Saturday, June 21, 2008

Wal-Mart's Global Reach


Wal-Mart serves more than 49 million iternational customers weekly at 3,146 stores in 13 markets outside the continental U.S. (see chart above), and employs 620,000 international associates. International sales were $90.6 billion for Wal-Mart's latest fiscal year (through 1/31/2008), a 17.5% increase over the previous year.

Carpe Diem Stats

Total Visits to CD (since 9/20/06): +750,000

Total Page Views: +1,000,000

Average Visits Per Day: About 2,500

Average Visit Length: 2.5 minutes

Total Number of Posts (since 9/20/06): 2,704

Average Posts Per Day: 4.23

Browser Share of Visitors: IE 59%, Firefox 33%, Safari 6%

CD Rank on 26.econ for Economics blogs: #31

CD Rank on Gongol.com for Business and Economics websites: #18 by daily page views and #17 by daily visits

2008: "The Year of the River" in Cedar Rapids


Thanks to J.J. Howe.

Related article from today's WSJ: City leaders in Cedar Rapids, Iowa declared 2008 at the "Year of the River" to highlight the riverfront revitalization that has been taking place there. That was, of course, before the Cedar River turned on an American city like few rivers have before.

Note: I lived in Cedar Rapids from kindergarten through 6th grade.

Classic Milton Friedman; "Classic Liberal" Friedman


In this video from 1975 (the year before he was awarded the Nobel Prize), Milton Friedman explains at the beginning:

"I never characterize myself as a conservative economist. As I understand the English language, conservative means conserving, keeping things as they are. I don't want to keep things as they are. The true conservatives today are the people who are in favor of ever bigger government. The people who call themselves liberals today -- the New Dealers -- they are the true conservatives, because they want to keep going on the same path we're going on. I would like to dismantle that. I call myself a liberal in the true sense of liberal, in the sense in which it means of and pertaining to freedom."

Friedman goes on to explain: why the welfare state philosophy of doing good with other people's money always involves violence and coercion; why even good people lie to the American people once they become politiicians; why the mininum wage law forces employers to discriminate against unskilled workers, especially black teenagers; why government programs almost always have the exact opposite effect of the intended effect; why the harm done by trade unions was becoming patently obvious; why the Great Depression was not necessary and did not arise out of any natural flaw in the market but because of monetary mismanagement, etc.

Transcript here.

Hat tip to Vijay Boyapati.


Friday, June 20, 2008

Cartoons of the Day




America's Environmental Imperialism

Gas is $4 a gallon. Oil is $135 a barrel and rising. We import 2/3 of our oil, sending hundreds of billions of dollars to the likes of Russia, Venezuela and Saudi Arabia. And yet we voluntarily prohibit ourselves from even exploring huge domestic reserves of petroleum and natural gas.

At a time when U.S. crude oil production has fallen 40% in the last 25 years, 75 billion barrels of oil have been declared off-limits, according to the Energy Information Administration. That would be enough to replace every barrel of non-North American imports for 22 years, nearly a quarter-century of energy independence.

The entire Arctic refuge is 1/3 the size of the U.K. and the drilling site would be 1/7 the size of Manhattan. The footprint is tiny.

Moreover, forbidding drilling there does not prevent despoliation. It merely exports it. The crude oil we're not getting from the Arctic we import instead from places like the Niger Delta in Nigeria, where millions live and where the resulting pollution and oil spillages poison the lives of many of the world's most wretchedly poor (see photo above of oil spill in Nigeria). Our environmental imperialism redistributes pollution to people who can least afford it.

~Charles Krauthammer, Critical Thinking on Energy

Cedar Rapids, IA Photos



Thanks to Cedar Rapids resident Lee Brown for the photos (click to enlarge).

Al Gore, Energy Hog: Do As I Say, Not As I Do

NASHVILLE - The Tennessee Center for Policy Research, a Nashville-based free market think tank and watchdog organization, obtained information about Al Gore’s home energy use through a public records request to the Nashville Electric Service. In the year since Al Gore took steps to make his home more energy-efficient, the former Vice President’s home energy use surged more than 10%.

In the past year, Gore’s home burned through 213,210 kilowatt-hours (kWh) of electricity, enough to power 232 average American households for a month. Since taking steps to make his home more environmentally-friendly last June, Gore devours an average of 17,768 kWh per month –1,638 kWh more energy per month than before the renovations – at a cost of $16,533.

By comparison, the average American household consumes 11,040 kWh in an entire year (almost 20 times less than Al Gore), according to the Energy Information Administration (see chart above).

MP: Wow, talk about the need for some carbon offsets......

