Werewolves of London

I am back from my unintentional hiatus which included a jaunt across the pond to London town. Some thoughts and pictures follow:

• Definitely an amazing place worth many a return. So much to see. So much history. 
• An international city, which is not the same thing as a foreign city by any means.
• We left runway number nine in Houston about 6 pm and touched down about 10 am at Heathrow--a tremendous airport, very efficient, clean, accommodating, . . . oh, and it is privately owned for profit . . .  weird how that works. 
• The formula for eastern-bound international travel was in effect--sleep as much as you can on the plane and then hit the ground running. Don't stop to rest much less sleep or you'll never recover. We followed this advice taking the train to Paddington Station then the Tube to Waterloo Station finished with a short walk to the hotel to check in and then get out on our way. 
• The three of us, me plus April and 10-year-old daughter Eva, made our way across the Thames to Parliament, "Hey look kids, there's Big Ben", grabbed sandwiches "to take away" by Westminster Abbey, ate in St. James Park watching the locals, strolled up to Buckingham Palace to gaze at the nonsense that is royalty, went up The Mall to Trafalgar Square, down Whitehall to the horse guards, continued on to Churchill War Rooms, did a loop on the London Eye, then back to the hotel to freshen up before dinner. We fancied a dip in the pool and sauna for a bit before calling an evening of it. A smashing first day. 
• Day two was a train ride to Bath. The Abbey was an incredible history lesson especially aided by the conversation with the volunteer guide. The Abbey has been in use for over a 1,000 years. Of course, if you want really old, you just have to go next door to the Roman Baths which date from 836 BC. There were many more things to see in this quaint town including the Pulteney Bridge, fine restaurants like Hall & Woodhouse where we ate, and a grocery store where we bought contraband. 
• Day three was limited since that is when the CFA conference began for me. We had a slightly eventful breakfast at the hotel where the manager was "being advised that" I was to eat breakfast with the conference downstairs while my "wife and daughter are quite welcomed to enjoy breakfast here in the restaurant". This polite little charade went on for a bit until he kindly relented, made sure I knew he was fine with the decision, curtsied, and left us to be. We had just enough time to take in Harrods. This place has everything including now my facial hair--I treated myself to a royal shave in the men's department. The rest of the day was conference for me, Hyde Park and Notting Hill for the girls. 
• Day four was solid conference for me. The girls took in Windsor Castle and environs. My evening did come with a gala event at the British Museum of Natural History. Dining under the diplodocus was interesting, but the tour getting there on the double-decker bus was just as good. 
• Day five was Saturday. The conference ended at noon. The three of us then made our way east along the Thames to Borough Market and past the Globe Theater and then Tower Bridge, which is not London Bridge. The new London Bridge is fairly nondescript and a few blocks away. Of course, the original London Bridge is in Arizona. I am one of what must be a small number of people who have been on both bridges within a three-month span. I can report confidently that neither is falling down. We walked around the Tower of London (lines were too long to get in), but we did get to see the impressive memorial (pictured below) that is on display using ceramic poppies to represent every British or Commonwealth soldier who died in WWI. We began a slow return through the financial district with an intermediate stop at Ye Olde Cheshire Cheese, which has been going strong since it was rebuilt in 1667. Since that pub didn't have WIFI, we headed toward some other options with hopes to watch the OU-Tulsa game, which would start at 5 pm local time. Luckily, we walked right in to find it on the main screen in the third pub we came to. There I sat and watched it with the British doppelganger of Marshall from HIMYM. 
• Day six was a car ride to, have I told you how awesome Heathrow is?, where I was treated to a very well prepared and free Bombay and tonic. Gotta love to shop at the duty free shop. 

Other thoughts:

• I heard more cussing by strangers on the street than any trip I could remember. We walked in front of a particularly saucy group of teens in Bath (in school uniforms and all) who must have just discovered the F word. 
• The eighties are back in Britain--at least the clothes are. Lots of stockings and hose, denim, guys who look like they are about to be saved by the bell, and sheer. Everything is sheer. 
• They don't understand coffee. 
• They are somewhere confusingly between automatic gratuity added and tipping voluntary. The level of service didn't seem to correlate (it wasn't noticeably better in tipping-voluntary situations) nor did it rise to a level bloody-well deserving the automatic gratuity in those situations.
• They are a very orderly, rule-based culture and they expect you to follow the rules. For example, I noticed a distinct lack of car honking despite the congested, confusing roadways.
• We had several English to English translation problems. In their defense many of those came from what are probably not first-language English speakers. Nevertheless, it was amusing to see how many people couldn't understand me despite us speaking the same language. American idioms like answering a waiter's question "Can I be of any further service" with "I'm good" resulted in a blank stare. At breakfast we never quite got the egg orders right despite numerous morning attempts. Related to the rule-based item above, trying to get made-to-order scrambled eggs was quickly and kindly met with a corrective reply that scrambled eggs were available on the buffet line. Problem was we didn't want those watery eggs. I restrained myself from having a full-blown "Five Easy Pieces" moment by politely asking for an omelet with nothing on it. Just an egg.
• We flew home on a 787 Dreamliner. The window tinting technology is awesome. No window shades. Just an adjusting dial with an up and down button. There are six settings ranging from full transparency to nearly full opacity (it made broad daylight look like a moonlit night). I want this in my home. I want this in my office. No more dusting blinds or drapes.
• We didn't get to visit an ancient race of people called the druids, which is to say we left a lot undone for another time.

