An Unhappy America Makes An Unproductive America

No kumbaya here - just a quick review of why happiness matters to an economy. [The Rude Awakening] March 20, 2024 [WEBSITE]( | [UNSUBSCRIBE]( An Unhappy America Makes An Unproductive America [Sean Ring] SEAN RING Dear Reader, Usually, I don’t care about the general population’s happiness. It’s their business, not mine. Though Gross Domestic Product is a lousy measure of economic output—so bad that it’s been nicknamed “Grossly Deceptive Product—” I still wouldn’t use Bhutan’s measure of Gross National Happiness in its place. But seeing the US fall out of the top 20 happiest countries felt like a gut punch. Really, if you can’t feel happy in America, where can you feel happy? How can the Land of the Free and the Home of the Brave not be one of the happiest countries on earth? Well, there are plenty of reasons. In this Rude, I want to discuss the exciting connections between happiness, confidence, and economic output. What Happened? I just read in The Wall Street Journal that the “[US No Longer Ranks Among World’s 20 Happiest Countries]( The article starts with this: The U.S. has fallen out of the top 20 happiest countries for the first time since a global ranking began in 2012, due in large part to a drop in happiness among younger adults. Americans fell to 23rd place in happiness, down from 15th a year ago, according to data collected in the Gallup World Poll for the World Happiness Report 2024. Costa Rica and Lithuania were among the countries that reported being happier than Americans, according to the annual survey, which asks respondents to rate their current lives on a scale of 0 to 10, with 10 being the best possible life for them. Nordic countries dominate the top 10, with Finland at the top. Unfortunately, the study didn’t give reasons for the unhappiness. But scientists suspect some of the reasons include worries about money, loneliness, anxiety about their futures, and what is happening around them. Why is this worrisome on a national level? Let me explain. What is Happiness Economics? Often seen as a subjective state, happiness plays a crucial role in the broader spectrum of economics. Beyond the mere accumulation of wealth and the pursuit of growth, the significance of happiness within an economic framework offers profound insights into societal well-being, productivity, and sustainable development. The Foundation of Happiness Economics The study of happiness economics emerges from the intersection of psychology and economics, challenging traditional metrics of economic success, such as GDP. Nobel Laureate Richard Easterlin’s Easterlin Paradox highlighted the complex relationship between income levels and happiness. It posits that beyond a certain point, increases in a country's wealth do not lead to greater happiness among its citizens. This insight propels the argument that economic policies should not solely focus on material wealth but also consider the happiness and well-being of the population. Happiness and Productivity A significant body of research underscores the link between happiness and productivity. Happy employees tend to be more engaged, creative, and resilient in facing challenges. They exhibit lower absenteeism and turnover rates, contributing positively to their organizations' bottom line. A seminal study by Oswald, Proto, and Sgroi (2015) at the University of Warwick found that happiness led to a 12% spike in productivity, while unhappy workers were 10% less productive. This suggests that investments in employee well-being can yield substantial returns in productivity, a critical component of economic growth. Consumer Behavior and Economic Stability Happiness influences not only how much individuals consume but also what they consume. Happier people are more likely to make long-term investments in their health and education, which are pivotal for economic stability and growth. Furthermore, a content populace is less prone to erratic spending patterns, contributing to a more stable and predictable economic environment. This stability is crucial for long-term planning and investment at the individual and governmental levels. Public Policy and Happiness Indexes The understanding that happiness is a valuable economic indicator has led several countries to integrate well-being measures into their policy-making processes. Bhutan famously prioritizes Gross National Happiness (GNH) over GDP to measure its development. Similarly, the World Happiness Report, an annual publication by the United Nations, ranks countries based on their citizens' self-reported well-being, considering factors such as income, social support, and freedom to make life choices. These initiatives underscore the shifting paradigm towards policies that foster economic environments conducive to happiness. The Broader Impacts on Society The emphasis on happiness within an economic context extends beyond the immediate benefits of increased productivity and stable consumer behavior. It fosters a society where mental health is prioritized, social bonds are strengthened, and inequalities are addressed more holistically. By valuing happiness, economies can create a virtuous cycle where well-being and economic prosperity reinforce each other, leading to a more resilient and cohesive society. How does happiness interact with confidence? [WARNING: The AI Wealth Window Accelerates on March 21]( On March 21, NVIDIA is slated to announce what will be the most powerful chip of all time – “The X Chip” – a microchip so powerful that it will send the current Wealth Window into OVERDRIVE… Unleashing an accelerated Wealth Window like nothing we’ve seen before. But James Altucher is warning you: do NOT just invest in any AI stock… Because this announcement is creating a 100X catalyst for a specific little-known A.I. firm, already trading on the NYSE, by 2025. [Click here to learn how to play this announcement.]