Saturday, March 22, 2008

If Life is So Awful Today, Why Do So Many College Students Own Cellphones, iPods and Digital TVs?

A few weeks ago I gave a talk on the state of the economy to a group of college students -- almost all Barack Obama enthusiasts -- who were griping about how downright awful things are in America today. As they sipped their Starbucks lattes and adjusted their designer sunglasses, they recited their grievances: The country is awash in debt "that we will have to pay off"; the middle class in shrinking; the polar ice caps are melting; and college is too expensive.

I've been speaking to groups like this one for more than 20 years, but I have never confronted such universal pessimism from a young audience. Its members acted as if the hardships of modern life are making it nearly impossible for them to get out of bed in the morning. So I conducted a survey of these grim youngsters. How many of you, I asked, own a laptop? A cellphone? An iPod, a DVD player, a flat-screen digital TV? To every question somewhere between two-thirds and all of the hands in the room rose. But they didn't even get my point. "Well, duh," one of them scoffed, "who doesn't have an iPod these days?" I was way too embarrassed to tell them that I, for one, don't. They thought that living without these products would be like going back to prehistoric times.

As late as 1970, air conditioning, color TVs, washing machines, dryers and microwaves were considered luxuries. Today the vast majority of even poor families have these things in their homes. Almost one in three "poor" families has not one but at least two cars.

From Stephen Moore's WSJ commentary "The Bare Necessities: A Generation Tries to Imagine Life Without iPods"

Watch Out for "Big Egg"

REEDSVILLE, WISC. Humpty Dumpty Eggs President Paul Brandt assured himself this week the 52-year-old company is not going out of business despite empty coolers and lack of inventory.
Eggs are a hot commodity these days prior to Easter Sunday, and the Reedsville company is processing about 60,000 eggs daily from about 71,000 hens, Brandt said. Brandt said egg sales peaked last weekend, but that Humpty Dumpty was still "busier than normal" during the week.

Brandt said higher egg prices haven't deterred buyers from getting eggs to hard-boil, color and eat in the tradition of Easter. "Even with higher prices, we're noticed demand is still high," Brandt said.

Comment: Isn't it possible that "Big Egg" is "price gouging" us this week for eggs? And won't "Big Egg" have "windfall profits" this week from the high egg sales and high egg prices? When market forces caused high oil prices after the hurricanes in 2005, there were Congressional investigations of Big Oil for "price gouging" and "windfall profits," isn't it time to give "Big Egg" the same scrutiny?

Hoppy Easter and Happy Holi!!

Browser Preference

Craig Newmark has a post today about how more than 50% of people access his blog with Firefox/Mozilla/Netscape. I checked the Sitemeter for Carpe Diem, and it was only about 34% (see chart below). So I decided to check some other blogs.
For Greg Mankiw's blog, the percent is 58%:
For Marginal Revolution, the percentage is about 45%:
Assuming that browser preference might vary internationally, I checked the country shares. For CD, the U.S. share is 83.3%, Canada is second at 4.4%:
For Greg Mankiw's blog, the U.S. share is 71%, and Canada is #2 at 6%.

For Marginal Revolution, the U.S. share is 71%, and the U.K. is second at 7%.

Q: Is Firefox more popular in other countries than in the U.S.? (Note: I think the Sitemeter statistics go back over the most recent 500 visits, so the percentages change slightly over time.)

The End of the Crisis in Mortgage Credit Markets?

From Global Insight:

The ailing U.S. mortgage credit market and housing market is poised to get a lift from a significant potential boost in lending activity by the GSEs (Fannie Mae and Freddie Mac). The ability of the GSEs to respond to the severe housing downturn had been severely constrained by: a) caps that have been placed on the overall growth of their retained lending portfolio; b) the conforming loan limit of $417,000—which effectively had frozen these lending entities out of the jumbo mortgage loan market; and c) the requirement from OFHEO (Office of Federal Housing Enterprise Oversight) to hold a 30% capital cushion over and above their usual capital minimum.

The reduction of the required surplus from 30% to 20% would unlock about $7.1 billion in capital in the case of Fannie Mae, and about $6.1 billion in the case of Freddie Mac. Given that total new mortgage credit was about $743.3 billion in 2007, the GSEs could make a significant positive impact on the flow of mortgage credit to the housing market in 2008.

A modest reduction of about 50 basis points in the risk premium on 30-year conventional mortgages, to near 200–210 basis points, would bring 30-year mortgage rates back down to a range of 5.30% to 5.50%. That could stimulate significantly more demand for mortgage loans, and the GSEs are now in a good position to meet that demand.

The big question is, can the recent Fed moves to provide significant new liquidity, unlock the credit markets, and lower benchmark borrowing costs lead to such a reduction in the risk premium? We believe they can. If we pass that important watershed in the next few weeks, it perhaps could mark the beginning of the end of the crisis in the mortgage credit markets.

Long-term Mortgage Rates Plummet

McLean, VA – Freddie Mac today released the results of its Primary Mortgage Market Survey in which the 30-year fixed-rate mortgage (FRM) averaged 5.87% with an average 0.5 point for the week ending March 20, 2008, down from last week when it averaged 6.13%. Last year at this time, the 30-year FRM averaged 6.16%.

"Mortgage rates fell this week as various actions were taken to improve market liquidity," said Frank Nothaft, Freddie Mac vice president and chief economist. "In addition, the inflation report from the Consumer Price Index (CPI) reflected weaker price increases than consensus expectations. Unchanged in February both including and excluding food and energy costs, it is the first time the core CPI did not report a monthly increase since November 2006.

Comment: Mortgage rates have come down by almost a full percentage point in the last 9 months, from 6.74% to 5.87%, a drop of .87%. For a $200,000 fixed-rate mortgage, that's a $113.43 monthly savings. Falling interest rates, along with falling home prices, will certainly be important factors in the real estate recovery process.

Friday, March 21, 2008

Walking Is NOT Carbon-Neutral and Zero Emission

A Prius is more energy efficient over its lifetime than a Hummer, right? Walking has to be much more environmentally-friendly than driving a car for a short trip, doesn't it? Well, as economist Steven Levitt points out, "When it comes to saving the environment, things are often not as simple as they seem at first blush." This CD post yesterday showed that driving a Toyota Echo is 5X more energy efficient as a Toyota Prius, and even a Hummer H3 might be better than a Prius over the lives of the vehicles.

Could it also be the case that driving a car is actually "more green" than walking? From NY Times science columninst John Tierney:

Chris Goodall, the author of “How to Live A Low-Carbon Life," is a member of the Green Party in Britain and a devout environmentalist. But he also questions how much good is being done by eliminating short trips by car. In fact, he says that in some circumstances it’s better to drive than to walk.

How can that be? Because Mr. Goodall takes into account something that a lot of environmentalists don’t: the human energy expended in averting fossil-fuel use. “Walking is not zero emission because we need food energy to move ourselves from place to place,” he writes. “Food production creates carbon emissions.”

If you walk 1.5 miles, Mr. Goodall calculates, and replace those calories by drinking about a cup of milk, the greenhouse emissions connected with that milk (like methane from the dairy farm and carbon dioxide from the delivery truck) are just about equal to the emissions from a typical car making the same trip. And if there were two of you making the trip, then the car would definitely be the more planet-friendly way to go.


Comment: Perhaps Native Energy and other groups that sell carbon offsets could add walking to their list of activities for which individuals can buy offsets?

Thursday, March 20, 2008

It Works in Canada and Elsewhere, How About Inflation Targeting in the United States?



From the Bank of Canada's website:

Inflation-control targeting has been a cornerstone of monetary policy in Canada since its introduction in 1991. At present the target range is 1 to 3%, with the Bank's monetary policy aimed at keeping inflation at the 2% target midpoint.

The inflation-control target has helped to make the Bank's monetary policy actions more readily understandable to financial markets and the public. The target also provides a clear measure of the effectiveness of monetary policy. One of the most important benefits of a clear inflation target is its role in anchoring expectations of future inflation. This, in turn, leads to the kind of economic decision making — by individuals, businesses, and governments — that brings about non-inflationary growth in the economy.

Comment: As the top chart above shows, the Bank of Canada has been pretty successful at keeping inflation in the specified range from 1 to 3%, and pretty close to the point target of 2%. On the other hand, U.S. inflation has been much higher on average and more volatile over the same period, compared to Canada (see middle chart above). And during the 2003-2008 period, the Canadian dollar has strengthened versus the USD by 28.5%.

In all of the daily media discussions and hand-wringing about inflation, stagflation, and the falling dollar, what has happened to the discussion of "inflation targeting" as an alternative, rules-based approach to monetary policy? It seems like that topic has been ignored lately, even though inflation targeting has been successful in Canada, New Zealand, Sweden, Australia, Brazil, Chile, Israel, Korea, Mexico, South Africa, the Philippines, and Thailand, the Czech Republic, Hungary, and Poland.

