Monthly Archives: January 2016

The Rise of Renewable Energy

Interesting.  I had a chance to talk with some other financial professionals last week, and of the 5 of us, 2 disagreed with me that fossil fuels are a bad long term investment, and 2 did not state any opinion.

I feel very strongly about this, and it would not be a surprise to me if this chart ends up grossly underestimating the pace and extent of the change.  From ThinkProgress:


So if you are an investor, it is estimated that coal usage will grow by maybe 20% over the next 25 years.  That’s less than 0.7% per year.  Oil goes backwards (although, to be fair, this is not a large use of oil even now).  Gas increases by quite a lot, but not enough to salvage the sector.

Remember, the energy sector, by definition, comprises ONLY fossil fuel industries – coal, oil, and gas exploration, production, and refining.

Buy oil now?  I’m not a trader, so I don’t know how to play the market for the next year or two.  As an investor, no thanks.



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What is The Market

In order to correctly allocate assets, certain assumptions must be made regarding “The Market.” Often, that term is used within the US to refer to US Large Caps. However, when investing, it is necessary to determine not only an allocation to the S&P 500, but also allocations to US mid and small caps, and international equities as well.

This analysis is focused strictly on publicly traded equities;  no fixed income or other asset classes are included. Additionally, a breakdown of large/mid/small caps is not included.  Although size criteria is generally definitional, it is not trivial, and must also be accounted for in any allocation.

My intent is to examine the global economy from a couple of different perspectives, compare the data to available indices, and understand any differences.

Data is readily available for both GDP and market cap in USD, and these are both relevant measures of economies from an investment standpoint. I have summarized the information from the CIA World Factbook, the IMF, the World Bank, and the World Federation of Exchanges. In order to make comparisons with Morningstar reports, I used Morningstar definitions of Emerging and Developed markets, which means that South Korea and Greece are both classified as Developed Markets.

This is a top down view of the world’s economy:

GDP (IMF, WB) GDP, PPP (IMF, WB, CIA) Market Cap Min – Max
IMF (2015 est) WB (2014) IMF PPP (2015 est) WB GNI PPP (2014) CIA PPP (2014) WFE (2015) WB (2012) CIA (2012)
US 25% 23% 16% 17% 16% 40% 40% 31% 16-40
Europe + Asia Developed 33% 34% 24% 25% 25% 35% 34% 39% 24-39
EM 40% 41% 58% 57% 58% 25% 23% 26% 25-58
Americas 33% 33% 26% 26% 26% 40% 46% 39% 26-46
Greater Asia 34% 31% 41% 41% 40% 37% 31% 35% 31-41
>Asia EM 23% 20% 33% 33% 32% 19% 14% 15% 14-33
Greater Europe 33% 36% 33% 33% 33% 21% 23% 26% 21-36
>Europe EM 5% 6% 7% 8% 8% 0% 1% 3% 0-7
>Africa/Middle East 6% 7% 10% 9% 10% 3% 5% 4% 3-10
China 16% 13% 17% 17% 17% 12% 9% 10% 9-17

For comparison, here are 3 indices for the Global Market.  I have included the economic Min – Max numbers for comparison:

Economic Min – Max FSTE Global All Cap MSCI ACWI All Cap S&P Global BMI Index Min – Max
2016 2016 2016
US 16-40 53% 55% 51% 51-55
Europe + Asia Developed 24-39 38% 37% 38% 37-38
EM 25-58 7% 7% 8% 7-8
Americas 26-46 56% 57% 55% 55-57
Greater Asia 31-41 20% 20% 21% 20-21
>Asia EM 14-33 5% 4% 5% 4-5
Greater Europe 21-36 24% 24% 24% 24%
>Europe EM 0-7 6% 6% 1% 1-6
>Africa/Middle East 3-10 1% 1% 1% 1
China 9-17 3% 3% 3% 3%

These do not match up very well.  The reason for this is that the top down economic look does not include any adjustment for whether or not an outside investor can safely purchase shares of the available stock.

