The Investor November 2021

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ShareFinder’s prediction for Wall Street for the next 12 months

We Beat the World Record

By Richard Cluver

In just a month’s time the virtual portfolio of South African shares which I maintain in my Prospects monthly investment newsletter will reach the 11-year mark and I am delighted to tell readers that, so far as I am able to establish, it has beaten the world growth record.

Since inception it has grown at a compound annual average rate of 18.4 percent and has delivered an average annual dividend of 2.6 percent which adds up to a total return of 21 percent annually which has taken our original R1-million investment to R5 232 294. That invested amount is currently delivering R81 913.50 annually in dividends. The annual dividend total is, furthermore, growing at 18.57 percent which implies that derived income will double in less than four years.

The graph below illustrates how it has performed daily over the past 11 years:

 Against that figure, it is important to note that the average South African unit trust delivered a total return of 5.43 percent. Thus the ShareFinder-driven Prospects Portfolio delivered a 387 percent greater return. However, I should hasten to add that some of the top globally-focussed South African unit trusts did nearly as well as the Prospects Portfolio and the best of them, the Old Mutual Global Equity Fund has delivered 19.7 percent annually over the past 21 years.

Meanwhile, the JSE All Share Index achieved compound 6.5 percent annually while the JSE Top 40 Index achieved compound 6.6 percent as the following graph composite illustrates:

I would love to claim all the kudos for the stunning performance of the Prospects Portfolio but, of course, most of the number-crunching that makes it possible is done by the folks at ShareFinder International in North America who daily gather the balance sheet statistics of every company listed in five of the world’s leading stock exchanges. All I do is add a little local insight in order to choose which of their daily recommendations to act upon.

So the truth is that anyone with a little market experience can repeat the achievement and the really good news is that ShareFinder International is this year doing a Christmas Special for registered readers of The Investor. They are offering the ShareFinder Professional at a concession subscription rate of just $US140.00 annually.

Go to the ShareFinder website on www.sharefinderpro.com and look for the special offer!

That is a huge discount on the international price of $49 a month. Furthermore, readers of The Investor who are able to introduce three new fully-paid-up annual subscribers at the same concessionary rate can use the new SF6 for free for the ensuing year and also get a years’ free subscription to the Prospects newsletter service.

The offer is doubly important since ShareFinder International is sunsetting support for the old ShareFinder 5 package at the end of this year.

Happily the story does not end there. With the launch of the ShareFinder 6 software package which offers users access to four additional markets, the New York Stock Exchange, the tech-heavy Wall Street Nasdaq, the London Stock Exchange and the Australian Stock Exchange I have recently been able to launch virtual portfolios for readers of my Prospects newsletter in those markets as well…..and those are doing even better than the South African portfolio!

Launched in September 2019, the Prospects New York portfolio is just two years old and has more than doubled in value over that time. From an original $1-million invested on August 28 2019, the portfolio grew to $2 414 541 this month. That is a compound annual average growth rate of 32.33 percent.

My London portfolio, launched in December 2019 with a £1-million investment has grown to £2 359 406. That’s a compound annual average growth rate of 35.29 percent a year.

 And my Australian portfolio, launched in December 2019 with an initial investment of AU$1-million is now worth AU$2 047 675. That is a compound annual average growth rate of 378 percent.

Of course the three new portfolios are all too new to justify any particular long-term growth claims, but they have clearly outperformed most professionally-managed portfolios globally. The following table, courtesy of Fincash, indicates that over the past three years the world’s eight best performers scored compound average gains of 16.63 percent.

 Here a little about the rules we observe in the Prospects newsletter regarding these portfolios. Quite simply, having employed ShareFinder’s ‘Quality List’ and ‘Portfolio Builder’ features in order to select specific share choices, I advise readers ahead of the event which shares I intend buying and a target price range I intend paying. Precisely mirroring the buying orders that the average investor would send to his stockbroker, if within the projected time-line the desired shares reach my target price, I consider them bought at that price.

Similarly, if I decide to sell any shares I adopt the same process of price and date targeting, publishing those details in the Prospects newsletter. So it is simple for readers to replicate the portfolio with greater or lesser sums of money depending upon their individual circumstances.


