I write this blog for two reasons: First, writing clears my head. Second, for the feedback from readers.
The best recent feedback was a reader pointing me to a link between heartburn drugs (like Prilosec which I was taking) and dementia.
Read the New York Times piece here.
I went cold turkey off Prilosec. Thank you. Now I take TUMS — usually when I need to. So far, the most I’ve taken in one day is three. TUMS seems to work. My gastroenterologist says TUMS is harmless in modest amounts. Still, he’s scheduled me for an endoscopy and colonoscopy.. Good article on “Quick Relief for Heartburn.” Click here.
Latest small gambles: FNMA and FMCC. The Verizon strike is over. I don’t see it helping the stock significantly, but it will lead to a more predictable daily trading pattern. I’m looking at SYK and ZBH, two leading providers of replacement body parts. All my friends are getting the stuff. It’s not cheap. Of course, if they did a little exercise… even walking. But that’s another story.
This past long weekend, I spent reading, maintaining stuff around the house, playing tennis and spending a time with friends. The usual stuff:
Latest Technical Tips:
+ Mice are my biggest problem in the country. They nest in cars, in AC chillers, etc. My weapons include poison, traps with peanut butter, dryer sheets, high frequency sound machines and mothballs. Nothing works. Ideas?
+ Does your bank offer two factor logon identification? If so, get it. You do not want strangers getting into your bank account.
+ My endless task: unsubscribing from every investment list I ever (stupidly) signed up for. If any were any good, the writer would be rich and not writing newsletters (or blogs).
+ Never install new, or improved software on your working laptop. Install it on your old one and test it. Never software is not always better than older software. Updated software can suck. Always keep a copy of the old software — just in case.
+ Is your Netflix movie jerky? There are three solutions. Don’t rely on WiFi. Wire your TV directly with an Ethernet cable (aka an RJ-45 cable). Second, ask the kids to stop downloading and get off Facebook while you’re trying to watch a movie. Pay your Internet company more money and get a faster service.
+ You don’t need a new laptop. You need more memory and a SSD (solid state drive). It takes hours to install all your favorite software and get your new machine configured the way you like it. Worse: If you buy a new Windows 10 machine, some of your old good software won’t work.
+ Get maintenance instructions and wiring diagrams. When they install stuff in your house, ask the contractor: “Sketch for me a diagram of how this works. And show me the things that need to be maintained — e.g. changing filters on air conditioning units. Show me the things that usually break. Have you installed a surge arrestor and voltage stabilizer?”
The economic view from Australia. Alan Kohler is a long-time leading Australian financial writer. Here’s a recent posting. This has nothing to do with picking individual stocks, but it sets the stage for some of the “curious” things happening in our investment world — like low interest rates and slow growth. Like overheated housing markets. We’d stimulate economic growth if we had infrastructure government spending — but that’s been off the table since 2008. Our politicians seem to be more concerned with bathrooms than bridges. Anywhere here’s Alan Kohler, from Australia, Worth reading. Thank you Rob Douglass for sending it.
Hayman
I attended the Australian Davos Connection’s Hayman Island leadership retreat last weekend (I was there when last Saturday’s review was sent to you). I’ve been going to these retreats for the past few years and they’re always like a three-day dinner party discussing the big economic (and other) issues of our time and this year was no exception.
The deal is that it’s Chatham House Rule, so I’m not allowed to quote anyone, but I can discuss the ideas I heard. What follows is from my notes.
Productivity
American productivity growth has halved, from an average of 1.5 to 2.5 per cent between 1995 and 2005, to one per cent on average since 2005. In fact productivity in all major countries, including Australia has collapsed.
That’s despite one of the most intense periods of technological disruption ever seen – something we’re all familiar with. What’s going on?
One of the world’s top economists and thinkers offered a few possible explanations:
- There’s a measurement problem, a “radical increase in incompetence” at measuring economic data.
- Investment is very weak. Companies have lots of money but aren’t investing it (this is true).
- Demand is weak and firms are employing people but not getting much out of them (I’m not sure what that means).
- Technology is not as transforming as we think, that it simply isn’t having that much effect. This is the explanation that the speaker preferred – that technology is not affecting huge swathes of the economy, specifically government, education, health and tourism are 70 per cent of the economy and it hasn’t yet transformed those industries. Are we really happy to be looked after by robots, he asks? In manufacturing humans are being replaced by robots, but that’s now a small part of the economy.
He thought the last of those was the most plausible.
Monetary policy
Almost everywhere it is the most aggressive it has been in the history of the world. Everyone has become Japan – low growth, low inflation/deflation, low interest rates, weak demand. We are in uncharted territory.
Central banks are powerless, so far, but there is actually no limit to what they can do. There is no limit to amount of money they can print and interest rates can go a lot more negative than they are (five central banks currently have negative rates, somewhere between zero and minus one).
But there is another reason rates are low, apart from central banks trying to get inflation back up to two per cent: “savings aren’t worth anything”.
