Monthly Archives: December 2015

Big Fish

Here are some cool photos courtesy of Ray Szalewicz.  This is on the Allegheny River, prior to the construction of the Kinzua Dam (completed 1965).

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Mindfulness at Work

So apparently teaching employees mindfulness is the hot new thing, from HBR:

As a leadership strategy, mindfulness helps people to be more effective by directing focus to the most pertinent task at hand. Deprogramming multitasking tendencies and intentionally focusing with full attention results in higher quality interactions and decisions. Mindful decision makers take the time to consider all of their options, and therefore make more-informed decisions. Managers who model and promote mindful practices with their teams create an environment of engagement.

This is not new.  The most valuable skill I learned in my short time at GM in the late 80’s was how to meditate.  This was taught by a TM instructor brought in from outside, over several weeks, during work hours.  So they were serious about it.  IDK if it did them any good or not, but that plant is still open.  I realize that these are different skills, but they are related, and they require the same kind of long term outlook from the management offering the training.

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Police on duty deaths

Excellent analysis of actual and current data from McClellan Financial Publications.

I would add that since this data includes traffic fatalities, the safety of cars should also be considered in the root cause analysis.

Here’s one chart, and you should read the whole thing:

Police_Deaths_Birth_Rate_Fwd_Oct2015

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My Plan to Defeat Daesh (ISIS, ISIL, terrorism in general)

Here is my brilliant and well thought out personal plan to defeat global terrorism, especially terrorism originating from the middle east.  It’s certain to be effective.  To summarize:  More love, less arms.

  1.  Pray for the terrorists.  This has 2 effects.  The first is that it might do some good.  Science has not proven any impact of prayer on health outcomes, so maybe it won’t do any good.  It certainly can’t hurt.  The second effect is on the person doing the praying.  It’s psychologically difficult to hate and wish ill on someone you are praying for.  Additionally, it forces you to see them as human beings.  People, with families.  Less hate is good for everyone.
  2. Encourage and financially support all efforts to eliminate the use of oil.  I can hardly wait to buy the Tesla Model 3.  In the meantime, I will buy all my gas from Kwik Fill (United Refining), which comes from all North American crude sources.  There is no doubt that oil and its associated money are the root cause of all of these problems, or at least our involvement in them.  Edit:  Country Fair stations (owned by Citgo) sell gas from Venezuela.  This would be a second choice.  They are in OPEC but at least not in the middle east.
  3. Refuse to fear.  I will resist all changes to our American way of life.  Changes we see now include excessive and/or intrusive security measures that impinge on our privacy.  Changes that are being widely discussed include more limitations on immigration (a foundation of American strength) and even possible curtailment of religious freedom.  How is it that this small, remote army (40,000 according to the CIA) can cause a mainstream presidential candidate to call them an “existential threat”?  Why are we in a national hysteria over issues that barely register here?  We already know that the FBI is not able to detect internal terrorist plots, as evidenced in Boston and California.  And yet, hate for non-Muslims is not very high on the list of reasons for mass shootings.  We live in a free country.  That means that from time to time, we will have these kinds of events.   I am not afraid.
  4. Support the troops.  I do not mean by posting Facebook memes, wearing flags, and criticizing those who don’t appear to be “patriotic enough”.  Pay your taxes, yeah, ALL of it.  Contact your public servants and demand that the military be properly maintained.  Active troops require proper training and equipment, and most importantly, thoughtful deployment.  They are not to be used as political pawns.  Veterans require prompt and effective medical care, including mental health.
  5. Research, think, and learn, and encourage others to do the same.  Think about what you see and hear regarding terrorism, and the motivations of those making the inflammatory statements.  Follow the money.  Think about possible perspectives of citizens of the countries where the terrorists originate.

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Types of Inequality

HBR has an interesting article about inequality.

