Year to date the S&P 500 has returned -8.77%, but its average price-earnings ratio is still 19.3, which is unappetizing. My investable portfolio is down about 4.5% for the year (and down about 6% from its 2015 high versus the S&P 500's being down 14% from its 2015 high). I'm currently about 25% in stocks. My bet is that the market will continue to fall further this year, rebound this year, then fall again next year, so I will continue to keep much of my money out of the market until I see a correction closer to an average of S&P 15 times earnings (versus the current 19). That implies a fall of 21% from here unless earnings improve. If stocks fall another 15% or so, I'm probably at least partially back in. If the market does rebound from here, I will miss the rally, but better to be able to retire with my current portfolio than risk a 40% decline. With my current asset level I can retire, but I cannot retire if it falls by 40%.
The Fed seems to have painted itself into a corner: It is running out of ammunition. The world economic picture and aging boomers militate against a strong-demand economy. Because of its obsession with demand and with growth rates, the Fed may overstimulate. If it doesn't, there will be declining stock prices and a slow economy.
Moreover, we are at an ambiguous point in the commodity cycle. Both oil and gold may have touched bottom, but that's unclear. I had read that a bottom of $25 is likely for WTI crude price, and today's bounce to $29 seems to be consistent with that claim. Today's bounce was painful for my oil short, but overall my investable asset portfolio is down year to date less than the S&P 500 because I had removed much of my investment assets into cash. I'm not sure that I still believe that $25 is the bottom for oil.
One thing I've learned is that low p-e ratios are not indicative of short term positive returns. I didn't do better because of my poor timing on a couple of oil shorts and because my stock investment choices have been dismal. These included falling into a value trap whereby I bought financial stocks because their valuations were fairer than the market average, yet the low-priced stocks underperformed the market this year. Low valuation is not the only measure for short-term performance, and in today's market I'm not sure that low valuation doesn't signal poor momentum rather than the market's overlooking a good buy. It is probably true, as Morningstar points out, that in the long run the financial stocks will overcome their association with oil lending and outperform, but I don't believe that the market for oil or stocks will stabilize for the next couple of years.
Gold has taken me by surprise, but I'm not convinced that its positive performance will continue unabated. I am getting ready to go long again on gold, but I suspect that there will be renewed easing that will complicate commodities prices for a while longer.
Saturday, February 13, 2016
Friday, February 12, 2016
De Tocqueville on Progressivism and Presidential Power
I have been rereading Alexis de Tocqueville's Democracy in America; the translation is by Harvey C. Mansfield and Delba Winthrop. It isn't light reading, but it is accessible, and every American should read it. Following his 1831 visit to the United States, de Tocqueville published it in two volumes, which appeared in 1835 and 1840. Many of de Tocqueville's insights about America are accurate today, often eerily so.
On page 128 de Tocqueville questions whether the framers of the US Constitution were right or wrong to permit the president to be reelected. This is a fascinating question because I can think of a number of abuses that have occurred in connection with presidential reelection during my lifetime, especially during the administration of President Richard Nixon. Indeed, statistics show that the stock market routinely rises during presidential election years, for the party in power manipulates the Federal Reserve Bank in its favor. De Tocqueville points out that a president who seeks reelection views laws and negotiations as electoral schemes that redound to his or her, rather than to the nation's, benefit. "The principle of reelection therefore renders the corrupting influence of elective governments more extensive and more dangerous. It tends to degrade the political morality of the people and to replace patriotism with cleverness."
De Tocqueville adds that all forms of government are associated with a natural vice, and laws that enhance the vice are undesirable. The founding fathers limited the whims of the majority by state governments' electing senators and the electoral college's electing the president. De Tocqueville notes, "In introducing the principle of reelection [of the president], they destroyed their work in part. They granted a great power to the president and took away from him the will to make use of it."
Progressivism worsened this result because the Seventeenth Amendment, a 1912 product of Progressivism, made the election of senators direct. Moreover, the replacement of party conventions with primaries and the diminution of the influence of the electoral college have made the president ever more likely to be tempted to manipulate public policy to gain reelection.
De Tocqueville writes:
Each [form of] government brings with it a natural vice...the genius of the legislator consists in discerning it well...[E]very law whose effect is to develop this seed of death cannot fail in the long term to become fatal, although its bad effects may not be immediately perceived.
The effect of Progressivism was to pass a series of such laws that enhanced the majoritarian principle without concern for checks and balances. The power of banks and the Federal Reserve Bank interact with the tendency of the president to manipulate public opinion in his--and the banks'--short-term favor. The result has been misallocation of credit and other resources and resultant economic instability that, in turn, has resulted in increasing cries for government intervention and socialism. The public is unable to perceive that their economic insecurity is the direct result of governmental manipulation of credit to the short-term advantage of politicians and banking, real estate, business, and investment interests.
