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Good Reading -- November 2011

Quoted "I think the future of equities will be roughly the same as their past; in particular, common-stock purchases will prove satisfactory when made at appropriate price levels. It may be objected that it is far too cursory and superficial a conclusion; that it fails to take into account the new factors and problems that have entered the economic picture in recent years -- especially those of the movement toward less consumption and zero growth. Perhaps I should add to the my list the widespread public mistrust of Wall Street as a whole, engendered by its well-night scandalous behavior during recent years in the areas of ethics, financial practices of all sorts, and plain business sense." -- Benjamin Graham, June 1974 (source: Financial Analyst Journal of Sept./Oct. '74, via Longleaf 3Q11 letter) Facts and Figures

  • 11.6% of Americans moved residences between 2010 and 2011, the lowest level since records began in 1948. The peak of 20.2% occurred in 1985. (source: U.S. Census Bureau via Bloomberg)

  • "Among the 20,000 Chinese with at least 100 million yuan ($15 million) in individual investment assets, 27 percent have already emigrated and 47 percent are considering it. Rich Chinese [with 10 million yuan] have about 3.6 trillion yuan ($564 billion) invested overseas." (source: China Merchants Bank and Bain & Co.)

  • In September, stock price correlations surpassed the levels experienced in 2008 after Lehman's collapse. Correlations hit 85% for the FTSE 100 and 90% for the S&P 500 (vs. a rough historical average of 30%). (Source: Longleaf 3Q letter)

  • These figures from a recent Allstate/National Journal poll are pretty striking -- the ongoing deleveraging of consumers' balance sheets has largely been forced by lower incomes and asset values, but now it is also backed by a decided anti-debt bias by the majority of borrowers, which is a sea-change from just a few years ago (although that's not quantified).

  • The affluent were much less likely to see debt as an obstacle, but otherwise the belief that it created more problems than benefits for society was widespread. That conviction is evident in another stunning result: Three-fourths of those polled said they believed they personally would be better off if they carried “no debt by paying off all your loans right now.” Just one-fourth accepted the idea that debt made them better off by allowing them “in effect [to] borrow from your future income.”

  • Just 39% agreed that “personal debt provides a path to achieving the American Dream by making it possible for people to borrow against their future earnings,” while a solid 56% majority said that “personal debt creates an obstacle to achieving the American Dream by encouraging people to spend beyond their means.”

  • 47% say the downturn has encouraged them to pay off debt or not take on new debt, even if that meant cutting back spending. Only 12% say the economy has required them to take on more debt to meet their daily expenses.


  • "Credit Scarred" -- the full article regarding the aforementioned consumer credit survey.

  • "Another Look at China's 12th 5-year Plan" -- Prof. Wong at The University of Hong Kong provides an interesting look at China's economy. (See here for video.)

  • "Reengineering the Appraisal" -- a good historical overview of U.S. residential real estate by my favorite housing finance expert, Ed Pinto. In the second half of the presentation he lays out an excellent analysis of home appraisals, a key cog in the machine and highlighted by many industry participants as a major, ongoing problem.


  • "Taking the Longview" -- I included an excerpted clip last time, but this is the full 44-minute panel with Eddie Lampert, Eric Schmidt, and Larry Summers, among others. Highly recommended. (thanks, Steve)

  • "Demographics Are Not Destiny" -- I disagree with many of the conclusions, but this article has some great data and charts. "From 2010 to 2050 the dependency ratio will quickly start increasing...the world is at an inflection point."

  • "Occupy Wall Street: It's Not a Hippie Thing" -- Roger Lowenstein's excellent perspective on Occupy Wall Street and the broader economic implications.

  • "Corzine Forget Lessons of LTCM" and "In Corzine Comeback, Big Risks and Steep Fall" -- two interesting profiles; the first by Roger Lowenstein of "When Genius Failed" fame has some excellent historical lessons and parallels.

