Bob Carlson

May 27, 2016

Billion Price Project Update

Filed under: Economy — Bob @ 5:20 pm

The Billion Price Project went live shortly after Lehman Brothers filed for bankruptcy in 2008. One of its goals is to test the accuracy of government-issued inflation data in 60 countries. This post summarizes some conclusions from the experience to date with the BPP. One conclusion is that the U.S. government’s price data is very accurate.

This “big data” approach to inflation is also helping us to understand the fundamental question of why recessions happen. Without opening a big bag of macroeconomics at this stage in the column, one influential school of thought is that recessions happen (in part) because prices don’t adjust smoothly in the face of a slowdown. Like a small rock that starts an avalanche, this price rigidity causes big trouble. Unsold inventory builds up, retailers slash their orders, and manufacturers go bankrupt.

The Economy and the Election

Filed under: Economy — Bob @ 12:20 pm

The economy determines or at least heavily influences who is elected President. That’s a theory that has a pretty good track record. Here’s a blog post summarizing the work of Ray Fair, the leading economist in predicting president elections. Though all the data for Fair’s equation aren’t in yet, he says it currently looks like the economy favors the Republican nominee.

At the most basic level, Fair’s equation is just saying that a slow rate of economic growth during 2016, along with the fact that there haven’t been many rapid quarters of economic growth during the Obama presidency, will tend to make it harder for Democrats to win in 2016. But correlation doesn’t prove causation, as Fair knows as well as anyone and better than most, and he would be the last one to overstate how much weight to give to these kinds of formulas.

Solutions for Aging CEOs

Filed under: Estate Planning — Bob @ 8:31 am

Corporate expert Jeffrey Sonnenfeld of Yale has an essay on Fortune.com about the controversy concerning Sumner Redstone. He identifies the problem as Monarch CEOs who won’t pass leadership to the next generation. It’s the responsibility of a CEO to develop the next generation of leadership, give them responsibility, and move on. The Monarch CEOs associate their personalities and self-worth in their jobs, preventing them from taking those steps. Instead, they should find other things to do.

Gordon was also a generous, patient leader. He explained that after he stepped away from management and sold back his controlling shares to his employees, “In Kidder, anybody that has an ounce of productive capacity, as measured by the bottom line, does not have to retire. It is necessary, however, to give leadership responsibility to other people so that they can learn.”

May 26, 2016

New Home Sales Boom

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

New home sales have been growing at a sluggish pace recently, despite optimistic surveys from the National Association of Home Builders. The optimism seemed merited this week when a surge in new home sales was reported. You can read details here and a follow up commentary on the prices of new homes here.

The new home sales report for April was very strong at 619,000 on a seasonally adjusted annual rate basis (SAAR), and combined sales for January, February and March were revised up by 44 thousand SAAR.

This was the highest sales rate since January 2008.

Sales were up 23.8% year-over-year (YoY) compared to April 2015. And sales are up 9.0% year-to-date compared to the same period in 2015.

May 25, 2016

The Dangers of Being Risk-Averse

Filed under: Economy — Bob @ 5:20 pm

This article argues that the most financially-dangerous people aren’t the real risk-takers. They also aren’t the risk-avoiders. It identifies a middle group, called prevention-focused, who are conservative and risk-averse most of the time. But under certain circumstances they’ll risk everything. It argues that these are the people who caused the worst effects of the financial crisis.

These are the people who, counter-intuitively, will take the most dangerous risks under the right circumstances. One of the most famous risk-takers in recent memory is JP Morgan’s “London Whale,” Bruno Iksil, who doubled down on a losing bet rather than admit his losses, ultimately costing the bank over six billion. Evidence from the Senate hearings on the matter, in the form of recorded phone calls and emails, paints a picture of desperation rather than over-confidence. (Incidentally, Iksil was head of the Chief Investment Office, the purpose of which is to protect the bank by hedging some of its other riskier bets. This is no longer ironic, when understood from the vantage of prevention focus.)

Why Gold is Falling

Filed under: Economy — Bob @ 12:20 pm

Gold finally was hot for a while this year. After peaking in 2011, gold was the top-performing major asset for the year, gaining over 20%. Now, it’s down to a four-week low. It’s still positive for the year to date, but it could lose those gains quickly at recent rates.

Blame the volatility and changes on the Federal Reserve and its rapidly-shifting policies. Even public statements by Fed officials can move markets without any real action behind them. This article describes the recent changes in Fed announcements and policies that sent gold spinning. If the Fed doesn’t follow through and raise rates soon, or if it decides to increase the money supply, then gold will reverse course again.

Senior Fed officials on Monday said that rates being kept too low for too long could cause financial instability, and that the U.S. central bank would continue with rate increases next year. More Fed policymakers are scheduled to speak this week and are expected to back the case for a rate hike within months. Fed Chair Janet Yellen will be at a panel event hosted by Harvard University on Friday.

