Chronicle of the Conspiracy
Saturday, December 03, 2005THE SKY REALLY IS FALLING From our very alarmist but very credible friend Brian Riedl at the Heritage Foundation:
Is it possible that the long-term federal spending picture is substantially worse than we feared?Read Brian's paper on this -- "Entitlement-Driven Long-Term Budget Substantially Worse Than Previously Projected." It has dozens of tables and graphs, and puts the costs in per-household terms that are more understandable -- and more sobering -- than the usual percent-of-GDP numbers.
Posted by Donald L. Luskin at 1:51 PM | link
JOKE OF THE DAY
Posted by Donald L. Luskin at 12:27 PM | link
Friday, December 02, 2005THREE BEST BERNSTEIN BOOKS, ALL IN ONE BOX My SmartMoney.com column for today.
Readers often ask me what's the very best book on investing. There are plenty of books that pander to investors' greed by offering too-good-to-be-true formulas for picking tomorrow's hottest stocks. What my readers want is a book that will give them a great foundation for becoming a serious and successful investor, able to compete over time with the professionals.
It turns out there are three books like that, all by Peter Bernstein, a seasoned investment manager and consultant who has seen it all. And what do you know -- just in time for the holidays, Bernstein's books have been put together in a handsome boxed set. So whether you're looking for insights you can use in your own investing, or for the perfect gift for the investors on your Christmas list, now's your chance.
The first of Bernstein's trio is Capital Ideas. It chronicles the birth of several core concepts that form the basis of modern professional investing -- ideas born in university classrooms and think tanks, but now standard operating procedure in every investment management firm and Wall Street trading desk. These ideas are mostly unknown to individual investors, yet they have transformed investing over the last few decades from art to science, and of the investment management business from an informal men's club to a global industry.
Even if you aren't prepared to learn to use the techniques and technologies used by today's investment professionals, there's no escaping the fact that you are competing against those professionals -- and they are using those tools. At the very least, you need to know what those tools are. And the reality is that those ideas really can make you a better investor.
For example, Bernstein talks about the development of the mean/variance framework for designing portfolios that have the highest expected return in relation to their risk.
"Mean" means that when you invest in a stock, you should have a concrete expectation for how much money you can make -- a "mean," or average, expectation for potential returns. If you can't put a number on how much money you expect to make when you buy a stock, then why the heck are you buying it in the first place? I'll bet last time you bought a stock you had no idea what to expect -- you just thought it would "go up," and that was enough.
"Variance" in "mean/variance" means you should have some idea of how uncertain your return expectation is. Of course if you didn't have a return expectation to begin with, chances are you didn't think about how much uncertainty there was around that expectation. But suppose you thought the stock you were buying would go up, on average, 20% in the next year. How certain were you? Were you 50% certain it would go up somewhere between 5% and 35%? Or 60% certain of that? Did you consider that there could be a loss involved? How much of a loss, and what were the probabilities?
Another key idea in the mean/variance framework is how different stocks in your portfolio interact with each other -- their "covariance." If one stock goes up, is another likely to go down? Or do both stocks move together? It's important, because you take a lot more risk with two stocks that move the same way at the same time -- it's like buying the same stock twice. But with stocks that aren't highly correlated, then by combining them in a single portfolio you get real diversification. .
The professionals think about all this stuff just as much or more than they think about picking the next hot stock (no matter what they pretend when they beat their chests on CNBC).. Why? Because they are in it for life -- it's their job. It's not a game, or a gamble. They're realistic about the fact that most "next hot stocks" really aren't so hot most of the time. They know that in the long run, in investing you win by not losing.
Bernstein's second book takes this idea further. Against the Gods is about nothing but risk. It tells the story of how, over the centuries, gamblers, mathematicians, businessmen and investment managers, learned how to define, understand, measure and control uncertainty. In other words, how they learned to not lose. And remember, once you've stopped losing winning will take care of itself.
When you're done with this book you'll understand that risk is not just the chance of bad outcomes (such as losing money on the next hot stock). Risk is simply uncertainty, and sometimes uncertainty can be about taking too little risk! For example, you take risk with the uncertainty that you won't have enough retirement income if you put your 401k money only in "riskless" Treasury bonds.
