"It is good to follow one's own bent, so long as it leads upward." - Andre Gide
One of the bedrocks of economic theory is that labor will migrate towards areas where there are higher wages and a better quality of life. The theory goes that if you remove all borders then workers will naturally flow to areas flush with job opportunities. This is one of the reasons behind creating the Euro Zone or the North American Free Trade Agreement. Furthermore there is proof that children who are moved to areas with better education, lower crime and where there is a preponderance of two parent families earn more than 10% than their peers. With this as proof one would think that the theory would hold as what parent doesn't want the best for their children?
A new study however has shown that the theory may not hold true specifically for those reliant on government subsidies. Unfortunately these are the people that would benefit most from an improvement in living standards and are the demographic of people that are assumed most likely to move with their relevant industries. The finding is that not only can these people often not afford the expense to move but they are tied to their subsidies. If they move they lose their subsidies such as housing and food stamps which is often their major source of financial sustenance.
Now moving from one town does not mean that the subsidies are lost forever but it often means that they are lost for a period of time. This period of time is more than most are able to handle and so they stay put. Changing the way that the subsidies are issued would be a big step in the right direction however society has found many ways of blocking the needy from entering the upper class halls. One is to restrict low income housing or change the building specifications to effectively stop the building of any space that would allow cheap units to be rented.
In addition to these issues America has long had a love of the automobile. This love has created a system where moving large bodies of people around the country is expensive and time consuming. Public transportation while improving is still far behind Europe and most of the rest of the modern world so spending money on these infrastructure projects would not only create work for those needing it but would bolster the economy far more than throwing more money at banks.
Creating a truly mobile work force should be a priority in the United States. Spreading the burden of subsidies evenly would assist those cities that are struggling to handle the draws and creating mobility would give everyone the ability to find work at a decent wage. The result would be a truly upwardly mobile economy and one that would worth celebrating and investing.
Friday, May 27, 2016
Friday, May 13, 2016
Measuring GDP
"Not everything that counts can be counted and not everything that can be counted counts." - Albert Einstein
The above quote is so true but humans have a natural tendency to try to place a value on pretty much everything. When it come to the world of economics, counting is a virtual impossibility because in most instances the things being counted are so vast and changing so regularly (if not every millisecond) that even after time and effort is made to calculate the number it is guaranteed to be wrong! The thought in economics is that even though it is well known that the number is incorrect it is better than no number at all.
There is no number more relied on and more wrong than GDP. The estimate of changes in GDP is used to assess whether the economy is growing too slowly or too fast (or not at all) and to gauge whether inflation is rampant, in line with targets or deflationary. It is used to determine whether we are in an overheated booming economy or a stagnant spluttering economic recession. Central bankers rely on it to create their strategies for stimulating or cooling down the economy and governments are held to account, particularly at election time, for the their ability to provide good GDP growth. Currencies swing higher and lower reflecting the strength or weakness of the underlying economy's GDP growth in comparison to everyone else, and interest rates depend to a large extent on the outlook for GDP growth or lack thereof. To say it is an important number is an understatement however to calculate it is all but impossible.
Created in the 1930s GDP was initially relatively simple to calculate. Take a basket of goods and services and then revalue them a year later and there's your answer/ Economies in those times were based more on manufacturing and farming than it was on services so computing the change in the inputs was relatively simple. Fast forward to today and the complexities of the modern world make a mockery of the number. Examples abound but I will mention only a few:
The issues are so complex that whatever number is calculated it is far from reality. This is why everyone should calculate their own inflation rate particularly when it comes to determining a real rate of return on your investment. Without it you cannot get a clear indication of real portfolio returns and this will have a tremendous impact on your retirement planning. But for all its problems having a number is better than having no number at all but basing your financial future on this number is akin to failure. Use it as a loose gauge of economic activity and follow any large swings but do not hang your hat on this number.
The above quote is so true but humans have a natural tendency to try to place a value on pretty much everything. When it come to the world of economics, counting is a virtual impossibility because in most instances the things being counted are so vast and changing so regularly (if not every millisecond) that even after time and effort is made to calculate the number it is guaranteed to be wrong! The thought in economics is that even though it is well known that the number is incorrect it is better than no number at all.
There is no number more relied on and more wrong than GDP. The estimate of changes in GDP is used to assess whether the economy is growing too slowly or too fast (or not at all) and to gauge whether inflation is rampant, in line with targets or deflationary. It is used to determine whether we are in an overheated booming economy or a stagnant spluttering economic recession. Central bankers rely on it to create their strategies for stimulating or cooling down the economy and governments are held to account, particularly at election time, for the their ability to provide good GDP growth. Currencies swing higher and lower reflecting the strength or weakness of the underlying economy's GDP growth in comparison to everyone else, and interest rates depend to a large extent on the outlook for GDP growth or lack thereof. To say it is an important number is an understatement however to calculate it is all but impossible.
Created in the 1930s GDP was initially relatively simple to calculate. Take a basket of goods and services and then revalue them a year later and there's your answer/ Economies in those times were based more on manufacturing and farming than it was on services so computing the change in the inputs was relatively simple. Fast forward to today and the complexities of the modern world make a mockery of the number. Examples abound but I will mention only a few:
- The smart phone in your pocket has more computing power than a PC had in the 90s and the price is lower so is that deflationary or should there be an adjustment for improved productivity?
- The new smart phone is more pricey than last year's version but it comes with a number of new features so is this inflationary or should the price be adjusted lower so that it incorporates the technological advances that make your life easier?
- What about the use of your car to take passengers for a paid ride (Uber) or that extra room in your house that is rented to travelers (AriBnB) or all the free entertainment that is available on YouTube or Facebook? How should this be included in GDP?
