Bob Carlson

July 31, 2014

Confusion About Uncertainty

Filed under: Economy,finances — Bob @ 5:20 pm

I like to tell readers that they shouldn’t try to forecast the future and then position their finances based on that forecast. Instead, you should focus on possible scenarios and the probability of each occurring. Have a plan that will benefit from the most likely scenario but also have some diversification and back up plans in case you are wrong. The hallmarks of the economy and investing are uncertainty. It’s not like many of the natural sciences where one set of inputs always leads to the same outputs. In the markets there are too many variables for that to be the case. You have to learn to make decisions under uncertainty.

Here’s a post that summarizes and links to a recent NPR series on the topic. It doesn’t focus on investing and the economy. But it does a good job of explaining how probability and uncertainty must be dealt with in several key areas (such as national security) and how difficult it is for most people to distinguish a probability from a forecast of certainty.

It’s not clear to me, though, how effective this approach is. For one thing, consumers are often lazy about trying to understand just what information they’re being given, and templates like Kent’s don’t automatically solve that problem. This laziness came across most clearly in NPR’s Risk and Reason segment on meteorology (here). Many of us routinely consume probabilistic forecasts of rainfall and make decisions in response to them, but it turns out that few of us understand what those forecasts actually mean. With Kent’s words of estimative probability, I suspect that many readers of the products that use them haven’t memorized the table that spells out their meaning and don’t bother to consult it when they come across those phrases, even when it’s reproduced in the same document.

More Stock Gains to Come

Filed under: Asset Allocation,Economy — Bob @ 12:20 pm

Byron Wein of Blackstone says that the U.S. stock market is only getting started. He’s been bullish since the start of the year and says the S&P 500 could gain another 17% by the end of the year. In his latest monthly commentary, Wein offers a very different perspective from the many bears out there and expect the markets will continue to climb the “wall of worry.”

Almost every indicator I am now looking at is, in fact, showing a better tone to the economy.  Vehicle production is running at 17 million units; consumer confidence and retail sales are improving; bank loans, which indicate a willingness by business people to borrow for inventories or new projects, are strong; capital spending is picking up; new plants are being planned or built; the unemployment rate is down to 6.1%; and the number of jobs created in June was impressive.  In addition, initial unemployment claims are down, small business hiring plans are positive and there are signs of wage increases in the service sector.  Based on historical trends, we will not have to worry about wage acceleration until the unemployment rate hits 5.5%, which probably will not happen before sometime next year.

On the other hand, the indicators are not universally positive.  Housing starts, which had been running above one million units, dropped to 893,000 in June.  Building permits also declined.  For the economy to move toward 3% real growth in the second half and for unemployment to continue heading to lower levels, housing has to be strong.  Recent data on housing has been mixed and the drop in starts is troubling, but there are enough other positive signs that I am not altering my favorable forecast.  If housing continues to be weak, I will probably have to change my view.

Free Behavioral Economics Guide

Filed under: Economy,Investing — Bob @ 8:20 am

Behavioral economics is the rage in economics and investing. For those who want to know the basics, there’s now a free 130-page PDF available for download.

July 30, 2014

Straight Talk on Sitting Too Much

Filed under: Health — Bob @ 5:20 pm

Here’s another slew of contradictory studies on health issues. You probably saw the recent media attention directed at the perils of sitting too long. The bottom line conclusion that shocked many is that even people who exercise daily and are in good physical condition dramatically shorten their lives if they spend too much time the rest of the day sitting at work or elsewhere. But other studies now show that regular exercise increases life expectancy, even if one sits a good deal the rest of the day. That’s good news for people who have to be sedentary to do their jobs. Other goods news is that it doesn’t take a lot of exercise to improve health and longevity.

Parking at a desk for just five hours a day doubles the risk of heart failure in men, according to research released in January by the American Heart Association. Such sedentary behavior also raises by almost 50% the “risk of death from any cause,” including cancer and diabetes.

Inactive women don’t fare much better. For instance, one study, by the American Cancer Society, published in the American Journal of Epidemiology four years ago, followed 123,216 people over 13 years, from 1993 to 2006. A grim finding: women who sat for more than six hours a day increased their odds of early death by 40%.

