Buttonwood
Criticism of index-tracking funds is ill-directed
Theories of their malignance run ahead of reality
INDEX funds were devised in the 1970s as a way of giving investors cheap, diversified portfolios.
But they have only become very popular in the past decade. Last year more money flowed into “passive” funds (those tracking a benchmark like the S&P 500) than into “active” funds that try to pick the best stocks.
In any other industry, this would be universally welcomed as a sign that innovation was coming up with cheaper products to the benefit of ordinary citizens. But the rise of index funds has provoked some fierce criticism.
Two stand out. One argues that passive investing is, in the phrase of analysts at Sanford C. Bernstein, “worse than Marxism”. A key role of the financial markets is to allocate capital to the most efficient companies. But index funds do not do this: they simply buy all the stocks that qualify for inclusion in a benchmark. Nor can index funds sell their stocks if they dislike the actions of the management. The long-term result will be bad for capitalism, opponents argue.
A second argument is that index funds pose a threat to competition. The asset-management industry used to be remarkably diverse. It was hard for any active manager to keep gaining market share; eventually, their performance took a hit. But passive managers benefit from economies of scale. The more funds they manage, the lower their fees can become, and the more attractive the product.
Since passive managers like BlackRock and Vanguard own the shares of every company in an industry, the fear is that they might play a role reminiscent of the monopoly “trusts” of the late 19th century. Studies have argued that the concentrated ownership of shares is associated with higher fares in the airline industry and fees in the banking sector.
These criticisms cannot surely both be true. They require index funds simultaneously to be uncritical sheep-like investors and ruthless top-hatted capitalists devoted to gouging consumers. Furthermore, passive investors, in the form of mutual funds and exchange-traded funds, own only 12.4% of the American equity market. It seems remarkable that they can have such a big impact on the corporate sector with such a small stake.
It is worth examining the criticisms in detail. The Marxist criticism implicitly assumes that the investment community is divided into two—passive investors and active managers devoted to combating corporate excess and ferreting out exciting new bets. But a lot of “active” investors run portfolios that cling closely to a benchmark index for fear of getting fired if they underperform. So they, too, own shares in the biggest firms. A few “activist” investors do try to change corporate strategy but most fund managers don’t have the time to campaign. They may be active but they are not activist.
When it comes to voting at annual general meetings, moreover, passive managers can and do get involved. In one 12-month period, BlackRock says it voted in support of proposals from activists 39% of the time, compared with 33% of occasions where it backed existing management.
As for the studies that found evidence of anti-competitiveness caused by passive money, they have been challenged. A recent academic paper* found “no relationship between common ownership and prices in the airline industry”; another** from the Federal Reserve on the banking industry found some results that were consistent with an anti-competitive effect but “the sign of the effect is not robust, and implied magnitudes of the effects that are found are small.”
Even if you concede the potential for a small group of fund managers to exert baleful influence on a few sectors through their cross-holdings, passive managers are surely the least likely participants in such a conspiracy. The point of their existence is that they hold the market weight in every industry; they have no reason to favour the success of one over any other. If a conspiracy were to occur, it would surely be driven by active managers buying very large stakes in a particular industry, and hoping to benefit accordingly.
There is an element of reductio ad absurdum about the anti-passive arguments. Yes, if the market was 100% owned by index funds, that would be a problem. And if there were no crime, policemen would be out of work. But we are nowhere near that point. Stop worrying and enjoy the low fees.
* “Common ownership does not have anti-competitive effects in the airline industry” by Patrick Dennis, Kristopher Gerardi and Carola Schenone
** “Testing for competitive effects of common ownership” by Jacob Gramlich and Serafin Grundl
CRITICISM OF INDEX-TRACKING FUNDS IS ILL-DIRECTED / THE ECONOMIST
THE FEDERAL RESERVE HAS NEVER PRINTED "MONEY": THE END GAME / SEEKING ALPHA
The Federal Reserve Has Never Printed 'Money': The End Game
by: Eric Basmajian
- Critics say that the US will not be able to repay its debt obligations and that hyperinflation will result in a collapse of the US dollar; this is likely inaccurate.
- Currencies are valued on a relative basis and our major trading partners are far more indebted, meaning that their currency must depreciate before the dollar.
- The only way all currencies can fall together (since they are relative) is to devalue against gold or some other hard asset commodity - an unlikely scenario.
Brief History Of Debt Problems In The United States



Many will scream to look at the Reagan tax cuts as a proxy for how the new potential tax cuts will benefit the economy, but a major hole in that logic is that Reagan had a debt to GDP ratio of around 40% at the Federal level, not 107%.
The GOP Tax Plan Is a Threat to National Security
As our federal debt spirals up and up, military readiness will inevitably suffer.
