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.

Today v. Tomorrow: The Running Ostrich

running ostrich

Jobs that focus on short-term fixes today, at the possible expense of many tomorrows, outnumber jobs that focus on long-term outcomes by as much as 16 to 1.  I call this the strategy of the running ostrich, as pictured above with a bucket on his head.  See table:

Discipline Definition Jobs available
(LinkedIn, 1/1/2018)
Sociology the study of human society at a given period in time 7760
Anthropology the study of human beings and their ancestors through time 1405
Clinical and medical genetics provides counseling or treatment for genetic diseases prevalent today 7760 + 2216
Population genetics study of how population traits will change in the future based on selective pressures today 567

The running ostriches (engineers, physicians, politicians, military strategists, sociologists, etc.) are fascinated by how things work, and want things to work or “run” very well.  Today.  It is an affront to their efforts that things might work differently tomorrow and no longer run well.  That is at worst just another in a long line of challenges they will “solve.”

To suggest that the well running of things today might actually cause them to run poorly tomorrow is a fighting insult, whether one is talking about climate change or population growth or social upheaval.  It is long forgotten that originally oil-based power was orders of magnitude cleaner than wood-soot and horse manure for the same amount of heat, light or travel.  And rarely considered that solar power and electric cars may have some even greater consequences unforeseen by opportunistic social planners today.  And certainly don’t mention that treating genetic diseases will harm the genome, or paying for poverty will buy more poverty.

The Problem

The trouble is, even those who study the evolution of the future fail to account for themselves.  They fail to see they ignore the fact that they must ensure their own success to have any impact on the future.  They do not seize material or political power, assuming they stand “outside” the system they are studying.  But they are part of it.

An Example

A case in point is the famous Carthaginian general Hannibal.  He saw that the Roman Empire was destroying all the “barbarian” tribes.  Carthage did not.  It’s colonies merely traded with them.  Romans first established vassals, then came back to enslave, and finally committed genocide against any resistance left.  Hannibal saw that Rome must be stopped.  He saw the long-term consequences of Roman aggression for the evolution of the human population.

But Hannibal did not see himself as participating in that same human evolution.  He thought he could take a one-time action, standing outside human history, to intervene in it.  He was brilliant in its execution.  He defeated 70,000 Roman crack troops with far fewer soldiers, a band of allied tribes who did not even all speak the same language.  It was a remarkable feat.

But Hannibal did not see the need to return victorious to Carthage, to seize political power, perhaps to become an emperor.  And so Carthage, founded by a mythical queen on female values, preferred not to make war, to leave alone and be left alone.  Their Senate (yes, they had a senate like Rome) could did not support Hannibal.

What was the outcome?  Rome imposed a punitive treaty and war debt.  But after the debt was paid, they continued to harbor evil intentions toward Carthage.  Carthage actually started none of the wars with Rome.  The 2nd Punic War was started by Hannibal from Spain.  But Cato the Elder ended each of his speeches, no matter what the subject, saying: “Further, I think that Carthage should be destroyed.

And destroy they did, leveling the city in 146 BC killing around 150,000 civilians and enslaving a further 50,000.

The Sins of Rome

At what cost to the world was Hannibal’s idealism and shortsightedness?

Not only did Rome end Carthage, but many other peoples.  And what it didn’t end it enslaved or drove into violent resistance.  In the First Jewish War Rome killed 1.2 million Jews, and enslaved 60,000 of them for the purpose of building the Coliseum.  Over the life of the Coliseum, 400,000 people were “sacrificed” there along with a million animals.  The total gladiator deaths across the empire was 3.5 million, around 3 times the total number of deaths of Roman soldiers during the life of the empire and republic combined.

But weren’t the Carthaginians evil child sacrifice-rs?  Thanks to Rome’s leveling of the city, we can only dig up the ceremonial graves and make inferences.  The most pessimistic estimates are 25 infants per year, within weeks of birth, barely different than late term abortion.  The total could have amounted to no more than a few thousands over the entire life of Carthage.  Compare that to around ten million people killed by Rome.

What type of society was Carthage?

We cannot know what the world would be like if Carthage prevailed.  Presumably the Jews would not have been dispersed.  But the Arabs, Huns, Mongols and others would likely have come conquering just the same.  Carthage might have simply been overrun later by the Arabs.  Even the warlike Romans were overrun by various groups.  However a few points are interesting to contemplate.

