Monday, July 07, 2008

McCain's Chances: From 42% to 31% in 38 Days

McCain's chances to become president are sinking on (last 38 days shown above).

Johan Norberg Exposes Klein's "Shlock Doctrine"

From "The Klein Doctrine: The Rise of Disaster Polemics," by Johan Norberg, Senior Fellow at the Cato Institute

Executive Summary: Naomi Klein’s The Shock Doctrine purports to be an exposé of the ruthless nature of free-market capitalism and its chief recent exponent, Milton Friedman (click arrow above to watch video). Klein argues that capitalism goes hand in hand with dictatorship and brutality and that dictators and other unscrupulous political figures take advantage of “shocks”—catastrophes real or manufactured—to consolidate their power and implement unpopular market reforms. Klein cites Chile under General Augusto Pinochet, Britain under Margaret Thatcher, China during the Tiananmen Square crisis, and the ongoing war in Iraq as examples of this process.

Klein’s analysis is hopelessly flawed at virtually every level. Friedman’s own words reveal him to be an advocate of peace, democracy, and individual rights. He argued that gradual economic reforms were often preferable to swift ones and that the public should be fully informed about them, the better to prepare themselves in advance. Further, Friedman condemned the Pinochet regime and opposed the war in Iraq.

Klein’s historical examples also fall apart under scrutiny. For example, Klein alleges that the Tiananmen Square crackdown was intended to crush opposition to pro-market reforms, when in fact it caused liberalization to stall for years. She also argues that Thatcher used the Falklands War as cover for her unpopular economic policies, when actually those economic policies and their results enjoyed strong public support.

Klein’s broader empirical claims fare no better. Surveys of political and economic freedom reveal that the less politically free regimes tend to resist market liberalization, while those states with greater political freedom tend to pursue economic freedom as well.

Watch another
video segment here.

Sure, Gas Prices Are High Now, But You Might Get It All Back When You Retire, Or Maybe Not?

1-Year Return: DJ Commodity Index vs. DJIA

WASHINGTON POST -- Soaring fuel prices that are burning a hole in the wallets of consumers are not only benefiting oil companies and Middle Eastern producers. They are also lighting up the investment returns of pensions funds, which millions of ordinary Americans are counting on for their retirement (see chart above that compares the +40% return over the last year for the Dow Jones Commodity Index to the -20% annual return for the Dow Jones stocks).

California's public employees' pension fund, the world's largest, made its first investment of $1.1 billion into oil and other commodities early last year, and since then, Calpers has seen it soar 68%. Fairfax County pension managers have enjoyed a 61% return from a similar move over the past 12 months, far outpacing any other segment of the fund's portfolio.

Other pension funds are rushing to get in on the action as the prices of oil, precious metals, corn, uranium and other vital goods continue to reach record highs. Montgomery County officials are in the process of shifting 5% of their $2.7 billion pension fund away from stocks and into commodities.

These funds are part of a tidal wave of investment dollars that has flooded commodity markets in recent years and, critics say, contributed to the run-up in prices.

Investors, including pension funds and Wall Street speculators, have sharply increased their commodity allocations since 2003, from $13 billion to $260 billion, making financial actors an even larger force on these markets than farmers, airlines, trucking firms and companies that buy and sell the physical goods to run their businesses.

For decades, trading commodity contracts was considered taboo by most pension funds because the market is so volatile and risky. Most fund managers relied on their stock and bond investments to enlarge their pools of retirement money.

That changed after the stock market crashed in 2001. Fund managers realized they needed more diversified portfolios that would perform well regardless of whether stocks did. At the same time, new financial products simplified trading by allowing big funds to buy into commodity indexes, which work like mutual funds, that were run by Wall Street firms.

MP: Sure, you're paying higher prices at the pump today, but you might get it all back when you retire, since record-high commodity prices might significantly boost the return on your retirement portfolio?

Well maybe not, see this Boston Globe story "Investors' Anxiety Builds as Retirement Nest Eggs Show Cracks."

HT: Ben Cunningham

Sunday, July 06, 2008

Texas Economy Booms: +238,700 Jobs in Last Year

Fort Worth (TX) Star Telegram -- From Main Street to Wall Street, the economic news gets more depressing every day, but things could be worse: You could be living outside of Texas.

Last week, the government reported that the U.S. economy lost 62,000 jobs in June, the sixth consecutive monthly decline. Texas, meanwhile, keeps purring along (see chart above). The economy is slowing, to be sure, and corporate layoffs are rising, but the state remains in positive territory by most measures. Even construction employment, down 5.2% nationwide in the past year, was up 3.6% here.

MP: Texas employment has increased in 56 out of the last 60 months, and has increased by +238,700 jobs over the last 12 months, compared to only a +77,000 net increase in jobs nationwide since May 2007. The chart above shows that overall U.S. employment is up by about 5% since 2000, while Texas employment has increased by 13.5% during the same period (1.26 million new jobs).

Credit three factors for Texas’ (relatively) good fortune:

1. The housing market has held up better than in much of the country, and as a result, consumer confidence hasn’t crashed to the same depths. That’s one explanation for why retail sales rose 5.6% in Texas in the past year, at least three times higher than nationwide.

2. The energy industry is booming, riding the wave of sky-high oil and gas prices. That’s producing scores of new jobs in Texas and abroad, and bonus checks for landowners. The Texas rig count reached 931 in June, the highest level since 1984.

3. Texas exports are on a tear, helped by the falling dollar and strong demand for chemicals. The currency drop has helped boost exports nationwide, but Texas exports grew 7.2% in April, compared with a 3.3% increase for the nation.

Foreign-Owned Assets in U.S. Top $20 Trillion

According to data just released by the BEA on the "U.S. Net International Investment Position at Yearend 2007," foreign-owned assets in the United States increased $3,474 billion in 2007 to $20,081 billion (see top chart above), representing the largest-ever annual dollar increase, and the largest percentage increase in 20 years (see bottom chart above) for foreign investment in the U.S.

From the highlights:

Foreign private holdings of U.S. securities (other than U.S. Treasury securities) increased $760 billion to $6.1 trillion. Foreign holdings of U.S. bonds increased to $3.3 trillion mostly as a result of net foreign purchases, and foreign holdings of U.S. stocks increased to $2.8 trillion as a result of both net foreign purchases and price appreciation.

The stock of foreign direct investment in the United States increased $271 billion to $2.42 trillion.

Bottom Line: Despite subprime mortgage and credit problems, a weak economy and real estate market, foreign investors expressed their continued confidence in the U.S. economy, by buying our stocks and bonds, and investing billions of dollars in American companies.

How Are We Doing? Pretty Good Actually!

The American economy is in a rough patch. But the long-term trends are good—and there is a price to economic pessimism.

When a presidential election year collides with iffy economic times, the public’s view of the U.S. economy turns gloomy. Perspective shrinks in favor of short-term assessments that focus on such unpleasant realities as falling job counts, sluggish GDP growth, uncertain incomes, rising oil and food prices, subprime mortgage woes, and wobbly financial markets.

Taken together, it’s enough to shake our faith in American progress. The best path to reviving that faith lies in gaining some perspective— getting out of the short-term rut, casting off the blinders that focus us on what will turn out to be mere footnotes in a longer-term march of progress. Once we do that, we see the U.S. economy, a $14 trillion behemoth, is doing quite well, thank you very much.

So many data points add up to steady, continuing progress for average Americans—and there’s no reason not to expect the future will bring further progress (see examples in the charts above). Bad news will pop up from time to time, just as it has in every decade of American history. Some people will take the negatives—the hiccups on the long road to progress—for harbingers of worse times to come.

W. Michael Cox and Richard Alm of the Federal Reserve Bank of Dallas answer the question "How Are We Doing?" The answer is "pretty good."

Wal-Mart Gets 6 Applications for Every Job

TAMPA, FL -- The temporary Wal-Mart Hiring Center had more than 2,000 jobseekers hoping to fill its 350 open positions in time for the new Supercenter's opening in August, according to one of the new Supercenter's co-managers.

MP: When it gets 6 applicants for every job, doesn't that mean Wal-Mart's wages are too high, or at least competitive? That is, Wal-Mart could obviously lower wages and still have thousands, or at least hundreds of applications, and fill its positions. WakeUp Wal-Mart has a lot of complaints about Wal-Mart's wages and compensation, but the 2,000 Florida residents applying to work at Wal-Mart seem to welcome the job opportunities available there.

In a previous CD post, I suggested that Wal-Mart was more selective than Harvard University.

Africa: The Last Big Investment Frontier?

Washington Post -- Psssst. Have I got a great stock tip for you: Now's the time to buy shares on the Nigerian Stock Exchange. No, really.

I know that may sound like an e-mail from the spam box, but it's actually good investment advice. While U.S. markets have been struggling with the effects of the subprime mortgage debacle and threats of a looming recession, the total value of the stocks traded on the Nigerian Stock Exchange has doubled over the past year (see chart above of Nigeria's stock market index vs. the US).

Investment gurus at Goldman Sachs named Nigeria as one of the top emerging markets to watch, and in recent years, Africa has offered the world's highest rate of return, according to United Nations trade figures. And yet the continent would be far down most people's list of investment destinations, with China and India probably at the top. But while we look to invest in China, the Chinese are looking to Africa, where new roads, ports, bridges -- the infrastructure the continent so desperately needs -- are springing up everywhere, thanks to Chinese investment.

What the Chinese want in Africa is what we all want -- the continent's abundance of natural resources, including oil and nearly every strategic mineral that we need for our daily life. Africa recently overtook the Middle East in exporting oil to the United States. Who knows how long Africa's current bull run will last? But one thing is certain: Africa's the last big investment frontier. If you missed China and India, don't miss this one.

Saturday, July 05, 2008

Middle-Income Tax Burden: Lowest Level in Decades

WASHINGTON, D.C. Recently released Congressional Budget Office (CBO) data show that the total effective federal tax rate (including income, payroll, and excise taxes) of the middle fifth of households declined after 2001 to its lowest levels since at least 1979 (see chart above). Under the 2001 and 2003 tax relief legislation, the income tax as a share of income for the middle fifth also has fallen to its lowest levels in decades.

In 2005, the CBO data indicate that in the middle fifth, the total effective tax rate was 14.2%, while the effective individual income tax rate was 3%. These figures compare to 2000 levels of 16.6% and 5.0%, respectively. Between 2003 and 2005, the total effective tax rate for the middle fifth edged up, but still remained far below the levels of the previous 24 years.

The CBO analysis shows that the 2001 and 2003 tax cuts have lowered the effective tax burden on middle income taxpayers to the lowest levels since at least the late 1970s. The CBO tax figures, put into historical perspective, also show that the income tax burden of middle income households has been reduced to its lowest levels in many years.

Note: Most households do not remain in a specific quintile for extended periods of time.

And You Thought Today's Gas Prices Were High?

The chart above (click to enlarge) shows the cost of 1,000 gallons of gas as a percent of per-capita disposable income, annually back to 1929, using EIA data for gas prices and BEA data for disposable income and GFD data for population (subscription required).