( [Click Here To Learn More]( Happiness Translates Into Consumer Confidence Economics has increasingly recognized the importance of psychological factors such as happiness and confidence in shaping economic outcomes. The interaction between happiness and confidence is multifaceted and influential, affecting individual behavior, market dynamics, and overall economic health. Here’s how economics handles this interaction: Consumer Confidence and Spending Consumer confidence, often measured by indices that reflect optimism or pessimism about future economic conditions, directly influences spending and saving behaviors. When consumers are happy and confident about their financial future, they are more likely to spend, driving demand for goods and services. This increased demand can stimulate economic growth. Conversely, low confidence can lead to decreased spending and slowing economic activity. Economists and policymakers closely monitor consumer confidence as an indicator of economic health and potential shifts in the business cycle. Investment Decisions and Risk Tolerance Happiness and confidence play a critical role in investment decisions, impacting individual and institutional investors. Confidence in the economy, markets, or specific investments can increase investment activities, driving capital formation and economic growth. Happy and confident investors, like Paradigm’s own Alan Knuckman, may exhibit higher risk tolerance and seek growth opportunities that can yield higher returns. Conversely, a lack of confidence can lead to risk aversion, potentially slowing economic growth as investment in new ventures and projects diminishes. Labor Market Dynamics The interaction between happiness and confidence in the labor market influences job satisfaction, productivity, and career decisions. Confident and happy individuals are more likely to pursue career advancements, switch jobs for better opportunities, or start new businesses. This dynamism contributes to economic flexibility and innovation. Furthermore, happier employees tend to be more productive, as mentioned earlier, which can enhance a firm's performance and, by extension, the economy's efficiency. Macroeconomic Policy and Stability From a macroeconomic perspective, happiness and confidence intersect in the realm of policy-making. Economic policies that foster stability, growth, and employment boost confidence and happiness across the population. For instance, effective monetary and fiscal policies that curb inflation, ensure low unemployment, and promote equitable growth can enhance overall economic confidence and happiness, creating a positive feedback loop that supports sustainable economic health. Behavioral Economics Insights Behavioral economics, a subfield integrating insights from psychology and economics, provides a framework for understanding how happiness and confidence affect economic decisions. It examines how cognitive biases, heuristics, and emotional states influence economic behavior, challenging the traditional economic assumption of rational decision-making. Through this lens, the impact of happiness and confidence on economic decisions is studied not as anomalies but as integral aspects of human behavior that significantly shape economic outcomes. Hopefully, it’s clear why the confidence indicators of the Confidence Board and the University of Michigan are being watched. Wrap Up That America isn’t happy anymore is noteworthy in and of itself. But this unhappiness has knock–on effects, from macroeconomic policy to the labor market to individual job decisions. America needs to turn its frown upside down. All the best, [Sean Ring] Sean Ring Editor, Rude Awakening X (formerly Twitter): [@seaniechaos]( In Case You Missed It… Modern Portfolio Theory: A Redo [Sean Ring] SEAN RING This is from two Rudes I wrote nearly three years ago. I’ve combined them into one and hope it meets with your approval. Feel free to write in with questions! Seanie Modern Portfolio Theory: Asset or Liability? As you know, every summer, I teach recent college and MBA graduates who are entering banks. It’s my job to teach total newbies about the financial markets and to get the business majors to be less theoretical and more practical. You can probably tell that no one loves the sound of my voice more than I do. That’s why this will be my sixteenth summer teaching. I can’t believe how fast it’s gone since March 2007, when I first started. One of the critical areas for the kids - yes, they’re kids, and the darn things keep getting younger! - to learn is portfolio theory. As banks are the “sell-side,” their clients are usually from the “buy-side.” The buy-side consists of asset managers and hedge funds, who serve the “real money” clients. Real money is the term we use to describe