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Who Best Predicts the Future?   Historians – Here’s Proof

By Shlomo Maital

Which discipline best equips people for predicting the future?

Economics? That’s a joke. Sociology? Psychology?

History! Precisely those who study, record and analyze our past history, are, I think, best equipped to predict our near-term future. And here is proof.

   Arthur Schlesinger Jr. was a primary speechwriter and adviser to the Democratic presidential nominee both times, Adlai Stevenson in the 1952 and 1956 presidential campaigns. Schlesinger served as special assistant and “court historian” to President Kennedy from 1961 to 1963. He was a Harvard history professor and wrote many wonderful books, following in the footsteps of his father, Arthur Schlesinger Sr., a decorated historian. He died in Feb. 2007, at 89.  

   In 1992 he published a short little book, The Disuniting of America: Reflections on a Multicultural Society. In it Schlesinger said this:

   “Instead of a transforming nation with an identity all its own, America increasingly sees itself in this new light as preservative of diverse alien identities. Instead of a nation composed of individuals making their own unhampered choices, America increasingly sees itself as composed of groups more or less ineradicable in their ethnic characteristics.

     Will the center hold? Or will the melting pot give way to the Tower of Babel? …the historical idea of a unifying American identity is now in peril in many arenas…”

The US Presidential election of Nov. 2016 provided the answer. It’s Tower of Babel, or as Senator Corker from Tennessee described it, the White House is a “day care center”.

   We are in the era of identity politics. My identity is determined not by the nation in which I live and sometimes serve, but by the specific ethnic, racial, social, economic, educational, and religious group to which I belong. The “we” of “me” has become very very narrow.   This is true not only in the US but all over the world – former Yugoslavia, Kurdistan, Catalonia….  

   With identity politics, nations split apart.  When the supreme value becomes the celebration of diversity, rather than the cohesive force of national pride and identity, nations fall apart. Electing a leader who leverages this split, like Trump, for political gain is inevitable. And it’s happening all over the world.

   Schlesinger called it. The unifying American identity is gone. He saw this coming  25 years ago, in 1992. But nobody listened.

“The genius of America,” Schlesinger concluded, “lies in its capacity to forge a single nation from peoples of remarkably diverse racial, religious and ethnic origins.”

That genius seems to be gone, mortally wounded by a learning-disabled attention-deficit President who is unable to read a half-page briefing document. The glue that once bonded a redneck gun-toting blue collar worker from Chattanooga to a Harvard-educated Wall St. bond dealer with a summer cottage in the Hamptons is gone.

Only when that glue disappeared do we realize how vital it was to America and to the world.

 

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Does Science Intelligence Make People More Reasonable?

By Shlomo Maital

 The latest Scientific American (October 2017) has a short piece and accompanying diagram, reporting research on the key question:

Do people who have higher ‘science intelligence’ (i.e. knowledge and education in the realm of science) understand better the risks inherent in:   Global warming (climate change); private gun possession (the more guns, the more violent gun deaths), and fracking (causes environmental harm)?   

   The answer?   It depends. It depends on the political views of the ‘science-educated person’.   If you are liberal democrat, then – the answer is yes, science education makes you far more sensitive to the inherent risks, except for guns, where the perceived risk is seen as high regardless of science or no science.

   But if you are a conservative Republican? The more science you know, the less concerned you are about the risks.   Your political views color, in fact dominate,  your scientific awareness.

   I think this finding explains a great deal.   Research on guns will not help bring gun legislation. Research on global warming (or even, wildfires and hurricans) will not bring restrictions on emissions. Research on the risks of fracking will not bring any slowdown in fracking.   And the enormous fracture in dysfunctional American politics between Dems and Republications will not be repaired by evidence, facts and research.

      Why? Because, “I have a Ph.D. in geophysics, and by the way, don’t confuse me with      facts, my mind is made up.”

