Revision to Corn and Geopolitics

After time to think and having great discussions regarding corn and geopolitics, I am going to add a little to my post.

Demographics of the Population


The old age and bad health of American citizens are a significant cause for current account deficient in the federal government. Until the demographics of the United States change, reforming the "big three" will prove to be hard for the foreseeable future. Changing demographics has to start with a reform of the US agricultural system to not incentive any food product over another(organic or industrial). However, the incentive to switch from grains or any grain substitute stems from the consumer.

There is nothing that can be done regarding the aging population, yet if the population was healthier than healthcare cost would be much lower. A healthier population would also allow more political choices regarding raising the retirement age and cutting healthcare costs. The United States' demographics always defines American politics. Age and health are the nation's biggest imbalance and correspondingly our biggest long-term costs. American success helped cause those imbalances; American geographic and political advantages can fix those imbalances.

Morning Readings

Here are a few good articles to start your Friday.

1.The sunk cost fallacy, what do investments, Farmville and bad emotions have in common? here
2. Iran, the US, and the Straits of Hormuz. here 
3.(A must see) If your investment adviser uses these random words, you need to find a new one. here

Have a great Friday.

Corn and Geopolitics in the United States

Corn and Geopolitics in the United States

January 18, 2011

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Introduction

The geopolitics of United States are heavily influenced by corn and other commodity foods (For simplification purposes the word “corn” will encompass soy, wheat, and other industrial food commodities). Although the concept may seem odd this short introduction to the corn industry will illustrate the importance of food in America.

Source of Success

The foundation of the United States lies in the geography of the nation. The two geographic elements that dictate the natural wealth of a nation are water transportation and large agricultural production. Moving large volumes of products over water is the most cost effective method of transportation. Large river networks allow goods to be moved from the heart of the US to international markets at a cheap rate. Deep water ports also play a major factor in allowing US products to be shipped. The east and west coasts of the US are blessed with ample deep water ports while the interior of the US is home to the worlds largest river network. The effect is the US spends much less on infrastructure compared to nations without river networks or deep water ports.

The other major source of geographic wealth stems from large tracks of prime agricultural land. The American Mid-West is the worlds largest area of food production. Ample water and sun mixed with rich and deep soil makes the farming very cost effective. In addition, food products are easily moved on the large river networks of the Mississippi, Missouri, and Ohio Rivers. The natural geographic advantages are the foundation of American wealth and power. However, the abundance of low cost food created by geographic advantages are also the source of many American financial concerns.

Cheap Corn and the National Debt

There is a direct correlation between cheap corn and the growing national debt. After the World War II the United States experienced a period of rapid economic expansion. Technology that had been used for the war started to be used for other purposes. Medical knowledge increased dramatically, extending the lives of citizens, while mechanization was used on the farms to increase food production. The net result was a rapid rise in the population over a single generation, this group was called the Baby Boomers.

The Baby Boom generation contributed much of the wealth and power the US currently enjoys, however, the cheap food and longer life spans have created considerable financial problems. Because the Baby Boomers are living longer than expect in the 1960’s and 1970’s the national retirement insurance program (known as Social Security) is vastly underfunded and expensive. In addition, American citizens are plagued with a large variety of diseases related to poor eating habits. The combination of the longer life-spans and poorer health has crippled the national budget.

Age, Sickness and Deficits

In 2011 the Federal government spent 59 percent of total expenditures on what I call the “big three:” health-care, social security, and pensions. Corn has had a direct impact on all three categories. Abundance of cheap food allowed for such a large and old population to exist, plus the cheap food is of poor quality leading to an increase of disease. For example, out of the top 10 most expensive medical conditions, 6 are cause by poor diet.

1. Heart Conditions
2. Pulmonary disease
3. High Blood Pressure
4. Type 2 Diabetes
5. Osteoarthritis and other joint diseases
6. Back Problems

Because of the poor health of the aging population it is hard to recommend raising the retirement age because many people are too sick to keep working past their 50s. Raising the retirement age would immediately solve many of the United States financial issues but as long as cheap corn is the main diet of Americans, such action will be impossible.

Closing Thoughts

Cheap food does not have to equate to poor quality food. If the United States gradually stopped paying subsidies for corn production than the Mid-West could be used to grow healthier food that would remain affordable. Medical cost would decrease and raising the retirement age would become feasible. In addition, more jobs would be created because higher quality foods take more human labor providing a wealther tax base to pay down national debt. The geographic advantages the US enjoys have also caused many of our problems. Simply redirecting away from corn would make a huge difference in the health of the population and the financial wealth of the nation.

Tuesday's Morning Reads

Today we have some articles regarding the foolishness of the markets.

