Bob Carlson

September 29, 2016

A China Update

Filed under: Economy — Bob @ 8:11 am

We haven’t heard much out of China since February. At the start of the year, a devaluation of the Chinese currency coupled with slower economic growth and other issues triggered a global deflationary scare. In this article, economist Kenneth Rogoff, former chief economist of the IMF, argues that China is the greatest risk to the global economy. He thinks much of the world depends on China for growth and that China’s debt level is too high. He also believes China is growing slower than the official numbers say.

Mr Rogoff warned that China could suffer a ‘hard landing’ – a much sharper slowdown that would have disastrous consequences for the rest of the world.

‘Everyone says China’s different, the state owns everything, they can control it,’ he said. ‘Only to a point. It’s definitely a worry, a hard landing in China. We’re having a pretty sharp landing already and I worry about China becoming more of a problem.’

The Bank of England last week warned that debt levels in China ‘are very high by international standards’.

September 28, 2016

Will Income Inequality End Naturally?

Filed under: Economy — Bob @ 5:34 pm

This article says that income inequality has increased and decreased around the globe at regular intervals for centuries. The causes of each cycle were different. It argues that this period of inequality is likely to end as the forces that caused it wind down and new forces move use to more equality.

Inequality has regularly waxed and waned over recent centuries, as indicated by modern economists’ studies of archival tax records, surveys of population incomes motivated by military-mobilization needs, or even of people’s private collections of historical family budgets. Moreover, although the forces driving inequality up or down vary, there are only a few of them.

The drivers of income inequality in pre-modern societies (that is, before industrialization) seem to have been mostly non-economic. Epidemics limited inequality; by killing part of the population, they made the remaining workers scarcer, which resulted in their wages rising. Wars either increased inequality as a result of conquerors enslaving and pillaging or, more commonly, reduced it by causing destruction that brought most of the population to levels of starvation. In fact, epidemics and wars alone can explain most of the swings in inequality in Spain between the early 1300s and the mid-1800s.

Analyzing the TED Spread

Filed under: Asset Allocation — Bob @ 12:28 pm

The TED Spread is a simple quantitative tool that some analysts use to gauge the level of risk in the markets. When the spread gets too wide, they say, it’s time to sell some assets. I bring this up because the TED Spread’s been rising lately. Here’s a good analysis of the TED Spread. Like most of these simple quantitative tools, it has a mixed history. There have been times when it seemed to make spectacularly good calls for investors, but a lot of false warnings.

From a long-term perspective, it is difficult to see how the Ted Spread would have been helpful in any manner for stock investors, except to confuse them. Given the look of the correlation chart above, a coin flip may be just as telling as the Ted Spread in terms of stock market odds. There are countless things to be concerned about; the recent spike in the Ted Spread is not high on the list.

Anticipating Future Market Returns

Filed under: Asset Allocation,Investing — Bob @ 8:19 am

Meb Faber summarizes a talk he recently gave about valuations and what they say about likely future returns. He doesn’t make forecasts. He looks at the probabilities of different scenarios and what the returns are likely to be in each of those scenarios. The outcomes aren’t very positive for investment positions taken today.

Historical returns in US stocks have been about 9% for reference.  So, if we stay at these lofty valuations for 10 years we get 6% returns.  If we go back to normal valuations for a low interest rate environment we get to 3.4%.  Not good but not as bad as bonds.  If we go back to full history normal valuations we get to 1.5%.  Similar to treasuries.  If we go to low valuations (where many foreign markets are today, well, you can see the red numbers.

Only if CAPE ratio expands can we get back to historical stock market returns.  The CAPE ratio has to go up to about 35(!) for us to get to historical stock levels.  Even if we go back to the highest bubble levels ever – where Elon Musk invents free energy and we all find out we’re living in a simulation – do we get 11.6% returns.  To get to the top level returns from the best 3 table?  Need to hit the biggest bubble ever ala Japan and get to a CAPE of 95.

September 27, 2016

Is Electronics Recycling a Fraud

Filed under: Economy — Bob @ 5:15 pm

This article describes a study that concludes most electronic devices that are turned in for recycling aren’t recycled. Instead, they are shipped to developing countries and put in landfills. It seems that recycling electronics is expensive. It’s cheaper to ship them around the world and deposit them in landfills.

Or at least, in a rational market, your office would have to pay an e-waste recycler to take their old stuff. But an astounding amount of US electronics recyclers will take old machines at no cost or for pennies per pound, then sell them wholesale to scrapyards in developing nations that often employ low-salary laborers to dig out the several components that are worth anything.

Based on the results of a new study from industry watchdog Basel Action Network and MIT, industry documents obtained by Motherboard, and interviews with industry insiders, it’s clear that the e-waste recycling industry is filled with sham operations profiting off of shipping toxic waste to developing nations.

