David Hume was one of the most prominent of the Scottish Moral Philosophers. He is particularly famous as a philosophical skeptic, who, in his book, An Inquiry Concerning Human Understanding (1748), questioned whether man’s reason and reasoning ability could successfully apprehend reality with any complete degree of certainty. He also argued that reason followed men’s “passions,” rather than reason being a guide for or a check upon men’s emotions and desires.

David Hume

Hume is also famous for arguing that there is a distinct difference between factual or “positive” statements from ethical or “normative” statements. Or expressed differently, an “ought” conclusion could not be self-evidently or logically deduced, per se, from an “is” statement.

He also has been widely recognized as one of the leading contributors to the theory of social ethics and the political order, especially in his work, An Inquiry into the Principles of Morals (1751). Hume also wrote a widely read and acclaimed five-volume History of England (1754-1762), but one which Thomas Jefferson considered unsuitable for students at the University of Virginia due to his belief that Hume was too “Tory” in his interpretation of British history!

Not too surprisingly, for over two hundred and fifty years these ideas of Hume’s have both been highly controversial in philosophy, yet immensely influential across many social and scientific disciplines.

David Hume’s Contributions to Economics Understanding

In addition, and for our purposes in particular, David Hume was an important and distinctly original contributor to economic theory and policy. It was in a collection of Essays, Moral and Political (1753-1754), that he made significant contributions to the emerging subject of “political economy.” It is in these essays that Hume presented a devastating criticism of Mercantilist thinking on trade and commerce, while at the same time, demonstrating the self-regulating and “balancing” forces of the market process.

But where luxury nourishes commerce and industry, the peasants, by a proper cultivation of the land, become rich and independent.

Indeed, it can be argued that if his own writings on various economic themes had been more systematically developed and joined together, it might have been David Hume who became considered the “father” of modern economics instead of Adam Smith.

Hume was born in 1711 in Edinburgh, Scotland and attended the University of Edinburgh, but did not graduate believing that he learned more from reading on his own than from the professors in the university courses. He made his living in various capacities, including for a period of time in France. He returned to his native Scotland in 1769 and lived there until his death in 1776.

Commerce Brings Wealth, Refinement and Freedom

David Hume emphasized that commerce and trade were among the most important avenues to offer opportunities to raise people’s standards of living, and to bring refinement and cultural betterment to a growing portion of a nation’s population.

Commerce also served as an important leveler of the material inequality of a society based on political privilege and government-bestowed monopoly. Through trade, a wider variety and quality of goods became available to a growing number of the people in any society, fostering the development of a “middle class.”

At the same time, growing wealth among more and more members of society acted as a means to restrain and weaken the arbitrary power of tyrannical governments, as a larger percentage of the population had the means to free themselves from government dependency and control. Or as Hume expressed it in his essay, “Of the Refinement in the Arts”:

“But where luxury nourishes commerce and industry, the peasants, by a proper cultivation of the land, become rich and independent; while the tradesmen and merchants acquire a share of the property, and draw authority and consideration to that middling rank of men, who are the best and firmest basis of public liberty.

“These submit not to slavery, like the peasants, from poverty and meanness of spirit; and having no hopes of tyrannizing over others, like the barons, they are not tempted, for the sake of that gratification, to submit to the tyranny of their sovereign. They covet equal laws, which may secure their property, and preserve them from monarchical, as well as aristocratical tyranny.”

Governments and special interest groups, Hume feared, are always want to use and abuse political authority and influence to gain much for themselves at the expense of the ordinary, or common, members of society. And as a society grows in wealth there is more for the government to siphon off through taxes for its own purposes and for interested groups to use the state to plunder and manipulate.  But with the emergence of a middle class that is increasingly supporting itself through commerce and industry, they have the financial means to resist these encroachments by the state. Or as Hume said in his essay “Of Commerce”: “So the luxury of the individuals must diminish the force, and check the ambition of the sovereign.”

Money, Prices, and Inflationary Short-Run Impacts on Production

Hume is also recognized as a significant eighteenth century contributor to monetary theory with his formulation of the quantity theory of money In his essay, “Of Money,” he said that money’s role in a market system is to serve as a medium of exchange and a unit of account. Looked at from a “static” equilibrium perspective, the quantity of money in a society is of little or no importance.

As long as prices in a society were sufficiently adjusted to reflect the available quantity of money to facilitate transactions, any quantity of money serves the purposes of exchange. Double the quantity of money in a society or reduce it by half, when all prices will have, respectively, risen proportionally by double their previous the level, or lowered proportionally by half their previous level, respectively, then all produced and marketed goods will “clear” off the market, with no change in the relative values or costs of the goods in terms of each other.

Any influence that money may have on the level of industry, production, or employment is, Hume argued, in the transition period between the injection or withdrawal of any part of the quantity of money in the economy, when some prices may rise or decline before others, thus influencing profit margins and cost relationships. Hume explained the process in the following way:

“If we consider any one kingdom by itself, it is evident, that the greater or less plenty of money is of no consequence . . . It is indeed evident, that money is nothing but the representation of labor and commodities, and serves only as a method of rating and estimating them. Where coin is in greater plenty; as a greater quantity of it is required to represent the same quantity of goods; it can have no effect, either good or bad, taking a nation within itself . . .

“Since the discovery of the [gold and silver] mines in America, industry has increased in all the nations of Europe . . . In every kingdom, into which money begins to flow in greater abundance than formerly, everything takes a new face: labor and industry gain life; the merchant becomes more enterprising, the manufacturer more diligent and skillful, and even the

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The most alarming part of the next four years is clear to any advocate of liberty. The growing trend of protectionism and economic nationalism, most clearly signified in the figure of President Donald Trump, represents a staggering regression of the slowly rising tide of free exchange that the world has enjoyed for decades.

Proponents of protectionism, perhaps knowing they don’t have an economic leg to stand on, often make appeals to ethics and justice to justify a whole slew of tariffs and quotas. Advocates of free trade are accused of not caring about jobs or prosperity or are eyed with suspicion, as though they’re secretly working at the behest of a globalist elite.

The more and freer the trade, the better for human flourishing.

In truth, the benefits of free trade are vast for all nations, including the United States. The alternative — trade restricted by protective tariffs and quotas — concentrates benefits to a protected few who profit from reduced foreign competition.

To be sure, protectionism preserves some jobs, the most inefficient, outdated, and comparatively disadvantaged jobs, that is. Despite what protectionists wail, a nation and all its citizens are undoubtedly worse off when trade is limited.

Virtuous Trade

There is an inherent justice to free trade. Individuals can choose what they buy from where. Trade links individuals across the world together through vast networks of exchange. Integration through trade and exchange is a major factor for lifting people out of poverty. The more and freer the trade, the better for human flourishing.

Those who cling to false justifications of protectionism might take comfort from Abraham Kuyper, Dutch theologian-turned-politician. In Kuyper’s book Antirevolutionaire Staatkunde (or Anti-Revolutionary Politics), he discusses his political support of tariff increases in the Netherlands. Kuyper makes a moral argument in defense of tariffs which stems from his concerns about unemployment. He writes:

Excessive enthusiasm for Free Trade and for free movement of population can deprive men of work who would otherwise have it in abundance. Free Trade can have as a consequence that many items are fabricated abroad so that there is no work to be done here. This can be observed in its simplest form in the case of lumber. If unsawed logs are imported, then the wages of sawing can be earned here. If, however, lumber arrives sawed, then the wages for sawing are lost here.”

In this one brief excerpt, Kuyper echoes familiar protests against free trade. What will happen to the jobs for those who can’t stand up to foreign competition? What about their wages, and their families? To Kuyper, only the immoral man could ever advocate for “excessive” free trade.

Moral defenses of free trade are few and far between. However, there are exceptions. In a 1956 article titled “Abraham Kuyper’s Unscriptural And Unsound Ideas On Tariff Protection,”Frederick Nymeyer takes Kuyper to task for what he sees as grievous moral and economic errors in his defense of tariffs.

Protectionism makes everybody worse off, bar a select few who enjoy the fruits of less competition and higher prices.

Kuyper’s defense of protectionism is rooted in concern for workers, like Dutch sawmill workers, who might be unemployed due to imports of already sawed lumber. These workers and the sawmill owners capture the concentrated benefits of restricted trade on lumber. However, the costs of restriction are spread across all the consumers of lumber throughout the Netherlands. They pay in higher prices.

As Nymeyer writes:

“From this viewpoint there was no gain to be obtained by Dutch sawmill employees except at the expense of other Dutchmen, namely the consumers. What virtuous morality is there in helping one man at the expense of another?”

