Tag Archives: stocks

The Daily View : Stocks Plunge, RIP American Dream, Why Prescription Drugs are so Expensive

Here is the backstory behind the 5,000% price hike of Daraprim.

In Martin’s defense, the drug is classified as an ‘orphan drug‘, which means there is little demand due to the rarity of the underlying condition it is supposed to treat. In order for phrama companies to profit from orphan drugs, they have to charge a lot, and since the left says every life is sacred, no matter the cost, taxpayers will always front the bill in the end. The left wants it both ways: affordable drugs for everyone to treat even the most obscure of diseases, but provided the company that sells them is not allowed to make too large of a profit. Maybe Daraprim was unprofitable at $13 a pill, necessitating a price hike. Turing paid $55 million for the rights to Daraprim, but due to the low demand it will take a decade to turn a profit at the old price:

Let’s consider the case of Daraprim. The US market for this drug is actually quite small. Last year, American sales of Daraprim totaled only $5 million. While that would still amount to an 8% annual return on Turing’s $55 million initial investment, it is far below the billions of dollars in revenue and 30% profit margin of most blockbuster pharmaceuticals.

Maybe the profits from Daraprim will be used for new research. We don’t have the full story. The left does not understand that the development of new drugs is very expensive (around $1-2 billion per drug), with a high failure rate, and a long development time (10-15 years from conception to approval). Out of 10,000 chemical compound, maybe only 250 will show promise for tests on mice and other small mammals, of which only 10% of drugs will qualify for tests on humans. Of these, only 21% pass clinical trials. Finally, just because a drug clears all the regulatory hurdles doesn’t mean it will succeed commercially. A notable example is Provenge, an expensive custom vaccine-based treatment for terminal prostate cancer, that received regulatory approval in 2010 but still failed because sales were not high enough to recoup the enormous expenses. As someone who follows stocks, I lost count of the number of biotech companies that have failed, but it’s a high percentage. Biotech companies need high profits on existing drugs to finance the development of new drugs. Perhaps Shkreli’s approach was wrong, and in his AMA he concedes he could have handled it better.

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Some say the American dream is dead. However, I argue that it’s merely being redefined. We all have varying ‘dreams’ attainable within our cognitive capacities. Smart people have more options than less intelligent people, but that’s the way the cookie crumbles, as unfair as it may seem.

He’s right about the growth of freelancer and ‘temp’ economy. We’re seeing a major shift in the labor market from salaried jobs to freelancer jobs:

These jobs, while not paying as much as traditional labor, may create more economic value for employers than regular jobs.

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No Stock Prices Plunge In Unprecedented Two-Week Slide

Don’t see a compelling catalyst for a bear market, but this decline is getting pretty bad, with the S&P 500 now twelve percent below the record highs of 2130. More likely, stocks will make a comeback later in 2016. The ‘experts have been saying to sell stocks, yet every year the market keeps going higher. So being a rationalist, the rational thing to to is heed the empirical evidence that we’re in a bull market until proven otherwise. None of my ‘sell’ indicators have been triggered. But the past two weeks have been pretty dreadful though.

Stock prices plunged again Friday and are down more than 8 percent in just two weeks, an unprecedented slide for a start of a year.

The vicious drops feel even more unsettling because they’re such a departure from the placid and strong returns that investors had been enjoying for years. Like vacationers returning from a warm beach to a slushy commute to work, the shock of change is making something already painful even more so.

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Chinese Cash Floods U.S. Real Estate Market

But the left says that US economy is supposed to be weak and the housing market a bubble. If America is as awful as the left insists it is, why is all this foreign cash flowing here?

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The New Investing Landscape

From The Reformed Broker, There is a limit

A lot of people are struggling in this market.

Here is the deal.

I’m going to divulge research that investment firms normally pay hundreds of thousands of dollars for, for free. It’s a very simple way to not lose your shirt in this schizophrenic, mean-reverting market.

First, stock picking does not work anymore *, unless by ‘stock picking’ you mean maybe a dozen or so stocks out all the thousands of stocks listed. But get it through your thick skull that unless your stock is one of those dozen, you should probably not own stocks. This market has been punishing stock pickers for too long, with stocks that perform well eventually getting pummeled (Sketcher’s shoes comes to mind, down 40% in a month). This is because fund mangers, desperate for any edge in an increasingly efficient market, pile in and out of individual stocks, creating erratic bursts of out-performance and then huge selloffs. Stock picking as always been hard, but it seems to have gotten harder. The S&P 500 is flat for the year, but most of the stocks in the index are negative, and this is due to the flight to quality as fund mangers seek only the best stocks and sectors out of thousands of losers. Anything that isn’t top quality eventually get culled.

Some say the market is rigged, but for the market to be rigged would imply that someone if making all the money, yet the performance of active management is in the dumps. That means even the experts, with their $20,000 Bloomberg terminals are as clueless as mom & pop investors. Instead, we’re seeing a race to the bottom, like a beach with some gold at the bottom and everyone is digging for this scant gold.

