Tag Archives: Economics

KILLER SHILLER

John Jonelis


Robert Shiller TAt Loop Lonagan’s urging, I’m walking his 85 pound bull terrier Clamps down the hard Chicago winter pavement. I don’t mind because it’s an opportunity to road test my two knee replacements.  That’s right; I’m the happy product of the wonders of modern orthopedic carpentry!  And I enjoy the best physical therapy known to man because I own the company!

Old Donatas Ludditis flanks my other side to make sure I don’t slip on a stray patch of ice. Despite my upbeat attitude, I hold Clamp’s heavy leather leash with some trepidation.  In my condition, I seriously doubt my ability to control such a large and volatile animal.

DSC04929e500

Clamps

I ask Loop why he insisted on this excursion.

“Hadda break you outa that place. Dem physical therapy gals is controllin’ yer whole life.  And we got business t’ discuss.  Ain’t that right, Don? ”

Old Man Ludditis slowly nods. “You listen to what he say. In old country we obey elders, not women.”

I can’t imagine anybody more elderly than Don but I object: “Everybody says my recovery is going so well.”

Don lays a hand gently across my shoulder, as if taking me into his confidence. “John, I know you invest big in this physical therapy company…but it not right.”

“Phooey! All the employees of Pavlovian PT are extremely lovely young ladies—” I catch my blunder and quickly shift gears. “I mean highly skilled physical therapists.”

Don sadly shakes his head. “John, it not look good. It seem—how you say—immoral.”

“It does plenty for my morale.”

Lonagan sighs. “Dem females got you completely bamboozled.   Yer prob’ly takin’ enough Norco so’s you don’t notice.  Brain’s like mush.  So lemme lay it out fer ya, okay? 

  • “That nutritionist feeds you fulla nothin’ but vegetables ‘n’ health food supplements. Doncha even notice what yer eatin’? Today, we’s gonna get ourselves some thick juicy steaks. How’s about that?
  • “Then there’s that Asian beauty twists ya into a pretzel twice a day ‘n’ yer too numb ‘n’ googoo eyed t’ feel any pain. C’mon, admit it—yer putty in her hands. So it ain’t yer brains behind this deal. What does that leave us with?
  • “Then that knockout Swedish masseuse gives you a hot bath ‘n’ rub down. Hoo boy, I ain’t sure I can take any more ‘o dis.

“I deeply resent these lewd insinuations.  Nothing improper is going on.”

“Resent away, John. Sheesh—I betcha never give business er economics a thought.  Prob’ly fer weeks.  Get my drift?”

He’s got me there. Economics definitely hasn’t crossed my mind at all.

Clamps lunges at a bright green Lexus sedan.  Probably targeting a tire. I haul back on the leash and quickly lose my balance.  Lonagan grabs the lead and lifts me by the collar before I tip over.  A broad smile spreads over his mug.

“But now we’s free, John boy! Take a deep breath! We can talk ‘bout anything youse guys want.  And get some real food!”

“Yah,” says Don.  “Good talk. Good food.  This is place.”

We’re at Michael Jordan’s Steak House.

“Just hook Clamp’s lead over that post.” Lonagan points toward the curb where cars whoosh past on Michigan Avenue.

“Loop, this is a rare and valuable animal. Somebody will steal him.”

“Can’t take ‘im inside. It’ll be okay.” 

We leave the dog at the curb, get ushered to comfortable red leather seats, and immediately order our steaks.

Loop leans back, takes a healthy sip of beer, and exhales in satisfaction—a clear signal he’s opening up a topic of conversation. “I saw Robert Shiller talk the other day. Big deal economist.  Know the guy?”

Robert Shiller

Robert Shiller – from Wikipedia

It takes me a moment. “Uh…financial guru? Yale, I think.  Nobel prize in econ?”

Don: “He share prize with Eugene Fama and Lars Peter Hansen. They—both of them—University Chicago boys.”

Loop slams his empty glass to the table. “Them guys never agree on nothin’. Fama gave us that crazy Perfect Market Hypothosis.”  He spins his index finger around his temple—an unmistakable and insulting gesture.

I lean back to enjoy the fireworks.

Ludditis raises his voice a notch. “Perfect Market Theory—it settled science

Loop: “Well, I guess a guy’s gotta believe in somethin’. I hate t’ contradict a good Chicago boy but that theory is a load o’ bunk.”

Don: “Big finance thinkers—they all say is true.”

