Piketty lambastes the US economics profession

This weekend I borrowed Piketty's Capital in the 21st Century from the library. Lest I be thought to have read it, I hasten to point out that I read only the introduction, the conclusion, and the chapter on inherited wealth. In addition, I looked at some of the graphs.

He makes a few basic points:

1. Given that the long-term growth rate of the world economy is 1%-1.5%, and the normal return on capital is 4%, it is a mathematical certainty that wealth will grow relative to incomes over time until wealth is destroyed by war, revolution or government policy.

2. Inherited wealth predominates over earned wealth.

3. The spread of knowledge and transparency is a countervailing force that tends to equalize wealth, but it is generally not strong enough to offset fully Point 1.

The introduction is good because it summarizes the book in about 30 pages. Piketty is also an entertaining writer. Someday when I have a lot of free time, such as one would have if serving a long prison term, for example, I may read the entire book.

Piketty was a wunderkind who was hired to teach at MIT just after finishing his PhD in France. He didn't like the US economics establishment, however, because he found that US economists deluded them into thinking they were scientists and were fascinated with their childish mathematical models which had little to do with reality. He therefore returned to France where economists have the advantage of being held in low regard and are therefore obliged to cooperate with the other social sciences and to provide useful insights.

I have attached a page from the introduction that states this. It made me laugh.

The problem we now have in the US is that the deluded economists with their childish models divorced from reality are controlling our fate.

Iraq: Government military strategy fails

Today's FT reports that the Iraqi army has over 50,000 "ghost" soldiers: soldiers who are paid regularly but who don't exist. This worked out fine until ISIS attacked; against them, the ghost soldiers turned out to be totally ineffective.

Interesting details on the rise in average earnings

Real wages are rising at last

The jobs report this morning was good, with 321,000 net new jobs in November. Economists were forecasting about 100,000 fewer.

Equally, and perhaps more interesting was the news that average hourly earnings grew 2.1% year-over-year. (In November of 2013 wages only grew 0.9% yoy.) You will note that wages in Japan are also growing an a good clip. (Not so in the UK.)

Faster wage growth is understandable because although the overall unemployment rate is at 5.8%, the unemployment rate of whites is 4.9% and of Asians is 4.8%, so whites and Asians are close to full employment, which means wages should rise. Rising wages will be tempered, however, by the 6.9 million involuntarily part-time workers plus the discouraged workers.

The FT reported this morning that real wages in the developed world rose only 0.1% in 2012 and 0.2% in 2013, so what we are seeing in Japan and the US represents an important change, I should think.

So wages are finally rising again. Maybe were are beginning to exit this long period declining/stagnant household income, and, at long last, consumption binging can resume. Let us hope for this good result.

Is Japan about to exit the lost decades? I would say yes.

Japan's labor statistics are very positive.  This should ignite the domestic ecoomy.

From today's FT:

Uranium in the long term will be unaffected by the Tohoku disaster (Euromoney Nov. 2014)

Inside investment: Uranium – Metal of the mind and Tohoku 

Lincoln Rathnam Monday, November 03, 2014 

Investment is easy when you can immanentize the eschaton. But even radioactive assets such as uranium can be worth running a Geiger counter over. 

News triggers thought in a tricky way. Take, for example, the Fukushima disaster in Japan. It occurred in March 2011 after the Fukushima nuclear plant was hit by a tsunami produced by the Tohoku earthquake, the largest ever recorded in Japan (9.0) and the fifth largest ever in the world. Over 15,000 people were killed by the tsunami, which, while not breaching the nuclear plant’s containment, caused three of the six reactors to melt down. 

Fortunately, the containment held, and no one has so far died from the meltdown. A 2013 World Health Organization report says that the worst case effects would be a possible rise of thyroid cancer among female infants living in and remaining in the Fukushima Prefecture from a natural rate of 0.75 to 1.25 per 100 over the course of their lives. The WHO estimated that, even among the emergency workers inside the plant following the incident, cancer risks were the same as the general population in two-thirds of the cases and slightly higher in one-third. 

Considering these facts alone, one might well conclude that the nuclear plant performed very well in the face of an incident far more severe than it was designed to handle. In the not-too-distant future, the Fukushima plant might well be cited as a testament to the safety of nuclear power. The 2013 WHO report is a step in that direction. 