The Small Cap Decline

Filed under: Asset Allocation — Bob @ 12:24 pm

Small company stocks have been under pressure in 2014 after leading the market indexes higher since the bottom in 2009. Can a cause for this be found? FTAlphaville, citing BCA Research, says that the problems appears to be that wage increases are starting to take hold. Small companies don’t have much power to raise prices. So, when job market conditions force them to raise wages, they have to accept lower profits. The article says this is a global problem now, not only a U.S. issue.

A reason is needed in the US because business conditions are otherwise great. Small business owners are confident, unemployment is falling, and it is possible to get credit again. Small businesses are taking people out the of unemployment statistics by hiring them, which is generally a sign of growth, recovery and the higher sales that typically follow.

However smaller businesses can lack pricing power. Aside from political pressure to raise minimum wages, BCA spots that labour quality concerns are about to overtake lack of sales as the most important problem cited by US job creators business.

A Perspective on the Recent Events in Israel/Palestine/Gaza

Filed under: Economy — Bob @ 8:20 am

The Middle East is making headlines again. I like this perspective from George Friedman of Stratfor.com. He basically takes a game theory perspective on the issues, incorporating the non-negotiable demands of both sides. He concludes that there isn’t a peaceful resolution of the situation likely.

Many believe the creation of a Palestinian state will be the solution, and those who believe this often have trouble understanding why this self-evidently sensible solution has not been implemented. The reason is the proposed solution is not nearly as sensible as it might appear to some.

Issues of viability and sovereignty surround any discussion of a Palestinian state. Geography raises questions about the viability of any Palestinian polity. Palestine has two population centers, Gaza and the West Bank, which are detached from one another. One population center, Gaza, is an enormously crowded, narrow salient. Its ability to develop a sustainable economy is limited. The West Bank has more possibilities, but even it would be subordinate to a dynamic Israel. If the Palestinian workforce is drawn into the Israeli economy, both territories will become adjuncts to Israel. Within its current borders, a viable Palestine is impossible to imagine.

From the Israeli point of view, creating a Palestine along something resembling the 1967 lines (leaving aside the question of Jerusalem) would give the Palestinians superb targets, namely, Tel Aviv and Haifa. Given its history, Israel is unlikely to take that risk unless it had the right to oversee security in the West Bank in some way. That in turn would undermine Palestinian sovereignty.

As you play out the possibilities in any two-state solution, you run into the problem that any solution one side demanded would be unbearable to the other. Geography simply won’t permit two sovereign states. In this sense, the extremists on both sides are more realistic than the moderates. But that reality encounters other problems.

July 29, 2014

Medicare Looking Better; Social Security Slightly Worse

Filed under: Medicare,Medicare Advantage,Social Security — Bob @ 5:20 pm

The annual report of the Trustees of Social Security and Medicare is out. The report really is from the actuaries. It presents the financial condition of the “trust funds” based on current assumptions. The headline from the report almost always is the changes in the dates when the funds are estimated to be exhausted. In the latest report, the main Medicare hospitalization fund is estimated to last about four years longer than last year’s estimate, until 2030. After that the fund will be able to pay only 85% of promised benefits. The improvement in Medicare is due to slower increases in medical costs and lower use of services. Only a few years ago Medicare was supposed to be exhausted by 2016.

Social Security isn’t doing as well. The retirement benefits fund is slated to run out of money one year earlier than last year’s estimate, making it to 2034. The Social Security disability benefits fund is in far worse shape. The number of disability retirees skyrocketed in recent years. The current estimate is that the disability trust fund will exhaust its reserves in 2016.

From the pubic trustees’ section of the report:

Long before the reserves of the OASI and HI Trust Funds are depleted, the finances of Social Security and Medicare will be challenging because of the growing pressure these programs exert on the Federal budget. This is a central concern from the standpoint of program financing because the reserves of each of the various trust funds are invested wholly in U.S. Treasury securities. Monitoring interactions between the trust funds and the General Fund is one of our core duties. When lawmakers created the public trustee positions in 1983 pursuant to a recommendation of the Greenspan Commission, that commission made its recommendation to create public trustees in the “investment procedures” section of its report, rather than in those sections pertaining to actuarial balance. While the Greenspan Commission presented different opinions on the issue of whether Social Security should be included within the unified Federal budget, members of the commission agreed that it was important that Social Security’s impact on the budget be laid out in a transparent fashion. The minority advocated for Social Security’s “impact thereon to be seen more clearly” while the majority’s arguments included making clear “the effect and presence of any payments from the General Fund of the Treasury to the Social Security program.” Indeed, our public trustee positions exist in large part because of lawmakers’ concern that the economic and fiscal implications of the trust funds’ buildup and drawdown be fully understood and properly managed. One of the first actions taken by the program’s original two public trustees in 1985, the year of their first report, was to direct a study of these implications in response to the concerns.

