Harry Clarke http://www.harryrclarke.com On economics, politics & other things Mon, 19 Jun 2017 02:32:52 +0000 en-AU hourly 1 https://wordpress.org/?v=4.8 58242727 Australia’s migration and humanitarian programs http://www.harryrclarke.com/2017/06/19/australias-migration-and-humanitarian-programs/ http://www.harryrclarke.com/2017/06/19/australias-migration-and-humanitarian-programs/#respond Mon, 19 Jun 2017 02:32:08 +0000 http://www.harryrclarke.com/?p=7225 Australia’s population growth rate is rocketing along primarily because of our migration and humanitarian programs. These make up 54% of our total population growth. Our migration program in 2015/16 took in 189,770 people gross and about 20,000 less than that allowing for permanent emigration. The gross figure is within a smidgeon of the highest level [...]]]> Australia’s population growth rate is rocketing along primarily because of our migration and humanitarian programs.  These make up 54% of our total population growth.  Our migration program in 2015/16 took in 189,770 people gross and about 20,000 less than that allowing for permanent emigration.   The gross figure is within a smidgeon of the highest level ever recorded (190,000 a couple of years back) while the humanitarian program intake was 17,555 entrants which is the highest level of intake for 30 years.  The total gross intake was 207,325 people. Useful source documents are here (for migration) and here (for the separate humanitarian program).

Most of our regular immigrants come from India and China while about half of the humanitarian program come from the Middle East  (in 2015/16 4358 from Iraq, 461 from Syria, 1714 from Afghanistan, 337 from Iran).

The migration program for 2016/17 and the planned program for 2017/18 is basically a replication of recent trends with an intake of 190,000 being targeted (here). The humanitarian program will increase through to 2018/19 when it will amount to an intake of 18,750 which will create a new record intake over the past 30 years (here).  The bulk of this increase will reflect the 2014 commitment by the Australian Government to refugees from Syria and Iraq.

Australia is growing its population using the migration and humanitarian programs at the greatest rate for decades.

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Advising investors not to believe in active investment strategies http://www.harryrclarke.com/2017/04/23/advising-investors-not-to-believe-in-active-investment-strategies/ http://www.harryrclarke.com/2017/04/23/advising-investors-not-to-believe-in-active-investment-strategies/#comments Sun, 23 Apr 2017 00:15:26 +0000 http://www.harryrclarke.com/?p=7217
Some of the fees charged by local investment advisors, such as local accountants, seem more than hefty. Particularly when investments are in equities. Often there is a fixed fee of around $300 per month or $3600 per year. There is also often a trailing fee of 1% of the value of the portfolio. Thus on a $1m investment with gross earnings of 5% the total annual fees would be $13,600 which, ignoring taxes, would be 25% of the total return. A big slab since it would now take about 20 years for your investment to double if all returns were reinvested whereas it would take only 14 years without the fees.
 
An alternative might be to charge clients $50 for a copy of Burton Malkiel’s A Random Walk Down Wall Street*, and a once-and-for-all $500 fee for assistance in opening up, for example, an efficient CommSec account**, along with a brief introduction to the Vanguard no-load mutual funds, exchange traded funds or to the low-load mutual funds such as Argo Investments or Milton Corporation. Capitalized over 20 years the transactions cost of doing this would fall from 25% of the investor’s total return to a tiny fraction of 1%. Moreover, this move is consistent with almost all evidence on equity markets that passive investment strategies outperform active management.  Should re-tool as a low-cost financial advisor and do this? Probably not although anyone else is free to pursue this approach. 
I mention this because, as an economist, I am often asked for financial advice.  My response is that I have no investment advice to give beyond reading Burton Malkiel’s book.  Generally, I believe in “efficient markets”***. In particular, if you have limited assets when you retire there are no miracle ways of accessing high-income returns. You need to learn to be frugal and budget to live within your means and can claim the aged pension.
*Malkiel is an enlightened believer in “efficient markets”. With a few exceptions, he does not believe in “stock picking” but prefers “no-load” mutual funds.  Malkiel is excellent on retirement planning where he favors a major proportion of investments being in REITs and fixed interest securities.
** One which includes direct debit of dividends or their reinvestment in dividend investment schemes.
*** Again following Malkiel I occasionally punt on investments about which “bubble-like” dreams can be built. But this is a risky business and I limit it to 1-3% of my portfolio.
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Policy proposal on North Korea http://www.harryrclarke.com/2017/04/17/policy-proposal-on-north-korea/ Sun, 16 Apr 2017 23:42:02 +0000 http://www.harryrclarke.com/?p=7212 The best deal offered so far in the ongoing conflict with North Korea comes from China. It is: Abandon your nukes and we will offer you protection. This gives the North what it wants, namely, protection from externally-imposed regime change. The North’s nuclear capacities are primarily defensive.Moreover, the policy is credible since China does want [...]]]> The best deal offered so far in the ongoing conflict with North Korea comes from China. It is:  Abandon your nukes and we will offer you protection. This gives the North what it wants, namely,  protection from externally-imposed regime change. The North’s nuclear capacities are primarily defensive.Moreover, the policy is credible since China does want a buffer between itself and the “west” (the US allies of South Korea and Japan) and, most importantly, helps prevent huge possible loss of life in the North and South and in Japan. It gives time and incentives for internal reform of the wayward North. It addresses the core concern with North Korea which is their ownership of nuclear weapons and their ability to use and sell these weapons.

