About Robert Shuler

Robert combines 50 year of investing experience, and 42 years of aerospace & software fault tolerant systems design, verification and management, with a knack for finding hidden principles. He has half a dozen patents and numerous publications in fields ranging from economics (corporate risk compensation, the equity premium) to physics (inertia & quantum gravity), and is the author of several books. He lives in Texas with his wife Natasha.

Which presidents benefited which races?

US fertility rates 1980-2013

The only meaningful long-term criteria for success of any category of people, especially in a democracy, is their numbers.  They can always vote themselves more economic opportunity.  So which groups really benefit from various presidents?

From the above figure, not the ones you might guess by a long shot:

  • Regan gave blacks a huge boost.  No one did especially poorly.
  • GHW Bush was bad for everyone.  American Indians went into a long slide.
  • Clinton was good for whites.  Everyone else went down, especially blacks and Hispanics.  Though most stabilized in the middle of his period, so maybe he was just fixing problems caused by the first Bush.  American Indian slide was not arrested though.
  • GW Bush was uneven.  But his apparent favorites, the Hispanics, took a big dive late in his administration, along with everyone else, just bigger.  No data in this chart on Muslim immigrants from the Middle East, which appeared in large numbers for the first time.
  • Obama was not able to arrest any of the slides, though they moderated.  However, blacks and Hispanics lost the most.

For a STABLE democracy, birth rates should be nearly the same.  Over time they have to be exactly the same, or races start going extinct.  During this period, not counting the American Indians, the spread in birth rates declined from 1.2 to .47, on a base (lowest) of 1.68 which was whites.  Oddly, whites were the only ones increasing since 1980, contrary to what you might thing.

If birth rates were frozen at 2013 rates blacks and Hispanics have about a 20% relative advantage.  If a generation is 30 years, and the total population growth of the USA is around 2%/generation, then in 150 years the black-Hispanic population will achieve an absolute majority:

US demographic trends extrapolated

Of course the birth rates won’t be the same, generational time may vary, blacks and Hispanics may neither share a political agenda or be able to maintain an integrated policy approach if this happens, and other immigrants are moving in with very high birth rates initially, so this is a hypothetical exercise.  But it shows the power of relative reproductive advantage.

Under this simple projection (which does not account for trends up or down, some of which are quite strong at the moment), there will be absolutely zero whites in the USA in 4500 years.

Trends do not remain over that kind of time frame.  However, in the remote past, human population trends were relatively stable over 1.2 million years, and a very, very small relative advantage of one group or another would have completely wiped out all other groups.  Given a typical population during that time of 26,000 only a relative advantage of 0.035% would have promoted a single new human to exclusive domination as of 20,000 or so years ago, and extincted all others:

human evolution 1.2M years

The surprising thing is, no great or even small conflict is implied by this, which is quite a slow rate of change.  In the middle period of fastest change about 6 million years ago, the population changes would be about 2 people per generation (the chart assumes 20 year generations, which is probably long … if 15 years, the relative advantage may have been much lower).

Humans like drama and imagine their past full of it.  But it simply may not have been so.  Even the asteroid that supposedly killed the dinosaurs took at least 33,000 years to do so, more than 6 times longer than recorded human history.

 

USA to emulate Iraq mob governance

statue pulldown
see BBC video article

The statue pull down in North Caroline today (8/15/2017) was eerily reminiscent of the Saddam statue pull down after the initial invasion of Iraq.  George Bush shortly declared victory.  That was, um, 15 or so years ago.  A couple trillion and a lot of legs lost later we are still fighting there.  Apparently these idiots pulling down this statue think we should emulate the behavior of Iraqis, and make decisions through mob action in the same way that gave rise to ISIS.  Apparently the idiots in charge of the government in North Carolina are going to let them.  And you wonder why half the country cannot tolerate the other half?  It’s obvious.

Is the Equity Premium only in the USA?

Long term small cap US vs bonds vs World
data from Yahoo Finance, 5/3/2017

The “Equity Premium” was discovered by my associate Rajnish Mehra, together with Edward Prescott, in the late 1970s, though only published in 1985.  See Wiki article, original paper, and Mehra’s 2008 review.  The finding was a “surprise” because finance theory suggests if one investment consistently gives higher returns, investors or arbitrageurs will bid up the price of it.  From a higher price base, the return is lower assuming the same final price.

Thousands of papers were published proposing solutions to the problem, many mentioned in Mehra’s review.  Mehra also states in the review that the premium “is observed  in  every  country with a significant capital market.”  However, he also states “The United States together with the United Kingdom, Japan, Germany, and France accounts for more than 85 percent of the capitalized global equity value.

