Baseline Portfolio: January 2011

In December 2008 we prepared a simple Baseline Portfolio to measure the markets core response to the then incoming Administration. The stocks were selected to each yield a dividend in excess of 5.5% pa and we paid little attention to capital gains, it was a pure dividend play. The above shows the results by date of that portfolio. It demonstrates a consistent 20% annual return since June 2009 and has changed very little. The stocks were also selected to be core economy stocks.

The same as above we show below for a different view:

We also calculate the percent daily change by day and we show that below:

One can see the volatility in early 2009 and then it has settled down considerably for the past six months.

Finally we show the total gains by each stock selection below:

This was surprising. Here DuPont is a core grower followed by Dow and then IBM. Despite all the high tech issue one wonders if these are market leaders and are predictors of growth in other segments. J&J and Verizon have gone no where, the Verizon return has recently been bolstered since late last year it was near zero. The sector returns may very well be predictors of a recovery.

Norbet Wiener: A Poor Description

I read Zero Hedge from time to time because they often have some sharp edged observations and lead one to think in another direction. Yet today they besmudged Norbert Wiener, and that I cannot stand still on.

The writer states:

This stands in stark contrast to Norbert Wiener’s approach to constructing a view of the world.  He was the first to rigorously characterize Brownian motion, but he exclusively used a (then) challenging and formal measure-theoretic construction.  Wiener avoided drawing connections to probabilistic methods because probability theory had a bad reputation among mathematical colleagues of the day.  Probabilistic intuition and measure theory reinforce each other:  many who could have benefited most by the advance were left out of the discussion.

 The author just does not know Wiener at all. Yes he was first a Mathematician, but he was also a tinkerer. There is a fantastic bio on Norbert by Masani and also one can read Wiener's own bios. He did stuff, really stuff, for example he and his team designed one of the first closed loop dynamic tracking systems used on MIT Rad Lab radars, just below my first faculty office in old Building 20. He was the fellow who created the first Boston Arm, the first prosthetic which actually worked, and the first with McCullogh to design neural networks.

Wiener was a genius, somewhat burdened with the weight of such, Von Neumann was also a genius but a self possessed and elegant gentleman who adapted to the post war way of dealing with institutions. Wiener was and remained the independent thinker, the leader of small groups, the mind of the type which existed for centuries, not the group mind of Neumann.

As such I believe the writer was quite unfair to Wiener and mis-spoke on what he had accomplished, you see I knew the man, and he was not what the author portrays, at least amongst the many he knew him and understood his accomplishments.

As to math in finance, my famous concern on Black Scholes was that in reality the approaches always suffer from instabilities due to the unknown. Look at LTCM, it went unstable because they linearized everything. Thus the conclusion is correct yet picking on Wiener is a poor touch.

Reskilling?

I enjoy Prof Rajan's ideas regarding the understanding of the economy and unlike so many others he is not the polemical position promoter we see in those who spend their lives telling others how to do things they have not the slightest clue about in reality. However in a recent post by Rajan I take some considerable exception.

He states:

The lesson for policymakers is clear: instead of constantly trying to boost spending and potentially creating problems for the future, a more sustainable way to improve job growth is to facilitate the “re-skilling” of the unemployed, especially those who were in construction-related jobs. Eventually, better labor-force supply will create healthy and more sustainable demand.

The problem is that I know a great many construction types, I grew up in a family of electricians, plumbers, carpenters, I worked as an electrician and our oldest is one as was my brother.  The mere idea of reskilling these people in general is impossible. For example, if you take a union crafts person, they have developed a mindset of the type that they are owed more than anyone else and they owe no one else anything. I have seen this close up again and again, one need just look at the trade unions in New York, they in my opinion make the Mafia look like the Elks Lodge at time. What jobs would you send these people to, and try and find an electrician, they are more scarce than hen's teeth, no unemployment there.

Thus the point he seems to be making has weak foundations. First, for craft union types they are not re-trainable, for independent contractor types, if they are good and self motivated they still have more work than they can handle, for those with no work, they most likely could not be hired no matter what, they just will not perform. Thus the three categories; (i) union types, they fell entitled and are arrogant, (ii) self employed, they have no need, (iii) unemployed, often of their own making.

In addition there is the simple question, train them for what? You cannot say train them and the jobs will come. There must be a need, a demand, and then you fill it. Train them as an engineer, well Prof Rajan is a grad of IIT, the most highly respected engineer school in the world, and it takes a fraction of a percent of the graduates. If these folks could be so trained it would have happened decades ago, it is too late.