As for those dozen stocks, here they are:

GOOG – alphabet/google (both versions)
V – visa
MA – mastercard
NFLX – netflix
AMZN – amazon.com
NKE – nike
DIS – disney
MSFT – microsoft
FB – facebook
AAPL -apple
HD – home depot
GILD – gilead sciences

I can probably think of some more: JNJ,COST,LOW, TSLA

Amazingly, this portfolio has not only beaten the market by large margin, but each stock has a >$200 billion market cap. This proves that you get what you pay for, in that the largest companies keep doing better while the smaller ones have poorer risk-adjusted returns.

But a portfolio of a dozen stocks may be insufficiently diversified, so you can get returns that are almost as good with just these two ETFs:

QQQ (large cap tech ETF)
XLY/RTH (large cap consumer discretionary ETF)

Either 50% in QQQ and 50% in XLY or RTH

or 50% in QQQ and 25% in XLY and 20% in RTH

This will give you modest risk-adjusted edge over the S&P 500, because you’re avoiding the weak sectors like energy, material, and utilities.

Large cap tech and large cap retail have been hands-down the best performers since 2013 or so, as everything else has stumbled.

On the fence (these are alright, but not as good as above)

Financials (XLF)
Utilities (XLU)
Transports (IYT)
S&P 500 (SPY)
Dow Jones Industrial Average (DIA)
Biotech & Healthcare (IBB, XLV)
Low Volatility ETFs (RHS)

What to avoid:

Any market that is not America. That means Europe, Australia, emerging markets, and so on.

Any stock or ETF that deals with precious metals, coal, commodities, shipping, mining, energy, drilling, oil, and so on.

Emerging market currencies and bonds

Junk bonds that have energy exposure

Small caps (the small cap premium is dead)

Medium caps (medium cap premium also dead)

Materials (XLB)

Individual stocks (unless it’s one of the twelve listed, any any single stock should not make up more than 1/12 of the portfolio)

The usual objection is, ‘what if the lagging stuff comes back?’ Historically, going back decades, consumer discretionary and tech have been among the strongest sectors. So even if the lagging sectors recover, the expected value with the strongest sectors is still higher.

Again, this is not rocket science. This is brain-dead easy, yet so many people keep getting this market wrong, trying to pick fallen stocks or bottom fishing for lagging sectors in the hope they will come back to life, which they seldom, if ever, do…

* Individual stocks can work if you only allocate a tiny percentage of your portfolio for each stock, and no more than 5% of the total portfolio. I like FNMA and FNMAS as barbell strategies, meaning that these will either become worthless if the government shuts them down or rise 500% or more should they be privatized. The expected value is positive, but there is still a definite risk of losing everything.

Stock Market Rebounds

Back in August and September during the stock market plunge, I recommended going long here and again here.

Sure enough, stocks have surged since then, with the S&P 500 up about 9% since my reiteration to buy the dip:

The portfolio I ‘manage’ is up 20% this year, vs. 2% for the S&P 500:

By ‘manage’, I tell the client which ETFs and stocks to buy in exchange for a cut of the profits. The historical returns are about 50% per year. This is better performance than probably any active management in existence on an absolute and probably risk-adjusted basis, too. AQR management, for example, a billion-dollar active management firm which is staffed by a team of PHD quants, cannot get these kind of returns. No one else can, and that’s why it’s proprietary. It’s not that my methods are sophisticated (they aren’t), it’s that almost everyone else is so bad.

A bet against the stock market is a bet against IQ, a bet against the best and the brightest who power capitalism and innovation, as well as a bet against the indefatigable American consumer. It means you’re betting against high-IQ tech companies like Google, Facebook, Apple, Visa, Mastercard, Cisco, Oracle, Netflix, Amazon, and Microsoft – that’s a bet no sober individual should ever make.

US stocks have outperformed pretty much all asset classes, going as far back as the 19th century:

(Graph courtesy of the Mega Foundation’s investing page)

Do the fools on Zerohedge think their alarmist nonsense can override 100+ years of gains, can override 100+ years of innovation and free market capitalism by America’s best and brightest? If you get your financial advice from losers, you will have loser returns, sulking under a cloud of self-pity and resentment waiting for the crisis that will never come, the black swan that will never arrive. Doom and gloom, conspiracy theories are a coping mechanism for the unsuccessful to reconcile mediocrity by shifting the blame unto nebulous entities instead of the ‘self’. If I fail, it’s because some shadow entity is keeping me down – not low-IQ, poor work ethic, or lack of talent.

Precious metals and bitcoin are fine for a diversified portfolio, but they should not be your entire portfolio.

