Monday, December 03, 2007

November Car Sales Rise: Good News or Bad News?

According to Motor Intelligence, light vehicle sales in November were 16.2 million unit on a seasonally-adjusted annual rate (SAAR), see chart above (click to enlarge). That exceeded the average estimate of 15.9 million in a survey of eight analysts and 12 economists.

Compared to October, sales on a SAAR basis increased by 2.6% in November, and compared to November 2006, sales increased by close to 0.50%. During the last year, auto sales (SAAR) have averaged 16.2 millions per month, the same as sales in November. Given the subprime mortgage crisis, and all of the talk about credit tightening, rising oil prices and a pending recession, vehicle sales of 16.2 million units in November seems like pretty good news, doesn't it?

Well you would never know that from the media reports today, here are some examples:

November auto sales weak

US Nov. auto sales weak; Ford, GM cut output

US auto sales weaken in Nov. as caution mounts

Carmakers warn of tougher times ahead in US

Pessimism Over '08 Could Crimp Auto Production

US auto sales fall 2% in November

Auto prospects for 2008 look grim

Carmakers report so-so November, expect weak 2008

Weak November a hint of what's to come for auto industry in 2008

Quote of the Day, Revisited

"Civil rights used to be about treating everyone the same. But today some people are so used to special treatment that equal treatment is considered to be discrimination."

~Economist Thomas Sowell

Fraser: US Drug Policies Produce Better Outcomes

From a new study by Canada's Fraser Institute (news release here, full report here) titled "Cost Burden of Prescription Drug Spending in Canada and the United States":

Even though Canadian prices for brand name drugs are lower than U.S. prices for identical drugs (by 51% on average), consumers in both countries spend roughly the same percentage of their personal income on drugs because the price of Canadian generics is more than double U.S. prices for identical drugs (115% more expensive).

The root causes of high generic drug prices in Canada are government policies that shield retail pharmacies and generic drug manufacturers from competitive market forces that would naturally put downward pressure on generic drug prices.


World Stock Markets Set Another New Record

According to recently released global stock market data from the World Federation of Exchanges, world stock market capitalization reached another all-time record of $63.1 trillion in October (see graph above, click to enlarge). The $3.3 trillion monthly increase in stock market value from September was the second largest monthly increase in history, just slightly behind the $3.4 trillion record set in December 1999 at the height of the Dot-com boom.

Compared to last October, world stock markets have increased in value by 33.4%, adding almost $16 trillion of new stock market wealth to the world economy in just the last 12 months.

Over the last five years, more than $42 trillion of stock market wealth has been created, as the global market capitalization rose from about $20.4 trillion in September of 2002 to more than $63 trillion in October 2007. In other words, more global wealth (measured by stock market value) was created in the last 5 years ($42 trillion total, or almost $6,500 for every person on the planet) than was created during the thousands of years it took to create the first $35 trillion of stock market value, a level first reached in 2000 (see chart above).

Among the world leaders for increases in stock market capitalization from October 2006-October 2007 (measured by percent increase in local currency) were the Shanghai SE Index (+366%), Luxembourg SE (+163%), Hong Kong (+102%), India (+88%), Brazil (+85%), and Peru (+81%).

Bottom Line: Let's assume that losses from the subprime mortgage crisis reach $300 billion over the next year as predicted, and those losses spread to other countries, as has already happened. Compared to the $16 trillion of global stock market wealth created in the last year, those subprime mortgage losses would be only 1.875% of the increase in world stock market capitalization. Stated differently, for every $1 of loss in the subprime mortgage market, more than $53 of new wealth has been created elsewhere in world stock markets.

And compared to the total stock market capitalization of $63.1 trillion, the subprime losses of $300 billion would be less than 1/2 of 1%. It'll probably take a lot more than a $300 billion credit problem to unsettle the $14 trillion U.S. economy and the $63 trillion world stock market!

Sunday, December 02, 2007

NYC's Population By Day vs. Population At Night

What a difference 12 hours makes. Click to enlarge.

(HT: Captain Capitalism)

Where Is The Outrage Over Foreign Grad Students?

According to this WSJ editorial from last week, foreign students received 33% of all research doctorates awarded by U.S. universities in 2006, up from 25% in 2001, and foreign students earned 44% of science and engineering Ph.D.s.

Given their past hostility to globalization and outsourcing, where are protectionists like Lou Dobbs, Pat Buchanan and John Kerry? Shouldn't they be complaining vociferously that foreigners are taking away research and teaching assistantships from Americans at U.S. research universities? Where is the outrage over "Benedict Arnold American university and college presidents" taking away funding from American graduate students and giving it instead to so many foreigners? After all, most doctoral students receive funding in the form of research or teaching assistantships, so aren't these foreign students taking away jobs from Americans?

What is the difference between Microsoft shifting its employment of Ph.D. software engineers from the U.S. to research centers in Bangalore, and the U. of Chicago, Cal Tech and M.I.T. increasing the percentage of acceptances and financial support for engineering students from India in their Ph.D. programs?

If Microsoft's hiring of an Indian engineer takes away a job from an American engineer, don't the foreign students earning 44% of science and engineering doctorates likewise take away opportunities from American students to attend graduate school?

Q: Where is the outrage?