Moreover, the Chinese policy is credible since China does want a buffer between itself and the “west” (the US allies of South Korea and Japan) and, most importantly, this policy helps prevent the huge possible loss of life in the North and South and in Japan were there to be an armed conflict. It gives time and incentives for internal reform of the wayward North. It addresses the core concern with North Korea which is their ownership of nuclear weapons and their ability to use and sell these weapons. In time the Pyongyang regime may be bribed or induced to voluntarily surrender power.  A pre-emptive strike runs the risk of the regime seeking to go out with a bang rather than a whimper.

Moreover the Chinese policy package is not purely passive – it has ended coal imports from the North (a major source of foreign exchange) and is considering further sanctions.

The US approach is the brinkmanship game of ramping up threats against the bully regime (which is using nukes entirely to protect itself) while leaving the US with the option of a pre-emptive strike. This policy will either not work because the incentives are misaligned or will likely end in a bloodbath.   Every nation party seeks eventual regime change in the North but the slow and steady policy path proposed by the Chinese is plausibly less costly than the impulsive militarism of Trump and his generals.

On this foreign policy issue, China is showing leadership whereas the US is moving to antagonize further the obnoxious Great Leader.

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Population growth and urban development http://www.harryrclarke.com/2017/02/28/population-growth-and-urban-development/ http://www.harryrclarke.com/2017/02/28/population-growth-and-urban-development/#comments Tue, 28 Feb 2017 08:20:47 +0000 http://www.harryrclarke.com/?p=7200 One useful issue raised by Tony Abbott, Dick Smith and, with less coherence, by Pauline Hanson, is the size of Australia’s immigration intake. Do we want cities of Melbourne and Sydney to have populations of 8 million by 2050? Do we wish, under a high immigration intake scenario, seek to double our total population by [...]]]> One useful issue raised by Tony Abbott, Dick Smith and, with less coherence, by Pauline Hanson, is the size of Australia’s immigration intake. Do we want cities of Melbourne and Sydney to have populations of 8 million by 2050? Do we wish, under a high immigration intake scenario, seek to double our total population by then?  I definitely don’t. Our cities are large and congested now and a doubling of their population would make them unpleasant (and ultra-expensive in terms of house prices) places to live in – if not for me then for my children and their children. Moreover, the natural environment of Australia is one of the most remarkable on the planet – I’d like to conserve it as well as provide a home base for people.

Then there seem to me two ways out. Either one of two options: (i) Dramatically cut the immigration intake so that our population tapers off at a few more million than it is now – perhaps at 27 million. The immigration program would be designed to offset the significant emigration that occurs from Australia each year and from the shortfall in natural population growth required to maintain population size. Or (ii) Develop new cities at a sufficiently rapid rate so that net growth in the major population centers is reduced to zero. I prefer option (i) because I cannot see the option (ii) working satisfactorily.

