31 October 2015

The Bush Brand and Jeb's Fall from Grace

The liberal media (and us liberals) like to point out how Republicans can be irrational. In the this GOP primary, they're disproving that claim.

Count me among the many who thought that Jeb Bush was a sure deal for the Republican primary. And yet he trails four candidates and while it is certainly not impossible for him to gain against those four, it seems unlikely. (Cruz and Carson seem highly unlikely to sustain their strong place in the polls: Trump and Rubio could.) Yet here he is in fifth place, cutting staff, and in the most recent debate in which he needed to perform strong, he actually spoke less than any other candidate. Things don't look good for him.

Meanwhile, Clinton looks more probable every week.

So why the big difference? Why is it that Bush - a brand name that has been hugely popular in the Republican Party for decades - has fallen out of favor and Clinton - another brand that has been popular for decades - is going strong?

It might be that the Republican Party is becoming more rational.

During Bill Clinton's time in office, the economy created 22.9 million jobs, the Dow rose 230%, and unemployment averaged 3.9% in his last full year in office. In his 8 years in office, he helped to turn a $290 billion deficit into a $236 billion surplus.Unsurprisingly, he left office with a 66% approval rating. That brand - the Clinton name - is pretty good.

During George W. Bush's time in office, the economy created 2.6 million jobs (around 1/10th the number created during Clinton's administration), the Dow fell 26%, and unemployment averaged 7.3% his last year in office. (It averaged 9.9% the year he left office in January.) In his 8 years in office, he turned a $236 billion surplus into a $458 billion deficit. And this litany of issues doesn't even include the two wars funded with a tax cut that resulted in thousands dead and millions displaced. Unsurprisingly, he left office with a 34% approval rating, a rating about half what Clinton had. That brand - the Bush brand - is pretty tarnished.

Shocked that the country re-elected George W., I just assumed that Republicans were irrational enough to try this Bush brand one more time. Turns out, they deserve more credit than that. It looks like Jeb's sure thing no longer is. And that, it seems to me - for whatever you think of Trump or Rubio, is progress. Jeb's fall is not really his ... it is a natural consequence of his big brother's fall.

The Truth About the Lie About Out of Control Deficits

Talking with a conservative friend the other day, he mentioned how unrealistic it was to think that the federal government can continue to borrow so much.
"It's not that different from the past," I said.
"40 cents of every dollar we spend is borrowed," he said.
"Ah. Well, yeah, at the height of the Great Recession that was probably right. The economy has recovered now and borrowing is about at a level that it has been for decades.

He sounded dubious.  And, the story that we have to slash government spending because it is out of control is a story that persists, like the notion that we had to bleed patients at a particular point in medical history.

So, here are the facts. (Federal receipts are mostly taxes.)

Average between 1980 and 2014, as a percentage of GDP
Federal Spending:   20.6%
Federal Receipts:    17.3%
Deficit:                      3.2%

(Note that spending as a percentage of GDP has averaged over 20% during the last 34 years. This might be a good time to point out that Ben Carson's plan to finance the federal government with 15% tax rate suggests cutting federal spending by over 25%, which he could almost get by completely eliminating either medicare, social security or the defense department. It's not impossible to lower federal spending that much but it won't happen. In fact, if you're convinced that he can do it, I'll bet you any amount up to a million that he won't. Seriously.)

In 2014,
Federal Spending:   20.3%
Federal Receipts:     17.5%
Deficit:                      2.8%

Last year, spending as a percentage of GDP was lower than its average since 1980 (a period that included the Clinton surpluses) and federal receipts were higher than their average. The result? In 2014, our deficit was lower than what it has averaged over the last 34 years, a time when the American economy has created 52 million jobs and increased GDP from $2.8 trillion to $17.2 trillion.

Oh, and if you go back another 20 years, to 1960, the averages don't change that much. In fact, federal receipts are still exactly 17.3% of GDP.. Government spending drops to 19.9% of GDP, which is not that surprising given this is a time that precedes the Vietnam War and Johnson's initiatives on social spending. The deficit as percentage of GDP in this period is 2.6% of GDP, not much different from last year's 2.8%.

Is it sustainable?

Bond markets continue to scoop up low-risk, low-return bonds that finance this debt. And voters continue to refuse to give up their social security or defense spending or to pay for them in real time. So yes, the debt is sustainable, as is the ability of politicians to alarm good people with talk of unsustainable debts. Like the Rolling Stones playing Satisfaction, this tune continues to get a great crowd response and will continue to be played by politicians who know better but hope that you don't.

29 October 2015

CNBC & the GOP - The Press Loses Debate

The Republicans in Wednesday's debate turned on the moderators, largely refusing to answer any question they found uncomfortable. Their disdain for the media was applauded by an obviously partisan audience who seemed to see the moderators' challenges as proof that "the liberal media" was biased against their candidates.