Mortgage Rates Fall to Six-Month Low of 6.1%

MINNEAPOLIS -- Amid the depressed housing market there's some good news: Mortgage interest rates last week dipped to 6.1% (the lowest level in more than six months, since early May, see chart above) -- within shouting distance of the historic lows that propelled home sales into the record books.

America's Ridiculously Large Economy III

Following previous posts (here and here) on America's ridiculously large economy, here is how the growth in U.S. nominal GDP would translate, in terms of how the typical increases in national output compare to the economic output of various U.S. states:

4% growth in current-dollar GDP ($560 billion of additional output) would be equivalent to adding two new states to the U.S. the size of Washington ($293.5b) and Maryland ($258b).

5% growth in GDP (average growth since 1997) would be equivalent to adding a new state the size of Florida to the U.S. economy.

6% growth in GDP (average growth from 2004-2006) would be equivalent to adding two new states the size of Georgia ($380b) and Ohio ($461b).

7% growth (achieved in some individual quarters like the fourth quarter of 2006), would add almost $1 trillion (corrected) of output to the U.S. economy, equivalent to adding a new state the size of New York to the U.S. economy.

Bottom Line: In an average year, the U.S. economy grows by an amount equivalent to adding the entire economic output of a state like Florida ($713 billion) to the U.S. economy, or a country like Australia ($755 billion). In a great year, the U.S. economy grows by an amount equivalent to adding the economy of another New York state to the U.S. economy, or adding the economy of an entire country like Russia to the U.S economy.

Good News: The Dollar Is Falling

George Mason economist Tyler Cowen explains in today's NY Times why the falling dollar has been good for the U.S. economy:

So far the Federal Reserve and the Bush administration have shown little concern over the falling dollar (almost 20% since 2001, see chart above). This isn’t because of neglect or lack of interest; trillions of dollars worth of currency are traded every day, so policy makers have only a limited ability to push around long-term exchange rates, even if they wanted to do so.

In the case of the dollar, we need to stop thinking of its value as a marker of economic success. The American economy has its problems, but so far the low value of the dollar has proved more a benefit than a cost.

Read more

Saturday, December 01, 2007

America's Ridiculously Large Economy II

According to the BEA, the U.S. economy grew by almost 6% (in current dollars) in the third quarter, and by 6.6% in the second quarter (on an annualized basis). In dollar terms, that translates into $200 billion of additional economic output in the third quarter of 2007 (or $800 billion on an annual basis) and $217 billion in the second quarter ($868 billion annually).

This brings up the question: Given the ridiculously large size of the U.S. economy ($14 trillion), what does each percent in nominal GDP growth translate to, in terms of that amount of additional U.S. economic output compared to the size of various national economies? Here is how it breaks down:

1% of current-dollar annual growth in U.S. GDP ($140 billion) would be the equivalent of adding the entire economies of either the Czech Republic ($142b) or Israel ($142b) to the U.S. economy.

2% growth would be like adding Denmark's entire economy ($276b) to the U.S.

3% growth would be like adding more than Turkey's entire economy ($401b) to the U.S.

4% growth would be almost like adding the entire Dutch economy ($660b) to the U.S.

5% growth would be almost like adding the entire economy of Australia ($755b) to the U.S.

6% growth would be like adding Mexico's economy ($840b) to the U.S.

7% growth would be like adding Russia's entire economy ($985b) to the U.S.

Bottom Line: Over the last year, from the third quarter of 2006 to the third quarter of 2007, the U.S. economy has grown by 5.3% (same as the 10-year average), or more than $700 billion in current dollars, which is almost the equivalent of adding the entire national economy of Australia ($755b) to the U.S. economy. And if the economy were to grow annually at the same rate as the second quarter (6.6%), it would be like adding more than the entire economy of Mexico to the U.S. economy, and almost like adding the entire Russian economy to the U.S.

A slowdown in the U.S. economy to something like 2-4% growth in nominal GDP would mean that instead of increasing output equivalent to adding the economies of Australia or Mexico to the U.S. economy in a given year, we would have to "settle" for only adding output equivalent to an economy like Netherlands, Turkey or Denmark. Still not a bad outcome for the "Dangerfield Economy."

Cartoon of the Day

A little late, but a good one from Henry Payne....

America's Ridiculously Large Economy

Following up on the previous CD post below, the chart above (click to enlarge) shows the 20 largest U.S. metropolitan areas by 2006 GDP using BLS data available here and the countries with comparable economic output using GDP data available here from the IMF and World Bank.

Consider that the top 10 cities in the U.S., all with GDP of $224 billion or higher, would rank among the top 30 countries in the world by GDP if they were a separate country. The top 20 American cities would all rank individually in the top 50 countries of the world by economic output if they became a separate country.

Consider also that the 10 largest cities in the U.S. produce the same amount of economic output ($4,300 billion) annually as Japan, and the top 20 largest U.S. cities produce the same output ($6,000 billion) as the economies of U.K., France and Canada combined.

When you consider how ridiculously enormous the U.S. economy is, diversified across a huge number of industries in 50 states, with individual cities producing more economic output than most countries around the world, it's truly mind-boggling. In the press, America's "Dangerfield economy" is often portrayed as fragile and delicate, ready to collapse into recession at any moment, when in fact, it's ridiculously larger and more stable than most people give it credit for.