The option of creating new cities would require the creation of 10 new cities (or the augmentation of existing small cities) by 2.5 million people each over the next 30 years of so.  It is a big task made difficult by the practical difficulties of socially-engineering where people will live.  This is the reason that academic areas such as “regional development” have fallen into such disrepute. Australia has only a handful of large cities now but the imperatives of doubling our population by 2050 would require the creation of 10 new cities the size of Brisbane or Perth.   Those who wish to pursue the high migration intake – the Housing Industry Association that represents the construction industry and the various business interest groups must explain clearly how this task will be carried out.  Otherwise, they must rationalize the creation of large megacities in all the current capitals.

The standard response on the left to such concerns is to claim that those expressing them are “racists” which is true in the case of a few but overwhelmingly untrue.  It is not the composition of the immigration intake that is being questioned here but its aggregate size and the implications of current intakes for how Australians will live in the future.  An additional foolish response is the claim that we need more young immigrants to balance the aging of our population.  This is Ponzi scheme reasoning  – let us take in more now to delay the problem that will be worse in the future because of our current efforts.  With a bigger population and a declining birth rate the problems will get increasingly worse not better.

A final argument is that by taking people from the overpopulated parts of the world (China, India, Africa) we relieve population pressures there.  That is true but, with reduced population pressures, these short term effects will be plausibly offset by increased births in those immigrant source countries.  China has already abandoned its “one child per family” policy and India will soon overtake China as the most populous nation on earth.   These countries will become “developed” over the next half century or so and will impose crippling demands on the global environment as a consequence.  They should, to the contrary, be forced to face up to their population problems now.

I used to believe that economic manipulations (entry charges, congestion taxes etc) could handle the issue of rapid population growth in Australia’s favor. I no longer do.  High house prices as a consequence of immigration-driven population growth as well as high rates of urban disamenities such as congestion and pollution are not being addressed by economic instruments such as taxes and charges. Indeed, I was naive to think they ever could be.   The charge towards a high population Australia needs to be stopped.  A small bunch of political figures are raising such issues and they deserve to be listened to.

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Social media-induced failures in the market for news information http://www.harryrclarke.com/2017/02/25/social-media-induced-failures-in-the-market-for-news-information/ Sat, 25 Feb 2017 04:01:52 +0000 http://www.harryrclarke.com/?p=7198 The web and social media, such as FB, comprise an innovation that, in some ways, makes us all worse off. For example, FB undermines the printed media because individuals almost endlessly provide hyperlinks to it, thereby providing an open access alternative to buying the content by, for example, purchasing a newspaper. The result is that [...]]]> The web and social media, such as FB, comprise an innovation that, in some ways, makes us all worse off. For example, FB undermines the printed media because individuals almost endlessly provide hyperlinks to it, thereby providing an open access alternative to buying the content by, for example, purchasing a newspaper. The result is that the newspapers decline in circulation and suffer economic adversity for reasons linked to a failure in the market for information This, in turn, leads to cost cutting and staff redundancies in newspapers and other media which feed back into lower quality journalism, to lower quality pilfered links in social media and, ultimately, to a more poorly-informed public. News, once published, can be digitized in many ways and. to some extent, this always involves a public good type of market failure – one newspaper can pilfer from another, for example.  But this type of theft becomes much more severe when millions of web users have access to this type of pilfering by simply citing a hyperlink.

The only way to get, at least partly, out of this downward spiral is to get rid of the externality here by rigorously defending the property rights of the commercial media to the news they provide. That applies both to individual users of social media and to news gathering organizations that rely primarily on pilfered material for their such matter.

It is technically possible to prevent hyperlinks to published material but much harder to prevent lengthy quotation of pilfered material. Of course, no-one likes to pay for material that they are currently accessing for free but the alternative is an ever-diminishing level of effort in providing news and the end of such things as investigative journalism. This disadvantages us all because we all then operate “in the dark” in settings where a knowledgeable few can set the social agenda.

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Kenneth Arrow RIP http://www.harryrclarke.com/2017/02/22/kenneth-arrow-rip/ Wed, 22 Feb 2017 10:16:02 +0000 http://www.harryrclarke.com/?p=7192 Kenneth Arrow was, with Paul Samuelson, one of the two greatest economists that the world has known since at least the time of Lord Keynes. I read of his death at age 95 this evening. An astonishing man, he wrote on a myriad of aspects of modern economics and he wrote well and with great [...]]]> Kenneth Arrow was, with Paul Samuelson, one of the two greatest economists that the world has known since at least the time of Lord Keynes.  I read of his death at age 95 this evening.  An astonishing man, he wrote on a myriad of aspects of modern economics and he wrote well and with great insight. A great applied mathematician he was also a skillful craftsman of the English (and French) languages. A   profound intellect, he influenced a whole generation of economists.