The clearest evidence that you're operating in a developed nation is the relationship between the media and government. In less developed countries with more oppressive governments, the media is cowed into submission, forced to simply echo government positions or risk bullying, arrest, or even death. In more developed, more open governments, politicians are forced to account for their decisions and actions to a media that keeps the polity informed and holds politicians accountable.

GOP candidates showed no interest in being held accountable for explaining their policies, responsible to explain numbers that didn't add up or policies that clashed with earlier statements or reality.

If they get away with it during campaigning, no one can act surprised when they are elected if they put in place an opaque administration that refuses to answer the questions of a media that would dare to challenge them. If they're this outraged when interviewing for the job of commander in chief, think how imperial they'll act once they've landed the job. and have tanks behind them to fully intimidate those silly reporters.

More about why the Republicans were so intent to discredit the journalists here.

19 October 2015

"You Take Your Fancy Facts Off to Some Other Party, Sir. We Don't Need Them Here."

It says volumes about the current state of the Republican Party that Donald Trump's simple statement of fact about George W. Bush being the president on the day of 9-11 would be wildly controversial.

07 October 2015

The Exciting Possibility of Joe Biden

There is a very different bar for "would you marry this man?" and "I do!" The list of people we might consider as spouses is much longer than the list of people we actually do marry. Dating often puts an end to exciting possibilities. Going to the polls is different than having someone query you for a poll.

Which brings me to this odd clamor for Joe Biden to run. He's at the stage of candidacy akin to your aunt telling you that you should date this guy because he's really nice. You're open to this possibility but given we're talking about meeting for coffee, it's hard to say "no." Later, before you actually begin shopping for a wedding dress, it'll be harder to say "yes." 

There are real issues in this campaign. By far the biggest and most urgent is 24/7 news agencies' need to run stories that drive ratings and click-throughs. As it turns out, we're less interested in politics than politicians, and it doesn't take us long to go through the entire cycle of intrigue, approval, skepticism, and dismissal with a candidate. The process from intrigue to dismissal has never been quicker and the period of serious campaigning has never been longer. So, there is a lot of demand for shiny new objects in the form of candidates. And while we aren't really sure that we want Joe for president, we are sure that we want him in that candidate parade. "We need you to run, Joe, if only for ratings bump."

05 October 2015

Mass Killing - What if it Has Nothing To Do With Mental Health?

If we legalized bombs and every time a crazy person detonated a bomb it killed 200 people, we wouldn't say that we've never had more problems with mental health.

If we legalized atomic bombs and every time a crazy person detonated an atomic bomb it killed a million people in a city, we wouldn't say that we have unprecedented levels of mental health problems.

If "More than half of the mass killers of the last 30 years possessed assault weapons or high- capacity magazines, [that] allow a gun to fire without the need to reload, maximizing damage, increasing body count and minimizing risk to the shooter," we might not have any more health problems than we had half a century ago. 

If mass killers can double the number of victims even if we could reduce the number of mass killers by half, maybe it is time to give some consideration to the technology we include under the umbrella of right to bear arms.

Baby Boom Now Senior Bust

After World War II, procreation resumed. The men who'd been shipped off to Europe and Asia came back and started families. Their children became a bulge in the American population that has re-shaped everything since.

When they hit campuses in the 1960s, they changed education, politics, and pop culture. Frank Sinatra gave way to Crosby Stills, Nash & Young. Segregation gave way to integration. And university enrollment grew at rates never seen before or since.

When they hit the work force, they drove up labor participation rates twice. Once because so many kids were becoming adults, transitioning from student to employee. Second because so many of those kids were enlightened females who were likely to take jobs rather than stay home to bake. The percentage of women working went up as baby boomers came of age.

When they formed families in the 1970s, their demand for housing drove up home prices. People got rich just building homes and speculating on their prices.

And now, when those baby boomers are retiring at a rate of 10,000 a day, workforce participation is dropping again. Baby boomers are the pig on the python, the big bulge in the population that distorts everything each time they enter a new phase of life.

In the graph above, you can see two things. For one, as they came of age, civilian labor rate participation rose and is now falling. Two, as they came of age, they drove up home prices. Home prices took their first real fall only as these baby boomers began to retire and downsize. 

Labor participation rate has fallen in part because of the Great Recession and our slow recovery from it. But the Great Recession hit in part because of falling labor participation rates that are simply a function of aging baby boomers.

The baby boom has become a senior bust. The ripple effect of this generational bulge is not over yet.

03 October 2015

Why Corporate Cash Hordes Make PE Ratios Look High

US corporations are holding more cash than ever. In 1980, they held nearly $500 billion. By 2011, they were holding nearly $5 trillion. [St. Louis Fed data and theories here.] In 30 years, the amount went up 10X.