The Immorality of Protectionism

In a protectionist system, the only gains come, as Nymeyer says, “at the expense of another.” For every sawmill worker who keeps his job, or enjoys higher wages, as the result of protectionism, thousands of other citizens suffer from a lesser ability to purchase what they want, and through higher prices for wood and anything for which wood is used.

In all cases, protectionist policies unfairly benefit a small, targeted group at the expense of entire countries.

Of course, domestic citizens are not the only ones harmed by this protectionist policy designed to benefit domestic sawmill workers. Foreign sawmill workers are harmed in the same way Kuyper fears for the Dutch. With fewer markets for their products, they may also end up unemployed.

Nymeyer argues that Kuyper, and other protectionists, approach the world with mixed morality. They only think of one specific category, such as workers in a protected industry. If they gain, it is just, even if thousands of others suffer at their expense. As Nymeyer says, “In plain language, Kuyper has scales for morality with two sets of weights; one set of weights for Dutchmen; another set of weights for Swedes [foreigners].”

Nymeyer did not go far enough. Protectionists have different “scales of morality” for domestic versus foreign producers but also for domestic producers versus domestic consumers. Protectionism makes everybody worse off, bar a select few who enjoy the fruits of less competition and higher prices.

The problem with protectionism is that it is rarely if ever confined to a single industry. Instead, it manifests itself into a whole restrictive system. Every industry becomes crucial and demands protection. Any concentrated gains that are realized in those industries become completely eroded, as goods in every sector become more expensive, and as the freedom for individuals to buy as they please collapses.

Protectionism is inherently immoral. In all cases, it unfairly benefits a small, targeted group at the expense of entire countries. It invites conflict between nations, reinforces nationalist ideas, and impoverishes everyone in the process. Not only is restricted international trade economic lunacy, but protectionism is wholly incompatible with justice, morality, and reason.

Tyler Groenendal

Tyler Groenendal is a graduate of Hillsdale College, and works for the Acton Institute for the Study of Religion and Liberty. He enjoys cats, liberty, and the music of Ritchie Blackmore.

This article was originally published on FEE.org. Read the original article.

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Economics (in general) is populated at its core by a lot of bad ideas. And these bad ideas have come to be accepted as the correct interpretation of how the economy functions and thus have become the basis for economic policy. This news shouldn’t come as a shock since I’ve written about this many times over the years in Thoughts from the Frontline.

Economics is an enormously useful tool for those of us who are trying to understand business and investments and government policy. But to paraphrase Dirty Harry, “An economist has to know his limitations.”

Economics

The whole concept of an economy’s being “in equilibrium” is simply academic nonsense. The real world is a complex, dynamic, out-of-balance mess that doesn’t fit inside anyone’s box. Those theories and equations only work when you assume away the real world.

The people who best understand economics are the worst at managing it

One of my favorite Keynes quotes (and there are lots of them) is:

Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

How can the very people who claim to understand how the economy works be so bad at predicting and managing it? The quick answer is that the real economy is far more complicated than they’re willing to admit.

Fortunately, some economists recognize these limitations and are looking for better ways to understand the economy. Unfortunately, that group is vastly outnumbered by old-school economists in government, central banks, international institutions, corporations, and universities.

As much as I like to quote John Maynard Keynes (he does have the best quotes in economics), I find his basic thesis to be the fundamental flaw in current macroeconomic thinking.

There’s a fatal flaw in their assumptions

It’s that aggregate demand is the most important factor in economics, and that if aggregate demand isn’t sufficient, then it is up to the government to run deficits to stimulate that demand.

Essentially, Keynesians of all stripes see the recovery that followed a recession as the result of the deficit spending enacted to rescue the economy. Look, they say, it has happened every time.

They fail to recognize that the activities of individual businessmen and women, plus the self-interested acts of millions of individuals, were the true driving force behind the recovery.

Thus they unwisely prescribe even greater deficit spending and more debt to counter recessions but routinely fail to adhere to Keynes’s dictum that during good times, that debt is to be paid down.

They refuse to recognize the obvious connection between distorted debt levels and the lack of growth in an economy—a connection that has been demonstrated time and time again all over the world.

The point—as we will confirm in a moment when we reconsider classical economics—is that income is the driver for the economy.

The great majority of economists have been trained to see consumption and government spending as principal drivers of the economy. I see these two as secondary, and productive behavior in the private economy as the primary driver.

Central bankers should not be surprised

Then we come to the concept of general equilibrium. Pretty much every economist accepts some variant of the concept of general equilibrium. I have come to the point where I completely reject the notion: it’s utterly false. There is no general equilibrium of any kind.

Today’s most popular macroeconomic models come in a flavor called “Dynamic Stochastic General Equilibrium.” The cool kids call them “DSGE” models. They are “dynamic” because they show economic changes over time, and “stochastic” because unexpected shocks to any of the inputs can drastically change the outputs.

Central banks are the most enthusiastic DSGE model users. If you believe their policies have worked well in recent years, then you may be a DSGE believer. I am not. I think a main reason DSGE models fail is that they assume everyone is similarly informed and always makes rational decisions. Neither of those things is true in the real world.

This sort of equilibrium never exists in the real world because the real world never stops changing. Thus neither we, nor our estimable central bankers, should be surprised when DSGE models don’t deliver much useful information.

Get a Bird’s-Eye View of the Economy with John Mauldin’s Thoughts from the Frontline

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The enduring power of Essentials of Economics is due to the persuasive power of economic logic itself. If it is done well, it applies in all times and places. And this book does economics extremely well. In times when economics is subject to vast political manipulation, when people have abused the science to push political agendas contrary to everything economics stands for, this book stands out as a clear, objective, and rational statement of the core of what economics teaches.

In his outstanding introduction, Art Carden speaks of the scandal that it is not better known. He means, of course, in our own time. This edition helps to rectify the problem.

Ballve

But let’s take a step back to the early years when it was first published. Professor Ballve was teaching in Mexico when he heard Ludwig von Mises speak. They struck up a correspondence. After Ballve felt that he had most of his questions answered, he sat down to write this short book. It was published in Mexico in 1956. It sold very well and went into several editions.

Benefactors

Two additional names deserve special mention in the tale of how it came to the English-speaking world. The William Volker Fund, administered by its founder’s nephew Harold W. Luhnow, funded a translation. This was one of thousands of incredible projects pushed by the Volker Fund in those years. Without this act of benevolence, this book would have likely been forgotten.

But there is another important act of entrepreneurship behind this work. Leonard Read (1898–1983) was head of the Foundation for Economic Education. His passion was finding literature that propagated economics to the intelligent layman. He had a remarkably independent mind and a good eye for literary value. He read through Ballve’s work and decided that he would use the extremely scarce resources of the foundation to promote and distribute the book as widely as possible.

This was a risky decision. Ballve was an unknown in the United States. He had no academic position in the United States. He had no champions, money, or connections. There was no quid pro quo at work. Read would not be able to sponsor lecture tours by the author or otherwise turn him into a big star. He saw the high quality of the work and decided to push it. It was piety for truth that drove the decision. There was nothing more to it than that.

It was an excellent decision. FEE distributed many thousands of copies, perhaps even many tens of thousands of copies. It was a widely read primer on economics in the 1960s, read by champions of free enterprise who wanted to understand and promote that understanding. What Read had seen in this book others saw as well. The book does not require a great deal of time, but it covers a vast scope of topics.

It is, in many ways, the perfect tutorial in what economics is and what it implies about our world. It is completely free of the tendency toward political posturing. Its lessons are broad enough to apply in all times and all places. For this beleaguered generation of freedom-minded individuals assaulted on every side by trends toward centralization, this tutorial is truly the light.

Falling in Love with Economics

Permit me a personal note. When I was 17, I had a sudden realization that I wanted to study something new, something fresh, a discipline that I had not yet encountered, something that would appeal to all my interests (history, philosophy, arts) but allow them be applied in a new way. I looked through university catalogs randomly.

Finally I stumbled on this thing called economics. I wondered what it was. I walked into the head of the department’s office at Texas Tech University and asked him point-blank: What is economics? He said just as pointedly: It is the science that seeks the causes for why civilizations rise and fall and the material forces that are ultimately behind these great events.

That’s all I needed to know. I was in. Then he gave me a book. It was a tutorial that covered the essentials of Keynesian theory. This was a disappointment. Rather than dealing with recognizable forces at work in the word, it dealt with unreal mechanical postulates that abstracted too far from anything to do with human choice.

Still, I stuck with the discipline until I finally bumped into the works of Hans Sennholz, Ludwig von Mises, and the whole Austrian tradition. I wish now that the first book I had been given was Ballve’s Essentials of Economics. This is a book that gets to the core of what makes economics wonderful.

I would finally like to say a special thank-you to Sheldon Richman, former editor of the Freeman, for having suggested this title for republication.

