Monday, January 30, 2017
Counter Factuals
I am reading another book right now by economist Richard Koo, innovator of the balance sheet recession concept. If you remember what his idea entails, it's that when you have a big bust in asset prices when folks are highly levered, causing technical insolvency as values tumble, the introduction of monetary stimulus is of limited usefulness. Ultimately, you need fiscal policy from the government to help mend the economy. He notes that the big examples of a balance sheet recession include the Great Depression, Japan's bust in the late 1980's, and most of the large western economies post-2008. What Koo emphasizes is that fiscal stimulus, in those cases, was the ultimate antidote. But, look a little deeper, and there is probably cause for concern even beyond the misallocations that are allowed to linger. In the case of Japan for the past 25 years, and the U.S. since 2008, the fiscal stimulus implemented prevented a Great Depression type event, but still did no better than only tepid growth. Now, looking at the Great Depression, Koo would argue that there were initially mistakes under Hoover that exacerbated the initial bust, and later under FDR when he tried to cut budget deficits and triggered the double-dip in 1937. So, what was it, by Koo's account (and others, like Paul Krugman who calls for a space invasion), that did the trick? Massive, massive stimulus -- and the only thing that ever gets you there is war.
Oil
From Louis Gave (on Real Vision):
“2 and 1/2 years ago Xi Jinping went to Moscow and signed a 50 year deal where China was buying natural gas at a fixed price, which was like half the market from Russia, paid for in renminbi. Now when you think that, who's the marginal buyer of oil in the world? It's China. For all the talk about how Chinese growth is collapsing, et cetera, Chinese oil imports last year were up 16% year on year to new all-time highs. So China needs energy, and keeps on. The reason oil went to $150 was China's emergence. So when China does a side deal with Russia and says basically, hey, we're covered here, then if your marginal buyer disappears, then all of a sudden the cost of oil doesn't go to the price where the marginal buyer's willing to pay, it goes to the price of where the marginal producer produces it. And so it eventually went-- And now we're obviously at the marginal cost. But that marginal cost may go down again. Because now with Donald Trump, we're going to get the Keystone Pipeline. I mean, you go to Alberta, your oil is at $25 a barrel. It's stuck there because it can't move. You put the Keystone Pipeline in and oil price goes down…”
“2 and 1/2 years ago Xi Jinping went to Moscow and signed a 50 year deal where China was buying natural gas at a fixed price, which was like half the market from Russia, paid for in renminbi. Now when you think that, who's the marginal buyer of oil in the world? It's China. For all the talk about how Chinese growth is collapsing, et cetera, Chinese oil imports last year were up 16% year on year to new all-time highs. So China needs energy, and keeps on. The reason oil went to $150 was China's emergence. So when China does a side deal with Russia and says basically, hey, we're covered here, then if your marginal buyer disappears, then all of a sudden the cost of oil doesn't go to the price where the marginal buyer's willing to pay, it goes to the price of where the marginal producer produces it. And so it eventually went-- And now we're obviously at the marginal cost. But that marginal cost may go down again. Because now with Donald Trump, we're going to get the Keystone Pipeline. I mean, you go to Alberta, your oil is at $25 a barrel. It's stuck there because it can't move. You put the Keystone Pipeline in and oil price goes down…”
Sunday, January 29, 2017
More on the Sideshow
My instinct is not to focus on politics too much in this space, but obviously it has played a large role lately in how to think about investing. With that in mind, I think Bill Fleckenstein did a good job of capturing my own personal view on politics in his recent Real Vision interview:
“The people that are the so-called conservatives think the economic engine is the most important thing, and then you can do good works with what comes out of it. The liberals tend to say, no, we want to do good works and the hell with the economic engine. Well, if you break the engine, you can’t do much.”
I think that view is spot-on, and explains why I believe that the women’s march and other efforts to focus energies on idealized notions of the nation state is to miss the point. If everyone is better off economically, the chances are slimmer and slimmer that the worst predilections and insecurities of man will win out. I’m not claiming absolute certainty on this point, but I am pretty sure that the worst moments in human history did not occur when people were doing well – in other words, that’s not when we are most vulnerable as a civilization. And that’s why economic populism was the strategy to win this time around.
