Wednesday Briefs – 4 August 2021

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THIS WEEK: Life Expectancy; What is a Right; Zoning.

LIFE EXPECTANCY

According to the World Bank, worldwide life expectancy has grown from 52.6 years in 1960 to 72.7 years in 2019. Nearly all countries showed some progress during this period with the richer countries achieving the highest life spans. San Marino, Hong Kong, Japan and Switzerland rank highest with 84-85 years of life expected at birth. At the other extreme, the Central African Republic, Chad and Nigeria1 have the lowest life expectancy at 53, 54 and 55 years. Generally, the lowest figures are in sub-Saharan Africa. Botswana and Rwanda are highest in this group and appear on the right track at 70 and 69 years.

In the United States, life expectancy at birth is 79 years, a few years behind European countries. Life expectancy in all countries is higher among women (see chart) because of their biological makeup and because men on average engage in riskier occupations and activities. In the US, it is also higher among American whites (78 years) than among African-Americans (75 years). Hispanic Americans fare relatively well at 81 years. See this 2020 US Census report.

South Korea has expectancy of 83 years vs. North Korea that alleges 72 years. China is at 77 and has nearly closed the gap with the United States. Hong Kong and Macao are at 85 and 84.

Life expectancy is projected to continue rising in future years. During the 20th century, advances in medicine, vaccines and pharmaceuticals (surgery, antibiotics, penicillin etc.) resulted in a near doubling of life spans. In the 21st century, further gains against cardiovascular disease and against cancer would add many more years to the average life.

1. Figures are not uniformly reliable. In countries that suffer from poor data collection, they may be publicized too high as markers for good governance. Or they may be set too low to encourage more outside aid.

WHAT IS A RIGHT

There are words with fixed definitions, for example chair, table etc. And there are words with abstract meanings that can be exaggerated or distorted. The latter are the playing field of wordsmiths, philosophers, sorcerers, mystics and of course the combination of all four, politicians. The word “right” as in human right or civil right is one such word. Everyone agrees that a right is a good thing when it is legitimate as for example the rights to life or liberty.

Because rights are universally wanted, the word has become politicized and is ubiquitous in the airing of various grievances or in the promotion of fringe policies. For example, candidate Obama argued during the 2008 campaign that health care is a right. And now, in the midst of debate about eviction moratoria, an argument is being made that housing is a right, or even a human right. There is also, coming from those who advocate cancelling student debt, a notion that free higher education is a right.

Whether these things (health care, housing, higher education) should be paid privately by each household or whether they should be paid collectively through the state is for politicians to sort out with a mindful eye on the impact of each on incentives. What incentives and ramifications, good and bad, are created if health care, low-cost housing and higher education are largely provided by the government through taxes or through more debt?

Outside of politics, abstract words are important and have an impact beyond their immediate every day usage. Changing the meaning of an abstract word, especially one that is politically charged, has consequences that transcend the glib convenience of the moment. Until recently, a right was understood to be something innate and unalienable, as for example in the Declaration of Independence the rights “endowed by [our] creator”. Until recently, a right was not considered as something that a government could endow or confiscate.

Reverting to the original meaning, a right is something that is innate and that cannot be a claim on the work of another. In this meaning, life, liberty, the other rights in the Constitution, civil rights etc. can all be enjoyed without taxing the collective or making a claim on the work of others. A right then is universal and does not require the consent of others. By contrast, a gain in welfare that requires the consent of another or that involves the coercion of another is not a right. The first (consent) is a market transaction; the second (coercion) is a tax clamoring for respect.

ZONING

There are zoning rules in most places in America that dictate what you can build and at what location. This is to some extent an infringement on your freedom to use your land in any way you choose. But most communities have determined that zoning is desirable in some form. You would not want a garish neon-clad casino next door to your house in suburbia. Nor would you want a tall glass structure in the middle of a historic old town.

It does not follow however that everything is well with zoning. There is among others the charge that some zoning is exclusionary in the sense that it keeps lower income households out of desirable towns or suburbs. For example, zoning a suburb for a minimum of three acres per lot ensures that only people with a certain income can live in that suburb. The consequences of exclusionary zoning are many, not least that the best schools which are usually in the richest suburbs are off limits to poorer people. Richard V. Reeves, a senior fellow at the Brookings Institution, explains in his book Dream Hoarders that exclusionary zoning helps the top 20% of earners cement their socio-economic advantage not just in the present but over several generations.

Now, the city of Portland Oregon has made an effort to mitigate this type of zoning and has passed new rules that allow for the construction of multi-family housing in nearly all parts of the city. Multi-family housing is seen as more inclusive because it allows poorer people who cannot afford single family homes to live in the same area. This is an experiment that bears watching, even if change is likely to be slow per this study from Sightline Institute.

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Are the Wednesday Briefs Worth Reading?