The retail price of gas was only about 20 cents a gallon from 1929 to 1946, but annual per-capita disposable income in the 1930s was only about about $400-500 (about $6,000 in today's dollars), so that a 1,000 gallons of gas cost as much as almost 49% of per-capita disposable income in 1933, and averaged more than 38% from 1929-1939~!

To reach those levels today, gas would have to sell for between $14 and $17 per gallon!

Bottom Line: When it comes to gas prices, it could be a lot worse. It was a lot worse. A lot, lot worse.

As an exercise, consider your life today, your house, your cars, your appliances, your electronic equipment (Blackberry, iPod, laptop, cell phone, DVD player, etc.), your life expectancy, your income, gas prices today as a percent of your income, and your overall standard of living, and now go back several generations or more, and compare your life and standard of living today to your grandparents, great-grandparents, or whatever generation in your family background was around in the 1920s and 1930s.

I think you'll find that there's no comparison.
In most cases, you live like a millionaire compared to your great-grandparents, and in fact you have affordable modern electronic equipment like iPods, cell phones, and laptop computers (which are standard today even for high school students) that even a multi-billionaire couldn't have purchased in the 1930s! And as a percent of your income, gas today is still dirt cheap compared to gas in your grandparents' or great-grandparents' generations.

Top 50% Pays 97% of All Federal Income Taxes

The U.S. income tax system is highly progressive. The top 1% of income earners, by household, paid more than 39% of all federal income taxes in 2005, the top 10% paid more than 70%, and the top 50% paid almost 97%, whereas the bottom 50% paid a little over 3%. Further, 32% of all tax returns filed in 2005 were from people who paid no federal income tax at all.

The chart below (click to enlarge) shows graphically the levels of household income earners, and their proportion of the federal income tax in 2005:


Friday, July 04, 2008

Oil Price Reality Check: It's All About Fundamentals

If you look at the situation on paper, it looks like the world should have enough oil. But you can't burn oil or turn it into gasoline if it exists on paper.

MSN Money Video.

What Is the Internet Doing To Our Brains?

Can the perfect recall of silicon memory be an enormous boon to thinking, or is Google making us stupid?

Read about it in The Atlantic. (Update: Link is now fixed, sorry).

HT: Suzanne Perry

Thomas Jefferson on Energy and "ROYAL-ties"

What would Thomas Jefferson say today about U.S. energy policy? Probably "Drill, drill, drill"?

Jerry Bower explains.

Markets In Everything: Sex for Gas

Kentucky john paid prostitute with $100 fuel card.


HT: Juandos

Cartoon of the Day

Thursday, July 03, 2008

Good News for College Grads: Salaries Up 7.1%

Average starting salaries for new college graduates are up a surprisingly strong 7.1% over last year, according to the National Association of Colleges and Employers. Among the average salary offers, according to the association's summer survey:

  • $63,165 for chemical engineering, up 6.4%
  • $60,416 for computer science, up 13.1%
  • $52,418 for information sciences and systems, up 3.1%
  • $48,085 for accounting grads, up 2.9%
  • $45,915 for business administration, up 5.1%
  • $36,419 for liberal arts graduates, up 12.6%


IBM's PlayStation 3 Chips Help Find Deep Oil

July 1 (Bloomberg) -- Repsol, Spain's largest oil company, is using chips that IBM designed for video-game consoles to find oil in deep water as much as six times faster.

Supercomputers outfitted with IBM's PowerXCell 8i chips are helping analyze undersea rock formations in the search for untapped reserves, Madrid-based Repsol said. The chips are an updated version of a product IBM, Sony Corp. and Toshiba Corp. designed for the PlayStation 3 game machine.

Watch Fox News video here.

HT: Michael Carrado

U.S. Congress = OPEC?

Energy: What do the Democratic-led Congress and OPEC have in common? Both sit on vast amounts of oil, and are content to leave it in the ground and let prices soar. Fortunately, Americans are catching on.

If you'd like more energy to fuel our economy and lower prices, we have a suggestion: Call your congressperson and tell him or her you want more energy — or you might vote for someone else. It might be the best expenditure of energy you make this year.

Investor's Business Daily

Cheer Up! Here's Some Good News You Don't Often Hear From the "Disaster Sells" Media

Wealth. The mainstream media played this up recently, but only because it fell by nearly $2 trillion in the first quarter. Stand back and a different picture is revealed. Americans' net worth — what they owned less what they owed — was $55.97 trillion. That's down from the peak of $58.196 trillion in the third quarter of 2007, but still $15.3 trillion above where it was seven years ago (see chart above).

Put another way, a bit more than one-quarter of all the wealth created in America in the 232 years since our founding was created in the last seven years.

• Incomes. We keep hearing that American incomes are "stagnant." The official data show that average real pre-tax income per worker hit a record $48,957 in April, 11% above what it was when President Bush entered office. Real family incomes are growing slowly. But that's because families have been shrinking in size since the 1960s.

• Jobs. People constantly worry about jobs, but we've created 9.2 million jobs since 2001, the year of the last recession. Unemployment today is 5.5%, below the 6.1% average since 1980.

• Consumer pleasures. Americans own more and better things than ever, despite our pining for the good old days. The average American has a larger home, and more and better cars, color TVs, computers and home appliances than ever before. They have more leisure time and take more vacations, too.

