One of These Things is not Like the Others

What's out of place in this picture?

(Photographed in the Cheyenne, WY, Barnes & Noble store yesterday.)

You Heard It Here First

Circle this day in red, as I am now calling this as the right time to start buying some stocks.  Maybe not an absolute market bottom, but I figure we're certainly below prices that you can rationally explain.  Dow well below 9,000?  P/E ratio for a the top 1000 companies in America sitting at 12.75?  (That's a rough estimate based on the P/E ratio calculated for the exchange-traded fund PRF.)  Yeah, I'd say we're pretty much at the bottom.  Stocks haven't been this cheap since 2003!  If you're like me, young and throwing money in a 401(k), count your lucky stars.

We're beyond belief right now.  I bought $1,000 of GE stock the other day at $20.00 per share.  That's at a P/E of 9.4.  That's crazy, they're a profitable, dividend-paying company!  Today they dropped down to $19.01 per share.  Today GE is suddenly worth 5% less than yesterday?  Do you believe that?  It's madness, but if you've got some cash on the side it's awesome.

Paul Krugman put up an obvious blog post about today's sell-off:

"Seriously, I'm sure we'll be hearing all kinds of explanations of today's drop - it's Paulson saying that he'll inject equity, or Obama's rise in the polls (yes, seriously, that's the right-wing line), or some obscure ruling by some government agency.

But you want to remember Robert Shiller's classic real-time study of the 1987 crash.  Basically, the crash had nothing to do with any news item.  Investors sold because - drum roll! - prices were falling."

There's some seriously irrational shit going on out there.  I recommend you make like me and pick up some quality stocks at fire-sale prices!

(Disclaimer:  Don't bet the farm (haha! remember when people had equity in their property), invest savings that you don't need for at least a couple years just in case I'm wrong).

NYTimes Sees a Number, Decides Sky Has Fallen

The magical thing about a recession is that you can't tell if one is happening or not until months later. This puts the news media in a delicate situation. There's no way to report on the thing that everyone is curious about. Reporting about recessions also seems to be a little bit like the Wizard of Oz, if you close your eyes, click your heals, and repeat "the economy may be slipping into recession," it just might happen.

Take, for example, an article today in the New York Times: Productivity Slowed in the 4th Quarter

I have several problems with this article.

1. Productivity did not slow. Productivity is not a thing that can slow, it is a measure of goods produced per unit labor input, so it can only increase or decrease. Productivity growth, on the other hand, can accelerate or slow down.
2. You look at that headline and your first reaction is to think "The US economy was less productive in the 4th quarter, the economy's really in the crapper!" Wrong. Productivity stilled increased, just at a slower rate than before.

Ok, so fine, maybe the headline is a little to pessimistic for me. Perhaps the article is objectively written in a thoughtful manner. But you're no fool, you can tell that I'm just setting you up with that statement.

In the body of the article you find nothing but doom and gloom. Productivity growth slowed to a mere 1.8% annualized growth rate in the 4th quarter, from a blazing 6% annualized rate in the 3rd quarter. Sounds disastrous, right? 1.8 is not a big number! It's certainly not as big as 6!

How about some perspective then? From Gregory Clark's "A Farewell to Alms," page 200, there's a table of long-term productivity growth rates. For the United States, from 1960-2000, the average growth rate of output per worker-hour was 1.75%.

To quote the article itself:

For the year, productivity rose by 1.6 percent, a slight rebound from a 1 percent gain in 2006 but both years were well below the average annual increases of 3.2 percent turned in from 2000 through 2004.

Because 4 years constitutes a reasonable amount of time to use to set your expectations. Seems more likely that we're just looking at productivity growth reverting to the long-term mean.

The whole tone of the article is ridiculous. It's basically written from the tone of "Batten down the hatches, it's going to get rough out here!" when all the data in the article says "We're not in a boom, but we may not be in a recession either." The article admits that productivity growth was twice what economists expected and that the cost of labor was lower than expectations, but then quotes an analysts that says everything is going to hell.

So my point is the New York Times has taken something that really means nothing or could mean anything, and decided to interpret it in the gloomiest possible fashion. What's worse, it's not even an individual reporter that we can blame. Apparently this is just a story from the Associated Press. Every news outlet is going to pick this up and people everywhere are going to clamor for an "economic stimulus" (which is synonymous with "increased deficit spending").