Point of No Return

As Burton Malkiel points out in this article, popular sentiment is growing that the stock market is reaching or has passed fair value. As he also points out, beware your attempts to "time" the market--selling out to buy back in after the "inevitable" dip.

The stock market will go up and down and up and up and down and up and down and down and up and . . . Of course, history shows that those downs don't fully counter the ups. The composition of ups and downs in both frequency and magnitude matter. Historically it has been the case that the rides up are slower and longer while the trips down are sharper and shorter. I've discussed this before. While that pattern isn't always followed, the strong historical trend has been an upward bias in returns--the long-term trend in the stock market is positive.

Add to that the fact that the market is very efficient, and you are left with virtually no reason to try to time the market. Yet, many are not convinced. They still feel compelled to sell out with the belief (hope) the market will decline allowing them to buy back in cheaper. My advice then comes in the form of a question: What if you're wrong? What is your contingency plan for that?

It better be to find a point to throw in the towel and get back into the market. Of course, you'd like to know how to recognize you were in fact wrong. After all, just because the market has risen from where you exited doesn't mean it won't come down still.

Here is perhaps a little guideline. Looking at the monthly total returns for the S&P 500 since January 1970 through June 2014 (44.5 years or 534 months), I isolated all of the drawdowns for the index. I then ranked them and calculated the implied percentage gain for each. This last figure would be the amount the index would need to increase in order to overcome the drawdown. For example, if the market declines 25%, it would then need to increase 33% to get back to even. A 50% decline requires a 100% increase from that new low point. Here are all 36 drawdowns for the period charted:

Your reentry point might be once the market has gained some threshold amount above the point in which you sold out. Because the general trend is for the market to grow, you would want to buy back in once that threshold of growth has been achieved no matter how difficult it feels to do so. And it will feel difficult--you sold out at a lower point for a reason. Your complaint might be that just when you thought you were out, the market pulls you back in.

To give you some comfort, though, notice how rare very large drawdowns are. Couple that with the fact that over this time period (January 1970 to June 2014) the S&P 500 increased over 8,300%. Like I said, are you sure you want to time the stock market? If you do, consider that once the S&P 500 has increased about 20% from your exit point only five times in the past 44 years has it dropped so much that it would return to your exit point. And that drop needs to happen ASAP. The index's average growth over this period was about 10.4% per year or about .83% per month. You risk being left behind for good.

When it comes to beating the market, market timing as a strategy isn't even on the map. The implication is discipline beats (mythical) exceptional skill--most value added by professional financial advisers (perhaps as much as 90%) comes from simply finding appropriate asset allocations, fulfilling it with appropriate (not sensational) investments (styles and classes are more important than particular names and issues), and KEEPING with it in good times and bad.

A World of Plenty

I have a client who is a former home builder. He has lots of interesting stories of home buyers with punch list requests. When it came to concrete, he always told them two "essential truths": (1) Nobody's gonna steal it and (2) It's gonna crack. It may be obvious, but the first part is pretty interesting. Why is this the case? It is not because of our harsh, one-strike-and-you're-out policy on concrete theft. Rather it simply doesn't pay to steal it. And it is not just concrete that carries this property. Do this experiment: place a new HDTV in your front flower garden and leave it over night. Do this for long enough, and you will wake up to find (nothing but) flowers. The thieves were there. They just weren't and generally wouldn't be in the market for flowers.

Megan McArdle recently wrote on this subject of crimes not meeting the cost-benefit test, but I think she left it undone. Let me think through the implications a little further.

Compare the cost of a hammer today to a hammer 100 years ago. Basic hammer quality and technology has really not changed in this time span (well, some hammer technology has changed, but a basic hammer is the same to the consumer today as back then--I said basic, not this one). The only impact of technology and progress has been in the production of hammers--they are A LOT cheaper today.