Economics Nobel to Thaler:

Fairness, Rationality, Self-Control

By Shlomo Maital

   Univ. of Chicago Professor Richard Thaler has won the 2017 Nobel Prize for Economics. Thaler is a behavioral economist, and has according to the Nobel committee “incorporated psychologically realistic assumptions into analyses of economic decision-making. He has shown how the following three traits affect individual decision-making, as well as market outcomes:

   Limited rationality: Thaler developed the theory of mental accounting, explaining how people simplify financial decision-making by creating separate accounts in their minds, focusing on the narrow impact of each individual decision rather than its overall effect. He also showed how aversion to losses can explain why people value the same item more highly when they own it than when they don’t, a phenomenon called the endowment effect. Thaler was one of the founders of the field of behavioural finance, which studies how cognitive limitations influence financial markets.

   Social preferences: Thaler’s theoretical and experimental research on fairness has been influential. He showed how consumers’ fairness concerns may stop firms from raising prices in periods of high demand, but not in times of rising costs. Thaler and his colleagues devised the dictator game, an experimental tool that has been used in numerous studies to measure attitudes to fairness in different groups of people around the world.

   Lack of self-control: Thaler has also shed new light on the old observation that New Year’s resolutions can be hard to keep. He showed how to analyse self-control problems using a planner-doer model, which is similar to the frameworks psychologists and neuroscientists now use to describe the internal tension between long-term planning and short-term doing. Succumbing to shortterm temptation is an important reason why our plans to save for old age, or make healthier lifestyle choices, often fail. In his applied work, Thaler demonstrated how nudging – a term he coined – may help people exercise better self-control when saving for a pension, as well in other contexts.”

Thaler’s book on Nudge (designing behavioral ways to nudge behavior and decisions in a desired direction) has been put into practice, especially in Britain, where a unique Nudge team was assembled to advise the British treasury.

 

 

Peering into Life Itself: 2017 Chemistry Nobel  

By Shlomo Maital

   Some Nobel prizes are awarded to those whose research helps others do research. This year’s Chemistry Nobel (according to the Nobel Committee) is awarded to Richard Henderson, Joachim Frank and Jacques Dubochet:

“…biochemical maps have long been filled with blank spaces because the available technology has had difficulty generating images of much of life’s molecular machinery. Cryo-electron microscopy changes all of this. Researchers can now freeze biomolecules mid-movement and visualise processes they have never previously seen, which is decisive for both the basic understanding of life’s chemistry and for the development of pharmaceuticals.”

   Each of the three Nobel winners contributed:

  • In 1990, Richard Henderson succeeded in using an electron microscope to generate a three-dimensional image of a protein at atomic resolution. (Until then it was thought that living tissue could not be analyzed with an electron microscope). This breakthrough proved the technology’s potential. Joachim Frank made the technology generally applicable. Between 1975 and 1986 he developed an image processing method in which the electron microscope’s fuzzy twodimensional images are analysed and merged to reveal a sharp three-dimensional structure. Jacques Dubochet added water to electron microscopy. Liquid water evaporates in the electron microscope’s vacuum, which makes the biomolecules collapse. In the early 1980s, Dubochet succeeded in vitrifying water – he cooled water so rapidly that it solidified in its liquid form around a biological sample, allowing the biomolecules to retain their natural shape even in a vacuum.

The ability to clearly see the structure of molecules and photograph it has immense value.

       ….researchers can now routinely produce three-dimensional structures of biomolecules. In the past few years, scientific literature has been filled with images of everything from proteins that cause antibiotic resistance, to the surface of the Zika virus. Biochemistry is now facing an explosive development and is all set for an exciting future.

How “You’re Out of Your Mind!” Won a Nobel Prize  

By Shlomo Maital

 

      Cultivate wild ideas!   This is a proven path for changing the world, and, perhaps, for winning a Nobel Prize in Physics.

