The cliche that can make you richEveryone's heard the phrase "things average out over time". In technical terms, scientists and economists fluff up the phrase and call it "reversion to the mean". But even though it's one of the widest-known cliches, almost nobody bets real money on it...and that's too bad, because it can make you quite rich.
We're living in some times of real extremes right now...Iowa's gotten way too much rain (the most at this point in the year in 141 years), following a year in which we got far too little. Interest rates (from mortgage rates to car loans to corporate bonds) are at record lows. Federal spending is way out of whack with historical precedent. People are leaving the labor force at a rate we've never seen before.
And it's when we're living in the middle of extremes that we are least likely to realize that things really do average out over time...even though that's when it benefits us most. When the economy appeared to be in the toilet a few years ago, everyone ran for the exits in the stock market. But the fundamentals of the American economy hadn't changed. Some things had changed around the margins; we needed to get some cash into the economy, to straighten out some of the errors made in the banking system, and to boost our national savings rate. But the raw, basic components of a strong economy were still there: Our country is still the world's biggest free-trade area, our commitment to the free market (challenged though it may be sometimes) is still the strongest, and our legal institutions are still world-class for protecting property rights and enforcing the rule of law. Seeing that the fundamentals hadn't changed, I argued back in November 2008 that the stock market was less risky as a result of its decline than it had been before, and that "Over the long term, which ought to be the time horizon for anyone under age 55 anyway, the current period is basically a huge clearance sale for shares in American business." Since then, the markets have risen by about 70%. All we really had to do was average out a little bit. But it was really hard to communicate that message at the time, because the panic was all around us.
So what needs to return to average now?Trying to predict how any given market is going to behave in the short run is a really dangerous game. But in the long run, it's smart to take a look at what forces are moving in which directions. Farmland, for instance, is selling at sky-high prices right now. Interest rates are very low, so borrowing is attractive. Meanwhile, conventional investments like bonds look very unattractive to investors, so some of them have been switching from bonds to land, meaning there's more demand for the land that goes up for sale. Simultaneously, crop prices are very high. All of these things make for a recipe for high (and possibly inflated) land prices in the Midwest. The conditions are optimal for the highest-possible prices, really. That doesn't mean they won't rise further, nor that they will necessarily crash. But when you see that a market is firing on every possible cylinder, you have to assume that something about it is going to have to come back down to earth. We don't want the boom to stop, because it's going to hurt us here in Iowa when it does. But virtually every factor affecting those prices is at an extreme, and only one or two of them will need to return to average to cause the land prices to make a downward shift.
So, taking a look at the American economy, should we be worried about the direction of our businesses? The stock market has gone up a lot lately -- are the factors there lining up for a correction, too?
Again, anyone who predicts whether the market is going up or down in the short run is just guessing. But we do know some things about the economy that are worth weighing:
Factors that could be temporarily inflating stock prices:
- Companies repurchasing outstaning shares
- Investors have no safe place to hide (fixed-income assets like bonds and bank accounts are paying less than inflation)
- Low interest rates are pushing people into stocks, because many dividend yields are higher than interest rates
- Low interest rates mean high returns to corporate capital; they can borrow cheaply and expand with that cheap money
- Wider private-equity opportunities, luring money away from common-stock investments
- Large number of Baby Boomers retiring, turning from net buyers of stock into net sellers
- Increasing automation and efficiency, resulting in higher corporate profits
- Decreasing price of technology
- Shift to efficiency means higher returns to capital, lower returns to labor
- Inflation could result if the Federal Reserve doesn't reverse the effects of Quantitative Easing in a timely manner; stocks are much better-positioned to ride out inflation than most other assets, since companies can raise the prices for their goods and services along with inflation
- The rise of a global middle class means that more people around the world have adequate wealth to invest globally, including in the United States, which will undoubtedly remain an economy of choice for investors
- High rates of Federal debt, pointing toward higher tax rates in the future
- Returns on Federal debt are likely to rise, attracting money from cautious investors
- Even a 2% to 4% growth rate in corporate profits, compounded for a few years, is very substantial; that eclipses many effects of price inflation
- Corporate profits are very high with no substantial signals of reason for them to fall
The fickle media businessThe Chicago Sun-Times has laid off its staff photographers, and will count on freelancers and reporters to take up the slack. It's no surprise from a macro scale...the market for metropolitan daily newspapers is extremely tough. But on a micro-scale, it sounds like a dumb move for the Sun-Times, which has long been Chicago's second paper, and without a truly unique selling point has little reason to succeed.
Why is Facebook's stock not going anywhere?One columnist speculates that it's because the company needs Mark Zuckerberg to start talking more like the head of Amazon, promising a big future in return for investment now. In reality, it's because Facebook was severely overpriced when it went public, and there are much better values to be found in the stock market for much more solid companies with much more certain futures. I pointed out last May that the stock was badly overpriced, because its profits were simply too hard to forecast -- and what profits it did show didn't justify the stock's price. Looks like the weighing machine that is the market has agreed.
We should welcome Dr. WatsonIBM's Watson supercomputer is likely to dramatically change health care for the better. And other supercomputers will do the same. When we use computers to enhance what we know, it's good for all of us -- especially on the margins of things like medicine, where it's impossible for any human being to keep up with everything that's being discovered through research. It will require us to be more open-minded about following the advice of machines, but health care isn't alone (not by a long shot) in areas where computing could help us reach better decisions. Let's get computers more involved in suggesting decisions for us in weather forecasting, engineering, and even our social lives, too.
Chuck Reed and I filled in for Jim Walden, who was away on travel. We talked with Nick Nurse, former head coach of the Iowa Energy and current head coach of the Rio Grande Valley Vipers in the NBA D-League. He gave us his take on the NBA playoffs, but managed to avoid confirming outright Chuck's suspicions that the league really wants Miami to win game 7 tomorrow night to avoid matching up Indiana and San Antonio in the finals...a likely recipe for disappointing TV ratings. Nick's record in the D-League has a lot of people asking whether he'll get moved up from the D-Leagues to a full NBA coaching staff position next season, and it certainly sounded like he'd like the opportunity.
Drake's new men's basketball coach, Ray Giacoletti, joined us for an introductory welcome to the program and the community. He's taking on a program that has some building to do within a conference that's losing a powerhouse school. Will Creighton's departure from the MVC for the Big East change how people look at the MVC (Loyola of Chicago is taking Creighton's place), and can Drake hold its own this coming year?
And we talked to Mike Jay about the USA Outdoor Track and Field Championships coming up later this month. Des Moines has a great opportunity to showcase its ability to host a big track event like this, and potentially to lure future Olympic trials away from Eugene, Oregon. We may not have Nike headquarters an hour or two away, but we have shown a lot of ability to put on well-run athletic events. It's probably fitting that the track championships will overlap with the Jim Zabel memorial service to be held on June 21st -- Jim was always one of the biggest boosters that track and field had in Iowa.