Two of those countries, Japan and Germany, were forbidden from funding large military forces after WWII, and most of their defense funded by the U.S.  They also benefited from postwar reconstruction assistance and planning.  Two of the most advanced industrial economics, both space and nuclear powers, did not have capital markets at all for most of the 20th century, Russia and China.  China now is the world’s second largest economy, making even Mehra’s recent 2008 assessment obsolete.

Japan’s markets fell after the peak of the late 1980s.  Since the Equity Premium is observed at 20+ year time horizons, it was the late 2000s before it could be evaluated whether Japan’s market still had a premium.  Currently it appears that after 35 years, it has not yielded a premium over bonds for investors who bought after 1982, and has presented a loss for many of them:

Nikkei 225
data from Yahoo Finance, 5/6/2017

Russia’s market begin in the early 1990s, only beginning to give valid Equity Premium data on the first few years of operation in the middle 2010s, i.e. just recently.  In 2011 when Putin was re-elected Russia’s market crashed badly, and in 2014 the twin disasters of the Ukraine war and the sanctions it entailed, and the fall of oil prices.  Still it does have a premium due to early gains from low value in the 1990s, but there is not enough data to assess whether it will continue.

China’s market since 1990 shows steady gains – IF you didn’t buy during one of the two large peaks.  See chart:

china

The peaks are when most people bought, and when you would have bought if you were permitted.  But of course, this wasn’t a free market at all.  Holdings by outsiders were strictly limited during this time frame, and still have serious limits.  China is still a tightly controlled and planned economy.  Perhaps it is no longer socialist enough to be called communist, but the ruling Communist Party has given up neither planning nor control.

In fairness, the U.S. economy is planned too, with growth targets set by the Federal Reserve, which “prints” money (actually electronically, buying bonds and mortgages and lending to banks) to meet those targets, balancing inflation and unemployment.  In my book The Equity Premium Puzzle, I argue this is the real reason for the equity premium.  By printing money to lend, the Fed suppresses interest rates, and no arbitrageur has deep enough pockets to fight a printing press.  The European Central Bank is charged only with preventing inflation, due to Germany’s fears from the 1930s.

Looking at the chart at the top of the page, with one bond fund and the rest small cap ETFs, which I deem to be more indicative of a particular country’s economy, and which usually perform as well or better than large caps, it appears only the U.S. market over the last 15 years has a clear premium over bonds.  Note that these are price plots, not total returns.  You have to add about 32% to the end of the bond plot for comparison, giving it a total return since 2010 (starting date for the bond ETF chosen) of 51% or about 5.2% per year.  But the U.S. small caps have a return over the same period, not even counting dividends, of 163%, or 12.8% per year.  That is not a long range return, as it was recovering from a market crisis.  From 2004, a 14 year period and as far back as that ETF goes, the return, sans dividends, is is 7.4%.  Add about 1% for dividends making it 8.4%, for a 3% advantage over bonds.

The only other countries on the chart showing a premium over the bonds are Britain and Canada.  Britain’s premium is small, and Canada has a premium only if one ignores the early data, the inclusion of which actually gives a negative premium.

I think it is time to admit that the Equity Premium is only striking in the U.S., and only exists in “planned” economies in which a central bank suppresses interest rates and prints money to fund growth.  Britain essentially “invented” the concept of the central bank, and the modern version of the stock corporation by which borrowed money is leveraged against equity to create excess growth (see book for details).

Britain probably suffered from membership in the EU with its paranoid banking policies.  The bank chief Mario Draghi “gets it,” but his German “overlords” do not.  They are punishing Greece and Spain, et. al., for their borrowing immorality (deserved) instead of funding growth and insisting the debtor countries use the funds for growth rather than welfare (pragmatic).  Yes it is warmed over Reaganomics, but the data show it works regardless of what one thinks of it morally, whereas welfare does not.

Japan’s central bank is waking up recently, but for decades was widely thought to be too tight, explaining their lack of premium.  China has a chance of holding its course, but its population has a great tendency to invest in bubbles.  Russia has a surprisingly strong central bank, and I expect if they ever get their politics straightened out they will have a strong equity premium.  But the U.S. is a much safer bet.

What if the U.S. is the only country with a really noticeable Equity Premium (3% or more), and we really don’t know why?  Then invest in the U.S. and don’t break it.  Globalization is a kind of unremitting equalization that will eventually break every equity premium on the planet unless all nations have one.  We’ve seen how well that works with currency policy in the EU, and it won’t work even that well with the EP.  If you invest, invest in the U.S.  If you invest in the U.S., oppose globalization.  It boils down to your pocket book, and whether central bankers and their overlords invest in growth.

