Archive for December 2019


What would real house prices look like in a world without bubbles?


A series of random, unpredictable ups and downs.

The Great Recession was not caused by a the bursting of a housing bubble, because there was no bubble.  It was caused by tight money.

When I started blogging in early 2009, I was told that the EMH was wrong because value stocks outperformed growth stocks.  But anti-EMH theories are not useful to me, because as soon as I hear one it stops working.

PS.  We’ve added the Hypermind NGDP forecast in the right margin of this blog.  The current reading for the 2020 market is 3.05.  That means market participants expect NGDP to grow at 3.05% between the first quarter of 2020 and the first quarter of 2021.

Should we fear this country?

By 2027, they will have a bit more than 1.4 billion people. Their economy is growing at 6%/year. They are becoming increasingly nationalistic and increasingly authoritarian. They have put more than a million Muslims into concentration camps, for no good reason. They have nuclear weapons, and occasionally threaten their neighbor with militaristic rhetoric.

Should we fear this country? If so, how should we respond?

The forgotten ones

The WSJ recently did a story on the unusual island called “Rockall”. It included a great picture, which captures the romance of lonely isolated islands. Go to the link and enjoy the photograph.

But there’s a problem with the WSJ story, no mention of the tragic history of Rockall:

On 22 June 1904 Norge left Copenhagen under the command of Captain Valdemar Johannes Gundel. After taking on Norwegian immigrants at Oslo and Kristiansand, the ship set course across the Atlantic Ocean, travelling north of Scotland to New York City. She was carrying a crew of 68 and 727 passengers. Among the steerage passengers, there were 296 Norwegians, 236 Russians, 79 Danes, 68 Swedes, and 15 Finns. Half of the steerage passengers had prepaid tickets, paid for by relatives living in the United States.[6]

On 28 June, Norge ran aground on Hasselwood RockHelen’s Reef, close to Rockall, in foggy weather. She was reversed off the rock after a few minutes, but the collision had ripped holes in the ship’s hull, and water began pouring into the hold. The crew of the Norge began lowering the lifeboats, but the first two lowered were destroyed by waves. Only five boats were successfully launched out of the eight on board. Many passengers jumped overboard, only to drown. The Norge sank twelve minutes after the collision. Captain Gundal stayed with the ship as it sank, but managed to swim to one of the lifeboats.

According to author Per Kristian Sebak’s comprehensive account, more than 635 people died during the sinking, among them 225 Norwegians. The first survivors to be rescued, a group of 26, were found by the Grimsby trawler Sylvia. 32 more were picked up by the British steamer Cervonax, and 70, including Captain Gundal, by the German steamer Energie. Some of the 160 survivors spent up to eight days in open lifeboats before rescue. Several more people lost their lives in the days that followed rescue, as a result of their exposure to the elements and swallowing salt water. Among the survivors was the poet Herman Wildenvey . . 

It was the biggest civilian maritime disaster in the Atlantic Ocean until the sinking of Titanic eight years later, 


This story makes me sad. Imagine the WSJ doing a story about the specific iceberg that hit the Titanic, without even mentioning the Titanic.  Yes, the Titanic disaster was worse (1500 lives lost), but the difference wasn’t great enough to explain the disparity.  And who’s ever heard of the Doña Paz?  When that Philippine boat sank in 1987, 4386 souls lost their lives.  So it’s partly numbers and partly glamour.  Leonardo DiCaprio was not on board the Doña Paz.  Teenage girls still weep over the fate of the Titanic victims, but no one cares about those poor Norwegians who tried to cross over on a crappy boat.  Or the 852 (mostly Swedish and Estonian) passengers who died when the Estonia sank in 1994.

Countries are sort of like that.  China has slightly more people than India, and perhaps triple the GDP.  But the American government is 100 times more obsessed with China than India.  That’s how people’s minds work—they fixate on the number one example in any given category—and that distorts thinking. 