The indices are all constructed similarly, using screening methods.  They all begin by examining every stock market and country in the world.  MSCI has a very detailed look at how they evaluate countries, here, and so does FTSE, here. The criteria are intended to determine if they are allowed to purchase stock there at all, and if so, are the trading rules fair for all participants, and are the investors all equally protected under law.  Once the constituent countries are determined (47 for the S&P, 79 for MSCI, and 46 for FTSE), then a stock screening process begins.  Float adjustments are made, and minimum cap size and trading volume screens are applied.  The end result of equities are then cap weighted within the index.  S&P holds 11,803 stocks, MSCI has over 14,000 and FTSE includes just over 3000.

It’s amazing how similar the three global indices are to one another, and how different they are from the economic data.  The two most obvious issues are the overweighting of the US market, and the underweighting of the Asian EMs (specifically, China).

Is this really a problem?  There is a lot of economic activity taking place that crosses borders.  If you own a stock that does a portion of its business in a foreign country, is that the equivalent of owning some stock from each country?  Currently the US exports approximately 13% of GDP, while China exports 30% of its GDP.    In 2011, 18% of  US workers were employed by US based multinational corporations, and an additional 5% were employed by US affiliates of foreign owned multinational corporations (source).  And it’s not just the US.  According to McKinsey & Company, 36% of global GDP crossed borders in 2012, and thanks to the internet, it isn’t just the big companies.

There are other considerations, as well.  In some European countries (Germany, for one,) many small and medium size businesses do not go public with the same frequency as in the US.  The market cap to GDP metric can be used as an estimate of how fairly valued a market is when compared to itself over time, but it might also give some idea of public versus privately held companies when compared country to country.  Here’s an example:


What may be happening here is the US has a larger percentage of companies that are public compared to other countries.  So if you want to own the world market, do you want a higher weight of US companies simply because they are more likely to have issued equity?

This is not only an issue with the “Global” indices.  Be sure to examine the details of any index you intend to use.  Emerging market indices, in particular, suffer from these same issues.

Thanks to the many country and region specific indices out there, along with the index funds and ETFs that replicate them, you don’t have to settle for the world market defined by the major index providers.  It is possible to create a portfolio that matches whatever you think is the best representation of the world market.



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Freedom from Conscription

This is horrifying, and fascinating.  From Tyler Cowen:

Being drafted during the Vietnam War also hurt your descendents

by on January 15, 2016 at 1:48 pm in Data Source, Economics, History, Law | Permalink

A decade after their military service, white veterans of the draft were earning about 15 percent less than their peers who didn’t serve, according to studies from MIT economist Josh Angrist.

Now, new research suggests that the draft did more than dim the prospects of that earlier generation: The children of men with unlucky draft numbers are also worse off today. They earn less and are less likely to have jobs, according to a draft of a report from Sarena F. Goodman, an economist with the Federal Reserve Board of Governors, and Adam Isen, an economist at the Treasury Department. (A copy was released by the Fed in December, but research does not reflect the opinions of the government.)

The researchers have not nailed down how, exactly, any of this is happening, nor why the disadvantage appears to be over twice as potent for sons than for daughters. But the work is valuable for showing how the circumstances of one’s parents can have lasting repercussions. This is one way that inequality persists through the generations.

That is from Jeff Guo at Wonkblog.

– See more at:

I wonder how this worked out for WWII draftees?  And what are the implications for a society where everyone is forced to serve in the military?


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Opioid Deaths vs. Legal Marijuana

Or, how to save 5800 American lives a year while generating new tax income and reducing crime.

This study came out in 2014:

Medical Cannabis Laws and Opioid Analgesic Overdose Mortality in the United States, 1999-2010

Objective  To determine the association between the presence of state medical cannabis laws and opioid analgesic overdose mortality.

Design, Setting, and Participants  A time-series analysis was conducted of medical cannabis laws and state-level death certificate data in the United States from 1999 to 2010; all 50 states were included.

Exposures  Presence of a law establishing a medical cannabis program in the state.

Main Outcomes and Measures  Age-adjusted opioid analgesic overdose death rate per 100 000 population in each state. Regression models were developed including state and year fixed effects, the presence of 3 different policies regarding opioid analgesics, and the state-specific unemployment rate.