Having said that, even if Trump is more economically literate that those who came before him, he can still masterfully screw it up by choosing to implement policies that are just so against the grain morally, as to undermine his ability and support to do the other more important things that need to be done. The immigration ban is a case in point. Yes, he said he would do something to this effect, but its implementation was crude, potentially unconstitutional, and anathema even to those who might otherwise be apt to give him the benefit of the doubt. I hope he finds a graceful way to backtrack on it, even as I find the liberal outrage to reek of hypocrisy.
“The people that are the so-called conservatives think the economic engine is the most important thing, and then you can do good works with what comes out of it. The liberals tend to say, no, we want to do good works and the hell with the economic engine. Well, if you break the engine, you can’t do much.”
I think that view is spot-on, and explains why I believe that the women’s march and other efforts to focus energies on idealized notions of the nation state is to miss the point. If everyone is better off economically, the chances are slimmer and slimmer that the worst predilections and insecurities of man will win out. I’m not claiming absolute certainty on this point, but I am pretty sure that the worst moments in human history did not occur when people were doing well – in other words, that’s not when we are most vulnerable as a civilization. And that’s why economic populism was the strategy to win this time around.
Having said that, even if Trump is more economically literate that those who came before him, he can still masterfully screw it up by choosing to implement policies that are just so against the grain morally, as to undermine his ability and support to do the other more important things that need to be done. The immigration ban is a case in point. Yes, he said he would do something to this effect, but its implementation was crude, potentially unconstitutional, and anathema even to those who might otherwise be apt to give him the benefit of the doubt. I hope he finds a graceful way to backtrack on it, even as I find the liberal outrage to reek of hypocrisy.
Tuesday, January 24, 2017
Doubling Down
In what has been termed a “tumultuous” opening to his Presidency by the media, I thought I could offer some of my own thoughts on the era of Trump so far. He came to Washington as an outsider who planned to set fire to the place. And in making an aggressive inauguration address, and the other opening acts of defiance, he has stuck to that promise. What I find particularly interesting is that the “opposition” seemingly has learned nothing from its defeat in November. To quote someone I know, they are doubling down on a bad strategy – whereas economic populism is what got Trump to power, the folks who could be the resistance are instead focused on identity politics. And, really, they should know better already.
During the campaign, where Trump went wholeheartedly after white working class voters by focusing on their economic pain, the Clinton side decided that the right response was to label Trump as a racist and misogynist, and better yet to categorize his supporters as deplorables. He still won. In the aftermath, between attempts at trying to overturn and invalidate his win, the strategy still seems to be a focus on some unsubstantiated claims about Russia hacking the election (again, a carryover) and continuing to dwell on identity politics (witness this past weekend’s march). None of that will change the score in terms of who supports him and who doesn’t.
The basic point is that it didn’t work during the election and it won’t work now. Unless the resistance can speak to the specific issues that helped Trump to win, they will make no progress over the next four years in arguing the case to vote him out.
Look, we can all agree that he is a jerk. But he is a smart jerk who understands what the pressure points are for a large swath of voters. Sadly, the folks who marched over the weekend are missing exactly that.
During the campaign, where Trump went wholeheartedly after white working class voters by focusing on their economic pain, the Clinton side decided that the right response was to label Trump as a racist and misogynist, and better yet to categorize his supporters as deplorables. He still won. In the aftermath, between attempts at trying to overturn and invalidate his win, the strategy still seems to be a focus on some unsubstantiated claims about Russia hacking the election (again, a carryover) and continuing to dwell on identity politics (witness this past weekend’s march). None of that will change the score in terms of who supports him and who doesn’t.
The basic point is that it didn’t work during the election and it won’t work now. Unless the resistance can speak to the specific issues that helped Trump to win, they will make no progress over the next four years in arguing the case to vote him out.
Look, we can all agree that he is a jerk. But he is a smart jerk who understands what the pressure points are for a large swath of voters. Sadly, the folks who marched over the weekend are missing exactly that.
