January 2017


Screen Shot 2015-11-18 at 4.55.47 PM

If you were waiting for a pullback to buy, here it is. Of course now the question is: will it keep pulling-back and get cheaper etc.

That is always the problem buying markets that have already made a run.

Personally, I wouldn’t buy here. Not that I know whether it goes higher/lower, simply that the potential volatility is too much to buy here.

For what it’s worth, I think the market goes higher again. Best guess.

Advertisements

Screen Shot 2015-11-18 at 4.55.47 PM

The Dow Jones Index has broken 20,000. Pretty impressive. Historic. Will it hold? Typically there is a bit of a pull-back and then the market moves forward.

 

 

Screen Shot 2015-11-18 at 4.55.47 PM

Towering debts, rapidly rising taxes, constant and expensive wars, a debt burden surpassing 200% of GDP. What are the chances that a country with such characteristics would grow rapidly? Almost anyone would probably say ‘none’.

And yet, these are exactly the conditions under which the Industrial Revolution took place in Britain. Britain’s government debt went from 5% of GDP in 1700 to over 200% in 1820, it fought a war in one year out of three … and taxes increased rapidly but not enough to keep pace with the rise in spending …

vothjuly15fig1

Until now, scholars mostly thought of the effect of government borrowing on growth as either neutral or negative…

In a recent paper, we argue that Britain’s borrowing binge was actually good for growth (Ventura and Voth 2015). To understand why massive debt accumulation may have accelerated the Industrial Revolution, we first consider what should have happened in an economy where entrepreneurs suddenly start to exploit a new technology with high returns. Typically, we would expect capital to chase these investment opportunities – anyone with money should have tried to put their savings into new cotton factories, iron foundries and ceramics manufacturers. Where they didn’t have the expertise to invest directly, banks and stock companies should have recycled funds to direct savings to where returns where highest.

This is not what happened. Financial intermediation was woefully inadequate – it failed to send the money where it should have gone …

By issuing bonds on a massive scale, the government effectively pioneered a way – unintentionally – to put money in the pockets of entrepreneurs in the new sectors …

The shift from investing in liming, marling, draining, and enclosure into government debt liberated resources – labour that could no longer be profitably employed in the countryside had to look for employment elsewhere. Because so much of English agricultural labour was provided by wage labourers, the switch to government debt pushed workers off the land. Unsurprisingly, wages failed to keep pace with output; real wages, adjusted for urban disamenities, probably fell over the period 1750-1830. What made life miserable for the workers, as eloquently described by Engels amongst others, was a boon to the capitalists. Their profit rates continued to rise as capital received an ever-larger share of the pie – while the share of national income going to labour and land contracted. Higher profits spelled more investment in new industries, and Britain’s industrial growth accelerated.

Screen Shot 2015-11-18 at 4.55.47 PM

A Le Pen victory in May, pretty much signals the end of Europe as a European Union.

Is a Le Pen victory possible? I would say definitely yes. The ‘nationalistic’ winds are blowing strongly at the moment, Brexit and Trump being the 2 standout examples.

I’ll probably start to pay a little more attention to this now that Trump has taken power in the US. I also have some definite ideas about where I would want to invest for this coming political cycle.

 

Screen Shot 2015-11-18 at 4.55.47 PM

Well before Donald Trump was elected President of the United States, I sent a holiday greeting to my friends that read: “These times are not business as usual. Wishing you the best in a troubled world.” Now I feel the need to share this message with the rest of the world. But before I do, I must tell you who I am and what I stand for.

I am an 86-year-old Hungarian Jew who became a US citizen after the end of World War II. I learned at an early age how important it is what kind of political regime prevails. The formative experience of my life was the occupation of Hungary by Hitler’s Germany in 1944. I probably would have perished had my father not understood the gravity of the situation. He arranged false identities for his family and for many other Jews; with his help, most survived.

In 1947, I escaped from Hungary, by then under Communist rule, to England. As a student at the London School of Economics, I came under the influence of the philosopher Karl Popper, and I developed my own philosophy, built on the twin pillars of fallibility and reflexivity. I distinguished between two kinds of political regimes: those in which people elected their leaders, who were then supposed to look after the interests of the electorate, and others where the rulers sought to manipulate their subjects to serve the rulers’ interests. Under Popper’s influence, I called the first kind of society open, the second, closed.