Results  Three states (California, Oregon, and Washington) had medical cannabis laws effective prior to 1999. Ten states (Alaska, Colorado, Hawaii, Maine, Michigan, Montana, Nevada, New Mexico, Rhode Island, and Vermont) enacted medical cannabis laws between 1999 and 2010. States with medical cannabis laws had a 24.8% lower mean annual opioid overdose mortality rate (95% CI, −37.5% to −9.5%; P = .003) compared with states without medical cannabis laws. Examination of the association between medical cannabis laws and opioid analgesic overdose mortality in each year after implementation of the law showed that such laws were associated with a lower rate of overdose mortality that generally strengthened over time: year 1 (−19.9%; 95% CI, −30.6% to −7.7%; P = .002), year 2 (−25.2%; 95% CI, −40.6% to −5.9%; P = .01), year 3 (−23.6%; 95% CI, −41.1% to −1.0%; P = .04), year 4 (−20.2%; 95% CI, −33.6% to −4.0%; P = .02), year 5 (−33.7%; 95% CI, −50.9% to −10.4%; P = .008), and year 6 (−33.3%; 95% CI, −44.7% to −19.6%; P < .001). In secondary analyses, the findings remained similar.

Conclusions and Relevance  Medical cannabis laws are associated with significantly lower state-level opioid overdose mortality rates. Further investigation is required to determine how medical cannabis laws may interact with policies aimed at preventing opioid analgesic overdose.


OK, so if a state has MEDICAL marijuana legalized, they experience 24.8% lower death rate due to opioid overdose.  This includes both prescription and illegal drug ODs.  If the gateway drug to heroin is marijuana, then ODs should increase with more legal availability.  This suggests that the prescription drugs are the gateway drugs to heroin, and that the availability of marijuana as a substitute pain medication reduces the number of people who take opioids of any kind, and then OD.

The data also suggests that to save a huge number of drug overdose deaths, we just need to make medical marijuana available in the remaining states.  In 2014, over 28,000 Americans died of opioid overdose (data here).  Based on US Census 2014 state population data (here), my back of the envelope calculation is that we could have saved nearly 5800 lives in 2014 if medical marijuana had been legal in the remaining states.

Do our lawmakers know this?  As a comparison, in 2014 there were roughly 33,000 gun deaths (source) and in 2013, 10,000 alcohol related auto accident deaths (source).  It seems bizarre that there is so much debate over gun control, with measures being taken that may or may not have any measurable impact on public health, and very little debate about medical marijuana.  Only kids with seizures seem a compelling reason to legalize.  I think the adults are worth it too.  Bring out the veterans!  They are terribly victimized by opioid addiction.

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Institute for Justice guy now on Arizona Supreme Court

ThinkProgress finds this “chilling.”

Boy, I sure don’t.  Without IJ, would people have known about eminent domain abuse?  I don’t think so.  They brought the case that was ultimately lost in the Supreme Court, but that resulted in many states changing their laws to prevent municipalities from seizing land from a private owner to give it to another private owner for a private business.

Check it out for yourself.  I don’t understand why ThinkProgress would object to the work of this charity.  IJ defends individuals against entrenched interests, often big corporations or other similar organizations, who use our government to stifle competition and violate the rights of individuals in a variety of ways.

Good for you, Clint Bolick!  Keep on doing your thing!

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Forecasts Suck

Great column from Bob Seawright, via Josh Brown.  An interesting and key point:

The now-defunct Bear Stearns won a noteworthy 2002 legal decision involving former Fed Governor and then-Bear Chief Economist Wayne Angell over advice he and the firm gave to a Bear Stearns client named Count Henryk de Kwiatkowski (really) after the Count lost hundreds of millions of dollars in a just a few weeks (really) following that advice by trading currency futures on margin. The Count had been born in Poland, escaped invading Nazis, been banished to Siberia by the Soviets, escaped and travelled across Asia on foot to Tehran, talked his way into the British Embassy, became a renowned RAF pilot, moved to Canada, became an engineer, and made a fortune trading used airliners, most famously selling nine 747s to the Shah of Iran over a game of backgammon in the royal palace (really). He also became the owner of the famous thoroughbred racing institution, Calumet Farm (really).

