Pictures That Tell a Story

They say a picture speaks a thousand words, and that means, to an economist, that sometimes it’s easier to communicate something complicated with a chart or a graph rather than a lot of explanatory text.

So it is with three charts and a picture, selected for the eye-opening perspective they offer.  The first, in the black outlines favored by a Bloomberg Terminal, shows the fluctuating value of an ETF that is invested entirely in the largest stocks on the Mexican stock market (blue line) vs. the American S&P 500 (green line) since the beginning of this year.


You may remember that when President Donald Trump took office, with his tough talk about trade and his promise to scuttle the North American Free Trade Agreement for something more beneficial to U.S. interests, the conventional wisdom was that the Mexican economy would hit a rough patch and the tougher trade agreements would benefit the American economy.

The month of January, when the new President took office, saw Mexican shares drop on the dire expectation that NAFTA would be ripped up and the Mexican economy would groan under the weight of tariffs.  But look what happened.  When it became clear that the campaign “promise” was nothing more than empty boasting, the Mexican market has not only recovered; it has roared ahead of the U.S. over the first six months of the year. So much for the conventional wisdom you were hearing from pundits and Wall Street stock touts.

The second chart, in pale blue, illustrates another interesting point.  You remember the great trauma that Americans experienced in the Great Recession of 2008-9, and you might be tempted to think that even in the depths of the Great Depression, people didn’t have it any worse.

CA - 2017-8-7 - Great Recession vs. Great Depression (2)

Au contraire!  Take a look at the left side of the chart, where the darker line represents the remarkably steep decline in total economic output across the U.S. business sector over the 11 years from 1929 to 1940.  You can see that the economy declined by a full 30%, and it took seven years before America had regained its former economic strength.


Still on the left side, notice the less bold line.  That represents the decline in GDP experienced by American citizens in the Great Recession—and you can see that the decline never even reached 5%.  Not only was the dip less traumatic, but the recovery was much faster, and the growth that is sometimes derided as “anemic” is at least steady.

The right side of the graph portrays the unemployment rate, again with the bolder line showing the experience of the Great Depression, and the pale line showing unemployment rates during the 2008-9 Great Recession.  Once again, the people in the 1930s experienced a much tougher economy than anything more recent participants of our recession had to face.

So if you hear a grandfather say that people had it a lot tougher in the 1930s than they did in that mild rainstorm we call the Great Recession, believe them.

Now let’s look at the map of the U.S., which shows, in color contrast, the average weekly wages in each American state.  The darker the color, the higher the wages; the highest are found in New York, New Hampshire, Massachusetts, New Jersey, Maryland, Illinois, Washington and California. In contrast, people in South Carolina, West Virginia, Kentucky, Mississippi, Oklahoma, Arkansas, New Mexico, South Dakota, Montana and Idaho have the lowest per capita income.  What is interesting about the map is that except for Texas and Kansas, the color codings tend to look a lot like the political divide in the U.S. between red states (generally lighter colors on this map) and blue states (darker and tending to be toward the coasts.  Can politics really be that simple?

CA - 2017-8-7 - State Wage Map (2)

Finally, take a look at the one-hundred-trillion dollar banknote issued by the troubled African nation of Zimbabwe.  This is an example of what happens when a nation simply prints its currency in unlimited amounts in order to pay for its government activities.  This bill was actually a replacement for pre-2006 Zimbabwean dollars, and was equal to a number of the previous currency so large that there isn’t a name for it—a one with 27 zeros after it.  Yet this new bill was soon worth a fraction of a U.S. penny.


You already know the lesson here: bad, inattentive or corrupt governments produce bad outcomes.

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Ignore headlines, stay the course


Don’t Sell on Headlines

So far, the world markets seem to be shrugging off the sabre-rattling coming from North Korea (normal behavior) and the U.S. White House (complete departure from policy). The smart money is betting that the distant but suddenly headline-grabbing possibility of the first conflict between two countries armed with nuclear weapons will amount to a tempest in a teapot.

Meanwhile, the U.S. stock market has been testing new highs for months, and experts cannot quite explain why valuations have been rising amid such low volatility.

So the question is quite logical: isn’t this a good time to pare back or get out of the market until valuations return to their historical norms, or at least until the North Korean “crisis” blows over?

The quick answer is that there’s never a good time to try to time the market.  The longer answer is that this may actually be a particularly bad time to try it.

