Monthly Archives: April 2014

Why The Rich Deserve More

An Economy Driven By Rich People?

Imagine a world in which those who work — or try to work— are given mere scraps. Imagine an economy that is driven purely by speculation by the wealthy, the gains of which are then spent in high-end stores, the source of employment for those lucky enough to have a job. Imagine economic institutions that puzzle over the slow growth experienced in this economy, uncertain as to the cause.

So record inflation adjusted entitlement spending is ‘mere scraps’?

The wealthy do contribute more, thus they are deserving of more. Economic policy should benefit the rich because they are the most important people of all. Since 2008, high income earners have been compensating for any middle class consumption weakness, as shown below:

According to the NYT, The top 5 percent of earners accounted for almost 40 percent of personal consumption expenditures in 2012, up from 27 percent in 1992. Largely driven by this increase, consumption among the top 20 percent grew to more than 60 percent over the same period.

In agreement with the Pareto Principle, the top 20% of income earners contribute 80% of personal consumption expenditures.

This is why we need pro-growth policy that will help the rich – such as tax cuts financed by raising the sales tax, so we can make inroads on the deficit and keep the economy growing as well. We more QE, 0% interest rates forever, an increase of the home mortgage interest deduction and tax cuts for the top 1% as well as entitlement reform. Low interest rates depress bond yields, creating an economic environment friendly for stock buybacks, merger and acquisitions, as well as making it easier to buy a home. Like their opposition to going to college, the left is opposed to home ownership and want everyone to rent, even though in today’s environment of low interest rates and rising home prices, buying is a better deal. By raising interest rates and taxes, the left seeks deflation so that asset prices fall and homeowners can no longer use their equity for consumption. The is part of the liberal war on the consumer, the 1% and homeowners.

There is no ‘rich people bubble’ or a stock market bubble. There is, however, a negativity bubble. For years, the doom and gloomers have insisted that the economy is weak, despite bring proven wrong year after year as profits & earnings and consumer spending keep making new highs. The left is fallaciously making an inference about the health of the overall economy by choosing the worst economic data such as the low labor force participation rate and ignoring the positive data like record high profits & earnings and exports. The left’s idea of economic ‘full potential’ impossibly high standard to meet, and an arbitrary one at that. As we wrote earlier, the economy is booming, but if the left can convince everyone the economy is still weak, they can justify more wasteful entitlement spending like extending unemployment for another 99 weeks. Sometimes, in a free market, you have to be patient and wait for the recovery to trickle down. Not everyone can participate in the recovery at once, or even at all. But that doesn’t mean wealth inequality is an urgent problem, that we’re in a bubble or that we need redistribution.

Priceactionlab Bad Analysis

Wrong again

Thus, I am not too optimistic about the future of this market if the geopolitical conflict is not resolved fast and financial conditions do not start to improve, especially as far as putting an end to an accelerating wealth inequality

Thanks, pert, for listing the two exact things Wall St. DOESN’T care about. If this is the worst you can think of, I feel much better not selling.

Low Paying Jobs Create Economic Value

Today’s good news:

Low-wage jobs drive the recovery, says new report

U.S. Stocks Gain on Internet Rally Amid Earnings Reports

The New Gilded Age: A bigger con job than the first one

We’re becoming over-coddled and spoiled. We grew up expecting a comfortable retirement, a good wage and stable employment. Millions of young people took out student loan debt, thinking their degree in criminal justice, communications, or gender studies would lead to a good job. The were in for a rude awakening when employers realized they had no use for those people and fired them all.

Low paying service sector jobs create more economic value than overpaid jobs in obsolete industries. Traditional employment is being replaced with temp work and freelancer jobs. Prior to the 2008 financial problem, wages were to high and productivity and profit margins were too low. Balance is finally being restored to the employer. To get ahead in this new era you have to provide exceptional value than just being average. We’re not going back to the old days of less productivity and too high of wages.

On the liberal websites such as the New York Times you see a lot of blame directed at immigrants for taking jobs away from Americans. Isn’t the left supposed to be party of labor and job creation? Or do they selfishly want all the overpaid jobs and entitlement programs to themselves? In a free market, if immigrants can do the work cheaper and with the same quality, then they should get the job. Liberals are hypocrites because they want jobs only if they pay a lot and only if they can have them. They denigrate low paying service sector jobs, jobs taken by immigrants, or jobs that are outsourced. They are the party of labor – if only the labor meets their stringent requirements. Otherwise, they attack job creators for all sort of things: low wages, disparate impact, workplace safety, discrimination and so on. Is it any wonder why the labor market seems so weak? If I were an employer would I hire an immigrant that is grateful to have a job or an indignant liberal that will sue for not getting enough vacation?

