Boomers, Korean Agriculture and Airlines

Think broader to think better

Arguments occasionally surface suggesting once the baby boomer generation begins retiring, it’ll likely pull the stock market down—predicated on the assumption boomers will begin living off their investments.

Though we find a few problems with such arguments, a big one is they’re too narrow. For example, consider that baby boomers are sitting on masses of less liquid assets—like businesses, real estate, etc. Eventually, they’ll liquidate those, and it would seemingly make sense at least part of those proceeds wind up in capital markets. Or maybe they’re passed along to younger generations who invest them. Or ... or ... or ...

Consider, too, such arguments look only at a single generation, neglecting entirely those following on the boomers’ heels. And according to a Wall Street Journal piece Tuesday, it seems younger generations are increasingly saving funds and deleveraging, tied partly to experiences from the last recession—and generating money to invest somewhere, like stocks. So it would seem possible to at least some extent retiring baby boomers will be largely offset by those following behind.

The moral of the story is this: In considering any argument’s value, it’s critical to think beyond the group narrowly involved or impacted and ponder what other impacts may result. Doing so is key—particularly for investors seeking to avoid common pitfalls.

Kim Jong-Un passes Econ 101

After decades of communism, it seems North Korea’s leaders have finally learned a basic economic lesson: If workers don’t have anything to gain from producing more, they probably won’t.

For decades, North Korea has relied on its collectivist farming system to produce enough to feed all 24.6 million citizens. Everything a farm produces, except for what farmers need to feed their families, goes directly to the state, which redistributes it nationwide. But food is scarce in North Korea and famine too commonplace.

Now, based on some farmers’ reports to South Korean media, it appears the government may allow farmers to begin selling 30% to 50% of their harvest—with the belief that if farmers are allowed to profit from their work, they’ll have incentive to grow more crops, and the country’s total food supply will rise. A very simple concept, but something communists have always been loath to admit.

Whether these reforms actually take effect remains to be seen—isolationist North Korea rarely makes broad policy announcements. If it does though, not only will quality of life likely improve for all North Koreans, but the implicit admission of communism’s failures might just open the door for further market-oriented reforms over time.

Tax, free trade and open skies

Barriers to free trade continue to fall around the world, as countries and folks recognize the myriad benefits of removing obstacles to free-functioning markets. However, in at least one global industry—airlines—progress has been slow and, in some cases, backward thanks to onerous regulation and outmoded protectionism.

Earlier this week, the US joined a host of other nations who’ve already rejected the EU’s carbon emissions scheme on airlines. The Senate unanimously passed a bill shielding US airlines from paying for their carbon emissions on European flights, as mandated by the EU. The scheme aims to tax airlines flying into European airspace on the basis of total miles traveled to get there. Japan, India and China have vehemently opposed the tax since it was first proposed—with some passing decrees prohibiting their airlines from paying the tax and yet others threatening to seize European planes landing in their country should their domestic carriers be punished for noncompliance. In our view, their blustery rhetoric is likely appropriate. Recall, airlines are likely to pass the costs of compliance onto consumers—making it more expensive for fliers into Europe. Of course, airlines could find other ways to reduce the tax’s impact, but that’s likely to result in other unintended consequences and costs.

Quite puzzlingly, the EU responded on Tuesday by pushing for more EU-US airline mergers, arguing more transcontinental mergers would allow them to better weather the costs of operating in an increasingly difficult economic environment. That’s ironic to us, given they’re responsible for making the environment for airlines slightly less hospitable globally. A little history is likely appropriate here, though—flights between the EU and US are governed by the EU-US Open Skies Agreement, which allows US airlines to operate intra-EU flights but bars European airlines from operating intra-US. Likewise, the treaty bars European airlines from taking controlling stakes in a US operator. Of course, that protectionist agreement (one wonders why the EU airlines agreed to such a lopsided deal in the first place) reduces competition and restricts foreign investment in the US—two things that could potentially increase consumer choice and decrease prices. Mergers or no, our advice here is simple: Ridding the US of silly protectionism and the EU of ineffectual legislative cost increases is the sensible path.