While Germany is the biggest economy in Europe, it’s actually not that much bigger that 3 other economies.  But because it’s the biggest, people wildly exaggerate its importance.  They seem to think Germany could rescue Europe with fiscal stimulus, or pay off the debts of the poorer European countries.  That’s crazy, but it comes from the single-minded focus on the top example in a category.

Speaking of China, Rockall was grabbed by the UK in 1955, at a time that no one else seemed interested.  China grabbed some tiny uninhabited islands in the South China Sea (note the name of the sea) at a time when nobody seemed to care about them.  Now Ireland is upset about Britain’s claim:

Though it doesn’t claim the rock as Irish, Dublin has never recognized British sovereignty, saying nobody should own the remote island.

I totally agree with Ireland.  Nobody should own an island this beautiful.

PS.  This post seems aimless, without purpose.  No one cares about a bunch of Nordics who would have settled in Wisconsin and Minnesota if they had lived.  People who would have voted for highly progressive policies in the 20th century and for Trump in the 21st century. 

So how can I get anyone to link to this post?  How about cute birds?  People love cute birds.  But Wikipedia suggests there is little animal life on Rockall:

The island’s only permanent macro-organism inhabitants are common periwinkles and other marine molluscs. Small numbers of seabirds, mainly fulmarsnorthern gannetsblack-legged kittiwakes, and common guillemots, use the rock for resting in summer, and gannets and guillemots occasionally breed successfully if the summer is calm with no storm waves washing over the rock. In total there have been just over twenty species of seabird and six other animal species observed (including the aforementioned molluscs) on or near the islet.

Guillemots?  That’s not enough.  But I don’t give up easily, and eventually hit gold with a Daily Mail article:

Nick was never much of a birdwatcher before coming to Rockall, but now that his principal companions are feathered, he is enjoying observing them. 

Kittiwakes, shearwaters, pigeons, puffins and guillemots fly past the rock, and gannets nest there.


PPS: Ball’s pyramid is also a cool island:

PS. Merry Christmas and Happy New Year.

NASDAQ 11,743?

No, NASDAQ has not reached 11,743; it’s around 8950 as I write this post. I’m going to make a slightly different argument. I’m going to argue that 11,743 is where NASDAQ would be if NGDP had grown as expected after the spring of 2000.

Between the spring of 1990 and the spring of 2000, NGDP grew at a 5.57% rate. That seems like a reasonable forecast of the growth rate over the following few decades, given what investors knew at the time, as I am comparing similar points in the business cycle.

In that case, as of the spring of 2000, investors probably expected NGDP to be around $28,001b by the spring of 2019. The actual value was $21,341b.

Let’s assume that money is neutral in the long run, and that the ratio of NASDAQ/NGDP is not impacted by monetary policy in the long run. In that case, NASDAQ would have now been at 11,743. If money is not neutral, and a more expansionary monetary policy leads to a higher NASDAQ/NGDP ratio (by boosting RGDP growth), then NASDAQ would have been even higher than 11,743.

Of course investors did not accurately forecast the slowdown in NGDP growth, and hence bonds would have been a much better investment in 2000, in retrospect. And even the NASDAQ/NGDP forecast was probably a bit optimistic at the very peak (when NASDAQ briefly exceeded 5000). But it’s not surprising that when one looks back over a period of several decades, the very peak price will have been, in retrospect, too high. That’s the nature of efficient markets. The very peak Bitcoin price also looks too high today, but no one at the time knew where the peak would be.

The overall tech bubble was actually not all that irrational, as we now know that fairly high tech stock prices were quite justified in the late 1990s, especially conditional on rational NGDP growth forecasts. Of course we didn’t know which specific tech stocks would become trillion dollar companies, which is the nature of efficient markets.

PS.  A quick reply to Tyler Cowen:

1. I do not believe that national security was an important motivation for Trump in the trade deal.

2. I do believe that national security was an important motivation for many people in the US government, as Tyler says.

3.  I do not believe the trade deal improved US national security.  Indeed I believe the opposite is true, as the trade war is part of the US government effort to create a new cold war, which I see as reducing US national security.

