Month: July 2018

Authored by Lance Roberts, Michael Lebowitz, CFA and John Coumarianos, M.S. of Real Investment Advice

• Part I – “Buy & Hold” Can Be Hazardous To Your Wealth
• Part II – Why Crashes Matter & The Saving Problem
• Part III – Valuations & Forward Returns
• Part IV – The Math Of Loss

Choosing The Right Portfolio Benchmark

“Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” –Ben Graham

Benchmarks serve an important role in growing one’s wealth. Most importantly they provide a yard-stick to see how we are doing in meeting our future retirement goals. For those that rely on professionals to manage their money, a benchmark allows the client to gauge how the manager is performing versus what the market is providing.

We do not disparage the use of benchmarks. However, the purpose of this article is to help you understand the differences between an equity index and your portfolio. As we discussed in Part 2 of this series, the proper benchmark for any portfolio is the rate of inflation plus a rate of growth that achieves the specific level of inflation-adjusted dollars required at retirement. Meeting such a benchmark guarantees you meet your goal. No other index can claim that. Benchmarking to the S&P 500, or any other equity index, requires investors to take on excess investment risk which is not correlated to the financial goals or duration of the portfolio.

This article specifically addresses the difficulty of trying to track an equity benchmark index (i.e. the S&P 500.)

The continual efforts to “beat the benchmark” leads individuals to make emotional decisions to buy and sell at the wrong times; jump from one investment strategy to another, or from one advisor to the next. But why wouldn’t they? This mantra has been drilled into us by Wall Street over the last 30 years. While the chase to “beat the index” is great for Wall Street, as money in motion creates fees, most individuals have done far worse. 

The annual studies from Dalbar show the dismal truth, individuals consistently underperform the benchmark index over EVERY time frame.

The reason this underperformance consistently occurs is due to emotional and behavioral tendencies and the many differences between a “market capitalization weighted index” versus a “dollar invested portfolio.” 

Let’s set aside the emotional and behavioral mistakes for today, and focus on the differences between a benchmark index and your portfolio which make beating an index difficult.

Building The Sample Index

To best understand why tracking the S&P 500 index is hard we must first understand how the S&P 500 index is constructed. The following explanation is from Investopedia:

“The S&P 500 is a U.S. market index that is computed by a weighted average market capitalization.  The first step in this methodology is to compute the market capitalization of each component in the index.

This is done by taking the number of outstanding shares of each company and multiplying that number by the company’s current share price, or market value. For example, if Apple Computer has roughly 830 million shares outstanding and its current market price is $53.55, the market capitalization for the company is $44.45 billion (830 million x $53.55).

Next, the market capitalizations for all 500 component stocks are summed to obtain the total market capitalization of the S&P 500, as illustrated in the table below. This market capitalization number will fluctuate as the underlying share prices and outstanding share numbers change.

In order to understand how the underlying stocks affect the index, the market weight (index weight) needs to be calculated. This is done by dividing the market capitalization of a company on the index by the total market capitalization of the index.

For example, if Exxon Mobil’s market cap is $367.05 billion and the S&P 500 market cap is $10.64 trillion, this gives Exxon a market weight of roughly 3.45% ($367.05 billion / $10.64 trillion). The larger the market weight of a company, the more impact each 1% change will have on the index.

For example, if Exxon Mobil were to rise by 20% while all other companies remained unchanged, the S&P 500 would increase in value by 0.6899% (3.45% x 20%). If a similar situation were to happen to The New York Times, it would cause a much smaller, 0.0076% change to the index because of the company’s smaller market weight.”

Okay, with that baseline understanding of the construction of the S&P 500, let’s create a most basic index called the Sample Index which is comprised of 5 fictional companies. For simplicity purposes, each company has 1000 shares of stock outstanding and all trade at $10 per share. The table shows the index versus “Your Portfolio” which is a $50,000 investment weighted identically.

We will take both the Sample Index and Your Portfolio through various events and price changes that cause differences to occur between the two. The events, and passage of time, are labeled at the top of each table. At the end of the exercise, we provide you a performance chart covering the entire period.

In Year 1, our starting point, we divide “your portfolio’s” $50,000 investment into exactly the same weights and stocks as the Sample Index as follows:

There are a couple of caveats here. The first is that by using so few stocks the percentage changes to the index, and subsequently the portfolio, are amplified versus that of the must broader indexes. However, this only for informational and learning purposes – it is the concept we are after.

