Monday, December 24, 2007

Foreign Buyers Snap Up 2nd Homes in the U.S.

The events of 2007 have made the U.S. much more affordable for international home buyers. Severe dollar declines against the euro and pound have made U.S. homes much cheaper for Europeans. But even foreign buyers without that sort of currency advantage are benefiting from sharp drops in housing prices at a time when problems in mortgage lending are keeping many Americans out of the market.

At the same time, many foreign real estate markets, especially in Europe, have experienced sharp increases in home prices.

Read more

(HT: Ben Cunningham)

Oscar Peterson, R.I.P.

TORONTO (AP) — Oscar Peterson, whose early talent and speedy fingers made him one of the world's best known jazz pianists, died at age 82.

AllMusic entry on Oscar Peterson.

YouTube video of Oscar Peterson Trio in Italy in 1961.

Wikipedia entry on Oscar Peterson, already updated.

Ethanol's Role in The Growing "Dead Zone"

JEFFERSON, Iowa - Because of rising demand for ethanol, American farmers are growing more corn than at any time since World War II. And sea life in the Gulf of Mexico is paying the price.

The nation's corn crop is fertilized with millions of pounds of nitrogen-based fertilizer. And when that nitrogen runs off fields in Corn Belt states, it makes its way to the Mississippi River and eventually pours into the Gulf, where it contributes to a growing "dead zone" — a 7,900-square-mile patch so depleted of oxygen that fish, crabs and shrimp suffocate.

Note: 7,900 square miles is larger than the states of Rhode Island, Delaware and Connecticut combined!

HT: Chris Douglas

The U.S. Economy Could Handle $15 Gas?

According to Professor Gregory Clark, chair of the Department of Economics at the University of California, Davis, writing in yesterday's Sacramento Bee:

With energy five times as expensive as at present we would take a substantial hit to incomes. Our living standard would decline by about 11%. But we would still be fantastically rich compared to the pre-industrial world.

That may seem like a lot of economic hurt, but put it in context. Our income would still be above the current living standards in Canada, Sweden or England.

My "back of the envelope" analysis shows that per-capita U.S. GDP would drop by about 13% if gas was selling for $15 per gallon, assuming that annual per-capita consumption remains at the current level of about 464 gallons. At $3 per gallon, per capita spending on gasoline is about $1400, and annual spending would rise to almost $7,000 at $15 per gallon. If we assume that the increased per-capita spending on gasoline of $5,560 annually would reduce our living standard by that amount, we can estimate that per capita-GDP would fall from from $43,223 to $37,655, and we would still be above U.K., Sweden and Canada (see chart above).

English and The Spontaneous Order of Language


If you speak English, you know words from at least a hundred different languages. That's because English has borrowed words from languages everywhere, and continues to do so.

All living languages borrow, though not to the same degree. Each new word brings its own color to the mosaic of the language, just as each new person does to a population, making it richer and vibrant.

We see words derived from Greek, Latin, Spanish, French, etc. every day, but this week we'll look at a few words from languages that are not so well known -- Javanese, Coptic, Tamil, Shelta, and Hawaiian -- and also learn a little about those languages.

From a previous CD post:

Number of words in the English language: 500,000 according to the number of words in the Oxford English Dictionary. There are supposedly another 500,000 uncataloged technical and scientific terms. By comparison, most estimates indicate that German has a vocabulary of about 185,000 words and French and Spanish have fewer than 100,000 words.

Best thing about the English language, and the main reason for its rich vocabulary?

Nobody is in charge! Human languages in general, and English in particular, are perfect examples of "spontaneous order," the spontaneous emergence of self-organization and order out of seeming chaos. And perhaps it's because English has been the language most open to borrowing words from other languages that is has developed the most extensive and richest vocabulary.

The opposite approach to allowing a language to develop according to spontaneous order, is that of the French Academy, which actively tries to limit the French vocabulary and prevent the "anglicisation" of the French language.

Sunday, December 23, 2007

Hey, The Goldilocks Economy Can Handle $500 Oil And We'd Still Be Richer Than UK, Canada, Sweden

Study of the long economic history of the world suggests two things. Cheap fossil fuels actually explain little of how we got rich since the Industrial Revolution. And after an initial period of painful adaptation, we can live happily, opulently and indeed more healthily, in a world of permanent $100-a-barrel oil or even $500-a-barrel oil.

UC-Davis economist Gregory Clark explains in today's Sacramento Bee.

(HT: Marginal Revolution)

Soviet Light Bulb Story, Revisited

Hey, it's a little slow for new postings, so I thought I'd recycle an interesting post from last December about the market for used light bulbs in the Soviet Union, especially because: a) I'm taking a group of MBA students to Russia in April 2008, b) Russia's Putin is Time Magazine's "Man/Person of the Year," c) my MBA students in MGT 551 are studying price controls in CH 4 of the Gwartney textbook and d) I didn't have a lot of regular readers last year at this time. Here it is:

Economists generally oppose price controls because they distort markets, and cause either shortages (e.g. rent control) when there is a price ceiling, or surpluses (e.g. minimum wage) when there is a price floor. Shortages (excess demand) and surpluses (excess supply) represent an inefficient use of scarce resources, and economists support market prices because they eliminate shortages and surpluses, and therefore lead to efficiency.