How to solve SA’s unemployment woes

By Professor Brian Kantor

Professor Brian KantorMany South Africans are condemned to a lifetime of inactivity for want of experience and the good habits acquired by having jobs. What are some of the practical steps that can be taken to solve SA’s unemployment problems?

In a well-functioning labour market, the number of employees who quit their jobs for something better will match those who are fired. The unemployed will then be a small proportion of the labour force. And it will not be a stagnant pool of work seekers. The number of new hires will roughly match the new work seekers, slightly more or less, depending on the state of the business cycle. Most importantly, the labour market will be reassigning workers to enterprises that are growing faster, from those that are growing slower or going out of business. It is a dynamic process that makes for a more efficient use of labour, and leads to faster growth in output and higher incomes from work over time.

To state the obvious, the above scenario does not describe the current state of the SA labour market. The unemployment rate since 2008 (the first year the current employment survey of households was released) and up to the just released for Q3 2020 survey, has averaged well above 20%. It was 23% in 2008 and 30.1% before the Covid-19 lockdowns. The army of the unemployed grew from 4.4 million in 2008 to 7.1 million in Q1 2020, compounding the problem at an average rate of 4% a year.

 

The numbers employed grew from 14.4 million to 16.4 million over the same period, at a 1.1% annual average rate, but therein lies the rub. The numbers of South Africans of working age who are neither working nor seeking work, nor are economically active, and therefore not counted as part of the labour force, numbered 15.4 million in Q1 2020. This is up from 12.74 million in 2008, having grown by 1.6% a year on average over the period. 

 

The ability of the economy to absorb a growing potential labour force, defined as numbers employed divided by the working age population, now 39 million, declined from a low 45.8% in 2008 to 42.1% in early 2020.  Even more concerning is the inability of the economy to absorb young people into employment.  Of the 10.3 million between the ages of 15 and 24 years, 31.9%, or only 3.2 million, were working or seeking work. The economically inactive numbered 7.5 million. The absorption rate for the cohort fell from 17% in 2008 to 11% in early 2020. The economically inactive part of this group numbered 8.2 million in September. Of the cohort aged 15 to 34, the proportion who were not economically active was 40.4%. 

A lifetime of inactivity

There is thus a large number of South Africans condemned to a lifetime of inactivity for want of experience and the good habits acquired on the job. What is going so very wrong in the SA labour market? We observe how vitally important it is for those with jobs to retain them. The struggle to hold onto well-paid jobs at state-owned enterprises (SOEs) such as SAA and the SABC is an understandably bitter one with so much at stake. And the sympathies of the politicians are with the threatened workers rather than with the attempts to sustain the economic viability of these SOEs in the face of an ever more padded payroll.

Being unemployed, especially for those retrenched from the public sector, is not part of a temporary journey to re-employment on similar terms. It is almost bound to be destructive of lifetime earnings. Even the competition authorities, who you might expect to focus on efficiency rather than job retention, make retaining jobs a condition for approving a merger or acquisition. Yet despite the large numbers of the unemployed and the economically inactive, the real earnings of those with jobs in the public sector have grown significantly and much faster than outside of it – by an average 2.2% a year after inflation compared with 1.52% for the privately employed. This perhaps explains why the SOEs have had such difficulty in balancing their books.


A system in SA has evolved that reinforces the better treatment of the insiders – those with jobs that are entrenched by law and practice – when compared with the outsiders who struggle. Many therefore give up the struggle to find “decent work”. A National Minimum Wage (NMW) is set at a level – R3500 per month – that regrettably few South Africans earn or are capable of earning. This is a major discouragement to hiring unskilled and inexperienced workers, particularly outside of the major cities. You would have to go well into the seventh decile of all income earners to find families with per capita incomes above this prescribed minimum wage.

It is not a low cost exercise to fire underperforming workers of all grades. Employers have to satisfy the Commission for Conciliation, Mediation and Arbitration (CCMA), with its enormous and ever growing caseload of contested “unfair dismissals” to do so.

It is possible to dismiss or retrench workers or managers in SA. But in addition to any regulated retrenchment package, it is not a low cost exercise to fire underperforming workers of all grades. Employers have to satisfy the Commission for Conciliation, Mediation and Arbitration (CCMA) to do so. Funding a human resources department, with skilled specialists well versed in employment and unemployment procedures, to whom dealing with the CCMA can be delegated, is one of the economies of scale available to big business. The small business owner-manager attempting to navigate the system is at a severe disadvantage that will surely discourage job offers.

