Tuesday, October 29, 2013

When One Is An Ugly Number

For many decades now, Modern Portfolio Theory (MPT) has been the "gold standard" for investment management.  Basically, it shows that an investor can achieve above-average returns with below-average risks by spreading his risks or allocating his portfolio across many "asset classes," i.e. large company stocks, small company stocks, international stocks, bonds, real estate, cash, etc.  This was possible because all assets are not perfectly correlated.  For example, bonds might go up in value when stocks go down in value. Or, gold may move a different direction than international stocks.  If an asset class moved exactly like the S&P 500, it had a correlation of 1.0.  If it moved up half as much as the S&P 500, it had a correlation of 0.5.  If it moved down one-quarter as much as the S&P 500 moved up, it had a negative correlation of (0.25).

Critics of MPT have always known there were some unrealistic assumptions supporting the whole theory. For example, one assumption was that all investors are rational and making decisions in their own best interest, based upon complete information.  Do you believe that?  And, there were some other unrealistic assumptions as well.

During the financial collapse of 2008, all correlations went to 1.0, which happens only when there is a complete collapse and all asset classes are losing value.  MPT made no provision for this happening, because rational investors would scoop up the bargains.  MPT made no provision for investors being terrified and wanting only cash.

In 2009, I was invited to serve on a certification committee, to re-write a certification exam for financial advisors.  At first, I was excited for the opportunity to update financial advisors on what we had learned about MPT during the global financial crisis, as well as other techniques for investment management. However, it was like finding yourself in an old-fashioned religious revival with everybody competing in their enthusiasm to agree with the preacher.  They were continuing to preach the "old-time religion."  Disappointed in the intellectual dishonesty, I resigned from the committee and have had nothing to do with them since then.

Currently, I'm in Dallas attending an advanced but similar course and relieved to find that we are finally being honest about the limitations of MPT, as well as other techniques.  But, why did it take four years?

Monday, October 28, 2013

Thank You, Wells Fargo

Each month, the Bureau of Labor Statistics publishes the "jobs report," which the media and the markets watch closely . . . too closely.  It is a flawed measure for several reasons.  One is that people get discouraged and quit looking for jobs, which decreases the available pool of labor and therefore makes the unemployment rate rise.  This factor in the changing labor force is called the "labor force participation rate." In other words, what percentage of "able-bodied" people are looking for work?  Of course, there is no shortage of political rhetoric around this number.

Today, Wells Fargo released a new Labor Market Index.  It includes six key labor variables and, at first blush, looks very interesting.  Next week, they will publish the statistical backup for this index, and I look forward to studying it.  Hopefully, the media and the markets can be liberated from the over-hyped "jobs report."

In the meantime, there is one little noticed piece of jobs data that I have always found interesting, i.e., the number of unemployed for every job opening.  It has now fallen to only to 2.9, which is the lowest since 2003.  I have no doubt the job market is improving, but it is improving slower than the economy is improving.  While this is characteristic of recoveries from a financial crisis (as opposed to recoveries from ordinary recessions), this is still unacceptably slow.

I applaud Wells Fargo for this new step forward and look forward to studying it. 

Down-Shifting Social Expectations

Republicans tend to believe that marginal income rates will not be raised if we experience strong economic growth.  Democrats tend to believe entitlements can be increased if we experience strong economic growth.  While they disagree on the methods to achieve it, they agree that the solution to all our problems is strong economic growth.  What happens when both parties praying at the altar of strong economic growth realize they are worshiping a false god?

A friend recently sent me a column by Robert J. Samuelson that makes me wonder if strong economic growth is a pleasant memory.  Are we doomed to a future of slow economic growth?  And, most importantly, can our society withstand such a down-shifting?

Since 1959, the U.S. has enjoyed approximately a 3% annual growth rate in GDP.  A product of the Age of Enlightenment, we've always assumed that things would always improve.  The conservative Cato Institute think tank explained that our growth since 1950 resulted from (1) a larger workforce from female participation, (2) a better educated work force, (3) more capital, e.g., machines & computers, per employee, and (4) technological & organizational innovation.

Unfortunately, labor force participation by women has decreased from 59.9% in 2000 to 57.7% last year.  High school and college graduation rates have stopped increasing.  Capital investment by business has been lagging for years.