Maybe Economic Size Does Matter

This previous CD post about the size of the U.S. economy, and Greg Mankiw's post with a link to a video about the size of the U.S. economy vs. oil-producing Gulf States, inspired me to do the analysis in the chart above (click to enlarge). Data on 2006 GDP by country were obtained here, and data on GDP by metropolitan area were obtained here from the BLS.

Consider that Iran's entire economy ($222 billion) is about the same size as Detroit ($213 billion), Qatar ($47 billion) is slightly smaller than Birmingham, AL and Jordan is just slightly larger than Flint, MI.

Bottom Line: We lose sight of how enormous the U.S. economy is (GDP of $14,000,000,000,000) in absolute value, and also have probably never even considered that individual cities in the U.S. like San Diego produce as much economic output per year as the U.A.E. And even with the world's second largest reserves of conventional crude oil, the annual economic output of Iran is barely larger than Detroit's economy.

The huge size of the U.S. economy ($14 trillion), diversified across a large number of industries and an enormous geographical area, must provide a high degree of economic stability, and should help stabilize the economy against recessionary pressures. When it comes to size, strength and stability, no other country in the world even comes close. A $14 trillion economy can take a lot of shots and remain standing, and it'll take more than a subprime mortgage crisis and housing troubles to knock Goldilocks down.

Friday, November 30, 2007

The Mountain Wingsuit

(HT: Ryan Stinson)

81% of Public Are Ethanol Atheists, Thank God

Results above are from the Wall Street Journal's online poll, accompanying Wednesday's article "Ethanol Craze Cools As Doubts Multiply."

As Jerry Taylor of the Cato Institute said, "The closest thing we have to a state religion in America today isn't Christianity. It's corn. It's hard to think of a more wrongheaded and ruinous policy than the program to subsidize ethanol. It's time for the voters to rethink their membership in this political cult."

Apparently, 81% of WSJ readers are corn atheists, and have resigned from their membership in the Church of Corn Ethanol, if in fact they ever actually did worship at the altar of ethanol the way politicians, corn farmers and lobbyists do.

(HT: Clover Aguayo)

$14,000,000,000,000 Is A Lot of Economic Output

Greg Mankiw has an interesting post "A Quick Quiz," which made me think of the map above (click to enlarge) that was featured on a previous CD post and other blogs and websites about 9 months ago. The map shows the 50 U.S. states renamed for countries that have similar economic output, measured by GDP.

Bottom Line: The $14 trillion of GDP in the U.S. is a LOT of economic output.

"Dollar Punishes Exporters"

No, not the U.S. dollar, which is stimulating our exports to record levels. This story is about the Canadian dollar, which has appreciated by about 50% since 2001 vs. the U.S. dollar, and has started to choke off Canadian exports.

Current account surplus plunges to a 4-year low as the mighty loonie crimps Canada's performance

TORONTO -- Canadians were given fresh evidence yesterday the soaring loonie is wreaking havoc on this country's trade performance after Statistics Canada reported our current account surplus with the rest of the world plunged by $5.3 billion in the third quarter to $1 billion.

The current account is the broadest measure of Canada's trade performance and includes trade, services and investments. This latest July-September snapshot shows the higher dollar, averaging about 95.7 cents (U.S.) during the period, pummelled exports and shoved this country's current account surplus down to its lowest level in four years.

Since the currency only reached parity with its U.S. counterpart during the tail end of the period, some economists are warning what's left of that surplus could disappear entirely during the current quarter.

We Educate Foreign Students, Then Deport Them

A mere 65,000 H-1B visas for foreign professionals are allocated in the U.S. each year. And this year, as in the previous four, the quota was exhausted almost as soon as the applications became available in April. This effectively means that more than half of all foreign nationals who earned advanced degrees in math and science in 2007 have been shut out of the U.S. job market.

It makes little sense for our universities to be educating talented foreign students, only to send them packing after graduation. Current policies have MIT and Stanford educating the next generation of innovators -- and then deporting them to create wealth elsewhere.

~From today's WSJ editorial American Brain Drain

Partisan Columnists: #1 Coulter, #2 Krugman

Lying in Ponds is a website that tracks and ranks the Democratic and Republican biases of a selection of regular political columnists. The top graph above for 2007 shows that Paul Krugman is the most partisan liberal columnist and Ann Coulter is the most partisan conservative columnist.

Lying in Ponds tries to draw a fundamental distinction between ordinary party preference and excessive partisanship. The presence of an excessive partisan bias transforms journalism into advertising, too distorted and unreliable to be useful in any serious political debate. Political parties are a healthy, essential part of American democracy; excessive partisanship is not. The methods used here are an attempt to quantify only partisanship, and are not intended as a more general guide to the quality of a columnist.

For example, an analysis of columns in 2007 by Ann Coulter shows that she has had 463 negative comments about Democrats, and only 10 positive comments (about a 46:1 ratio). Paul Krugman has had 603 negative comments so far this year about Republicans, and only 31 positive comments (almost a 20:1 ratio). In comments about Republicans, Coulter's positive comments outnumber negative comments by about 2.5 to 1, and Krugman's positive comments about outnumber negative comments by about 3.5 to 1 (see bottom chart, click to enlarge).

