Beyond Protests and The Police

While protests may not be, strictly speaking, market-based news, the size and scope of the protests regarding police violence and black lives makes them hard to ignore regardless of context. So far, these massive public demonstrations have not had an impact on markets (though they may yet on the spread of Covid-19), and have garnered a mixed reaction in the wider society. Whether police will be held to a level of greater accountability for actions that result in death remains to be seen, and regardless of what reforming actions are taken by police departments its quite obvious that it will take years to overcome distrust of authorities in some communities.

A more interesting aspect of the protests have been calls to “defund the police”, a rallying cry that either means exactly what it says, or sparks 15 minutes of explanations as it “doesn’t mean quite what it sounds like”. The arguments for it do make some sense though, and within some police departments there is sympathy for the idea that too much is asked of the police, resulting in a hodgepodge of policy goals foisted on a group simply not equipped to handle them. Currently the same people who have to deal with a domestic disturbance and oppose criminal gangs are the same people that have to help those with serious mental health issues and spend their days collecting revenue for cities. Not all these jobs should likely fall on the same person.

This raises an interesting point, which is how our political class has largely sidestepped any of the blame aimed at police departments. Police only enforce the laws that they have on the books, and true to any bureaucratic industry, we have lots of laws on the books. So many laws in fact that it is practically impossible to know what they all are. By-laws are added with little consideration for what has preceded it, speed limits seem set arbitrarily and may be subject to change, some laws are posted while others invisible. Which laws are enforced and where is left to the discretion of the police at the time. Many laws end up serving an unintended dual function, launched ostensibly to combat thing A, but end up serving issue B.

Consider that in 2008, Ontario passed a law making it illegal to smoke in a car in the presence of a minor, someone under the age of 16. This was part of a long campaign aimed at discouraging smoking in public that bore some superficial resemblance to other laws that discouraged smoking by making it harder to do in social settings. But where as smoking in public on patios and bars limited where you could go, this new law invited police into a citizen’s private space and criminalized behavior that was, at least under the laws of the province, still kind of legal. But the real issue here is who the law inadvertently targets.

Despite continued drops in the number of people smoking, those people that do smoke are statistically more likely to be poorer with more minimal education. According to the CDC 30% of people below and 25% of those at or just above the poverty line smoke, while those at more than double the poverty level only smoke at a rate of about 15%. In short the people most likely smoking in their car won’t be found in Leaside, but might be found in one of Toronto’s less affluent but already heavily policed neighborhoods. This law isn’t intended to target minorities or the poor, but put in the hands of police who are already tasked with policing higher crime areas (again areas that tend towards being poorer and with higher populations of minorities and new Canadians) it puts another class of previously non-offending people into potential confrontations with the police.

You may remember the death of Eric Garner in 2014. Another black American who died in the arms of a police officer that was caught on camera, Garner had been placed in a choke hold and had died from lack of asphyxiation. Garner’s crime, that had led him to this confrontation with multiple police, was for selling “loose cigarettes”. As part of a style of policing called “broken windows”, police had been instructed by the highest levels of authority within civilian politics to crack down on minor crimes to scare off larger criminal enterprises. Tackling the “loose cigarette” problem ultimately involved “the deployment of special plainclothes unit, two sergeants, and uniformed backup” to arrest a man selling cigarettes for a dollar who had been arrested 12 previous times. At no point did anyone wonder if this was a useful deployment of resources, or whether re-arresting a man who had already been arrest 12 times might finally break his habit.

You might be tempted to imagine that police would simply look the other way when silly or impractical laws find their way onto the books, but this too is a problem. Indeed, we know that the police can sometimes be given directives to enforce some laws over others. But the law cannot function effectively when it is applied only at the discretion by those in authority. If a law cannot be practically enforced or only enforced unevenly, it probably shouldn’t be a law at all.

Politicians remain responsive to their voters, particularly so at municipal levels. That can put enormous pressure on them to pass laws that are intended to fix social ills for moral reasons, but our politicians should be mindful that every law passed puts potentially puts citizens into conflict with the police. So long as the police remain the first line of citizen’s interaction with the state’s power, whether it be for jay walking, speeding, parking illegally, domestic disturbances, assault, or more serious illegal activity, any action can theoretically become fatal. Recently two young people died during police interventions in the GTA. The first was a young woman named Regis Korchinski-Paquet, who fell from a balcony during a mental health crisis when police showed up to take her to CAMH. The second, D’Andre Campbell was shot by police in his home in Brampton when police were called because he was having a schizophrenic episode. How culpable the police were in these events is the subject of much debate, but families in both instances have wondered aloud whether it is the police that should be the people who come during a mental health crisis.  

