Monthly Archives: June 2014

US: Now policing Europe?

From Times of Isreal, via FB friend.  I’m not excited about the actions this statement could lead to:

“We have seen Europeans sympathetic to their (militants’) cause traveling into Syria and may now travel into Iraq, getting battle-hardened. Then they come back,” Obama warned in an interview that aired Sunday on the US broadcaster ABC.

These combatants “have a European passport. They don’t need visas to get into the United States,” he told “This Week.”

“Now, we are spending a lot of time, and we have been for years, making sure we are improving intelligence to respond to that.

“We have to improve our surveillance, reconnaissance, intelligence there. Special forces are going to have a role. And there are going to be times where we take strikes against organizations that could do us harm.”


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Backtesting vs. Data Mining

Jason Zwieg at WSJ wrote this piece about how data mining works.  Here’s the summary from one of his test portfolios:

If you had invested $10,000 in this portfolio two decades ago, you would have $105,971 now. Meanwhile, the losers who stuck with the stodgy S&P 500 ended up with only $58,347.

Craig Lazarra at S&P did an analysis of the test portfolios, and determined that the outperformance was caused by equal weighting:

The most important thing about the Journal and the Vanguard portfolios is not their (somewhat similar) stock selection processes.  The most important thing is that after they determine what stocks they want to own, the portfolio construction process weights each stock equally.

The most important thing about the Journal and Vanguard portfolios is not their (somewhat similar) stock selection processes.  The most important thing is that after they determine what stocks they want to own, the portfolio construction process weights each stock equally. – See more at:
The most important thing about the Journal and Vanguard portfolios is not their (somewhat similar) stock selection processes.  The most important thing is that after they determine what stocks they want to own, the portfolio construction process weights each stock equally. – See more at:
The most important thing about the Journal and Vanguard portfolios is not their (somewhat similar) stock selection processes.  The most important thing is that after they determine what stocks they want to own, the portfolio construction process weights each stock equally. – See more at:

I’m not sure I would agree with that conclusion.  It seems like if you pick any group of stocks today, and compare them to the index over the last 20 years, survivorship bias will pretty much guarantee you a better return.   I’m thinking equal weighting has an impact, but survivorship bias has to be a key to the success of those portfolios.

Speaking of data mining, I saw a presentation by Jeremy Schwartz of WisdomTree 2 weeks ago.  The speech included a rationale for hedging foreign currencies (one of their newest funds is in this category).  The main points are included in this Seeking Alpha article.  But to me, the argument was completely undercut by one chart (marked not for public viewing, sorry), showing a graph with ups and downs marked off at separation points (start of dollar strength and weakness dates).  The point was to show that hedging improves returns.  But there were a total of 5 time periods marked off from 1969 to present.  Essentially, 5 data points.  To me, that’s data mining.  I’m not saying they are wrong.  I just remain unconvinced.  On the topic of hedging currency, the counterpoint argument is from Larry Swedroe at  Here’s the gist of his argument, and I would like to see the WisdomTree response:

Despite the currency risk, and despite the MSCI EAFE having lower returns (10.0 percent versus 10.4 percent) as well as higher volatility (22.4 percent versus 17.6 percent), the portfolio that included the allocation to the MSCI EAFE had slightly higher returns and slightly lower volatility.

The reason is that the annual correlation of the MSCI EAFE to the S&P 500 was just 0.66, and while the correlation of the S&P 500 to five-year Treasurys was just 0.03, the correlation of the MSCI EAFE to five-year Treasurys was actually a negative -0.16, providing greater diversification benefits. This example demonstrates why you should never make the mistake of considering assets in isolation.

I don’t think backtesting is a bad thing, or misrepresentative, necessarily.  In fact, if you have some great investing idea, and want to see if it would work, is there really any other way to see if it would have worked in the past?  I think for due diligence, you just need to make sure that the backtesting is done correctly.  It must be done as if it were real time, that is, use the universe of stocks for any given time that was actually available at that time, and data for weighting that was accurate for that time.

