Sunday, May 2, 2021

The Cascading Exponential Trend Failures of Real GDP Growth

The headlines are dominated by talk of robust GDP growth during the recovery. Thought it might be a good time to offset that with a few charts of real GDP reality.

Here is a short-term chart of the natural log of real GDP. When using logarithms, constant exponential growth is seen as a straight line.

Note that, thanks to the virus, we failed to stay in the green channel. We're currently throwing everything at real GDP, including the kitchen sink, just in an attempt to get back to where we were. Also note that real GDP growth was weakening before the virus even hit. The Fed raised rates in 2017 and 2018. In 2019, the Fed was forced to backtrack on that plan. In hindsight, a rate of 2.4% was too draconian. The Fed ended the year at only 1.6%. And then, the virus hit.

So, in the short-term, we're definitely attempting to claw our way back to that green trend channel. But what about long-term?

The red channel is where we once were. That ship has sailed. No hope of ever getting back to it, especially now that we have a Covid baby bust. That exponential trend failed spectacularly, leaving us with a new green channel. The green channel then failed too. Cascading exponential trend failures. That's where we are now.

Here's the good news. We're all in this perma-ZIRP handbasket together and some of us strongly suspect where we are headed. Brush up on your Japanese and enjoy the ride! We might not like the ultimate destination all that much, but the path to get there is filled with easy money. And when I say easy money, I'm not expecting retired savers patiently waiting for interest rates to "normalize" to someday make out like bandits. This isn't a Hollywood movie. If anything, it's more like Gilligan's Island. Being stuck at zero is normal. Interest rates have been exponentially decaying for 40 years. It's just more of the same.

Friday, April 30, 2021

VPU Performance v.004

Months Elapsed: 4
Total Growth: 9.20%
Annualized Growth Rate: 30.22%
Distribution Yield (TTM): 3.06%

The 30-year Treasury yield has risen from 1.67% in December to 2.30%. In hindsight, investing in utilities was a much better plan than locking in a 1.67% yield (the red target in the chart). Since I am not even remotely convinced that the long-term bull market in government bonds is over, those locking in 2.30% today might not be similarly disappointed though. That said, it would take a lot to be similarly disappointed. 30 years at 1.67% nets so much less than 30 years at 2.30%.

I suspect one short-term tailwind for utility investors to diminish as Treasury yields stabilize. Picture a recent safety-seeking retiree invested in low-yielding bonds who is looking at massive losses on those bonds, while also watching higher-yielding utilities actually going up in price. Painful. Is it any wonder that some therefore sold government bonds to buy utilities? As utility prices rise and Treasury prices fall, there is a growing temptation for me to sell utilities to buy government bonds though. The 30-year TIPS yield is currently only 0.02%, so the temptation is still very minimal.

4 months down, 196 to go.

Sunday, April 18, 2021

Tech vs. Utilities (Musical Tribute)

The following chart shows the QQQ to XLU ratio since 1999.

Chart courtesy of

The ratio peaked in 2000. 21 years later, we've almost come full circle. What good fortunes will the next 21 years bring? Fully autonomous self-driving cars? Better late than never. Am I right?

This is not investment advice. As a utility investor, I am indifferent when it comes to how utilities perform relative to tech stocks from here. That said, it would not surprise me in the least if utilities outperform Tesla. Keep in mind that I want Tesla to succeed, just as I would have wanted Ford to succeed in the early days if I would have been a gasoline investor.

As a side note, my first mower was gas-powered. My next mower was battery-powered. I really liked how quiet it was, but I did not like that, as it got older, it took more than one charge to mow my lawn (nor did I like that the battery was not easy to swap out). My current mower is gas-powered. Spent more than an hour today cleaning its carburetor. My next mower may be battery-powered, again. As much as the thought of a fully-autonomous self-driving lawn mower appeals to me, I don’t think I’m emotionally prepared to risk having it mow over things that randomly might appear in my lawn completely unsupervised though. You know, like the neighborhood kids and pets.

I’m not even emotionally prepared to risk owning a fully-autonomous self-driving vacuum. We have two dogs and a cat. All it took was one poopocalypse story involving a Roomba to cure me of that desire.

Saturday, April 17, 2021

Thoughts on Food, Services, Health, and the Economy

The following chart compares the annual percentage change in personal consumption expenditures of food and services.

Looking forward to a return to normal.