4.  I do believe that China spies on the US, and tries to steal technology that would improve its military capability.  (Other countries also do this.)  I believe we should try to prevent this from occurring, but I don’t believe that this spying has a material impact on US national security.

5.  I believe that a richer China would improve US national security.

6.  I believe that Russia is by far the greatest threat to US national security, with North Korea a distant second.

To conclude, I believe it makes more sense to interpret the trade deal as an exercise in mercantilism, and judge it on that basis.  If you are worried about the trade deficit (I am not), then Trump’s policies have been a complete disaster.

Recent articles

I recently expressed some doubts about the idea of “progress”.  David Rose has a short essay that provides one example of how society is regressing:

Not long ago, it was possible for people with dramatically different views to talk to each other about what they believed and why they believed it. They were not afraid to speak their minds. And even when debate did not lead to agreement, the very act of discussion led them to connect to that person, to view him or her as an individual and not an objectified silhouette from the tribe of “them.”

Anyone over the age of 55 cannot imagine any leftist hippie in the 1960s or ’70s tolerating any censoring of another person’s speech. But today an increasing number of young people intimidate each other into silence so often that it is becoming a habit. Without realizing it, students are increasingly self-censoring to avoid being shunned. This is making them paranoid and miserable. Worst of all, they are getting used to it. That is a very dangerous thing for a free society. To say it is Orwellian is an understatement because it is occurring at a cultural level.

For decades I sat at the lunch table at Bentley College, free to say whatever I wanted.  I feel bad for younger academics that no longer have that freedom.

People often claim that China wants to impose its (illiberal) system on the rest of the world. But what sort of system do the Chinese actually prefer in other countries? Here’s The Economist:

Russian rent-seekers and their short-term interests play a central role in the Sino-Russian relationship. “Sometimes it seems that Russia’s policy towards China is shaped by the lobbying interests of the Kremlin’s heavyweights,” says Andrei Kortunov, head of the Russian International Affairs Council, a think-tank. The same is not true in reverse. Private Chinese firms are reluctant to invest in Russia. Some fear American sanctions; others worry about the lack of property rights and clear rules. To operate in Russia, you need what Chinese businessmen now call bao hu san—a protective umbrella provided by siloviki. For such a small market, why bother? There is an irony here. Russia’s regime has opted for the East; but Chinese people and investors are interested in Russia only to the extent that it is Western. Investors want rule of law, not cronyism. Tourists want St Petersburg, not Tuva.

From the same issue, we learn that America is not just a big bully, it’s also a hypocrite:

America, however, did not join the CRS. Instead it shares information on the foreign clients of American banks under FATCA’s reciprocal provisions. But sharing is patchy; a lot of countries get nothing. Combine that with the high level of anonymity offered by American shell companies, and it is hardly surprising that America has become the destination of choice for many tax evaders. One tax expert reckons that “over 90% of assets avoiding the CRS have been herded into the USA”.

America does not have to worry about the sort of bludgeoning that it doled out to Switzerland—no other country has anything like the same extra-territorial financial power.

Also from the same issue, evidence that something mysterious happened in the mid-2010s.  The entire world, including the US, China, India, Europe and many other places, suddenly became more bigoted against Muslims.  Why?

NAHEED NENSHI, Calgary’s ebullient mayor, says that when he was elected in 2010—becoming the first Muslim to lead a large North American city—only the foreign media brought up his religion. The local press never mentioned it. That changed when he ran for re-election for a third term in 2017. People “suddenly started talking about race and religion”, sometimes abusively, online. Although his rivals avoided bigotry, it encouraged formerly non-voting racists to turn up at the polls. He still won. Four years ago, when Justin Trudeau was elected, “Canada was bucking the trend,” says Mr Nenshi. Now it is learning that “we’re not immune at all” to the political maladies of the age.

In the early 1920s, Herbert Hoover led a relief effort in China Russia that assisted millions of starving peasants.  One of the great evils of nationalism is the denial of historical truth:

In the Volga region, where residents were driven by hunger to boil and eat human flesh, the ARA organised kitchens and transport, distributed food and rebuilt hospitals. . . . “The help given by the Americans can never be forgotten, and the story of their glorious exploit will be told by grandfathers to their grandchildren,” grateful Russians told them.

