July 17, 2016
I have changed the blogger template to make it easier to read on a mobile phone. On my Android phone, the dynamic template defaulted to classic view without all the widgets on the side and was easier to read. The graphs are easier to see in landscape mode, when the long part of the phone is horizontal to the ground. Perhaps some readers can give me some feedback if there are problems viewing on an Apple phone. Now on to this week’s business!
As I noted last week, things can get a bit ugly when both stocks and Treasuries surge upward at the same time, as they have in the past few weeks following the sharp downward response to the Brexit vote in the U.K. The buying of stocks signals that investors have more of an appetite for risk. The buying of Treasuries and gold signal a desire for safety. At the beginning of the week the world woke up to the news that the Japanese central bank was going to provide a lot of stimulus to goose economic growth. This gave a boost to Asian stocks and the rally in equities was on. By the end of the week, the Japanese stock market had risen 8% during the week and it’s currency, the yen, had fallen the most since 1999.
Economist Paul Krugman has called on Japanese policy makers to set higher inflation targets and provide even more stimulus to spur an economy now lethargic for two decades. According to Krugman’s own textbook, the roles of an economist are 1) to describe the economic and market mechanisms; and 2) form predictions of how the economy and market would react if certain policy actions were adopted.
However, Krugman has a lot of visibility as an op-ed writer in the NY Times. In this role, he often offers prescriptive solutions, and this week’s call is yet another prescription from Dr. Krugman. Japan has been basing their policies on Krugman’s predictions for a decade with mixed or muted results. More stimulus seems to be the eternal cry from Krugman, a smart man who seems to have but one or two solutions for the majority of social and economic problems.
Most economists are rather circumspect, arguing among themselves the mechanisms and validation of varied predictions. But there are a few stand outs who reach out to the general public, ready and willing to engage in the political debate. The subfield of economics called macroeconomics forms a beautiful mud pit for the struggle of political policies, for politicians often cite macroeconomic rationale when championing a set of policies. For thirty years, Nobel winner Milton Friedman espoused a more conservative and monetary model of the economy, emphasizing montetary, not fiscal, policy by the central bank as the chief intervention in the market economy. Search YouTube and you will find many of his talks and lectures and they are both informative and entertaining.
Krugman is one of the more vocal macroeconomists who diagnose economic maladies, build a predictive model based on policy or monetary fixes, then diagnose their model when their predictions are in error. The patient didn’t take enough of the medicine or there is some response lag or the full extent of the problem was not known or was disguised by something or other. The descriptive aspect of macroeconomics doesn’t seem to help develop a predictive model. Perhaps the study of economic phenomenon on a national and international scale is just too difficult to have much predictive ability. Let’s hope not. For the past decade, so many really smart people have been wrong.
Once again this week, central bankers signalled that they were ready to adopt what are called accommodative policies to reassure markets. If stock markets were an athlete with a knee injury, central bankers would be the good doctor who drains the knee then injects a bit of pain medication and cortisone into the joint before sending the athlete back onto the field.
Wildlife scientists may study herds of grazing animals to gain insight into both the seasonal behaviors of the herd and its response to conditions that alter the animals’ environment. These include drought, war, or the burning of forests for farmland. Economists follow a different kind of herd – people.
Macroeconomists focus on the behavior of the entire herd; microeconomists analyze the behavior of individuals acting within the herd. Two telltale signs of human behavior are paycheck stubs and sales receipts, which act in tandem like entangled particles in a quantum dance. In this consumerist economy, retail sales are fueled by the earnings of 140 million workers; the monthly reports on each activity guide the analysis of economists.
Each month a sample of paycheck stubs is gathered and reported by the Bureau of Labor Statistics. The Census Bureau produces an estimate of retail sales based on a survey of almost 5000 companies. (For those interested in the methodology.) Year-over-year growth in real, or inflation adjusted, sales fell below 1% in March this year and spurred some concern that consumption power was being eroded by slow income growth. Following the extraordinary labor report a week ago, the monthly retail sales report, released this past Friday, was stronger than the consensus. Inflation adjusted sales rose 1.67% over last year, rising up a 1/2% from May’s year-over-year reading. 2% real growth would be ideal but anything over 1.5% is a sign of a growing economy. Why the 1.52% threshold? 1% of each year’s growth can be discounted as simply population growth.
On a sobering note, the year-over-year growth in retail sales is gradually declining as we can see in the graph below.