The classification is too simplistic. There are many degrees and variations throughout history, from well-functioning models to failed states, and many different levels of government in any particular situation. Even so, I find the distinction between the two regime types useful. I became an active promoter of the former and opponent of the latter.

I find the current moment in history very painful. Open societies are in crisis, and various forms of closed societies — from fascist dictatorships to mafia states — are on the rise. How could this happen? The only explanation I can find is that elected leaders failed to meet voters’ legitimate expectations and aspirations and that this failure led electorates to become disenchanted with the prevailing versions of democracy and capitalism. Quite simply, many people felt that the elites had stolen their democracy.

After the collapse of the Soviet Union, the US emerged as the sole remaining superpower, equally committed to the principles of democracy and free markets. The major development since then has been the globalization of financial markets, spearheaded by advocates who argued that globalization increases total wealth. After all, if the winners compensated the losers, they would still have something left over.

The argument was misleading, because it ignored the fact that the winners seldom, if ever, compensate the losers. But the potential winners spent enough money promoting the argument that it prevailed. It was a victory for believers in untrammeled free enterprise, or “market fundamentalists,” as I call them. Because financial capital is an indispensable ingredient of economic development, and few countries in the developing world could generate enough capital on their own, globalization spread like wildfire. Financial capital could move around freely and avoid taxation and regulation.

Globalization has had far-reaching economic and political consequences. It has brought about some economic convergence between poor and rich countries; but it increased inequality within both poor and rich countries. In the developed world, the benefits accrued mainly to large owners of financial capital, who constitute less than 1% of the population. The lack of redistributive policies is the main source of the dissatisfaction that democracy’s opponents have exploited. But there were other contributing factors as well, particularly in Europe.

I was an avid supporter of the European Union from its inception. I regarded it as the embodiment of the idea of an open society: an association of democratic states willing to sacrifice part of their sovereignty for the common good. It started out at as a bold experiment in what Popper called “piecemeal social engineering.” The leaders set an attainable objective and a fixed timeline and mobilized the political will needed to meet it, knowing full well that each step would necessitate a further step forward. That is how the European Coal and Steel Community developed into the EU.

But then something went woefully wrong. After the Crash of 2008, a voluntary association of equals was transformed into a relationship between creditors and debtors, where the debtors had difficulties in meeting their obligations and the creditors set the conditions the debtors had to obey. That relationship has been neither voluntary nor equal.

Germany emerged as the hegemonic power in Europe, but it failed to live up to the obligations that successful hegemons must fulfil, namely looking beyond their narrow self-interest to the interests of the people who depend on them. Compare the behaviour of the US after WWII with Germany’s behaviour after the Crash of 2008: the US launched the Marshall Plan, which led to the development of the EU; Germany imposed an austerity program that served its narrow self-interest.

Before its reunification, Germany was the main force driving European integration: it was always willing to contribute a little bit extra to accommodate those putting up resistance. Remember Germany’s contribution to meeting Margaret Thatcher’s demands regarding the EU budget?

But reuniting Germany on a 1:1 basis turned out to be very expensive. When Lehman Brothers collapsed, Germany did not feel rich enough to take on any additional obligations. When European finance ministers declared that no other systemically important financial institution would be allowed to fail, German Chancellor Angela Merkel, correctly reading the wishes of her electorate, declared that each member state should look after its own institutions. That was the start of a process of disintegration.

After the Crash of 2008, the EU and the eurozone became increasingly dysfunctional. Prevailing conditions became far removed from those prescribed by the Maastricht Treaty, but treaty change became progressively more difficult, and eventually impossible, because it couldn’t be ratified. The eurozone became the victim of antiquated laws; much-needed reforms could be enacted only by finding loopholes in them. That is how institutions became increasingly complicated, and electorates became alienated.

The rise of anti-EU movements further impeded the functioning of institutions. And these forces of disintegration received a powerful boost in 2016, first from Brexit, then from the election of Trump in the US, and on December 4 from Italian voters’ rejection, by a wide margin, of constitutional reforms.