From the Soviet Union, there are many examples of distortions and inefficiencies from its long history of price controls, but here is a real classic.

Light bulbs, like most other basic goods and staples in the Soviet Union, were often in short supply because the official price was below the market price, resulting in excess demand and prolonged shortages. As a result of the chronic light bulb shortage, an informal, black market developed in the USSR for used, burned-out light bulbs. That is, Soviet citizens would actually pay a positive price for a light bulb that didn’t work.

How would it be possible for a burned-out light bulb to have a positive price, when it would normally just be thrown out? Of what use could anybody have for a used light bulb? Think about it first, and read the
answer here.

Quotes of the Day

"The humble improve."

~Wynton Marsalis, Jazz Musician

"Sell your cleverness and buy bewilderment."


Saturday, December 22, 2007

Overcoming Fear and Paranoia to Blog in Cuba

While there are plenty of bloggers who dish out harsh opinions on Cuba and Castro, most do so from the cozy confines of Miami. 32-year old Yoani Sánchez (pictured above) is one of the few who do so from Havana.

Read about her
here in today's WSJ front page article.

Read her blog
Generación Y (in Spanish).

Friday, December 21, 2007

Consumer Spending Surges in November

WASHINGTON (AP) -- Consumers put aside worries about slumping home sales and soaring gasoline prices and headed to the malls in November, pushing spending up by the largest amount in 3 1/2 years.

The Commerce Department reported Friday that consumer spending shot up 1.1% last month, nearly triple the October gain. It was the biggest one-month jump since a 1.2% rise in May 2004 and was significantly higher than the 0.7% gain analysts had expected.

Bottom Line: Consumer spending increased for the 14th consecutive month (see chart above, shaded area on right), for the first time since 1999 (shaded area on left), providing further evidence that the economy is strong and stable, and not in any imminent danger of falling into a recession.

Real Disposable Income Shows Economic Strength

The BEA reported today that Real Disposable Income grew by 2.1% in November from a year ago, the 23rd consecutive month of positive growth (see chart above).

Bottom Line: This is one of the 5 economic recession-indicating variables watched by the NBER (the others are real GDP, industrial production, trade sales and employment), and suggests that there is still no evidence yet that recessionary conditions are affecting the U.S. economy.

Thursday, December 20, 2007

Cartoon of the Day: A Year of Global Cooling

Follow up on yesterday's post on 2007: a year of global cooling.

Final Estimate of Real GDP: A Healthy 4.9%

The BEA released it final estimate of third quarter (July-September) real GDP growth today, and it remained unchanged from its previous estimate of 4.9%. Third quarter growth in real GDP was more than twice the average growth this decade of 2.2%, and followed second quarter growth of 3.8% (see chart above). Notice also that the strong back-to-back growth in real output during the last two quarters looks nothing like the recessionary period of 2001, or even the pre-recession period of 2000.

Wednesday, December 19, 2007

Milton Friedman Rides Again

The top chart above is from a previous CD post, and the bottom chart above is from Larry Kudlow's blog, and he featured it last night on Kudlow and Company.

I used a three year lag in my chart, and Larry is using a two-year lag in his graph, which might be a slightly better fit. But the main point is that money supply growth takes between 2-3 years to have its full impact on the price level and inflation.

The significant decline in the growth rate of M1 over the last few years (and the monetary base as well), suggests that inflation could likely decrease in 2008 and 2009 from its current year-end level. M1 growth has actually been negative for the last year, and the M1 money supply today is below its level a year ago, suggesting that inflation won't continue to be a problem much longer.

More on Education Majors' Test Scores

See chart above (click to enlarge) for evidence of Walter Williams' claims that Education majors perform poorly on standarized tests like the LSAT, GMAT and GRE.

(HT: Ironman at Political Calculations)

The World is Not Running Out of Oil: Fill 'er Up

From todays' Investor Business Daily:

"The world produces about 85 million barrels of oil a day. Global energy demand is expected to rise 55% from 2005-2030. Peak oil theories abound that new discoveries are not keeping up with oil usage. But it's significant that the new demand also is fostering big new discoveries, largely from the very countries where demand is growing most."

The IBD editorial documents recent discoveries of new oil in Brazil, China, Mexico, India and Russia, and discusses how new oil technologies have also significantly increased the supply of oil.

"The world is not running out of oil," said Daniel Yergin, head of Cambridge Energy Research Associates and one of the world's leading oil experts, in a recent interview with Les Echos in Paris.

Go ahead and fill up your SUV, and engage in some guilt-free driving.

