World's Best Performing Market: 787% in Kenya

Kenya has gone share crazy. The incredible performance of the Nairobi Stock Exchange (NSE) - which is next to the public auditorium and provides the live share-price feed - is the talk of the country. From 2002 to 2007, the main NSE index rose 787% in dollar terms (see graph above), according to Standard & Poor's, the investment research firm, making it one of the world's best-performing markets.

The NSE chairman, said: "We have several stock market billionaires. We've stopped counting the multimillionaires."

Read more here from the article "Share crazy: how Kenyans fell in love with their stock market," from the Guardian.

The First "Economic Freedom" Stock Fund

There is now an "investable" index of economic freedom - First Trust announced the creation of the Index of Economic Freedom Portfolio.

The portfolio (IEFP) is made up of country funds or large foreign stocks from the top 20 countries labeled "free" by the annual Heritage/Wall Street Journal Index of Economic Freedom.

Read more about it here.

Thanks to Club for Growth for the tip.

Overheating in India?

With breakneck growth, an outsourcing industry that leads the world and hundreds of millions of consumers demanding more class and comfort, India has an economy many countries would envy.

But now, after three years of near double-digit growth, signs of a potentially dangerous inflationary spiral are beginning to emerge. Prime Minister Manmohan Singh and his closest economic advisors gathered just last weekend over fears that India’s extraordinary economic expansion was starting to overheat, an issue they labeled as a “key short-term priority.”

From India Finds Its Economy on the Verge of Overheating in today's NYTimes.

ETFs vs. Classic Index Mututal Funds

Fund managers love the ETF (exchange-traded funds). But what's in it for the investor? Vanguard founder John Bogle expresses his skepticism of ETFs in today's WSJ:

So long as the truism that "the more financial intermediaries take, the less their clients make" remains in effect, serious and intelligent investors ought to beware of moving their investments out of classic index funds focused on low costs, broad diversification and long-term, buy-and-hold strategies into index funds nouveau (ETFs), with their overlay of costs, limited diversification and short-term trading strategies. Industry participants, too, should be concerned. For in the long run, any business that puts the interest of service to self before service to clients will ultimately pay for this contradiction.

The Best Trade-off in History

Public policy is all about trade-offs. Economists understand this better than politicians because voters want to have their cake and eat it too, and politicians think whatever is popular must also be true.

In the history of trade-offs, never has there been a better one than trading a tiny amount of global warming for a massive amount of global prosperity. Earth got about 0.7 degrees Celsius warmer in the 20th century while it increased its GDP by 1,800%, by one estimate. How much of that 0.7 degrees can be laid at the feet of that 1,800% is unknowable, but let's stipulate that all of the warming was the result of our prosperity and that this warming is in fact indisputably bad (which is hardly obvious). That's still an amazing bargain. Life expectancies in the United States increased from about 47 years to about 77 years. Literacy, medicine, leisure and even, in many respects, the environment have improved mightily over the course of the 20th century, at least in the prosperous West.

Given the option of getting another 1,800% richer in exchange for another 0.7 degrees warmer, I'd take the heat in a heartbeat.

From Global Cooling Costs Too Much by Jonah Goldberg.

As Thomas Sowell said, "The first lesson of economics is that we live in a world of scarcity and there are trade-offs. The first lesson of politics is to ignore the first lesson of economics."

Tenure Quotas at Yale to End

"Yale now is alone among American colleges and universities in failing to provide, at the initial appointment, resources for a potential tenured appointment, should the faculty member eventually qualify.

Current nontenured faculty members at Yale must wait for a colleague to retire, to leave, or to die -- or hope that good fortune allows for an additional tenured position to open up in their department. Even then, they may have to compete with more-seasoned scholars in an open search that gives them little to no advantage."

From The Chronicle for Higher Education article "Yale Plans Overhaul of Tenure Process."

Price Controls = Empty Shelves in Venezuela

"Meat cuts vanished from Venezuelan supermarkets this week, leaving only unsavory bits like chicken feet, and many staples sell far above government-fixed prices.

