Oct

19

They say the market is upset about the jump in bond yields but maybe she's anticipating a premature return to socialism

Stefan Jovanovich writes: 

If I thought there was any reliable direct connection between elections and speculations, I would be tempted to join LW and you other clever traders and bet my "system" - which does better than average at guessing political horse races. I don't because, if there were any such link, I would not be able to pretend to be an expert in such company. You guys would already know the odds down to the precinct levels if that mattered.

I think, in fact, you all do know what matters regarding politics and money. Now that I am 60% of the way through the House "swing" districts, I are learning what the markets have already predicted: Jim Jordan is going to be the new Speaker of the House of Representatives. When that happens, the Federal budget and the Treasury's operations are going to be subject to the approval of the 21st century successor to John Sherman; and the shock is going to be that the national debt will be brought home. The taxpayers are going to become the Federal bond holders just as they did during and after the Civil War; and they are going to want tariffs and "sound" money to protect their investments, even as Confederate paper (aka Chicago municipal bonds) is allowed to evaporate.

Larry Williams writes: 

If the new speaker shrinks debt stocks will get hit hard. Deficits are very bullish for equities.

Alex Forshaw asks: 

Larry, why do you say that/how do you strip out correlation vs causation in this? The blowoff 1998-2000 top occurred among budget surplus and deficits are inherently counter cyclical i.e. generally low in late cycle/high in early cycle (deficit as % of GDP biggest in 1981-83, during/after 2 recessions or 1 severe recession; 1991-93 after a fairly deep recession; 2002-03 after a recession; 2009-10 after a severe recession.) To the extent that the deficit is high adjusted for its place in the economic cycle (2012, 2018 ytd) it doesn't seem bullish. To the extent that deficits are unusually low cyclically adjusted (late 90s, 2007 arguably, 2015 arguably) it definitely does not seem bearish. 

Larry Williams replies: 

I don't think it is correlation but causation. Large deficits means lots of money floating around the hood. That translates to expansion, building–which translates to jobs, and that to consumer spending, and that to corporate profits. I'm traveling so lack data. The "one and only" Mr Vince may wade into this with data.

Ralph Vince responds: 

25+ years ago I bought the Commerce Dept Database of 900 data items, and set u p a program (that would take two months to run, with a math coprocessor no less!) to examine each pairwise data set, and for each pairwise data set, to skew them +12/9/6/3/0…/-12 months, and record only those dataskew pairs with absolute value of correlation > some value (I forget which, but it was quite high).

One of the (many) dataskew pairs that filtered through very highly was that of federal deficits and economic growth (and broadly, we can stipulate that ROC of economic growth correlates to equity returns). The greater the deficits, the greater the market gains.

There were periods that did not fit this pattern, of course, it was not absolute (one out-of-sample period being the Robt Rubin era which was yet to transpire).

My guess is like the Senator's here; greater money floating around menas greater economic activity. I think it;s even a deeper causation than that. I would define it by saying that debt needs be repayed only once (if ever, it can also be perpetually rolled — the "problematic" nature of this is solely a function of rates. If manageable due to rates, it is virtually nothing. Further, even if rates become problematic, the yield curve itself provides an avenue of release — cue Rubin again), whereas the borrowed dollar can circulate multiple times.

So there is the multiplier effect of borrowed money vs the borrower's asset which is a one-time shot

If it weren't for borrowing, in particular the fractional banking system, we'd be in the year 1,000.

Oct

17

The generic ballot poll for the House of Representatives, which was, until this week, the best evidence for the predicted "Blue Wave", asks a sample of adults, registered voters and/or likely voters which major party they favor for "Congress" (the word of both the House and the Senate has, in modern parlance, come to mean only the House).

The logical flaw in using such a poll is that no office in the Federal government is determined by a national vote–not the President, not the Senate, not the House. But, the poll does have the great advantage of being easy. The only alternative is to go by individual House district; I am not even 30% of the way through the "battleground" House districts, and I am - for the first time in my sedentary life–beginning to have a sense of what long-distance runners mean when they discuss "hitting the wall". I promise to finish; but getting the data for each House race is a long slog.

That is why I am following 538 and taking the easy road for an hour this morning.

But, I can't be a complete cheat. No political poll, of any kind, avoids GIGO if it does not disclose its sample's partisan allocation. It will not surprise any of you to learn that the New York Times and the other most frequently cited generic ballot polls are scrupulous about not providing any such useful data. I did find one polling organization that has gone against the GIGO trend. The YouGov people have been remarkably forthcoming about how they get their numbers. In their CBS/You Gov Tracker poll, their sample data for party ID is R-42, I/O-15, D-43; for political affiliation it is Conservative-38, Moderate-32, Liberal-30. What they do not disclose is their methodology for converting these sample numbers into their overall prediction: R-48 and D-52.

I can explain how they get there, but I was not able to find any explanation of the why. The recipe for How works by taking the middle third of voters - the Moderates - and asking the Lean question in such a way that more than 3 to 1 favor of the Democrats. The result of their party ID inquiries is to assign 13 points to the Democrats and 4 points to the Republicans. That reduces the "middle of the road" share of the electorate to 1/7th. To get to their final D +4 result, their algorithm assigns 60% of the Independent/Other vote to the Democrats and 40% to the Republicans.

When YouGov did a second generic ballot poll for the Economist, they queried 1500 adults. Their bottom line result was similar to the one from their CBS tracking poll: D +6. But, here, too the How and the Why seem very much at odds. Their political affiliation numbers show a slight leftward variation on the common 1/3rd, 1/3rd, 1/3rd distribution pattern. Their sample has Conservative - 31, Moderate - 34 and Liberal - 35. But, that somehow shifts to a Party ID landslide for the Democrats: Republican - 23, Independent - 42, Democrat - 35. Where the numbers get really strange is in the data for 2016 voting. The 931 respondents who voted in the last Presidential election produce a sample that is divided Republican - 45.8 and Democrat 54.2.

But we know that the actual vote count was Republican - 62.98M and Democrat - 65.84M. That was Republican - 48.9 and Democrat - 51.1. Somehow a sample that should, to be representative of known ballot numbers, have a D +2.2 margin ends up with a D +8.4 spread.

No wonder the statistical affiliates of the party of Native American heritage prefer national algorithms above all else. They are not only easier but they always give the right answer.

Oct

15

Maine - The Suffolk poll is wonderfully detailed. They break down their registered votere sample into R, D, I and then add Green and Libertarian. They also distinguish between Unenrolled (which they include with Independent) and Undecided. R-28.6,I/U-33,R-28.6,G-1.2,L-.6,U-2.8. Eric Brakey, the Republican, has no chance, given the bias of the Democrats in favor of King, the "Independent" (sic).

Vermont - No one has bothered to take a poll. Socialism rules! Sanders is anointed again.

Rhode Island - The "conservative" news had a recent flurry of articles about how this might be a competitive race. It is not. The most recent UNH poll sample has the electorate R-28, I-24, D-48. Whitehouse in the usual landslide.

Connecticut - Quinnipiac has given up on telling us what its samples contain; but their estimate for the race is not going to be so far off as to give the Republicans an upset. When Gravis did a sample earlier this year, it was R-26, I/O-34, D-40. Murphy is re-elected easily.

New Jersey - The news may say that this race is close; but it is not. Fairleigh Dickinson's poll sample has the state: R-36,I-8,D-56 among Likely Voters; yet it has the race as a statistical "dead heat" between the incumbent Democrat Robert Menendez and the Republican Hugin. More than 1 in 5 Democrats (22%) and nearly half the Independents (42%) declare themselves undecided. The problem for the Republicans is that it is still New Jersey. The statistical "dead heat" is Menendez-43, Hugin-37; and the odds are beyond hope that Hugin can somehow win 2 out of every 3 of the votes from the 20% of the electorate that has not made up its mind. Menendez will win because New Jerkers, especially women, seem to loath the Donald. Prediction: Menendez +4/5.

Pennsylvania - Franklin & Marshall's sample is R-40, I/O-8, D-52. Casey will be re-elected easily.

Maryland - This state makes California look purple. The Goucher Likely Voter poll sample is R-27, I/O-12, D-61. Cardin will win, even if he is in a coma on election day.

Delaware - Gravis sample: Conservative-32, Moderate-45, Liberal-23. On its face that might offer the Republicans a chance; but the term "Moderate" is now code for Democrat-leaning Independent. The sample shows the party affiliation as R-32,I/O-21,D-47. Their Likely Voter poll was taken in July and had Carper +8. The most recent poll - from the University of Delaware - offers no sample and has Carper +37. Carper should win easily.

Virginia - The University of Mary Washington poll has R-29,I/O-35,D-31 and C-37,M-31,L-32. Kaine, the Democrat, is not an attractive candidate; but he has the advantage of running in a 3-way race. The Libertarian candidate is likely to get 5% of the vote. Prediction: Kaine +8.

West Virginia - This race is really a Republican primary in drag. Manchin, the Democrat, was clever enough to not commit political suicide by voting against Kavanaugh; and his personal popularity is distinctly higher than Morrisey's, his Republican opponent. Gravis's likely voter sample has the state R-35,I/O-22,D-43. Trump has been to West Virginia for several rallies, but he has been careful not to criticize Manchin harshly, except at the one held before the Senate vote on Kavanaugh. The Republican party in WV is very much as the Republican party in Alabama was in 2017 - fractured by internal scandals. Prediction: Manchin +6. Commentary: Manchin will become the White House favorite for "bi-partisanship". He is likely to campaign for Trump in 2020.

Ohio - Suffolk's poll sample: R-34.8,I/U/O-23.8,D-38.4. Sherrod Brown, the Democrat incumbent, polls consistently with a double-digit lead. That will be the final election result.

Indiana - None of the polls - Ipsos/Reuters, Fox News, NBC News/Marist - deigns to disclose their sample. The RCP Average has the Democrat incumbent Donnelly +2.5 over the Republican challenger Braun. They show the Libertarian candidate Brenton getting 7% of the final vote. In the absence of any usable data, I am relying on the judgment of the brains of the outfit - Susan, who was born and raised in Evansville and whose mother still lives there. (Margaret Mead: "Everyone knows somebody from Evansville, Indiana"). She thinks Donnelly's vote against Kavanaugh was fatal. I agree. I also think the Libertarian vote will be half the RCP prediction; and Braun will be get those votes. Prediction: Braun +2/3.

Florida - Mason-Dixon poll sample: R-37,I/O-25,D-38. RCP's current average is Nelson, the incumbent Democrat, +2.4. The governor's race is equally tight. Prediction: Genuine Toss-Up.

Tennessee - Gravis poll sample: R-40,I/O-29,D-31 and C-39,M-42,L-19. Gravis had Blackburn, the Republican candidate, at +4 in August; CNN, with their usual bias, had Bredesen, the Democrat, at +5 a month later. The NY Times/Sienna poll from this week (as always, no sample data) had Blackburn +14. That is likely an exaggeration. TN is a Republican state; but Republican states never reward their candidates with landslides. Prediction: Blackburn +7/8.

Wisconsin - Marquette University's Law School poll sample data is wonderfully precise. They not only include the historical data of their previous samples. The sample for the current poll: R-47,I/O-8,D-44; when the pollsters exclude "leaners" it is R-33,I/O-36,D-30. Wisconsin's electorate is true to its good government heritage; and I do not offer that as a snarky comment. Their voters are genuinely independent-minded and have no difficulty in splitting their tickets - i.e. voting for candidates from both parties for the offices on the ballot in a single election. That is not good news for the Republican Senate candidate - Vukmir. The voters are likely to reward the Republicans by re-electing Scott Walker as governor and Brad Schimel as Attorney General and then by "fair" by re-electing Democrat Senator Tammy Baldwin. Prediction: Baldwin +7/8.

Mississippi - At least the GOP has one state where RCP and 538 concede that their incumbent hold a "safe" seat. Roger Wicker will be re-elected. Cindy Hyde-Smith will also win and take the seat Thad Cochran held before his retirement. There have been polls taken in MS but only for the "jungle" primary. No one is bothering to talk to the voters for the general election. The Democrats have Vermont; the Republicans have Mississippi.

Minnesota - Klobuchar is an absolute lock; but the race to fill the comedian's seat could be interesting. The Star Tribune/MPR poll sample is R-31,I/O-32,D-37; and they have Smith, the DFL (Democrat Farm Labor) candidate at 44, Housley, the Republican at 37, Other - 4 and Undecided - 15. That is less than half the margin of the latest poll from NBC/Marist, which offers no sample data at all. What makes this interesting to me is that Smith's lead is almost entirely from "Da Yute". There has been a flurry of new registrations among voters 18-30; and they hate Housley - perhaps because the old people like her. Housley is definitely a longshot; but the Michael Moore effect could easily take hold, especially if Minnesota has one of its lovely blizzards. And, MN is very much like its Southern neighbor, WI - a good government, ticket-splitting state. If I did trade, the Housley win would be the black swan option I would buy. Prediction: Smith +3

Montana - Remington Research offers its sample data: R-42,Non-Partisan-30,D-28 and C-47,M-38,L-15. RCP has the incumbent Democrat Tester at +3. It is the contest of Marine haircuts; both Tester and his opponent Matt Rosendale sport buzzcuts. Trump's popularity is likely to be enough to defeat Tester, especially since he was foolish enough to vote against Kavanaugh. Prediction: Rosendale +2/3

Washington, California, New Mexico, Utah, Wyoming, Nebraska. These states will all return the incumbents who are evenly split 3-3.

Overall Forecast: Republicans gain 3 to 5 seats. They are nearly certain to win Indiana, Missouri and Montana without losing Arizona or Nevada. They have a good chances to win Florida and a longshot to win the open seat in Minnesota. If you include Manchin's conversion to being the President's new and permanent bi-partisan best friend, the election could be enough of a gain for McConnell to decide that the 60-vote filibuster rule has to go so that Tax Cut - 2 and Build the Wall funding can be passed, either during the lame duck session or in the next Congress (if the Republicans keep their majority).

That will be the question for the next 2 weeks when I plan to review each of the 41 House races that RCP lists as either a Toss-Up or a Republican incumbent in a Lean Democrat seat.

One last snark for the weekend: Using the Generic Ballot for the country as a means of predicting the results in the House is the polling equivalent of the Hillary Clinton campaign thinking that total votes is the way you keep score in a Presidential campaign. It is truly Garbage Data In = Nonsense Out.

Sep

29

 Whoever is running the vote counting at the White House is really good. The Flake compromise is artful. The nomination is now on the floor of the Senate, and he and Coons, Flake's bi-partisan comrade, have agreed that the FBI will investigate only the 3 current allegations and no new ones and that the investigation will take only 1 week or less.

The President has announced that he will do whatever the Senate and the Judiciary Committee want to do, that the goal is to bring the country together. So, the FBI will prepare a report that will be kept in a secure reading room, like the FISA warrants, the Senators will pretend to study them, and McConnell has a free No Vote to offer to either Collins or Murkowski (or 2 if Manchin does a deal and follows the West Virginia Governor's example and goes over to the dark side).

Even yesterday the odds at Victoria University's New Zealand casino were that Kavanaugh would not get out of committee. Now, the probabilities have completely flipped. If the present news flurry keeps the odds at or below even money, bet the good Catholic boy and get ready for the Notre Dame professor to replace Margaret Hamilton.

Sep

19

I will keep to my promise not to make any predictions before October 9th; but - like the Penguins (who have replaced the Peyton Manning Broncos as my favorite winter team) I have to get ready for the real political prediction season by working through the necessary exercises and drills.

There are two big things for political prediction: (1) getting the sample - like trades - correctly sized and (2) guessing the turnout - what those you who trade call the trend.

Last year's Senate race in Alabama taught me a lesson that I should have already learned from reading what LW and the other pros have said about trends. The only proper times for guessing turnout are when people are going to the polls; anything but recent "history" is, by itself, no guide at all.

What you can do early on, before the political season starts for real, is being figuring out what the proper allocation of the actual voters (Republican, Democrat, Independent) will be. Trump's odds in 2016 were far less of a longshot bet than the "expert" journalists and pundits said, once you at the cross-tabs in the polls. In an national election in which the Republicans controlled both the House and Senate and a clear majority of statehouses and governorships, the respectable polls and pundits were still allocating to the Democrats and Democrat-leaning Independents over 50% of the likely voters.

The drill this week is to read all the recent polls that are NOT about the elections but include cross-tabs that define party affiliation. First up is one from Harris surveying "Blue Collar" workers.

Their unweighted sample shows a break-down of 1049 respondents as 353 Conservative, 444 Moderate and 252 Liberal. This is hardly surprising, given that the sample is heavily weighted toward males (628 Men, 421 women). Yet, even before we get to the pollsters own weighting, the thumb begins pressing down on the scale. Somehow, when the question of party affiliation is asked, 80 respondents disappear from the sample base and the remaining 969 report themselves as being 333 Republicans, 327 Independents, and 309 Democrats.

A sample that was 33.7% Right(Conservative), 42.3% Middle (Moderate) and 24% Left (Liberal) magically becomes 34.3% Right (Republican), 31.9% Middle (Independent) and 33.8% Left (Democrat). The party of segregation, slavery, racial quotas and unConstitutional naturalizations finds its allocation increased by 40%.

Harris' weighting of their sample show comparatively minor bias. The weighted sample for Party affiliation does add back 36 respondents and give them all to the Democrats; it also finds 19 respondents who, in going from unweighted to weighted sampling, have magically changed their affiliation to the Democrats (10 from the Republicans, 9 from the Independents). But these are - compared to the slight of hand in the unweighted sample from political sentiment to party affiliation, relatively minor changes; in percentage terms the Democrats only gain 1 point and the Republicans and Independents shares only lose a half point each.

To their credit, the Harris people do keep the complete survey data for their weighted sample of political sentiment; yet even there the Conservatives find themselves losing 30 respondents, while the Moderates gain 7 and the Liberals 23.

Preliminary conclusion: If 2016's numbers were distorted by sample bias, the ones for this year are trending towards being being actual works of fiction.

anonymous writes: 

Some good thoughts there.

Mr Market has already made a pretty hard-and-fast prediction though, and, rather cryptically says "Nothing changes, it;s the same bull market we've been seeing since early 2016, just a little noise in Feb and March of this year, and back to the same chorus."

Whether or not this means the party in power in the various chambers change is uncertain, but the bass line will remain the same.

Sep

16

538 version:

HOR: 5 in 6 the D side wins control

Senate: 2 in 3 the R side maintains control

Stefan Jovanovich writes:

538 offers us their assurance of the accuracy of their 3-headed model by telling us how successful it has been. After all, their accuracy score in actual election predictions has been between 95.7% and 96.9%. Or, to put is another way, their inaccuracy score has been between 3.1% and 4.3%; on average, they have been wrong in only 3.7% of their predictions.

That looks wonderfully impressive until you remember that, in House of Representative elections in the United States, you have to look through the small end of the telescope. Since the passage of the Permanent Apportionment Act in 1929, only 22 of the 44 elections have seen a change in either party's seats that was greater than 538's strikeout average.

If you limit the sample to the current period in which the House changed hands between the two major parties - i.e. 1994-present, there have been only 4 elections out of the 12 that have seen a change greater than 3.7%.

Their astounding "accuracy" is built into the game. Since 1929 the mean change in the number of seats has been 1 (.2%) and the median change has been 3 (.6%). Even when you look only at the "wave" elections - those whose changes are greater than 538's inaccuracy percentage, the mean change has been 44 seats (10.2%), the median gain by the Democrats has been 37 seats (8.5%) and the median gain by the Republicans has been 46 seats (10.6%).

I trust Big Al's and others' math more than my own; but these spreadsheet calculations suggest to me that we are playing the 95% confidence interval game.

In any case, this seems to me a bit like forecasting the pennant based on teams' records in spring training. The primaries are only now ended and even "well-informed" citizens barely recognize the names of the candidates the parties have chosen. The one survey that no political polling firm will ever take is the name recognition one where citizens are asked to match their local candidates with their party affiliations; even among likely voters the results are wonderfully bad. It will not be until 4 weeks before election day that a majority of them will be able to guess the names of the people on whom the fate of the Republic depends.

At that time guessing about the likely results becomes less like propaganda and more like the speculation that we all enjoy.

Back on October 9th.

 

Sep

10

The word 'lodestar' was an early hint, and seemed to indicate Vice President Mike Pence, who has since claimed his innocence. Some now think this could be either the work of a speechwriter or something meant to misdirect any possible investigation.

Pence is not the only administration member who uses the word 'lodestar,' either.

As Cillian Zeal, a fellow writer at Conservative Tribune, found, sitting director of the National Economic Council Larry Kudlow once penned an article called 'Look to the Lodestars.'

