Strange Bedfellow

Greg Mankiw isn't on my list of favorite pundits. Forced to assign him to a list, it would certainly be Plutocrat Panderer. But then he goes and writes this piece. What makes the piece amusing is its backhanded swipe at the puffed up quants.

So if looking at contemporaneous economic conditions is not a reliable way to judge presidents, how should they be graded?
...
Similarly, a better way to judge presidents is by the policies they pursue, not the outcomes over which they preside. This task is harder than merely looking at unemployment, inflation and the growth of gross domestic product. It requires having a view about what policies are best at fostering prosperity and acknowledging that the experts are often divided on that question.

IOW, if not the proximate data, then what? Well, how well do you reward your friends and punish your enemies? Policy changes.

Fools on Errands

Wanting one's cake and eating it too is a common syndrome in humans. In corporations, it's epidemic. With all the chatter about the US's healthcare expenditures being the highest, and general population health nowhere near that, high amongst that chatter is that "it cost $X billion to get a new drug to market!!" I'm among those who blame drug companies for continuing to throw good money after bad. After all if they didn't, the CxO class wouldn't be able to keep their million dollar sinecures.

Today Alkermes reports it's latest trial bit the big weenie. Or, as Adam Feuerstein put it:

Alkermes argued Thursday that hints of efficacy in the failed clinical trials means ALKS 5461 isn't dead yet. A third phase III study in depression is still underway.
...
"We are steadfast in our commitment to developing new medicines for serious CNS conditions where there is a clear and compelling need for new treatment options for patients and their families," said Richard Pops, Alkermes CEO, in a statement.

IOW, "I'll keep beating this dead horse until my second house in the Hamptons is finished". Oh, and the company is really in Waltham, MA, but inverted to Ireland in 2011. So, you the taxpayer get to pay for that house even more directly. Failure couldn't happen to a better bunch of knuckleheads.

Retro Progress

There's a new book out that I guess I have to read, and Eduardo Porter has a bit of review, and reporting on it. I'm curious to see whether Gordon ties his thesis to science and engineering reaching an asymptote, or just crunching latter data against previous. Porter's commentary suggests the latter.

Americans like to think they live in an era of rapid and unprecedented change, but this kind of comparison -- pitting the momentous changes of the mid-20th century against the seemingly more modest progress of our present era -- raises a critical question about the nation's future prosperity.

Of course, Gentle Ben gives sort of backhanded support to Gordon's thesis

Ben S. Bernanke, the former chairman of the Federal Reserve who is now at the Brookings Institution, points out that long-term interest rates have been declining for a very long time. This is in response partly to the accumulation of savings in China and other developing economies, which have been buying Treasury bonds hand over fist. But it also suggests that investors, whether they realize it or not, may agree with Professor Gordon's proposition.

"People who invest money in the markets are saying the rate of return on capital investments is lower than it was 15 or 30 years ago," Mr. Bernanke said. "Gordon's forecast is not without some market reality."

My take on the surge in progress through the mid-20th century continues to rest on two points:
1) our collective scientific and engineering knowledge of the real world became nearly complete; today's science is either sub-atomic or cosmological and is highly unlikely to give us new products
2) the 50s and (less so) 60s were led by public and private leaders still embued with a war time socialism, creating a large middle class, thus a large TAM for product

Someone observed that software was going to eat the world. May be so, but that works only so long as the exchange rate betwixt coding and farming/manufacturing remains asymmetric. That will only last so long. I guess many haven't noticed that 2nd and 3rd world coders have eviscerated much of the coding middle class.

There's no question that productivity has burgeoned over the last couple of decades, and as automation continues to displace labor in the production of physical widgets people want to buy, the reckoning will come: as the upper X% become the TAM for widgets, prices have to rise, since the capex to make those widgets can't be laid off the way humans can.

Two new data points from today's news.

- Total CPI dipped to -0.1% (Briefing.com consensus 0.0%) in December
- "There has been concern that consumers are less enthusiastic about the feature and performance gains with the latest iPhone 6s/6s+ models," UBS continued. "Indeed, more consumers appear to be opting for last year's iPhone 6 models that are priced $100 lower." here

The (1 - X%) aren't spending much, and when they do, "good enough" rules. Of course, The Giant Pool of Money continues to demand ever higher returns on government instruments. IOW, a transfer of wealth from taxpayers (only the little people pay taxes) to the X%.

