You Do What You Gotta

Oregon’s Public Employees’ Retirement Fund has reduced its stake in Berkshire-Hathaway by a 40% in reaction to B-H’s lacklustre performance. From Barron’s:

Warren Buffett isn’t close to beating the market this year, and a giant pension fund has cut its investment in Berkshire Hathaway , the investment juggernaut that Buffett helms.

Class B shares of Berkshire Hathaway stock (ticker: BRKb ) have only managed a 0.9% gain so far in 2019 through Friday’s close, in sharp contrast to the S&P 500’s 18.7% rise.

We’ve noted that Buffett suffered “a reputational and financial black eye” earlier this year as Berkshire took a $1 billion paper loss when Kraft Heinz stock (KHZ)—one of its larger investments—tumbled. Years ago, Buffett backed the combination of H.J. Heinz and Kraft Foods Group that created the company.

Oregon’s Public Employees’ Retirement Fund slashed two-fifths of its Berkshire stock investment by selling 141,822 Class B shares in the second quarter. OPERF, as the pension is known, made the disclosure in a form it filed this week with the Securities and Exchange Commission. OPERF, which recently was counted as the 42nd largest public pension in the world by assets, now owns 222,763 Class B Berkshire shares.

The reality is that they had to. The fund’s assumption is a 7.2% return. With such a large stake in B-H the company’s low returns threatens the fund’s entire structure. Look for a lot more of this especially from pension funds with higher assumptions. They will encourage greater risk-taking which inevitably will mean more losses.

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Things I Won’t Be Alive to See

Continuing on from the previous post, demography may not be destiny but it’s not nothing, either. In this post I’m going to show you four different demographic trend patterns of countries around the world and consider the implications of each. All of the graphics below are from the fascinating site, Population Pyramid. You can while away quite a few hours checking the population pyramids for different countries there.

Gradual growth

The first trend pattern I want to consider is that of the United States which is one of gradual growth.

I consider that a pretty benign, stable pattern although I recognize that some people despise population growth and think it’s disastrous. Our population is presently around 330 million and will be around 450 million by the end of the century. That’s the pattern in all majority English-speaking countries as well as in France, the Netherlands, and Denmark, among others. I think it is a statement of tempered hope for the future.

In these countries the size of the working age population will continue to grow, able to support increasing number of children and elderly people. Continuing prosperity will require prudence but it can be done. Increasing real per capital GDP would help, too.

Critical decline

The second pattern is one I’ve deemed “critical decline”. It is the pattern in Germany:

You can see why the Germans are panicked. By the end of the century the German population will have declined by a quarter. That means that a relatively small number of young people will be supporting a lot of old people. There is no really good solution to this problem. They can’t import a lot of Germans from somewhere else. They can import people but they won’t be Germans and they won’t behave like Germans do. One way or another Germany in 2100 will not be much like Germany in 2019.

That’s the pattern not just in Germany but in Japan and most of the other ethnic states of Europe, e.g. Greece, Czech Republic, Romania, etc.

Critical increase

The third pattern I’ve deemed “critical increase”. It is the pattern in Nigeria:

By the end of the century Nigeria’s population will have nearly quadrupled, from 202 million now to 750 million. It is the pattern of countries in sub-Saharan Africa with the exception of South Africa and of Egypt. It’s tempting to think that people in these countries could emigrate to Europe but I don’t believe that’s a practical solution for two reasons. Relatively few people in these countries speak any European language fluently or have 21st century schools. Emigration would solve their problems while aggravating the problems of countries who are already starting to experience critical population decline.

Sadly, I suspect that the challenges facing these countries will be corrected by the traditional means: famine, pestilence, and war. They could address their own problems by engaging in ambitious programs of education, particularly of women, and political reform but I am not hopeful. I suspect that tribal interests will overwhelm national survival. Said another way if you think the genocide in Rwanda was terrible, you ain’t seen nothin’ yet.

Gradual decrease

My final pattern I’ve called “gradual decrease”, essentially the opposite of the first pattern. It is not only the pattern in China:

but the pattern in Russia, India, Brazil, Mexico and most of Latin America, North Africa with the exception of Egypt, and the Middle East. In most of these countries in which the populations were formerly rising rapidly, the trend may continue into critical decrease or reverse into gradual or critical increase. It’s too early to tell. If China’s population is actually decreasing more rapidly than the official statistics tell us (as suggested in the article I’ve linked to), it could be in critical decrease.

