Economics: The Fed Is Right - We Need More Interest Rate Hikes

(Drivebycuriosity) - Last week the Federal Reserve hiked her interest rate another quarter percent point, as expected. Much more interesting were the comments & announcements by Jerome Powell. The Fed chairman predicted another hike by December and signaled three more for 2019. The Fed also dropped the phrase that her policy will be “accommodative.”

I appreciate the announcement. The US economy is growing about 3% and doesn`t need more monetary stimulation, which has been described by the term “accommodative". And inflation is already cooking up, driven by spiking oil prices, rising rents & climbing medical cost. Today oil costs about 40% more than a year before and the oil prices have almost tripled since begin 2016 (charts below). Hedge funds and other speculators are using (still) cheap money and are pumping it into financial futures on oil prices. The risk is growing that the oil speculation is getting out of control - like in 2007/08 as oil prices jumped above $140 - and could cause again a severe recession.

The Fed is doing the right thing by fighting against inflation relatively early. If the central bank responds too late to rising inflation rates they would have to fight harder to break the inflation mentality, meaning sharp interest rate hikes. Recessions are often caused by the Fed who is trying to get inflation under control.

I don`t expect that the signaled 2019 interest rate hikes will cause another recession and I doubt that they will end the bull market for stocks. I assume that the necessary interest rate hikes will be moderate because inflation will be constraint, thanks the early response of the Fed (yesterday`s hike was the eights in this cycle) and the technological progress - including Internet - that keeps prices at bay. And the climbing US oil production (fracking) should slow further rising oil prices. Company earnings are growing swiftly (explained here ) and should overcompensate the negative impact of climbing interest rates.

History shows that stock prices & interest rates can rise happily together: The Bank of America Merrill Lynch (finance) notices that “the 1950s was a period of higher stock prices and higher US interest rates. The US 10-year yield bottomed near 1.5% in late 1945 and the S&P 500 remained firmly within its secular bull market until yields moved to 5-6% in the mid 1960s. The S&P 500 rallied 460% over this period.”

Stock Market: Hopping Procession On Wall Street

(Drivebycuriosity) - The US stock market reminded me last week of the hopping procession of Echternach (Echternacher Springprozession wikipedia ). This is a traditional religious parade in Luxemburg, where the participants jump two steps ahead and then one step back - and so progress slowly. Last week US stocks performed similarly - and so the whole year 2018 so far (charts below). This way the market has been creeping to new all-time highs, without showing much progress.

The movements are caused by professional investors, mostly fund managers, who buy & sell according to news and sentiment. Reports about trade war, interest rate hikes, oil price jumps etc. provoked selling, growing economy and climbing company earnings induced buying. I got the impression that many professionals are buying high (when stocks are rising) and selling low (when stocks are falling), contrary to conventional wisdom. This explains why managed funds generally underperform the stock market.

Being an investor with a long-term horizon I don´t participate in the daily hopping dances. I am just wondering how stupid the crowd of the professionals behaves.

Economics: Why Did Rome`s Empire Decline - Two Provocative Explanations

 

(Drivebycuriosity) - The history of Rome is still fascinating. There are so many theories & explanations about rise & decline of the ancient super power. I want to add two more theories about Rome`s fall, which may be provocative, but they are both based on historical observations & logic. It is interesting that Rome´s decline went along with two developments: Global cooling and the rise of Christianity. Did they cause it?

The historian Greg Woolf describes in his book "Rome - An Empire´s Story" (amazon) how climate changes have influenced Rome`s rise and fall: Rome`s ascent was accompanied by a warmer climate which permitted better crops that could feed more people; the decline occurred in a chilling period which reduced the food supply and caused flu epidemics. A colder climate might also have inspired northern tribes to move south and to invade Rome. Kyle Harper, another historian, also sees a connection between a cooling period, called a “little ice age”, with the fall of Rome  (amazon   spectator).

But a cooling climate alone surely didn`t destroy Rome´s power. There was another and a much powerful development: The rise of Christianity. Rome´s status was based on military power, administrative skills & technological progress (as described in "SPQR - A History Of Ancient Rome" driveby ). The Romans conquered cities & nations and then they integrated them into their empire by granting their people citizenship. Rome also manifested her power by developing & extending an impressive infrastructure, like streets, aqueducts, harbors and more.