According to Lying in Ponds, "A partisan pundit is one whose opinions nearly always break down along party lines. Assuming that it's unlikely that a partisan columnist is actually formulating the party platform, then the partisan columnist's opinions must therefore derive from allegiance to the favored party or hostility to the other party rather than from independent thought. The views of pundits who are excessively partisan cannot be taken seriously, because their ulterior motives or uncontrolled biases are certain to frequently contaminate their judgements."

Conclusion: Don't take Krugman and Coulter too seriously.

Thursday, November 29, 2007

GM's India Market Share Rises, Sales Up By 150%

NEW DELHI: General Motors Corp. opened its first design studio in India on Thursday, a move intended to support the U.S. automaker's efforts to expand its presence in the country.
The studio in the southern Indian city of Bangalore, where GM already has a research and development center, will "contribute to the mid-cycle enhancement of existing models and the advanced design of future products," the company said.

The studio, which will initially have about 60 employees, comes at a time when GM is having some success after struggling for years to penetrate the Indian car market.

The company introduced the low-cost Chevrolet Spark this year (pictured above), which is proving popular among young buyers. In the past seven months, the U.S. automaker has sold nearly 2 1/2 times the number of cars it sold in the country in the same period last year.

Net Exports Contribution to GDP Highest in 10 Yrs.

The contribution of net exports of goods and services to real GDP growth in the third quarter was revised upward to 1.37% (from the original estimate of 0.90%), and contributed to half of the 1% upward revision of real GDP growth from 3.9% to 4.9%. Further, it was the largest percent contribution to real GDP growth since the fourth quarter of 1996 (see chart above). Further, without the -1.03% decline in housing, real GDP growth would have been 5.93% in the third quarter. Read more here from First Trust Advisors.

Summer Real GDP Growth Highest in 4 Years

WASHINGTON (MarketWatch) -- The U.S. economy expanded at the fastest pace in four years during the third quarter, growing at a real annual rate of 4.9%, the Commerce Department reported today in making its second estimate of growth for the three-month period.

The 4.9% growth rate during the summer of 2007 was only the second time in the last 29 quarters that the economy expanded at close to a 5% rate, and it was the strongest growth rate for the economy in 4 years (see chart above).

End All Government Involvement in Education

Prayers in school, sex education and "intelligent design" are contentious school issues. I believe parents should have the right to decide whether their children will say a morning prayer in school, be taught "intelligent design" and not be given school-based sex education. I also believe other parents should have the right not to have their children exposed to prayers in school, "intelligent design" and receive sex education.

The reason why these issues produce conflict is because education is government-produced. That means there's either going to be prayers or no prayers, "intelligent design" or no "intelligent design" and sex education or no sex education. If one parent has his wishes met, it comes at the expense of another parent's wishes. The losing parent either must grin and bear it or send his child to a private school, pay its tuition and still pay property taxes for a school for which he has no use.

The solution is to take the production of education out of the political arena. The best way is to end all government involvement in education. Failing to get government completely out of education, we should recognize that because government finances something it doesn't follow that government must produce it. Government finances F-22 Raptor fighter jets, but there's no government factory producing them. The same could be done in education. We could finance education collectively through tuition tax credits or educational vouchers, but allow parents to choose, much like we did with the GI Bill. Government financed the education, but the veterans chose the school.

~From George Mason economist Walter Williams' latest column

Quote of the Day II

The writers' strike basically shapes up as a couple of third cousins at Thanksgiving dinner arguing over who gets a slightly larger slice of the billion dollar pumpkin pie: the writers who create the movies and shows, or the corporations who actually take all the financial risk that allows us Hollywood writers to write in Hollywood in the first place.

~John Ridley's NPR's "Visible Man"

Quote of the Day; Blogging is Like Being Married...

There's an old newspaper saying, attributed to Lewis Grizzard, that "Being a newspaper columnist is like being married to a nymphomaniac. Every time you think you're through, you have to start all over again."

I think the same could be said for being a blogger.

Wednesday, November 28, 2007

FDIC Report Suggests Banks Are Surviving Well

The charts above were created using the most recent banking data from 8,560 FDIC-insured banks, throughout the third quarter 2007, showing that:

1. Total assets of commercial banks increased by a record $446.3 billion (3.6%) to $12,707 billion, eclipsing the previous quarterly high of $331.6 billion set in the first quarter of 2006 (top chart above). Loans secured by real estate at commercial banks were up by 5.3% in the third quarter 2007 vs. the same quarter last year (see second chart above), suggesting that credit tightening in response to the subprime troubles is not a problem for U.S. banks.

2. The "net-charge offs to FDIC banks" (loans removed from balance sheet because of uncollectibility) in 2007 has been 0.50% (or about 1 loan in 200), slightly higher than last year, but about the same as 2005 (0.49%) and much lower than 2003 (0.78%), and about half the rate in 2002 (0.97%), see third chart above.

3. The number of "problem institutions" in 2007 (65 banks) is slightly higher than 2006 (50 banks) and 2005 (52 banks) as might be expected given the recent troubles in the financial sector, but lower than 2004 (80 banks), 2003 (116 banks) and about half the number in 2002 (136 banks), see bottom chart.