- What about the billions of dollars that are flowing through the black markets of the world?
The case for the basket of goods capturing a change in GDP is so rife with problems that it is starting to make the number of little relevance. When you start to consider the inflationary aspects of the number and the adjustments that are made for technological advances it becomes even more haphazard. How can you compare the change in price of say a fax machine and the use of email or crutches with prosthetics or vinyl records with streaming digital music?
The issues are so complex that whatever number is calculated it is far from reality. This is why everyone should calculate their own inflation rate particularly when it comes to determining a real rate of return on your investment. Without it you cannot get a clear indication of real portfolio returns and this will have a tremendous impact on your retirement planning. But for all its problems having a number is better than having no number at all but basing your financial future on this number is akin to failure. Use it as a loose gauge of economic activity and follow any large swings but do not hang your hat on this number.
Saturday, May 7, 2016
Desperado
"Desperado, why don't you come to your senses, you've been out riding fences for so long now;
Oh your a hard one, I know that you've got your reasons, these things that are pleasing you will hurt you somehow>" - Lyrics to a song by The Eagles
Is it just me or is the world filled with a lot of Deperados? The central bankers of the world are desperately doing their best to convince the world that more debt is the solution to our problems and are considering more desperate measures to pump more useless money into a flagging economy in a desperate attempt to stave off the inevitable. The general population is not convinced and is showing its frustrations at the polls by desperately buying in to the rhetorical garbage that is coming from the mouths of the Presidential candidates. Not only will the policies of either candidate not solve the man in the streets woes, but some of them will create a far larger mess but we will see who takes over in November and deal with that then.
Through all of this the stock market continues to toy with new highs but has yet to print any for over a year and we are now into the May to October low volume trading period so anything can happen. To me it is truly amazing that the stock market is up at all for the year; corporate sales and earnings are continuing to decline (GAAP earnings were down 15% in 2015 and were down another 8% year over year in Q1 for the S&P 500), two thirds of the companies reporting earnings cut guidance for the second quarter, GDP growth in the first quarter was only 0.5% and business investment in Q1 was the lowest since the 2009 recession.
With all of these negative data points plus rising oil prices and poor economic activity being reported across the globe I firmly believe that we are entering the end game in terms of the stock market. As I have mentioned repeatedly though the Federal Reserve will come to its rescue with more support in the form of rate cuts (possibly going negative to join the global party) and money stimulus. The issue is that the impact of further rate cuts and monetary stimulus will be muted and the results of trillions of dollars of stimulus is weak economic growth and a faltering labor market. The next step will more than likely be the "helicopter" method coined by Ben Bernanke. The idea is to go around the banks and directly to the consumer by throwing money out the side of a helicopter! Sounds like a great and well thought out plan like the rest of the central bank's policies!
All of these desperate attempts at stimulus are not providing the economic windfall that was predicted and more stimulus will not magically create jobs or increase productivity. In fact productivity has continued to lag as the burden of debt is creating an economic drag that has crowded out the private sector (and more importantly the small business and middle class) resulting in continued lackluster growth and fractions within political parties. Adding more debt will not magically solve these issues but will create a larger problem. In this highly volatile environment if you are not posturing yourself for the inevitable then you are opening yourself up to enormous risk. My advice is to look to gold stocks and alternative investments or go to cash but either way exit as soon as possible.
Oh your a hard one, I know that you've got your reasons, these things that are pleasing you will hurt you somehow>" - Lyrics to a song by The Eagles
Is it just me or is the world filled with a lot of Deperados? The central bankers of the world are desperately doing their best to convince the world that more debt is the solution to our problems and are considering more desperate measures to pump more useless money into a flagging economy in a desperate attempt to stave off the inevitable. The general population is not convinced and is showing its frustrations at the polls by desperately buying in to the rhetorical garbage that is coming from the mouths of the Presidential candidates. Not only will the policies of either candidate not solve the man in the streets woes, but some of them will create a far larger mess but we will see who takes over in November and deal with that then.
Through all of this the stock market continues to toy with new highs but has yet to print any for over a year and we are now into the May to October low volume trading period so anything can happen. To me it is truly amazing that the stock market is up at all for the year; corporate sales and earnings are continuing to decline (GAAP earnings were down 15% in 2015 and were down another 8% year over year in Q1 for the S&P 500), two thirds of the companies reporting earnings cut guidance for the second quarter, GDP growth in the first quarter was only 0.5% and business investment in Q1 was the lowest since the 2009 recession.
With all of these negative data points plus rising oil prices and poor economic activity being reported across the globe I firmly believe that we are entering the end game in terms of the stock market. As I have mentioned repeatedly though the Federal Reserve will come to its rescue with more support in the form of rate cuts (possibly going negative to join the global party) and money stimulus. The issue is that the impact of further rate cuts and monetary stimulus will be muted and the results of trillions of dollars of stimulus is weak economic growth and a faltering labor market. The next step will more than likely be the "helicopter" method coined by Ben Bernanke. The idea is to go around the banks and directly to the consumer by throwing money out the side of a helicopter! Sounds like a great and well thought out plan like the rest of the central bank's policies!
All of these desperate attempts at stimulus are not providing the economic windfall that was predicted and more stimulus will not magically create jobs or increase productivity. In fact productivity has continued to lag as the burden of debt is creating an economic drag that has crowded out the private sector (and more importantly the small business and middle class) resulting in continued lackluster growth and fractions within political parties. Adding more debt will not magically solve these issues but will create a larger problem. In this highly volatile environment if you are not posturing yourself for the inevitable then you are opening yourself up to enormous risk. My advice is to look to gold stocks and alternative investments or go to cash but either way exit as soon as possible.
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