  • "Bill Gates on Being the Top 1 Percent, Fox News, and Taxes" -- "Asked about economic disparity, how money is influencing politics and the challenge voters face making informed decisions, Gates said 'the world at large is less inequitable today than at any time in history.'" He later added, "So if you really look at where we're letting people down in terms of the American dream, I wouldn't say - you can take this as self-serving - I wouldn't say it's because of a few people are very rich. I'd say it's because we haven't been doing a good job on education to give them an opportunity to move up into the top few percent."

  • "The King of Human Error" and "The Anti-Gladwell" -- this will be the last mention of Kahneman and his new book, I promise. (But if you need one more endorsement to go read it, I just did and it was even better than the hype.) Be sure to also check out "The Quiz Daniel Kahneman Wants You to Fail" and "Debunking Myths of the Medical World."

  • "Cargill: Inside the quiet giant that rules the food business" -- Cargill is an amazing organization, and as a private company that has purposefully avoided attention, most people don't know much about it. This is a decent profile but really just scratches the surface. One big clue to its success: "[Our] capital's not only private, it's patient and permanent." Later the CEO adds, "As far as how our corporate strategy works, we don't say, 'We think the world's going to look like this, let's define our strategy for that world.' We say, 'We don't know what the world's going to look like. We need a strategy or a set of strategies that can be successful almost irrespective of what the world looks like.'"

  • "How a Financial Pro Lost his House" -- this is truly incredible on multiple levels. At the least, it's a microcosm of housing and consumer finance in the U.S. last decade, not to mention the "financial advisory" industry.

  • A series of interesting articles on China -- a couple of these are a few months old, but they're all very good. The first one in particular is excellent but concise.

  • "Why We Should All Be Very Skeptical on China" -- a brief historical primal on the dismal track record of centrally planned economies. The particular focus is on the ultimate and often sudden drop-off in growth once investment opportunities become scare and/or debt begins to pile up. Examples are France in 1820s/30s; Germany and Italy in 1930s; USSR in 1950s/60s; Brazil in 1960s/70s; Japan in 1980s; and China more recently. (Full audio is here and requires free registration.) And I don't know if this was in direct response or not, but Pettis published an article just a few months later titled, "Don't Panic, China's Economy is Not on the Rocks Yet."

  • "Swimming Naked in China" -- back to the ledge...

  • "Top of Chinese Wealthy's Wish List? To Leave China"

  • "Rich China, Poor China" -- be forewarned that there is a Cato economist behind this one.

  • "The No Growth Trap" -- in case you have any optimism left, this article should take care of it. I actually think there are some useful historical lessons in here, but I would be careful not to extrapolate too much.

Copied Below

  • "Housing Affordability: the U.S. is the Envy of the Developed World" -- some good news, some bad news and as always some interesting data in an op-ed by housing expert Ed Pinto

  • "The Decline and Fall of America's Decline and Fall" -- some good historical perspective.

  • "For Better and Worse, the Web is Changing How We Think" -- an interesting synopsis of the debate regarding the web's influence on human thought processes. (Thanks, S.D.)

Housing Affordability: the U.S. Is the Envy of the Developed World

Affordable markets are those where the median house price is less than or equal to three times median income. The United States as a whole is affordable with an average score of 3.0. As the nearby chart indicates, this places the U.S. at the head of the affordability class among seven ranked countries, with the other six ranging from moderately unaffordable to severely unaffordable.

Significantly, half of the 211 housing markets in the U.S. are ranked as affordable, with another 35% ranked as moderately unaffordable. For the other six countries, almost eighty percent of their 114 markets were ranked as either seriously or severely unaffordable. While the U.S. has 15 severely unaffordable markets, they are concentrated in a few geographies, including Honolulu, nine markets in California, and two in the Northeast, including New York City.

The U.S. high affordability ranking is noteworthy in at least three respects:

Government policy made things worse:

In the early 1990s Congress, responding to pleas by community groups such as ACORN for loosened underwriting standards to make home ownership "more affordable", imposed affordable housing mandates on Fannie Mae and Freddie Mac. Their goal was to replace common sense credit standards based on a reasonable amount of equity, a good credit history, and adequate income.

