226 (19 August 2015)

Welcome to week 226!  The articles below caught my attention this week.  Please note that what are intended to be relatively objective “briefs” are preceded by dashes (——–), whereas additional material or relatively subjective comments are preceded by asterisks (********).  The links to articles preceded by [SR] require a subscription to be read in their entirety, although complete articles may frequently be found by an Internet title search.

(15 August 2015): “Not So Soft Drink: Brewers Add Booze to Root Beer” (http://www.wsj.com/articles/not-so-soft-drink-brewers-add-booze-to-root-beer-1439546400)

——–“An alcoholic version called Not Your Father’s Root Beer has become one of the fastest-growing product in U.S.”  The beer is made by Small Town Brewery of Wauconda, Illinois, which was “the sixth best-selling craft brewer for the four weeks ended July 12, snagging 3.3% of the craft dollars sales at retail. . . . The brand’s success has created a new category in the alcoholic-beverage industry.  Some call it hard soda.  Others call it flavored beer.”  Whatever the name, “the root-beer blitz highlights the beer industry’s effort to appeal to adults under age 35, many of whom prefer sweeter beers.”  According to Eugene Kashper, the CEO of Pabst Brewing Co., “There’s a tidal wave shift in consumer consumption patterns . . . Younger people are looking for something lighter and sweeter.  The beer segment long-term doesn’t seem like it will be dominated by traditional, hoppy beers.”

********There is some information in the article to suggest that hard root beer may be a temporary phenomenon.  Still the “hard soda” category is easy to understand in light of the different life experiences of Millennials as compared to, say, Baby Boomers, and given their increasing numbers.  According to the Pew Research Center, “This year, Millennials will overtake Baby Boomers” (http://www.pewresearch.org/fact-tank/2015/01/16/this-year-millennials-will-overtake-baby-boomers/).  The link provides graphs of projected population by generation from 2015 to 2050, which is definitely worth looking at.  Of course, the power of numbers is one thing and economic power is another.  For the time being, Boomers still have the advantage of economic power in many markets.

(15 August 2015): “Letter from the editor: A new chapter” (http://www.economist.com/news/leaders/21660919-only-second-time-our-history-ownership-economist-changes-new-chapter)

——–On August 12th The Economist “announced the most important change” to its “shareholding structure in almost 90 years.”  In its 172-year history this “is only the second significant change of ownership.”  The editorial independence of The Economist is “absolute and fiercely guarded by four independent trustees” and the newspaper has served “no master save the liberal credo of open markets and individual freedom,” engaging in what founding editor James Wilson called “a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstruction our progress.”

********With a circulation of 1.6 million and with an expanding social media presence, The Economist plays an important role in forming a particular type of educated opinion.  May it continue to thrive under its new ownership arrangements.

(15 August 2015): “Schumpeter: From alpha to omega” (http://www.economist.com/news/business/21660985-conglomerates-are-back-fashion-only-best-will-thrive-alpha-omega)

——–“Few management fashions have waxed and waned quite as dramatically as that for conglomerates.  From the 1960s to the 1980s business gurus praised conglomerates such as ITT of America and Hanson Trust of Britain as the highest form of capitalism.  Today they routinely dismiss them as bloated anachronisms [arguing that] Companies should stick to knitting; investors should minimize risk by investing in a portfolio of companies rather than backing corporate megalomaniacs.”  It appears, though, that the mood is shifting.  “Warren Buffet has been steadily and almost single-handedly restoring the popular appeal of conglomerates.”  Now Google has “announced a big reorganization in which, in effect, it admits to being a conglomerate.  Larry Page and Sergey Brin, its founders, will run a holding company called Alphabet. . . . Mr Page has acknowledged that he looks to Berkshire as a model of how to run an increasingly diversified company.”  Companies that are and have operated successfully as conglomerates have done so for different reasons.  Consequently, “it is now clear that you should not apply the same conglomerate discount to all diversified groups.”  The best conglomerates “have the patience and skills to end up changing the world.”