This puts Kudlow as the prime suspect for many. As of the writing of this article, he has not denied the claims. With the few clues we do have, Kudlow seems to fit the bill.

George Zachar writes:

Kudlow is a New York/Wall Street guy. The op-ed writer patted himself on the back for being a part of Washington's 'steady state,' as opposed to its 'deep state.' I doubt it was Kudlow.

To me, what's significant is that the times happily validated the deplorables' contention of a willful, obstructionist GOP deep state, working against its base.

Peter Ringel writes: 

My first thought after this article came out was the following:

If I want to poison the relations and working climate of your group - I will tell you that I placed a spy in your midst. Then it does not matter if I really have a spy or not.

Also the next election seems near and the wave of banning of "multipliers" from twitter and other social media happened simultaneous.

Andy Aiken writes: 

My first thought was that the editorial was written by a NYT staff writer, making do with scraps that didn't make the final edit of Woodward's book.

What evidence has the NYT provided that their claim has more veracity than that of other opinion journals?

Let me know when they give the Pulitzer back for Walter Duranty's reportage that the purges, show trials, and famines in Stalin's USSR are fairy tales manufactured by fearful plutocrats.

Stefan Jovanovich writes:

Thx to the list, I have become fascinated with the facts of how information has actually been shared by people so they could try to answer the political economic questions that troubled/fascinated them. It has been a wonderfully encouraging study. I find, for example, that the effectiveness of the hub-spoke model for the transfer of political economic information is almost entirely an academic myth. Under that model the New York Times (and, as T. S. Eliot reminds us, once upon a time the Boston Evening Transcript) is the hub; and we the voters and Congress and (when he was a properly educated lawyer) the President were the spokes. If only. AA is right about Walter Duranty; his lies were truly awful. But, I think we can all take heart from realizing that they never persuading anyone in Congress to change their vote. You can study the budgets of the Roosevelt Administration in great detail and not find a single appropriation that sent a nickel to the Soviet Union before December 11, 1941 (the date Germany declared war on the United States).

The present nonsense from the "name" bureaucrats (fascinating how many of them are - like Joe Crowley - aging good Catholic boys with Irish ancestry) is yet another retelling of the same hub-spoke story. If you want to believe that paid-for published political opinions greatly matter - like televised speeches about "Black Lives", it is a comforting fairy tale; but it has very little relation of electoral reality.

Ms. Ocasio-Cortez won her 4,138 vote margin over Joe Crowley because Thomas Manton's Queens Democrats got out of the business of winning elections once the last faint whispers of the Republican Party on Long Island died away. Her "Socialism" mattered not as a question of policy but as an indication of how effective the Sanders campaign had been in creating its own lists of precinct captains.

We have been here before.

Sep

7

Today is my (our, I guess) 29th anniversary. To celebrate, we decided to go the day before up to San Francisco. Sunday rather than Monday since the parking is better. One of the first places in San Francisco we went when we first met and came out west to visit friends was Union Street. It's a nice shopping district. Lots of nice cafes. Perfect for a Sunday. (Granted, it's summer, so the city was a tad cold, and the stiff breeze didn't help, but still, it's San Francisco. The place of lonely hearts (well, they're out on a hill, so they must be lonely. Or at least alone.)

Something seemed strange to me though. In 5 blocks, I counted 12 stores available for lease and 5 available for sale. Empty stores. That's unusual for this street. Three years ago, it was bustling. Today , not so much. Not many people walking on the street either. Schools reopened a couple of weeks ago, but maybe everyone is coincidentally taking off at the same time. Probably not, though.

I made a similar observation in May on upper Madison Avenue in Manhattan. Both are places where traditionally, it's been pretty easy to fill an empty store. Sure, those are places that are a bit expensive, but in San Francisco at least, there's lots of money floating around the city. That money is going somewhere. It's not all for 80 inch monitors. Union Street tended to get its "fair share" in the past. Consumer confidence is at record highs. I know that Amazon and the rest of the net has taken over much of retailing, but there's still a need for neighborhood shops for impulse purchases—as in, " forgot it's our anniversary." Or "If I don't do something for her birthday, it'll be a week of sleeping on the couch."

I have to wonder, then, as the Fed drones on about the need to hike, if the economy really is as healthy as many suggest. After all, 20 years ago, when the same measures used today were in use, it wasn't a gig economy. The Fed may have hiked, but it wasn't concurrently selling off its portfolio of debt instruments. And while there are lots of "for hire" signs out, the wages of a given job may not be what they once were. Just some observations and speculations.

Peter Drucker used to note that if what you see doesn't agree with the data at hand, maybe the data at hand are misleading. I have to wonder if the same thing is going on here. The numbers look good, but is the economy really as good as the numbers suggest? If it is, why are the shops now empty? 6 mos to a year ago they weren't. Did Amazon move that fast? Maybe, but somehow, that just seems unlikely. The disruption in retail has already hit the bricks and mortar stores. Except for Sears, which seems to have missed the memo.

Or is the Fed really justified in raising rates, as it did in 2007 and 2000 and 1990?

Mr. Isomorphisms writes: 

Low interest rates benefit only those who have access to them (established firms). Another decade of QE wouldn't help America's poor; only change can do that.

Alan Wolfe, in "the seamy side of democracy", argues that the USA is a story of conflict between stability and freedom–and that stability has always taken precedence. This was 1973.

Yes, people can and do take dogsh__ companies public (doesn't make their bonds good), but that's still different from healthy capitalism. Dynamism requires failure. With regard to everything being expensive but empty, I posted a note about Al Jazeera east 101's takes on paper holdings of China's million millionaires. As a simplistic story, ask yourself where the USA's lost manufacturing wealth 1980-2010 went. Then ask where they park their money. Vancouver is one answer for Chinese wealth. London/NYC are an answer for Saudi money. Qatar had the good sense to make their own BBC, investing in people instead of buildings.

Then turn in your copy of Sidney Homer's history of interest rates to the part where a Swede buys California ranching property based on figures, with no knowledge of how to run the thing.

anonymous writes: 

It is easy to get caught in the echo chambers of the two coasts. I've often heard, but only recently, recently how "nice" people are in the Midwest and South. Foreigners here in Los Angeles are frequently replacing locals who are leaving for many reasons. My town's Chinese population has jumped dramatically in the last 18 months. 

Stefan Jovanovich writes: 

Data from IHL: "Grocery, drug stores, mass merchants/supercenters, and convenience stores are adding a net 2,694 stores in 2018 on top of 3,115 net new stores in 2017. Department stores, specialty soft goods (apparel, shoes), and specialty hardgoods (DIY, electronics, sporting goods, books, furniture) are closing a net 682 stores in 2018 on top of 2,557 net closings in 2017."

Henry Gifford writes: 

High end retail areas in New York City, such as Madison Avenue (as mentioned on this site a couple of days ago) have higher vacancy rates than last year. But, retail rents outside of the 6 or 8 fanciest areas went up since a year ago, and vacancies remain fairly low.

All I've written above is to be taken with a grain of salt, however, as nobody really knows what retail rents go for, and even vacancies are hard to track with the increasing popularity of temporary (pop-up) stores. Apartment rents are easy to track, but retail leases usually include the building owner spending some money on repairs/buildout, and the owner usually gives some months of free rent. Owners used to bring electricity and water and sewer into retail spaces, and maybe nothing else, but now more and more owners pay large sums of money toward the cost of building out a space.

The reason is that the more money the owner pays, the higher the rent will be, and thus the larger the mortgage the owner can get on the building - based on the reported rent. If/when mortgage rates change, or mortgage availability changes, owners will pay more or less toward buildouts, and the retail rents will change accordingly, making any effort to track retail rents very difficult.

Sep

1

 US Market Cap/GDP

Data sources

Steve Ellison writes: 

This indicator was also mentioned in Mark Hulbert's article in the Wall Street Journal on Sunday. People who cite it as an indicator usually implicitly assume that the aggregate value of the stock market should grow at the same pace as GDP over the long term.

I believe this assumption is flawed for two reasons. Privately held companies are not counted, so changes in the relative percentages of public and private companies affect the ratio. More importantly, the traditional capital structure of 50% debt and 50% equity, in which all upside value goes to equity holders, is a good reason why stock valuations should increase faster than GDP, especially over very long periods. Indeed the inflation-adjusted compound annual growth rate in the S&P 500 between the generational lows of 1982 and 2009 was 4.4%, significantly more than GDP growth during the same period. So I don't lose any sleep over this ratio being higher now than in 1929.

Stefan Jovanovich writes: 

In a recent speech Jorg Meuthen made a simple point: GDP calculations assume that civil servants are somehow as magically "productive" as the people who have to do work for a living and successfully sell their work for cash.

No one in the "mainstream" (sic) wants to do calculations that remove all the recipients of government payments from political economic calculation. It is, from the point of view of modern economics, heresy.

I took Big Al's elegant calculation and found its "private sector" derivative.

The results are precisely what spec and others see in their views of the data. Not at all a pretty picture. If you take private earnings from wages net of taxes as a proxy for the country's additions to wealth, the 5 years up to and including 2017 only recovered the amounts lost from 2007 through 2011. From the point of view of people to do work that other people actually pay for, the last decade has been a complete wash. It is only the gains for this year and beyond that can be counted as actual increases in wealth.

Mr. Isomorphisms writes: 

Thanks for doing the work for this calc. I would argue your characterisation of government work is overly harsh. Shuttering IndyMac took real work, was productive, and experienced a boom during the decade in question.

There was a boom in useful work for bank regulators around the time of Continental Illinois as well. Stefan, as you pointed out with regard to an economic historian's writing, details matter. Even if on average government employees are worse, that varies across time and across agencies/remits.

More importantly certain kinds of useful work are not privatised. In fact anything that was privatised (parks management, penitentiary management, utilities) by construction used to be a government job that accomplished something. Furthermore various government initiatives do often produce private benefit–I'm thinking of the stories of Bureau of Land Management and Army Corps of Engineers in Marc Reisner's Cadillac Desert. Whether irrigation ditches are dug on Brigham Young's holy command, on debt-financed speculative capitalist entrepreneurship, or bureaucratic mandate, water changes course.

Aug

22

The market is amazingly resilient today [8/21/18] vis a vis the two decisions on cases. All the Asian Markets are strong as a stone wall. And eminis are down only 7. We will see if the European markets can hold up especially since they have been very strong the last two days. I would posit that a bad market would show that Trump is good for markets and this would keep him in the battle.

Kim Zussman writes: 

A hostile deep state bringing felony convictions (with ridiculous sentences compared to violent youth's) of associates in order to upend the presidency in the name of Russian collusion will bring great succor to the Russians. And it would seem to put the finishing touches on anyone who isn't completely cynical toward all forms of aggressive government.

Stefan Jovanovich writes:

KZ's basic point is incontrovertible. Manafort was and is guilty of the counts on which he was convicted (tax evasion, bank fraud, failure to report himself as a lobbyist); but the sentencing is out of all proportion to what other taxpayers would receive in a "normal" case.

One of the many, many things the List and our Host have taught me is to trust the verdict of the markets. What they seem to be saying today is that Mueller has yet to lay a legal glove on the Great White Hope.

And now for another message from the past:

"The Tenure of Office act, it will be remembered, was passed in 1867 for the express purpose of preventing removals from office by President Johnson, between whom and the Congress a quarrel at that time raged so bitter that it was regarded by sober and thoughtful men as a national affliction, if not a scandal.

An amusing story is told of a legislator who, endeavoring to persuade a friend and colleague to aid him in the passage of a certain measure in which he was personally interested, met the remark that his bill was unconstitutional with the exclamation, "What does the Constitution amount to between friends?" It would be unseemly to suggest that in the heat of strife the majority in Congress had deliberately determined to pass an unconstitutional law, but they evidently had reached the point where they considered that what seemed to them the public interest and safety justified them, whatever the risk might be, in setting aside the congressional construction given to the Constitution seventy-eight years before.

The law passed in 1867 was exceedingly radical; and in effect distinctly purported to confer upon the Senate the power of preventing the removal of officers without the consent of that body. It was provided that during a recess of the Senate an officer might be suspended only in case it was shown by evidence satisfactory to the President that the incumbent was guilty of misconduct in office or crime, or when for any reason he should become incapable or legally disqualified to perform his duties; and that within twenty days after the beginning of the next session of the Senate, the President should report to that body such suspension with the evidence and reasons for his action in the case, and the name of the person designated by the President to perform temporarily the duties of the office. Then follows this provision: "And if the Senate shall concur in such suspension and advise and consent to the removal of such officer, they shall so certify to the President, who may thereupon remove said officer, and by and with the advice and consent of the Senate appoint another person to such office. But if the Senate shall refuse to concur in such suspension, such officer so suspended shall forthwith resume the functions of his office."

On the 5th of April, 1869, a month and a day after President Johnson was succeeded in the presidency by General Grant, that part of the act of 1867 above referred to, having answered the purpose for which it was passed, was repealed, and other legislation was enacted in its place. It was provided in the new statute that the President might in his discretion, during the recess of that body, suspend officials until the end of the next session of the Senate, and designate suitable persons to perform the duties of such suspended officer in the meantime; and that such designated persons should be subject to removal in the discretion of the President by the designation of others. The following, in regard to the effect of such suspension, was inserted in lieu of the provision on that subject in the law of 1867 which I have quoted:

"And it shall be the duty of the President within thirty days after the commencement of each session of the Senate, except for any office which in his opinion ought not to be filled, to nominate persons to fill all vacancies in office which existed at the meeting of the Senate, whether temporarily filled or not, and also in the place of all officers suspended; and if the Senate, during such session, shall refuse to advise and consent to an appointment in the place of any suspended officer, then, and not otherwise, the President shall nominate another person as soon as practicable to said session of the Senate for said office."

Grover Cleveland (Ma, Ma, Where's My Pa) made this speech to the Princetonians after leaving Presidential office (for the 2nd and last time).

anonymous writes: 

A hostile deep state bringing felony convictions (with ridiculous sentences compared to violent youth's) of associates in order to upend the presidency in the name of Russian collusion will bring great succor to the Russians. And it would seem to put the finishing touches on anyone who isn't completely cynical toward all forms of aggressive government.

Aug

21

 So the traditional way of trade wars is to levy high tariffs on goods imported from the opponent country. The logic is that the higher tariffs result in higher prices in the market for those imports, so the compatriots will buy less of those, resulting in less exports by the opponent country, and hence damaging the economy of the opponent country. A critical condition for the traditional way of fighting is that there is sufficient competition in the market for the targeted imports. Otherwise, the compatriot consumers will end up paying more and get hurt. In many cases, this latter case is true. This is why many say there is no winner in a trader way.

So can't a trade war be fought better with a better strategy? Instead of imposing tariffs alone on the imports, the policy is to force reduction of import prices on goods from the opponent country, and then levy the tariffs. The percentage of reduction can be deviced according to market conditions in the imposing country and in the opponent country. Should we term this as "managed pro-dumping"? With the price reductions and tariffs, the prices of the imported goods will likely stay relatively the same as before in the market. This way, the compatriot competing indutries don't get hurt much, the compatriot consumers don't get hurt as much, but the opponent country bleeds if they continue to export.

Stefan Jovanovich writes: 

There tariff question was one of the 3 issues that Americans disagreed about enough to make them a constant political argument. The others were (1) the expansion of slavery to new states and the Federal territories and (2) the currency question which was about everything from internal improvements to national banking. Neither side argued that there should be no tariffs, just as neither side argued that all slavery should be instantly be abolished. The question was whether tariffs could be protectionist or had to be for revenue only. In the current debate the revenue question has been largely ignored. I doubt that it will be much longer. For 2016 total U.S. imports were roughly $2.25 trillion. The average rate for the Walker tariff - written and passed by the revenue only side of the debate -was 25%. Applied to total imports a modern Walker tariff would produce $550 billion - 55% of all the employment taxes collected last year. I doubt very much that I am the only person who has made this back of the envelope calculation, and the geezers among us remember the last time a non-establishment Republican President considered tax changes based on numbers that could be scribbled on a napkin. What no American in the 19th century disagreed about was that foreigners should pay the taxes and leave Americans to worry about the costs.

anonymous writes: 

All taxes are (pick one or more) fascist, communist, democratic socialist, Gaullist, Whig…..They are, as the Libertarians justly remind us, enforced at the point of a gun. The question that must always be asked is which official theft is least threatening to citizens' individual liberty. Direct taxes are everywhere and always the worst because they are imposed on people directly (hence the name) and not simply on their transactions and property. That is why the Constitution did not allow them until the party of slavery, segregation and socialism and the theocrats (aka Prohibitionists) made their evil bargain. Tariffs work, for the same reason sales taxes do; the rates can, in a political economy not wholly corrupted by wage bribery, be set low enough that cheating is not worth the bother - as Amazon's recent conduct illustrates. (Collecting sales taxes has not affected their volume of trade, contrary to what do many analysts once feared.) The fundamental point to be understood is this: income taxes and employment taxes, in particular, demand the greatest oppression because individual extortion is built into the process of collection. People will cheat much more on direct taxes because they reward cheating. The rate differential is enormous (25% is the minimum) and the taxpayer has the "freedom" (sic) to characterize his/her/its transactions. (Contrast the enduring simplicities of the Uniform Commercial Code with the exponential mushrooming of every income tax law.). Like the drug laws and other forms of outright prohibition, direct taxes are guaranteed to be an abomination. No wonder Marx loved them.

Aug

16

 Arm waving aside, whenever they advocate about officials deciding about who should get what, I think of Czech or Hungarian limp bodies swinging from lamp posts.

Laborers don't want their good efforts expropriated. As do not those smart and industrious enough to create profitable systems in the first place.

There is a zero sum sense short-term, but the battle is positive sum and unending. The problem lies in subsidizing profiteering champions of your cause when you wind up on the wrong side.

Zubin Al Genobi writes: 

Under capitalist theory, the purpose of capitalism is to use workers labor to provide a return to those whose capital is being utilized. Labor cannot really be levered, and is limited in a way that capital is not. I suppose productivity is a leverage of labor but does not grow exponentially in the way capital does. The worker does not reap the benefit of productivity. Capital has mobility. Labor is less mobile.

Stefan Jovanovich writes:

Discussing commerce using the academic Marxist term "capiatalism" is like listening to a former communist explain why freedom is a good idea. They mean well, but they never quite escape the notion that liberty has to have an underlying dialectic. It doesn't. Money is movable only in the abstract; in practice, it's owners have to go with it. If they don't keep an eye on where it is parked, both digitally and physically, it has a terrible likelihood of disappearing. Labor can be levered; that is precisely what enterprise is - the ability to get people and machines to work together better, faster, cheaper. And cheaper is measured by unit costs of outputs, not individual rewards. The reason American and most other progressive countries' labor laws outlaw payment by piece work is that it rewarded the people who could work faster and smarter. The unacknowledged part of U.S. labor history is the struggle between the home grown craft guilds and the mass unions promoted by the (mostly) German immigrant believers in syndicalist labor organization. Of course, workers reap the benefits of their greater skills and productivity. The question is whether the law, in the name of social justice, will allow them to do so. My Polish grandmother figured out in 6 weeks how to work two looms at once and more than doubled her wages (she said her work had better quality when she could follow the rhythm of 2 machines). She then learned how much of poverty is about people acting like crabs in a barrel and preventing anyone from being able to climb out. A Socialist comrade complained that Hedwiga was not showing proper solidarity and that was that.

Peter Ringel writes:

Stefan's great reply saves me from a rant. He checks all the boxes. Some additions (not well sorted):

- there are leverage winners and leverage losers. More or less a zero-sum game.

- leverage facilitates the animal spirits, which is an important driver of an economy (H/T G.Gekko)

- labor is leveraged

- I agree with ZAG & Stefan: productivity is a form of labor leverage, especially the work-time saving aspect.

- we are all highly specialized workers with specialized skills, standing on the shoulders of earlier generations.

- In my whole lifetime I could not build a machine, that brings you this email. I can not pump the oil to build a PC, and If I could, I can not build the wafer or the chips, and if I could, I can not build the undersea cable or the satellite, and so on, yet I produced this email in a few minutes.

- I see this accumulated knowledge as leverage.

- by many measures, my wealth is greater than the historical wealth of British royals. I have a car. They had a horse (or two)

- "they" call it capitalism. "We" call it freedom. It's about where to move and apply spare capital most efficiently.

- Smith's invisible hand moves the investor and the laborer (and the politician). Every laborer is also an investor.- the German immigrant communists in America were an embarrassment. Something is wrong with us. An analysis would bring us back to Kafka and his characters.

- Stefan's Polish grandmother is exemplary: I believe the urge for freedom of the Polish people where always stronger compared to the Germans. I grew up in East Germany. In the 1980s from an age of ~8 to 12 my father took me to Poland each Summer. It was the Poland of Solidarność and it was the land of freedom for me. My definition of freedom back then was: CocaCola, Pepsi and arcade Games. None of this existed at my home. This was all that counts.