By Kori Schake
U.S. Senate Majority Leader Sen. Mitch McConnell (R-KY) (right) talks with Sen. Orrin Hatch (R-UT) as they attend a press event on tax reform on Sept. 27, at the Capitol in Washington, D.C. (Alex Wong/Getty Images)
Republicans control both houses of Congress and the presidency, which conservatives of yore would anticipate would result in a sustained assault on the most important national security challenge facing the United States. That yawning vulnerability in our defenses is the national debt. But the tax plan released Thursday by the congressional leadership would have Dwight D. Eisenhower weeping. Not only will it increase the debt, but it also has no reasonable prospect of providing the money the administration argues the defense enterprise requires.
The U.S. government now owes roughly $20.5 trillion, more than double what our debt was 10 years ago. President Donald Trump and the Republican-led Congress have introduced a tax reform bill that would decrease federal revenue by a projected $5.5 trillion. Meanwhile, Republicans in Congress are congratulating themselves on committing to increase the debt by only $1.5 trillion over 10 years and are currently wrangling over possibilities — capping 401(k) deductions, taxing college endowments — to close the gap. Even if they succeed in finding a formula that can attract sufficient votes to pass into law, the tax reform is likely to worsen rather than improve on our security.
The debt is important in three ways. First, in relation to GDP, it is an important indicator of the country’s risk of stagnation that prevents growing the economy — even middle school students know that increasing the denominator makes the numerator relatively less important. Second, it exposes us to risk in credit markets: Should holders of U.S. debt become skeptical of our creditworthiness, interest rates will increase, making our debt costlier and putting further pressure on the government’s ability to provide services, including defense. Third, debt service is impinging on the funds available for discretionary spending, including defense spending, and that is likely to get much worse if either interest rates rise or the economy sputters.
The United States has been extraordinarily lucky that we have accrued such staggering debt in a time of historically low interest rates.
We have also been lucky that other prospective holding currencies have not become genuinely substitutable: The euro has its troubles with shaky eurozone finances, the renminbi its opaque stewardship, and cryptocurrencies their cybervulnerabilities. But none of these conditions is likely to remain fixed over time, especially if the political dysfunctionality of spending by the U.S. government continues.
Republicans assert that widening the tax base and freeing up the economy will provide new revenue. That would be a reasonable prospect if the administration had a theory of victory for passing a budget aligned to its spending priorities. It does not. The budget submitted by the Trump administration is, to quote a leading Republican committee chair, “dead on arrival.”
The Budget Control Act will remain the law of the fiscal land, the Damoclean sword of sequestration hanging over the Defense Department’s head.
A decade ago, Congress reached a bipartisan agreement that cuts to federal spending would be applied with 50 percent to domestic priorities and 50 percent to defense. It has become the closest thing to an immutable law of federal spending. Secretary of Defense James Mattis has argued that the Pentagon deserves a disproportionate amount of federal spending. But his appeals have not changed a single vote.
Defense Department spending has been declining for more than a decade, due first to President Barack Obama’s policy choices and then the mandatory cuts required when the Budget Control Act spending ceilings were breached — which they have been for the past nine years. Congress could not reach agreement on prioritized reductions and so agreed to limit federal spending by cutting everything proportional to existing budgets. Which is, needless to say, terrible management.
In 2010, Mike Mullen, then-chairman of the Joint Chiefs of Staff, identified the debt as “the most significant threat to our national security.”
In 2012, a subsequent chairman assessed that the defense strategy could not be carried out if “even $1” were cut from the Pentagon budget. And yet $50 million was cut from that budget, even before the Budget Control Act kicked in. In the six years since the act became law, the military chiefs and their civilian superiors have uniformly and repeatedly argued that resources are inadequate to their assigned missions and that Congress tying their hands against sensible management of their budget compounds the problem.
The Office of Management and Budget must privately believe that it is giving fiscal conservatives in Congress political cover to vote for deficit spending. That is, in order to get needed defense spending, Republicans will vote for domestic spending and increasing the debt. Republican leaders must be banking on tax reform spurring economic growth sufficient to dull the edge of fiscal husbandry and making painful trade-offs unnecessary.
This is wildly unlikely unless Republican leaders — in the White House and in Congress — do the hard work of persuading their colleagues on both sides of the aisle to adopt a set of national priorities. Nothing in the behavior of President Trump, his budget team, or Republican leaders in Congress indicates that will be the case. And if it is not, the Republican tax reform proposal, even if it passes, will leave our greatest national security vulnerability exposed and continue the emaciation of our defense program.
Kori Schake is a fellow at the Hoover Institution.
