Sunday, July 27, 2014

The problem with "average returns"...

I have long disputed the axiom touted by our financial industry that long-haul equity investment would outperform other assets. Like too much advice it was a facile glossing-over of the actual impossibility of mortal individuals to experience long term average gains.

It turns out timing - spelled L-U-C-K - is a big factor as well. Those average returns are not the same for any particular investor lifetime.
One other scenario year is interesting just for the dramatic disconnect it shows. It involves those fortunate enough at the outset to have a pile of cash to invest. The period from 1975 to 2005 was a stunning three decades for the American stock market, returning 13.7 percent per year. A person who socked away $300,000 in the S&P 500 at the start of 1975 and reinvested all dividends walked away with $14.2 million in 2005.But the pattern of returns was distinctly unfavorable for someone who was a slow and steady saver throughout that period. Some of the years of the sharpest gains came early in that window, like the 38 percent return in 1975 and 24 percent in 1976. And then the last few years were weak, encompassing three straight years of sharp declines to start the 2000s.As a result, our person who invested $10,000 each year walked away with $1.59 million come retirement — nothing terrible, certainly; it was almost impossible to hold stocks during that 30 years without making money. But hardly $14 million.A final note. You can’t control any of this. We all happen to be born when we are born, and the future returns of the stock market are unknowable. As an investor, it is generally best to focus on the things you can control, like how much you save and whether you are putting money in investment vehicles with low fees that are tax efficient.But the luck of when you are born may have a bigger impact on how much you have for retirement than you might like. [More]

Again, I agree that average returns are a good source for basing decisions. Expecting average results is not rational, however. 

Now apply this principle to farmland. How do you think the returns on land bought in say, the last 5 years will match up to acres purchased in 2005, for example?

Uh, guys...

Lost in the rural umbrage over Chipotle cartoons and "responsible raising" was any consideration that this concept might have endurance. I think the Meat Establishment consistently assumed a little pushback would not just be tremendously satisfying, but snap Joe Public back to his burger-loving senses.

That could still be proven correct, but the chances of a significant change in consumer consumption at the fast food level are growing right now - not diminishing.
The numbers were startling: Shares of Chipotle Mexican Grill shot up 12 percent on Tuesday after the company reported a nearly 26 percent spurt in its quarterly profit. For the fast-food industry, this was fresh evidence that the world of Big Macs and Doritos Locos Tacos has room for a menu with healthier-than-average food and higher-than-average prices.But it came as no surprise to a new generation of smaller fast-food chains that are coming up fast behind Chipotle and its peers, and taking its “food with integrity” mantra even further.A handful of rapidly growing regional chains around the country — including Tender Greens,LYFE Kitchen, SweetGreen and Native Foods — offer enticements like grass-fed beef, organic produce, sustainable seafood and menus that change with the season. Most promise local ingredients; some are exclusively vegetarian or even vegan. A few impose calorie ceilings, and others adopt service touches like busboys and china plates.And despite the higher costs and prices, all are thriving and planning national expansions, some directed by alumni of fine dining or of fast-food giants like McDonald’s.Their success marks a milestone: After decades of public hand-wringing about the empty calories and environmental impact of fast food, the farm-to-table notions that have revolutionized higher-end American restaurants have finally found a lucrative spot in the takeout line. The result already has a nickname: farm to counter.“This is not a passing fad,” said B. Hudson Riehle, the research director for the National Restaurant Association, who added that locally grown food and sustainability were the top two customer priorities reported this year in the group’s annual poll of American chefs. “It’s only going to get stronger.” [More]

The numbers are still absurdly lopsided, but with traditional fast-food (jeez - who'd have thunk that would be a legitimate label?) struggling to generate sales growth, I think there is a real risk that market for proteins - and consequentially, grains - may move slowly overseas. Fast food's future could be dependent on a rising lower class - not a thriving middle class.

It's tough to say how much of Chipotle's strong sales are a result of its campaign, but many analysts give the practices lots of the credit.
McDonald's doesn't expect full-year international comp sales to be too different from its June performance, and July global comps are expected to be negative.That's in spite of the late-April makeover for the iconic Ronald McDonald clown, who traded in his pear-shaped yellow onesie for a hip vest-and-cargo-pant combo. For special occasions, he wears what the firm calls a whimsical red blazer and bow tie. His floppy red shoes remain.Shares of the Oak Brook, Ill.-based company slid 1.4% in the stock market today.By contrast, Chipotle wolfed down profit in spite of higher menu prices, reporting late Monday a 17.3% jump in Q2 same-store sales. Earnings topped views as revenue growth accelerated for a third straight quarter.The company's antibiotic-free proteins and fresh ingredients have made the chain a fan favorite in the fast-casual world.Making over menu items — instead of mascots — may be the ticket to success with consumers. [More]
The numbers are all the more impressive given the healthy (heh) price increases Chipotle announced earlier this year.