One final note. Over the next 50 years we will be journeying into uncharted territory. We don’t really know what conditions are required for a country to maintain a strong economy with a declining population because populations have been increasing for millennia. Watch Japan. The Japanese continue to do pretty well with a declining population because per capita GDP continues to grow. Accomplishing that may be a challenge.

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Revisions

There’s an interesting article from scholar Yi Fuxian at South China Morning Post asserting that China doesn’t have the number of people claimed in the official statistics:

China’s official demographic figures, including the now-cliched “country of 1.4 billion people”, seriously misrepresent the country’s real population landscape. The real size of China’s population could be 115 million fewer than the official number, putting China behind India in terms of population.

This massive error, equal to the combined populations of the United Kingdom and Spain, is a product of China’s rigged population statistics system, influenced by the vested interests of China’s family planning authority.
To start with, the raw data of China’s population figures were “adjusted”. China’s total fertility rate, or the number of kids per woman throughout her life, dropped below the watershed level of 2.1 in 1991, from which moment the population size of the next generation would be smaller than the current one, and the average total fertility rate was 1.36 in 1994-2018, according to data from census and surveys. However, the family planning authority in charge of the country’s population control refused to believe the numbers and “adjusted” the rate to 1.6-1.8 and, accordingly, the official population size.

For instance, the real total fertility rate in 2000 was 1.22, according to a census result, but the government revised it to 1.8. Accordingly, the country had 14.1 million new births in 2000, but the government revised the figure by 26 per cent to 17.7 million. A census, which is conducted every 10 years, should provide the truest picture of China’s demographic situation. But for the 2000 census, the government was unhappy about the original finding of 1.24 billion and revised it up to 1.27 billion.

I have made my view of official revisions pretty clear, not just in China but here in the United States as well. They are always politically motivated.

I guess some people’s reaction would be who cares? Does it really matter if China has 1.285 billion people rather than 1.4 billion people or more people than India? I think it does and let me try to explain why.

The reasons it’s important have to do with the number of young people, the size of the working age population, and the dependency ratio (children and old people related to number of working age people). If China’s working age population and total population will peak in a few years with both to decline after that, it’s one thing. If China’s working age population and total population have already peaked and from here on a shrinking number of people of working age will need to support a growing number of elderly people, it has enormous implications for Chinese politics and policy. Its options will be different.

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What “Muslim Solidarity”?

The reaction of the editors of the Washington Post to the support the Chinese have received for their treatment of their Uighur minority would be funny if the situation weren’t so tragic:

T A SESSION of the U.N. Human Rights Council this month, 22 mostly Western ambassadors joined in a letter expressing concern about China’s mass detentions in the Xinjiang region and calling for “meaningful access” for “independent international observers.” It was another tepid gesture in what has been a weak international effort to respond to Beijing’s campaign of cultural genocide against the Uighur ethnic group and other Muslim minorities.

What was remarkable was what came next. Four days later, countries recruited by Beijing delivered their own letter to the council, signed by 37 ambassadors, which endorsed what it whitewashed as a “counter-terrorism and de-radicalization” operation and claimed that “the fundamental human rights of people of all ethnic groups there are safeguarded.” The signatories included the usual global rogue’s gallery — Cuba, Russia, North Korea, Venezuela. But a dozen Muslim governments also joined in — thereby sanctioning one of the largest assaults on Islam in modern times.

The statement represents a shameful capitulation by Pakistan, Saudi Arabia, Egypt, the United Arab Emirates, Algeria and other majority-Muslim states that frequently pose as defenders of the faith — especially when it involves condemning Israel. And it offers an augur of what international affairs will look like if the Chinese regime of Xi Jinping realizes its global ambitions: a world where most states meekly submit to Beijing’s dictates and endorse its crimes.

Don’t they realize that “Muslim solidarity” is a contradiction in terms? Condemnation of assaults on Islam only apply to the United States not China and then only if they are attacks on Arabs. Beyond that the Saudis think they’re the only real Arabs.