I am not, by the way, saying unlimited growth is good.  But if it exists and you do not invest in it, then you are giving up your say in the world by falling behind in economic power.

Getting Out of Hercules Technology

HTGC

Hercules Technology Growth Capital (HTGC) was favorably mentioned in some of my books.  It was a staple holding for me for around a decade.  I heard a radio interview with the founder some years ago and was impressed that he wanted to bring venture capital-like opportunities to regular investors.  I have sold it and no longer recommend it.

The disaster on the chart above would be enough.  It is unprecedented, if not for the magnitude, then for the surprise.  Confirmation was present in a second day follow through.  It might rebound a little, but then so did Countrywide Savings and Novastar Financial, lasting for several years before the final bankruptcy.  Financial companies are just too tempting to management to run scams, and it looks like that is happening to HTGC.

The first day’s drop was apparently precipitated by the announcement HTGC management would no longer work for HTGC, but for an outside management company wholly owned by the founder.  His interests would be aligned with the management company, not HTGC.  While not approved yet, shareholders do not have a record of voting their own interests with this company, and even if they did, apparently the company has already lost the founder’s true interest.  See article at The Motley Fool.

The very next day, adding insult to injury, the company reported a surprise 7 cents a share loss against a Wall Street expectation of 29 cents profit.  Companies whose business is to lend money are not supposed to have surprises, and when they do, it is really bad news and likely to continue.  Some of them like ARCC and even AGNC can bounce back from it, eventually, but I do not want to wait several years, especially with the change in management.  See announcement at Yahoo Finance.

HTGC dividends are around 8% presently.  Assuming they continue, now uncertain, they are non-qualified, so you can do better.  The “illusion” of capital growth, implied in the name, has run its course with the decline of the last two days.  The founder seems to want to convert it into a “growth” company.  But the ownership arrangements of the management company do not suggest he will remain focused on that.

I suggest instead Dynagas, DLNG, paying 10% fully qualified dividends.  In a non-taxable account, you can hold AGNC, or if able to mentally handle volatility, MORL (which pays 17% but typically declines 4-5% a year for a net of 12-13%, often more).

Dilemmas for Driverless Cars

UberCrash
Uber self-driving car on its side, March 25, 2017, Arizona

In the last week I’ve encountered half a dozen situations difficult for me, a human, to figure out and drive through.  Too bad they require my full attention and I cannot snap photos through the windshield.

walking stopsign

In one, signals were flashing on a 10 lane road (3 thru lanes and 2 turn lanes on each side, NASA Parkway, Houston, TX).  Usually cars treat this as a 4-way stop, complicated enough with so many lanes.  But a policeman was dragging a fold-up stop sign into the road.  He was several lanes away.  Wait for him?  Oh, there is another policeman farther away, also walking.  He makes some vague gesture.  I think he is telling the people to my right to go.  He gestures again and looks straight at the group of cars I’m in.  OK, I cautiously go.

dancing snow traffic

What would Uber do?  Probably treat it as a 4-way stop.  But how would it figure out whose turn it was?  It is extremely difficult in multi-lane intersections with turn lanes.  Would it run over the policeman (either of them) because they “failed to yield” as the other driver did in the wreck pictured above?  Most of my attention as I drive down the road is not on normal expected behavior, but is spent estimating whether approaching cars either on side roads or in other lanes are really going to yield as they should.  This is a “dance” that people do.  One develops a feel for it, which varies with culture and even by city or neighborhood.

traffic accident

Last night driving on Mississippi 17 between Vicksburg and Yazoo City, I saw blue blinking lights ahead in the dark.  I slowed down, thinking I should be prepared to pass in a different lane, but with no different lane available, perhaps go very slow.  My estimate of how slow kept decreasing.  I can’t imagine it being set by an algorithm.  When I got there, a wrecker was parked at an angle in the road, extending into my lane.  Apparently someone was off in the field, their car wheels so mired in the mud the frame was dragging.  I didn’t laugh.  I’ve been there myself.  On the other side some man was waving a little light back and forth.  Eventually I assumed he meant for me to go, as no one appeared to be coming from the other direction.  He didn’t shout or change what he was doing, so that must have been the correct thing to do.  I might have had to go off the pavement a little bit.

Gorsuch-Frankel

Frankel-ly, Gor-such a case got into the news last week.  It seems that even Supreme Court nominees cannot decide what to do in common road situations without engaging in the “absurd.”  The subject was Gorsuch’s dissenting opinion on a Minnesota truck driver whose company left him in 14 below weather to freeze.  After many hours, rather than die, he drove a trailer with locked breaks onto the highway.