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Krugman vs. Mankiw on Wealth Inequality

So Greg Mankiw wrote an editorial in defense of inherited wealth, and thanks to the prodding of “a number of people,” Paul Krugman has agreed to bless us with his response.

It seems to me that punitive death taxes are really unfair and un-American, and there is no doubt that the most wealthy will find ways to avoid them anyway.   As Krugman correctly points out, Mankiw completely ignored the what happens to the money if it goes to the government.   To me, any argument that says government is going to do a better job managing money than, well, pretty much any other person or entity, is ridiculous.  So when Krugman says,

In fact, what we’re really talking about here is taxation of wealth., and the question is what would happen to that revenue versus what happens if the rich get to keep the money. If the government uses the extra revenue to reduce deficits, then all of it is saved – as opposed to only part of it if it’s passed on to heirs. If the government uses the revenue to pay for social insurance and/or public goods, that’s likely to provide a lot more benefit to workers than the trickle-down from increased capital.

then I’m thinking, pretty sure the rich are going to find better uses for it.  Actually, it would be interesting to see the data on what exactly happens to inherited wealth.  Another day.

It seems really a stretch when Krugman says that if the government uses that money to pay down debt, that’s the same as saving.  I guess definitionally it is, but to me, it’s not really saving unless there is an operating surplus.  It’s just lower deficit spending.  And once that money flow is in the mix, it’s not going to be treated like the end result of a life’s work (already taxed at least once) that it is.  It’s just going to go into the same flow of income as every other source.

Mankiw also failed to address the purchase of the political system by the very wealthy, or as Krugman calls it, “plutocratic capture.”  Is it really a choice between inherited wealth and a free political system?  Is reform of the electoral system and its addiction to money really so out of the question as not to be even discussed?  If the ultra-rich figure out ways to pass on their fortunes anyway, then plutocratic capture is still an issue.  What is Krugman going to do, find every rich kid and forcibly remove all of their assets on an annual basis starting at age 18?

Wouldn’t it make more sense to regulate the political system and remove the money being spent there?  That would free up a lot of money for more beneficial uses, certainly.



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SCOTUS gives one to the little guys

Thank you, Supreme Court, and especially Chief Justice John Roberts (author of the decision,) for telling the cops that they need a warrant to search cell phones.  Wonderful news.

From NY Times:

One of the driving forces behind the American Revolution, Chief Justice Roberts wrote, was revulsion against “general warrants,” which “allowed British officers to rummage through homes in an unrestrained search for evidence of criminal activity.”

“The fact that technology now allows an individual to carry such information in his hand,” the chief justice also wrote, “does not make the information any less worthy of the protection for which the founders fought.”


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More visionary than rent seeker

As everyone knows by now, Elon Musk has given all his Tesla related patents to the world.  This has driven up the share price 9% so far.

I think this is a pretty clear indication of visionary rather than rent seeking behavior.  Quartz notes:

…a Financial Times report (paywall) …says major automakers Nissan and BMW are “keen on talks” with Tesla, to collaborate on charging networks and on “possible global vehicle-charging standards.”

The Washington Post thinks it’s a bad idea, but their examples are not very compelling.  They cite companies that gave away information and then many years later, after failure to continue innovating, were beaten by competition who were using some of the technology that the original company had developed.  They then add:

Musk is making a huge bet, but he isn’t crazy. If he were, then he’d free up the patents owned by SpaceX, too. Musk knows that the market for space launches is much more limited; he’s even sued the U.S. government because it insists on letting the same two aerospace companies put the Pentagon’s satellites into space. The space launch industry also doesn’t require a nationwide infrastructure (or mass public buy-in) to sustain it.

By contrast, the electric vehicle market needs both of those things.

OK, well, according to Business Insider, that’s just plain wrong:

Musk explains in a recent interview with Chris Anderson at Wired:

We have essentially no patents in SpaceX. Our primary long-term competition is in China,” said Musk in the interview. “If we published patents, it would be farcical, because the Chinese would just use them as a recipe book.”