********No doubt investors will benefit from having greater clarity given to the many “moonshots” associated with the old Google—perhaps management will, too.  A related paper is “The Decline and Fall of the Conglomerate Firm in the 1980s: The Deinstitutionalization of an Organizational Form” (http://webuser.bus.umich.edu/gfdavis/Papers/Decline%20and%20Fall.pdf).  Its arguments might help to understand recent conglomerate behavior.  Of course, two data points, even if they are very large, don’t make for a trend; as the French say, une fois n’est pas coutume.  All this reminds me of Designing the New American University, by Michael Crow and William Dabars (http://www.amazon.com/gp/product/1421417235/); Crow is the president of Arizona State University, the largest public university by enrollment during the 2013-14 academic year (https://en.wikipedia.org/wiki/List_of_United_States_university_campuses_by_enrollment).  It strikes me that the spirit of conglomeration has never left some parts of higher education.  It would be interesting to look at a time series of the size distribution of universities in the U.S.

(15 August 2015): “Free exchange: Automation angst” (http://www.economist.com/node/21661017)

********The article summarizes three papers that “examines fears that machines will put humans out of work” that are part of a Symposium on Automation and Labor Markets that appears in the Summer 2015 Journal of Economic Perspectives (https://www.aeaweb.org/articles.php?doi=10.1257/jep.29.3).  I especially enjoyed the statement of the implicit classification of technological impact using a 2×2 classification, which follows.  “One way to think about the impact of technology is by categorizing the tasks involved in any job between cognitive and manual on the one hand, and routine and non-routine on the other hand.  It is occupations in administration and middle management, which involve cognitive but routine tasks, that have been the most vulnerable to automation so far.  By contrast, employees whose work is cognitive but not routine have largely gained from technological change.”  As with all such classifications, it is a starting point for thought rather than a procrustean bed to be adhered to.

(17 August 2015): “In Venezuela, Economists Improvise to Track Economy” [SR](http://www.wsj.com/articles/in-venezuela-economists-improvise-to-track-economy-1439759978)

——–[Caracas, Venezuela.] “On monthly trips to his native Venezuela, Miguel Octavio heads to the same restaurant for the cornmeal cakes he enjoyed as a boy known as arepas . . . The price, however, is never the same.  Over nine months, the Miami-based financial analyst and blogger has recorded a fourfold increase in what he calls his Hyperinflated Arepa Index, a yardstick he created to trace soaring consumer prices in this economically crippled country.”  The necessity of such yardsticks has grown since “President Nicolás Maduro’s government stopped publishing monthly inflation data last December when the level hit 68% annually, the world’s highest.”  Venezuela is not alone in its struggle with inflation.  Claudio Loser, a former director of the IMF, notes: “Latin America has had more problems with inflation than any other region in the world.”  Indeed, Barclays estimates that “Latin America will post triple the average inflation for emerging markets this year.”  Contributing to the inflation in Venezuela has been an 18-fold increase in “the supply of bolivars . . . in the seven years since they slashed three zeros off the previous currency and introduced a new one.”

********The nonpublication of inflation data in Venezuela has been termed a “data drought” and is regarded by some as “a political error.”  This is, of course, an all too familiar strategy.  The cultural production of ignorance is a field of study called agnotology.  You can learn more about it at Wikipedia (https://en.wikipedia.org/wiki/Agnotology) or in the book by that title (http://www.amazon.com/Agnotology-The-Making-Unmaking-Ignorance/dp/0804759014/).

(17 August 2015): “How Medicare Rewards Copious Nursing-Home Therapy” [SR](http://www.wsj.com/articles/how-medicare-rewards-copious-nursing-home-therapy-1439778701)

——–“Patients getting ultrahigh therapy—at least 720 minutes a week—generate some of nursing homes’ biggest payments from the taxpayer-funded program.  Medicare’s ultrahigh rate average about $560 a day in 2013 . . . The average $445 a day for ‘very high’ therapy of 500 to 719 minutes and $325 for the ‘low’ category, 45 to 149 minutes.  Medicare adopted the payment rules in 1998 and phased them in over the next few years, replacing its system of paying based on costs.  Since then, nursing homes have billed for increasing therapy levels, a Journal analysis of their federal financing reports found.  In 2002, nursing homes gave ultrahigh therapy to patients on about 7% of days they billed to Medicare; in 2013, they billed 54% as ultrahigh.”  According to Vince Mor of Brown University, Medicare’s 1998 reimbursement system “changed the incentives, which changed the culture.”