China’s Major Policy Change

Filed under: Economy,Emerging stock markets — Bob @ 8:28 am

The Wall Street Journal reported (subscription might be required) on a major, but undisclosed, change in China’s economic policy. For the last few years, China’s policy has been to move closer to a market economy. In particular, it was moving away from pegging the value of its currency to the U.S. dollar. Instead, it eventually wants the currency to float against the value of a basket of major international currencies. Some market players questioned the competence of China’s leader in implementing the policy last year when it suddenly devalued its currency against the dollar by 2%. That led to major market disruptions throughout the globe.

The Journal’s coup was to reveal what it said were unreleased minutes of meetings among China’s economic leaders supplemented by anonymous interviews with some of the leadership. The result of the discussions was an unannounced change in China’s policies. The leadership decided markets are too unstable. They no longer want the currency to eventually float against the dollar or other currencies. Instead, they’re going back to a fixed exchange rate.

The new policy is intended to reduce the amount of capital fleeing the country for more stable environs. The country needs to do that so that it can focus on the major economic shift it is making from an export-based economy to a more domestic-demand-based economy. It also is intended to stabilize the country’s stock markets.

The flip-flop is a sign of policy makers’ deepening wariness about how much money is fleeing China, a problem driven by its slowing economy. For now, at least, officials believe the benefits of freeing the yuan are outnumbered by the number of threats. Re-emphasizing the yuan’s stability would also bring a sigh of relief to trading partners who worried a weaker currency would boost Chinese exports at the expense of those produced elsewhere.

Freeing the yuan, the biggest overhaul of China’s currency policy in a decade, was meant to empower consumers and help invigorate the economy. The negative reaction, from financial markets world-wide and Chinese who sped their efforts to take money out of the country, was so jarring that the top leadership, headed by President Xi Jinping, began to have second thoughts.

At a heavily guarded conclave of senior Communist Party officials in December, Mr. Xi called China’s markets and regulatory system “immature” and said “the majority” of party officials hadn’t done enough to guide the economy toward more sustainable growth, according to people who attended the meeting.

May 24, 2016

Recognizing the Role of Luck

Filed under: Retirement - General — Bob @ 5:20 pm

Every church choir has one or more people with great voices but who never became famous singers. Robert Frank, an economist at Cornell, argues in his book, Success and Luck, that luck plays a role in this result. He says successful people often have to credit luck with part of their success. This article explores why many people resist his argument.

Frank does think hard work, and merit more broadly, play important roles in determining success. Most successful people worked very hard to get there, and indeed are quite talented. But merit and hard work aren’t enough — because there are so many people who are smart and hardworking, but only so many “slots” for the best jobs, for most successful artistic endeavors, and so on, luck invariably plays an important role. Frank, who was turned onto the topic of luck when he survived a severe medical scare simply because of, well, very good luck, thinks that this is a very important blind spot that can explain a great deal about how America is organized — specifically, the country’s somewhat lackadaisical approach to tackling inequality and, relatedly, to offering residents the sorts of government-sponsored social supports so common in the rest of the wealthy world.

The Dollar, and the Fed, are Driving Markets

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

In the latest Retirement Watch I point out that central banks and China are the factors driving markets these days. This article from Ben Hunt says that Federal Reserve policy has been driving most markets. There are tight correlations between Fed policy changes and changes in emerging markets, oil, China, and more.

More impactful, I think, is that for the past seven years investors have been well and truly trained to see every market outcome as the result of central bank policy, a training program administered by central bankers who now routinely and intentionally use forward guidance and placebo words to act on “the dance of mind” in classic Mephistophelean fashion. In effect, the causal relationship between monetary policy and oil prices is a self-fulfilling prophecy (or in the jargon du jour, a self-reinforcing behavioral equilibrium), a meta-example of what George Soros calls reflexivity and what a game theorist calls the Common Knowledge Game.

The causal relationship of the dollar, i.e. monetary policy, to the price of oil is a reflection of the Narrative of Central Bank Omnipotence, nothing more and nothing less. And today that narrative is everything.

New Medicare-Funded End-of-Life Talks

Filed under: Estate Planning,Medicare,medical power of attorney — Bob @ 8:32 am

Usually when people talked about the limits of end-of-life medical care, it is done with an estate planner as part of the estate planning process. It might result in a living will, do-not-resuscitate order, health care directive, and other documents. But a new rule went into effect this year under which Medicare will pay for end-of-life decisionmaking with a medical professional. This article discusses the new rules, and the writer talks with some doctors and patients who have been involved in such discussions. (The article confuses this procedure with the provision that was labeled a “death panel” by some. The “death panel” refers to a groups of experts that would determine which treatments are effective, and Medicare could refuse to pay for any treatment not deemed effective.)

These are conversations you should have as part of your estate and retirement planning, and it’s benefits you that Medicare now will compensate your doctor for keeping you informed.

Altogether, 95 percent of doctors in the poll expressed support for the Medicare benefit and a big majority considered such conversations important.

Some doctors had already incorporated end-of-life planning into regular visits, and certain private insurers began offering reimbursement for it before Medicare announced its change. But because Medicare is the single largest payer of health care in the U.S., this could stand to be one of the most significant developments in end-of-life care ever seen in the country.

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