08 August 2016

Post-Capitalist Economics: What It Means for Policy When Investors Buy Negative Interest Rate Bonds

$10 trillion around the globe is now invested in negative interest rate bonds. Investors are actually paying countries to keep their money, the way that you might pay a bank for a safety deposit box. The Netherlands has records that go back 499 years - back to the year that Martin Luther started the Protestant Revolution - and for the first time in half a millennia, the Dutch are paying negative interest rates on bonds. Japan, the European Central Bank, Sweden, Switzerland, and Denmark are all paying negative interest rates on some bonds. The price of capital is really, really low.

Prices fall when there is a glut. All together, there is more than a quadrillion in money, precious metals, stocks, bonds, and financial derivatives. As the global population grows and - more importantly - the number of people earning enough to save grows - the supply of capital continues to grow. The US alone has more than 10 million millionaires and now has more billionaires than members of congress.

The supply of capital is at an all time record high. That's reason enough that capital's price (interest rates) is low but there is more. The demand for capital is low.

What options do investors have? There is real estate, which continues to rise in major cities. And obviously you can buy bonds - an increasing percentage of which offer a negative interest rate. Or you invest in existing businesses, buying stock. Stock might look like a decent investment compared to bonds, but stocks are priced pretty high already. And companies have enough capital that they are buying back their own stock at record rates. They don't really need your money and don't even know what to do with their own cash. Another option is to fund a startup rather than buy stock in an existing company. You can help to create a business rather than just buy a share of an existing one.

So, what is the demand like for startups? How much capital do they need? Not much. It now takes less capital to start a business and that is one more reason the price of capital has fallen.

The Global Entrepreneurship Monitor (GEM) tracks various entrepreneurial measures around the globe (which I guess is implied by its name). One fascinating tidbit came out of new data they released 8/8/2016. In their 2006 report, entrepreneurs needed an average of $65,000 to get a business off the ground. For the 2015 GEM report, the median was $13,000. Now median is typically lower than average and it is possible that the difference between $65,000 and $13,000 could all be explained by that difference in measure. It's also possible that the capital needs for startups has dropped considerably in the last decade.

To exaggerate the differences, think back to a startup in 1960 when you might be setting up a factory or even a brick and mortar store. That requires a serious outlay of capital. Now think about a startup today. It might be focused on app development. They might need a half dozen laptops for the programmers.

Consider Uber. Its valuation is around $60 billion. It is essentially a taxi service. It has at least a quarter of a million drivers in the US but it didn't have to purchase any of their cars. 10 or 20 years ago, it might have taken $5 billion to create a fleet of 250,000 taxis. Today they are able to "create" a new car simply by having another driver download an app. The capital it took to start Uber is so much less than what it would have taken to create comparable capacity in 1995 or even 2005 before smart phones became ubiquitous. Uber was able to create a lot of wealth but they didn't need a glut of capital to do it.

In 2006, it took $65,000 to start a company. By 2015, it took maybe 1/4 that. Demand for capital is dropping even as the supply of capital is going up. No wonder the price of capital is so low.

There are a couple of implications of this.

One implication is that capital is no longer a limit. To have low capital gains tax might make sense in terms of competing for global capital but it doesn't make sense in terms of trying to attract capital as if it were still the scarce input that it was in the late 1800s - or even late 1900s.

The other implication is that we have to think about strategies that treat capital as plentiful rather than scarce. What does this mean? Among other things, it means that we should more aggressively fund startups, recognizing that it is the entrepreneurial opportunities that are scarce rather than the capital to fund them. And of course if we go further upstream, we will realize that the entrepreneurial opportunities worth investing in are more scarce than we would need to fully employ capital because we don't do enough to create entrepreneurs. We have an education system designed to create knowledge workers but not to create entrepreneurs. And entrepreneurs - rather than capital - are the real limit to today's economy. We have to popularize entrepreneurship.