The early Christian´s did not care much about Rome´s status & power. They focused more on the afterlife, many even sacrificed their lives for their faith. Martyrs and the like were not a good foundation for Rome`s economy and for maintaining the empire. The Christians didn`t cause an abrupt change, but their slow rise after emperor Constantine´s regime  (306 - 337 AD) shifted the priorities and slowly eroded the Roman system. It seems that Constantine, the first  Roman emperor who converted to Christianity, was more interested in building churches than in constructing & maintaining streets, aqueducts and other infrastructure (wikipedia). He also split the Roman empire into two pieces, by moving the imperial residence to Byzantium (today Istanbul), so weakening the empire even more. The early Christians also were pacifists and they were less willing to defend Rome against the northern tribes who got it easier to overrun the city state.

Is it a coincidence that all of Europe declined and drifted into a deep economic & cultural darkness - and Rome`s streets, harbors, aqueducts and other infrastructure fell apart - while the power of the Christian Church rose? Ís it a coincidence that Europe suffered her darkest period - the middle ages  - when the Church and their Popes reached their climax? Then, science and development were called "blasphemy" and punished by the inquisition, stalling all progress.  Is it a coincidence that Europe´s economy & culture began slowly to recover (Renaissance) as the Reformation started and the power of the church became weaker? Is it a coincidence that science - which led to the industrial revolution - began to evolve as Europe disempowered the Church in the 19th century (secularization)?

I plan to write more on this topic in the coming months. Stay tuned.

Contemporary Art: Dystopian Cars @ Gallery Perrotin New York

(Drivebycuriosity) - It is very fashionable to be pessimistic for the future. There is a cult around "dystopia". Now wonder that many artists integrate dystopian ideas into their work. The ambitious gallery Perrotin on Manhattan´s Orchard Street presents an exhibition of dystopian work by Daniel Arsham, called "3018" (through October 21, 2018 perrotin).

The press release says "3018 continues Arsham’s dystopian vision of the future, one in which culture as we know it today is eroded, and the objects of modern life have fallen into aestheticized obsolescence".

The gallery´s ground floor "is transformed into a provisional garage, as two storied cars occupy the space: a 1981 Delorean, reminiscent of Back to the Future’s (1985) essential prop, and a 1961 Ferrari 250GT California that visitors will recall from Ferris Bueller’s Day Off (1986)". According to the press release "the cars are instantly recognizable for their pop cultural import, though Arsham has rendered them in crystal, as if an ashy veil had fallen over this museum for film memorabilia. The cars are in a state of decay and portions of the shell have eroded away revealing a mineral core underneath. Volcanic ash, pyrite crystal, selenite, and quartz have sprouted where the mechanical components used to be".

Anyway, I liked the show and apparently these girls too.

To be continued.

Movies: Hereditary

(Drivebycuriosity) - Better late then never. I missed "Hereditary" this summer in the cinema theaters but thanks to Netflix I could watch it now on the TV screens (imdb). The rave reviews had stimulated my expectations and the film came up to it. "Hereditary"  is a subtle and slowly developing horror movie about a family in distress. Shortly after Grandma´s funeral bad & strange events happen (this is a spoiler free blog. You can find a synopsis here wikipedia ).

Director Ari Aster, who also wrote the script, created a hypnotic and deeply creepy atmosphere. Even though the film reminded me of Japanese ghost movies, "The Exorcist", "The Shining", "Rosemary´s Baby" and many more horror classics, Aster found his own and original ways and the film stayed all the time strange & surprising. I was  impressed by Gabriel Byrne, who performed as increasingly subdued husband, suffering from events & family members he couldn`t understand anymore. Milly Shapiro fascinated as the thirteen years old daughter who seemed to live in a dark world of her one, but I think Toni Collette, who got the most applause by the reviewers, overplayed a bit.

I got mesmerized by the bleak cinematography (Pawel Pogorzelski ). The screen was often almost black, sprinkled with some creepy colors. The movie gained a lot from the very special set design (Brian Lives). One of the leading characters was an artist and created hyper-realistic dollhouses, which looked like the set and often filled the whole screen, giving the film a surrealist quality. Sometimes I got the impression that the whole story happened just inside these constructions.