Today, we're only growing from 1.5-2.0%.  That's not much additional income to keep a population happy when faced with higher taxes, possibly higher health insurance costs, and worsening income inequality.  Is there a tipping point, at which the resentment boils over and irrationality prevails?  If so, how will we know it when we approach that point?

Always seeing a glass as 51% full, I'm praying that our workforce increases from Hispanic additions, that education becomes more STEM-centric, and that businesses will lose their fear of politicians and start investing capital.

Even England is growing more rapidly than the U.S.   How will this country be different if we must lower our social

Wednesday, October 23, 2013

Giving the Devil His/Her Due

The latest forecasts from investment banking giant Goldman Sachs predict the following:

1.  GDP growth this year will average only 1.6%, reflecting damage of the government shutdown, but will jump to 2.9% for next year and unemployment will be "only" 6.6% by the end of 2014.
2.  Inflation remains tame at 1.8% at the core level through next year.
3.  Interest rates will move up sharply from about 2.5% for 10-year Treasuries now to 3.25% next year.
4.  The S&P 500 will end this year about where we are now (1,750) but end next year at 1,900.
5.  Oil will continue to fall about 10% through next year.
6.  Gold and cooper will both fall.  Gold is expected to drop from about $1,325/oz to only $1,030, while cooper will drop from $6,600/ton to $6,200.
7.  The dollar will appreciate against the Yen but depreciate slightly against the Euro.
8.  Tapering of quantitative easing will not begin before March.

Any questions?

Tuesday, October 22, 2013

One Cost of Uncertainty

Due to the government shutdown, the all-important Jobs Report was delayed from October 4th to October 22nd.  While the delayed report showed the unemployment rate dropped from 7.3% to 7.2% and average hourly earnings up a bit, the other numbers were disappointing.

Private sector jobs grew 161 thousand in August and were expected to grow 180 thousand in September.  Instead, they only grew 126 thousand.  The anecdotal reports were that hiring decreased during the month as the fiscal cliff of September 30th approached, obviously a response to increasing possibility of a government shutdown.

I could die happy if I never hear another politician piously mouthing "jobs, jobs, jobs."  If I needed a job, I would be angry at all politicians, and I would be justified.  Politicians are not job creators but job destroyers.

Mommies, don't let your babies grow up to be . . . politicians!

Sunday, October 20, 2013

Just Another 56-Year-Old Movie

I should have watched the film classic by the famous Ingmar Bergman called The Seventh Seal many years ago.  It plotted the emotional trail for so many combat veterans.

In the mid-fourteen century, a priest convinces a young Swedish knight to leave his wife and castle to serve in the bloody Crusades.  Seeing death up close, smelling it, feeling life leave others, and loathing his own fear of it, he finally returns from the Crusades to await his own death, whenever and wherever he finds it.  When he returns to his native Sweden, the Black Plague is ravishing the country he loved.  Sorrow is everywhere.  Before he reaches his castle, he meets Death on a beach.  Stalling for time, he invites Death to play a game of chess first, which they play intermittently throughout the movie.  He realizes he is stalling, not to just continue living, but to do something, anything worthwhile in his wretched life; so weary of war.  He befriends a young couple with a baby girl and an infectious love of life.  When they find themselves in danger, the knight distracts Death with their chess game.  Once the young family is safely away, the knight is then ready to die.  He had accomplished something worthwhile, and Death takes him.  The final scene shows the knight dancing joyfully on a hillside, liberated from the sorrow of life.

The title of The Seventh Seal refers to a passage in the Book of Revelation in the Bible when "the Lamb opens the Seventh Seal, there was silence in Heaven."  This refers to the knight's continual prayers for God to lead him, but he only hears from Death instead.

The best known themes in existentialism are the love of absurdity and the obsession with death.  While there are some delightfully absurd situations and dialogue in the movie, the obsession with death is overwhelming.  But, another existential theme is the individual's responsibility for his own life and his own death.  Doing something worthwhile in his life was more important to the knight than his death, and that's good advice!

I couldn't help thinking about my fellow veterans, who return from war more emotionally-damaged than physically-damaged.  Their feelings are not unique; just unbearably heavy.  Maybe, it would be helpful for them to view this movie, to see that doing something worthwhile in life is more important than their death by suicide.  Indeed, it is a predicate to dying.