So I guess my point is, maybe there's a recession coming, but there's no way to really tell. Also, for most people, a recession is an entirely abstract thing that you can blame unfortunate economic events on. When you're using a home equity loan to finance your consumption, you have to know it's going to catch up with you eventually. When the entire nation is gripped by this mania, why are we surprised that the economy is slow for a bit? I guess that I just wish the news media had enough economic sense to parse the news a little better by themselves, rather than just weighting their stories to whichever camp has more analysts. Or, failing that, be a little more objective about things.

Alan Greenspan is an Inspiration

Lately, I've been reading Alan Greenspan's memoirs "The Age of Turbulence: Adventures in a New World." I've got to say, I'm surprisingly inspired by this book. Not necessarily inspired as in "This is a work on literary genius," but inspired in the "Dude, I love market capitalism" kind of way.

Alan Greenspan's memoirs reinvigorate me to become a kick-ass businessman, because I believe that business can be a force for good. A well-run, profitable, ethical business makes the world a better place. Ethical does not mean merely following the law, there is a higher moral calling that everyone in business should strive to reach. Sure, there is are elements of power-seeking and a desire for wealth (or, if we're calling a spade a spade, greed) in my motives for a career in business, but business is honestly something that I enjoy doing. I like making things happen, finding ways to solve a problem, and creating a faster, more efficient, and hopefully more elegant solution. I really love coming up with a solution that benefits both parties. I think that's why I can be good at business, because I love finding a win-win situation. When I can solve a problem that I have while creating sales or profit for a partner company, I love it.

Some people can become doctors, thank God, because I don't think I could. Some become social workers or academics, but these professions just are not for me. I think that one reason people get into these professions is to lower overall suffering and improve people's lives. Doctors do it by curing, treating, or preventing disease. Social workers have a more direct impact on the lives of families and children. Academics study esoteric problems so that no one else has to. This may seem a little hard to fathom, but part of the reason I want to be in business is to improve the general lot of humanity. This is what I find so exciting and amazing about market capitalism, it's not a zero-sum game. By pursuing my own goals, I can make the world a better place. The long-term productivity gains enabled by technological advance and implemented by mostly private actors has led us to reach living standards that our great-grandparents could never imagine.

I suppose that this what causes me to disagree with so much of what I hear from the political left (but don't get me started on why I disagree quite vehemently with the political right). I truly believe that by applying myself to market capitalism, I will contribute to the common good. It takes advantage of my innate abilities and market capitalism is not evil. More importantly, what else can I choose to do to improve the common good? It seems almost impossible to be able to choose something that will actually make a difference in the world.

But if I believe so much in business and market capitalism, how can I be employed as an engineer at a defense contractor? I'm an engineer by the fact that I like solving problems and it was an undergraduate degree that promised to teach me useful skills. I work at a defense contractor for simple economic reasons: they offered me a good job right out of college. I am still both of these things because I'm gaining some great experience. I am yet young and my career has barely begun. Also, one of the things I've learned from my work is that while there are some decidedly non-market forces in large defense contracting, private defense firms can provide a very real and worthwhile service to our nation.

In short, if anyone has ever wondered why I've made the choices I have in my life, perhaps you now have your answer. Seriously, I feel silly sometimes at how excited I get about the idea of making business deals in general. I look forward to the next XX years of my life doing business and making things happen. I suppose that there are many motivations for people who pursue the general category of "business" in the private sector. I don't claim to understand or have the ability to explain these motivations, but I can attempt to fathom my own reasons. For that reason, I hope that this post can allows some of you doctors and social workers and academics to understand in some way why a person would choose to devote themselves to private industry.

I know I haven't told you much about the book. Suffice it to say, Alan Greenspan had an amazing career and was involved in a ridiculous number of the most important economic decisions of the last 30 years. It's also a very readable book about the state of the world economy and where it may go in the next few years. Good stuff, I definitely recommend it.

Can a Headline Tell You Anything about an Article?

Furthering Slate.com's reputation for frivolous economic analysis*, Tim Hartford asks the question "Can physics explain why poor countries remain poor?" Want to know the answer? Well you won't get it from me.

It's not that I don't want to tell you the answer, it's that the subject of the article has nothing to do with the title. Apparently a couple physicists worked with some economists to produce an abstract map of economic space to see how different goods are connected (by the assumption that because if a lot of countries that export good A and good B, then somehow it is easy to move good A production to good B production and the productions of these two goods share some sort of connection).