Simply put: I idolized the guy.

His early work did three things. First, he concerned himself with welfare economics and with the possibility of making social judgements that “reasonably” reflected individual values.  His famous “impossibility theorem” showed that, in general, this was not possible.  To make social judgements you needed to act illiberally – for example, by behaving as a dictator.  His second major early strand of work (with Gerard Debreu) proved that with reasonable individual preferences and production technologies a market-clearing, competitive equilibrium existed in competitive markets. This idea, traceable to the thinking of Adam Smith, was one of the most profound observations in modern economics.  A very deep result it drew on convex set theory and deep results in combinatorial topology notably the Kakutani fixed point theorem that had been suggested by the work of John von Neumann.  (It is impossible not to use weaker analytical methods since the existence of a competitive equilibrium implies the Kakutani fixed point theorem).  The third strand of work involved establishing the welfare properties of a competitive equilibrium.  The “First Theorem of Welfare Economics” (that a competitive equilibrium is Pareto Efficient) is a straightforward application of the definition of a competitive equilibrium.  The “Second Theorem of Welfare Economics”  showed that any sought after Pareto Efficient allocation of resources (for example, one that was equitable) could be realized as a competitive equilibrium after making transfers of resources among agents and then allowing them to trade.  It is an astonishingly insightful result (drawing on the theory of separating hyperplanes in convex set theory) that provides the intellectual basis for social democracy – for using markets after making transfers to those in need.  Many of these results are collected in a book written with Frank Hahn (“General Competitive Analysis”) where he carefully demarcates the strengths and weaknesses of these arguments.

Arrow understood the intellectual need to understand the claim that free markets could work and that they had potentially good characteristics.  This is probably the major intellectual achievement of modern economics. But Arrow spent a lifetime analyzing the strong assumptions that were necessary to make these results work. Among these assumptions were that no externalities occurred  (no pollution, no congestion), no increasing returns to scale (so no natural monopolies), no public goods (which you could neither effectively price nor would you want to price even if you could) and, most critically of all, no imperfections in the availability of information. He provided a firm basis for analyzing these “market failures” and for devising ways to address them.  Arrow was a master of modern economic theory but knew the critical foundational assumptions required to make simple generalizations work.

I have his 6 volumes of “Collected Works” at home.  It is impossible, and indeed meaningless, to try to summarize them in a short blog post.  I’ll pick a few things that I found important in my own economic studies that involved his work.  Arrow was a major student of finance and was one of the early theorists to introduce securities and risk into models of competitive equilibrium.  Arrow founded much of the core work on the “stability” of competitive systems –  this literature looked not only whether an equilibrium existed but also whether real economies would approach such equilibria starting off in a disequilibrium state.  I think it is not an exaggeration to say Arrow was the major early figure to focus on the economics of uncertainty and information – he studied insurance, gambling, education markets, health markets  (he founded “health economics”) as well as organization behaviour as a way of addressing moral hazard and adverse selecting – perhaps the major issues in what economists would now describe as comprising the analytical core of “management science” namely, “agency theory”.

I spent most of my own career working on applied optimal control theory and dynamic optimization. This theory I learned from lecture notes (and a book) on optimal economic growth written by Kenneth Arrow and Mordecai Kurz.  Again a substantial body of mathematical literature that Arrow exposited and applied in economics. His work withn Kurz remains underappreciated in the profession.

One paper that I regard as really pioneering was co-written by Kenneth Arrow and Anthony Fisher. It concerned environmental conservation under risk when current decisions had irreversible consequences.  With characteristic brilliance, this problem was solved using dynamic programming. Simply put when there are opportunities to learn in a risky environment and when decisions are irreversible, the benefits from development must exceed the costs by a “quasi-option value” that reflected the potential value of new information.  This provided a basis for the “conservation movement”,  not based on hand-waving and slogans, but on rigorous analysis.  I spent about a decade of my life studying such problems.

Arrow was keenly interested in modern thinking about a host of issues in politics (e.g. Rawls, Nozick) and most particularly in the history of economic thought.  He was generous in recognizing the work of others and particularly of the classical economists like Adam Smith. His knowledge of philosophy, of ethics and of mathematics was immense.

