Price Points

December 15, 2019

by Steve Stofka

This week I tested Alexa. You know who I mean. She who shall not be named in idle conversation for she will respond. She can do arithmetic, but can she do algebra? I asked her, “What are the factors to the expression x2+2x+1?” She gave me the simple factors x(x+2) + 1. A better answer would have been (x+1)2. Not bad.

We have adapted so quickly to these new technologies. It is normal to talk to a cylinder. Farmers guide their tractors with a cellphone app (Future Farming, 2017). A library of information readily available 24 hours a day. An earthquake on the other side of the planet and we learn of it within the hour.

Despite the accessibility of information and communication, we are bombarded with disinformation. We can’t talk to members of our family or some of our friends because of their political beliefs. Has technology unloosed our own demons from Pandora’s box? In one version of the myth, the demons burst out from Pandora’s box and she was so frightened and alarmed that she closed the lid before the last demon, Hope, could get out. Is hope a curse or a blessing?

We have become accustomed to the entertainment, communication, information and convenience of our phones. They make us powerful. We watched a movie on DVD tonight. I forgot we still had a DVD player. The remote didn’t work. We had to put new batteries in.

On a job site a decade ago, I heard a family arguing. Mom was taking her kids’ phone away because he did something or didn’t do something. A short while later I heard the kid crying. This was a big 12-year-old boy who had received a smart phone as a gift. The phone had become this kid’s heartbeat. He was addicted to a phone.

Have we become a nation of addicts? We are addicted to high energy use even if it does introduce much more carbon dioxide into the atmosphere than the plants, soils and oceans can absorb. Yes, it’s a problem, but …

I forgot my phone last week, turned the car around and came back eight blocks to get it. I was only going to be gone for a few hours. Yes, I know I’m addicted to my phone, but…

Are we addicted to our opinions? God forbid that someone should threaten our political or religious beliefs. Don’t try to change my mind about something. If I want to change my mind, I’ll do it on my own time, thank you. We have so much information at our fingertips that we can’t absorb it all, so we select a few sources and satisfy ourselves that we have a balanced enough perspective.

The stock market has gone up more than 10% in the past one hundred days. Is that the final hurrah before prices dive? Or is the market waking up to a new era of continued low inflation and healthy corporate profits? I’m surrounded by a cacophony of opinion.

In a decade, my calendar app will know what to remind me about. I won’t have to tell it. For that to happen, the app will need access to a lot of personal and financial information about me. “You paid for a subscription to National Geographic magazine last February,” my app will say. “Shall I add a reminder for this coming February?” Sure, why not. I’ve already given away so much information.  I will need an app to guard my information in case someone hacks into the database where my calendar app stores all my information.  

Each of us has price points – boundaries of what we’re willing to pay for something. There was a time in my life when I wouldn’t spend more than a $1000 on a car. Then it was $2000 for a reliable car. My price points were moving up.

Starbucks has been around for almost 50 years (Starbucks, n.d.). I couldn’t believe it. Sometime in the 1990s I became aware of them. Who would pay $3 for a $1 cup of coffee? Lots of people.

A decade ago, who would pay $700 for a phone? A decent computer could be bought for that price. Apple rolled out the iPhone 3G for $199 with AT&T as the exclusive carrier (Wikipedia, n.d.). More than a million people bought one in the first weeks. $199 was just the down payment on the phone. The two-year contract with AT&T included about $20 extra per month for the phone according to some estimates. That raised the cost of the phone to $700.

If the stock market goes down 20%, who buys and who sells? What are the price points? What about 30%? 50%? During the 2008 financial crisis, brokers said they got a lot of calls when the market was down 50%. They cautioned their clients that this was the wrong time to sell. Most of the damage had been done. Their clients couldn’t take it anymore. Sell, sell, please sell. There was a last hurrah of selling and then…the buying began in earnest.

What are our political price points? I asked Alexa. She doesn’t know that. What causes people to say, “I’ve had enough!” and go out in the streets to demonstrate? In the past month the world has witnessed large scale demonstrations in Tehran, Iran, in Hong Kong, in Baghdad, Iraq, in Santiago, Chile, and in Barcelona, Spain. I think 2020 will be an American crisis year and we will see such demonstrations in our country. I hope I’m wrong.