The impact of Covid-19

It is not just the regulations and practices that inhibit the willingness of employers to take on more labour. Post-Covid-19 reactions reported by the latest survey of households give some important clues to the forces at work.  During lockdowns, numbers employed fell from 16.3 million in Q1 to 14.15 million in Q2, and recovered slightly to 14.7 million in Q3. The numbers counted as unemployed fell sharply from 7.1 million in Q1 to 4.3 million in Q2 and then rose to 6.5 million in Q3, after the lockdown. The numbers of those who were not economically active rose dramatically in Q2 from 15.4 million in Q1 to 21 million in Q2, when it made little sense to actively seek work. The numbers of the economically inactive then fell dramatically by over 2 million in Q3, as more people sought work and were physically allowed to do so.

The numbers employed in Q3 rose, but were not as many as those additional work seekers and so the unemployment rate picked up. It was a development highlighted in the survey.  It made sense for more people to look for work because it was more likely to be found, and also presumably  because the declining economic circumstances of the family, perhaps the extended family on which many depend, made the search for work and additional income imperative.

Covid-19 may well have damaged the ability of the extended family to provide support for those not working or intending not to work, hence the fewer inactive members of the workforce.

South Africans understandably have a reservation wage, below which working does not make good sense. It has to pay to work. And the economically inactive in SA who are overwhelmingly low or no income earners are presumably able to survive without work by drawing on the resources of the wider family. They will not have accumulated much by way of savings to draw upon. The family resources, on which they rely, are likely to be augmented by cash grants from government and from subsistence agriculture or occasional informal employment. Covid-19 may well have damaged the ability of the extended family to provide support for those not working or intending not to work, hence the fewer inactive members of the workforce.  

The failure of SA’s mix of economic policies is revealed by what is still for many a reservation wage that remains higher than the wage employers are able and willing to pay them. Hence the discouraged employment seekers who are among the economically inactive. It seems clear that South Africans choose to some extent to supply or not to supply their labour, depending on their circumstances including their skills and earning capacity as well as the state of the economy. They have a sense of when it seems sensible to work or to seek work at the wages they are likely to earn.

Practical solutions

What can be done about this essentially structural issue for our economy? Businesses surviving Covid-19 have increasingly learned to manage with fewer workers and managers. Abandoning the NMW or the CCMA or reducing the legal powers of trade unions and collective bargaining would help increase the demand for labour, but this course of action is unlikely. Meaningfully improving the quality of education and training (on the job as lower-paid interns and apprentices) to raise the potential earnings of many more over their lifetimes of work, also seems wishful thinking. Reducing the value of the cash grants paid, so reducing the reservation wage to force more of the population to seek and obtain work, would be cruel and is as unlikely. Some form of welfare payments for work seems to be on offer in the form of the internship scheme announced recently by President Cyril Ramaphosa.


The Employment Incentive Scheme allows employers to deduct up to R500 off the minimum wage paid to workers under 29 and for all workers in the special economic zones. Employers simply deduct the subsidy from their PAYE transfers. It takes very little extra administration by either the firms or the SA Revenue Service. In 2015/16, 31,000 employers claimed the subsidy for 1.1 million workers and the scheme cost R4.3bn in 2017-18. The subsidy may well have to be raised to keep pace with higher minimum wages imposed on employers.


Raising taxes to subsidise the employment of young South Africans may be the only practical and politically possible way to provide more opportunities for them, especially if the market is not allowed more freedom to address the employment issue, by offering wages and other employment benefits that workers are willing to accept. Abandoning the NMW, the CCMA and nationwide collective bargaining agreements, all so protective of the insiders, would increase the willingness to hire and raise real wages for the least well paid in time. But it would be unrealistic to expect the unemployment rate in SA to rapidly decline to developed market norms. It will take faster economic growth, which leads to higher rewards for the lowest paid and least skilled, to make work the better option for many more. And it will take many more workers to raise our growth potential.


The Economic Bubble Bath

by Jeff Thomas

At the end of a long, tiring day, we may choose to treat ourselves to a soothing bubble bath. Surrounded by steaming water and a froth of sweet-smelling bubbles, it’s easy to forget the cares of everyday life.

