Biden's First 100 Days in Charts

Today marks President Biden's 100th day in Office. Basically every news outlet has some combination of timeline, accomplishments and comparisons as well as op-eds either extolling his "complete success" or decrying his "complete failure." Well here are some more "important" Biden numbers from BI and the WSJ:

First, who's Mr. Popular? Obama, it seems. Biden's more popular than Trump at the 100-day mark but lags both Clinton and Bush (click chart to enlarge).

Next, federal spending. No competition here. Biden's planned six trillion of spending introduced in the first 100 days is more than Clinton, Bush and Obama combined! What's remarkable is the paltry spending plan Obama undertook to revive the economy in the midst of the Great Recession. The lack of sufficient spending led to a very weak recovery. Biden's not repeating that mistake (click chart to enlarge).

To put that spending into context. Here's what the unemployment situation was in the first year of the presidency for the last eight presidents (click chart to enlarge). Unemployment was high and rising when Obama came into office, but his response, in retrospect, was woefully lacking. To be fair, he did carry the burden of being the first Black president and had to be careful not to antagonize political opponents. 

Showing Congress who's the boss? Biden, definitely, with 41 Executive Orders...speaks softly, but carry a big stick?

And the big one? Depending on your point of view, the most important or most meaningless metric of Presidential success is the stock market. And Biden is the clear winner! The Dow Jones returned 9.34% in the first 100 days under his watch, versus 6.12% under Trump and -1.15% under Obama.

Earnings Week and May Sweeps

This is a big week for earnings, with AAPL, AMZN, FB, MSFT, and GOOG all reporting. And of course, Tesla.

But Tesla is less about company fundamentals and more about Elon Musk the personality. And his big day is in a couple of weeks on SNL:

Yup, the Boring guy is hosting SNL. Why? Who knows, who cares? It will surely generate a lot of publicity for NBC and maybe some ratings. Will Tesla stock pop if he has a good performance? Will it drop if he bombs? My guess is it'll be curiously entertaining, Musk is a world-class showman after all:

Poor Little Rich Scions: Inequality Among Billionaires

Our last post was about how wealth naturally flows from the poor to rich in society due to imbalances in power, access, opportunities, etc. And how inequality has been on the rise in the U.S. for decades. Today, according to the Fed, the top 1% of U.S. households controls $38.6 trillion of wealth or 31% of all wealth in the country. That's about 15.5x more than the bottom 50% combined!!

Well, if we took something like the top 0.001% of the Top 1%, would we get a similar distribution of wealth? Forbes puts out a list of the 50 richest families in the U.S. (This list covers multiple generations and is separate from the richest individuals list, who are considered self-made). Well the 50 richest families collectively control about $1.2 trillion of wealth. But it's certainly not evenly distributed. Not even close. (Click to enlarge)

The Waltons ($247B), the Kochs ($100B) and the Mars family ($94B) together control 30% of that $1.2 trillion. In fact, the top 5 families control ~60% of the wealth in this tiny, tiny, tiny slice of America. Yup, everything really is relative...

Is Economic Inequality Inevitable?

Income inequality is a big problem in the U.S. and increasingly so as the chart below highlights (click to enlarge). There are many possible reasons for this, including regressive tax policies, deregulation, weaker unions, globalization, access to education, eroding transfer payments (social security and unemployment benefits), etc.    

But what if we cleared the deck and started anew, giving everyone the same starting wealth? Would we be able to mold a more egalitarian economy? No, I'm not taking about the Bolshevik model, which replaced "unequal share of blessings with equal sharing of miseries" (to quote Churchill). I'm thinking more of the "Yard Sale" model, a mathematical framework of free-market economics that, with a few tweaks, accurately predicts wealth distributions in the U.S. and Europe. Bruce Boghasian has a  fascinating article in Scientific American magazine about the economic work he and other physicists (yes, physicists) are doing. 

The Yard Sale model was introduced by Anirban Chakraborti, an Indian physicist, in 2002. It mimics real one-on-one economic transactions as the box below shows (click to enlarge) and helps explain "the movement and distribution of wealth [arising] from pairwise transactions among a collection of economic agents."  

Imagine an economy with 1,000 individuals. Assume everyone has $100 to start with. Assume a fair coin flip determines the winner/loser in any transaction as defined above. Also assume every time you "win"/"lose" in a trade your wealth rises/ falls 20%. Now "choose two agents at random and have them transact, then do the same with another two, and so on. [The] model assumes sequential transactions between randomly chosen pairs of agents...[conducting] millions or billions of such transactions in our population of 1,000."

To better approximate reality the researchers added a constraint. As Boghasian writes "people have a natural aversion to going broke, so we assume that the amount at stake, which we call Δω...is a mere fraction of the wealth of the poorer person, Shauna. That way, even if Shauna loses in a transaction with Eric, the richer person, the amount she loses is always less than her own total wealth." 

What happens? Well, after a large number of transactions, "one agent ends up holding practically all the wealth of the economy, and the other 999 end up with virtually nothing[!]" Every time! Any single agent in this economy could have become the oligarch (in that sense, there was an equality of opportunity). But only one does.

This outcome may be surprising because all the agents started off with identical wealth and were treated symmetrically (implying equal abilities and opportunities). But even in this stylized economy it boils down to the tyranny of math. "The very first coin flip transfers money from one agent to another, setting up an imbalance between the two. And once we have some variance in wealth, however minute, succeeding transactions will systematically move a “trickle” of wealth upward from poorer agents to richer ones, amplifying inequality until the system reaches a state of oligarchy." In another words the natural condition is trickle up economics! Now imagine our economy as it is with huge disparities between economic agents, individuals, households, companies, etc.  