Saturday, October 19, 2013

The Joy of Unintended Consequences

Many laws have unintended consequences, whether at the national, state or local level.  Republicans believe that is proof the government never understands what it is doing.  Democrats believe that unintended consequences are a normal part of legislating.  Existentialists find unintended consequences to be absurdly amusing.

Over the last few years, there have many changes in laws regulating ownership of guns, especially at the state level.  This can pose a significant problem to executors of estates, as they try to distribute personal effects of the decedents to beneficiaries across state lines.  The executors can incur both financial and criminal liability for distributing guns illegally, even if innocently.

Rising to the occasion, a cottage industry is developing among lawyers to create "gun trusts."  While the details are fluid, the basic idea is that a person would transfer ownership of his guns before his death to a trust that would continue after his death, relieving the executor of any responsibility to transfer the guns.  The trustee of the trust would be whomever the decedent wanted to have the guns.  That trustee would have the right to pick his successor trustee, presumably based upon some exchange of money.  Of course, the trust would have to be established in a "gun-friendly" state, like Virginia.  Voila -- an end run around restrictive gun laws!

Republicans, who feel strongly about the second amendment, will undoubtedly applaud this evolutionary step.  Democrats, who feel 300 million guns in this country are enough already, will undoubtedly feel the need for more laws.  Existentialists will just chuckle.

Friday, October 18, 2013

Rationalized Irrationality

Novice investors either expect the stock market to be efficient, according to Efficient Market Theory where all information is known by all investors, or they expect to invest based on hunches or even inside information.  However, experienced investors know to study the specialized analysts, and make rational decisions supported by careful analysis, but always expect some irrational behavior.

For example, consider the example of IBM, a historic giant in information technology.  Morningstar gives it 4-stars, with a grade of A on financial position.  Thomson Reuters rates it a BUY, with its highest possible score of 10.  Standard & Poor's also rates it a BUY, as does Argus and The Street.  The Jaywalk score of 2.65 makes IBM a BUY.

Yesterday, the company announced an increase in its profit margin and got pounded by the market, losing a whopping 4% in one day.  Because the company is such a large component of the Dow Jones Industrial Average, the Dow was down most of the day, even though the S&P 500 was up strongly.  How's that for irrational behavior?  Since when is increasing your profit margin bad??

Here's the problem:  total revenue was down slightly because of a 40% drop in hardware sales in China.  Following the Snowden/NSA affair, the Chinese government has become worried about sales of American technology in their country and is pressuring Chinese businesses to only buy Chinese technology.  That's it!  A clear market over-reaction, making IBM an even better buy right now, I think.

Most pundits think it was Lord John Maynard Keynes who first warned that the stock market can remain irrational longer than you can remain solvent.  In other words, always expect some irrationality but don't fight it.  Adjust your investment decisions when irrationality presents opportunities.

Rational investors don't need to understand irrationality . . . just deal with it!

Thursday, October 17, 2013

The Morning After

Congress finally did their job last night to prevent America from defaulting.  Yes, the international community had to get involved, with a host of "shame on you, America" comments and China asking the world to be de-Americanized.  The debacle in Washington was certainly not the best promotional piece for democracy.

But, that is minor.  Take a look at the loss in consumer confidence:

Chart of the Day

This is major!  After hitting a post-recession high in June, the horrors in the Capitol has really discouraged the American people.  Of course, this affects consumer spending, which is about 70% of our GDP.

And, did I mention that another of the three credit-rating agency put us on "negative credit watch," which is the last step before a credit downgrade?  

Now, refresh my memory, what was this debacle all about?

Wednesday, October 16, 2013

Falling Into Place ?

The pieces are already falling into place for the worst-case scenario to the current debt debacle in Washington. On Friday, mutual fund giant Fidelity announced they had sold all short-term Treasury notes and bonds, expecting they would be hammered if Congress cannot agree to raise the debt ceiling.

Yesterday, a small auction of Treasuries was poorly subscribed, as investors are starting to avoid U.S bonds.  Last night, one of the three credit ratings firms, Fitch, announced the United States was being placed on "negative credit watch," the last step before stripping us of our AAA rating.  Standard & Poor's has already stripped us of that rating, based not on our ability to pay but on our inability to govern.

Interest rates that we pay on short-term Treasuries have risen, while falling on long-term Treasuries.  This is called a "flattening yield curve" and is usually a predictor of recession.