Bear offered the Count “a level of service and investment timing comparable to that which [Bear] offer[ed its] largest institutional clients” (which is not to say that they were any good at it). The key trade was a huge and ultimately disastrous bet that the U.S. dollar would rise in late 1994 and early 1995. At one point, the Count’s positions totaled $6.5 billion nominally and accounted for 30 percent of the total open interest in certain currencies on the Chicago Mercantile Exchange. The jury awarded a huge verdict to the Count but the appellate court reversed. The appellate judges determined, quite conventionally, that brokers may not be held liable for honest opinions that turn out to be wrong when providing advice on non-discretionary accounts.

But I’m not primarily interested in the main story. Instead, I’m struck by a line of testimony offered at trial by then-Bear CEO Jimmy Cayne that does not even show up in subsequent court opinions, despite extensive recitals of the facts of the case. The generally “cocksure” Cayne apparently thought that his firm could be in trouble so he took a creative and disarmingly honest position given how aggressive Bear was in promoting Angell’s alleged expertise to its customers. Cayne brazenly asserted that Angell was merely an “entertainer” whose advice should never give rise to liability.

Economists are right only 35 to 40 percent of the time, Cayne testified. “They don’t really have a good record as far as predicting the future,” he said. “I think that it is entertainment, but he probably doesn’t think it is” (and I doubt that the Count was much amused). Cayne even noted that Angell did not have a real job description at Bear (a claim that Angell’s bio seems to support). “I don’t know how he spends most of his time,” testified Cayne . “He travels a lot and visits people and has lunches and dinners and he is an entertainer.”

Notice that Cayne did not even pay lip service to the idea that Bear’s clients were entitled to the firm’s best efforts based upon the best research (or even their best research). Moreover, he did not seem to think that the Count deserved honesty together with competent advice. For Cayne, the goal was simply to be entertaining and to make sales. That the Count lost hundreds of millions of dollars was merely collateral damage (and not even necessarily unfortunate at that).

So this anecdote is kind of about how Wall Street advice sucks, but click on the article, he goes into a lot of detail about how their economic forecasts suck as well.  He also makes a good point about how every action you take depends on your belief about what is going to happen in the future.  I file that under “check your assumptions,” but certainly it’s related.

Barry Rithotlz has compiled a list of how to check your assumptions and remain more or less unaffected by the entertainers.  In the end, he gets back to the really important assumption:

10 How am I spending my time? How do I want to spend my time? This is very important, one that many folks don’t think about until it’s way late.

Time is an extremely limited resource, one that you should use appropriately. Are you spending this finite resource doing things you dislike, or are you pursuing that which gives you the most satisfaction?

Remember, everybody gets the same 24 hours each day. What differentiates some people from others is how they spend that precious resource.

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Microbes on Seeds

This is fascinating.  From Scientific American.

Microbes Added to Seeds Could Boost Crop Production

Researchers are testing more than 2,000 different microbial seed coatings on half a million test plots in the U.S.

Agribusiness firms Novozymes and Monsanto are leading the way by coating seeds with microbes, planting them on farms across the U.S. and harvesting the crops to see how they fared. The two companies, through their BioAg Alliance, have just concluded the world’s biggest field-test program of seeds laced with promising microbes. This past autumn they harvested a variety of crops, planted using seeds with more than 2,000 different microbial coatings, grown in some 500,000 test plots from Louisiana to Minnesota, and they have been busily analyzing the outcomes.

Ultimately, such microbial agricultural products could significantly reduce fertilizer and pesticide use, easing the burden farming imposes on the environment and potentially helping a farmer’s bottom line by reducing costs or increasing crop yields. The research is the beginning of an ambitious movement to replace chemistry in agriculture with microbiology.

This will require a LOT of statistically rigorous testing, I would think.  Specific microbes might work in one soil or climate better than another.  This could generate a whole new business of soil specific or even field specific bioengineered seed coatings.  Think of the patents and the $$$$ for Monsanto.  Plus no need to worry about someone “stealing” their product, like the GMO seeds.  A whole new way to monopolize the world’s food supply.

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