Arrow pursued what were initially idiosyncratic endeavors. For example, in the early stages of his career, Arrow studied meteorology and, in the 1940s, became aware of the likely problem of climate change.  He remained interested in climate economics and served on important public committees concerned with this issue.

If I could close with one of my favorite Arrow characteristics it was that he wrote well.  He was an international class mathematician as well as an economist but his writings are clear and easier than most to follow.  He always articulates the terms of the problem he is investigating well,  provides a literature survey that does in a genuine way situate a problem in the literature and exposits his approach to a solution with clarity and without either preposterous notation or intellectual demands that make it incomprehensible to mere mortals.  (That is a possibly inappropriate polemical slight of much modern economic modeling).

I was fortunate to meet Arrow (and his wife Selma) twice in Australia. He liked Australia and was an engaging pleasant person. He was an exciting man who made a room buzz with his intelligence and insight.   RIP Kenneth Arrow – a great modern thinker,  a good and remarkable man.

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Vietnamese civet coffee http://www.harryrclarke.com/2017/02/20/vietnamese-civet-coffee/ Mon, 20 Feb 2017 08:51:54 +0000 http://www.harryrclarke.com/?p=7186 Vietnam is the second largest coffee exporter but its coffee has a low international reputation and much of it ends up in instant coffee brews. In fact, there is a substantial coffee culture in Vietnam with (non-alcohol serving) coffee shops operating everywhere (I made the unspeakably bad error of judgment of asking for a beer [...]]]> Vietnam is the second largest coffee exporter but its coffee has a low international reputation and much of it ends up in instant coffee brews.  In fact, there is a substantial coffee culture in Vietnam with (non-alcohol serving) coffee shops operating everywhere (I made the unspeakably bad error of judgment of asking for a beer in one – I got it though the owner had to raid her husband’s supplies!).  Vietnamese coffee does take a bit of getting used to –  it has a thick somewhat chocolatey taste and is quite strong. But, like the best coffees served in the West, the best Vietnamese coffee is very concentrated and served in specialist coffee shops – one magnificent shop next to my hotel in Hue served far better coffee than in the up-market hotel next to it.  I grew to like Vietnamese coffees and will purchase them given half a chance.  Certainly worth a trial though they are different.

And the Vietnamese do sell the ethically challenging civet coffee which comes from the bowels of a civet cat who selectively choose the best civet beans and then excrete such. It is, in fact, literally “shit coffee”.  Against my better ethical judgment, I bought a packet at Hanoi airport. Good smooth coffee with, if anything, less of the chocolatey taste of the standard Vietnamese coffees but with a fairly intense flavor. These civets “generate” good coffee. The Economist article below provides a more complete review.

http://www.economist.com/blogs/prospero/2012/01/coffee-vietnam

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Testing connection with FB http://www.harryrclarke.com/2017/02/20/testing-connection-with-fb/ http://www.harryrclarke.com/2017/02/20/testing-connection-with-fb/#comments Mon, 20 Feb 2017 08:22:32 +0000 http://www.harryrclarke.com/?p=7183 A major issue with my WordPress blog is its inability to consistently connect with Facebook whereI spend too much time these days. I have refreshment all settings and this post tests whether a connection has been achieved. I used the WP blog for 10 years so I would dearly like to get things working again. [...]]]> A major issue with my WordPress blog is its inability to consistently connect with Facebook whereI spend too much time these days. I have refreshment all settings and this post tests whether a connection has been achieved.  I used the WP blog for 10 years so I would dearly like to get things working again. Helpful advice appreciated.

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What does Xmas mean?: Annual repost. http://www.harryrclarke.com/2016/12/24/what-does-xmas-mean-annual-repost/ http://www.harryrclarke.com/2016/12/24/what-does-xmas-mean-annual-repost/#comments Sat, 24 Dec 2016 09:26:55 +0000 http://www.harryrclarke.com/?p=7176 Xmas is a celebration of what is guessed to be the approximate birth date of Jesus Christ. It is an important occasion in almost all civilised societies for both Christians and Non-Christians alike.