Here’s a bigger question. Why aren’t those condemning racism condemning China? The Han Chinese leadership are among the greatest racists on the planet. Does keeping the supply of cheap consumer goods flowing outweigh the principle of opposing racism?

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Answering the Question Without Answering the Question

In his Washington Post column about the Iranians seizing a British tanker, David Ignatius seems determined to answer the question “What should the American response be?” without answering it:

The latest evidence of the United States’ seeming “rope-a-dope” strategy toward a flailing Iran came Friday, when the Iranians seized a British-flagged tanker and boarded and then released a second British-owned tanker. The United States has not taken any visible retaliatory action, in what seemed a calculated nonresponse.

Gen. Kenneth F. McKenzie Jr., the U.S. Central Command commander, gave a clear explanation of this measured U.S. approach in an early-morning interview here Saturday in Kabul, the latest stop on his tour of the region. McKenzie had closely monitored Friday’s events from his mobile command post and directed U.S. military actions.

“We need to be the calm and steady part of the equation,” McKenzie told CBS News’s David Martin and me, the two journalists who are traveling with him. “We don’t need to overreact to what the Iranians do.”

“Clearly this [Iranian] action is irresponsible,” McKenzie continued. “But merely because they’re being irresponsible, we shouldn’t fall into the trap of some form of overreaction. So our response is going to be very calm, taken in concert with the international community.”

McKenzie said that, about three hours after Iran seized the British ship, Centcom had affirmed freedom of navigation in the gulf by sending a U.S.-flagged cargo ship, the Maersk Chicago, through the Strait of Hormuz. U.S. drones and fighter jets flew above the freighter to protect it in case the Iranians tried to interfere, but the Iranians stayed away.

The next step is a collective maritime-security plan. Two U.S. destroyers are now positioned at the ends of the Strait of Hormuz, in what McKenzie calls a “sentinel” operation, coordinating U.S. surveillance of the strait. The United States expects that soon, nations whose ships transit the strait into the gulf will begin escorting them with their own warships, aided by U.S. surveillance and other intelligence and military support.

Sometimes U.S. military advice conflicts with President Trump’s impulses. But that doesn’t seem to be the case in the confrontation with Iran. Trump is conducting an economic war against Iran, through his “maximum pressure” campaign of sanctions to cripple Iranian oil exports. But Trump clearly wants to avoid a shooting war, especially as he heads into an election year.

A “collective maritime-security plan” is blithe but it does evoke the obvious follow-up question: to what end? Is there any Iranian escalation or provocation to which the United States should respond forcefully?

My own view is that while we’re working out the details of that collective maritime-security the British should be defending vessels that fly their flag. The primary U. S. role should be one of negative reciprocity with respect to the greater powers, i.e. Russia and China. By that I mean we should not intervene so long as neither Russia nor China intervene.

If the British are not willing or able to defend their own assets, that would be something worth knowing.

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Minority Rule

Today at Outside the Beltway Steven Taylor is outraged that minority rule prevails in the United States:

To reiterate: the notion that a system that, on a mass level, provides more power to the minority than to the majority in terms of basic decision rules (like selecting a president) is inherently flawed. It is not democratic. And even if one tries to engage in some convoluted argument that tries to establish that the EC does some amazing magical representation that is superior to a popular vote, all one is doing is rationalizing a failed institution that never even worked as designed.

The situation of a candidate who failed to garner a majority of the popular vote become president is not a new one. Bill Clinton did not receive a majority of the popular vote either time he ran for president and John Kennedy got a minority of the popular vote in 1960. They did, however, win pluralities of the popular vote. Pluralities are still minorities. I can mount the same arguments against plurality rule that Dr. Taylor does against minority rule.

I think our system is facing a crisis of legitimacy which has its roots not in the electoral college but in the failure of elected leaders to implement policies that a majority of Americans support, as I suggested earlier today. Rather than perseverate on the cruel injustice of the electoral college, I’d like to take a different tack. What policies do a majority of Americans support? Let’s consider a number of hot button issues.

Immigration


Nearly three-quarters of Americans believe that immigration should be decreased or stay the same compared to just over half who think it should be increased or stay the same. Decrease has the most support. I believe that the extremely high rate of illegal immigration sours Americans on immigration more generally.