Betting against the stock market and America means betting against companies like Home Depot, Target, Costco, Lowes, Nike, and Disney – all which are posting record profits & earnings quarter after quarter due to consumer spending and exports. Disney is a play on obesity and population growth, neither of which shows any signs of slowing. Disney makes billions of dollars a year exporting its intellectual property all over the world, in addition to billions of dollars from sedentary youths watching Disney programs and movies and parents buying merchandise. It’s not that I personally like this trend, as these obese kids will add to healthcare costs down the road, but it’s the way it is. Google is play on the propensity of the Left Side of the Bell Curve to click contextual ads. Facebook, which is run by high-IQ people, also makes its money from the left of the Bell Curve (to click the ads), as do most companies. As I said, there’s a lot of room on the bottom – a lot of money to be made from the Left Side. But you also have companies like Amazon, which is laying the infrastructure that is powering the trillion-dollar ecommerce economy. Investing in companies like Google, Amazon, and Facebook is like investing in the company built the Matrix in the eponymous movie, and I’m sure it would be a good investment considering that everyone is plugged into it. The aforementioned stocks are up 20-30% since August and, despite their $300+ billion dollar market caps, have much further upside. I been telling folks to buy these stocks (Amazon, Mastercard, Visa, and Google) since 2011 and Facebook since the IPO. But you have these doom and gloom liberals who want the economy to fail so that the rich lose money and there is less wealth inequality. At the same time, you have idiots like Peter Schiff and Karl Denninger that keep repeating this hyperinflation/end the fed nonsense. That’s why the populist movements of the left and right are stuck, they keep coming up empty handed as the status quo keeps prevailing. Subscribing to liberalism is like believing in man-made global warming. It’s like believing you can grow an economy by overtaxing its most productive members.

Will the market go lower? Yes, eventually it will. But if you heed these fear mongers, like those fools who say to always rent instead of buy a home, after many years you will have nothing to show for it.

Reiterate: Buy the dip

Reiterate: Buy the dip

The market keeps falling even though the fundamentals of the US economy aren’t worsening. Right now, the major indexes are close to the lows made in August during the beginning of the sell-off.

(click to enlarge)

The recent selling bears a strong resemblance to prior selling in 2014 and in 2011.

In the short run, the S&P 500 could fall another 5% to 1820, but it from there it will probably make a vigorous rally and close the year positive or flat.

With stocks falling, the labor market soft, and potential problems in China, any rate hike in 2015 is off the table.

Large cap, high-IQ companies like Apple, Facebook, Microsoft, Amazon, and Netflix will keep posting strong earnings despite the media’s insistence that the economy is weak.

Data points like GDP and consumer spending keep rising:

The media says the consumer is maxed out, but apparently consumers didn’t get the memo and are spending as much as the ever have.

Is James Altucher Right About Never Buying a Home?

James Altucher really doesn’t like home ownership, but repeating an argument ad nauseam doesn’t make it good advice.

James had a negative experience with real estate due to bad dotcom investments, in addition to 911, which forced him to sell his newly purchased expensive New York apartment at a loss, not because of New York real estate being a bad investment. Had he not been forced to sell the apartment, he would have done well. Losing all his money and his home made him jaded, understandably, about home ownership, but it doesn’t have to be this way for everyone.

People fail at real estate because of buying too much house at once and or buying in undesirable locations.

Rent in many locations far exceeds inflation. According to Zillow, San Jose rent, for example, is over $3,000 a month, a gain of 50% since 2011 vs. negligible CPI. I would rather put that money into a home in San Jose, where prices are rising 15-20% YOY, than make the landlord rich.

Of course, if you are in a situation where you are constantly moving, real estate may be harder. But home ownership is how you build wealth and eventual financial independence. If you’re always renting, 30 years later what will you have to show for it? Nothing.

Many people make money with real estate, maybe even people you know – neighbors, friends, colleagues – but it’s harder to find stock market success stories. They exist, but the data suggests the vast majority of people are terrible at stock picking and market timing. But with a mortgage, you get to use much more leverage than with stocks.

James writes:

Historically this isn’t true. Housing returned 0.4% per year from from 1890 to 2004. And that’s just housing prices. It forgets all the other stuff I’m going to mention below.

Location is key.

Anyone who bought a home in the Bay Area in the 90′s, and held, is up at least 100% as of today, and many regions like Berkeley and San Jose are up 200% or more, which is a compounded return of 5.5% a year from 1995-2015 – 14 times the .4% figure given by James. And that includes the entire 2005-2011 housing bubble.

Buying a home in the Bay Area, although expensive, has proven to be a worthwhile investment, and prices are rising a couple percent a month which for a $2 million home is about $20-30k a month while you sit on your butt and watch TV. For all the ‘evils’ of home ownership, its hard to beat that.

While Many Panicked, Japanese Day Trader Made $34 Million

While Many Panicked, Japanese Day Trader Made $34 Million

But the left insists that the markets are rigged, a bubble, a scam….this is not supposed to be happening. Yet again, empirical reality keeps slapping the left across the face. The left says the market is a zero-sum game, yet people (such as the example above) keep proving the left wrong, and these professional traders do so with much more consistency than suggestive of mere luck. The left wants to deny the biological reality that some people are smarter and therefore intrinsically better and more successful than others. Smart people see opportunities that 99% of people, who are of lesser intelligence, are oblivious to and proceed to exploit these tiny opportunities for huge profits, repeating this over and over.