President Hugo Chavez's administration blames the food supply problems on unscrupulous speculators, but industry officials say government price controls that strangle profits are responsible. Authorities on Wednesday raided a warehouse in Caracas and seized seven tons of sugar hoarded by vendors unwilling to market the inventory at the official price.

Chavez began regulating prices in 2003 for 400 basic products as a way to counter inflation. Government officials dismiss any problems with price controls, while state TV has begun running tickers urging the public to "denounce the hoarders and speculators" through a toll-free phone number."

Read more here; thanks to Cafe Hayek.

MP: Didn't Venezuela learn anything about the painful lessons of price controls in the Soviet Union for decade after decade, and the resulting shortages those price controls caused?

Wikipedia, Encyclopedia of the Information Age

Within hours of her death, Anna Nicole Smith's listing in Wikipedia was already updated to reflect this information. There is some controversy about vandalism on her Wikipedia entry, and there might be some temporary restrictions on editing.

Bottom Line: What now happens in minutes or hours (updating information in online encyclopedias like Wikipedia) used to take years (annual or bi-annual updates of the Encyclopedia Britanica).

10 Most Economically Literate Members of Congress

From the American Enterprise Institute:

"To compile our list of the most economically literate members of Congress, we interviewed 22 Capitol Hill aides, think tank experts, senior business lobbyists, and lawmakers. We made no litmus test of ideological views or party affiliation. Whatever you may think of their politics, our experts said, these ten lawmakers do have a strong grasp of the economic fundamentals that guide their work. Many of them hail from a business background. But our selections focus on the legislators’ public records rather than their personal histories."

Whatever you may think of their politics, these ten lawmakers have a strong grasp of the economic fundamentals that guide their work. Many of them hail from a business background."

Read more here. (Note: 6 Republicans, 4 Democrats)

Sometimes Average is Good

From Indexed.

Michael Jordan: Baseball, BB

From 4-Block World.

Alternative Currencies in Germany

Interesting article from the IHT "In lands of the euro, a growing number of local currencies," about alternative currencies being used in Germany (like the chiemgauer note above):

"While more than 300 million people in Europe use the euro to buy life's essentials, a small but growing number — concentrated in the German-speaking world — use a proliferating species of currencies with names like chiemgauer, urstromtaler, landmark, kirschblüte and kann was.

Issued by private organizations, these currencies are probably better understood as vouchers — pieces of paper that can be redeemed for goods and services at specific regional businesses that have agreed to accept them.

By having charitable organizations sell them at a profit for euros, the organizations create an incentive for people to obtain them in the first place — on top of harnessing an altruistic desire to buy locally in an era of globalization — and businesses that accept can tap into a new vein of customers."

Indian Business Model is "Commoditized"

Unless Indian companies urgently adapt and innovate, the country's dominant position as an outsourcing center could be endangered by competition from cheaper locations, a shortage of qualified talent and rising wages, according to executives attending an industry conference here.

"The business model has very obviously been commoditized."

From the article "Indian CEOs warn of competition for outsourcing crown" in today's IHT.

New Orleans: Then and Now

Greater New Orleans White Pages, pre-Katrina 2004 (left) and post-Katrina 2007 (right). Via Inida Uncut.

Revenues At All-Time High, What About Spending?

The Congressional Budget Office reported this week that through the first four months of the fiscal year (Oct 2006 - Jan 2007), total tax revenues collected increased by $74 billion compared to the same period last year, almost a 10% increase. For the month of January there was a $40 billion surplus, more than twice the surplus in January 2006.

As the table above shows, individual income tax receipts increased by $45B (+12.6%) and corporate taxes increased by $20B (+22%), compared to the same period a year ago. We keep hearing about the "tax cuts of 2003" (rates were decreased) when it was actually a "tax hike" if we look at what happened to revenues.

In 2006, tax revenues were at all-time historical high of $2.4 trillion. At the current pace, tax revenues collected this will be $2.64 trillion, and will set another record. Now, if they could just get that spending part under control (see cartoon above).

Why Didn't Prince Get Electrocuted @ Superbowl?

Slate Magazine explains why here in "When Doves Fry."

Music Lovers, Listen Up

The Music Genome Project's Pandora Internet Radio website is one of the most amazing websites I have visited in a long time. Here is the deal:

"When was the last time you fell in love with a new artist or song?