That is not, however, how people view the matter today. Forgotten are the earthquake and tsunami that caused so much death and destruction; remembered is the ‘Fukushima nuclear disaster.’ I imagine that when many Japanese people think about the tsunami, what comes to mind is not a tidal wave, but Hiroshima. 

235 Gnostic speculations 

Uranium is as much an idea as it is a metal. I remember a time around 1970 when I was a college undergraduate and ran into a friend sporting a lapel button that read, ‘Don’t immanentize the eschaton.’ 

William F Buckley Jr had visited the campus to address the Conservative Society where he distributed these buttons. At that time, the Vietnam War controversy was raging on campuses because the draft still existed, which made the already scary prospect of graduation even more horrifying. Anti-war sentiment was high and the proponents of unilateral nuclear disarmament were active. Buckley took the position that although the effects of a nuclear war would be horrible, unilateral disarmament would increase rather than reduce the risk of one occurring. He might have been right – so far. 

But the point is that ideas are often more powerful than reality, even over substantial periods of time. This applies more strongly to investments than to many other areas, such as lawn care or automotive repair. The feedback mechanism for bad lawn care ideas is the appearance of brown spots on the grass in a few days or weeks, and for bad automotive repair ideas mechanical failure. 

Investment ideas, however, do not exist in that real world. Investment ideas are not of this earth. They float in outer space in an ether of capital markets theory, buoyed up by forecasts – fallacious and otherwise. The world of investment ideas is, in short, a world of opinion. 

This frustrates fundamentalists who perforce believe there will be an end time, an eschaton, when reality is revealed. Fundamentalists are betting reality will trump theory within their investment horizon, which might be a month, a quarter, or a year. 

I wondered about this when I listened recently to a presentation by a uranium mining company. I was particularly struck by a slide that showed that while only 58 nuclear reactors were under construction before Fukushima, the number is now 72; 152 reactors were planned before Fukushima, 174 are planned now. This is on top of the 435 reactors now operating in the world. 

Although demand dropped when Japan shut down its nuclear industry, the supply of uranium is already getting tight again. In fact, mine supply has been below consumption for 25 years. The 20-year programme under which Russia, in co-operation with the US, downgraded its weapons-grade uranium to fuel grade had been adding to supply until it ended last year. 

Mine production increased in the previous decade as uranium prices spiked to almost $150/lb, and the increase was mainly in Kazakhstan, which now accounts for about 40% of world production. We are now at $35/lb, which is said to be less than half the price needed to justify investing in new mining capacity. Meanwhile, the Global X Uranium ETF (URA) has dropped 21% this year and 80% from its high in 2011. 

According to the World Nuclear Association, the uranium fuel cost needed to produce one-kilowatt hour of electricity with uranium costing $35/lb is half a cent. Electricity prices in the US average between 10 cents and 15 cents per kilowatt-hour, so the uranium fuel is not a big factor. The price effect of uranium falls, therefore, wholly on supply and not at all on demand. Right now, supply is flagging while rising demand is built into the existing plant construction schedule. 

Some fundamentalist investors are now betting on uranium. Their reward still floats gently between the real world of facts and the dream world of investment ideas. They are betting that the realization of uranium’s value will soon come to earth and that the eschaton will be immanentized to their profit. 

Will regulatory changes finally unleash the velocity of money?

The banks have been saying that they are restricted in lending due to capital constraints due to two rules that the regulators have imposed since the crisis:

1. Banks must retain some of the risk for mortgages they sell that have less than 20% equity behind them.
2. The banks must take back mortgages they sell that go bad due to "their mistakes."

These innovations meant that even loans sold into the market effectively remained on the balance sheet and thus required capital. Since capital requirements are higher than they ever have been, lending has been fairly static despite Fed stimulus.

This is part of why easy money has not resulted in more lending.

Now this has changed. The regulators have done away with both rules. (See the NYT article: http://nyti.ms/1yZEtup )

Will this result in an acceleration in lending? It should. But how much? Maybe Bernanke should apply again.

This graph shows how anemic mortgage lending has been: