Asset prices are high across the board. Is it time to worry?

With ultra-loose monetary policy coming to an end, it is best to tread carefull

IN HIS classic, “The Intelligent Investor”, first published in 1949, Benjamin Graham, a Wall Street sage, distilled what he called his secret of sound investment into three words: “margin of safety”. The price paid for a stock or a bond should allow for human error, bad luck or, indeed, many things going wrong at once. In a troubled world of trade tiffs and nuclear braggadocio, such advice should be especially worth heeding. Yet rarely have so many asset classes—from stocks to bonds to property to bitcoins—exhibited such a sense of invulnerability.

.. Rarely have creditors demanded so little insurance against default, even on the riskiest “junk” bonds. And rarely have property prices around the world towered so high. American house prices have bounced back since the financial crisis and are above their long-term average relative to rents.

.. If today’s asset prices have been propped up by central-bank largesse, its end could prompt a big correction. Second, signs are appearing that fund managers, desperate for higher yields, are becoming increasingly incautious. Consider, for instance, investors’ recent willingness to buy Eurobonds issued by Iraq, Ukraine and Egypt at yields of around 7%.

.. But look carefully at the broader picture, and there is some logic to the ongoing rise in asset prices. In part it is a response to an improving world economy.

.. A widespread concern is that the Fed and its peers have grossly distorted bond markets and, by extension, the price of all assets. Warren Buffett, the most famous disciple of Ben Graham, said this week that stocks would look cheap in three years’ time if interest rates were one percentage-point higher, but not if they were three percentage points higher.

.. But if interest rates and bond yields were unjustifiably low, inflation would take off—and puzzlingly it hasn’t. This suggests that factors beyond the realm of monetary policy have been a bigger cause of low long-term rates. The most important is an increase in the desire to save, as ageing populations set aside a larger share of income for retirement. Just as the supply of saving has risen, demand for it has fallen. Stagnant wages and the lower price of investment goods mean companies are flush with cash.

The Dying Art of Disagreement

Galileo and Darwin; Mandela, Havel, and Liu Xiaobo; Rosa Parks and Natan Sharansky — such are the ranks of those who disagree.

And the problem, as I see it, is that we’re failing at the task.

.. Extensive survey datashow that Republicans are much more right-leaning than they were twenty years ago, Democrats much more left-leaning, and both sides much more likely to see the other as a mortal threat to the nation’s welfare.

.. Fully 50 percent of Republicans would not want their child to marry a Democrat, and nearly a third of Democrats return the sentiment. Interparty marriage has taken the place of interracial marriage as a family taboo.

.. as Americans increasingly inhabit the filter bubbles of news and social media that correspond to their ideological affinities. We no longer just have our own opinions. We also have our separate “facts,” often the result of what different media outlets consider newsworthy. In the last election, fully 40 percent of Trump voters named Fox News as their chief source of news.

Thanks a bunch for that one, Australia.

.. Allan Bloom ..  published a learned polemic about the state of higher education in the United States. It was called “The Closing of the American Mind.”

..  What we did was read books that raised serious questions about the human condition, and which invited us to attempt to ask serious questions of our own. Education, in this sense, wasn’t a “teaching” with any fixed lesson. It was an exercise in interrogation.

.. To listen and understand; to question and disagree; to treat no proposition as sacred and no objection as impious; to be willing to entertain unpopular ideas and cultivate the habits of an open mind — this is what I was encouraged to do by my teachers at the University of Chicago.

It’s what used to be called a liberal education.

.. The University of Chicago showed us something else: that every great idea is really just a spectacular disagreement with some other great idea.

Socrates quarrels with Homer. Aristotle quarrels with Plato. Locke quarrels with Hobbes and Rousseau quarrels with them both. Nietzsche quarrels with everyone. Wittgenstein quarrels with himself.

.. Most importantly, they are never based on a misunderstanding. On the contrary, the disagreements arise from perfect comprehension; from having chewed over the ideas of your intellectual opponent so thoroughly that you can properly spit them out.

In other words, to disagree well you must first understand well. You have to read deeply, listen carefully, watch closely. You need to grant your adversary moral respect; give him the intellectual benefit of doubt; have sympathy for his motives and participate empathically with his line of reasoning. And you need to allow for the possibility that you might yet be persuaded of what he has to say.

.. 51 percent — think it is “acceptable” for a student group to shout down a speaker with whom they disagree. An astonishing 20 percent also agree that it’s acceptable to use violence to prevent a speaker from speaking.

.. Middlebury is one of the most prestigious liberal-arts colleges in the United States, with an acceptance rate of just 16 percent and tuition fees of nearly $50,000 a year. How does an elite institution become a factory for junior totalitarians, so full of their own certitudes that they could indulge their taste for bullying and violence?

.. I was raised on the old-fashioned view that sticks and stones could break my bones but words would never hurt me. But today there’s a belief that since words can cause stress, and stress can have physiological effects, stressful words are tantamount to a form of violence. This is the age of protected feelings purchased at the cost of permanent infantilization.

.. Then we get to college, where the dominant mode of politics is identity politics, and in which the primary test of an argument isn’t the quality of the thinking but the cultural, racial, or sexual standing of the person making it. As a woman of color I think XAs a gay man I think YAs a person of privilege I apologize for Z. This is the baroque way Americans often speak these days. It is a way of replacing individual thought — with all the effort that actual thinking requires — with social identification

.. But it is a safe space of a uniquely pernicious kind — a safe space from thought, rather than a safe space for thought, to borrow a line I recently heard from Salman Rushdie.

.. it has made the distance between making an argument and causing offense terrifyingly short. Any argument that can be cast as insensitive or offensive to a given group of people isn’t treated as being merely wrong. Instead it is seen as immoral, and therefore unworthy of discussion or rebuttal.

..  For fear of causing offense, they forego the opportunity to be persuaded.

.. If you want to make a winning argument for same-sex marriage, particularly against conservative opponents, make it on a conservative foundation: As a matter of individual freedom, and as an avenue toward moral responsibility and social respectability. The No’s will have a hard time arguing with that. But if you call them morons and Neanderthals, all you’ll get in return is their middle finger or their clenched fist.

.. the so-called “alt-right” justifies its white-identity politics in terms that are coyly borrowed from the progressive left. One of the more dismaying features of last year’s election was the extent to which “white working class” became a catchall identity for people whose travails we were supposed to pity but whose habits or beliefs we were not supposed to criticize. The result was to give the Trump base a moral pass it did little to earn.

.. seem to think that free speech is a one-way right: Namely, their right to disinvite, shout down or abuse anyone they dislike, lest they run the risk of listening to that person — or even allowing someone else to listen.

.. Yes, we disagree constantly. But what makes our disagreements so toxic is that we refuse to make eye contact with our opponents, or try to see things as they might, or find some middle ground.

.. Fox News and other partisan networks have demonstrated that the quickest route to huge profitability is to serve up a steady diet of high-carb, low-protein populist pap. Reasoned disagreement of the kind that could serve democracy well fails the market test. Those of us who otherwise believe in the virtues of unfettered capitalism should bear that fact in mind.

.. no country can have good government, or a healthy public square, without high-quality journalism — journalism that can distinguish a fact from a belief and again from an opinion

.. that requires proprietors and publishers who understand that their role ought not to be to push a party line, or be a slave to Google hits and Facebook ads, or provide a titillating kind of news entertainment, or help out a president or prime minister who they favor or who’s in trouble.

.. Their role is to clarify the terms of debate by championing aggressive and objective news reporting, and improve the quality of debate with commentary that opens minds and challenges assumptions rather than merely confirming them.

.. This is journalism in defense of liberalism, not liberal in the left-wing American or right-wing Australian sense, but liberal in its belief that the individual is more than just an identity, and that free men and women do not need to be protected from discomfiting ideas and unpopular arguments. More than ever, they need to be exposed to them, so that we may revive the arts of disagreement that are the best foundation of intelligent democratic life.

Bitcoin’s Wild Ride Shows The Truth: It Is Probably Worth Zero

The digital currency’s value depends on it becoming digital gold—or on criminals

There is no chance whatsoever that bitcoin can displace the dollar, for the simple reason that it is badly designed. Bitcoin can handle a pathetically small number of transactions, and uses an inordinate amount of electricity to do so, making it entirely unsuitable to replace ordinary money.