At Pandora, we have a single mission: To help you discover new music you'll love.

For almost 7 years now, we have been hard at work on the Music Genome Project. It's the most comprehensive analysis of music ever undertaken. Together our team of 50 musician-analysts have been listening to music, one song at a time, studying and collecting literally hundreds of musical details on every song. It takes 20-30 minutes per song to capture all of the little details that give each recording its magical sound - melody, harmony, instrumentation, rhythm, vocals, lyrics ... and more - close to 400 attributes! We continue this work every day to keep up with the incredible flow of great new music coming from studios, stadiums and garages around the country.

We've now created an interface to make this available to music lovers so they could use this musical 'connective-tissue' to discover new music based on songs or artists they already know.

Pandora is the doorway to this vast trove of musical information. With Pandora you can explore to your heart's content. Just drop the name of one of your favorite songs or artists into Pandora and let the Genome Project go. It will quickly scan its entire world of analyzed music, almost a century of popular recordings - new and old, well known and completely obscure - to find songs with interesting musical similarities to your choice. Then sit back and enjoy as it creates a listening experience full of current and soon-to-be favorite songs for you."

MP: Pretty amazing, I typed in a favorite artist "Charles Brown" and it selected and played music by Charles Brown and then selections by Dr. John, Professor Longhair, Bobby "Blue" Bland, and Duke Robillard as similar artists, which I think is pretty accurate. Check it out, sound quality is excellent.

Thanks to Marcella.

Quote of the Day: Economic Models

“The construction of an economic model, or of any model or theory for that matter (or the writing of a novel, a short story, or a play) consists of snatching from the enormous and complex mass of facts called reality, a few simple, easily-managed key points which, when put together in some cunning way, become for certain purposes a substitute for reality itself.”

~Evsey Domar, Essays in the Theory of Economic Growth

Bernanke on Protectionism

Federal Reserve Chairman Ben Bernanke issued a fresh warning for the United States to steer away from policies that seek to erect protectionist barriers to trade and investment opportunities or to stifle the economy's flexibility. Such a course, he cautioned, "would do far more harm than good."

Commercial Real Estate is HOT

The Vanguard REIT (real estate) Index Fund has gone up by 36.32% over the last year (vs. 14.5% for the S&P 500), and almost 11% just so far this year (vs. 2.2% for the S&P 500). Intererst rates are low and stable, construction has slowed, vacancy rates are the lowest since 2001 and falling, commerical rents are rising (5.2% increase expected in 2007), which all makes commercial real estate one of the hottest markets right now.

Equity Office Properties (EOP) holds the nation's largest portfolio of office properties (500 buildings), and is the subject of a heated bidding war between the Blackstone Group and Vornado Realty Trust in a deal valued at more than $38 billion. EOP's share price has almost doubled over the last year from $30 to almost $60.

Bottom Line: A $10,000 investment 10 years ago would have grown to $20,000 today invested in the S&P 500 Index, and to almost $40,000 invested in the Vanguard REIT Index Fund. The residential real estate market might be soft, but the commercial real estate market is HOT! (Note: You can invest in the Vanguard REIT Index fund with a minimum of $3000).

Ford = Fourth

Global Cooling or Global Warming?

Economic Freedom = Economic Prosperity

Some people claim that some countries are rich because of abundant natural resources. That's nonsense! Africa and South America are probably the richest continents in natural resources, but are home to some of the world's poorest people. By contrast, countries like England, Japan and Hong Kong are poor in natural resources, but their people are among the world's wealthiest. Hong Kong even has to import its food and water.

Some people use the history of colonialism as an excuse for poverty. That's also nonsense. The United States was a colony. So were Canada, Australia, New Zealand and Hong Kong, but they're rich countries.

The reason some countries are rich while others are poor is best explained by the amount of economic freedom its peoples enjoy and the extent of government control over economic matters.

From George Mason economist Walter William's column "World Poverty."

Hugo Chavez in a Pantsuit

On CNBC's Kudlow & Company last Friday night, writer and humorist P.J. O’Rourke referred to Hilary Clinton as “Hugo Chavez in a pantsuit.”