The FDIC report presents a picture of a U.S. banking system that is overall still very healthy, while it absorbs some of the negative effects of the subprime mortgage troubles. On the positive side, commercial loan growth set another new record in the third quarter 2007, residential mortgage loans registered the largest quarterly increase since the second quarter of 2006, "problem list" assets declined, more than 99% of insured institutions met or exceeded the highest regulatory capital requirements, more than half of all banks (51%) reported higher quarterly earnings compared to the third quarter of 2006, and net interest income increased by the best year-over-year growth rate in five years (6.5%). No credit crunch, and bank performance is healthy.

On the negative side, there are some effects of the subprime mortgage troubles: the number of banks on the FDIC's "Problem List" increased from 61 to 65 in the third quarter (probably not a big deal since there are 8,560 banks), and loan-loss provisions totaled $16.6 billion - the largest quarterly loss provision since the second quarter of 1987.

Bottom Line: As I mentioned in several recent posts, not a single U.S. bank failed in either 2005 or 2006, and only 3 banks failed in 2007 (out of 8,560 banks). The banking system today is probably much stronger than it was was in 2002 or 2003 on many dimensions (net charge-off rates, problem institutions and bank failures), and much stronger and more stable than most people give it credit for. Certainly the subprime troubles have shown some effect on banks, which is to be expected. But the fact that more than 99% of insured U.S. institutions currently meet or exceed the highest regulatory capital requirements suggests that the U.S. banking system is healthy and will absorb and survive the current turmoil in the subprime mortgage sector.

86% Chance of Rate Cut in December

Based on 30-day Fed Funds futures trading for December at the CBOT, the chance of a Fed Fund rate cut to 4.25% in December increased today from 80 to 86%. The Dow posted its biggest 2-day gain in 5 years.

Bank Stocks Post a 4.2% Gain Today!

The DJIA was up today by 2.55% (red line), but how about those NASDAQ bank stocks (blue line) - they made a nice 4.19% recovery today!!? Holy Moly!!

TelaDoc Market Solution: The Doctors Is Always In

Health care entrepreneurs working outside the traditional health insurance payment system are using telephone, e-mail, text messaging and innovative computer software to make medical care more accessible and convenient for patients, according to a new study by the National Center for Policy Analysis titled "Convenient Care and Telemedicine."

Approximately 1 million patients are now subscribers to a nationwide service operated by TelaDoc Medical Services. For a low $35 consultation fee, enrollees can talk to a doctor by phone, any time day or night.

Conclusion:Telemedicine provides important new opportunities to improve health care in the 21st century. Telemedicine is safe, efficient and convenient for both patients and providers. It is often the method preferred by patients who demand timely access to their doctors. And it is a method endorsed by a growing number of doctors who understand its potential. Other industries have taken advantage of information technology to benefit consumers in numerous ways. It is time that health care does the same.

Online Shopping in Nov. At All-Time Record Highs

"Cyber Monday" sales set a new all-time single day record for e-commerce sales of $733 million, according to comScore, representing a 21% increase over last year. While Monday represented the first time ever more than $700 million was spent in a single day by online shoppers, comScore said that it expects spending on some days may exceed $800 million in the coming weeks.

Further, online shopping for the month of November so far is also up significantly from the same period last year by 17%, see chart above, and online shopping on Thanksgiving and Black Friday are also up by more than 20% from last year.

What recession?

Multiple Refinancing Contributed to Mortgage Crisis

The chart above is from an article in today's Detroit News, illustrating how one Detroit homeowner got into foreclosure trouble: Ethel Cochran refinanced her home 7 different times within a ten-year period at adjustable rates, pulling out more and more equity each time.

30-year fixed-rate mortgages were available in 1987 for about 10%, which would mean that Ethel's original monthly house payment was only about $83 (principal and interest), and her mortgage balance today would be less than $6,000 with only ten years left to pay off the mortgage. Now she has a $116,000 mortgage that she can't pay, and is being evicted from her house.

What happened to the old-fashioned idea of making payments on your original mortgage, paying it off and having a "mortgage burning party?"

There's a perception that it was first-time howeowners who got in trouble with subprime adjustable-rate mortgages, but this story suggests that there were also many existing homeowners who also got in trouble with multiple refinancings, and have probably contributed to the current subprime mortgage crisis.

Tuesday, November 27, 2007

Buy Houses in Detroit For $250, Monthly Pmt = $1

You can go to and search for homes for sale in any city in the U.S., and you can specify a certain price range. If you search for Detroit homes for sale between $0 and $1,000, you'll find that there are 74 homes for sale in that price range, including the bank owned bargain above for $250, with estimated monthly payments of $1. There are 4 homes for sale for $1. If you search for Detroit houses for less than $5,000, you'll have almost 1,000 homes to choose from!

See previous post on Detroit houses here.

Bank Stocks Outperform Market in The Long Run

Bob Wright wrote in a recent comment "If you look at financial stocks over any meaningful period - like 10 years or more, they kill the DJIA and the S&P 500. They even out-performed over the last 5 years until this recent bit of turmoil."