Speaking Too Soon Again

Everyone does it – speaking too soon, calling the top too early, predicting a bubble or crisis where none exists, etc. Josh Brown is the latest.

Let’s see…on the very week he wrote this blog post, Air B&B secured a funding at a mind-blowing $10 billion valuation. So I guess the bursting of the rich people bubble will have to be put on hold until this type of activity stops (which we predict it won’t).

Same for the Ukraine situation. We’re seeing this front-running of crisis by the left and right because a lot of people are tired of the status-quo and want a renegade like Putin to break the monotony. For the left it’s so that Russia enters a recession and the global economy is disrupted like it was in 1998; for the right it’s so that Obama looks more incompetent than he already is and they can say “we told you so”. We predict to the disappointment of pundits everywhere, nothing further will happen. Stocks will keep going up and oil prices will surge on even the smallest of developments. Rising oil prices is evidence Obama’s sanctions are backfiring, as we predicted would happen a few month ago. But a distinction must be made in that this is an energy problem, not a military one. If oil does go to $150 on energy supply disruption, it will be very bad news for the democrats.

More Evidence Bigger is Better

More evidence big business, not small business, is the driver of the U.S. economy : American Dream Peddlers

Lax federal oversight allowed lenders to repeatedly make bad loans to small businesses under a government program that has cost taxpayers $1.3 billion since 2000 on defaulted loans, a Dayton Daily News investigation found.

Since the beginning of 1990, lenders made more than 1 million loans guaranteed under the SBA’s 7(a) program, the agency’s largest, according to a Dayton Daily News analysis of SBA loan data. Excluding the 280,948 loans that are still active, more than 1 in 5 of the remaining 769,242 loans were discharged to the U.S. Treasury after they defaulted and the lender and SBA were unable to collect the money owed.Some franchises generated jaw-dropping default rates: The SBA made 90 loans to Petland franchisees; 55 percent defaulted. The agency made 18 loans made to Party land franchisees; 61 percent defaulted. Of the 17 loans made to Wings-N-Things franchisees, all except one defaulted — a 94 percent default rate.

As we’ve been saying this for years, with few exceptions, small business is for chumps, mainly due to the very high failure rates and high start-up costs. College is worth the money if you attend a prestigious university and or you major in a STEM field. Instead of wasting money on an overpriced useless liberal arts degree or a failure-prone small business, just buy stocks on all the dips and or buy real estate. The S&P 500 is up 150 percent from its 2009 lows. Bay Area real estate (especially my neighborhood) keeps going up. Prices are ten to thirty percent higher than they were in 2007. Or learn how to code. Learning to code is an extremely valuable skill. Graduates of the Access Code program in New York saw their incomes rise from $15,000 to over $72,000 in less than six months. That’s how people are getting rich in this economic boom.

How about start-ups like Facebook and Google that were once small businesses? These are widely publicized exceptions in a wasteland of quiet failures. In this economic environment, being bigger is incontrovertibly better. We’re in an era of too big to fail and too small to succeed (unless you’re in cloud computing/web 2.0 where it’s easier to succeed). Apple sold $17 billion in bonds at next to nothing to avoid paying taxes. Individuals and small business, on the other hand, are incapable of borrowing anywhere near the rate Apple can.

IQ and SAT Scores as a Solution to the Student Loan Crisis

From the WSJ: Job Hunting? Dig Up Those Old SAT Scores

In the smartist era -an era of perpetually rising stocks, of a hyper-meritocracy, of hyper-globalization, of hyper-capitalism, of super-productivity and super-efficiency- never before have the economic premiums of being smart been so great, or the disadvantages of being average been so grave and intractable. This is a sensitive issue because intelligence has become inextricably linked to socioeconomic outcomes. Look around you. The folks you read about on the blogs making millions and billions are, with few exceptions like athletes and entertainers, of above average intelligence. The smarties are running victory laps around everyone else. A revenge of the nerds in overdrive.

Here’s the harsh reality: Grades are worthless. GPAs are worthless. The military knows this and that’s why for years they have been using IQ tests to screen enlistees and assign positions. About 30-40% fail to achieve the cutoff score, despite otherwise satisfactory academic performance. Why? Because GPAs and grades are inflated and don’t give a useful, objective measure of how prospects acquire skills and synthesize information in a time-sensitive environment. Grade inflation has gotten worse as shown below:

A low score doesn’t necessarily kill a person’s chances, hiring managers say; instead, they say they believe SATs and other college entrance exams like the ACT help when comparing candidates with differing backgrounds or figuring out whether someone has the raw brainpower required for the job.