While Canada’s problems are mercifully not those of the United States (the proliferation of guns and the militarization of police are fortunately not major issues here), that shouldn’t excuse politicians who make noise about police excesses while being quick to use the law to fix minor grievances. While the police continue to do their own reviews and consider reforms, politicians should perhaps begin considering an audit of the numerous laws that we keep and whether it still makes sense to be ticketing people for jaywalking, working out in a park, or issuing fines to children who run a lemonade stand, especially when these laws can not be enforced with any consistency.  Whether our politicians can rise to meet even this challenge remains to be seen.

*In addition to the linked articles within this post, I have also referenced the book The End of Policing by Alex S. Vitale for anyone interested in the arguments of defunding or abolishing the police.

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of Aligned Capital Partners Inc.

Who Will We Hold Accountable?

June is here and the summer promises to be hot, sunny and inviting. Yet Canadians are still struggling with the pandemic, with daily numbers still in the 100s of new cases and the curve being bent slowly. Far from crushing the pandemic or setting up a robust testing and tracing system Canadians are being reprimanded for being to close to each other in parks and watching the mayor of Toronto walk around incapable of wearing a mask properly.

These results are not nationally representative, but regionally specific. Quebec is currently the worst affected province, with Montreal the country’s epicentre for the virus. Ontario fairs only a little better, while the rest of the country is beginning to move to reopening. In all, while Canada largely sidestepped an out of control spike, we have failed to bring the virus under control.

Fighting the pandemic has taken an enormous financial and emotional toll, to citizens, to cities, and to the economy. Economic lifeboats to offset the worst of the effects have cost in the hundreds of billions and will represent a sizeable financial burden for the foreseeable future. That cost has been born willingly, with people foregoing seeing relatives and friends, risking the survival of businesses, and saying goodbye to loved ones who died in hospital alone, all in an effort to smother a new and existential threat to our well being.

But Canadians will be right to wonder whether our governments maximized our response and put our consent to be governed to good use, or did they squander it in bizarre and foolish ways? I’m sorry to say that it’s probably the latter.

Cast your mind back to March (roughly 100 years ago) and recall that the minister of health, Patty Hajdu had insisted that the coronavirus posed a minimal risk to Canadians. Questions about whether we should be wearing masks were dismissed as misguided and the idea that closing borders to people travelling to places that had been Covid-19 hotspots was considered useless or potentially even discriminatory.

What an innocent time.

Today masks are recommended (sort of) albeit reluctantly, borders are largely closed and social distancing is not simply a recommendation, but mandatory and enforced by private businesses. Concerns about racism have been buried under a growing mountain of evidence that China actively misled the world about the severity of the new epidemic while simultaneously buying as much personal protective equipment as it could.

Given the conceivable difficulty with getting people to “socially distance” responsibly, something that people have never done in a society accustomed to largely doing what it likes with little fear from its government, the political opposition to masks has remained particularly puzzling. What has struck people as one of the most simple and straightforward ways to improve safety by embracing an obvious form of precaution has been regularly opposed by every public health official for all kinds of reasons right up to the moment that they decided that it was a good idea.

Other concerns about our government’s handling of the pandemic seem even worse. Though Ontario and Canada at large were meant to be better prepared as a result of the SARS outbreak, at every turn it seems that its quite the opposite. The national stockpile turns out to not have been much of a stockpile at all. Ontario’s own stockpile was largely destroyed in 2013 when it was supposed to expire and not replaced at the time (in a cruel twist of irony that expiry date was revealed to likely have been too early). In a recent interview, when Dr. Theresa Tam was asked whether concerns over pandemic preparedness had been presented to the cabinet she was cut off by the Minister of Health and reminded that all conversations with the cabinet are private.

The only thing that might have made up for all these missteps would have been an effective test and trace system that would have over-tested the population so that it could get out ahead of the virus and proactively isolated carriers. By comparison testing remains well below where it needs to be to accomplish this. In fact, to get a clear sense of just how far behind we are on the testing consider that in Ethiopia (ETHIOPIA!) the capital is testing people door-to-door! Meanwhile, here in Toronto it’s unclear whether you should even go in for testing or just stay home.

