Category Archives: Web Article Review

how to think about human capital

Here is a Morningstar study on how to think about your personal human capital in investment and retirement planning decisions.

Financial assets such as stocks and bonds are only one component of an investor’s total economic worth. Other assets, such as human capital, real estate, and pensions (e.g., Social Security retirement benefits) often represent a significant portion of an investor’s total wealth. These assets, however, are frequently ignored by practitioners when building portfolios, despite the fact that they share common risks with financial assets. This paper provides evidence that industry-specific human capital, region-specific housing wealth, and pensions have statistically significant exposures to different asset classes and risk factors. Through a series of portfolio optimizations we determine that the optimal allocation for an investor’s financial assets varies materially for different compositions of total wealth. These findings suggest that narrowly focused portfolio optimization routines that ignore human capital and outside wealth are insufficient, and that a holistic definition of wealth is necessary to build truly efficient portfolios.

Richard Thaler

Here’s a Vanguard interview with Richard Thaler on what behavioral economics is all about.

Losses have about twice the emotional impact of an equivalent gain. Fear of losses (and a tendency toward short-term thinking—I’m sneaking in a third one here) can inhibit appropriate risk-taking.

For example, investing in the stock market has historically provided much higher returns than investing in bonds or savings accounts, but stock prices fluctuate more, producing a greater risk of losses. Loss aversion can prevent investors from taking advantage of the long-term opportunities in stocks.

The second bias that causes a lot of trouble is overconfidence. Most people think they are above-average investors, and as a result they trade too much and diversify too little. Overconfidence can also lead people to invest during what appears to be a bubble, thinking they will just get out faster than others. Research shows that the more individuals trade, the lower their returns. Not surprisingly, men suffer from this problem more than women.

package delivery robots

Here come the package delivery robots. I don’t know that this couldn’t work in a quieter urban residential neighborhood. This would work great on several narrow streets I have lived on in Philadelphia, where post office and UPS/FedEx trucks typically double park at the nearest intersection (often blocking crosswalks, fire hydrants, bike lanes, etc. because there aren’t other options) and then walk in. Urban areas can take a number of forms other than high rise towers and central business districts, which is what (most likely suburban living) authors of articles like this always seem to be picturing.

David Brooks ca. 2001

Here’s an enormously long 2001 rant by David Brooks on the ethics of college students he observed at the time.

There are a lot of things these future leaders no longer have time for. I was on campus at the height of the election season, and I saw not even one Bush or Gore poster. I asked around about this and was told that most students have no time to read newspapers, follow national politics, or get involved in crusades. One senior told me she had subscribed to The New York Times once, but the papers had just piled up unread in her dorm room. “It’s a basic question of hours in the day,” a student journalist told me. “People are too busy to get involved in larger issues. When I think of all that I have to keep up with, I’m relieved there are no bigger compelling causes.”

I find today’s new generation of young adults fascinating. On the one hand, they seem much more involved in community service than I or most people I know were at the same age. But they seem less interested in current affairs. They are extremely intelligent and well educated, and yet their intellectual engagement seems confined within fairly narrow boundaries. They seem to be about more than money and materialism, and yet they seem accepting of the existing order and willing to get ahead the best they can within the system, rather than interested in questioning the system itself. I don’t have them figured out yet. Not that I have myself completely figured out.

go anywhere on Earth in four hours

That’s right, four hours. According to BBC:

the technology would allow the launch of satellites into space at a fraction of the current cost and allow passengers to fly anywhere in the world in four hours…

According to Reaction, an aircraft using such engines could take off from a runway and accelerate to more than five times the speed of sound, before switching to a rocket mode which would propel the aircraft into orbit.

 

the best and the brightest

The U.S. is sending “advisors” into Syria. This reminds me of David Halberstam’s The Best and the Brightest, where he describes the gradual escalation of the Vietnam war. A small force is sent. Then more are sent to protect the perimeter of that force. Then more are sent to patrol out from the perimeter. And so on until you have a president (Kennedy started it, Nixon ended it, but this book takes aim squarely at Lyndon Johnson) with an enormous amount of blood on his hands. Johnson has been judged kindly by history for his domestic programs and civil rights, but anybody who has read The Best and the Brightest might question that. Obama must have read The Best and the Brightest.

time to worry about the national debt?

While the Republican candidates are obsessing over the national debt, economists are thinking the opposite, that Keynesianism is back and a lot of borrowing and spending is going to be necessary to keep the economy going. Your average person on the street can follow the first argument, because it seems similar to his household finances, and because it has an undertone of morality (debt=bad). But very few people understand the theories behind fiscal or monetary policy. Because our education system hasn’t given us the mental tools to understand the nested complex systems we are all embedded in. How are we supposed to elect the right people to make the right choices then?