1. Correlation, China, and a website that called out Bloomberg here.
2. Is Italy a risk when the ECB is buying regardless what European leaders say? here
3. Alcoa lost money but it came in at "expert" estimates, guess that means "buy" to the markets here

Send me what you are reading.

Today's Reads

We are diving once more into the human mind.

1. A great short piece on why investing is hard for humans here
2. The brains is creative and we can tap into it here
3. Fractals in a zip code here 

Send me what you are reading or leave a comment on the articles I posted.

The Role of the Expert, Group-Think, and Hindsight Biases on Market Participants

Although the title to this post is long and sounds like the beginning of a boring academic journal essay, I assure you I will summarize. My goal is to show how a vast majority of the economic, finance, and statistic literature regarding the markets is less useful than an issue of TV Guide. Three mental heuristics are responsible for the continued belief in failed fields of academia.

The Belief in Experts

The role of an expert has long been a coveted title in human society. It is the expert that calms our fears and outlines the risks. In most circumstances following the advice of an expert is a wise decision, however, you must define what type of expert you are seeking advice from. The title of "expert" in itself does not guarantee "expertise."

For Example, if you are about to have surgery it would be prudent to listen to surgeon regarding the possible options and complications. The surgeon has performed surgery and is peer reviewed on constant bias. The rightful title of expert is given to the surgeon, however, would you buy a stock that the surgeon recommended during a period of idol conversation? If you said no, than you are probably deluding yourself.

The human brain has a hard time separating context and definition. If a person is labeled an expert in a certain field, we tend to view them simply as intelligent and capable overall. As a thought experiment lets change up the surgeon analogy I just used. You meet a man at your grandmother's cocktail party, we will call him Dave. Dave strikes up a stirring conversation and you glean that he went to medical school at Harvard.  Over the course of the discussion Dave starts telling you about his hobby of investing his portfolio and how successful he has been. Before parting he imparts on you some of his investment wisdom and recommends a stock that cannot fail. Would you be more willing to invest on Dave's advice? Studies show that you would simply because he said Harvard and your brain equated Harvard to intelligence.

The Problem of Group-Think


There is a difference in types of experts. Doctors come from a field that regularly employs the scientific method and has a peer hierarchy that checks and refutes studies performed. There are mistakes but the results of modern medicine are clearly proven as humans continue to have longer life spans.  Economics on the other hand has a bad track record and does not employ any type of empirical research. Yet, presidents still defer to economic experts when drafting a policy, why?

The answer is that people view professors of any field as an expert, if they were not smart they would not be a professor at MIT, right? Wrong, the reason people still view an economist as an expert when making investment decisions is because we fall for the expert bias and the group-think bias. If polled, most people would agree that a economics professor at MIT is an expert in the field of economics. The fact that others believe is going to make you believe, because who are you to argue with the rest of society? We do not like to make decisions that run contrary to public opinion, regardless if that opinion is wrong.

Hindsight Bias 


The heuristic that brings all of this together is the hindsight bias. I have been extra hard on the study of economics in this post, not because I do not like economists, but because despite the empirical data the markets still believe in their wisdom. The reason the reputation of the economist is still untarnished is due to the hindsight bias. When economic theory is implemented and fails it is easy for economist to state that it was astronomically rare event or pin the blame on a scapegoat such as the government. When we look back at past events humans like to believe that the reason for those events is clear.

For example, the 2001 terrorist attacks on the United States are completely understood. It was a massive failure of intelligence communication that allowed the attacks to take place, or was it? The attack happened because it was unexpected. If the attack had been expected it probably would not have happened. But our brains need a reason for events and the reason that has been popularly accepted is a failure of the CIA and FBI.

Summary 


The assumptions of modern economic, financial, and mathematical literature are still popular and widely followed beliefs. The existence of such literature is dependent on society's collective mental biases. For these reasons, investing in the stock market on existing theories and ideals will always lead to disaster. That is why the need for empirical research regarding human behavior and the markets is incredibly valuable to a portfolio. So before you believe what a market "expert" tells you, ask yourself, "do I believe him because he has an empirical approach or because he seems really smart?"

Please remember, I summarized a massive amount of information into a few paragraphs. If you have questions or would like more information please leave a message in the comments.  Also, I appreciated criticism as long as you acknowledge that this is a blog post and do not attack on a personal level. 

Reads of the Day: Morning Edition

Hope everyone slept well, here on some reads to get going this morning.

1. Tensions in Iraq keep mounting here.
2. Daily dose of behavioral science and why political polarization exists here.
3. An interactive look of Empires that have controlled the Middle East here.

Reads of the Day

Here is a list of good reads for this evening.

1. Iran and the United States in a war of words and political positioning here.
2. Why the brain hates New Year's resolutions and how to overcome lack of willpower here.
3. Does money make us happy? A look into lay-mans behavioral science here

Leave me any questions in the comments and I will respond as quick as possible.