THE CHANGING GEOPOLITICS OF ENERGY / PROJECT SYNDICATE
The Changing Geopolitics of Energy
JOSEPH S. NYE
TOKYO – In 2008, when the United States’ National Intelligence Council (NIC) published its volume Global Trends 2025, a key prediction was tighter energy competition. Chinese demand was growing, and non-OPEC sources like the North Sea were being depleted. After two decades of low and relatively stable prices, oil prices had soared to more than $100 per barrel in 2006.
Many experts spoke of “peak oil” – the idea that reserves had “topped off” – and anticipated that production would become concentrated in the low-cost but unstable Middle East, where even Saudi Arabia was thought to be fully explored, with no more giant fields likely to be found.1
The US was regarded as increasingly dependent on energy imports, and this, together with rising prices, was seen as a major limit on American geopolitical influence. Power had shifted to the producers.
The NIC analysts did not neglect the possibility of a technological surprise, but they focused on the wrong technology. Emphasizing the potential of renewables such as solar, wind, and hydro, they missed the main act.
The real technological breakthrough was the shale-energy revolution. While horizontal drilling and hydraulic fracturing are not new, their pioneering application to shale rock was. By 2015, more than half of all the natural gas produced in the US came from shale.
The shale boom has propelled the US from being an energy importer to an energy exporter. The US Energy Department estimates that the country has 25 trillion cubic meters of technically recoverable shale gas, which, when combined with other oil and gas resources, could last for two centuries. The International Energy Agency now expects North America to be self-sufficient in energy in the 2020s.
Facilities built to receive liquefied natural gas (LNG) imports have been converted to process exports.
World markets have also been transformed. Previously, gas markets were geographically restricted by dependence on pipelines. That gave market power to Russia, which used it to exercise political and economic leverage over its European neighbors. LNG has now added a degree of flexibility to gas markets and reduced Russian leverage. In 2005, only 15 countries imported LNG; today, that number has tripled.
Moreover, the smaller scale of shale wells makes them much more responsive to fluctuations in market prices. It is difficult to turn on and off the billion-dollar multiyear investments in traditional oil and gas fields; but shale wells are smaller, cheaper, and easier to start and stop as prices change. This means that the US has become the so-called swing producer capable of balancing supply and demand in global hydrocarbon markets.
As Harvard’s Meghan O’Sullivan points out in her smart new book Windfall, the shale revolution has a number of implications for US foreign policy. She argues that the new energy abundance increases US power. Shale-energy production boosts the economy and creates more jobs. Reducing imports helps the balance of payments. New tax revenues ease government budgets. Cheaper power strengthens international competitiveness, particularly for energy-intensive industries like petrochemicals, aluminum, steel, and others.
There are also domestic political effects. One is psychological. For some time, many people in the US and abroad have bought into the myth of American decline. Increasing dependence on energy imports was often cited as evidence. The shale revolution has changed that, demonstrating the combination of entrepreneurship, property rights, and capital markets that constitute the country’s underlying strength. In that sense, the shale revolution has also enhanced American soft power.
Skeptics have argued that lower dependence on energy imports will cause the US to disengage from the Middle East. But this misreads the economics of energy. A major disruption such as a war or terrorist attack that stopped the flow of oil and gas through the Strait of Hormuz would drive prices to very high levels in America and among our allies in Europe and Japan. Besides, the US has many interests other than oil in the region, including nonproliferation of nuclear weapons, protection of Israel, human rights, and counterterrorism.
The US may be cautious about overextending itself in the Middle East, but that reflects its experience with the costly invasion of Iraq and the general turmoil of the Arab Spring revolutions, rather than illusions that shale produces political “energy independence.” America’s ability to use oil sanctions to force Iran to negotiate an end to its nuclear-weapons program depended not only on Saudi willingness to make up Iran’s exports of a million barrels per day, but also on the general expectations that the shale revolution created.
Other benefits of shale energy for US foreign policy include the diminishing ability of countries like Venezuela to use oil to purchase votes at the United Nations and in regional organizations of small Caribbean states, and Russia’s reduced ability to coerce its neighbors by threatening to cut off gas supplies. In short, there has been a tectonic shift in the geopolitics of energy.
Although no one can know the future of energy prices, modest world prices may last for some time. Both technology and politics could of course upend this prediction. Technological advances could increase supply and reduce prices; politics is more likely to disrupt supply and cause prices to rise. But the disruptions are unlikely to be sharp or long-lasting in the wake of the shale revolution, which is what makes it a geopolitical revolution as well.
Joseph S. Nye, Jr., a former US assistant secretary of defense and chairman of the US National Intelligence Council, is University Professor at Harvard University. He is the author of Is the American Century Over?
Bienvenida
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Friedrich Nietzsche
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
Lao Tse
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
If you know the other and know yourself, you need not fear the result of a hundred battles.
Sun Tzu
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
Paulo Coelho

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