Ask CEOs about income inequality and stagnant wages, and you’ll inevitably hear about skills. The argument goes like this: Workers today face global competition and even the threat of automation. Those who can work with technology and possess sought-after skills in fields like computer programming are thriving in the labor market. Those without a college degree or specialized skills are struggling.

There’s considerable evidence to support this narrative of mismatched supply and demand. But recently the story has come under fire from a number of prominent economists, and some of them would like to discard it altogether. Instead, the critics want to talk about institutions, rules, and political power.

Criticism of the idea that wages are determined by supply and demand isn’t new, of course, but recent political focus on inequality has raised its volume. The result has been more discussion of executive compensation, corporate governance, and unionization.

Economists who pit these ideas against one another are missing the point.  There are two distinct types of inequality, or wage pressures.

The first is skills/globalization/automation.  This is not going away.  Jobs that can be done somewhere else for less money will often go there.  This has been ongoing for manufacturing for 35 years, and everyone knows the frustration of the Indian call center. Skilled jobs, like design detailing and coding, have varying degrees of outsourcing success, but it’s more than zero.  This phenomenon also does not require moving jobs away from the US.  In Erie, PA, the GE locomotive plant is in the process of laying off about half its union workforce.  This is due to work being moved to both a non union plant in Texas, and offshore to “partner” factories, which in this case are built with a cooperating foreign government (India).  The effect is to lower wages, and reduce the number of jobs available at those lower wages.  Automation is pretty easy to see.  It’s been applied in manufacturing for a long time, and it is now working its way into service industries.  As automation increases, the number of workers needed to produce the same amount of stuff goes down.  American manufacturing is not declining.  American manufacturing employment is.  Here’s how it looks:

manufacturing

I would anticipate that with the next recession, another 3 to 4 million people will lose manufacturing jobs that will simply never return.  There is no way to stop this kind of progress.  Unionization, minimum wage laws, and other artificial means of increasing labor costs will only accelerate the adoption of automation into new industries, ultimately having the opposite of the intended effect.

The other kind of inequality is what is referenced in the Stiglitz report that the HBR article references.  He shows how government policies have caused the ultra rich to come into being, and discusses his ideas for how to reverse this trend.  Here are the opening sentences:

Inequality is not inevitable: it is a choice we make with the rules we create to structure our economy. Over the last 35 years, America’s policy choices have been grounded in false assumptions, and the result is a weakened economy in which most Americans struggle to achieve or maintain a middle-class lifestyle while a small percentage enjoy an increasingly large share of the nation’s wealth.
I think he is 100% correct that the Big Inequality, that is, the .001% vs. everyone else, is caused by the rules.  And more indirectly, some of the other inequality is, as well.  However, I think he is wrong that “America’s policy choices have been grounded in false assumptions.”  I think that the top tier have made the rules on purpose to benefit only themselves.  The assumptions they used have worked out perfectly for them.  If they fooled a bunch of academics and politicians in the process, well, shame on them.  His assumption that there have been bad assumptions is, I think, an error in the analysis.  Additionally, he is proposing a whole lot more government intervention based on a bunch of new assumptions, of which some are obviously not true, my notes in italics:
we have a tax system that raises insufficient revenue (insufficient for what?) and encourages the pursuit of short-term gains over long-term investment (really?  short term cap gains taxes are higher than long term); weak and unenforced regulation of corporations (how will new laws cause enforcement?); a de facto public safety net for too-big-to-fail financial institutions (true, and not just in the obvious way); a dwindling support system for workers and families (this is not true in real $ terms, at least for unemployment and food stamps); and a reorientation of monetary and fiscal policy to promote wealth rather than full employment (true, but why should government be involved in either of these?).
His very detailed and prescriptive set of recommendations might or might not have the intended impacts, but it will cause government to be bigger and more involved in the economy.  Last night on 60 Minutes, Apple CEO Tim Cook decried the US Tax Code as outdated.  While this was a total sidestep of the question being asked (Are you minimizing your tax bill?  Well, of course we are, don’t you?,) that doesn’t mean Mr. Cook is wrong.  Imagine all these detailed laws going into effect just as our economy undergoes another massive change.   Which it is.  And will do again.  And the rate of these changes is accelerating.  I’m not sure we can regulate all this activity.  What we can do, that has not been happening, particularly in the financial sector, is allow these businesses to fail.  Remember the auto bailouts?  It was presented, at the time, as, “do this, or the industry will disappear.”  Really?  Wouldn’t it have just gone through an orderly reorganization like any other failing business?  We still buy cars, after all.
The idea of government promoting full employment is especially grating, but the specifics are less so, focusing on infrastructure, which is an area where almost everyone can agree that government should be doing more.  What about, for instance, the issues with the financial sector’s unregulated shadow banks?  I would include in that all of the unregulated financial products, such as certain types of options and swaps, that caused so many problems during the great recession.  You can’t just go in and regulate these innovations, and be done with it.  People will come up with new financial products that are not covered by the regulations, and then those will have the same results.  So do we give up and just assume that we will have periodic melt downs, to be refunded by public bailout?  Of course not, but whatever rules are put in place will have to account for ongoing innovation.  Additionally, if laws are not going to be enforced (what bank CEOs are in jail??), then none of the rules really matter anyway, do they?
Stiglitz is correct that “equality and economic performance are complements, not substitutes.”  But he needs to consider how the new rules he proposes will impact each of those, and also how these rules will work going forward as the economy changes.  He also says:
The focus here on the rules of the economy and the power to set them isn’t a call for the government to get out of the way. There is rarely an “out of the way” for the government. Rules and institutions are the backdrop of the economy, and the ways we set these rules, and keep them up to date and enforce them, have consequences for everyone.
This is so true.  Stiglitz suggests better transparency as one remedy, which should help.  But rules requiring that CEOs be compensated in specific ways, or with specific limits, seem like a lot of meddling.   It also seems like a lot more for the government to enforce, and more reporting for all the smaller corporations who aren’t doing this stuff anyway.  More regulations and reporting requirements act as a barrier to entry and a fixed cost, and are an advantage for the bigger companies.  Dodd-Frank elicits howls from the financial industry, but the truth is that it has actually caused the industry to further consolidate.  The big guys gobble up the small and mid size banks that cannot afford the new compliance.  This is also true for changes to laws that are labeled as “deregulation.”  Stiglitz recognizes this, ““Deregulation” is, in fact, “reregulation”—that is, a new set of rules for governing the economy that favor a specific set of actors.”
This is why checking the assumptions is so important.  You can’t look at what any of these actors say, not the politicians or the top .001% outside of politics.  You have to watch what they do, and assess the real effects.
There’s a lot more to the Stiglitz report.  He spells out the real problems with market power and political power, and it would be interesting to see which of his ideas would work.  Certainly allowing discharge of student loans in bankruptcy would be effective, although it would probably have the side effect of essentially ending private loans to students.  This is simply a reversion to how it was before the bankruptcy laws were changed in the first place.  He talks about the Fed (they shouldn’t have a dual mandate; it should only be employment).    He has a very divisive bit on taxes, arguing that taxes should be punitively progressive, both for income and capital gains, on the grounds that there is no evidence that allowing the high earners to keep some of their money is good for everyone else (huh?).   He argues for more unionization and a higher minimum wage, ignoring both the effects of reality as shown in the FRED graph above, and inflation (but seemingly arguing that keeping inflation low only helps the rich in his Fed policy section).  He also complains about labor law violations, while suggesting more labor laws.  His analysis of race and sex discrimination is excellent, although he somehow fails to even mention the war on drugs as a source of institutional racism.  This is another area where less laws, or less restriction on economic activity, might lead to better outcomes.

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Early Childhood Learning

I know my kids started hating school right around the time that the teachers started bitching that they weren’t good at sitting still and listening like robots (OK, the teachers did not use the word robot).  This happened immediately upon arrival to the public school that was not Montessori.  First and fourth grades.   The school wanted the first grader held back.  As if I would sentence him to an extra year of that nonsense.