Secondly, there are many other factors, outside of the examples that we will cover today, that have major impacts on performance. Corporate events such as mergers, buyouts, and acquisitions affect the index. Your portfolio is also impacted by withdrawals, contributions, and  your dividend reinvestment policy.

Lastly, and most importantly, none of the examples today include the significant impacts to portfolio performance over time which comes from taxes, fees, commissions and other expenses. These factors alone typically account for a bulk of the underperformance over the long term but are often ignored by investors trying to chase some random benchmark index.

The Status Quo

In year two, we assume that nothing exceptional, other than typical price appreciation or depreciation occurred. The table below shows the impact of price changes on both the Sample Index and Your Portfolio.

As you can see the Sample Index and Your Portfolio had the same price return and remain exactly the same.

Share Buybacks & Bankruptcy

Over the last ten years, corporations have become major buyers of their own stock pushing such actions to record levels. Stock buybacks are typically viewed as a good thing by Wall Street analysts supposedly because it is a sign that the “company believes” in itself, however, nothing could be further from the truth.

The reality is that stock buybacks are often a tool used to artificially inflate bottom line earnings per share which, temporarily, drives share prices higher. The biggest beneficiary of buybacks are the executives whose compensation is heavily tied to stock options. The losers are the long terms shareholders. Not only must the debt and interest expense, frequently incurred to conduct buybacks, be paid for with future earnings, but the buyback, in many cases, took precedence over investment in the company’s future. The long-term implications for the company and the economy are troubling.

The importance of buybacks cannot be overlooked. The dollar amount of sales, or top-line revenue, is extremely difficult to fudge or manipulate. However, bottom line earnings are regularly manipulated by accounting gimmickry, cost-cutting, and share buybacks to enhance “per share” results in order to boost share prices and meet “Wall Street Expectations.”

Stock buybacks DO NOT show faith in the company by the executives but rather a LACK of better ideas for which to use the capital for.

Importantly, for our overall example, the reduction in outstanding shares reduces market capitalization.

Let’s go back to our original index and portfolio example.

In year 3, Company DEF buys back 100 shares and each company experiences a change in its share price.

The table below shows the impact of these three events on the index and the portfolio.

Notice that the DEF share buyback caused the market capitalization of the index to fall and the weighting of DEF to decline versus the other stocks. Your Portfolio was unchanged and accordingly, the weightings of the index and your portfolio are different. As we will see the returns will begin to diverge at this point because of the slight change in weighting.

Substitution Effect

In year four we introduce the “substitution effect.”

When company’s such as GM, AIG, Enron, Worldcom, and a host of others in history, goes bankrupt or have shrunken considerably, they are swapped out of the index for another company. The index is naturally reweighted for the “substitution.” The table below shows the impact of the substitution on the index and your portfolio.

The substitution not only adds a new stock to the index, but a stock with a much higher weighting than the one removed. Not only does Your Portfolio not hold the new stock but whatever value is left on the removed stock is still affecting your portfolio. Additionally, the change in weightings cause further misalignment between the index and your portfolio.

In order for you to get your portfolio back into alignment with the Sample Index, the stock of MNO Company must be sold and replaced with PQR. The problems with doing this are shown in the next table.

The Replacement Effect

The replacement of a stock in your actual portfolio is confronted by a problem. Since there is no cash in the portfolio, other than what was raised by the sell of MNO – only 100 shares of PQR can be purchased as shown in the table below.

As with each year previously we also included changes in price for each individual company other than PQR so that the substitution and replacement were done at the same price for example purposes.

Note: Yes, I could have rebalanced the portfolio to raise cash to purchase more shares of PQR, however, we have NOT rebalanced the index. Therefore, using just available cash is the appropriate measure.

Comparison Is The Problem

The point of this exercise is to show how different types of index and corporate events change the composition of the Index. Unless one is consistently rebalancing their portfolio they will not be able to match the index. Even if one is constantly trading to mimic the index, the commissions, taxes, and fees will weigh heavily on results over time and will lead to underperformance of the benchmark index. 

The chart below once again returns us to our $100,000 invested into the nominal index versus a $100,000 portfolio adjusted for “reality.” A $100,000 investment in 1998 has had a compounded annual growth rate of 6.72% on a nominal basis as compared to just a 4.39% rate when adjusted for reality. The numbers are far worse if you started in 2000 or 2008.