In Bernstein's view, the more risk you can manage, the more risk you can take. For example, sometimes you should add the next hot stock -- the riskier the better -- to your portfolio. Why? Because if it's not correlated with your existing holdings, the riskier it is the more it will reduce overall portfolio risk.
The third book in the Bernstein collection, The Power of Gold, looks at the yellow metal that has represented money for thousands of years. On one level the book is a fascinating history (I particularly like the bit where Julius Caesar murders his rival Crassus by having molten gold poured down his throat). But more than that, it forces investors to examine their deepest conceptions of value and wealth.
For example, we have confidence that the green pieces of paper in our pocket represent purchasing power. And we have even more confidence in a brick of gold hidden in our safe deposit box. Are we any smarter than the natives of the island of Yap described in Bernstein's book, whose money takes the form of giant stone disks? Money, you see, isn't paper, stone or gold -- it's a social convention: it's whatever we all agree it is. And stock prices are the same way.
Get these three books and read them. They won't lead you to the next hot stock, and they won't transform you into a professional investor overnight. But they'll teach you -- in simple and compelling terms -- about the biggest ideas and the deepest concepts that underlie the way professionals think.
Posted by Donald L. Luskin at 1:25 AM | link
Thursday, December 01, 2005THIS EXPLAINS A LOT ABOUT KRUGMAN It's official. It has to be true. It's in a "study."
Scientists have discovered why some shorter children do worse at school than taller youngsters. A team from the University of Bristol found that children with lower levels of a height controlling hormone also had lower IQs.Thanks to reader Paul Engel for the link.
Posted by Donald L. Luskin at 9:10 PM | link
BEAUTIFUL You must see this. Thanks to our "public editor" Irwin Chusid for the link.
Update [12/1/2005]... Reader Martin Whitman points to another variation on the same theme.
Posted by Donald L. Luskin at 9:49 AM | link
Wednesday, November 30, 2005JOKE OF THE DAY
Posted by Donald L. Luskin at 6:48 AM | link
REFRESHING IDEAS FROM EUROPE Our friend in Switzerland, Olivier Mermod, compiles a page of intriguing daily quotations on the web. Check it out.For example, consider today's demonization of capitalists in light of this one from Whitehead:
"A great society is a society in which its men of business think greatly of their functions".
Posted by Donald L. Luskin at 5:51 AM | link
AS ALWAYS, THE TIMES HAS A BIG "BUT" The New York Times just can't accept that the economy is strong, looking for a needle of dross in a haystack of gold:
Gasoline is cheaper than it was before Hurricane Katrina slammed into New Orleans. Consumer confidence jumped last month and new home sales hit a record. The stock market has been rising. Even the nation's beleaguered factories appear to be headed for a happy holiday season.What follows is a list of nitpickings that treat positives as negatives, including this gem:
...that does not mean the broad economic picture next year will be even better. Indeed, the Organization of Economic Co-operation and Development said today that the United States economy is likely to be a repeat of 2005. The O.E.C.D. projected that 2005 growth will settle at 3.6 percent, down from 4.2 percent in 2004. The O.E.C.D. also forecast 2006 growth at 3.5 percent...So forecasted growth better than the historical norm is no good because it's "not even better" than this year? If this is the best the Times can do, then admit it -- things are good.
Thanks to readers Sean Hayes and Josh Hendrickson for the link.
Posted by Donald L. Luskin at 5:33 AM | link
Tuesday, November 29, 2005THE POWER OF VOLUNTEERISM From the Free Market Project:
The broadcast media have often paid short shrift to corporate philanthropic donations, preferring to focus on layoffs, downsizing, lawsuits, scandals, and other stories that portray American business in a negative light. A feature in the November 28 Business Week proved a must read for evening and morning news producers, with its reports on corporate philanthropy, particularly Suzanne Woolley’s piece on "The Top Givers."