As Fed Chairman Ben Bernanke said in 2003, "Central banks that have switched to inflation targeting have generally been pleased with the results they have obtained. The strongest evidence on that score is that, thus far at least, none of the several dozen adopters of inflation targeting has abandoned the approach."

Can we put inflation targeting back on the table for discussion? Given its proven record in countries like neighboring Canada, I think serious consideration should be given to adopting inflation targeting in the U.S.

Ethanol: Ethical, Economic, Environmental Sham

Dwindling foreign oil, rising prices at the gas pump and hype from politically well-connected U.S. agribusiness have combined to create a frenzied rush to convert food grains into ethanol fuel. The move is badly conceived and ill advised.

The science is clear: The use of corn and other biofuels to solve our energy problem is an ethically, economically and environmentally unworkable sham.

~David Pimentel, professor of entomology at
Cornell University, "Corn Can't Save Us"

Lifetime Energy Cost Per Mile: Prius v. Hummer H3

Average, all 2005 vehicles sold in the U.S.: $2.28 per mile

Top 5 most energy efficient 2005 vehicles, over their lifetimes:
1. Scion xB: $0.48 per mile
2. Ford Escort: $0.57 per mile
3. Jeep Wrangler: $0.60 per mile
4. Chevrolet Tracker: $0.69 per mile
5. Toyota Echo: $0.70 per mile


Top 5 least energy efficient 2005 vehicles, over their lifetimes:
1. Mercedes Benz produced Maybach: $11.58 per mile
2. Volkswagen Phaeton: $11.21 per mile
3. Rolls-Royce: $10.66 per mile
4. Bentley: $10.56 per mile
5. Audi Allroad Quattro: $5.59 per mile


2005 Hybrid Vehicle energy efficiency over their lifetimes:
1. Honda Insight: $2.94 per mile
2. Ford Escape Hybrid: $3.18 per mile
3. Honda Civic Hybrid: $3.24 per mile
4. Toyota Prius: $3.25 per mile
5. Honda Accord Hybrid: $3.30 per mile


2005 Hummer H3: $1.949 per mile

From the study "Dust to Dust: The Energy Cost of New Vehicles From Concept to Disposal" by CNW Research. Full database of vehicles here.

What A Difference Three Years Makes

Patrick's Tailor in Bangkok, Thailand 2005

Patrick's Tailors in Bangkok, Thailand 2008

Highest Marginal Income Tax Rates, 1913-2007

Been working on your income taxes for 2007? If you're in a high income tax bracket (35% is the highest marginal rate for 2007), it could be a lot worse, you could be paying taxes at the rate of 91% like during the 1950s, or 70% during the 1960s (see chart above based on IRS data). Of course, it could be a lot better, like the 28% highest rate in the 1980s or the original maximum rate of 7% in 1913. (The average highest marginal tax rate since 1913 is 60.3%.)

Comment: Is is any wonder that the economic conditions in the 1930s turned from bad to worse, from a recession to the Great Depression, when the highest income tax rate was raised from 25% to almost 80% during that decade (see shaded area above)? Now that was a real "economic buzzkill."

Wednesday, March 19, 2008

Tax Deadline Approaches: Bring Us Back to 1913

See the original 1913 IRS 1040 form here (only 4 pages including all forms and instructions).

To see how much you would be taxed at the 1913 tax rates, check out the Political Calculations blog (Note: maxiumum tax rate in 1913 was 6%).

Houston: The Next Great World City?

A place with fewer than 300,000 people in 1930 is now a mega-region with a population nearing five million. The population of the metropolitan area itself, which did not even rank in the U.S. top 20 in 1940, is today the fourth largest in the country. The 2006 census estimate pegged Houston’s population at 2,144,491, only 700,000 behind third-place Chicago.

In 1960, Houston was the home of just one Fortune 500 company; as of 2007, the area has 23. An indicator of Houston’s international reach: it now ranks third among U.S. cities, behind Los Angeles and New York, in the number of consulates located there. And the city is well positioned to benefit from its important place in the energy industry, a sector of the global economy that is only going to grow in strategic importance in the early 21st century.

Read
more here.

Another reason for Houston's growth and potential?

Houston is the freest major city in America, with no zoning and only moderate government intrusions into how property owners use their land. This freedom has made Houston the most affordable major city in America, with housing costs that are less than half of most other major urban areas. This freedom has also created an innovative and growth-friendly environment that is creating tens of thousands of new jobs each year.

Update: The chart above shows employment in Houston vs. the U.S. from 2000-2007. Overall employment increased in Houston during this period by more than 16%, compared to an increase in employment nationally of only about 5.5%.

Breaking Down Doors: Another Drug Raid Nightmare

Reason Magazine: Over the last quarter century, we've seen an astonishing rise in paramilitary police tactics by police departments across America. Peter Kraksa, professor of criminology at the University of Eastern Kentucky, ran a 20-year survey of SWAT team deployments and determined that they have increased 1,500% since the early 1980s—mostly to serve nonviolent drug warrants.

This is dangerous, senseless overkill. The margin of error is too thin, and the potential for tragedy too high to use these tactics unless they are in response to an already violent situation (think bank robberies, school shootings or hostage-takings). Breaking down doors to bust drug offenders creates violent situations; it doesn't defuse them.

World Bank Study on Migration and Remittances

WASHINGTON, DC, March 19, 2008 – The top five recipients of migrant remittances in 2007 were India ($27 billion), China ($25.7 billion), Mexico ($25 billion), the Philippines ($17 billion), and France ($12.5 billion) according to the World Bank’s new Migration and Remittances Factbook 2008, released today. Rich countries are the main source of remittances. The United States is by far the largest, with $42 billion in recorded outward flows in 2006. Saudi Arabia ranks as the second largest, followed by Switzerland and Germany.

The United States was also the top immigration country in 2005, with 38.4 million immigrants, followed by the Russian Federation (12.1 million), and Germany (10.1 million). Among low-income countries, India had the highest immigration volume (5.7 million), followed by Pakistan (3.3 million). The Mexico–United States corridor is the largest migration corridor in the world, accounting for 10.4 million migrants by 2005. Migration corridors in the Former Soviet Union— Russia–Ukraine and Ukraine–Russia —are the next largest, followed by Bangladesh–India.

Quote of the Day

"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

More H1-B Visas = More U.S. Jobs

Conclusion of the study H-1 B Visas and Job Creation: Based on a regression model that controls for both general market conditions and firm size, requests for H-1B certifications by U.S. technology companies are associated with an increase in total employment more than five times the size of the H-1B request. The data show that for every H-1B position requested, U.S. technology companies in the S&P 500 increase their employment by 5 workers. For technology firms with fewer than 5,000 employees, each H-1B position requested in labor condition applications was associated with an increase of employment of 7.5 workers.

Bill Gates, testifying before Congress: Congress's failure to pass high-skill immigration reform has exacerbated an already grave situation. The current base cap of 65,000 H-1B visas is arbitrarily set and bears no relation to the U.S. economy's demand for skilled workers. Today, knowledge and expertise are the essential raw materials that companies and countries need in order to be competitive. We live in an economy that depends on the ability of innovative companies to attract and retain the very best talent, regardless of nationality or citizenship.

WSJ: The Labor Department projects that by 2014 there will be more than two million job openings in science, technology, engineering and math fields. But the number of Americans graduating with degrees in those disciplines is falling. Meanwhile, visa quotas make it increasingly difficult for U.S. companies to hire foreign-born graduates of our own universities. Last year, as in prior years, the supply of H-1B visas was exhausted on the first day petitions could be filed.

Bottom Line: More H-1B visas, more U.S. jobs, not fewer jobs.

Reverse Outsourcing: From India TO MI, OH and GA

Bangalore--India's IT giant Wipro plans to open more centers in the U.S. in a continuing trend of “reverse outsourcing,” as Indian information technology outsourcing companies recruit in the U.S. and Europe.

Azim Premji, chairman of Wipro, India’s third-largest information technology outsourcing company, said it aimed to hire more than 1,000 people in the U,S, to staff two new software development centres in Michigan and Atlanta.

Tata Consultancy Services, India’s leading outsourcing company, on Tuesday opened its first US centre near Cincinnati, Ohio, which has capacity for 1,000 employees.

Bottom Line: Trade and outsourcing work both ways.

Tuesday, March 18, 2008

Mortgage Troubles Concentrated, Not Widespread


The Mortgage Bankers Association recently released mortgage delinquency and foreclosure data at the state level for the fourth quarter 2007. As the maps above show, most of the delinquency and foreclosure troubles are concentrated in 12 states for each category.

For serious delinquencies, the states with the biggest problems are
Michigan (8.97%), Indiana (8.35%), Florida (7.47%) and Nevada (6.53%), compared to the national average of 5.82%. Some of the states with the lowest delinquency rates include Wyoming (3.1%), Montana (3.2%) and Washington (3.2%).

States with the highest foreclosure start rates include Nevada (1.54%), Florida (1.46%) and Michigan (1.29%), and states with the lowest rates include Montana (.27%) and Wyoming (.29%), compared to the national average of .83%.

Comment: The worst of the mortgage delinquency and foreclosure troubles seem to be pretty concentrated in a small number of states (Nevada, Florida, Michigan, Ohio and Indiana), while the rest of the country is probably at normal levels for delinquencies and foreclosures. The data and maps above suggest that delinquency and foreclosure problems are certainly not as widespread of a problem as many think.

MBA: Commercial Mortgage Delinquencies End 2007 At or Near Record Lows



Washington, DC (March 10) – The Mortgage Bankers Association (MBA) released its inaugural analysis of Commercial/Multifamily Mortgage Delinquency Rates for Major Investor Groups that shows delinquency rates ended 2007 at or near record lows for most major investor groups (see charts above, click to enlarge). Fourth quarter delinquency rates for four of the five largest investor groups – commercial mortgage-backed securities (CMBS), life companies, Fannie Mae and Freddie Mac – remained at or near historically low levels. For the fifth group, FDIC-insured commercial banks and thrifts, delinquency rates were lower at 2007’s year-end than during 5 of the previous 11 years and 10 of the previous 16 years. Together these groups hold more than 80% of commercial/multifamily mortgage debt outstanding.

“This is an important new analysis that helps cut through much of the recent ‘noise’ on commercial real estate finance,” said Steve Graves of the MBA. “Despite a great deal of attention being paid to economic uncertainty, it is reassuring to know that the performance of commercial and multifamily mortgage loans and bonds has remained so fundamentally sound.”


For life insurance company portfolios, the rate was 0.01% (see bottom chart above) – with only nine delinquent loans, amounting less than $19 million, out of a reported total of $245 billion. For Freddie Mac, the fourth-quarter rate was 0.02%. For Fannie Mae, it was 0.08%. For commercial mortgage-backed securities, the delinquency rate was 0.40%. Even for the fifth group – the FDIC-insured institutions, which had a delinquency rate of 0.80% – the rate of past-due loans was still lower than in five of the previous 11 years and 10 of the previous 16 years, the MBA found. Of $1.2 trillion of commercial/multifamily loans at FDIC-insured banks and thrifts, only $9 billion was 90+ days delinquent.

Comment: The general media consensus seems to be that credit is drying up, and the entire U.S. credit market is collapsing and getting worse by the day. This recent report from the MBA shows that the commercial real estate has never been healthier, at least in terms of delinquencies on commercial real estate loans, which are at or near all-time lows. It's not all gloom and doom.


Drew Carey on Legalizing the Sale of Kidneys

Each year more than 3,000 Americans—a figure comparable to the death tolls from the 9/11 attacks—die waiting for kidneys. Is it time to legalize the sale of kidneys?

In this
Reason.tv video, Drew Carey investigates what could be done to end the wait for people needing kidneys and give them the freedom they deserve.

Related Reason Magazine article "Who Owns Your Body Parts?"

Walgreens Is Taking Health Clinics To Workplaces

Milwaukee--Walgreen Co., which rolled out its retail health clinic concept at Milwaukee-area Walgreens locations last year, is taking those services into large-company work sites with a pair of acquisitions announced Monday. Once the transactions close, Walgreens will have more than 500 work-site and retail health centers in 40 states.

Comment: Since most medical insurance is paid for by employers, it makes sense that they can probably control costs more effectively with employer-provided work-site health clinics than traditional insurance plans. In other words, if employers are going to pay for medical costs for employess, why not just provide the medical services at the worksite?

Let A Thousand Retail Clinics Bloom, or Even 2,000

There are nearly 1,000 retail health clinics in the nation, a number that is expected to rise dramatically in the next few years as chains like Wal-Mart, CVS, Target and Walgreens add more clinics. A recent poll predicted that there will be around 2,000 retail clinics by the end of 2008.

One company that offers retail health care is
MinuteClinic, which currently has 505 locations in 25 states across the country and more on the way. The company was started by Rick Krieger when he got the idea after he took his son to urgent care in 1999 in Minneapolis for a strep throat test and ended up waiting two hours.

~From
NBC4.com in Washington, D.C.

