27 February 2013

Ron Paul's End of World Prophecies

Wikipedia lists dozens and dozens of end of world prophecies. Oddly, the alarm and attention raised by these prophecies works like advertising, attracting new members, and the failure to come true doesn't seem to much alienate followers.  (There are, for instance, a great number of Jehovah Witnesses in spite of their getting the dates wrong for the apocalypse on more than one occasion.)

I think that there's likely a good overlap between Ron Paul's constituents and the folks susceptible to end of world religious prophecies. There are folks primed for truly catastrophic news. It just feels right to them. For decades Ron Paul has been warning of a coming economic apocalypse, one brought on by loose monetary policy that will trigger great inflation before causing markets to crash. At times it seems as though the audience for such apocalyptic news is larger than the audience for boring and esoteric talk of fiscal stimulus.

Does Ron Paul have great economic insight or is he more like a religious messiah with a vision?

Well, the great inflation has not yet happened. And Ron Paul has been (mostly) in office since 1976 - nearly 40 years. This absence of economic apocalypse suggests there may be some flaws in his predictive models. In spite of this, it is hard to think of a politician the Tea Party more admires.

Yesterday Fed Chairman Ben Bernanke asked Congress to avoid the Sequester because the economy is still struggling. Senator Bob Corker, a Republican from Tennessee, accused Bernanke of being soft on inflation. As Bernanke pointed out, inflation on his watch has been the lowest of any Fed Chairman since WWII.

Corker and his ilk don't need the numbers to prove that Bernanke's loose policy causes inflation. They've got a prophet who has warned them of doom. Poor Bernanke is so caught up in book learning that he misses this deeper truth and thinks that inflation is not a problem because it is low. Once the prophecies of doom have gathered the faithful, they're not easily disbanded. And right now, they're no marginal faction: in fact, they are about to give us a sequester.

The Sequester Explained - Or, How to Shoot Your Cat Out of the Tree

Once upon a time, a cat lover was shocked to learn that his cat had climbed high into a tree. Terrified of what this might mean for the cat's health, he did everything he could to get the cat back onto the ground. He coaxed. He pleaded. He offered tuna. Nothing seemed to work. Eventually, he forgot how all this got started and simply fixated on this: the cat had to come down. So, he finally shot the cat out of the tree.

The deficit was huge. It still is. But the deficit was the lesser of evils in tough economic times. The only option to a larger deficit in a downturn is to raise taxes and / or cut spending when unemployment is already high, when GDP growth is already faltering. Had we cut the deficit to zero last year we'd have to raise taxes and / or cut government spending by $1.3 trillion. That would be about 8 or 9% of GDP. That approach - favored by Eric Cantor and the Tea Party who refused to raise the debt ceiling - is the equivalent of shooting the cat out of the tree because you're nervous about it. The only reason the deficit matters is because it is not sustainable and it could eventually be bad for the economy. To suddenly take 8% of GDP away is not an eventually bad for the economy - it is  an immediately bad for the economy. 

To recap. Big debt - eventually and possibly bad for the economy. Abrupt contraction of economy - immediately and definitely bad. Cat high in the tree - possibly bad. Shooting cat out of the tree - definitely bad.

This will be a slower year for growth because these frequent budget standoffs have worn down the American people who find it increasingly difficult to sustain outrage or interest in congressional deadlock. As the private sector is recovering and growing, the public sector will be further shrinking, and the net effect will be sluggish growth, perhaps even another dip. Unemployment will remain too high. The good news is that the sequester is not quite like shooting your cat out of the tree; it is, instead, just like wounding it. (Cantor's charge to freeze spending, by contrast, would have been like a head shot.)

The right path is to bring down the deficit as the economy improves, but certainly not faster than the economy improves. And it is worth noting that the deficit is currently projected to halve between 2012 and 2014, from $1.3 trillion to $668 billion. [Seen here.] That, it seems to me, is probably faster than is optimal for GDP growth (and for lowering unemployment) over the next couple of years but not bad for longer-term investment markets. This is not a trivial sum, amounting to nearly 4% of GDP in the space of two years, a deficit reduction of $659 billion. To approach the deficit more aggressively is to forget about the health of the cat and get fixated on its place in the tree.