The movie works best on the big screen in a dark cinema theater, but the TV version is spooky enough.

Stock Market: Welcome To The Stocktoberfest

(Drivebycuriosity) - Munich is celebrating her gigantic Oktoberfest again. Wall Street has her own festival. Yesterday the S&P 500, the gauge for the US stock market, climbed to a new all-time-high, Dow Jones & Nasdaq reached new records as well. The US stock market gained 9% year-to-date and 17% in the recent 12 months. Since the panic trough from spring 2009 stocks climbed more than 300%. Enough reasons to celebrate!

I believe that the party will continue. History shows that stock prices follow the company earnings. This year company profits climbed about 25%, more than the US stock market, which made stocks even cheaper (lower PE correlations). Even if we discount the positive influence of the corporate tax cuts by the Trump admiration (about 8 percentage points) company earning grew about 15%.

I reckon that the trend of rising company earnings (annually 10% plus) will continue in the coming years - generating more stock market records. Rising company earnings are a long term trend. Corporations are getting more efficient & more productive over time - thanks to learning processes and the technological progress. They are learning organisms because they are managed by humans who are continuously improving themselves and their companies. During the recession 2008 companies had restructured and reduced costs significantly in order to survive. Now they are more fit & more efficient than before.

Company earnings are also boosted by automation.  Since the early 18th century (the first industrial revolution) the technological process has been enabling companies to produce more goods & services with the same amount of employees. More and better machines are doing the work of people which translates into lower costs, higher profit margins and climbing earnings.

It seems that this process is accelerating again and we are at the begin of a new industrial revolution. We are experiencing a rapid advance of information technology, meaning combinations of computers, smartphones, Internet and other digital systems. Software - which is increasingly Internet connected and uses more and more the cloud (access to huge external data centers) - organizes the whole business: Creating new products, inducing machines to run more efficient, finding cheap suppliers, manage customer relations and so on. Car producers and many other manufacturers are increasingly using robots and similar machines to reduce their costs. Companies are also beginning to use 3D-printers to become more cost efficient and flexible. All these developments translate into global economic growth and in even faster climbing company earnings & stock markets.

Enjoy!

Contemporary Art: A Scratch In Time @ Thierry Goldberg Gallery New York

(Drivebycuriosity) - New York`s fast gentrifying Lower East Side became a magnet for the bridge-and-tunnel crowd and an infamous party & nightlife center. But the neighborhood is also a mecca of art with dozens of respectable art galleries. Thierry Goldberg on Norfolk Street - which has recently reopened - belongs to the most interesting galleries on LES.

This week I saw there again an interesting group exhibition - called "A scratch in time" (through October 7, 2018  thierrygoldberg ). I display here my favorites, a very subjective selection as usual. Let the images speak for themselves.

Above you can see two images by Grace Metzler:  "Lovers Quarrel + Make Out" (2018, oil and acrylic on canvas, 48 x 60 inches) & "The end of Summer" (2018, oil and acrylic on canvas, 60 x 60 inches )

Above 2 images by Kelly Beeman: "Life Guards" (2018, watercolor, ink, colored pencil on paper, 22 x 30 inches) & "Singing at the Piano" (2018, watercolor, ink, colored pencil, gold ink on paper, 30 x 22 inches).

Above images by Kyle Vu-Dunn: "Bad News (II)" plus "In the Garden" & "Rooftops", all 2018, Acrylic on resin, plaster, and foam panel.

Above 2 sculptures by Derek Weisberg: "Perfection at Every Moment" (2017, cone 6 ceramic and mixed media, 34 x 13 x 11 inches) & "A Phoenix Wishbone" (2018, porcelain, 34 x 14 x 12 inches).


To be continued

Books: The Year`s Best Science Fiction - 35th Annual Collection By Gardner Dozois

(Drivebycuriosity) - I like science fiction. Unfortunately most science fiction novels disappoint. Therefore I usually skim collections of science fiction short stories in order to find some gems. For many years I have been reading the anthology "The Year`s Best Science Fiction" edited by Gardner Dozois. His compilations have been the market leader for 3 decades and offer a kaleidoscope of plots, ideas and styles. Dozois caters to a lot of different tastes and shows the state of art in science fiction.