• The poor. Those officially defined as poor in America aren't thriving. But they, too, are faring better than you might imagine. For instance, 80% of poor households today have air conditioning vs. 36% of the entire population as recently as 1970. Some 97% of our poor own a color TV, and half own two or more. Thirty-one percent own two or more cars. The typical poor American has more living space than the average individual living in Paris, London, Vienna, Athens and other cities throughout Europe.

Poor people typically often consume more than they earn. The average person with income before taxes of $17,462 — a level that qualifies as poor — consumed $24,422 in goods. The difference is welfare and subsidies.

• Energy. America is in fact energy-rich, not energy poor. In the U.S., we have at least 139 billion barrels of oil that we can profitably get using current technology at current prices. All we have to do is decide to get it. It can be found in the Arctic National Wildlife Refuge in Alaska, in shale-oil deposits in Colorado, Utah and Wyoming, and in our offshore reserves.

• Life Spans. The average person born today can expect to live more than 78 years. That's up from 75 just 20 years ago. Infant mortality has plunged to about 6 per 1,000 live births, a 25% drop since 1990, with the best gains among minorities, especially African Americans.

See related
CD post here.

Wednesday, July 02, 2008

Here's One Way To Stop Inflation

Maybe enough for a loaf of bread?

WSJ -- Robert Mugabe's embattled regime in Zimbabwe relies on a steady supply of paper -- fortified with watermarks and other antiforgery features -- to print the bank notes that allow it to pay the soldiers and other loyalists who enable him to stay in power. With an annual inflation rate estimated at well over 1 million percent, new notes with ever more zeros need to be printed every few weeks because the older ones lose their worth so quickly.

The Munich-based company that has supplied Zimbabwe with the special blank sheets to print its increasingly worthless dollar caved in to pressure on Tuesday from the German government for it to stop doing business with the African ruler.

Zimbabwe Inflation Facts:

A 10 million Zimbabwe dollar bank note is worth 0.0008 of a U.S. cent.

It would take 12.5 billion Zimbabwe dollars to equal one U.S. cent, and 1.25 trillion Zimbabwe dollars to equal $1. (Note that the total value of all U.S. currency in circulation is "only" $768 billion.)

Vending machines, which take coins, fell out of service in Zimbabwe years ago. A single soda would require the deposit of billions of coins.

Imported from South Africa and in very short supply, a Coke sells on the black market for around 15 billion Zimbabwean dollars.

Civil servants mostly get paid through direct deposits into bank accounts, which limit withdrawals to 25 billion Zimbabwe dollars a day.

Pre-Paid Gas for Everyday Drivers

Gas prices seem destined to keep rising, and many consumers feel powerless to do anything to protect themselves from what they perceive as the inevitable.

Now a new Miami-based company, MyGallons, is offering what it hopes will be a solution: the chance to pre-buy gasoline at the current price and fill up later when prices -- presumably -- are higher.

"Save money by pre-purchasing gas at today’s prices, then fill up with your MyGallons Card when prices rise. No matter how high prices at the pump will go, the price of the gallons you’ve purchased will be locked-in."

MP: Hey, we can all be speculators/hedgers now!

HT: Travis Walker

From The Big Three to the Not-So-Big Two?

THE ECONOMIST -- So just how bad are things for the Big Three? This is hardly the first time that their survival has been questioned, of course. But two aspects of the current crisis are new. Carmakers’ finance arms used to bring in cash even during cyclical downswings in the vehicle market. That is not the case now. Not only have they been infected by the contagion from the home-mortgage market, but the value of SUVs and pick-ups has collapsed so catastrophically that they are losing big money on vehicles returned after lease.

It also seems increasingly unlikely that consumers will eventually shrug off the high price of fuel and return to their old buying habits, which means that Detroit’s old business model is now obsolete. The problem is that the smaller, more efficient cars that buyers now want, and which will come on stream in a year or two, are inherently far less profitable for both manufacturers and dealers.

GM and Ford can at least take some comfort from their well-run foreign operations, which are benefiting from growing demand in China, Russia and Brazil. But Chrysler has no such cushion. Worse, it is planning to replace only half its fleet in the four years after the 2009 model year (compared with Honda’s 72% replacement and Nissan’s 80%). John Murphy of Merrill Lynch believes this is “an active decision by the new owners to rationalise the product portfolio in advance of a break-up or sale.” It may not be long before the Big Three become the Not-So-Big Two.

The Great Media Depression

According to the Business and Media Institute:

The economy consumes the nightly newscasts. Broadcast networks report that America’s finances are “like a house of cards.” ABC, CBS and NBC even hyped similarities to the Great Depression more than 40 times in the first four months of 2008.

Today’s journalists are making repeated connections to the largest economic crisis in modern times – often with the phrase “not since the Great Depression.” Only a few of those comments explained the differences between today’s economy and the nation’s darkest economic years, or bothered to note that America is not in a depression.

MP: Before we (and especially the media) get too carried away about comparing today's economy to the Great Depression, consider the chart above (click to enlarge) that shows the annual unemployment rate from 1929 to 2008. Between 1930 and 1940, the jobless rate averaged 17.1%, which is way, way above anything we've seen since, and far, far above today's jobless rate of 5.5%.

See related article by John Stossel "Dire News from My Colleagues."

History's Fall Guys

Given the media and government-directed hostility toward "speculators," many people will want proof that they are innocent. Well, for the scapegoat-seeking masses, there's the following inconvenient truth: If oil were being withheld from the market by speculators, said oil would physically have to be somewhere other than on the open market where it is being sold and bought. And yet crude inventories have remained roughly constant since 1998. If someone were hoarding oil, we would have seen a spike in crude inventories.