Posted by Donald L. Luskin at 4:52 PM | link
CJR GOES AFTER RETCHIN' GRETCHEN It's about time this bastion of liberal media rationalization took on the New York Times' true crime business columnist, Gretchen Morgenson. This a must read take-down on CJR Daily (here are its final paragraphs):
...in Morgenson's [Sunday] article, the parade of alarming numbers that look not-so-alarming-after-all upon close inspection never ends. Her last shot: A survey last week by the Conference Board found that shoppers intend to spend $466 on average on holiday gifts this year, down $10 from last year. This, she warns us, is "only the sixth year since 1990 that planned spending has declined, as measured by the survey." Well, yeah, but there have only been 15 years since 1990. So what do we really learn here? Forty percent of the time, people saying they're going to trim back a bit from last year's holiday spending, and 60 percent of the time they say they'll spend a little more than last year..
Posted by Donald L. Luskin at 4:52 PM | link
NOW WHAT? WHITE PHOSPHOROUS... The New York Times has come up with yet another thread to weave into its narrative about the US's malfeasance in Iraq. Now it's white phosphorous. But as usual, it's all lies. EU Rota has the definitive takedown.
Posted by Donald L. Luskin at 9:16 AM | link
THE GOP HAD BETTER LISTEN Dick Armey has some grave advice for Republicans who think they can get re-elected in 2006 by acting more like Democrats:
In all my years in politics, I've never sensed such anger and frustration from our volunteers -- those who do the hard work of door-to-door mobilization that Republican candidates depend on to get elected. Across the nation, wherever I go to speak with them, their refrain is the same: "I can't tell a dime's worth of difference between Republicans and Democrats." Our base rightly expects Republicans to govern by the principles -- lower taxes, less government and more freedom -- that got them elected. Today, with Republicans controlling both the legislative and executive branches of the federal government, there is a widening credibility gap between their political rhetoric and their public policies.
Posted by Donald L. Luskin at 9:04 AM | link
Monday, November 28, 2005FRANKLY AWFUL A number of readers asked me to comment on a column that appeared in Friday's New York Times business section -- "Sometimes, a Tax Cut for the Wealthy Can Hurt the Wealthy" by Robert H. Frank. It's a classic Times "economics" column -- i.e., it's written by an academic economist, and it poses under the banner of the science of economics, but it's really just left-wing political moralizing that is long on opinion, short on facts, and chock full of errors. The upshot is that rich people don't need tax cuts because they won't make them happy; the economy doesn't need tax cuts because we're "already at full employment"; and because spending cuts necessitated by the tax cuts hurt the rich as much as they do the poor.
Who is Robert H. Frank, anyway? At the end of the column, he is identified by the Times like this:
Now that Ben Bernanke has been nominated to be the next Federal Reserve chairman, it's good marketing for Frank to say that he once wrote a book with him. But Frank shouldn't be too proud of his teaching credentials, nor his book. In another Times commentary last September he admitted that "most students seem to emerge from introductory economics courses without having learned even the most important basic principles."
Frank's true credential to write for the Times, however, was revealed following another commentary last June: "he is the author of 'Luxury Fever.'" Ah, so now it comes out. He's not really an economist at all -- that's just his day job. He's really a moralizing moralist, who thinks (according to a Times story about him from August 1999), that "people are caught in an arms race of consumption and that tax policies need to be changed to encourage public investment over private spending." In other words, "Tax me, before I spend again!"
That people spend too much is simply Frank's opinion, and he is entitled to it (presumably his own spending -- he told the Times he owns both a Saab and a BMW -- is just right). But he doesn't present his opinion as his opinion -- it's economic science, and he's certain enough of it to call in the police power of the state to enforce it on everyone else. Per the Times in 1999:
But you can have dozens of commentaries published in America's "newspaper of record," palming off this swill as science. But it doesn't even pass the simplest smell test. If increasing consumption doesn't make people really happy, then what's Frank's theory of economic incentives? You can only do two things with your wealth -- spend it or save it, and if you save it that's only because you think you'll have more to spend later. Perhaps his theory is that incentives work up to and including the level of a Saab or a BMW, but that people don't really want a Mercedes or a Porsche (which will come as quite a surprise to Mercedes and Porsche drivers, who work damn hard to get those cars). And besides -- if the rich didn't want to get even richer, why would John Kerry have married Teresa Heinz (having passed over heiress Emmy Gilbey, who later got scooped up by Times executive editor Bill Keller)?
