Imagineering if Disney and Nintendo Merged

Overview

This gem by Greg Ip is by far our favorite book about economics. Ip has an awesome sense of humor that really speaks to a lot of people because it keeps you engaged. His style is fun, easy to read, and easy to understand. He uses a lot of great examples to make his point, which drastically improves retention. I can walk around and talk about economics, or hear it discussed in the news and know what is meant after reading this book. You really don’t need another economics book, although more good ones are indeed out there. If you read just one economics book, this is it.

Note: Students, read this book first, then read your assigned books – give yourself a head start, an advantage.

Let’s dive in

First and foremost, we noticed that Greg Ip puts a healthy check on the government. He definitely supports the government's role in economics though. “This is not a book for PhD Economists, but for the citizens – the investors on Main Street,” he opens. And he sticks to that. It describes how China was economically at the top of the world pre-Industrial Revolution, but squashed private enterprise. In turn, its people were poorer in 1952 than in 1820. He wisely points out that one overcomes the law of diminishing returns with ideas, and he calls for “better recipes, not more cooking.” In this way, China let itself down. 

He points out that GDP comes down to population and productivity. The business cycle suffers from viruses that make it sick, but we can inoculate ourselves and keep GDP growing. But the trouble is that viruses mutate, so responses need to keep adapting. He feels that post-war economic expansions, however, were all “murdered” by the Federal Reserve (the Fed), not natural causes. He specifically calls out Reg Q here. He also calls out how the Fed raised rates before inflation broke out and slashed them before growth crumbled. In this way the Fed tried to create “soft landings.” Something it still does today. Something I am personally in favor of. 

Ip describes recessions too, and how defining them is an art for some and a science for others. The NBER (National Bureau of Economic Research) for instance declares recessions after the fact, so “it’s about as useful as an autopsy report is for an EMT.” Funny guy. He notes that data-wise, business cycles (here) average 5 years. Short ones are about 2 years, long ones are about 11 years (1990-2001). And they typically end when an industry boom busts and brings the rest of the economy down with it.

The 4 Engines of GDP

He describes well 4 engines of GDP: consumer spending, business investment, government spending, and exports. He notes that two-thirds of GDP is consumer spending, which acts as a ballast and steadies the economy – except for housing which is volatile and 5% of GDP. It’s no surprise that after 9/11 President Bush reassured people to keep living and spending. 

For business investment, inventories are the biggest quarterly variable, but buying, leasing, or building buildings and equipment also drives GDP. He points out that for investors the biggest driver within business is the sales outlook from analysts. If sales are down or projected to be down, then business investment’s contribution to GDP slows. 

Government spending accounts for 20% of GDP per Ip. (A quick search shows it currently at 30%, but spending is up recently so his data passes a simple sanity check.) He cites things such as “tanks and teachers” as being major players in government spending’s upward push of GDP. Funny guy. 

Lastly, exports. Export data comes mainly from the BEA (Bureau of Economic Analysis), the US Census, the Bureau of Labor Statistics, and some Fed data. He points out that since 1982 the number of Americans that want to work grew 42%! To me that’s amazing, but also fits the “latch-key kids” narrative we grew up with (when kids would let themselves inside their house after school because no parent was home since both parents began working). He also notes that jobs since 1982 have grown 47%, and that the two statistics move together. 

He points out that “the income ladder has grown much taller but the distance between rungs has grown bigger too.” Data-wise the high earners correspond with education and skill levels, but the top 1% is not education-based. And that the top 1% represents 24% of all income, which is the highest rate since 1928. This is both good and bad in our opinion. It is the result of new age robber barons, who create jobs… and shows that we have been down this road before. But there are economic problems with stretching out incomes, economic problems with re-compressing it too quickly or forcefully, and economic problems with ignoring it. All in all, timely and appropriate action is key to creating soft landings, instead of hard landings.

Inflation and money supply

Ip goes into detail about inflation and money supply too. He points out that printing doesn’t equate to inflation, which most people think. To make the point he says that $1-trillion dollars printed and put under your mattress doesn’t create inflation. As unlikely as it is for 100% of printed money to be held and not circulated, he makes a good economic point. 

We’d add that this is part of the concern with China holding massive amounts of US dollars; the US government operates with the money in circulation, but what if massive amounts were quickly released? Ip continues and explains how “voters hate inflation” more than unemployment. He gives examples of how the former gets people voted out of office but the latter less so. Also of note, he points out that a bit of inflation is stabilizing, but too much is destabilizing.

Deflation is covered too, and Ip describes it as destructive. In the US, inflation wasn’t a problem during The Great Depression, but unemployment and deflation were.

Ip writes really well about imports and exports. He discusses comparative advantage and its role in international trade. He points out that since 1950 global trade has outpaced world GDP by 50%, or 6% versus 4%, and even US exports moved from 5% to 11% of GDP in that time. We are exporting more and it’s a larger percent of our GDP than it was in 1950. But we import more too now. 

It’s the relationship between importing and exporting nowadays that concerns people. When giving an example of comparative advantage, Ip points out how households import a nanny’s services from abroad (aka outside the household) so that they can go to work. So the import of the child-watching service enables more production because it is cheaper than doing it yourself (cheaper than not working).

Ip describes imports and exports as one of the few economic topics that is straightforward. Yet it remains controversial, nonetheless. He estimates that 25% of our jobs could be done offshores, and that this idea terrifies people. Astutely, he then points out the importance of our infrastructure and legal system. They are critical because they make it worth keeping jobs inside the US. You may be able to do a job overseas at a lower cost, but how risky and complicated is it at that point? Companies tend to overdo or underdo their overseas endeavors. 

For whatever reason it is tough for them to keep properly balanced, likely because the more abroad you go the more dynamic things get, which creates vulnerabilities in supply chains, management, diplomacy, and so on.

He points out how trade can reward the top and erode the middle class. For instance, Apple is rich, but the jobs needed to make their products are lost to the US middle class. So it ends up as a net plus, but if the middle class evaporates then that effect is worse than the gain because it alters our fiber and complicates our economics. Interestingly, no one company really feels at fault for the erosion of the middle class, similar to how no one contributor of the GFC (Great Financial Crisis) felt guilty and few were held accountable. 

Everyone was just playing their part in a very big thing. We see how an industry bubble can form, pop, and pull the entire economy down. Ip finishes this section by saying that voters don’t like imports en masse because the negatives are obvious and the positives aren’t. So you have obvious negatives competing with obscured, nuanced, or second-order positives. 

There are actually a lot of examples of how a gross net positive does not work for individuals because it is not a positive for them personally. A government (economy) is not a household, as the saying goes.

Currencies

Greg Ip describes current accounting deficits (aka financing deficits) well too. He explains that current accounting deficits means one must borrow or sell assets, but that action enables investment opportunities that exceed the value or usefulness of saving.

He describes how driving down one’s own currency value boosts exports, and that China used to have excess savings (from a governmental, macroeconomic point of view) but eventually boosted its exports by buying US Treasuries, which strengthened the US dollar by “retiring it” and therefore weaken Chinese currency relative to the US dollar. That buying also spent the “excess” Chinese savings, drove down the value of the Chinese currency (Yuan) and therefore improved exports (as the value of your currency means either imports or exports are more attractive). You have to decide which game you want to be in. China chooses exports and therefore devalues its currency, while the US chooses imports (remember comparative advantage) and therefore boosts its currency’s value. 

Why doesn’t everyone use comparative advantage? 

Because not every household, or government, is rich enough to spend on X (nanny) in order to earn more Y (income). What if there were very few high-income jobs? Would you have one? If not, you aren’t playing this “import” game. Interestingly, in countries with few high income jobs it is actually a social expectation that you hire nannies and “import” similar jobs because you are a job creator, and therefore a socio-economic enabler. 

Back to currencies though. 

Ip states that the USD (US dollar) is like a boring mutual fund for an ordinary household, and is therefore the world currency. And since countries like to take USD, we finance things easily. This is just one way in which money makes money and having the reserve currency of the world is critical to the US economy. And the US staying stable is, in turn, critical to the world economy. You want the world currency to be under the tutelage of a stable nation, not a flash in the pan or a gamble.

The Fed

Ip describes several mistakes the Fed has made, which we will not go into here. He describes them well, and it is important for us to understand (and the Fed too) so we can avoid them. By and large, the Fed does learn well. But there are always new mistakes to be made. By studying the past mistakes, Ip shows us how it is possible to distill fundamental economic truths. At that point, there’s no excuse for violating one of those truths. If the Fed is to make mistakes moving forward, it should only be in new, unexplored circumstances – not fundamental errors like during The Great Depression. The Fed has power; FOMC meetings move the market for a reason ("Investors, don't fight the Fed" as the saying goes.

Hawk and dove bankers are described pretty well by Ip. He shares that in the banking world “Only hawk bankers go to central banker heaven.” Funny guy. That’s the feeling in that circle at least. Hawkish bankers are tight with their actions, more likely to dissent, and care far more about inflation than unemployment. Doves are the opposite. It’s not just war that has hawks and doves, but economics too.

Overall, the Fed tries to target 1.7-2% inflation by measuring growth, unemployment, and inflation. Ip points out how Ben Bernanke did well overall in that regard, and describes Bernanke as a Great Depression buff, like there are Civil War buffs. Ip says Bernanke disliked the Fed’s excessive orthodoxy during The Great Depression, felt more action (and more liberal action) was needed sooner, but disliked FDR’s New Deal. Simply put, Bernanke felt the Fed missed and then the president missed in response, which exacerbated and prolonged The Great Depression.

Ip describes the Federal Funds Rate, the Fed as a lender of last resort, and discretionary spending versus entitlement spending. Each of these is covered well, easy to read, and easy to understand. Merely his poignant description of how US government borrowing is like an elephant pushing up long-term interest rates and crowding-out private investing is worth the price of the book. 

There are pros and cons to government borrowing, but they have major impacts that are important to understand as an investor. Basically, the US government borrowing abroad is far better for everyone in the US because they aren’t crowded-out, and Uncle Sam gets his borrowing complete. 

Another very poignant point Ip makes is that if the US borrowing is mainly abroad then inflation is mainly the rest of the world’s problem. A full two-thirds of inflation is at the expense of the rest of the world (when two-thirds of government borrowing is outside the US). Obviously this is both good and bad depending on how you look at it. But it's important to know as an investor. It gives you insight into the health of the US and world economic health.

Oh the leverage!

Lastly, we'll mention Ip’s coverage of leverage. He describes leverage this way: “Leverage is like speed in a crash, and as a crisis hits the more leverage involved the more damage.” See, he paints pictures. He's easy to read, and easy to remember. There are amazing advantages of leverage (labor, money, technology, media are all leveraged to great benefit) but when a household, business, industry, sector, or an entire economy begins to wobble… measure their leverage and decide how far away you need to get as an investor from an upcoming crash!

“The Little Book of Economics: How the Economy Works in the Real World” was fantastic, and we hope you can tell how much we loved it.

Built for The One in the Arena

Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

You’re the Hero.
    We’re the Guide.

We are excited to announce a strategic partnership between Arena Investor and Betterment, a leader in smart investing and innovative financial solutions. As part of our ongoing commitment to providing cutting-edge investment management services, we are now offering clients the opportunity to invest in diversified crypto portfolios through Betterment’s robust platform.

‍Why Betterment?

Betterment is widely recognized for its user-friendly platform, sophisticated financial tools, and commitment to helping investors achieve their goals through diversified, low-cost portfolios. With this integration, Arena Investor is bringing you a seamless way to access the rapidly growing world of regulated cryptocurrency investments. Betterment’s intuitive platform ensures that our clients can easily manage their crypto portfolios and not just their traditional investments, all within a secure and regulated environment.

‍Enhanced Investment Management Experience with Crypto Portfolios

The inclusion of crypto portfolios through Betterment marks a significant enhancement to our investment management offerings. Betterment’s platform allows us to provide clients with expertly managed crypto portfolios. By leveraging Betterment’s technology, we can offer a streamlined experience that simplifies the complexities of crypto investing, ensuring you can stay informed and confident in your investment choices. 

‍Value for Investment Management Clients

As an investment management client of Arena Investor, you now have the opportunity to diversify your portfolio with exposure to cryptocurrencies, a rapidly evolving asset class. Betterment’s crypto portfolios are designed to provide broad exposure to the most established cryptocurrencies, managed with the same care and attention to risk that characterizes all our investment strategies. Whether you’re new to crypto or looking to expand your existing holdings, this partnership offers a secure and efficient way to integrate crypto into your broader investment strategy.

Betterment looks to the future, as does Arena Investor. Leveraging technology to provide more and more value to our clients is integral to both Arena Investor and Betterment. Features such as tax-loss harvesting and rebalancing are key factors in our decision to integrate with Betterment.

‍Looking Ahead

Our partnership with Betterment represents just the beginning of our efforts to integrate more advanced investment solutions into Arena Investor’s services. While we are currently focused on crypto portfolios, we are excited about the potential for further collaboration with Betterment in the near future. This partnership reflects our commitment to staying at the forefront of investment management, ensuring that our clients have access to the latest tools and strategies for achieving their financial goals.

We are eager to see the benefits this partnership will bring to our clients and look forward to helping you navigate the exciting opportunities in the crypto space with confidence and clarity. If you have any questions about how Betterment will enhance your investment experience with Arena Investor, please don’t hesitate to reach out to us.

Truly,
The Arena Investor Team

Built for The One in the Arena

Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

You’re the Hero.
    We’re the Guide.

‍Market Recovery: The Bounce Back

The week began with a recovery from a previous drop, where the S&P 500 saw a significant rebound, up by over 6.5% from its August lows. This recovery was led by sectors that had previously taken the hardest hits, particularly technology. The Nasdaq, home to many tech giants, surged over 8%, showcasing the market's resilience and optimism.

Inflation: The Cooler Cousin

Inflation, which had been the party pooper for a while, seemed to have taken a chill pill. Recent data indicated a cooling off, with numbers coming in lower than expected. This was good news for everyone, suggesting that the Federal Reserve might not need to keep interest rates as high, potentially leading to rate cuts sooner rather than later.

The Fed's Next Move: A Crystal Ball Moment

The market's mood was heavily influenced by the anticipation of the Federal Reserve's actions. With inflation showing signs of easing and employment data suggesting a softening labor market, the consensus was leaning towards the Fed beginning to cut rates possibly as early as September. This expectation was a significant driver behind the market's positive momentum.

Sector Spotlight: Tech Leads the Charge

While the market saw broad gains, technology stocks were the stars of the show. They not only recovered but led the market's upward trajectory, indicating a strong vote of confidence in growth-oriented investments.

Economic Indicators: The Good, The Bad, and The Ugly

• Employment: A slight uptick in unemployment hinted at a cooling labor market, which might give the Fed more room to maneuver on rates.
• Retail Sales: Up by 1%, suggesting consumer spending was still robust, despite inflation pressures.
• Gold and Crypto: Both saw gains, with gold shining as a safe haven and crypto riding the wave of optimism

Looking Forward: Diversification is the New Black

The theme for the next phase might be diversification. After a period where tech giants dominated, there's a shift towards a more balanced market where both growth and value stocks could perform well.

Conclusion

Last week's market movements were a blend of recovery, anticipation, and economic data that painted a cautiously optimistic picture. For the average person, this means your investments might have had a good week, but remember, the market's dance card is always full of surprises. Keep an eye on the Fed's decisions, as they could set the tone for the next big moves in the market.

Built for The One in the Arena

Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

You’re the Hero.
    We’re the Guide.