According to some sources, though Carthage had slaves they did not go on slaving expeditions after about 500 BC.  (Tyre still did.)  One might suppose then that no, or fewer, slaves would have been brought to the New World.  The history of approximately half the world might be radically different, and more peaceful.

How exactly did the Carthaginians trade and “cooperate” with strangers?  Out-group vs. in-group cooperation is considered one of the strongest markets for an advanced society, capable of making a technological civilization.  Here is a remarkable description from Herodotus of Halicarnassus (about 430 B.C.) :

“The Carthaginians also say they trade with a race of men who live in a part of Libya (Africa) beyond the Pillars of Hercules (Straits of Gibraltar). On reaching this country, they unload their goods, arrange them tidily along the beach, and then, returning to their boats, raise a smoke. Seeing the smoke, the natives come down to the beach, place on the ground a certain quantity of gold in exchange for the goods, and go off again to a distance. The Carthaginians then come ashore and take a look at the gold; if they think it represents a fair price for their wares, they collect it and go away; if, on the other hand, it seems too little, they go back aboard and wait, and the natives come and add to the gold until they are satisfied. There is perfect honesty on both sides; the Carthaginians never touch the gold until it equals in value what they have offered for sale, and the natives never touch the goods until the gold has been taken away.

The Romans in Briton

Compare that to the way the Romans treated their “allies” in Briton.  King Prasutagus chose to become a “friend of Rome” and at first the Romans left him largely at peace, though they raided his neighbors for slaves.  He wanted to preserve this peace, and so on his death his will left his kingdom to “joint rule” between his heirs and the Roman Emperor.  The Roman tax authority Catus concluded this meant Rome owned the kingdom.  He had Prasutagus’ queen Bodica flogged and his two daughters raped to make the point.

Implications for today

  1. A lot of our laws, customs and ideas of trade or cooperation are still based on Roman ideas.  The government of the U.S. was deliberately modeled on Rome.  Our ideas of justice might be more like those of Catus than either Prasutagus or Hannibal.
  2. Our social activists today are either like Prasutagus or Hannibal.  They appease, or they think winning a few points and making alliances in the present will secure the future.
  3. We do not systematically study the evolution of the future because the past has been so horrific, we, like the ostrich, want to pretend that it doesn’t matter, that who we are was not shaped by it, and the future will not inevitably be shaped by “unwelcome consequences” of our actions.  We think the future is shaped by the “intent” of our actions.

We can sum these ideas up more succinctly:

  1. The inertial continuation of aggressive law and trade in the race of corporate dominance.
  2. The strategies by progressive factions of appeasement, alliance and one-day victories vs. consolidation of power over time.
  3. The belief that it is intent that counts, and that good outcomes engineered today will spontaneously persist without future consequence.

History seems to suggest that none of these three ideas leads to desirable outcomes.  We seem to be just a bunch of running ostriches, not looking where we are going.

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Case for/against impeachment of Trump

brusa flag
Flag of the Banana Republic of the United States

During Christmas my brother-in-law asked if I thought Trump would still be in office at the end of 2018.  What do you think?

The standard for impeachment is “Treason, Bribery, or other High Crimes and Misdemeanors.”  Let’s take those one at a time:

Treason – People may seriously think Trump’s policies are mistaken, but there is no plausible “motive” for the leader of the most powerful nation on earth, or a man already a multi-billionaire, to decrease the power of the nation he leads.

Bribery – in the ordinary sense of regulatory or judicial favors in exchange for money, this is equally implausible.  If you want to include the trade of foreign policy favors for fake news, you have to produce a conversation along the lines of “Would you like us to produce some fake news for you in exchange for lifting sanctions?  Yes, that would be nice, by all means do so.” The Russians pulled their shenanigans all around the world but did not engage with any other nation’s political party in this manner.  It is unlikely they did so here.  They did not need to ask or offer favors.  Trump stated during the campaign he wanted to have improved relations with Russia, strongly suggesting that meant lifting sanctions.  It was said in front of everyone.  Do you suppose in private someone told the Russians “If you don’t help us, we won’t be lifting sanctions?”  Highly improbable.

Other High Crimes – Trump is as likely as anyone to have committed unrelated high crimes in the past.  I assume they would have come out by now.  That leaves only the Nixonian crime of obstruction.  Where there is fire there must be smoke.  People are looking at the firing of Comey and thinking that is smoke.  I see that as Trump’s insistence on loyalty – an insistence of every strong leader in human history.  There is an ambiguity here.  The definition of obstruction is “corruptly or by threats or force, or by any threatening letter or communication, influences, obstructs, or impedes, or endeavors to influence, obstruct, or impede, the due administration of justice.”