If we can't scapegoat "speculators" for $4 a gallon gas, who can we blame? For those who really need to find a villain in this affair, there is good news and bad news. The bad news is that one of the principal causes of high gas prices will be familiar to anyone who took an introductory economics class-supply is relatively low (not to mention relatively inelastic), while demand is relatively high. That means higher prices.

But blaming the whole thing on Adam Smith's invisible hand obviously serves no political purpose. That brings us to the good news for the politicians in the audience-the other principal cause of $4 a gallon gas is the weak dollar. Because how the dollar gets strong or weak is understood even more poorly than what "speculators" do, a crafty politician can blame pretty much anyone he wants.

Weekly Standard

The Ultimate Resource

Why is it that mankind enjoys cell phones, computers and airplanes today but not when King Louis XIV was alive? The necessary physical resources to make cell phones, computers and airplanes have always been around, even when caveman walked the Earth. There is only one answer to why we enjoy these goodies today and not yesteryear.

George Mason economist Walter Williams' explains here.

Tuesday, July 01, 2008

D'OH! Detroit 3 Market Share Lowest in History

CNN -- Asian and European brands captured 54.2% of overall vehicle sales in June, edging out the 45.8% of sales that went to the U.S. brands, according to Autodata (see chart above), placing the Big Three in their weakest competitive position ever compared to their overseas rival. Until last year, there had never been a month that American car buyers preferred the combined offerings of Asian and European automakers to those of the Big Three.

MP: Maybe it's not the "Big" Three any more?

Remember: Futures Trading is Zero-Sum

For every trader betting on higher prices, another is betting on lower prices. These trades are matched. In the stock market, all investors (buyers and sellers) can profit in a rising market, and all can lose in a falling market. In futures markets, one trader's gain is another's loss.

~Robert Samuelson

In the world of futures speculation for every long there is an equal and opposite short. That is, unlike the world of equity trading where there needn't be equal numbers of longs vs. shorts, in the world of futures dealing there is. Money is neither made, nor lost, in futures; it is simply moved from one pocket to the next as margins are swapped at the close of trading each day. Thus, every time there is a buyer betting that prices shall rise in the future, there is an equal seller taking the very opposite "bet," betting that prices will fall.

~Dennis Gartman, in "The Gartman Letter"

Speculator-Bashing: Scapegoating, Grandstanding

Speculator-bashing is another exercise in scapegoating and grandstanding. Leading politicians either don't understand what's happening or don't want to acknowledge their own complicity.

By their nature, raw materials (food, energy, minerals) sustain the broader economy. They're not just frills. When unexpectedly high demand strains existing production, prices rise sharply as buyers scramble for scarce supplies. That's what happened - in industry after industry, global buying has bumped up against production limits.

Politicians promise to tighten regulation of futures markets, but futures markets aren't the main problem. Scarcities are.

Government subsidies for corn-based ethanol have increased food prices by diverting more grain into biofuels. A third of this year's U.S. corn crop could go to ethanol. Restrictions on oil drilling in the U.S. have reduced global production and put upward pressure on prices. If politicians wish to point fingers of blame, they should start with themselves.

~Robert Samuelson
in today's IBD

HT: Juandos

Maps: Gasoline Taxes vs. Gasoline Prices

We Can Lower Gas Prices Now: Drill, Drill, Drill


Harvard economist Martin Feldstein explains in today's WSJ that the relationship between future and current spot oil prices (see equation above) implies that an expected change in the future price of oil will have an immediate impact on the current spot price of oil.

When oil producers concluded that the demand for oil in China and some other countries will grow more rapidly in future years than they had previously expected, they inferred that the future price of oil would be higher than they had previously believed. They responded by reducing supply and raising the spot price enough to bring the expected price rise back to its initial rate.

Hence, with no change in the current demand for oil, the expectation of a greater future demand and a higher future price caused the current price to rise. Similarly, credible reports about the future decline of oil production in Russia and in Mexico implied a higher future global price of oil – and that also required an increase in the current oil price to maintain the initial expected rate of increase in the price of oil.

Once this relation is understood, it is easy to see how news stories, rumors and industry reports can cause substantial fluctuations in current prices – all without anything happening to current demand or supply.

(MP: Also note that the spot price of oil will fluctuate even without speculators playing a role. After all, speculators have no control over the global supply of, or global demand for, physical barrels of oil. Speculators respond to market conditions, they don't create market conditions.)

Now here is the good news. Any policy that causes the expected future oil price to fall can cause the current price to fall, or to rise less than it would otherwise do. In other words, it is possible to bring down today's price of oil with policies that will have their physical impact on oil demand or supply only in the future.

Increasing the expected future supply of oil would reduce today's price. Any steps that can be taken now to increase the future supply of oil, or reduce the future demand for oil in the U.S. or elsewhere, can therefore lead both to lower prices and increased consumption today.

Monday, June 30, 2008

Obama Wants Tiger-Size Tax Bite

When Tiger Woods collected his $1,350,000 check for winning the U.S. Open golf championship this month, his federal and California taxes approximated $586,000. So, Tiger got to keep about $764,000, or 57% of his winnings.

It was fortunate for Tiger that his most-recent U.S. Open win occurred in 2008. Under twin tax proposals from Obama to: 1) remove the "cap" from Social Security taxes for individuals earning over $250,000, a plateau Tiger has long since surpassed in 2008, and 2) eliminate the "Bush" tax cuts, thereby raising the top marginal federal income tax rate to 39.6%, Tiger's taxes on his winner's check would have increased to approximately $776,000, a boost of almost $190,000 (see chart above).