Jeffrey Tucker

Jeffrey Tucker is Director of Content for the Foundation for Economic Education. He is also Chief Liberty Officer and founder of Liberty.me, Distinguished Honorary Member of Mises Brazil, research fellow at the Acton Institute, policy adviser of the Heartland Institute, founder of the CryptoCurrency Conference, member of the editorial board of the Molinari Review, an advisor to the blockchain application builder Factom, and author of five books. He has written 150 introductions to books and many thousands of articles appearing in the scholarly and popular press.

This article was originally published on FEE.org. Read the original article.

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My book, Advanced Introduction to the Austrian School of Economics, is being translated into Korean, and the translator asked me to provide a short preface for the Korean edition.  I’m reproducing it below, partly just to give my book a bit more publicity (it’s affordably priced, if you go with the paperback), partly to indicate how I see how the ideas of the Austrian school are relevant to Korea, and partly because the introduction will be translated before it is published, so the only people who will be able to read it are those who read Korean.  Here’s what I had to say:

Economics

Preface for Korean Readers

Mainstream economic theory at the beginning of the twenty-first century rests on a neoclassical foundation of equilibrium models.  The concept of equilibrium in economics, as in the sciences more generally, is that when something occurs to disturb that equilibrium, there are forces at work to pull the economy back to equilibrium.  Equilibrium models provide a great deal of insight into the way markets coordinate the desires of suppliers and demanders in all markets so that the quantity supplied equals the quantity demanded.  This is one of the great achievements of economic science, and the equilibrium approach to analyzing economic phenomena has developed and matured over the twentieth century and into the twenty-first.

All models are simplifications of reality, and when they are applied to issues in which some essential elements have been assumed away by the model, can give misleading policy guidance.  One area in which the neoclassical equilibrium framework has misled some economists is in policies that generate economic progress.  In fact, often when forces disturb an equilibrium, those forces change the underlying nature of that market, and the economy more generally, so the economy never returns to its former equilibrium.  The economy is characterized by progress and change, not equilibrium.

The neoclassical framework assumes firms have production functions and produce certain goods, but leaves outside the model an explanation of how production technologies are developed, and how ideas for new and improved goods and services emerge.  Entrepreneurs. the people who develop new and improved goods and better ways of producing them, are a central component of the Austrian school’s contribution to economics.

A fundamental economic problem is that knowledge in an economy is disbursed among all individuals in an economy.  Knowledge is decentralized, new information is often contradictory, and knowledge held by one person often cannot be easily communicated to others so they can make effective use of it.  Whereas the neoclassical framework emphasizes how markets are able to generate equilibrium prices and quantities, the focus of the Austrian school is more on how markets coordinate the decentralized knowledge in an economy and incorporate new information into that knowledge base.  The coordination and effective use of everyone’s economic knowledge is the way that a market economy generates economic progress.

South Korea has enjoyed a remarkable period of economic progress since the early 1960s, and Koreans understand that as the global economy progresses, an economy that stands still will fall further and further behind.  The challenge is to find policies that allow that economic progress to continue, and an Austrian-school view of the economy is that prosperity is the result of an effective coordination of decentralized knowledge and an effective incorporation of new knowledge into a continually developing economy.

The challenges for Korea are as great as for any developed economy in the world because its past reliance on industrial policy suggests that heavy government oversight and direction of the economy, which has worked in the past, should be continued into the future.  The Austrian school views this type of thinking with skepticism, and the discussion of the “socialist calculation debate” in this book gives some reasons for this skepticism.

The Austrian school of economics has a great deal to offer to those interested in understanding how to encourage entrepreneurship and innovation, and how economic progress is generated.  Many of the significant works of the Austrian school appear in the list of references to this volume, but because most are in English, with some German, the work of the Austrian school is less accessible to Korean readers.  This volume can serve as an introduction so readers can get a sense of the major ideas of the Austrian school and how they can augment the ideas in standard neoclassical economics.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

Article by Randall G. Holcombe – Mises.org

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What good is a central banker which keeps interest rate high enough that kills market volaility,the lifeblood of traders , deprive media of sound bytes, hurt asset owners (basically rich guys)  and favors long term effect on real economy over short term gratification through stock market gains.

Meet Reserve Bank of India, now these are early days and I was the sceptical one after Dr Rajan left but watch the behaviour of Indian Rupee as compared to other Emerging market currencies against dollar in last couple of months when almost every EM currency has come under pressure except Indian Rupee

The CPI released this week surprised on the lower side  as Consumer prices in India increased 3.17 percent year-on-year in January of 2017, easing from a 3.41 percent rise in December and below market expectations of 3.22 percent. It is the lowest inflation rate since the series begun due to a sharp slowdown in food prices

But Indian wholesale prices (WPI) rose 5.25 percent year-on-year in January of 2017, following a 3.39 percent gain in December while markets expected a 3.89 percent rise. It was the tenth straight month of increase and the highest since July 2014, driven by a faster increase in cost of manufactured product and a surge in cost of petrol while prices of food fell less than in the prior month. On a monthly basis, wholesale prices went up 1.0 percent, compared to a 0.2 percent fall in December. WPI inflation came as a surprise to the market and vindicated RBI stance of keeping interest rate unchanged ( as per reuters poll 46 economist expected rate cut in this policy) and shifting bias to neutral from accomodative.

Rising WPI is a cause of concern because pricing pressure first comes out at wholesale level and then at retail level. so, we can safely say WPI is a leading indicator and CPI is a lagging indicator.

This is last oe year chart of CRB Index (CRB Index is calculated using arithmetic average of commodity futures prices with monthly rebalancing. The index consists of 19 commodities: Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, RBOB Gasoline, Silver, Soybeans, Sugar and Wheat)

CRB index is up 20% in last one year but we dont see this kind of movement in domestic prices simply because in absence of demand ,companies were absorbing this cost by increasing the productivity .Demonetisation hit perishable commodities so bad that in absence of hard cash with traders , farmers had to sell their produce at throw away prices leading to collapse in food inflation. I think companies will not be able to absorb anymore raw materials price hikes as it will start impacting the margins and will start increasing the output prices . With return of hard cash ,agri inflation will catch up  http://worldoutofwhack.com/2017/02/06/global-food-prices-on-a-sprint-up-16-in-last-one-year-diverge-from-indian-prices/ to global prices.

The single biggest beneficiary of RBI policy is Indian Rupee and if you are miffed that your home EMI is not going to come down further , dont blame the central bank, it is in the hand of your own bank (better banking cartel) or better enjoy a vacation with Egyptian Mummies. One Egyptian pound (currency of Egypt ) today equals 4 Indian rupee whereas just a year back 1 egyptian pound equalled 9 INR. So INR has appreciated more than 50% against Egyptian pound and consequently your egyptian vacation should be 50% cheaper.

This is what happens (Egypt)when inflation is left unchecked , central bank is BEHIND THE CURVE and listens to economist and political masters.

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The CBOE VIX or volatility index has ground down to very low levels, and as noted in the recent S&P500 #ChartStorm a series of signals and indicators are starting to light up that say the VIX is too low and is unlikely to stay low.  Something I thought I would add to the mix here is the historical seasonal patterns for the VIX.  In this case we are just talking about the level as rate of change doesn’t really make a great deal of sense for something that is mean reverting and relatively stationary. The bottom line is, if you ignore all other data and info, the historical seasonal pattern would suggest that volatility could actually go lower from here!  In face it’s not until the second half of the year that you seasonally tend to see a rise in the VIX.  Something to think about… not a base case, but probably goes against consensus.

The VIX is so far tracking along in a range, similar to what it does seasonally – however if history is anything to go by it could go even lower from here!

The chart below provides a seasonal map for both the S&P500 and the VIX.

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There’s value and opportunity in European high-yield bonds today. But if you’re considering using an exchange-traded fund (ETF) to tap into the market, you may want to think again.

The reason is simple: Europe’s largest high-yield ETF has consistently underperformed the top 25% of actively managed European high-yield mutual funds. That’s true whether one measures performance over the past one, three or five years.

ETFs

This may be news to many investors. According to Thomson Reuters Lipper, bond ETFs were the best-selling assets within the European ETF industry last year. ETFs that invest in European corporate bonds were among the top sellers, pulling in 5.5 billion euros in 2016.

Why the rush into ETFs? Financial advisors often tell us that their clients like ETFs because they offer a low-cost and easy way to access the high-yield market and its high income potential.

That all sounds good. But when we dig a little deeper, we find that high-yield ETFs aren’t as cheap or efficient as they first appear—and that’s a big reason why their returns have lagged those of actively managed funds.