Comment: Never underestimate the power of a frustrated consumer, turned entrepreneur, to fix a problem and change the world in a real, positive way with a market solution. Never underestimate the failure of a politically-motivated government solution to fix the same problem. Health care is a good example. While politicians argue about how to make health care more affordable with government solutions, the market is opening thousands of retail healthcare clinics, with convenient hours (7 days per week, no appointment needed) and affordable prices (starting at $29), for basic health care.

New BLS Website for International Labor Data


There is a new website for international labor data from the BLS, including lots of charts and graphs:

Although BLS is the premier source for U.S. labor statistics, the Bureau is also widely recognized for providing comparable international data. The BLS provides information on employment, unemployment, productivity, compensation costs, labor force participation rates, and other labor-related measures for 36 countries in the Americas, Europe, and Asia and the Pacific.

(HT: James Hohman)

Watch Cramer for Entertainment, Buy Index Funds



Watch the video above from last Tuesday (March 11) of Jim Cramer scolding a viewer for “being silly” by thinking about dumping Bear Stearns stock — at $65.

(HT: Chris Douglas)


Monday, March 17, 2008

Some Perspective on Subprime Mortgages

The graph above was created using data from the Mortgage Bankers Association's (MBA) most recent release on delinquencies and foreclosures, and a previous MBA report here. Facts:

1. Of the 75.2 million American homeowners, 25.6 million, or 34% of the total, own their homes free and clear.

2. Of the 75.2 million homeowners, 39.6 million, or almost 53% of the total, have prime mortgages (fixed and adjustable).

3. Of the 75.2 million howeowners, 65.2 million, or almost 87%, have a prime mortgage or no mortgage. Add in the 3.5 million FHA loans, and it brings the total percentage to 91.4%.

4. Subprime borrowers (6.5 million) make up the rest, or only 8.64% of all homeowners, and only 4.65 out of every 100 homeowners has a subprime ARM, which make up almost half of the foreclosures started.

5. Of the 49.6 million mortgages, 2.04% were in the foreclosure process in the fourth quarter of 2007, or about 1.01 million homes. Of the total number of homes (75.2 million) including those with no mortgage, the percent of all homes in foreclosure was 1.34%. Obviously then, 98.66% of homes were NOT in the foreclosure process in QIV 2007.

(Updated: March 20, 2008)

More Top 100 Billionaires in Emerging Markets (37) Than in the United States (32)

Carpe Diem Exclusive

The chart above was created using the Forbes annual rankings of world billionaires (data are available here, here, here, here and here). In 2008, for the first time in history, the percentage of the richest 100 world billionaires in emerging markets (37 out of 100, or 37%) is greater than the percentage of the top 100 billionaires in the U.S. (32 out of 100, or 32%).

The "Headless Donkey" Big Dog Robot Rocks


Watch an amazing video of the 235 pound Boston Dynamics Big Dog robot, as it navigates hills, ice, snow, rocks, a pile of cement blocks, and even a dude trying to kick it over, etc. The quadruped robot can carry 340 pounds. Freaky!!


Reset LIBOR Rate for Subprime ARMs Falls By 3%

From the Mortgage Bankers Association latest report on Delinquencies and Foreclosures:

"Of significance is that the rate reset issue on adjustable rate mortgages is becoming less of an issue. The 6-month LIBOR rate, the index rate used for many subprime ARMs, has come down around 2.5 percentage points since last September, greatly reducing the payment shock on many ARM resets."

Actually, since last August when 6-month LIBOR was 5.53%, the latest rate of 2.67% indicates that the reset rate for subprime ARMs has fallen by 2.86% in the last six months (see chart above), which is some rare good news for the subprime mortgage market.

Free-Market Health Care: Only Idea That Will Work

While government's role in health care has expanded — one out of two health care dollars is now spent by the government — health care has become more expensive, less efficient, and less accessible. Health insurance premiums have nearly doubled since 2000 while inflation grew at 18% and wages grew by 20%. Meanwhile, the percentage of employers offering coverage has dropped 8% during the same period.

Convincing consumers that government is the problem obviously will require more than statistics or sound policy, but an appeal to their gut level expectations. The fact is Americans expect choice, freedom, and security in every area of their lives except for two: health care and education. This dynamic represents both a challenge and an opportunity.

The challenge is that low expectations and widespread frustration has made consumers vulnerable to the seduction of socialized medicine. The opportunity is in helping consumers see that if the government-imposed barriers in the health care market were erected anywhere else in our economy they would revolt.