Meanwhile, P/E are also higher than in 1980. Around that time, P/E ratios were about 10. Now, they are around 20.

While cash doesn't account for the whole of the difference in P/E, I think it gets overlooked in the popular press. 

For instance, Microsoft is selling for about $45 a share and its P/E ratio is just over 30. But Microsoft also has $12 of cash per share. If you pay $45 for Microsoft, you're really just paying $33. Your first $12 gets you $12. You pay cash for the stock and immediately get $12 in cash, almost like a rebate. (Okay. You don't actually get the cash. It stays with the corporation. But it is easier to price cash than it is to price future profits.) If you adjust Microsoft's P/E for this, the P/E is closer to 23. That's still high (apparently investors are still excited that Steve Ballmer has been replaced by the new CEO Satya Nadella? They really like Windows 10? Who knows?)
7 Biggest US Companies by Market Cap, PE Adjusted for Cash

Adjusting for cash adjusts PE ratios for companies to varying degrees. Apple's PE drops from 12.76 to 12.05. Berkshire Hathaway's PE ratio drops from 17.89 to 14.32. Johnson & Johnson's from 16.54 to 14.38. Google's 29.54 to 24.89. The companies with higher PE ratios are still companies with more exciting growth potential but PE ratios are generally higher because of all this cash. (PE is the ratio of today's price to the earnings, or profits, of the last 12 months - not the next 12 months. If your profit is expected to double in the next year, your PE ratio should be double that of a company whose profits are expected to remain unchanged.) 

Again, higher PE ratios are not just a function of companies carrying more cash, but adjusting for this phenomenon does lower PE ratios to something closer to historic norms. And it buttresses another claim as well. We live in a time when capital no longer limits. As investors look for places to put their trillions of dollars in capital, they are more likely to use it to purchase stock. Even if stocks seem over-priced by historic standards, what else are they to do with their money? Bonds pay ridiculously low rates. Commodities - even oil and gold - are falling in price. So they put their cash towards the purchase of companies. 

Oddly, the companies they're buying also have more cash than they know what to do with. Maybe its time to start shifting all that capital into entrepreneurial ventures that promise to create new jobs and wealth.

02 October 2015

So, What's Really Going on in the Job Market? (Why 2015 Will Still Be the 2nd Best Year of The Century)

Many analysts were disappointed in the jobs report today. The forecast - based on ADP's Wednesday report - was for 200,000. Not only did the jobs report come in 57,000 below that (it hit 143,000), but the two previous months were revised downwards by 59,000. When the dust settled, the economy had nearly 120,000 fewer jobs at 8:30 eastern than people had been assuming at 8:29. That's a lot of jobs to lose in a minute.

So is that reason for concern?

First of all, let's put it in perspective. The longest run of uninterrupted job creation streak before this was exactly four years. The next longest was 46 months. This streak? It is now at 5 years and counting. No streak on record (data goes back to 1939) has ever stayed above zero for this long. And when this streak falters .... it hits 144,000 jobs gained? 60 months in, the next two longest streaks had "faltered" to the tune of losing 1.6 million and 856,000 jobs. At this point they weren't falling below average for the streak. No. They were instead shedding jobs at a rapid rate. If job gains of 144,00 is our equivalent to actual job losses of around a million, let out a loud hallelujah now.

Secondly, the question is whether this is meaningful. In any given month, the American economy destroys and creates more than 2 million jobs. We might talk about a net gain of 144,000 jobs, but obviously there were jobs lost in September as well as gained. The jobs report gives us the difference between these two. In a typical month during this recovery, the economy might create 2.4 million jobs and destroy 2.2 million for a net gain of 200,000. (Which is about the average for this 5 year streak.)  Missing a consensus forecast by 70,000 means that one of those numbers was off by about 3%. It is noise in the signal, static on the radio, normal variation.

Even with the weak numbers, the number of employed Americans is up about 2.2 million from this time last year. Meanwhile, an estimated 10,000 baby boomers are retiring every day. This works out to about 3.6 million in the last year. The job participation rate is dropping now as they leave the job market just as it rose when they entered it in the 1960s. (This point about job participation rate is made here by urban camel.) Baby boomers are like a pig in a python - creating a bulge in the numbers every time they enter a phase of life (whether university enrollment, job creation, home prices, or - now - retirement).

Is there reason to worry? Always. Just as there are always reasons for hope in a recession. The economy could turn within a quarter. Having said that, the reports of the last few months are not cause for alarm. They fall within normal variation for this recovery.

My prediction? The last three months of this year will be so strong that the analysts will change their tune to one of wonder. This year will turn out to be the second best year of this century for job creation. (That means at least 243,000+ jobs a month average, between revisions and new reports.)