Aug

15

 The book Biological Invasions by M. Williamson contains many topics of interest to market people interested in the impact of one major move in one market on other markets. The book case studies of invasions of fulmars, rabbits, and impatiens. It describes the spread with chronological maps. Topics covered are the process of spread, contagion, diffusion, rate of natural increase, pests, spread, and interaction with the food web. There is a brief introduction to the mathematics and statistics of invasion. I find the book relevant to big moves in one market, say, wheat and its effect on say, the stock market, and the effect of an usual move in one market on another. The book is full of examples of invasion with their ecological effects; Williamson posits a rule of 10% to describe the 10 % of invasions that last, and describes the reasons that they fail and diffuse. The framework could be very useful for thinking about invasions in life and markets.

Jim Sogi writes: 

I live in Hawaii. About 8 years ago a handful of coqui frog came on some plants in a container and landed in Hilo about 90 miles away. A nursery 5 miles away brought to this side of the island. Over the next years they slowly but surely moved down and have invaded my land by the hundreds. They are very loud at night. In the dry season, they dry up and go dormant. As soon as it rains they return.

About 80 years ago a friend's grand father, who was a missionary, brought a few seeds of tussock grass from Africa. When he planted it and saw it spread, it tried to burn it, only to discover burning is what it needed to germinate. About 30 years ago, it only appeared in a few spots along the road. Within the last ten years, what was one bare black lava, is now completely covered by this grass as far as the eye can see over the entire West Hawaii region.

Amazon might be a good analogy. Available in 2008 for $8 its now taken over the entire retail landscape and a global shift. Look a Apple and iphones, valued at over a trillion, and the largest cap ever. It grew until now as far as the eye can see, everyone has one in their hand and is mesmerized by the device. These invasive ideas have the potential to change the world.

Several billion years ago, small microbes that ate carbon and produced oxygen changed the atmosphere to an oxygen rich environment where life as we know it began.

Stefan Jovanovich writes: 

The precursor to our species relied on a similar invasion–the rise of flowering plants.

Plesiadapiformes

"Primate Origins Tied to Rise of Flowering Plants"

anonymous writes: 

Although I don't agree with deep ecologists that humans are an invasive species, the spread of humanity over the earth's surface is impressive.

Steve Ellison writes: 

Cheatgrass, which originated in Russia, similarly displaced many of the original native grasses in the US Mountain West. Cattle grazing of the original grasses by early American settlers weakened those grasses and encouraged the spread of cheatgrass, which was unappetizing to cattle. Cheatgrass's high flammability also aided its spread once established.

When my daughter had a project to collect seeds of original native grasses for the local university, she went to the cemetery in Virginia City, Nevada, once a silver boomtown and now a tourist trap with a small fraction of its 1860s population. The sacred ground of the cemetery had never been grazed, and the original grasses were still flourishing within its fence.

 

Aug

13

 Crumb & Mairovitz's book about Kafka argues that 1. Kafka has been reduced to a single adjective by those who haven't read him thoroughly 2. Jewishness, Jewish mysticism, and the mystical experience of the Jewish ghetto where Kafka spent almost all of his life, are the real takeaways from his work.

The second piece was strongly coloured by a father who always called him a failure, who frightened him even as Kafka tended to the old man in his dotage. The US census shows that more 20 somethings are living at home (with more degrees than ever). Pace Charles Murray, changes in living arrangement particularly the American (versus, eg, Saudi, Surinamese, Pakistan, Burkina Faso) seem to me a likely change if the U.S. jobs picture stays bad.

Stefan Jovanovich writes: 

It is difficult to tease out of the census how many "children" lived at home while working in the 19th and early 20th centuries. Our present world only began with the Fair Labor Standards Act which Congress and the President enacted in 1938. It made employment of anyone under the age of 16 a crime; but the Census had not bothered tabulating the numbers for the problems that the Progressives were solving.

The 1900 Census questions
, for example, do not ask how many children are working.

Neither, for that matter, do the 2010 questions.

The American Community Survey–the "long form" questionnaire–does ask the question; but it has only been used since 1998.

It may be a scandal that people are living at home; but it may be that people are sensibly concluding that, in "average" residences that are 3 times the size they were in 1950, there is no more reason for the "children" to move out before they get married than there had been when most people still lived on farms.

I don't have the answer; but, then, neither does Charles Murray. He just likes the idea that there was once a golden era when all Americans were "normal".

Mr. Isomorphisms writes: 

Freud lived at home until a wealthy patron set him on his course of nervous therapy, setting him up with enough wealth to afford a home in which to put himself and Martha Bernays.

So did D'Alembert (inventor of the wave equation)–with his adoptive mother–until his 40s.

Early US video, eg the "Brooklyn ghetto fish market" (and you can cruise around on loc.gov or getty images to see more), shows a lifestyle much like what Mairovitz tells of Kafka's upbringing. As for people who neither would be worthy of depiction by Ms. Austen nor influenced the course of intellectual history–information on their lives is scarce indeed.

I'm not sure it's scandalous for families to share houses. For whatever reason, that became Americans' expectation, even though only a couple generations ago flophouses, boarders, county poorhouses, and many other arrangements were common. It's still an open question how money and jobs link to fertility and housing arrangements. Chinese migrant workers come to mind. I heard there is a law that children who work in factories MUST return on certain dates to their parents in the country. 

The part of Murray's most recent book that I like to focus on is the geographic segregation of rich and poor. He contrasts Manhattan in the 1950s to the 2010s. The point was made by Tom Wolfe as well (Bonfire of the Vanities is now 30 years old, if you can believe that).

It was a ten-dollar ride each morning, but what was that to a Master of the Universe?

Sherman's father had always taken the subway to Wall Street, even when he was the chief executive officer of Dunning Sponget & Leach. Even now, at the age of seventy-one, when he took his daily excursions to Dunning Sponget to breathe the same air as his lawyer cronies for three or four hours, he went by subway. It was a matter of principle. The more grim the subways became, the more graffiti those people scrawled on the cars, the more gold chains they snatched off girls' necks, the more old men they mugged, the more women they pushed in front of the trains, the more determined was John Campbell McCoy that they weren't going to drive him off the New York City subways. But to the new breed, the young breed, the masterful breed, Sherman's breed, there was no such principle. Insulation! That was the ticket. That was the term Rawlie Thorpe used. "If you want to live in New York," he once told Sherman, "you've got to insulate, insulate, insulate," meaning insulate yourself from those people. The cynicism and smugness of the idea struck Sherman as very au courant. If you could go breezing down the FDR Drive in a taxi, then why file into the trenches of the urban wars? (The same review critiques Mr Wolfe for drawing characters for whom he has no sympathy.)

Howard Gillette Jr's book on Camden, NJ, begins with a similar outlook from even earlier.

Hazzard of New Fortune, William Dean Howells

A HAZARD OF NEW FORTUNES.


At Third Avenue they took the Elevated, for which she confessed an infatuation. She declared it the most ideal way of getting about in the world, and was not ashamed when he reminded her of how she used to say that nothing under the sun could induce her to travel on it. She now said that the night transit was even more interesting than the day, and that the fleeting intimacy you formed with people in second and third floor interiors, while all the usual street life went on underneath, had a domestic intensity mixed with a perfect repose that was the last effect of good society with all its security and exclusiveness. He said it was better than the theatre, of which it reminded him, to see those people through their windows: a family party of work-folk at a late tea, some of the men in their shirt sleeves; a woman sewing by a lamp; a mother laying her child in its cradle; a man with his head fallen on his hands upon a table; a girl and her lover leaning over the window-sill together. "What suggestion! what drama! what infinite interest!

Gillette compares this to himself as a suburb-dwelling commuter living the good life whilst gawking at the commoners in the United States' favored image of its post-industrial failure. 

Aug

9

 Steve Ellison writes:

This indicator was also mentioned in Mark Hulbert's article in the Wall Street Journal on Sunday. People who cite it as an indicator usually implicitly assume that the aggregate value of the stock market should grow at the same pace as GDP over the long term.

I believe this assumption is flawed for two reasons. Privately held companies are not counted, so changes in the relative percentages of public and private companies affect the ratio. More importantly, the traditional capital structure of 50% debt and 50% equity, in which all upside value goes to equity holders, is a good reason why stock valuations should increase faster than GDP, especially over very long periods. Indeed the inflation-adjusted compound annual growth rate in the S&P 500 between the generational lows of 1982 and 2009 was 4.4%, significantly more than GDP growth during the same period. So I don't lose any sleep over this ratio being higher now than in 1929.

Stefan Jovanovich writes: 

In a recent speech Jorg Meuthen made a simple point: GDP calculations assume that civil servants are somehow as magically "productive" as the people who have to do work for a living and successfully sell their work for cash.

No one in the "mainstream" (sic) wants to do calculations that remove all the recipients of government payments from political economic calculation. It is, from the point of view of modern economics, heresy.

I took Big Al's elegant calculation and found its "private sector" derivative.

The results are precisely what spec and others see in their views of the data. Not at all a pretty picture. If you take private earnings from wages net of taxes as a proxy for the country's additions to wealth, the 5 years up to and including 2017 only recovered the amounts lost from 2007 through 2011. From the point of view of people to do work that other people actually pay for, the last decade has been a complete wash. It is only the gains for this year and beyond that can be counted as actual increases in wealth.

Jul

27

You cannot find a single textbook that suggests that World War I was a "big deal" in terms of the history of the causes of the Great Depression. There are literally a thousand references in the academic literature to Smoot and Hawley's awful tariff for every one that suggests that maybe all that spending that started in 1917 had something to do with it.

So, as my final rant for the day, let me share a few numbers. All of these are based on the Constitutional system of accounting, i.e. the U.S. dollar as the same fixed measure and weight of gold.

From 1791 through 1849, the cumulative budget surpluses and deficits of the U.S. Federal government resulted in a net revenue surplus of $70 million. From 1850 through 1916, the result was a cumulative net revenue deficit of $925 million– almost all of which was the result of the extraordinary expenses of two wars– the Civil War/War of Rebellion and the Spanish-American War.

From 1917 through 1919 (3 years), in the War to end all Wars, the U.S. Federal government had a net cumulative revenue deficit of $21,238 million.

As spenders, Obama and the Congress were pikers. In their 8 budgets they did manage to double the outstanding Federal debt; but Wilson and his boys (good male bipartisans all; there were no women in Congress) were able to increase the outstanding IOUs 20-fold in less half the time.

Jul

18

I've been aggravated for most of my adult life with slow drivers in the left lane. I notice the slow drivers the most during working hours, 8-5. It's very frustrating to have someone going 40 in a 55 while the right lane slowpokes are passing by. Looking at the dawdlers in the left lane, I cannot help but see that many of their vehicles are government owned cars, corporate vehicles, or delivery trucks of large companies. It occurred to me that those slowpokes are on the job, and can go slow because they're paid by the hour, or are on salary. There is no need for them to go fast, or even the speed limit for that matter because they're getting paid no matter what. In their case, time is not money. The small plumbing, lawn, and heating/air conditioner workers are paid by the job, and one never notices them going slowly, they seem to be in a hurry all the time. They will get on my bumper if I'm not going fast enough. In their case, time is money and they have to hustle. Thoughts?

Kim Zussman writes: 

I have the impression that drivers in expensive cars speed more and drive more aggressively. Not just hot-rodding BMers, but Mercedes, Lexus, and Range Rovers.

Time is money. To wealthy people that translates to high productivity, whereas hourly employees might take the opposite view.

anonymous writes: 

Kim will have his own opinion, since this is a comment about California and LA, in particular. My daughter Nora, a UCLA Med School graduate (and fan of Leonard Nimoy for his wonderful remark to the administration when they asked him to teach for a semester: "My price is an assigned parking place") thinks the rule for all traffic is simple: "Most expensive car goes first".

To be clear, the rule is what SoCal drivers do as Nora observed in 4 years of driving to the hospitals in the Basin. It is not her own approach, especially now that she lives in North Carolina where the rule is that everyone should practice for NASCAR by driving as close to the rear bumper of the car in front of them (they call it "drafting"). 

Gregory Van Kipnis writes: 

Worthy of a study. What are the underlying determinants of slower drivers sticking to the fast lane?

Several states have determined this behavior itself leads to more accidents as other drivers become impatient and outflank the offender by passing them on the right. These left lane turtles are subject to moving violations. Further there are TV public announcements criticizing this behavior.

Is there potentially useful market related information from such a study? A preponderance of people who try to slow down trading, markets, and decision making betray a distinct value system. I believe it has something to do with wanting to exercise control over others. 

Russ Sears writes:

For most traffic offenses it is easy to imagine a valid reason a driver would be agressive or have a momentary lapse of judgement. It occurs to me that the reason left lane turtles are so irritating is that there is no "good" reason for it besides passive aggressive malevolence for the productive such as suggested: their employer or other drivers. But as the rule goes its usually incompetence before malevolence. As the boomers age I expect this to increase. Perhaps this bodes well for Tesla and Uber.

Jun

21

The Pax Americana is changing – substantially

I want to bring this model to the attention of the readers of this site-– because it helps (me) understand many of the recent geopolitical events and the markets by extension.The model is as follows:

America is the most benevolent empire the world has ever seen–but an empire it is.

What changes now, is that this empire wants less from the world–than the world wants from the US and less than the US wanted from the world in the past.

The main reasons for this are good US demographics, US energy independence (shale), superior geography, the winning of the cold war and a dominant navy–by far.

If you are a country leader today and you want something from the emperor–you better bring gifts.

This is a substantial change. Previously the US gave the gifts (economical gifts and gifts as security guaranties ).

The Chinese in Xi Jinping and Japan do understand this – both currently compete for the love of Trump (and the love of America) and both bring gifts. China just pressured NK's Kim into submission and has probably stopped to oppose a Korean unification. Japan brought lot's of FDI.

(A brief excursion: This is a result of Trump's policy of maximum pressure It also shows Trump is well informed, active and not a fool regarding Korea. "Maximum pressure" most likely also includes some juicy stuff - like allowing NK to steal attack plans, exaggerating Warmbier, using MOABs nearby and high level defections )

Russia in Putin understands this. Putin is a player. He plays a weak hand excellently– as Russia always has.

Israel understands this. Besides many other things–this is why they are schmoozing up to Russia and KSA.

UK understands this. They bring two super carrier.

I thought France in Macron understands this–but after the G7 I am not sure.

Germany in anyone does not understand this change. (Lots to say here, but I am currently enjoying meine Schadenfreude about this.)

Canada in Trudeau does not understand this–though the eyebrow might know and left . Canada and Mexico are special cases, because they are hard-wired into America' s economy.

One can go around the globe and watch how players act against this new reality of America's shift.

What is great about Trump is: a) He is a tweeting Tom–his tweets make geopolitics nicely transparent b) He acts according to the model (consciously and unconsciously).

(The above is heavily influenced by a series of texts by Peter Zeihan - I Think They Get It Now, Part I).

Stefan Jovanovich comments: 

The U.S. is no more benevolent than any other empire run by popular election. Like the Athenians and the English and the Republican Romans, we have always let majority self-interest define the morality of our decisions. The dominance of our Navy is as fragile as the superiority of the British was after World War 1. Our aircraft carriers are now as technologically and financially obsolete as Jackie Fisher's battle cruisers were ib 1919. But for the German decision to commit their limited shipyard capacities to the building of turret armed battleships and cruisers instead of submarines and carriers, "the Allies" would have lost the Battle of the Atlantic. The Chinese seem to be making the same mistake by putting their efforts into carrier battle groups instead of stealthy drone/sea to sea missile platforms. The British should know better; for the cost of these 2 Mary Rose show projects, they and the Germans could have developed silent running submarines that would dominate the sea lanes from the Gulf of Arabia to the Baltic and Arctic Circle.

None of this has any relation to Trump's cleverness about shifting tax burdens from U.S. wage earners to American corporate importers of goods and foreign workers. That is, as P R notes, truly brilliant political economic thinking as apt for the U.S at this time as Lord Salisbury's were for Britain after the disasters of the previous perverse reformer (Gladstone then, Obama now).

The Admiral (actually a retired Navy Captain who shares David's cursed condition of being a lifelong Orioles fan) tells me I am half wet about the Germans in WW 2. Submarines–yes, aircraft carriers– never. Land-based 4 engine bombers were a far better choice.

Jun

19

 "Mergers Would Make AT&T, Comcast World's Most Indebted Companies"

In the last week in February, 1901 J. P. Morgan, Elbert H. Gary, the founder of Federal Steel in Chicago, Charles Schwab, President of Carnegie Steel, and William Henry Moore, owner of National Steel, incorporated United States Steel. On March 2, 1901 they entered into an amalgamation agreement. U.S. Steel's capitalization, most of which was debt, was $1.4B. This was the first combination in history to be a "billion dollar company".

Jun

15

  During WW1, in 1917, the price of wheat went to a record $3.25 a bushel. Using an online CPI calculator(courtesy of the Bureau of Labor Statistics), that price in today's dollars would be $60.24. A far cry from the $5 and change wheat is trading today. Grains in general have had a long term decrease in price over the past couple hundred years. We owe this price decrease to improvements in technology. After all, in 1917 a farmer was lucky to get 14 bushels of wheat an acre while today a farmer can anticipate a yield of over 55 bushels per acre….and the cost of production in both time and labor has decreased substantially. One wonders what the yields will be like in another 100 years.

Brendan Turner writes: 

Gro Intelligence put out some interesting data points on fertilizer and pesticide use in the US.

From them:

"Sixty five years ago, harvested area of corn sat around 77 million acres, and average US corn yield was just 54 bushels per acre. Presently, corn acreage is at 82.7 million acres, and yield now sits at a median of over 170 bushels per acre. In the 1940s, soybean harvested area was at just 10.7 million acres. Today, there are around 89.5 million acres harvested, representing an increase of 736 percent. Soybean yield was less than 20 bushels per acre in the 1940s, but now averages 49 bushels per acre."

From me:

While the growth in US grain and oilseed production is no doubt impressive, the rise of other agricultural players in South America and the Black Sea have had the largest influence on keeping a lid on prices thanks to their explosive production.

Back home in Saskatchewan, every year, our family farms about 15,000 acres of pulse crops like lentils, peas, and chickpeas. The varieties for these crops were mainly developed by university and CDN government partnerships and the large majority of the harvest of these pulses have been shipped to India or the Middle East. However, for the last decade or so, these varieties have been exported to places like Kazakhstan and Russia and now, the Black Sea is replacing Canada as the staple exporter of pulses to these markets.

Simple equation: Lower costs of production by new players –> lower selling price points –> downtrend shift in margin for major producers –> potentially fewer acres planted by major producers (assuming demand isn't increasing proportionately to supply)

Of course, this thesis gets thrown out the window when there is a drought in a major producing country (or any commodity). However, In a drought situation, for markets like pulses where there is no futures market, speculation is a bit more suppressed. By this, I mean less volatility and thus, decreased opportunities to capture value within volatile markets like you might w/ corn or soybeans or wheat.

Stefan Jovanovich writes: 

$3.25 in 1917 is equal to today using the gold currency unit of account As the Watsurf notes, the BLS with its CPI calculation estimates today's nominal dollar price as 18.53 times the record 1917 price for wheat. If you use the 1917 dollar price as the gold currency unit of account (gold adjusted for the change in official price in 1933 and the changes in the open market price of the metal and the relative prices of the dollar against other major currencies since 1973), the change is even more dramatic. $3.25 becomes $133.90 - a multiple increase of 41.12. As always, the BLS CPI calculations fall far short of the actual price collapses of currencies against physical commodities.

For an average acre of land suitable for wheat growing the total yield in 1917 was $45.50 in gold currency units of account (gcus). At that time Kansas wheat acreage sold for roughly $200 (gcus). Today the same acreage produced produces a total yield of $6.67 (gcus) and sells for $50.87 gcus ($2100 in current nominal dollars).

So, based on P/Es measured in gcus, the prices for Kansas wheat acreage were a seeming bargain in 1917 (less than 5 times gross yield).

The difficulty is that P/Es do not seem to be very useful as predictors of what comes next. Kansas wheat land prices peaked at slightly less than $300 in gcus in the 1921; nearly a century later they are selling for less than 20% of that price using the same unit of account.

I defer to our expert and others for any speculations about what may happen to Kansas wheat land prices over the next century. The current P/E is - once again - a relative bargain: 7.6 times gross yield. 

Jun

13

 Why are we at war with Canada? According to the Trump Administration, there's a net trade surplus between US and Canada (goods and services):

"The U.S. goods trade deficit with Canada was $17.5 billion in 2017, a 59.7% increase ($6.5 billion) over 2016."