Any threatening letter or communication would be out in the open by now.  Comey would have said so immediately.  Nixon paid hush money.  That leaves a trail.  There is no suspicion of hush money here.  The thing is, the obstruction has to be done “corruptly or by threats …”  It is not sufficient to qualify as obstruction of justice for an officer of the government to exercise legitimate discretionary authority over an investigation, making a trade off with broader goals, such as foreign policy.  Happens all the time.  I think it is likely that is all Trump did.  Did he attempt to impede (stop) the investigation?  Yes, plainly he has stated that he wishes it would go away, and plainly he asked Comey to drop it, but that was done openly, not corruptly (acting dishonestly in return for money or personal gain).  Anything that Trump is likely to have done he has already openly declared, and so not dishonest. If it were for personal gain, he would have blocked or fired the special prosecutor also.  (There is no issue of loyalty in regard to the special prosecutor, who is not appointed by Trump and does not work for Trump.)  If Trump fires Mueller, we can revisit this.  But if the Senate gets rid of him, there is no implication.

And Misdemeanors – If the president of the United States is removed for a misdemeanor, then we need to change our flag to the design at the top of this article.  It seems to have become the policy of the United States, both under Bush and Obama, to advocate the overthrow of any government we don’t like either by street protest or revolution or invasion rather an election.  Not one such government (Ukraine, Libya, Afthanistan, Iraq, Syria, etc.) is now stable.  This is what throwing the president out for a misdemeanor amounts to.  The US won’t be stable if we do that.  There has already been a special election that limits Republican control of the senate.  There is another coming up in just 10 months, and a presidential election in 34 months.  It isn’t clear Pence would be a better leader for anyone but die-hard republicans (anti-gay, walked out on anthem protesters, not one to be loved by the left).

Interest Rates & Recessions

Fed Funds w Recessions
Fed Funds rates last 62 years from macrotrends.net with my annotations

After the longest “recovery” in over half a century (see yellow lines above), and the Fed finally confident to raise interest rates, and yield curves inverting, some people are beginning to ask if that forecasts a recession?  Look at the history above and see for yourself.  In 9 out of 12 cases following interest rate increase campaigns, recession has followed, though in three cases there were periods of level rates of 3 months to 18 months (only one case of the latter, most around 3-6 months) of stability.

It appears a rise of at least 2% is necessary to trigger a recession.  We haven’t got there yet, with rates rising only 1% in the last 7 years.  Most of that is recent, but even so, you can see it is the slowest, most cautious rate increase since the 1950s.  Therefore I do not expect a recession in 2018.  Since it is unlikely rates would rise another full percent in 2018, and even if so it is unlikely their effect would be felt as soon as 2019, I do not expect a recession in 2019 either, and probably not in 2020.  The soonest we might see a recession is 2021, which is also a post-election year in which a new administration might increase taxes or otherwise institute reforms that might pile on top of Fed policy to trigger recession in 2021 or 2022.

The economy will get some boost from the various corporate tax breaks just enacted.  However these might be canceled by aggressive Fed policy.  That, however, would only add up to “neutral” and would not trigger a recession, now or in the future.  In other words, we might be able to absorb an additional 1% Fed increase to around 2.25% without triggering recession.  Only one recession in this chart was triggered by such a mild increase, and that was long ago after a lengthy post-war boom which is before the start time of the chart.

Some new conflict in Korea or Ukraine seems likely.  Unless it is nuclear (not out of the question), it seems unlikely to have a big effect on the world economy.  Those places are insignificant in the world economy, and we already have a sanctions regime on North Korea and Russia.  Military damage to South Korea would trigger a boom from reconstruction aid.  Conflict in Ukraine, if the US continues and extends the new policy of providing offensive armament, might actually result in the lifting of sanctions on Russia, as part of a negotiated settlement to end hostilities.

Most likely the market will be driven by corporate profits, and moves will be less than 20% on the downside.  I won’t make any prediction about upside, but I think the pace of 2018 will be less, with perhaps modest gains in 2019.  The market is still more or less correlated with recovery in the oil industry, and the inability of the US to cooperate in restraining supply to maximize profits continues to threaten the global climate as well as limit market upside.  The US should adopt a temporary cooperative posture with OPEC, not reducing production but limiting upside and apportioning it among suppliers, like the Russians do.  However, this is not politically popular with our naive population and pseudo-populist politicians.

 

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).