Related: How High-IQ People Make Money In The Stock Market

Everything Keeps Going Up

Aren’t we supposed to be in a bubble, says the media? Why does it refuse to pop? Whether it’s stock prices, web 2.0 valuations, China, or Bay Area real estate, the unending post-2008 asset boom continues with no end in sight.

Those web 2.0 valuations keep rising, especially for companies valued at over $1 billion (unicorns). Uber’s valuation went up another $15 billion this week, on its way to being worth $100-150 billion upon IPO.

My opinion, the valuation for the most prized web 2.0 companies, such as Snapchat, Pinterest, Dropbox, Uber, and Tinder, will keep rising until either IPO or buyout. There will be no 2000-like blowup, or at least not for a very long time. While the first internet boom lasted just 8 years or so (1992-2000), the web 2.0 boom, which began around 2004 or so, is still going strong 10 years later, and I see no reason for it to suddenly burst. You look at companies like like Facebook, Twitter, Air B&B, or Uber, which originally were speculative ideas, become juggernauts that have upended the status-quo, creating multi-billion dollar mobile advertising and big data infrastructures. It’s not like these companies are all hype; no, there is massive growth, profits, and market dominance behind these huge valuations. Right now, as part of the bigger is better theme, the best VC strategy is to invest in the most successful of the unicorn companies rather than speculate on the small stuff. Any app company right now that is worth $2 -5 billion can easily make the jump to $10-20 billion. That right there is a 200-900% ROI in just a year or so.

Related:

There is Absolutely No Bubble In Technology
Billion Dollar Start-Up Club: Separating Winners From The Losers
Snapchat Proves America & Capitalism is Not in Decline
Snapchat’s Huge Windfall : The State of Web 2.0

Stocks keep going up, too, with the S&P 500 making new highs every week it seems. In nominal terms, this is quite possibly the biggest bull market in US history, exceeding even the 1995-2000 boom. Dubbed the ‘idiot maker‘ rally (for all the supposed ‘smart people’ who predicted its demise), the S&P 500 is now up 200% from the March 2009 lows, creating millionaires out of people who ignored the media’s every attempt to elicit fear and panic to scare people into selling too soon. While valuations are not exactly cheap, with rates forever low, cash has to find somewhere to go. A 1-2% CPI and a 5-year bond paying 1 1/3 percent means that you you need to either buy 10-yr (or longer duration) bonds or stocks to not lose money in real terms. Low rates should not be confused with QE, the later which ended awhile ago, which is in response to people who insist that the rally is only due to QE. In spite of the unprecedented magnitude of the post 2008 asset boom, the fed has the luxury of keeping rates low due to the global ‘flight to safety’, as well as other factors. Ultimately, unlike in 2000, 2008, or 2011, there is no compelling reason for stocks to go meaningfully lower, and we’ll probably see the DJIA go to 25,000 with a couple years. Of course, I could be wrong, but I seldom am.

Especially since 2008, we’re also in a STEM/high-IQ boom, of people of above-average aptitude earning more money than everyone else, whether through wages, better employment opportunities, rising valuations for web 2.0 and other start-ups, or investments like stocks or real estate. Like the prior two examples, this boom too will continue for a loooong time. Meanwhile, real wages for people not in STEM have tended to lag inflation. Not all STEM is equal though, and computer science, math, and engineering have seen the biggest inflation-adjusted gains. An advanced degree in computer science pretty much guarantees good employment. Coders in the Silicon Valley can easily command a solid six-figure salary, and many are becoming wealthy overnight after their company gets bought out or gets slapped with a super-high valuation. In today’s economy, being smart is the gateway to prosperity and success, albeit it’s a narrow gate since few are smart enough to become good coders.

And last but not least, there is the Silicon Valley/Bay Area housing boom, now in its third year. Homes prices in that region just keep going up, and will continue to do so. Prices in the most coveted areas are up another 10-20 YOY, AFTER 20% YOY gains in 2013. Homes are being sold at a huge premium above asking price in all-cash bidding wars between high-IQ foreigners, techies and private equity. So much for housing being a poor investment, as some fools insist it is. It’s all about location and a little of timing. Smart people keep making money in real estate year after year, defying the losers who call it a bubble.

Related: Why Bay Area/Silicon Valley Real Estate Keeps Going Up

To quote a famous economist, markets can remain irrational longer than you can remain solvent. But we’re in a special situation where markets are rationally high.

Evidence That America Is Not In Decline (long post)

Rumors of America’s decline have been exaggerated.

Vox Day, in a recent post, writes:

What we are witnessing is nothing less than the gradual demise of the biggest, wealthiest economy in world history. It is truly a privilege and an education to behold. It is rather like being able to witness the death of the last Tyrannosaurus Rex. Regardless of how the fallout from the event may affect us personally, we have seen and experienced something that very few men have ever known.