This isn’t a political rant. I’m under no illusions that another party or another leader might have made better or more decisive decisions. If anything multiple parties are to blame for the failed efforts to deal with the pandemic at every level of government. If I needed to find a single example that encapsulated the level of this failure, please consider that last week the Toronto Star reported that the TTC was trying to find out if they could legally enforce wearing masks on buses and subways! Months after a pandemic has ravaged people’s lives and eroded billions in wealth, only now does the TTC aim to see if it can enforce the most basic form of prevention for buses and subways. Even a cursory glance at where most of Toronto’s cases have been are aligned with poorer neighbourhoods that depend on more public transit.

These questions aren’t academic, and they aren’t partisan. The stakes are very real and the crisis will have a long reach into the future. Canadians have spent the last decade acquiring sizeable debt anchored by home values, with governments and banks happy to pretend that this debt was a form of wealth. Today the financial situation looks considerably worse, and one way to mitigate the damage to the economy would be to reopen the economy with confidence. Sadly, in the hands of our existing political class, such a thing remains out of reach.

Information in this commentary is for informational purposes only and not meant to be personalized investment advice. The content has been prepared by Adrian Walker from sources believed to be accurate. The opinions expressed are of the author and do not necessarily represent those of ACPI.

Vexed by the VIX

This past week a number of articles spilled forth regarding the VIX index being at record lows. If you aren’t familiar with the VIX, that’s quite okay; the VIX is an index that tracks the nervousness of investors. The lower the VIX is the more confident investors are. The higher the VIX, the greater the concern.

At first glance the VIX seems to clearly tell us…something. At least it seems like it should. The index is really a measure of volatility using an aggregate of prices of options traded on the S&P 500, estimating how volatile those options will be between the current date and when they mature. The mechanics aren’t so important for our purposes, just that this index has become the benchmark for the assumed fear or comfort investors have with the market.

So what does it mean when the VIX is supposedly at its lowest point in nearly a quarter of a century?

Historic VIX
This is the historic performance of the VIX. Data provided by CBOE.

Because we live in the 21st century, and not some other more primitive time, we have the best technology and research to look to when it comes to discerning the meaning of such emotionally driven statistics. Its here that the the area of study of behavioural economics and investing supposedly cross paths and that we might be able to yield some useful insight from the VIX.

Motorola RAZR V3_1
What is this, 2007? Might as well be the stone age!

Or not.

The holy grail of investing would presumably be something that allowed you to accurately predict changes in the market based on investor sentiment. Though over time stock markets are meant to be an accurate reflection of the health and wealth of an economy, in the short term the market more closely tracks a series of more micro events. Investor sentiment, political news, potential scandals as well as outside influences like high frequency trading and professional traders pushing stocks up and down all make up daily activity.

The VIX seems like an ideally suited index to then tell us something about the market, and yet it probably isn’t. The problem with research into behavioural economics (and its other partner, big data) is that it is great at telling us about things that have already happened. The goal, that we could use this information to change or alter human behaviour, is still a long way off (if it exists at all). Similarly the VIX is basically great at telling us stuff that we already know. When markets are bad the VIX is high. When markets are good its generally low.

Skiing in pants
Bad forecasting can lead to terrible outcomes.

Thus, the VIX represents a terrible forecasting device but an excellent reminder about investor complacency. When markets are “good” (read: going up) there is a tendency for investors to ask for more exposure to those markets to maximize returns. If you feel uncertain about the future, investors and financial advisors are less likely to “drift” in terms of their investing style, but if people feel very good about the future their far more likely to take their foot off the breaks.

Screen Shot 2017-05-18 at 2.00.19 PM
Yesterday’s selloff followed news that Trump’s Russia problem wasn’t going to go away, but remain a permanent feature of his administration.

Real market panics and crashes tend to be triggered by actual structural problems. 2008 wasn’t the result of too much confidence about the future from investors, but because the market itself was sitting on a bubble. That the VIX was low only tells us what we already knew, that we weren’t expecting a financial crisis.

Trump-Jail
We can hope.

With markets down sharply yesterday its tempting to see that this level of investor complacency/confidence harbingered the most recent sell off. But that’s not the case. Trump is, and remains, a kind of nuclear bomb of unpredictability that must be factored into anyone’s expectations about the markets. But what we should do is consider the VIX a mirror to judge our willingness and preparedness to deal with unexpected events and market downturns. If you’ve started to assume that you can afford growing concentration in your portfolio of high performing equity or that you don’t need as many conservative positions, you should take a long hard look at why you feel that way. Maybe its just because you feel a little too confident.

Like everyone else.