In Australia the number of people who describe themselves as Christians has fallen from 71% of the population to only 64% in [...]]]> Xmas is a celebration of what is guessed to be the approximate birth date of Jesus Christ. It is an important occasion in almost all civilised societies for both Christians and Non-Christians alike.

In Australia the number of people who describe themselves as Christians has fallen from 71% of the population to only 64% in the 10 years to 2006. I have been a non-believer for my entire adult life so I am gradually acquiring more companions. As Kevin Rudd said recently, Christianity faces the prospect of being a minority belief – part of the ‘counter-culture’ – in Australian society. But Christianity remains by-in-large an important positive force in our society and Xmas remain important to many of us – both the secular and the religious.

I lack empathy with multi-culturalists and those from other religions who see the widespread respect paid to Xmas as something offensive to atheists and non-Christians. Given my early Christian upbringing I still feel comfortable celebrating the message of hope, forgiveness, friendship and kindness that Xmas brings to us. I have a long-standing respect for the values that the man Jesus Christ espoused. Most of all, the birth of a baby indicates the hoped-for possibility of living in a better world. The materialism associated with Xmas does make me reflect – but most of us enjoy giving and receiving gifts. One can be too puritanical about such matters. Most of us enjoy some of the incidentals of Christmas – carols being sung, food and wine being imbibed and homes being brightly decorated. At the very least these are a valued part of our cultural traditions.

The idea of hope associated with Xmas and the belief that the world can be a better place because of the birth of a boy is a beautiful parable. I do not believe that to appreciate the beauty of this notion that one, in fact, needs to accept the idea that the young boy is the ‘son of God’ or our ‘saviour’. It is enough to think about our prospects for renewal and for trying to live a life that reflects Christian values of kindness and forgiveness even if not of Christian theology.

No religion – Christianity included – should ever be seen as having the last word on anything. One of the great advantages of living in Australia is its openness and the freedom of choice it offers with respect to religion. But the wisdom of many religions, freed from their bigotry, can guide us towards living happier, more fulfilled lives. Whether you are thinking about what job you should take, what partner you should live with or how you should deal with the neighbours and with outsiders, the message of Christianity has something to teach us all. God might be irrelevant in all this – we are after all human beings – but the core message of Christians and the hope of Xmas is not.

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Internationally diversifying your share portfolio http://www.harryrclarke.com/2016/11/29/internationally-diversifying-your-share-portfolio/ http://www.harryrclarke.com/2016/11/29/internationally-diversifying-your-share-portfolio/#comments Tue, 29 Nov 2016 01:20:56 +0000 http://www.harryrclarke.com/?p=7149 The case for diversifying your equity portfolio internationally is obvious given that Australian equities are such a small component on the overall international equity market and given the strong growth potential in many newly emerging markets. One way of doing this – that I have in the past thought was a sound idea is to [...]]]> The case for diversifying your equity portfolio internationally is obvious given that Australian equities are such a small component on the overall international equity market and given the strong growth potential in many newly emerging markets.   One way of doing this – that I have in the past thought was a sound idea is to buy “low load” (low transaction cost) exchange traded funds from firms such as Vanguard.   I have increasingly developed reservations about pursuing this path.

Consider the VEU fund from Vanguard. It has very low management costs (around 0.15%) and covers all the world markets except for the US – investment in the US itself is covered by a variety of other funds.  It sell as around $58 Australian and is freely traceable at normal brokerage fees.  The difficulty for me is that it sell as a 61% markup to its asset backing.  Its popularity has made it expensive.

What would make sense here are funds that make available investment in the range of equities covered by VEU but which are available in perfectly elastic supply at a slight markup to asset backing.  That would facilitate diversification but without the hefty markup.

The difficulty here is that in a downturn the premium over set backing is likely to fall.  In a downturn the assets will be valued at less but the markup over asset backing would likely be less too  creating large capital losses.

There are a few investment funds out there that currently sell at a discount to their asset backing.  One is Argo Global which invests mainly in US infrastructure assets (electricity, toll roads, airports).  It is currently selling for around $1-70 but its asset backing is around $1-90.   It charges much higher fees (around 1%) and has nothing like the coverage of the Vanguard ETFs but, on balance seems to me a better bet.

The above is not to be construed as advise to buy or sell anything.  It is mainly intended to clarify my own investment thinking and to receive feedback.  I am not a qualified financial advisor.

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