Tuesday, September 19, 2017

Risk Management in the Long Term

I work in a pension fund. And pension funds, as well as sovereign wealth funds -- which are like pension funds for an entire country -- need to take the long view. The liabilities can stretch out for twenty or thirty years. And a lot can happen in between. But some of this is not too hard to divine. In fact, ironically, the issues that extend to the long term are in some ways more predictable than those of the shorter term. Things like demographics, changes in demand due to the adoption of new technology, fixed income of retirement, and, unfortunately, climate change.

The thing about demographics is that you get plenty of warning. If the driving issue for risk is what twenty year-olds are up to, you get to know how many twenty year-olds you will be dealing with twenty years ahead of time. (Excluding immigration.) And, similarly, you have a pretty good head start in knowing what lies ahead as people retire, like, that they will live longer, and that there is a sizable group that does not have enough between savings (which is close to zero) and social security and pensions (which averages under $20K a year) to make a go of it.

Demographics is a slow motion tidal wave that washes over society. Look at how our institutions have changed as the baby boomers moved into school age (remember split sessions as elementary schools became overcrowded ) and then college age, and then became home buyers. And now they are moving into retirement, an age of dissaving, of heading off to Florida, and of consuming more and more health care resources. Will we soon see in reverse the housing boom that occurred when the baby boomers reached house-buying age. Will the cash strapped Millennials be able to pick up the inventory? In a time when dining rooms and living rooms are the housing equivalent of an appendix, will there be demand for what will be coming onto the market?

We don't know what lies ahead for technological innovation, but we do know the longer-term trend as the technology that we already have is improved and adopted. Jobs in transportation will shrink. Jobs generally will shrink. The oil, insurance, and auto industries will face huge disruption. The wonders of innovation will meet the realities of political will. The winner-takes-all business models, Amazon being the dominant case, will find increasing headwinds from the regulators and lawmakers.

What is true for the path of demographics is also true for climate change. We have a pretty good read on the direction, if not the magnitude, of climate change. There has been so much energy expended in fighting the pushback on whether climate change is real that we haven't had the energy to contemplate the full implications of its course. If you want to get a scary version of what can happen, read the New York Magazine article The Uninhabitable Earth. The author spoke to climate scientists about their views of the future, views that they generally do not share publicly because it is hard enough to put the simple, non-dire view out there without dodging tomatoes. The dire-view list includes, section by section in the article: heat death, the end of food, climate plagues, unbreathable air, perpetual war, permanent economic collapse, and poisoned oceans.

Where does all this lead? To something that is more concerning (well, not as concerning as heat death, the end of food, and the rest) than the trends themselves: social revolt. The ushering in of the industrial age had its Karl Marx and its hundred years of revolution rolling across the globe. What will we see rolling across the globe when the broadly predictable demographic, retirement, employment, and climate trends take their course during the next decades? (And I haven't even discussed the implications of all of this for rising inequality and marginalization.) When we have a younger generation trying to support an older one that outnumbers it by some multiple; when it is doing so without being able to find meaningful (or just about any) jobs; where the retirees do not have the wherewithal for self support; all with the backdrop of a climate that is making the earth uninhabitable in multiple ways?

Has the UFC Jumped the Shark?

Now, in the middle of hurricanes, Trump, and a (possibly) overheated stock market, here's a blog about something different and somewhat inconsequential: The mixed martial arts world, which pretty much means the UFC.

I have been interested in martial arts for a long time -- I have been training in Brazilian Jiu Jitsu for over twenty years -- and have enjoyed the increasing interest in mixed martial arts. But about a year ago the dominant organization for mixed martial arts was purchased by a consortium of WME and IMG for a staggering $4 billion. These are organizations that are not focused on sports, but on entertainment, and the UFC has followed the lead to increasingly become an entertainment enterprise. 

In its first incarnation, the UFC was a little better than a refereed bar fight. Such as it was, these fights are what got me interested in Brazilian Jiu Jitsu, because Royce Gracie, a member of the famous Gracie clan that brought BJJ to the U.S., defeated opponent after opponent regardless of the size differential using these ground-based techniques. I train at his nephew Renzo Gracie's academy in New York (I'm bottom right, Renzo is two to the left of me).

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Then in 2001 the UFC was bought by the Fertittas brothers, and it was rebuilt as a serious sports enterprise. Over time it attracted top athletes, first men, and then women, most famously Ronda Rousey, that fought in weight classes built on a professional structure. 

But if you want to recoup that sort of investment, you have to reach for a broader audience. You have to create buzz and spectacle. The poster child for this, of course, is the fight between Floyd Mayweather and Connor McGregor. This fight pitted two men who were undefeated in the boxing ring.  One with a 49-0 record, the other undefeated for the same reason that I remain undefeated as a professional boxer. He had never been in the ring. 

This fight looked more interesting than it fundamentally was. Mayweather promised to give the spectators a show, and the match lasted for ten rounds of boxing action. In part because Mayweather didn't bother to throw punches for the first rounds, and then let the exhausted Connor gamely trudge on until he leveled him with a barrage. The slow start could be chalked up to caution on Mayweather's part, making sure he understood an opponent that he had never seen in the ring before. Or it could be that he didn't want fans who spent hundreds of million of dollars to watch the fight head home after a few minutes. 

This fight will mark the turning point, when the sport, at least in its most popular venue, will have jumped the shark. Former UFC champion Benson Henderson put it succinctly, "It's a very slippery slope when you have a world champion boxer fighting an MMA guy for the sake of money, and he can't knock him out in the first round," Henderson said. "He has to make sure he carries him a little bit. For me, that's too close to skirting the edge [of a fixed fight].

Now Paulie Malignaggi, a sparring partner for McGregor and world champion in two weight divisions before retiring earlier this year, has been trying to get into the circus by fueling demand for a grudge match with McGregor based on a falling out after a video appeared that showed Malignaggi hitting the canvas during a sparring session. He argued it was a push, McGregor's camp called it a knock down. 

In any case, there is more showmanship where this is coming from. With Mayweather versus McGregor we had boxer versus MMA fighter.  But before that, we had the WWE star CM Punk come into the UFC octagon to get destroyed (surprise) by a UFC professional of no particular note. We are having a fight of 38 year-old Michael Bisping, who last fought a year ago, versus 36 year-old George St-Pierre, who retired five years ago. And we have another MMA versus pro wrestling bout being bandied about between Jon Jones and Brock Lesner. There is a huge weight discrepancy between them, so maybe it will be billed as David versus Goliath. It also could be billed along some lines related to the fact that both fighters have been banned from legitimate fights for failing drug tests.