Vox is right about SJWs (can’t stand em’, too) and other things, but I disagree here. If we call the SJWs on their lies over the imaginary college rape epidemic, we should also hold ourselves to high standards and not fall for the same delusional thinking and demagoguery that plagues the SJW left. That means having to confront and acknowledge empirical reality, even if we don’t necessary like it or agree with it. I like to think of myself as a ‘right-wing’ Penn Jillette, calling ‘bullshit’ on things, but from a right-of-center perspective, and no one is off-limits when they are wrong. Kinda like James Randi, Michael Shermer and Richard Dawkins, but the focus being on economics, finance, and sociology. Anyway, I don’t want to make this too political. But I actually want the economy to do well because when the economy succeeds, so to do the best and the brightest who comprise it, and that is how civilization and living standards advance.

Is America in decline? If so, the rest of the world with the possible exception of China is doing much worse. We’re seeing the rise of the west (America) and decline of the rest, which I will explain in more detail throughout this post.

Right now, we’re in a Goldilocks economy of modest growth, no stagnation, tame inflation, and no meaningful economic headwinds. Some pundits like Summers and Krugman bemoan how America’s economic growth is too anemic, especially compared to the 40′s and 50′s, and that its best days are behind it, but as I show here and in the graph below, US GDP growth has broken from the pack, since 2008 exceeding pretty much all g-20 nations. Yeah, 2-3% GDP growth ain’t great, but compared to pretty much everywhere else that has either no growth (Japan, UK, France) or high-inflation growth (Turkey, India, Brazil) – it’s pretty good.

America is running circles around the rest of the world:

And that is especially impressive for an economy as large as America. We’re never going to get back to 40′s era growth, and that’s fine. Law of large numbers and diminishing returns. It’s harder to grow an economy that is 5x larger at the rate it was growing when it was 5x smaller.

Post-2008 GDP growth is pretty much back to the historical average, or at least back to where it was in the late 90′s and 2000′s. Not hyper-speed growth, but certainty not recessionary.

Recent real GDP (below) doesn’t differ too much from historical performance:

Also, having too much growth isn’t always desirable since it tends to result in interest rates going up too quickly (a flat or inverted yield curve), resulting in bear markets and recessions. It’s better to have a prolonged, slow explanation than bursts of growth followed by severe busts, the later of which characterized the US economy until the creation of the federal reserve, which has had a stabilizing effect on the economy and stock market.

True, Consumer Sentiment Plunge Lowers Odds of U.S. Growth Rebound, but a lot of this data is just noise. Consumer sentiment tends to be very volatile is of little predictive value.

The University of Michigan’s preliminary sentiment index for May plunged to 88.6, the lowest since October, from 95.9 the prior month. It was weaker than even the lowest estimate of 68 economists surveyed by Bloomberg. Another report showed factory production stalled in April.

Hmmm..but the S&P 500 is 4% higher than October 2014. Those who shorted the market based on low consumer sentiment would have lost money. Consumer sentiment was in the low 70′s a few years ago, but that didn’t stop stocks from making huge gains since then. Contrary to the doom & gloom financial media narrative that consumers somehow suddenly stop consuming when they lose confidence, dour consumers have pretty much the same propensity to consume as happy ones.

If you look at the chart above, one can argue that a consumer sentiment indicator below 95 is a bullish signal since bear markets and recessions have typically followed very high readings. We should be welcoming this low reading as good news, not as a reason to fret. Sometimes, the most enduring economic expansions are the ones where the most number of people feel left out, in what I call the un-particpatory economic boom. When everyone gets too happy, too giddy…when everyone starts to feel rich…that’s when the market seems to roll over. Unless you’re among the cognitive and financial elite, you may feel left out of the recovery…and that is OK, even it seems socially undesirable. Sometimes in a recovery, especially this one, as more and more jobs become automated and the wealth gap widens, not everyone will be smart or skilled enough to participate fully in the recovery – or at least they will have to wait longer than usual, and we need to comes to terms with this reality.

Furthermore, consumer spending, like most indicators, tends to be volatile as shown below, but the overall trend is positive:

But back to the topic of America being in decline, the evidence of such a decline doesn’t bear itself out. As of May 2015,The S&P 500 made another high this week. One can argue that maybe this is due to QE, but profits & earnings are also rising in lockstep with stock prices, suggesting that fundamentals, not QE, is mostly responsible. America may be facing moral decay, and I don’t dispute that there are problems, but it hasn’t irreparably hurt America’s economy, global influence, military might, profits & earnings…stuff like that. Look at how some of the biggest, most influential tech companies in the world (Apple, Google, Microsoft, Facebook) are all in America. Same for institutions of higher learning, and so on. America’s most prestigious institutions of higher learning and tech companies are being inundated with foreign applicants. Foreigners keep buying America’s most expensive real estate (New York, Aspen, Southern California, Bay Area) and buying up our debt – something you wouldn’t expect for a country that is supposed to be dying.