The chart above (click to enlarge) shows the performance of NASDAQ Bank Stocks (blue line) vs. the NASDAQ Composite (green) and the S&P500 (red) from 1990 to 2007. Consider that $100,000 invested in the NASDAQ Banks stocks in 1990 would have grown to $1,137,000 today, vs. $782,292 today if you had invested $100,000 in 1990 in the NASDAQ Composite, and only $469,812 if you had invested in the S&P500. In other words, you would have almost $700,000 more today from your $100,000 investment in NASDAQ Bank Stocks in 1990 compared to the same initial investment in the S&P500.

Bob is right.

Forcing The Poor To Buy Rich Man's Toys

Closing sweatshops and forcing Western labor and environmental standards down poor people's throats in the third world does nothing to elevate them out of poverty. Instead, it forces poor people to buy a lot of rich man's toys, like clean air, clean water, and leisure time. If clean air and leisure time don't strike you as extravagant luxuries, that's because Americans - even the poorest of us - are so rich these days that we've forgotten what true poverty is like. But chances are your great-great-grandparents could have told you what it's like: when you're truly poor, you can't afford things like clean air. Nobody in 1870 America worried about the environment.

~Rochester economist Steven Landsburg in "More Sex is Safer Sex"

Barefoot Indian Steelworkers: "Help" Is On The Way

I was reminded of this cartoon while reading some of the comments on the Indian-made manhole covers in NYC.

Let me suggest an alternative caption:

"Help is on the way, barefoot Indian steelworkers. We're cancelling all orders for Indian manhole covers in the U.S., and we're also going to help shut down all of those exploitive, steel foundries in your country that fail to meet the safety standards of advanced economies like the U.S. that are 50 years ahead of you."

Carpe Diem On CNBC's "Kudlow and Company"

Thanks to Larry Kudlow for mentioning the Carpe Diem blog last night on CNBC's "Kudlow and Company," as well as featuring some Carpe Diem posts on his blog yesterday: "Perry Is On the Mark." Three Carpe Diem graphs were featured last night on the show: the two from this CD post, and the one from this CD post.

Don't miss "Kudlow and Company" at 7 p.m. on CNBC Mon.-Friday.

Moving In And Out of Those Income Brackets

Significant Income Mobility: Quintiles Not Closed Clubs

Great column today by Thomas Sowell on That "Top One Percent," here are a couple excerpts:

Americans in the top 1%, like Americans in most income brackets, are not there permanently, despite being talked about and written about as if they are an enduring "class" -- especially by those who have overdosed on the magic formula of "race, class and gender," which has replaced thought in many intellectual circles.

At the highest income levels, people are especially likely to be transient at that level. Recent data from the Internal Revenue Service show that more than half the people who were in the top one percent in 1996 were no longer there in 2005.

Among the top one-hundredth of one percent, three-quarters of them were no longer there at the end of the decade.

These are not permanent classes but mostly people at current income levels reached by spikes in income that don't last.

Among corporate CEOs, those who cash in stock options that they have accumulated over the years get a big spike in income the year that they cash them in. This lets critics quote inflated incomes of the top-paid CEOs for that year. Some of these incomes are almost as large as those of big-time entertainers -- who are never accused of "greed," by the way.

Most Americans in the top fifth, the bottom fifth, or any of the fifths in between, do not stay there for a whole decade, much less for life. And most certainly do not remain permanently in the top one percent or the top one-hundredth of one percent.

Most income statistics do not follow given individuals from year to year, the way Internal Revenue statistics do. But those other statistics can create the misleading illusion that they do by comparing income brackets from year to year, even though people are moving in and out of those brackets all the time.

Apostrophe Misuse Ending at The NY Times?

NYTimes today: In the first half of the 1990’s, she was Mr. Mitterrand’s lead aide on international trade issues.

NYTimes today: For two years in the mid-1990s, Mr. Morrissey was suspended from practicing law in New York State for mishandling a client’s escrow account.

NYTimes today: As prime minister in the 1990s, Nawaz Sharif was a religiously conservative, nationalist leader who allowed the Taliban to flourish in Afghanistan and detonated a nuclear weapon despite an American plea not to.

NYTimes today: In the past four years, he has designed collections inspired by the war in Chechnya, the boycotted 1980 Moscow Olympics, the Soviet Navy and, this season, Moscow criminal gangs of the 1990s.

Although it's not always consisent, I think the NY Times is phasing out its long-standing policy of adding an unnecessary (IMHO) apostrophe to words like "1990's" (first example above) and is moving toward the standard style guideline in use at every other major newspaper, and is now using "1990s" (most of the time), since a decade is plural, not possessive.

For example, a search of the NY Times in 2007 through November 27 shows almost 3,000 examples of the term "1990s," and only 56 examples of the term "1990's."

A search of the same period in 2006 shows almost 3,000 examples of the term "1990's" and only 237 examples of the term "1990s."

There is a definite trend at the NY Times towards eliminating the misuse of that "puny piece of punctuation." Thank God. See previous CD posts about apostrophe abuse here and here.

Monday, November 26, 2007

New York Manhole Covers, Forged Barefoot in India

It's not just call centers that are outsourced to India.

NEW DELHI — Eight thousand miles from Manhattan, barefoot, shirtless, whip-thin men rippled with muscle were forging prosaic pieces of the urban jigsaw puzzle: manhole covers.

