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.

Sunday, December 09, 2007

Move Over "Big Oil," Here Comes "Big Wheat"

And you thought oil prices were high.... what about wheat, soybeans, eggs and milk?

See Captain Capitalism post here, and USA Today article here: "Commodities go ka-ching; buyers go, 'Ouch'"

Everyday Low Prices, U.S. Is A Giant Wal-Mart

From, "Canada's Dollar Craze":

When I was a kid growing up in Detroit, my mother once said that she loved to visit Canada, right across the river, because “everything there is on sale.” It certainly seemed that way when the Canadian dollar traded at a fraction of the value of the U.S. dollar.

The United States is now benefiting from a flood of Canadians crossing the border to do their holiday shopping. The two neighbors have traded places: America is now the country where “everything is on sale.”

The chart above (click to enlarge) shows the 40% decline in the value of the U.S. dollar since 2002 vs. the Canadian dollar, transforming the entire U.S. economy into a giant Wal-Mart for Canadians, with "everyday low prices."

The War on Gambling: Cops Raid VFW Poker Game

In his latest video for, Drew Carey reports on how Dallas cops carried out a paramilitary-style raid on a poker game at the VFW Post #1837, which has now been forced to close its doors.

The raid is part of a broader move by local police to shut down poker games, arrest players, and seize property - even in low stakes games benefiting charity, like at the VFW. And it's emblematic of the government's misguided war on gambling, such as the recently enacted federal ban on Internet wagering.

In most jurisdictions throughout the country, consenting adults are banned from gambling -- unless of course they want to bet on low-odds games run by the government. State lotteries, that is.

Govt. Solution: Pressure to Renege on Contracts

The government sure has a funny prescription for restoring confidence in America's credit markets. It purports to solve the nation's credit crunch — a slowdown stemming from investors' loss of trust in instruments such as mortgage-backed securities — by pressuring millions of borrowers and lenders to renege on their contracts and bilk mortgage investors.

Unless there was fraud, both borrowers and lenders should be expected to live up to the terms of their contract, unless they mutually agree to changes. Innovations such as ARMs enabled many smart borrowers to improve their prospects by using the extra cash flow for purposes such as starting a business or getting a new degree. These responsible borrowers and their lenders should not be punished for the imprudence of others.

John Berlau of the Competitive Enterprise Institute, writing in USAToday

Why Do Bloggers Blog For Free?

George Mason economist, blogger, and author ("Discover Your Inner Economist") Tyler Cowen explains why (BTW: Tyler was on my Ph.D. dissertation committe at GMU) in an interview with UPenn's Wharton:

Knowlege@Wharton: You are a writer and co-founder of the popular economics blog How does your inner economist explain blogging? What is the incentive for people like yourself to offer high-quality goods and services online for free?

Cowen: Blogging is fun. I've made friends through blogging, but most of all I have learned a lot. I think it has made me a better economist. I would also say it's helped me to discover my inner economist. Because when you are blogging for real people, they don't want techno babble. They don't want jargon. They're like, "What can you tell me that I actually care about?" Most of the ideas in this book, in one way or another, came out of blogging.

Knowlege@Wharton: So we can be motivated to do a lot of work, even highly skilled work, just because it's fun?

Cowen: Absolutely. A lot of science works on the same basis. It's true that scientists get paid, but typically they don't get paid more, or much more, for discovering something that will make them famous. They do it because they love science, or because they want the recognition or because they just stumble upon it. Einstein was never a wealthy man but he worked very hard. So blogging is a new form of an old idea: that people do great things for free. Adam Smith didn't get paid much for writing Wealth of Nations, even though it's a long book that required a lot of work. He had an inner drive to get his ideas out there.

MP: Hey, maybe there is such a thing as a free lunch (blog)?