The Year in Review: By David Collum

The Scenic View from Mt. Stupid....

Forecasting

Okay, so people make fun of the bad forecasts of economists.  Fair enough.  But economists are trying to forecast actions of sentient, prospectively focused creatures.

Hurricanes are just big unruly piles of wind.  But we can't forecast THOSE either.  Check out this "ensemble" forecast for the next week (click for an even more incoherent image):

Of course, if we can't predict the actions of "big unruly piles of wind" I guess forecasts about Congressional votes are also off the table. 

Never predict anything, least of all the future

"This fall, as the exchanges come on line, tens of millions of people are going to find they can get health coverage they never could before. They are likely to be quite happy about that, especially if they’ve been hearing for months in advance that it will be a mess."

~Josh Barro, April 29th 2013

The future of work?

As AI and globalization chew up good jobs for the non-elites, there is a bright spot on the career horizon. The market for household staff is booming.

According to the WSJ, "A good housekeeper earns $60,000 to $90,000 a year. A lady's maid can make $75,000 a year. A butler may start at $80,000 a year and can earn as much as $200,000."

And, there are openings, "Demand for the well-staffed home is on the rise, according to agencies and house managers alike. Clients are calling for live-in couples, live-out housekeepers, flight attendants for private jets, stewards for the yachts and chefs for the summer house. In San Francisco, Town and Country Resources, a staffing agency for domestic help, has seen demand for estate managers and trained housekeepers grow so fast the agency is going to offer its own training programs in subjects like laundry, ironing and spring cleaning starting in 2014. Claudia Kahn, founder of The Help Company, a staffing agency based in Los Angeles, says she used to get one call a month for a butler but has gotten three in the past week alone."

If your skill set is more exotic, don't despair:

"She will also be bringing with her the two animal trainers who come seven days a week to care for Prince Mikey, a white-faced capuchin monkey. Prince Mikey's trainers work with him five to six hours a day during the week and three hours a day on weekends.  The annual cost is in the six figures"

Behold the future of American mass employment!

Capex implosion

New durable goods orders were down 5.7% in March. Yikes!

But the sequester.....

Excluding defense, they were down 4.7%


Is it going to be another spring swoon and summer of discontent? Will Joe Biden have to go back out on the road?

Or has the new housing bubble stoked the economy sufficiently to continue its vaguely upward drift?

Tell me in the comments.

What goes up....

(clic the pic for an even more bubbly image)

Football: Stick a fork in it?

Earlier this year, LeBron and I wrote about the end of football in Grantland. We speculated that it could take 10-15 years before football was knocked off its perch as the number 1 US sport.

New findings from Boston University make our scenario even more likely. Researchers there have found 28 previously unreported cases of chronic traumatic encephalopathy (CTE) in deceased football players:

Previously, CTE had been found in 18 of the 19 former NFL players whose brains were examined. The 15 new cases in the BU study mean that of the 34 brains of former NFL players that have been examined, 33 had the disease. Linemen made up 40 percent of those cases, supporting research that suggests repetitive head trauma occurring on every play — not concussions associated with violent collisions — may be the biggest risk. BU also reported CTE in four former NHL players.

So, CTE is more prevalent than we thought and may well not be fixable by focussing on concussion avoidance or treatment.

The "end of football" is very much in sight.

Your Thunder draft pick update

As part of the Harden trade, the Thunder received a protected first round pick from the Toronto Raptors. If it turns out to be one of the top 3 picks or worse than the 14th pick, the Thunder would have to wait at least another year to get the pick.

Obviously, the dream scenario would be for it to be the number 4 pick.

Right now, the Raptors are tied with Detroit for the second-worst record in the NBA with a .214 winning percentage. The Whizzers are winless, and Cleveland is 1/2 game better than Toronto (notice how all the truly pitiful teams are in the East).

Kyrie Irving's injury is a bit of a plus for the Thunder as it might help push Cleveland below Toronto.

Yes, I know that there is an element of randomness in the lottery, but it looks like, at this early point in the season, the Raptors might be too crappy for the Thunder to get their pick this year.

Create inclusive institutions and call me in a century!

Daron Acemoglu may well be the pre-eminent economist of our time.  Acemoglu and Johnson (along with other coauthors) have written massively cited and highly influential journal articles.

But their overarching theory in "Why Nations Fail" just won't wash, at least for prediction and policy.

Full disclosure: I have not read the entire book (give me a break here people, "reading the book" is a very over-rated strategy)!

