They treat us like dogs

Source: TLS November, 23, 2012

U.S. stock mutual funds gain $7.5 bln, most since 2001 -Lipper

The situation of the stock market compared to fixed income reminds me of a story:  Sam, an irascible fellow who was not much like by his neighbors, died and everyone showed up for the funeral either for the refreshments or to make sure he was dead.  At the appropriate moment in the service, the clergyman asked if anyone would say a few words of remembrance about Sam.  There was a long and awkward silence, so the clergyman said, "surely, there must be someone who has something to say about Sam?"  Finally, a longtime acquaintance stood up and said, "I'll say this for old Sam: his brother Henry was even worse."

Stock inflows were substantial in the week ending January 9th, according to Lipper .  With real interest rates already negative all over the world and high-quality stocks like Intel yielding 4.2%, the case for equities is so compelling as to be almost indisputable.  All that is needed for a big stock market rally is a dose of animal spirits.

From whence will these spirits come?  Perhaps it will come from Japan, where Mr. Abe seems intent on abolishing the last vestiges of central bank independence, consistent with what governments around the world are doing.  Japan lightening the spark of speculation would be highly emblematic to the rest of the world.

It is telling that central bank independence, long considered an important social good, is now being denounced as  unconscionable and even immoral by the likes of the formerly sane Joseph Stiglitz.  In demanding a weak currency and high inflation, Mr. Abe may be unleashing forces he can hardly comprehend, let along control, but they will likely lead to the aggressive deployment of capital that Keynes referred to as "animal spirits."

Here are the numbers for the week ending January 9th:

Migration: Is the American workforce becoming ossified?

The Wall Street Journal published some interesting statistics, the significance of which they did not really analyze, in an article today entitled  "Americans get moving amid torpid recovery"   

There are a couple of points of interest: 1. Americans are continuing to shift to the southeast and the west (ex-California)  2. Despite an uptick due to the current recession, internal migration is declining.

As to point one, people, particularly young people, are moving away from the states with heavy social overheads to the more efficient environments where jobs are being created.

As to point two, we are becoming older and more unwilling to move.  This is normal and understandable.  Of all of Newton's laws of motion, inertia has always been my favorite.  Moreover, I would think that the rapidly-growing reach of the social safety net has combined with lower incentives to work that have resulted from the decline in real compensation for labor has also been a factor.

I remember an article in the Financial Times some years ago that examined the problem posed by the fact that English people were reluctant to move from their homes to towns fifteen miles away to find work.  I observed the same phenomenon when living in France in the 1970's.  Now the USA is joining the club.

Implications of less striving include slower growth, more crime, and increased drug abuse and alcoholism in our Clockwork Orange society.

Greek tax evasion is institutionalized

A recent study¹ at the University of Chicago has concluded that Greece loses at least 1/3 of its deficit through tax evasion. (Other estimates puts this at more than 50%.)  They reached this conclusion by comparing bank lending to reported income, and they found that debt service on loans to many professions and industries exceeds 100% of reported income but that these loans have low default rates. Clearly, banks used actual rather than reported income in their lending standards.

My comment:  Since enforcement of taxes is very unevenly applied, Greeks feel justified in not paying them.

Here is a quote from the study:

“Ranked by euros tax-evaded, the largest offending industries are medicine, engineering,

education, accounting, financial services, and law. This industry distribution of tax evaders in Greece provides support for two incentive stories. First, paper trail matters. Industries with lower intensity of paper trail have more tax evasion. Second, politicians matter. The occupations of parliamentarians line up very well with the tax evading occupations, and these same parliamentarians failed to pass mild reform targeting their own industries.”

1“TAX EVASION ACROSS INDUSTRIES: SOFT CREDIT EVIDENCE FROM GREECE” Chicago Booth Paper 12-25. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2109500

Repent, for the end is eventual!

Many developed countries are in the final stages of the bankruptcy of their common business model, including the US, UK, France, etc.  At some point a wrenching change will occur; it will be precipitous, like Greece in April 2010.  I remember that at a conference in Hong Kong of risk managers in February of 2010, no one believed that the PIGS were a serious problem.  Then, suddenly, . . the emperor had no clothes.

So at some point the chickens will come home to roost.  The crisis will be caused by a change in psychology rather than some specific event.  More and more pundits are saying things like "our situation is dire." The debt ceiling debate may be a trigger.  But, as the bible says, "we don't know the hour or the day."

Gold investors are not a cult!

From THE NEW YORKER

Falling fertility rates mean no global growth the new normal

Standards of living and quality of life will rise without growth.   Retirement from gainful employment will cease to exist for the able-bodied.

 (FT, January 3, 2013)