What’s happening between the U.S. and Korea is admittedly unprecedented.  In the past, the U.S. largely ignored the bluster and empty threats coming out of the tiny, dirt-poor Communist regime, and believe it or not, that also seems to be what the military doing now.  Yes, our President did blurt out the term “fire and fury” in impromptu remarks to the press, and later doubled down on the term by suggesting that his warning wasn’t worded strongly enough.  But the U.S. military seems to be responding with a yawn.  There are no Naval carrier groups anywhere near Korea at the moment; the U.S.S. Carl Vinson and the U.S.S. Theodore Roosevelt are both still engaged in training exercises off the U.S. West Coast, and the U.S.S. Nimitz is currently patrolling the Persian Gulf.  Nor has the State Department called for the evacuation of non-essential personnel from South Korea, as it would if it believed that tensions were leading toward a military confrontation.

Meanwhile, on the home front, the U.S. economy continues to grow slowly but steadily, and in the second quarter 72.2% of companies in the S&P 500 index have reported earnings above forecast.

What does that mean?  It means that you will probably see a certain amount of selling due to panic over the North Korean standoff, which will make stocks less expensive—a classic buying opportunity.  History has given all of us many opportunities to panic, going back to World War I and World War II, and more recently 9/11—but those who stayed the course reaped enormous benefits from those who abandoned their stock positions.

If you’re feeling panic over the North Korean situation, by all means, go in the nearest bedroom and scream—and then share some sympathy for the Americans living in the island territory of Guam, which is in the direct path of the North Korean bluster.  Just don’t sabotage your financial well-being in the process.

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Elder orphans


Aging Without Support

Probably the most forgotten minority in America is the “elder orphans”—aging retirees who no longer have a spouse (if they ever had one), no kids and no caregiver.

According to The Gerontologist magazine, about one-third of 45 to 63-year-olds are single, and most of them never married or are divorced.  Meanwhile, about 15% of 40-44-year-old women have no children.  These statistics don’t tell the full story of a small but significant aging population who are growing older without a support network—the American Geriatric Society thinks that nearly one-quarter of Americans over age 65 lack someone to care for them if they become physically incapacitated or experience cognitive decline.  And many will; statistics show that 69% of Americans will need long-term care at some point in their lives—usually later in life.

How are these people coping?  An article in a recent issue of U.S. News & World Report says that the best advice is to plan for long-term care needs with an LTC policy and/or a home that is retrofitted for an elderly occupant.  It’s also important to make social connections and avoid being lonely.  A 2012 study found that the loneliest older adults were nearly twice as likely to die within six years as the least lonely, regardless of health behaviors or social status.  The post powerful finding was that human connection helps ward off depression.

One way to raise the connection level is to retire in a college town, where the elder orphan is surrounded by young people and can stay engaged with activities like mentoring.  At the same time, it is recommended that these people find like-minded retirees who can look out for each other.  Some have actually gone so far as to create communities that act like surrogate families.

The elder orphans need someone to speak up for them if they’re incapacitated, which means finding a friend who knows their Social Security number, keeps their insurance card, knows which medications they take, and can be designated as the durable power of attorney for health care against the day when they start losing cognitive capacity.  As a last resort, this person could be hired; an attorney who specializes in elder care law might either serve in that capacity or find a professional who is willing to do so.


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“Banking deserts” in U.S.


Banking Retreat

Low interest rates and added regulation designed to head off another global financial crisis has made it more expensive and complicated to run a banking operation these days.  Gone are the heady days when banks were building 200 new brick and mortar locations a month in the U.S. market, leading up to the market top in 2008, when there were 100,000 bank branches in the U.S.—35 for every 100,000 adults, twice as many, per capita, as Germany.

Today, lenders are cutting back.  Since the financial crisis, banks have closed an average of three branch offices a day, and the pace has picked up.  In the first half of 2017, a net of 869 brick-and-mortar bank branches shut their doors.

Community organizations have noted that much of the cutback has occurred in areas where less-wealthy people live, and in rural areas there are now more than 1,100 “banking deserts” in the U.S.—defined as places where consumers have to drive at least ten miles to the nearest bank branch.  At the other end of the spectrum, half of Americans, chiefly from wealthier neighborhoods, live within one mile of their nearest bank.