For roughly the quarter century leading up to the Great Recession, excess reserves bounced around between one to two billion dollars. Excess reserves are money that banks keep rather than loan out. Then starting in September of 2008, excess reserves began to swell. From August to September, they rose from %1.9 billion to $59 billion. In October they hit $267B and then $767B by the end of 2008. In August of 2014 excess reserves peaked at $2.7 trillion, roughly 200X what they’d averaged before the Great Recession.
You have to appreciate the fact that the Federal Reserve was trying to pump capital into the economy. The fact that it did so much more for excess reserves than actual investments suggests that capital wasn’t the limit to progress. (An important caveat here. At the height of the financial crisis in 2008 and early 2009, credit and capital was a limit and it was a beautiful thing to have the Fed intervene with a flood of cheap capital and guarantees. By 2014, though, things were a little different.)
Policy makers continue to act as though capital is what we need more of and we use everything from tax policy to monetary policy to address that apparent scarcity.

The question is no longer, How do we get more capital? We've got a glut. The question is, How do we get more entrepreneurs and make more employees more entrepreneurial? We've got plenty of capital to fund them. So much capital, in fact, that we're putting it into negative interest bonds. That might be a signal that we need to start treating capital differently. This is a post-capitalist market economy and requires a different set of policies.


One reason that markets are great is because of price signals. Things that are cheap you should use a lot of and things that are expensive you should use less of. Capital? Capital is cheap and we should take the market's advice on how to use it. What really is scarce? The entrepreneurial ability to transform that capital into jobs and wealth. That’s the limit that policy should focus on overcoming.

05 August 2016

What About Gender?

More than once conservative friends have told me that there is no real difference between Trump and Clinton. To test that hypothesis, consider this little thought experiment.

Imagine that a woman who came to fame as a reality TV star was running for president without any previous experience in office. Much of what she says terrifies the experts and reveals layers of ignorance. (What sort of statements? How about something like “[Putin’s] not going into Ukraine, okay? Just so you understand. He’s not going to go into Ukraine, all right? You can mark it down and you can put it down, you can take it anywhere you want.” The sort of statements that would make a former CIA Director warn that she's become an unwitting agent of the Russian Federation.) More than once her emotions have led her to lash out at people in her own party.

Her opponent is a man who has been senator and secretary of state and has worked closely with a president on special projects. His policies have even been endorsed by members of the opposition party. 

Tell me that race would be close or that anyone would seriously think the two candidates were just the same.

02 August 2016

What if Trump is on the Most Amazing Betting Streak in History?

Couldn't a lot of this casino owner's campaign behavior be explained by a series of drunken double or nothing bets with other billionaires?

Trump: Ok. How about this? I get an argument with the pope about what it means to be a Christian and I go up in the polls.
Cuban (or Bloomberg or some other billionaire who will eventually have to come out against him): No way!
Trump: Double or nothing on the last bet I won when you said I'd be the first of 17 GOP candidates to drop out.
....
Ok. I got another. I say McCain isn't a war hero because he was captured.

....
I insult a gold star family and then remind the nation that I've made comparable sacrifices.

....
I ask the Russians to hack into and then release classified emails from the secretary of state.

....
Instead of kissing a baby on the campaign trail, I order it out of the room.

............
I insult the NY Times because they don't write good.


There may be more than a few billionaires who are already into negative territory from betting against the Donald.

01 August 2016

Conservatives and Liberals Would Get Along if Only They Could Time Travel

Trump is against free trade, big corporations, and military intervention. He's even contemptuous of the military, both the judgment of generals and the sacrifice of warriors. He questions authority. He revels in moral relativism and shocking language and statements.


If all of this seems familiar, it's because it is. Today's conservatives are 1960s liberals. Who says the GOP doesn't believe in recycling?


31 July 2016

The 2 Kind of Statements Trump Makes

Trump makes two kinds of statements, both with great confidence. The one kind can immediately be proven false (this from ABC):

The other statements can't yet be proven false.


It's also worth noting that Trump's inability to stay quiet during the Democratic National Convention - his compulsion to have the spotlight shifted to him - is what we will look back on as his fatal flaw. Tired of being ignored, he has made a series of outrageous statements this week, statements that likely mean his steady drop in the polls to his huge loss in November.