Inconvenient Weather: A Year of Global Cooling

"Al Gore says global warming is a planetary emergency. It is difficult to see how this can be so when record low temperatures are being set all over the world. In 2007, hundreds of people died, not from global warming, but from cold weather hazards," says David Deming, geophysicist and associate professor of Arts and Sciences at the University of Oklahoma, in today's Washington Times. Consider these inconvenient weather facts:

Unexpected bitter cold swept the entire Southern Hemisphere in 2007.
  • Johannesburg, South Africa, had the first significant snowfall in 26 years.

  • Australia experienced the coldest June ever; in northeastern Australia, the city of Townsville underwent the longest period of continuously cold weather since 1941.

  • In New Zealand, the weather turned so cold that vineyards were endangered.
In the United States:
  • In April, a killing freeze destroyed 95% of South Carolina's peach crop, and 90% of North Carolina's apple harvest.

  • At Charlotte, N.C., a record low temperature of 21 degrees Fahrenheit on April 8 was the coldest ever recorded for April, breaking a record set in 1923.

  • On June 8, Denver recorded a new low of 31 degrees Fahrenheit; Denver's temperature records extend back to 1872.

  • On Dec. 7, St. Cloud, Minn., set a new record low of minus 15 degrees Fahrenheit.
  • On Dec. 4, in Seoul, Korea, the temperature was a record minus 5 degrees Celsius.

  • The Canadian government warns that this winter is likely to be the coldest in 15 years.

Academic Slums: Schools of Education?

American education will never be improved until we address one of the problems seen as too delicate to discuss. That problem is the overall quality of people teaching our children. Students who have chosen education as their major have the lowest SAT scores of any other major. Students who have graduated with an education degree earn lower scores than any other major on graduate school admissions tests such as the GRE, MCAT or LSAT. Schools of education, either graduate or undergraduate, represent the academic slums of most any university. As such, they are home to the least able students and professors with the lowest academic respect. Were we serious about efforts to improve public education, one of the first things we would do is eliminate schools of education.

~George Mason economist Walter Williams writing in his most recent nationally syndicated column

Tuesday, December 18, 2007

Tonight on Kudlow!

Subject to any last minute changes, I'll be a guest on CNBC's "Kudlow and Company" tonight at 7 p.m. EST to discuss some of my recent blog postings on inflation.

Here's the link to my segment, it should be good for at least a few days.

Real Tourism Output at Record High

Real direct tourism spending increased at an annual rate of 1.6% in the third quarter of 2007, according to data released today by the U.S. Bureau of Economic Analysis.

Overwhelming Evidence V: Good Old Days Are Now

Another post on the theme "The good old days are now." The standard of living for the average American just keeps getting better and better over time. One reason we don't appreciate it, is that the improvements, though persistent and relentless, happen gradually year after year, so we end up taking it for granted. If the average home size increased from 983 sq. ft. to 2,349 sq. ft. overnight, we would treat it as a modern miracle. When it happens 25 sq. ft. per year for a half century, we don't even notice it.

(HT: FancyPlaidPants, via NPR)

There's Hope For the US Dollar: Comeback Ahead?

Using mid-December exchange-rate data from, the chart above shows the one-year forward discount or premium for the US dollar vs. the Euro and British Pound in 2005, 2006, and 2007.

Note that two years ago, the USD was trading at a one-year forward discount vs. both the Euro (-2.0%) and the BP (-0.20%). In recent trading, the USD is now trading at a one-year forward premium vs. both the Euro (+0.20%) and the BP (+1.20%).

Bottom Line: There's hope for the USD! Its value has stabilized, and it has actually appreciated by more than 2% vs. the Euro in the last week, and by 1.5% vs. the British Pound. And since late November, the USD has been trading at a one-year forward premium vs. the Euro for the first time in at least three years, and I don't think that has received any media attention.

Biggest Factor in Rising Health Care Costs? MDs

There are a myriad of factors involved in the rising costs of health care, but the biggest factor in rising medical costs? The medical doctors themselves, says one physician......

Dr. Steve Cole, staff physician at Baylor University Medical Center, writing in today's
Dallas News.


Tata: Maker of World's Most, Least Expensive Cars?

NY TIMES--The luxury brand Jaguar is poised to join Tata Motors, a widely diverse Indian auto company that makes tractor-trailers, full-size SUVs and the world’s cheapest car. A final signed deal, which is expected to be worth about $2 billion, will not be announced until early next year.

When Tata is done buying a company, it should look the same as before, “except now it’s owned by someone in India,” said Ratan Tata, chairman of the Tata Group.

Crass Commercialism vs. Crass Politics

Even more predictable than the post-Thanksgiving appearance of shopping-mall Santas is the inability of pundits at this time of year to say or to write "commercialism" without prefixing to it the word "crass."

I challenge this notion. Commerce is peaceful. It involves sellers working hard and taking risks to bring to market goods and services that consumers want to buy. No one forces anyone to do anything; all is voluntary.

What truly is crass is politics. Far more enlightened and ethical behavior is on display during any one day in a shopping mall than the most intrepid observer will find in a century on Pennsylvania Avenue.

