Excerpts from James Grant's 

Time Magazine Article

The Time article in question was Tweeted here.

The following are some excerpts:

• The very language of government debt is calculated to tranquilize the critical mind. 
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• Today’s miniature interest rates constitute another form of public sedation. You’d suppose the doubling of the debt would jack up the cost of servicing the debt. Nothing of the kind. As the debt has doubled, the rate of interest has halved.
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• In 2007, we owed $5 trillion and paid an average interest rate of 4.8%. Net interest expense: $237 billion. In 2016 we’ll owe $14.1 trillion and pay the average interest rate I already mentioned: 1.8%. Net interest expense: $240 billion. 
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• The public debt will fall due someday. (Some of it falls due just about every day.) It will have to be repaid or refinanced. If repaid, where would the money come from? It would come from you, naturally. The debt is ultimately a deferred tax. You can calculate your pro rata obligation on your smartphone. Just visit the Treasury website, which posts the debt to the penny, then the Census Bureau’s website, which reports the up-to-the-minute size of the population. Divide the latter by the former and you have the scary truth: $42,998.12 for every man, woman and child, as I write this.
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• In the short term, the debt would no doubt be refinanced, but at which interest rate? At 4.8%, the rate prevailing as recently as 2007, the government would pay more in interest expense–$654 billion–than it does for national defense. At a blended rate of 6.7%, the average prevailing in the 1990s, the net federal-interest bill would reach $913 billion, which very nearly equals this year’s projected outlay on Social Security.
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• To understand our financial fix, put yourself in the position of the government. Say you earn the typical American family income, and you spend and borrow as the government does. So assuming, you would earn $54,000 a year, spend $64,000 a year and charge $10,000 to your already slightly overburdened credit card. I [James Grant] say slightly overburdened–your outstanding balance is about $223,000.
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• According to the Government Accountability Office, unpaid taxes add up to more than $450 billion a year. Even so, according to the Tax Foundation, Americans spend 6.1 billion hours and $233.8 billion each tax season complying with a federal tax code that runs to 10 million words. 
• We owe more than we can easily repay. We spend too much and borrow too much. Worse, we promise too much. We conjure dollar bills by the trillions–pull them right out of thin air. I [James Grant] won’t insist that this can’t go on, because it has. I only say that it will eventually stop.
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• I [James Grant] don’t know the date, but I believe that I know the reason. It will stop when the world loses confidence in the dollars we owe. Come that moment of truth, the nation will resemble Chicago, a once prosperous polity now trying to persuade its once trusting creditors that it is actually solvent.

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Richest 1 per cent and the Gilded Age redux

Sir, Alan Rohrbach (Letters, March 5) says that there is no obvious bubble. I disagree. In 1979 the richest 1 per cent of Americans took home 9 per cent of gross domestic product. Today they earn one in four of all dollars earned in the US. In 1979 the bottom 99 per cent of Americans earned 60 per cent of GDP. Today they earn 50 per cent of GDP. For the weaker sections of society the fall in income has been even worse.

The bubble is visible politically. Donald Trump draws his support from generally uneducated white southerners. Their standard of living has been decimated for the benefit of the Trump class. Fed chair Janet Yellen can’t generate 2 per cent inflation since her dynamic stochastic general equilibrium model with its Phillips curve assumption is misfiring due to the hold the 1 per cent have on the US economy.

It also appears as though corporate America has given up on investment to drive growth. Last year C-suites took $1tn out of the national corporate balance sheet in the form of buybacks. This is how the 1 per cent works.

It is all very Gilded Age redux. As Scott Fitzgerald wrote in The Great Gatsby: “So we beat on, boats against the current, borne back ceaselessly into the past.”

Cathal Rabbitte Villars sur Ollon, Switzerland

Financial Times, March 12, 2016

China Income Gap is Among World's Widest

China has one of the world's highest levels of income inequality, according to an article published in the Financial Times on Jan. 15, 2016, page 5.

• The richest 1% of households in China own 1/3 of the nation's wealth, according to a report from Peking University. This report is based on a survey of 15,000 households in 25 provinces.
• The poorest 25% of Chinese households own just 1% of the nation's total wealth, according to the same study.
• China's Gini coefficient, a measure of inequality, was 0.49 in 2012, according to the same report.
• Its Gini coefficient was 0.3 in the 1980s.

Separately, the Hurun Report indicates that the number of dollar millionaires in China is 3.14Mn, up 8% over the past year.

According to Hurun's 2015 China Rich List, China has 596 dollar billionaires, which is more than the US.