Manhole covers manufactured in India can be anywhere from 20 to 60 percent cheaper than those made in the United States.

MP: Just wondering, to be PC, shouldn't it now be "personhole cover"? After all, "Frosty the Snowman" has been replaced by "Frosty the Snowfriend," and a "grandfather clause" has been replaced by a "grandperson clause," and I'm not making that up!

Watch a slide show here about manholes made in India.

(HT: Sanil Kori)

Mad Money = Money-Losing Investment Advice

In the December 2007 issue of the Quarterly Review of Economics and Finance, there is an article "Does Mad Money make the market go mad?"

From the abstract: Our analysis of returns and trading volume around stock recommendations aired on charismatic host Jim Cramer’s Mad Money program reveals statistical evidence of response to both his buy and sell opinions, with most of the full-day return following an on-air buy recommendation captured by that day’s opening price. Trading strategy analysis suggests that individuals with limited funds should be wary of short-term trading to exploit the show’s suggestions.

From the conclusion: Heightened investor activity around stocks discussed on the show is indicated by statistically significant abnormal and raw returns, as well as trading volume increases, on both the day 0 air dates of buy recommendations and the day +1 trading day, with the day +1 effects being stronger as expected. However, since almost all of the average raw return on day +1 is captured in the difference between the day 0 close price and the day +1 opening price, a change likely induced by the weight of pending buy orders placed by viewer investors before the market opens, the average investor is unable to benefit from this effect and, further, the aggregate impact is to increase the cost of acting on these recommendations for all investors.

From the text: Table 6a (shown above, click to enlarge) shows that the 127 buy recommendations are distributed across twenty-eight different show air dates within our 7/26/2005 to 9/16/2005 sample. On each day, the $10,000 is allocated equally across all of the buy recommendations. Share purchases are rounded to the nearest whole share. As a result, the amount invested on each day is never exactly $10,000 but is more than $10,100 only twice. If an investor had executed this strategy twenty-eight times on the days covered in this sample, a loss of $861.32 would have been realized, not counting the per-trade commissions.

(MP: Add in $10 per trade for 127 buy orders, and your total loss would be $2,131.)

(HT: Mike Munger)

Commercial Bank Lending at All-Time High

From today's front page WSJ article "Recession Fears Weigh Heavily On the Markets":

This time around, much depends on how tight a rein financial institutions keep on their lending and consumers keep on their spending.

By itself, the housing slump seems unlikely to choke off U.S. economic growth. Home construction accounts for less than 5% of the nation's gross domestic product. But if banks curb their lending in response to billions of dollars of mortgage-related write-offs, or if consumers cut their spending as home values fall and gasoline prices rise, it could knock the economy out of its delicate balance.

The chart above (click to enlarge) shows lending activity at all U.S. commercial banks from 1985 through the third quarter 2007, using data from the Federal Reserve Board. As the chart shows, both: a) all loans, and b) real estate loans, are at all-time highs, and there doesn't appear to be any "curbing in lending" by commercial banks, at least not yet.

Sunday, November 25, 2007

In Euros and UK Pounds, Oil Prices Aren't That Bad

Rising oil prices, measured in dollars, get all of the media attention, largely because oil is priced and sold in dollars in world oil markets. What has gotten much less attention is the price of oil in other currencies like British pounds and Euros, which have both appreciated vs. the USD by 16-18% over the last few years, helping to offset the higher price of oil in dollars for Europeans.

The chart above (click to enlarge) shows that oil prices in dollars have almost tripled since 2004, whereas oil prices in pounds and euro have only doubled during this period. Since July 2006, oil prices in dollars have risen more than 15% (see vertical line above), compared to modest increases over the same period of only 2.74% in euros and 4% in pounds.

Further, consider that $100 oil today is only 67.4 euros per barrel at today's exchange rate of $1.4828/euro, compared to 114 euros per barrel at the exchange rate 5 years ago of $0.8766/euro. The double-digit appreciation of major currencies (pound, euro, Canadian dollar, Swiss franc, etc.) vs. the USD might be another factor that explains why the world economy has been able to absorb the shock of $100 oil.

From the NY Times, "Throughout Europe, the rise of the euro has acted as a hedge against fluctuations in the dollar-denominated oil market."

You Can't Trust Those Big-Government Socialists

NY Times: Transparency International, an organization that tracks corruption, ranks countries from least to most corrupt, and in its 2007 index Venezuela was at 162 out of 179 countries.

Some Historical Perspective on Commercial Banks

The charts above are based on Federal Reserve commercial banking data released on Monday and available here, with updated data on a) loan charge-off rates and b) loan delinquency rates through the third quarter 2007 for all U.S. commercial banks.

As the charts show, despite all of the recent bad news and "gloom and doom" about the U.S. banking sector, the commercial banking sector might actually be surviving the subprime crisis quite well, at least so far. The charge-off rates for all bad loans (0.60%) has increased recently (top chart), but is about half the 1.2% rate in 2002, and about 1/3 the 1.75% rate in 1991. The charge-off rate for real estate loans (.19%, or only about 2 properties per 1,000) in the third quarter 2007 is almost half of the .29% rate in 2001, and less than 1/6th of the 1.2% rate in 1991.