       Profs. Weiss, Barish and Thorne have won the 2017 Nobel for Physics. They won it for empirically demonstrating the existence of “gravity waves”, predicted by Albert Einstein a century ago. According to The New York Times:

    These waves would stretch and compress space in orthogonal directions as they went by, the same way that sound waves compress air. They had never been directly seen when Dr. Weiss and, independently, Ron Drever, then at the University of Glasgow, following work by others, suggested detecting the waves by using lasers to monitor the distance between a pair of mirrors.

In 1975, Dr. Weiss and Dr. Thorne, then a well-known gravitational theorist, stayed up all night in a hotel room brainstorming gravitational wave experiments during a meeting in Washington. Dr. Thorne went home and hired Dr. Drever to help develop and build a laser-based gravitational-wave detector at Caltech. Meanwhile, Dr. Weiss was doing the same thing at M.I.T.   The technological odds were against both of them. The researchers calculated that a typical gravitational wave from out in space would change the distance between the mirrors by an almost imperceptible amount: one part in a billion trillion, less than the diameter of a proton. Dr. Weiss recalled that when he explained the experiment to his potential funders at the National Science Foundation, “everybody thought we were out of our minds.”

   The breakthrough research combined a wild idea (empirically measuring gravity waves) with a feet-on-the-ground project to measure them.  The most advanced version of LIGO Laser Interferometer Gravitational-wave Observatory had just started up in September 2015 when the vibrations from a pair of colliding black holes slammed the detectors in Louisiana and Washington with a rising tone, or “chirp,” for a fifth of a second.

   Barish knew how to manage Big Science projects, like LIGO; Weiss and Thorne had the wild idea of measuring tiny tiny waves, an “out of your mind” idea.  And the National Science Foundation provided the needed resources. Presto – Nobel.

   Weiss and Thorne are MIT professors; Barish is from Caltech.

 

Nobel for Physiology: How We Rise and Shine!

 By Shlomo Maital

 

     The Nobel Prize season is upon us! The first prize, for physiology or medicine, was awarded to three researchers who discovered how living things tell the difference between night and day (the 24-hour body clock):

     According to the Nobel committee’s citation, Jeffrey C Hall, Michael Rosbash and Michael W Young were recognised for their discoveries explaining “how plants, animals and humans adapt their biological rhythm so that it is synchronised with the Earth’s revolutions.”   The team identified a gene within fruit flies that controls the creatures’ daily rhythm, known as the “period” gene. This gene encodes a protein within the cell during the night which then degrades during the day.

   According to Paul Nurse, at the British Crick Institute:

   “Every living organism on this planet responds to the sun ….   All plant and animal behaviour is determined by the light-dark cycle. We on this planet are slaves to the sun. The circadian clock is embedded in our mechanisms of working, our metabolism, it’s embedded everywhere, it’s a real core feature for understanding life.”

      This Nobel Prize highlights the competitive nature of science:

“While all three laboured to isolate the period gene, publishing was something of a race. While Hall and Rosbash collaborated, Young was working on the puzzle independently. Both teams reported their findings in 1984.”

      Experts tell us that it is wise to rise and retire at the same time each day, to regulate our biological clock. I like to rise at 5 a.m.   Now I know that somewhere, a gene is turning on a protein that gets me going.   The experts say, “Our [internal] timer is constantly struggling to reset to what environment people are exposed to. If you shift your clock every week by six hours or three hours, that puts an enormous pressure on your body.”

What kind of personality does it take to win a Nobel? Well – crazy, eccentric, nose-to-the-grindwheel, obsessive-compulsive, super-nice? Yes, all of the above.

   Bambos Kyriacou, professor of behavioural genetics at the University of Leicester, who is friends with all three winners and a former colleague of two, said the trio were very different people. “Jeff [Hall] is eccentric … brilliant but eccentric,” he said. “Michael [Rosbash], there is no stopping him – he is just going 100%, he will die with his boots on in the lab, and Michael Young is the most charming, nicest one of them because he is polite and pleasant, whereas the other two aren’t like that, they are just crazy,” Kyriacou added.