What Race and Astrology Tell Us About Our True Inner Selves

From Datacalysm by Christian Rudder:
On OkCupid, one of the easiest ways to compare a black person and a white person (or any two people of any race) is to look at their "match percentage." That's the site's term for compatibility. It asks users a bunch of questions, they give answers, and an algorithm predicts how well any two of them would get along over, say, a beer or dinner. Unlike other features on OkCupid, there is no visual component to match percentage. The number between two people only reflects what you might call their inner selves - everything about what they believe, need, and want, even what they think is funny, but nothing about what they look like. Judging by just this compatibility measure, the four largest racial groups on OkCupid - Asian, black, Latino, and white - all get along about the same. In fact, race has less effect on match percentage than religion, politics, or education. Among the details that users believe are important, the closest comparison to race is Zodiac sign, which has no effect at all. To a computer not acculturated to the categories, "Asian" and "black" and "white" could just as easily be "Aries" and "Virgo" and "Capricorn."
So, how do race and astrology define us? About as much as we or other people believe they do. Which could be a lot .... or not at all.

28 July 2016

Legitimizing Desire: Why We Needed a Religious Revolution to get Our 1st Market Economy


During the first market economy of roughly 1300 to 1700, desire had to be made legitimate. This was one important reason that church reform was central to the emergence of the first economy, shifting the regulation of desire from the church to the individual.

Martin Luther helped to ignite the Protestant Revolution by translating the Bible into the German language that could be understood by the average German and not just the elite who'd been educated in Latin. But literacy rates were not that high and art still had a huge role in transmitting ideas.

Martin Luther challenged the Church in so many ways that it's easy to forget that one of his most startling challenges was around the issue of celibacy. He was in favor of emptying out the convents and marrying off the nuns. On the left is a painting of Martin Luther with his wife, the former nun Katharina von Bora. It was made by Lucas Cranach the Elder, probably the most famous German painter of his time and Martin Luther's friend. It was circulated to illustrate this notion that individual freedom included even the right of priests and nuns to marry. Martin Luther realized how important this message was for religious change and his friend Lucas helped him with this mission.

Lucas Cranach the Elder also did this painting of the Silver Age on the right. Like other Renaissance artists, he went back to the classical myths and art of the Greeks and Romans to find inspiration in depicting a less cloistered world. The Italian Donatello, who died in 1466, six years before Lucas the Elder was born, had carved the first nude since classical times. By the time of Martin Luther, art had become more openly erotic, the human body a legitimate theme for artists throughout Europe.

It might be easy to dismiss this new theme in art as tangential to the bigger changes sweeping throughout Europe but it seems as though it was, instead, fundamental.

At the dawn of the first economy, in about 1300, the church controlled about 70 percent of the money in circulation. Desire of every kind - whether in the form of covetousness, curiosity, or lust - was controlled by - or least condemned by - the church. Individual desire was something to be repressed rather than allowed. One of the overlooked reasons for the darkness of the Dark Ages, the incredible poverty and brevity of life, was because desire was illegitimate.

Desire is the engine of any market economy. In a traditional or even centrally-controlled economy, you can tell the consumer what they want or what is good for them. Their desires are incidental to what society produces and distributes. One definition of a market economy is that it caters to the individual. People want a quarter pounder with cheese even though experts agree it's not healthy? The market makes quarter pounders by the billions. The market lets the individual define what goods and services are offered. In a world in which the church controls 70% of the currency, the individual has almost no control.

Martin Luther did more than undermine the Church's exclusive control over proper thinking by translating the Bible into German and giving each literate German the chance to reach his or her own conclusions about God's word. When he married Katharina von Bora, he helped to legitimate desire.

As it turns out, the first market economy had to make desire of every kind legitimate. Covetousness, the desire for goods that make us happy but aren't essential to survival, had to be legitimate in order for economic progress to kick in. And covetousness, lust, and curiosity - the desire to have, to possess, and to know - are so closely linked that it's simply not possible to allow one without allowing them all. The story of our first market economy was a story about deciding that individual desire is legitimate and best left to the individual to regulate or channel.