The Administration Attacks Zoning Laws

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

The Obama administration is taking aim at local zoning laws, building codes, and other restrictions on building housing. A paper issued by the administration urges local governments to revise their zoning laws. The administration believes the laws restrict the supply of housing, which makes housing unaffordable and increases income inequality. A report is here.

Zoning policy might seem picayune for a president, but eight years after the foreclosure crisis left the country littered with empty homes, the country is facing a critical housing shortage in its most vibrant job centers. The result is soaring rents, growing income inequality and sputtering economic growth nationwide. By one estimate, barriers to development in major cities have shaved as much as $1.95 trillion a year off U.S. economic growth.

“It’s important that the president is talking about it,” said Mark Calabria, director of financial regulation studies at the Cato Institute. “Local restrictions on housing supply are a crucial economic issue. I would say it’s one of the top 10.”

Another Bubble Bursting

Filed under: Economy — Bob @ 8:20 am

Classic cars had their prices surge since the financial crisis. But the ride could be ending. This article says sales volume is falling, prices are barely rising, and price declines could be next.

Signs of softness in the classic car market come amid worries that demand for other luxury or collectible goods has been weakening. In the art world, pieces that sold for $100,000 as recently as 2013 are now selling for $20,000, and in real estate some developers are aiming at a lower end of the market by splitting luxury apartments into two.

“I still think it is an indication that things are getting frothy at the high end — be it collector cars, art, jewelry, etc,” Tynan said.

September 26, 2016

FedEx and UPS as Market Indicators

Filed under: Economy — Bob @ 5:09 pm

This article argues that the two shipping giants are the best tools for evaluating current levels of economic activity. People buy things, and these two companies deliver them. Of course, part of the success of the firms might be due to shifts from retail stores to online purchasing. The two companies could benefit from that shift more than they would from general economic growth that boosts retail stores.

“A recovering economy coupled with the rapid growth of e-commerce should provide a lift to revenues, volumes and operating margins,” Corridore wrote, describing FedEx as “well positioned” to benefit from growing volumes of shipments over the next several years.

Online shopping has been a huge blessing to both FedEx and UPS. Total online sales are forecast to grow at an average annual rate of 9.3 percent over the next five years, according to Forrester Research, soaring to $523 billion by 2020 from $335 billion in 2015. The e-commerce share of total retail sales is expected to expand to 11% in 2018 from 7.5 percent in the second quarter of this year.

Planners for the Elite

Filed under: Economy,Estate Planning — Bob @ 12:20 pm

This article goes into some detail about the professionals who help the very wealthy handle their finances. It mainly focuses on efforts to hide the wealth from the public and avoid taxes. But it looks at other uses of financial strategies. The article generally argues that the effects of these strategies are negative for society and increase wealth inequality.

Determining whether a wealth manager is worthy of their trust is a key concern of elite clients. Several people in the profession told me that they had been asked to perform extraordinary acts of service in the early stages of their relationship with a new client, simply to prove that they were up to the job. For example, Eleanor told me of one person who called her office in Geneva and told her: “I’m outside a restaurant in London and I just lost a bracelet – I need you to find it.” In other words, the client was asking her to locate a missing piece of jewellery outside an unnamed building in another country. Eleanor somehow did this, billed for her time, and earned a loyal client for decades to come. “The very rich are willing to pay for that extra-special bespoke service – just like suits,” said Mark, who is based in Dubai.


David, a British wealth manager who is nearing the end of a 40-year career in Hong Kong, had a particularly impressive story: “I was phoned up from Osaka once, by a client who said, ‘I’m sitting across from Owagi-san, who speaks no English, but we are bowing to each other. He has just said to me through a translator that he needs a thousand sides of smoked salmon by Tuesday, and I’m relying on you to get them.’ I said, ‘I’m your wealth manager, not your fishmonger.’ And the client said, ‘Well, today you’re a fishmonger.’ So I had to ring up a friend who knew the guy from Unilever who runs the smoked salmon plant in Scotland. And the plant manager made it happen.”

A Negative View of Central Banks

Filed under: Economy — Bob @ 8:20 am

While the central banks believe their policies since 2009 have kept the developed world’s economies growing, however slowly, Steve Forbes has a different take. He says central banks now are realizing that the policies are having negative effects. Here’s his summary of the problems and why he believes central banks finally are questioning their policies.

The institution’s naive faith that computer models can replicate the real world and predict how people will respond to changes in the marketplace is stunning. It has forgotten the old adage of modeling: garbage in, garbage out. Its forecasting model has widely missed the coming year’s economic growth for 13 out of the last 15 years, embarrassing the Fed not a whit, until now. Its economists would have done better reading chicken entrails.

Economies aren’t machines that can be calibrated, like automobiles. They are billions of people making decisions numerous times a day. The idea that central planners, whether they’re of the Soviet or Federal Reserve variety, can calibrate economic activity always founders because they can’t predict the future.

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