"The United States has a services trade surplus of an estimated $26 billion with Canada in 2017, up 8.0% from 2016."

Stefan Jovanovich writes: 

1. Cars and Auto Parts.

Canada manufactures 4 million cars. It buys 3 million and exports 1 million to the United States. It is also the largest auto parts exporter to the United States.

2. Marketing Boards

Canada uses the agricultural marketing board mechanism for controlling production and prices of domestic dairy and other "grocery" farm products. To support this mechanism the marketing boards restrict all imports by tariff and by quota while allowing Canadian "surplus" production to be exported at foreign market prices.

Question: Who would profit most from the shift of car and auto parts production to the United States? Whose domestic production of "grocery" farm products would be boosted by the exclusion of "surplus" Canadian production?

Answer: Agricultural and car and auto parts producers in the Great Lakes States of the Mid-West

Ain't the study of actual political economic events much more interesting than further refinement of marginal utility theory?

Geoge Zachar writes: 

The reports I've seen indicate Canadian dairy protectionism is driven by Quebec…something the the anglophone provinces deeply resent, as they're forced to pay up for dairy products.

So, in addition to being seen supporting important US constituencies, Trump is deepening political divisions north of the border.

Stefan Jovanovich writes: 

The Canadian Parliament decided to "stand with Canadian workers" when President Trump announced the steel and aluminum tariffs.

I doubt very much that they have examined their own history with regard to trade "wars". If they had, they might have been tempted to take President Trump at his word about the need for "reciprocity".

In the Elgin-Marcy Treaty, signed in 1854, the U.S. and London entered into a free trade agreement. As the Wikipedia article notes, the Canadian business interests threatened to ask the U.S. for annexation if Britain did not work to open the U.S. markets to Canadian exports. Under the Treaty timber and wheat and coal were admitted to the U.S. without duties or quotas; the existing 21% tariff was eliminated by the U.S. The reward for the Americans was open navigation on the Great Lakes and St. Lawrence and access to the Grand banks fisheries. The arrangement was broadly popular and hailed as the Canadian-American Reciprocity Treaty.

Within 4 years the Canadians decided that they needed to protect their manufacturers. The Cayley tariff of 1858 and the Galt tariff of 1859 raised the duties on imported manufactured goods 20 per cent. For the new Republican Party, this was an absolute Godsend. In 1860, as now, the United States had the lowest tariffs and least restrictive trade rules of any country. Why, Congressman Morrill asked, should American producers have to accept foreign competition but be shut out of foreign markets? Morrill shifted the discussion on tariffs from being a question about protecting Northeastern manufacturers to one for the nation as a whole. He introduced his bill by announcing this change: "In adjusting the details of a tariff, I would treat agriculture, manufactures, mining, and commerce, as I would our whole people—as members of one family, all entitled to equal favor, and no one to be made the beast of burden to carry the packs of others." The "free trade" Democrats did not have an answer.

By 1861 the U.S. had increased overall tariffs from 17% to 26%; by the end of the Civil War the average rate had increased to 38%. It was to stay there until the Underwood tariff (the Revenue Act of 1913).

Jun

12

Here in the bleachers we are entertaining ourselves during the half inning and pitching changes by discussing FX. This has more than a purely academic examination since our handicapping spreadsheet for the U.S. stock market keeps offering ADRs among its "can't lose" picks. The magic formula has us owning positions in companies in Taiwan (TSM), China (NTES, SHI,YY) and Argentina (TGS); companies whose stocks trade in non-U.S. dollar markets are now 20% of the List.

So, for 1 out of every 5 stocks, the "Buy" recommendation involves a double speculation– a long on the companiese individual fortunes and a short on the U.S. dollar.

Keynes hoped that the very question of foreign exchange would disappear, that money would cease to be part of economics by becoming universally invisible. His dream was for all FX clearings to be handled through the Bank for International Settlements - the intermediary first established to receive the German reparations payments that were to be financed by U.S. loans of gold. The reparations were not, in fact, paid, even though Keynes never revised his opinion that the Treaties by which Germany promised to pay them were somehow the main cause of the Great Depression. Those of you fortunate enough to have studied economics in and after college know that this is still the Number 1 explanation for the collapse in domestic and international credit that occurred between 1927 and 1934. In any case, Keynes' dream of the Bancor never came true; on the contrary, clearings between countries remain stubbornly ties to particular national currencies and the money of the European currency bloc aka the Euro.

So, the question remains: which money offers the best chances for relative gain. The smart(er) guys out here in the bleachers think that FX is THE QUESTION. Frontrunner, the most obnoxious of us all (this year he is wearing an Astros cap) - points out that, if you use the world's private currency (gold) as a unit of account, for a Japanese investor the Nikkei is currently selling for the same price being offered in 1978.

May

22

 I was reading this: “Our main finding is that economic data do not appear informative enough to uniquely identify the relevant predictors when a large pool of variables is available to the researcher. Put differently, predictive model uncertainty seems too pervasive to be treated as statistically negligible. The right approach to scientific reporting is thus to assess and fully convey this uncertainty, rather than understating it through the use of dogmatic (prior) assumptions favoring sparse models.”

And Karl Popper’s “Science as Falsification” came to mind. 

Peter Grieve writes: 

I’m sorry to say that there is a movement in physics to abandon Popper’s ideas about falsifiability. This seems to be motivated by the fact that string theory and the multiverse theory are at best extremely difficult to test.

Those still supporting Popper are called Popperazzi. Some of them call string theory “mathematical theology”.

Kim Zussman adds: 

Is an untestable theory that fits observations necessary to discard?

Stefan Jovanovich replies:

A theory that “fits” - i.e. usefully works with - observations cannot be discarded until those observations challenge the theory’s ability to predict events. The theory may simply be lucky enough to fit what people and their instruments can “see” and be better than chance at estimating what will happen in the future; but that “luck” will still be sufficient know-how until repeated observation reduces its foresight to no better odds than chance.

Observation is the test. Until Eddington’s observations of the eclipse in 1919, there had been no observations of the spacial interaction of matter and light that contradicted Newton’s theory. Eddington’s observations did not “prove” Einstein’s theory was “settled science” as the warmists like to say; they proved that Newton’s theory was not as useful an approximation of reality as general relativity.

The point that Eugene Fama keeps making is that economics, as a general theory of behavior, has yet to be even lucky over any extended period of time. Its interpretations of information theory seem to work fairly well in the limited domain of financial transactions but only to prove that risk’s rewards are only verifiable after the fact.

Meanwhile, we enjoy the game and keep blowing on the dice when it is our turn to roll.

May

17

"As of March 31, 2018, total household indebtedness was $13.2 trillion, $536 billion higher than the previous peak in the third quarter of 2008."

The total household debt was "18.5 percent above the trough in the second quarter of 2013."

(full article here)

George Devaux writes: 

Ratios are important here.

Number of households/individuals- resulting debt

Same for income level (capacity to repay debt)

Same for assets - resulting debt to asset ratios

I apologize for suggesting math to a person whose wordsmithing I relish–in the sense of consuming as a gourmand.
 

Apr

18

 Why MC Rove's way ahead of the curve prediction that the "automation is going to take all of our jobs" theory was not correct:

"Why Isn't Automation Creating Unemployment"

Stefan Jovanovich writes: 

Consider the source: a law school in Boston.

"In the more distant future, the story might be quite different and service sector jobs might experience the kind of declines we now see in manufacturing."

1. Manufacturing employment in the U.S. is actually increasing because 3-D printing and other new forging and fabricating technologies are reviving job shops.

2. "Service" sector jobs are already declining. The big employers now are the box stores - Wal-Mart, Lowes and Home Depot to name a few, medical care, and "education". The box stores and other retailers have already seen peak employment. The non-profitistas come next.

Apr

16

The use of deception by the US in the missile strike on Syria where they sent destroyers to the Mediterranean and had the Syrians thinking the missile strikes would come from there but in actuality they came from 3 other directions was similar to the market deceptions where they have a market that is usually associated with a move like bonds down which usually is associated with S&P up but then S&P tanks as it did on February 5th.

Anatoly Veltman writes: 

Interesting. Does anyone have good number: were 70% of Tomahawks shot down, or only 30%? 

Stefan Jovanovich replies: 

There are no "reliable" sources for such matters, but it is usually wisest to take the military reports first as "data".

As the report notes, the attack came from US Air Force bombers, Navy ships and a Marine electronic warfare suppression support aircraft. It is also careful to specify that there was no intrusion into "Syrian" air space by any plane. Only the munitions "invaded".

The reported "feint" is mostly Washington Post nonsense. The attacks came from every point of the compass except North. (Theoretically, the U.S. destroyers in the Black Sea - the Carney and Ross - could have launched their missiles; but that would have been a direct provocation of Turkey and Russia.) The French frigate and the British Virginia class submarine fired their missiles from the Mediterranean. The American attacks came from the Red Sea and the Persian/Arabian Gulf. The Syrian AA capacities, which are entirely Russian, were limited.

What I find notable is that this was very careful gunboat diplomacy on both sides. The Americans, French and British clearly warned the Russians and Syrians that there would be an attack; the buildings and their surrounding areas had been completely evacuated. The Russians, in turn, were careful to keep S-400 systems turned on but they did not launch their ground-to-air missiles while the attacks were underway. 

Anatoly Veltman writes:

Wow. Stefan's opinion, although carefully qualified, tends toward 0% (?) Russian Minister claims 71%.

Stefan Jovanovich responds: 

The truth is always the first casualty. My initial report had the British attack coming from a Virginia class submarine in the Med. Right weapon, wrong country. The sub was the U.S.S. John Warner.

The British Forces net has a detailed report of the weapons used.

Here is the report from TASS.

The Russian report says that the defensive weapons used were the S-125, S-200, Buk, Kvadrat and Osa air defense systems. The Pentagon referenced the S-400. The differences among these weapons is considerable.

The S-125 was introduced by the Soviets in 1961.

The S-200 also dates from the Cold War but is still in active service - hence, the Wikipedia page. The Syrian inventory dates from the 1980s.

The Buk, Kvadrat (Kub), and Osa are of a slightly more recent vintage; but none would be called "modern".

The question to be asked: Why would the Russians omit any mention of the S-400 when the Americans had identified it? The S-400 is the one system that is not a worked-over antique.

Apr

3

It appears many American media are worried that the US will lose the trade war against China. That sounds very cowardly. The trade war will hurt parts of the American economy, but how can it lose? For every $1 America sells to China, it buys $4 from China. So China's loss will be at least 4:1 vs America's if the trade war goes into full motion. Plus, a few of the big imports by China, like soybean and Boeing, are irreplaceable. Other things like the semiconductors are critically needed by Chinese economy. So China doesn't really have a lot of weapons.

Any other opinions?

Stefan Jovanovich writes: 

Trade wars helped build the United States. So it should hardly be surprising that the people most dedicated to tearing the country down are hysterical at the prospect that county may be having another one. 

Stef Estebiza writes: 

America has already lost.

You have decided to invest in China/Asia rather than in your population. I would not see it only at the "trade war" level. Globalization has allowed you to ignore internal problems, your population, to focus on foreign profits. The structural problems are the same worsening. Either you decide to reduce your earnings by investing in your own home but by recovering structural problems, your population…or you will have to keep it.

Unbelievable watching the children, the students who survived the massacre in the streets demonstrate against the weapons without the support of the American political parties. It speaks volumes about the real situation of America.

If there's one thing you really have to worry about losing, it's your population…that you've already lost for the interest of a few.

Here in Italy we rejected right and left, the major political parties. There are two major parties in the government, both as out of the popular discontent. If Americans wake up and form a third party (your constitution permitting) you can put Republicans and Democrats in mothballs.

Then either raise your population from poverty, put back a little balance in the system, or they will show you the green mice.

Stefan Jovanovich writes: 

"America" has not invested in China/Asia. Even our war spending kept most of the money here on-shore. (I can remember lobbying to abolish the draft in 1971 after I got out of the Navy and running up against all the Congressmen whose districts were prospering from the war orders.)

When I wrote that trade wars helped build America, I was not being facetious. The times when the United States has been a taker in foreign exchange have been the times when the country's population and wealth have grown. Whenever the U.S. has been "protectionist" - i.e. let people and money come here freely but charged goods and services an admission fee, the place has boomed. Whenever "prudence" - i.e. worries about paying off the debt - and "internationalism" - i.e. let's become allies with the French, British, etc., etc. - has guided Congress, we have "lost", as Stef puts it.

We certainly lose whenever "policy" takes hold and questions of "structural" reform become more important than the common sense that even Congress accepted before our best and brightest all went to graduate school - don't let people come to the country with diseases or criminal connections and choose: (a) free trade for goods and services and no immigration OR (b) open immigration and tariffs. Most of the time the political majority chose (b). They are doing so again right now.

Mar

21

 Sobering article: "The Rise and Fall of the American Farmer"

Stefan Jovanovich writes: 

As Tennessee Williams' best line from Camino Real puts it, "you can file this under C - for crap".

"As early as the 1830s, American cash crops had arrived as a powerful force in international markets."

American grain exports had a brief honeymoon during the Crimean War. As soon as that ended, imports from Russian resumed; and the U.S. exports collapsed. Before the Civil War any surplus produced by the U.S. "farmer" (sic) went to the internal market; and that was slow to develop. Chicago did not develop its first trading exchange for grain until 1848; the second active market - in New York - only developed because of the demand from the Union armies and it waited until the second year of the war to open. The international trade in grain came after the war; Kansas City opened its exchange in 1869, Duluth in 1870 and then Minneapolis in 1881.

"By the time the Civil War began, US imports were so pivotal to European economic stability that Britain and France considered the possibility of sacrificing decades of moralistic opposition to slavery and openly intervening on behalf of the slaveholding confederacy. King Cotton was responsible for the existence of millions of European jobs at the time, especially in the industrial sector."

There were no "decades of moralistic" opposition to slavery in France; the French looked to the Confederacy to join them in turning Mexico into a latifundia. Britain's policy towards the U.S. was determined entirely by their calculations of how much of a threat the Union armies would be to Canada. If the Confederacy had a chance to win quickly, then support for them would - theoretically - help protect Canada. (Some wiser heads suggested that it might, in fact, do the opposite; that, having lost the South, the North would do its best to compensate by swallowing Ontario and Quebec and the plains provinces.

Cotton had been King, but the Confederates had terrible timing. The textile business in the Midlands suffered a collapse in 1861/2; merchants there were selling their raw cotton inventories to the New England mills, which were busy handling war orders - not just for uniforms but for gun cotton. Grant, who understood these things, was furious with his father and the Jews who had the monopoly on cotton broking in the South because they were selling the contraband to American buyers, not European ones. By the time textile manufacturing revived in Britain (and France and Germany) the American blockade had taken hold; and the Europeans had found other sources for their fiber - in Egypt and India.

Mar

8

Robots were going to strike terror into the hearts of all workers and devastate incomes and the economy. They were cited as a reason to sell stocks back in 2009-11 by our resident robot pundit, actually one of the best times ever to buy stocks.
Where they at, though?!

Did they go the way of "peak oil?"

Stefanie Harvey writes: 

One of the issues with robotics and automation is that designers frequently anthropomorphize their construction and use cases.

This is silly (with the exception of "companion" robots.)

Effective robotics enhance or extend human competency. Lift more, survive harsh environments, no need for down time.

The technology needs a bit of improvement but one driving factor is that human life is cheap. As we near 8 billion people we are the ultimate commodity; there is no cost driver for widespread adoption. Yet. 

Stefan Jovanovich writes: 

Stefanie is letting the mad Rover down easy. No one whose enterprise must do things better, faster and lower price has paid any attention to the Department of Labor statistics since public employees became unionized. No one who cares at all about people having better lives thinks "robots" (sic) threaten anything. If applying the labor theory of value really worked to produce wealth, ditches would be dug with teaspoons instead of mini-backhoes.

anonymous writes: 

Based on capital investment, it appears businesses are not even bothering to build the robots. Check out this tweet with chart from Adam Tooze:

"Historically, tighter labour markets in US drive wages and capital substitution —> higher investment. Since 2014 that pattern has uncoupled. @CapEconUS @SoberLook"

Jan

30

My 1-syllable half-namesake ("Stef") has offered up this phrase as part of his latest Gini-inspired solution to the nation and the world's problems. If only.

Tariffs, like all other taxes, are fundamentally unhealthy. John Locke would not have made such a fuss about the social contract if the idea of a deal were not the necessary Big Lie on which the revenue depends. Taxes are the only payment transactions that are not contracts; they are always and everywhere legalized extortions.

The W,M & F cabal knew this when they wrote the Constitution and accepted the Bill of Rights as part of the necessary whip count to get the votes of the amateur Virginia bar. They also knew that relying on the States to pay the Army and Navy would never work. The local extortionists - the State governments and their voters' interests - would always keep the money at home, even when it was used to pay the militia and reward privateers. Tariffs were the only form of taxation that could be made national precisely because they were the one tax that foreigners could be made to pay without instituting the very oppressions that had led to the Revolution in the first place.

What W,M & F and their wisest successor - the 2-term drunken butcher - could not have imagined is an America with an IRS and compulsory indoctrination camps. Such a poverty of liberty was simply beyond their conception.

Jan

13

 I sometimes wonder how big agrarian reformer traders like palindrome and drunk and upside down man and his twin can make money retrospectively outside of service loopholes and I think a large part of it is creating a buzz concerning their already held positions and another part of it is they made money in the past but haven't made as much as the market in the last x years? What do you think?

anonymous writes: 

Some time ago I corresponded with professor Malkiel about the WSJ dart-throwing contest. I pointed out that the pros had (slightly) beaten the darts. Dr Malkiel's response was that this was explained by the announcement effect: People reading the picks of experts (vs darts) bought the expert's picks at the next open - believing the experts were in fact experts. This publicity added to the the expert's returns. And controlling for this, there was no difference - like the thousand monkeys composition problem.

As far as upside down people and sages, in a world of lawyers surely it is malpractice not to advertise positively one's positions.

Peter Ringel writes: 

Two days ago the  center-most headline on drudge was:

"CHINA MAY HALT PURCHASES OF US TREASURIES –Markets Rattled" (It linked to articles on Bloomberg and cnbc.)

An emotional argument and IMHO not the real driver of the current leg down in bonds. Bonds made some sort of short-term low.

I thought: "Wyckoff Lives", because it seems to be Wyckoff-style news-manipulation.

Today, I read the first paper on Kora's list: Front Page News: The Effect of News Consumption on Financial Markets by A. Fedyk

and I think: "Wyckoff Lives!"

- The paper gives empiric to the fact, that front-page news on BBerg create higher volume and stronger drift in the minutes after the news-release – than non-front page news "of equal importance".

- The paper defines three categories of news PI("primary important"), SI_1("secondary important" on front page) and SI_2("secondary important" NOT on front page)

- The paper discusses the relation of SI_1 and SI_2

- The paper does not research the impact of PI-news - probably because we don't know what the control group (of news) would be .

I think it is an easy step to conclude that this behavior is gamed. E.g. if someone wants to exit a position, he will attempt to place news on BBerg's front-page, create a buzz and exit into that "artificial" volume.

The above describes a potential manipulation to exit a position and a resulting reversal (intraday).

Now I wonder if there are already papers that research news-buzz impact longer-term and for directional moves.

To research this I think a major problem is how to categorize and qualify the news and what would be the control group? E.g. for the "story stock Tesla" (the one with the buzz), what would be the "non-story Tesla"?

Stefan Jovanovich writes: 

The question about the last year's stock market rise is whether the gains are to be measured in dollars or Euros. In dollars it has been a big deal; in Euros it was an 8% net return, less than half what could have been earned without the stock market risk by simply being short the Almighty dollar and long the Euro. 

I agree FX impact & risk is often overlooked by the (global) public. We just had it in Poland, where a lot of private real estate debt was in USD. Then people were in trouble, because of the strong USD. The polish Gov ended up forcing the creditor to convert to zloties (the polish currency).

Jan

12

The Oriental Institute sponsored a dual address by an Egyptian and Hittite scholar about the first recorded battle in history–Kadesh.

I found it fascinating.

anonymous writes: 

I find the Hittites fascinating myself. They were very innovative. I think we still don't know how they got water into their mountain capital.

If I remember it correctly, for this battle they also had the innovation of better wagons. They moved the axis and were able to place more fighters in one wagon. The Egyptians had only two (?) per wagon.

Some months back I argued here that the military is a driver of innovation. I was in part thinking that because of the Hittites.

Dec

29

 Today is the anniversary of their deaths, Albertini in 1941 and Macmillan in 1986.

Between them they explain everything that needs to be known about The Great War. Albertini's work–the Origins of the War of 1914– is the best single work of history I have ever read. Macmillan's experience as a young man says it all.