Future Farming. (2017, June 21). App turns smartphone into a cheap tractor guidance system. [Web page]. Retrieved from

Photo by Colin Watts at

Starbucks. (n.d.). Starbucks Company Timeline. [PDF]. Retrieved from

Wikipedia. (n.d.). iPhone 3G. [Web page]. Retrieved from

Job Threats

September 8, 2019

by Steve Stofka

The greater threat to your job – automation or other workers? For thousands of years people have stored their human capital in writing. In some cultures, only a privileged few were allowed access to these “secrets.” The invention of the printing press in the 15th century caused massive unemployment among monks and scribes who copied treasured books by hand.

No, that didn’t happen. Demand for books, particularly the Bible, added many jobs. A symbiosis of knowledge exploded through Europe and parts of Asia. In the network of knowledge, the sciences flourished. The mathematics of chance and the development of calculus spawned the birth of modern physics in Newton’s Principia Mathematica. In the following centuries came the understanding of air and other gases, the physics of fire, electromagnetism and the very structure of stuff. All this human capital was written down in words and equations written in a single language called mathematics.

Books could hold and display the knowledge but couldn’t make the calculations. All that changed when the computer was invented in the mid-20th century. Dancing on pathways etched on silicon circuit boards, electrons simulated the calculations that the human brain had learned.

After defeat by IBM’s Deep Blue chess computer in 1996 (he won the first game), Garry Kasparov realized that computers could become human partners. Crude mechanical computers had automated some tasks during the the 19th and 20th centuries. Now they were ready for some of the tasks of knowledge workers like lawyers (Note #1). Some clerical tasks in the practice of law have been automated but there is still much that relies on judgment gained through experience and “je ne sais quoi” – the subtle weighing of multiple factors that are difficult to write algorithms for.

Thirty years ago, a grocery clerk had to be good at arithmetic – able to multiply four apples times 89 cents per apple and punch in the total on older cash registers. Clerks who could do those calculations quickly and accurately were paid good money.

An accounting clerk in a finance office had to know what calculations to do to get a loan payoff, or to calculate how much credit to extend to a customer. Today a clerk with much less knowledge and training can tab from box to box on a screen and enters the data that the program asks for. Natural language processing is rapidly making even that obsolete. A clerk will simply be able to ask a program a question and it will compute the answer or ask for more information if needed. We used to have to give Google the formula to compute the volume of a sphere. No longer. Ask “what is the volume of a sphere with a radius of 2?” Each year more human capital is being transformed into technology capital.

Some are concerned about the number of jobs that will be lost to automation. The development of the Cotton Gin in the early years of the nineteenth century reduced the number of workers needed to harvest an acre of cotton. Did plantation owners tell their slaves “I don’t need your services any longer?” No. They devoted more acres to the growing of cotton and the demand for slave labor increased.

A few years earlier before the cotton gin, the invention of the Loom greatly improved the efficiency of garment workers. Manufacturers reduced prices of some finished goods, the demand for silk and cotton soared, and employment in the industry grew.

The invention of primitive computers in the middle of the 20th century should have put arithmeticians out of business. Instead the demand increased for people who could do the more difficult or time-consuming computations. Careful but relatively unskilled people could punch in data on a punch card and the computer would tabulate the results. In the 1960s, the demand for business data dramatically increased.

Those in technical professions like lawyers and doctors lobby to protect their jobs not from automation but from other people who could do portions of their job.  In some states, a dental technician cannot fill a cavity. In some states, routine tasks can be performed by a paralegal with less training. They also command lower salaries. In other states, those tasks have to be carried out by a lawyer or with the active supervision of a lawyer.

Some areas of the country are based on a monoculture, an industry that dominates the local economy. The leaders in those industries exert a lot of political influence. A fundamental shift happens when one monoculture competes with another. Many coal workers may be convinced that former President Obama killed the coal industry with burdensome regulations. In 1979, the rock group The Buggles sang “Video Killed the Radio Star;” a similar shift has happened to the coal industry. The surge in lower cost natural gas supplies killed the coal industry. North Dakota against West Virginia and Wyoming. The coal industry’s leaders had less political influence and could not push back against the regulators.

In the 1990s, checkers at Albertson’s went on strike to protest the adoption of scanning technology and UPC codes that were first developed in the 1970s. They were concerned that the store chain would begin hiring lower-paid workers who simply had to pass a grocery item over a scanning screen.