This fact is equally true of economic bubbles. When the markets are up, we’re inclined to feel as though life is rosy. Unfortunately, it does seem to be the norm that investors fail to recognize when a healthy up-market transforms into a dangerous bubble. We tend to be soothed into overlooking the fact that we’re in hot water, and economically, that’s not an advantageous situation to be in.

Periodically, any economy will experience bubbles. It’s bound to happen. Human nature dictates that, if the value of an asset is on the rise, the more success it experiences, the more we want to get in on the success.

Sadly, the great majority of investors have a tendency to fail to educate themselves on how markets work. It’s easier to just trust their broker. Unfortunately, our broker doesn’t make his living through our success; he makes it through brokering transactions. The more buys he can encourage us to make, the more commissions he enjoys.

It’s been said that a broker is “someone who invests your money until it’s gone,” and there’s a great deal of truth in that assessment.

And so, we can expect to continue to witness periodic bubbles in the markets. They’ll occur roughly as often as it takes for us to forget the devastation of the last one and we once again dive in, only to be sheared once again.

But we’re presently seeing an economic anomaly – a host of bubbles, inflating dramatically at the same time.

The Stock Market Bubble

Only a decade ago, stocks plummeted and billions were lost by investors. But then, before the system could be cleansed of the detritus, more money was artificially pumped into the system and stocks began to rise again.

Margin debt is now at an all-time high and complacency is at a maximum. The present condition looks quite a bit more like 1929 than 2008, and the stock market is overdue for a crash. This time, it promises to be much greater than before, as the debt that’s fuelling the bull market is at a level that’s historically unprecedented.

Back in 1929, communications were poor and stock market trades were recorded in handwritten ledgers. Today, the recording is entirely electronic, and in addition, in order to minimize losses, the investor may have his broker set electronic stops that will ensure that a given stock is offered on the market automatically, if it drops below the stop price.

This works quite well as long as times are good, but, if there were to be a crash, what it means is that, even if a crash were to be triggered in the middle of the night, when everyone is asleep, the market would awake in the morning to a sudden collapse, as prices blew through the stops of countless investors.

Therefore, the collapse would be much swifter and much more severe than in 1929.

The Bond Market Bubble

This bubble could just as easily be termed a “debt bubble,” as bonds are simply a promise to pay a debt at a future date. (It’s important to note that the bond market consists of a far higher level of investment than the stock market and therefore has the potential to do far more damage in a crash.)

Bonds may be issued by companies, municipalities or central governments. By far, the largest portion of the bond market is that of Treasuries, or government-issued bonds.

Since 1944, the US has been in the catbird seat in the world, as its dollar has been the world’s default currency. But, as the US has, in recent decades, increasingly abused that privilege, the rest of the world has been looking for ways to extricate itself from this economic stranglehold.

With the introduction of new central banks in Asia, plus the new CIPS system (an alternative to the monopolistic SWIFT), it’s become increasingly possible for the East to wean itself from the dollar. Increasingly, this has meant dumping US Treasuries back into the system.

Bonds are presently in a bubble of epic proportions, and with every month, the foundation underneath them is crumbling more, due to ever-increasing dumping.

Even the perma-conservative Alan Greenspan now states that, “We are in a bond market bubble… Prices are too high… The bond market bubble will eventually be the critical issue.”

The Real Estate Bubble

In 1999, the Fed, then under Alan Greenspan, convinced the US president to repeal the Glass Steagall Act, freeing the banks to create the types of loans that helped cause the Great Depression. This, of course, led to the real estate crash of 2007, but instead of the banks going belly-up, they were rewarded for their misdeeds through bailouts that were paid for by taxpayers.

Consequently, although there was a significant correction in real estate prices, this didn’t result in prices dropping to fair value.

They have once again risen and, at this point, are overdue for a major correction. That correction is now well under way. Since it has begun at a time when other markets are also in peril, the level of bailout required for all of them at the same time is impossible to achieve.

Had each of these markets been allowed to collapse in the normal manner, as would occur in a free-market system, they would have done so at levels below the present ones and would have done less damage when they burst. Additionally, each bubble would have burst at its own, logical time.