My thought is that the United States would be better with a president elected for one six-year or even four-year term rather than for two four-year terms.
On page 128 de Tocqueville questions whether the framers of the US Constitution were right or wrong to permit the president to be reelected. This is a fascinating question because I can think of a number of abuses that have occurred in connection with presidential reelection during my lifetime, especially during the administration of President Richard Nixon. Indeed, statistics show that the stock market routinely rises during presidential election years, for the party in power manipulates the Federal Reserve Bank in its favor. De Tocqueville points out that a president who seeks reelection views laws and negotiations as electoral schemes that redound to his or her, rather than to the nation's, benefit. "The principle of reelection therefore renders the corrupting influence of elective governments more extensive and more dangerous. It tends to degrade the political morality of the people and to replace patriotism with cleverness."
De Tocqueville adds that all forms of government are associated with a natural vice, and laws that enhance the vice are undesirable. The founding fathers limited the whims of the majority by state governments' electing senators and the electoral college's electing the president. De Tocqueville notes, "In introducing the principle of reelection [of the president], they destroyed their work in part. They granted a great power to the president and took away from him the will to make use of it."
Progressivism worsened this result because the Seventeenth Amendment, a 1912 product of Progressivism, made the election of senators direct. Moreover, the replacement of party conventions with primaries and the diminution of the influence of the electoral college have made the president ever more likely to be tempted to manipulate public policy to gain reelection.
De Tocqueville writes:
Each [form of] government brings with it a natural vice...the genius of the legislator consists in discerning it well...[E]very law whose effect is to develop this seed of death cannot fail in the long term to become fatal, although its bad effects may not be immediately perceived.
The effect of Progressivism was to pass a series of such laws that enhanced the majoritarian principle without concern for checks and balances. The power of banks and the Federal Reserve Bank interact with the tendency of the president to manipulate public opinion in his--and the banks'--short-term favor. The result has been misallocation of credit and other resources and resultant economic instability that, in turn, has resulted in increasing cries for government intervention and socialism. The public is unable to perceive that their economic insecurity is the direct result of governmental manipulation of credit to the short-term advantage of politicians and banking, real estate, business, and investment interests.
My thought is that the United States would be better with a president elected for one six-year or even four-year term rather than for two four-year terms.
Saturday, January 30, 2016
My Article in Econ Journal Watch
Econ Journal Watch just published my study of 920 industrial
relations (IR) researchers. Mine is one of the first times an association has
been shown between (a) Democratic registration and political contributions and
(b) the ideological orientation of a field’s published research. I found that
when I scored papers in the leading IR journals for ideological orientation
without knowing the authors’ information and then looked up the authors’
information in a party registration data base there is a statistically
significant association between the ideological orientation expressed in the
articles and the authors’ political registration or contributions. In other
words, the exclusion of scholars with alternative views mirrors the balance of
views expressed in the published research in the leading IR journals.
Nevertheless, none of the journals states that they advocate an ideological
orientation.
As well, I found that the exclusion of non-leftists becomes more intense as
one moves up the academic hierarchy. While individual academics associated with
the IR field have a D:R ratio of 8 to 1 (mainstream economists have a D:R ratio
of 3 to 1), those who contribute twice or more (e.g., publish two papers over
five years or are both an editor and an article author) have a D:R ratio of 11
to 1. Editors at the two leading IR journals, Industrial and Labor Relations
Review and Industrial Relations, have a D:R ratio of 43 to 1.
Thus, in the study I emphasize person roles rather than individuals. (That is,
if someone is both an editor and an author they count twice.) The overall D:R
ratio for academic person-roles is 10 to 1, but that includes the Journal of
Labor Research, which the Olin Foundation specifically funded to permit
alternative views in the IR field. Without JLR, the registration ratio
is 13 to 1. The political contributions ratios are even more extreme.
The article appears here:
http://econjwatch.org/issues/volume-13-issue-1-january-2016http://econjwatch.org/issues/volume-13-issue-1-january-2016
The summary is as follows.
