Random Musings on Markets XV: Musings Runs Out of Movie References

This week’s volatility made us wonder whether readers would have interest in an installment of Random Musings, leading us to debate if this was the week we would prove this not-weekly column isn’t actually weekly. But in the end, we decided to move forward based on this thought: Maybe readers have been bombarded with gloomy headlines dwelling on the week’s volatility and need a respite (and perhaps a bit of a therapeutic laugh). A palate cleanser, if you will. If true, please, by all means, sally forth. We hope you enjoy. If not, check out our other coverage, which shares Fisher Investments’ view of recent volatility.

North Korea’s Most Well-Fed Man Shows Why Tariffs Aren’t Economic Poison

In case you missed it, The Wall Street Journal ran a delightful piece this week showing the, um, clever ways firms in the US and China are skirting tariffs. Turns out, it is pretty easy to remove “Made in China” labels and change the product code to something that isn’t covered by tariffs. Why pay a tariff on steel plates from China when you can get tariff-free “turbine parts” from Malaysia? You probably have to pay some broker a fee, but their markup is likely a lot lower than a 25% tariff.

The Telegraph built on this in a flashier fashion. It seems North Korean dictator Kim Jong-un has taken to tooling around Pyongyang in a shiny new Rolls Royce. Ordinarily, a despot flaunting his wealth (and healthy girth) while his people starve wouldn’t be news, since it is a typical day in the life of a murderous tyrant. But as the reporters note, that Rolls Royce isn’t exactly supposed to be in North Korea. Despite Kim’s recent make-nice with South Korean President Moon Jae-in and US President Trump, UN sanctions remain in force. They are supposed to prevent luxury cars (actually, any cars) from entering the country. Yet this flashy black number with tinted windows somehow evaded their grip.

This isn’t new or surprising. After all, this is the country that once tried to import Soviet-era fighter jets and weapons from Cuba, which hid the contraband under 220,000 sacks of brown sugar. If sanctions don’t let you buy something on the up and up, just pay cash, have the seller bury it under basic food staples, fudge the customs bill and hope for the best.^[i] Which sort of makes us wonder how that Rolls got to North Korea. Was it hidden under sugar? Salt? Sacks of flour? Did the car have its own shipping crate hidden behind said sacks of food staples, or was it wrapped in plastic^[ii] and bubble wrap?

To say tariffs targeted at one country can have a biting economic impact is to say they work. Kim’s new ride is evidence against that point. So is the entirety of the global economy’s black and gray markets. In a world where tariffs worked, there would be no counterfeit goods. There would be no illegal drug trade. There would be no mafia or other organized crime syndicates. There would be no human trafficking. Actually, that would be a pretty fantastic world! We would like it to be real! But alas, the world is pretty terrible at policing this sort of stuff, which is tragic. We guess the silver lining to this overall gray cloud is that a world that can’t enforce sanctions or squelch illegal activity is at least a world where unilateral tariffs are toothless.

Is Chernobyl the Greenest Place on Earth?

No, probably not. But is it far off? A few years back, we were gripped by National Geographic’s account of a return to Chernobyl—home of the world’s worst nuclear disaster. While the former Soviet (now Ukrainian) site has restricted human visitation^[iii] due to radioactivity, it seems animals and plant life consider it something of an oasis—an area where they can frolic in the glowing foliage.^[iv] These creatures—wild horses, beavers, deer, etc.—are commonplace, not mutated or multi-headed. It is an interesting tale of rebirth.

There are, of course, limits to it. Like the fact you can’t dig into the earth near the reactor for at least the next 24,000 human years. But still: Pictures depict it as covered in beautiful plant life. The greenery looks spectacular.

It seems Chernobyl is now destined to be doubly green. This week, the Sydney Morning Herald featured an account of the former fallout zone of a different sort. A Ukrainian utility installed the first stage of a solar power plant at this site. Now, again, you can’t dig into the soil, so the utility had to get a touch creative. They poured concrete slabs and installed panels atop them. That adds costs! But that cost was outweighed by several benefits: One, few want a solar farm in their backyard. Two, this land, for very obvious reasons, is cheap. Three, because Chernobyl is there, infrastructure tying this location to the Ukrainian power grid already exists. How creative! Humans solving problems through creative solutions few could have imagined!

The aim, at least partly, is to defray Ukraine’s reliance on Russian energy, which seems smart given Vladimir Putin’s interest in Ukrainian real estate.[v] Right now, Chernobyl’s green power machine is too small to do much, generating only about 1 megawatt, enough to power 2000 homes. The plan is to boost this, though. Which would be quite a great use of this land, in our view! (Although perhaps less so to the wildlife who frolic there. We bet they are kind of down on the plans.) But either way, it is a wild, wonderful, weird world when Chernobyl is going really, really green.[vi]

Attention: We Do Not Excel at Some Things!