Tim Hartford reads a lot into this (or maybe he just reads the authors' conclusions, I'm not excited enough about their pretty picture to read their actual research article). His point is that he doesn't know what physics is.

Just kidding, his point is that perhaps resource-rich poor countries can't diversify their economies because oil is fairly disconnected and far away other things on the map of abstract economic space. I'm not convinced that this map is any proof of anything. I think you're looking at a chicken-and-the-egg situation; has this illuminated a fundamental principle of economics (that switching from a resource-gathering activity to another economic activity is too woefully complex for poor countries to manage) OR is it telling us what we already know - that most countries rich in oil are run by corrupt assholes that don't bother to diversify their economies, thus skewing the data to show that oil production is not related to anything?

So, in summary, I would say that while I don't think they've proven that physics can explain why resource-rich countries can stay poor, I do think that you could use economics to explain why two physics PhD's would do economic analysis.

* - And highlighting a new publication of frivolous economic analysis - the magazine Science! Can someone tell me how this study got published in Science? I mean, it's sciencey, sure. They totally use some scientific analysis in economics, but I can't imagine how this is so ground-breaking as to deserve to be published in such a top journal. Maybe I'm going to actually have to read this article...

A Response to a Comment

In response to my last post, someone claimed that they disagreed with me saying that "poor=stupid." That hit me kind of hard, because that is not at all the message that I intended to get across. Perhaps I am not skilled enough writer, I seem to sometimes get carried away sometimes and over-stress certain points that screw up the overall message. Then again, maybe it is not the performer that is flawed, but the venue. Either way, I don't mean to say that all poor people and stupid or that stupid people deserve to be poor.

In fact, I don't see my viewpoint as disrespectful to low-income households; I find the paternalistic viewpoint of many activist organizations to be much more insulting to the working poor. To set a double-standard for low-wage earners and high-risk borrowers is to discount the achievements of those who work their way out of poverty. To say that great numbers of people are victims of "their socialization and education" often implies that only the middle and upper classes have free will; poor people are victims to their emotions and desires and can not be trusted to enter into financial contracts as adults.

My philosophy is that low-wage earners and high-risk borrowers are not society's J.V. squad, but an important, integral part of the economy and should be respected as full-fledged members of society. A natural conclusion is that this means they must also be held to the contracts they sign, just like anyone else. What people like that National Fair Housing Alliance are advocating amounts to a sort of "positive discrimination" in the housing market. It's still discrimination, artificially setting one group of people aside because of education, race, or income and telling lenders, "Ok, now you have to treat these people differently." Lenders will treat them differently all right, they'll probably stop making loans to them because regulations will make it much more expensive (compliance is time-consuming) and unprofitable (because they'll be forced to offer lower interest rates if the NFHA gets it's way - see this blog).

Also, my portrayal of NPR is intended to point out that while they often produce interesting news stories, sometimes the editorial bias can be a little heavy-handed. An example of this would be their coverage of Hurricane Katrina's aftermath. The typical tone of the man-on-the-street interview was "New Orleans is national icon, clearly a national treasure, and I was doing the country a great service by living New Orleans, so obviously you, the American taxpayer should buy me a new house." My favorite news stories were the ones where civil liberties groups would complain that although people were going to get checks from the government, it was taking too long to process the claims and this was somehow infringing on someone's natural rights.

My opinion is that if you live below sea level, in an area known to have the occasional hurricane, and you don't buy flood insurance, you should be grateful to get tent and one hot meal per day. If you excuse it and say "Oh, but those people are really poor and unable to properly assess the risk and couldn't afford flood insurance anyway, what can you expect?" you are only enabling further inefficient use of resources. Perhaps the fact that flood insurance is ridiculously expensive is a secret message from actuaries that there's a high likelihood of a terrible disaster in an area? If you set up a market to manage risk, then allow people to ignore risk with impunity because you've judged them unfit to make such decisions, how fair is that to people that did play by the rules? One of the assumptions in a market is that once the rules for something are set, they will not change drastically. If you live in a hurricane zone, why would you buy flood insurance? If something really bad happens you can probably get enough CNN cameras to extort some "disaster relief" money from the government.

People in areas of the country not prone to weather disasters (i.e. San Diego, Indianapolis, etc.) should be super-pissed about government-subsidized flood insurance much less hurricane relief. Government-subsidized flood insurance a wealth transfer program designed to encourage people to live near water. It masks the true cost of living in a hurricane zone or on a floodplain using money taken from people living on hills or plains.