From the Telegraph: "In his year at Balliol, 28 students went to the Western Front. Only Macmillan and one other came back."

Dec

12

Grant's reputation for "corruption" is based entirely on his committing two sins: (1) he insisted that the government actually keep accounts, and (2) he called the bluff of the St. Louis Germans who were furious at his being willing to allow the accounting to include a review of the excise tax accounts that had been their own private slush fund.

Trump seems to be going down that same path towards academic reputational hell. He is actually going to audit the DOD.

Vince Fulco writes: 

Reminds me of that sub-plot in the movie last emperor when Pu Yi asked for an audit of the family's warehouses since he didn't trust the eunuchs who had been administrators to the family for decades (centuries?) and suddenly a day later, everything went up in flames.

Jim Lackey writes: 

Mr. Stefan's point is this, Ralph. I was a rookie trading the Nazz. SOES, Daytek and my first backer now in heaven.

We had an amazing edge, in execution. There was five 25 year olds sayin, "this can't last! How do I pay the rent much less support my Austin, Lack?" Magic words… "The warehouses are full" Hugs tech bubble. Limit up every week. We make selling them only when we are certain. That was the point. You made the call. Plz. Never call the turn. We all know.

Dec

7

 The handful of SpecListers who have had investments in crypto are well past 30 (no offense intended, you don't look it).

But yes, many of the enthusiasts are millennial. Having come of age in the depths of the financial crisis, they have a keen distrust of the banking system and the political establishment that reinforces its oligopoly power and socializes its risks.

I have cut and paste the answers I got from a very good friend who really can hack the math and the digital mysteries of cryptocurrencies. He is 30.

My contribution is the choice of a sound track.

Stefan Jovanovich writes:

"A Brief History of Bitcoin Hacks and Frauds"

Sum up the number of stolen bitcoins just from the 7 hacks mentioned by that article and multiply by current price. Adds up to greater than $13B.

Out of all the bitcoins ever mined, 6.6% of them were stolen from just those 7 hacks.

And that is with bitcoin basically only used by tech savvy people. Imagine how much worse it would be if bitcoin went mainstream?

This site offers a retrospective on 45 different hacks.

Dec

4

Bubbles Excluding Tulips

Andy Aiken writes:

Since bitcoin is one of these emotionally freighted subjects that permits otherwise serious investors to unironically post charts that juxtapose data from highly disparate eras, contexts, and time frames, I might as well contribute one too.

Stefan Jovanovich writes: 

It is not emotional, Andy. If it were, I and others would not have complimented you, both on the List and privately, on a great call. What the professionals on this List have taught me is that price movements are themselves information, independent of the units they denominate. The difficulty with your chart is that it is not a display of prices over time. What I find paradoxical about cryptocurrencies is that their growth in popularity and transaction volumes has been accompanied by a rise in price that is independent of any increases in outputs or payouts. All other mines in history that have seen dramatic price rises in their asset values have seen even greater increases in outputs even as the output prices dropped–salt, silver, gold, coal and even diamonds all followed this pattern. The asset prices for the leaseholds for the essential commodity of the modern age–oil & gas energy–have confirmed this same pattern. Rockefeller became the wealthiest man in history by owning the distribution and production of a product whose price plummeted even as consumption soared.

Clearly, cryptocurrencies, like Tesla's newly imagined giant batteries, defy all the known rules. Congratulations on the unprecedented and profitable levitation. 

Andy Aiken replies:

I didn't mean to say that your points, or the discussion on the List, were emotional. It's been a rational discussion here, although I do think dismissing bitcoin as a bubble similar to the South Seas stock bubble shows an insufficient understanding of bitcoin as well as the South Seas affair.

My "emotionally freighted" reference had performances such as this recent Joseph Stiglitz interview in mind. "We ought to just go back to what we have always had" (i.e. the state prints money at will and deliberately impoverishes the middle class over multiple generations) One of the B'Berg commentators even chips in with his pathetic misunderstanding of Marx, as if to red-bait libertarian viewers who might consider buying a few satoshi.

I was thinking as well of this chestnut from Paul Krugman, another courtier to the flexions:

When I have been in doubt about how to live or invest, doing what Krugman and Stiglitz consider evil has always been a rewarding choice.

What is unique about bitcoin is that unlike diffusion of earlier technologies, in which investors participated by investing in representations of the technology (startup companies), in the case of bitcoin and a handful of other platform cryptos, the coin is definitionally equivalent to the technology.

The dynamics driving the price are aligned with Brexit and the "surprise" election of Trump. Bitcoin is a Cassandra for our age.

The price could of course drop by 50% or 90%. As Jayson points out, it has dropped by this magnitude several times previously. It's the nature of innovation that isn't "managed" by the state.

Nov

29

 Change Research has just released their 3rd poll on the Alabama Senate race. They show Roy Moore at 49%, Doug Jones at 44%, with 7% undecided and 4% planning to write-in another candidate.

The partisan allocation is - for Alabama - extremely cautious; it may understate the overall Republican share of the electorate, but it is - by far - the most scientific weighting of any of the polls taken for this race. They use the 2016 Presidential vote tally, as self-reported by the sample.

Donald Trump, the Republican 58.4 Hillary Clinton, the Democrat 32.5 Gary Johnson, the Libertarian 4.6 Did not vote 2.9 Jill Stein, the Green Party 1.5

Their sampling was done over the weekend so their data is - right now - the only survey information that is current. RCP and others are using what is very stale data. Nate Silver and Co. - the usual Leftist suspects - seem to be unusually slow in incorporating the results into their data. That could be taken as a sign.

The cross-tabs for the Change Research poll are fascinating and wonderfully detailed.

Nov

28

Change Research has just released their 3rd poll on the Alabama Senate race. They show Roy Moore at 49%, Doug Jones at 44%, with 7% undecided and 4% planning to write-in another candidate.

https://tinyurl.com/yb739e9z

The partisan allocation is - for Alabama - extremely cautious; it may understate the overall Republican share of the electorate, but it is - by far - the most scientific weighting of any of the polls taken for this race. They use the 2016 Presidential vote tally, as self-reported by the sample.

Donald Trump, the Republican    58.4
Hillary Clinton, the Democrat    32.5
Gary Johnson, the Libertarian    4.6
Did not vote    2.9
Jill Stein, the Green Party    1.5

Their sampling was done over the weekend so their data is - right now - the only survey information that is current. RCP and others are using what is very stale data. Nate Silver and Co. - the usual Leftist suspects - seem to be unusually slow in incorporating the results into their data. That could be taken as a sign.

https://www.mediaite.com/online/will-roy-moore-actually-win-an-running-analysis/

The cross-tabs for the Change Research poll are fascinating and wonderfully detailed.

https://tinyurl.com/yaldfxby

Nov

14

"Low Volatility and Investor Complacency - the NY Fed Offers An Interesting Analysis":

As discussed in Robert Shiller's Nobel Prize lecture, the original puzzle in financial economics was why stock prices are so volatile relative to dividends. According to the Gordon growth formula, stock prices and dividends should have the same volatility. In the data, however, stock prices are significantly more volatile than dividends. Since the 1950s, stock prices have exhibited 16 percent annualized volatility. That is almost 10 percentage points higher than the "fundamental" volatility of dividends, which has been closer to 7 percent (for example, see Shiller's annual data).

Shiller interpreted these results as evidence that stock prices were inefficient, with investors potentially succumbing to animal spirits, or "waves of optimism and pessimism," to explain the large variation in stock prices (see John Cochrane's discussion of this view in a Grumpy Economist blog post) . Importantly, however, Shiller's analysis assumed a constant discount rate for computing net present values. Subsequent work provided evidence against this assumption. Time-varying discount rates are now a standard feature of asset pricing models that can explain the excess volatility of stock prices relative to dividends (see Discount Rates by Cochrane or Monika Piazzesi's summary of related asset pricing research).

As shown in the previous chart, today's realized volatility is about 6-7 percent. This level is what one would have originally predicted using the Gordon growth formula, suggesting that the low volatility puzzle is perhaps less puzzling than originally thought. Alternatively, if one subscribes to the more recent asset pricing theories, it appears that current volatility is either abnormally low or that discount rate variation has somehow been dampened, leading us back to concerns about investor complacency.

Larry Williams writes: 

The disparity is because investors are more influenced by price than dividends. Dividends are not a driver of emotions, prices are. The waves of optimism or animal spirits are in response to price changes which may feed upon itself.

Theo Dosis writes: 

Also worth mentioning that Schiller's data is garbage.

Ken Sadofsky writes: 

How so?

You needn't encumber your own studies, but perhaps a reference to anything, somethings - studies, that falsify.

I understand mu((c) or (s))h is too vague and convoluted to falsify; but then why false a void?

I ask, because you speak with authority.

Thanks,

a wannabe learner. 

Nov

6

 Do you hear that?

This new and sudden silence is deafening.

No crack of the bat. No slap of the mitt. No murmur in the stands. No roar of the crowd. No police whistles as they break up a fight at Citifield. No melodious tones of the announcers as they describe how the pitcher overcame juvenile explosive diarrhea to attain Major League success. Hell, I would go even put up with Joe Bucks annoying cadence and nonsense of the would turn the lights back on and open the turnstiles once more. But it is not to be. The 2017 baseball season is gone now. It had a good, exciting long life-extending as far as the rules allow but it has left the world leaving us only memories of its glory and grandeur. Spring training is 100 days away, and the silence is deafening.

Gone are the bright colors and melodic songs of the Blue Jays. Cardinals and Orioles. The Marlins and Rays scamper among the waves no longer. The Padres and Mariners have both ended their voyages for now. Though they are champions only memories of the Astros light the night sky now. The Rangers and Indians alike have retreated from the plains. The delights of spring and summer are gone once again along with the extreme passion and grand intensity of October.

Ahead lies only winter with Timberwolves, Grizzlies, Warriors, and Raptors to hold our attention to any degree. They won't work for me as I find most NBA basketball to be absolutely unwatchable on TV. One can almost succumb to tears comparing Havlicek, Monroe, West, Frazier, Bird, and Magic to the run and slam version of the game played today. I must confess I do watch the highlights most nights but a whole game would be too much for me.

I have pondered my loss of interest in the NFL a great deal. Part of it is the fact that the game is shit. The referees seem to be determined to have more airtime than the two starting quarterbacks and flags fly out more consistency that many airlines have ever shown. While I am a fan of celebrating achievements watching some idiot do a victory dance because he sacked the quarterback while his team is losing 31-7 late in the 4th quarter disgusts me. If we are honest, it is just not a very good game anymore.

Part of it I think is social. Football is an excuse for the single, or no kids crowd to head to the bar at noon on Sunday and avoid the emptiness of an apartment on Sunday with no work or events to distract you. It is something to do when the snow is up to the low edge of your ass, and the idea of venturing outside is about as welcome as inviting a politician to dinner. It helps pass the winter and gives you something to think about besides frozen pipes salted driveways.

I am now married these past seven years and live in Florida. I am not a big fan of day drinking unless I can get a nap before dinner, so I don't head out to the sports bars much anymore. There is always something to do in Florida and weather that allows you to do things.

I am sure it is a combination of things, but the NFL just does not hold my interest. I follow and watch Notre Dame and Navy at the college level but have no interest in the pro version of the game. No, baseball is the game for me. An evening with a book, while the games played on the TV, has been the preferred activity of many of the last 249 days. Checking the MLB app on a regular basis when the wife wants to watch something else has also been a significant part of my life. Games on the radio version of the app while running around town doing errands while engaging in Florida things has also been a regular activity. Now, that's over. One catch, one toss from Altuve to first base and baseball is over. No more home runs, double plays, dumb baserunning, brilliant pitches, astounding catches, stretching a single or stealing a base. No more second-guessing the manager, yelling at umpires encased in my flat screen or wondering how in the hell Chris Davis could let that pitch go by without swinging. No more box score searching, mathematical determinations of how we can catch the division leaders with a little run of luck. There will be the hot stove league, trades and all sorts of managerial stuff going on all winter to follow. I will probably go sit at the bar during the Winter meetings next weekend to get a little fix. But none of it will enough.

The silence is deafening.

Stefan Jovanovich writes: 

There is the NHL - where all the fans and players stand for 2 national anthems whenever American and Canadian franchises compete and they know the words to both. It is the only team sport other than baseball where 1 player–pitcher, goalie–can single handedly lead a weaker team to victory–something neither Michael Jordan nor Barry Sanders could do.

Tim Melvin writes: 

I have gone to some minor league hockey games and enjoyed them…but find the sport unwatchable on TV. The only ice I want to see most of the time is my glass. While I am watching a baseball game.

Oct

23

 An interesting aspect of baseball is that top competitive athletes fail 70% of the time and they are considered good and are paid millions. They play 160 games a year, and no team or player no matter how good can win them all. There are too many variables. They learn to think statistically, and go for percentages. Its a different way of thinking than normal. Specs also fail 40% of the time, at least statistically and that is considered good. Winning and losing tends to be overemphasized in conventional thinking. I wonder what kind of training for youth might change that.

Stefan Jovanovich comments: 

Baseball is about losing most of the/your time; for all the audience cheering and TV noise its natural pace is laconic. So is work. The game outlasts your skills if you are really good or great; it defeats most of us almost immediately. That is why its home has been the parts of "America" that have never had the pretense of being "winners" - the grain farms, the mill towns, the small city (NOT the Large) ghettoes and hoods. The people always knew that the real odds in life are never far from 50/50. 

Oct

3

 Toria my 4th daughter's boyfriend is a dealer in the Bellagio. He was dealing there when the shooting started. As predicted, the poker did not stop, thereby replicating the situation on the titanic where the gentleman continued their backgammon game until they sunk and the band continued playing.

Stefan Jovanovich writes: 

The White Star Line invoiced the heirs and family members of the ship's band–for the cost of the unreturned company uniforms.

anonymous writes:

The sinking of the Titanic was a harbinger of change — for some things. (Below is an excerpt from the book And the Band Played On by Christopher Ward. Ward's grandfather was the Titanic's Violinist.)

But the Titanic revealed changing social attitudes, as well as atavistic ones. Andrew Hume, for instance, did not pay the bill for his son's uniform. He forwarded it to the Amalgamated Musicians Union, which published it without comment in its newsletter. Public opinion was beginning to assert itself. More than 30,000 people lined the streets of Colne in Lancashire for the funeral of the liner's bandmaster, Wallace Hartley, who, with the rest of the band, had heroically played until the end to maintain calm.

If White Star learned nothing from the consequences of its recklessness, its employees did. A week after the sinking, 54 stokers and firemen, most of whom had lost a father, a son or a brother, walked off the White Star liner Olympic when they discovered there were insufficient lifeboats to accommodate the passengers and crew. They were arrested for mutiny, but the magistrates discharged them. They returned to the Olympic, whose departure had been delayed by a fortnight, to find 16 additional lifeboats.

The captain and crew of the Mackay-Bennett also discovered that the old order was changing. Having risked their lives sailing more than a thousand miles into ice fields, they might have expected to return to Halifax as heroes. Instead, they were the subjects of a public storm, for they had come back with only 190 corpses, having buried 116 at sea. What made the difference between a body being tipped overboard and one being brought ashore? The purser's conscientious descriptions provided the explanation: tattoos or a foreign-sounding name.

Oct

3

 This spring Las Vegas gave 14-to-1 odds on the San Francisco Giants winning the World Championship. They gave roughly the same odds to the Houston Astros and the Washington Nationals.

Here are the 3 teams records as of the end of the season:

Houston 101 wins, 61 losses, .623, won the American League West by 21 games

Washington 97 wins, 65 losses, .599, won the National League East by 20 games

San Francisco 64 wins, 98 losses, .395, finished in last place in the National League West, 40 games behind the Los Angeles Dodgers

The Major League Baseball Giants have won more games than any other team in the history of baseball. They have the most victories of any professional sports team in American history. There are more Giants players enshrined in the Baseball Hall of Fame than any other franchise in MLB history.

The last time the Giants were this bad was in 1984-1985 when they finished last in their division both years and were a combined 68 games under .500. In 1985 they hit bottom, winning 62 games and losing 100.

Steve Ellison writes: 

Anybody thinking of taking such bets should follow the strategy outlined by Bacon to assess the probabilities implied by the odds and the resulting house edge. For example, if the Giants are at 14-1, the implied probability is 1/15 or about 7%. Now consider the odds on every other team and see what they add up to.

The last time I did this with the odds to win the Stanley Cup at a casino, the total percentages added up to 167%. That works out to about a 40% house edge! That seems an impossible level of vig for finding an overlay.
 

Sep

28

The NY Times and Bloomberg wrote about this new paper (August 2017) that purports to show that Tbills outperform almost all stocks over the long run–and that a tiny number of stocks account for all of the returns. I just read it. I recommend that you read it too–since it is counter intuitive.

I see several unrealistic/unspecified methodologies in this paper including (1) equal weight holdings from IPO to delisting of every stock; (2) no clear explanation for how the capital from mergers, acquisitions and spinoffs are handled; (3) where the new investor capital comes from to buy fresh IPO's and where the cash goes when a company is acquired for cash. I also didn't study his statistics carefully. Since most every company goes through a life cycle, it's intuitive that most will disappear or be acquired/acquire, so I need a better explanation for the investor's portfolio management/cash to really understand the practical. What other problems or unique insights do you see in this paper? Something just feels wrong here.

Do Stocks Outperform Treasury Bills?

Hendrik Bessembinder, Arizona State University. Revised August 2017.

Abstract:

Most common stocks do not. Slightly more than four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns, inclusive of reinvested dividends, less than those on one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the entire gain in the U.S. stock market since 1926 is attributable to the best-performing four percent of listed companies. These results highlight the important role of positive skewness in the cross-sectional distribution of stock returns. The skewness of multiperiod returns arises both from positive skewness in monthly returns and because the compounding of random returns induces skewness. The results help to explain why active strategies, which tend to be poorly diversified, most often underperform market averages.

Victor Niederhoffer writes: 

This ridiculous paper from anti stock which I haven't read and goes counter to the carefully worked and accurate work of the triumphal trio duly reported in all their yearbooks is an absurdity. Of course most stocks will underperform. That's the nature of cross sectional returns. The distribution has quite a few good winners. It's probably true of a normal distribution also. Certainly for the kind reported in the NYSE year book. Certainly for the stocks in any variant of the pareto distributions. How far will they go to undermine the value of equities. It's so absurd I can't begin to say how it would apply to most any real life distribution in any field like IQ's.

Stefan Jovanovich writes: 

Index investing works because it allows people to avoid the risks of trading; and most of us are lousy traders.

Enterprise ownership beats public investment in terms of ROI (not "Radio on Internet"); but the public markets offer the only way for entrepreneurs to cash out. We still own one of our start-ups; its annual payout as ROI has been greater than 40% annually for the last 38 years. But, we cannot not "cash out" by selling it to someone else. The actual market for private businesses that makes hundreds of thousands, not millions, does not exist. We have been able to "retire" - i.e. extend the life of the business beyond the time we directly manage it - by doing a private variation on an ESOP; our former employee now runs it as a part owner.

As for the tug of war between "capital" and labor, we have been lucky enough to escape Marxism almost entirely. The cash flow from the business is distributed using the New England whaling ship model of "shares". Keith, the captain and part owner, sails out into the unknown every month and we get our cut on what the barrels that he lands in New Bedford. What we all share - Keith, Eddy and her Mom, your pontificating correspondent, and everyone else in the crew - is a 19th century American sense of equality. We are all equal members of the enterprise in dignity and responsibility and everyone understands that what people "make" is a function of talent and timing, not innate worth.

P.S. Every business failure in my life has been a situation where the people in charge (including me) thought that talk about the business as "family" and a mission statement on the web site would do the trick. It didn't; it can't. 

Rocky Humbert writes: 

I read his paper again and was able to tease one critically important fact out of it.

Page 15 and table 2A/Panel C: 70.5 % of the stocks that are in the largest decile by market cap outperformed the Tbill with a 1 decade horizon. And 81.3% of those stocks had a positive return. It's only for the smallest market cap groups that a substantial percentage substantially underperformed Tbills. Look at that table carefully and you can look at your own portfolio and it all makes sense.

In essence — if you own the biggest companies, you have beaten the Tbill (as we know from experience), but if you own the smallest market cap stocks, you have not. This makes intuitive sense since there are only two kinds of small cap stocks — those that start small and end up big. And those who were once big and are on their way to 0. It's a rare and bizarre company that starts small and always stays small!