How Costs Can Add Up

Let’s start with costs. Most ETFs passively track an index. In theory, that should keep costs down. In practice, it doesn’t always work that way. This is especially so in a market like high yield, where it’s a lot harder—and more costly—to replicate an index than it is in the stock market.

The manager of an MSCI Europe equity ETF, for example, can easily buy all the stocks that make up the index, since the turnover of stocks within the index is low. That keeps trading costs and fees to a minimum.

In high yield, tracking a benchmark is more difficult. New bonds get issued and old ones mature. Some get called or tendered. The result: bonds go into and out of benchmarks often. To keep up, ETF managers have to trade more frequently, often at significant cost.

The Pitfalls of Passive Exposure

There’s another problem with indexing in high yield—it’s an inefficient and risky way to access the market. There are good reasons to consider European corporate bonds today, including attractive valuations, thrifty corporate borrowing habits and a highly supportive policy backdrop. But that doesn’t mean investors will necessarily want exposure to the entire market.

When it comes to high yield, issuer credit quality varies widely, and so do the risks. Active managers can draw on detailed credit analysis to discriminate among credits and sectors. They’re also likely to make better decisions about how to redeploy income from bonds that mature or are tendered.

Passive ETF investors, on the other hand, lend indiscriminately to every company that borrows enough to make it into the index. That can result in unwanted exposures to overvalued or risky sectors.

Paying a High Price for Liquidity

There’s another reason many investors gravitate toward ETFs: they’re liquid. Unlike mutual funds, which are priced just once a day, ETFs can be bought and sold at any time, just like stocks. This is a great thing if you’re a high-frequency trader who wants to short the high-yield market for a few days or a professional portfolio manager who needs to hedge her exposure for a short period.

But a large share of the people who have been buying high-yield ETFs aren’t traders. They’re investors who are saving for retirement or college or a home. To meet these goals, they need long-term exposure to the market and a hands-on strategy that can seize opportunities as they arise. They don’t really need intraday liquidity—and if they knew what it was costing them in terms of performance, they probably wouldn’t want it.

There’s another thing to consider: In a sharp market downturn, there’s no guarantee that high-yield ETFs will be able to deliver that liquidity as promised. This is because their growing popularity forces them to hold ever-larger shares of less liquid assets. If prices were to fall sharply, finding buyers might be a challenge, and investors who have to sell could take big losses.

ETFs have their uses, particularly for short-term traders and tactical exposure to the high-yield market. But they’re a poor choice for long-term exposure. Investors on the hunt for income and value are right to focus on European high-yield bonds. They just shouldn’t be doing it with ETFs.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. AllianceBernstein Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

Article by Jorgen Kjaersgaard, Gershon Distenfeld, Sahil Khan – Alliance Bernstein

The post Why European High-Yield ETFs Don’t Deliver appeared first on ValueWalk.

CPI excluding food and energy (core-CPI) increased by 31 bps in January for the largest one month increase since March 2006. Headline CPI increased to 2.54% year-over-year which is the fastest growth rate since March 2012. Even with some higher headline numbers, inflation in the US still seems contained. Core-CPI is still running below a 2% trend growth line for the past decade and our CPI diffusion index remains at a very low level which indicates that rising prices isn’t yet broad based. One area that we are keeping a close eye on is the shelter component of the CPI. The year-over-year change in owner’s equivalent rent and rent of primary residence are basically at the highest levels since 2007. The shelter component of the CPI has accelerated and is now growing at above a 2% growth rate for the past decade. All in all, however, structural inflation is still historically low as the 10-year moving average of the year-over-year change in the CPI stands at just 1.78%.

Artiicle by Eric Bush, CFA – Gavekal Capital Blog

The post Largest Monthly Gain In US Core-CPI Since March 2006 And More From January’s CPI Report appeared first on ValueWalk.

Many Samsung fans were disappointed when the company said that the flagship Galaxy S8 wouldn’t be announced at its MWC event later this month. But the Korean company may have at least something to say about the S8 at the show. There have been speculations that Samsung would show off the handset to a limited audience and unveil a teaser video. A new report coming out of Korea claims that Samsung will announce the Galaxy S8 launch date at MWC.

Samsung has beefed up safety procedures

Citing Kim Dong-jin, head of Samsung’s wireless business, Hankyung.com reports that the official Galaxy S8 schedule would be announced at the Mobile World Congress. Most leaks and rumors point to a March 29 unveiling at an Unpacked event in New York. The phone would go on sale in most major markets on April 21st. Instead of the S8, Samsung would introduce the Galaxy Tab 3 tablet at the February 26 event.

Samsung has traditionally announced new Galaxy S devices at the Mobile World Congress (MWC). But the company has decided to delay the S8 launch following the Galaxy Note 7 disaster. Samsung has promised to develop better quality assurance practices and safety procedures to ensure that the S8 doesn’t blow up like Galaxy Note 7.

Samsung expects strong demand for Galaxy S8

Sources familiar with the matter told The Investor a few days ago that Samsung plans to increase the initial shipments of the Galaxy S8 by 40% compared to its predecessor. The company plans to ship 16 million units in the first batch. It includes 10 million units of the 5.8-inch S8 and six million of the 6.2-inch S8 Plus. Overall, The Investor expects Samsung to ship 55 million Galaxy S8 handsets by the end of this year, though Samsung has set a target of 60 million units.

A few days ago, Samsung accidentally leaked the Galaxy S8 Plus on its Singapore website, only to take down the page minutes later. The phone listed on Samsung’s Singapore support page carried model number SM-G955FZKDXSP. The same handset with model number SM-G955FZKDINS was recently spotted in India. The last few characters in a model number differ depending on the carrier and region.

Galaxy S8 features and specs

Both the Galaxy S8 and S8 Plus are said to feature a Quad HD Super AMOLED display. Though the upcoming handsets would sport the same 12MP main camera with Dual Pixel technology, there would be under the hood improvements. Samsung will also add its own voice assistant Bixby, which would work with all the native apps on Galaxy S8. Bixby will be capable of communicating in eight different languages.

A report from The Investor claims that the Galaxy S8 and S8 Plus would pack 3,000mAh and 3,500mAh batteries, respectively. Both the phones would be powered by Qualcomm’s Snapdragon 835 or Samsung’s in-house Exynos 8895 chipset depending on the region.

The post Samsung To Officially Announce Galaxy S8 Launch Date At MWC appeared first on ValueWalk.

World Gold Council data released earlier this month reveal a paradox. Demand hit 4,389 tons during 2016, but mines produced only 3,236 tons. Yet despite differing supply demand fundamentals, gold prices rose by only 9%. A supply squeeze that size, should have produced far bigger price action.

What gives?

As with many of life’s mysteries, a good place to start is with Chinese thinkers. No, not Confucius, Lao Tse, or even Sun Tzu. I am talking about Bruce Lee.

Gold

In a competitive investing world, in which price discovery, financial reporting and economic data are systematically distorted, the best parallels are with competitive boxing, which is governed by the Marquis of Queensbury rules, and a street brawl.

“When you talk about fighting with no rules,” said the late martial artist, in the lost Bruce Lee interview, “you had better learn to use every part of your body. Your feet. Your elbows. Thumbs. Everything.”

That sage advice increasingly applies to an investing world, in which supply-demand fundamentals, as measured by official statistics, don’t tell you much.

To avoid being fleeced, gold investors – indeed all investors – need to know a bit about everything. Some examples:

Economics and central bank manipulation

Most seasoned investors have caught on that the US Federal Reserve has been intentionally manipulating housing, bond, equities and other asset prices higher. Ben Bernanke, a former Fed chair, and Richard Fisher, former president of the Dallas Fed, have admitted as much.

Less well-known, as Bill Gross recently pointed out, is that while Fed manipulations have tapered off, European and Japanese central banks continue to buy $150 billion a month in assets.

This has swelled global balance sheets to $12 trillion and distorted prices throughout the system. Ten-year bond rates would be nearly 3.5% (instead of 2.45%) Gross suggests, without the manipulations.

If interest rates were 43% (1.05 percentage points) higher, this would bring down the implied value of stocks (by more than 30%, according to this writer’s back of the envelope calculation).

The question gold investors need to ask themselves is how long the central bank manipulations can continue. And which asset classes would best hold their value if current unconventional monetary policy proves to be a bust?

History: no fiat (printed) currency has ever survived

Good investors also need to know a bit about history, which today is taught by professors who grew up in the 1960s. Today’s crop of politically-correct academics teach that the most interesting thing about the Roman Empire, are its public baths, mosaics and approaches to women’s rights. Greece, for its part, is taught for its poetry, philosophy and rhetoric.

Hints regarding how these empires ruled much of the earth, for nearly 2,000 years, might be in a footnote somewhere.