Despite the data in this article, we keep hearing from leaders (like Obama) about how great universal preschool is, and how it is necessary, and how our kids cannot succeed without it.  I’m not a teacher, but I think this article sums up real issues with that point of view.  It’s from the Atlantic:

The New Preschool Is Crushing Kids

Today’s young children are working more, but they’re learning less.
Edmon de Haro

Erika Christakis Jan/Feb 2016 Issue Education

Step into an American preschool classroom today and you are likely to be bombarded with what we educators call a print-rich environment, every surface festooned with alphabet charts, bar graphs, word walls, instructional posters, classroom rules, calendars, schedules, and motivational platitudes—few of which a 4-year-old can “decode,” the contemporary word for what used to be known as reading.

One study, titled “Is Kindergarten the New First Grade?,” compared kindergarten teachers’ attitudes nationwide in 1998 and 2010 and found that the percentage of teachers expecting children to know how to read by the end of the year had risen from 30 to 80 percent. The researchers also reported more time spent with workbooks and worksheets, and less time devoted to music and art. Kindergarten is indeed the new first grade, the authors concluded glumly. In turn, children who would once have used the kindergarten year as a gentle transition into school are in some cases being held back before they’ve had a chance to start. A study out of Mississippi found that in some counties, more than 10 percent of kindergartners weren’t allowed to advance to first grade.

Until recently, school-readiness skills weren’t high on anyone’s agenda, nor was the idea that the youngest learners might be disqualified from moving on to a subsequent stage. But now that kindergarten serves as a gatekeeper, not a welcome mat, to elementary school, concerns about school preparedness kick in earlier and earlier. A child who’s supposed to read by the end of kindergarten had better be getting ready in preschool. As a result, expectations that may arguably have been reasonable for 5- and 6-year-olds, such as being able to sit at a desk and complete a task using pencil and paper, are now directed at even younger children, who lack the motor skills and attention span to be successful.

New research sounds a particularly disquieting note. A major evaluation of Tennessee’s publicly funded preschool system, published in September, found that although children who had attended preschool initially exhibited more “school readiness” skills when they entered kindergarten than did their non-preschool-attending peers, by the time they were in first grade their attitudes toward school were deteriorating. And by second grade they performed worse on tests measuring literacy, language, and math skills. ..

That’s right. The same educational policies that are pushing academic goals down to ever earlier levels seem to be contributing to—while at the same time obscuring—the fact that young children are gaining fewer skills, not more.

…the actual academic consensus on the components of high-quality early education tells another story. According to experts such as the Yale professor Edward Zigler, a leader in child-development and early-education policy for half a century, the best preschool programs share several features: They provide ample opportunities for young children to use and hear complex, interactive language; their curriculum supports a wide range of school-readiness goals that include social and emotional skills and active learning; they encourage meaningful family involvement; and they have knowledgeable and well-qualified teachers….

The real focus in the preschool years should be not just on vocabulary and reading, but on talking and listening. We forget how vital spontaneous, unstructured conversation is to young children’s understanding. By talking with adults, and one another, they pick up information. They learn how things work. They solve puzzles that trouble them. Sometimes, to be fair, what children take away from a conversation is wrong. They might conclude, as my young son did, that pigs produce ham, just as chickens produce eggs and cows produce milk. But these understandings are worked over, refined, and adapted—as when a brutal older sibling explains a ham sandwich’s grisly origins.

Teachers play a crucial role in supporting this type of learning. A 2011 study in the journal Child Development found that preschool teachers’ use of sophisticated vocabulary in informal classroom settings predicted their students’ reading comprehension and word knowledge in fourth grade. Unfortunately, much of the conversation in today’s preschool classrooms is one-directional and simplistic, as teachers steer students through a highly structured schedule, herding them from one activity to another and signaling approval with a quick “good job!”