Technological change displaces one type of worker with another type. Millions of workers are doing jobs today that didn’t exist 50 years ago because of technological change. I was at a get-together a few months ago and spoke with a woman who was a social media manager. That’s a job. As the growth of social media has exploded around the world, thousands of new jobs have been created. In the past two decades, programmers have automated some coding. Programmers who could not adapt did lose their jobs but many more jobs were created for those with different or more complicated skills.

What can’t be automated -so far – is people taking care of people. The fact that these are some of the lowest paid professions speaks to the values of our society. Companies pay paltry wages to the people who take care of our parents and grandparents. Those jobs cannot be automated to any great degree. It’s possible that some company will develop a robot that can help an older person into a bathtub or shower, but the process requires many delicate decisions, patience and empathy.

In monoculture economies around the country, some worry that unauthorized immigrants will take lower paying jobs from Americans. Immigrants are more willing to move for a job than Americans. In a county dominated by oil, gas, coal, mining, agricultural or car manufacturing industries, there isn’t much variety in employment and native residents of those towns and cities have something to worry about.

For the whole country, there will not be enough people to fill many lower paying jobs. The Bureau of Labor Statistics estimates that jobs for home health and personal care aides will grow by 36% – rising to almost five million workers. Difficult to keep up with a growth rate far above the 7% average growth of all occupations. Employment for in-facility nursing assistants and orderlies are expected to grow by 9%. Even taking care of our pets will be more difficult – job opportunities for vet assistants are expected to grow by 19%.

If only Congress could set up an immigration program to help our hospitals, clinics, long-term care facilities and home aide programs fill these positions. If only. The H-2B visa program is for temporary jobs only and there are far too few permits issued each year (Note #3). Most of the demand for health care services comes from urban and suburban areas, whose votes have less influence in a rural state where the legislature heeds the wishes of the extractive and “ag” industries. We are not fighting the machines. We are fighting each other.



  1. Kasparov recounts that match with Deep Blue in the TED talk (transcript)
  2. BLS estimates of employment growth for health care aides
  3. 1H-2B visa program


August 27, 2017

Pew Research surveyed four generations of Americans, from the oldest Americans who are part of the Silent Generation, those who grew up during the Great Depression, to the Millennials, those born between the years 1983 – 2002. Pew asked the respondents to list ten events (not their own) or trends that happened during their lifetime that had the most influence on the country. 9-11 was at the top of the list for all four generations. Obama’s election, the tech revolution and the Iraq/Afghanistan war were the other events common on each list. Some differences among the generations were understandable. Some were a surprise to me. The Great Recession/Financial Crisis of 2008 was only on the Millennials list. Many in this generation were in the early stages of their careers when the recession began. Here is a link to the survey results. Perhaps you would like to make your own list. Keep in mind that the events must have happened during your lifetime.

I don’t think that the Boomer generation understands the long-term impact of the Great Recession. In another decade, many will discover how vulnerable the financial crisis left all of us, not just the Millennials. As we’ll see below, the crisis may be over but the response to the crisis is ongoing.

One of the trends common to each generation’s list was the tech revolution, which has reshaped much of the economy just as the last tech revolution did in the 1920s. The widespread use of electricity, radio and telephone in that decade transformed almost every sector of the economy and accelerated the mass migration of the labor force from the farm to the city.

Like today, a small number of people made great fortunes. Like today, the top 1% of incomes accounted for about 15% of all income (Saez, Piketty). The GINI index, a statistical measure of inequality of any data set, has risen significantly since 1967 (Federal Reserve). The GINI index ranges from 0, perfect equality, to 1, perfect inequality. Incomes in the U.S. are more equal than South Africa, Columbia and Haiti (Wikipedia) but we are last among developed countries.

For several decades, Thomas Piketty and Emmanuel Saez have collected the aggregate income and tax data of developed countries. Piketty is the author of Capital in the Twenty-First Century (Capital), which I reviewed here.  A recent NY Times article referenced a report from Piketty and Saez comparing the growth of after-tax, inflation-adjusted incomes from 1946-1980 (gray line labeled 1980) and 1980-2014 (red line labeled 2014). I’ve marked up their graph a bit.