Everyone talks about ‘dumbing down’ of America like it’s a fact, yet these people don’t see or are ignoring that curriculum, even for the youngest of students, is getting harder. If there’s dumbing down, you won’t find it in the post-2008 American public school system.

The typical American high school student is taking harder courses and performing better in them, according to a new study released today.The 2009 National Assessment of Educational Progress High School Transcript Study underlines the importance of rigorous curriculum, particularly with higher-level math and science courses, as a key to greater achievement in high school.

America dominates ‘top university’ rankings:

As shown by the global IQ map, if America is dumb, the rest of the world (with the possible exception of East Asia) is dumber:

And from Voxeu The Geography of Academic Research:

…we draw on a database of 76,046 empirical papers published between 1985 and 2004 in the top 202 economics journals (Das et al. 2013). We provide basic facts on the country focus of empirical economics research and the likelihood of publication in top journals for research on the US and on other countries. The newly-assembled dataset first highlights just how little empirical research there is on low-income countries. Over the 20-year span considered, there were four papers published on Burundi, 9 on Cambodia, and 27 on Mali. This compares to the 36,649 empirical economics papers published on the US over the same time-period (Figure 1).

America has the highest per-capita research output of any country:

It’s just a weird, paradoxical situation we’re in, of America doing so well by so many metrics but many Americans being so pessimistic. As Americans gripe about America’s alleged weakness and decline, the rest of the world can’t get enough of America. Compared to the rest of the world, America reigns supreme terms of its rising currency, surging stock market, inflation-adjusted GDP growth, central bank policy, consumer spending, free market capitalism, etc.

Only the Bombay market has outperformed the S&P 500, but that doesn’t account for India’s substantially higher inflation and falling currency.

An an example, Bernanke, as controversial as his policies were, seemed to be a success, and so much so that other countries have adopted QE programs. When Europe’s economy seemed to be going over the cliff in 2011, the major policy makers of Europe ignored the zerohedge people and went strait to Bernanke’s playbook of infusing liquidity to boost confidence, staving off a potential crisis. Now five years later, while growth in Europe is anemic, there is no crisis.

The debt may seem unsustainable, but it actually is because these countries who are buying it have no alternative and they keep rolling it over. It’s not like China wants to redeem its holdings, because that would make things worse for them. As part of American exceptionalism, the dollar is among the safest, most stable place for foreigners to park their surpluses, and I don’t see that changing.

Forbes explains it best, about why China cannot just arbitrarily dump treasuries:

If China does not buy the next Treasury bill… someone else will buy it with dollars, because it can`t be purchased with anything else but dollars. If China sells a T-bill out of its portfolio… it can only sell it for dollars. What does it do with the non-interest-bearing cash it acquires? It can buy goods or services or real property available from the U.S., available only for dollars. If China prefers none of these, its remaining option is to trade them for yen or euros, using that cash to buy stuff for sale in yen or euros. But now, someone or some institution that gave up the yen or euros now has those dollars, and where do they go? They can buy stuff for sale in dollars, or they can buy those interest-bearing T-bills that were just sold by the Chinese. Hmmm.

And from Business Insider:

A large selling of U.S. dollar assets by China will be noticed by global markets and could cause a panic selling of USD across the world. The resulting crash of the dollar would drive interest rates higher and hurt the U.S. economy. The end result? China would be hit hard because of falling OECD demand for Chinese goods.

The system may seem perilously unstable, but it works. The bigger things get, the more effort goes into making them work. The more interconnected the world becomes… the more that is at stake, and this dissuades policy makers from making rash, impertinent decisions. That could explain the ‘Long Peace’ phenomena observed by Pinker in his book, The Better Angels of our Nature. Contra Taleb who argues that large systems are prone to blowing up, a large system may be better because more effort goes into making it work and individuals have less power or incentive to disrupt it. The events of 2008 warped people’s thinking, particularly the punditry, into believing that financial crisis are very common (they aren’t) and that policy is ineffective (it can actually be quite effective). A large system has the resources (R&D, infrastructure, venture capital, markets, consumers, etc) that allows the best and the brightest to thrive whereas millennia ago, without such systems, humans all lived in quaint dwellings and caves, and no one was able to excel because day-to-day survival took precedent over innovation. As a libertarian-leaning conservative, I actually believe there is a role in public policy to create optimal socioeconomic environments for the best and the brightest to live to their fullest cognitive potential, and such policy will pay dividends down the road in the creation of tomorrow’s Teslas, Apples, Ubers, Googles, and Facebooks. It’s not that we need less government spending; we need smarter spending.

However, the hollowing out of the middle is real, as America splits between a rarefied high-IQ elite and everyone else. It may seem contradictory for the economy to be doing so well when so few seem to be participating, but the economy as measured by the actual data (real GDP growth, profits & earnings, etc..) doesn’t show decline. How people feel about the economy or are impacted an the personal level is often much different than the broader picture. Many people still think we’re in a recession, and this is not surprising since the media tends to focus on the negative and it’s true that inflation adjusted wages have stagnated for large portions of the population, but the recession ended a long time ago.