More of Lucas Cranach the Elder's amazing paintings here.

25 July 2016

Well Isn't That Special?

Some Sanders supporters don't see the difference between Trump and Clinton. Remember the Nader supporters who didn't see the difference between Gore and Bush back in 2000? That worked out well.

I used to think that at least people who made poor choices would learn from them but now realize that the feedback comes so long after their action that they don't. The same progressives outraged at Iraq and the de-regulation that helped to make the 2008 recession a Great Recession aren't clever enough to see a link between those outcomes and their votes in 2000. So they're at it again because one thing they do have in common with Trump supporters is a hatred for the current system and a willingness to crash it if it won't change to accommodate their personal views.

Still, if the Republican Party is dumb enough to nominate Trump ,and Sanders supporters are deluded enough not to see a difference between Clinton and Trump, the country likely deserves what would follow from a Trump reign. Still, it's a shame for the rest of the world that has yet to recover from our last major failures.

What Will Donald Say This Week?

This week there's a big scandal because hackers - most likely Russia the FBI says - have revealed private emails from within the Democratic Party. Imagine if tweets were private and Donald Trump's had just been revealed for the first time.

It's seem more and more clear that Donald Trump is not motivated by money, adulation, or power. Or, rather, he's motivated by those things but they pale in comparison to his true motives, his lust for attention. It seems to me that most of his behavior can simply be explained by an addiction to attention as powerful as any cocaine or alcohol addiction.

Traditionally, during the convention, the rival party or candidate goes into relatively quiet mode while the other party has their time in the spotlight. Given Donald couldn't even take time out of his speech introducing his vice president to actually talk about his vice president, it's hard to imagine that he'll be able to contain himself this week. He's done nothing conventional yet.

This is the man who has claimed his opponent's father helped to assassinate JFK, bragged about the size of his penis during a presidential debate, recently made it cleat to Putin that if he were to invade a Baltic state, members of NATO, that he wouldn't protect them, wants to institute a religious test for entrance to the country and suggested that the US could default on its debts, an act every rational economist sees as a guarantee of a financial crisis. (Slate has a stunning list of the outrageous things he's said here.) If he's as eager to shift the focus from Hillary Clinton to himself as I suspect he is, this could be the most fascinating week yet in Trump watch.

And whatever he says it could cause his ratings to rise some more. Warning Americans not to vote for Trump because he's racist enough that white supremacists love him is like warning teenage boys not to go to that beach because its a favorite for topless women.

21 July 2016

What If America is Not as Frightened as Trump Thinks?

If Americans are frightened by Trump's oratory, Trump will win. What are they afraid of in his eyes? Crime, illegal immigration, and the economy.

So what does Google Trends - which monitors the pulse of American's interest through its search, say about these topics?

Do American's searches suggest that they're more interested in a good or bad economy?

As you can see above, "bad economy" peaked during the Great Recession. Since about 2012, sentiment has decidedly turned towards "good economy." It's even stronger than it was pre-recession.

What about illegal immigration? Trump has said that before he came along this issue was largely ignored. 



As you can see, the peak mention of illegal immigration was about April of 2006. Since then it has largely faded in terms of the number of searches. Not really an issue new to Trump and certainly not bigger in the minds of Americans since his campaign began.

Finally, what about crime? Even cops are being shot. Surely people are upset about this?

Crime searches are higher than they were just a year ago. Curiously, they are still lower than they were in February 20011 and considerably lower than November 2005.

It is not just public perceptions as measured through this window of searches that suggests these hot buttons Trump is pushing are not that hot. Illegal immigration, unemployment, and even the number of police officers shot is down from what it was in previous administrations. Reality and perception alike indicate that these aren't big issues for Americans.

Donald is certainly pushing buttons. It's not obvious that they're wired into the country's collective anxieties. 

Finally, two favorite snapshots of Republican National Convention.