That is, there is vast glut of savings in the world and little demand from companies to invest it. Simple rules of supply and demand are driving down the price of those savings, so if you are a saver, or someone living in savings, you have something that’s in oversupply.
Growth
Someone from the IMF described the outlook as “low for long”.
The world permanently lost 12 per cent of GDP in 2008-09 that will never be got back. In fact it’s worse than that because the GDP growth line has flattened since the GFC, so the gap between what would have happened without the GFC and what has actually been happening is getting wider.
Why? Because it isn’t just savings in oversupply – there’s overcapacity everywhere, or everything.
Partly as a result of that trade has collapsed (countries don’t need to buy as much stuff from elsewhere). Between 1986 and 2007 annual growth global trade was 1.5 times GDP; now it’s less than GDP growth (two per cent versus three per cent).
Foreign direct investment used to 4.8 per cent global GDP; now it’s 2.4 per cent.
Trump
The push for Brexit and Trump winning the Republican nomination, as he did yesterday, and possibly becoming President, are two manifestations of the same thing: a backlash against globalisation.
The good news is that Brexit won’t happen, but the bad news is that Trump could happen. This is perhaps the greatest threat that the global economy faces, because if Trump carried through all his promises and ideas he would have to withdraw the United States from the World Trade Organisation.
It’s clear that the economic and financial elites failed. People suffered costs and saw their futures blighted, and they have also seen those responsible for that not properly punished.
That has led to a fundamental crisis of confidence in policy making elites. Why? Because it’s true. They did well in the immediate aftermath of the crisis, but since then they have been at sixes and sevens.
Liquidity
Liquidity is a dangerous illusion because it’s never available when you really need it.
Debt
Governments should all borrow incredibly long at the moment to lock in low interest rates to fund infrastructure, so that if/when rates go up it won’t affect the existing stock of debt.
Interest rates will only go up if there is an investment boom, and if that happens economic growth will return and the debt will “melt away”.
Banks
What’s really unnatural about the present situation is that bank assets are exchangeable at par with the central bank. The assets are risky and are not worth what they’re in the books at.
This is a peculiar and unstable situation.
Robots and artificial intelligence
Looking at it in terms of machines replacing jobs is unhelpful – what they are actually doing is replacing tasks.
In every job some tasks are routine and some require judgement and creativity. It’s clear that the number of tasks that can only be performed by human beings will be smaller than we think.
Australian GDP
The National Accounts come out on Wednesday, but a few components were released this week so we can have a pretty good guess at it. GDP growth is likely to be less than three per cent for the year, probably around 0.8 per cent for the quarter.
In other words, growth is slowing, and more importantly perhaps, without the contribution net exports Australia would be in, or close to, a recession. In other words, the domestic economy is quite weak – almost shrinking.
We learnt on Thursday that business capital expenditure fell by 5.2 per cent in the quarter. On Wednesday it was construction – down 2.6 per cent. Residential construction remained firm (up 1.5 per cent) but non-residential fell seven per cent.
Domestic final demand is expected to be flat in the quarter. Household consumption is slowing.
NAB’s economists put out a paper this week estimating that Australia’s potential growth had fallen from 3.25 per cent to 2.5 per cent – a little below actual growth.
Productivity growth has slowed noticeably since the 1990s (see item above), but the effect of that on GDP was postponed by the mining boom.
Given the likely weakness in population growth, the only way potential GDP growth is going to get to where it was is through a surge in productivity (GDP growth is basically the addition of population growth and productivity).
The low hanging fruit for productivity gains has all been picked, so future gains will be hard. However progress can still made and IMF analysis shows there are still a few industries that could benefit a lot from efficiency gains.
But as I told an audience of western suburbs business people at a breakfast at Flemington Racecourse yesterday morning, it means the easy wins for business, and therefore investors, are probably over.
Favorite New Yorker cartoon this week:
I have $2,050 bets on Trump becoming President. Anyone want me to take their money?
Harry Newton who’s off to bike ride and play tennis today. I believe we have space in one residential syndication if you’re interested. Send me an email. I don’t make anything — fee or commission — on this.
Hayman One and Only Resort in Queensland, Australia is absolutely lovely. Got bored a year ago with our chartered sailboat and sailed over there, checked in with wife and had a delightful 4-5 days. Delightful. But not cheap.
The trouble with our and the world around us’s economy is SIMPLE, too much gov’t interference, regulation, obstacles and stupid harassment. Get out of the way, you asses and people will do fine. Actually super fine.
Had serious mouse problem at our cottage…as many as 30+ trapped over one winter season while we were back in Arizona. I recalled from the very back of my memory the old trick of “steel wool”…I stuffed steel wool into every tiny opening I could find like around water and gas pipes and etc. coming into the cottage. NO MORE MICE!! Remember, no hole is too small for a mouse to get through…plug it!
Mice, call White flag or some other.