Traditional interest rate analysis begins with the "risk free rate" (RFR), which reflects inflation and the demand for bonds versus other asset classes.    To that RFR, you add something to reflect risk of not being repaid, called the risk premium.  Whether you are comparing AAA corporate bonds with junk bonds, you start with the RFR and add a small risk premium for AAA corporate bonds and a large risk premium for junk bonds.  That's why junk bonds carry higher interest rates than AAA corporate bonds.

Around the world, the RFR has universally been U.S. Treasuries.  Now what, the RFR is no longer risk-free or is it?  Investors are avoiding short-term Treasuries, but buying longer-term Treasuries in the belief we'll eventually get our act together.

Many pundits are predicting our interest rates will rise sharply, because the RFR will rise, but that ignores the power of the Fed to keep interest rates low with quantitative easing.  Over the long term, the RFR will rise but no time soon.

Another piece falling into place are the lawyers circling Congress.  If interest payments are made while Social Security payments are not, there are legions on both sides saying that is an unconstitutional prioritization of equally-binding laws.  I don't venture a legal opinion, but, as an economist,  it is better to pay the interest.

Treasury workers are already hiding behind technology, saying they cannot technically pay interest without paying entitlements.  They're getting their excuses ready.

Another piece is the sophisticated cash-flow analysis for the Treasury, which predicts the end-of-the-world tomorrow.  Goldman Sachs predicts it will be next week.  Who knows?

The most annoying piece is the international ridicule.  China has called for the de-Americanization of the world, as America has proven that democracy is a joke.

Still, Wall Street remains optimistic that the debt ceiling will be raised and default avoided, as the futures market indicates a nice rally today.  I think they're right . . . until we do all this again in a few months!

Tuesday, October 15, 2013

A Refreshing Change of Pace

During the national embarrassments that Congress creates ever more frequently, it is nice to read a little good news, such as three Americans winning this year's Nobel Prize for Economics.  They were Eugene Fama and Lars Peter Hansen of the University of Chicago and Robert Shiller of Yale University.  Congratulations to each of them!

Although all three have increased our understanding of how asset prices are determined, it is also interesting that the two universities represent very different views of economics.  The University of Chicago is associated with the conservative view:  that government can only make an economy less efficient.  Indeed, their seminal work is called "the efficient market hypothesis."  Detractors have joked that Professor Fama was walking across campus with a student, when the student saw a $20 bill laying on the ground.  He pointed it out to Professor Fama, who said there was no $20 bill laying there.  Seeing it with his own good eyes, the student asked Fama how could he deny the existence of what the student could see?  The professor explained that if the $20 bill was really laying there, somebody would have already picked it up, because the market is efficient.

All joking aside, the efficient market hypothesis gave birth to and propelled the index industry of mutual funds and ETFs.  Why pay somebody to pick stocks for you, when that was impossible.  If a stock was undervalued, somebody would have already bought it.

Professor Shiller of Yale, on the other hand, is a very different type of economist.  While he doesn't argue undervalued stocks can be found, he does argue overvalued stocks can be avoided.  (Fama would argue stocks could not be overvalued, because investors would have already sold the stocks if they were overvalued.)  Shiller has done significant work in documenting "bubbles," which theoretically is impossible if the markets were really efficient.  He clearly predicted "dot.com" stocks were overvalued and later predicted home prices were overvalued.  Last week, he said home prices are again showing some signs of being overvalued.  Shiller is a big supporter of Janice Yellen as the replacement for Ben Bernanke as Fed Chairman.  (He also does economic research with Yellen's husband.)

Be it a "high five" or a glass of champagne, raise your hand today and be proud of being an American. Since the year 2000, Americans have won 21 out of 37 Nobel Prizes in physics, 18 out of 33 in medicine, 22 out of 33 in chemistry, and an incredible 27 out of 30 in economics.  Whoever said that America is in decline?

 Now, wasn't that refreshing??

Monday, October 14, 2013

Ceiling Uncertainty?

As someone who tries very hard to keep political opinions out of his writing, I've always respected The Kiplinger Letter for keeping their political opinions private.  However, their newest letter said "For now, Republicans favor ideological purity over winning . . ."  I'm trying to judge whether their political opinion is showing or whether that is a simple statement of the facts.

It also predicts more continuing resolutions than budgets to fund the government, which is unfortunate.  Without doing budget planning, there is no curtailment in entitlement spending.  We really do need a "grand bargain" with entitlement cuts and revenue increases.

Also, with small increases in the debt ceiling, there will be even more opportunities to create a crisis, and it will make it seem debt is rising faster than it really is.  "That, in turn, will embolden the staunchest conservative Republicans to fight against the increases."

While the latest newsletter doesn't speak to the potential default, if the debt ceiling is not raised this week, it doesn't seem overly-concerned about it, just mentioning it in passing.

If I were a historian, I would also treat the debt ceiling lightly, as Congress has always done the right thing and raised the ceiling to pay for the spending they have approved.

If I were a psychiatrist, I would argue that rational people connected to reality can never negotiate successfully with irrational people who have only a tenuous connection to reality.

If I were a market strategist, I would continue to buy all this week as the market goes down, as it will.  If we do break the debt ceiling on Thursday or Friday, the market will fall badly . . . for awhile, which is time to do even more buying.  After all, fourth quarter earnings are expected to rise 9.4%.

Make no mistake, breaking the debt ceiling is simply idiotic.  It is a self-inflicted wound and a seriously-bad economic event, but we will survive.  Prepare to be scared  . . . but keep buying slowly.

Truth or Who Cares?

Everybody knows you cannot trust information you find on the internet or receive in emails.  But, sometimes, it doesn't matter, because the idea is more important.  I'm quoting from an email a honest friend sent me.  While I don't know if Warren Buffett said this or not, the idea is more important than the facts.

Warren Buffett, in a recent interview with CNBC,offers one of the best quotes about the debt ceiling ...
"I could end the deficit in 5 minutes," he told CNBC.
"You just pass a law that says that any time there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election."

The 26th amendment (granting the right to vote for 18 year-olds) took only 3 months and 8 days to be ratified!  Why?
Simple! The people demanded it.

That was in 1971 - before computers, e-mail, cell phones, etc.
Of the 27 amendments to the Constitution, seven (7) took one (1) year or less to become the law of the land -
all because of public pressure .
Warren Buffet is asking each addressee to forward this email to a minimum of twenty people on their address list; in turn ask each of those to do likewise. In three days, most people in The United States of America will have the message.
This is one idea that really should be pass ed around.
Congressional Reform Act of 2013
1.   No Re-election if over 3% Deficit
If there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election.

2.   No Tenure/ No Pension
A Congressman/woman collects a salary while in office and receives no paywhen they're out of office.

3 . Congress (past, present & future) participates in Social Security.
All funds in the Congressional retirement fund move to the Social Securitysystem immediately. All future funds flow into the Social Security system,and Congress participates with the American people. It may not be used for any other purpose.

4 . Congress can purchase their own retirement plan, just as all Americans do.

5 . Congress will no longer vote themselves a pay raise.
Congressional pay will rise by the lower of CPI or 3%.

6 . Congress loses their current health care system and participatesin the same health care system as the American people.

7 . Congress must equally abide by all laws they impose on the American people.

8. All contracts with past and present Congressmen/women are void effective 12/31/13.

The American people did not make this contract with Congressmen/women.
Congress made all these contracts for themselves.
Serving in Congress is an honor, not a career.
The Founding Fathers envisioned citizen legislators,

so ours should serve their term(s), then go home and back to work.
If each person contacts a minimum of twenty people then it will only take three days
for most people (in the U.S.) to receive the message.

Don't you think it's time? 

Saturday, October 12, 2013

Quarterly Column

Long-term readers know I write a column for Inside Business, which is affiliated with The Virginian Pilot and owned by Landmark Communications.  My latest column can be found here:

Tuesday, October 8, 2013

Wake Up, Ronnie!

My favorite professor at Wharton has always been the brilliant Jeremy Siegel.  Today, I'm quoting from his latest Commentary:

With the current stalemate in Congress, I began imagining the formation of a third political party that would be fiscally conservative, socially fairly liberal, and strongly dedicated to solving the tough problems that face our country. Many of the party would be non-Tea Party Republicans who no longer want to be held hostage to the right wing of their party. I think such a third party could get 20% to 30% of the popular vote, deny either the Democrats or Republicans an outright majority in Congress, and force either the Dems or the GOP into a coalition to run the country. For such a model, just look at the United Kingdom, where current Prime Minister David Cameron was forced into a coalition with the Liberal Democratic Party in 2010 to form a government. It was the first coalition government since World War II.

It sounds like he is arguing that Reagan Republicans should secede from the Republican Party.  I'm sure Ronald Reagan must be rolling over in his grave!

American "Opium"

Communist theorist Karl Marx once said "religion is the opium of the people."  That may be true in some places and during some times.  But, in America, it is more true that "credit card debt is the opium of the people."

Since the global financial crisis in 2008, Americans have taken a twelve-step program and seem to be kicking the habit of using credit cards and paying those high interest rates.  After total credit card debt routinely increased about 10% year after year, it dropped that much in 2009 and has been relatively flat since then.  (It actually fell $883 million in August.)

Of course, total debt of consumers continues to rise, but it is mostly car loans and student loans.  Car loans are good debts.  However, it is still unclear if student debt is good or bad.  (Is a diploma from some "failure factory" worth more or less than a new wardrobe?)  But, the point is that credit card debt is NOT rising.

As a whole, monthly debt service of households has fallen from 17.6% in 2008 to only 13.8% now.  That is a huge change.  The America consumer is getting healthier financially.  Well, those Americans who don't need a job are getting healthier financially.

The gap between those of us who don't need jobs and those who do need jobs is getting wider and wider.  I'm sure Karl Marx would have much to say about that as well . . . but I'd rather not hear it!

Monday, October 7, 2013

Different This Time ?

A government shutdown is not new.  It has already happened eighteen times.  But, how has the stock market reacted in the past?  Take a look at this interesting graph:

Chart of the Day

The market falls for a few days before rising sharply, when investors realize the world did survive.  After a little over-enthusiasm, the market then resumes its gradual, sustainable rise.  Based on this, the market should start rising quickly today, but the futures market indicates another losing day.

The difference is that there has never been a simultaneous debt ceiling debacle.  Therefore, I don't expect this big relief rally until confidence rises that a default on U.S. debt will be as survivable as another government shutdown.  Then, I do expect a sharp rally.  

Warren Buffet thinks a one or two-day technical default will not be "a big deal," and I agree.  But, it is still embarrassing.  It is like being a day or two late on your credit card bill . . . but worse.

There is considerable debate whether the Treasury Department has the legal authority to pay interest without simultaneously paying out Social Security checks.  It might be far better to "act now, ask forgiveness later" by paying the interest bill now and asking the Social Security recipients for forgiveness later.  Our creditors will be happier and those Social Security recipients, not suffering quietly, will besiege Congress to act like adults . . . finally.

Saturday, October 5, 2013

Just Another 61-Year-Old Movie

As a boy, I thought the ideal life was being a low-level bureaucrat, doing as little work as possible and spending as little money as possible, until I would finally got a hand-shake and a pension.  However, once I read my first Ian Fleming novel, bureaucracy lost its charm for me forever.

When my curiosity about existentialism began in Texas decades ago, I read about an obscure Japanese movie made in 1952 called Ikiru, (Japanese for "to live") about a low-level bureaucrat who learns he has terminal stomach cancer with only six months to live.  He had been dutiful and thrifty all his life but was now dying anyway.  Because the movie has been described as the greatest existential movie ever made, I went to the local video store (remember those?) and asked if they could order the movie for me.  They just laughed.

Eleven years ago when I first found Amazon, I looked for the video again without success, except for a short book about it.  Imagine my surprise when it just popped up on Amazon recently as recommended for me, based on previous purchases.  Of course, I bought it, and it was a joy to watch that grainy, black & white old movie.

Two themes run through existentialism.  One is the abundance of absurdity, and the other is man's obsession with death.

In this movie, we see the neighborhood mothers complaining about a cesspool that was making children sick.  We see them being shuffled from agency to agency, from department to department, from bureaucrat to bureaucrat, with nothing being accomplished.  You cannot miss absurdity of it.

Realizing the end of his drab,boring life is quickly approaching, he makes the mistake of many old fools and finds the innocent exuberance of young women irresistible, but only for a short time, before one tells him her exuberance comes from actually accomplishing something.  With little time left, he commits himself to fighting his fellow bureaucrats and turning the neighborhood cesspool into a park for children.