On the lighter (and totally not market-related) side, another Wall Street Journal piece highlighted the perils of Microsoft Excel experts. People who are so good at complex formulas that their colleagues are forever begging them to fix their broken spreadsheets. Naturally, these experts are loath to tell anyone they are experts, lest they spend all their waking hours trying to diagnose circular references and other logic errors that plague us mere pretenders to Excel self-sufficiency. Do an Excel favor for one co-worker, apparently, and it snowballs faster than If You Give a Mouse a Cookie.

We aren’t Excel experts. VLOOKUP gives us nightmares, and we are barely on speaking terms with INDEX-MATCH. We once got an IF-AND right, but a broken clock is also right twice a day. Ask us about pivot tables, and we will ask what basketball has to do with it.

But in the spirit of trying to simplify life and keep our free time free, we would also like to let it be known that we are totally not at all good at the following things in any way, shape or form:

• Proofreading term papers
• Untangling yarn
• Changing headlight bulbs
• Roasting bacon
• Making jam and pickling veggies
• Setting fantasy football lineups
• Reading and opining on very long books
• Assembling IKEA and other pre-packaged furniture
• Mending clothing
• Recommending craft breweries

Really, about all we are good at is spilling too many words about things that may or may not be related to markets. So if you would like to suggest a topic for future Musings—rather than solicit baking or bacon tips—hit us up through the “contact the editors” link at the bottom of this page. 

Deflating Drew Brees

Not literally! Economically! Readers who share our fondness for professional football may know New Orleans Saints’ Quarterback Drew Brees broke the NFL’s career passing yardage record last Sunday, amassing 72,103 yards. Of course, the debate immediately turned to whether this actually means he is history’s greatest passer, given rule changes have vastly increased passing yardage over the years. But there are ways we can make comparisons using economic methods—which actually highlight the squishiness of pretty much all allegedly “hard” economic data.

Specifically, we can calculate an inflation index for passing yards and “deflate”^[vii] Brees’ 72,103 to put it on more equal footing with the past. To do this, we used Excel^[viii] and took average passing yards per game data from 1932 to 2018 (to date) and indexed them to 100 at 1978.^[ix] We chose this year due to two rule changes—one allowing offensive lineman to block with open hands, the other the “Mel Blount Rule” that restricted defensive players’ ability to interfere with receivers prior to catching the ball—which greatly affected the game then. You also have to use average yards per game to calculate this because the NFL season has expanded over time. The end result is “real” and “seasonally adjusted” career passing yards allowing comparison over time by stripping out the impact of passing yard inflation.

When we indexed Brees’ yards for the change in each year, we found his 72,103 nominal yards are actually 51,306.7 real yards in 1978 base-year terms.^[x] By this metric, he still trails both Brett Favre (54,774.5 real yards) and Peyton Manning (53,024.4). However, he is ahead of Dan Marino, whose 61,361 nominal yards equal 47,683.9 real yards. Deflating Tom Brady’s yards,^[xi] we find his 58,028 (and counting) equal 41,944.9, behind Minnesota Vikings legend Fran Tarkenton, whose 47,003 nominal yards equal 45,052.3 real yards.

But ultimately, does any of this shed light on who the actual leader is—who the greatest passer of all time is? No. It is too squishy. Which also seems like a common problem in comparing economies over time. Hence, President Trump calling America’s economy “the greatest in history” is as hard to prove true or false as calling Drew Brees the NFL’s greatest passer.

Public Service Request

We love consuming financial media. It informs us, challenges our views and makes us think. Overall, we think it does a wonderful service of providing investors up-to-the minute information. When stocks have rocky days like Wednesday and Thursday, simply opening an article to see someone has seen and thought about the volatility can be a comfort to people. But sometimes, it isn’t so comforting due to the way stocks’ movement is portrayed. We aren’t talking about the adjectives—rather, the numbers. Specifically, the tendency to cite Dow Jones point declines as a measure of market movement. We get why using Dow point movements is appealing. The Dow is big, so it can move hundreds of points in a day—and putting hundreds of points in a headline is great, eyeball-catching copy. But we think it risks leading investors to a weird place. With the Dow at 26,000, the 800-point move media led off a slew of headlines. It looks big! But in percentage terms, it isn’t so huge. So quoting in points, rather than percentages, risks giving readers some unnecessary heart palpitations. Yes, of course, a -3.1% daily decline is a large daily move. Certainly not unprecedented! But large. However, quoting it in points, in our view, makes it seem bigger than it really is. So, can we all please resolve to use percentages instead?

Enjoy your weekend!