I show that the field known as
industrial relations (IR) leans overwhelmingly to the political left. I
investigate the voter registration and political contributions of IR
researchers, showing overwhelming Democratic Party favor. I construct a data set
of participants in the IR field, which contains 920 U.S.-based person-roles
(deriving from 709 actual persons). Included are the authors of the 539 research
articles published in four periodicals 2009–2013: (1) the annual meeting
proceedings volume of the Labor and Employment Relations Association (LERA), (2) Industrial and Labor Relations Review, (3)
Industrial Relations: A Journal of Economy and Society, and (4) the
Journal of Labor Research. I also include the editors of the
periodicals, the officers of LERA, and a sample of LERA’s ordinary members. The data suggests that the ratio of
Democratic-to-Republican voter registration among participants in IR is roughly
10 to one. I find a similar ratio when looking at those who have made
contributions to Democratic and Republican candidates for office. I also show
that Democratic lopsidedness at the three mainstream IR journals becomes more
extreme at the higher stations (officers and editors, as opposed to ordinary
members and authors). Also, I analyze the content of the 539 articles for union
support and regulation support; the mainstream IR journals are overwhelmingly
pro-union and pro-regulation.
Sunday, January 24, 2016
Alfie Kohn's Authoritarian, No-Bathroom Theory
I am reading Alfie Kohn's book Punished by Rewards, which assaults incentive systems, bonuses, pay for merit, praising children, and any other extrinsic reward. Rewards are extrinsic when they arise outside a task. If I blog because I enjoy it, then the reward is intrinsic, but if I blog because of the great fame it brings me, then the reward is extrinsic.
Kohn's is a no-bathroom theory. That is, if I hire a contractor to build me a bathroom, and I tell him that his reward will be intrinsic rather than extrinsic, then I will get no bathroom. A more primitive example is a cave dweller who works harder than his neighbor to bag two mammoths instead of one. The second mammoth is his reward. He is not punished by the reward, for his family is better fed and may live longer. His hungry neighbor may spend his time on intrinsically rewarding tasks like drawing on cave walls, but the neighbor's family goes hungry. The industrious cave dweller is rewarded, and the reward is natural.
Mark Twain's Tom Sawyer convinced his friends to whitewash a picket fence because it was fun. Most of the time, though, my offering merely intrinsic rewards to contractors will not result in a contract. Modern economies are based on contracts, hence they are based on rewards, incentives, and bonuses.
I do not doubt the gist of Kohn's book: Experimental evidence developed by social psychologists in laboratory conditions shows that interest in tasks wanes when rewards are introduced. Nevertheless, the real world differs from laboratory conditions. No one goes to work without an incentive, namely, a paycheck. "If any would not work, neither should he eat," (2 Thessalonians, 3:10).
The phenomenon of incentives' causing declining interest in a task is related to the theory of cognitive dissonance. Absent a reason for doing something, the mind invents a reason: I am doing it because I believe in it or because it's interesting. If we are doing something because we have decided that we believe in it, we will tend to be better at it because we believe in it. Pay introduces dissonance: We do not believe in what we are doing; rather, we are doing it because of pay. That may make us less attentive because the pay rather than the task is our reward.
However, without pay and without rewards many tasks will not be done because the reality, absent psychological manipulation, is that we do not care enough to do most work. The cave man did not invent the automobile not because he would not have benefited from the automobile but because he could not imagine it. We imagine not only because of intrinsic interest but also because of rewards. We would not have most of today's conveniences--cars, electronics, and the like--without the financial and social incentives that benefited the inventors. That can be seen in the lack of invention in societies in which rewards are absent--India and the USSR, for example. They have not been innovative because of their socialistic systems. America became increasingly socialistic after 1900, so innovation has gradually slowed from the 19th century rate.
Kohn attempts to deflect these points by differentiating between objectively determined rewards and those dependent on others' will--a distinction he mostly avoids when talking about gainsharing plans and stock options. On page 183 Kohn writes this passage, which is among the most realistic in his book:
When someone contacts me about giving a lecture or writing an article, I ask how much is involved and often negotiate for the maximum amount that seems to be fair and that the organization can afford to pay. Then, assuming we have come to an agreement, I do my best not to think about the money again. I do this because I fear the consequences of construing what I am doing in terms of what I am being paid: eventually I might find myself thinking, "A is paying me twice as B, so I'd better do twice as good a job for A. If I ever reach that point, my integrity will be gone, and my intrinsic motivation will have fled along with it.
What I attempt to do, in other words, is decouple the task from the compensation. Since I am self-employed, this is largely a matter of how I think about my work--what I attend to, and when, and how. But for people who do not work for themselves, it is imperative that the act of decoupling be facilitated by the organization. This is done mostly by avoiding certain practices--specifically, anything that encourages people to become preoccupied with what they will get for what they are doing.