After the dedication ceremony of the park, where he is not recognized for all his effort, he stays in the park, sitting on the children's swing as the snow falls.  He froze to death that night, but a witness reported the old bureaucrat was singing softly as he lay dying in the snow.

The absurdity of excessive structure in life and the importance of doing something despite your impending death remind me of some Jimmy Buffet lyrics about "I'd rather die while I'm living . . . than live when I'm dead."  The old bureaucrat in Ikiru didn't start living, really living . . . until he started dying.

Thursday, October 3, 2013

Generation Shutdown

The impasse in Washington is difficult to understand.  Is it just the tired, old Republican versus Democratic conflict?  Is it more of a philosophical conservative versus liberal conflict?  I have viewed it as Tea Party versus Reagan Republican conflict.  But, one pundit suggested the obvious, i.e., that it is all the above but complicated by a generational conflict.

She speculated that the average age of Reagan Republicans is 60, while the average age of Tea Party members is only 45 (but didn't have the metrics to back that up).  She did not speculate why that was important.

Is it because younger people see black & white clearly but not grays?   Is it because older people have lost the will to fight or already have a belly-full of conflict?  Is it because older people have found confrontation is seldom a winning strategy over the long-term?

Philosopher Jean-Jacques Rousseau (1712-1788) wrote extensively on how people reflect their social and historical environment.  A 45-year-old has no memory of Vietnam.  Their only experience with war is the "war on terror" in which a small number of volunteers fought far from home.  Their only obligation is to be overly-solicitous of veterans, merely thanking them for their service.  They came of age in the aftermath of the Cold War, as the world recognized the U.S. as the only super-power.  They came into middle-age as the U.S. stumbled into the realization that we will not remain the only super-power much longer.  They witnessed the birth of the internet age, when sources of communication diversified from the mainstream media into outlets for every extreme viewpoint.

Futurist Alvin Toffler (born 1928) wrote extensively about the rate of change increasing ever faster.  Does a mere 15 year difference in average age change perspectives that much?

Is there such a difference in generational perspective among Democrats?  Why not?

Wednesday, October 2, 2013

Uncomfortable Bedfellow

Wall Street pundits, from coast-to-coast, have been worrying themselves sick about the possible failure of Congress to raise the debt ceiling, followed by the first default in history by a country with the reserve currency.  Only a fool would not be worried about this.  It could indeed be frightening, and I have spent quite a bit of time thinking about it.

Think of  it in two ways.  One, what is the probability of Congress failing to raise the debt ceiling?  Two, what are the consequences if they do fail?

First, the worst thing that could happen would be another stalemate.  I would worry less if one side is much, much stronger than the other side.  While I certainly have my preference, my preference is not important.  What is important is raising the debt ceiling.  It doesn't matter to me as an economist if the Republicans or the Democrats "win."

Public opinion is moving strongly behind the Democrats, as a result of the government shutdown.  The longer the shutdown, the stronger the Democrats will be in raising the ceiling.  If that decreases the probability of default, I'm all in favor of that.

Second, in a purely academic world, investors around the world should shun U.S. Treasury Bonds unless they are compensated accordingly, which means a rise in our interest costs and which we cannot afford.  In the real world, the Fed is likely to actually increase, not "taper," quantitative easing or buy enough of the bonds to keep interest rates low.  This may be good in the short term but not in the long term.  Selling the bonds will not be the issue, in the event of default.

Also, I've been reading as much as possible about the reaction of foreigners to a U.S. default, and they appear remarkably sanguine.  One referred to us genially as "those wacky Americans."  Many cannot resist comparing the U.S. government to the hopelessly ungovernable Italian government.  But, nobody is talking about actually losing money on U.S. Treasury bonds.  That does not mean gold will not rise, nor that oil will not fall.  They will, but they are not as volatile as I originally feared.

I expect the stock market will continue to drift downwards until there is some resolution, but this should be a buying opportunity.  That doesn't mean there is no risk.  The credit default swaps on U.S. Treasuries would become quite a bit more expensive, but nobody thinks we don't have the resources to pay our debt.  (Some unknown derivatives linked to the dollar could "blow-up," but all we can do is be prepared to sell quickly, if that is the case.)

I'm now in the uncomfortable position of hoping the shutdown continues long enough to make it certain the debt ceiling will be raised before default can occur.   Now, let us pray . . .