Peter Yastrow's Blog

Myth Conception

A lot of people have it plain wrong. I know this because I learned this stuff at Northwestern University, and at University of Chicago, and am now just applying what both Universities taught to the markets and our economy. The difference between my approach and other people’s approach, is that I do not believe in cycles. History does not repeat. Good does not always triumph over evil.( ref. apoc. now )

This time is different. All times are different ! It is a method of comprehension and categorization that we use that creates the perception that history repeats. We see an event, and immediately look for prior examples of similar events. We see our economy contract, and we look for other periods when our economy contracted. It is our way of trying to apply some sort of scientific method to economics. However we should always and everywhere ( ref. milton friedman ) remember that the other word for average is mean.

Relying on averages can lead to some dreadful decisions. When we rely on historical “norms” to be our guidance, we are really just betting that history repeats itself. Mark Twain’s remark that,” history does not repeat, but it does rhyme” is exactly correct and even more so today in modern America. We can see similarities, and we can draw parallels between events, but it is more important than ever to focus on the differences.

Assuming what worked for the past 50 years will work in the next 50 years seems pretty absurd.

We wont see the same growth rates in population. We won’t see the same technologies get reinvented. We can no longer build highways, we can only rebuild them. The country is no longer an infant, growing and developing. We are still a very young and disorganized union, but the growth to our borders, our numbers, and our GDP all seem to be reaching a limit.

This would suggest that return on investments in this country should drop. We should anticipate equity to also grow more slowly.
However, the investing public is convinced that you get 8% return on investments over time. Most people who have an IRA or 401 k are advised that they can comfortably expect 8% over time. If this rate is in fact too high we could have some problems.

Most Americans are living longer and longer. They will need their retirement money to last a long time. Just as life expectancy is going up, the returns on assets are going to be dropping. Combined with the ever exploding costs of health care, we have a real problem coming. The average person will want to retire by 65, and they will be living until 85. So we will have to fund a longer and longer “retirement” .

Most Americans will not be able to retire. They are already underfunded, and will not be able to earn enough on the assets as returns on investments stay low.

Soilent green is people

peter

Supply Chains

There is a pretty well known kid’s song called, ” There was an Old Lady Who Swallowed a Fly “, which told the story of a woman who ingested a fly, and then proceed to swallow a spider, and a bird and a cat in an attempt to rid herself of the animal she previously ate. I always hated that song. It was tiresome, and long and boring. Economics is a lot like that song. The key to understanding the woman’s predicament, and the key to understanding economics, are almost identical. You have to follow through the entire long drawn out process. To truly understand our economy, and to avoid dreadful financial and business decisions, people need to take the time, and grind through the entire chain of goods and services. They must understand where their profits come from, and whether or not they are sustainable for a long period of time.

Take for example a coal mining town. It is booming, with a diner, a movie theater, grocery stores, and car dealerships. However, when the coal mine closes down, the town dies. The town was living off of the coal. It was the natural resources in the ground, that was creating the motive force in the town. All of the profits that were made by the owners of the various stores and service providers were originating from the ground.

In fact when you look at it more closely, you realize that the hydrocarbons that make the coal were actually produced by our sun.
All of the food we grow is also produced by the sun. In fact, when you take any profit that exists anywhere in the world and follow it back, it always started with energy from our sun.

Energy, transportation and agriculture are the primary industries. These industries create profits, or the potential for profits. These profits are then spread through our society. Like passing a giant loaf of bread, and each person pulls off their portion. One man’s expense is another man’s income.

In our country, we have had to create more and more roles for people to fill. Extending the supply chains longer and longer, allowing more and more people to join in the profit parade, and make a living. We need baristas, and personal trainers, and yoga instructors. We work harder, so we spend more playing. We drink more coffee, and then need sleep remedies, which all creates more and more occupations for people to fill.

These incredibly long supply chains allow for us to have a gdp of over 14 trillion dollars, with only 350 million people. China has 1.3 billion people and only has a GDP of 5 trillion tops. We have squeezed and stffed all of these workers into our lives. Raising the level of our standard of living massively along the way. To go to work at your food company, you need to have a cell phone, a car, clothes, shoes, hair products, hygiene products, and are expected to have a home etc.

But all of these other industries; the periphery. The entertainment, leisure, non essentials are all dependent on other industries to survive.

Know your business. Know where your profit starts, and maybe you can hold them for a bit longer.

joy to the world

peter

Democracy and Debt

There is an old saying: A camel is a racehorse designed by a committee. The lesson being that groups of people are not good at working together, and often the results of a group effort are quite dismal. There are thousands of examples of such outcomes. Laws that were written, buildings that were planned, even meals that were cooked- have all been ruined because groups failed. Too many cooks in the kitchen.