A Bit of a Problem

Overture:
If you like what OPEC means for oil prices, you'd love what the gold standard would do to financial markets.
-- Michael Feroli/2011

Well, Bitcoin is back in the news, and not, it seems, in a pleasant way. (There was a time, perhaps still is, when bitcoin was called the new gold.)

For those who've read history, 19th America was a 100 years' war, of sorts. Those with wealth waged war on those without it. Deflation/depression/panics were the order of the day. The country was in one most of the time. Those who had specie liked that, since they got a "return" on their positions without any investment risk. What could be better? And some wonder why I've concluded that the same motive and incentive™ exists with today's cash holders: corporations, hedgies, and 1% individuals. The Giant Pool of Money is still out there, and growing. Really new innovation in the consumer arena (the only one that matters, supply side ideation notwithstanding) is stalling out. Not least because battery chemistry has run up against the limits of the periodic table. A really Godzilla depression is the holders' best chance of risk-free return. American housing didn't work out so well.

So, here's why bitcoin is worse than gold:

Like many of the programmers who took an early interest, Mr. Hearn admired the rule-bound nature of the system. Only 21 million Bitcoins would ever be created. And the distribution of new Bitcoins was clearly laid out, relying on mathematical algorithms that left no room for human meddling.

Two points to keep in mind:
1) with a strict limit on the number of "specie" in circulation, deflation in prices has to result with any level of expansion of an economy -- this is the 19th century experience
2) bitcoin, by design, is a pyramid scheme

OK, 2) isn't obvious. The fundamental meme of a pyramid scheme is two points:
1) first entrants get (nearly) all profits
2) late entrants bear (nearly) infinite cost

That's bitcoin in a nutshell. The mining of bitcoin is, by (not necessarily intentional) design, more expensive for each succeeding unit, so that the first 100 bitcoin were orders of magnitude cheaper to acquire than the next 100 from today.

According to my calculation, a single Bitcoin transaction uses roughly enough electricity to power 1.57 American households for a day.
...
The Bitcoin protocol will continue to increase the difficulty of the cryptopuzzles to keep rewards constant, continuing the arms race until the last block is mined.

That's a pyramid scheme.

Now, the current report deals with enabling cheaper mining and network management. Needless to point out: the early entrants who got their bitcoin on the cheap don't want to lower the cost today; that's giving away the farm. And, needless to continue, the point of a specie currency is that it levels the field for all participants. And, of course, the incumbents retaliated against the liberators (bitcoin XT).

When that last bitcoin is mined, not in our lifetimes,

But since the last Bitcoin block is projected to be mined around the year 2140, adopting Bitcoin as a major (or world) currency anytime in the next few decades would just exacerbate anthropogenic climate change by needlessly increasing electricity consumption until it's too late.

life won't be so nice. Given the restriction, so far, on coinage rate and the increasing cost of mining, bitcoin may both drive deflation (should it ever gain specie status, and long before coinage exhaustion since new bitcoin approach infinite cost soon) and end the global warming problem by consuming all electricity. Ain't capitalism grand?

Da Wave Boss, Da Wave!! [update]

Here comes the Money Tsunami again!!!!!!
[briefing.com 13 January, 2016 1:35 pm]

Elsewhere, at the top of the hour, the Fed''s $21 bln 1-year note reopening was met with robust demand, showing the highest bid-to-cover since since December of 2014 and the highest indirect bid since February 2011. The auction drew a high yield of 2.09% on a bid-to-cover of 2.77.

[update]
This just in from Al Sleet, the Hippy Dippy Forecaster.

Expect a 90% chance of inversion over that Manhattan Island and the Treasury building down in DC. It's an unusual inversion, being it happens at two different places at once. But, hey, I know how that is. Half the time my brain is in Haight-Ashbury and my body is in Fresno. Be prepared for being hot and cold at the same time. Don't spend it all in one place!

The Stag Party

So, today's version of the what and why of 'secular stagnation'. It's not too bad, but as all of the others I've seen, ignores the three underlying causes/drivers of the condition:
1) stagnation, whether called panic/depression/recession, is always caused by flagging demand. Demand need not diminish, in need only slow its expansion. The CxO class does not invest in physical capital without certainty that there exists unmet demand.
2) there has been a kind stagnation since the 1990s. The dot.bomb was followed by the housing mania, and both were driven by the same force: demand for high returns on risk-free instruments. There was a time when the CxO class brayed that Treasury interest rates were depriving them of capital. These days the CxO class is demanding Treasury interest greater than they can, or will, generate with organic growth of their businesses with hard assets.
3) moreover, in the example, the piece doesn't mention the distribution problem: as more of the national income concentrates, demand slackens simply because the few can eat only so many carrots or send so many tweets.