Dietarily, I don't really have a stake in this battle. I eat increasingly less beef, but have been doing so for years. But I travel enough to use fast-food for refueling simply because it's, Come to think of it, that may be the large majority of the attraction.

Nonetheless, I think treating this sales trend with the respect the numbers deserve might not serve us better that echo-chamber outrage-fests. 

Saturday, July 26, 2014

Out of the closet...

No - not that closet. I have nurtured an abiding fear somebody will find my Kindle and note the astonishing amount of, low quality fiction I read. We're talking space operas, hard-core SF, and even some Tolkein-ish fantasy. We're talking a couple hundred books here. (Some only $1.99 and still overpriced)

It was a relief to find a masterfully written article that helps me justify this juvenile escapism.

Second, some of the most celebrated practitioners of modern fantasy share with their pre-modern predecessors this belief that the fictional apparatus of fantasy is a relatively close approximation to the way things really are for human beings. J. R. R. Tolkien may not have believed in Sauron, but he surely believed that there are in human history people who sell themselves to the Enemy and find themselves as a result of that decision first empowered and then destroyed. And when, at the beginning of Lewis’s Perelandra (1944), the protagonist Ransom’s progress toward a friend’s house is impeded by invisible forces who fill him with fear, Lewis was describing the work of spirits whom he truly believed to exist, though under a slightly different description, just as he probably believed thatsome forms of scientistic rationalism are the product of demonic influence. In short, these writers sought to present their readers with an image of an enchanted world, of selves fully porous to supernatural forces. But because they did so in genres (fantasy, science fiction) known for the imaginative portrayal of the wholly nonexistent, readers confident in their buffered condition can be delighted by those stories without ever for a moment considering the possibility that the forces portrayed therein might correspond to something real. Indeed, the delight of the stories for such readers consists primarily in their perceived unreality. [Much more]
The mental escape routes are handling some heavy traffic these days. Fantasy/SF is a hot genre - and not only with nerds. But some suspect this wave is only a bubble.
Therein lies the rub. There's a reason fantasy wasn't mainstream before. It's a genre that appeals to people who play D&D and get their kicks reading about elves with names like Tanis Half-Elven and Galadriel. Unless publishers can keep finding the next big crossover, fantasy may once again return to its less mainstream, and considerably less profitable, roots. People can only take in so many teenage vampire romances and wizarding schools. It's possible that the next Harry Potter is just around the corner, of course, but it seems like no matter how many "Is Such-and-Such the Next Harry Potter?" articles I read, the books never quite gain enough momentum to go mainstream. Books like Lev Grossman's The Magicians gain wide critical acclaim, but then run into the immovable object that is the hardcore fantasy fan base.As much as I'm enjoying the bubble, I won't care too much if it bursts. Fantasy has simply gotten better over the past decade, and most of the best titles will never be adapted into an HBO series or a movie anyways. The really good stuff these days also tends to be really edgy. R. Scott Bakker's Prince of Nothingseries is so dark I'm not sure it would make an R-rating if it were translated to the silver screen. Many other contemporary fantasies are similarly adult, with lots of sex and lots of violence. Steven Erikson's Malazan books are also dark, but more problematic from a filmmaking standpoint, as the popular series spans several distinct time periods, countless perspectives, and a sprawling epic storyline. The various storylines are not obviously connected with one another even after several books. Robert Jordan's Wheel of Time series suffers from the same kind of shortcomings. What works in epic fantasy doesn't necessarily translate onto the big screen.Plus fantasy costs too much money to produce. Dragons, spells, and fantastical worlds are expensive, even in the age of digital animation that has made this all possible. It's one thing to adapt A Game of Thrones, which is as much medieval adventure as it is high fantasy. Martin's work has little overt magic, and few magical creatures. Compare this to the work of Jordan, Erikson, or Bakker and you begin to see how studios such as HBO might be leery of the investment. [More]
It could be the increasing intrusion of technology is affecting our feelings about religion and our dreams alike. The intensifying monotony of our choices for entertainment certainly encourages borrowing someone else's imagination, perhaps. 

But as I continue to note lately, I care less about whether others think my preferences are silly or misguided. At this point, life really is too short. Besides, when I did care I couldn't change their opinions, anyway.

Thursday, July 24, 2014

Bankers unclear on the concept...