The press reports and paper abstract are written in a bearish sensationalistic manner. For whatever reason, he chose not to include the key point mentioned above in his abstract. Now that I found this fact, I feel like everything else is noise — except for reinforcing one lesson that I've discovered anectodally: individual price momentum on the way down matters. If you have a stock that was once a $100 billion market cap and is unfortunately now a $10 Billion market cap, you should take your tax loss and reinvest whatever is left in another stock. And not wait for it to go to zero…and definitely not keep averaging down. In contrast, if you bought a $50 Billion market cap stock and it's now a $100 Billion market cap stock, don't sell it because it went up a lot. The skew and history suggest that it will continue to do well. (Until it doesn't).

Sep

20

 The Senate race in Alabama is becoming more and more interesting. The establishment candidate - Luther Strange - who was just endorsed by the Realtors national lobby - is still running behind in the polls.

The underfunded odd-ball outsider Roy Moore is being attacked in television ads paid for by Mitch McConnell's Senate Leadership PAC. The PAC is spending what is a large amount of money even for an Alabama general election. For a Republican primary, it is an enormous expenditure. Ballotpedia says they have committed to spending over $8M - which would be nearly 90% of the money that is likely to be spent on the race.

The President has endorsed McConnell's candidate - Luther Strange - and is planning to appear at a rally for him at the end of this week. The rally had been scheduled for Saturday at the local football stadium; it has since been moved to Friday and the local civic center. One could legitimately explain this change of venue on the prospect of bad weather, except for the fact that Friday is expected to be a mild (by Alabama standards) day with plenty of sunshine and little chance of rain - perfect stadium weather.

It is a measure of the near desperation of the Strange campaign that Vice President Pence is scheduled to make an appearance on Monday, the day before the election.

The delicious irony of all this is that Moore is the candidate who supports Trump's "extreme" positions; he has pledged to do away with the filibuster, and he opposes any amnesty. So far, the President's support for his opponent has not hurt Moore; the likely voter surveys show the Trump endorsement as having no significant effect. The Republican potential voters support the President overwhelmingly, but a majority of them still support Moore.

The candidates have their one debate scheduled for tomorrow evening.

Sep

14

Harvest, from Kim Zussman

September 14, 2017 | 2 Comments

 Our vines this year produced a much larger crop than anticipated. Maybe 2 tons, including an earlier pick for Rose' fermentation.

This last weekend we did the pick for reds. I hire a crew of experienced Mexican workers to pick the grapes into plastic lugs, and haul them up the hill where I transport them to our shaded sorting area. I did some picking with these boys but they are amazing. 5 guys - each not much more than 5 feet tall. But strong like oxes, and coordinated enough to carry 36# lugs along slippery slopes like I can no longer do. Couldn't ever, for that matter.

I generously tipped each of them and worried a little that they thought I was greater than them.

14 friends and neighbors formed the sorting brigade. In the shade the brigade picked off bird-damaged berries, leaves, etc. This year the grapes were left to ripen more than prior years, and I learned something: Pretty fruit isn't great fruit. Our crop already had many raisins and bird damaged berries. Raisins are ok, and the flavor improvement by waiting for full ripening through incessant bird attacks and heat waves was amazing.

The harvest party and lunch afterwards - featuring our wines - was great. Except for the neighbor who was drunk by 11, and failed in his function of sorting grapes in lieu of chatting up the on site women.

I had anticipated a bigger crop this year, but not this much bigger. As I write this there is 1000L of grape must fermenting in four containers in the garage. Fortunately I was prepared with enough fermenters, but I'm still short an aging tank that is to be shipped from Florida.

Wine making reminds me of my emergency medicine rotations as a resident. You have to think on your feet. No texts to consult, no one to ask. Each and every crisis you have to address to the best of your ability. (The Mrs is not on board as to the amount of work involved in this. But I think it is good for one's 62 year old noodle, to the extent that it forces me to learn and adapt like I was a kid)

The fermenting must is like a beautiful version of the irresolvable mess of humanity. There are thousands of compounds and enzymes going off in every direction, and your job as wine maker is to not destroy beauty and enjoy the ride. This kind of thing attracts controlling people who serendipitously succeed by letting go.

Here's to what California might have been, had the socialist putsch of the past 40+ years not robbed of us our destiny.

Check out the blind taste testing scene in the movie Bottle Shock.

Stefan Jovanovich writes: 

Amen. I first saw California in 1967 on my way to VN and it took me 5 years to get back. Our daughter, who was born and raised there, and her parents now live in permanent exile from what was our near perfect homeland. None of us is ever going back, and we will always mourn for what was destroyed - the common belief that no one in private life had the right to tell anyone else what to think or do.

Kim Zussman writes: 

I have done two Tours of Duty of living in the beauty of California, and I can confirm that the 1960s were very different, especially from a technologists point of view. The joy of creativity has moved to the effects of huge financial emphasis rather than intellectual idealism.

Our natural setting is still very desirable, but the feeling of open spaces has changed into me feeling claustrophobic in freeway traffic, escalating housing and living costs, and government that makes things worse.

But I see even more problems in the world almost everywhere else: Crowded Asia, Corrupt Latin America, poor overpopulated Africa, cold Russia, and dyeing Europe. There are too many people in all the big cities, and not enough for all the people to do. I fear the world will go through bigger problems before society settles on a more peaceful and productive system.

Sep

13

"The tariff" - i.e. the principal source of Federal government revenue from 1789 until 1912 - was criticized for being "unfair" and "overly complicated". Believe it or not, one of the arguments in favor of the income tax was that it would make the Federal rules for taxation simpler.

The tariff was complicated precisely because it acknowledged the basic truth of all taxation: even in a time of war, there is a tug of war between the tax payers and the tax collector; and the art of successful political economy is to allow every taxpayer to have some actual influence over how much pull the tax collector has.

The chaos, waste and abuse of the tariff system was precisely its virtue. No one, in the name of "reform", could enact broad legislation that would devastate the profits for particular industries and workers.

It is impossible to go back to that sensible system; the income tax and its withholding is as essential the present system of money, credit and banking as the Federal Reserve wire.

What is possible - even now - is for intelligent people to abandon all ideas about "reform".

An income tax that had more tax rates, not fewer would begin to take us back to an even tug of war between the collectors and taxpayers.

If the income tax and Social Security tax - which are one and the same - had consolidated rates, beginning at 2% (the original Civil War rate) and rising by 1/4% increments to 22%, the revenue would explode - just as it did after Grant (that man again) established the comprehensive tariff.

The key is to eliminate the stair step; one's rate would be flat on all income, regardless of source or type of taxpayer, based solely on the total annual income. The increase in taxation from "making more money" would become a trivial obstacle; there would be no incentive to cheat at the margin. The current wholesale lying about deductions would largely disappear because enforcement would be focused solely on a simple question: how much did you make and did you report it all?

Sep

3

Today (September 2cnd) is the anniversary of ERISA - the legislation passed by Congress and signed by into law by President Ford - and the creation of the IRA. In 1981 ERISA was amended to allow 401(k) plans.

This was the most important single cause of the 25 year bull market that produced our present world.

The legislation provided (1) an added supply of cash to the markets from investments by IRAs and 401(k) plans, (2) a safe haven escape for corporations from the inescapable accruals of defined benefit pensions, and (3) the ability of corporations to use their own paper instead of cash to fund present employee bonus compensation and retirement obligations.

We will know the party is over when ERISA accounts begin loading up on cryptocurrencies.

Aug

29

 The amount of written information we have about any past event is usually in inverse proportion to their relevance to actual events. Jefferson had no part in the actual American Revolution but his is the name that overshadows all others, even Washington. Why? Because he made damn sure that it would be in terms of what was preserved in the libraries at UVA and DC. By comparison, we know almost nothing about Washington; spymasters who win wars do not write things down if they can possibly avoid it. Lack is wrong. Hamilton was insane to choose Washington as any kind of example for his own life. Men who have no family fortunes cannot afford to wait and never learn patience. Henry Knox and Franklin understood what Washington had done; book sellers, if they succeed at all, are masters of inventory control and waiting. The British could only be defeated by their own expectations that the thing would soon be over, that a campaign or two would do it just as it had in the earlier fight with the French in Canada. But Washington refused to fight, lose and surrender honorably; he kept letting the thing drag on. That drove Hamilton as insane as it did the British, and even though he was there, he never quite understood how Washington had actually pulled it off.

Aug

29

 What is the composition of the rainwater dumped by the storm? The eventual source is the ocean, but is the means of getting into rainwater evaporation (in which case it's "fresh water"), or has it simply been sucked up into clouds? If the latter, then it must have significant salt, and therefore be detrimental to crops.

Stefan Jovanovich answers: 

The rain is fresh water; Japan gets half its annual rainfall from typhoons. The salt water comes from storm surges - basically high tides aided by sustained onshore wind; but it is not the source of the flooding. The updrafts in typhoons are so destructive because they push the clouds higher and, when the storm comes against structures, create pressure differentials that can literally blow buildings apart from the inside. That is why, even though it is counter-intuitive, you have to have air vents that can be left open so that the pressures inside and out can equalize. The only "sucking up" of actual sea water is the wave action, but that is caused by the rotational windspeeds, not the updrafts.

As bad as Harvey may seem, Hato's effects will probably be even more damaging.

Aug

25

 "Memory believes before knowing remembers. Believes longer than recollects, longer than knowing even wonders."

This quote by Faulkner says much though you'll have to read it over again many times along with Light in August before it sinks in. Faulkner knew much about tragedies which befell the South and wrote about them as honestly as anyone. Understanding the South starts with reading Faulkner.

Most of his books concerned individuals saddled with crimes and mistakes inherited from the past, borne for lifetimes and passed on for many more. Eventually even their statues grew tired, and only the memory of memories remained; and they wondered if the past had finally offered up redemption. Faulkner believed no; history never once forgave nor was ever forgiven.

Stefan Jovanovich writes: 

Faulkner is the classic schoolie author. He is the Henry James of the South, and almost everything he writes about actual history is complete bunk. He lied about being in the Royal Flying Corp in WW I and seeing action. His only actual service was as a reserve cadet in the British Army in 1918 in Canada. The only "front" he saw was Toronto. "Pickett's charge was the end of the Civil War" because he and Shelby Foote say it was; the Confederates who were there - including the man in charge of the artillery, General Alexander - thought it was only a loss and no worse for the Army of Northern Virginia than Chancellorsville had been for the Army of the Potomac. The actual war - the period when there is not one bloodbath in a year but one each month that the weather permits - is won and lost in 1864; but that doesn't fit the story of how "they" drove Old Dixie down.

Faulkner's obsession with history is about all the lost Butler money of his mother Maud and her mother Lelia. He and his fiction mourned the good old days when Mississippi was the richest state in the Union, and his sentiment for the former slaves was the same bathetic crap that people indulge in when they talk about the old cars they once owned but were forced to sell.

If political blacks and their allies want to continue "the struggle" 150 years later, that is hardly shocking or surprising. The Irish in America were still marching and crying and complaining to the United Nations 250 years after the Battle of the Boyne; and the Irish Free State was still choosing to be neutral when presented with a choice between Hitler and Churchill.

Understanding "the South" starts with knowing that Faulkner never picked cotton, never missed a meal and never, ever had to eat shit from Yankees for talking funny; and that absolutely none of that matters, as history.
 

Aug

23

 Aaron Brown on 1820s Northwest USA and poker's role in the invention of futures markets

Aaron Brown laying out his ideas on currency (also available in chapter 10 of RBR or part 7 of The Physics of Wallstreet: "The Physics of Wall Street: The Most Arrogant Book in the World? Part 7")

The most notable part of his thesis is that the standard story of futures markets (farmers love them) is false for farmers, centered on the wrong parties (should be centered on processors: millers, cleaners, shippers of grain), and backwards.

Brown claims that, instead of borrowing the cash to run a business, running the business, and repaying the creditors in cash, futures markets allow businesses to borrow something much more like what they will produce (wheat, electricity, FCOJ), and then pay back in kind—thus hedging currency risk. (This was especially important in the days of wildcat banks and soft paper monies—the wild west had little coinage.) Someone who transports wheat from St Louis to Chicago could short a location spread, for example.

Crucial to his point is that July 23 #2 soft red winter wheat at Minneapolis is *not* what I produce—it's merely similar enough that by rolling a series of short calendar spreads, I can continually borrow in terms *similar* to what I will actually produce.

In AB's world, not only are bonds, bills, notes, and corporate equity alternative currencies/numeraires –so is, with thick enough markets, each short spread on a commodity market. What's more, he claims that futures markets were not invented by anyone; they arose bottom-up out of a poker-playing culture, which had developed "clearing-houses" between 1820-1850, so that hedging credit risk/ currency risk in this way felt obvious.

Stefan Jovanovich writes: 

As another Brown would say "AAAARRRRGGGGGHHHHH!!!!"

No one in 5th century Greece or 18th and 19th century Atlantic America thought that you "borrowed cash to run a business". If you could not deal in credit, you had no business to run.

The use of the term "money" seems to defeat almost everyone's understanding of these periods. There was no "paper" (or clay or parchment) money. Those were, like the Federal Reserve's small pieces of art, bills and notes - forms of IOUs. Coin - cash on the barrel head - was what you demanded from people when you no longer trusted their credit on any terms. Coin was valuable because the demand for gold and silver jewelry, plate and other forms of ornament was real and because, when there was a credit collapse, anyone holding coin could find great bargains by being willing to surrender their cash in exchange for - wait for it - bills and notes.

"Wildcat" banks were local credit merchants; people who lived within a day's ride or canal boat journey (also dependent on horses) had a pretty good sense of what the local wildcat's IOUs were worth. The conventional histories pretend that this produced a crisis because they were all written by people who found the anarchy of local credit dealing offensive. They wanted a nice, neat world run by proper people named Biddle.

anonymous writes: 

I have not read the book. But I just read Aaron Brown's review. If he submitted that essay to an accounting professor, he would get an F. It is obvious to any objective observer that the proximate cause of the Bear Stearns and Lehman blowups is the same thing that blew up all of the S&L's in the 80's, Mettelgeselschaft, and countless other operating companies: they held illiquid long-term assets that were financed with short-term funding. Period. End of story.

Aaron Brown evidently has a large brain that is similar to Nassim Taleb's but he lost my respect when he wrote: "But everyone with a brain agrees that (a) derivatives are at the heart of things and (b) the essential aspect of derivatives is not contracts that reduce risk by specifying prices in advance but the system of exchanges, clearinghouses, and standardization that replace credit risk with liquidity risk."

Absent a surprising development since his last medical exam, Rocky still has a brain. And with that brain, he has written several laws — laws that have served him profitably over the past decades. One of those laws is that when a market becomes dominated by arbitrageurs and second-order instruments (whether it's merger arb, convertibles, mortgage backeds in 1994 and again 2007, CMO's etc etc etc) — it will blow up. Always has. Always will. And there are many many reasons for that. Note to Aaron Brown: (1) DERIVATIVES ARE NOT THE HEART OF THINGS. THAT IS WHY THEY ARE CALLED DERIVATIVES. (2) There is nothing remotely interesting, novel or insightful about your (b) observation. Anyone who has taken an introductory course in Finance understands there is a difference between Solvency and Liquidity.

Aug

17

 On this day in 1843, in Honolulu, Herman Melville enlisted as a seaman on board the USS United States. He served for 18 months and was discharged in Boston in October 14, 1844. He was 25 years old. Everything Melville knew about life at sea came from the 5 years he spent on the St. Lawrence, Acushnetat, Lucy Anne, Charles & Henry and the USS US.

The public wanted him to write about those adventures. Melville wanted to preach about the unfairness of a life that saw him begin rich as a child and then get thrown out of financial paradise, never to return again. The books about what he saw and did– Typee, Omoo, Redburn, White Jacket– were all popular; the ones with the philosophical discussions never sold and remain unreadable to this day.

Aug

16

 The Literary Digest was once the microphone through which that mythical beast "public opinion" spoke to America

The mass media - newspapers, movies, radio - were careful not to offer political opinions on the sensible theory that favoring one party over another would cost them money. Political opinion was limited to print and, within print, almost entirely to magazines.

In 1927 the Literary Digest had 1 million subscribers; by 1938 it was gone.

It fascinates me how the formerly mass media are well on their way to becoming the voice of minority opinion because of their one-sided politics.

Zubin Al Genubi writes: 

With 500 TV channels, and a thousand news sites, information and political views have become Balkanized. Will political parties soon follow and breakdown like the parliamentary systems in Europe.

Stefan Jovanovich replies: 

The Parliamentary systems in Europe may have political deadlocks but they are hardly breaking down. Brussels has authority that was Napoleon's dream. There are not 500 channels if by TV you mean mass audiences similar to those held by the 4 networks in the U.S. Britain has 5 channels, France has 3. What I was trying to point out was the obvious. Netflix, Amazon Prime and hulu–none of which offers any political "news" - have become what the movies and radio were in the 1920s and early 1930s. The audience that elite opinion thought it had literally melted away, much as it is doing now. Trump is "unpopular" only if one believes the modern Literary Digest audience represents a clear majority of the American electorate.

Aug

8

 In a visit to The War Rooms and a reading of every one of the 1000 pages in Manchester's The Last Lion, I was not impressed by the heroism of the French, and with deference to Jovanovich, the chances of the French not turning their navy over to the Reich after the armistice would seem to have been close to the proverbial parts in a salvage dump spontaneously assembling themselves into a jet. It led me to think of all the times all my opponents in squash defeated in earlier rounds would stay around to the finals hoping I would lose. This led me to think of whether when one market has a terrible fall, whether it predicts with inordinate frequency that a related market will suffer a similar fate. The latter must be tested.

Stefan Jovanovich writes: 

About Dunkirk there is no question that the French stood and fought–bravely and well.

The Vichy French did not turn their Navy over to the Germans; they refused to turn it over to the British. Not quite the same thing. The result was Operation Catapult.

Churchill is not to be trusted about almost everything he wrote and said regarding the strategies of the war; in almost all cases he was a blowhard and a buffoon. But, he had luck. He had one subordinate commander brilliant enough to ignore his orders and preserve the RAF (in spite of Churchill's sending two months' of fighter production to Singapore so they could be captured by the Japanese weeks after being off-loaded in their crates on the docks). Hugh Dowding and the pilots won the Battle of Britain; and then the Germans lost the war by choosing to invade Russia instead of completing their conquest of North Africa and the Middle East and Iraq and Persia's oil reserves.

Andrew Goodwin writes: 

Greenspan cares about the bond bubble. If his commentary has influence perhaps he will move to remarks about other markets that don't share the same ecosystem. That 1000 page Manchester book was excellent and the brain makes the link finally in the naming.

anonymous writes: 

Sad but true: before WW I both Churchill and Roosevelt thought that the greatest threat to Anglo-American Empire would come from the Russians in Europe and the Japanese Navy in the northern Pacific. The Germans were not going to be any problem at all, no matter what the stupid French kept saying.

Jay Thompson writes: 

Accepting the above as true then major kudos to Churchill and Teddy as they possessed more foresight than the vast majority of foreign policy experts–to say nothing of US Presidents–in the past 100 years. Russia was/is a threat to the civilized west if for no other reason than it has been such a tempest - incredibly unstable and nearly ungovernable The near totality of Russian leadership was Germanic (like most of Europe that mattered) yet the people are Slavs. This exacerbated the already tense relationship between the peasants and the aristocracy or, if you wane Marxist, the bourgeois and the proletariat. The Japanese had a long lead time in their accumulation of navy power and the associated increase in their sphere of influence.

Patton, and Churchill, were right. We should have continued on and/or let the Third Reich destroy the Soviets. If for no other reason it would have taken away the "Cold War" as an excuse to waste trillions of dollars and the lives lost in the hot wars of Korea and Vietnam. 

Victor Niederhoffer writes: 

Anyone who believes that the Vichy prezs, petain and lebrun would not have turned over their entire navy to the Germans as smoothly and easily as they killed all the jews in Southern France, and who also believes that without Churchills courage and refusal to surrender that England would not have signed an armistice with Germany in 1939 or 1940 is very biased against the man who saved the world from German rule. With French armaments their would have been no hope left for the British and Churchill would have been booted out of office by the many collaborationists he brought into his cabinet.

Aug

7

The price of a lumen-hour in British pounds adjusted for monetary inflation

Jul

30

 Dunkirk the movie is a video game with no characters to speak of and no context to illumine the heroism of the English in defending their Island, the sordid cravenness of the French, and the amazing woeful strategic mistake of the Germans in halting their war effort in an attempt to accept their hoped for surrender from England. Particularly wasteful aside from the 1 1/2 hours of dog fighting with the masked pilot was the remaining 20 minutes showing some tars stuck in an abandoned ship wrestling with the French question. Almost as wasteful was the showing of an abandoned tar shipwrecked by a Uboat taken on board by a yachtsman who promptly kills a rescued because of shell shock. The agrarian nature of the only spoken dialogue downplaying the heroism of the individual and showing moral neutrality between the French, Germans, and British, with no mention at all of Churchill's energizing words to fight the Germans except for a listless Newpaper reading is in keeping with the agrarian nature of the film, and the need to gain good reviews by showing a lack of heroism.