The authors calculated net incomes after taxes and transfers to determine the effect of tax and social policies on income distribution. Transfers include social welfare programs like Social Security, TANF, and unemployment. Census Bureau surveys of household income include pre-tax income and it is these surveys which form the basis for the calculation of the GINI index and other statistical measures of inequality.

I am guessing that Piketty and Saez used their database of IRS post-tax income data then adjusted for transfer income based on Census Bureau surveys. The Census Bureau notes that people underreport their incomes on these surveys.  Is the IRS data more reliable?  Probably, but people do hide income from the IRS. Both Piketty and the Census Bureau note that the data does not capture non-cash benefits like food stamps, housing subsidies, etc.

From 1947 to the early 1960s, the very rich paid income tax rates of 90% so that would seem to explain the after-tax income data from Piketty and Saez. The federal government took a lot of money from the very rich, paid off war debts, built highways, flew to the moon and built a big defense network to fight the Cold War.  Those infrastructure projects employed the working class at a wage that lifted them into the middle class. So that should be the end of the story. High taxes on the rich led to more equality of after-tax income.

But that doesn’t explain the pre-tax income data from the Census Bureau. The very rich simply made less money or they learned how to hide it because of the extremely high tax rates.  In the Bahamas and Caymans, there grew a powerful financial industry devoted to hiding income and wealth from the taxman. In the first years of his administration, President Kennedy, a Democrat, understood that the extremely high tax rates were hurting investment, incentives and economic growth.  He proposed lowering both individual and corporate rates but could not get his proposal through the Congress before he died.  Johnson did push it through a few months after Kennedy’s death. The rate on the top incomes fell from 91% to 70%, still rather high by today’s standards.

An important component of income growth in the post war period from 1947-1970 was the lack of competition from other developed countries who had to rebuild their industries following World War 2. These two decades were the first when the government began collecting a lot of data, and this unusual period then became the base for many political arguments. Liberal politicians like Bernie Sanders and Elizabeth Warren advocate policies that they promise will return us to the trends of that period. It is unlikely that any policies, no matter how dramatic, could accomplish that because the rest of the world is no longer recovering from a World War.

We could enact a network of social support policies that resemble those in Europe but could we get used to a 10% unemployment rate that is customary in France? For thirty years beginning in the early 1980s, even Germany, the powerhouse of the Eurozone, had an unemployment rate that exceeded 8%. At that rate, many Americans think the economy is broken. Despite 17 quarters of growth, unemployment in the Eurozone is still 9.1%. Half of unemployed workers in the Eurozone have been unemployed for more than a year. In America, that rate of long term unemployed is only 13% (WSJ paywall).

The post-war period was marked by high tax rates and high federal spending, a period of robust government fiscal policy.  The federal government intervenes in the economy via a second channel – the monetary policy conducted by the central bank.  The Federal Reserve lowers and raises interest rates, and adjusts the effective money supply by the purchase or sale of Treasury debt.

The 1940s, 1970s and 2000s were periods of high intervention in both fiscal and monetary policy. The FDR, Truman, Eisenhower, Johnson and Nixon administrations exerted much pressure on the Fed to help finance war campaigns and the Cold War. In 1977, the Congress ensured more independence to the Federal Reserve by setting two, and only two, clear objectives that were to guide the Fed’s monetary policy in the future: healthy employment and stable inflation.

A rough guide to the level of central bank intervention is the interest rate set by the Fed. When rates are less than inflation, the Fed is probably doing too much in response to some acute or protracted crisis.


Let’s look at an odd – or not – coincidence. I’ll turn to the total return from stocks to understand the effects of central bank policies. There are two components to total return: 1) price appreciation, and 2) dividends. When price appreciation is more than 50% of total return, economic growth and company profits are doing well. Future profit growth looks good and more money comes into the market and drives up prices. When dividends account for more than half of total return, as it did in the 1940s and 1970s, both GDP and company profit growth are weak. Both decades were marked by heavy central bank and government intervention in the economy.

Here’s a link to an article showing the total return on stocks by decade. During the 2000s, the total return from stocks was below zero. An average annual return of 1.5% from dividends could not offset an annual loss of 2.4% in price appreciation. Hubris and political pressure following 9-11 led Fed Chairman Alan Greenspan to make several ill-advised interest-rate moves in the early 2000s that helped fuel the housing boom and the ensuing financial crisis. His successor, Ben Bernanke, continued the policy of heavy intervention. Following the financial crisis, the Fed kept interest rates near zero for nine years and has only recently begun a program of gradually increasing its key interest rate.