The World Bank considers a coefficient above 0.40 to represent severe income inequality. In comparison to China,

• Only South Africa and Brazil have higher Gini coefficients at 0.63 and 0.53, respectively.
• In contrast, the figures for US and Germany are 0.41 and 0.3 respectively.

Turning to the US, the Gini coefficient doesn't tell the whole story. 

In the US, the wealthiest 1% of households own 42% of all US wealth as of 2012 (vs. 1/3 for China). This is according to UC Berkeley economist Emmanuel Saez.

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My analysis

Putting things in perspective, since US population is almost 319Mn (as of 2014) versus 1,393Mn (as of 2014) for China, 1% of the population of each country equals 3.2Mn in the US versus 13.9Mn in China. (Source: Google.) There's a factor of 4.4 in difference here.

But we are dealing with household wealth not per-capita wealth, so population is irrelevant.

The number of households in the US was 123.2Mn as of 2014. (Source: Google.) The number of households in China was 455.9Mn but that was as of 2012, not 2014. (Source: Wikipedia.) Google reports the average household size in China as 3.0 as of 2012. Using this figure of 3.0, I'll estimate the number of Chinese households as of 2014 to be 1.393Mn / 3.0 = 464.3Mn. Here, there's a factor of 3.8 in difference. (US households are smaller than their Chinese counterparts: 2.6 people  per household vs 3.0.)

So, 1% of households in US vs China amount to 1.2Mn and 4.6Mn households respectively.

So, we can say the following. 1.2Mn households in the US control 42% of all US wealth whereas in China, 4.6Mn households control 1/3 ie 33% of all China wealth. This statement implies that there's more wealth concentration in the US: You have a fewer number of households controlling a larger percentage of each nation's wealth.

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It would also be interesting to look at the amount of total wealth in each country. Credit Suisse's Annual Global Wealth Report estimates total global wealth at $250 trillion as of June 2015, with the US owning $86 trillion and China at $23 trillion. Here, the difference is a factor of 10 4; (error corrected on June 6, 2016). (Source: Barrons.) 

So, we can say the following. 1.2Mn households in the US control 42% of all US wealth with this 42% amounting to $36 trillion whereas in China, 4.6Mn households control 33% of all China wealth with this 33% amounting to $7.6 trillion.

Using division, in the US, the average wealth per household within the top 1% of households amounts to $30 million per household. In China, the average wealth per household within the top 1% of households amounts to $1.6 million. Here, the difference is 20 times.

Google reports US and China median per-capita income in PPT (purchasing power parity) terms as $53,750 and $11,850 respectively, as of 2013. Here, the difference is 4.5 times. (I chose to work with median per-capita income rather than median household income because I couldn't find data on the latter for China. However, I will note that median household income being $51,939 in the US as of 2013 is very close to the figure I'm using for US median per-capita income, $53,750.)

So, if we adjusted the 20 times difference associated with the top 1% for the fact that median per-capita income exhibits a 4.5 times difference across the two countries, we can say that the top 1% of households in US are 4 times wealthier than their Chinese counterparts, i.e. 20x / 4.5x = 4.4x which is about 4x.

Within each country, we can say the following. In the US, household wealth for the top 1% of households is 558 times median per-capita income (i.e. $30Mn / $53,750) whereas it is 135 times in China (i.e. $1.6Mn / $11,850). Measured this way, the wealth gap is wider in the US than China. On the other hand, the Gini coefficient indicates a larger wealth gap in China than in the US. That's probably because it also takes into account wealth at the bottom end too.

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Takeaways

Gini coefficients by country:

• 0.63 South Africa
• 0.53 Brazil
• 0.49 China
• 0.41 US
• 0.3 Germany

Aggregate household wealth by country:

• $86 trillion US
• $23 trillion China
• $250 trillion World

Average household wealth for the top 1% of households by country:

• $30 million US
• $1.6 million China

Median per-capita income by country:

• $53,750 US
• $11,850 China
• $9,733 World

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War and Price

As the five-year civil war in Syria between President Bashar al-Assad and the rebels seeking to overthrow him continues, sieges have become a policy by all sides in the conflict.

Estimates on the number of people trapped in besieged areas vary from 1 to 4.5 million. For reference, Syria's population has shrunk to 16.6 million, down from a pre-war level of 22 million, according to the Economist as of Sept. 2015.

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A kilogram of of rice in the besieged town of Madaya, Syria, 40km from Damscus the capital, cost $450 last week.

Sugar is like gold. You can sell it for SPY 3,000 a kilo. It used to cost SPY 70.