~George Mason Economist and Cafe Hayek blogger Don Boudreaux

More On Why Inflation Will NOT Be A Problem

Exhibit A: See graph below (click to enlarge) of the Adjusted Monetary Base, from the St. Louis Federal Reserve, from 2002-2007. Notice the decline in growth from 10% to 2%, suggesting a deflationary trend in high-powered money.

Exhibit B: See graph below of the Adjusted Monetary Base vs. M1 Money Supply, from 2002-2007. Notice that as the growth in high-powered money growth, controlled by the Fed, has come down from 10% in 2002 to 2% in 2007, the M1 Money Supply has stablized at about $1.36 trillion.

Monday, December 17, 2007

Don't Like the Bush Tax Cuts? Don't Pay Them! Pay Your Taxes Under Old Rates From 2000 or 2001

SAN FRANCISCO--Buffett indirectly blamed the Bush administration for a tax code he said is out of whack.

"In the last seven-eight years what has happened is that the super-rich have gotten a huge break," said Buffett, one of the world's richest people with a net worth of $52 billion, according to Forbes magazine.

In a previous post, I challenged proponents of tax increases to raise taxes on themselves immediately by making a voluntary gift to to the U.S. Treasury, and not waiting for the Bush tax cuts to expire. After all, if forced increases in taxes are desirable by future changes in the tax code, then voluntary tax increases by rich taxpayers like Buffet and the Clintons right now should be desirable.

Here's another idea for Buffet and the Clintons. If they think that the tax codes in previous years were more equitable, fair and desirable then they can pay under the old rates for their 2007 tax returns. Here are the tax rates for 2000 (highest rate 39.6%), 2001 (highest rate 39.1%), and 2002 (highest rate 38.6%). In other words, if they don't like the Bush tax cuts (highest rate 35%), they don't have to accept them, they can file under the pre-Bush tax rates, i.e. the Clinton tax rates.

It Wasn't a Tax Cut for "The Rich," It Was a Tax Hike

Based on the latest available tax data, no Administration in modern history has done more to pry tax revenue from the wealthy than the current one, says the Wall Street Journal today. Consider:
  • For 2005, the richest 1% paid about 39% of all income taxes that year (see chart above).

  • The richest 5% paid a little less than 60%, and the richest 10% paid 70%.

  • The richest 1.3 million tax-filers -- those Americans with adjusted gross incomes of more than $365,000 in 2005 -- paid more income tax than all of the 66 million American tax filers below the median in income; ten times more.

For the political left and most of the media, this means only that the rich are getting richer. However:

  • The rich showed more rapid gains in reported income shares in the 1990s than in the first half of this decade.

  • The share of the richest 1 percent jumped to 20.8% of total income in 2000, from 14% in 1990, but increased only slightly to 21.2% in 2005.

  • Notably, however, the share of taxes paid by the top 1% has kept climbing this decade -- to 39.4% in 2005, from 37.4% in 2000.

  • The share paid by the top 5% has increased even more rapidly.

In other words, despite the tax reductions of 2001 and 2003, the rich saw their share of taxes paid rise at a faster rate than their share of income. This makes it hard to pin their claim of "rising inequality" on the Bush tax cuts, though the income redistributionists are trying. By this measure, the Clinton years were far worse for "inequality."

Conclusion from the WSJ: "We hate to break up the media's egalitarian chorus with these details, but facts are facts. If Democrats really want to soak the rich, they'll keep tax rates where they are, or, better, lower them some more."


Goldilocks Sets Record: 51 Months of Job Growth

According to the BLS labor report on December 7, "Nonfarm payroll employment continued to trend up in November (94,000), and the unemployment rate held at 4.7%."

What didn't get reported anywhere in the media (that I could find), and was only reported by the White House, is that November 2007 marked the 51st straight month of employment growth, setting an all-time record for the longest continuous run of job growth on record (back to 1939, see chart above). The previous record of continuous job growth was set back in the July 1986 to June 1990 period, when there were 48 straight months of employment growth.

Bottom Line: In each of the last three months (September, October, and November), the Goldilocks economy has set new all-time records for continous monthly job growth, and yet this has gone virtually unreported. Never before in U.S. history have we experienced an extended period of job growth like in the last four years, and all we hear about are recessionary fears, and gloom and doom.

Chocolate Goes Global

The World Is Flat, and Chocolatiers Want to Coat It

NY Times: Swiss chocolatiers, having long ago conquered markets in Europe and North America, are now aiming at the vast expanses of Russia, India and China, making Swiss chocolate a case study in globalization.

Reminder: Trade works both ways. As economies like India, Russia, China, and Brazil become wealthy and prosperous by producing goods and services for the U.S. and European markets, the workers of those economies also become increasingly wealthy and prosperous consumers of American and European products.

Exhibit A: Swiss chocolate.

Sunday, December 16, 2007

Finally, Some Relief for Double-Standard, Racist, and Insane Drug Sentencing for Baking Soda

WASHINGTON - The Supreme Court on Monday (December 10) said judges may impose shorter prison terms for crack cocaine crimes, enhancing judicial discretion to reduce the disparity between sentences for crack and cocaine powder.