The Dao of Capital
The subtitle is Austrian Investing in a Distorted World and the author is Mark Spitznagel (2013).
I have had this one sitting around for a little while, having long heard that it is an interesting and unique take on both the Austrian School of Economics and its practical application. And, with that in mind, what I actually took away from the book is that perhaps what I find compelling about the Austrian theory is that there is an obvious transition to a very logical and sound way of investing. At its heart, the Austrian school is all about how market interventions by Central Banks or others that increase the availability of cheap credit lead to distortions that always come back to upend the economy. That is to say, where Keynesians have a view on fiscal and monetary policy to address the bust and hopefully to try and avoid it, invariably the bust comes and the solution usually resembles the initial problem that caused it – suggesting, on some level, a misdiagnosis. In contrast, the Austrians don’t try to paper over the problem, and also offer a compelling tale of why the bust happens. Still, the thing that I never appreciated about the theory, or at least didn’t understand about why I respond so well to it (certainly not until reading this book), is how it marries an economic theory with an investment approach that allows you to profit and still minimize risk. The essence is understanding that good things can take time, and so investing in roundabout production, rather than playing the casino for immediate gratification, is the course. It is about small losses on the way to big wins. A broader depth of field. Ultimately, the Austrians are value investors with an added insight. And who can argue with that.
I have had this one sitting around for a little while, having long heard that it is an interesting and unique take on both the Austrian School of Economics and its practical application. And, with that in mind, what I actually took away from the book is that perhaps what I find compelling about the Austrian theory is that there is an obvious transition to a very logical and sound way of investing. At its heart, the Austrian school is all about how market interventions by Central Banks or others that increase the availability of cheap credit lead to distortions that always come back to upend the economy. That is to say, where Keynesians have a view on fiscal and monetary policy to address the bust and hopefully to try and avoid it, invariably the bust comes and the solution usually resembles the initial problem that caused it – suggesting, on some level, a misdiagnosis. In contrast, the Austrians don’t try to paper over the problem, and also offer a compelling tale of why the bust happens. Still, the thing that I never appreciated about the theory, or at least didn’t understand about why I respond so well to it (certainly not until reading this book), is how it marries an economic theory with an investment approach that allows you to profit and still minimize risk. The essence is understanding that good things can take time, and so investing in roundabout production, rather than playing the casino for immediate gratification, is the course. It is about small losses on the way to big wins. A broader depth of field. Ultimately, the Austrians are value investors with an added insight. And who can argue with that.
Saturday, January 21, 2017
Public Housing Myths
This compilation of essays published in 2015 seeks to debunk certain notions of why public housing as a concept and social policy has failed. Not surprisingly, much time is spent using New York as the template to debunk these ideas, in part because it is the largest public housing system in the county, but also because it has particular features that has enabled it to perform better than others (as a previous book discussed on this site has noted). Generally, it is safe to say that for political reasons and beyond, public housing is developed in poorer, struggling neighborhoods, enabling many of the bad elements that are associated with the projects to thrive. And, as a more macro feature, the fate of public housing usually follows the overall health of the city in which it stands. That is, when the industrial base in cities like Cleveland or St. Louis goes into decline, the ability of those cities to fund maintenance at public housing, and for its tenants to pay rent, mirrors the overall local economy. Yet, even as public housing has not lived up to the utopian ideals that underpinned its conception, the reality is not as stark as one would be led to believe. And the need for its continued existence and maintenance only grows stronger.
Thursday, January 19, 2017
NATO
Courtesy of Geopolitical Futures:
"Nations have the right and obligation to carry out their foreign and military policies as they wish. But an alliance constrains nations to behave in a certain way given certain events. An alliance is a pooling of sovereignty. It is absolutely true that NATO wasn’t conceived to fight wars outside of Europe. Nor was it conceived as an organization where the primary military burden falls on the Europeans. But Europeans must face two facts. First, this is 2017, and the wars that matter to the U.S. are being fought in the Islamic world. Second, this is not 1955, and Europe is not struggling to recover from World War II. It is a wealthy region, and its military capabilities should be equal to those of the U.S...