Democracy is now in crisis. Even the US, the world’s leading democracy, elected a con artist and would-be dictator as its president. Although Trump has toned down his rhetoric since he was elected, he has changed neither his behaviour nor his advisers. His cabinet comprises incompetent extremists and retired generals.

What lies ahead?

I am confident that democracy will prove resilient in the US. Its Constitution and institutions, including the fourth estate, are strong enough to resist the excesses of the executive branch, thus preventing a would-be dictator from becoming an actual one.

But the US will be preoccupied with internal struggles in the near future, and targeted minorities will suffer. The US will be unable to protect and promote democracy in the rest of the world. On the contrary, Trump will have greater affinity with dictators. That will allow some of them to reach an accommodation with the US, and others to carry on without interference. Trump will prefer making deals to defending principles. Unfortunately, that will be popular with his core constituency.

I am particularly worried about the fate of the EU, which is in danger of coming under the influence of Russian President Vladimir Putin, whose concept of government is irreconcilable with that of open society. Putin is not a passive beneficiary of recent developments; he worked hard to bring them about. He recognised his regime’s weakness: it can exploit natural resources but cannot generate economic growth. He felt threatened by “colour revolutions” in Georgia, Ukraine, and elsewhere. At first, he tried to control social media. Then, in a brilliant move, he exploited social media companies’ business model to spread misinformation and fake news, disorienting electorates and destabilizing democracies. That is how he helped Trump get elected.

The same is likely to happen in the European election season in 2017 in the Netherlands, Germany, and Italy. In France, the two leading contenders are close to Putin and eager to appease him. If either wins, Putin’s dominance of Europe will become a fait accompli.

I hope that Europe’s leaders and citizens alike will realise that this endangers their way of life and the values on which the EU was founded. The trouble is that the method Putin has used to destabilize democracy cannot be used to restore respect for facts and a balanced view of reality.

With economic growth lagging and the refugee crisis out of control, the EU is on the verge of breakdown and is set to undergo an experience similar to that of the Soviet Union in the early 1990s. Those who believe that the EU needs to be saved in order to be reinvented must do whatever they can to bring about a better outcome.

Screen Shot 2015-11-18 at 4.55.47 PM

If American conservatives have an intellectual hero, it might well be Friedrich Hayek — and rightly so. More clearly than anyone else, Hayek elaborated the case against government planning and collectivism, and mounted a vigorous argument for free markets. As it turns out, Hayek simultaneously identified a serious problem with the political creed of President-elect Donald Trump.

One of Hayek’s most important arguments in his great classic, “The Road to Serfdom,” involves the Rule of Law, which he defined to mean “that government in all its actions is bound by rules fixed and announced beforehand.” Because of the Rule of Law, “the government is prevented from stultifying individual efforts by ad hoc action.”

In “The Road to Serfdom” and (at greater length) in “The Constitution of Liberty,” Hayek distinguished between formal rules, which are indispensable, and mere “commands,” which create a world of trouble, because they are a recipe for arbitrariness. When formal rules are in place, “the coercive power of the state can be used only for cases defined in advance by law and in such a way that it can be foreseen how it will be used.”

Like the rules of the road, formal rules do not name names. They are useful to people who are not and cannot be known by the rule-makers — and they apply in situations that public officials cannot foresee.

Commands are altogether different. They target particular people and tell them what to do. (Think Hitler’s Germany, Stalin’s Soviet Union, Mao’s China, Castro’s Cuba.) They require the exercise of discretion on the spot. As examples, Hayek pointed to official decisions about “how many buses are to be run, which coal mines are to operate, or at what prices shoes are to be sold.”

Hayek offered two arguments on behalf of the Rule of Law. The first is economic: If the government’s actions are predictable, then people are able to plan. In his famous formulation, “the more the state ‘plans,’ the more difficult planning becomes for the individual.” If officials are issuing commands, it will become much harder for people to have the kind of security that is a precondition for economic development and growth.