A narrow majority of Americans believe that some method of regularizing the status of illegal immigrants brought here as children should be implemented.

Health Care


A majority of Americans believe that health care insurance is the government’s responsibility. That is a recent change. A bare majority supports the Affordable Care Act. A majority of Americans are worried about paying ordinary health care expenses and a supermajority are worried about paying the bills for a serious illness or accident. A majority think that health care is not affordable.

A majority of Americans want a system based on private insurance.

I have no idea how to resolve the contradictions in those positions.

Abortion


A majority of Americans think that abortion should only be legal under certain circumstances—essentially the status quo. That’s a far higher number than either those who think that abortion should be legal under all circumstances or illegal under all circumstances.

The majority position is the status quo.

Afghanistan

I found it hard to find good polling on this subject but the impression I am left with by what I have found is that a majority of Americans think we should withdraw our troops from Afghanistan.

Syria


Just about half of Americans supported our military actions in Syria.

LGBT Rights


A narrow majority of Americans think we need new laws to ensure the rights of LGBT Americans.

Race Relations


Majorities of Americans think that blacks and whites have equal opportunities for jobs and housing.

Taxes


A majority of Americans think that “the rich” pay too little in taxes.

As should be obvious from the discrepancy in so many areas between what Americans think and what American political leadership is doing, is it any wonder we have a crisis of political legitimacy in the United States?

Are there any other issues I should address here?

As one final note, if you are strongly committed to democracy, why should we not try direct democracy? If you do not think we should try direct democracy, how do you reconcile that with your support for democracy?

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Business Models Come and Go

There’s something I have been predicting for some time: that not just the lifecycles of companies from birth to death but the lifecycles of whole industries and business models was accelerating. Blockbuster Video was founded in 1985. By 2013 it was gone. Its business model had collapsed.

Netflix.com was founded in 1997. Keep that in mind as you read these articles at the Washington Post:

Netflix Inc. and the soon-to-come HBO Max app need a little of what each other has. In the meantime, consumers may be the ones who lose out.

If you’re like me, you’ve started to realize that despite a vast number of video-streaming apps, none on its own offers the ideal mix of content best suited to your tastes. And if you’re like me, paying for more than a couple of these subscriptions would feel excessive and expensive. But the media giants behind these products sure aren’t making it an easy choice.

AT&T Inc.’s freshly acquired WarnerMedia division announced on Tuesday that HBO Max, its Netflix copycat, will launch next spring and exclusively feature the hit show “Friends,” which it’s yanking from Netflix. The sitcom hasn’t had new episodes in 15 years, but it’s a large part of Netflix’s lifeblood. Subscribers spend more time watching “Friends” than any other program on the service except “The Office,” according to Nielsen data for 2018. (Comcast Corp.’s NBCUniversal is taking “The Office” off Netflix, too, in 2021.)

As services like HBO Max and Walt Disney Co.’s Disney+ hit the market, it’s crucial for Netflix to try to maintain its standing as the necessary “base” streaming package – the minimum that most people need. Without “Friends,” “The Office” and other popular licensed content, Netflix risks becoming an add-on service instead – nice to have but not a requirement. Sure, it’s building a strong franchise in “Stranger Things,” but of Netflix’s top 20 programs last year by time watched, only six were Netflix originals, the Nielsen data show.

and New York Magazine:

Netflix’s main strategy to stay necessary is though its offerings of original content, which can’t be yanked away by a rival studio. But that’s a really expensive business, and Netflix will have to show, in a way it has not to date, how much of its original content is generating a return on investment by driving subscriptions and viewership.

Netflix’s traditional movie studio rivals have been complaining for years that Netflix (and Amazon) have been driving a “bubble” in content production, paying insane prices and inflating the cost for everyone to make movies and television shows. A key question for them is whether Netflix has been using its profitable old-content middleman business to cross-subsidize an unsustainable original-content business. By yanking away their old content, the studios don’t just have an opportunity to keep some of Netflix’s profits for themselves; they can also test their hypothesis that Netflix wouldn’t be such a bothersome competitor in the original-content business if it didn’t have other profits to rely on.