Trump’s approach to NATO has been forced on the U.S. by the Europeans and would be on the table with a different president. NATO doesn’t function as an alliance. It is a group of sovereign nations that will respond to American requests as they see fit. The U.S. understands this, and inevitably, the veil of good manners was going to be torn away. Someone was going to point out that NATO is obsolete. Trump happened to enjoy saying it.
But whether it is a tragedy or comedy, the matter can be summed up the following way. The Europeans are wondering if the U.S. will leave NATO. The U.S. is wondering if the Europeans will join NATO. Forgetting NATO, the question is this. What is the commitment of European countries to the United States, and what is the American commitment to Europe? It is not clear that there is a geopolitical basis for this commitment any longer. Interests have diverged, NATO is not suited to the realities of today, and the U.S.’ relations with European states differ from nation to nation, as do European nations’ relations to the United States."
"Nations have the right and obligation to carry out their foreign and military policies as they wish. But an alliance constrains nations to behave in a certain way given certain events. An alliance is a pooling of sovereignty. It is absolutely true that NATO wasn’t conceived to fight wars outside of Europe. Nor was it conceived as an organization where the primary military burden falls on the Europeans. But Europeans must face two facts. First, this is 2017, and the wars that matter to the U.S. are being fought in the Islamic world. Second, this is not 1955, and Europe is not struggling to recover from World War II. It is a wealthy region, and its military capabilities should be equal to those of the U.S...
Trump’s approach to NATO has been forced on the U.S. by the Europeans and would be on the table with a different president. NATO doesn’t function as an alliance. It is a group of sovereign nations that will respond to American requests as they see fit. The U.S. understands this, and inevitably, the veil of good manners was going to be torn away. Someone was going to point out that NATO is obsolete. Trump happened to enjoy saying it.
But whether it is a tragedy or comedy, the matter can be summed up the following way. The Europeans are wondering if the U.S. will leave NATO. The U.S. is wondering if the Europeans will join NATO. Forgetting NATO, the question is this. What is the commitment of European countries to the United States, and what is the American commitment to Europe? It is not clear that there is a geopolitical basis for this commitment any longer. Interests have diverged, NATO is not suited to the realities of today, and the U.S.’ relations with European states differ from nation to nation, as do European nations’ relations to the United States."
Duterte and the Philippines
Courtesy of Geopolitical Futures:
"China wants to have the Philippines as an ally. The Philippines wants to become less dependent on the U.S. The United States wants the Philippines to behave as the U.S. wishes. However, desire does not determine reality. Until either China or the Philippines is willing to give up sovereignty claims in the South China Sea, it is hard to see how an alliance between Beijing and Manila could work. Until the Philippines develops a better military or finds a naval power capable of replacing the U.S. security guarantee, the Philippines will remain an American ally, if a reluctant and boisterous one. The U.S. has always been slow to learn that self-righteous moral indignation does not translate into strategically valuable action and will have to re-examine its approach to the Philippines if it wants the relationship to be based on anything more than superior strength and need. Duterte is likely to produce plenty more eyebrow-raising quotes, but until one of these variables changes, the Philippine relationship with China won’t progress much beyond a tease."
"China wants to have the Philippines as an ally. The Philippines wants to become less dependent on the U.S. The United States wants the Philippines to behave as the U.S. wishes. However, desire does not determine reality. Until either China or the Philippines is willing to give up sovereignty claims in the South China Sea, it is hard to see how an alliance between Beijing and Manila could work. Until the Philippines develops a better military or finds a naval power capable of replacing the U.S. security guarantee, the Philippines will remain an American ally, if a reluctant and boisterous one. The U.S. has always been slow to learn that self-righteous moral indignation does not translate into strategically valuable action and will have to re-examine its approach to the Philippines if it wants the relationship to be based on anything more than superior strength and need. Duterte is likely to produce plenty more eyebrow-raising quotes, but until one of these variables changes, the Philippine relationship with China won’t progress much beyond a tease."
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