Hayek’s second argument, moral in character, involves a specific value: impartiality. When the Rule of Law is intact, public officials act behind a veil of ignorance. If the government does not know who will be helped or hurt by what it does, it cannot play favorites or take sides. For Hayek, the state should never specify “how well off particular people shall be and what different people are to be allowed to have and to do.”

Many late 20th-century conservatives, including Ronald Reagan and Margaret Thatcher, have been drawn to Hayek’s arguments; the same is true of contemporary figures like Paul Ryan and Ted Cruz. In sharp contrast, President-elect Trump prides himself on his skills as a dealmaker, and he wants to use those skills to “make good deals” for the American people. There is a real risk that in practice, presidential deals, deliberately done on an ad-hoc basis, will turn out to be Hayekian commands.

Consider in this regard Trump’s participation in the highly publicized agreement with Carrier Corp., a manufacturer of air-conditioning and heating equipment, to keep operations in the U.S. in return for tax breaks. Or consider Trump’s negotiation with Boeing Co., which brought down the cost of the Air Force One program.

There is a legitimate argument (long pressed by Democrats) that Medicare should negotiate prescription drug prices with pharmaceutical companies. But Trump’s endorsement of that argument undoubtedly stems, in part, from his enthusiasm for the role of Dealmaker-in-Chief.

In the abstract, of course, no one should object if the president is able to secure better deals for the American people. A successful negotiation is not a command. But unlike a candidate or a president-elect, a president has coercive power. Any negotiation is inevitably undertaken under the shadow of that awesome power.

A succession of “good deals” by the executive branch might garner impressive headlines, but Hayek’s analysis offers a serious warning. Exactly which companies will end up with favorable or unfavorable deals, and why? A dealmaking executive branch, interacting with those in the private sector along multiple fronts, will be tempted to reward its friends and punish its enemies — and it will have plenty of ways to do exactly that.

In a world of presidential deals, companies are going to have horrible incentives — to curry presidential favor in countless ways, to act strategically, and to make promises and threats of their own, so as to avoid unfavorable treatment from government and to obtain optimal concessions from it. That’s nothing to celebrate. On the contrary, it is a road to serfdom.

One of Hayek’s enduring achievements was to clarify the importance of government neutrality and forbearance, not through anything like laissez-faire, but by avoiding commands in favor of clear, general, stable, predictable rules on which the private sector can rely. A Dealmaker-in-Chief might turn out, in practice, to be a Commander-in-Chief in precisely the sense that Hayek deplored.

Screen Shot 2015-11-18 at 4.55.47 PM

A recent study found 50% of occupations today will be gone by 2020, and a 2013 Oxford study forecasted that 47% of jobs will be automated by 2034. A Ball State study found that only 13% of manufacturing job losses were due to trade, the rest from automation. A McKinsey study suggests 45% of knowledge work activity can be automated.

94% of the new job creation since 2005 is in the gig economy. These aren’t stable jobs with benefits on a career path. And if you are driving for Uber, your employer’s plan is to automate your job. Amazon has 270k employees, but most are soon-t0-be-automated ops and fulfillment. Facebook has 15k employees and a 330B market cap, and Snapchat in August had double their market cap per employee, at $48M per employee. The economic impact of Tech was raising productivity, but productivity and wages have been stagnant in recent years.

And the Trumpster…

Trump’s lack of attention to the issue is based on good reasons and bad ones. The bad ones are more fun, so let’s start with them. Trump knows virtually nothing about technology — other than a smartphone, he doesn’t use it much. And the industries he’s worked in — construction, real estate, hotels, and resorts — are among the least sophisticated in their use of information technology. So he’s not well equipped to understand the dynamics of automation-driven job loss.

The other Trump shortcoming is that the automation phenomenon is not driven by deals and negotiation. The Art of the Deal‘s author clearly has a penchant for sparring with opponents in highly visible negotiations. But automation-related job loss is difficult to negotiate about. It’s the silent killer of human labor, eliminating job after job over a period of time. Jobs often disappear through attrition. There are no visible plant closings to respond to, no press releases by foreign rivals to counter. It’s a complex subject that doesn’t lend itself to TV sound bites or tweets.

Next Page »