The middleman position that bootstrapped Netflix into existence is a tough business. IMO it’s possible for a company to succeed as a middleman in the streaming business but only by remaining a tech company and having the best streaming service, the best search engine, etc. and remaining very lean.

Netflix has clearly decided that’s not for it. It’s gotten into the content business which is an even tougher business. How do I know it’s tougher? Take Disney (please). Disney has been in the content business for 90 years. How creative are live action versions (or “live action versions”) of fully animated cartoons? Disney’s last real blockbuster was Frozen in 2013 and it’s had several big flops since then. So, Netflix, if Disney, the heavyweight champion of content, is having problems coming up with new ideas, what makes you think you can do it successfully?

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Never Tell Me the Odds!

As of today President Trump’s job approval rating based on the RCP Average of Polls (sampled above) is 45%. The spread (the difference between approval and disapproval ratings) is 6.6 points, the most favorable since the earliest days of his presidency. The polls included in this RCPPA includes polls taken after the tweets heard ’round the world and incessant charges of racism. Those polls include Rasmussen (50%), Reuters/Ipsos (44%), and Economist/YouGov (46%). An approval rating on election day of 51% is generall considered a lock on re-election.

I don’t know what this improvement in Trump’s approval rating portends for his re-election but I think it’s fair to speculate that he is now immune to charges of racism.

I also think that the mystery of Trump is that a significant number of people vote for him despite their personal disapproval of him. I speculate that there are people who actually support Trump who lie about it to pollsters.

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Something in the Water

I got as far as this passage in Megan McArdle’s smirking behind her fan Washington Post column, noting the political problems in both the U. S. and U. K.:

There has been a lot of talk lately about the erosion of the long-standing U.S.-British “special relationship.” Yet in one respect the countries are more tightly linked than ever before: Both are enduring a collective nervous breakdown of their political institutions.

It is not just the United States and the United Kingdom. France, Germany, Italy, Greece, Sweden, and who knows how many other countries are also having “collective nervous breakdowns” all at the same time. It makes you wonder if there’s something in the water.

Maybe it’s something inherent in social media. Maybe it’s Russian interference. Maybe it’s the spirit of the times. Maybe mass migration inevitably results in political unrest. But there’s clearly something happening here and what it is ain’t exactly clear.

I think that greed is one of the factors. Greed is a natural human emotion. It cannot be stamped out only controlled. You can have a rapacious elite and a rapacious civil bureaucracy (there is some overlap there) and, in the presence of robust economic growth and prosperity all may still be well.

Here in the United States for the last dozen years or more economic growth and prosperity have been greatly concentrated in just a handful of cities: Los Angeles, San Francisco, Seattle, Denver, Boulder, Houston, you know the list. It isn’t as pat as “coastal”, “big cities”, or “red” vs. “blue”. Denver and Boulder aren’t coastal or megacities. Chicago is a big city and its economy has languished. I don’t know enough about France or Germany to know whether there have been similarly uneven patterns there.

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The Reaction to Friedman

Well, apparently Tom Friedman got quite a lot of response to the column I posted about the other day and the New York Times has published a selection of the comments. If this comment:

Why is it the left’s job to keep in step with the status quo in order to unite the party?

is at all typical it highlights that they just don’t get it. “The left” is, perhaps, an eighth of voters. Far, far more are center-left, moderates, or conservatives. In particular blacks, necessary for Democrats to win elections, are far more conservative than a lot of people seem to believe. Whatever Republicans may think “Democrat” is not synonymous with “the left”.

For “the left” to get even a little of what it wants, they must persuade people not bludgeon (literally) them. I do not believe that in the age of smartphones and the Internet any Democratic presidential candidate, having raised their hand in favor of open borders, will be able to dash back to a more centrist position.

The question that Democrats should be asking is if Barack Obama had staked out the positions in 2008 that he eventually had taken by the end of his presidency, would he have been elected for a first term? I think the answer is “no”.

Historically, the candidate who expresses the most optimistic view of America, its people, and its future has won in the general election and that includes Trump. Maybe it will be different this time but, as Cicero said more than two millennia ago, to be ignorant of what happened before you were born is to remain forever a child. It’s even worse to think that this time will be different just because you’re around.

Running against two-thirds (or more) of the voters will not be a winning strategy for anybody.

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