Exactly. Dull people don’t get high scores on these aptitude tests. In an economic environment heavily tilted in favor of employer over the employee, where efficiency and productivity is paramount, employers will be very choosy with a preference towards the best and brightest. Countless psychological studies support the link between a high IQ score and performance at work.

More evidence of grade inflation from prof. Mark Perry:

For more than 40 years, grades have risen across universities nationwide. The Raleigh News and Observer reported Jan. 25 that 82% of all grades given to undergraduate students at the University of North Carolina at Chapel Hill were As and Bs in Fall 2007, and that the average GPA was 3.2. In 1967, the average GPA at UNC was 2.49

But what about grade inflation at Harvard? But getting into Harvard is the challenge. Upon doing so, you’ve already established your intellectual worthiness, but this further lends support to GPAs being worthless.

“It is a little confounding how a test somebody took when they were 17 predicts success in a competitive workplace when they’re 22,” said Kevin Monahan, a career-services dean at Carnegie Mellon University.

It’s not confounding if you study the literature. Studies have shown IQ scores tend to be stable throughout life and IQ scores are positively correlated with work performance and SAT scores.

But what about Google?

Internal studies found “very little correlation between SAT scores and job performance,” said Kyle Ewing, head of global staffing programs at Google. The company now relies on interview questions that probe how a potential hire has solved complex problems in the past.

Major selection bias going on here. Applicants for intellectually demanding positions like coding will naturally have very high scores. All else being equal, a major difference in performance is not expected when selecting from a pool of 95-99.9 percentile scorers.

The next step beyond credential-ism is smartism or IQ-ism. Instead of being hired based on a college degree, you’ll be asked to provide an IQ or an SAT score. The wonderlick test is already widely used for this purpose. Or possibly an admittance letter from a prestigious university like an IVY League school would suffice. With few exceptions, admittance into schools like MIT or Caltech is tantamount to a superior IQ score. This could be a solution to the student loan debt problem by substituting a diploma with an IQ or equivalent test score.

Of course, push-back is expected. The left has a love-hate relationship with standardized testing. They support it to increase funding for troubled schools, but oppose it if the results are in any way connected to the underlying intelligence of the test taker. Or if the results are used in the hiring or admittance process.

A Case Against Secular Stagnation

The secular stagnation theory has gained a lot of attention in the past few years. From Wikipedia:

Economists have asked whether the low economic growth rate in the developed world leading up to and following the subprime mortgage crisis of 2007-2008 was due to secular stagnation. For example, economist Paul Krugman wrote in September 2013: “[T]here is a case for believing that the problem of maintaining adequate aggregate demand is going to be very persistent – that we may face something like the ‘secular stagnation’ many economists feared after World War II.” Krugman wrote that fiscal policy stimulus and higher inflation (to achieve a negative real rate of interest necessary to achieve full employment) may be potential solutions.[7]

Economist Larry Summers presented his view during November 2013 that secular (long-term) stagnation may be a reason that U.S. growth is insufficient to reach full employment: “Suppose then that the short term real interest rate that was consistent with full employment [i.e., the "natural rate"] had fallen to negative two or negative three percent. Even with artificial stimulus to demand you wouldn`t see any excess demand. Even with a resumption in normal credit conditions you would have a lot of difficulty getting back to full employment.”

However, just as there is evidence of stagnation, there is also evidence that the U.S. economy is inflating, in refutation of stagnation. This is where the theory bifurcated inflation‘ come into play to reconcile the deflationary indicators with the inflationary ones. On the deflationary/stagnation side, labor force participation remains historically low as well as the CPI index, treasury yields, and lending. CPI is still at ‘crisis’ levels:

This chart shows the considerable shortfall of lending relative to deposits in American banks:

This PBS interview with former Fed economist Catherine Mann explains the situation in further detail:

The second channel through which quantitative easing is supposed to work is to provide additional liquidity to banks, and those banks are supposed to offer credit to businesses. Now that particular channel has not been very effective, precisely because the banks have not done much in the way of lending. Yes, there’s been some more lending for mortgages, commercial and residential, but there’s been very little additional lending for so-called “industrial loans” to small businesses, and to businesses in general, who do depend on banks in order to expand their inventory…

So lenders and borrowers have remained risk averse. This is is one of several deflationary indicators that proponents use to promulgate their stagnation theory.