Furthermore, both numbers also fall far short of the promised 8% annualized rates of return often promised by the mainstream analysts promising riches if you just buy their investment product, or service, and hang on long enough.

The reality, as shown previously, is that such an outcome will likely prove to be extremely disappointing. However, the financial media continually pushes the idea that we must “beat the index.”

However, comparison is the cause of more unhappiness than anything else. Perhaps it is inevitable that human beings as social animals have an urge to compare themselves with one another. Maybe it is just because we are all terminally insecure in some cosmic sense. Social comparison comes in many different guises. “Keeping up with the Joneses,” is one well-known way.

Comparison is why individuals have trouble patiently sitting on their hands, letting whatever process they are comfortable with work for them. They get waylaid by some comparison along the way and lose their focus. If an individual makes 12% on their investments, they are very pleased. That is, until they learn “everyone else” made 14%. Now they are upset.

The whole financial services industry, as it is constructed now, is predicated on making people upset so they will move their money around in a frenzy. Money in motion creates fees and commissions. The creation of more benchmarks, indices and style boxes is nothing more than the creation of more things to COMPARE to which keeps individuals in a perpetual state of outrage creating more revenue for Wall Street.

Comparison of your performance to an index is potentially dangerous to your investing objectives. 

The major learning points regarding benchmarking are:

1) The index contains no cash

2) It has no life expectancy requirements – but you do.

3) It does not have to compensate for distributions to meet living requirements – but you do.

4) It requires you to take on excess risk (potential for loss) in order to obtain equivalent performance – this is fine on the way up, but not on the way down.

5) It has no taxes, costs or other expenses associated with it – but you do.

6) It has the ability to substitute at no penalty – but you don’t.

7) It benefits from share buybacks – but you don’t.

In order to win the long-term investing game, your portfolio should be built around the things that matter most to you.

– Capital preservation

– A rate of return sufficient to keep pace with the rate of inflation.

– Expectations based on realistic objectives.  (The market does not compound at 8%, 6% or 4%)

– Higher rates of return require an exponential increase in the underlying risk profile.  This tends to not work out well.

– You can replace lost capital – but you can’t replace lost time.  Time is a precious commodity that cannot be regained.

– Portfolios are time-frame specific. If you have a 5-years to retirement but build a portfolio with a 20-year time horizon (taking on additional risk) the results will likely be disastrous.

We want to reiterate an important thought from the start of this article. Stock indexes have little to do with your goals. Later in this series, we will discuss a benchmark that is extremely relevant to every investor but used by a precious few – inflation. Simply, if your portfolio is growing faster than inflation your wealth is growing. However, just because your portfolio beat the S&P 500, it does not mean your wealth is actually growing.

As Ben Graham suggests, investing is not a competition and there are horrid consequences for treating it as such.

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Having recently called the peak in 10Y yields, over the weekend Morgan Stanley’s chief rates strategist Matthew Hornbach looked at what else is going on and concluded that “something is afoot in global macro markets.”

What he was referring to is a creeping shortage of dollars in a world in which central bank tightening is finally starting to flow through to asset prices. Here is how he describes the “odd” mood in the market:

Bitcoin just made a new year-to-date low below $5,922 on Thursday, June 28. The price of gold in US dollars also fell to local lows and is mounting a challenge of its December 2017 nadir (see Exhibit 3). Is it just the bloom coming off these roses? Or do investors need US dollars – cash – to settle claims against them? Borrowing cash to settle claims has become increasingly expensive, thanks to the Fed’s efforts to remove monetary accommodation and tighten financial conditions.

What is notable is that it was about a year ago that Morgan Stanley’s nemesis, Goldman Sachs, was perplexed how the more the Fed raised rates, the easier market conditions became, going so far as to say that after the March 2017 rate hike, which sent stocks higher, “this is not the reaction the Fed wanted.”

Fast forward to today when, as Hornbach counters, “Guess what? It’s finally working.”

No longer can borrowers, increasingly non-financial corporations since the financial crisis, take out a loan at 2017 prices. Investment grade corporate spreads are not only at year-to-date wides – having widened by 40bp since February 2 – but they are also wider than their widest levels of 2017, according to the Bloomberg Barclays US aggregate corporate option-adjusted spread. In yield terms, the US aggregate corporate yield-to-worst is at 4.0% – the highest yield level since 2011 (see Exhibit 4).