The Stanley hammer from the 1914 issue of Popular Mechanics linked above was priced at $1.25. The Home Depot's hammer also linked above is priced at $5.75. Average hourly wages for manufacturing workers was about $.22 in 1914, which means a worker would have to toil for about 5 hours and 40 minutes to earn enough to pay for a hammer. Average hourly wages for manufacturing workers today are about $19.60, which means a worker today must work only about 22 minutes to earn enough after tax (assuming a high 20% average tax rate) to pay for basically the same hammer. Which all means the hammer is at least 93% cheaper today than 100 years ago. That is one way to see the cost difference. Here is another.

Imagine this: You purchased a hammer two months ago. It has sat in your toolbox for the last two months, or so you think. It actually was stolen a month ago. You discover this while reviewing your personal video surveillance system. You won't need it for another month at which time you plan on hanging some pictures. This theft is but a minor inconvenience to you. And you are actually pretty surprised anyone would steal a simple hammer. In fact, it sounds like some fanciful hypothetical designed to prove a point. Now imagine if it were 1914 and your hammer was just stolen. Ouch!

We may ask ourselves, "Well, how did we get here?" We're naturally blind to the progress, and we are probably equally blind to where it is heading. You'd be wrong to guess that this must be the place where the story ends.

Tomorrow's HDTV's are today's hammers. As goods keep piling up getting cheaper and cheaper and scarcity meaningfully dwindles, virtually all economic theft becomes undesirable from the standpoint of the thief. It is not worth the thief's time to go to the trouble of robbing you for something that basically has no black market. One day a thief's search for diamonds will be no more than grabbing at straws.

Not only will we live in a world basically without economic theft; we will live in a world safer in other ways. You'll no longer have to worry about someone stealing your TV, but you'll also not have to worry about walking in on someone stealing your TV where a burglary turns into a homicide.

That is the future world of plenty we are heading towards. Eventually there are no pirates on the ship no matter the cargo. 

Highly Linkable

These people and their miniature worlds are so tiny. I'm crushing their heads! Be sure to hit the video at the end.

Megan McArdle asks us to take a moment to marvel at the kitchen wonders some of us (humans) enjoy today.

The rest of this link post is brought to you by Don Boudreaux (directly or via hat tips).

On the 69th anniversary of inexcusable brutality, Boudreaux asks us to remember and remember how conservatives felt about it at the time.

I relate very, VERY much to Sheldon Richman's sentiments in this post.

George Will rightfully takes to task those who would paint inverting corporations as unpatriotic. I love the conclusion:

This illustrates the grandstanding frivolity of the political class. It legislates into existence incentives for what it considers perverse behavior, and then waxes indignant when businesses respond sensibly to the incentives.

Matt Zwolinski has five important moral (and economic) points about payday lending.

The free market is filled with something even better than tolerance--indifference.

Here Boudreaux offers not just a strong argument against cronyistic policies like the Ex-Im Bank but also a strong argument against the minimum wage. To wit: why is it consumers' job (or in the case of the minimum wage, employers of low-wage employees' job) to compensate the "victims" of foreign subsidies (low wages)?

Just how dangerous is it to be a cop? Daniel Bier answers. (SPOILER ALERT: not very).

Highly Linkable

Then there was only the ocean and the sky and the figure of Howard Roark . . .

A new day is dawning in sports. A tyrannical dragon has suffered the first strike of what I predict will be a lethal combination leading to its eventual slaying. The NCAA has lost the O'Bannon case. Michael McCann's take is, as always, a must read. He carefully lays out the limits of the ruling, but my optimism is not naive. The lawsuits have just begun, and the law from which they challenge is various--meaning more ways the NCAA can be harmed--while the judge will be the same--and she didn't mince words in rejecting the NCAA's logic and arguments. Notice that those calling for (market) reform are not satisfied yet. That is important as it means the NCAA hasn't found refuge in a new normal. Rather the hypocrisy and ignorance is being called out. And the silly arguments, which wouldn't mean salvation for the NCAA even if they were valid, are smothered before leaving the nest.

Kevin Erdmann makes an interesting comparison between school choice and financial regulatory choice with a spotlight on Dodd-Frank. The thrust is that a right to exit is essential to good institutional policies and incentives.

Speaking of exit, Arnold Kling points to others showing yet another way we could exit the FDA.

Scott Sumner wants you to know that the American middle class is fine and that is exactly what he means.

Do We Want To Live In A Third-Best World?

I listened to this NPR story on my way home from work today. The basic facts quickly:

• A disabled man uses marijuana for medicine. He says it works better than anything else for his symptoms. 
• The man lives and works in Colorado where the state law allows medical marijuana and where state law prohibits discharging an employee for lawful activities conducted off work premises.
• The man works for Dish Network, does not use pot while at work, and does not come to work high.
• Dish Network conducts periodic random drug tests that screen for marijuana, and the test it uses can detect marijuana's THC compound days or even weeks after actual use (the story is slightly murky on this, but I believe it is the case).
• Dish Network dismissed (fired) the man after his positive test result.