The lack of banking locations hits small businesses and homeowners the hardest, since many of their lines of credit are dependent on relationships.  The local banker knows them and their character, even if their balance sheets might not be spotless.  A study in 2014 found that when branches close, new small business lending falls by 13% in the surrounding area.  In low-income areas, the impact comes in at something closer to 40%.


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Don’t put off fun!


Putting Off Fun is a Bad Idea

If you’re like most people, you carefully put off doing something fun—like taking a trip or treating yourself—until you finished your work.  Of course, for most people, the work never ends, and the fun gets put off over and over and over again.

The hidden assumption behind putting off fun is that you won’t enjoy it if you have uncompleted work on your desk.  But what if research showed that when you put fun ahead of work on your priority list, it is at least as much fun as it would have been in the unlikely case of your finally getting everything cleared off your desk?  Is it possible that you’ve been deferring gratitude for no reason?

Several experiments suggest that this might actually be the case.  In one, working adults were given two assignments: a strenuous battery of cognitive tests and a fun iPad game that involved creating and listening to music.  Some were assigned the cognitive tests first, others started with the iPad game, and they were asked beforehand how much fun they expected to have.

The beforehand responses suggested exactly what you would think: people in the
“play first” category predicted lower enjoyment ratings than participants in the “play after” group.  But when asked the same question after they had completed both activities, the participants reported equally high enjoyment, regardless of the order.  Play first participants enjoyed themselves just fine.

In a follow-up study, some University of Chicago students were given massages before their midterm exams, and some once their exams were finished.  Both groups were asked to rate their expectations before and their actual experience after.  Nearly all students thought they’d be too stressed to enjoy the massages if they received them before the exams, but afterwards there was no difference between those who received the massages before and after the demanding tests.  While the students assumed they would be highly distracted if they received a massage before midterms (they predicted exams would dominate nearly 40% of their attention at the spa), this didn’t actually happen. In reality, the students thought about midterms less than 20% of the time. They mostly just enjoyed themselves.

American workers work longer hours and take fewer vacations than anyone in the industrialized world. Most of them are unhappy with work-life balance, leave paid vacation days on the table, and wish they could find more time for fun.  But these studies, and others, suggest that leisure improves our work.  People often work better and are more satisfied with their jobs after returning from restful breaks.  We may keep postponing doing something fun for “the right time,” only to realize that it never seems to come.

Having fun may seem like hard work. It’s not. You could wait for a “right time” to enjoy something or just enjoy it now. The point is, you’ll enjoy it either way.


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It’s a dilemna


Aging Dilemma


Should today’s 70-year-old American be considered “old?”  How do you define that term these days?  Statistically, your average 70-year-old has just a 2% chance of dying within a year.  The estimated upper limits of average life expectancy is now 97, and a rapidly growing number of 70-year-olds will live past age 100.


Perhaps more importantly, today’s 70-year-olds are in much better shape than their grandparents were at the same age. In most developed countries, healthy life expectancy from age 50 is growing faster than life expectancy itself, suggesting that the period of diminished vigor and ill health towards the end of life is being compressed.


A recent series of articles in the Economist magazine suggest that we need a new term for people age 65 to 85, who are generally hale and hearty, capable of knowledge-based work on an equal footing with 25-year-olds, and who are increasingly being shunted out of the workforce as if they were invalids or, well, “old.”  Indeed, the article suggests that if this cohort does NOT start returning to the workplace, the impact could be catastrophic on society as a whole.


Globally, a combination of falling birth rates and increasing lifespans threaten to increase the “old-age dependency ratio” (the ratio of retired people to active workers) from 13% in 2015 to 38% by the end of the century.  That, in turn, could lead to huge fiscal strains on our pension and Social Security systems, because fewer workers would be paying for retirement benefits for more retirees.


What to do?  The article notes that, in the past, whenever a new life stage was identified, deep societal and economic changes followed in the wake.  A new focus on childhood in the 19th century paved the way for child-protection laws, mandatory schooling and a host of new businesses, from toymaking to children’s books.  When teenagers were first singled out as a distinct demographic in America in the 1940s, they turned out to be a great source of economic value, thanks to their willingness to work part-time and spend their income freely on new goods and services.