.. Even if bitcoin worked better, it is in a Catch-22 because of Gresham’s law, the nostrum that bad money drives out good. Given the choice of spending inflationary government-issued money or something which holds its value, everyone would spend the bad paper stuff and hoard the bitcoin. You wouldn’t want to be the person who spent 10,000 bitcoins on two pizzas in 2010, when a bitcoin was worth a fraction of a cent. Those bitcoins are now worth $40 million. But if no one spends bitcoin, it will never get established as a currency.

.. There are two somewhat less ambitious claims for bitcoin that could give it value.

  1. The first is that it is a limited form of money because of its usefulness for dealing illegal drugs and dodging capital controls.
  2. The second is that it is a form of digital gold: an insurance that will keep its value even if governments confiscate or inflate away the buying power of the currencies they issue.

In any currency, the money supply multiplied by how often it circulates equals

  • the price level times
  • the number of transactions.

For bitcoin we can estimate three of the four variables

.. Assume that all drug dealing moves online, that bitcoins circulate as rapidly as ordinary currencies and estimate a $120 billion-a-year market for illegal drugs, and the formula spits out an ultimate value of $571 for a single bitcoin. The more drugs traded, the higher the value, and the more bitcoin hoarded rather than spent, the higher the value.

.. On this basis the recent price of $3,950 is mostly speculation, and J.P. Morgan Chase & Co. Chief Executive James Dimon’s comparison to the 17th-century Dutch tulip mania is apt.
.. the potential to replace gold gives us some figures to work with. Thomson Reuters GFMS estimates there were 2,155 metric tons of gold held in exchange-traded funds. Switch all of that into bitcoin and it would justify a price of about $5,500 for the 17 million bitcoins currently outstanding.

When Will the Tech Bubble Burst?

The profitless start-ups that were wiped out in the dot-com crash have consolidated into an oligopoly composed of leading survivors such as Google and Apple. These are giants with real earnings, yet signs of a irrational euphoria are growing.

.. One is pitchmen bundling investments with very different outlooks into a single package. Last decade they bundled Brazil, Russia, India and China to sell as the BRICs. More recently they packaged Facebook, Amazon, Netflix and Google as FANG, then, as names and prospects shifted, subbed in Alphabet, Apple and Microsoft to make Faama. Others are hyping the hottest tech companies in China as BAT, for Baidu, Alibaba and Tencent. Whatever the mix, acronym mania is usually a sign of bubbly thinking.

.. Seven of the world’s 10 most valuable companies are in the tech sector, matching the late 1999 peak.

.. The dot-com era saw the rise of big companies that were building the nuts and bolts of the internet — including Dell, Microsoft, Cisco and Intel — and of start-ups that promised to tap its revolutionary potential. The current boom lacks a popular name because the innovations — from the internet of things to artificial intelligence and machine learning — are sprawling and hard to label. If there is a single thread, it is the expanding capacity to harness data, which the Alibaba founder, Jack Ma, calls the “electricity of the 21st century.”

.. the scale of today’s tech boom is not readily visible because much of the investment action has moved into the hands of big private players. In 1999, nearly 550 start-ups went public, and after many ended in disaster, the government tightened regulation of public companies. In part to avoid that red tape, this year only 11 tech companies have gone public. Many are raising money instead from venture capitalists or private equity funds. Venture capitalists have poured more than $60 billion into the technology sector every year for the past three years

.. “unicorns,” companies that haven’t gone public but are valued at $1 billion or more. Unicorns barely existed in 1999. Now there are more than 260 worldwide

.. We can never know when the end will come. Still, there are three critical signals to watch for.

  1. The first is regulation. The tech giants are seen today as monopolizing internet search and commerce, and they are angling to take over industries such as publishing and automobiles, raising alarms at antitrust agencies in Europe and the United States
  2. ..  Going back to the “nifty 50” stocks of the 1960s, nearly every big market mania ended after central banks tightened monetary policy and many people who had borrowed to get in the game found themselves in trouble. The dot-com bubble peaked in 2000, after the Federal Reserve had increased interest rates multiple times.
  3. .. Finally, watch for tech earnings to start falling short of analyst forecasts. The dot-com boom was driven in part by increasingly optimistic predictions for technology company earnings