The answer is that $10,000 in saving gets turned into investments through financial markets. This is one of the main functions of financial markets: to find a way to turn saving into productive investments.

At which point the text should distinguish between hard assets and fiduciary instruments, but doesn't. Bad juju. Both the dot.bomb and housing mania were, mostly for the former, and entirely for the latter, just fiduciary. Despite attempts to 'impute' value to consumer durables, particularly housing when prices are skyrocketing, there isn't any marketable output from such 'investment'.

Classical economists did not believe this could happen. They argued that financial markets would always find a way to equate saving and investment.

They also didn't conceive of such things as credit default swaps. They always assumed that investment was ultimately physical. Again, physical capital and fiduciary instruments are *not* interchangeable. Especially instruments disconnected from underlying assets. Financial engineering?

Who Controls the Food Controls the People

Somethings never seem to grow organically in the brain. Some times it has to be read to be understood. Among all the recent assaults on community and freedom, a Borg-fascist future, this post is truly chilling. As most folks, I have been aware of the mechanization and corporatization of farming, Monsanto's efforts in particular, but not being a farmer or agronomist by training, a cursory effort at best.

At a congressional hearing on big data in agriculture last October, the President of the Missouri Farm Bureau said that "farmers should understand what will become of the data collected from their operation", including who has access to it and for what purposes it can be used. From the farmer's perspective, they "must do everything we can to ensure producers own and control their data, can transparently ascertain what happens to the data, and have the ability to store the data in a safe and secure location." It will certainly be interesting to see how this plays out, particularly between developed and developing nations.

One aspect of change in farming over the last few decades was what has been called The Green Revolution

The Green Revolution spread technologies that already existed, but had not been widely implemented outside industrialized nations. These technologies included modern irrigation projects, pesticides, synthetic nitrogen fertilizer and improved crop varieties developed through the conventional, science-based methods available at the time.

Somehow or another, Green has been morphed into meaning sustainable, which makes sense. Unfortunately, the earlier Green Revolution is the furthest thing from sustainable. In other words, turning the rest of the planet's farm land into what we have now, and (no cite that I can recall) one wag called it: "dead dirt, used only to hold up the plants". Stripped of its nutrients, and dependent on manufactured fertilizers, largely derived from petro. Eat or drive your car.

The folly of Wall Street to drive the US (and Western economies generally) into FIRE and other non-producing activities (I blame Maslow in the final analysis, but that's another episode) leads to the ultimate question, "how many tweets for that bag of carrots". Just as those who snipe at the Arab oil states with the pithy, "you can't eat oil", so to video game code. Speaking of which, there's been a series of GE TeeVee commercials in which a 20-something coder announces to family and friends that he'll (not a girl, alas) be programming for GE, doing machine control and such. All the while pestered by another 20-something kiddie koder showing off his latest website/game/toy. It only took 20 years for corporate America to realize the issue.

Don't Go East Young Man [update]

What some have been saying for years, "Don't go East, young man!!", is playing out today. The Asian markets, led by China, have done a minor (one hopes) nosedive. Can another strategic devaluation from Beijing be far behind? All that anti-American off-shore profit by American corporations out to stick it to the working class going up in rubble dust? We'll see. But Beijing has done it before, and recently enough as to be remembered. One hopes.
[update]
Well, that didn't take long, a couple of days.

On Thursday morning, China's central bank set the rate for the renminbi at 6.5646 to the dollar, its lowest point in almost six years.

"People are worried about whether they are using currency depreciation to stimulate growth," said Steven Sun, head of China Strategy and Hong Kong and China equity research at HSBC.

Well, D'oh!!!! Of course they are. Just as every slave/indentured economy, China depends on being able to export to Blue States, worldwide. To the extent that the US kills off its Blue States, China's only option is to crater its currency to keep pace with Blue States diminishing buying power. Quants and pols (esp. of The Right) never want to admit that motive and incentive trumps (hehe!) data whenever they conflict.