Wealth Creation: Creativity Beats Oil

 By Shlomo Maital

  

A brilliant long-view analysis of capital markets is provided  by the New York Times (Karl Russell)..   The graph above shows “years publicly traded since 1926” on the X axis, and “total wealth creation since 1926” on the Y axis. The area of the circle shows the annualized stock return (capital gains and dividends). So this lovely graph shows us 3 pieces of information in two dimensions.

   The 90-year old companies are mainly resource-based (oil, e.g. Exxon, Conoco, ), consumer products (Pepsi) and Pharma.

     The newer companies are high-tech and digital.  

     Most striking:   Apple has, in 2017, overtaken Exxon as a wealth creator, even though it is half Exxon’s age. This is because of Apple’s astonishing 30% +   annual return.   And Microsoft has created more wealth than, say, General Electric or IBM, with over 40% annual return.   The tech stocks (the fat circles) have generated much higher annual returns than the traditional old-line companies (fairly slim circles).

       What this means for individuals, companies, small businesses, and whole countries, is simple.   The digital revolution is real. If you haven’t got on board yet, you’ve missed the boat. But maybe it’s not too late.   If your country is still resource-based (oil nations, like Russia, Chad, Gulf States, Iran), you are out to lunch. Your leadership has be asleep.  

       What will this graph look like ten years hence? Fifty years hence?   I’d give a lot to know. 

    

Politics Trumps Economics

By Shlomo Maital    

 

 

 

     Sorry for the awful play on words but —   once again we learn that politics drives (Trumps) economics.

   McKinsey Global Research does a global survey of ‘experts’ (mostly senior managers) to survey perceptions of global risk. For some reason, I get to respond as well.

   Here are the results of the latest survey.

   Worldwide, four of the five top global risks are related to politics: transition of leadership, changes in trade policy (which are highly politicized, viz. Trump’s new tariffs on Canadian imports), geopolitical instability and domestic political conflicts. Asset bubbles are #3, but fall well behind the two key sources of political instability.

      Trump’s footprint is seen in the risks for North America, 52% see domestic political conflicts as by far the main source. In contrast, for Latin America, it is the transition of political leaders that is most worrisome.

       Developing markets are most concerned with asset bubbles, fed by massive credit expansion, especially in China.   Eight years after the global crisis, asset bubbles are back.

       What this means for all of us, especially global managrs but not only they:   We all need to track political currents and events closely, because they drive asset prices and the economy.

     Politics trumps economics. And when you capitalize Trump – you get a quirky, narcissistic and utterly unpredictable egotistical leader who can and does and say almost anything.    

Wall St.: Yup, They’re At It Again!

 By Shlomo Maital

  

 

 Frank Partnoy was a Wall St. insider who wrote two powerful books, showing how greed and deceit have corrupted our crucial financial markets, leading to the disastrous 2008 financial crash and ensuing economic crisis.

       Hard to believe but – he now reports (in the Financial Times) that the same skullduggery that sank the world in 2008 has begun anew, with slightly different disguises.

   The central culprit this time is the collateralised loan obligation. Like its earlier esoteric cousins, a CLO bundles risky low-grade loans into attractive packages and high credit ratings. In May, there were two deals of more than $1bn each, and experts estimate that $75bn worth are coming this year. Antares Capital recently closed a $2.1bn CLO, the largest in the US since 2006 and the third-largest in history. Although most of the loans underlying these deals are of “junk” status, more than half the new debt is rated triple A. Sound familiar?   During the early 2000s, similar highly rated deals called collateralised debt obligations were popular. At first, they seemed harmless, or at least not so big that their collapse could cause financial contagion. But when regulators ignored their growth, they became more opaque and more profitable, with credit ratings disconnected from reality. Like cracks in a building’s foundation, the risks seemed minor at first. But high ratings hid the instability of the entire structure. Until it was too late.

   Same script, different actors.   Hide junk bonds in a package with good bonds, and have the credit ratings agencies rate the whole package AAA, triple A, risk-free.