Instead of Tiger keeping 57% of his earnings and the government taking 43%, under the twin Obama tax proposals, Tiger's federal and California taxes would have amounted to 57% of his winnings, leaving Tiger with just 43%.


HT: Ben Cunningham

Ebay Updates

1. Ian Usher's "Life for Sale" sold for AU$399,300 ($380,000).

2. Power Lunch with Warren Buffet sold for $2,110,100.

Adjusted for Increases in Income & Fuel Efficiency, Gas Today is Almost 50% Below Record High

Yesterday's CD post of a graph of 1,000 gallons of gas as a percent of per-capita disposable income (top graph above) shows that we're still nowhere near record highs for gasoline, when measured as a share of income.

Warren Meyer at Coyote Blog thoughtfully suggested adjusting the analysis to account for the significant increases in fuel efficiency over time, see middle chart above, which shows the 64% increase in fuel efficiency from the early 1980s to 2005.

The bottom graph above shows the results of Warren's analysis (see his chart here), which calculates the percent of per-capita disposable income required to buy enough gasoline to drive 15,000 miles, at the average fuel efficiency in each month from 1980 to 2008. This adjustment for increased fuel efficiency makes the initial results even more dramatic.

After adjusting for: a) higher incomes and b) greater fuel efficiency since 1980, we are nowhere near record highs for gas. In fact, to match the 13.75% level in 1980 when average fuel efficiency was only 16 mpg (and gas was $1.26 per gallon and per-capita disposable income was $8,575), gasoline today would have to reach $7.53 per gallon, almost twice today's prices!

Bottom Line: Gas prices today are almost 50% below the record highs of 1980, after adjusting for higher incomes today and much greater fuel efficiency.

From 2 Hrs. to 30 Minutes: Moscow's Airport Train

MOSCOW -- I almost cried when I arrived at Moscow's Sheremetyevo-2 International Airport the other day. Not because I was so sad – I was thrilled to be going on vacation – but because the previously tortured trip to the airport is now remarkably painless.

The new Aeroexpress train from Savyolovsky Vokzal, a relatively central train station, cuts the trip to Sheremetyevo to half an hour, a miracle in a city notorious for brutal traffic jams and jostling public transport.

But most important is the direct train, available from early morning until late at night, which now means no more nail-biting trips by car never knowing what disastrous traffic jam or accident will keep you from making your plane. On arrival in Moscow, no more maneuvering through a bus, metro marathon to make it into town in reasonable time at reasonable cost. My last such trip took over two hours.

MP: Moscow must be one of the few major cities in the world that has a subway system that does not connect to the international airport. Arrive in London, Washington, D.C., Chicago, Amsterdam by air, and you can easily take a subway or train to the downtown area, and avoid traffic jams and long delays. Arrive in Moscow, and you have to fight traffic by cab or bus to get to the subway station, about 5 miles away or more from the airport, which will then get you downtown Moscow. Looks like that has finally changed.

Now they should make it more convenient to get from the International Airport (international flights only) to the Domestic Airport (domestic flights only), about 5 miles away. Bags are not automatically transferred between the two airports, and there are no convenient shuttle buses or trains between the two airports. When you need to make a connection to get a domestic flight after arriving at Moscow's International Airport, you're basically on your own.

HT: Greg Allar

Facts About Non-Producing Leases

According to the American Petroleum Industry:

When oil and natural gas companies purchase a lease, it is because of the possibility the lease may yield enough oil or natural gas to benefit consumers and become economically viable. A lease is simply a block on a map and until a company actually completes the exploration process, there is no guarantee that it contains any resources.

The process takes considerable time. It involves geological exploration, data analysis and a series of government permitting steps, and that's before the industry even finds anything viable. If we do, more time-consuming steps follow before the first production of either oil or natural gas.

If a lease doesn’t produce energy, a company starts the process over again with a new lease – yet continues to pay rent on the original, non-producing plot of land. And if this land fails to develop natural resources within a certain time frame, it is returned to the federal government, forfeiting industry costs and investments.

Find out more here.

Paul Krugman Has Two Words: Iron Ore

What about those who argue that speculative excess is the only way to explain the speed with which oil prices have risen? Well, I have two words for them: iron ore.

You see, iron ore isn’t traded on a global exchange; its price is set in direct deals between producers and consumers. So there’s no easy way to speculate on ore prices. Yet the price of iron ore, like that of oil, has surged over the past year (see chart above,
data here). In particular, the price Chinese steel makers pay to Australian mines has just jumped 96%. This suggests that growing demand from emerging economies, not speculation, is the real story behind rising prices of raw materials, oil included.

~Paul Krugman, NY Times article "Fuels on the Hill"

See related CD post on onions, which are also not traded in futures markets.

WSJ: Some Remedial Education on Idle Leases

"I want you to think about this," Barack Obama said in Las Vegas last week. "The oil companies have already been given 68 million acres of federal land, both onshore and offshore, to drill. They're allowed to drill it, and yet they haven't touched it – 68 million acres that have the potential to nearly double America's total oil production."

Wow, how come the oil companies didn't think of that?

(MP: Especially now that oil is $142 per barrel!)

Perhaps because the notion is obviously false – at least to anyone who knows how oil and gas exploration actually works.

As a public service, the WSJ provides some remedial education about "idle leases."

Sunday, June 29, 2008

Record High Gas Prices? We're Still Not Even Close

Despite all of the reports about record-high gas and oil prices, we're still nowhere close to record high gas prices adjusted for the growth in per-capita, disposable income.