fully-funded, long-only asset managers and their clients: pension funds, sovereign wealth funds, insurance companies, and endowment funds. That is, they have “real money” to invest and are not leveraged like hedge funds. So, to know their clients, young bankers must learn what real money—or institutional investors, as they’re sometimes called—does with all the cash they have. Modern Portfolio Theory: Background One of the problems presented to fund managers is simple: what do we do with all this money? In 1952, a young economist named Harry Markowitz wrote a paper called [Portfolio Selection](. It was published in The Journal of Finance, Vol. 7, No. 1 (Mar. 1952), on pages 77-91. Markowitz studied at the University of Chicago under Milton Friedman. In 1959, Markowitz published [Portfolio Selection in expanded book form]( at the invitation of James Tobin, an eventual Nobel Prize-winning economist. [The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1990]( was awarded jointly to Markowitz, Merton H. Miller, and William F. Sharpe "for their pioneering work in the theory of financial economics." So one thing’s for sure: the theorists and prize winners love Modern Portfolio Theory. (That’s the name colloquially used to describe Markowitz’s entire body of work.) The Purpose of Modern Portfolio Theory I’m going to write as if I’m next to you with my coffee, so I’ll avoid jargon as much as possible. The purpose of MPT is to maximize an investor’s returns for his given level of risk. Markowitz confirmed that a portfolio’s return is the weighted average of the returns of the individual securities in a portfolio. That is if stock A had an expected return of 2% and stock B had an expected return of 10%, the portfolio’s expected return would be (50% x 2%) + (50% x 10%) = 6%. But Markowitz discovered that portfolio risk isn’t just a weighted average of the individual risks of the stocks. You had to take the correlation between the two stocks into account. Without getting all mathy on you, let me visually demonstrate what happens with a portfolio of two stocks. In our little sandbox, stock A has that 2% expected return and a 5% standard deviation. Stock B has that same 10% return with a 12% standard deviation. They are the only two stocks we can invest in. In finance, the standard deviation is synonymous with risk and volatility. This is based on a normal distribution or bell curve, and I’ll explain this more tomorrow. I will vary the correlation between the two stocks to show you how important it is. In our first screenshot, both stocks are perfectly positively correlated. That is, they move in lockstep with each other. [pub] If we’ve got a 50/50 portfolio, the expected return is 6%, the portfolio standard deviation is 8.5% (the average of the two stocks’ risks), and the minimum standard deviation we can achieve with this portfolio is putting 100% of our money in stock A, which has that 5% risk. Then, it’s not much of a portfolio, is it? What happens when there’s no correlation between the two stocks? That is, we can’t see a relationship between the movements of the two stocks at all. [pub] What’s interesting about this is how the line is now a curve. If we stick with our 50/50 mix, we have a portfolio with the same expected return of 6% but an expected risk of 6.50%. We lowered our risk by 2.00%, just by having assets that now did not correlate. And if we wanted to minimize risk, we no longer had to put all our money in stock A. We would put 85% in stock A and 15% in stock B to achieve an expected portfolio risk of 4.62%. That’s a much lower risk than when the stocks are perfectly positively correlated. Let’s do one last example. Let’s now make our stocks negatively correlated with each other. We won’t achieve a perfect negative correlation, but let’s make the correlation -0.70. What happens? [pub] With a -0.70 correlation, our 50/50 portfolio still has an expected return of 6% but a risk of only 4.61%. That’s a pretty dramatic reduction from 6.50%. However, our minimum variance portfolio—the one with the lowest risk—only has a risk of 2.69%. We achieve that by investing 74% of our money in stock A and 26% in stock B. To be sure, the entire curve is called the “minimum variance frontier.” The “efficient frontier” is the “top side of the bullet.” That is, only those portfolios with a higher risk and a higher return than the minimum variance portfolio are what we’d call efficient. That means they earn the highest return for a given level of risk. [Don’t Buy Any Crypto Until You Read This New Book!]( I repeat… [Do NOT buy a single cryptocurrency until you read this new book](. This could be the biggest opportunity of your life, but only if you act now. [Click here to see how to claim a copy of The Big Book of Crypto](. [Click Here To Learn More]( MPT’s Assumptions, Finance’s La-La Land Theorists make assumptions when they’re mathurbating. Ahh, sorry. New word. Or portmanteau, to be specific. The [Urban Dictionary]( defines Mathurbation as The art of substituting actually interesting content with complex-sounding but actually superficial math. Might bring some degree of arousal for the one performing it and some inexperienced and simple-minded spectators. Example: Sannilkov's entire research has absolutely no contribution to science, it is just mathurbation. Now that that’s out of the way, let’s discuss