The next most logical shift in our thinking could be separating out people age 65-80 from the traditional “old” and “retiree” category—and calling them something different.  (The article doesn’t offer a suggested name.)  They might continue at their desks, or downshift into the kinds of part-time work that emphasize knowledge and relationships.  Many who experienced mandatory retirement retired to the so-called gig economy.  Though gigging is usually seen as something that young people do, in many ways it suits older people better. They are often content to work part-time, are not looking for career progression and are better able to deal with the precariousness of such jobs. The article notes that a quarter of drivers for Uber are over 50.

More broadly, a quarter of all Americans who say they work in the “sharing economy” are over 55.  Businesses that offer on-demand lawyers, accountants, teachers and personal assistants are finding plenty of recruits among older people.

Still others are preparing for life beyond traditional retirement by becoming entrepreneurs. In America people between 55 and 65 are now 65% more likely to start-up companies than those between 20 and 34.  In Britain 40% of new founders are over 50, and almost 60% of the over-70s who are still working are self-employed.


One large economic contribution made by older people that does not show up in the numbers is unpaid work. In Italy and Portugal around one grandmother in five provides daily care for a grandchild, estimates Karen Glaser from King’s College London. That frees parents to go out to work, saving huge sums on child care.


All of these changes represent societal adjustments to a reality that isn’t well-publicized: that the traditional retirement age increasingly makes no sense in terms of health, longevity and the ability to contribute.  The sooner we find a label for healthy people age 65 to 80, the faster we can start recognizing their potential to contribute.




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Prudent diversification – a market discussion


Measuring the Market

Have you ever wondered what stock market professionals and equity analysts talk about in their spare time?  Recently, the Bloomberg website featured a debate about something that is getting a lot of attention recently: the historically high, and still-rising U.S. stock market valuations.  People have been willing to pay more, and more, and more for a dollar of corporate earnings.  What does that mean about future returns?

Let’s look over the shoulders and see how two professionals approach the question of how to look at today’s markets.

Bloomberg Gadfly columnist Nir Kaissar starts by noting that the Standard & Poor’s 500 Index has beaten both the MSCI EAFE Index — a collection of developed market stocks outside the U.S. — and the MSCI Emerging Markets Index by 6 percentage points a year since March 2009, when the market hit bottom, through May, including dividends.  Whether you measure market prices by price-to-earnings ratio, price-to-book or price-to-cash flow, U.S. stocks are now more expensive than their foreign counterparts.

To Kaissar, that suggests that investors should consider moving at least some of their money out of American companies and into companies domiciled elsewhere.

Bloomberg View columnist Barry Ritholtz countered that valuation is largely driven by psychology.  We are experiencing a bull market in American stocks, which can be defined (in psychological terms) as a period when investors become willing to pay more and more for a dollar of earnings.  Eventually this will turn around, and the regional performance gap between the U.S. and Europe will reverse.

But for Ritholtz, the important issue is timing.  You could have used Kaissar’s argument four or five years ago, gotten out of U.S. equities, and you would have missed a nice runup while foreign stocks were going nowhere.  Is it possible that the same will be true over the next few years?  (Hint: it is definitely possible.)

Kaissar responded with a definition of risk vs. valuations—the idea that investors are generally willing to pay more for less risky stocks.  So can we make an argument that the S&P 500—with a price-to-book ratio about twice as high as the EAFE basket of stocks—is half as risky as stocks trading in the rest of the world?  He doesn’t think so, and the conclusion is that American stocks are mispriced.

Ritholtz says that rather than trying to time which part of the world is going to do better or worse, it’s better to own it all.  Instead of U.S. stocks vs. world stocks, own a portfolio that includes all of them in proportion.

Aha! says Kaissar.  U.S. investors commonly allocate 70 percent to 80 percent of their stocks to the U.S., even though U.S. stocks represent only 50 percent of global market capitalization.  He says that if you believe in true diversification, it would make more sense to create portfolios with a U.S. stock allocation that’s closer to 45 percent, tilting slightly toward the global stocks that are currently trading on sale.

Ritholtz makes a final argument, saying that sometimes cheap stocks get cheaper and continue to fall; other times expensive stocks get more expensive and keep going up.  He doesn’t want to abandon U.S. equities, but he finds common ground with Kaissar when he recommends that people with U.S.-heavy portfolios consider diversifying into MSCI EAFE and MSCI EM indexes—not for timing purposes, but because it’s prudent diversification.  You can see exactly how boring the cocktail conversations of stock analysts can be by viewing the entire discussion here:




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