To be sure, tightening is now being felt across the market, if not all that acutely in stock prices just yet:

At the same time, the yield on US dollar cash has increased dramatically. The 1m yield on a T-bill is up 80bp and the rate on a 1m CD is up 87bp since Labor Day 2017 (see Exhibit 5).

Meanwhile, cash has become “so dear” that Morgan Stanley’s cross asset strategists have increased their allocation to it

What is the culprit behind these market changes? Simple, the same one we discussed two weeks ago in “The Central Bank Party Is Already Over“: central banks, and the phasing out of the global liquidity supernova:

The rate at which global liquidity has increased – loosely defined as the change in major central bank balance sheet sizes and the change in international currency reserves – has fallen rather dramatically over recent months led by the ECB’s balance sheet (see Exhibit 6).

And here Morgan Stanley joins the likes of Bank of America, Deutsche Bank and many others who warn that as the central banks accelerate the draining of liquidity – starting today the Fed’s balance sheet declines by $50BN per month, up from $30BN last quarter – the probability of a major market risk increases:

We expect this decline to continue in the second half of the year and lead to even tighter financial conditions both in the US and abroad. This decline in global liquidity and tightening in financial conditions should benefit longer maturity Treasuries.

Note, however, that not even MS is ready to turn bearish on stocks, and instead the bank’s reco is the inverse: “We continue to suggest long duration positions via the 10y Treasury note.“

And yet, this is where most of the market would disagree, because as Hornbach writes “Macro funds still trading [Treasuries] from the short side.” His advice – cover, and here’s why:

Selling government bonds was the trade of 1H18. Many expect it to be the trade of 2H18 as well. We take the other side. Short positions have come down in the recent rally, no doubt. But hedge funds still trade US rates from the short side. Over the past 6 weeks, the correlation coefficient between weekly changes in 10y Treasury yields and the HFR macro/CTA index has been +0.55 and was recently as high as +0.92 just 4 weeks ago. When Treasury yields go up, macro funds have done well.

Measures of sentiment also point to persistent bearishness in the rates market. The instruments of choice for most leveraged Treasury bears have been FV and TY futures, and Eurodollar futures have been popular as well (see Exhibit 13). We measure sentiment in the futures market by looking at how many traders are long vs. how many traders are short, instead of looking at actual positions which net to zero. Amongst leveraged funds, sentiment in FV and TY futures is still very bearish, though not at recent extremes (see Exhibit 14).

Why is sentiment on Treasuries still so bearish? According to Morgan Stanley, 4 factors have kept the majority of investors bearish:

1. expected impact of continued increases in Treasury supply,
2. expected effects of fiscal stimulus and deregulation on the economy,
3. a Fed looking to continue removing accommodation via rate hikes, and
4. very strong data in 2Q18 that has many tracking estimates of real growth around 4% (see Exhibit 15).

Here Hornbach disagrees with conventional wisdom, and explains his rationale to go long duration as follows:

From our perspective, the increase in Treasury supply related to Fed balance sheet normalization and fiscal stimulus is already in the price of longer maturity Treasuries. In addition, real economic growth around 3% in 2018 is also already in the price. As for the Fed, we see a central bank intent on tightening financial conditions with less accommodative monetary policy and we think they will have increasing success as this year wears on.

Finally, while 2Q18 growth looks to have been strong, forward-looking indicators of growth in the equity market have started to roll over. In particular, Morgan Stanley points out a basket of corporate stocks that are fundamentally levered to business investment has started to underperform the broader S&P 500 index (see Exhibit 16).

The relative performance of this basket has tended to have a coincident relationship with the ISM manufacturing index. If the ISM manufacturing index declines from recently elevated levels, investors will have to adjust lower their expectations for 2H18 growth from elevated levels as well.

In parting we will say that Hornbach is certainly correct: the drainage of liquidity is causing a scramble for dollar-equivalent securities and out of risk assets (and if it hasn’t yet, it will soon). However, the bigger question is what happens if the shortage becomes so acute asset managers fund themselves to sell both stocks and bonds to obtain immediate funding. In that case, first proposed by Jeff Gundlach at the start of the year as a worst case outcome heading into the next recession in which an equity plunge does not lead to a Treasury bid, there would be two options: either the Fed steps back in the market and injects a few trillion moral hazard equivalents… or all bets are off.