Through $4 Gas, Consumers Find Religion: Record Decline in Drivng, Record Level of Conservation

The Federal Highway Administration reported that travel during April 2008 on all roads and streets in the nation fell by -1.8%, resulting in estimated travel for the month at 245.9 billion vehicle-miles. April marks the sixth consectutive month of traffic volume decline, compared to the same month in the previous year. Cumulative travel for 2008 fell by -2.1% compared to 2007.

On a moving 12-month total basis, traffic volume fell to a three-year low of 2.982 trillion miles, the lowest level since May of 2005 (see chart above), and it has fallen in each of the last six months. This six month trend (in both year-over-year traffic and the moving 12-month total) is the most significant adjustment in driving behavior in at least the last 25 years. There was never more than a single monthly decline in traffic volume until 2006, a few examples of two consectutive monthly declines 2006 and early 2007, but never in the history of these data was there ever a period of more than a 2-month consecutive decline until now, and therefore the 6 consecutive monthly decline is a record, and represents the most significant adjustment to driving behavior in recent history.

High gas prices are working - consumers are changing their behavior by driving less and conserving gasoline. In fact, high gas prices have probably done more to change behavior and inspire conservation of fossil fuels than all of the Earth Days, and all of the efforts of groups like the Sierra Club, combined? Consumers have "found the religion of environmentalism and conservation" through high gas prices.

Why Didn't MDs Ever Object About Cigs in the Past?

Kansas.com -- Physicians this week agreed to support legislation that would ban the sale of tobacco products and/or byproducts in retail outlets housing store-based health clinics.

The American Medical Association wrapped up its policy-making meeting in Chicago this week, where member physicians defined the groups’ political and legislative agenda for the coming year.

If laws that support a no-tobacco policy as described above were enacted, stores such as Walgreens — which plans to open five retail health clinics in Wichita by the end of the year — and other retail chains housing walk-in medical clinics (such as Target, Kroger and Wal-mart) would no longer be allowed to sell cigarettes to customers.

Q: The MDs never objected in the past when their patients went to Walgreens to purchase the medications the doctors prescribed and cigarettes were available, but the docs just now became concerned when Walgreen's starting opening clinics? This is all about concern for their patients, and has nothing do with competition, right?

Thursday, June 19, 2008

"Left Wing" Milton Friedman on Legalizing Drugs, and Why Drug Laws Kill 10,000 People Per Year

In this video, economist Milton Friedman explains his position on why drugs should be legalized, how drug laws created the market for crack cocaine ("the stronger the drug laws, the stronger the drugs") and why the government's drug laws result in 10,000 additional deaths per year.

Bottom Line: Contrary to the position of the University of Chicago faculty that Milton Friedman was a right-wing, conservative economist, this video clearly demonstrates that Milton Friedman was a libertarian, and not a conservative. Friedman's advocacy of drug legalization would immediately disqualify him as a Republican and/or a conservative, and would demonstrate that on at least this topic, Friedman was actually radically left-wing.

Would the anti-Friedman faculty at the University of Chicago agree with Friedman that drugs should be legal (in which case they should drop their objections to the "conservative" Friedman Center), or would they align themselves with the right-wing, conservative Republicans in the "War on Drugs" (in which case they are conservatives themselves)? Seems like a no-win outcome for them?


Carbon Footprint Calculator From Delta Airlines

From Delta Airlines website:

Today, when you book a flight on Delta.com, you can make a contribution to The Conservation Fund’s Go Zero program to plant trees to offset the carbon emissions that result from your flight.

Now you can calculate your estimated annual emissions from airline miles and your personal carbon footprint online via our
online Carbon Calculator.

Q: What's next? Will people start buying carbon offsets as gifts pretty soon, e.g. birthday gifts, wedding gifts, Christmas gifts, etc.? "Thanks for travelling so far to join us for Christmas this year, we bought you carbon offsets as this year's gift, to offset your carbon footprint from travelling." "Happy Birthday, I bought carbon offsets to offset some of your carbon footprint over the last year." "Congratulations on your wedding, I'm giving you carbon offsets as a wedding gift to cover some of your wedding's carbon footprint."

Real Compensation HAS Risen With Productivity

It is a commonly held view that the American worker has not shared in the phenomenal economic growth since the late 1970s, and data like the chart below are often cited to show that median household income is falling farther and farther behind gains in productivity:

But the Heritage Foundation's James Sherk reminds us that "Wages are only part of what workers earn. Benefits, such as health coverage, 401(k) plans, and paid sick leave are an increasingly large part of workers' earnings.

Economic theory says that companies will raise workers' earnings when their productivity rises, but it does not say that those increased earnings will take the form of cash wages. The correct comparison is between productivity growth and workers' total compensation, including benefits, not just the cash wages portion of that compensation.

The chart below shows such a comparison. Over the past forty years compensation per hour and output per hour—that is, productivity—have moved almost in unison. Productivity rose 110% since 1968, and total compensation rose 103%.