I just finished reading his "Thirty-Fifth Annual Collection" which harvests the science fiction year 2017 (the paperback edition, published in July 2018, has 720 pages amazon).  As usual Dozois starts with a lengthy summation of important events, trends and publications in the world of science of fiction in 2016. For each story the author wrote an introduction where he outlines the background and most important works of the presented author.

The collection of 39 stories by different authors has something for almost everyone. I found 12 very strong stories at least, a good quota. I enjoyed the space operas, especially "Night Passage" by Alastair Reynold. The plot is told in first person by the female captain of a space ship. She has to deal with a sudden and unexpected stop on an interstellar flight which causes a dangerous situation. Who did it and why? How to escape the danger? One of the best space operas I have read recently, thrilling and spiced with science. Reynold is a professional scientist with a Ph.D. in astronomy who had worked for the European Space Agency in the Netherlands but belongs now to the most successful sci-fi writers. I also like "The Wordless" by Indrapramit Das, another space opera set on a planet which is used as a transit station for bizarre spaceships. Indian philosophy meets ultra-high tech - very exotic.

I loved the stories about the wonders of technological progress. My favorite there is "A Series of Steaks" by Vina Jie-Min Prasad. The tale is set in a near future Hong-Kong and focuses on Helena, who sees herself as an artist. Helena has an university degree and tries to make a living by producing fake steaks with the help of 3D-Printers, which is strictly illegal and brings her into deep trouble. The story is fresh & original, certainly one of my favorites in this book, I want to read more by Jie-Min Prasad. I was also impressed by “Vanguard 2:0.” by Carter Scholz. An astronaut is working in a space station owned by Uber. He is ordered to capture a historical satellite which is still circling around the earth.  "Vanguard" is a philosophical story about technology, corporation power and political influence

Gardner covers artificial intelligence (AI) of course, maybe the most important sci-fi topic of the present: "Zen and the Art of Starship Maintenance" by Tobias S. Buckell is told in first person by a robot with artificial intelligence who does maintenance works on the hull of a space ship. He has to deal with a superior power which causes  a conflict of interests. Very subtle and thought provoking.  "Number Thirty Nine Skink" by Suzanne Palmer is also told in first person by a robot with artificial intelligence. This AI  has the mission to terra-form a freshly discovered planet which leads to surprises.

The collection also deals with alternate history/worlds: “Winter Time Sharer” by Ray Nayler focuses on very special tourists who are visiting a future Istanbul. There is not much happening but I enjoyed Nayler´s style and the atmosphere he creates.

Dozois also covers Cloning:  In "Triceratops" by Ian McHugh  scientists have cloned Neanderthals which causes social tensions.

And there are aliens as well: In "Canoe" by Nancy Kress scientists are exploring a moon in a distant sun system and  are confronted with a cosmic issue.

Gardner covers other interesting topics of course: "The Proving Ground" by Alec Nevala-Lee deals with global warming. The story is set in near-time future on an atoll in the South Pacific. Residents and scientists from abroad are trying to adapt the island to the rising sea level. A sophisticated story about evolution, technology, international law & more with influences by Alfred Hitchcock´s "Birds". “My English Name” by R.S. Benedict is set in contemporary China  and told in first person, but not by a real person. An entity is faking to be a human being (changeling), but has problems doing so.

“An Evening with Severin Grimes” by Rich Larson focuses on a billionaire who got abducted by a group of radical terrorist. A slick near-future thriller

Sadly this is the last edition of these wonderful collections. Gardner Dozois died shortly before the publication. Fortunately many of the 35 editions are still available as Kindle books, for about $10 and less.

Science: Animals Behave Rationally & Follow Their Self Interest, Why Can`t People? - A Defense Of Economics

 

(Drivebycuriosity) - It seems that economics is out of fashion. Economists assume that people are rational & follow their self-interest. They claim that humans behave economically because their resources - time, food, land, money etc - are limited. Many pundits disagree and declare economics as useless. Last year Prof. Richard Thaler, one of the loudest deniers of economics, received the Nobel Prize for economics!