Perfection is unattainable, but the track record has been solid and consistent.

The Wednesday Briefs are not primarily about forecasting but about providing unique commentary and insight on current affairs. But this commentary and this insight have sometimes come hand in hand with making forecasts.

Described by a regular reader as a “weekly gift and a treat”, the Wednesday Briefs are thought-provoking and enjoyable to many. But are they worth reading as a forecasting source? Below are excerpts from the various Briefs over the past seventeen months. We were too optimistic about the pandemic’s longevity but mostly right about other things.

POLITICS

4 March 2020: “Sanders has virtually no chance… Because of Biden’s current strong momentum, there is a possibility that he will gain a majority of the delegates before the convention, which would automatically make him the nominee on the first round.”

3 June 2020: “Protests and Election: In 2016, Trump prevailed by winning Pennsylvania, Wisconsin and Michigan but his narrow margin in these swing states means that they could tip to Biden under reasonable assumptions.”

19 August 2020: “Trump prevailed in 2016 by winning Michigan, Wisconsin, Pennsylvania and a handful of other swing states. The postmortem at the time was that Hillary Clinton did not sufficiently connect with voters in those states, some of whom had been in previous cycles reliable supporters of the Democratic candidate. Biden’s more down to earth style will likely play better with these voters this time around.”

21 October 2020: “Where the Media Would Miss Trump: A lot of anchors and editors would celebrate a Biden victory but the bottom line might not be as peppy in the next four years.”

9 June 2021: “But now Trump is out of the White House and off of Facebook and Twitter. On cue, the New York Times’ stock has traded down [from $58 in January] to $42 as of yesterday. What Peter Thiel called years ago the “bull market for news” appears to be over for now.”

MARKETS

We nailed it by calling the bottom of the market in March 2020, a market melt-up subsequently, and a sector rotation starting in late 2020.

4 March 2020: “The near unanimous view that markets will not recover quickly probably means that they will… There is a possibility of an asset bubble later in the year after virus cases have declined and the relief summer boom and pent-up economic activity kick into gear.”

18 March 2020: “The stock market, as a discounting mechanism for activity that is three to six months ahead, has already made a bottom.”

20 May 2020: “Bearish predictions based mainly on valuations are notoriously unreliable as decades of sector overvaluation have shown. In addition, record low interest rates suggest that equities could in fact be undervalued.

3 June 2020: “There is plenty to choose from for a brave value investor.”

17 June 2020: “The Coming Meltup: the most likely scenario in our view is now a meltup of stocks in the coming months… The biggest beneficiaries as in 1999 would be growth names, irrespective of their already elevated valuations.”

8 July 2020: “The market’s divergence means that some sectors are doing very well (on Wall Street and in the real economy) while others are struggling and going bankrupt.”

29 July 2020: “There would be significant upside for several sectors within the next year if the economy gets past the pandemic and recovers some degree of normality. Among severe laggards are travel and hospitality, restaurants, energy and many others.”

5 August 2020: “Further upside can now be driven by 1) a continued meltup in the top 5 and other technology names and/or 2) an improving outlook for companies that have underperformed due to the pandemic. With regards to the latter, the fade in cases and impending fade in deaths should provide support to depressed sectors in the fall.”

30 September 2020: “Zeitgeist investing has come of age in 2020. The last time that we saw this on this scale was in 1990-2000, a period that celebrated “new economy” companies but that was followed by a decade-long resurgence of the old guard sectors.”

7 October 2020: “The market is of two minds, as evidenced by the K recovery with some sectors such as tech and pharma doing well and others such as energy, travel and retail still languishing. The difficulty that the stock market now faces is that the upper arm of the K seems fairly valued, or arguably overvalued, while the lower arm is still experiencing deteriorating or stagnating fundamentals.”

14 October 2020: “The combination of a Democrat-majority senate and a President Biden would not cheer the markets under normal circumstances because Mr. Biden has vowed to raise taxes on individuals and corporations. But for the time being, the markets are focused on the likelihood of greater and greater stimuli in the months ahead. Although the candidates do not refer to it in these terms, this is Modern Monetary Theory in action, an expansion of the government’s role in the economy with little concern for the expanding budget deficits.”

18 November 2020: “There is considerable upside left in the laggards if the economy holds through the winter surge of the pandemic and if a new stimulus is enacted by Congress. In theory, other things being equal, the latter part of 2021 and the year 2022 could see a very strong recovery in travel, leisure and other sectors that are now depressed. The rush back in spending and socializing will be analogous to a flood after a dam break.”

2 December 2020: “With more stimulus promised, the current tech exuberance can last a few more weeks or months much as its 1999 predecessor lasted into the new year and until March 2000. What happens afterwards will depend on the condition of the economy starting in the spring. The seasonal fade of the virus combined with the wider availability of vaccines would push bond rates up and could lead to a very large sector rotation with this year’s winners losing some gains and the losers effecting a swift recovery. Value investors, if there are any left, would now be loading up on names that were worst-hit by the pandemic.”