Q.E.D.

Thanks to Travis Walker for the pointer.


It's An "Educated-Take-All" Economy

In an interview with The Wall Street Journal, Barack Obama said that he was trying to put together tax and spending policies that dealt with two challenges. One is the competition from rapidly growing developing countries, like India and China. The other: the U.S. becoming what he called a "winner-take-all" economy, where the gains from economic growth skew heavily toward the wealthy.

MP: Sen. Obama should take note of the chart above (click to enlarge), from the Brookings Institution study "Education and Income Mobility," showing the Median Family Income (adjusted for inflation) of Adults Ages 30–39, with Various Levels of Educational Achievement from 1964–2005.

In 1964 the median income of households with a college degree or greater was about 1.67 times higher than households with less than a high school degree ($50,000 vs. $30,000). By 2005, that ratio almost doubled to 3.21 for households with a professional degree - their median income was $90,000 compared to only $28,000 for high school dropout families. That is, the real median income of households with a professional degree increased by 80% between 1964 and 2005, and the real median household income of households with less than a high school degree decreased by almost 7%!

For households with a college degree, median income increased by almost 60% between 1964 and 2005 to about $58,000, increasing the ratio of college-educated income to high school dropout income to almost 3:1 in 2005 (from 1.67 in 1964).

In other words, it would be more accurate to say that the U.S. has become an "educated-take-all" economy, where the gains from economic growth are heavily skewed toward the educated. Wouldn't one way for Obama to solve this "problem" be to have the government shut down all American colleges and universities, eliminate all federal funding for higher education, or have the government put limits on the number of students attending college?

There is rising income inequality, but the inequality is due to the increasing gains to education over time. It's not so much that the "rich are getting richer and the poor are getting poorer," as much as it's "the college-educated are getting richer in an Information Age Global Economy, and the high school dropouts are staying the same or getting poorer."

World's Most Prosperous Workers?

Are these the prosperous workers Obama had in mind?
"Globalization and technology and automation all weaken the position of workers," Barack Obama said in this WSJ article, and a strong government hand is needed to assure that wealth is distributed more equitably.

As Don Boudreaux points out
on Cafe Hayek, if Obama is correct, "then some of the world's most prosperous workers must be the people in that newly discovered tribe in Brazil (see picture above) -- persons with absolutely no contact with the global economy or with modern technology. Less extreme cases, of course, include persons not so cut off from the world as these Brazilian tribes. Sub-Saharan Africans should be more prosperous than eastern Europeans, who, in turn, should be more prosperous than Americans and western Europeans."

Wednesday, June 18, 2008

87% of Faculty at Elite Colleges Are Liberal, and UC Faculty Are Worried About Milton Friedman?

Chicago Tribune -- In a letter to University of Chicago President Robert Zimmer, 101 professors—about 8% of the university's full-time faculty—said they feared that having a center named after the conservative, free-market economist Milton Friedman could "reinforce among the public a perception that the university's faculty lacks intellectual and ideological diversity."

About a half-dozen faculty members aired their concerns Tuesday in a meeting with Zimmer and Provost Thomas Rosenbaum, who remain committed to the project.

"It is a right-wing think tank being put in place," said Bruce Lincoln, a professor of the history of religions and one of the faculty members who met with the administration Tuesday. "The long-term consequences will be very severe. This will be a flagship entity and it will attract a lot of money and a lot of attention, and I think work at the university and the university's reputation will take a serious rightward turn to the detriment of all."

Now wait a minute. First of all, Milton Friedman's political philosophy could be more accurately described as libertarian, and not conservative. Exhibits A and B: Friedman supported legalization (or decriminalization) of both prostitution and drugs, and both positions are associated much more with liberals and Democrats, than with conservatives and Republicans.

Secondly, college faculty are worried that a "conservative" center on a college campus would reinforce a perception that university faculty lack intellectual and ideological diversity?
"Give me a Stossel!"

By their own description, 72% of those teaching at American universities and colleges are liberal and 15% are conservative. (In comparison, only 39% of college faculty identified themselves as liberal in 1984.) The current disparity is even more pronounced at the most elite schools, where 87% of faculty are liberal and 13% are conservative (that's almost a 7:1 ratio), according to a study cited in the
Washington Post.

And faculty have the nerve to object to a Friedman Center because they're worried about intellectual diversity? Where's their concern about underrepresented ideologies?

14,000 Countrywide Foreclosures

The chart above shows the number of foreclosed properties being offered for sale by Countrywide Mortgage since January 2007. As of this week, Countrywide has 14,029 properties for sale around the country, representing almost $2.6 billion of real estate (by list price), at an average list price of $167,055. You can view detailed foreclosure listing in each state at Countrywide's website.

You can view additional foreclosure charts here for individual states. From these state charts, it looks like recent spikes in Florida, Nevada and Arizona foreclosures in the last week were responsible for the reversal of the downward trend in foreclosures that started in late 2007 (see chart above).

What Goes Up Must Come Down?

Updated: The chart above from Zillow.com shows property values in the Sacramento, CA zipcode 95843, going from about $250,000 in 2003 to almost $400,000 in late 2005 (+60%) and now back down to about $244,000.

Some Homework for Sen. Obama

From yesterday's Wall Street Journal:

"While Sen. McCain has argued that tax cuts—particularly on business—spur growth, Sen. Obama rejected that as flawed economics. "I've seen no evidence that . . . would actually boost the economic growth and productivity," he said."

The Tax Foundation provides plenty of evidence for Sen. Obama from the experience of developed nations over the past 20 years (
NBER, OECD, Treasury, American Enterprise Institute, KC Fed, Oxford University) suggesting that corporate tax rates "boost economic growth and productivity"—not to mention real wages and living standards for U.S. workers.

Thanks to Travis Walker for the pointer.

Chart of the Day: Say "Ahhhh"

The Economist

Unions Attack Vouchers and Charter Schools

1. Since when does Washington, D.C. pass up $18 million in federal money? When the teachers' unions demand it. Link.
(Via Club for Growth)

2. Since when does a state come up with a novel way to kill off its innovative and successful charter schools? When the labor unions demand it. Link.

Email Stats and Email Netiquette

Email netiquette from NPR: Are electronic wedding invitations OK? May I forward a friend's personal e-mail without her permission? How big is too big when it comes to sending photos?

Legalize It. Legalize Everything. Legal Is Better.

Of course medical marijuana should be legal. For adults, everything should be legal.

Banning drugs certainly hasn't kept young people from getting them. We can't even keep these drugs out of prisons. How do we expect to keep them out of America?

While drugs harm many, the drug war's black market harms more. Legal is better. And most importantly, in a free country, adults should have the right to harm themselves.


~John Stossel's latest column "Legalize All Drugs"

Tuesday, June 17, 2008

Members of Congress Are 3-4 Times More Likely Than Public to Send Their Kids To Private Schools

A 2007 Heritage Foundation survey found that the percentage of Members of the 110th Congress who practice pri­vate school choice is disproportionate to the general populace, since only 11.5% of American stu­dents attend private schools. Also of note, Mem­bers of the Congressional Black Caucus and Congressional Hispanic Caucus, who represent populations that have fared poorly academically in public schools and that stand to benefit the most from educational options, showed particularly high rates of practicing school choice.

Notable findings include the following:

Over 37% of Representatives and 45% of Senators responded that they had sent their children to private school;

Over 23% of House Education and Labor Committee members and 33% of Senate Health, Education, Labor, and Pensions Com­mittee members exercised private school choice; and

Exactly 52% of Congressional Black Cau­cus members and 38% of Congressional Hispanic Caucus members sent at least one child to private school.

I-35W Bridge in Minneapolis

I got these pictures from Google Street View:


This is the old I-35W bridge (I think), from West River Parkway (which is closed now), before the collapse on 8/1/2007:


Update: These are pictures of the old I-35W bridge that was undergoing construction work at the time of the collapse:
Minneapolis downtown skyline in background:

World Cement Output & China's Construction Boom

The chart above (click to enlarge) shows annual production of cement by country, in billions of metric tons (data available here: USGS 2006 report and USGS 2008 report).

Cement is mainly used to make concrete, and is sort of the "active ingredient" in concrete - it is combined with sand and gravel in roughly fixed proportions. So cement production can be considered a rough proxy for the total amount of construction going on in a country.

From The Oil Drum, via Ben Cunningham

School Choice: Change You Can Believe In

Barack and Michelle Obama send their children to an upscale private school saying it is "the best option" for their children.

Several hundred low-income parents in our nation's capital have also sent their children to private and parochial schools, with the help of a federal program that provides Opportunity Scholarships. Like Mr. and Mrs. Obama, most of these parents are African-American. And like Mr. and Mrs. Obama, they too believe the schools they've chosen represent the "best option" for their children.

Now these parents have a question for Mr. Obama. Is Mr. Change-You-Can-Believe-In going to let his fellow Democrats take away the one change that is working for them? Or will be one more Beltway pol who speaks eloquently about public schools -- while making sure his own kids never have to step inside one?

From today's WSJ

New Evidence on Fat vs. Slim Governments: The Early Supply-Siders Were Right

In the early 1980s, Ronald Reagan embraced the ideas of a small group of economists dubbed "supply-siders." They argued that lower taxes and slimmer government would stimulate growth, enterprise, harder work and higher levels of saving and investment. These views were widely ridiculed at the time, dismissed as "voodoo economics."