But, I have read and taught their papers and followed the review and counterattack cycle that reached its peak this week with their diatribe against Jeff Sachs.

There are two basic problems for the relevance of their theory:

1. Mrs. Angus and I show that across countries from 1960 - 2000, "institutions" are converging, while output is diverging.

2. Institutions move slowly while in most of the world growth, even in the medium term, is volatile. See "The anatomy of start-stop growth" or "growth accelerations".

So, "inclusive institutions are necessary (and sufficient?) to sustain long run growth"is just not a very relevant or helpful statement for poor countries or policymakers over a 5 - 25 year horizon.

"Create some inclusive institutions and call me in a century", is not going to get you appointed as chief economist at any IFI anytime soon. Nor will it get you elected in a developing country.

Nor should it.

Shows you what I know

Chavez wins 54% - 45%. Not really all that close. I really should just shut my yap at this point. I broke Munger's law and Gaddie's law and didn't heed Boz's wise voice.

I am a dope.

Ecce Chavez

Today is election day in Venezuela. The opposition seems united, its candidate, Henrique Capriles, has run an energetic campaign and made a major comeback in the polls. Chavez has survived his health issues (so far), and the vote is expected to be very close.

While it is certainly fair to denounce the dramatic fall in economic freedom, personal freedom, and impersonal rule of law in Venezuela under Chavez, it is also important to remember that pre-Chavez Venezuela was not exactly a democratic paradise.

There is, after all a reason that Chavez was elected and re-elected and re-elected. People think Venezuela is a socialist dictatorship masquerading as a democracy (I don't think this is true), but pre-Chavez Venezuela was an oligarchy masquerading as a democracy.

While it may take 20 years to undo the damage Chavez has done to the economy and the rule of law, in the long run (40 or 50 years), I believe that Chavismo will prove to have been a net plus for Venezuela.

He broke the oligarchy. He gave voice and hope to millions of effectively disenfranchised people. I don't Venezuela can ever go back to the old ways again.

If I can get all Marxist up in here for a minute, to me something like Chavismo was almost an historical necessity for Venezuela given the abuses of the old regime.

For the big finish, I am going out on a limb and predicting a Capriles victory.

Department of bold predictions: Krugman Edition

Look at Paul, way out on a skinny branch:

"The next four years are likely to be much better than the last four years — unless misguided policies create another mess."

 LOL. Ya think?

The last 4 years have been absolutely horrible. Perhaps the worst in the post-war era, certainly since the early 80s. The economy can't stink forever, household de-leveraging won't last forever, so this is kind of a no-brainer.

And yet note the lack of any quantitative dimension. "Much better", not "average 3.5% growth", or "have unemployment hit 5.5%".

And also note the convenient escape clause "unless....".

Perfect PK move. Setting himself up for a big "I told you so", with a very flexible goalpost and a get out of jail free card if things really don't work out.

You ain't seen nothing yet

We are headed for a world where most production can be done efficiently without very many people. Either smart machines will do it by themselves, or communications technology will massively raise the scale at which that the best people can practice their trade.

In other words, we are headed for a new gilded age where owners of capital and labor market superstars will be producing a massive chunk of the economic pie. The exact percentage? Shall we say 90?

Our politicians are, as usual, fighting the last war. It's nuts to worry about getting manufacturing jobs back, because as a first approximation, there won't be any in 10-15 years.

I can think of two possible outcomes for the rest of us.

 One is that we are all on the dole, happily chewing qat or plugging into the Matrix of amazing alternate reality experiences available to us.

The other is that we form an army of personal service providers to the ultra rich. I specialize in fingernail care, you focus on toenails. Uncle Chester vacuums out bellybuttons, and so on.

Unless we get fully functional personal assistant robots who can pass the Turing test.

Then it's the Matrix for all of us non-elites.

People, how do you want to spend your time in a world where meaningful work is not really an option for most of us?

Wow!! Doug Hibbs basically calls the election for Mittens!

Here is the money quote:

"according  to  the  Bread  and  Peace  model  per  capita  real   income  growth  rates  must  average out  at  nearly  6  percent  after  2012:q2  for  Obama  to  have  a   decent  chance  of  re-­‐election."

You can get to the whole paper from here (and obviously a hat tip goes to Brendan).

Beyond this bombshell, the paper is well worth reading as Hibbs excoriates his competitors for using ad-hoc and ex-post dummy variables as well as endogenous approval ratings as explanatory variables in their vote-share equations.

le deluge

I have said (and so has Angus) that Obama will win in November. That prediction was in part predicated on a belief that the folks in DC could put together some kind of cockamamie "Krugman Model" stimulus that would make measured growth appear to hit the 3% (or so) target required to get the idiots-who-make-up-the-electorate to vote for the incumbent.