WASHINGTON -- The U.S. Sentencing Commission voted unanimously Tuesday (December 11) to allow some 19,500 federal prison inmates, most of them black, to seek reductions in their crack cocaine sentences.

Four of every five crack defendants is black. Most powder cocaine convictions involve whites.

Even after the change, prison terms for crack cocaine still are two to five times longer on average than sentences for powder cocaine, the result of a 20-year-old decision by Congress to treat crack more harshly.

See previous CD posts
here and here. Note that crack cocaine is powdered cocaine + baking soda.

Gene Fama: Hardest Workin' Man in Finance/Econ

From the Minneapolis Fed's interview with University of Chicago economist Eugene Fama (pictured above):

Fama’s work transformed Wall Street, and later Main Street, by giving rise to a proliferation of low-cost index funds, as many questioned the value of paying for active portfolio management. “If one takes into account the higher initial loading charges of the mutual funds,” he observed over 40 years ago, “the random investment policy outperforms the funds.”

Mpls. Fed: How do you view the suggestion that some CEOs are overcompensated?

If it’s a market wage, it’s a market wage. They may be big numbers; that’s not saying they’re too high. It’s easy to say that people are paid too much, but when you’re on the other side of the fence trying to hire high-level corporate managers, it turns out not to be so easy.

Mpls. Fed: I understand that you work every day, even holidays. Is that right?


Mpls. Fed: That’s an amazing work ethic.

Fama: Not really.

(HT: Marginal Revolution)

Quote of the Day, Chart of the Day

"Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output."

~Milton Friedman in his book "Monetary History of the United States 1867-1960," (co-authored with Anna Schwartz)

Exhibit A: See chart above, click to enlarge. Monthly data for CPI and M1 are from the St. Louis Federal Reserve.

Market Signals Suggest Low Inflation, Stable Dollar

The top chart above (click to enlarge), shows the one-year percentage forward premiums and discounts for the USD vs. other currencies, based on current quotes for one-year forward exchange rates. The USD is now selling at a one-year forward premium vs. at least a dozen currencies, suggesting that the value of the USD has stabilized and might start appreciating in 2008.

The bottom chart above displays gold futures trading on the NYMEX, and shows moderate annual increases in the price of gold over the next 4 years of about 4%. Since gold is a hedge against inflation, the moderate increases in gold prices through 2011 indicate that there are no inflationary pressures building in the U.S. economy.

Bottom Line: These direct market signals suggest that: a) the fall of the USD is probably over and we can expect an appreciation of the USD vs. the pound, rupee, peso, etc., and b) the current rise in inflation (4.29% increase through November 2007) is probably temporary, and we can expect lower inflation in 2008 and beyond. See related previous post here.

Saturday, December 15, 2007

Put Your Tax Money Where Your Political Mouth Is

Challenge: If taxes increases for "the rich" are a good thing, members of Congress and presidential candidates (all part of either "the rich" or "super-rich") don't have wait for the Bush tax cuts to expire or for Congress to pass new tax legislation, they can immediately raise taxes on themselves voluntarily by making a gift to the U.S. Treasury.

Here is the link to the Treasury's website with instructions for politicians, presidential candidates, or any citizen like Warren Buffet who wish to make a general donation to the U.S. government into an official account called "Gifts to the United States."

Question: What if Edwards or Clinton proposed legislation to force everybody to "donate" 5 pints of blood every year. Wouldn't it be a lot more credible if they were already donating blood themselves right now voluntarily, and not waiting until they were forced to "donate" blood by their own legislation?

This is from a previous CD post, and I mentioned on Larry Kudlow's radio program today that I would re-post instructions on how politicians and Warren Buffet can pay extra taxes to the U.S. Treasury.

Guest Appearance on Larry Kudlow's Radio Program

Update: I'll be appearing on Larry Kudlow's radio program this morning (Saturday), you can listen live here at WABC, should be between 10:30 a.m. and 11 a.m. EST.

Contractionary Fed Policy?

The graph above shows that the M1 money supply has been flat for three years, and is actually lower now than it was a year ago, suggesting that Fed policy has been TOO TIGHT.

See previous post where I suggested that the Fed Funds rate should be about 3-3.25%.

Why Inflation Will NOT Be A Problem

Inflation vs. M1 Growth with a 3-year Lag
The top chart above (click to enlarge) shows the relationship between M1 Money Supply and the effective Fed Funds rate from 1999-2007. Notice that there was a 25% increase in M1 that was required to get the Fed Funds rate to fall from 6.5% in 2000 to 1%. The bottom chart shows that M1 grew between 3.5% and 6.5% in each year from 2001-2004.

The bottom chart allows for a 3-year lag between growth in the money supply and its eventual full effect on the price level and inflation (average annual inflation), and therefore matches M1 growth in 1998 with consumer inflation in 2001, etc.