Loop: “Only in universities ‘n’ now Shiller proved otherwise. Da big brokers ‘n’ traders always knew better.  It’s so stupid, it’s—” 

Loop stops. Cocks his head.  Switches to a conciliatory tone. “Okay Don—why doncha explain it to us in simple terms, so’s we understand?”

Don raises himself erect in his chair. “I try. With you, is not so easy.  I give example:  Once upon time, news come out on certain stock.  Investors, they predict it go up.  Everybody buy.  Drive up price.  Stock no longer good value.  Fall again.  Price chart show no logic or reason—what they call Random Walk.”

“Bullshit!” Loop’s thick fist pounds our heavy table and beer sloshes out of my glass.  “Sure they drive up da price.  It’s a determined strategy.  Once that happens, the trade is done, ‘n’ all da smart money is already out with fat gains leavin’ da retail crowd high ‘n’ dry.  Markets move due t’ aggression.  It ain’t some disconnected perfect market.   Real traders profit in real dollars. 

“But now that’s changing too. Da High Freaks—I mean da big brokerage houses—is tradin’ with powerful computer algorithms, in ‘n’ out in miliseconds.  Hell, they make over 70% of the volume ever’where ya look.  They pushed all da floor traders off the edge of the world.  Kaput!  Short term gets killed off by shorter term ‘n’ da universities still say it don’t exist!”

Me: “That’s why you switched to private equity?”

“Yeah, I saw it comin’ years ago.” Loop shows both palms.  “But I still wanna talk about Bob Shiller.

S&P Price Earnings, Div, Int from Irrational Exuberance Shiller

S&P Index Price vs Dividends – from Irrational Exuberance

“Ever’body thinks investors make rational decisions.  Shiller’s a completely different animal.  He takes into account all da crazy stuff goes on. He gave us Behavioral Finance.  He called da internet bubble o’ 2000 right to the month. Then he gave us da Case-Shiller Index ‘n’ called the housing bubble.” 

Loop turns his palms back down.  “Fama never predicted nothin.’   

Loop pauses—for effect I suppose—then goes on: “Shiller says, you can predict asset prices. Fer an economist, dis is big stuff!  How does he do it?  Way too much volatility caused by illogical decisions compared to future cash flow.  Turns out you can measure it.  That shakes up da whole academic world.” 

Home Prices, Irrational Exuberance Shiller

Home prices – from Irrational Exuberance

So this is this the news flash I missed while embroiled in such excellent and enjoyable physical therapy.

Don: “You not correct about Shiller study.  It predict long term only.  To quote famous economist, ‘In long run, we all dead.’”

Loop: “Yeah, Shiller’s model’s limited t’ dividend-paying stocks, so that’s as far as he can go fer now. Maybe someday he gets the resta the story.” 

Our steak is served and we all tuck in. When dinner is done, Lonagan surprises me by paying the bill.

We exit the premises to find Clamps crouched on the pavement, his short, powerful tail wagging vigorously. The dog is happily chewing on an electric green Nike sneaker.  I always thought dogs were color blind.

Loop bends down to inspect the shoe. “Just makin’ sure there ain’t no foot in it.”

READ – THROW THE BUM OUT

 READ SERIES FROM BEGINNING

Sources:

Wikipedia bio on Robert Shiller.

IRRATIONAL EXHUBERANCE – Robert Shiller

The Royal Swedish Academy of Sciences – Prize in Economice 2013

 

Image Credits –Irrational Exuberance—Shiller,  Bio on Wikipedia

Chicago Venture Magazine is a publication of Nathaniel Press www.ChicagoVentureMagazine.com Comments and re-posts in full or in part are welcomed and encouraged if accompanied by attribution and a web link. This is not investment advice. We do not guarantee accuracy. It’s not our fault if you lose money.

.Copyright © 2016 John Jonelis – All Rights Reserved

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Filed under angel, angel capital, angel investor, Big Corporations, big money, Characters, chicago, Chicago Ventures, Conflict, Donatas Ludditis, Entrepreneur, Entrepreneurship, Entrepreneurship and Politics, Financial Markets, loop lonagan, Nobel Prize, vc, venture capital

THE CLIFFS OF INSANITY

Seven Solutions

VERBATIM – From storied business consultant, J. P. Pierogiczikowski—affectionately known as Joe Perogi,

as told to John Jonelis

Cliffs of InsanityJoe Perogi here. I’m listening to Peter Orszag speaking real clear on The Fiscal Cliff. He comes all da way from Manhattan to give this great talk to us at The Chicago Council on Global Affairs.