The problem we are now seeing across the whole world is stemming from this human shortcoming; we do not work well in groups, committees or assemblies.

There is a huge psychological blind spot that makes these officials continue to vote for more debt, and more spending. This is not just a Democratic flaw, because there are plenty of Republican districts and communities that are in debt. The Republicans are more concerned, because tax policy is the eventual salve that is put on the wounds. These dollars come from Republican voters. But the wounds of over spending are not unique to Democrats.

The reason elected officials overspend is more human nature than lack of discipline. Consider for a minute the “lottery”. Millions of people play the lottery. Some of them even understand that it is a terrible gamble, and that the odds of winning are so infintesimaly small you might as well throw away your dollar, rather than waste the leather on your shoes walking to the store to buy the ticket. But people see the very small price and figure ” it’s almost free ” and they see the huge payoff, and think ” that could change some lives ” and when you rationalize the whole lotto experience down to ” it is almost free to have a chance at a dream” well then you start to see why they sell hundreds of millions of tickets to people.

Now consider the roll of the committee members who have all been elected to serve the people. They review all sorts of developments and projects. The cost of these wondeful new facilities and projects is infentessimally small to each citizen, just a few extra dollars. Yet the payoff will be a new wonderful civic achievement. It is almost impossible to think through such decisions and not always vote for more. ” it’s just a few dollars more…and look at all of the good we will be doing”.

The alternative would be a group of fussy old do nothings saying “no” “NO” ” NO ” to every new public works project because they re trying to save a few dollars. A few dollars here, a few dollars there, and soon we ‘ve saved SOME dollars.. yee hah !

Seems pretty foolish putting a group of men and women together to decide how to spend other people’s money. Money that has not even been earned yet! Let alone taxed and collected. But that very foolish act is happening everywhere, all over the country, all over Europe. Illinois to Ireland, they’ve all fallen into the same trap. Took on too much debt, couldn’t say NO. Each decision taken independently seems so right. But the cummulative effect of these groups spending our money will eventually be the very act that ends the United States, and most likely the Euro.

Know your weaknesses.

peter

It Is NOT Taxes

There is a huge debate about tax policy. Some claim that the government can lower taxes. The lower taxes allow people to spend their money, stimulates demand and in turn, stimulates the entire economy. Others claim that our government needs to raise taxes. That the higher tax rates will barely effect high income people, but will allow the government pay down the deficit. This helps lead to confidence in the currency, stability in the money markets and healthier economic environment. There are economic geniuses from all over the world on both sides of the tax rate debate.

The point we must learn from the debate on tax policy; IF SOME BRILLIANT PEOPLE THINK RAISING HELPS, AND OTHER BRILLIANT PEOPLE THINK LOWER HELPS- THEN IT CAN’T BE THAT SIGNIFICANT.

If it is not obvious which course of action is superior to all involved, then it is not a course of action that need be undertaken.

Furthermore, our government needs to realize that they are wasting a lot of time, energy and money debating tax policy, which also makes the business climate much more uncertain. Hence we create an economic slowdown, as CEO’s and other decision makers await changes in legislation. This is for sure- people will wait until the policy is clear, hence any policy change, or vote creates some loss of economic potential. Then when the final legislation is passed, it is not clear if it will help or not.

One of the key mistakes Team Obama made in their rookie year was doing too much.They wanted to enact lots of new legislation. This huge amount of impending legislation caused business leaders to stop dead in their tracks, and wait; just as the Federal Reserve was cutting rates to 0. So the FED’s monetary policy was marginalized by Washington’s overzealousness to help.

If our leaders are going to waste thousands and thousands of hours debating a new tax policy, they will eventually move some demand from some people to other people- but it wont create any new economic growth. It won’t begin a new age of fairness- it wont cause all the rich people to leave the country, or stop working. It just buys them votes and keeps them employed.

Let’s keep our elected officials working on the important issues. There is no magic tax rate that will spontaneously generate growth and prosperity, and having Washington distracted from the real problem is not going to help……or is it. Maybe I am totally wrong here. Maybe if Washington is too busy trying to buy votes with tax policy, they won’t be able to ruin the things that matter- like innovation.

Peter

College Fun(d)s

Here we go again.
Student loans were made with no regard to what the student was studying. Study philosophy, or literature, even anthropology. Borrow money to pay for it. Who is the moron that made those loans? That is the person who is stuck. You lent money to kids so they could go take multiple choice tests in a state funded degree factory, while they partied their brains out. Now 4 years later, with no marketable skills, no entrepreneurial ability, and no prospects in philosophy, literature or anthropology people are crying foul. The students claim it is unfair that they can’t get jobs, and the student loan companies want their money paid back. Once again, the people with money, will be forced to pay for the mistakes of the stupid.
The sad truth is that if it is a small loan, mad stupidly- then the lender loses. When the mess is big enough, then the lender cries foul, the government comes in and saves everybody. Just remember ” the government ‘ cant save anybody- it’s those of us who still pay taxes that are the real heroes.

