THE ZEITGEIST: DECEMBER 20, 2016
RISING POLICY UNCERTAINTY
It’s a settled axiom in the personal growth industry that everyone loves to stay in their “comfort zone.” This is a positive, reassuring space in which we are pretty certain how the world works and we make our decisions—not too many, not too fast—at a very deliberate pace. When we leave our comfort zone, everything changes. We no longer know how the world works. We become anxious and fearful, and sometimes, our adrenalin-fed reptilian brain takes over: as in, root, hog, or die. Minutes turn into hours. The speed at which we make big choices, even life-altering choices, accelerates.
The wonks who calculate options prices have known this for a long time. It explains why bull markets are characterized by low volatility and bear markets by high volatility—and why the VIX has acquired the “fear index” nickname. One vital aspect of our financial comfort zone is certainty about the laws and policies that structure our financial world. With rising uncertainty about those rules, there is rising fear.
Enter a team of three academics (Scott Baker at Northwestern, Nick Bloom at Stanford, and Steve Davis at Chicago) who began studying policy uncertainty several years ago. They created algorithms that scan the entire spectrum of news sources each day for key words and phrases indicating worry, doubt, and contingency about policy direction. Out of this data stream they fashioned an “Economic Policy Uncertainty” (EPU) index.
Baker, Bloom, and Davis—along with other researchers—have since run abundant econometric tests showing that the EPU index runs a high negative correlation with equity prices and economic performance (GDP growth, investment, employment, etc.) and a high positive correlation with market volatility. What’s more, VAR (vector autoregression testing) shows the EPU index is a leading indicator of all the above bad news. To quote from the summary of the trio’s most recent paper: “At the macro level, innovations in policy uncertainty foreshadow declines in investment, output, and employment in the United States and, in a panel VAR setting, for 12 major economies.”
Right now, this matters for a very simple reason: In most economies around the world, the EPU index is surging. A GDP-weighted average of the EPU indices from 17 countries has recently hit unprecedented heights—higher than 9/11, Gulf War II, the GFC, or the Euro-Crisis of 2011.
Which countries account for most of the upsurge? With the Trump victory, the U.S. EPU index is now as high as it was after Brexit—and higher than it has been since the federal shutdown crisis of 2013. But it’s still considerably lower than earlier big crises like the GFC. The recent rise does call into question the meteoric jump in most U.S. sentiment indexes, since historically the EPU index has a high negative correlation with “confidence.” But its absolute level remains well short of DEFCON 1.
The same cannot be said, however, of the EPU indexes for Europe and China, which are both in the historical stratosphere. Europe probably requires little explanation. The EU’s self-confidence—already shaken by Brexit, a worsening banking crisis, and chronic economic underperformance—has not been helped by aftershocks in Italy (last month) and likely further socioquakes accompanying next year’s scheduled elections in the Netherlands, France, and Germany.
The high readings in China are bit more surprising. After a scare in late 2015, isn’t China supposed to be in cyclical recovery? Yes, it is. But apparently the ongoing decline in the yuan—together with private-sector capital hemorrhaging, CBOC FX reserve drawdowns, and credit-control efforts to prevent a real estate bubble—has put policy leaders in a very uncomfortable box. For the first time, they feel they have little room either to ease or to tighten. Add on to those worries a rising dollar, tanking EM markets, and Donald Trump—and, well, I guess you’ve got lots of uncertainty. Stay tuned.
NewsWire
- The Better Business Bureau recently found that Millennials are actually more likely to be scammed than older generations. While there are many factors at play here, such as young people being more likely to buy things online, one major reason why positive, overprotected Millennials are so vulnerable is their “optimism bias.” (Better Business Bureau)
- A Gen-X columnist reminisces about his youth in Milwaukee, and contrasts the vastly different experiences of Xers and Millennials who grew up there. While the Gen-X culture of the time was not as “youth-friendly” as the author describes, it’s certainly true that overprotected Millennials “don't have the freedoms...that we took for granted.” (OnMilwaukee.com)
- Over the last 12 months, Baby Boomers have purchased the most alcohol by dollar value than any other generation. Part of this can be explained by the fact that older consumers are more likely to buy higher quality (read: more expensive) alcohol, but Boomers are also renowned for bringing unhealthy habits with them into old age. (IRi)
- Chipotle’s CEO recently announced that half of its restaurants are now failing the company’s internal customer service scoring system. Chipotle is still trying to recover from food poisoning outbreaks last year; while the food is now safe, the chain can’t afford lackluster customer service at a time when the restaurant industry as a whole is struggling. (Barron’s)
- While every age group named 9/11 the most significant historical event in their lifetime, WWII came in a close second for the Silent Generation. The Second World War was a singular formative event that bound this generation together, and served as the de facto cultural dividing line separating them from Boomers. (Pew Research Center)
- Fully two-thirds of Millennials are comfortable planning an entire trip on their smartphones, compared to only one-third of travelers over age 35. Whether it’s for business or pleasure, Millennials are on the go, and airlines and hotel chains need to ensure that their websites are responsive enough to meet their needs. (AudienceSCAN)
- Canadian Millennials and Boomers are more likely than Xers to have put down 20% on a home, with Millennials also more likely than Xers to have gotten help from their parents in the process. As usual, Xers are neglected and financially left behind—not as well-off as older Boomers, yet not receiving the same help that Millennials count on from their parents. (ratehub.ca)