The chart above shows the cost of 1,000 gallons of gasoline, as a percent of per-capita disposable income in every month from January 1980 to May 2008. During most of 1980 and 1981, it took between 13.50% and 15% of per-capita disposable income ($8,5000 to $10,000 in that period) to purchase 1,000 gallons of gasoline ($1.25 to $1.40 retail price per gallon in that period), which was far greater than the 10.26% that it takes of today's per-capita disposable income of about $37,000 to purchase 1,000 gallons of gas at the May average of $3.76 per gallon.

For gas to reach a record high as a percent of per-capita disposable income, it would have to sell today for about $5.50 per gallon to reach 14.90% of per-capita disposable income, like it did in March of 1981, when gas sold for $1.42 per gallon, and per-capita disposable income was only $9,500.

What Can Onions Teach Us About Oil Prices?

Onions have no futures market, yet their recent price volatility makes the swings in oil and corn look tame.

Fortune Magazine -- Before the government starts scrutinizing the role that speculators may have played in driving up fuel and food prices, investigators may want to take a look at price swings in a commodity not in today's news: onions.

The bulbous root is the only commodity for which futures trading is banned. Back in 1958, onion growers convinced themselves that futures traders were responsible for falling onion prices, so they lobbied an up-and-coming Michigan Congressman named Gerald Ford to push through a law banning all futures trading in onions. The law still stands.

And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics' belief that futures trading diminishes extreme price swings. Since 2006, oil prices have risen 100%, and corn is up 300%. But onion prices soared 400% between October 2006 and April 2007, when weather reduced crops, only to crash 96% by March 2008 on overproduction and then rebound 300% by this past April (see chart above, click to enlarge).

Update: The chart below shows monthly percent changes in the spot prices of onions and oil, from January 2000 to May 2008. The volatility of monthly onion price changes (measured by the standard deviation of price changes, 66%) was 7.5 times higher than the volatility of oil price changes (standard deviation of 8.8%) during this period.

Victimless Crime of "Ticket Scalping" Now Legal

Philadelphia -- As you might expect, scalping isn't a term used much anymore. The buzzword is "secondary ticket market," and all over the entertainment and sports industry, business is booming, turbo-charged by the technological advances of recent years.

Under a new 5-year revenue-sharing agreement between Major League Baseball and StubHub - where ticket-holders sell their tickets to buyers online - MLB is guaranteed $200 million over the five years and could make as much as $300 million.

The 25% profit on each ticket sale (15% from the seller and 10% from the buyer) is divided three ways, with a third to the club, a third to StubHub, and a third to Major League Baseball Advanced Media, which is the Internet subsidiary of Major League Baseball. The clubs had the choice of whether to be a part of the deal and only Boston chose not to participate.

Except for Boston, MLB teams now have links on their websites to StubHuB, see Philadelphia Phillies here.

HT: Ben Cunningham

Saturday, June 28, 2008

Welcome to the "OPEC Congress": 40 Oversight Hearings, 160 Witnesses, But Zero New Supplies

WASHINGTON, D.C.Now adjourned for its Independence Day recess, the U.S. Congress has convened at least 40 hearings on the issue of skyrocketing energy prices in the first six months of 2008. At least 160 witnesses have been sworn-in and questioned. But, even as consumers suffer, the Congress still has done nothing to increase American energy supplies. But, even as consumers suffer, the Congress still has done nothing to increase American energy supplies.

Institute for Energy Research (IER) president Thomas J. Pyle issued the following statement:

“Don’t mistake activity for productivity,” Pyle said. “Members of Congress have been questioning witnesses and pounding podiums for the news cameras, but they have done nothing to increase American oil production by even one single barrel. Families are paying the price of Washington’s willful refusal to do what we all know must be done.”

“American taxpayers own the federal lands, and they own the vast energy resources that lie beneath them too,” Pyle continued. “If the federal government continues to withhold these supplies, how is it any different than OPEC? That’s something all of us should think about on Independence Day."

HT: Juandos

Chart of the Day: Finish High School, Finish College

The chart above displays unemployment rates by education level from 1993 to 2005, and shows the averages over this period on the right side of the chart. It's interesting that there are big differences between a) no high school and high school (3.4% difference in averages), and b) some college and college grads (1.5% difference), and a pretty small difference between high school and some college (0.90%).

Bottom Line: In terms of reducing unemployment over one's lifetime, finishing high school and finishing college have big payoffs. Stay in school.

US Energy Secretary: Don't Blame the Speculators

JIDDAH, Saudi Arabia - The U.S. energy secretary said Saturday that insufficient oil production, not financial speculation, was driving soaring crude prices.

Secretary Samuel Bodman said that oil production has not kept pace with growing demand, especially from developing countries like China and India.

"Market fundamentals show us that production has not kept pace with growing demand for oil, resulting in increasing prices and increasingly volatile prices," Bodman told reporters. "There is no evidence that we can find that speculators are driving futures prices" for oil.

He said commodities markets have experienced a huge influx of money from financial investors in recent years, but they have been following the market upward rather than driving the increase in the price of oil.

Blame Governments, Not Speculators for High Oil

By preventing production and through inflationary monetary policy, maybe the government should be blamed for high oil prices, not speculators?


Friday, June 27, 2008

Don't Blame the Speculators; Without Futures Markets, Oil Might Be At $200 Instead of $135

Excerpts below from the Fortune Magazine article "Don't Blame the Oil Speculators: A Campaign in Congress to Punish Traders for Record Oil Prices Reveals a Fundamental Misunderstanding of How Futures Markets Work":

Here's a suggestion: The next time a Congressional committee wants to hold a hearing on how "speculators" are driving up oil prices, each committee member should first be required to demonstrate - preferably in their opening remarks - a basic understanding of the mechanics of futures trading.