We never bought into the whole stagnation hysteria because there are just too many counterexamples. Yes, the CPI is low but this is partially attributed to the flawed methodology of computing the housing component of the CPI, as Matthew Yglesias expounds in further detail. The rates for new renters is higher than long-time renters.

Look at someone in D.C. who’s been renting a house in Shaw in D.C. since 2006, and she is almost certainly getting an outrageously good deal from her landlord compared with what someone trying to move into the neighborhood in 2014 would pay. The landlord fears that if he tried to raise the rent all the way up to the current market price that he would (a) wind up with several months’ worth of vacancy and (b) run the risk of acquiring a problem tenant. Consequently, in an area where rents for new tenants are rising quickly the average rent paid will rise more slowly (and vice versa in a downturn).

Additionally, home prices in many areas are up 10-20 percent year-over-year, with some regions even surpassing their bubble highs:

S&P 500 profits & earnings are at historic highs. Same for exports, consumer spending, and productivity. Private sector employment has recovered all the losses from the crisis:

GDP growth is back to ‘pre-crisis’ levels:

In agreement with our ‘bifurcated inflation’ theory, we’re seeing vastly higher real gains in stocks, real estate, healthcare, rentals, TV & internet service, air travel, food, gas, and tuition:

Why? Partly because people have lots of money to spend as evidenced by record high household net worth:

And record consumer credit:

As long a consumers have money to spend and their preferences to certain goods remain inelastic, prices will keep going up.

Secondly, the USA cannot deflate because prices are always rising by profit maximizing and colluding firms in order to extract every last penny out of consumer. Furthermore, sticky wages, aggressive monetary policy, productivity and the tendency of Americans to consume in good times and bad also provides inflationary pressure. In Japan, for example, consumer preferences are more elastic or companies are less inclined to habitually raise prices and ‘leave money on the table’ by not taking full advantage of the in-elasticity of consumer preferences to certain goods. Japan’s CPI has been close to negative. Less regulation in the hiring and firing process allows companies to quickly adjust labor during booms and busts, resulting in more efficiency and productivity. This could account for why labor force participation is low despite otherwise healthy economic and business indicators. Yeah, business lending is sluggish, but healthcare M&A activity is at record highs. It’s a confusing situation with conflicting signals. Yes, it’s cheap the buy a computer or a TV, but the subscriptions fees will exceed what you paid in just a year. So, while there’s evidence of stagnation, there’s just as much evidence of economic flourishing and above average inflation

In Praise of the Contrarian Blogging Movement

As we explain in the intro page, the contrarian blogging movement gained momentum following the financial crisis and the election of Obama in retaliation to the perceived incompetence and political correctness of the prevailing political and media hegemony. Contrarian blogging and journalism covers the entire political spectrum and consists of a combination of a rejection of individual malleability (biology superseding free will) and deviations from conventional party orthodoxy. Rejection of malleability can be found in the emergent HBD (human bio-diversity) movement as well as the contemporary writings of Charles Murray and Steven Pinker. From an interview with Steven Pinker by Steve Sailor to promote The Blank Slate:

Q: Aren’t we all better off if people believe that we are not constrained by our biology and so can achieve any future we choose?

A: People are surely better off with the truth. Oddly enough, everyone agrees with this when it comes to the arts. Sophisticated people sneer at feel-good comedies and saccharine romances in which everyone lives happily ever after. But when it comes to science, these same people say, “Give us schmaltz!” They expect the science of human beings to be a source of emotional uplift and inspirational sermonizing.

Vox Day, otherwise a conservative, tacitly supports HBD. Liberal and moderate bloggers like Kevin Drum and Andrew Sullivan have also treaded the waters of biological determinism and other risky subjects, positing that individual behavior and economic outcomes can be attributed to biology, and thus hard to remedy by government intervention alone. For example, Last year Andrew Sullivan caught fire for comparing white people to poodles and black and brown people to (presumably less intelligent) beagles. For years, alternative news sites like Salon and Slate have served as an outlet to express unconventional or controversial views on subjects pertaining to admittance tests, IQ, economics and human biology. Thomas Friedman, who otherwise identifies as liberal, has a long history of incensing his readership with his unwavering support of free markets, nation building, and infatuation with the eat-or-be-eaten meritocracy. Steve Sailor, who otherwise seems to hold traditional conservative views, is skeptical of unfettered capitalism and foreign intervention while also including themes of biological determinism in his writings.