Yet in 1989 nearly 90% of U.S. markets were already rated as affordable with only 4% rated as severely unaffordable. Not much has changed as these four were Honolulu, San Francisco, Los Angeles, and New York City. In 1992 the national home ownership rate was 64.4% and had changed little over the previous 30 years.

By 2005, after more than a decade of government affordable housing policies that led to hollowed out lending standards, less than a third of markets were rated affordable and 20 markets were now rated severely unaffordable. By 2011 the homeownership rate had slipped back to 65.9% from a 2004 high of 69.2%. Subtract homeowners currently in foreclosure and the 2011 rate falls to 63%. Some policy-a lower homeownership rate, reduced affordability, and trillions wasted.

No lessons learned:

Second, federal housing policy has long been driven by an undue focus on using broad policy interventions to address narrow or geographically limited problems. We saw an example of that short-sightedness just last week when the Senate approved legislation to restore modest reductions to the loan limits applicable to Fannie Mae, Freddie Mac, and FHA.

Except for the housing lobby, there is widespread agreement that reducing these limits is a key first step towards ending the government's chokehold on the now nationalized housing finance market. Yet sixty senators voted to raise the mortgage limit from $625,000 to $729,750 for homes that sell for about $1 million.

Notwithstanding that these limits help relatively few potential homebuyers, they were initially a temporary measure, and were passed at a time when home prices were substantially higher. Is it reasonable to postpone reducing interventions that distort our markets in order to preserve federal benefits for buyers of million dollar homes?

Yet there is good news:

Even though overall affordability today is lower than in 1989, homes in most areas of the country are affordable and that's before taking into account current low interest rates and the impact of rising rents. This means that once policies promoting permanent private job creation are put in place, the housing market is poised to respond.

This worked for Ronald Reagan in the 1980s when his pro-growth policies helped spark a recovery from both 10% unemployment and, what was then, the biggest foreclosure crisis since the 1930--the result of the collapse of a regional housing bubble in the Oil Patch. The sooner this takes place, the sooner the Fed can end its price-setting policies for long term interest rates.

Edward Pinto

Resident Fellow

American Enterprise Institute

The Decline and Fall of America’s Decline and Fall

Joseph S. Nye

CAMBRIDGE – The United States is going through difficult times. Its post-2008 recovery has slowed, and some observers fear that Europe’s financial problems could tip the American and world economy into a second recession.

American politics, moreover, remains gridlocked over budgetary issues, and compromise will be even more difficult on the eve of the 2012 election, when Republicans hope that economic problems will help them unseat President Barack Obama. In these circumstances, many are predicting America’s decline, especially relative to China.

And it’s not just pundits who think so. A recent Pew poll found that in 15 of 22 countries surveyed, most people believe that China either will replace or has replaced America as “the world’s leading superpower.” In Britain, those putting China on top rose to 47%, from 34% in 2009. Similar trends are evident in Germany, Spain, and France. Indeed, the poll found more pessimistic views of the US among our oldest and closest allies than in Latin America, Japan, Turkey, and Eastern Europe. But even Americans are divided equally about whether China will replace the US as a global superpower.

Such sentiments reflect the slow growth and fiscal problems that followed the 2008 financial crisis, but they are not historically unprecedented. Americans have a long history of incorrectly estimating their power. In the 1950’s and 1960’s, after Sputnik, many thought that the Soviets might get the better of America; in the 1980’s, it was the Japanese. Now it is the Chinese. But, with America’s debt on a path to equaling its national income in a decade, and a fumbling political system that cannot seem to address the country’s fundamental challenges, are the “declinists” finally right?

Much will depend on the uncertainties – often underestimated – brought about by future political change in China. Economic growth will bring China closer to the US in power resources, but that doesn't necessarily mean that China will surpass the US as the most powerful country.