But dolphins don´t care about Nobel Prizes and they ignore the pundits. The "Guardian" describes the rational behavior of Kelly, a dolphin, who lives in a research institute in Mississippi (   theguardian):
"All the dolphins at the institute are trained to hold onto any litter that falls into their pools until they see a trainer, when they can trade the litter for fish. In this way, the dolphins help to keep their pools clean. Kelly has taken this task one step further. When people drop paper into the water she hides it under a rock at the bottom of the pool. The next time a trainer passes, she goes down to the rock and tears off a piece of paper to give to the trainer. After a fish reward, she goes back down, tears off another piece of paper, gets another fish, and so on.
…Her cunning has not stopped there. One day, when a gull flew into her pool, she grabbed it, waited for the trainers and then gave it to them. It was a large bird and so the trainers gave her lots of fish. This seemed to give Kelly a new idea. The next time she was fed, instead of eating the last fish, she took it to the bottom of the pool and hid it under the rock where she had been hiding the paper. When no trainers were present, she brought the fish to the surface and used it to lure the gulls, which she would catch to get even more fish. After mastering this lucrative strategy, she taught her calf, who taught other calves, and so gull-baiting has become a hot game among the dolphins.
The dolphins are not only gaming the system they are saving and using a capital structure to increase total output".

      The Rules Of Supply And Demand


Kelly certainly behaves rationally. The dolphin is spending energy & time to get more food, a strategy which is called profit maximizing. And dolphins aren`t alone. Researchers from the Max Planck Society discovered that at least some birds, the African Grey Parrots,  also are rational and follow their self-interest (phys.org). They report:
"The birds have learned how to trade a token for food: one each for a low, medium or high-value food. The task was to choose between an instant food reward and a token that they could exchange for higher quality food. In controlled tasks, however, selecting a token resulted in an equal or lower payoff. The parrots only rejected the immediate reward and chose the token, if the token's value corresponded to a higher quality food compared to that of the immediately accessible food. The results show that parrots are capable of deliberate and profit-maximizing decisions."

Animals also respond to rising prices and consume less of something when it gets more expensive. Animals don´t use money of course, but they pay by burning energy and spending time to get some preferred food. The Dictionary of Animal Behavior says, if an animal expends a certain amount of energy on a particular activity, then it usually does less of that activity if the energy requirement is increased (oxfordreference). Studies show that animals invest in auspicious assets the same way stock market investors do. Researchers from the University of British Columbia and Warsaw University of Life Sciences found that dairy cows are willing to expend energy (for instance for opening a gate) to gain access to a grooming brush (phys.org).

Scientists are observing "biological markets" where animals trade goods (food) and services (grooming, shelter, protection etc.), following the economic rule of "supply and demand" (ronaldnoe). For instance 'helper wasps' raise the offspring of dominant breeders in small social groups in return for belonging in the nest (sciencedaily).  Scientists from the University of Sussex noticed that "the helper wasps provide less help to their own 'bosses' (the dominant breeders) when alternative nesting options are available. The dominant wasps then compete to give the helper wasps the 'best deal', by allowing them to work less hard, to ensure they stay in their particular nest".

I don`t assume that animals think. They follow their instincts which are shaped by evolution. If a species would behave irrationally it would lose against their competitors (getting less food and inferior shelter for instance) and would have gone extinct over time. The best strategy wins and their genes survive. This way animals inherited behavior which leads them to act economically.

If animals can behave rationally and follow their self interest, why don´t people?   Prof. Thaler is wrong and does not deserve a Nobel Prize for economics.

Contemporary Art: Amazing Trompe L’Oeils @ Marc Strauss Gallery New York

(Drivebycuriosity) - The art world is full of wonders. Some of them I spotted at Marc Strauss Gallery on 299 Grand Street, New York`s unofficial borderline between the Lower East Side and Chinatown (marcstraus). The art dealer is now showing work by the Spanish artist Antonio Santin (through October 16, 2018).

At first I believed I saw tapestry, colorful rugs in the Persian style. But they are not, what I really saw are paintings, all oil in canvas. According to the press release "Santín’s arresting and highly tactile works with its uncannily realistic application of shadow and highlight tempt the viewer to reach out and run their hand over the rug’s pile, which is after all a two-dimensional painting on the canvas mounted on the wall" (exhibitions). Above you can see "Apaña" (2018, Oil on Canvas, 70.8 x 78.7 inches (180 x 200 cm) and a detail of it.