Apres November, le deluge. The wheels come off, it gets bad. But not even THAT is happening. Golly. The jobs report is apocalyptic.

So, here is what I think is going to happen. (I have this talk I give to VC groups and annual meetings of investors, and it's really long and has lots of ppt slides. This is the summary, free for all you loyal KPC readers). (And I should also note that my own thinking was influenced by a dinner with LeBron a while back, though of course he is blameless for my getting this wrong).

Came, Saw, Bailed

Okay, so I clearly waited three weeks too long.

But I liquidated all the stock in my retirement accounts today.  It was only 25%.  But now it is 0%.

I sincerely hope that I did this at the bottom, and that things get very much better, quickly.  You can all laugh at me.

But I doubt it.  Because Spain cannot survive another month.  And banks and financial institutions in England have truly massive exposure.  This is the end.  Boom.  Not like economic boom.  Like really loud heavy object hitting a floor boom.

UPDATE:  LeBron describes capital flight from the wreckage of the EuroZone.  The comments are quite funny.

UPDATE 2:  Mr. Overwater asks, "Why?"  Not the volatility thing, volumes have not been that high lately.  In fact, holy shinola, volumes have fallen through the floor:

We are at 1999 levels of volume, even allowing for the Facebook IPO and etc.  Yikes!  I hadn't even seen that.  Damn.

No, the problem I see (before I scared myself with this volume picture) is the bets that so many banks have made on Euro bailouts.  It's not just JP Morgan and MF that did it, they just got caught first.  Many banks, worst in England, but bad elsewhere also, took huge net long positions in sovereign debt from Eurozone nations, betting that the bailout woud happen.  To the extent that the bonds were selling at a discount, and you end up getting par, that's a good bet.

The problem is that these banks are taking long positions with customers' money.  There were not hedges, they were net bets, big ones. 

Banks should be bookies, not bettors.  Bookies lay off bets and use the line (whether it's points, or odds, or whatever) to adjust the market so they get equal amounts of exposure on either side.  A bookie who himself takes a net position on a game, a horse race, or Greece is called (technically) an "idiot."  Bookies take bets on both sides, and make money on the vig, and cash in on volume of trades.

Well, it turns out nearly every bank you can think of is an "idiot."  They do NOT have equal positions betting for and against a Euro-zone sovereign debt bailout.  They all bet the bailout would happen.  As Louis XV said, "Apres (JP) MOIrgan, le deluge."

never say never

Hugo Chavez has called home from Cuba to affirm that he's alive and running the government. As for the future, he had this to say:

"The opposition are never going to win any elections in Venezuela, ever again,"

Wow, those are some doctors, those Cuban doctors. Apparently they are not only curing Hugo but making him immortal?

 Or maybe he says that because he feels like there won't BE any elections in Venezuela ever again?

Hat tip to Greg Weeks

The employment situation

The March jobs report is out from BLS and it's not good.  After job growth averaged over 225,000 per month the last three months, the current number is 120,000. "Expectations" were for 205,000.

We are not out of the woods yet, people.

Prophets of the KPC?

I've been droning on (and on) about how the Fed has backed themselves into a weird position where if the economy keeps growing decently, they will have to backtrack on one of their two promises.

Promise #1 is 2% inflation. Promise #2 is a doozy: no short term interest rate hikes until the second half of 2014!

Increasingly, others are growing more skeptical of promise #2.

In CNBCs survey of "67 economists and equity and fixed income managers", it found that "nine out of 10 market participants don’t believe the Fed will wait that long. In fact, 54 percent believe the first Fed interest rate hike will come by 2013."

I wonder what The Bernank and crew are thinking? Are they banking on a recession to save their "credibility"? Do they think there is enough weasel room in the wording of promise #2 that they can claim compliance no matter when they raise rates? Do they regret getting pressured into making promise #2?

People, which is more likely to happen, the Fed keeping promise #2 or Congress allowing the planned sequestrations to go through without any changes?

Hat tip to LeBron.

Can you smell what the Angus is cookin'?

Over at MR, LeBron asks for your most surprising prediction.

Here's mine:

Within the next 10 years we will (at least de facto if not de jure) have very close to open borders in the USA.

Restated in English: within the next 10 years immigration into the USA will rise dramatically.