|"Can we fix things?"
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Dow up 106 points yesterday. Gold down $7.
Time to buy stocks...sell gold? Nah... Even if you think stocks will rise more...and gold will fall more... it's not a good idea.
Because you don't bet on what you think will happen. You bet on what has the best odds. With more cash and credit from the Fed, further stock market gains may be likely. But they're not guaranteed. And they're not solid. You're not buying good companies at good prices. You're speculating on what the Fed will do...and what effect it will have.
If you bet on higher prices and win...you still have a problem: how to get out before everyone else.
And if you're wrong...you could lose big.
Our proprietary analysis - done by our Family Office investment director - tells us that stocks are nearly double 'good value.' That doesn't mean they won't go higher. It just means that you're paying too much for what you got.
We prefer to pay little and get a lot...whether they go up in price or not.
But some people think that no matter what you pay for stocks, they'll eventually be worth it. Because things are getting better and better.
Tyler Cowen is a clever man. He wrote a little book titled "The Great Stagnation" which pointed out that Americans are not doing as well as their parents and grandparents - at least in terms of material progress.
His explanation? They had "picked the low-hanging fruit" already. That made sense to us and inspired us to write a book explaining why that was so and what it meant (to be released whenever we get around to finishing it).
More specifically, it was the end of the book that provided the motivation, wherein we discovered that if economic analysis were a highway...we wouldn't want to be on it at the same time Mr. Cowen was headed home from work. He described, correctly, how - during the first half of the 20th century - investments in education, health, technology, infrastructure and so forth, paid off. Test scores rose. People lived longer. Productivity and output increased. This was the low-hanging fruit he was talking about.
Back to Basics
It's time to brush up your investing basics!
Then, in the second half of the 20th century...after, say, 1980...we continued to make investments in all these areas. But the rate of progress slowed. We still knew where we wanted to go. We just didn't get very far. Students did no better than they had in 1960. Health care costs rose with little change to patient outcomes. GDP growth rates slowed...and wages reached their peak in the 1970s. (Familiar subjects in these pages).
But in the last part of the book, he has a chapter entitled "Can we fix things?" There, he runs right into a ditch. He seems to think that economic history is the product of conscious efforts by intelligent and well meaning people. But if that is so, what was wrong with people in the '80s and '90s? Weren't they just as well-meaning and intelligent as they were in the first half of the century?
He makes a few earnest suggestions, such as that we should be nice to each other, improve our public education system and "raise the social status of scientists." He even suggests that "a favorable trend" is the "interest in science and engineering in India and China." In our copy of his book, from 2011, here we find this annotation written in our own hand: "huh?" Weren't there far more scientists and engineers in the latter 20th century than in the early years? What was wrong with them?
Poor Mr. Cowen didn't understand his own metaphor. Trying harder is not going put more low hanging fruit on the limbs. We're going to have to reach higher...which is going to cost more...and reduce the marginal rate of return. In other words: the rate of progress is going to slow down...regardless of how nice we are.
And here he comes again. This time, yesterday, he is writing in the pages of the New York Times. The NYT publishes Paul Krugman and Thomas L. Friedman; it never seems to run out of ways we can fix things.
On the Horizon, Five Reasons to Smile By TYLER COWEN
What? America's real growth spurt occurred near the end of the 19th century...when we had far, far fewer high school graduates. Then, the number and percentage of graduates increased until 1974...just when the US went into a decline. C'mon...put 2 and 2 together. More high school grads seem to lead to slower growth, not faster growth.
...MORE DIPLOMAS The nation's high school graduation rate has risen - to 78 percent in 2010, the Education Department says in its most recent estimate. That's obviously still not where it should be, but it's the highest figure since 1974.
NEW KNOWLEDGE, LESS COST When it comes to education, an even greater productivity gain may be on the way. This month, for instance, the Georgia Institute of Technology announced a new online master's degree in computer science, for a price of no more than $7,000.
Okay...we'll give him that. Education is often not productive. Better that it is cheap. Less waste.
LOWER HEALTH CARE INFLATION The growth rate in health care costs has been slowing for the last four years. In some years, in fact, it's been no higher than the growth rate of the economy as a whole.
Here, he's onto something. Probably the most important low-hanging fruit was cheap fossil fuel. It could be used to produce more goods and services.
Here again. Less is more. He's right. But stabilizing health care costs at a level where they are very wasteful is not a sign of progress. It is a sign of stagnation.
POWERING AMERICA FOR LESS We appear to be at the start of a new era of cheap energy. Through advances in both oil and natural gas production, the United States is again becoming a leading exporter of fossil fuels.
Many of the nation's economic troubles, like slow productivity and income growth, began about the same time that America's first age of cheap energy came to a sudden end, in the early 1970s.
Trouble is, those advances are already fully exploited in America. Cheap fuel may allow them to remain marginally productive. It doesn't put more low-hanging fruit on the vine. The low-hanging fruit is in the emerging world - which still uses a fraction of the energy/person that we use in America.
This is all explained in our as-yet still unwritten new book!
MOBILIZING THE CREATIVE ...While the populations of countries like the United States are aging, the number of innovative young people worldwide has never been higher. Countries like China, India, Brazil and Russia, despite recent slowdowns in growth, still are making progress in improving their educational systems and scientific networks.
Good for them.
If we could only short Mr. Cowen's stock! He thinks progress comes from "innovative young people"... "scientists"...and "high school graduates."
He should read his own writing.
If you were born a genius in Shanghai in 1960, for example, your chances of making much contribution to the larger world were small, because China was largely isolated back then...
Yes, he's right. Circumstances change everything. Had he been born in the 19th century, Mr. Cowen might have contributed manfully to economic progress, bending his back to build a railroad or hammering steel at a village forge. But a strong back is a terrible thing to waste. Now, he's getting paid to write airy editorials for the New York Times.
There are always smart, potentially-innovative people around. But they don't always have a hammer in their hands or low-hanging fruit within their grasp. The availability of cheap fuel, the internal combustion engine...a fairly free market...and a sufficient level of technology and infrastructure to benefit from these things made possible a great spurt of growth in the US in the late 19th and early 20th centuries. Now that spurt seems to be over. Cowen:
The first decade of this century was largely a lost one, economically speaking, for the average American household. And in the beginning of this decade, median household income has actually dropped, during a time of ostensible economic recovery. Yet the longer-run picture, finally, can be given a partly optimistic gloss
Yeah. You can put an optimistic gloss on it. Or flat, white paint. But underneath, the wood is still rotten.
As we will see tomorrow...
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.
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