To test how this framework would predict reality Boghasian and colleagues incorporate starting wealth disparity and introduce parameters such as taxes (χ) and privilege (ζ). The concept of privilege is represented by biasing coin flips in favor of wealthier individuals.   

They find that whenever the influence of wealth-attained advantage exceeds that of redistribution (taxes), you get more inequality and vice versa. Remarkably, extending the Yard Sale model by just those two-parameter (χ and ζ) the researchers were able match empirical data on U.S. and European wealth distribution between 1989 and 2016 to within 2 percent!!!

The implications are huge. If the natural tendency of wealth is to flow from the poor to the rich in a free-market economy, then public policies geared towards "trickle down" economics are futile, even under the best of intentions. But is higher income taxes the answer? Perhaps not, because taxes focus on income rather than wealth. To solve for that progressive politicians, like Warren, have proposed a wealth tax on the rich. Is that radical or new? Mosaic Law exhorts the Israelites to tithe (Deuteronomy 14:20) and the Quran obligates Muslims to pay zakat. So, no. But in fairness wealth tax, unless voluntary, is difficult to administer and enforce and complicated. So a myriad of public policies, taxes, regulation, affordable-education, etc. will likely be necessary to reverse the inequality trend.       

Do Stocks Outperform Treasury Bills?

No! Emphatically, vehemently, unmistakably no! Prof Hendrik Bessembinder's fascinating and exhaustive analysis cogently demonstrates the difficulty futility of trying to pick stocks. The full paper is here. 

Bessembinder evaluated the lifetime returns of every U.S. common stock traded on the New York and American stock exchanges and the Nasdaq since 1926; which tallies to 26,168 firms. And the key findings were (drum roll...):

1. Between 1926 and 2017 U.S. stocks increased shareholder wealth by $35 trillion (yay!). But just 86 stocks accounted for $16 trillion in wealth creation, half of the stock market total (whoa!!).

2. All of the wealth creation can be attributed to the thousand top-performing stocks, while the remaining 96 percent of stocks collectively matched one-month T-bills.

3. ~58% of stocks actually decreased shareholder wealth.

The chart below highlights the key findings and the stocks that generated the most wealth over the last 90 years (click to enlarge). Not surprisingly, Tech firms generated the most wealth, though Energy, Telecom and Healthcare generated wealth disproportionate to the number of firms in the industries. The Champions: Apple, ExxonMobil and Microsoft. 

The results highlight the "skewness" of stocks. Returns from long-term stock investing are positively skewed, i.e., very large returns from a few stocks pull up the average. Most stocks actually have negative returns.  

The takeaway: “The results help to explain why active strategies, which tend to be poorly diversified, most often underperform.”- Bessembinder. So passive strategies (index funds or ETFs) are your best bet. To paraphrase Jack Bogle, the pioneer of index investing, don't go try to find the needle in the haystack, just buy the haystack. 

Note: An updated list through 2019 has the following companies (lifetime wealth produced, year publicly listed):

1. Apple             ($1,600 billion, 1981) 
2. Microsoft       ($1,400 billion, 1986)
3. ExxonMobil   ($990 billion, 1926)
4. Amazon          ($865 billion, 1997)
5. Alphabet         (720 billion, 2004) 

Timing the Market, Not Time in the Market?

Hmm, our last post advised against market timing. But wait, what if there was a way to successfully time the market, and an easy way at that? Well interestingly, err...amazingly, data shows that over the 25 years between 1993 and 2018, nearly all of the stock markets gained have happened at the same time each day: overnight. And the phenomenon was even more pronounced in 2020.

Yup, if sold at the open and bought at the close each trading day you would have been up 600%. Look, if you bought the S&P 500 at the end of 1992 and held on, by the end of 2018 you were up 857% (with dividends). So yeah, better to just invest and forget about it. But if that's too boring then this might be your best bet: buy at the market at the open and sell at the close.

Why does this work, even if market participants know about it? Well maybe for a couple of reasons:

1. Retail investors panic (of course!) and often flood the market at the open.

2. Buy backs by corporations (of course!) always at the end of the day.

3. Just for good measure, there's also the conspiracy theory that the Plunge Protection Team buys in the more thinly traded afternoon sessions to prop up stocks.

Time in the Market, Not Timing the Market?

Market timing can be deceptively difficult. Analysis from BoA Research quantifies how much so. Looking at data going back to 1930, BoA calculates that if investors missed the S&P 500′s 10 best days in each decade, total returns would be significantly lower than the return for investors who stayed in the market throughout. (Click chart to enlarge)

So, if an investor held on through the ups and downs of the market from 1930-2020, their return would have been 17,715%. On the other hand, if the same investor missed the S&P 500′s 10 best days each decade, their total gain would be just 28%!! Much of investing is about avoiding large losses, so that compounding can work it's magic on a growing base. If you were to 'simply' side-step the 10 worst days in every decade over the last 70 years, your gains would be an gargantuan 3,793,787%!!! Basically, $1 would grow to ~$400,000 as the S&P 500's best days turbocharged your returns. But the market’s best days typically follow the largest drops, so your timing has to be almost surgical.

We know that's nearly impossible, so the best path is to hold steady and dollar-cost average. And time in the market has historically ensured a positive return, as this analysis from Morgan Housel shows:

Based on the last 150 years of stock market data, a 10-year investment horizon gives investors an almost 90% chance of coming out ahead...with a 20-year horizon it's almost a certainty investors will have a positive return. So stay invested.