6 January 2021: “While Bitcoin scored big in 2020, the dollar and its custodians won’t be disenfranchised without putting up a good fight.”

3 February 2021: “But with Tesla trading near $850, an at-the-market call or put will set you back $350, or roughly 40% of the stock price. This means that an option investor will not make money at expiration unless the stock moves at least $350 up or down. This elevated option price is a reflection of Tesla’s large move in the past fifteen months but it also denotes lack of confidence in the stock’s current level, be it too low or too high. With momentum on its side and more stimulus money coming soon, Tesla stock could be too low. But based on valuation, it looks too high.”

24 February 2021: “Companies that are associated with the upper arm of the former K recovery (now looking increasingly like a V recovery) have stagnated since the vaccine news in November, with the notable exception of Alphabet/Google and Tesla. Meanwhile, companies associated with the lower arm have done very well in the past four months. This rotation will continue for several weeks. The main problem for the major indices is that the combined market cap of the laggards is probably not sufficient to offset declines in the former leaders. On current trends, one way to outperform in 2021 will be to underweight technology.”

3 March 2021: “Peak Elon could in theory coincide with Peak Tesla. That the stock is overvalued is beyond contention. Bearish estimates put the valuation at somewhere between $50 and $250, depending on how much you allow its cars to be a software product instead of an automotive product with a long-range battery.”

17 March 2021: “A better time to have been a superbull was one year ago when the market was in free fall and all celebrations were shut down.”

7 April 2021: “This dream scenario for investors has fallen in place thanks to a combination of rising S&P 500 earnings, low interest rates and big government spending. Big tech names such as Microsoft, Apple, Facebook, Google and Amazon are all pushing higher at or near their all time records. Meanwhile pandemic-struck laggards (travel, retail etc.) are staging strong recoveries across the board. In December,we foresaw the mother of all sector rotations (MASR). This means that travel and leisure spending within the United States may exceed current projections by a long mile (no pun intended). Travel, leisure and hospitality names will do very well if they can meet the demand.”

26 May 2021: “The appeal of Bitcoin has spread mainly thanks to four constituencies: tech savvy investors who understand and believe in the white paper, investors who try to jump on a good trend, closet revolutionaries who see cryptos as a way to upend the world order, and assorted hackers/pirates/traffickers trying to extract ransom in an untraceable manner. One limitation of this spread is that there are not enough of these people in society to make John and Jane Doe give up on the greenback and on its main sponsor, the United States Treasury.”

ECONOMY

We called it right but overworried a bit about inflation.

15 April 2020: “Pandemic winners: At home or small group work and schooling; at home or small group entertainment; medical equipment and supplies, pharma and biotech; online shopping; home improvement. More broadly, suburbia and the countryside. Pandemic losers: Hotel, cruising, restaurant and travel; transportation, auto and oil/gas industries; brick and mortar retail; commercial real estate; private schools and universities; stadiums and large venues. More broadly, high density urban environments.”

29 April 2020: “There is a possibility that Q3 will see a very sharp snapback in activity that could drive up GDP growth close to 10%.” (The snapback was even stronger).

2 December 2020: “Those who, like investors, try to internalize today events that lie six months into the future can imagine the pandemic to be nearly over. Confirmed cases are not peaking fast enough, and deaths are still climbing, albeit at a less bad rate than previously expected. But six months out, it will be the beginning of June and everything will look different. It could be an unprecedented summer and year of activity in 2021.”

17 March 2021: “As the weather warms and the virus subsides further, demand [for air travel] could surprise on the upside. The challenge for some airlines would then be to bring back sufficient capacity for the summer. Pulling an aircraft and its crew out of lockdown is a complex process. It is possible as a result that some routes could see higher than usual prices during the high season. New York to Paris fares for July are at about half the usual summer fare but this could change quickly.”

28 July 2021: “In the Briefs of 10 February and of 28 April 2021, we projected that the decline in births during the pandemic could be followed by an offsetting mini baby boom after the pandemic, in particular as household bank accounts have been padded by several rounds of government checks. There is early evidence that this scenario is now unfolding.”

PANDEMIC

We were on the whole too optimistic but there were some accurate estimates.

17 June 2020: “A fair estimate of the Case Fatality Ratio in a nonstressed situation is therefore in the range of 0.4% to 0.9%.”

25 November 2020: “Using a well-established 1.8% for the ratio of US daily deaths to 21-days-ago confirmed daily cases, we can deduce that deaths will double from a grim 1,660 today (7-day average) to a disastrous 3,200 by mid-December.” (Close. The peak was in fact 3,400 in mid-January).