This got me thinking about the world according to a libertarian. Here is the breakdown:

• In a first-best world marijuana is fully legal. Employers can freely choose to employ or not employ people at their will including considering if they use marijuana on or off premises. Different firms have different policies and people (customers, employees, and everyone else) respond to those policies by respectfully agreeing or disagreeing, engaging or disengaging, and supporting or protesting. This way norms tend to work themselves out and adapt over time. The evolution is completely based on persuasion rather than force. Where disputes come up about rights (always a conflict of negative rights since positive rights do not exist in libertarian utopia), those are handled by a common law process. Again, it is evolutionary from the bottom up. Sadly, we do not live in this world. 
• In a second-best world marijuana is mostly or fully legal. Employers must adhere to rules governing their conduct as set by a combination of common law and local legislated law, but these rules that emerge from this process are few in number and necessarily local in scope and encumbrance. The relationship between employer and employee is adaptive since it is governed some by rules imposed externally but mostly agreements made between the two parties internally. You'll never have that kind of relationship in a world where you're afraid to take the first step because all you see is every negative thing 10 miles down the road. Hence, we do not live in this world either. 
• In a third-best world marijuana is mostly illegal. Employers are strictly governed by a multitude of rules set both locally and nationally with little of it coming out of a common law process. These rules are often in conflict with themselves as well as political tensions that dominate at different levels. The environment is ripe for lawsuits since so much is unclear and arguable. And those suits have little hope of bringing precedent-setting resolution or clarity for future disputes. Nothing is ever settled and almost nobody is ever happy with the results. The clarion call for a solution demands a top-down, one-size-fits-all approach that is as arrogant as it is unjustified. Sadly, we live in this world. 

While we work towards a better world that I do believe we can achieve (to wit: No matter what anybody tells you, words and ideas can change the world), we must settle for something less perfect. I hope Brandon Coats prevails in his case under state law. I hope the federal government takes a step back from the employer-employee relationship rather than offer its unhelpful solutions. 

We don't have to live in a third-best world, but it will take people learning to think for themselves. Your move, chief.

Remember... all I'm offering is the truth. Nothing more.

(Updated to correct small grammatical errors due to voice to text problems)

Yesterday's Marketplace Morning Report had a snippet examining different articles from an old 1948 issue of Fortune magazine (starts about the 3:45 point in the short clip). One part of the story stood out to me. It was about business and ethics and specifically about inequality using the example of teachers being underpaid. It is unsurprising but disappointing to me that this story line has been around as long as it has. It is disappointing from the standpoint of it being either economic ignorance or deceptiveness.

Allow me to point out the logical implication of the idea that teachers are underpaid (Fair warning: I do this to be provocative by stating it in a rather harsh but still true manner. This is designed to get a rise out of you but also to make you think critically.). Here goes:

Either they're too dumb or lazy to figure out how to get out of that job and into the one that pays them what they're worth or . . . they're worth what they're being paid.

I will let you seethe on that for a moment.

Okay, now let's be a little more charitable. Notice I won't go so far as to basically canonize everyone in the teaching profession. For those who truly could make a greater total compensation but instead sacrifice for the good of the cause, that is wonderful and to be commended. At the same time, if you are doing it as an act of charity, you have forfeited your right to complain about the pay. For the rest . . .

This could be another case of the old adage there ain't no money in that. But there is money in that; we just have to understand what type of money there is and what is truly determining that total compensation. If you make the proper adjustments for time off and other benefits including pension plans for public school teachers that may be too generous, you see that actual total compensation is fairly high. It still lags what many talented teachers could earn in other professions, but we have to respect their reasoning for making the choices they make.

So why is teacher compensation largely composed of non-pecuniary benefits like time off and job security? One easy answer would be that most of the teaching jobs are through government, which is subject to the whims of the political arena and haunted by bad incentives.

(I've updated the next paragraph to clarify my point)
Yet the larger economic reason (for teachers' pay structures including the low annual wage commonly kvetched about) is more subtle. Income is overwhelmingly determined by comparative advantage and the size of the market--not intelligence per se. Frankly speaking there are a lot of eligible candidates for teaching jobs despite the work of teachers unions to restrict the employee pool. And in the market for teaching children there are in most cases quickly diminishing returns to intelligence.

Don't believe me that income is a matter of comparative advantage and market size rather than intelligence? Imagine you are a member of a primitive society living on a small, isolated island. Would you rather have as your only differentiating skill to be the one guy who knows how to split an atom or the one guy who knows how to tie knots?