The credit rating agencies, particularly Moody’s Investors Service and S&P Global Ratings, are the central actors in this story, just as in the original. The computer programs they use to assign triple-A ratings remain flawed. Because loan defaults can come in waves, mathematical models should account for “correlation risk”, the chance that defaults might occur simultaneously. But the models for CLOs assume correlations are low. When defaults occur at the same time, these supposed triple-A investments will be wiped out. CLOs are just CDOs in new wrapping.

   Partnoy observes that keeping financial markets honest, clean and sane is really difficult!

It is hard to police the financial markets. New business school graduates are inevitably one step ahead of their regulator counterparts, and many of the least creditworthy businesses find it easy to borrow, because their loans can be quickly repackaged and sold. During the debates about Dodd-Frank repeal, legislators should keep their eyes on these complex investments and the agencies that facilitate them.

    Trump and his Treasury Secretary are actively working to repeal the key elements of Dodd-Frank, the legislation that keeps 2008 from recurring.

Fasten your seat belts!

Warning: The Next Crash is Taking Shape

 By Shlomo Maital

     In the children’s fable, a boy cried “Wolf! Wolf!” in jest – until, when there really was a wolf, nobody came to help. Economists seem to be like that boy. We are always crying “wolf!”.   Problem is, sometimes, not always, the wolf does come.

     Writing in the New York Times, Ruchir Sharma, chief global strategist of Morgan Stanley Investment Management (a Wall Street insider for sure) sounds a thousand warning bells. When an insider cries Wolf!, we should listen.

       Here is why.

      “Central banks adopted zero to negative interest rates and provided huge amounts of cash” after the 2008 crisis. Result: “global financial assets are worth over $250 trillion, up from $12 trillion in 1980, or more than 3 times global GDP.” …”The ocean of money in financial markets is so large, it’s possible that ripples on its surface could trigger the next big downturn.”

       Suppose, just suppose, as North Korea and the US square off, global financial markets fall by 10%. That implies paper losses of $25 trillion, or half again as large as the United States’ annual GDP. That could trigger widespread panic.

         Why have asset prices risen so dramatically? Because when you get to borrow free money, you are tempted to do something, anything, with it —   even when returns are low. At long last, central banks are beginning to worry about what they’ve done – create a new bubble. As Sharma notes, “asset prices from stocks to real estate have never been this expensive simultaneously.” Clue that it’s a bubble? Of course.

         Since WWII, there have been 88 recessions – and 62 of them followed a stock or housing bubble or both. So a financial crash will inevitably bring an economic crisis.

       Does anyone else agree that the wolf is on the way?   Philip Inman, The Guardian, does. He notes that the US Federal Reserve is now starting to sell its $4 trillion in bonds, bought in order to pump money into the system. In other words – soak up some of the mountain of money it created. This will require the US Treasury to raise more in tax, Inman notes. Why? If the Treasury can’t sell bonds, it has to raise taxes.  But baby boomers everywhere, those who have grown wealthy, simply refuse to pay the taxes needed to keep their governments afloat. And the Trump administration is hell-bent on lowering taxes, not raising them.   The baby boomers are “offloading the problem to younger lower-income groups, who now must borrow excessively just to make ends meet”.  

     It’s a recipe for big trouble, which now includes a war between the generations – when once, we old fellows used to try to make things better for the younger kids, and now we seem to be working hard to make them worse. And I haven’t even mentioned climate change.  

     “There is growing evidence of a slide into outright deflation even ahead of the next recession…”, notes a financial analyst, Albert Edwards. He thinks the US will soon slide into recession. And Trump is about to appoint five new Fed governors, all of whom want less regulation and less government.  

       I know a fairly wealthy investor, highly savvy, who is pulling his investments out of the US and putting them into Europe, of all places. Problem is, in a global crisis, there is no safe haven.

       These are dangerous times.   Everyone should set aside a bit extra for rainy days, and prepare at least mentally for a new global crisis.

 

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
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