Stefan Jovanovich writes: 

Whatever the French Army was at Dunkirk, they were neither sordid nor craven. Half of them defended the perimeter to allow the escape of the BEF and 100K other French soldiers (those who became the Free French Army that suffered higher casualties after D-Day than any other Allied Army except the Poles). German Panzers halted not because of any strategic mistake but because of internal quarreling between Hitler and the General Staff over whether or not von Rundstedt would have central command authority. When the unit commanders kept ignoring their own Chief of Staff, Hitler called a halt to all operations and demanded that the Army mend its ways. But for the miracle of the English Channel becoming a lake and the Germans discovering that ruined cities built of concrete and steel become perfect tank traps, the delay would have made little difference.

Jul

14

 I continue to be amazed that anyone takes Warren Buffett's public comments seriously. What the man does in his tax management of ongoing businesses deserves absolute attention; what he says is the kind of stuff that used to be dispensed by every barker at a medicine show.

The only people who make money buying and selling shares are the rocket scientists. Sometimes their experiments blow up, but they are the only people who have ever made a killing on Wall Street, since the Morgan family was blessed with not one but two genius partners (Peabody and Drexel).

Buffett pretends that his great fortune has come from buying socks and stocks when they are on sale; but his actual stock portfolio's performance has been mediocre ever since the quants and index funds joined the party. Buffett's actual success has come from copying what the best merchant bankers did in the 19th century: buying whole companies and eliminating internal their bureaucracies and combining their income statements and balance sheets to turn the government into a minor partner in the future gains. (The merchant bankers in the 19th century did this as well, with tariffs and what they called "money shaving".)

The world Buffett describes is gone. There are no times now "when no one else is (interested)" and patent medicines are readily available everywhere.

Jun

27

According to the CDC, the U.S. population's growth rate is undergoing a dramatic decline.

The teenage birth rate - which, in the past, has been the leading indicator for overall population change - has fallen in half.

In 2007 births per 1000 females aged 15-19 in 2007 were 41.5; for 2015 the number was 22.3.

Jun

22

 An old high school friend (who reads and has commented on DS) recently told me that he is burned out in his career and wants to trade FX for a living. Apparently he knows 2 people that make a living trading through one of those shops. I gave him more than several reasons why he should consider taking a pass on this new career, but he's going to a 4 hour seminar to learn why FX trading is the way to go. He is willing to invest $10K in this venture. My immediate comment when hearing about his limited bank roll was that he would need to generate an extraordinary return on his money just to make a living and that would be near impossible. I ask the list for some guidance….questions he should ask the FX broker, questions he should ask himself. I've tried to talk him out of this, but he is still considering taking the plunge. What are your thoughts about someone 60 years old, quitting his job and trading FX on a $10K bankroll. I know my thoughts, but ask the list to add some of their own.

Generally speaking, when casual acquaintances ask me this question, I tell them that they will do better going to Vegas….at least when one blows through the $10K bankroll, they might get a few comps….the mistress of the market will just take one's money without even a thank you kiss in return.

Stefan Jovanovich writes: 

Cue Marcel Proust: We remember the stories of our lives but there is very little of the past that our nervous systems actually keeps in the present.

One of the lucky and tough survivors of the torpedoing of a merchant ship sinking in WW II described the part of the whole thing that stayed longest in his active memory.

It was the voices of the barely 20 year old seamen in their Mae West's calling for their mothers.

Jeff's friend seems to be another believer in the age-old faith that Mommy is still out there somewhere and will magically save us from the hardships of shipwreck. 

Bud Conrad writes: 

Read the opening personal story of Education of a Speculator for an example of how hard the high leverage can become. You could quote me as saying: "I wouldn't trade forex without a $300,000 portfolio." This kind of desperation often accompanies market reversals. For forex I don't know what the change will be, but I would warn your friend in the strongest terms.

anonymous writes: 

I think risk of ruin is too high if you're under 100k bankroll. With 10k there is leverage needed to make a living, but with a 100k you can survive a couple bad streaks. 

Jim Lackey writes: 

Good afternoon, Chair, Brothers, ladies and gentlemen. Interesting post, I just caught a young man screen watching. It's the stare of hope. If one would focus enough the prices would go our way. I was asking him if he wanted to buy the truck or not. He cursed and I knew it was about something online. I said what is going on dude? He said "look at this. " He motioned me to look at his screen. It was forex quotes, I said, what is your position?. "Long the Euro and they said it is going up because….". I asked who are they and why would they tell you and what is their position? He looked up and………., huh? First off one must start with individual stocks 2-1 only. Secondly they always know and I was always the last to know. Huh? Do you want the truck or not? He looked back at the screen and said "but the Euro….." If he bought the truck I would have given him a few good books. I'm sticking with trading cars and trucks. It is not a very profitable business margin wise. It is a lot of physical work. I am in excellent physical shape. I can sleep at night. I'm not sure if it is a permanent disability, but I have lost my ability to take risk in the financial markets. However, I would never discourage anyone from speculating for a living. Buy them a cup of coffee and after an hour see if they would read the good books. Specs are honorable and benefit society in ways that I did not comprehend until years after I hung up the racing helmets.

Larry Williams writes: 

While I've already agreed with the majority comment on the subject let me add this…

A few years back I got a letter at Christmas time from a guy who wrote basically saying, "Larry I bought your trading course I actually went to the blood bank and saw blood to buy it. I raise some capital while I was learning started trading now here I am in Vail Colorado. I'm a single father my kids are with me I'm living in a house beyond my wildest expectation, all because of learning to trade etc., etc."

Of course I replied that it had nothing to do with me was his success and good fortune but nonetheless this was a wake-up call in lesson for me it's hard to tell people know don't do this because this letter was not an exception have had others, not as extreme, but in a similar vein. Clearly there been other people who have lost money, some probably even shirts or shorts.

This is a hard-core to stop somebody so what I personally do is let them see the doors open but also all the dragons and monstrous just beyond the door. Full disclosure, brutal disclosure then if they want to pick up the craft they can.

I know you don't build good athletes by telling them they can't do something you have to encourage them so this trader, want to be trader need some encouragement.

Jim Lackey adds: 

This is what happens in forex too: Cascading margin calls for so many and who was holding the other side after everyone was forced out of their positions? GDAX affiliates? GDAX?

A side point: a few million worth and the price is crushed. Small market. Any medium sized player can own the price action in that arena…

https://www.cnbc.com/amp/2017/06/22/ethereum-price-crash-10-cents-gdax-exchange-after-multimillion-dollar-trade.html 

Jun

19

 The Liddell Hart theory–i.e. a war of movement can avoid the costs of frontal assault–has been almost entirely discounted by modern studies of what actually happened in WW II. If the Great War was so much bloodier than WW II for the British and Americans (but not for the Russians and Germans), it was not because of any change in tactics or strategy but because the Anglo-American forces spent so much less time at the sharp end. When you compare killed, wounded and missing per day of direct combat, the WW II battles (the Bulge, to take one, which is still and is likely to always be the bloodiest battle in American history) are no less "massive showdowns" than Western front struggles in the Great War and just as awful. The casualty rates are the same.

Hart's hope that tanks could produce battles of movement was not proven true; as soon as the opposing forces learned to use them, the anti-tank guns created their own stalemate. Kursk became a mechanized meatgrinder equal to Verdun.

The military analogy that comes to mind for the Bezinator's successful campaign is Curtis LeMay's firebombing of Japan. With its massive capacities for warehousing and delivery and the logistic coordination that allows customer orders to be processed without interruption, Amazon has done an incendiary bombing of its competitor's profit margins.

Andrew Goodwin writes: 

I have read Liddell Hart and Clausewitz. The losses on a frontal assault were too high in land campaigns.

Napoleon did the indirect attack in a formulaic way by a mock frontal assault covered by a horse screen on one wing ending in a back side cutoff of the supply line of the enemy. The maps of his campaigns are well seen through the book called "The Campaigns of Napoleon" written by David G. Chandler.

This approach appears to create a panic in the enemy lines. The method to defend against this has developed considerably since then. You have to think about how they worked a way to defend against the elephant charge.

If you leave corridors open, the elephants will look for less resistance and charge through the gaps you create. Then you can cut them off from behind.

The one who figured out how to use this in more modern warfare was Von Manstein. He created passes and then encircled from the rear. How this is done today with air and sea and land combat is not of my reading yet.

Stefan Jovanovich replies: 

Er, not quite. Neither von Manstein nor Napoleon ever doubted his own genius, but we can't take them at their face value. Von Manstein managed to be consistently blind to any possibilities that the Soviets might also use their brains. His great triumph - Kharkov - came between two disasters that were far more consequential - Stalingrad and Kursk.

Napoleon's genius came almost entirely from his ability to move his cannon quickly to the point of attack. In the set piece battles for which he is justly famous, that allowed him to bring massive firepower to bear and then follow it up with attacks in column by infantry that were classically "frontal" - most of the time the infantry did not even discharge their muskets but marched forward in a phalanx of bayonets. In the wars that he lost, his cannons were useless; in Russia because of the mud (the same factor that lost him his chances at Waterloo), in Spain and Portugal because of impossible terrain.

Nelson followed largely the same tactics, with the same success. His ships attacked in column, not line, and in direct frontal assaults.

The actual record of the use of elephants is that they look impressive but are - like the massive artillery guns the Germans loved - not worth the trouble. Alexander refused to use them; and Hannibal discarded them (they probably ate them) long before Cannae.

Jun

15

It was only after business men and women sent their children off to be thoroughly schooled in administration in the late 19th century that there were economics textbooks. Poor Jack Morgan never fully regained his father's respect after he came home from Harvard and told Dad what he had learned about banking from Charles Franklin Dunbar.

The beauty of the late 19th century in the United States was that its massive failures were awful but never frightening. For people who had endured the Civil War, the financial collapse of a third of the railroads in the U.S. was something to be gotten over; but not the end of the world. Sensible people bought and owned the bonds that the Morgans put their names on and understood that the money market was a fascinating place to go gambling but hardly the appropriate investment for themselves and the other people who were not speculators.

Morgan made only one public prediction about "the market" in his entire life; when asked what it would do, he laughed and said, "It will fluctuate." He knew that his customers would accept fluctuations precisely because they were owners, not traders. That is why his bonds could be paying 4.5% when offers of 15% were failing to draw sufficient call money to carry a position through from Saturday afternoon to Monday's open.

The present portents of an inverted yield curve are supposedly warnings about recession and inflation. What they might be instead is a signal from the Chairwoman of the Federal Reserve that the central bank is no longer willing to be the Treasury's bitch - i.e. the customer of first resort - now that the ECB really needs a friend. Ms. Yellen can either help the ECB pretend that European sovereign debt is never ever going to be a problem or allow Secretary Mnuchin to roll over his inherited overdraft at bargain rates. For those who believe in the global future of globalism, that is hardly a choice; the Euro must be saved by being discounted freely just as Bagehot commanded. (Oh, wait, he was talking about domestic borrowers, wasn't he - since FX did not allow for any discounting until the Austrians decided that they wanted a Balkan War of their own.)

anonymous writes: 

I show that the curve is still in up trend-bullish. Am I missing something (as I usually am)? 

Jun

13

 Ken Burns' Vietnam series starts in September.

I wonder if Gen. Vang Pao's story will be part of it:

"Gen. Vang Pao, Laotian Who Aided U.S., Dies at 81"

Even before President Dwight D. Eisenhower's vow in 1960 that Laos must not fall to the Communists, the country was immersed in bloody conflict. Its importance grew immensely during the Vietnam War, when most of the Ho Chi Minh Trail, the serpentine route that North Vietnam used to funnel supplies southward, ran through Laotian territory.

The United States wanted to interdict the supply route, rescue American pilots shot down over Laos and aid anti-Communist forces in a continuing civil war, but was hampered in doing so publicly because Laos was officially neutral, so the C.I.A. recruited General Vang Pao for the job. At the time, he held the highest rank ever achieved by a Hmong in the Royal Laotian Army, major general.

The Hmong are a tribe in the fog-shrouded mountains separating Laos from southern China, and they were natural allies for the C.I.A. because of their enmity toward Laotian lowlanders to the south, who dominated the Communist leadership.

General Vang Pao quickly organized 7,000 guerrillas, then steadily increased the force to 39,000, leading them in many successful battles, often against daunting odds. William Colby, C.I.A. director in the mid-1970s, called him "the biggest hero of the Vietnam War."

Lionel Rosenblatt, president emeritus of Refugees International, in an interview with The New York Times Magazine in 2008, put it more bluntly, saying General Vang Pao's Hmong were put "into this meat grinder, mostly to save U.S. soldiers from fighting and dying there."

When the C.I.A. approached him in 1960, he was already fighting Laotian Communists. The next year, he would also fight Communists from Vietnam after they had crossed the Laotian border. The Times in 1971 said that the C.I.A. did not command the general's army at any level, because his pride and temper would have never permitted it.

The general led troops into combat personally, suffered serious wounds and was known to declare: "If we die, we die together. Nobody will be left behind." About 35,000 Hmong died in battle.

General Vang Pao was also skilled at uniting the 18 clans of Hmong. One technique was to marry women from different tribes, as multiple marriages were permitted in Laos. He had to divorce all but one of his five wives when he went to the United States in 1975, settling on a ranch in Montana.

General Vang Pao lived more recently in Southern California and Minnesota, where many of the 200,000 Hmong that followed him to the United States or were born here live. His picture hangs in thousands of homes.

Stefan Jovanovich writes: 

The beauty of the New York Times is that they always get it wrong. Eisenhower's "vow" came in 1954, not 1960. There is even video.

I can guarantee that Burns et. cie. will get wrong the other unspoken part of Eisenhower's "domino" theory - the one that was communicated privately to the Soviets now that Stalin was dead: Indochina would be the last acceptance by the U.S. of territorial war by the Comintern. Spying, subversion - everything that Stalin had initiated as part of communism's "cold" war - would be accepted as part of the normal woofing between major power; but this would be the last "war of liberation". If the Soviets persisted in that policy, they risked bringing on their own nuclear destruction.

The Soviets knew Eisenhower was serious because Admiral Radford as Chairman of the Joint Chiefs had asked for permission to use atomic bombs to rescue the French from Dien Bien Phu. Ike knew that the Soviets knew what his reply had been; the U.S. would not "defend" British, Dutch or French imperial possessions in Asia. As the British later learned over Suez, Eisenhower meant what he had said. The U.S. had not fought WW 2 to defend European empire.

But it had fought WW 2 and Korea to defend Europeans' and East Asians' rights to "self-determination". That is the part of the story that the Democrats never ever seem to understand even though the policy itself goes back to Woodrow Wilson - the one thing the man got right.
 

Jun

11

He sees a case against Prez but the 30,000 emails deleted, smashed computers, emoluments to foundation contributors were not enough for a reasonable prosecutor to consider a case against cattle.

"Bharara 'Absolutely' Sees Enough Evidence for Case Against Trump"

Stefan Jovanovich writes: 

The monopoly on prosecution is another part of the American legal structure that has no support in either canon or common law. It is based on sovereign presumption and preemption; to a horrible extent, allowing a district or U.S. attorney the discretion to decide whether or not someone should do the time for their crime is a product of the desires of the early New England emigrants to North America. They wanted to establish a Congregationalist theocracy. They succeeded. Now, of course, we have the high priests throw the Federal Criminal Code instead of scripture at the apostates; but the outcomes are entirely the same. None of us is without sin, and we are all guilty of something; our actual freedom is almost entirely a matter of having not yet pissed off someone in authority who thinks we are a ham sandwich in human form.

19th century Americans understood this in their bones. That is why The Scarlet Letter was the first blockbuster novel in U.S. publishing history. I know we are all supposed to prefer Melville's tract; but I think the public got it right. It remains the best single work of fiction ever written by an American.

Jun

6

 The standard academic introductions to economics spend no time discussing the invention of credit. They usually have the conventional summaries about the uses of money - store of value, et. al. - but there is literally nothing about the invention of promises to do and to pay. In one way, that is completely understandable. People live their economic lives in a world of futures; they measure even their savings by what the hoards will earn; evn in Rousseau's world of pure nature, financial promises would be made. Given those facts, it makes sense that economic textbooks do not spend any time discussing the invention of credit; IOUs have always been part of human interaction itself.

But, if credit's origins do not need to be part of the history of economics, surely the invention of legal tender deserves at least some small attention. Coinage is usually given at least a few paragraphs, but there are rarely any discussions of how the law came to be the method that defined what would be the financial unit of account. Hayek, at the very end of his life, complained that money had been literally hijacked by the state, that people should be free to use whatever money they choose. Even his theoretical opponents agree; current "mainstream" economic theory begins with the assumption that there is no need to give state money any special legal status; in the natural world of credit people can buy and sell using whatever coinage they want, as the success of BitCoin has proven. And yet, the IRS insists on being paid only in dollars, by check or credit card or wire transfer. (One of the wonderful ironies of the current age is that actual money - currency printed by the Treasury for the Federal Reserve Bank - is NOT an acceptable means of tax payment.)

Legal tender - officially enforced money - only exists because some exchanges are not and never have been voluntary. Hayek's assumption that money developed as a means of payment to clear private debts is bad history. The archaeological record shows that the earliest money coinages survive from the Greek city states that traded with one another in the Aegean Sea in the 7th century B.C.E. The first known coin, the Lydian Lion, (formed from electrum - a naturally occurring alloy of gold and silver) can be dated to 610-600 B.C.E. It was minted by the tyrant Alyattes in Sardis. Every money hoard discovered by archaeologists in that region has been found in sites that were government treasuries, not private merchants. The German historical school's standard story (the one used by all the textbooks) is that people invented money as a "store of value". No. Tyrants, monarchs, emperors and - eventually - democracies all created money as a means of collecting taxes.

Why? Well, for one thing, the governments could do what the people who control governments always want them to do - keep crooked books and fiddle with the tax rates and preferences . The taxpayers would have to use drachmas, and the state would define what a drachma was. The standard historical theory for "inflation" is that when people with the power of the state stretched their credit beyond its limit, the state would increase its "money supply" by changing what a drachma was. The more realistic assumption is that coinage as legal tender was manipulated from the moment of its invention. Tyrants did not have to wait around to discover that they could "manage" their economies by "tightening" and "loosening" public credit. Even the U.S. Constitution takes it for granted that the Federal government will charge a fee for making its own money. Needless to say, this "money" thing caught on. Within two centuries every part of the Mediterranean world had its official money.

As Hayek so beautifully points out, free human exchange creates its own systems that work even though they defy logic. When confronted with the demand for tax payments in "money", people did what they always do - they started trading. The money market was born. As every black market in the world confirms, there is the official price for currency and then there is the market price. If you owed tax to Necho II, you could save some of its cost through arbitrage among the coins minted by Aegina, Samos and Miletus. (The Egyptian Pharaohs used all 3 as their official money.)

The academics have it backwards. "Money" was never a store of value and never the primary mechanism through which human exchange developed. It was how the state paid for and exercised its own power through war.

Jun

6

 The J.P. Morgan test applies for both customers and employees: you should only deal with people whose character you trust. Every successful business I have owned (including the one I still own) applied those rules; in every failed one I thought that exceptions should continue to be made.

I have never been shrewd enough to be able to judge the character of people until I have dealt with them. So, for me, until experience has proven otherwise, I deal on the assumption that others will be honest. (There is also a good deal of evidence from applications of game theory that this Tit for Tat approach has actual rewards, provided that the game is one of repeated encounters, each with limited risk.)

But, once you have seen someone cheat, there is no excuse for continuing to deal with them. Every significant business failure I have had started with my telling myself that a lie did not matter. That meant, of course, that the dishonest had already begun to compound itself; I had lied to myself and others by letting the dishonest person skate.

Jun

6

How I got out of Florida condos at the top:

1) The tennis pro at the building became a realtor.
2) The fellow who installed my window treatments became a realtor.
3) Hurricane season was approaching.
4) A "ballerina" I knew quite well told me to delay selling my condo until she could take the newly instituted 5 day cram course to get a realtor license for which there was a several month waiting list.

This week I heard from a fashion model eagerly desirous of entering the coin market who had opened up accounts at several shops and was mad because they had a waiting period for her buying of various coins.

The conventions on coin presentations were oversold and standing room only.

Sad I can't hand out a statistical answer to document the froth, but there are many.