A market-based system that would unleash the power of innovation and competition in health care is within reach. A key reform would involve transferring health care tax benefits to individuals rather than employers. Free-market health care isn't merely a good idea that ought to be attempted; it is the only idea that will work.

~Oklahoma Senator Tom Coburn, M.D., writing in today's NY Sun

Comment: Now that's a double breath of fresh air: both a politician and a physician calling for free-market health care.

Industrial Ouptut: 1% Annual Growth

Federal Reserve--Industrial production fell 0.5% in February after having increased 0.1% in January. Much of the decrease in February resulted from a weather-related drop of 3.7% in the output of utilities. In the manufacturing sector, output decreased 0.2% in February, and declines were fairly widespread across industries. The output of mines moved up 0.4%. At 113.7 percent of its 2002 average, total industrial production was 1.0% above its year-earlier level (see chart above).

Comment: At 1% annual growth, industrial output is certainly slowing but still does not necessarily suggest we have entered a recession. Notice on the chart above that annual growth in industrial output was significantly negative during the 2001 recession, and was about -2% as the recession started. We are not close to that kind of negative growth yet in output. Notice also the slowdown in industrial production growth to zero and negative growth in mid-2003 and subsequent recovery, without recession.

The New Authoritarian Capitalists: State, Inc.

In modern times, business and government have occupied increasingly separate spheres in Western economies - separation that has laid the groundwork for their economic ascendancy. By the end of the 20th century, many economists and political scientists assumed there was no other path to growth. The modern record of state-controlled business, by contrast, was chiefly one of failure.

But in the past five years, governments around the world have been transforming themselves into deal makers and business players on a scale never seen in the modern era.

The rise of states as global economic players marks a sharp reversal from decades in which private enterprise seemed an unstoppable force in global finance, commerce, and culture. It represents a new and unexpected fusion of state control with the business principles of capitalism. And it is already causing a significant shift in global power.

The new state capitalists - China, the United Arab Emirates, Russia, and others - are primarily authoritarian nations. And as they become bigger commercial players, they are gaining new influence in a realm once dominated by the democratic West. As the global business momentum shifts from private companies to national governments, the implications are far reaching.

Read more of the article "State, Inc." in
the Boston Globe.

Sunday, March 16, 2008

CME: New Futures Contracts on Nonfarm Payrolls

Effective Sunday, April 27, 2008, for trade date April 28, 2008, the CME Group will launch Nonfarm Payroll (NFP) futures and options on futures to coincide with the release of the NFP economic date on Friday, May 2.

These plain vanilla contracts are based on the monthly U.S. Bureau of Labor Statistics (BLS) report usually released on the first Friday of each month that measures employment health. NFP futures and options are a transparent, straightforward and accessible way for you to gain direct exposure to the government labor number or to offset unexpected financial market moves that often occur when this number comes out.

The Nonfarm Payroll report is the first major economic release of each month that speaks to the condition of the prior month and is closely followed as a way to gauge how the Federal Open Markets Committee perceives economic growth.


(HT: Tyler Cowen at Marginal Revolution)

4 Signs We Are Not In a Recession

James Pethokoukis, at US News & World Report writes, "I know we are supposed to be in a recession since Warren Buffett said so, but the data refuse to fully cooperate":

Sign #1: Jobless claims remain stubbornly low. Initial claims in the week ending March 8 were unchanged at 353,000, while the four-week average edged down to 358,500 from 359,750 (see chart above).

Read the other three signs that we are not in a recession here.

MP: Note also that First Trust Advisors said last week that "initial claims for unemployment insurance were unchanged at 353,000 last week, still well below the 400,000 mark that could signal recession."

Falling Home Prices Drive Home Sales in Michigan

A month ago, a CD post reported the real estate boom in Detroit, with a 45.5% increase in January sales compared to a year ago.

February 2008 home sales were up again, this time by 49.4% in the city of Detroit, compared to February 2007. For the larger Metro Detroit area, home sales were up 13.8% in February over the same month last year, and marked the third month in a row home sales for the metro area were up over the previous year, welcome news for a region that in 2007 saw its yearly number of homes sold fall 14.4% from the peak in 2004. Read more here in the Detroit News.

According to another Detroit News article "Bargains Drive Up Sales of Homes," Median sale prices in February demonstrate the effect of foreclosure sales on the local market.

In Detroit, for example, February sales were up 49.4% from a year ago, but nearly 58% of the sales involved foreclosed homes, with a median sales price of $10,000. In contrast, the median price of foreclosed homes in February 2007 was $27,000.