This guy’s real smart. Sure, he’s way left o’ my way o’ thinking but he’s got alotta ideas,  Ideas make money move. And he understands the politics as well as the economics – a rare combination.  So after the talk, I read a buncha his articles, put it all together, and here’s what I come up with:Chicago Council on Global Affairs Logo

He says $750 billion per year of income is already vaporized. That’s right—it’s down da tubes fer good. He says it’s as bad as the dot com bust but get this—this time we’re not bouncing back so fast.

Peter Orszag - Bloomberg

Peter Orszag – Bloomberg

Private lending is zilch. And the jobs are just gone. We lost workers permanently. Lotsa skills become obsolete. People give up.

Here’s something new to me: This mess has been going on long enough that disability benefits are rising. And as Orszag puts it, “Once people get on disability, they don’t go off.” While all this is goin’ on, global labor supply quadruples. So no wonder you can’t find a job.

According to Orszag: “People can sense that all this is happening and that nothing is being done to fill that $750B hole. They’re right.”

Bridge Out Ahead!

Now take that same broken-down train and drive it off the Fiscal Cliff. More than $600 Billion in tax increases and spending cuts by the end of 2012. We’re talkin’ a train wreck of epic proportions on a national scale. Probably push Europe over the edge too.

Budget Elements - American Enterprise Institute

American Enterprise Institute

A Little Comic Relief

It’s times like these we gotta keep our sense of humor.  Orszag cites some stats from his Bloomberg column and that takes my mind back to just before the talk. I actually watch Orszag post that article while we’re sitting together in da coffee shop. And I have some fun with that. My old friend, Ethan Sobriety invited me to this shindig and I get here earlier than he does. So I introduce Orszag to him and Ethan almost throws a coronary. Orszag was Obama’s top dog in Management and Budget and the Congressional Budget Office. But he goes back further. Senior economist under Clinton’s Council of Economic Advisors and the National Economic Council.  These days he’s bigtime at Citigroup.Bloomberg Logo

My friend Ethan ain’t no slouch neither. International currency investor who makes a home in England, Asia, Africa, and right here in Chicago, but when the color comes back to his face he says hello to Dr. Orszag and shakes his hand. From his reaction I figure Ethan’s got a whole lot of respect for this guy.

Posting Article

Orszag Posting His Article

Whacha Gonna Do?

But Orszag is still speaking and I snap my attention back to what’s going on now, right in front of me.  He asks, “Will we shoot ourselves in the foot again?”  He says we’re doing stimulus the wrong way. “We need to do specific, gradual, policy that’s hard to reverse over time.” Gradual and irreversible makes for stability. That way business knows what’s gonna happen and has plenty of time to plan for it. Lending opens up. Da economy starts workin’ again. So are we doin’ that?  No, he says, “We’re doing the opposite.” Not good.

Anybody’d think them bums in the White House, the Senate, and the House of Reps could work this thing out. But Orszag shows two simple charts that explain why it’s so hard to fix. The first one explains the way Left and Right thinking used to overlap. All the deals get done in that overlap area. (This guy’s an economist and uses bell curves to make his point. Ethan tells me Venn diagrams might make more sense to most people, so I’m giving you that version.) Here’s the way it looked in the ‘60s:

VENN 1

Now let’s fast forward to today. You see it? There’s no overlap at all no more. No consensus. Maybe no deal.

VENN 2

Polarization

Some say polarization is the natural result of gerrymandering and Orszag says that might be as much as 15% of it. But he thinks it’s driven by the polarization of the population itself. We’re doing it to ourselves,” he says. Then he explains how:

  • If you put like-minded people in a group, the group becomes more extreme. That rings true to me. It’s plain common sense.
  • Landslide elections in voting districts are getting a whole lot bigger. Lotsa candidates run unopposed or with token opposition. That means our neighbors are more like us. Again, more like-minded equals more extreme.
  • Nowadays we can all pick our own reality. Each of us can select our own news feeds and the like. Orszag talks about how he “unfollowed” a Twitter user who criticized him. So now that person is still criticizing him, but it’s not in Orszag’s world no more, so it’s got no impact on his decisions. Again, if you listen only to like-minded people, you get more extreme.

The Positions

So here are the positions on da Left and da Right:

  • DA LEFT—Let the Tax Cuts Expire for the Rich– This is the plan to tax the $250K+ crowd. Problem is, it really doesn’t raise much money and it kills jobs.
  • DA RIGHT—Entitlement Reform – Everbody agrees we gotta do this, but gimme a break. If the country was ready to bite da bullet, Obama wouldn’t be in the White House again.