Consider the difference between a teacher’s use of a closed statement versus an open-ended question. Imagine that a teacher approaches a child drawing a picture and exclaims, “Oh, what a pretty house!” If the child is not actually drawing a house, she might feel exposed, and even if she is drawing a house, the teacher’s remark shuts down further discussion: She has labeled the thing and said she likes it. What more is there to add? A much more helpful approach would be to say, “Tell me about your drawing,” inviting the child to be reflective. It’s never possible to anticipate everything a small person needs to learn, so open-ended inquiry can reveal what is known and unknown. Such a small pedagogic difference can be an important catalyst for a basic, but unbounded, cognitive habit—the act of thinking out loud.

Conversation is gold. It’s the most efficient early-learning system we have. And it’s far more valuable than most of the reading-skills curricula we have been implementing: One meta-analysis of 13 early-childhood literacy programs “failed to find any evidence of effects on language or print-based outcomes.” Take a moment to digest that devastating conclusion.

The shift from an active and exploratory early-childhood pedagogy to a more scripted and instruction-based model does not involve a simple trade-off between play and work, or between joy and achievement. On the contrary, the preoccupation with accountability has led to a set of measures that favor shallow mimicry and recall behaviors, such as learning vocabulary lists and recognizing shapes and colors (something that a dog can do, by the way, but that is in fact an extraordinarily low bar for most curious 4-year-olds), while devaluing complex, integrative, and syncretic learning.

The academic takeover of American early learning can be understood as a shift from what I would call an “ideas-based curriculum” to a “naming-and-labeling-based curriculum.” Not coincidentally, the latter can be delivered without substantially improving our teaching force. Inexperienced or poorly supported teachers are directed to rely heavily on scripted lesson plans for a reason: We can point to a defined objective, and tell ourselves that at least kids are getting something this way.

We neglect vital teacher-child interactions at our peril. Although the infusion of academics into preschool has been justified as a way to close the achievement gap between poor and well-off children, Robert Pianta, one of the country’s leading child-policy experts, cautions that there is “no evidence whatsoever” that our early-learning system is suited to that task. He estimates that the average preschool program “narrows the achievement gap by perhaps only 5 percent,” compared with the 30 to 50 percent that studies suggest would be possible with higher-quality programs. Contrasting the dismal results of Tennessee’s preschool system with the more promising results in places such as Boston, which promotes active, child-centered learning (and, spends more than twice the national average on preschool), lends further credence to the idea that preschool quality really does matter.

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Edesess on Barclays Aggregate

Michael Edesess has a new piece called “Is the Bond Index Broken?”  His article is an answer to some criticisms of the Barclays Aggregate (link to Barclays info here).  He seems to be mainly referring to its use as a benchmark, but since he references a discussion with John Bogle, it’s safe to assume that he also is including its use as an index for direct investment (such as through funds or ETFs, like AGG).

The three criticisms of the bond index

Inquiries made to people with long experience in the investment field identified three criticisms that have been leveled at the bond index:

  1. It overweights heavily indebted issuers.
  2. It may be double-counting some fixed income securities.
  3. It is not representative of most investors’ fixed income portfolios; this was expressed by Bogle himself in twoconversations with Morningstar.com interviewer Christine Benz.

I’m a huge Edesess fan, but that list does not include some of my biggest concerns with the index.   Let’s start with his list, then I will add my concerns:

  1.  Overweighting of heavily indebted issuers.  Edessess believes this is not a problem.  However, the problem he describes is one of mispricing.  This is how cap weighted equity indeies become “overweighted.”  That is, if an equity has too high a price, it will be over-represented in a cap weighted index.  I don’t think this is the problem in fixed income.  Say company A and company B are essentially identical.  Both have identical cash flows, and identical amounts of cash on hand, but company A issues twice as much debt as company B.  AGG will have twice as much debt from company A.  The problem with this is that it would seem on its face that company A is the company you would want less exposure to, not more.   Mispricing can add to this problem, but it’s not the problem.
  2.  Double counting of some securities.  I agree with him here.  It may be a problem, but it shouldn’t be significant.
  3.  Not representative of investor portfolios.  Here’s what he has to say about that:

Here, the criticisms are those leveled by Bogle himself, and they do bite. About 70% of the U.S. Aggregate Index, according to Bogle, consists of U.S. federal government-issued securities. The total of those securities, according to Bogle, is about $16 trillion. Of that amount, however, at least half is owned by national governments – notably China, Japan, the UK, and, in fact, the United States itself. …

The demand for U.S. federal debt for such purposes has pushed up its price relative to less highly-rated corporate bonds. Hence, funds that replicate the Barclays U.S. Aggregate Index have substantially lower yields than U.S. corporate bond funds.

For example, Vanguard’s Total Bond Market Index mutual fund (VBTLX), which is invested, according to Vanguard’s web site, “about 30% in corporate bonds and 70% in U.S. government bonds of all maturities,” currently has a yield of 2.3% while its Intermediate-Term Corporate Bond Index fund (VICSX) has a yield of 3.5% – a difference of 1.2%.

Bogle argues that the small additional risk of default and slightly longer durations in the corporate bond fund (6.4 years for VICSX versus 5.8 years for VBTLX) does not justify forgoing 1.2% of yield, especially when – in the current interest rate environment – that 1.2% represents a reduction of yield of more than a third. To the extent that standard deviation measures risk, for example, the Total Bond Market Index fund VBTLX has a standard deviation of about 3.0% while the standard deviation of VICSX is 4% to 4.5%. Bogle questions whether this is enough difference in risk to justify a 1.2% premium for corporates.

I agree, in a sense.  However, the AGG is intended to include all the investment grade debt that is out there.  The lower grade the debt, the more it acts like equity from a variability and correlations standpoint.  People own bonds, in general, for income and safety.  Portfolio managers add bonds for diversification.  Neither of these groups want the bonds to act more like equity, and as is pointed out above, funds with those kinds of bonds are available for those who do.  The Barclays Aggregate Index is the default specifically for investment grade issues.  The issue here, I guess, is that it’s used as the default index for “bonds”.  If point #1 is not a problem, this shouldn’t be either.  And if this is a problem, then the overweighting of more heavily leveraged entities’ debt should also be looked at.  It depends on what you are using the index for, I guess.

So what are some of the other concerns?

4. Debt is removed from the index one year before it matures.  Why?  I suppose as debt matures, the bond just starts to act like cash, but that’s the reality of bond ownership.  I would think that when all the index funds and ETFs sell off their one year from maturity debt, that those issues tend to sell slightly below value (supply and demand, right?).

5. The maturity and size constraints can cause huge turnover within these funds.  If your goal is to own something that acts like an investment grade bond, but with the diversification of a fund, then you don’t want high turnover.  Turnover for bond index funds range from 72% (BND) to 318% (!) (AGG).  With an average duration around 5.4 and average maturity of 7.5, why so much turnover?

6. The details of the rebalancing rules make this index easy to front run.  They publish daily both a backward looking index, consisting of current constituents, and a forward looking index.  The index is rebalanced to match the forward looking index on the last day of the month.   This is not to say that the fund managers can’t use their discretion to trade in and out of bonds as they see them going in and out of the index, but their mandate is to match the index performance.

I think it’s important to keep in mind that this index was invented in 1973.  Prior to all of our computers and internet.  Data was both more difficult to obtain and to analyze.  If a person were to make up the ideal bond index today, the rules would probably not be these.  In fact, people are trying to make something like “smart beta” style indices for bonds.  It’s not simple.  Bonds are not like stocks, and the people who invented this index back in the dark ages accomplished a rather remarkable feat.  That doesn’t mean we have to continue to use it unchanged forever, either as a benchmark or as an investment guide.

 

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