Likewise, loan delinquency rates have increased recently (bottom chart), but are still far below the rates of the late 1980s and most of the 1990s.

On a previous CD post, I reported that not a single U.S. bank failed in either 2005 or 2006, and only 3 banks have failed in 2007. The loan charge-off and delinquency rates for U.S. commercial banks through the third quarter of 2007 indicate that our banking system is surviving the subprime crisis, without any danger of pending collapse.

Bottom Line: The U.S. banking system is probably stronger and more stable than most people give it credit for. Empirical data on bank charge-off rates and delinquency rates, at least through the third quarter 2007, suggest that banks are probably doing better than most people think.

Ethanol: "Dangerous, Delusional Bullshit"

Ethanol: Fails a Cost-Benefit Test

Ethanol production in the United States has been steadily growing and is expected to continue growing. Many politicians see increased ethanol use as a way to promote environmental goals, such as reducing greenhouse gas emissions, and energy security goals. This paper provides the first thorough benefit-cost analysis of increasing ethanol use beyond four billion gallons a year, and finds that the costs of increased production are likely to exceed the benefits by about three billion dollars annually. It also suggests that earlier attempts aimed at promoting ethanol would have likely failed a benefit-cost test, and that Congress should consider repealing the ethanol tariff and the ethanol tax credit.

Abstract of a new research paper "The Benefits and Costs of Ethanol," by Robert W. Hahn and Caroline Cecot, both of the AEI-Brookings Joint Center for Regulatory Studies.

From Robert W. Hahn's editorial in yesterday's WSJ:

To hear the candidates tell it -- especially those on the stump in Iowa -- ethanol is the answer to America's energy-security woes. And back in Washington, politicians since 1978 have been putting your money where their mouths are: Ethanol is currently subsidized to the tune of 51 cents per gallon when blended with gasoline.

To make sure foreigners don't share the ride on the ethanol gravy train, moreover, Congress has imposed a 54-cent tariff on imported ethanol.

Saturday, November 24, 2007

Goldilocks Rocks on Black Friday, +8.3% Increase

NEW YORK (AP) -- The nation's retailers had a robust start to the holiday shopping season, according to results announced today by a national research group that tracks sales at retail outlets across the country. According to ShopperTrak RCT, which tracks sales at more than 50,000 retail outlets, total sales rose 8.3% to $10.3 billion on Friday, the day after Thanksgiving, compared with $9.5 billion on the same day a year ago. ShopperTrak had expected an increase of no more than 4-5%.

By the way, consider that gas prices last Thanksgiving were about $2.25 per gallon, and gas prices today are about $3.09. Even with gas prices 37% higher than a year ago, consumers spent a record amount this year on Black Friday. See the post below.

Why The Goldilocks Economy Can Handle $3 Gas

In a previous CD post "The Energy-Efficient Economy Can Handle $100 Oil," I suggested that today's economy is much better able to absorb higher energy prices than at any other time in the past, due to significant improvements in energy efficiency of the last 50 years. Compared to the early 1970s, the economy today is about twice as efficient, measured by energy consumption per dollar of real GDP. The graph in that post was featured on CNBC's "Kudlow and Company" a few weeks ago and also appeared in Larry's blog.

Here's another reason that the Goldilocks economy is able to handle $3 per gallon gas without sending consumer spending into a tailspin and without causing a recession: Even at $3 per gallon, gas is still relatively affordable for today's consumers, as a percent of disposable income, especially compared to the 1970s and 1980s.

The graph above (click to enlarge) shows the cost of 1,000 gallons of gas at the average retail price (using EIA data) as a percent of per-capita disposable income (from the BEA), from 1974-2007. Consider that since gas prices peaked in the early 1981 at about $1.40 per gallon, retail gas prices have increased by 2.21 times to $3.099 per gallon today. But per-capita disposable income has increased during that same period by more than 3.5 times, from $9591 in 1981 to $33,940 today.

In the early 1980s, it would have taken almost 15% of per-capita disposable income to buy 1,000 gallons of gas, and today it only takes only 8.5% (third quarter 2007). Even back in the "good old days" when gas sold for 50-60 cents per gallon in the mid-1970s, gas was more expensive as a share of income (10-11%) than today.

Bottom Line: Measured as a share of per-capita disposable income, gas prices would have to rise all the way to $5 per gallon today to be as expensive as gas in the early 1980s. Even if gas gets to $3.76 per gallon, it would be equivalent to 50 cent gas in the "good old days" of the mid-1970s, when measured as a share of disposable income. Goldilocks can handle $3 gas, no problem.

Friday, November 23, 2007

Libertarian Drew Carey on Medical Marijuana

One of the most outrageous consequences of the war on drugs is the federal crackdown on medical marijuana, which is used by patients to help treat the effects of cancer, glaucoma, HIV-AIDS, chronic pain and nausea, and other severe symptoms associated with serious illnesses. Medical marijuana prescribed by a physician is legal in 12 states, yet federal agents are raiding state-approved dispensaries and preventing patients from having safe access to this drug.

In Episode 2 of's Drew Carey Project, Drew takes a look at patients who need and use medical marijuana in California, and how the federal government is making their lives even worse.