Instead, all are being propped up artificially, far beyond their natural sell-by date.

For this reason, they’re so over-inflated that, when one bubble is popped, it’s all but certain that they’ll all go down together.

And so, effectively, the financial world is in a bubble bath. The investor is surrounded by soothing bubbles, each of which is rising, reassuring him that his investments are growing.

Although it should be clear to him that he’s in hot water, the majority of investors are holding on to their bonds, rubbing their hands over the rising sale prices of homes in their neighbourhood and considering taking out a loan to buy more stocks on margin.

The collapse will therefore come to most as a complete surprise.

Economic bubbles are normal. They’re created by the lack of forethought that’s common to human nature.

But the present bubble bath is an anomaly without precedent and, as such, promises to result in a crash of unprecedented proportions.



Live from New York, Etc

By John Mauldin

Recently I’ve mentioned some changes in my own investments. This generated questions from readers who want to know more. So now is a good time to elaborate.

Years ago, my partner in our money management business, Steve Blumenthal of CMG, and I developed what we called the 80/20 portfolio. Conceptually, that means 80% of your portfolio goes into core positions intended to grow to 100% of the original portfolio in five years. These are typically nonaggressive cash flow and similar products yielding somewhere in the 5% neighborhood.

We then position the other 20% to “explore” stocks and assets able to grow at a much faster pace, albeit with more risk. Think technology, certain real estate positions, etc. You spread your risk over multiple such positions, taking a longer-term view but watching them closely.

The 80/20 split is a guideline, not a hard and fast rule. The older and less risk tolerant you are, the more you allocate to core positions. Younger investors with good income might think more along 70/30 lines—realizing that your business and/or job is a key risk as well.

 Now, this is a “do as I say not as I do” description. Five years ago, my own portfolio was probably more like 70/30. That was a bit aggressive for somebody then in his mid-60s, even though my income stream was comfortable. Given my personality and access to deal flow, it seemed quite reasonable.

Today, my portfolio is about 40/60, for good reasons. My explore portfolio has done very well over the past few years. It will come as no surprise to long-term readers that the bulk is in biotech. It’s where I somehow have access to deal flow, familiarity with the technology, and a really exceptional team of advisors/friends. I admire people like Cathie Wood and Ron Baron who can source and understand technology and businesses over a wide array of opportunities. I let managers like them source “explore” technologies in AI, robotics, etc. I’m enthusiastic about the entire space, but I simply don’t have the personal ability to drill down and figure out who’s going to be the winner. Everybody talks a good game, but only a few managers actually get the ball past the goal.

There is a school of thought that says I should rebalance. I could do so, but I simply have no real reason to, at least currently. Most of the companies I own are still in the growth stage. There’s one, still private but my largest single position, that I put a great deal of due diligence on. I believe in the management team and their technology. To the point that I have told Shane that if something untoward happens to me, don’t sell that stock until Steve Blumenthal does. Everything else is fair game but I think this is my personal bet on a long-term monster multiple. I think it is just on the cusp, even though we’ve already seen some very nice growth in the last few years.

If I were starting today, my portfolio would probably look closer to 80/20. My core allocation has averaged mid- to high single-digit returns for the last seven years. Much of it is in a variety of multi-strategy hedge funds, which may sound risky simply because of the word hedge fund, but are actually fairly boring mainstream fixed income substitutes. We have been able to track it as a portfolio since 2014. My worst year was -0.2% and my best year was, well let’s just say really good as everybody hit a homerun that year. I don’t expect to repeat that very often.

I do have one fairly aggressive hedge fund, whose manager I personally know very well. I told him recently that one of my biggest mistakes was not giving him more money. I knew when he launched his fund about five years ago it would be volatile, and it has been—40% drawdowns have been common. But the up years have been very, very good. That was less than a 2% position when it started. Now it’s closer to 7–8% and I actually think about rebalancing, but he is in a drawdown. I hate to take money from what I ultimately think is a very good winner and I like his current positioning. But at some point…? (By the way, he is closed to new money, and he is too volatile for me to recommend to clients. I don’t want to have to hold someone’s hand in a 40–50% drawdown. Some months I don’t even look at the monthly returns, trying to focus more on the quarterly and annual returns.)