1) Control of more than 50% of the coins potentially weakens the security.
2) The leaked ability of the hackers to enter any computer in multiple ways retrospectively.
3) The advent of access to quantum cloud computers by corporations in beta (which means govts have had access longer)
4) The untested nature of the post-quantum algos.
5) The need for the governments to track and tax money flows.
6) The investigation powers newly needed to stop ransom attacks requiring payment of coins to "anonymous" wallets.

Andy Aiken writes: 

Possibly some lessons are:

Techies, anarchocapitalist utopians, Chinese elites, even ordinary people desire a currency not controlled by the state, that offers privacy and security without requiring armed guards for a big gold stash.

The financial technology and payment processing systems for USD, Euro, etc are antiquated and slow, decades behind what is feasible and in reach, struggling under a mountain of regulation.

A currency is what people use to pay for things. When the European banking system was in shambles after WW II, people paid for food with cigarettes. Scrip has been used many times throughout history.

Getting financing for a company by working with bankers is an expensive, frustrating experience.  Business founders will find a way to cut the middlemen out of the game if they don’t add value.
 
The cryptocurrency mkt is definitely frothy. As with the dot com bubble, most of the coins & firms will fail.  Some will go on to be the future Amazons. These human needs are in search of a solution even if all of cryptocurrency goes to zero tomorrow.

Orson Terrill writes: 

Same here, starting about 2 weeks ago, yet again, people are asking me about bitcoin. This has usually coincided with near term top, and has been true since 2012. Same for stocks.

anonymous writes: 

I do some consulting in this area, and last week I had a few calls (one from a PE firm) come in asking me for a general overview of the competitive crypto landscape, including who mines, what the pecking order of coins is (in terms of best, most used, etc.) and so on; stuff that could pretty easily be found on the web, by haunting Reddit, etc.

Froth indeed.

Stefan Jovanovich writes: 

Thanks to Andy Aiken, I have been able to get some sense of how Bitcoin actually trades. Also thanks to him, I learned - yet again - the most important lesson about trading: you can't claim to understand a market if you don't actually trade it.

I don't trade Bitcoin and have absolutely no idea what will happen to the markets for it. But, it does seem to me that the participants in the markets for cryptocurrencies - whether long or short - are making one assumption that is simply not proven by the evidence.

Bitcoin is not a currency. Neither, for that matter, are ounces of gold. These days a currency is an IOU that

(1) is accepted as a credit for deposit by the banks that are willing to use that currency as a unit of account; (2) is accepted as final payment for taxes and legal judgments; and (3) is the face denomination for the government debts that are accepted as officially-sanctioned reserves for financial institutions

That Bitcoin is not a legal tender has not mattered in the slightest as far as the traders in Bitcoin are concerned.

In the days when money was coin, there was a long history of unofficial credits being actively traded and readily exchanged and even accepted for deposit. The Virginia lawyers who most closely followed Washington as President (Jefferson, Madison) were infuriated by the speculation they saw in New York over the debts that were to be redeemable in the country's new money. They were themselves active speculators, as Washington had been; but their gambles and savings were in warrants and other paper claims on the Western lands. When the people who support and believe in Bitcoin argue that the digital claims they have bought or mined are as "real" than as the digits that represent the vast bulk of people's dollar/pound/Euro/yen/renminbi "money" (sic), they are absolutely right. Bitcoins and dollars are both simply collective promises that what is represented has the value of scarcity and is not counterfeit, and they both have to be taken on faith.

There is only one problem. Governments, as Hamilton demonstrated, have a serious interest in having their official fictions take precedence. The risk of any Bitcoin "bubble" is that, in the name of the protection of official legal tender, unofficial digits may find themselves being investigated for their risks of "fraud". Government can always be relied on to investigate others for having committed the very sins that the government wants to preserve for its own spiritual authority. 

Anatoly Veltman writes: 

Centrals may investigate and outlaw whatever they wish - but since they've encouraged the vastness of the internet, it's impossible for them to replace the cork. Eventually, they'll be adapters of a protocol.

anonymous writes: 

And that is exactly the point.

With crypto there are no groups of individuals painstakingly crafting bills in basements OR shadowy dictators buying eight figure currency printing machines from manufacturing facilities in Bavaria or Switzerland. Even if governments manage to cripple or persecute the Bitcoiners - (who? miners? users? developers? writers? consultants?) - there are as I type this 735 existing crypto issues, over 100 crypto assets, and thousands of tokens trading in nearly 4000 markets of varying mechanisms and liquidity around the world. Far more important than that, each day tens of thousands of new minds are brought into the crypto sphere, some of whom are brilliant programmers both (a) eager to outdo the best of what is currently available, and (b) eager to get rich. There is no, absolutely no, putting the proverbial genie back in the equally-proverbial bottle.

May

25

 The Pentagon has confirmed that the USS Dewey sailed within 12 miles (20 kilometers) of Mischief Reef in the Spratlys. The DOD spokesman stated that the U.S. "operate(s) in the Asia-Pacific region on a daily basis, including in the South China Sea….We operate in accordance with international law. We fly, sail, and operate wherever international law allows."

This "violates" the claim that these waters are sovereign territory of the PRC. The Chinese report that two frigates drove the Dewey out of the area.

That seems improbably. The Dewey is the size of a WW II heavy cruiser. Chinese frigates are the size of American Coast Guard cutters.

May

23

 If American Enterprise Institute's numbers are correct and if the Trump Administration is serious about their promise of creating jobs, Trump should immediately give up on coal and focus on solar. Unfortunately, AEI's presentation is wrong.

AEI put their thumb on the solar scale. For solar, they included employees dedicated to the construction and installation of new solar assets in addition to operating employees. They did not do the same for coal. They didn't do it for coal because almost no one is building a new coal plant.

Instead of comparing apples with oranges, AEI compared apples with orange trucks. Nevertheless, on the jobs front, the conclusion is the same: Trump should give up on coal.

Stefan Jovanovich writes: 

When Milton Friedman was shown a construction project in The Third World where the earth moving was done by people using shovels, he was told that this was helping with employment. Friedman is said to have replied: "Then why not take away the shovels and give them trowels." The output for solar remains trivial - .04 billion MWH vs. 1.24 billion for coal and 1.38 billion for natural gas. Even the most optimistic projections of the DOE don't have solar producing even 10% of the present output of either coal or natural gas before 2025. Perhaps the solution to the employment problem is to abolish the long-wall mining equipment and bring back the shovels.

Leo Jia writes: 

It is alive and well here in China. At my building complex on the east side of Shanghai, which was an early 1990s series of lux buildings, they'll send a ground crew of 10 to trim hedges all day. I could have easily done the same with a trimmer in an afternoon during my summer odd jobs.

Other bizarre aspects of town– even in some of the most posh areas with the latest buildings, there are a dirth of street lights and almost none of the bicycles, runners, and electric mopeds, even the newest, have lights and/or reflectors.

Another thing I wince at is workmen of all kinds not using safety glasses which cost all of a couple of USD equivalent. The ones I see wearing are the supervisors well away from the dangers.

May

18

 Carlo Cipolla's Five Fundamental Laws of Stupidity:

1. Always and inevitably everyone underestimates the number of stupid individuals in circulation.

2. The probability that a certain person (will) be stupid is independent of any other characteristic of that person.

3. A stupid person is a person who causes losses to another person or to a group of persons while himself deriving no gain and even possibly incurring losses.

4. Non-stupid people always underestimate the damaging power of stupid individuals. In particular non-stupid people constantly forget that at all times and places and under any circumstances to deal and/or associate with stupid people always turns out to be a costly mistake.

5. A stupid person is the most dangerous type of person

Here's a link to Cipolla's essay.

Stefan Jovanovich writes: 

Many many thanks to AC. Cipolla's Guns, Sails, and Empires: Technological Innovation and the Early Phases of European Expansion, 1400–1700 (1965) should be required reading for anyone who wants to presume to understand our "modern" world.

anonymous writes: 

I have the most trouble identifying my own stupidity.

My swat drove home the lessons of liberalism and progressive taxation. It was in Mr Gallagher's 8th grade history class. Before class started, noxious Paul initiated a fencing match with me using pencils. It wasn't my idea but I did score the only point - with a leaden puncture to Paul's forearm. He promptly took his wound to Mr Gallagher, who summarily referred me to the vice principle's office.

Mr Curtis had me grab my ankles for three humiliating whacks. They didn't hurt so much as worry me that my parents would find out (they didn't). And it seemed unfair as I only attacked in self defense.

I won the skirmish but lost the battle, because the system was rigged pro "victim", even then. It would have been better, in a away, had I lost the fight. I wouldn't have snitched but would have learned about another kid to avoid.

Russ Sears writes: 

What I have observed is that some people are too stupid to realize that they are stupid. Studies show that those that do the worst overestimate their abilities on a test of just about anything, while those that do the best underestimate their abilities to test on just about anything. Socrates was right that the beginning of wisdom is to know one is ignorant. However, as his untimely death implies, he was wrong to point this out to stupid but powerful people. However the leaders should not be as Aristotle implies (perhaps as survival mechanism learned from Socrates experience), the most learned dictator, but the ones most capable of producing cooperation from all individuals talents. 

I was told that the reason most people do not know they are stupid is that they attribute their knowledge as being the most important, and therefore under-estimate the importance of their ignorance. Perhaps this is a form of denial, to justify their self-worth. The market's in general is brutally honest on what is "important". 

May

18

 Bitcoin is currently stalling out on transaction speed and will force the hand of the core development team to make adjustments.

At present, the miners are clearing (very roughly) 2000 transactions every 10 minutes, this is primarily due to the limit of the block size of 1 megabyte and the amount of transactional information they can place into that size.

There is a lot of hand-waving about the slowing rate of growth of bitcoin versus other cryptos and the glacial adoption of newer protocols is certainly a part of it. For my part, I am content that the developers are overly cautious as any bug in the implementation can crash the economy. Ethereum learned this firsthand last year after they lost millions due to a bug. That said, Ethereum is also a model about how resilient the cryptos can be in the face of lost confidence.

At some point, bitcoin will increase the size of the block above 1MB and punt the transaction problem down the road for a while, but it exposes one of the problems with it's design which is transactional throughput. Most of the cryptos out there have the same tree-based transactional design that at greater scale will eventually cause the system to come to a crawl under normal load, not to mention making them vulnerable to spam attacks.

There is some promise in a new way of guaranteeing transactional integrity without a tree in DAG (directed acyclic graphs). The concept is more of a mesh of (very) lightweight transactions, each of which is forced to validate two other previous transactions. This obviates the need for miners and makes every initiator of a transaction do the proof of work. This concept would scale far better than (what has become) the centralized miner model of the major cryptos.

I am aware of two cryptocurrencies being developed that use this model, Byteball and Iota, with Iota having a better marketing department. They are completely unproven, flawed, hoarded and still in development, but already have a solid following and are trading at what I'd consider high premiums. If they somehow reach critical mass without implosion there may be a big future in actual microtransactions, fulfilling the promise of cryptocurrencies years ago.

Andy Aiken writes:

Ethereum is on track to convert to a Proof of Stake transaction model sometime in 2018. Like bitcoin, ethereum is currently a Proof of Work cryptocurrency, in which transactions must be included in each new block being "mined".

As Jayson indicates, mining is highly computationally intensive. BTC and ETH mining requires special hardware, and consumes hundreds of gigawatts of power globally.

In a Proof of Stake (PoS) system, the network consists of nodes that reach network consensus on transactions without the computational intensity. The owners of the nodes (stakeholders) get a share of the transaction fees. A node could be run on an ordinary PC. There are currently PoS coins, but they are much less popular than bitcoin and ethereum.

On May 22, there is an Initial Coin Offering (ICO) for Tezos, which will be Proof of Stake right out of the gate. Tezos claims to be a direct competitor to Ethereum for the mantle of next-generation bitcoin. I'm skeptical of this ICO since the issuance is uncapped. This means that interested individuals and institutions will be able to get a piece, unlike other recent ICOs (e.g. Blockchain Capital, a venture fund that issued its own coin) that closed within 5-10 minutes of opening. On the other hand, Tezos could raise billions of dollars while being years from developing anything close to what Ethereum has already developed.

Byteball and Iota are using an entirely different model and a unique distribution system. E.g., if you hold BTC, you can get an allotment of Byteball by providing some personal information.

Cryptocurrency is much like the auto industry of the early 1920s. The failure rate of new coins/businesses will be high. Regulatory agencies are barely present, there are many scams, and a gambling mentality at the cryptocurrency exchanges. But the opportunities appear to be commensurate with the risk.

Stefan Jovanovich writes: 

AA may want to adjust his historical analogy slightly. The failure rate for automobile manufacturers peaked not in the 1920s but in the preceding decade. By the "early 1920s" the "Big 3" were already established.

The historical analogy that works best for me is the growth in the collectibles market pioneered by Joseph Segel. No one can question the Marxist measure of value for the objects that the Franklin Mint and others produced just as no one can quarrel with the enormous amounts of human labor, energy and computation that have gone into producing these current digital collectibles. One wonders what network of Quality Value Convenience will evolve out of all this buying and selling of precious man-made objects.
 

May

17

 The investigation of Iran-Contra diminished Reagan's authority with Congress and killed the second tax rate cuts.  This time the  appointment of a special counsel has saved a Republican President from himself.  The language of Mueller's mandate is to investigate "any links and/or coordination between the Russian government and individuals associated with the campaign of President Donald Trump; and…any matters that arose or may arise directly from the investigation."  Those "any matters" are far more likely to be questions into the FBI's own conduct and those of the Obama DOJ than recordings of Trump plotting with Putin.  The delicious irony of all this is that a career civil servant, not the Republican Congress, has forced the President to return to trade and taxes and Israel and China even as the Democrats celebrate and convince themselves into that "the Russian connection" will be their winning issue for 2018.

We in the bleachers are doubling down on our U.S. Common stock longs.

Ralph Vince writes:

I'm with you Stefan. It's still a bull market, you have a volume bar buy signal tomorrow (a very short term thing) at any point lower than today's low (or for any of the next couple of subsequent days).

I may take some heat on it, but that's what must be done.

Shields up and let's go.

May

17

 The founder of the modern cow flesh trade Phillip Danforth Armour was born on this day in 1832 in Stockbridge, NY. The town then was the same size that it is now -  two thousand people.  Armour went to California when he was twenty and came back four years later with a fortune - what would be roughly $5 million now ($8000 then).  His next killing came when he got the contract to sell beef to the Union Army. 

Thanks to Nelson Miles, Roosevelt's "brave peacock", Armour and Swift are still seen as villains.  Miles was, what else, a Progressive Democrat; thanks largely to Miles' testimony as a non-witness,  the body counts of the last Indian War have the same accuracy as John Kerry's estimates of what our Genghis Kahn hoards did in Viet-Nam.  

The thing about PD Armour that intrigues me the most is his actions in the wheat market in 1897. In the spring of 1897, 28 year old Joe Leiter decided to corner the wheat market. Leiter had money as his dad was a partner of Marshall Field. The novice Leiter also had a great first trade in wheat, netting $500,000. When he started buying wheat in 1897, it was trading at $0.50 and his buying promptly ran it up to a dollar. (Armour was a seller of wheat). Since dollar wheat hadn't been seen since the Civil War, the farmers sold every grain of wheat they had in storage. Leiter was a hero to the farmers for his "Patriotism." Leiter happened to be a customer of PD Armour, as Armour owned many grain elevators with a capacity of a few million bushels of wheat. He also owned 7,000 reefer rail cars for shipping meat that could be used to ship wheat(or tie up rail lines,) if necessary. Leiter had 1.2 million bushels of wheat in Armour's elevators, which he exported during November of that year, emptying Armour's elevators.

Leiter had a few million bushels of Dec wheat (WZ8 Comdty) and intended on taking delivery which would have left Armour short because he had no wheat to deliver. Armour had his agents scour the country buying up every bushel they could get, plus he also bought wheat futures to cover his short position. Since it was late in the season, Armour had to charter tugs to keep the ice from blocking the waterways and Great Lakes clear so he could get his grain ships through. Armour also built the largest grain elevator in the world on Goose Island to store all the wheat. Interesting factoid…the elevator was built in 28 days.

 Armour got all the cash wheat he needed(he had been short 9 million bushels) and was able to make delivery of 9 million bushels of Dec wheat to Leiter. Incidentally, Leiter had to pay storage to Armour of 3/4 cent per bushel per month. In the spring of 1898, the US went to war with Spain, and the wheat market rallied. However, Leiter was forced to buy May wheat (WK8 Comdty) to keep his corner going. Armour had the wheat, and stuffed another million bushels of wheat on Leiter in May. Armour was hoping that Leiter didn't have the cash but he did have the cash, barely, and was able to hang on.

In March 1898, Leiter charted 21 ships and started exporting wheat. He began lightening up on his July wheat position, selling 6.5 million bushels. While he was selling his July (WN8 Comdty) position, he was attempting to corner the May wheat. Leiter went to Pillsbury and Peavey and got them to double cross Armour and not sell him any wheat. In the meantime, with the war against Spain, wheat traded up to $1.85 and Leiter looked golden. However, Leiter never thought of other variables and left his flank exposed. The wheat crop came in early and huge, and as much as 4.5 million bushels flooded into Chicago in May alone. Armour got Peavey and Pillsbury to re-double cross Leiter and sell him the wheat to stuff down Leiter's throat. The rest of the summer saw Chicago's elevators fill up to the bursting point. All the elevators in the country quickly became full of wheat. The crop turned out to be 650+ million bushels, the war with Spain was short, and the wheat price broke hard very quickly.

Leiter was long 15 million bushels of wheat in both cash and futures. To say he was hurting would be an understatement. His father, Levi, had to come out of retirement to bail Joe out. They ended up selling the 15 million bushels using the very wily Armour as their broker. Leiter never traded wheat again, and he spent the rest of his days being a dandy while hanging around at the track.

The moral of this story is that the cash grain market will always trump the grain futures market. This is very apparent when the front month goes into delivery near the contract expiration.

May

15

 "A Demographic Theory of War: Population, power, and the 'slightly weird' ideas of Gunnar Heinsohn":

"What about America and Europe?"

"Except for its white population, which is falling, America is in demographic neutrality. Europe, however, is in demographic capitulation. Several European countries have birth rates so low they are committing demographic suicide.

Supposedly, the EU was formed because Europeans were tired of fighting. 'Five hundred years of war is enough,' they said. But there is a great lie here.

Why wasn't four hundred years of war enough? Or three hundred?

The real reason Europeans decided to stop killing each other is that they were no longer having big families. They had no more superfluous sons to burn on the battlefield. I talk about these things in my book. I will talk about them today, as well."

"Your book hasn't been published in English," I said. "A demographic theory of war and terror could be a tough sell to a military audience in London." Heinsohn smiled. "Generals understand. If you don't have children today, you won't have soldiers tomorrow.

Stefan Jovanovich writes: 

Heinsohn's economic theories are interesting to me. He is another creditista - i.e. someone who thinks credit is the oxygen for the voluntary systems of exchange that human beings have spontaneously created. But I doubt he would let this amateur into the Otto Steiger club; they join nearly everyone else in the academic world in believing that central banks are somehow essential to commerce.

I don't think anyone can argue successfully with the "youth bulge" theory as it applies to street crime and mob violence; but I wonder if it explains much about how the really bad wars start. There were no "surplus" young males in France, Prussia, Austria or Britain in 1790. There were in Russia, but the Russians were brought into the several Napoleonic Wars by their allies; they were not the ones who started the official killing. There was no demographic bulges in Spain, Germany and Japan in the 1930s or in the United Kingdom, France, Austria and Germany, net of emigration, in the 1910s.

In any case, if demography starts wars, it does not pay for them. For that you need central government taxation and the central banks that can turn government credit into payment, which takes us back to Heinsohn's economics…..

May

11

On healthcare, the actual voters wanted "repeal and replace", not just repeal. Even among Republican likely voters, few than half wanted complete repeal and "start all over", according to the most recent Rasmussen; and an equal number wanted "Go through the law piece by piece to improve it". Overall, the poll results were 54% for "piece by piece", 31% for "repeal only" and only 13% for "leave as is". Trump's judgment was proven correct: the voters wanted him to do something that was an attempt to "fix" healthcare.

On the question of churches in politics, his instincts were also in line with the likely voters. On the question of whether churches should be banned from politics, their response was 39% Yes, 52% No and 9% undecided.

Among Republicans Trump has a nearly 5-to-1 Approval ratio: 51% Strongly Approve, 11% Strongly Disapprove. The Never Trump "conservatives" are even outvoted by the 15% of Democrats who Strongly Approve. The overall result is 47% Approve, 53% Disapprove which are exactly 3% below what the beloved outgoing President's numbers were at this time last year. For a Republican President, who never ever wins the net approval of the "non-partisan" middle until they are faced with an actual ballot, those are more than satisfactory numbers.

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