Few ivy league professors today will explain what happened in both empires, and in 1780s France and 1920s Germany, when governments engaged in precipitous currency debasement, that recalls what we are starting to see in Western countries.

Before investing in gold, investors need to assess whether the yellow metal, which has acted as money for at least 3,000 years (many claim longer), has better staying power than paper and digital currency.

More important, how long will it take for the disparity to show?

Math: the US dollar has lost 98% of its value since 1933

Asking investors to learn math, which is so badly taught in Western schools, that the public is essentially innumerate, may be asking a bit much. But one example demonstrates its importance.

In 1933, just prior to the US government’s confiscation of Americans’ gold holdings, an ounce was worth US $20. Today (Feb 15th EOD) an ounce of gold is worth $1,234. That means a dollar buys less than 1/50th as much gold as it did back then (1.6%), and has lost more than 98% of its value.

Worse, almost all that decline occurred since 1971, when the United States, led by President Richard Nixon, defaulted on its international obligations to back the dollar with gold.

Before investing in gold, investors will need to assess whether US dollar debasement will continue, (in truth this is generally accepted) and calculate what pace that will occur.

******

Complexities surrounding outstanding derivatives contracts, ETFs, and other “paper gold,” complicate things even further. Many investors who have been following markets all their lives remain baffled.

That said, one question seems more straightforward. Does one trust all of one’s assets to a paper and digital-based system, run by politicians, central bankers and ivy-league economists?

Or does one hedge one’s portfolio with real economic assets, of the kind that Lao Tse, Confucius, Sun Tzu and Bruce Lee would understand?

Article by Peter Diekmeyer, Sprott Money

The post Gold Paradox Recalls Bruce Lee’s Fighting (And Investing) Advice appeared first on ValueWalk.

Exchange is part of life, even from the youngest age. At first, little kids fight over stuff and their parents have to settle it. But as they get older, perhaps after the age of 6 or so, they discover something wonderful. They can avoid punching and anger, trade with each other, and both parties come away happy.

Exchange is never more wonderfully on display than the day after Halloween when the candy economy at school becomes most elaborate.

Economics

My own earliest memories of trading involved, inevitably, marbles on the school playground. I just asked around the office. Every guy said the same thing. We developed vast systems for valuing collections. We had names for everything: cat’s eye, steely, galaxy, milky. We believed we knew what was and was not valuable, no doubt based on scarcity, and the metrics were constantly changing.

The girls had a different experience. (Don’t judge me; I’m just reporting.) For them, it was about lip gloss, hair ties, and something called Gogurt. They would trade and aspire to create great collections, even at a young age.

In every case, my sample group was influenced by an older sibling or the young brother or sister of a friend. The intention was oddly cruel. An older person would try to swindle a younger person. The awareness that this had happened created a burning desire to not be taken advantage of again. You get wise.

Young Adult Economic Activity

As people enter middle school, exchange becomes a huge part of social life. It involves anything and everything: apples, sandwiches, candy, and notes from school. But no question about the centrality of food in this exchange economy.

Everything was up for grabs, and it is never more wonderfully on display than the day after Halloween when the candy economy at school becomes most elaborate.

Then high school comes and things become much more complicated. Those who can drive trade their services for money, concert tickets, clothing, and so on.

All parties can gain from trade while preserving the peace. It’s an awesome discovery, perhaps the greatest discovery in history. Each of us finds it out in our own lives, and we live with this reality until death.

Therefore Economics

You have to have a certain level of mental maturity to handle the difficulties of economics.

The insight sounds simple, right? Strangely, this is the single hardest lesson of life to institutionalize in society. The failure to learn this and put it into practice is right now the cause of famine in various spots in the world.

Economists have been trying to teach the world this lesson for many hundreds of years. It turns out that it is not enough just to discover how to trade. We also need a consciousness of why we trade, what the social implications of trade are, and an awareness of the inner logic of the trading economy. Through a study of these features, we gain knowledge of that awesome puzzle that vexed the best philosophers of the ancient world: where does wealth come from?

This is the core of economic science. It is about developing a systematic understanding of the implications of exchange in a world of unlimited wants and limited resources. There is a logic at work here. Understanding that logic and what it means for our world is what economics is really about.

Once you study economics, you get it. It can even seem obvious in retrospect. But the initial discovery? It’s awesome. A light goes on. For me, discovery of economics was one of the most exciting moments in my life.

But it does raise the question: when is the right time to start teaching the higher logic of economics? It can be a demanding subject. It requires a certain level of abstract thinking, the ability to trace through several steps of logic, to see cause and effect happening in what otherwise might appear to be a random series of data points.

A generation of thinkers became fed up with the lack of solid economic education in the cultural marketplace. They started the FEE to address the problem.

I’ve found myself wincing when I’ve heard of parents who read Adam Smith or Ludwig von Mises to their young kids. I just want to say: no no no. I mean, good intentions but not good execution. You have to have a certain level of mental maturity to handle the difficulties of economics.

But at some point, the day arrives. Maybe at age 15, maybe 17. It depends on the person. But there is a moment when it is time and you are able to wrap your mind around basic economics. That lesson is something you carry with you the rest of your life. You become a better professional, a better friend, a better person, a better voter! Economics as a discipline can change your life.

FEE Is Your Teacher

In the waning days of World War II, a generation of thinkers became fed up with the lack of solid economic education in the cultural marketplace. They started the Foundation for Economic Education to address the problem. And for the 71 years, FEE has done just that. It has developed a specialization in teaching high school students. Nobody does it better.

This tradition continues to this day. This summer, FEE is holding a number of 3-day seminars on economics, specifically designed for high school students. You can see them all here. An experience like this lasts a lifetime.

And keep in mind: very little, if any of the content, will you hear in any public school in this country. So gaining this knowledge can give any student a huge advantage going forward. It can spark a new appreciation for learning itself.

There is still time to apply for this Spring and Summer offerings. You might forward it on to a student or parent you know.

Tom and Huck

Students, I suppose, do not read Tom Sawyer anymore, which is tragic, since it is one of the greatest books of American literature.

I leave you with this hilarious conversation between Tom and Huck, one that ends with the greatest lesson of all.

“Say–what’s that?”

“Nothing but a tick.”

“Where’d you get him?”

“Out in the woods.”

“What’ll you take for him?”

“I don’t know. I don’t want to sell him.”

“All right. It’s a mighty small tick, anyway.”

“Oh, anybody can run a tick down that don’t belong to them. I’m satisfied with it. It’s a good enough tick for me.”

“Sho, there’s ticks a plenty. I could have a thousand of ’em if I wanted to.”

“Well, why don’t you? Becuz you know mighty well you can’t. This is a pretty early tick, I reckon. It’s the first one I’ve seen this year.”

“Say, Huck–I’ll give you my tooth for him.”

“Less see it.”

Tom got out a bit of paper and carefully unrolled it. Huckleberry viewed it wistfully. The temptation was very strong. At last he said:

“Is it genuwyne?”

Tom lifted his lip and showed the vacancy.

“Well, all right,” said Huckleberry, “it’s a trade.”

Tom enclosed the tick in the percussion-cap box that had lately been the pinchbug’s prison, and the boys separated, each feeling wealthier than before.

The post What Is The Best Age At Which To Learn Economics? appeared first on ValueWalk.

Wharton’s Sidney Winter discusses a new way of looking at technological innovation.

Innovative activity is what mainly separates the winners from the losers as industries evolve. The book Innovation and the Evolution of Industries puts forward a new way of looking at this central mechanism of economic growth: a systematic but ‘history-friendly’ view that takes into account the differences in industry context, as exemplified in the computer, semiconductor and pharmaceutical industries.

Innovation

In this interview with Knowledge@Wharton, Wharton emeritus management professor and co-author Sidney Winter discusses the book and the years-long collaboration it took with his colleagues.

An edited transcript of the conversation follows.

Knowledge@Wharton: Tell us about your book.

Sidney Winter: Well, I should probably first tell you about my three co-authors. I’ve got one American co-author, my friend Richard Nelson with whom I’ve worked a lot over the years. [They co-wrote the seminal book on evolutionary economics, An Evolutionary Theory of Economic Change.] And then there are two Italian colleagues, [Bocconi University professor] Franco Malerba and [IUSS professor] Luigi Orsenigo. We’ve been at this together for quite a few years now.

We started on the research program way back in the late 1990s, and then the first draft of the book appeared in 2012, I think it was. We worked on it for four-and-a-half years before it was finally published by Cambridge University Press. In terms of the subject, the book deals with the interactions between innovation and industry evolution, how innovative activity affects industry evolution, how industry evolution affects the level of innovative activity. And an important part of our objective is to put forward a new method for studying this kind of question. This new method is called ‘history-friendly modeling.’