China’s GDP will almost certainly surpass that of the US within a decade, owing to the size of its population and its impressive economic-growth rate. But, measured by per capita income, China will not equal the US for decades, if then.

Moreover, even if China suffers no major domestic political setback, many current projections are based simply on GDP growth. They ignore US military and soft-power advantages, as well as China’s geopolitical disadvantages. As Japan, India, and others try to balance Chinese power, they welcome an American presence. It is as if Mexico and Canada sought a Chinese alliance to balance the US in North America.

As for absolute decline, the US has very real problems, but the American economy remains highly productive. America remains first in total R&D expenditure, first in university rankings, first in Nobel prizes, and first on indices of entrepreneurship. According to the World Economic Forum, which released its annual report on economic competitiveness last month, the US is the fifth most competitive economy in the world (behind the small economies of Switzerland, Sweden, Finland, and Singapore). China ranks only 26th.

Moreover, the US remains at the forefront of such cutting-edge technologies as biotech and nanotechnology. This is hardly a picture of absolute economic decline.

Some observers worry that American society will become sclerotic, like Britain at the peak of its power a century ago. But American culture is far more entrepreneurial and decentralized than was that of Britain, where industrialists’ sons sought aristocratic titles and honors in London. And despite recurrent bouts of concern throughout its history, America reaps huge benefits from immigration. In 2005, foreign-born immigrants had participated in 25% of technology start-ups in the previous decade. As Singapore’s Lee Kuan Yew once told me, China can draw on a talent pool of 1.3 billion people, but the US can draw on the world’s seven billion, and can recombine them in a diverse culture that enhances creativity in a way that ethnic Han nationalism cannot.

Many commentators worry about America’s inefficient political system. True, America’s founding fathers created a system of checks and balances designed to preserve liberty at the price of efficiency. Moreover, the US is now experiencing a period of intense partisan polarization. But nasty politics is nothing new to the US: its founding era was hardly an idyll of dispassionate deliberation. American government and politics have always experienced such episodes, and, though overshadowed by current melodramas, they were sometimes worse than today’s.

The US faces serious problems: public debt, weak secondary education, and political gridlock, to name just a few. But one should remember that these problems are only part of the picture – and, in principle, they can be solved over the long term.

It is important to distinguish such problems from those that cannot, in principle, be solved. Of course, whether America can implement the available solutions is uncertain; several commissions have proposed feasible plans to change America’s debt trajectory by raising taxes and cutting expenditures, but feasibility is no guarantee that they will be adopted. Still, Lee Kuan Yew is probably right to say that China “will give the US a run for its money,” but not surpass it in overall power in the first half of this century.

If so, the gloomy predictions of absolute American decline will turn out to be as misleading as similar predictions in decades past. And, in relative terms, while the “rise of the rest” means that America will be less dominant than it once was, this does not mean that China will necessarily replace the US as the world’s leading power.

Joseph Nye, a former US assistant secretary of defense, is a professor at Harvard and author of The Future of Power.

For Better and Worse, The Web Is Changing How We Think

Yesterday by Navneet Alang | 7 comments

In the past few weeks, the internet has worked itself into a state over one question: does the web make people stupid?

It’s a discussion that in large part was started by Nick Carr, whose recent book The Shallows argues that the internet is changing the way our brains work for the worse. People like Clay Shirky have said, no the web is making us smarter, while others have responded by saying that the online world is not inherently good or bad – it’s just change.

Who’s right? Well, they all are. But if the future is all about the web – and, make no mistake, it is – how is the internet changing how we think?

The Way We Used To Think

For the last little while – let’s say, oh, three thousand years – Western thought has very much been about two things: logic and linearity. If you ever slogged your way through Plato in high school, you’re familiar with this. The way to the truth was about logically moving through arguments from start to finish, weighing and measuring each and then, at the end of the process, arriving at a conclusion.