To be fair, Space-X is not a Tesla-type open information company.  They do keep trade secrets.  But they are not using patents to try to protect their trade secrets.

I’m not saying Musk has given away his patents out of altruism, as a giant charitable act (although, I wonder if he can claim it that way on taxes?).  Patents are a rent seeking enterprise.  That’s why patent troll companies exist.  This is capitalism at work – he decided that it would generate more revenue for his company in the long run if he gives away the technology today.

Score one for visionary.

Ref:  Previous post here.

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Continuous, pervasive, pre-criminal surveillance

It appears that for a huge number of Americans, constant surveillance will soon be not just done by our own electronic devices, but also by visual observation.  From Jason Koebler at Motherboard:

By the end of the year, there will likely be two giant Army blimps hovering 10,000 feet above Baltimore with the ability to see 340 miles in any direction.

…the entire mid-Atlantic region will, at least, have the potential to be under “persistent surveillance,” a dream term for those in the intelligence biz and a worst-case scenario for those who care a lick about privacy. One aerostat that was tested in Utah last year was able to follow individual vehicles “dozens of miles away” and watch a test subject plant a fake bomb on the side of the road. According to the Washington Post, the Army has “no current plans” to use that high-powered video sensor in Maryland, but wouldn’t rule out using it in the future.

JLENS also doesn’t have to focus on just one target at a time. According to Raytheon, it can “track hundreds of airborne and surface moving threats, in 360 degrees.”

I feel so much safer.


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Government vs. Creativity

From this week’s thoughtful missive from John Mauldin.  It’s about the future, and rate of change, and the predicaments our governments world wide have gotten us into (meaning, the debt and money printing).

It’s not too much of a stretch to say that we’re in a race between how much wealth and value and improvement in lifestyles human ingenuity can create versus how much destruction of wealth and lifestyles governments can destroy.

You go, John.  I think he is non-partisan in his analysis here, or maybe anti-partisan.  That is to say, he is not bringing an ideological position to this fight.  It’s not a D vs. R thing.

He also discusses his view of the future, which is that things will be changing at an ever accelerating pace.  He then offers up this example.  I have personally been a 3D printing skeptic, having used very early versions:

In China they are literally 3D printing 3000-square-feet houses in a day! One company is planning to 3D print a car with 20 moving parts this fall, using advanced materials much stronger than steel and aluminum.

OK, point taken.

This accelerated pace of change will cause good but also harm:

A society cannot reap the rewards of creative destruction without accepting that some individuals might be worse off, not just in the short term, but perhaps forever.

At the beginning of the article he talks about how the governments of the world have made promises they can’t keep (entitlements).  This is a fact.  However, these displaced people are going to need help.

Enter Laura Tyson, via Project Syndicate.  This is really a half-thought-out piece of work.  She starts out with this:

The American public’s attitude toward government, especially toward the federal government, recalls a classic scene in Monty Python’s “Life of Brian.”

“What have they ever given us in return?” fulminates John Cleese, playing a Judean revolutionary. “The aqueduct,” concedes a sheepish co-conspirator. “And sanitation,” says a second, as others pipe up with more examples.

“All right,” Cleese erupts in exasperation. “But apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, the fresh-water system, and public health, what have the Romans ever done for us?”

The scene brilliantly captures America’s cantankerous and contradictory zeitgeist. On one hand, public trust in government is at an all-time low. On the other hand, Americans are deeply frustrated with gaping holes in health care, education, equality of opportunity, infrastructure, and environmental protection – goods and services traditionally provided by government.

As if the interstate system built decades ago is a reason for us to trust the insanity in Washington today.  But she prefers to focus on the positive, not the negative:

…blanket distrust in government, framed by glaring examples of boondoggles and fueled by ideology, too often focuses on the wrong question: How big should government be? The right question is how to develop innovative and efficient government programs to provide public goods and services that neither the marketplace nor the nonprofit sector can deliver on its own.