This sector, the construction types, are either self sustainable or potentially lost until the economy is willing to use the marginal worker.

McLuhan

I have always enjoyed McLuhan. There is a new book out and praised by the NY Times. However I do think that they, the NY Times review, and the author of the work may have missed a critical point.

As I wrote some twenty plus years ago, Peter Drucker, in his biographical sketches of his contemporaries, remarks on his first encounter with McLuhan. It was during a presentation that McLuhan was making on the results of his doctoral studies. His presentation reflected upon the impact that the printing press has had upon the university system in the late Middle Ages. He contended that the modern university came into being in the sixteenth century because of printing, which changed not only the method of instruction but, more importantly, what the university intended to teach. He further contended that the cultural results of this period had little to do with the Renaissance and was all a direct result of the printing press.

To quote Drucker, who paraphrased McLuhan;

 "Did I hear you right," asked one of the professors in the audience, "that you think that printing influenced the courses that the university taught and the role of university all together." "No sir," said McLuhan, "it did not influence; printing determined both, indeed printing determined what henceforth was going to be considered knowledge."

Thus this led to McLuhan's famous phrase that the medium is the message. Specifically, as we developed a new medium for human communications, we dramatically altered the nature of the information that was transferred and the way in which the human perceived what was "truth" and what was not. The television generation of the 1960's was an clear example of the impact of television versus film in portraying the war in Vietnam as compared to the Second World War.

The perception of these two events was determined by the difference of the two media that displayed them to the pubic masses. Television allowed for a portrayal that molded more closely to the individual humans impact of the events as compared to films overview of the groups involvement's. Both media deal with the same senses but they are different enough to have determined two different outcomes of the wars. This conclusion is a McLuhanesque conclusion but is consistent with the changes that McLuhan was recounting in the 1960's in his publications.


As we start to see the ongoing complexity of media stuff, the echoes of McLuhan should resonate more loudly. Of all the quotes that I have used over the years I am drawn back to the one above, for as we change media we change knowledge. It is also a question then how quickly do we change our culture.

Employment Stats: December 2010

As is the usual case one must look at the data in some detail. Here goes:

This is the unemployment reported and unemployment based on the constant 2005 rate. There is a slight drop but the actual unemployment still hovers at 12% and that is not including the chronically unemployed.

This is the employment by sector. Again we point to the fact that Government plus Health and Ed accounts for 33% of the population when rounded up. Again that means that there are 2 real employees for every one on the Government dole. As usual we assume that both health care and education are in effect Government supported.

The above shows the percent of total in each category for January 2005 and December 2010. Construction has decreased as has manufacturing, Retail, Information, Goods producing, but Government, Ed&Health have health up ticks and so does Leisure and Professional. The Leisure we cannot explain.

The above then depicts the percent changes by category. This shows a 16-17% increase in health and education. Look at the drop in Production and Construction! This is the core problem. Things are getting worse and not better. We have more people in non-productive jobs and less creating things.

The above shows the month by month change by sector. We have the blip due to the mid year census employment and then we see generally a positive growth in Govt and Health & Ed and average zero swings in Manufacturing and Services. This seems to be an Administration Goal of boosting up the payrolls but in the end it is less real taxes and more expenditures. Hopefully the new Congress can stop this quickly.

Battling Economists?

Battling Economists, yes indeed, there are a few out there that I just wonder about, especially a few on the West Coast, and yes even here in New Jersey.

I have been following the duel between one in the DC area, a libertarian, if I read it correctly, who has positions that generally are classic libertarian but do make considerable sense, a Hayek follower, and as such one who values the individual and is concerned about the excesses of the Government.

The battle is with one of those Berkeley types. one of that collection of what appears to be quite chubby, one may even say tending towards the morbidly obese, collection of academics from that institution, along with "Chuckles", the former in my opinion rotund economics prognosticator whose second anniversary of the announcement of "happy days being here again" comes on January 11th, not!

I do not see engineers, physicians, even lawyers doing this type of back and forth, perhaps because they are professionals with a profession whereas the economists are almost believers in cults, the cult of the left or right. They have plastered the cults with equations, but a cult is still a cult.

As for the problem at hand, the limits on natural resources, this is akin to the discussions in the early 1970s by the Limits of Growth and Club of Rome folks. They all have the hubris that they know the truth and that those dumb engineers over there will never come up with a solution. And time and time again the engineers come up with solutions. Perhaps that is why China is run by engineers, or is there some cause and effect that even runs deeper?