Knowledge@Wharton: All four of the authors are economists, I believe. Is the term ‘industry evolution’ a standard one in economics?

Winter: Yes, we are all economists, and the answer is that, unfortunately, the term ‘industry evolution’ is not particularly standard in economics. I suspect that most of today’s undergraduate economics majors never hear that term in the course of their education. But outside of economics, in innovation studies and in the field of strategic management — also in evolutionary economics — it’s a very familiar term.

Knowledge@Wharton: What does evolutionary mean in the context of economics?

Winter: It means that there’s a lot of emphasis on how economic events unfold in time, especially over substantial periods of time. In particular, there’s the question of where new things come from, which is the innovation part of the story. This is pretty much what “evolutionary” means in biology, too: It’s about things unfolding over long periods; it’s also about where the new things come from. The book actually provides a strong illustration of these two themes, since it deals with the interactions between evolution and innovation. And it also illustrates a number of other aspects of the evolutionary approach.

Knowledge@Wharton: The book goes on to examine the evolution of particular industries, does it not?

Winter: Yes, indeed it does. It has three core chapters that deal, in turn, with the U.S. computer industry, with the semiconductor industry — considered as a supplier to the computer industry — and with the pharmaceutical industry. In each of these cases, we examine a period of about 50 years or so of actual industry history. And in our presentation, the first thing we do is to summarize that 50-year history. Then we draw on the literature that already exists about that industry in that time period, and consider the explanations it offers or the mechanisms it suggests for why the industry developed in the particular way that it did.

Then, drawing on that, we create a custom-made computer simulation model for that particular industry, in that particular time period, and try to build into it the mechanisms that have been previously identified by other scholars as being the important ones in history. Then we use that simulation model, and we use it first to try to reproduce some main features of the history itself — to show that, indeed, the explanations that have been suggested can be made to work when they’re spelled out in detail, in the context of a computer model.

Having done that, we take up counterfactual history. We consider what would have happened if some of the background conditions of the industry had been quite different. For example, suppose that the advances achieved in semiconductor technology had been smaller than they were, or suppose that the pharmaceutical industry had a different sort of patent system facing it than the one it actually did. We examined those results to suggest what difference it would have made if those particular historical circumstances had been different. At the end of the book, we pull it all together in a summary, and we also speculate a bit about where else one could go with these kinds of methods.

Knowledge@Wharton: Can you give us a general idea of how these computer models work?

Winter: Yes, I certainly can. The basic aspects of these models are the same as some that have existed for a lot longer, in particular the same as some that [Richard] Nelson and I put forward back in 1982, in our book An Evolutionary Theory of Economic Change. A lot of people followed that lead and did similar work after that.

So those basic building blocks are, first of all, we have model firms — individual firms are modeled as agents. This is sometimes called ‘agent-based modeling’ nowadays, but we were doing it before it was called that. And then these firms are put into a model market environment where they compete, and they set the usual things — there is price and output determination — as they do in basic economic models. Then we also have some sort of technological environment, or a technological opportunity environment, which determines what it is that the firms are able to do by spending resources on research and development activity. That research and development activity and that particular sort of environment, drives the progress in the model and provides feedback to profitability and other things.

“We examined those results to suggest what difference it would have made if those particular historical circumstances had been different.”

We also have some other features in each of these models, because there are always some other aspects of the setting that you have to consider. For example, there are things that determine the conditions on which firms exit the industry, and the conditions on which new firms enter the industry, which are quite important. So, we have to include the specifications of those things, too.

Knowledge@Wharton: Are the model firms representations of actual historical companies, like IBM, Dell, and Intel?

Winter: No, we don’t actually attempt to match our model firms to individual historical examples. What we’re hoping is that if we get the causal forces right — that if we understand the mechanisms that are shaping things — then our array of toy firms, if you want to call them that, the model firms, are going to represent the collection of behaviors that the real firms as a collection also represented.

There’s one exception to that, or a partial exception

The post A ‘History-Friendly’ Way To Look At Tech Innovation appeared first on ValueWalk.

According to a recent annual survey published by the Census Bureau, State and local governments have witnessed the number of those benefiting from public pensions rise by 3.3% in 2016 to total of 10.3 million people. This is an increase from 9.9 million beneficiaries in 2014 and 10 million in 2015. While contributions to public pensions’ funds rose 6.6 percent to 191.6 billion dollars, earnings from investments have undergone a steep decline of 67.9% to $49.9 billion, from $155.5 billion in 2015. Observers attribute this decline due to market volatility which has produced unexpected market fluctuations.

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Benefits have also seen an overall increase of 5.4% to $282.9 billion for 2016, rising from $268.5 billion in 2015. This is in juxtaposition to the revelation that the total assets within the public pension funds have decreased by 1.6% to 3.7 trillion in 2016, a fall from 2015’s $3.8 trillion. Cautious consideration is warranted if this trend continues in this current fashion.  Currently, workers who retire from the public sector receive $1.90 in benefits from every $1 they contribute to the pension fund. Furthermore, states like Arkansas, Wisconsin, Minnesota, Oregon, South Dakota, Colorado, New Jersey, Ohio and Florida have retirees receiving $1.90 in benefits or higher for every $1 in total funding contributed to the public funds.

It is no secret that there have been analysts who have called into question the integrity of the public pension system citing asymmetrical relationships in funding and payouts. Often, when pension liabilities are tabulated, the underfunded portion as well as associative mandatory cost like healthcare is left out of the calculus. If true, this would create errors in the needed amounts in contributions and expected rate of returns for public pensions to remain solvent.

The post Number of workers receiving benefits Rise As Public Pension Fund Earnings Decline appeared first on ValueWalk.

A recent report from Stanford University’s Hoover Institution details the “Hidden Debt” and “Hidden Deficits” contained in state and local government pension unfunded liabilities. The report begins by stating:

“despite the introduction of new accounting standards, the vast majority of state and local governments continue to understate their pension costs and liabilities by relying on investment return assumptions of 7-8 percent per year. This report applies market valuation to pension liabilities for 649 state and local pension funds. Considering only already-earned benefits and treating those liabilities as the guaranteed government debt that they are, I find that as of FY 2015 accrued unfunded liabilities of U.S. state and local pension systems are at least $3.846 trillion, or 2.8 times more than the value reflected in government disclosures. Furthermore, while total government employer contributions to pension systems were $111 billion in 2015, or 4.9 percent of state and local government own revenue, the true annual cost of keeping pension liabilities from rising would be approximately $289 billion or 12.7 percent of revenue. Applying the principles of financial economics reveals that states have large hidden unfunded liabilities and continue to run substantial hidden deficits by means of their pension systems.”

By using unrealistic investment targets and only reporting the earned benefits as liabilities, the public pension system under represents the complete picture of its unfunded liabilities.  As of fiscal year 2015, the complete accounting for unfunded liabilities from all cities, states, governments were $1.378 trillion. This is after recently implemented governmental accounting standards. Nevertheless, these accounting methods do not incorporate more market valuation techniques which treat future obligations as a capitalized long term debt. This problem arises because recent reforms in governmental accounting permitted pensions to assess their liabilities based expected return on assets. Thus, there is little allotment for the inherent risk posed by these projections. Especially, when pensions place expected rates of returns at 7.6%(a expected rate return that is proving difficult to obtain) which would mean that they expected the value of their money to double approximately every 9.5 years. These projections create distortions that under state the true cost of the unfunded portion of the pension liabilities. According to the report:

“The market value of unfunded pension liabilities is analogous to government debt, owed to current and former public employees as opposed to capital markets. This debt can grow and shrink as assets and liabilities evolve. From an ex ante perspective, the economic cost of the pension system to the sponsor is the present value of the increase in pension promises (service cost) plus the cost incurred because existing liabilities come due a year sooner (interest cost). Under lower discount rates, the service cost is higher but the interest cost is lower.”

The complete report can be read here

The post Government Public Pension Liabilities Are Understated By Trillions: New Study appeared first on ValueWalk.

Fitch has adjusted the expected discount rate for public pensions to 6% from the rating agency’s previous 7% expected rate of return. This change is based on what the rating agency views as slowed economic growth that will adversely affect investment returns for public pension funds– a possible repeat last year investment earnings decline seen by public pensions.

According to a source in the agency, the US economy has been exhibited signs of sluggishness. That does not bode well for investment performance. Public pensions are eager to maintain returns in order to lessen their future liabilities. Nevertheless, the current market environment does not appear to lead itself to the capturing of easy returns. For public pensions, this will result in the potential increasing of future liabilities. Estimates place the expected increase of future liability public pensions at upwards of 11%. Public pensions will either have to increase the amount of contributions to the funds or decrease the expected payouts. Both actions would be advisable but will undoubtedly cause consternation among public employees.