A quarter of a century later, many more countries have cut taxes and reined in heavy-handed government intervention. How far have they gone down this path, and with what success?

My study, "Big, Not Better?" (Centre for Policy Studies, 2008), looks at the performance of 20 countries over the past two decades. The first 10 have slimmer governments with revenue and expenditure levels below 40% of GDP. This group includes Australia, Canada, Estonia, Hong Kong, Ireland, South Korea, Latvia, Singapore, the Slovak Republic and the U.S.

I compared their records to the 10 higher-taxed, bigger-government economies: Austria, Belgium, Denmark, France, Germany, Italy, the Netherlands, Portugal, Sweden and the United Kingdom. Both groups cover a representative range of large, medium and small economies measured by their gross national incomes. The average incomes per capita of the two groups are similar ($27,046 and $30,426 respectively in 2005).

The early supply-siders were right (see chart above summarizing empirical findings). My findings firmly reject the widely held view that lower taxes inevitably result in cuts in public services, slower growth and widening income inequalities. Today's policy makers should take note of how tax cuts and the pruning of inefficient government programs can stimulate sluggish economies.

~Keith Marsden writing in
yesterday's WSJ

Bottom Line: The chart above clearly shows that: compared to the higher-taxed, bigger-government countries, the lower-taxed, smaller-government countries have higher growth rates of investment, exports, employment, output (GDP), and consumption; budget surpluses instead of deficits, and lower interest payments on government debt.

Economics of Futures Trading, Part II

From this previous post on the economics of oil futures trading:

$100 Spot Price per barrel + $5 Carrying Cost Per Barrel = $105 Futures Price (1 year)

Now suppose that speculators anticipate rising future oil prices, due to increasing global demand in China and India, and tightening world oil supplies. As in my previous example, let's assume that the increased speculative futures trading raises the price of oil in the futures market to $110 per barrel for delivery in one year, which then also raises the spot price to $105.


Q: What's could be so beneficial about speculators trading in oil futures, especially if they are contributing to both increases in spot prices and increases in futures prices for oil?

As Bloomberg's Kevin Hassett
points out, "If speculators know that the price of something is going to go up a month (year) from now, they buy today. If they are correct, they make money, and the price change is smoothed by the higher demand today. By loading up on futures, speculators pulled some of the price increase forward to today. This change is beneficial for society, as it forces consumers to conserve sooner, and suppliers to search for new deposits."

For example, think about what would happen if futures speculators were able to increase the futures price of oil to $110, without affecting the spot price (stays at $100). Consumers would then NOT conserve oil, and suppliers would NOT search for new oil. If speculators were correct about the rising future price of oil in one year, and if consumers and producers did not change their behavior (because the spot price didn't change), then it's likely that the future price of oil would rise above $110, say to $115 per barrel. And that would be an increase in price volatility over time - oil prices would increase to $115 without speculation in one year, instead of $110 with speculation.

By "pulling some of the price increase forward to today" speculators then actually help stabilize oil markets over time, by moving prices in the correct direction and helping allocate resources more efficiently over time. That is, the pain of higher spot prices today due to speculation, would be more than offset by the benefits in the long run, because behavior would change sooner to the increased scarcity of oil.

To paraphrase Walter Williams: "Suppose speculators are correct about future supply and demand conditions and oil will be scarcer in the future, what is the socially wise thing to do now so that more will be available in the future? The answer is to use less oil now. How do you get people to voluntarily use less oil now? By letting the spot price today rise."

Q: Do speculators raise spot prices and futures prices when a commodity will be scarcer in the future? Yes, but if a commodity like oil is expected to be less scarce and more abundant in the future, speculators would lower both spots prices today and futures prices. It works both ways, but speculators don't receive attention when they are lowering spot prices, only when they are raising spot prices.

Q: If oil is expected to be more (less) scarce in the future, is it beneficial for spot prices today to rise (fall)? Yes, and speculators help to make that happen.

Q: Are oil prices more or less volatile/stable over time with speculators? More stable, by pulling some of the expected future price changes forward to today. "Speculation has to be stabilizing if speculators are making money," says Hassett. And the more speculators are correct in their assessment of future market conditions, and the more trading they engage in based on those assessments, the more stable prices will be over time.

Russia's Economy is Booming!

NY Times -- Russia’s economy expanded an annual 8.5% in the first quarter, higher than economists expected, as consumer demand fueled an investment boom. The expansion followed 9.5% growth in the previous three months.

The government expects the economy, the world’s 10th biggest, to expand 7.6% this year after growing 8.1% in 2007 (see graph above - 2008 will be the tenth year of solid economic growth in Russia, averaging close to 7%).