- New research finds that younger generations are showing less interest in material possessions compared to older consumers—which poses a serious threat to carmakers. While Baby Boomers used to say that “a car is the most expensive suit you’ll ever own,” they’re aging out of their prime car-buying years—and Xers and Millennials either don’t want, or can’t afford, to make up the difference. (Ford)
- Only 6% of U.K. Silent Generation investors have at least one passive fund in their portfolio, a far lower share than younger investors. Silent Generation technocrats were raised to trust the experts, and this includes the (tenuous) belief that asset managers can consistently outperform the market. (Hargreaves Lansdown)
- Millennials are the generation least likely to list some aspect of “The Tech Revolution” as one of the top 10 historical events of their lifetimes. This may seem surprising, but Millennials grew up surrounded by technology—and many might not even consider the revolution to have happened while they were alive. (Pew Research Center)
- The recent Italian referendum regarding proposed constitutional amendments failed to pass, with 80% of Italian Millennials voting for “an anti-establishment rejection of the status quo.” While Brexit and Trump were the work of older voters, in continental Europe the radical votes tend to be cast by young people rejecting a system that they feel doesn’t work for them. (Mic)
- Baby Boomer Peter Arango ponders the sacrifices his own generation has made to better the world, and comes up lacking. While the author asks, “We made a lot of noise in the 1960s, but what remains?” Boomers have an unprecedented platform to make a difference for younger generations thanks to their lasting cultural influence. (Mail Tribune)
- McDonald’s is hoping to compete with coffee giants Starbucks and Dunkin’ Donuts by revamping its McCafé coffee brand. By upgrading its caffeinated products, McDonald’s intends to capitalize on the newfound demand for sustainable, gourmet coffees—as well as build on the success of its recent move to all-day breakfast. (Bloomberg Business)
- A contributing author commemorates the 75th anniversary of Pearl Harbor by examining how various catastrophic historical events affected different generations. The G.I.s responded to Pearl Harbor and the subsequent war by banding together, shaping them into the leaders and builders that all age cohorts venerate today. (WXOW)
- While U.S. high school graduation rates continue to rise, the total number of high school graduates has begun stagnating, leaving many colleges scrambling to fill seats. The rising number of total births peaked in the early ‘90s, and the demographic consequences are just beginning to be felt in higher education. (The Washington Post)
- Nintendo recently released the NES Classic Edition, a smaller version of the company’s original 1985 console, just in time for the holiday season. This remake was designed and marketed with Xer nostalgia in mind; the console even comes pre-loaded with 20 classic games, like Super Mario Bros., Donkey Kong, The Legend of Zelda, and Tecmo Bowl. (The New York Times)
- National financial data show that the Silent Generation has by far the highest credit score of any generation (with a 730 average), while other generations’ scores range from 700 to 630. It’s not surprising that the generation that came of age during the Great Depression would do their best to remain debt-free and in good financial standing. (Experian)
- Amazon is currently testing a concept store in Seattle called Amazon Go, where customers’ items are automatically tracked throughout the store and charged to their account upon leaving—no standing in line required. Amazon Go is the online giant’s latest attempt to encroach upon, and improve, the traditional grocery business. (Bloomberg Technology)
- A recent report on the health of Baby Boomers in the U.K. finds that the physical and mental health benefits of remaining employed, or otherwise active, in old age “should not be underestimated.” This is great news for the many Boomers who either cannot yet afford to stop working or are too invested in their jobs to retire. (U.K. Department of Health)
- Urban Millennial mothers and fathers are choosing to be called “mama” and “papa,” because classic terms like “mom” and “dad” conjure up images of Baby-Boomer suburbia. Progressive young parents are also redefining the traditional gender roles of parenthood—and many want a unique new moniker that reflects those changes. (The Daily Beast)
Did You Know?
Boomers Go Under the Knife. Over the past two decades, the number of people age 65 and over getting facelifts and cosmetic eyelid surgeries has more than doubled. Plastic surgery’s growing popularity is partially the result of changing demographics: There are a lot of Boomers, and older people are living longer than they used to. Plastic surgery has also become more socially acceptable (thanks to TV programs like Nip/Tuck), more economical, and less invasive over the years. But the largest factor bolstering plastic surgery’s popularity is generational: Boomers are remaining in the workforce and the dating world later in life—and don’t want to be mistaken for an “old person.” In the words of one Boomer, “[When] my grandfather and grandmother were 60…it was like they had a foot on a banana peel and the other in the grave—and now [people their age] are skiing.”
Who Are the Gig Workers? We’ve written before that a growing share of Americans is making money through informal, contingent “gig work.” (See: “The Gig Economy is Alive and Growing.”) Now, Pew Research tells us who these workers are—and what motivates them. Fully 39 percent of 18- to 29-year-olds have made money in the past year either by offering their services on “labor platforms” (like Uber) or selling goods on “capital platforms” (like Craigslist), the greatest share of any age group. Generation Xers are close behind, with 37 percent of 30- to 49-year-olds having earned gig income during the past year. More than half (56 percent) of all gig workers say that the income they earned through gig work in the past year was either “essential” or “very important” to them. But despite the gig economy’s growing popularity, just 16 percent of all Americans believe that gig work can be a building block toward a career—against 41 percent who disagree.