Shifts in the aging population could have impacted the current economic picture. As baby boomers continue to retire, work force participation is certain to decrease which will affect the overall market. The elderly are also living longer. Actuarial updates for public pensions will be required to reflect these changes. Currently, the define benefit plans that are offered to public employees do not appear to be sustainable as many struggle with underfunding, violate market environments, and increased number of participants requiring payouts. In order to combat this, the pension system have invested in a more diverse range of equity, fixed-income and alternative assets- a reaction to today’s low interest rate environment. Nevertheless, such investment strategies are bound to increase volatility with the possible result being the unintended consequences of lower investment returns. Thus, this has the potential to further exacerbate the already stressed public pension system.

No simple solutions are readily available. And one can make an argument that the current discount Rate For Public Pensions should be cut even further.

The post Public Pensions Are Slated For Slower Growth – Fitch appeared first on ValueWalk.

Last week it was reported that the illinois Budget was in dire financial straits making it a perfect candidate for Sate Bankruptcy. The state faces $15 billion in backlogged bills and mounting ratings downgrades from credit agencies. The struggling state is poised to obtaining the dubious honor of being the first state to be rated junk status in US history. Traders have responded in kind sending the yields on Illinois bonds higher-a reaction from court orders that claim the state violated previous orders and must adhere to prior obligations to vendors.

The State has yet to pass a budget for the last three years – the longest for any US state- and has recently announced via its Transportation Department that roadwork would stop starting July 1^st. The Powerball lottery is also considering dropping Illinois over its lack of a budget. Compensation to state employees is in jeopardy of evaporating. According, to a recent piece from the Associated Press, the state Comptroller Susan Mendoza is  sounding the alarm regarding the turmoil the financial strapped state is facing. The piece explains that court ordered lawsuits by state suppliers are binding but the state’s monthly revenue isn’t enough to meet these obligations. This puts services such as school buses and ambulance services at risk of shut down.

In the state legislator, both parties are battling over the finances of the state. The Governor, Bruce Rauner, has been adamant about instituting changes to the budget before supporting any tax increases. Democrats in the State argue that his demands like term limits for lawmakers, a four-years property tax freeze, and new worker compensation laws would hurt working families. Such arguments will fall on deaf ears as the State increasingly faces the harsh reality of mounting bills coming due. State suppliers and vendors are increasingly lining up to file lawsuits against the state demanding payment. Recently, The administrator for the State’s Medicaid program went to court to obtain a order for $2billion of unpaid bills. The city is running out of time and drastic measures are needed urgently for the Illinois budget. “Once the money’s gone, the money’s gone, and I can’t print it,” Mendoza said.

The post State Of Illinois On Its Last Legs appeared first on ValueWalk.

Even if the mention of a “Gold Standard” makes your eyes glaze over, the video above and the article below show you how a monetary system SHOULD WORK.  More importantly, you learn how the US can extract itself from ever-compounding debt.  Currently, the FED is destroying savers in the name of “helping” the economy.   Learn how credit can expand and contract WITHOUT booms and busts.

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Also read:

• Trump’s DOL Rescinds Obama-Era Franchise Rule
• The Fallacy Behind “Robots Will Steal Your Jobs” Fears
• Gold Moves Higher But Miners Don’t

The Unadulterated Gold Standard Part I

by Keith Weiner

The choice of the word “unadulterated” is not accidental. There were many different kinds of gold standard, including what we now call the Classical Gold Standard, the Gold Bullion Standard, and the Gold Exchange Standard. Each contained flaws; each was adulterated.

For example, in the Coinage Act of 1792, the government forced the price of one thing to be fixed in terms of another thing. The mechanism was in Section 11:

“And be it further enacted, That “the proportional value of gold to silver in all coins which shall by law be current as money within the United States, shall be as fifteen to one…”¹

Of course, people respond to such distortions. When the government fixes the price of something too low, then people will hoard or export it. If the price is fixed too high, then they will flood the market with it.

According to Craig K. Elwell, in his 2011 Congressional Research Service Report:

“Because world markets valued them [gold and silver] at a 15½ to 1 ratio, much of the gold left the country and silver was the de facto standard.”²

Subsequently, the government changed direction. Elwell notes:

“In 1834, the gold content of the dollar was reduced to make the ratio 16 to 1. As a result, silver left the country and gold became the de facto standard.”

If the law dictates the ratio between gold and silver, then only one metal–the one that is undervalued–will be used. It would be extremely difficult for the government to get the ratio exactly right. And even if so, as soon as the market value changed the ratio would be wrong and only one metal would circulate.

The government should not attempt to force a price onto the market. In the unadulterated gold standard, the market is allowed to set the price of silver, copper, oil, wheat, a fine wool suit, and everything else. It allows people to use gold, or silver, or seashells as money if they wish (the market has not chosen seashells in modern history).

Throughout the 19th century, there were various state laws to impose new kinds of restrictions on the banks. One popular restriction was that in order to obtain a charter (permission to operate as a bank), the bank had to buy state government bonds. This theme–forcing banks to buy government bonds–was to recur later.

This is a pernicious idea. Banks must have an earning asset to match the liability of the deposit accounts. Why not make them buy some government bonds as a condition for permission to operate? Because this is obviously blackmail. In a free country, one should not need to ask permission to be in business and one should not be forced to do something in exchange for that permission.

This policy has two economic effects. First, it pushes the price of the government bond higher than it would otherwise be, which means it pushes down the rate of interest. This distortion ripples throughout the entire economy.

Second, it exposes the state-chartered bank to the fiscal irresponsibility in the state capitol. And of course the state capitol is encouraged to borrow and spend by this very perverse policy, because they know that there is always a market for their bonds. This lasts until they default, of course. And when they do, the state-chartered banks become insolvent. This is not a failure of the gold standard, or of the free market. It is a failure of a deficit spending policy and central planning.

The Unadulterated Gold Standard Part I

The Horror of Being a Deep Value Money Manager–KGGAX is Kopernik Global vs. SPY and FANG Stocks

• The Weight of the Wait – Final
• Kopernik 2Q 2017 – Conference Call – Final
• 2017 – 2Q Call – Transcript – Final

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The most fundamental basis for economics is human decision-making. Satisfying needs and wants creates demand. Engaging in a vocation to provide a good or service of value to others generates supply. The intersection of the two is a market.

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• Mistakes To Avoid When Building A Machine Learning Investing Program
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This week we introduce the unique insight of Mark McElroy. Mark is a friend of 720Global who often provides valuable input on our article concepts, their structure and occasionally challenges their validity. Now, with some minor arm-twisting, he challenges the status quo of economics – the profession, the pedigrees and their intentions. 

In Saying It Slowly Doesn’t Help, he doesn’t challenge the PhD economists so much as he takes the rest of us to task. If human decisions are the basis for economics then aren’t we all obligated to be economists at some level? His casual but intentional arms-length observer status poses the question: why is economics so difficult?

Saying It Slowly Doesn't Help

“The quality of ideas seems to play a minor role in mass movement leadership. What counts is the arrogant gesture, the complete disregard of the opinion of others, the singlehanded defiance of the world.” –Eric Hoffer, The True Believer

To communicate about economics is to describe the mirror as if it were a commodity. Economics is a tricky subject. It schemes and dodges—just try to sneak up on a mirror. For all the numbers, parentheses, red and black, boxes and columns, economics is mostly narrative. The digits and bytes of the trade are stand-ins for our resources or assets that are stand-ins for our fears, hopes, memories, hungers and regrets.  Economics is the overly eager attempt to hold at arms-length what we don’t want to see up close. Quantifying the narrative is like measuring a joke. But, it must be done.  It should be done.  Honestly, it needs to be done because no one is alone.

If such twaddle seems impractical, you’re in large company. I get it. That doesn’t necessarily mean you should be off the hook for thinking practically (critically) regarding how we talk about ourselves, our resources, and our guiding principles–economics.  Our collective want for information about economics is huge. Really huge. Cable, Twitter, whatever offers a 24/7 stream of info about economics to more and more people.  Evidently being in a flood doesn’t make one a hydrologist (that was weak, I apologize).  For all the volume of economic info/data available, one would expect we could be fairly proficient in discussing/communicating the basics of economics. Given the rise of six year financing plans for Toyota Corollas, I’m gonna go out on a limb and call BS on the notion that we know how to talk about it effectively. Clearly. Honestly.