What negative signs should an ordinary investor watch for? Where is the herd going? Investors should get cautious when year-over-year growth in real retail sales consistently falls below 1.5%. After December 2006, growth remained below this threshold and did not cross back above it till March 2010 – a period of 3-1/4 years that darkened the lives and hopes of many Americans. During that period January 2007 through March 2010, the SP500 index fell from about 1440 to 1170, a decline of 19%. We are part of the herd but with some observant caution we may be able to move some of our savings to the fringes of the herd movement and avoid getting trampled.
Earlier this year the U.S. Treasury introduced a Roth IRA tool called myRA for employees who work at a company that does not offer a retirement savings account. This is a fully guaranteed account similar to a savings account that grows tax free. The maximum one can save in this kind of account is $15,000 and part of the contribution amount is entitled to a tax credit. This can be a good way to get started with retirement savings. The Federal Reserve has an article on the subject here.
Amtrak Train Trance
On vacation in California recently, I rode Amtrak’s Pacific Surfliner several times on day trips from Los Angeles. Unlike the east-west Amtrak routes, these north south routes along the coast are more frequent, running several times a day sometimes only two hours apart. Part of the route is along the beach, part along a highway, and part travels the urban backcountry – the backyards of businesses, farms and homes that most of us do not see from a car. The experience was a sightseeing delight, a meditative trance of motion.
Most of Amtrak’s lines do not make money and rely on government subsidies. Like so much of our transportation infrastructure in this country, railroad infrastructure needs upgrade and repair. Opponents of government subsidies often don’t realize how much of what they personally use is subsidized. Here is a link to a Business Insider article on Amtrak’s operations and the political debate over federal subsidies for Amtrak. The debate crosses party lines because rural politicians of both parties tend to support subsidies for Amtrak when the rail service crosses through their geographic region.
Air travel, the most frequent mode of long distance transporation, is heavily subsidized by the federal government. Here is a USA Today article on that subject and the $2 billion in subsidy for one airport alone, LaGuardia airport in New York City. Likewise are the massive amount of indirect subsidies for automobile transporation, which rely on roads maintained by federal, state and local tax dollars. These repairs are only partially paid for with dedicated gasoline tax dollars; state and local taxes must make up the difference. Let us also include the multi-billion dollar bailouts of the industry that arise every few decades because of poor planning by industry executives in response to market demand or foreign competition.
Amtrak subsidies look miniscule in comparison. The railroad suffers from a chicken and egg problem of investment and revenue. Which comes first? Without more investment the railroad can only offer once a day service on east-west routes, which does not attract strong ridership. Without a show of rider demand, there is little incentive to provide investment. The California Zephyr leaves a major city like Denver enroute to the west coast at 8 A.M. only once a day.
Boarding times in a particular region may be inconvenient. Barstow, CA is a city of 23,000 north of Los Angeles that is serviced by the southern east-west Amtrak route called the Southwest Chief. Like the Zephyr, this train starts in Chicago but heads southwest through Kansas, Colorado and New Mexico before heading west through northern Arizona to the west coast. The Barstow railroad station, if it can be called that, consists of a bench and a slight overhang typical of urban bus stops. There is no bathroom or other facilities. The 4-1/2 hour trip to Union Station in Los Angeles arrives and departs once a day in Barstow at 3:40 AM, a unwelcoming time for a train jaunt into the big city. The large city of San Bernadino, CA has a slightly more hospitable departure time of 5:30 AM.
In the early 19th century, before the refinement of petroleum deposits into gasoline, railroads were developed and built in Britain, then spread to Europe. Early investment in rail transportation both for goods and people embedded the concept and the technology in European politics, its economies and cultures.
Many decades ago, this country chose to subsidize the movement of people by car, reserving the rails for the transportation of goods. The land was big, and population centers west of the Mississippi were distant. Steam locomotives run on wood, a precious commodity west of the 100th meridian (central Nebraska), where there was not enough rainfall for trees to grow on the vast plains. Oil deposits were plentiful in several regions within the country and gasoline is portable and a rich source of energy, packing a lot of BTUs per volume.
We love our cars, the hum of tires on blacktop as we run down the highway. But a train has another quality that is difficult to get in a car – a reduced sense of movement, a trance like floating through space while staring out the picture window of a rail car at a movie in motion. If you have a few days and you are not in a rush, take a seat and let the landscape unroll before you.