Above "Cajón Desastre" (2018, Oil on Canvas, 70.8 x 78.7 inches (180 x 200 cm) plus a detail shot.

Above "Debris a vis" (2018, Oil on Canvas, 75 x 118 in (190.5 x 299.7 cm) and a detail shot.



To be continued

Stock Market: Ignore Morgan Stanley

(Drivebycuriosity) - If we believe Morgan Stanley than the US stock market will stagnate in the coming years. The bank predicts that the S&P500, the gauge for the US stock market, will stick in a range of 2,400 and 3,000 points for several years (marketwatch ).  Yesterday the S&P 500 closed at 2,904 points, so the stock market would go nowhere. They claim that this "rolling bear market" had already started. This is just nonsense.

First, nobody can foresee the future. Stock market movements are unpredictable. If banks were better in guessing the economy & the financial markets, they would not have to be saved in the 2008 crisis. But we can think in probabilities. There are many catastrophes possible: The world could get hit by a major meteor, volcanic eruptions could cause a nuclear winter, a global epidemic could kill many millions etc.  Fortunately the likelihood for these events is very low - and so is the probability for a stock market stagnation over the next years.


                                        Stocks Follow The Company Earnings

Morgan Stanley claims that the current bull market, which hiked stock prices more than 300% since spring 2009, is fueled by an expansive monetary policy, meaning low interest rate rates and bond purchases, which is now coming to an end. But the monetary policy is just a part of the story. Since 1950 the S&P 500 rose on average annually 6.7% , even that dividends are not included (annually 2-3%  driveby),  faster than the economy, which grew 2 - 3% annually, because stocks follow the company earnings, which are rising much faster than the economy.

Rising company profits are the engine of the current bull market and are responsible for the more than 300% gains. This year US company profits are rising more than 20%.  Even without the tax cuts by the Trump administration they are climbing more than 10%. The growing profits are keeping stock valuation (price-earnings-relations) reasonable and are overcompensating the negative effect of climbing Fed interest rates.

I assume that company earnings will continue to grow with double-digit rates because fast rising company earnings are a long term trend. Corporations are getting more efficient & more productive over time - thanks to learning processes and the technological progress. They are learning organisms because they are managed by humans who are continuously improving themselves and their companies. During the recession 2008 companies had restructured and reduced costs significantly in order to survive. Now they are more fit & more efficient than before.

Company earnings are also boosted by automation.  Since the early 18th century (the first industrial revolution) the technological process has been enabling companies to produce more goods & services with the same amount of employees. More and better machines are doing the work of people which translates into lower costs, higher profit margins and climbing earnings.

It seems that this process is accelerating again and we are at the begin of new industrial revolution. We are experiencing a rapid advance of information technology, meaning combinations of computers, smartphones, Internet and other digital systems. Software - which is increasingly Internet connected and uses more and more the cloud (access to huge external data centers) - organizes the whole business: Creating new products, inducing machines to run more efficient, finding cheap suppliers, manage customer relations and so on. Car producers and many other manufacturers are increasingly using robots and similar machines to reduce their costs. Companies are also beginning to use 3D-printers to become more cost efficient and flexible.

Ignore Morgan Stanley.

New York City: David Salle On Fifth Avenue

(Drivebycuriosity) - New York City is full of wonders. On  Fifth Avenue & 28th Street you can see two huge murals by the American artist David Salle. The giant prints beautify a construction site for a new hotel.

I show here a series of images to give an impression. The print above is called "Swamp Music" and measures 47 by 70 feet.

Above images from the second mural on the same construction site. This print is named "Solar System" and is 44 by 66 feet large.


To be continued

Contemporary Art: Chinese Expressionism @ Chase Contemporary New York

(Drivebycuriosity) - China is rising. The huge country is not only gaining economic power, China is also getting more important in the world of art. At Chase Contemporary in Manhattan´s Chelsea district (521 West 23rd Street I spotted fascinating large murals by the Chinese artist Liu Shuishi (through October 13, 2018  exhibitions).

According to the press release Shuishi is "influenced by both Western philosophers, as well as German and Abstract Expressionism". I display here my favorites from the show, a very subjective selection as usual.

To be continued