Prediction: Obama or Chaos

When I say that it is either Obama or chaos I don't mean that a Romney victory would mean chaos. Rather, that with Obama ahead in most polls in the key swing states most of the scenarios that would give these states to Romney will be chaotic. If the vote is within 200,000 or so in Ohio, the recount won't even start until November 17 when the 200,000 provisional ballots (absentee voters who decided that they wanted to vote in a polling place) are counted. 

Whether or not the vote is close depends on many things - there is a good chance that polls have been overestimating the likelihood of younger democratic leaning voters making it to the polls. On top of this, with high pressure "ground game" and massive text messages many potential voters in swing states have been so inundated with election ads that they could very easily have taken to habitually lying to those who are asking them about whether and when they vote.  It's also possible that there will be more unlikely but registered voters who get dragged to the polls almost against their will, but with early voting many of those who don't feel like voting can lie about having voted already. One additional wrinkle is there are supposedly internal Romney polls that indicate that he is winning in Ohio, but his team has a massive incentive to lie about being ahead in order to encourage their supporters to go out and vote - on net people like to be part of the winning team.

For those of you looking to track the election results tonight, has done well in the past. But it would probably be more productive to spend your time seeing Wreck it Ralph. It's a good movie and stressing out over voting results isn't going to change anything. 

The capital gains tax increase and Buffett's book

To most people who look closely, it's very obvious that when Warren Buffett proposes an inheritance tax that he is advocating for policies that helps his company. He isn't planning on giving very much of his money away in a manner than can be taxed by the inheritance tax and he runs a businesses that benefits from the tax. One way he benefits from an inheritence tax is through his life insurance companies, which benefit from the tax because their policies can be used to transfer wealth while avoiding some of these taxes. Buffett's company is also in the business of buying businesses, and when smaller businesses must be sold to pay the inheritance tax after the death of a founder the companies who systematically acquire these businesses from forced sellers end up profiting. 

It turns out that a rising capital gains tax can have a similar effect on bringing bargain businesses to market. With a capital gains tax hike coming up, a lot of businesses owners are looking to sell, including some big names. In the US, corporations see no difference on capital gains and ordinary income so a capital gains tax hike won't impact his company negatively. Many non-profits are also exempt from the capital gains tax.

Most people running a business in the business of buying businesses would not benefit from a capital gains tax hike, regardless of the deals that became available to them from people looking to sell quickly. But because Warren Buffett is donating the majority of assets to charity, when he advocates for a higher capital gains tax he is also advocating for something that will help his business with little negative impact to himself or the causes that he is supporting.

Outside of lobbyists and politicians, most people truly believe that the policies they advocate will be the best option for society. But it's interesting when it turns out that a high profile advocate proposing a policy which seem to cause them harm (and thus gives the advocate's arguments slightly more credibility) actually benefits from the policy. 

Quick overviews of a few topics

1. Understanding why the web can be very annoying. This runs from Facebook's fan pages having trouble reaching their users to the websites that break up stories into multiple pages in order to maximize ad impressions. All of this is correlated to those providing a free service making their service worse because they want to be paid a little bit more for their services. (Hat tip: MR)

2. Understanding the unrest in the middle east: There is a positive correlation between groups with high average IQs and how cooperative they are. There is a negative correlation between countries with high IQs and how religious they are. The middle east is full of countries with large youth bulges and bad economic policy that keeps these youths unemployed and looking for trouble.  Which of these factors are most important is an exercise that determines how politically correct the reader is.

3.  QE3. This issue isn't going to be cleared up in a few links. But there are a few things to keep in mind.

a. Members of the Federal Reserve really did shift their viewpoints on the proper roll of monetary policy - this new easing program wasn't just a reaction to bad economic data and the upcoming fiscal tightening. Those who follow the markets can work out their own implication from that.

b. It will be inflationary, but not as inflationary as some people think.

Key quote for those who think hyperinflation is around the corner:

"The Fed is buying bonds in the secondary market.
In contrast, during the German hyper-inflation, government tax revenue was as low as 1% of government spending – the rest of the spending was done by printing money with no intent to collect the taxes needed to pay for it."

4. Finally, despite what you might have read or been told, "dork" did not originally mean whale penis.

Pork Shortage?

A lot of people are worried about the upcoming pork shortage. The thesis is high corn prices have caused many farmers to kill their pigs, keeping prices low now but raising it in the future.
Yet, looking at the lean hog futures prices shows us that there isn't really a pressing need to open up the strategic pork reserve.  If you could afford pork three months ago then stop worrying. Pork prices aren't expected to rise much beyond that level.

