Social Capital, Debt, and Stages of Growth

I finally read this Pettis piece from last month. This point struck my interest:

Developed countries are rich because they have higher levels of social capital than backward countries, and not, as is sometimes believed, because they have abundant capital stock. On the contrary, rather than the cause of wealth, abundant capital stock should be, but isn’t always (China may be an example), a consequence of abundant social capital. The resulting higher level of worker productivity makes it easier to justify additional infrastructure that saves the time and labor of productive workers. A high level of capital stock is a “symptom” of wealth, not a cause.

It got me thinking about the types of things I like to think about, in this case neighborhood/community/economic revitalization.

A caricature of neighborhood gentrification would be, “Gays and hipsters move in, start fixing up the neighborhood, cool bars/coffee shops follow, and then entrepreneurs and wealth/yuppies enter the scene.”

If I had to formalize/abstract this a bit, I’d say that first the cost of real estate has to fall to a level such that there’s a market opportunity in buying access to physical infrastructure (however dilapidated it might be) for less than its market value. This allows “social capital formers” who may lack financial capital to come in and build community/social capital.

As the level of social capital rises it attracts financial capital and status seekers. I’d define a status seeker as roughly someone who’s risk averse in nature but often hard-working and looking for social/financial capital trends to follow.

As a neighborhood becomes more and more rich in social capital the demand for physical infrastructure improvements rises, as does financial capital and economic activity. Now the neighborhood is booming. The boom goes on for awhile.

In the latter stages of the trend social capital begins to decline (through some combination of the aging/death of the high social capital population, and/or high social capital young people being unable to afford the neighborhood), and often debt levels rise as status seekers/entrepreneurs stretch to enter the neighborhood/community.

A decline in social capital coinciding with a rise in debt levels then becomes the most dangerous possible state for a community — an economic shock makes the debt unserviceable, unemployment and vacancies increase, the price shock creates vacancies for less desirable community members to enter, which creates further downward shocks to social capital, and so on. And the natural state of physical infrastructure, as with everything, moves in one direction — decline/decay.

But the bottom line is social capital is everything.

Housing, Race, and the Politics of Scarcity

The little Elizabeth Warren bubblet this week reminded me of when I first heard of her, when I was watching the indie documentary “Maxed Out" in the dingy Opera Plaza Cinema in San Francisco back in 2007. Never did I imagine that 7 years later she’d become the heart and soul of the party most likely to win the presidency in 2016.

Inequality and hence Warrenism has become all the rage, and while after 3-4 decades I believe inequality has begun to reverse over the past 1-2 years, its political impact will be felt for many years to come.

That being said, there are growing economic and social pressures for a new political movement that being at the vanguard of the Millennial generation makes one acutely aware of.

Those pressures involve housing, which always involves race, and leads into a broader discussion about scarcities for the things that Millennial families need and some amount of political action is necessary to provide.

As the employment market continues to tighten, wage growth accelerates, as does household formation, brought about by the largest vintages of Millennials (currently age 21-23). This will put more and more pressure on the housing and rental markets.

The housing market is ill-equipped to provide the things that Millennials want. In global megacities it’s too expensive, there’s not nearly enough single-family housing, existing residents are uncomfortable with more construction, and in many cases the school systems are poor. In maturing Sunbelt metropolises the cheap/available single-family housing has a combination of awful commutes and/or exists in “socioeconomically undesirable neighborhoods,” and large scale transportation infrastructure improvements in a best case are a decade or more away. In Rust Belt and/or somewhat-forgotten mid-sized cities the housing stock is generally poor, and the job market is still transitioning from the manufacturing age into the global age. And in all cases construction workers are in short supply even at the present level of single-family construction.

I didn’t mention how race fits in. With job centers increasingly in urban cores, commutes become more and more important. Most urban cores are built out, so the only way to build new urban core housing tends to involve tearing something down. In many cases, this means low income housing mostly occupied by black and Hispanic families, and/or older neighborhoods that have been predominantly black for decades. After enough low income black and Hispanic families get displaced by young, wealthy, predominantly white families, it would be easy to see how this could become a bigger political issue in the future as non-whites become a growing part of the electorate. Additionally, as these wealthier families move into traditionally non-white neighborhoods, school quality becomes of more importance, and in many cases creating new charter schools to fit the needs of these families becomes easier than reforming existing schools, another friction point between new and existing residents.