Yet the duplicity and paranoia of the Soviet government haunted the ARA’s operation to the very end. While publicly Bolshevik leaders showered the Americans with praise and thanks, the secret police instructed local officials: “Under no circumstances are there to be any large displays or expressions of gratitude made in the name of the people.” No sooner was the Russian job done than the authorities began to expunge all memory of America’s help.

The edition of the Great Soviet Encyclopedia of 1950 described the ARA as a front “for spying and wrecking activities and for supporting counter-revolutionary elements”. Modern Russian textbooks barely mention the episode.

I also doubt that American textbooks mention the episode.

Some people claim that the Chinese people like the draconian security measures being imposed, as they reduce crime.  It’s not that simple, as this story from Xinjiang demonstrates:

Six local Han Chinese businesspeople working in real estate, agriculture, services and retail estimated that the city population had halved from between 500,000-600,000 to about 200,000-300,000 over the past two years.

In the city centre, rows of shops were shuttered. Farther out, many low-rise houses — usually rented by migrant workers — had been demolished. . . . 

Another small business owner said people left Korla because of the inconvenience of the security. “It’s not that living here isn’t ‘stable’,” he said, using the Chinese authorities’ term for their mission in Xinjiang — to “stabilise” the region. “It’s the pressure of daily life. When you go into a shopping centre you have to scan your face, scan your ID, scan your bag, store your bag in a locker. You have to hand over ID just to buy something,” he said.

China had the goal of bring lots of Han people to Xinjiang.  Now they are leaving.

Back when I was teaching economics, India students used to tell me that while Modi was an anti-Muslim bigot, at least he was good for business.  Actually, nationalists are rarely good for business:

“There is no demand and no private investment,” groused Rahul Bajaj, chairman of Bajaj Auto, a motorcycle-maker, at its annual meeting in late July. “So where will growth come from?” The remark, widely interpreted as a swipe at Mr Modi, encapsulates Indian business’s disenchantment with the man they once regarded as their champion.

The immediate cause of the mood swing was the budget, presented on July 5th by Nirmala Sitharaman, the newly appointed finance minister. Business folk tuned in to the two-hour presentation expecting less red tape, fewer tariffs, more incentives for investment and lower taxes. They got the opposite.

At an international bank, analysts’ feigned interest turned to mild bewilderment, then despair, as Ms Sitharaman recited the budget’s 143 provisions. The top marginal tax rate for high-earners would increase from 35.9%, already above the level in most emerging economies, to 42.7%, roughly as much as the average in the OECD club of mostly rich countries. The corporate-tax rate for big companies stayed at 35% (compared with a global average of 23%, and 21% in America). Or at least it appeared to: a new levy of 20% on share buy-backs, on top of existing charges, would bring the capital-gains rate above 40%, among the highest in the world. Add in a tax on dividends and a recently imposed charge on recipients and, all told, the government could skim off 60% of corporate profits. New tariffs would be slapped on products from cashews to newsprint to fibre-optic cables.

I frequent do “not from The Onion” posts, which for some strange reason have become much more common in recent years. Maybe it’s time to do “not from the People’s Daily” posts.

In 2018, the Department of Homeland Security (DHS) announced its plan to require migrants list their social media accounts on immigration forms. The goal is to monitor and keep record of their social media activity. Although the monitoring isn’t supposed to apply to naturalized citizens, the information collected could influence the success of their applications for citizenship: conversations and comments made on social media may be scrutinized and interpreted to find reasons to deny the application.

The bad news:  Every day the US seems to become more like China.

The even worse news:  China’s a moving target, as it’s becoming ever more repressive.

The life expectancy gap between blacks and whites is falling rapidly, especially for women:

Miami is building air conditioned bus stops.  No, this is not a joke:

In America, even many prisons now have air conditioning. (I grew up without it.) Still think that living standards in America are declining?