My point is not to encourage taking more risk, especially at this point in the market, but to get you thinking about creating your own core positions so you can feel comfortable taking a few “explore” options. The key is having a core portfolio that is adequate to sustain Shane and me. If it weren’t, then the level of my current explore portfolio would be irresponsible. Yet my explore portfolio has grown to the size it has, position-wise, organically, for all sorts of good reasons. I should note that I certainly don’t hit 100% in my riskier choices. I’ve had my share of goose eggs, more than I want to think about. Which is why I’m a little bit pickier about my explore choices today.

Just food for thought as over the last few weeks I have been talking with the management of some of my explore choices and it is at the top of my mind right now.

Whither Inflation?

I have had numerous meetings and discussions about inflation over the past few weeks. It is clearly the hot topic. I’ve written about it a little bit over the last few months. I’ve also been able to talk with a number of analysts and researchers this week in New York.

Let me go out on a limb and say the chance of an 8% handle on CPI inflation in the first quarter of 2022 is nontrivial. As my friend Peter Boockvar noted, it becomes harder in April and May 2022 to show high year-over-year inflation as it was already at 4% at those points in 2021. Here’s a chart and some thoughts by Joseph Brusuelas at RSM (which we shared with Over My Shoulder members this week).

“A deeper look at the data shows that the increase took place primarily in the sectors of the economy hardest hit by the pandemic, implying some relief ahead as supply-chain bottlenecks are undone. The Fed will not be so concerned about these factors, many of which will abate in the coming months.”

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Source: RSM

“But the second straight 0.4% increase in owners’ equivalent rent—up by 3.1% on a year-ago basis—requires scrutiny by policymakers. The inflation that flows through this component and the broader shelter sector tends to be more persistent than the increase in the volatile food and energy components and in the pandemic-impacted industrial supply space.”

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 Note that inflation early last year was quite low. So the year-over-year comparisons give us the current 6.1% inflation we have today and could easily grow to 8% in January and February, especially if the OER (owner’s equivalent rent) is properly accounted for.

So inflation is back to where it was in Oct/90 and July/08. Guess what? The economy was recession-bound both times, the Fed’s next move was not exactly to raise rates and Treasury bond yields plunged in the coming twelve months (and by a lot!). Bob Farrell’s Rule #9 reigns.”

The economic growth we’ve seen came not from the Fed and quantitative easing but from the massive fiscal stimulus provided by Congress, leading to the current inflation. Now that it is mostly spent, future growth will be inhibited. My friend David Bahnsen sent this chart:

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Source: David Bahnsen

This is not the stuff that 3% GDP dreams are made of. It should give us pause in our exuberance of hopefully being past the COVID crisis, that the real economy is still governed by supply and demand, and demand depends on income.

I think it is quite possible we will have a very low-growth 2022 accompanied by uncomfortably high inflation. Fed officials are way behind the curve. They have now painted themselves into a corner. How do you tighten to the extent needed when GDP growth is only 1–2%?

An entire generation of portfolio managers and investors have never dealt with inflation, except in the theoretical context of an economics book. Inflationary periods have often not been kind to stock market investors. I literally have no idea what Jerome Powell (assuming he is reappointed) will do. He will only have bad choices. Doing nothing is a bad choice. Reducing QE, let alone raising interest rates, will likely prove uncomfortable for markets, to say the least. I would have your hedges and portfolio positioned for a lot of volatility over the next 14 months.

There’s No Free Lunch

Speaking of David Bahnsen, Tuesday night I was at his book launch party. He’s written a brilliant collection of 250 quotable economic thoughts throughout the centuries, with his own commentary appended. The short quotes are all sound economic thinking in today’s world of very dangerous ideas. The book is called There’s No Free Lunch .

One of the quotes is actually mine.

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Source: David Bahnsen

A few other samples:

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Source: David Bahnsen

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Source: David Bahnsen

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Source: David Bahnsen

Some Interesting Data on Viruses

I read a wide variety of letters and research. Recently, Justin Stebbing pointed me to the fascinating question of whether viruses are actually “alive.” Can you put them somewhere on the tree of life? It’s a very complex and controversial subject. But this part really struck me:

“An estimated 10 nonillion (10 to the 31 st power) individual viruses exist on our planet, enough to assign one to every star in the universe 100 million times over…

“Yet, most of the time, our species manages to live in this virus-filled world relatively free of illness. The reason has less to do with the human body’s resilience to disease than the biological quirks of viruses themselves…

“These pathogens are extraordinarily picky about the cells they infect, and only an infinitesimally small fraction of the viruses that surround us actually pose any threat to humans.

