Fall 2018: The Makings of a Bull Market

It has been ten years since the stock market crash of 2008. Since then, the market has been on a tear. From hitting a low of 676.53 in March 2009, the S&P 500 Index has risen 331%, reaching 2,913.98 at the end of September 2018. While there have been occasional selloffs due to international events, unexpected election results, or fears of a trade war, the market has been resilient. All of this has investors asking, “Why has the market done so well?”

A lot has changed over the past decade. According to Bloomberg Businessweek, today the market is ruled by three giants, “Vanguard, State Street, and BlackRock, which manage 80 percent of the $2.8 trillion invested in U.S stock ETFs [exchange-traded funds].” A decade ago, the market was run by brokers who offered insight into the market and relayed their orders to trading floors. Today, computers have replaced many of the people on the trading floors, leaving them eerily quiet.

Summer 2018: Why did you do that?

Richard Thaler had a problem. As a graduate student at the University of Rochester, he began to have misgivings about the material being taught in his economics classes. At first, he was unsure whether the problem was with the material being taught, or his inability to fully comprehend it. He was, by his own admission, hardly a stellar student. However, after Thaler became a professor of Economics at the University of Rochester, his doubts grew and he wrote them down as a list. He called the list “Dumb stuff people do.” The list, as it turned out, would forever change economic theory and in turn, created an entirely new field called “behavioral economics.”

A Cash Windfall

The irony was not lost on many in the news media. As the president signed the Tax and Jobs Act of 2017, which amounted to providing one of the largest corporate tax cuts in recent history and a ballooning of the national debt, many were left wondering, what happened to the conservative economic principles that were used to admonish the previous administration? In a February 26th editorial, Barron’s viewed the passing of the Act as “standing history on its head.” Instead of reducing national debt as the economy recovers from a recession, this plan cuts taxes to encourage spending and increases government debt. In doing so, it encourages inflation instead of eschewing it, a departure from what the U.S. has done in the past.

The Overconfidence Effect?

The presidential election of 2016 will be remembered for many reasons. For those who watched the results on election night, the greatest of these was the sheer surprise that despite the universal consensus of experts, Hillary Clinton would not win the oval office. The outcome sent overnight markets crashing, as the Dow futures market plummeted 900 points, only to rebound the following day. If there is a lesson to be learned, it is the tale of the overconfidence effect: how people make predictions, and how experts often have the most difficult time accepting outcomes that differ from what they anticipated.

Fall 2017: Unintended Consequences

In 1968, a Southern-born engineer named Don Wetzel was waiting in line at a Dallas bank when he had an idea: to create a machine that could automatically dispense cash. Instead of waiting in line and being limited to a bank’s hours, the machine would allow people to withdraw money from their accounts 24 hours a day. His idea was revolutionary.

At the time, Wetzel was an executive at Docutel, a Dallas-based company that produced automated baggage handling equipment. Previously, he had been an engineer at IBM and probably knew of existing technology where a machine could automatically count and dispense money, as it was already used in vending and money-counting machines. The problem was how to create a way for a machine to identify people and determine how much money it could, or could not, disburse for a given transaction. The answer came in the form of a plastic card with ironed on magnetic tape that the machine could read. The magnetic strip was similar to those used in cassette tapes and contained useful information, such as a person’s identity and bank account numbers. After a year of development, Docutel sold the first automated teller machine, or ATM, to New York’s Chemical Bank in 1969.

Summer 2017: The Many Faces of Unemployment

June marked the 10th anniversary of the Great Recession of 2007-2009. Yet, as Barron’s magazine lamented, one would be hard pressed to find much attention given to commemorating this anniversary, or more importantly, how much stronger the U.S. economy is today. Housing prices have rebounded, consumer confidence is higher, corporate profits have grown, and the unemployment rate has fallen from its high of 10% in October 2008 to 4.3% in May 2017. The turnaround in the U.S. economy has contributed to investors’ confidence in the stock market. From June 30, 2009 to June 30, 2017, the S&P 500 Index grew 163%. With an improving economy, there has been some concern regarding the prospect of inflation, due to increased consumer spending driving up prices on many goods and services. However, the bond market has been lowering its inflation expectations, causing long-term interest rates to fall. We believe the reason that inflation may not be a problem in the short-term has a lot to do with the unemployment rate.

Spring 2017 The Environmentally-Minded Economist

My father once told me that when he was a child, the Schuylkill River was so polluted that it would blacken one’s feet, due to the years of coal and other runoff that had turned the river into a slurry. He mentioned that the air was so dirty that his grandmother would complain about blackened sheets on the clothesline and windowsills coated with soot. He grew up during Reading, PA’s heyday, when conventional economics did not look at the impact of pollution.

The Schuylkill River was not the only casualty of early industrialization. Before the Industrial Revolution, each year over 50,000 salmon would journey up the Connecticut River to as far as Vermont and New Hampshire to spawn. It was not until the early 1800’s that the salmon disappeared, as dams were constructed to power the numerous mills built during America’s early industrial revolution. Since the dams blocked access to their spawning grounds, the salmon stopped being able to reproduce.

Winter 2017: Made in China

It is easy to understand why most Americans do not view trade with China favorably. For over thirty years, it has been a lopsided affair. Since 1986, the U.S. trade deficit with China has grown an astounding 22,056%. As the trade deficit has grown, many Americans are questioning the value of “free trade.” For investors, the outcome is critical. Will the U.S. become protectionist? Will the Chinese economy collapse as a result of decades of government manipulation? Or, will free-market influences prevail?

Winter 2016: It’s a match – who gets what and why

The King of Prussia Mall, situated in southeastern Pennsylvania, is the second largest mall in the United States. With over 400 stores, it offers something for just about everyone. Although the mall has outgrown its humble origins, opening in 1963 with open-air shopping and Gimbels as an anchor store, its evolution is a prime example of economics’ simple yet seldom-known principle of “matching.” The theory of matching attempts to explain how certain relationships are formed. At the mall, it helps explain how buyers and sellers are matched, or in the case of Gimbels, which went out of business in 1987, mismatched.

Fall 2016: Hobson’s Imperial England

Imagine a country with no laws to regulate business. No environmental laws. No labor laws. No consumer protection laws and little-to no taxes on income and property. The only “law” was that a market would regulate itself (laissez-faire capitalism.) You do not need to imagine such a world, however. Simply read about Victorian England, or the United States during the early Industrial Revolution. During these times, both nations experienced robust economic growth with little regulation and government involvement.

It is in Victorian England that one of the most loathed economists lived—his name was John A. Hobson. (If you think “loathed” is too strong of a word, think again: the title of his autobiography is Confessions of an Economic Heretic.) Hobson looked out on Victorian England and saw the disparity of wealth that existed. He saw pollution, poor working conditions (especially for child laborers) and the vast amount of wealth that was being created by the industrialists. While many economists of his time lauded England’s “free market” capitalist economy, Hobson saw a major flaw.