Tags: student loans

Tools’ Significance on Economic Activity

As we come through another election cycle, I am forced to listen to all sorts of people from all walks of life chime in on the economy. The problem with Economics, is that people assume that because they are part of the economy, they know something about how it works. This often leads to some rude comments and nasty looks, ….by me. Too many people really do not understand economics.
Even as recently as today April 24th, there is an editorial in the WSJ that discusses tax rate’s significance on economic growth. The authors were trying to justify higher taxes by looking at a period during the mid 1900s. They sincerely believe tax rates can provide the solution we need to generate growth here and abroad. Not lower tax rates, but higher rates. Either way, higher or lower- the entire analysis provides clear insight into one fact. Economists are pathetic. They have data sets that are so small and biased that they are useless. Combine the small data sets, with all of the noise in the data, and any good economic argument can be supported by the data. As Mark Twain said, there are liars, damned liars, and statisticians. That is why we can find economists who claim Obama has been a benefit to the economy, while others will tell you he has been a disaster.
But for the rest of us- thinking is allowed. The real driver to economic activity is tools. As we have developed tools, we have made people more valuable, more productive. In order to compete, others were forced to acquire the tools. During the past 150 years, tool development exploded as we unravelled the mysteries of physics and chemistry. We advanced mankind’s societies in amazing and incredible ways. In the early 1900s the country was horse driven, on dirt roads. By the 1960s we had ribbons of highways connecting the entire country. And now, we all use cell phones, computers and the internet on a regular basis. I am certain that the computer boom had more to do with our lives getting better, than the tax policies that were put in place during the period. The government can only take from an economy.
Hopefully we have leaders who are smart enough to know that we should tax more when the economy is thriving, and we should tax less when the economy is weak.
Hopefully we have leaders who know that we should not budget based on good years, which allows us to not be caught short of funds in lean years.
Hopefully we have leaders who recognize that government is nothing more than a necessary evil, and not a saviour.
Hopefully we have leaders who will enable the best and the brightest to lift our economies, rather than those who would slay the strong and feed the weak in order to maintain an average level of mediocrity.

peter

Tags: WSJ

Small Changes, Big Consequences

The fear of becoming an old coot often prevents me from saying things like, ” the younger generation is…” I remember when i was the young Roger Daltry wannabe that wanted to stick it to the older guys, but the world turns, and I am now the old guy shaking his fist at these kids today.
But there is a few changes in attitudes that I have noticed, and that they also noticed in Bloomberg/Business week.

Shopper now go into stores, determine which product is best, and then go home and order it on line. Oh wait, that was so 45 seconds ago, now they order the item from the Starbuck’s next to the store, which has Wi-fi. Many people will say that this is good for the consumer. The consumer is going to save money. The problem comes for the large stores. They cannot stay in business acting as showrooms for internet savy people. The stores actually have to sell the merchandise, at higher prices in order to pay for all of the sales people, and even more importantly, the real estate and physical plant. Go into the large malls, and you will see hundreds of people enjoying an air-conditioned walk thru a beautiful clean structure. High ceilings, and gleaming floors- all must maintained. These costs must be passed on to the shoppers.

The trends are awful. Department stores are getting killed. Big box retailers are getting killed. This bodes poorly for commercial real estate too. The large strip malls that became the huge trend in commercial real estate development over the last 30 years will not be around for much longer…

All of this because we change the way we shop. We look at things in one store, and buy then from someone else, more cheaply. This is not considered unfair, or wrong. It is getting the best price using the tools at our disposal. The impact to our entire country has yet to be felt. It will take a few more lean years, but eventually we will buy everything directly from manufacturers, and middle men will be gone…..along with the middle class.

peter

Tags: consumer behavior

Why is This Time Different From All Other Times

If we rolled a pair of dice 100 times, and we got double 4s 50 times, we would know that there was something wrong with the dice. In fact after about 7 or 8 rolls, with double 4s coming up 3 or 4 times, most people would question the results. When things do not occur as expected, we will look to other factors; the dice are unbalanced, there is a magnet..
When we look at larger more complex systems, like poker, or economics, we realize that we are constantly making our predictions, and then comparing the results to those predictions. When the predictions are correct, your model is correct. When your predictions are all wrong, it’s the government’s fault.

The truth is that few economists employ a “model”. They just know how a lot of different statistics have correlated over the past 50-80 years, and feel comfortable making future predictions based on their historical knowledge. This is the part that I find so terrifying. It is because of the huge number of very well educated economists and financial planners who are completely and pathetically lost. At sea. These people are advising my parents’ friends, and state pension plans. These people are responsible for the futures of every single American. They are making investment decisions based on historical congruences, and correlations, regardless of whether or not they understand why events played out they way that they did.