Ted Cruz tells convention attendees to "Vote your conscience," and gets booed off the stage.

Trump and Pence stand on stage at the convention's close with their families to sound of Rolling Stones playing, "You Can't Always Get What You Want."

Zipf! An Elegant Formula that Predicts How Often You'll Use Words

On occasion, we stumble across something so elegant that it makes us stop. We suddenly see order in what we once thought of as random activity, hear the voice in the din.

Zipf's law states that within any large body of text, a word's popularity or rank multiplied by the number of times it shows up will result in the same value.

Rank X Number  = constant.

This law holds for the Bible, pop songs, and literature. Here's the law applied to James Joyce's Ulysses:


 That is an absurdly robust prediction. I don't care who you are, that's abundantly cool.

Dataclysm by Christian Rudder is the source for this gem of an idea.

18 July 2016

End of Day One of Republican's 2016 Convention

Reza Aslan, in his book on Islam, is just one of many writers to claim that in cultures that have an oral tradition, with people who don't read, words have a particular kind of magic. Mohammed was challenged to produce miracles like Jesus but said that he was just a messenger. The word had power. And in some cultures an abra cadabra spell is thought to be enough to change reality.

I couldn't help but think of this as I listened to Rudy Giuliani speak. You have to admire the fact that Giuliani has managed to sustain a sense of impending apocalypse for 15 years now. That shows a real commitment. But he got most worked up when he talked about President Obama's reluctance to use the term, "Radical Islam." There seems to be belief that if only someone in power would dare to utter these words, ISIS's power would be shattered. It's like a priest's incantation.

It's worth remembering that the folks who came into the Republican Party through the Tea Party came in through talk radio. Mike Pence was a talk show host. These are a people of an oral tradition and they still seem to believe in the power of the spoken word as something magical.

GOP convention attendees are certainly angry. It will be really fascinating to see whether this message of fear and anger resonates with the American people. This audience loved to be scared but in a down home sort of way. I wasn't sure whether the next speaker was going to be Wes Craven or Larry the Cable Guy.

Finally, it was sad to realize that the American way of life is no longer an option. Listening to each side talk about the other it seems obvious that our only choices are fascism or socialism. That's too bad because what we had seemed pretty good.

The Rise and Fall of the Republican Party

Just last week, many of the country’s tech leaders signed a letter arguing “Trump would be a disaster for innovation.Signatories include Vint Cerf, who helped to invent the Internet, Steve Wozniak, the man who helped to invent the personal computer, and local Qualcomm founder Irwin Jacobs, who helped to invent the smart phone. These people understand innovation and the Republican Party’s presidential candidate alarms them.

This week the party faithful gather in Cleveland to present their nominee. The party's first president was Lincoln and since then the parade of candidates has included Teddy Roosevelt, Eisenhower, Reagan, Bush, and now Trump. It's easy to think the party's struggles are because of increasingly weaker candidates; it might be that it's instead because of increasingly weaker policies. 

Once upon a time, the Republican Party was the voice for tech leaders and their policies fed progress.

The Rise
Republicans emerged as the anti-slavery party in the late 1800s. They were the progressive party on two counts: they were more humane and they were the capitalists who believed in investment and innovation as a better route to prosperity than enslavement. Northern Republicans created a new economy.

The industrial economy made regional economies national. Railroads let big factories sell across state lines. In this new reality, the notion of states’ rights that complicated things like enforcing contracts across state borders became as quaint as sewing by hand.

When the South seceded from the Union, the Northern – largely Republican – representatives passed a flurry of legislation that created the modern corporation and expanded interstate commerce, laying the foundation for unprecedented prosperity.

Between 1861 and 1933, Republicans had the White House 72% of the time. In 1865 the economy was not much different than what it was in 1776; by 1933, the nation had automobiles, electricity, telephones, and radio. Capital was king and Republicans were presidents.

The Fall
Since then, the economy has evolved more rapidly than the GOP. The region that now leads the world is Silicon Valley and it represents a new, entrepreneurial economy that is different in many ways from the industrial economy. Detroit made cars. Silicon Valley makes companies. Wages there (specifically, Santa Clara County) are about two-thirds higher than the rest of the country, and the region has created trillions in wealth.