If there’s no deal, we go over The Cliffs of Insanity and da country goes into another Great Depression.

The Cliffs of Insanity from The Princess Bride - Wikipedia

The Cliffs of Insanity from The Princess Bride – Wikipedia

Seven Solutions

Even with no consensus, Orszag sees a number of possiblities:

  • Two-Stage Agreement – A 9-month temporary deal to give the bums in Washington time to work it all out. This is one of the president’s proposals.  Give him what he wants now and he’ll talk about the rest later.  But Orszag asks a good question: “If either side gives in now, why believe the other party will change later?”  So nobody budges. 
  • Tax Reform Refund – Let the tax cuts expire.  Replace them with a $1,600/year tax refund.  Do that till a deal is reached or the economy recovers. This way negotiators start with a clean slate. Both sides might find it easier to swallow. This is one of Orszag’s interesting ideas.  Maybe it works. I dunno.
  • Cut Spending – Orszag points out spending cuts are easy to say but hard to do. The more vague the proposal, the more popular it is and the more useless. When he was in government service, he’d give out a list of tax cuts but nobody could agree on anything significant.  But we gotta cut spending somehow.
  • The 50K Limit – If we limit itemized deductions to $50,000 for everybody, we can raise the same $700 Billion we’d get from taxing the job creators. But 90% of that is deductions from just three things: local taxes, home mortgage interest, and charitable contributions. Of those three, charity is the only one a taxpayer can do anything about. So charities would get clobbered. Not a good thing.
  • Raise the ThresholdExtend the tax cuts for everybody under $1 Million insteada chopping it off at $250K. So far nobody’s hot on this, but who knows? It’s the natural place to reach a compromise.  And as I see it, anybody earning $1M is likely to be runnin’ a corporation, not a mom and pop proprietorship or LLC. Regular corporations are taxed separate from personal income so I figure it shouldn’t oughta hurt jobs too much. But taxing corporations hasta raise prices. We all pay fer it, so either it’s a hidden tax or it’s inflationary.  I think one ‘o these days we’re finally gonna see summore inflation.
  • Scale Back Tax Breaks – Don’t raise rates at all. Chop off deductions the $250K-and-up earners. House Republicans might bite. But the White House hasta make a concession here and this commander in chief hasn’t shown any ability in the art of compromise. Also, the downside is this could hurt any housing recovery big time.
  • Social Security Reform – Orszag is big on this one and it’s real interesting stuff: Lift the $110,000 cap on payroll taxes. He says Democrats will leap at the chance to make Social Security solvent without private accounts. And, this one’s stable ‘cause it can be done in an orderly manner over several years. Again, he’s big on a plan that can’t be reversed and phases in over time. That means everybody knows what’s coming and has time to plan for it.

O’course, we can always kick the can down da road again like Obama did last term.  Orszag don’t raise this issue ’cause it ain’t a permanent fix.  We got a looming debt crisis and it’s only getting a whole lot worse.  

Optimism

Orszag sees some good coming in spite of all this suffering:

  • He sees shale gas and shale oil and a pipeline from North Dakota to Texas because there’s no way around it. So oil prices will eventually plummet.
  • He seems to like the way healthcare is headed because he likes defined contribution and national healthcare. Well, I figure ya gotta make allowances for people’s opinions.
  • He says there’s a lot more to come from the tech revolution.

At least that last one’s for sure.  I hope them bums figure this mess out before New Years Day.  And thanks Ethan for the great invite.  This was worth da trip.

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GO TO – THE FISCAL CLIFF – A SURPRISINGLY SIMPLE STORY

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Find Chicago Venture Magazine at www.ChicagoVentureMagazine.com Comments and re-posts in full or in part accompanied by attribution and a web link are welcomed and encouraged. This is not investment advice.  I do not guarantee accuracy.   It’s not my fault if you lose money.

.Copyright © 2012 John Jonelis – All Rights Reserved

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3 Comments

Filed under Chicago Council on Global Affairs, Chicago Venture Magazine, CORE Insight Story, Economics, Entrepreneurship and Politics, Fiscal Policy, Innovation and Culture, Taxes

SOMEBODY KEEPS MOVIN’ MY CHEESE

As told to John Jonelis

Cheese HeadEarly morning on Clark Street, I run into Loop Lonagan, former floor trader on the CME, venture capitalist, and man-about-town.  It’s been about two months and my feelers tell me something is wrong with Loop

“Hey, long time no see.”  That sounds awkward and I try to follow with a joke.  “Been locked up in the joint or what?”  I intend the prison reference as tongue-in-cheek, but Loop’s reaction surprises me.  He staggers to a standstill and then sidles over to lean against a light pole.  When he moans, I know it’s an act.