If you fancy yourself an economist (and everyone should), it may be of comfort to realize economists are not the only ones in this “we have much to say and struggle to be understood” syndrome.  Scientists find themselves there, too. Scientists are studying themselves and the scientific assumptions regarding how to communicate about science. Tired of being picked last for kickball in the public square, scientists are aiming their magnified gaze upon themselves and are coming around to a counter-intuitive notion.  The more scientists try to correct and inform the public discourse, the less impact they have.  Saying it (you know, smart stuff) with more detail and credentials not only doesn’t work, it makes things worse. Tim Requarth in Slate wrote it like this:

[T]he way most scientists think about science communication—that just explaining the real science better will help—is plain wrong. In fact, it’s so wrong that it may have the opposite effect of what they’re trying to achieve.

I think he meant this:

[T]he way most scientists economists think about science economic communication—that just explaining the real science economics better will help—is plain wrong. In fact, it’s so wrong that it may have the opposite effect of what they’re trying to achieve.

Okay, he clearly did not mean that, but it would have been great if he did. Go read his article in full and play this parlor game. Every time you see “science” or some version of it, replace it with “economics” or some version of it.  It pretty much holds up.

Economics should be natural for us to communicate, but it isn’t. Who doesn’t know what a mirror looks like?  Economics is discussed ad nauseam as if it were an elusive concept that only a few have glimpsed (yep, just like Bigfoot) when it should be as natural as falling off a bike. Why is that?

I have a guess. Something as simple and natural as discussing the priorities and principles around which we value and exchange our assets has been made complex, confusing, and somehow has justified cable news panels with snooty people using phrases I can’t spell (of which there are many)—all this is the handiwork of a cottage industry (institution) committed to sustaining the confusion for profit, prestige, or because they miss satisfaction of taking names in third grade.

SIDEBAR: I am in a sustained lover’s quarrel with an institution that now spans 30+ years. Institutions of all flavors are the same in that their original spark, purpose or mission always becomes overwhelmed by its desire for self-perpetuation. To be clear, when I refer to the cottage industry proliferating the confusion regarding economics as an “institution,” it is meant as no compliment. If you have finished watching the paint dry and are intrigued by the whole institution thing, check out the work of Eric Hoffer, The True Believer: Thoughts on the Nature of Mass Movements.  SIDEBAR CLOSED

If economics remains confusing for me (as is religion and healthcare), I am less likely to experience contentment (or faith or health). Admittedly, though, the institutions that keep economics (and other matters) an ivory tower topic have a willing accomplice in me.  It is a co-dependence. Somewhere deep down I need as a way coping for that topic to be at arms-length.  At arms-length, I can see economics as a collection of digits, theories, and fractional transactions en masse. I am then spared the need to contemplate the basics of economics: stewardship, community, contentment, and charity.

Honestly, it needs to be done because no one is alone.

Mark McElroy, PhD @B40MKM is a writer, farmer, and management consultant with leadership roles in nonprofit and technology/information companies.

Michael Lebowitz, CFA

Investment Analyst and Portfolio Manager for Clarity Financial, LLC. specializing in macroeconomic research, valuations, asset allocation, and risk management. RIA Contributing Editor and Research Director. Co-founder of 720 Global Research. 

Follow Michael on Twitter or go to 720global.com for more research and analysis.

Article by Michael Lebowitz, Real Investment Advice

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Today is my last official day at the Naval Postgraduate School (NPS) in Monterey. After today, I will be an emeritus professor, with all the rights pertaining thereto. That means mainly I get to use the library, which, by the way, is very valuable.

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I've enjoyed my 33 years there. That's almost exactly half my life. When I went there I figured that, on a scale of 1 to 10, it would be between 4 and 7. For most of the time, it was between 8 and 9, which is why I stayed.

I later heard, there was a lot of opposition to my being hired.

The biggest draw was the students. They are almost all in the military, either in the United States or in other countries, including, sometimes, Pakistan. The median age is probably about 31. It was actually much easier to get them interested in economics than it was to get undergrads at Santa Clara U, the only place I taught economics to undergrads, interested. I had to work much harder to get the Santa Clara students interested: I succeeded, but I had to work hard.

My experience with teaching at NPS directly contradicted what I was told by the department chairman when I did my courtesy call on arriving there in August 1984. The previous chair had liked me a lot and had hired me even though, I later heard, there was a lot of opposition to my being hired. The new chair had replaced him a month or two before I got there.

His predecessor had hired me on a year to year basis with a handshake agreement that it would go 3 years. When I made my courtesy call, the new chairman gave me some tips about what to do in "your year here." So I knew that he had no intention of renewing. My wife was 5 months pregnant at the time and so I wasn't thrilled about almost immediately looking for a new job.

Early Advice

In my first conversation with the new chairman, he gave me two tips. It's the second one that relates to teaching the students but I want to tell the first one too, because my response to it was key to my turning the chairman around on whether he wanted to renew me.

He said, "There are a lot of people on the faculty who didn't want you here. I don't need to tell you who they are. You'll figure that out pretty quickly when you run into them in the hallway and they try to trip you up."

Earlier on, he told me that if I had any questions at any time, I should feel free to ask.

Most people don't want to think of themselves as liars and so by saying "No," he had to allow that it might really be "No."

I saw my opening. "Bill," I said, "You mentioned that there are people who didn't want me here and who will try to trip me up. I do have one question: are you one of them?"

He paused and then said, "No." "Good," I said, "that's good to know." A year later, he renewed me, and a year after that he supported me in going tenure track. Years later, when I told this story to a colleague in Organizational Behavior, she told me that what I had done is opened up a space in his brain for his answer to be "No." His answer at the time was probably "Yes," but, she said, most people don't want to think of themselves as liars and so by saying "No," he had to allow that it might really be "No." All I knew, at a gut level, was that that was the right question to ask.

His other tip related to teaching. He had read one of my articles in <em>Fortune and, knowing that I was coming from Reagan's Council of Economic Advisers where I had been senior economist for health policy and senior economist for energy policy, he knew that my main interest was in domestic economic policy. He also, I think, figured out that I was a libertarian. He said that if I tried talking about economic policy and tried to elicit the opinions of the students and engage them in discussion, I would get total silence. The students, he said, are professional military, and they are taught not to give their opinions. That seemed strange to me but I'm an empiricist at heart and I resolved to try my approach and see if it worked.

For some reason, I was not trusted to teach a course on my own at first and so was put in to co-teach a class with another economics professor. I'm guessing that he reported back that whatever their worries about my being an ideologue in class, there wasn't much to it. So the next quarter I was given my own class. Finally, l I would get to test the chairman's claim.

Engaging with Students

He was dead wrong. It was easier to engage the students in discussions about policy than it had been at Santa Clara. Each day I taught I would come and say to my wife, "Well, they sure haven't gone silent yet."

He was dead wrong. It was easier to engage the students in discussions about policy than it had been at Santa Clara.

I've actually made their interest part of the pitch my first day of class. I tell them that many of them have seen more parts of the world than I have, that all of them have been in charge of way more people than I have, and that they've probably noticed things that they are curious about. Some of these things, I say, economics can answer. For example, if you've lived in Germany, have you noticed that very few houses and apartments have closets. If you've been to Guam (many of them have – I haven't), what do you notice about buildings in Guam? Sometimes I answer upfront. Other times, I leave them hanging.

Then I say, "To quote from one of my favorite movies, Pocahontas, you'll learn things you never knew you never knew."

A big part of what I teach them is the Ten Pillars of Economic Wisdom. When former students contact me years later, they talk about those things and how they have helped them understand the world. Mike Ward, the new Chief of Staff for NPS, who arrived here last month, said in his first posted statement to the school that he was pleased to make it back here for the retirement of one of his favorite professors: me. He and I went to coffee this week and, sure enough, got talking about the Ten Pillars. Another of my favorite students, a civilian at NASA in Houston, when he found out I was retiring, wrote the following:

I wanted you to know that your class was one that still impacts me to this day. Since that time, I often look at the world through the lenses of the 10 Pillars of Wisdom, and I can say without a doubt that it has been a life-changing experience for me.

The thing I will miss most is being with students over 30 to 40 hours a quarter and seeing, for over 80% of them, the light bulb go on multiple times and with various degrees of intensity.

Sometime soon I'll reminisce a bit about my students' quick humor during class, which is icing on the cake.

About the picture: Terry Rea, the assistant to the Dean, whom I've gotten fond of over the years, put together a PowerPoint presentation showing some highlights of my career. The one at the top was my favorite of her pictures. My second favorite was one of my in an In' N' Out Burger hat. I don't know where she found it.

Reprinted from the Library of Economics and Liberty.

David R. Henderson

David Henderson is a research fellow with the Hoover Institution and an economics professor at the Graduate School of Business and Public Policy, Naval Postgraduate School, Monterey, California. He is editor of The Concise Encyclopedia of Economics (Liberty Fund) and blogs at econlib.org.

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