Every politician approves of Silicon Valley but it doesn’t approve of every politician. Republicans have struggled there.

In California’s 17th in 2014– a Congressional district that includes Santa Clara and headquarters for Apple, Intel, Yahoo, and eBay – no Republican candidate won enough primary votes to compete in the Congressional general election. The same happened in District 14, which includes Stanford, and headquarters for Alphabet (Google) and Facebook.

Immigration and social traditions are two reasons Republicans struggle in the Valley.

Depending on how it is measured, immigrants are members of 25% to 50% of tech industry’s founding teams. These companies aren’t part of a national market: they are part of a global market that includes customers, employees, investors, and partners. They connect countries rather than wall them off and they aren’t going to support isolationist policies.

Social tradition is another issue. San Francisco’s government became the first to officially recognize gay marriage. The folks in startup friendly regions like Cambridge, Massachusetts, Austin, Texas, and Boulder, Colorado realize that the boundaries between technology innovation and social change are fluid. When they talk about disruption, they might be talking about Uber or gay marriage.

The entrepreneurial economy will challenge any political party that is nationalist and socially conservative. (And of course Donald Trump’s aversion to free trade is yet another reason for the Valley to recoil from the GOP.) To adapt, the Republican Party would have to abandon so much of what now defines it.

Many Republicans will rightfully argue that they, too, embrace entrepreneurship, global markets and the disruption that comes with this. As this year’s primaries revealed, though, such Republicans are now a minority within the Party.

It’s possible that advocates of the new entrepreneurial economy won’t affect the outcome of this election and as a nation we will opt for candidates and policies that make our economy more closed and less innovative; the policies that make a country more prosperous are not always the most popular.

Still, one hopes that forces within the Republican Party are studying Silicon Valley because until the GOP adapts to the new realities it represents, the GOP will represent the past of this great country and not its future.

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14 July 2016

Why All-Time Market Highs Are Largely Meaningless

The S&P 500 is at an all-time high. Optimists point to this as proof that things are great, have never been better. Pessimists point to it as further proof that market prices are irrationally inflated, a bubble ready to burst. An all-time high doesn't signal either outcome.

If you put $10,000 into an account that paid a 0.5% annual rate, compounded daily, your account would hit a "new high!" every day. Every day.

Compound interest rates mean continuously higher value. The reason the market does not hit a new, all-time high every day is simply because the market is really volatile. It can hit a high one day that it takes years to again reach. But over the long-run, it is like that savings account in that it - with fits and spurts and leads and lags that can distort the effect of steady returns - will hit a new high with some regularity.

Is the market a bubble ready to burst?
One argument against that is here in this data on the S&P 500:
From 1950 to 2000, the annual return was 9.4%
Since 2000, the annual return has been 0.8%.
This alone could suggest that the market could rise quite a lot without reaching excessive levels over the long-run.

Is the market under-priced and ready for a huge rally?
One argument against that is here in this data on Price to Earnings (PE) Ratio.
From 1950 to 2000, PE ratio for the S&P 500 averaged 15.3
Since 2000, it has averaged 25.5
This alone would suggest that the market is not under-priced.

So what will the market do?

I think the stock market will be driven by bond prices. Within the last week, the interest rates on Dutch bonds went negative for the first time in 499 years. About a day later, German bonds went negative. Investors are actually paying governments to take money. That suggests two things. One, people are really risk adverse, actually embracing a small loss rather than risking a big one. Two, anyone interested in returns will be forced into investments other than bonds and the most obvious of those is stocks. As people finally remember that uncertainty is not a new thing but is instead what characterizes markets, they'll accept more risk and will likely take on that risk by buying stocks. Given that returns on bonds are so low, people will accept lower returns on stocks, which means that the PE will go up. As the global economy continues to grow, that means that earnings will also go up. So, the combination of rising PE and rising earnings should mean a really strong stock market through the rest of this decade.