In other words, Kohn finds financial incentives amenable when he receives them because he believes that he is intelligent enough to decouple the reward from the task, but he has no such faith in workers, whom he sees as lacking his ability to put things in perspective because they need employers to do their thinking for them. Kohn applies similar elitist reasoning to students. He claims that students study for grades because the system has inculcated in them a belief in incentives. He does not believe that students can think for themselves, as he believes he can, and develop interest in a subject.
Kohn's lack of faith in students' ability to think for themselves falls apart with respect to their cheating. Despite being told over and over that cheating is wrong, many students still cheat. Kohn seems to think that it is impossible for students to think for themselves and develop interest in a subject because schools give rewards for study, but it is possible for students to think for themselves and cheat even though schools give punishment for cheating. Why is developing an intrinsic interest in the face of rewards more difficult than cheating in the face of punishment? Both are subject to external incentives.
Kohn's elitism is familiar to those who have thought about professionals' privileged roles in America's authoritarian economic system. Kohn himself has garnered rewards such as consulting contracts with major corporations, writing for the Harvard Business Review, and appearing on CNN. Why would such capitalist institutions be interested in supporting a radical, which Kohn claims he is?
Although Kohn claims to be opposed to rewards because they are, in his view, authoritarian, Kohn's solution set is authoritarian--and in many ways to the liking of authoritarian corporate bailout recipients. He sees no problem in using authoritarian, violent methods to ban products that do not match his personal tastes (p. 192):
But what interests me are the unpleasant jobs that do not have to be done in order for society to function, those whose existence reflects the premise of our economic system that if something sells, it has value by definition and should be produced. Should convenience foods or luxury appliances be made available if the human costs of preparing or assembling them are severe? Our answer may be yes, but the question needs to be asked. If the issue is rarely addressed, it is partly because many people are forced to choose between working at such jobs and not working at all--a choice framed not by "life" but by our economic system. These people are expected to be grateful that any employment is available, regardless of the psychic and physical toll of doing such work.
In other words, if Kohn feels that convenience foods are unnecessary, then Washington should send federal agents to force the producers to stop making those foods in the name of the producers' supposed authoritarianism in rewarding their employees.Violent federal agents are presumably not authoritarian in Kohn's world.
In fact, few workers earn an adequate wage. Incentives are a way for workers to improve their wage. Such improvement is possible on large scale only in a free economy. It exists nowhere else in the world other than in free market economies (including Sweden's relatively free one). It exists to a greater degree in countries that have freer economies than the US, such as Singapore, Hong Kong, and Switzerland, and it does not exist in countries where there are no incentives like North Korea and Cuba.
Why is Kohn popular among big business-related interests like CNN and the Harvard Business School? This point has been addressed by historians, such as Martin Sklar, who have studied the Progressive era. Big business has a lot to gain from not paying incentives to workers and from centralizing authoritarian control, where it can illegalize any business that it and Kohn find offensive. By avoiding incentive pay, corporations can save lots of money. Plus, they can put their competitors out of business by using government controls to shut down those that do.
Kohn's is a no-bathroom theory. That is, if I hire a contractor to build me a bathroom, and I tell him that his reward will be intrinsic rather than extrinsic, then I will get no bathroom. A more primitive example is a cave dweller who works harder than his neighbor to bag two mammoths instead of one. The second mammoth is his reward. He is not punished by the reward, for his family is better fed and may live longer. His hungry neighbor may spend his time on intrinsically rewarding tasks like drawing on cave walls, but the neighbor's family goes hungry. The industrious cave dweller is rewarded, and the reward is natural.
Mark Twain's Tom Sawyer convinced his friends to whitewash a picket fence because it was fun. Most of the time, though, my offering merely intrinsic rewards to contractors will not result in a contract. Modern economies are based on contracts, hence they are based on rewards, incentives, and bonuses.
I do not doubt the gist of Kohn's book: Experimental evidence developed by social psychologists in laboratory conditions shows that interest in tasks wanes when rewards are introduced. Nevertheless, the real world differs from laboratory conditions. No one goes to work without an incentive, namely, a paycheck. "If any would not work, neither should he eat," (2 Thessalonians, 3:10).
The phenomenon of incentives' causing declining interest in a task is related to the theory of cognitive dissonance. Absent a reason for doing something, the mind invents a reason: I am doing it because I believe in it or because it's interesting. If we are doing something because we have decided that we believe in it, we will tend to be better at it because we believe in it. Pay introduces dissonance: We do not believe in what we are doing; rather, we are doing it because of pay. That may make us less attentive because the pay rather than the task is our reward.