Progress in North Korea?

More signs of progress are coming out of North Korea.

"Peasants will have incentive to grow more food. They can keep and sell in the market about 30-50 percent of their harvest depending on the region," said the source.

The question of whether or not they are following in China's footsteps leads to some interesting speculation.

North Korea was indeed trying to follow in the footsteps of China but was avoiding the phrase coined by Beijing because of an unfortunate quirk of the Korean language. "It won't be called 'reform and opening up' because it sounds like 'dog fart' in Korean," the source said.

Nonprofit Fraud

A recent story on highlights some pretty ridiculous charity fraud. Their investigation finds many cases where telemarketers, in this story the company InfoCision, are hired by a charity to raise money for a cause. The people donating are assured by people who pretend to be volunteers that the majority of the money is going directly to the charity but in reality over 80% of it (in some cases it looks like over 100% of it) goes to pay the telemarketers.  Charities raising money in this manner range from medical charities such as The American Cancer Society, March of Dimes, the Diabetes Associate to political groups like Citizens United.  

The charities are doing this in order to identify donors and volunteers that they can later on contact directly for support without giving the telemarketers a cut. But the initial cut isn't just from money raised directly by telemarketers, it's also taken from money raised by the volunteers recruited by telemarketers. And in the meantime donors are often told that over 70% of their money is going to the charity.

It’s an InfoCision filing with North Carolina that reveals that the Diabetes Association got just 22 percent of the money raised nationally by volunteers recruited by the telemarketer in 2011. That figure isn’t found in any public filing with the IRS.

So far, only Ohio has looked into this fraud and they settled with InfoCision for a nominal fee. This strategy of defrauding donors in order to find those willing to donate might work for charities in the medium run, but systematically defrauding new donors and lying to volunteers could impact their brand in the long run. 

Hopefully people who decide they want to donate will learn how to give well instead of funding telemarketers who disrupt everyone's dinner time. In the meantime, there is always the Do Not Call registry (which the founders of InfoCision lobbied against) - and if a friend asks for a donation for their favorite big name charity you'll want to check and see who recruited them to act as a fundraiser.

China's Lack of Trustworthiness: Iron Ore Edition

Garett Jones, guest blogging at econlog, has a post up on the value of trustworthiness in a society. 

I suspect that Adam Smith's pin factory prospered because the UK had found ways to create trustworthiness.  That's because without trustworthiness it's difficult to reap most of the rewards of the division of labor: if firms can't rationally trust each other, if workers and owners are rightly suspicious of each other's motives, if citizens can't trust the police, then everyone has to become a generalist.  In this world, everybody makes his own pins.  

This perspective makes what is happening in China even more interesting. China is a developing market that has moved away from full state control towards a more capitalistic structure. However, this structure is lacking in trustworthiness as highlighted by recent events in the iron ore market. 

The sequence is as follows: benchmark prices drop in the spot market; Chinese buyers walk away from contracts, often at the last minute; suppliers are forced to dump their defaulted-cargos in the spot market at knock down prices, further depressing the spot market; this triggers a fresh round of Chinese defaults. The spiral feeds itself, producing dramatic price corrections.

Even generalized, this lack of trustworthiness isn't going to crush China's economy. However, it does increase the chance that China will end up stuck in the middle income trap.

Political party's rules are made to be broken

It's interesting to see that both the Democrat and Republican party leaders have no respect for the rules they are ostensibly following.  This convention season has seen blatant fake vote counts by the chairs of the conventions to create optics that will favor their candidate in the election.

Exhibit 1: The Republican Party changed the rules so a Maine delegation more supportive of Romney could be sat down. The rule change also ensured that there wouldn't be a counted vote for or against Mitt Romney during the convention.

Exhibit 2: The Democratic leadership realizes that the language in the document pertaining to "god" and Israel will not play will for Obama in the election and change it against the wishes of supporters.

Neither of these changes actually did anything significant. Romney was going to be the Republican nominee either way and Obama's policies on religion and Israel aren't going to shift as a result of the altered platform. They just broke the rules to give themselves better optics to the voters. If they'll blatantly ignore their rules in order to look good to certain voters, it's interesting to think about what party leaders will do when the stakes are higher and something like their business interests are threatened. 

A Chart for EM investors

Those counting on high GDP growth to help their investments should give this chart a second look: 

This post summarized the Morgan Stanley report in more detail, but in general real GDP growth does not necessarily coincide with higher equity returns. Not when your shares are being diluted in order to expand (or in order to enrich shareholders).