The price gains of the 2010s have lifted the average annual return of the past 18 years to 7.4%, and the portion from dividends is exactly half of that, at 3.72% per year.  It has taken extraordinary monetary policy to rescue investors, to achieve balanced returns  that are about average from our stock investments.  Some investors are betting that the Fed will always come to the rescue of asset prices.  That same gamble pushed the country to the financial crisis when the government did not rescue Lehman Brothers in September 2008.

The financial crisis should have been on each generation’s list.  Within ten years it will be.  It is still crouched in the tall grass.



Happy days are here again.  Yes, girls and boys, it’s time to raise the debt ceiling!  By the end of September, the Treasury will run out of money to pay bills unless the debt ceiling is raised. This past week, President Trump hinted/threatened that he would not sign a debt increase bill unless it included money to build the wall between the U.S. and Mexico.

The Congress has not had a budget agreement in several years and is unlikely to enact one this year. People may sound tough on debt but a Pew Research study
showed that a majority do not want to cut government programs, including Medicaid.

Liberal economists insist that government debt levels don’t matter if the interest on the debt can be paid. This article from Pew Research shows the historically low rate on the federal debt. However, Moody’s reports that the U.S. government pays the highest interest as a percentage of revenue among developed countries. As a percent of GDP, we are 4th at 2.5%.

Package Me

July 9, 2017

Two weeks ago I looked at a long term trend of consolidation and concentration. Technology companies now dominate the top spots in the SP500, the number of retail outlets is shrinking, the number of banks is dwindling, and the population itself is concentrating in urban areas. This week, I’ll look at a companion trend – categorization.

The essential business model of some leading technology companies is the selling of advertising to us and the selling of us – our interests and choices – to other companies. We are the consumers and the products. We are the components of the business models of companies like Facebook (FB) and Google.

A business model is a plan to provide and capture value. FB and Google provide value by connecting us to each other and to a vast trove of information, most of which we ourselves provide. FB and Google capture value by selling us. To sell us, the unique composite of all of our choices must be packaged into algorithmic categories.

We consume information and we are information. We are part of the network of information. When I travel, Google Maps tells me where I am and how to get where I want to go. Where is a grocery or sporting goods store along the way? Google knows. Within hours, Google has sold that information to companies who offer me deals on hotels and restaurants. I am part of the network.

Listen to a forty year old song from Pink Floyd, Welcome to the Machine. It is a cynical vision of being absorbed into the dream machine of the entertainment industry. This is a brave new world of information – and maybe some disinformation and some anger and scams and sexploitation but I want to focus on the positive.

As I drive to work or the store, I give a wave to the mobile purchasing unit in the car next to me. Hi, neighbor! I don’t mind that my entertainment, dining and transportation choices are for sale. I do mind that my political and religious beliefs are packaged and sold like commodities. That is the price that I pay for being in the information club.

Talking about travel….annualized sales of autos and light trucks has fallen below 17 million for several months now. On a per capita basis, sales never reached the levels of past economic recoveries. We are buying about 5 cars for each 100 people, and that is less than the 5.8 cars we have bought in previous periods of economic strength. The auto industry would have to sell almost 19 million cars and light trucks each year to meet those per capita levels.


I heard someone remark that cars are becoming like appliances. As I drive down the highway, I see that there are only a few body styles. Engineers have gradually perfected those designs that minimize wind resistance in order to increase gas mileage enough to meet EPA requirements. I drove next to a Ford Fairlane 500, a boat of a car from the era when car designers and advertising guys – always guys – teamed up and let their creative juices flow. Those were the days when a car was a signature. Now I drive down the highway in a category of vehicle. Hey, ma, look at me!

In order to sell me stuff, Google and FB need my attention. Unfortunately, I must devote a lot of my attention to driving. As a mobile purchasing unit, this is an unproductive use of my attention. A self-driving car will be the final step in the appliancification of the automobile. “Google, when will I arrive at work?” “In approximately 8 minutes.” Beam me up, Scotty.

Over a million people in the U.S. die in automobile accidents each year, and approximately 10% of the entire population are injured in a year. The major car companies have committed to having a driverless car by 2020 or soon after. The cost to add driverless capabilities is only a few thousand dollars. Some research companies are predicting (Motley Fool article) a gradual transition to driverless cars with 10% being fully autonomous in 15 years.