Even better, they should be required to explain in detail how it is that investors who never take delivery of a single barrel of crude - and thus never remove a drop of oil from the open market - are causing record high oil prices.

"Do I think politicans understand the role of futures markets - how they facilitate price discovery and the transference of risk?" asks former U.S. Commodities Futures Trade Commission chief economist Gerald Gay. "No, they're clueless - at least most of them."

If our representatives did understand the oil markets, they'd know that the true telltale sign of a speculative bubble is not rising trading volumes but rising oil inventories. Speculators would be hoarding oil - building up inventories either in anticipation of higher prices or as part of a scheme to drive prices there. Yet according to the Department of Energy, U.S. oil inventories are now at below-average levels. U.S. oil stocks stand at 309 million barrels, versus 330 million in June 2005.

A more basic misconception in Washington involves what these so-called speculators are really buying. They're not buying oil, they're buying futures, and this is a crucial distinction. A futures contract is an agreement between a buyer and a seller to deliver a set amount of oil at a specific price on a specific date. The value of that contract rises and falls, depending upon market conditions, right up until the date of delivery.

"For speculators to be propping up the price of oil, they somehow have to be taking physical oil off the market," says energy markets expert Craig Pirrong, a finance professor at the University of Houston's Bauer College of Business.

There's something else politicians conveniently overlook: futures trading requires two to tango. For every investor who is betting oil prices will go up, there also needs to be an investor willing to take the opposite side of that bet.

Today's speculators are evenly split between shorts and longs. Moreover, the percentage of futures contracts held by speculators (as opposed to commercial traders) actually decreased over the last year even at the same time that oil prices were increasing.

Without a futures market, I believe we'd be decrying oil at $200 a barrel oil instead of oil at $135.

Markets In Everything: 2 Girls For Every Goal

Russia Players Offered Two Girls For Every Goal. Link

HT: Sanil Kori

Signs of a Bottom to Home Sales?

Economists React

Give Me a Break

I say, "Give Me A Break" to police officers who punish motorists for ignoring rules that the police themselves routinely ignore. In Warren, Michigan, one officer alone ticketed almost 4,000 people because he said they didn't come to a complete stop at stop signs. Reporter Heather Catallo of Detroit's ABC affiliate took her cameras out to see if the cops stopped at the stop signs. Most, it turned out, didn't. Tonight I'll ask Warren's police commissioner if this is just a moneymaking scam. To all those cops who would punish us for what they don't do, I say, give me a break!

~John Stossel, ABC's 20/20, Tonight at 10 p.m. EDT

Thursday, June 26, 2008

American Energy Policy


Warren Buffett Can Pay Higher Taxes Right Now

CNBC: How do you think the tax code should be changed?

Warren Buffett: I think the super-rich should pay more and people in the middle-class and lower should pay less. I think there should be a major overhaul of the payroll tax. I think guys like me should pay more.

Dear Mr. Buffett:

If you think that you should pay more in taxes, you don't need to wait for Congress to change the tax laws, and you don't have to wait for the repeal of the Bush tax cuts. You can voluntarily pay more taxes right now, today by making a gift to the United States Government. Simply write a check or money order payable to the "United States Treasury," and mail to the address below.

Gifts to the United States
U.S. Department of the Treasury
Credit Accounting Branch
3700 East-West Highway, Room 6D17
Hyattsville, MD 20782

Median Home Prices Have Risen 3 Straight Months

WSJ reports that "Home resales rose to a 4.99 million annual rate, a 2.0% increase from April's unrevised 4.89 million annual pace, the National Association of Realtors said Thursday. The median home price was $208,600 in May, down 6.3% from $222,700 in May 2007. The median price in April this year was $201,200 (see chart above).

High inventories have exerted downward pressure on prices. The decline has kept would-be buyers from signing off on property as they wait for still-lower price tags."

Reuters reports that "The housing market has been shaken for months by a credit crunch and a wave of failing home loans that have spooked lenders and prospective buyers.

The disappointing new homes data is nonetheless in line with the pace of the last eight months, which have seen sales hover around the 5 million level, said Paul Bishop, a senior economist with the National Association of Realtors."

MP: Aren't these reports missing the following seemingly good news: After declining for 7 out of the last 8 months, median home prices have increased for 3 months in a row, and the median price of $208,600 in May was 6.65% above the $195,600 level in February (
data here)?

Alaska's Governor Supports Drilling in ANWR, OCS

Governor Sarah Palin of Alaska (pictured above) submitted this letter to Senate Majority Leader Harry Reid (D-NV) on the importance of the Arctic National Wildlife Refuge (ANWR) to address the energy crisis. Sen. Reid is a staunch foe of opening ANWR and has a long track record blocking ANWR legislation. Gov. Palin's letter stated how ANWR could provide 1 million barrels of oil a day and provide relief at the pump for all Americans over time.

Gov. Palin strongly supports opening ANWR to oil and gas development as well as environmentally responsible development of the outer continental shelf (OCS). ANWR and OCS are headline news across the nation now due to the record level prices of oil and gasoline.

ANWR production will benefit the nation with long-term jobs in all 50 states for services and infrastructure construction and maintenance. Federal taxes from oil production totally over 200 billion dollars would be used to fund alternative energies and future energy development for over 3 decades to come. ANWR oil is worth $1.3 trillion to the nation at today’s prices.


MP: How about we let the people of Alaska decide? 75% of Alaskans support exploration and production in ANWR.