But give the Republicans credit. They know how to work the media. Just as they got everyone fixated on the invasion of Iraq, getting the media and the American people convinced that this was such an urgent task that nothing else mattered - especially questions about "What's next?" - they've now gotten everyone fixated on the deficit and its reduction, as if nothing else matters and convinced people that rapidly reducing the deficit won't bring about a slew of further complications. And there's a sort of evil genius in their approach. To the extent that budget stalemates and government spending cuts and tax hikes make the economy falter, they have further proof that  the economy is in bad shape and we need to take desperate measures. 

It's fine to worry about getting the cat out the tree. Just don't let anyone convince you that this is so important or urgent that you need to reach for a gun. 

26 February 2013

When Corporations Get Smart Enough to Become Venture Capitalists (or How to Make Employees Very Happy)

Daniel Kahneman is the only psychology professor to have won a Nobel Prize in Economics. His studies on how people value things are one of the reasons. They suggest something counter-intuitive about the design of incentives.

In the study, Kahneman ran a few scenarios with coffee mugs from a person’s alma mater. In one scenario he gave people the mug and let them “take ownership” before offering to buy it back from them. In the other study, he let people with money buy the mug that was not yet in their possession. On the surface, you’d think that they would value the mug the same way in both instances, but they didn’t. He had to pay, on average, $7 and some change to buy the mugs back from people. By contrast, he had to sell the mug for about $3 and change to get them to buy. Kahneman’s conclusion was that people put a higher price on loss than they do gain. It is more painful to lose what you have than never get something comparable. He had to pay people twice as much to give up their mugs as they thought they were worth when they simply bought them.

And this makes sense. You might feel the pang of a relationship that fails to materialize but that is nowhere near as devastating as a divorce. Not getting the job is rarely as painful as getting laid off. Loss is painful and we put a premium on avoiding the loss of valuable things.

This is one reason that Warren Buffet is worth so much. He sells insurance. People pay to avoid loss.
I think that this explains one reason that corporations have the opportunity to profit from entrepreneurship more than venture capitalists, investment bankers, or traditional investors.

The prime candidates for entrepreneurial ventures are actually people in their 30s and 40s. Their startups are less likely to fail and reasonably so. They’ve got experience. They know processes and products and people. But they have one major disadvantage in comparison to the twenty-something crowd: they have so much to lose.

Imagine a 40 year old who has been in the industry – any industry – long enough to have a potentially lucrative idea. He knows a cheaper way to make an old product or has an idea for an innovative new idea or how to tap an untapped market. He also knows that executing this idea will require capital. And leaving his job. And working at risk for at least 6 months – more often about 3 to 7 years. It’s not hard to imagine that at 40, he’s been married for 10 or 12 years. His children are 9 and 7 and he has a small amount saved for their college. He is 8 years into his 30 year mortgage. He is 10 years into his job and now gets 4 weeks of vacation and is fully vested in the 401(k), which is just starting to seem sizeable – but still not enough for retirement. The man has a lot to lose. And if Kahneman’s studies are correct, he puts more weight on the value of that potential loss than he does the potential gain from his entrepreneurial venture.

The twenty-five year old, by contrast, has almost nothing to lose and for this reason alone might be the better candidate for entrepreneurship.

If Kahneman’s studies are right, our 40 year old values what he has now vs. what he could have about twice as much as he should. The emotional cost of losing what he has – waking up at 47 with no 401(k), no business, no money for college for the 16 and 14 year olds, no equity in a home – is so much greater than the emotional boost from gaining what he doesn’t have – waking up at 47 to a net worth of $5 million and prospects of doubling that every 2 to 5 years. His preference for the second scenario is not as great as his desire to avoid the first.

This suggests that corporations have a great deal to make by offering entrepreneurial opportunities to their employees. Countless employees who could be great entrepreneurs shy away from the prospect because they have something to lose. What a corporation would have to offer as a percentage of returns would be less – perhaps considerably less – than what a venture capitalist or traditional banker would have to offer. A successful venture could return considerably more to the corporation than it might to the venture capitalists.

Regular readers of this blog or readers of my book know that I think one of the big shifts that will occur during the next ten to twenty years is the re-definition of employee to something more entrepreneurial. This matter of valuing loss more than gain is just one of the reasons why I believe that. 

It’s time to give employees the chance to make more money than they ever could in any position but a C – CEO, CFO, CTO – position, but still less than they could if they were traditional entrepreneurs. Given how much of a higher price we place on loss than gain, there’s a huge difference through which you could drive a whole business. Or two. And a way to make both employees and stockholders much happier. 