There are three reasons we spent more money on food since the pandemic started. First, we have more food stockpiled. Second, our food has been delivered. Third, we have not been as price conscious. Taking advantage of sales hasn't been nearly as important to us over the past year. All of these things will soon reverse once we are vaccinated.

There is a disturbing fourth reason that food expenditures are up for others.

March 11, 2021
One year later, a new wave of pandemic health concerns

Weight change is a common symptom when people are having difficulty coping with mental health challenges. A majority of adults (61%) reported experiencing undesired weight changes, since the start of the pandemic, with more than 2 in 5 (42%) saying they gained more weight than they intended. Of this group, adults reported gaining an average of 29 pounds (with a median gain of 15 pounds), and 1 in 10 (10%) said they gained more than 50 pounds. For the 18% of Americans who said they lost more weight than they wanted to, the average amount of weight lost was 26 pounds (median of 12 pounds).

50 pounds is a lot to gain in one year, and a surprisingly large number of people managed to do it. Ouch.

For what it is worth, I intentionally lost about 10 pounds. It wasn't from eating less. I chose to walk more. I've averaged 6.7 miles per day during the pandemic. Trying to make a permanent habit out of both walking and cycling. Bought a bicycle late last year and will soon be riding it again. I'm optimistic that even more weight will be lost this summer.

I'm more optimistic in general. I do think inflation will be transitory. I do think interest rates will remain low. If true, I'm not even that concerned about debt. I don't currently see a stock market bubble or a housing bubble (although I do see pockets of great excess). Like Japan, it won't be a great era for savers, but that's okay. There are worse things than ZIRP. Not expecting the roaring twenties, but perhaps the meowing twenties? Could that be a thing?

I'm basing my optimism on a reversion to the mean, or lack thereof. We are continually told that when interest rates normalize, blah, blah, blah. I am arguing that rates have been normalized. They've been decaying exponentially for 40 years. That's what has been normal. Unless someone can give me a good reason why rates will soon stop decaying then I'm going to continue to believe that they will continue to decay. More money deposited in banks certainly won't lead to higher interest rates. Any counterargument based purely on excess money makes no sense to me at all. And man, has there ever been more excess money than right now?

This is not investment advice. My optimism is tempered. A friendly reminder that this is still an Illusion of Prosperity blog. The meowing twenties could easily become the hissing thirties. Sustainable and stable is not the long-term path we find ourselves on. Each economic crisis has been worse than the last.

Monday, April 5, 2021

Mining Productivity Miracle

The following chart shows the mining industrial production index divided by the number of mining employees (thousands).

Bagger 293

Bagger 293 is 96 metres (314.9 feet) tall (Guinness World Record for highest terrestrial vehicle, shared with Bagger 288). It is 225 metres (738.2 feet) long (same as Bagger 287), weighs 14,200 tonnes (31.3 million pounds), and requires five people to operate.

At what point are these fully-automated and/or self-replicating?

Thursday, April 1, 2021

VPU Distribution History

This chart is one reason why I am mostly comfortable holding VPU over the long-term. I say mostly comfortable because:

1. Past performance is not necessarily indicative of future returns.

2. Exponential trends eventually fail. This one will be no exception.

3. VPU's distributions held up great during the Great Recession. However, had the fund existed during the dotcom bubble collapse, it would not have done well. XLU investors buying utilities in 2000 were no doubt greatly disappointed in 2003. Both the price and the distributions fell over the period, and not by a trivial amount. See data here.

4. A return to the 1970s era, which I am not at all predicting, could make the dotcom bubble's utility pain potentially seem tame by comparison. My comfort level is therefore tied to the belief that rising inflation will be transitory and that long-term yields will begin to fall again at some point in the next few years.

My expectations are low. Not trying to hit a home run here. I'd be perfectly happy walking to first base. This investment is mostly just a bond replacement in a TINA world, at least to me. Anything more than that is just a bonus. That said, there is a definite possibility of a substantial bonus, assuming the wheels don't fall off.

Wednesday, March 31, 2021

VPU Performance v.003

Months Elapsed: 3
Total Growth: 5.23%
Annualized Growth Rate: 22.60%
Distribution Yield (TTM): 3.17%

VPU paid a $0.9851 dividend today (a 9.5% increase from 2020 Q1). It was automatically reinvested through a DRIP @ $139.874. VPU closed @ $140.51.

From down 4.59% last month to up 5.23% now, it's been quite a volatile start. Live by the sword, die by the sword, live, die, and so on.

3 months down, 197 to go.