a bad look for EA (Edit: I want to clarify that I don’t have a problem with the EA Hotel as a project, I just think it’s not a great media story) . Although turning the journalist away at the door also worked out badly in hindsight, I think the bigger mistake was accepting the journalist’s invite in the first place, so if anything I think this example updates me towards a stronger non-engagement policy.
(Also the fact that the journalist came even after you’d turned down the interview is pretty aggressive of him, suggesting the story could have been a lot worse.)The way I agree with (2) is that it’s a big shame there wasn’t more positive coverage out about longtermism 1-2 years ahead of the launch of WWOTF, which would have meant Torres didn’t drive the discourse around it as much as they did.
More broadly, generating high-profile positive coverage is hard—pushing into more marginal opportunities can easily lead to stories that are more ambiguously positive, or simply have little reach, or require doing a ton of work, and there’s always the question of opportunity costs.
On 3), I think you’re overstating CEA’s influence. The large orgs (GiveWell, OP, FP, TLYCS, ACE, 80k, Singer etc) all have their own outreach people and decide their own strategy. CEA provides advice to some of these orgs, but I wouldn’t say it’s the main driver of what’s happened in recent years. Far more funding comes from OP than CEA. CEA does not ‘appoint’ the representatives of EA.
On 4), I agree it would be great if there were more EA public figures, and having a small number of faces of EA is a big risk for the reasons you say. But my impression is that Will, CEA and 80k have all been trying to find and encourage such people. (If you’re reading this and interested in trying, please apply to 80k advising asap.)
The reason it hasn’t happened isn’t because CEA doesn’t want it, but rather because it’s a shitty and difficult job. Even if someone can match e.g. Toby in terms of communication skills and charm, very few people can tell the kind of story he can, and match the level of coverage he’s able to get. And results are heavy-tailed – it’s almost bound to be that a couple of people receive the majority of the coverage. (Unless those people step back, in which case the total amount of coverage will likely drop.)
So I would really like this to change, but I think it’s going to be a slow process.
On 5), I disagree for similar reasons that others have said in the thread. It’s pretty hard to make media go well and generate positive coverage. I think if lots more people tried without making it a major focus of theirs, the results are as likely to be bad as good.
Since media coverage affects the brand of the whole movement, I think it’s an area where it’s easy to be unilateralist, so it’s reasonable to adopt a rule of thumb like “if a significant number of people think this coverage would be bad, don’t do it.” I’m not sure how this should be implemented in practice, and maybe right now things are too centralised, but I think something like having a media team who can provide quick guidance on whether something seems good or bad seems like a reasonable way to go.
I’m sorry I don’t have more positive suggestions about how things should change going forward (and they probably should) but maybe this helps identify the best criticisms of the old approach.
Yes, maybe we should model it as 10bn meta and 10bn other stuff, now worth 2.5bn and 7bn.
Something like that seems right.
Though I don’t believe the Forbes figure for Dustin – it seems to assume that most of his wealth comes from his meta stake, and he’s said on Twitter that he’d sold a lot of his stake (and hopefully invested in stuff that’s gone up). Last spring, Open Phil also said their assets were down 40% when Meta was down 60%, which could suggest Meta was about half of the assets at that point. So I expect it’s too low.
Also seems like there might be some new donors in the last year.
The original rumour was that Alameda would have net negative assets if FTT coin collapsed. Though there’s a chance it’s actually OK.
This is very helpful.
Might you have a rough estimate for how much the bar has gone up in expected value?
E.g. is the marginal grant now 2x, 3x etc. higher impact than before?