********It is certainly not surprising that nursing homes respond to the reimbursements they expect to receive, however distasteful that might be.  The step-wise reimbursement system contributes to the situation, as behavior changes around “switch points,” i.e., as one moves from one reimbursement level to another.  Accompanying the article (and not requiring a subscription) is an opportunity to look at the behavior over time of (some) nursing home in every state from 2001 to 2013.  You can filter the data by State and Facility at: http://graphics.wsj.com/medicare-therapy/.  Background information on the reimbursement of Medicare for nursing-home care can be found at: http://blogs.wsj.com/briefly/2015/08/16/what-to-know-about-medicares-nursing-home-coverage-the-short-answer/.

(18 August 2015): “Central Asia Mountain Range Has Lost a Quarter of Ice Mass in 50 Years, Study Says” [SR](http://www.wsj.com/articles/central-asia-mountain-range-has-lost-a-quarter-of-ice-mass-in-50-years-study-says-1439823730)

——–“The glaciers of Central Asia’s Tien Shan mountain range have lost a quarter of their ice mass over the past five decades, largely because of increased melting linked to a rise in summer temperatures, according to new research.  The Tien Shan range stretches across 1,500 miles.  Both glacial melting and snow are vital sources of water for people living in semiarid parts of Kazakhstan, Kyrgyzstan, Uzbekistan, Turkmenistan and China.  The worry is that continual glacial shrinkage could affect the water cycle and reduce the water supply in coming decades.”  The study looked at the period from 1961 to 2012, much longer than past studies.  The glaciers of Tien Shan “may be particularly vulnerable because its winters are especially cold and dry, leading to hardly any winter snow accumulation.  Snow falls in the summer months, but the study suggest that because of rising temperatures there is less snow and more of it is melting.”  According to the lead author of the study, Daniel Farinotti, “You’re double-hitting the glacier—that is why they’re so sensitive to changes in temperature.”

********You can learn more, and find a reference to the original research article, at: http://www.sciencedaily.com/releases/2015/08/150817132329.htm.  It was challenging to find a decent map of the Tien Shan Mountains.  Here is the best one I found: http://www.britannica.com/place/Tien-Shan.

(19 August 2015): “Grad-School Loan Binge Fans Debt Worries” (http://www.wsj.com/articles/loan-binge-by-graduate-students-fans-debt-worries-1439951900)

——–“The doubling of student debt since the recession, to $1.19 trillion, has stoked a national discussion over how to rein in college costs and debt and is becoming a major issue in the 2016 presidential race.  Little noted in the outcry is the disproportionate role played by postgraduate borrowers, who now account for roughly 40% of all student debt but represent just 14% of students in higher education.  Propelling the surge in grad-school debt is a welter of federal programs that make it easy for students to borrow large amounts, then to have substantial chunks of those debts eventually forgiven.  Critics of the system say it makes it easier for graduate schools to raise tuition, and for some high-earning graduates such as doctors to escape debts they can afford to repay.”  In contrast to undergraduate from the federal government, which are capped at $57,500, “Federal programs allow grad students to borrow essentially unlimited amounts—whatever their schools charge—while requiring only a scant credit check and no assessment of their ability to repay.”

********A valuable article that disaggregates total student debt, focusing on the indebtedness of graduate students.  It clearly shows, among other things, how the structure of federal programs have affected the work decisions of students.  In this way, the article complicates the Medicare article above.  Also of interest is “5 Things About Grad-School Debt” at: http://blogs.wsj.com/briefly/2015/08/18/5-things-about-grad-school-debt/.

(19 August 2015): “Fast Food’s Big Challenge: Fresh Ingredients” [SR](http://www.wsj.com/articles/fast-foods-big-challenge-fresh-ingredients-1439890200)

——–“It will have taken three years and a search involving more than 30 growers for Wendy’s Co. to procure enough blackberries for a new salad it plans to offer next summer. . . . Wendy’s quest for the nearly 2 million pounds of blackberries it will need to embellish a seasonal salad at its 6,500 North American restaurants illustrates the challenges large chains are trying to digest as they seek to keep up with growing demand for fresh ingredients.”  Some ingredients, like raspberries, are not an option as they would “become too mushy by the time it made it into a salad.”  One fruit that does make it into salads is the strawberry, which must hold up seven days “From farm to fork.”

********The article points out the challenge of creating effective supply chains for fresh ingredients on a large scale, with Wendy’s being only one example.  All other things being equal, it seems, the longer the supply change, the lower the quality of the product.  Typically Wendy’s “reviews two to five suppliers for each type of produce it uses,” instead of the 30 it reviewed (over 14 months) to procure the necessary blackberries.

May you have a good week!



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