However, without pay and without rewards many tasks will not be done because the reality, absent psychological manipulation, is that we do not care enough to do most work. The cave man did not invent the automobile not because he would not have benefited from the automobile but because he could not imagine it. We imagine not only because of intrinsic interest but also because of rewards. We would not have most of today's conveniences--cars, electronics, and the like--without the financial and social incentives that benefited the inventors. That can be seen in the lack of invention in societies in which rewards are absent--India and the USSR, for example. They have not been innovative because of their socialistic systems. America became increasingly socialistic after 1900, so innovation has gradually slowed from the 19th century rate.
Kohn attempts to deflect these points by differentiating between objectively determined rewards and those dependent on others' will--a distinction he mostly avoids when talking about gainsharing plans and stock options. On page 183 Kohn writes this passage, which is among the most realistic in his book:
When someone contacts me about giving a lecture or writing an article, I ask how much is involved and often negotiate for the maximum amount that seems to be fair and that the organization can afford to pay. Then, assuming we have come to an agreement, I do my best not to think about the money again. I do this because I fear the consequences of construing what I am doing in terms of what I am being paid: eventually I might find myself thinking, "A is paying me twice as B, so I'd better do twice as good a job for A. If I ever reach that point, my integrity will be gone, and my intrinsic motivation will have fled along with it.
What I attempt to do, in other words, is decouple the task from the compensation. Since I am self-employed, this is largely a matter of how I think about my work--what I attend to, and when, and how. But for people who do not work for themselves, it is imperative that the act of decoupling be facilitated by the organization. This is done mostly by avoiding certain practices--specifically, anything that encourages people to become preoccupied with what they will get for what they are doing.
In other words, Kohn finds financial incentives amenable when he receives them because he believes that he is intelligent enough to decouple the reward from the task, but he has no such faith in workers, whom he sees as lacking his ability to put things in perspective because they need employers to do their thinking for them. Kohn applies similar elitist reasoning to students. He claims that students study for grades because the system has inculcated in them a belief in incentives. He does not believe that students can think for themselves, as he believes he can, and develop interest in a subject.
Kohn's lack of faith in students' ability to think for themselves falls apart with respect to their cheating. Despite being told over and over that cheating is wrong, many students still cheat. Kohn seems to think that it is impossible for students to think for themselves and develop interest in a subject because schools give rewards for study, but it is possible for students to think for themselves and cheat even though schools give punishment for cheating. Why is developing an intrinsic interest in the face of rewards more difficult than cheating in the face of punishment? Both are subject to external incentives.
Kohn's elitism is familiar to those who have thought about professionals' privileged roles in America's authoritarian economic system. Kohn himself has garnered rewards such as consulting contracts with major corporations, writing for the Harvard Business Review, and appearing on CNN. Why would such capitalist institutions be interested in supporting a radical, which Kohn claims he is?
Although Kohn claims to be opposed to rewards because they are, in his view, authoritarian, Kohn's solution set is authoritarian--and in many ways to the liking of authoritarian corporate bailout recipients. He sees no problem in using authoritarian, violent methods to ban products that do not match his personal tastes (p. 192):
But what interests me are the unpleasant jobs that do not have to be done in order for society to function, those whose existence reflects the premise of our economic system that if something sells, it has value by definition and should be produced. Should convenience foods or luxury appliances be made available if the human costs of preparing or assembling them are severe? Our answer may be yes, but the question needs to be asked. If the issue is rarely addressed, it is partly because many people are forced to choose between working at such jobs and not working at all--a choice framed not by "life" but by our economic system. These people are expected to be grateful that any employment is available, regardless of the psychic and physical toll of doing such work.
In other words, if Kohn feels that convenience foods are unnecessary, then Washington should send federal agents to force the producers to stop making those foods in the name of the producers' supposed authoritarianism in rewarding their employees.Violent federal agents are presumably not authoritarian in Kohn's world.
In fact, few workers earn an adequate wage. Incentives are a way for workers to improve their wage. Such improvement is possible on large scale only in a free economy. It exists nowhere else in the world other than in free market economies (including Sweden's relatively free one). It exists to a greater degree in countries that have freer economies than the US, such as Singapore, Hong Kong, and Switzerland, and it does not exist in countries where there are no incentives like North Korea and Cuba.
Why is Kohn popular among big business-related interests like CNN and the Harvard Business School? This point has been addressed by historians, such as Martin Sklar, who have studied the Progressive era. Big business has a lot to gain from not paying incentives to workers and from centralizing authoritarian control, where it can illegalize any business that it and Kohn find offensive. By avoiding incentive pay, corporations can save lots of money. Plus, they can put their competitors out of business by using government controls to shut down those that do.
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