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Seven months after ABC News’ Brian Ross crashed stocks with a fake news story about Michael Flynn being prepared to testify against Trump, the veteran reporter/producer has quietly left the ‘news’ organization.

As a reminder, in early December 2017, ABC News was forced to correct Ross’ earlier report, that Michael Flynn is prepared to testify that Donald Trump directed him to contact the Russians as president-elect, not as a candidate.

ABC News issued a statement that night:

We deeply regret and apologize for the serious error we made yesterday.

The reporting conveyed by Brian Ross during the special report had not been fully vetted through our editorial standards process.

As a result of our continued reporting over the next several hours ultimately we determined the information was wrong and we corrected the mistake on air and online.

It is vital we get the story right and retain the trust we have built with our audience –- these are our core principles.

We fell far short of that yesterday.

Effective immediately, Brian Ross will be suspended for four weeks without pay.

After the suspension – which President Trump praised – things went quiet. Ross kept the same title, but moved to another unit of ABC, Lincoln Square Productions, with offices blocks from the news division, to work on “long-term projects,” plus “20/20” and “Nightline.”

And now, as PageSix reports that Ross on Monday announced he’s leaving the network. His longtime executive producer Rhonda Schwartz is also exiting.

“The time has come to say good-bye,” said the duo in a letter to staff with an announcement by ABC News president James Goldston.

“After a great run of 24 years, we have decided to pack up and move on from ABC News, an organization that has meant so much to us. We leave with enormous gratitude for all those who supported us and helped build the industry’s most robust and honored investigative unit.” They added: “While we are signing off from ABC News, we are hardly leaving investigative journalism. There is much more to do.”

So seven months after his “epic mistake,” Ross is finally out.

We look forward to Trump’s response.

This is the second purveyor of fake news to fall in the last few days.

As The Daily Caller reports, a reporter at a Massachusetts-based newspaper resigned Friday after falsely claiming in a tweet Thursday that the man who killed five employees at the Capital Gazzete newspaper left a “Make America Great Again” hat at the crime scene.

“Shooter who killed 4 people at Annapolis newspaper dropped his #MAGA hat on newsroom floor before opening fire,” Conor Berry, a reporter at The Republican in Springfield, Mass., wrote in a now-deleted tweet.

Berry, who covered politics and crime for The Republican, apologized for the “stupid” and “regrettable” tweet Friday, adding that it made his 21-year career as a journalist come to a “screeching halt.”

Folks, My 21-year career as a “journalist,” a fancy term that makes my skin crawl, frankly, came to a screeching halt yesterday with one stupid, regrettable tweet. Can’t take it back; wish I could. My sincere apologies to all good, hardworking reporters and to POTUS supporters.

— CONOR BERRY (@CBerry413) June 29, 2018

“I am ashamed of my tweet, which taints the good work of fair-minded journalists everywhere,” Berry said.

At least he admitted his mistake and left on his own terms, taking responsibility for his actions.

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An Ohio man who was radicalized in the US has been nabbed by the FBI after reportedly planning to plant a bomb during Fourth of July celebrations in Cleveland then stand nearby and “watch it go off,” Reuters reported. Demetrius Pitts, a 48-year-old man who expressed allegiance to Al Qaeda, was arrested on Sunday after a meeting with an undercover FBI agent whom Pitts believed to be an Al Qaeda sympathizer.

Pitts, who lives in the Cleveland suburb of Maple Heights, told the agent that he planned to plant the bomb at a July 4 parade, while also targeting other locations in Cleveland and Philadelphia. The holiday fireworks, the man reasoned, would provide good cover for the attack. The undercover agent who nabbed Pitts helped him pick locations that would’ve been near multiple US government buildings.

Pitts told his would-be accomplice that he wanted to be downtown when the bombs exploded so he could watch the chaos unfold.

“I’m gonna be downtown when the – when the thing go off. I’m gonna be somewhere cuz I wanna see it go off,” Pitts told an undercover FBI agent who he believed was affiliated with al Qaeda, the FBI said in court documents.

In a sickening twist to his plot, Pitts raised the idea of giving the children of military personnel remote control cars packed with explosives, turning them into unwitting accomplices.

Pitts was charged with attempting to provide material support to a foreign terrorist organization and is facing up to 20 years in prison. The undercover agent who brought Pitts in gave the man a bus pass and a phone to help him carry out surveillance ahead of the planned attack. Pitts and the FBI agent also discussed him possibly traveling to San Francisco.