November 2006-November 2007 inflation was 4.29%, and inflation averaged 2.72% for the year to date, reflecting the strong money growth in 2004 of 5.58% (allowing for a 3-year lag). The good news on the inflation front is that inflation in 2008 will reflect money growth in 2005 (assuming a 3-year lag), which was less than half (2.05%) of money growth in 2004 (5.58%).

Bottom Line: Inflation will not be a problem in the future, and will likely fall in 2008 and 2009 from its level in 2007. The money supply has been flat now for 3 years, suggesting that inflation in the future will be low and stable. The money supply (M1) has actually FALLEN over the last year.

Friday, December 14, 2007

Consumer Spending or Business Investment?

Tune in to CNBC's "Kudlow and Company" on Monday night (7 p.m. EST) for an economic smackdown between Robert Reich, former labor secretary under Clinton, and free-market Austrian economist Mark Skousen, on the question, "What drives the economy--consumer spending or business investment?" It should be an interesting debate between a demand-side Keynesian and a supply-side Austrian.

The graph above shows that retail sales is not a leading indicator of the economy, does not predict recessions (shaded areas) and is probably one of the most stable and boring economic variables. Notice in the graph above that retail sales almost never decline, even during recessions (shaded areas). Industrial production, on the other hand, is an excellent indicator of the business cycle. Notice the significant decline in industrial output in each of the last four recessions.

Conclusion: According to Skousen, "Productivity and investment are driving forces in the economy; consumer spending is the effect, not the cause, of prosperity. Say's law (supply creates demand) trumps Keynes's law (demand creates supply)!"

For more information check out Mark Skousen's book "
The Structure of Production."

Industrial Output Growth Signals Strong Economy

According to the Federal Reserve's report today, total industrial production in November 2007 was 2.1% above its level in November of last year (see chart above). This was also the highest output growth since the first quarter of 2007 (March), and marks the 51st consecutive increase in year-to-year growth in Industrial Production (June 2003 was the last month of negative growth).

On a quarterly basis, industrial output in the fourth quarter is matching growth in the second and third quarters, when GDP growth was 3.8% and 4.9%. The current estimates of real GDP growth in the fourth quarter of 1.5% might turn out to be too low, given the continuing strength in manufacturing output.

Bottom Line: Given the continued robust growth in both real output and retail sales into the fourth quarter, the economy appears to remain on solid ground, and the economic expansion is on track to continue well into 2008.

If Steroids Are Cheating, Why Isn't LASIK?

Slate Magazine had an interesting article several years ago after the March 2005 Congressional hearings about steroid use in baseball, where Mark McGwire and others were required to testify. The article posed an interesting question, now relevant again with the recent MLB report on steroids: If steroids are cheating, why isn't LASIK eye surgery?

Scores of pro athletes have had laser eye surgery, known as LASIK (Laser-Assisted In Situ Keratomileusis). Many, like Tiger Woods, have upgraded their vision to 20/15 or better. Golfers Scott Hoch, Hale Irwin, Tom Kite, and Mike Weir have hit the 20/15 mark. So have baseball players Jeff Bagwell, Jeff Cirillo, Jeff Conine, Jose Cruz Jr., Wally Joyner, Greg Maddux, Mark Redman, and Larry Walker. Amare Stoudemire and Rip Hamilton of the NBA have done it, along with NFL players Troy Aikman, Ray Buchanan, Tiki Barber, Wayne Chrebet, and Danny Kanell. These are just some of the athletes who have disclosed their results in the last five years. Nobody knows how many others have gotten the same result.

Good question, what's the difference?

Click here to read the full MLB report on steroids.

Thursday, December 13, 2007

Upeat Consumers On A Spending Spree

WASHINGTON (Reuters) - Retail sales were solid in November as the holiday shopping season got underway, but a good portion of consumer dollars went to higher-priced gasoline.

WASHINGTON (AP) - It was the biggest sales advance in six months and reflected widespread strength in a number of areas from department stores to clothing shops and furniture stores.

Indeed, a closer look at today's Retail Sales report confirms that year-to-date consumer spending IS widespread - it's up from the same period last year in every retail sector except for "Building Materials" (only 8% of the market for total retail sales), due to weakness in the housing market.

And although consumer spending at gas stations increased by 5% this year, that is actually less than the gains in spending for clothing, food and health products. Further, if you take gasoline sales out of retail sales completely, consumer spending is still up 4.2% from last year. Higher gas prices contributed only 1/10 of 1% to overall consumer spending (see chart above)!!

Bottom Line: Despite the perception of widespread consumer gloom and pessimism, the November spending spree reflects a much more optimistic and upbeat American consumer.

Retail Sales Soar: Record November Increase

According to a report today from the U.S. Census Bureau, retail sales in the U.S. surged to $385.7 billion in November, a 1.2% gain from October. The monthly sales increase of $4.66 billion was the largest sales increase in U.S. history for the month of November, breaking the previous record of a $3.74 billion retail sales increase in November 2003. On a percentage basis, the 1.2% November sales gain was also the largest in history, matching the 1.2% gain previously established in November 2003.

On an annual basis, the November 2006-November 2007 gain of 6.3% was the largest annual increase in November retail sales since 1999. On a 3-month basis, the increase in retail sales during the September-November period established a new record of $8.5 billion for that period, going back to the start of the series in 1992.

Also, the Census Bureau made an upward revision to September retail sales, which should boost third quarter real GDP from 4.9% to above 5% when the BEA releases final third quarter GDP data around the first of the year.

Bottom Line: Strong gains in retail sales over the last three months, along with record-setting November sales increases, suggest that the U.S. economy is not about to fall into a recession, and to the contrary, is strong and healthy. Keep in mind that the NBER looks at four variables to determine when a recession starts: employment, output, income and retail sales. Recent reports on all four economic variables indicate ongoing economic strength, vitality and expansion, not economic weakness and recession. This is the Energizer Bunny Economy.


1. NY Times: A soaring economy and crumbling trade barriers are making India a “must visit” destination for foreign politicians and executives. They all hope to sign deals, find local partners, sell their wares or just soak up the contradictions that characterize the world’s largest democracy, a singular melding of chaos and opportunity.

2. Larry Elder: Let's not minimize the trouble faced by thinly collateralized borrowers and their lenders, given the soft housing market. But the financial difficulties affecting both sides of transactions voluntarily entered into do not warrant a taxpayer bailout.

U.S. homeowners' equity today equals almost $11 trillion. Price declines for this year and next year may amount to $6 billion, or a 0.05% decline -- a worry, but hardly Judgment Day.

Wednesday, December 12, 2007

India's Stock Market Soars to a New High of 20,000

Mumbai -- India's benchmark BSE Sensex closed at the highest ever 20,375.87 points on the Bombay Stock Exchange on Wednesday on brisk buying across various counters (see chart above).

Mumbai -- India's benchmark share index, the Bombay Stock Exchange Sensex 30, closed above 20,000 points for the first time yesterday.

Annual rate of return over the last 5 years for India's BSE Index: 43.14%, as it soared from below 4,000 in 2003 to over 20,000 in 2007. Free market capitalism is the best path to prosperity.

Wal-Mart and Home Depot To The Rescue

Disasters are just another cost of doing business.

Big-box chains like Home Depot and Wal-Mart have formed emergency management teams to predict disasters and speed the recovery of customers, employees and business. Some teams have become so deft at handling emergencies that local governments turn to them.

Spurred by the Sept. 11 terror attacks and rough hurricane seasons in 2004 and 2005, more retailers have created specialized divisions to gird for emergencies. Wal-Mart's 40-member Emergency Management Department at the Arkansas headquarters of the world's biggest retailer crackles round-the-clock with sounds of scanners, radar and cable news. The goal: to speed recovery for customers, employees and ultimately sales.

As leaders in the business of moving goods and information -- Wal-Mart's famous for daily crack-of-dawn conference calls detailing real-time sales -- some have found they can react more quickly than local governments. For them, disasters have become just another cost of doing business.

Read more here. (HT: Division of Labor and Ben Cunningham)

Bottom Line: Another example of the invisible hand at work. Should we really be surprised though that profit-seeking corporations can react more quickly to disasters than civil servants, bureaucrats and politicians? And aren't profit-seeking "price-gougers" always there immediately after a disaster offering for sale exactly what the disaster victims need most - generators, chain saws, plywood, or water - way before the government provides those needed supplies?

The Square Surcharge: USPS Favors Rectangles

BUFFALO, N.Y. -- The square has four equal sides and four right angles. It is a regular shape. To the U.S. Postal Service, however, the square is "unusual." Its sorting machines, built for oblongs, can't find the address on a square envelope. People have to do it. That's why the post office imposes the square surcharge.

(Alternative link to the article here.)

How would UPS handle it?

Tuesday, December 11, 2007

Update: America's Ridiculously Large Economy

The map above (click to enlarge) is an updated version of this map, based on 2006 GDP by state available here, and GDP by country available here.

It's hard to comprehend the enormous size of the U.S. economy ($14 trillion), but this map puts $14,000,000,000,000 into perspective. See previous CD posts
here, here, here, and here.

Hillary and Rudy Have 2:1 Leads in Futures Trading

The chart above (click to enlarge) displays futures trading on for the most traded contracts. The most current trading indicates that Hillary is about a 2:1 favorite over Obama (61% to 31% chance of being the Democratic nominee), and Giuliani has more than 2:1 lead over Romney (40.2% vs. 18.6% chance of being the Republican nominee), based on hundreds of thousands of outstanding contracts.

Looking for A Strategy to Get Rich Off The Rich?

Invest in the "Living Large Index," a stock index of businesses that cater to affluent consumers: luxury-goods makers, higher-end retailers like Tiffany and Saks, and travel and entertainment companies. Read about in the NY Times Business Section here.