12 February 2013

Cut Spending on Alzheimer's by 10%? Or 100%

Idea junkie that I am, I was watching Robert Wright and James Pinkerton talk about Obama's Inauguration Speech. Pinkerton, a Fox News contributor, casually tossed out a fairly brilliant observation that reminds us of what matters.

[not verbatim ... but close enough]
"If Alzheimer's is going to cost us a trillion dollars, we could start cutting aid to medicare now. Or we could pump up research for Alzheimer's to try to accelerate a cure so that we don't incur those additional costs. It's pretty clear which is a greater social good: a cure for Alzheimer's or a balanced budget."

It's easy to create a panic about the deficit. But it's also worth remembering that if we decide that no other goal matters as much as deficit reduction, we miss a great number of other great possibilities. And possibilities that could either lower future costs or raise future incomes are typically much better than strategies for deficit reduction.

11 February 2013

The Real Reason the Pope Retired (is probably not included here)

For the first time in 600 years, a pope has retired. In all seriousness, that is stunning news, something more truly historical than another snow storm in New York, even if it won't get as much coverage. A story of this magnitude deserves wild speculation. So, in the spirit of revelation that can't be contested, I'm offering a few, er, theories about why the pope is stepping down. If they don't get accepted as explanations, perhaps they could be fleshed out into screenplays.

The money angle.

1. The pope began selling pieces of priceless art, using the money to feed the poor. Appalled, the cardinals maneuvered to force him out before the Vatican came to look as dowdy as a Church of Christ building.


2. He's fallen in love and is, like King Edward in 1936, sacrificing his position for marriage.

Apostasy - a loss of faith is, of course, an even juicier angle than romance. 

3. Benedict was previously head of the Congregation for the Doctrine of the Faith. This office had earlier been known as the Congregation of ... the Inquisition. As in The Spanish Inquisition. Seriously.
One rather fancies the notion that as protector of church secrets from before the time of the Inquisition, he probably had access to documentation that could undermine any number of church claims. Or proof of abuse  to much beloved figures of history. Or even geniuses who had been completely shut down by the Church but who have since been proven by the advances of modern science - or perhaps even geniuses who are ahead of where we are today. That is to say, Benedict may well have discovered evidence that even Dan Brown would have dismissed as ludicrous. Let's assume, in any case, that he knows things. And as he nears the end of his life, his conscience is making him feel compelled to announce what he knows, a terrible revelation that could shatter the church. As church officials learned of this, they intervened, getting him to turn away from the church rather than turn on it.

4. He has scheduled an appointment to be cleared at a Scientology office, hoping to exorcise demons that have haunted him since his youth.

5. Caught up in the heat of a recent inter-faith conference, he agreed to be baptized by Mormon missionaries as a show of solidarity with Protestant churches.

6. Wantied to rename the New Testament as the "Not Really that New Testament" and add an "Actually Quite New Testament" that would include a number of more contemporary sermons the pope enjoyed as well as a number of Buddhist koans, bumper stickers and really interesting t-shirt sayings he'd seen worn by Vatican tourists.

7. He could think of no reason to ban women from the priesthood.

08 February 2013

You Can Clearly Hear Just How Good This Band Is

Even if you're blind.
This might be my favorite (new to me) song from 2012. Might be. What's certain is that it is Friday. That's reason enough to post some delightful music.

03 February 2013

Has the Market Peaked at 14,000?

Dow at 14,010: Market peak or new leg up?

One hardly knows what to find more amusing: the thought that something as impersonal as a measure of stock value would somehow pause or stall at a round number like 14,000 ("Doc! His fever has hit 100. Does this mean he'll die?") or that, given human psychology, it is legitimate to ask such a question.

Actually, it's worth clicking through on the above article. It has some interesting facts, including these:

Siegel (a finance professor at the Wharton School of Business at the University of Pennsylvania) says with cash yielding 0% and 10-year U.S. Treasury notes paying roughly 2% in interest, investors have little alternative other than to buy stocks in search of bigger gains. "Where else are they going to go for returns," says Siegel.
Main Street investors now have $2.4 trillion parked in money market funds, $6.7 trillion in bank savings accounts and $633 billion in low-yielding certificates of deposit, according to Peter Crane, publisher of Money Fund Intelligence, citing Federal Reserve data.