Anyway, one more argument to address: socioeconomic background. I'm not discounting the phenomenal hurdles one must overcome if you're growing up in East or West Baltimore, but neither does it give someone in that situation carte blanche to explain away their actions. At some point, you have to say to someone from that background, "You're a human being, you have a faculty to reason not dissimilar from the population as a whole, you can no longer use your socioeconomic background to excuse your actions." I think that most non-profit, activist-type organizations agree with me that such a point exists, it's more of a debate as to where that point is located.

This all being said, I support the hell out of things education, especially things like low-cost community colleges and adult GED programs. Education changes behavior and improves your economic standing, something wealth transfers have been shown, again and again, to be unable to do.

Predatory Lending is for Schmucks

Today, one of my favorite shows on NPR thoroughly disappointed me. Typically I can count on Marketplace to be a bit of a haven, a place where you can get decent economic news on NPR. It's a pretty typical complaint, but for the most part, Morning Edition and All Things Considered have not met a net welfare reducing program they didn't like.

Announcer: "Economists argue that this program is unnecessary and will cost billions of tax dollars. However, if you ask an activist like Jim McSocialist, Chief Policy Officer of the non-partisan Union of Concerned Public Policy Majors:"

Dumbass Activist: "We're the richest country in the world and capitalism has clearly failed stupid people, so it's time to try something different. What we propose is a massive transfer of wealth."

Announcer: "Economists have a bunch of facts and figures that show this isn't a real problem, but we've got some anecdotal evidence to the contrary."

Uneducated Man/Woman on the Street: "I ain't got no education anna I gotta three kids anna I cain't affor no house."

Dumbass Activist: "The deck is just stacked against them. It's time that our lawmakers acted to reshuffle the deck."

Announcer: "Back by studies that show children living in houses outperform children living in gutters by 25% on standardized tests, activists are lobbying Congress this week to sign this bill into law."

Actually, it's not always that bad. Occasionally NPR does overcome every journalist's (apparent) natural fear of economics and do a story based on such wild ideas as "subsidies are a bad idea" or "trade makes everyone richer." Concepts that are somehow still hotly debated around this country.

Anyway...Marketplace. So today they did a story on "Predatory Lending," a trend that is sweeping the nation. (Not that predatory lending is sweeping the nation, news shows doing stories on predatory lending is spreading like wildfire). Unfortunately, they treated "Predatory Lending" like it is a thing that actually happens and that we must be vigilant to keep it bay. Very successful PR from "non-partisan" organizations has more or less convinced journalists everywhere that predatory lending exists.

I'm a bit of a skeptic. Call me crazy, but if you enter into a contract that you can not perform against, I call you an idiot, not a victim. Anti-predatory lending organizations have a great argument for this - the victims of predatory lending are uneducated or not financially literate enough to understand what they're signing. Once again, if you enter into a contract that you can not understand, I'll call you an idiot. Here's a simple idea, don't agree to things you don't understand. If you can't figure out the loan document, then don't take out the loan. The loan agent says you can afford it? Congratulations. I say you can totally jump across that shark tank. Based on the documentation I've seen of your athletic ability, you can totally do it. Go for it, your dream is attainable right now, no need to train for it, just jump!

I suppose what frustrates me about it is the assumption that contracts with dumb people are not as binding as contracts with everyone else. Somehow being uneducated or earning a low income means that you are not subject to the same rules as everyone else. You have to get special treatment, because if we don't hold your hand, you'll do something dumb.

So, I decided to find out a little about predatory lending from someone with a little less of an agenda than ACORN. According to the Department of Housing and Urban Development, predatory lending sounds a heck of a lot like plain, ol' fashioned loan fraud. Under their definition, I'm sure it exists. Mortgage brokers convincing people to overstate their incomes so that they can get a bigger fee? I'm sure it occurs.

If someone lied to you or broke a law, then it's loan fraud and they should be prosecuted. However, the idea that banks and institutions are trying to make loans that people can not afford and drive borrowers into bankruptcy seems a little ridiculous.

Finally, here's the real reason I published this post - an economist has put out an interesting paper examining payday lending and attempting to determine if it is a "predatory" practice. It's pretty approachable, I highly recommend you read it. I'll hit you with a highlight:

"Thus, higher prices are neither necessary or sufficient to conclude that a certain class of credit is predatory."

Interested? Check it out - Defining and Detecting Predatory Lending