Out in Kansas, home of the famous "Fighting 'Flation Hawks", bankers recently gathered to complain how the Federal Reserve was ruining their lives.
"Interest rates have been low longer than needed," said Jim Farrell, president of Farmers National Company and chair of the Omaha branch board of directors of the Kansas City Fed. "The low rate doesn't seem to be stimulating anything now.""Beware of unintended consequences," Farrell added. Discounted interest rates get factored into farmland values, which influence cash rents and that drives up the cost of production, Farrell noted.Another consequence: "Some have called it a 'retirement tax,' because retirees are paying the price, [by not being compensated for their savings]," said Farrell.In fact, George pointed out, "We've seen signs of 'reaching-for-yield' behavior in the leveraged loan market, subprime auto lending and corporate bonds."The lack of alternative investments has been a factor in keeping farmland values high, noted Doug Stark, president of Farm Credit Services of America, based in Omaha."Lower interest rates have also pushed some savers, who traditionally relied on safer assets, into riskier securities," said George. And there is growing concern these savers, especially those retired or nearing retirement, may not understand those risks, George noted. [More]

It's unsettling to me to hear remarks like these from people in charge of our financial system. My understanding of the system seems to be strongly at odds with their POV.

For example, there are easy ways to tell when interest rates need to rise: inflation comes to mind. When people want to buy stuff and services more than they do save money, prices will begin to rise. This demand-pull doesn't seem to be what we've seen for years.  In fact, inflation remains historically low.
The Labor Department’s latest consumer price index report suggests concerns about inflation pressures may again be premature. U.S. consumer inflation firmed last month but largely decelerated outside a jump in gasoline prices, and food costs in particular slowed after surging in recent months.Indeed, the Fed’s preferred measure of inflation—the Commerce Department’s personal consumption expenditures index–has been undershooting the central bank’s 2% target for two years. Any reading that finally approaches 2% – and even one that surpasses it slightly – is likely to be welcomed rather than feared by Fed Chairwoman Janet Yellen and many of her colleagues. [More]
Let's see what this looks like:

Another sign rates are too low would be bond yields. If US debt wasn't paying enough interest the price of bonds would drop to raise the effective yield. But signs of investor reluctance just aren't there.

And while the bankers complained that savers were being "forced" into riskier investments to get some yield, this is another indication we have plenty of money looking for work. Just like we now seem to have more than enough corn, the price has plummeted. For many, it is hard to think of money as a commodity, but the same supply/demand principles apply. 

Here's a curious indicator about the abundance of savings.
A report released Thursday by bank consulting firm Moebs Services Inc. calculated the average balance for U.S. checking accounts at $4,436 at the end of last year — more than double the average of $2,100 over the 25 years of the annual survey.During good economic times, when unemployment and inflation are low, the average balance in consumer checking accounts is about $1,400, the survey noted."When times get difficult, the consumer sits things out and checking balances get larger, normally upward to $3,000 or a bit beyond," the study said. "Generally there is higher unemployment, lower inflation and falling prices." [More]
The idea of more money than can be used by borrowers simply eludes many people. The belief that money has intrinsic value is deeply ingrained in our minds. Perhaps this is necessary, because if we ever did try to come to grips with the fact that it's jut a piece of paper or a number on a screen we'd panic. And buy gold.

But this, I believe, is the big reason why interest rates are low - there are oodles of money being saved, much less being spent. And as for needing money for investing in new business ideas, that's not happening either.

The surplus of savings has gone on long enough to trigger a sense of entitlement in savers - they deserve a decent return! It turns out if nobody wants to use your money, you don't. Money earns a return, it isn't a built-in guarantee.

Finally, these bankers seem to have forgotten they control their interest rates. The Fed can't prevent them from raining what they pay savers. Of course, they would have to charge more to borrowers in return, who would likely go to a) borrow less or b) find another cheaper lender. The Fed doesn't tell banks what to charge. 

Exacerbating the problem is how banks have voluntarily linked loan rates to the prime rate (which links to the Fed funds rate) so as to "automate" and shift blame for rate changes. This is a real help when going up, but less fun for them when rates are falling. Again, this was their choice, not the Fed.

This is simply low demand. While $3 corn may help that situation for some ag banks, right now more saving is going on than spending.  The worst (for them) news is this is unlikely to change very fast. Economic growth is largely being garnered by the saving class, not the spending (borrowing) class.

Banks have the same problem I have: too much product for current demand. Carping about the Fed won't help, and raising interest rates could actually make the problem worse.  Until loan demand and inflation show some life, they need to figure out some other way to make a buck.

Wednesday, July 23, 2014

I'm not dead...

"Anonymous" below asks if I've giving up blogging. Which reminded me:

So, the answer is, I don't think so. But I've gotta get my time balanced.

Here is what I can tell you right now.

  • There will be some changes coming at USFR which will help. (Other than Tyne having her baby)
  • I am posting links and comments on Twitter almost daily. Follow me there if you like.
  • I miss blogging but also found out I missed farming and woodworking.
The time off really helped, so now that corn is headed to $4.00 $3.50 $3.00, there may be some stuff to write about. 

I think I'm about ready to get going.  Thanks for asking.