But what about record food stamp usage, stagnant wages, student loan debt, and the high youth unemployment?

I don’t mean to make this too political, but a lot of people on the left who complain about student loan debt being too high oppose programs such as workplace cognitive screening that could replace costly diplomas, on the grounds of ‘disparate impact‘. There is also the element of personal responsibility in that students who do go to college should major in a high-ROI field such as STEM, and that we need better screening to identify students who are smart enough (an IQ > 115 according to Charles Murray) to benefit from college instead of dropping out or failing, and then discourage students who don’t meet the IQ threshold from applying. Part of the problem is that the SAT has becomes less of an IQ test and more of a ‘general knowledge exam’, making it less effective at identifying students who would truly benefit from higher education.

Youth unemployment is high in America, but I don’t necessarily think that problematic. There are a myriad of factors, ranging from possibly Obamacare, the push to raise minimum wages, and automation making unskilled jobs obsolete (structural unemployment). Young people delaying careers for higher education, and living with their parents instead of making landlords rich – may be a good idea, as I mention here:

Despite a poor job market, another possibly is that the millennials, being the smartest and most educated generation ever, are delaying careers, family formation, and home ownership for longer-term investments like education. While worse-off now, when in their 50’s, millennials will be in a superior position than their parents when this tradeoff between short-term gratification and long-term education and planning finally pays off. Millennials that live with their parents are prudently saving money for their future instead of making landlords rich.

Maybe it’s better that young people delay making a pittance through dead-end jobs and instead focus on high-paying, self-actualizing, in-demand skills like coding, publishing, mathematics, writing, entrepreneurship, and finance.

As mentioned in my post, The Smartist Era, we’re becoming a drop-out nation, and I think this has continued to the nascent MGTOW movement:

We’re also becoming a drop-out nation. Adults moving back in with their parents, delaying marriage, leaving the workforce and dropping out of college saddled with debt they have no hope of paying off.

And this confers with an article but the Washington Post about the unappreciated benefits of being alone:

Ratner has a new study titled ‘Inhibited from Bowling Alone,’ a nod to Robert Putnam’s book about Americans’ waning participation in group activities, that’s set to publish in the Journal of Consumer Research in August. In it, she and co-writer Rebecca Hamilton, a professor marketing at the McDonough School of Business, describe their findings: that people consistently underestimate how much they will enjoy seeing a show, going to a museum, visiting a theater, or eating at a restaurant alone. That miscalculation, she argues, is only becoming more problematic, because people are working more, marrying later, and, ultimately, finding themselves with smaller chunks of free time.

The stigma or being alone is going away, in our increasingly competitive economy that rewards rewards intellect and self-determination, as we transition to a nation of salaried employees to a winner-take-all nation of entrepreneurs. The person who likes to spend time in solitude learning to code is or trade stocks is faring much better in this economy than the person who is overeager to please others. That’s not to say social skills are completely obsolete, but like religion, they are becoming less relevant in our post-2008 world. You look at some of the biggest success of our post-2008 economy – namely web 2.0 companies like Snapchat, Uber, Slack, and Tinder – and you see they typically involve introverts who are getting very rich very quickly. Being alone is not just a way to save money or find inner peace, but – in the Silicon Valley at least – a possible pathway to riches and fame.

Also, like normal unemployment (U1 or U2) rate, youth unemployment is also falling:

The empirical evidence suggests that the US economy is doing fine despite record wealth inequality. Record wealth inequality hasn’t hurt key economic metrics such as profits & earnings, consumer spending and exports, and GDP growth, as mentioned earlier, is healthy. What we’ve seen is that real entitlement spending is making up the gap in wages, in that more people are drawing aid from the government.

From Daily Signal, Food Stamp Participation Doubled Among Able-Bodied Adults After Obama Suspended Work Requirement

A new report from the Congressional Research Service (CRS) confirms that food stamp participation doubled among able-bodied adults after the Obama Administration suspended the program’s work requirements.

The welfare reform of 1996 requires that after three months on food stamps, recipients be engaged in some kind of work activity for at least 20 hours a week. Tucked away in the mammoth 2009 so-called “stimulus” spending bill was the suspension of this requirement for able-bodied adults with no children.

The good news is Obama recently signed a $9 billion food stamp cut into law.

Someone rebutts:

How can you say such in support of your position, given the non-participation rate being what it is? For them, wages haven’t stagnated, they’ve collapsed. That, for a large portion working, wages have stagnated is not symptomatic of an economy healing. You say the recession ended a long time ago. That’s easy to show as even I can juggle the books and polish a turd, on paper.

But there will always be some form of economic weakness no matter where you look. Anxieties over the economy are not new, and even in the strongest of expansions there will always skeptics who have litany of reasons for why things will go wrong. I guess my point is that the economy and America may be strong (as measured by the data) even if not everyone can participate fully in the recovery. You look at the role IQ plays in our increasingly competitive economy, and people of lesser intellectual means may be falling behind, but that doesn’t prove the whole economy is weak. That is called the fallacy of composition – to make an inference about a bigger system from one of the smaller parts.