Russian industrial output grew an annual rate of 9.2% in April, the most in nine months, as output of trucks, cars and construction materials surged. Real wage growth has advanced more than 12% every month this year, increasing demand for housing and consumer goods.

Monday, June 16, 2008

Carpe Diem


Economics of Futures Trading, Part I

Politicians seem to generally dislike high prices (except maybe when they're selling their own houses or their own stocks) and are quick to conduct investigations or propose legislation any time they feel that prices are "too high."

If market-driven CEO compensation is rising because super-star executive talent is scare relative to the demand, politicians generally condemn the high salaries. If market prices for plywood or generators rise after a hurricane because of increased scarcity, politicians condemn "price gougers" and sometimes pass laws that put them in jail. When gas prices rose after 9-11 and after Hurricanes Rita and Katrina in response to significant disruptions in market conditions, politicians investigated oil companies and gas stations for "price gouging." If rents in NYC or Berkeley are rising due to increasing demand for rental housing interacting with a limited supply, politicians pass "rent control" legislation.

In the most recent period of high and rising oil prices, there's a new bogeyman on the block, coming under the watchful eye of politicians: SPECULATORS. In their perpetual mistrust of market forces, politicians cannot accept that high prices might actually be a result of either rising market demand, or falling market supply, or both. And there seems to be a general misunderstanding among both politicians and the general public about the basics of futures of markets in general, and the relationship between spot prices and futures prices in particular. Consider that:

Spot Price + Carrying Cost = Futures Price

For a one-year period for oil it would be:

Spot Price of Oil Today + Carrying Cost of Oil for One Year = Futures Price of Oil for Delivery in One Year

The carrying cost includes storing oil for one year, and the opportunity cost of $100 of capital invested today to buy oil at the spot price (foregone interest for one year). Assuming the carrying cost of oil is $5 per barrel per year, and a spot price of $100 per barrel, we would have a futures price of $105 per barrel:

$100 Spot Price per barrel + $5 Carrying Cost Per Barrel = $105 Futures Price

Assuming that the $5 carrying cost remains fixed in the short run, we can see that there is a direct one-to-one relationship between the spot price and the futures price, and if the futures price rises, the spot price would rise by about the same amount. And that 1:1 relationship would exist even if speculators were banned from the market, and only hedgers remained to trade.

For example, assume that Northwest Airlines and other carriers anticipated that rising global demand for oil and tightening oil supplies would put upward pressure on oil prices for delivery in June 2009. To hedge against the price risk of higher oil prices, NWA and other transportation companies that rely on oil as a major input might start buying oil futures contracts for delivery in one year, which would put upward pressure on the future price of oil, say to $110 per barrel. Now the relationship would be:

$100 Spot Price + $5 Carrying Cost < $110 Futures Price.

At the spot price of $100 per barrel, arbitrage profit opportunities would exist. You could buy oil today at the spot price of $100 and simultaneously sell contracts at the futures price of $110. After adjusting for the $5 carrying cost, you would have a $5 profit per barrel. But others would join you in your money-making plan, and the rising demand for spot oil would raise the price to $105 per barrel, such that:

$105 + $5 Carrying Cost = $110 Futures Price.

Notice that the spot price went up when the futures price went up, due to the trading of hedgers like NWA, and this would happen EVEN IF THERE WERE NO speculators in the market.

Conclusion #1: Spot prices generally rise (fall) when futures price rise (fall), due to market forces today and anticipated market forces in one year.

Conclusion #2: Conclusion #1 holds even when ONLY hedgers participate in a futures market.

There is a straightforward, mechanical relationship between spot prices and futures prices that doesn't necessarily have anything to do with speculators. In fact, speculators don't determine market forces, they respond to market forces of supply and demand.


Therefore, speculators can't be blamed for high oil prices, because high oil prices are ultimately caused by factors beyond the control of any speculator: rising global demand in places like India and China, and global supply in places like Saudi Arabia, Nigeria and Venezuela. No individual speculator, or any group of speculators has an iota of influence over the demand for gas or oil in Brazil, nor do they have one iota of influence over the amount of oil in Canada or ANWR, or any control over OPEC quotas.

Think about it - Exxon Mobil, one of the largest oil producers and private oil companies in the world, has NO control over the world spot price of oil, so how could a small group of speculators?

Part II to follow.

In A Colombian Town, Cocaine is the Only Currency

A shoe shop owner in Guirema, Colombia weighs out coca base handed over by a customer in exchange for goods.
In a remote Colombian settlement, transactions are conducted in coca, with one gram enough to buy a soft drink.


Crude Oil Futures: Trading is Down, But Prices Up?