As Larry Kudlow says "Hillary Clinton doesn’t want corporations to pay any taxes at all—not a single penny. Hillary plans on confiscating their profits altogether!"

Watch Hillary's speech where she says "I want to take those profits (of the oil companies)."

U.S. Culture Rewards Innovation and Risk-Taking

A dynamic economy is much more than the sum of its test scores. It's part of a culture that rewards innovation and risk-taking and values unconventional problem-solving. Much of this is nurtured in U.S. schools, even if it can't be quantified on a test.

Recently, Newsweek International noted Singapore's success on international math and science exams but asked its Education Minister why Singapore produced so few top-ranked scientists, entrepreneurs, inventors, business executives and academics.

"We both have meritocracies," he replied. America's "is a talent meritocracy, ours is an exam meritocracy. There are some parts of the intellect that we are not able to test well – like creativity, curiosity, a sense of adventure, ambition. Most of all, America has a culture of learning that challenges conventional wisdom, even if it means challenging authority. These are the areas where Singapore must learn from America."

From an editorial in today's Dallas Morning News.

Bottom Line: With 5% of the world's population, Americans have won almost 50% of Nobel prizes awarded in the sciences (chemistry, physics, medicine and economics) over the last 100 years because of our culture of innovation, challenging authority and risk-taking. Singapore has won 0 Nobel prizes.

Interesting Facts of the Day

1. The used car and truck business dwarfs new car sales in the United States and accounts for a larger share of earnings by the over 21,000 franchised car dealerships because of the higher margins used vehicles carry.

2. In 2006, 42.5 million used vehicles were sold in the U.S., compared to 16.55 million new cars.

Quote of the Day

"Any book worth reading is worth buying."

~Source unknown, but I think economist Steven Landsburg mentioned this in one of his books.

Predatory Pricing, Price Gouging, or Price Fixing?

I thought we were mostly worried about high gas prices, but in Colorado, a court ruled that prices at some gas stations were TOO LOW, and those gas stations were accused of "predatory pricing":

"After a price war among several gas stations forced retail gas prices in Montrose, Colorado below wholesale cost in January 2005, several stations filed a lawsuit that asked the court to stop a competitor's program of giving a 7-cents-per-gallon gas discount to shoppers who purchased more than $100 in groceries over a 30-day period, citing the Colorado Unfair Practices Act in their case."

In Florida, politicians are worried that gas prices are TOO HIGH, and want to stop "price gouging":

"Florida Agriculture and Consumer Services Commissioner Charles H. Bronson today urged state residents to report any instances of price-gouging in the wake of the tornadoes that tore through four Central Florida counties overnight. Under Florida law, it is unlawful to charge exorbitant or excessive prices for essential items -- including shelter, gasoline, food, water, ice, generators or lumber."

And in Ohio, politicians are worried about "price fixing" and collusion.

Bottom Line: In the topsy-turvy world of politics and anti-trust law, you can get in trouble as a gas station owner for almost any price you charge. If politicians or courts think your prices are too low, you can be accused of predatory pricing; if your prices are too high, you'll be charged with price gouging; and if your prices are the same as your competitors, you can be charged with price-fixing or collusion.

Tiger Woods vs. Jack, Michael Jordan vs. Larry

From Brian Wesbury at Real Clear Politics, via Division of Labour:

A widening income gap reflects a long-running historical truism. Whenever technology advances rapidly, the so-called gap between the rich and the poor widens. This does not mean that those at the low end actually experience falling standards of living. In fact, technology lifts standards of living for all, often by lowering the prices of goods and services.

For example, companies serving consumers across the income spectrum have performed well recently. And even with recent weakness in housing, more new homes have been sold in the past four years than during any four year period of history, while home ownership rates have surged to record highs. Air miles flown, sports attendance, cell phone ownership, flat screen TV sales, jewelry sales, and dining out are all at record levels. This is not the type of economic activity one would expect in an economy where wide swaths of citizens are falling behind.

Nonetheless, incomes at the top (earned by entrepreneurial innovators or early-technology-adopters) rise more rapidly. This divergence happens whenever growth picks up due to technological innovation. And it is even more pronounced in recent decades because of technology.