I think that the changeover will happen more quickly because Google and FB need my attention. Thousands of vendors want the dollars in my pocket to join the network. For the next 10 minutes only I can get a deal on a fresh pastry and a coffee at the Starbucks just down the street. Say or press “Yes” to accept this deal and my car will drive itself into the Starbucks’ drive-up lane.  Would I like to order ahead?  The car can do that for me. Well, sure.  Hey, I like this new world.

I wrote about consolidation and concentration a few weeks ago. Soon to come will be an integration to package us as mobile purchasing units. A big technology company could partner with or absorb a finance company to help me buy a driverless car in order to market to me. Google could subsidize a better interest rate on my auto loan or lease as a cost of packaging my choices to other vendors. I hear the sound of dollar bills stirring in my pocket. They want to be part of the network as well.

Next week, the stream and the pool…

A Decade Of Change

June 25. 2017

This week I will review a decade of change to help illustrate a fundamental fact about investing:  most of us are clueless about the future because we are bound by comfortable habits of thinking.

Ten years ago this month, June 2007, Apple launched the iPhone. The touch screen was innovative but I found the keyboard had a lack of responsiveness. The ability to use the internet was cool but the connection was slow. There was no camera built into the phone. Cameras took pictures, not phones.  Apple did not introduce the App Store till July 2008 so users got whatever Apple thought they needed. Apple controlled both the hardware and software. People stood in line when the first phone was released because Apple people are a little bit nuts. The phone was suitable for geeks who had money to burn.  Or so it seemed.

Phones were tools, not toys. People who used their phones for work used a Blackberry, a phone with a keyboard that kicked butt over the iPhone and had a great email interface to boot. The low cost workhorse phones were Nokia models. They stood up to daily wear and tear and the little screen was adequate for reading text messages.

The previous year, a relatively new company called Facebook notched 12 million monthly users (Guardian) and their user count was growing fast. Facebook was a social networking site for people who had time on their hands and the desire to connect with their friends. A passing fancy for the kids, no doubt, just like rock and roll was to an earlier generation of parents.  Or so it seemed.

That same year, the internet search company Google developed a beta version of a phone operating system (OS) that could compete with Apple’s iOS.  In the fall of 2008, a year later, Google released version 1 of the OS.  It was built with an open source code that Google called Android. That same month, the wheels came off the global economy. As millions of people lost their jobs, they worried more about paying their bills than a phone operating system.  By November 2008, both Google and Apple had lost half of the value they had in the summer.  Blackberry lost 2/3rds of its value.

In June 2009, two years after the launch of the iPhone, the electronics division of the conglomerate Samsung introduced the Galaxy smartphone.  The phone used the new Android OS and, to compete with Apple’s App Store, hundreds of apps were available for the phone.

Clickety-click as we turn the time dial to the present.  At $10, Blackberry’s stock sells for 7% of its price in June 2008.  Hillary Clinton likes her Blackberry but too many people switched. Until the fourth quarter of 2016, Samsung sold more phones than Apple, but Apple makes more profit on their phones and is the largest company by market capitalization.   Since the iPhone launch Apple’s stock price has soared 900%. Together the two companies account for almost half of all smartphones. They have become wearable computers and cameras and music players and podcast devices.

The iPod was the marriage of a CD player and a portable radio – a consolidation of two functions. Following its introduction in 2001, the iPod became the dominant music player.  Umpteen million songs were available on the device through the iTunes store.  In April 2007, Apple announced that they had sold 100 million iPods in 5-1/2 years, and by the end of 2014, that figure stood at 390 million.  But smartphone users were now using their phones to play music.  In 2014, sales of the iPod fell by half to 15 million. In 2015, Apple stopped reporting the number of iPods sold.  Consolidation had been the key to the iPods success and its demise.

The iPhone and the various Android models of smartphones have depended on increasing network availability and quality – “can you hear me now?” – and the thousands, or millions, of apps available for the phones. I can read email on my phone as well as my newspaper, a book or magazine. Students can read their textbooks on their phones. In addition to music, I can listen to podcasts or radio stations from far away.