Then she gives us this load of crap:

…the US Department of Education’s Race to the Top Fund, which offered $4 billion in grants to states that developed successful educational reforms, spurred innovations that hold promise for school systems across the country.
And she conveniently leaves out how NCLB is still in place, with Common Core being added on!  Sometimes how big government is, really is the problem!  By the way, $4B?  The Department of Education ALONE has a budget of $312B. ( If you click that link to their website, they have a synopsis of exactly how they got so big.  They don’t have any charts showing their budget vs. America’s world ranking in educational achievements over time, of course, or any information on how they root out and eliminate their least effective programs, or how they determine what their regulatory load is on any person or organization.  They do talk a lot about all the new stuff they are adding on.)
Then Tyson adds insult to injury, citing how philanthropy is helping out, too:
The Gates Foundation may devise breakthrough innovations for public schools; but, even with its billions of dollars, it lacks the resources to revitalize education at the national or even the state level. As former New York City Mayor Michael Bloomberg recently observed, philanthropists should test innovative policy ideas and then rely on government money to implement them widely.
So, the rich can tell us what to do, but really, we should have to pay for what it is they want for us.  This is the very worst of what is wrong with government, and how government is stifling creativity.  And how inequality actually does hurt us.  That quote from Bloomberg might just make a believer out of me.
I hope John Mauldin is correct about the pace of change being able to overcome the pace of government induced sclerosis.  And I include in this (as, I think, would Mauldin) both the regulations, like Common Core, that make innovation harder, but also the crony capitalism that stifles the entrepreneur (this can be found in regulations sometimes too, but also in other ways).

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Drones in Pakistan

I don’t think we should be doing this.  Interactive guide to drone strikes in Pakistan.

ht Barry Ritholtz:

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Belgian Bond Buying

I had noticed this and wondered about it.  Thanks to Peter Schiff at Euro Pacific Capital for explaining the possibilities.

Over the last six months Belgium has started to behave eccentrically, even by Belgian standards. No, the small country of 11 million has not decided to stop making chocolate or waffles. It has decided to increase its buying of U.S. Treasury bonds…in a very big way. According to latest U.S. Treasury Department data, since August of 2013 entities in Belgium have purchased and held a stunning $215 billion of U.S. Treasuries. This figure is equivalent to about half the country’s annual GDP, and equates to almost $20,000 for every living Belgian. Prior to that time, Belgium had held its cache fairly steady at around $170-$190 billion. But by March, that total had increased by almost 130% (to $381 billion) in just seven months. The purchases represented 61% of the total increase in foreign holdings of U.S. Treasuries over that time frame. Given the fact that Belgium, as of last September, had less than 3% of the Treasury bonds held by foreign sources, this is strange behavior indeed.

Of course exactly who is buying those bonds remains a mystery. It’s only known for sure that a Belgium-based clearing house called Euroclear is “likely responsible” for holding the $200 plus billion in Treasuries. It’s amazing in this day and age when every e-mail and phone call is scrubbed for security content that hundreds of billions of dollars could move across borders without anyone really knowing what is going on. Of course this is likely only possible if official sources themselves are the transacting parties.

What is clear is that this is not likely the government of Belgium, or private Belgian capital, that is doing the buying. The numbers are just too large. This is particularly true in the First Quarter of 2014 when the buying averaged a stunning $41.5 billion per month (January was the biggest month with $54 billion). In all likelihood, the only European buyer with a wallet that big would be the European Central Bank (ECB) itself.


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Piketty, Peter Schiff, and Inequality

I keep trying to figure out what is bad about wealth inequality.  Peter Schiff has several very good points in this post from May:

according to Forbes, Bill Gates is $78 billion richer than the poorest American. Finding another instance of that much monetary disparity may be difficult. But wealth is measured far more effectively in other ways, living standards in particular.

For instance, the wealthiest Roman is widely believed to have been Crassus, a first century BC landowner. At a time when a loaf of bread sold for ½ of a sestertius, Crassus had an estimated net worth of 200 million sestertii, or about 400 million loaves of bread. Today, in the U.S., where a loaf of bread costs about $3, Bill Gates could buy about 25 billion of them. So when measured in terms of bread, Gates is richer. But that’s about the only category where that is true.