And what "spending cuts" is Frank talking about? Mandatory government spending stands at 10.8% of GDP, up from 9.8% in 2000. And discretionary spending is off the charts, too. Hasn't Frank heard of this year's transportation bill?
Oh -- and about the economy being "already at full employment," can you believe that the Times has finally admitted that? It was almost years ago that Paul Krugman lamented in the Times that the 2003 tax cuts were an abysmal failure because, just half a year after they were enacted, we had "the worst job market in 20 years." Now Frank admits, implicitly, that the tax cuts worked. And yet now he wants to take them away because they won't make rich people happy? Sheesh!
Update [11/29/2005]... Perry Eidelbus has a nice take on all this.
Posted by Donald L. Luskin at 3:51 PM | link
FREAKED OUT Economics rock-star Steven Levitt is getting some of his arrogant self-promotion shoved back in his face. In today's Wall Street Journal:
Prepare to be second-guessed. That would have been useful advice for Steven Levitt, the University of Chicago economist and author of the smash-hit book "Freakonomics," which uses statistics to explore the hidden truths of everything from corruption in sumo wrestling to the dangers of owning a swimming pool. The book's neon-orange cover title advises readers to "prepare to be dazzled"...Looks like Levitt, who, like Paul Krugman, is the recipient of the John Bates Clark Medal, made an itsy-bitsy mistake.
The "Freakonomics" chapter on abortion grew out of statistical studies Mr. Levitt and a co-author, Yale Law School Prof. John Donohue, conducted on the subject. The theory: Unwanted children are more likely to become troubled adolescents, prone to crime and drug use, than are wanted children. When abortion was legalized in the 1970s, a whole generation of unwanted births were averted, leading to a drop in crime nearly two decades later when this phantom generation would have come of age.Levitt's response? All these Clark Medal winners are alike:
"Does this change my mind on the issue? Absolutely not," Mr. Levitt says.Thanks to reader Chris Masse for the link.
Update... From reader Timothy Dreier :
I read Freakonomics, finally, on a plane about a month ago, and I can't say I was all that impressed. Firstly, I think any economics book you can read in under four hours probably glosses over many important issues. Secondly, I didn't find any of the observations particularly shocking. Sumo Wrestlers cheat when they can benefit from it? SHOCKING! Non-monetary incentives matter to low-level gang members? TELL ME MORE! These findings aren't exactly Earth-shattering: they're in line with the most basic observation in all of economics, incentives matter. The abortion thing struck me as, well, a little off for some reason but I couldn't put my finger on it exactly. I guess the whole line of argument seems post hoc ergo propter hoc. It makes a nice "just so" sort of story, but I absolutely doubt the causal inference. There's also the small fact that the abortion rate in the US has been declining for some time, really since a spike in the 70s.Update 2 [11/29/2005]... Reader Tino Sanandaji says:
I do think you are going to harsh on Levitt. He is not an ideologue, and has in fact done a lot of excellent work empirically proving the large effects of prisons and police on reducing crime; he has punctured other left-wing myths, such as US elections being for sale; and given empirical support for school choice.Update 3 [11/29/2005]... Reader Chris Masse leaps to my defense:
Hey, Don Luskin mocked "his arrogant self-promotion" ---which is different than "calling Levitt arrogant".
Posted by Donald L. Luskin at 8:56 AM | link
MANKIW RESPONDS TO TIMES INNUENDO I asked former Council of Economic Advisors chair N. Gregory Mankiw to comment on Daniel Altman's article in the Sunday New York Times, which employed innuendo to imply that Mankiw was a hypocrite to support President Bush's economic agenda. Here is my earlier post on it. And here is Mankiw's reply:
Sadly, this is the kind of "reporting" that I have come to expect from the Times, substituting rumor and innuendo for fact. For example, Altman quotes Bill Niskanen as asserting the the CEA has less access now than when Bill was at the CEA twenty years earlier. There is no way that Bill can possibly know whether this is true (has he had access to Hubbard's, my, Rosen's, or Bernanke's meeting schedule?).