“This defendant, by his own words and by his own deeds, wanted to attack our nation and its ideals,” said Justin Herdman, the US attorney for northern Ohio.

Pitts is an American citizen, and his arrest follows the apprehension back in 2015 of 10 people who were plotting a slew of attacks in the name of Islamic State. It wasn’t immediately clear whether Pitts had retained a lawyer, Reuters said.

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Authored by Charles Hugh Smith via OfTwoMinds blog,

Printing / borrowing money to generate the unsustainable illusion of “growth” sets up the collapse of the entire Keynesian edifice.

Of the many delusions of modern economics, perhaps the greatest is that the dominant Keynesian model reflects permanent dynamics of advanced economies. Economics, along with other social sciences, makes an implicit claim that its econometric claims are the equal of the “hard sciences” of physics and chemistry.

In other words, the econometrics of Keynesian economics is presented as possessing the same timeless validity of the natural sciences.

The reality is that Keynesianism arose in an era of abundant cheap energy, and it is an artifact of that brief one-off period in which industrialization, consumption and the human population were able to expand by leaps and bounds due to cheap energy and new technologies that leveraged greater value (“work,” output) from the cheap energy.

Once energy is no longer cheap or abundant, the Keynesian model of paying people to dig holes and fill them as a means of boosting “aggregate demand” falls apart. In the Keynesian model, “growth” as measured by consumption (gross domestic product) is assumed to be permanent and the highest goal of any economy.

If an economy starts contracting (i.e. recession), the one-size-fits-all solution in the Keynesian model is to boost consumption, i.e. “growth” by any means available: paying people to produce no useful output (building bridges to nowhere, etc.), distributing newly created money via “helicopter drops” into consumers’ laps via tax rebates, tax cuts, increased social welfare spending, etc.

This “solution” implicitly assumes the energy needed to fuel this unproductive labor, investment and consumption is permanently abundant and cheap. It also assumes that the quantity of energy available to fuel the economy will always expand, and as a result new currency (“money”) can be issued by central banks with few (if any) constraints.

The connection between currency and energy is: “money” is nothing but a claim on future energy. Without energy to power the future economy, the “value” of “money” vanishes.

As a result, printing/borrowing vast sums of new money into existence when the supply of affordable energy is stagnating leads to inflation/ loss of purchasing power as the expanding supply of money is chasing a stagnating quantity of energy and what requires energy to generate output, i.e. the vast majority of the economy.

We have a test case for how well the Keynesian model works in periods in which energy is scarce and costly. That test case is the 1970s, the era of stagflation: as governments and central banks pumped freshly created money into the economy to generate “growth,” what they got wasn’t “growth”–they got inflation and stagnating output and consumption.

The Keynesian model failed to work as advertised. The reason is obvious: the model is an artifact of an era of cheap, abundant energy, as it only functions when energy is cheap and abundant.

In effect, the Keynesian model of how the economy works was saved by the discovery of super-giant oil and gas fields in the 1970s that expanded oil production and dramatically lowered the cost of energy for the rest of the 20th century.

The Keynesian illusion was again saved in the early 21st century by the widespread application of fracking technologies that boosted supply and suppressed the cost of energy.

But fracking is not the equivalent of bringing new super-giant oil/gas fields into production. Where super-giant fields produce for decades, fracked wells deplete very quickly–two or three years.

Fracking is even more capital-intensive than the horrendously capital-intensive super-giant fields. Fracking is an artifact of cheap capital in much the same way that the Keynesian model is an artifact of cheap abundant energy: without an essentially limitless supply of cheap, abundant credit, fracking would not be feasible.

Even with unlimited cheap credit, fracking makes no financial sense at today’s relatively modest energy prices; the fracking sector has famously burned $500 billion, i.e. the sector has lost $500 billion providing energy at today’s prices.

This consumption of capital in service of affordable energy is not sustainable.

The Keynesian model makes another implicit assumption: that technology + cheap abundant energy will always generate increasing productivity: in other words, the same quantity of inputs (energy, labor, capital) will yield greater outputs due to rising productivity.

But as this chart of productivity illustrates, productivity is in a long-term secular decline. Productivity is a proxy for cheap, abundant energy as well as for technology. Clearly, technology alone is not the driver of increasing productivity. Despite tremendous advances in various technologies, broad measures of productivity are in secular decline.