Crassus lived in a palace that would have been beyond comprehension for most Romans. He had as much exotic food and fine wines as he could stuff into his body, he had hot baths every day, and had his own staff of servants, bearers, cooks, performers, masseurs, entertainers, and musicians. His children had private tutors. If it got too hot, he was carried in a private coach to his beach homes and had his servants fan him 24 hours a day. In contrast, the poorest Romans, if they were not chained to an oar or fighting wild beasts in the arena, were likely toiling in the fields eating nothing but bread, if they were lucky. Unlike Crassus, they had no access to a varied diet, health care, education, entertainment, or indoor plumbing.

In contrast, look at how Bill Gates lives in comparison to the poorest Americans. The commodes used by both are remarkably similar, and both enjoy hot and cold running water. Gates certainly has access to better food and better health care, but Americans do not die of hunger or drop dead in the streets from disease, and they certainly have more to eat than just bread. For entertainment, Bill Gates likely turns on the TV and sees the same shows that even the poorest Americans watch, and when it gets hot he turns on the air conditioning, something that many poor Americans can also do. Certainly flipping burgers in a McDonald’s is no walk in the park, but it is far better than being a galley slave. The same disparity can be made throughout history, from Kublai Khan, to Louis XIV. Monarchs and nobility achieved unimagined wealth while surrounded by abject poverty. The same thing happens today in places like North Korea, where Kim Jong-un lives in splendor while his citizens literally starve to death.

But then, it turns out that Bill Gates has some advantages that not only are beyond the reach of the ordinary American, but in fact define the lives of all of the rest of us.  From the Washington Post:

For an initiative billed as being publicly driven, the Common Core States Initiative has benefited enormously from the generosity of the private philanthropy of Bill and Melinda Gates. How much? About $150 million worth.

I’m inclined to be against the common core standards, just on the principle that top down command-and-control government regulation is generally more harmful than helpful, as well as the awesome results we have seen from the similar process that gave us NCLB.

But the point is not whether I or you are for or against the common core standards.  The point is that we don’t have a voice in the public education system, because we don’t have $150 million to spend lobbying for whatever it is that we want.  This is where extreme inequality is problematic.

Michael Edesess has been thinking on this also.  His quotes here are from The Great Escape: Health, Wealth, and the Origins of Inequality, by Princeton economist Angus Deaton:

It is desirable for a nation to ensure equality of opportunity, though not necessarily equality of outcomes. However, extreme inequalities of outcomes – extremes of wealth – can undermine equality of opportunity. Those who are successful have every incentive to pull up the ladders of opportunity behind them to ensure that others will not follow. “The newly rich,” says Deaton, “may use their wealth to influence politicians to restrict public education or health care that they themselves do not need.” If the newly rich are extremely successful, their wealth can be lavishly applied to both public information (and misinformation) dissemination and private lobbying of politicians and bureaucrats in an effort to limit others’ opportunities and to enrich themselves further.

Deaton cites evidence that political lobbying has played a key role in the increase in top incomes: “Changes in what might appear to be arcane or obscure rules on how markets operate, on what firms can and cannot do or on accounting rules can mean immense sums to particular interests. … Rules are set not in the public interest but in the interest of the rich, who use those rules to become yet richer and more influential.” And the costs to the wealthy, he claims, of political lobbying and campaigning are extremely low. “Even the costs of recent presidential elections are dwarfed, for example, by the annual advertising budgets of car manufacturers,” Deaton writes. “Political favors come amazingly cheaply relative to the potential benefits.”

All of this threatens democracy itself, according to Deaton: “The political equality that is required by democracy is always under threat from economic inequality, and the more extreme the economic inequality, the greater the threat to democracy.”

So it seems that the real problem is all the money that is allowed in politics.  If you couldn’t buy influence, then income or wealth inequality wouldn’t matter, or at least not as much.  How do we get money out of politics?


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