A common theme among the doom and gloomer crowd is to doubt the veracity of the economic data, as if it’s rigged, but there was hardly any conspiratorial talk when things were falling apart in 2008. As mentioned earlier, anecdotal evidence and the economic data can diverge, and the former is often not a reliable indicator for economic health. People who feel like they are not participating in the recovery, who feel like they are being left behind, are more inclined to believe that America is in decline or the economy sucks, regardless of evidence that shows otherwise. The inability to disprove that the government data is fallacious does not prove that it is, so trying to argue on the premise that the data is flawed leaves the opponent with the burden of proving that the data is not fake. The result is a Turtles-all-the-way-down/Homunculus argument, where every piece of evidence is countered with ‘fake data all the way down’. The burden of proof should be on the person who insists the data is false, which is the premise of the Russell’s teapot analogy. If we cannot agree on a uniform set of data for reference, there can be no debate. Part of the problem with the social sciences, of which economics is one of them, is that any argument can be met with an equally convincing counter-argument, if one tries hard enough to find one. I can offer an argument and someone can offer seemingly convincing counter-evidence and this can continue back and forth, of each side dredging more and more counter-evidence. Eventually, we have a situation where there is not a consensuses (except for very few circumstances), but a set of augments that supports/refutes both sides. It’s not like mathematics, which has consensus in the form of proofs. The best you can do in an economics debate is to lay out your evidence/cards, counter some opposing evidence (like a poker round), and leave it at that (the round is over).

The S&P 500 made another high this week. As long as you forget that $10 worth of pre 1965 quarters melt down to $180+ of silver

I’ve heard this ‘dollar losing gold/silver purchasing power’ argument for awhile. On one hand, in a process called bifurcated inflation, real prices for some goods have exceeded inflation, but on the other hand, our dollars buy things that never existed decades ago, new products that have much more utility than old technologies. A $300 iPhone has considerably more utility than a 1960 TV set and rotary phone. Netflix costs $10-20 month, versus 20 cent movie tickets of earlier generations, but with Netflix you can watch pretty much any movie or show ever produced.

In debating the doom and gloomers, the Homunculus argument also comes into play when discussing the impact of QE on the economy, where every piece of evidence that the shows the economy and stock prices growing due to fundamentals is dismissed as being attributable to QE or some form of intervention. Pretty much everything boils down to either the data being manipulated or fed intervention. Nevermind that companies like Apple, Disney, Google, Microsoft, Netflix, and Facebook keep posting blowout quarters, even in some instances long before 2008. Those millions of people who are buying iPhones were somehow enticed by the fed. Rather than choosing the most parsimonious explanation, let’s instead create increasingly intricate conspiracies.

The fed ended QE a year ago and began the taper two years ago, but the S&P 500 has surged 20% since then. If Wall St. felt that QE and printing were purely responsible for the rise in stock prices, this would not have happened. As shown below, profits & earnings of the S&P 500 have risen in lockstep with stock prices:

As I stated here, QE is not some magical elixir but merely a a monetary stimulus of last resort. Many people overestimate its effectiveness, and in fact, it inflation didn’t surge following QE, as so many predicted it would:

This is not too surprising since QE, unlike a stimulus, is just an asset exchange that replaces long-dated bonds with ‘reserves‘, which are not lend out.

QE helped the economy some extent, but it’s hardly the main reason why stocks and the economy have recovered so vigorously from the depths of 2008 & 2009. The main criticism of QE is that it did more to boost asset prices than economic growth, but since the PE ratio of the S&P 500 is only somewhere between 17-20 despite a huge 200% rally since 2009, the divergence been prices and fundamentals isn’t that great. And given that inflation didn’t budge, it didn’t push the economy into an inflationary overdrive. At this point fundamentals seem to be doing most of the work, not fed policy. Another reason given for rising stocks prices is aggressive buybacks, and this is true to some extent, but only a small factor.

The present bull market is about 100% bigger than the 2002-07 one, but buybacks are only at 07′ levels, suggesting that fundamentals are playing bigger relative role.

The Tobin’s q, on the other hand, shows stocks being richly valued:

But this in itself is not a reliable indicator since in the late 90′s stock valuations wildly diverged from the long-run average, and there’s no guarantee they won’t do it again. If the general public becomes as enamored with stocks as they were a couple decades ago, it we could possibly see the S&P 500 double. I certainly would not want to be on the sidelines or short then.

In conclusion, I hope this exegesis provides a convincing argument for why America is not in decline (or If America is in decline, the rest of the world is doing even worse). Republicans should be more optimistic about America, because America (and especially the Silicon Valley), more so than anywhere else, through its free markets, infrastructure, consumer base, and intellectualism, rewards high-IQ, talent, and merit more so than anywhere else. That’s why high-IQ, ambitious foreigners keep wanting to come here, and I think republicans, who believe in the merits of free markets and capitalism, should welcome this.