A completely different investment strategy is offered by ultra-hip mutual fund company Thrasher Funds, which recently introduced the "GendeX Mutual Fund." According to its website:

The GendeX Mutual Fund offers a group of more than 60 million Gen X and Y'ers largely overlooked by the financial market place until now, the opportunity to leverage their youth along with a disciplined investment and savings strategy to help use what they already know to engage the stock market.
We created The GendeX Fund for any investor who does not feel a connection to the traditional investment establishment. Welcome Home.

Read more about it here in today's
NY Sun.

One question: "Engage the stock market?"

Fed Funds Rate Down to 3% in 2008?

According to Larry Kudlow writing in his most recent column:

"The Fed also must undo the inverted Treasury yield curve whereby the 4.5% Fed Funds rate remains well above the 4% 10-year Treasury rate. This situation has prevailed for 18 months (see shaded area in chart above); unless it's fixed immediately, it represents an illiquidity threat that increases the odds of recession. A 3-month Treasury bill around 3% is pointing the way for the fed funds rate."

Over the last half century, the Fed Funds rate has been below the 10-year Treasury yield by an average of 0.87%. Assuming that the 10-year Treasury rate remains at about 4%, that would mean that the Fed Funds target rate would have to get down to somewhere between 3% and 3.25% to restore the historical relationship between the two benchmark interest rates (see chart above). In that case, a 50 basis point rate cut in the target Fed Funds rate today to 4% would be a good start, and additional rate cuts next year could be expected.

Interestingly, the Fed Funds futures contracts for December 2008 are predicting a Fed Funds rate of about 3.4% a year from now.

After Setback, Chávez Makes the Clocks Fall Behind

CARACAS (NY Times) -- When all else fails, change your country's time by a half-hour and create a new time zone.

Carpe Diem on CNBC's "Kudlow and Company"

Thanks to CNBC's Larry Kudlow for mentioning this Carpe Diem post on last night's program of "Kudlow and Company."

Thanks also to Larry for a nice mention of Carpe Diem in his most recent nationally syndicated newspaper column.

Monday, December 10, 2007

100% Chance of a Fed Rate Cut

From the Chicago Mercantile Exchange Group Fed Watch:

Based upon today's (December 10) market close, the 30-Day Federal Funds futures contract for the December 2007 expiration is currently pricing in a 100% probability that the FOMC will decrease the target rate by at least 25 basis points from 4.5% to 4.25% at tomorrow’s FOMC meeting.

In addition, the 30-Day Federal Funds futures contract is pricing in a 42% probability of a further 25-basis point decrease in the target rate to 4% (versus a 58% probability of just a 25-basis point rate decrease).

A Very Inconvenient Peer-Reviewed Climate Study

Canada Free Press: Climate warming is naturally caused and shows no human influence, according to an inconvenient new peer-reviewed study published in the December 2007 issue of the International Journal of Climatology.

Climate scientists at the University of Rochester, the University of Alabama, and the University of Virginia report that observed patterns of temperature changes (‘fingerprints’) over the last thirty years are not in accord with what greenhouse models predict and can better be explained by natural factors, such as solar variability. Therefore, climate change is ‘unstoppable’ and cannot be affected or modified by controlling the emission of greenhouse gases, such as CO2, as is proposed in current legislation.

These results are in conflict with the conclusions of the United Nations Intergovernmental Panel on Climate Change (IPCC) and also with some recent research publications based on essentially the same data. However, they are supported by the results of the US-sponsored Climate Change Science Program (CCSP).

Meanwhile, Al Gore said today in Norway, "We, the human species, are confronting a planetary emergency, a threat to the survival of our civilization that is gathering ominous and destructive potential even as we gather here."

(HT: Tom Hemphill)

2 Consecutive Mo. Increases in Pending Home Sales

A Glimmer of Hope for Housing?

WASHINGTON -- Existing-home sales are projected to trend up in 2008, with pending home sales showing a slight near-term rise, according to the latest forecast by the National Association of Realtors®. The Pending Home Sales Index, a forward-looking indicator based on contracts signed in October, increased 0.6% to an index of 87.2 from an upwardly revised reading of 86.7 in September. It was the second consecutive monthly gain, but remained 18.4% below the October 2006 index of 106.8 (see chart above, click to enlarge).

Mortgage Rates Lowest Since 2005, Increase in Mortgage Applications Highest Since 2004

Dec. 5 (Bloomberg) -- Mortgage applications in the U.S. jumped last week by the most in more than three years, led by a surge in refinancing as long-term interests rates dropped to two-year lows, according to this press release from the Mortgage Bankers Association (see chart above, 30-year fixed rates are the lowest since mid-October 2005).

The Mortgage Bankers Association's index of applications to buy a home or refinance a loan increased 22.5% to 791.8, the highest level since July 2005. Refinancing surged 32 percent and purchases rose 15 percent.

The biggest drop in 30-year fixed mortgage rates since 2003 may have convinced owners it was a good time to refinance, at a time when outstanding adjustable loans are resetting higher.

Bottom Line: Despite all of the gloom and doom we hear about the mortgage and credit markets (for example, see today's front page WSJ article "U.S. Mortgage Crisis Rivals S&L Meltdown"), reality and the data paint a much brighter picture.