For example, Michael Jordan and Tiger Woods earn much more than Larry Bird or Jack Nicklaus ever did because of the global reach of television. A rising income gap signals growth and opportunity for investors and the economy, and should not be viewed as a problem in a free economy. Income gaps in third-world countries, ruled by dictators, are a more serious development because they reflect exploitation and an abuse of political advantage.

Carpe Diem in Chinese

U.S. Stock Market, 1800-2007

In a previous CD post "Economic Growth," I had a graph of world GDP per capita from 1 - 2003 A.D., and commented that "sustained economic growth of even 1% per year was not a reality until the 19th century, and sustained economic growth of 2-3% was not a reality until the last 50 years," and only in advanced economies like the U.S.

That post generated a lot of interest, and it was linked to several other blogs. That made me think about historical stock market performance, which should follow the same historical pattern as economic growth, since they are linked so closely together. Without positive economic growth, you won't have positive stock market growth.

Sure enough, sustained positive growth in the U.S. stock market was not a reality until 1950, see the graph above of the S&P 500 Index from 1800-2007. The S&P 500 Index stock series back to 1800 is from Global Financial Data.

From 1800 to 1950, the average annual nominal stock market return was 1.35%, inflation averaged 2.4%, resulting in a negative, real annual stock market return of -1.05%.

From 1950 to 1975, the average annual return on the S&P 500 was 6.1%, inflation averaged 3.24%, resulting in a real return of 2.9%.

From 1975 to 2007, the average stock market return was 9.1%, inflation averaged 4.3%, generating a real return of 4.8%.

Bottom Line: It's only been in the last 50 years that positive, real stock returns were a reality, and it's been in the last 25 years that real, annual stock returns have approached 5%.

An Undertaxed America?

From today's Investor's Business Daily:

1. U.S. corporate taxes are the second highest among industrialized nations. As a percentage of GDP, corporate income taxes rose from 1.2% in 2003 to 2.3% in 2005, the highest level in 25 years.

2. About 14 million Americans at lower incomes have been removed from the federal income tax rolls since 2000 because of the earned income tax credit and the per-child tax credit.

3. The rising tax burden (see graph above) is borne disproportionately by those who are successful. The top 50% of Americans pays almost 97% of income taxes. And most of that — 54% — is paid by the top 5%, and the top 1% pay more than 34% of all personal income taxes collected.

4. The CBO found that the after-tax income of those "superrich" actually declined after the 2003 tax cuts — by 8.3% from 2000 to 2004.

Why is Health Care So Expensive?

Jacob Sullum in today's Washington Times answers the questions: a) why do employers pay for our health insurance?, and b) why does health care cost so much?

Most Americans get medical coverage through their employers, which is a strange situation when you think about it. People do not expect their employers to pay for their car insurance, their life insurance or their homeowner's insurance. Why should employers pay for their health insurance?

This strange situation was created more or less by accident. During World War II, businesses competing to attract scarce workers got around wage and price controls by offering health insurance instead of higher pay. In 1943 the Internal Revenue Service decided not to count this increasingly popular fringe benefit as taxable income, a policy codified by Congress in 1954.

The seemingly free coverage makes health care more expensive for everyone. Not only are you unlikely to know or care how much your employer spends on health insurance, but the coverage may be more generous than you would choose on your own, which means you are unlikely to know or care how much particular services cost.

If you were using your own money to buy insurance, you might opt for a cheaper policy with a higher deductible, in which case you would be more conscious of things like the fee for an office visit or the difference in price between name-brand and generic drugs. Indifference to such considerations contributes to escalating health care costs.

See a previous Carpe Diem post here on the same topic.

Quote of the Day

"Every politically controlled educational system will inculcate the doctrine of state supremacy sooner or later. . . . Once that doctrine has been accepted, it becomes an almost superhuman task to break the stranglehold of the political power over the life of the citizen. It has had his body, property and mind in its clutches from infancy. An octopus would sooner release its prey. A tax-supported, compulsory educational system is the complete model of the totalitarian state."