Then he slowly nods.  “No mercy.  No grace,” he says in a voice that sounds more like a growl.  “Prison’s gotta be better than what really happens to a man these days.  Lousy do-gooder sister.  A guy lets loose just once and next thing he wakes up in the tank.”

“Which tank is that?”

Loop cocks his head and looks at me with bleary eyes.  I’m not sure if it’s a hangover or just a typical early morning.  “You didn’t hear?” he says, “That’s right, your house burned down.  The old battle axe signed me up for a life sentence.  Detox, then my own private room.  For good.  I call in a few favors and get outa there just before the big holiday celebrations in Honolulu.”

“You always seemed to hold your liquor before.”

“That counts for nothin’ these days.  Let it rip once—just once—and they think they got you pegged.  Anyhow, I’m back.”

“What set you on a binge?”

He growls again.  “Don’t get me started on that.”

We walk into an eating establishment and shed our coats.  Loop orders bagels and lox.  I do the same.  He finishes and orders another helping, then downs a second cup of coffee.  I can see it’s doing him a world of good.

Then he looks straight at me.  “Okay John, if you wanta know about it.  But I ain’t got a lotta time.”  He takes another bite of bagel.  “Somebody keeps movin’ my cheese.”

“You mean like in the cartoon?”

“Yeah.”  The waitress fills his cup.  It steams and he slurps it carefully.  “You notice that GDP is back where it was three years ago?   But it don’t feel that way, right?”

I shake my head and wait for him to go on.

“The numbers.  They’s all back to what they was but things is different—way different.  Same numbers but the way business delivers ‘em is different.”

Loop finishes his second bagel and orders a third. By this time he looks like the old Loop Lonagan and goes on:  “One thing—access to capital is all screwed up after the housing bubble and banks got a real attitude.  We move thousands of working jobs out o’ the country.  Hell—R&D too.  The stinkin’ Internet changes way the way we do business.”

I sit there in shock.  Is it possible that this news flash takes so long to hit him?  “Listen, Loop.  Everybody knows all that stuff.  Everybody.”

“Yeah, yeah.  But here we get to the crux.  We redefine success.”

I swallow some coffee.  Redefine success—first time I’ve heard it put that way.

“Success with no access to capital gets you nowhere any more.  The lousy Internet changes delivery.  Access to information and business processes change.  People depend on referrals even more to make transaction decisions.  Everything’s different and less people needed—a lot less in the good old US of A.  So we get massive unemployment.  It’s all structural.  Ain’t goin’ away.  Everybody gets redefined.”

I take my last bite of breakfast and think over what I’m hearing.

After another slug of coffee, Loop goes on.  “That means we redefine the planning process.  That means we redefine data sets.  Those now come from outside the business as much as inside.”

I hadn’t thought about that but it’s true.  I nod.

“Goals change.  Used to be you get your capital first then build a business.  Now it’s build a business then prove that you deserve the capital to grow it.”

That rings true for me as well.

“Collaboration changes, too.  Now there’s more going on between companies than inside them.  Lots more collaboration cross-country.  Overseas.  With customers.  Platform companies like Google and Facebook dominate what goes on with information—that’s why their shares get bid so high.  Then companies put together Content Management systems—can you beat that?”

“Loop, you may have noticed that my business card reads Content Specialist.”

“Yeah, but you’re a writer at heart.  Then I finally come to grips with what that term really means.  Manage what goes in the bag.  They used to call it marketing but now it’s about information more than product.  Trust the big guys to turn it into a science.”

Loop signals for the check and I ask a question.  “You don’t like it—the change, I mean?”

“Don’t make no difference what I like.  Gotta move with the market.  Anyhow, I put the past behind me with the help of my close friend Jack Daniels.  You know where that landed me—but that’s behind me too.”  He looks at his smartphone.  “Hey, I got a meeting.  Let’s have lunch later.  Gimme a call.  I got the low-down on the Zero Moment of Truth.  Good seeing you, John.”

And just that fast, he’s gone, and the check still sits on the table.

Find Chicago Venture Magazine at
www.ChicagoVentureMagazine.com
Comments and re-posts are welcomed and encouraged. This is not investment advice – do your own due diligence. I cannot guarantee accuracy but I give you my best.

© 2012 John Jonelis – All Rights Reserved.

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