The Dow also looks attractive from a valuation standpoint, as the stock market is now trading at 14.5 times its trailing four-quarter earnings, a slightly cheaper price-to-earnings ratio than at its prior top in 2007. It sports a P-E that is 50% below where it was during the prior peak in 2000, according to S&P Capital IQ data.

01 February 2013

A Comprehensive Ranking of the (Luck & Efficacy of the) Last 7 Elected Presidents

I've compiled a table that rather comprehensively measures the sum of presidential luck and efficacy. (You get to decide just how those two are mixed.) It ranks presidential performance for the first term of presidents from Nixon to Obama, who just finished his first term.

This seems to me a fairly comprehensive measure. It includes net new wars, changes in murder rates, GDP growth, changes in unemployment rates, changes in the Dow Jones Industrial Average, and end of term approval ratings.  By this ranking, Clinton and Reagan dominate but Obama and HW Bush do surprisingly well. (I'll leave the reader to decide if Obama is to Clinton what HW Bush was to Reagan. Personally, I think that's a loaded comparison unlikely to leave anyone particularly happy.)

I didn't just capture presidential performance. I scaled it against all the other presidents' performance in their first term. For instance, Reagan's approval rating in February after his re-election was 60%, which was 11% better than average. So, in the approval rating column he got a 111%. Murder rates went down about 2.4% during the average first term so Obama's drop of 4% in the murder rate got him a score of 166% (66% better than average). I wanted all the numbers on the same scale (although obviously numbers with wider swings give presidents more opportunity for piling on points).

Some numbers we want to go up (like GDP growth and changes in the Dow) and some we want to go down (like murder rates, unemployment rates, and net new wars).  The total tallies the negatives and the positives into a comprehensive score, using absolute values for all.

I'm sure that others could do better but this is a pretty telling table even without the sum of positive effects column. One fascinating thing is that while approval ratings tend to determine whether you get re-elected, this comprehensive score seems to better forecast legacy. Clinton and Reagan are easily the most popular modern presidents. George W Bush and Nixon are not popular in spite of being re-elected (Nixon by a landslide). Nixon's score was killed by the sharp rise in murder and unemployment rates and fairly anemic stock market performance. He may not have fared well in the history books even without Watergate.

Perhaps we'll never know whether these presidents were all more like fleas made to feel  frightened or triumphant by the behavior of the elephant they were riding or were mahouts (elephant jockeys) able to actually influence the speed and direction of this unwieldy mass we call America. I do believe that while presidents have only a small amount of influence it is still more than any other person in the country. Further, I think that the choice of a president reflects something about the mood and direction of the country, a preference for policies that do have a very big influence on outcomes. A country that chooses a Reagan is expressing very different intentions than one that chooses an FDR or Carter. Presidents may not make a big difference but they do reveal moods and a direction that can lead the country to very different places.

Finally, while I don't believe in grades, I'll nonetheless translate the table into the following grades:
Clinton, A
Reagan, B
Obama, C
HW Bush, C
Carter, D
W Bush, F
Nixon, F

[A note about this comprehensive measurement. I'm happier with this table now that the numbers are scaled but am still open to suggestions about how to improve or what more to include.]

BLS Reports 755,000 New Jobs Today

Today, the Bureau of Labor announced that 755,000 new jobs had been created. Well, not exactly new, just new to their data set. Their best estimate for January was that 157,000 new jobs were added but they revised numbers from the last couple of years upwards as well.

At the end of each month, the Bureau of Labor announces how many jobs were created. It obviously doesn't really know, not exactly. It's a sprawl of an economy in which about 12.3 million people don't have jobs and the bureau is reporting job changes in the thousands, an amount that's pretty much a rounding error on the total. Further, the Bureau is estimating based on sampling. But then more substantial numbers eventually come in and from that the Bureau does two things: it adjusts past numbers that had been calculated from sampling and it tweaks its estimation processes for on-going sampling.

All that to say that - by my count - today the Bureau announced an extra 755,000 jobs. In addition to the 157,000 jobs for January, they bumped the 2012 numbers up by 335,000 and the 2011 numbers up by 263,000. That totals 755,000 jobs more jobs than had been counted just a week ago.

So once again, things were better than we thought at the time. It turns out that you were happier, thinner, and better looking than you realized in your past. So it is, apparently, with the economy. Except, of course, none of this lowered the unemployment rate. Go figure.