The chart above shows that open interest (volume) for crude oil futures contracts declined by more than 16% since last November, and yet oil prices kept going up. Less oil futures trading, less speculation, but higher oil prices? Isn't is supposed to be the other way around?

The Phantom Recession is Over

A funny thing happened on the way to the most predicted recession in U.S. history: it didn’t happen.

According to First Trust Advisors.

NY Times Article Explains The Role of Speculators

The NY Times has an article that does a pretty good job of explaining the role of speculators in the futures markets, and highlights some of the benefits they bring to the market: Greater volume of trading, leading to greater liquidity, and thicker, more efficient commodity and futures markets, and even possibly less price volatility. Here are some excepts:

Although it is common in tough financial times to blame the speculators, this escalating hostility toward them is starting to worry people with years of knowledge about how commodity markets work. Because without speculators, they say, these markets do not work at all.

Speculators, people willing to risk their capital in search of high profits, are central to healthy commodity markets, they say, and broad-brush restrictions on them could damage markets that are already under pressure from rising global demand for food and fuel.

The more money that speculators are willing to put to work in the market, the more liquid it is and the easier it is to buy and sell without causing big ripples in prices.

So speculators become the ballast in the market, making the contrary trades, taking on the risks the hedgers want to shed, reacting quickly when news jolts the markets and, most important, creating liquidity by pouring in enough money to allow everyone to make very large trades quickly without causing wild price swings.

Liquidity is, in effect, the hostess gift that speculators bring to every market party, and without the capital poured into energy markets by institutional investors, prices may well be far higher and more volatile than they are, said Philip K. Verleger Jr., an economist and energy policy consultant who testifies frequently before Congress on energy issues.

Mr. Verleger said he strongly disagrees with the view that these new speculators are pushing up the price of oil and other commodities. “In fact, they have at a minimum reduced price volatility and quite possibly contributed to a lower price level than would have been obtained had they been barred from the commodity markets,” he said.

Life Expectancy at RECORD HIGH 78.1 Years


According to a report last week from the National Center for Health Statistics, life expectancy at birth hit a record high in 2006 of 78.1 years, a 0.3 year increase from 2005 (see chart above). Record high life expectancy was recorded for both white males and black males (76 years and 70 years respectively) as well as for white females and black females (81 years and 76.9 years).

Since 1940, life expectancy has increased by more than 15 years, from 62.9 years to 78.1 years, an amazing 24% increase in average life expectancy. Americans today can expect to be alive an additional decade and a half longer than just a few generations ago.

It seems like this story about record high life expectancy went largely unreported in the press. The NY Times had a brief mention buried inside this story yesterday. The Washington Post reported on it here. What if life expectancy had gone down? It probably would have received a lot more attention. Maybe it's like economic news, and news in general - bad news sells, good news doesn't?

What If They Ran An Election and Nobody Came?

That's exactly what happened, read about it here: "Voter Turnout for Tiny North Dakota Town: Zero"

Now that's rational ignorance.

UM in the Post-Prop 2 Period: Reasons to Be Happy

Pre-Proposal 2 Data for University of Michigan (Last column is national data):
The Michigan Daily -- Underrepresented minorities, which the University defines as black, Hispanic or Native American, will make up 10.5% of the Class of 2012. The class from the previous year was comprised of 10.8% underrepresented minority students. The Class of 2011 were admitted during an election cycle place partially after the affirmative action ban took effect. The Class of 2010, the last to be chosen prior to the ban, was made up of 12.6% underrepresented minorities.

Ted Spencer, associate vice provost and executive director of undergraduate admissions, said the number of minority applicants and enrolled students for this year was good, "relative to the fact that we were working under the constraints of the proposition." "We're not happy where we are," Spencer said.

MP: The chart above show UM data (last column is national data) during the pre-Proposal 2 (which ended race-preferences for admission to UM) period, suggesting a possible mismatch between the abilities of underrepresented minority students admitted under affirmative action, and the academic environment at UM.

A black student with a 3.2 high school GPA and 1210 SAT score used to have a 92% chance of admission to UM vs. only a 14% chance for a white student, a ratio of 6.5 to 1. However, once admitted, black students were almost 6 times as likely as white students to be on academic probation at UM (45% vs. 8%), and 10 times less likely to be admitted to the Honors Program (1% vs. 10%). Black students were also graduating from UM with overall GPAs equivalent to a C+/B- letter grade (GPA = 2.63) compared to the A-/B+ (GPA = 3.34) outcome for white students. And if the graduation pattern at UM was consistent with national patterns, fewer than 4 out of 10 black students were graduating within 6 years, compared to almost 6 out of 10 white students.

So here's what UM should be pretty happy about: Relative to the pre-Proposal 2 period, underrepresented minority students now admitted to UM without race-based preferences will: a) be attending an academic institution better matched with their academic qualifications, and will have a better chance of: b) graduating on time with a higher GPA, c) qualifying for the Honors Program at a higher rate, and d) not being on academic probation.