Conventional journalists and pundits- on both the left and right- doesn’t venture into this area. National Review, with the only possible exception of Kevin Williamson, there is no implication of unmalleability. The overarching theme is that poor people of all types can rise out of poverty through pure tenacity, less government and and strong family ties – all of these being environmental factors. There is no mention of biology or IQ by any of the major conservative writers like Michelle Malkin, Charles Kruthhammer and Thomas Sowell. Mainstream liberal writers on sites like Huffington Post and NYT treat poverty and inequality as something that can be overcome through regulation with, again, no mention of the role of biology.The third possibility is that some people may be biologically incapable of attaining a middle class lifestyle or abstaining from bad behavior, but to express this on a mainstream news outlets is forbidden. Mainstream conservatives tend to be confident about the ability of the free market to replace jobs lost due to automation of globalization; many contrarian conservative bloggers express doubt. That leaves us with the contrarian blogging movement for those who want the truth, or at least a different perspective. But the best part is you get a wide variety of views on any issue. Even on this blog we challenge the prevailing view of low inflation with something we call ‘bifurcated inflation‘ that reconciles the low CPI with rising living expenses.

No, We Don’t Need to Put People to Work

Kevin Williamson from National Review Online writes:

The cost of mass unemployment is not only the loss of income and dignity suffered by the jobless. The real cost includes the loss of theeconomic output of the unemployed.

This sounds like something Paul Krugman would say. Seems like he’s falling for the ‘we must put people to work’ leftist fallacy. Unemployed people help the economy by:

1. By giving an excuse for the fed to continue pro-growth monetary policy. What do you think is gonna happen if unemployment returns to 4.5%? Interest rates will rise, as shown below:

Bull markets tend to end when unemployment is low:

2. By increasing profit margins. Profit margins are at record highs:

We need more profits and less overpaid work. We need stocks and home prices to keep going up instead of wages going up too much.

The Creative Class isn’t losing sleep over wealth inequality or people being unable to find work, sorry. The economy adapts on a need-basis though stochastic evolution. If more U.S. workers are needed, unemployment will fall. Companies want to make profits and hiring is typically a last resort when automation or outsourcing won’t do. A liberal begging companies to do something, or else face the nondescript consequences, just isn’t convincing. Also, I’m not sure if the candy parable is supposed to be analogous to currency or individual wealth? If the former, we have the power the treasury to print more.

Some structural and frictional unemployment is needed if the economy is to grow and advance technologically. Zero percent unemployment would be undesirable and impractical. Imagine an economy where everyone has a job breaking rocks by hand. Then someone finds a way to do this with machine. Now the company can smash rocks ten times as fast without the need for workers, and the rock smashers are fired. Profits & productivity surge. This is structural unemployment. Some of the unemployed learn how to fix these machines if they break. They are re-hired. In a different rock smashing factory, others quit their job smashing rocks by hand to apply for work at the company that smashes with machine because it’s safer, has better pay and is less strenuous. Until they are hired, they are fictionally unemployed. Though creative destruction (of both jobs and obsolete industries), living standards improve.

Time for Putin to Cut-Off Gas to Europe?


Friedman: Fareed, I’m going to ask you something. Would you think I’m a bad guy if I were hoping that Vladimir Putin turned off the gas to Europe? Because that’s my secret hope, because I believe if Putin turns off the oil and gas to Europe right now, it would be the equivalent of the 1973 Arab oil embargo, which is what launched the solar wind and efficiency industry.

We only got the first auto mileage standards after that. I think we are poised to take off. I hope you bought solar stocks last year, because if you did, they’re all exploding. And I don’t have to tell you about Tesla stock. We just need a little push. We just need Vladimir to do the right thing and turn the gas off. I’m happy to pay all the energy bills for the Ukraine because the impact it would have on the whole clean tech industry, which is poised to take off now, would be just like 1973. You go, Vlad. Give it to us.

Even though Thomas Friedman identifies as a liberal, he raises some valid points. If Putin cuts Europe off it will cause energy prices to surge and potentially push Europe into a recession. This will make Obama look more inept than he already is and give ammunition for the republicans in time for the mid-term elections. As we wrote a couple years ago, pain at the pump and rising oil prices isn’t bad for the economy even though the media will try to convince you that it is by blaming speculators. In the past month oil has rallied ten percent in agreement with our earlier prediction that the sanctions would backfire. It will teach Europe an important lesson to stop depending on foreign sources for energy. Although he says to buy solar stocks, oil and gas futures would have more upside with less risk than alternative energy stocks.

Not all liberals are bad, just welfare liberals like Paul Krugman, Robert Reich, Roubini, Robert Shiller, etc. We make a distinction between welfare liberals that want more entitlement spending and wealth redistribution versus pragmatic neo-liberals and classical liberals that are more open-minded to free market capitalism, the fed, and pro-growth policy.