“Still, as the ongoing COVID-19 pandemic clearly demonstrates, outbreaks of new human viruses do happen—and they aren’t as unexpected as they might seem.” ( National Geographic ).

That speaks to the fragility of life. But before you begin to obsessively wash your hands and decide to live in a clean room, here’s a bit of good news from two young Australians who write a rather quirky newsletter called Future Crunch . They highlight good news from around the world that you just don’t read about. I like reading them just to make myself feel good.

This week they had some rather good news on the virus front, which probably didn’t make it to your inbox:

“One of the four major flu viruses that circulate in humans [in Australia at least and maybe the world— JM ] might have gone extinct thanks to the COVID-19 pandemic. The Yamagata virus has not been detected since April 2020 anywhere in the world. Together with the Victoria virus, it used to be responsible for somewhere between 290,000 and 650,000 global deaths every year.” ( ABC )




So many ideas, so much growth, so little time?

A compelling theory of long-run economic growth needs to be able to explain at least two important empirical observations: first, the explosion of growth around the time of the industrial revolution, after millennia of apparent near stagnation; and, second, the slowing down of this growth beginning 50 or 60 years ago.

In a superb new post Matt Clancy suggests a plausible candidate for a “deep law” of growth: combinatorial innovation. We’ve discussed this idea before in the context of technological progress, but Clancy cites literature that suggests that it could provide a profound explanation for the shape of human history so far.

The basic idea of combinatorial innovation is that combining two or more ideas sometimes produces a new and more powerful one. In theory, the more ideas there are to combine, the more possibilities there are. Clancy cites this paper that shows that explosion of new ideas could be self-sustaining – and, indeed, produces a chart that looks strikingly like the pattern of long-run economic growth. So why don’t we get exponential growth forever? What causes stagnation in a world of combinatorial innovation Clancy introduces two sources of slowdown. First, as the number of possible ideas explodes, we run out of resources to explore them all (more recent evidence here).

Second, if we assume that the economic usefulness of combinations is normally distributed (which seems reasonable) and that the average combination is useless, then finding combinations that are better than the status quo will get harder and harder as the status quo improves. As Clancy says, taken together, this “suggests the ultimate rate of technological progress depends on how rapidly we can increase our resources for exploring the space of ideas”. As I’ve said before, AI might be one way to do this and I’d love to see more work on this – but, as Clancy says, even machines will run into hard limits in the face of the sheer cosmological vastness of the possibilities.

Towards a Theory of Justice… by gradient descent?

Political theory has had relatively little to say about AI; a new paper from DeepMind researcher Iason Gabriel, “Towards a Theory of Justice for AI”, aims to start to redress this. A Theory of Justice(ToJ) by John Rawls is almost certainly the most influential work of political philosopher of the twentieth century. It’s not too much of an exaggeration to say that since its publication in 1971, academic political philosophy has been, for better or worse, a series of replies to it (there’s also – doubtless for worse – Theory of Justice: The Musical).

ToJ puts the idea of fairness at the heart of its account of justice. Gabriel argues that it’s time to apply Rawls’ frameworks to the impact of AI on society. For example, core to ToJ is the notion that each person should have a set of basic liberties that protect fundamental interests. Gabriel notes that Rawls believed that this set of liberties would vary according to the technological character of society, and suggests that, for example, an AI-dominated society may require a right to privacy

(I wonder, too, about Albert Wenger’s “right to be represented by a bot”)

One the most famous, and controversial, ideas in ToJ is the Difference Principle, which (in part) states that social inequalities are permissible only to the extent that they benefit the worst off (e.g. incentives to get rich might lift societal wealth enough that the poorest are better off than in a more equal world). Gabriel notes that this is an exacting standard but that AI could have a positive role to play in fulfilling it. I’m not a Rawlsian, but papers like this seem an important avenue for further research. AI will remake society in profound ways and public debate that goes beyond the short-term and political will be an important part of ensuring it works for all of us.





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