Housing availability (build vs NIMBY), commutes (highways vs transit/bike lanes/walkability), schools (public reform vs charter), and neighborhood conflict (wealthy Millennials vs older blacks/Hispanics) — these are the issues that cities and metros are currently wrestling with, and will bubble up into national politics over the next decade.

Watch those Millennials born between 1991-93 (currently 21-23) — as they exited their college years we finally hit mainstream (some would say peak) walkable, mixed-use, apartment-led construction and development. As they approach age 30 their needs and wants will put more and more pressure on the political system.

Why the 21st Century May Be More of An “American Century” Than the Mid-20th Was

Some random thoughts on a summer Friday…

What’s the rationale behind all of this talk of American declinism? Let’s look at some of the key drivers of the 21st century:

Communications Technology: American-based companies dominate the internet, especially the mobile internet. Smartphones run on Google or Apple technology. Facebook, Twitter, and LinkedIn dominate social and professional networking. Whatsapp and Waze are now owned by American companies. Amazon may end up being the retailer of the globe.

Transportation and Energy: Solar’s gaining a lot of momentum. Elon Musk is almost single-handedly dragging the US into a post-hydrocarbon world. And if that turns out to be a pipe dream, we’ve got plenty of oil and natural gas in the Dakotas and Texas. Still plenty of coal too, as out of favor as that’s become. If ride-sharing really is a thing, we’ve got Uber and Lyft. Gen-X leaders are currently making our cities more walkable for rising Millennials who favor such things.

Diversity and Immigration: The US remains the country that the world wants to move to. The US’s megacities are as diverse and tolerant as they come, and the urban south is becoming a new immigrant hub with megacities becoming too pricey. Atlanta looks to become the South’s answer to Los Angeles. Legal same sex marriage in all 50 states may be less than 5-10 years away if SCOTUS rules that way.

Education: Lots of issues here at all levels, but increasingly cities are giving charter schools and other reform approaches more consideration. Elites from the developing world want to send their kids to get educated here in larger numbers. Whether they stay or not, they’ll form university-based diasporas throughout the world, creating benefits for Americans. If and when online education takes off, hard to think Silicon Valley and/or American universities won’t play a prominent role.

A Dynamic Economy: For all the talk about tax rates and regulations in the US, when it comes to corporate culture the US is blessed with dynamic and transparent shareholder-friendly companies. It’s a phenomenal place in which to be an investor. And with demographic trends turning, should be a better and better place to be a worker. Whether we’re going through a credit boom or credit bust, labor abundance or labor shortage, energy boom or technology boom, the US economy always manages to figure it out.

Demographics: Between birthrates and immigration, where else in the developed world is it better? And the US continues to be blessed with abundant land on which to build relative to its economic peers.

Institutional Strength: We’re going through a rough patch, but relative to Europe, China, and Russia, it’s hard to argue the US isn’t #1 by a mile. Japan is kind of a special case, but it seems willing to accept its demographic demise in order to maintain ethnic homogeneity and harmony.

Military Strength: The US remains blessed to have two enormous oceans to its east and west, a peaceful neighbor to the north and increasingly a cultural and economic sibling to its south. Technology should continue to gain preeminence relative to soldier labor, and if drone and cyber-warfare are the future who else would you want to bet on?

The period from the mid 1940’s to mid 1960’s are thought to be the golden age for American hegemony, but a careful read of that time showed just how much the country struggled with it. “The olds” at the time, and much of the heartland, wanted no part of wearing the crown, preferring its “mind our own business” attitude that prevailed until World War I. The US made a series of foreign policy and political gaffes as it adjusted to its new role.

Much of the “American declinist” talk is about the end of the American empire, but the American empire is at most 70 years old. That’d make it one of the shortest reigns in history. Surely one day the American empire will end, but would a duration of 200, 300, or 400 years be out of line with the Roman or British empires, to which the American empire is compared?

While I expect the world as a whole to be more prosperous in my golden years than it currently is, I wouldn’t be surprised at all if US power is even greater in the 2030’s and 2040’s than it was in my parents’ childhood.

The Labor Crunch is the New Credit Crunch


Something strange is afoot in long-distance trucking that is also bedeviling other industries: Many jobs that pay well—and don’t require expensive degrees—are going unfilled for months.”

And this

Unfortunately, we have fewer drivers right now due to a much higher attrition rate than expected. Because of this shortage of drivers, we have had more cancellations than we have experienced for some time.”

The snarky response is “Why don’t they just pay more?”

But not everyone can. Yes, in the aggregate corporate America is flush with cash and reporting high profit margins, but there are always a whole host of businesses where that isn’t the case, businesses that are just barely scraping by.

In the same way, in 2005-07 there were plenty of businesses that only existed because credit was cheap and readily available. Once that was no longer the case they collapsed.

A 10-15 year labor crunch unfolding as we speak, lasting from probably 2015-2025 or 2030, is on the horizon. And just as the credit crunch destroyed many businesses, the labor crunch will do so as well.

Immigration Reform Will Happen in the 115th Congress (2017-18)

Why then? It’s a function of the unemployment rate and perhaps the Presidential cycle.

Immigration and Nationality Act of 1965 — signed into law by President Johnson in October, 1965, when the unemployment rate was 4.2%

Immigration Act of 1990 — introduced into the Senate by Ted Kennedy in February, 1989 when the unemployment rate was in the low 5%’s. Passed the Senate in July (U3 5.2%). Finally passed the House and signed into law by President Bush the following year.

With each tick down in the unemployment rate the urgency to reform immigration increases, and the more resistance melts away. At 6.1% from a timing perspective we’re probably another 12-18 months away from conditions lining up economically to get the public behind it. Of course, 12-18 months from now will be mid-late 2015 when the Presidential race is heating up, so politically it won’t work then.

After the 2016 election, should Republicans win their business interests will race to pass it so that they can shape the bill and take credit for it. Should Democrats win you’ll hear even more about how immigration cost them the election, and Republican leadership will pass it in the House with Democrat votes if need be to be done with the issue.

Of course, a huge employment recession between now and 2017 could derail that, but that’s not the economic scenario I expect to unfold.

Georgia [White] Demographics in Two Charts: 2010-2013

Change in Georgia’s white 50+ year old population (Boomers/Silent) since 2010 by county:

Change in Georgia’s white 25-34 and 0-4 year old population (older Millennials and their newborns) since 2010 by county:


The Eisenhower Era and the VIX at 12

During Eisenhower’s presidency, 1953-1960, the S&P 500 had a realized volatility of 11%. Since 2000, it’s been about double that.

Those years are sometimes called the Eisenhower era, and his presidency spanned much of the decade. When used by critics, the label is pejorative, implying a complacent, self-satisfied time (“looking down the long green fairways of indifference,” Frank Clement, the governor of Tennessee, sneered when he keynoted the Democratic convention in 1956 — a reference to the fact that the President played golf primarily, it seemed, in the company of America’s wealthiest corporate figures). The truth was the country was changing at a remarkable rate, and a generation would soon come to power whose confidence and ambition had been intensified by both World War Two and the dynamism of the postwar economy. Still, it was Dwight Eisenhower and the men of his generation who were actually running the country, and the America they governed was the one they remembered from their childhoods, during the turn of the century. Thus, while the country was exploding in terms of science, technology, and business, and had assumed a new international role as the most powerful nation of earth, the minds of the governing class were rooted in a simpler day. Many of the tensions of the era stemmed from this contradiction.

-David Halberstam, “The Fifties”

As we enter the summer months with the VIX at 11-12, inflation at 2%, housing construction slowly grinding its way higher off the bottoms of the recession, and Congress slumbering, I’d argue we’ll look back on these past few years, and perhaps the next few, as a bizarro 1950’s.

The Risks of Too Much Risk Management

Good WSJ piece today:

Wells Fargo now has 2,300 employees in its core risk-management department, up from 1,700 two years ago, and the department’s annual budget has doubled to $500 million in the same period. The company’s overall workforce has remained flat.

In February, Goldman Sachs Group Inc. put its chief risk officer on the company’s management committee for the first time in Goldman’s 145-year history. The 34-person group oversees the entire firm and is traditionally dominated by executives who made their name as traders or investment bankers.

Risks grow in markets and the economy after a multi-year trend that overshoots or becomes ill-suited for the emerging environment.

The two “bad environments” that people under the age of 50 are aware of are the excesses of the dot com boom/bust and the housing/credit boom/bust, so that’s what banks and companies are focused on preventing going forward.

The “A” story in the US economy over the next 5-10 years will be the transition of Millennials from underemployed renters to wage-growing homeowners. We’ll need a lot more home construction and the facilitation of a lot more mortgage/construction loans than we’ve seen in 5+ years. This story may develop more over the next three months, or it may take another 2-3 years, it’s hard to know.

Banks and regulation, unfortunately, are moving in the opposite direction. For quarter-to-quarter earnings managers, it’s understandable that you’d cut exposure to business lines that aren’t generating revenue with trading volumes and loan originations way down. But putting in more regulation and increasing the clout of risk managers, while making risk-taking excess less likely, will make increasing supply to match the increase in demand that’s inevitable more difficult.

Forward guidance from central bankers and a lack of volatility in the bond market has also decreased the cost of misjudging the market. Standing still doesn’t cost you anything if nothing’s moving, as your bond-trading friends on the beach will tell you.

Similarly, putting more and more emphasis on a 2% inflation target/ceiling, if you’re the Fed, doesn’t cost you anything when inflation’s consistently running beneath your policy objective, and we haven’t seen a sustained uptick in inflationary pressure in 30+ years. It’d be understandable that a 50 or 60-something year old policymaker would assume that we’ve licked inflation based on their experiences over their entire career.

Risks are growing that we’ve made the holistic “cost” of mortgage credit too high, that we’ve given regulators and risk managers too much power, and that the Fed will eventually hurt Millennial household formation in order to defend an arbitrary 2% inflation target. This is a story for the next 3-6 years, not the next 3-6 months, but it’s my main longer-term focus.

MacArthur in Korea, Gross and the New Neutral

Some excerpts related to septuagenarian generals…

"After World War Two was over, for some five years, [MacArthur] served as the viceroy of Japan. His needs and those of the Japanese dovetailed perfectly — the Japanese needed to worship the man who had conquered them, and he needed to be worshiped. He prided himself on his expertise in Asia, yet there is some question as to how great it really was. He had significantly underestimated the military reach of the Japanese just before World War Two. Unlike Joe Stilwell, he had no bright area experts who could report to him on the vast changes taking place in Asia. His speeches and conversation were filled with simplistic and racist references ‘to the Asiatic mind’ and ‘the mind of the Oriental,’ which blurred the vast ethnic, historical, and social differences of the many countries of Asia. His Victorian mind could not see the revolution against colonialism taking place in Asia, most particularly in China. The China he felt he knew so well no longer existed." -David Halberstam, "The Fifties"


"We sell insurance, basically, against price movements," Gross, chief investment officer of Pimco, said in an interview today in Chicago at Morningstar Inc.’s Investment Conference. “At Pimco, that’s what we’ve tried in the last four or five weeks.”

The wager on low volatility by the $2 trillion asset manager is “part and parcel” of its outlook for the next three to five years, an era it calls the “new neutral,” Gross said. The outlook is characterized by low interest rates and lower, more stable global growth.

Policy and the Inadequacy of the Housing Stock in the 21st Century

This article is the beginning of the Millennial Crisis narrative shifting from underemployment and student loans to inadequate housing as Millennials shift from young singles into young nesters.

“Sometimes, I feel like our only options are to get higher-paying jobs or to move,” he said the next afternoon, over a stack of résumés in his office at his day job.

With the youngest Millennials still in late high school or early college, and many if not most Millennials underemployed with student loans in their 20’s, marriages and kids deferred, we’re just at the beginning of a 15-year wave of Millennials looking to move into permanent, family-raising housing and communities. And at the moment it doesn’t seem possible that there’s any way to supply all that will be demanded.

There are 3 legs to the stool — adequate housing stock, both in terms of quantity and quality (plus, in the case of homeownership, the means to finance it), adequate school choices, and proximity to jobs that can support families.

The available cheap housing/vacant land is in poor communities and/or far away from job centers. Schools are a mixed bag of expensive private schools, overcrowded schools in neighborhoods with expensive houses, and underperforming schools in poor communities. And increasingly good, family-sustaining jobs are in dense, urban centers, where housing tends to be expensive and sub-par schools. This is a crisis that markets can’t fix.

What about our parents, the Baby Boomers? Policymakers made decisions (that I’d like to understand better) in the 1940’s and 1950’s that led to mainstream mortgage finance, to the creation of a sprawling nationwide highway system, and to the construction of suburbia, much of which was built by [sometimes undocumented] immigrants.

Were there problems with all of the planks of this platform? Absolutely. But it housed and schooled the families of 80 million Baby Boomers reasonably well.

Where’s the policy that will do the same for 85 million Millennials? Because I don’t see it. And if you’re in your late 20’s or older, the clock is running very quickly.