The secular decline in productivity has puzzled mainstream economists who expected productivity to increase at the same rates logged in previous eras. This trend is complex and can’t be distilled down to one cause, but the point here is that “growth” is ultimately dependent on rising productivity: printing / borrowing money to generate the unsustainable illusion of “growth” sets up the collapse of the entire Keynesian edifice.

*  *  *

My new book Money and Work Unchained is $9.95 for the Kindle ebook and $20 for the print edition Read the first section for free in PDF format. If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

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Maxine Waters (D-CA) is now attacking establishment Democrats after they denounced her calls to form into mobs and attack Trump officials – blasting Senate and House Minority Leaders Chuck Schumer and Nancy Pelosi after they called for civility and debate in the wake of her inflammatory comments.

“Leadership like Chuck Schumer will do anything that they think is necessary to protect their leadership,” said Waters during a Sunday appearance on MSNBC’s “AM Joy. “What I have to do is not focus on them. I’ve got to keep the focus on the children.” 

Waters has chosen the “separated migrant children” hill to die on politically after viral images of “caged” migrant children under the Obama administration was wrongly attributed to President Trump. In the ensuing debate over roughly 2,000 migrant children, the American public learned that it also happened under Bush and Obama, and that the Obama administration placed nearly 300,000 migrant children in “cages” after they were apprehended at the border. 

Pelosi rebuked comments Waters’ late-June call for supporters to physically confront Trump administration officials, when she said: “If you see anybody from that Cabinet in a restaurant, in a department store, at a gasoline station, you get out and you create a crowd and you push back on them, and you tell them they’re not welcome anymore, anywhere.”

Responding over Twitter, Pelosi said “In the crucial months ahead, we must strive to make America beautiful again. Trump’s daily lack of civility has provoked responses that are predictable but unacceptable.”

In the crucial months ahead, we must strive to make America beautiful again. Trum p’s daily lack of civility has provoked responses that are predictable but unacceptable. As we go forward, we must conduct elections in a way that achieves unity from sea to shining sea. https://t.co/vlpqOBLK4R

— Nancy Pelosi (@NancyPelosi) June 25, 2018

Senate Minority Leader Chuck Schumer also laid into Waters last Monday, saying “No one should call for the harassment of political opponents. That’s not right. That’s not American.” 

President Trump, meanwhile, tweeted: “Congresswoman Maxine Waters, an extraordinarily low IQ person, has become, together with Nancy Pelosi, the Face of the Democrat Party. She has just called for harm to supporters, of which there are many, of the Make America Great Again movement. Be careful what you wish for Max!”

Congresswoman Maxine Waters, an extraordinarily low IQ person, has become, together with Nancy Pelosi, the Face of the Democrat Party. She has just called for harm to supporters, of which there are many, of the Make America Great Again movement. Be careful what you wish for Max!

— Donald J. Trump (@realDonaldTrump) June 25, 2018

Waters’ comments came on the heels of several incidents in which Trump administration officials have been harassed or ejected from public spaces, while protesters have begun to show up at the houses of various White House employees. 

In Mid-June, White House Press Secretary Sarah Huckabee Sanders was ejected from a Lexington, VA restaurant because the gay staff was too triggered by her presence. After the story went viral, Sanders posted to Twitter: “Last night I was told by the owner of Red Hen in Lexington, VA to leave because I work for @POTUS and I politely left. Her actions say far more about her than about me. I always do my best to treat people, including those I disagree with, respectfully and will continue to do so.“

At the end of the day, the fractured left is eating its own. Pelosi and Schumer likely realize that Waters’ calls for physical confrontation with Trump admin officials isn’t the best way to message going into midterms, while an entirely different wing of Democrats has swung so far left that they’re embracing Democratic Socialism – which will be hard to defend in a debate when the left’s leading Democratic Socialist, Alexandria Ocasio-Cortez, can’t even explain what it is. 

Meanwhile, the Venezuelan military just seized control over water supplies as their socialist infrastructure collapse.

We wonder if Waters’ comments will have a negative impact in November when she faces GOP challenger Omar Navarro.

Maxine Waters’ GOP rival @RealOmarNavarro seeks traction over her inflammatory comments.

She can go back to the rich district she lives in!! #CaliforniaRevolt in full effect! Let’s Go!! #WalkAway

https://t.co/67OZ1wwyOt

— Kambree Kawahine Koa (@KamVTV) July 1, 2018

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