the assumptions Markowitz made to make the mathå work. Asset returns are distributed normally. Right off the bat, we have a ridiculous assumption. Sure, height, weight, and shoe size are normally distributed. But no returns anywhere in finance are normally distributed. It’s little wonder why Nassim Taleb called the bell curve (or the standard normal distribution) The Great Intellectual Fraud in [Fooled by Randomness](. The investor is rational and will avoid all unnecessary risks. This one isn’t so bad, but it assumes the investor knows all the risks and can, thus, avoid them. Investors will give their best to maximize returns for all the unique situations provided. We know this simply doesn’t happen. The largest investors rarely do this. Pension funds, insurance companies, sovereign wealth funds, and endowment funds routinely sell calls against their portfolios to smooth out their returns. High net-worth individuals’ first priority is asset protection, not return maximization. All investors have access to the same information. Dearie me. Sure, we can access stock data, charts, and news better than we ever could. But do I get invited to dinner with Dalio, Fink, or Schwarzman? No. And if you don’t think dinner or golf matters, let me remind you Alan Greenspan made his “Irrational Exuberance” comments at the [Annual Dinner and Francis Boyer Lecture]( of The American Enterprise Institute for Public Policy Research, in Washington, D.C., on December 5, 1996. I woke up the next day wondering why the market tanked. The people at the dinner doing the tanking clearly didn’t. Investors don’t consider tax and trading costs when making decisions. Taxes are most certainly taken into account in the States and other countries with a capital gains tax. Where there’s no CGT, it’s obviously less of an issue. Are trading costs accounted for now that it’s practically free? Probably not. All the investors have the same view on the expected rate of return. Again, I think not. Sure, investors have similar views on the markets. But if we all had the same view, no trades would take place. A lone investor is not sizeable enough to influence market prices. BlackRock is. To be fair, most aren’t. Investors can borrow unlimited capital at a risk-free rate. Usually ridiculous, this feels awfully true at the moment. In fact, so much capital is available to institutional investors that banks have to redeposit their excess reserves—the stuff they can’t loan out—at the Fed every day. And they earn - their word, not mine - interest on it! It’s about as preposterous as it gets, but that’s another conversation. Should You Employ MPT? [pub] Ok, that’s not fair. But Taleb further destroyed MPT in his book Antifragile - on my Rude Reading List - by alerting us to the fact that MPT relies on volatility and correlations remaining constant over time. It’s plainly ridiculous. Here’s an [excerpt]( I noticed as a trader— and obsessed over the idea— that correlations were never the same in different measurements. Unstable would be a mild word for them: 0.8 over a long period becomes −0.2 over another long period. A pure sucker game. At times of stress, correlations experience even more abrupt changes— without any reliable regularity, in spite of attempts to model “stress correlations.” He goes on: Note one fallacy promoted by Markowitz users: portfolio theory entices people to diversify, hence it is better than nothing. Wrong, you finance fools: it pushes them to optimize, hence overallocate. It does not drive people to take less risk based on diversification, but causes them to take more open positions owing to the perception of offsetting statistical properties… Ok, that’s the man himself speaking. What does that mean for you? Buffett… or This Guy? No one can be Warren Buffett. Despite his folksy self-deprecation, there’s only one Warren Buffett. And there will only ever be one Warren Buffett. Sure, read every one of his annual reports. It’ll make you a more thoughtful investor. So while MPT is not necessary to follow, Buffett is out of everyone’s reach. Now, let me introduce you to a man who has defied all investing trends, kept a low profile, and is respected by everyone. His name is Tony Deden, and he’s the Chairman of Edelweiss Investments. Tony was an early supporter of Ron Paul and is an avid follower of the Austrian School of Economics. I met Tony years ago at a conference. Great guy - I had no idea who he was. No, I don’t know him well. And he certainly wouldn’t remember me. What separates Tony from the rest of the fund managers is his duty of care to his clients. I found this fantastic [blog post]( on thewoodshedd.com about Tony and his philosophy. Reading it and understanding how he does business will make you do business better. Heck, I wish I had found it sooner. Tony rejected MPT long ago. You’ll see why in this post. Please read the post after you’re done reading this. It’ll make you a little bit better today. Thanks once again to Ed Kelly for his MPT request. I hope I did it justice. Until tomorrow. All the best, [Sean Ring] Sean Ring Editor, Rude Awakening Twitter: [@seaniechaos]( [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2024 Paradigm Press, LLC. 1001 Cathedral Street, Baltimore, MD 21201. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. 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