Dodging a Solar Storm

Filed under: Economy — Bob @ 12:20 pm

There are people who worry about wars, extreme weather, climate change, and a host of other possible calamities. But there are relatively few people who worry about solar storms and the damage they could do to modern society and its technological basis. Here’s an article that says in 2012 earth just missed being hit by an extreme solar storm that would have caused extensive damage. It reads like science fiction but apparently isn’t. In addition, one scientist quoted in the article says that in the next 10 years there’s a 12% chance earth will be hit by such a storm.

Before July 2012, when researchers talked about extreme solar storms their touchstone was the iconic Carrington Event of Sept. 1859, named after English astronomer Richard Carrington who actually saw the instigating flare with his own eyes.  In the days that followed his observation, a series of powerful CMEs hit Earth head-on with a potency not felt before or since.  Intense geomagnetic storms ignited Northern Lights as far south as Cuba and caused global telegraph lines to spark, setting fire to some telegraph offices and thus disabling the ‘Victorian Internet.”

A similar storm today could have a catastrophic effect. According to a study by the National Academy of Sciences, the total economic impact could exceed $2 trillion or 20 times greater than the costs of a Hurricane Katrina. Multi-ton transformers damaged by such a storm might take years to repair.

“In my view the July 2012 storm was in all respects at least as strong as the 1859 Carrington event,” says Baker. ”The only difference is, it missed.”

Aging Gracefully–Conductors

Filed under: Health,Retirement - General — Bob @ 8:20 am

Orchestra conductors tend to continue working well after most of their contemporaries have stopped. This article explores how they do it by interviewing three internationally-renowned conductors, the youngest of them is 70. It’s an interesting piece but is anecdotal, rather than research-based.

Sir Neville is also kept young through mental effort. ‘Intellectually it’s a fairly engaging profession and I don’t think your mind rests very frequently. From one day to the next you’re always thinking about what’s happening tomorrow.’ Passion helps too. ‘The music keeps us going,’ says Sir Andrew, who has been puffing on a cigarette (he smokes five or six a day). He’s just stepped off a plane from the US, where he is principal conductor of Lyric Opera of Chicago, and straight into a rehearsal with the BBC Symphony Chorus. He’s in the middle of a frantic few weeks of work in Germany, Australia, America, Edinburgh and London, and is leading the Melbourne Symphony Orchestra in its Proms debut. ‘Conducting is meat and drink to me. I love it. It’s FANTASTIC. Perhaps the most important thing is to make an orchestra or a chorus love it. It’s a hard life for an orchestral player. They’re churning out new programmes every week, or sometimes more often than that.’

July 28, 2014

The U.S. Visa for Sale Program

Filed under: Economy — Bob @ 5:20 pm

Not many people know about the EB-5 visa program, part of the law since 1990. The program effectively allows wealthy foreigners to buy U.S. citizenship for $500,000. Here’s a detailed article from Fortune.

From the law’s inception in 1990, selling potential citizenship to the rich struck many as a corruption of American ideals. “Have we no self-respect as a nation?” asked Texas congressman John Bryant on the House floor that year. “Are we so broke we have to sell our birthright?”

But that powerful objection was overcome with an even more potent counterforce: The program would generate jobs where they’re needed most. Immigrants seeking EB-5 visas must invest their half-a-million dollars in a new business that creates 10 full-time U.S. jobs in a high-unemployment or rural district. (Technically, one can obtain an EB-5 visa for $1 million with no requirement that the jobs benefit a struggling area; in reality, few apply under that provision.)

Today EB-5 commands bipartisan support—and it’s booming. Believers tout the program as a “win-win-win” that helps immigrants and U.S. workers, and provides valuable investment in American communities. A trio of billionaires—Warren Buffett, Bill Gates, and Sheldon Adelson—recently endorsed the program in an op-ed column in the New York Times.

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