Finally, there is a fourth view, championed most prominently by Larry Summers and Paul Krugman. They argue that there is little evidence that monetary policy will ever restore full prosperity. In this view, Milton Friedman’s dream of using strategic monetary interventions to offset economic shocks remains just that: a dream. It was only the unique circumstance in Europe and the US over the last half-century – most notably rapid demographic and productivity growth – that made his ideas seem plausible. “If nobody believes that inflation will rise, it won’t,” is how Krugman put it. “The only way to be at all sure of raising inflation is to accompany a changed monetary regime with a burst of fiscal stimulus.”

I do not claim to know which of these views is the correct one. But I do think that this discussion is the most important debate in the field of macroeconomics since John Maynard Keynes wrestled with similar questions in the 1930s. For Keynes, the answer was clear, and it was something close to what is being argued by Summers and Krugman; indeed, his conclusions are what transformed him from a monetarist into a Keynesian.

“It seems unlikely that the influence of [monetary] policy on the rate of interest will be sufficient by itself,” Keynes wrote in 1936. “I conceive, therefore, that a somewhat comprehensive socialization of investment will prove the only means of securing an approximation to full employment.” Those are words worth considering the next time we find ourselves needing the courage to act.

Oh, even if monetary policy did work, the Republicans want to destroy the Federal Reserve.

Jimmy Carter on Syria

This Jimmy Carter op-ed in the New York Times is a bit eyebrow raising.

The Carter Center had been deeply involved in Syria since the early 1980s, and we shared our insights with top officials in Washington, seeking to preserve an opportunity for a political solution to the rapidly growing conflict. Despite our persistent but confidential protests, the early American position was that the first step in resolving the dispute had to be the removal of Mr. Assad from office. Those who knew him saw this as a fruitless demand, but it has been maintained for more than four years. In effect, our prerequisite for peace efforts has been an impossibility…

The involvement of Russia and Iran is essential. Mr. Assad’s only concession in four years of war was giving up chemical weapons, and he did so only under pressure from Russia and Iran. Similarly, he will not end the war by accepting concessions imposed by the West, but is likely to do so if urged by his allies.

Mr. Assad’s governing authority could then be ended in an orderly process, an acceptable government established in Syria, and a concerted effort could then be made to stamp out the threat of the Islamic State.

The needed concessions are not from the combatants in Syria, but from the proud nations that claim to want peace but refuse to cooperate with one another.

It’s eyebrow raising both because if it is right it makes U.S. foreign policy look pretty bumbling, and also because these statements are being made in public seemingly after many years of behind-the-scenes frustration.

I think back to the 1990 Gulf War. The Cold War was over and we still had faith in international institutions. Iraq’s invasion of Kuwait was a clear violation across sovereign borders. A coalition was formed and backed by the U.N. Security Council. As imperfect as all of this was, at least it had the feel of the rule of law. 15 years later, we have sovereign nations invading other sovereign nations, shadowy commando activity and drone assassinations across national borders from Europe to Africa to Asia. That hope we all felt when the wall fell in 1989 (well, maybe Jimmy Carter should ask his good friend Gorbachev how he felt at the time) seems to be receding further into history. And on top of the geopolitical instability we have more people, more weapons, climate change, and a shaky global economy.

Middle East spiral?

Here’s a scenario of how the Syria war and larger Middle East instability could escalate into something much worse.

As in imperial Europe in the period leading up to the First World War, the collapse of an entire order in the Middle East is in process, while forces long held in check are being released. In response, the former superpowers of the Cold War era have once again mobilized, at least modestly, even though both are fearful of a spark that could push them into direct conflict. Each has entangling regional relationships that could easily exacerbate the fight: Russia with Syria, the US with Saudi Arabia and Israel, plus NATO obligations to Turkey. (The Russians have already probed Turkish airspace and the Turks recently shot down a drone coyly labeled of “unknown origin.”)

Imagine a scenario that pulls any of those allies deeper into the mess: some Iranian move in Syria, which prompts a response by Israel in the Golan Heights, which prompts a Russian move in relation to Turkey, which prompts a call to NATO for help… you get the picture. Or imagine another scenario: with nearly every candidate running for president in the United States growling about the chance to confront Putin, what would happen if the Russians accidentally shot down an American plane? Could Obama resist calls for retaliation?

As before World War I, the risk of setting something in motion that can’t be stopped does exist.

As I’ve said before, I don’t think any of this is Obama’s fault, but if it does ultimately lead to something very bad, the roots may be traced back to events that happened on his watch whether they were under his control or not (also, clearly, to direct actions taken by his predecessor), and his legacy could be the president who let the post-World War II and post-Cold War order slip away.