In Oakland County, foreclosure sales made up nearly 35% of transactions in February, with a median price of $91,395, compared with $123,000 last year. The median price of non-foreclosure sales for the month was $176,500, compared with $191,000 a year ago.

In the Flint area, the 720 homes sold in January and February 2008 set a record for sales in those two months going back to at least 1998 (see graph above), driven mostly by falling home prices.

According to the Flint Journal article "
Foreclosures Drive Home Sales," 394 houses were sold in February, up almost 16% from a year earlier and the highest February total in nine years. January sales also were up more than 15 percent from the same month in 2007 and the highest since 2003, when 327 houses were sold in January.

Real estate professionals say lower prices are the main reasons houses are selling. Buyers are seeing much lower prices or getting much more house for their money. The average sale price of homes sold in February was $76,997, down almost 26% from an average of $103,604 the previous year. The average sales price in January also was down sharply from 2007 averages.


Comment: Like any market with an excess supply, falling home prices are helping to stimulate home sales and bring about a better balance between the number of home buyers and home sellers. Although we tend to think of a real estate boom as a positive period of rising home prices and the current correction period as a negative period of falling prices, in both cases market prices are doing what they do best: achieving market-clearing equilibrium that helps to balance supply and demand. It's a great time to buy in the current "buyers' boom."

Mankiw in NY Times: McCain vs. Hillbama on Trade



From Greg Mankiw's article in today's NY Times:

No issue divides economists and mere Muggles more than the debate over globalization and international trade. Where the high priests of the dismal science see opportunity through the magic of the market’s invisible hand, Joe Sixpack sees a threat to his livelihood. This gap in perspective grows especially wide whenever the economy experiences short-run difficulties, as it is now. By all indications, the issue could come to dominate the presidential campaign.

This shift of public opinion toward economic isolationism may well become a political problem for John McCain. Compared with those of either of his possible Democratic rivals, his track record shows him to be a more unequivocal free trader.

Mankiw gives 5 example of McCain supporting free-trade legislation, which is consistent with the chart above on McCain from a previous CD post, which showed the voting records of Clinton, Obama and McCain on trade from Cato's interactive website (see charts above).

Mankiw continues:

Nafta is the latest whipping boy for the anti-globalization crowd. During their last debate, Mrs. Clinton and Mr. Obama said they would withdraw from the treaty unless Canada and Mexico agreed to further concessions. Canadian authorities were quick to respond that if negotiations were reopened, they would ask for some concessions of their own. True to form, Mr. McCain offered his unconditional support for the landmark agreement.

It is hard to be confident, however, that on issues of trade policy either Democratic candidate would act like the last Democratic president. Maybe the candidates’ records as legislators are not good indicators of what their policies might be as president. Maybe campaign rhetoric about Nafta is nothing more than that. But counting on it requires, one might say, the audacity of hope.

Globalization and Italy's "Globali Tascabili"

Wedding-dress makers in Putignano, Italy (pictured above) were supposed to be globalization's first victims. Most of the factories make only a few thousand dresses a year, luxurious creations that sell for around €5,000 apiece (about $7,500). The seamstresses who stitch garments by hand enjoy traditional Italian perks such as two-hour lunch breaks and four weeks of paid vacation, and earn competitive salaries.

But many of these companies have become globalization's unlikely winners, managing to expand their sales abroad as their share of the Italian market shrank. It has meant moving into new and sometimes uncomfortable territory. "It would have been ideal for us to stay here, where we speak the language, where we know the customs," says Mr. Lippolis of Giovanna Sbiroli. "For us, it didn't work out that way." Today, Giovanna Sbrioli exports to 18 countries, and foreign sales account for 30% of its business.

Giovanna Sbrioli's evolution is part of a broader transformation of the Italian economy, as its small, specialized and family-run makers of wares from women's stockings to wooden furniture have turned themselves into globali tascabili -- so-called pocket-size global firms that aggressively market their Italian craftsmanship and style. Once thought too small to survive in a global market, these companies have carved out niches around the world. According to the latest available figures, Italy's share of the global export market rose by 6.1% in the first half of 2007, compared with the same period a year earlier.

Comment: What a great and fascinating story about globalization and the significant challenges AND opportunities created by world trade, even for these small, family businesses in the remote hilltowns of Tuscany. Read the full WSJ story here, and read some interesting comments about the story at the Evolving Excellence blog here.

Thanks to CD commenter Ken for the pointer.