The sophistication and accuracy of Google maps is science fiction made fact. I was recently in the middle of beautiful Idaho. The topographic map published a few years ago indicated that a particular county road was improved but unpaved. Google maps marked the road as paved for about ten miles. Google was right. Portions of Nevada that were blurred a few years ago on Google maps now show roads that lead to where? Maybe some alien city in the middle of the desert.

As I mentioned last week, the top 5 companies in the SP500 are tech companies. Ten years ago, the top 5 were Wal-Mart, Exxon, GM, Chevron and ConocoPhillips (Fortune), a mix of retail, automotive and oil sectors. Now there is only one sector at the top: technology. As a rule, concentration is not a good thing.

Let’s turn from tech to banks.  Since 2007, America has lost a third of its banks, a continuation of a trend that began after the Savings and Loan crisis in the late 1980s. The number of commercial banks in the U.S. is about a third of what it was in 1990. New York has lost half of its banks in that time. California has lost about 60% of its banks. You can check your state at the Federal Reserve Database  and search for [postal abbreviation for state]NUM. As an example, Colorado is CONUM. New York is NYNUM. California is CANUM. The U.S. figures I mentioned earlier come from the series USNUM.

Consolidation is spreading throughout the economy. In the last 12 months, more retail stores closed than during 2008, the year of the financial crisis. The stocks of the retail sector (XRT) have fallen 20% from their highs.

Adding to the pressure on brick and mortar retail stores, Amazon recently announced that they were buying Whole Foods. Amazon’s sales have grown by more than 1000% since 2007, and America’s stores have felt the pain.

The consolidation in the retail space has been going on since the 2001 recession and the demise of the dot-com boom. The population has grown 14% since then but the number of employees in retail has grown less than 3%. Inflation adjusted sales per employee have grown by 61% in the past 16 years but the inflation adjusted wages of retail workers have declined 1%.

We ourselves are concentrating. For the first time in the nation’s history, more people live in urban areas than rural areas. That concentration has pushed home prices up in the larger metropolitan areas. The S&P/Case-Shiller 20 city home price index has doubled since 2000, easily outpacing the 45% gain in prices, averaging 2% better than inflation.
Smaller cities and rural areas have not done as well. Below is a 40 year chart of inflation adjusted residential prices for all of the U.S. The average yearly gain is 1.7% above the inflation rate, slightly below the 20 city gains of the past 16 years. But the ten year average tells a story of crisis, erratic recovery and migration. The 20 city price index has lost only 1/4% per year since the highs of 2007. The country as a whole has lost 2% per year.


(Sources: National sources, BIS Residential Property Price database)

Where will this consolidation lead?
Less competition
Less responsiveness to customer needs
More political power to create a regulatory environment which guards against competition.



Mutual funds and ETFs usually specify their historical performance for several time frames, i.e. 1 year, 3 year, 5 year, 10 year, Lifetime. Four years ago, I noted the diffiiculties of getting a reasonable appraisal of performance if the comparison period begins with a trough in price and ends near a peak.

It is best to disregard the five year performance of many large cap stock funds this year because they include the 13% gain of 2012 and the 33% gain of 2013. A more honest appraisal is the ten year performance. Comparisons start in 2007, near the highs of the market before the start of the 2007-2009 recession and the financial crisis.

Vanguard’s SP500 index fund VFINX reports a ten year average annual return of 7.39%.  Their blended corporate bond fund VBMFX has an annual return of 4.12% over the past ten years.  If I had nothing but these two funds in my portfolio since 2007, my portfolio of 60% stocks, 40% bonds would have gained about 6.1%.  With a conservative allocation of 40% stocks, 60% bonds the annual return was about 5.5%.  The .6% percent difference in returns is slight but it adds up over ten years.  In the first case, a $100,000 portfolio would have grown to $181,000.  In the second case, about $171,000.

Let’s compare those returns to two actively managed blended funds that Vanguard offers.  VWINX is a balanced fund oriented toward income.  The mix is about 40% stocks, 60% bonds and it has earned 6.7% per year over the past ten years.  The Wellington fund VWELX has a mix of 65% stocks, 35% bonds and cash and earned 7.13% each year since 2007.  Both funds have fees that are slightly higher than Vanguard’s index funds but are relatively low at .22% and .25%.  Depending on allocation preference, either fund could serve as a core “gone fishing” fund.  You can use these as a basis for comparison with products that your fund company offers.

Next week I’ll put my ear to the ground and listen for….