~Isabel Paterson, The God of the Machine (1943)

Related, from The Cato Institute: "The Utah House of Representatives passed the nation’s first universal school voucher bill, and it’s probably going to pass the Senate this week as well, and be signed by the governor. If it is signed into law, it will be an unprecedented step forward for educational freedom in this country."

Technology from the Jetson's Era

Check out the Concierge, a wireless interactive touch-screen computer console integrated in shopping cart handles, featuring personalized account recognition, product scanning, self-checkout, in-store cart tracking, dynamic advertising, product finder, interactive shopping list, and recipes.

Watch a demonstration video here.

Note: These are already being used in Canada.

It Took India 35 Years, But Friedman Was Right

"In a memorandum dated November 5, 1955, submitted to the government of India, Milton Friedman, who predicted the end of the post-war boom and stagflation, was at his prescient best while candidly critiquing the model of planned development being formulated under the auspices of the eminent mathematician P. C. Mahalanobis.

It is worthwhile revisiting Milton Friedman’s arguments, as valid now as they were then, with most of them quietly implemented over three decades later as part of India’s new economic policy from the 1990s."

From the article "Milton Friedman and India," in the Economic Times of India, via Professor Lawrence White at Division of Labour.

India vs. China

India's real GDP grew by 9.2% in the year to last September (the latest numbers available). Over the past four years it has clocked up an average annual pace of more than 8%, compared with around 6% in the 1980s and 1990s—and a measly 3.5% during the three decades before 1980, when highly interventionist policies shackled the economy (see graph above).

India seems to be reaping the rewards of reforms that were made in the early 1990s. These massively lowered barriers to trade and liberalized capital markets. As a result, total trade in goods and services has leapt to 45% of GDP, from 17% in 1990.

From The Economist Magazine article "India on Fire."

Quote of the Day

"The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the presupposition that human choice behavior is sufficiently rational to allow predictions to be made. Just as no physicist would claim that "water runs uphill," no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores."

~James Buchanan, 1986 Nobel economist, George Mason Univ.

The New Global Economics of Modeling

From Saturday's WSJ, an article about "the new economics of modeling -- lower fees and a surge of Russians."

The global economy is transforming the modeling world. Supply has soared, as aspirants from developing countries stampede into the field. At last season's New York's fashion week, the quintessentially American design house of Calvin Klein didn't send a single American down its catwalk. Twelve of the 22 chosen were from Russia and Eastern Europe.

"There's so many models now. It used to be the Americans, Europeans and Canadians. Then we got the influx of Brazilians, Russians, Eastern Europeans," says American designer Nicole Miller. "There are just thousands every year."

Corporations Don't Pay Taxes, People Do

Economists generally agree that individuals (people) pay business taxes, not corporations like oil companies, in one of 3 ways:

1. The first to pay are the employees of oil companies here in the U.S. -- people who would make lower wages or perhaps even lose their jobs if taxes on oil companies are increased.

2. Next would be the millions of Americans who have investments in the oil industry -- people who would earn lower returns on those investments if taxes were increased.

3. And finally, the principal group to pay would be American gasoline customers -- the millions of people who would pay more at the pump if oil companies pay higher taxes.

From the Tax Foundation's Tax Policy blog.

MP: Higher corporate taxes = higher prices for consumers, lower wages for employees and/or lower dividends for shareholders. People pay all business taxes in their roles as consumers, workers or shareholders.

Investing Goes Global

From an article The Global Bet, in today's Wash Post Business Section:

1. Six years ago, only about 8% of new money flowing into U.S. stock funds was invested overseas. Now, that number is hovering around 77%, as American investors look longingly at soaring returns in international markets.

2. Investors have a total of $5.3 trillion invested in U.S. stock funds, including $950 billion in international stocks. Although that only accounts for 18%, that total is growing rapidly as overseas gains outpace gains in U.S. markets and as globalization makes Americans more aware of foreign companies and products.

3. Last year, international funds had average returns of 26%, compared with 12% for domestic funds. Funds that invest in emerging markets had gains of 32%. Gains have been even more dramatic in rapidly growing countries such as Brazil, Russia, India and China.

See my previous post on global stock returns.