Posted by Donald L. Luskin at 8:36 AM | link
THE RICH TRUTH SQUAD Bravissimo to the New York Sun for this scathing point-by-point takedown of Frank Rich's lies. I'd bet that the Times won't correct any of this -- but who would bet against me? Thanks to reader Gordon Haave for the link.
Posted by Donald L. Luskin at 8:29 AM | link
OH YEAH... THAT REALITY THING AGAIN... Our correspondent "Irrational Exuberance" points to an interesting article in The Economist, which draws a rather embarrassingly bright line between economics and science. Science, it seems, depends on testing theories in the real world and, if finding them wanting, revising them. Here, an ivory tower economist tries to learn from a real-world currency trader (whose P&L objectively grades the quality of his theories every day).
The currency market routinely confounds economists. A classic 1983 study by Richard Meese and Kenneth Rogoff, then both at the Federal Reserve, concluded that macroeconomic models could not explain a currency's direction of travel, let alone how far it would go. One would do just as well to assume that next month's exchange rate will be the same as this month's. After another 20 years of interrogation, the macroeconomic data has confessed little more of value. A new review of the evidence† finds that some models, in some periods, beat tossing a coin. But not by very much.
Posted by Donald L. Luskin at 7:26 AM | link
Sunday, November 27, 2005HUH? Okay, I can clearly get from context that this is supposed to be anti-Bush. And apparently that's enough for economic analysis in the New York Times business section. But what the hell does this passage from an article today by Daniel Altman even mean?
the role of the council's [White House Council of Economic Advisors] chair can take on a decidedly political tilt. That much was clear when Professor [N. Gregory] Mankiw, the last chairman to serve for more than a few months, appeared before the Joint Economic Committee of Congress in February of last year.Why is that "political"? Why can't it be that Mankiw, thinking as an economist, precisely believes that making temporary tax cuts permanent will encourage employment? And how is it that he "caught himself"? Are we to assume that extending unemployment benefits is ipso facto sound economic policy, and so mentioning it means that one is speaking sincerely as an economist -- while to praise tax cuts is merely "political"?
This is a beautiful example of how what the liberal media doesn't say is rhetorically more important than what it does. The superiority of the welfare state (driven by hand-outs) over the ownership society (driven by low tax burdens) is simply assumed as part of the fact background, an implicit and unquestioned platform on which subsequent analysis can be based. The subsequent analysis isn't important. What's rhetorically important is that the implicit fact platform is subliminally reinforced -- over, and over, and over.
Posted by Donald L. Luskin at 4:04 PM | link
HERE'S THE BOOK ON THE TIMES AND IRAQ American Future has begun a series of definitive field-guides to the New York Times' opportunistically shifting editorial viewpoint on Iraq -- depending, of course, on who is in the White House.
As shown by the cited quotations, the newspaper’s stance on Iraq underwent a complete transformation during the decade separating 1993 and 2003. While its editors never lost their fear of Saddam’s weapons of mass destruction (WMD), their prescription for countering the threat posed by the weapons was altered beyond recognition. In 1993, by arguing that cease-fire violations nullified U.N. protection, the Times affirmed the right of a victorious party to resume hostilities at its sole discretion if the party it defeated did not abide by the terms of the agreement to which it affixed its signature. Ten years later, the Times reversed its stance, asserting that the United States should not go to war without the approval of the United Nations. In so doing, the Times implicitly argued that going to war with the approval of a multilateral institution took precedence over the use of military force to expeditiously eliminate the threat posed by Iraq’s WMD.Thanks to Josh Hendrickson for the link.
Posted by Donald L. Luskin at 10:44 AM | link
GET ME REWRITE! The New York Times lets one slip by the agenda radar. Confounding its long-running narrative that social mobility and income mobility are on the decline, a front-pager in today's business sections reveals the happy truth:
They may be paid like kings, but C.E.O.'s seem to come from a wider variety of economic backgrounds - with growing numbers rising from humble beginnings and fewer having attended Ivy League colleges - than they once did... Wall Street, for example, was once seen as a club for the well heeled; today it seems much more open.
Posted by Donald L. Luskin at 10:40 AM | link