However, there are many things now, that are different. The business world has changed, the information flow has changed, and corporations’ behavior is adapting quickly.

In the area of Research and Development, companies know that spending huge amounts of money is a quick way to hurt profits. They are much better off spending money on monitoring all of the possible competitors, and trying to erect barriers of entry. It is not in Shell Oil’s best interest to develop a new energy source. Any company that does try to innovate and develop new products is saddled with the costs of research, testing, and marketing- whereas the second entrant, can steal the idea and come to market with a much leaner cost structure. “The second rat gets the cheese.”

The speed at which competition can come into a market and destroy the profits of all entrants is amazing. The cell phone companies ate each other alive as they drove the prices of cell phones down and down. Computer manufacturers, and small electronics makers are driving each other out of business. SONY is going to lay off 10,000 people.

Profits are always and everywhere going to zero. That is the way of the world. New windows of opportunity have been opening up for so long now that many people think that too is part of the natural order. Yet, this is where another critical error is made. The assumption that technological advancement will continue at this incredible pace is completely ridiculous.

In this world of fierce competition, with the technological barriers so incredibly high, we will see corporations spend more and more effort on observing and defending, and less on development. If we hope to breach the tech barriers that confront us, we will need huge sums of money for research, development, and testing. However, any corporation that undertook such a monumental effort would be acting irresponsibly. The costs of research and development, adjusted for risk, and the speed at which others will come into the market make the whole effort less than good business. So we get a stagnant world economy. Profits will be under pressure, and we wait.

Don’t assume the returns on assets will be as high as they used to be.

peter

Bad Data

My brother Eddie said he was great at rationing. He went on to explain that he would consume only half of his cache on any given day, and hence would never run out of anything. Drink half your beer today, and you never run out.
The truth is he is wrong. Eventually you would be down to one molecule left, and you could not split that.
We used to laugh about starting out with a case of beer, and then drinking 12, then 6, then 3 , then a can and a half….
You can only take anything so far.
If running 30 minutes a day is good for a person, then running 7 hours a day must be outstanding !
Perhaps Bernanke and company have been guilty of taking it too far.
After 20 years of seeing the economy grow and slow with every interest rate adjustment, the Fed and Geithner believed that if rates were good at 4%, and great at 2%, then they must be super awesome at 0.25%
The problem is that the housing market used to be the mechanism by which all of the Fed tweaking stimulated our economy. The housing market has since imploded, and no longer is an economic driver. The Fed is scratching their collective head. They have rates down to the lowest levels we have seen in our life times, and the economy remains sluggish. They have pumped the system full of money, and they are not seeing the response that always happened before.
Most people have studied economics from such an academic perspective, that they lack any real economic insight. Their education, and training consisting of studying relationships and correlations of major economic statistics, without any understanding of the actual data. Yes, the economy exploded in the 1990s, but why ? Yes, the economy started to slow in the 1970s, but was that the same reason why it slowed now…
Many people can yammer on about economic jargon, and quote many statistics, but unless they can comprehend that the world is changing quickly, that the economic relationships of the past 70 years were a fluke, and not a precedent, than listen to them with tremendous skepticism. For they are failing to recognize why it is different now.

So 45 Seconds Ago

There is a new commercial for a new wireless company, or their phone or something, that makes fun of people in the office who are behind the times. It seems that their data is always coming in late, and they are subsequently always late. Late for the taco party, late for the birthday cake, late for wishing someone luck. There really is no important benefit or opportunity for those who have the faster, better phone. They just are 30 seconds ahead of the others. We are quickly getting to the point where the market for technology has hit saturation. We are not willing to pay more money to get the small marginal advantages. We will only pay for something that is more awesome than what we have now.

Trouble is our televisions are awesome, our phones awesome, computers, and the internet is AMAZING !. All of the knowledge of mankind for free, instantaneously. Clearly, we are not able to employ all of this computing power and information that we now have harnessed.

I can’t even imagine what I need next. I said NEED. I can dream up ways i want to entertain myself, but I do not have a need for anything other than money or an easy way to make money.

As human beings we rely on 5 senses, but clearly sight and sound are most important to us. When we communicate, we can do it with sight or sound. We do not rely on smell, or taste. So now that we can see and hear around the world, the spectrum of global communication is complete. We can talk to anyone, almost anywhere. We can download maps, plans, data, formulas, in a split second. It is done. We have not only completed the industrial revolution, but we have also completed the tech revolution as well.

Energy and transportation are the next areas to evolve. However, until we get the lobbyists for the auto industry and petroleum companies out of the way, we are going to be slow to change.

peter