Checkpoints controlled by groups besieging each other are an opportunity for both combatants and traders to make money on desperately needed goods, with prices marked up quadruple, or more.

Only corruption can explain how this siege can last so long.

Excerpted from an article that appeared in the Financial Times on January 16, 2016, page 2.

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How your mind & emotions affect your health

Examples:

1) Pessimistic personality has higher correlation with disease

2) So does depression

3) So does a hostile mental attitude

4) Positive attitude increases life expectancy

5) Marriage improves life expectancy

6) Both number and quality of social relationships has positive correlation with good health

There's a 1 hour+ video covering this by UCSF's Kevin Barrows, MD here or here.

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2015 US Equity Market Performance: Lopsided

Looking only at the broad indexes, the losses were modest. The Dow fell 2.2% and the S&P 500 fell 0.7%. But only a few stocks did well. According to Bonner & Partners researcher Nick Rokke, on average, the 10 biggest stocks by market cap in the S&P 500 rose by a little less than 27% in 2015. On average, the bottom 490 were down by about 2%.

Excerpted from this source.

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Afterthought (added Jan. 10, 2016).

FANG's Valuation Multiples

Here are the trailing 12-month PE ratios for the so-called FANGs:

1) Facebook: 98 -- based on $97.33 share price as of Jan. 8, 2016 close
2) Amazon: 870 -- based on $607.05 share price
3) Netflix: 296 -- based on $111.39
4) Google (now Alphabet): 31 -- based on $730.91 share price

The first letter of each company's name, F + A + N + G = FANG.

Their combined PE ratio works out to 56. Derivation: Their aggregate market cap is $1.11 trillion. Their aggregate trailing 12-month earnings is $19.6 billion. Dividing results in 56.

One could also have worked with enterprise value (EV) to EBITDA ratios to reach the same conclusion, which is that these stocks are expensive. OK, here are their enterprise value to EBITDA ratios:

1) Facebook: 39
2) Amazon: 41
3) Netflix: 127
4) Google: 19

Their combined enterprise value to EBITDA ratio works out to 28. Derivation: Their aggregate enterprise value is $1.035 trillion. Their aggregate trailing 12-month EBITDA is $37.3 billion. Dividing results in 28.

More on their latest financials available on Yahoo.

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How expensive are these stocks? A reasonable PE ratio might be 10-25 ... A reasonable EV/EBITDA ratio might be 10-20 ... The implied overvaluation is therefore what? (A) 2-5X according to PE, (B) 0.5-3X according to EV/EBITDA. Taking the minimum, we get 0.5X overvaluation, at least. To eliminate a 0.5X overvaluation requires a 33% price drop.

For reference, the S&P500 closed at 1,922 on Jan. 8, 2016, down 6% from 2,043 on the last trading day of 2015. A 33% drop would put it at 1,281.

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On Concentration, Fear, and Motivation

from 

Novak Djokovic, Tennis Champion

The game of tennis is as much mental as it is physical. 

Novak Djokovic is a Serbian professional tennis player. (More on him at this link.)

His interview with the Financial Times was published in that newspaper on October 17, 2015. Here are some excerpts. 

They shed light on the mental aspect of the game and carry over to other parts of life.

(Blue font text has been copied verbatim from the article.)

On Concentration

So what does it feel like for him in the "clutch" moments, which have rather more at stake?

"The first thing is to make sure you are in the moment," he answers calmly. "That is much easier to say than to do. You have to exclude all distractions and focus only on what you are about to do. In order to get to that state of concentration, you need to have a lot of experience, and a lot of mental strength. You are not born with that. It is something that you have to build by yourself."

"If you can channel it the right way, fear will turn to strength."

On Fear

Did he ever actually feel fear on the court?

"Absolutely. Absolutely. Everyone feels fear. I don't trust a man who says he has no fear. But fear is like a passing cloud in the sky. After it passes, there is clear blue sky."

On Motivation

I [the interviewer] ask him how he keeps himself motivated.

"I can carry on playing at this level because I like hitting the tennis ball," he says simply. Are there players who don't, I ask? "Oh yes. There are people out there who don't have the right motivation.... You don't need to talk to them. I can see it. But I don't judge."

On his Record

His 10 Grand Slam career wins  put him seventh in the all-time list. At the age of 28, he is at the peak of his powers; in form, in demand, and in relentless pursuit of the two contemporary players who hold more titles than him: Rafael Nadal (14) and record holder Roger Federer (17). 

The thought occurs to me [the interviewer] that, rather than go down in history as the third man, he may actually transcend the archetypal qualities of both of his rivals: even more gracious than Federer, still steelier than Nadal.

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