It’s also not a surprise – or a coincidence – that this ‘linear logic’ found a home in a book – an object that basically guides you to move through it from beginning to end in a straightforward fashion.

And the people who made really great strides in Western thinking were able to do this through two ways: really plowing through a lot of stuff to arrive at a new conclusion, like Immanuel Kant or Karl Marx; or people who came at things from a new perspective to arrive at a new idea, like René Descartes or Albert Einstein.

And really – until you get to the second half of the twentieth century, at least – things pretty much stayed focused on what you could call ‘book thinking’. This meant putting together ideas in an orderly and rational fashion and moving towards something called ‘the truth’.

How The Web is Changing Us

But according to thinkers like Nick Carr, the internet is changing this emphasis on deep thought and long-form thinking by doing things to how we process information. He points to scientific studies that show that people retain less information when they read pieces with lots of links or that students who use laptops in lectures do worse when they are later tested on what they learned. So book thinking is being hurt by the web.

A lot of this has to do with the pleasure we get from receiving new information. Humans are wired to seek out new data, which is why it feels good to have fun surprises. In the same way, we like constant streams of new information like those which we get on the web because they give us the same sort of pleasure (and this explains why I never shut Twitter off and keep Google Reader open all day).

The downside, however, is that all this new information can often prevent or preempt the sustained, linear thinking necessary for deep thought and analysis. It’s not so much a question of whether the internet is making us dumber, as much as it is spreading out intelligence across a wider plain, fragmenting our attention over many things instead of allowing ourselves to hone in on a specific task or idea. This is a real problem, not simply the paranoia of luddites. Any tech-head who tells you their attention span hasn’t changed over the years is either a liar or a superhuman.

But not all this mental change is happening for the worse. What if our thinking was changing to meet the challenges of the contemporary world?

Networked Brains for a Networked World

So, are our brains ruined? Not quite.

One of the things that has been missing from the conversation is this: it might be a good thing if the web changes how we think.

See, the linear book thinking we’ve relied on for so long has served us well. When you’re trying to solve a problem like the electrical grid or a social issue like getting women the vote, setting out clear and logical arguments in books is a good way to go.

But that kind of thinking may not be serving us as well now. As an example, let’s take the recent financial crisis. How many people can give you a neat little explanation of what went wrong? Or a simple infographic? Sure, people have tried, but it’s all just a little too complicated to make much sense in a clear, linear way. There were so many variables and so much data constantly ricocheting around, no-one – not even the best and brightest – could make clear sense of it.

This is the problem we face now – we live in a world that is so complex and overlapping, the long-form thinking of the book can sometimes be too slow and too linear to make sense of things. Something like the financial crisis is a sign that we need new ways of thinking to deal with the world that responds to the fact that so much of our world – the economy, our governments, our environment – are actually incredibly complex systems that are interconnected with other really complicated systems.

As the book and book thinking are similar – long-form, linear etc. – the web and web thinking work the same way. Web thinking is, well, more web-like – it’s more about making multiple connections between ideas in a pattern that may or may not be in order. It’s about constantly evolving information. It’s about designing new ways of approaching problems that aren’t about a a simple beginning and end, but unexpected connections in unexpected ways.

Put more simply, if book thinking works like a book, network thinking works like a network: multiple, layered, non-linear and dynamic.

Sure, it’s vague – but we’re just muddling our way through some of the biggest changes to human thought in centuries. It will take time. And it’s important. But…

Don't Throw Away Those Books Yet!

Yet, before we get too reliant on web thinking, it’s worth pointing out that the kind of work that puts things into context – like, say, this blog post – leans more towards the book thinking side of things.

So, to be clear: we need both types of thinking. The non-linear, networked kind, and the logical, long-form book kind. Because tomorrow’s problems will require both.

Debates over whether the web is making us dumber or smarter are vital. But we also need to think about how our definitions of intelligence change as the world grows more complex, non-linear and overlapped.

So maybe the real question is this: in 100 years from now, what will the definition of smart be?

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