Suppose you are in an Uber or Google or Apple or whatever, and it is 14 below, and the damn thing won’t go because some warning light is flashing, or maybe it simply cannot see the lane markers?

Intel-Mobileye-15bil

Even if it can see lane markers and cars, which might be 90% of freeway driving, it’s only, what 5% of residential driving?  0% of special situations?  Of course the easy part can be automated.  I heard a paper on automated driving at Oklahoma University in 1968.  Since then computers got smaller and cheaper and faster and sensors have improved, but I’m not aware of any progress on understanding special situations.

Frankly, the full range of human judgment is required in such situations, and even a judicial automaton is not adequate.  I don’t want Gorsuch for judge in the SCOTUS (where ALL the cases are difficult), nor do I want self-driving cars – until they can fully pass written and driving tests as humans do, under all conditions.

when red light shows

Who really undermined election credibility?

not my election

Choose the top two persons or organizations that you think undermined election credibility (if indeed any did), and at the end we’ll compare with my unscientific poll of one friend:

  1. Protestors who insist “Trump is NOT my president” after the election.
  2. James Comey FBI Director who announced re-opening of Clinton email investigation weeks before the election, withheld fact that he was investigating Russian counterintelligence since July, then later announced the Russian investigation and said that announcing it probably aided their goals
  3. Barak Obama whom Clinton thinks [now] should have announced the counterintelligence investigation in July
  4. Clinton herself who asserted Trump was unqualified and mentally unstable after he had won election as Republican nominee
  5. Putin-Russia who allegedly promoted fake news stories (the only one that comes to mind is the pizza-parlor child trafficking thing)
  6. Julian Assange-Wikileaks who released Podesta’s emails (whom some allege came from Russia, but Assange says not, and in any case he released them)

Here is what my friend said, which was not my list exactly but he persuaded me:

  1. Comey, who seems to have been squirrely for some time, possibly on a power trip.
  2. Obama a distant second, since what he says is not highly credible anyway
  3. Nothing else much matters

 

Travel ban blues? Take a que from Andrew Jackson

750px-Trails_of_Tears_enIndian removal, 1830-1835 https://en.wikipedia.org/wiki/Trail_of_Tears

 andrew jackson
Andrew Jackson

UPDATE 3/16/2017 – Apparently I am not the only one who thought of the Andrew Jackson angle.  See Robert Barnes: Trump Could ‘Go Full Andrew Jackson’ and Ignore Interference from Activist Judges.

Andrew Jackson is hardly one of my favorite people.  But his very existence refutes everything modern intellectual liberals “say” about what our country “is” whether you like Jackson or note, because he is in fact part of history, and along with a lot of other people did things in direct contravention of the liberal view, so much so that the preponderance of the constituent history of the USA has to be judged to be anti-liberal, anti-diversity, and totally discriminatory as to who is allowed to live within its borders.  Any recent counter-trend is just a blip in a long historical trend the other way.

Trump has called Jackson a “flawed and imperfect man” but in the same speech praised him for confronting and defying an arrogant elite.  So I guess the $20 will keep Jackson’s picture.  Jackson’s most famous fights were with the 2nd Bank of the US, and in opposing a Supreme Court decision protecting the rights of the Cherokee in Georgia.  He famously said of the chief justice, “John Marshall has made his decision, now let him enforce it.”

I disagree with Jackson on both counts.  But with goings on like this, the liberals simply can’t be right about the essence of America.  Even if I agreed with them, I’d have to admit this “fact.”  And it continued even after the Civil War.  In 1875 Congress passed a civil rights act forbidding discrimination by places of public accommodation, but in 1883 the Supreme Court struck it down.

A Federal Court in Hawaii has just struck down (or “blocked,” if there is any difference) the 2nd Trump executive order on immigration.  If you have read any of my recent blogs, you know I think there is constitutional grounds for discriminating against Islam, and not just on the basis of screening terrorists.  Maybe it is time to take the Jackson approach, to specifically cite Jackson, and direct the US Customs and Border Protection to carry on with the ban.

Is my view radical? Only relative to the liberal globalists who want no borders and no USA, just a monolithic one-world socialist melting pot with themselves at the top and everyone else their slaves.  I am dead center in American history, which has fought much less justified wars to settle borders and expel anyone who wasn’t fitting in.

Do I advocate expelling Muslims?  Of course.  Their holy book advocates killing any non-Muslims.  This is entirely treasonous.  If you don’t believe this (I have friends who don’t),   read the Quran for yourself.  Could this be successful?  Historically it has been one of the most successful things ever done.  Simply ask them to renounce the objectionable verses, or convert to another faith.  See previous post on a country that did this successfully.