Quote of the Day

Politicians never accuse you of "greed" for wanting other people's money -- only for wanting to keep your own money.

~Joseph Sobran

Sunday, June 15, 2008

Heading South of the Border for $2.54 Gas + Time

SAN DIEGO - If there's pain at the pump in the U.S., Mexico may just have a remedy. A gallon of regular unleaded gasoline in San Diego retails for an average price of $4.61 a gallon. A few miles south, in Tijuana, it's about $2.54 — even less if you pay in pesos.

More and more people appear to be taking advantage of the lower price. The lower prices mean a U.S. motorist could save almost $54 filling up a two-year-old Ford F150 pickup with a 26-gallon fuel tank in Mexico. The differential in diesel is even greater, selling at $5.04 a gallon in San Diego County and $2.20 in Tijuana.

Still, international gas-buying trips don't make sense for everyone. The wait getting back into the U.S. at the border in Tijuana frequently takes longer than two hours and cars can burn about a gallon of gas for each hour they idle.

Bandwidth Hogs Face Limits on Internet Use

Some people use the Internet simply to check e-mail and look up phone numbers. Others are online all day, downloading big video and music files.

For years, both kinds of Web surfers have paid the same price for access. But now three of the country’s largest Internet service providers are threatening to clamp down on their most active subscribers by placing monthly limits on their online activity.


NY Times article "Charging by the Byte to Curb Internet Traffic"

Related CD post from yesterday

Free and Flush, Russians Eager to Roam Abroad

One of the most enduring changes in the lives of Russians in recent years has occurred not in Russia itself, but in places like this coastal region of Turkey, where an influx of Russian tourists has given rise to a mini-industry catering to their needs. A people who under Communism were rarely allowed to venture abroad, and then lacked money to do so when the political barriers first fell, are now seeing the world. And relishing it.

The number of Russian tourists visiting countries outside the former Soviet Union grew to 7.1 million in 2006, the last year statistics were available, from 2.6 million in 1995, according to the Russian government.

A record 2.5 million Russians visited Turkey in 2007, up 33 percent from 2006, Turkish officials said. Only Germany, that paragon of European wealth, sends more tourists to Turkey. (By contrast, in 1988, a few years before the collapse of the Soviet Union, all of 22,000 Soviet citizens visited Turkey.)


Today's
NY Times

New Real Car Prices Fell by $2,500 from 1998-2006

Thanks to an anonymous comment for the link to this Dept. of Energy website with data on the Average Price of a New Car from 1970 to 2006, in both current and constant dollars. The chart above shows the real, inflation-adjusted average price of a new car from 1976 to 2006 (in constant 2006 dollars).

What's interesting is that the real price of a new car fell by 10% from 1998 ($25,186) to 2006 ($22,651), and decreased in 7 out those 8 years, or by a total of $2,535 during that period.

Note that this measure of retail car prices does NOT adjust for the continual quality improvements over time in new vehicles, while the CPI: New Cars measure does (see post below).

The Real Cost of New Cars is Falling 2% Per Year


In the face of all of the bad news about rising gas prices, here's maybe some good news: The real cost of new cars is actually declining.

Here's why: In the last 30 years since 1978, consumer prices on average (CPI: All Items) have increased by about 3X (see chart above). During that same period, the CPI for Gasoline Prices has increased almost 6X, meaning that the real cost of gasoline has risen. But the CPI for New Cars has only gone up by less than 2X, meaning that the real cost of new cars has been falling, offsetting some of the sting of higher gas prices for consumers.

On an average annual compounded basis, consumer prices have increased annually at a 4.1% rate since 1978 (see chart above), while gas prices have increased by 6%, meaning that the real cost of gasoline has been rising by 2% per year on average over the last 30 years. But the cost of new cars has increased by only 2% annually, suggesting that car prices adjusted for inflation have been falling on average by 2% each year since 1978!

Another way to look at it: If new car prices had risen at the same rate as inflation since 1978, new cars would be more than 50% higher than today's prices. And if new cars had increased annually at the same rate as gasoline prices, they be more than 3X higher than current car prices! If the real price of gas is rising, but the real cost of new cars is falling, is it possible that the overall cost of owning and operating a car might not be changing that much?

Update: IRS guidelines allow 50.5 cents per mile deduction for vehicle expenses in 2008. At 12,000 miles per year, 25 mpg and $4 gasoline, that works out to about 16 cents per mile in fuel costs, leaving 34.5 cents for non-fuel related expenses. In percentage terms, that's 32% for gasoline and 68% for non-fuel expenses, including the cost of the vehicle, financing, depreciation, etc.