Monday, July 14, 2008

We Shouldn't Be Surprised That Rent Control Distorts Markets, Increases Non-Price Rationing

Economic theory predicts that rent control laws will result in these effects (from the Gwartney textbook):

1. Shortages and black markets will develop for housing.
2. The future supply of housing will decline.
3. The quality of housing will deteriorate.
Non-price methods of rationing housing will increase in importance (discrimination).
Inefficient use of housing will result.
6. Long-term renters will benefit at the expense of newcomers.

The New York Sun article "Don't Blame Rangel for His Rent" explains why we shouldn't necessarily blame Rep. Rangel for hoarding 4 rent-controlled apartments in NYC, we should blame the rent control laws themselves for distorting housing markets and creating the adverse, inefficient outcomes outlined above:

Consider the world as it appears to owners of New York City's million-plus apartments governed by rent regulation. By definition, they are asked to take a price which is different than that which the market might dictate — in most instances (especially in Manhattan neighborhoods), likely a lower price. This essential fact is what leads to situations such as that of Mr. Rangel — and other distortions.

If one cannot get the best possible price for one's premises, it is inevitable for owners to seek other, non-monetary forms of compensation (see #4 above). Having access to the chairman of the House Ways and Means Committee — a person with the presumed capacity to influence matters at the city level, as well — could be one such form of compensation.

There are other, much more common — and pernicious — forms of non-monetary compensation which owners in a rent-regulated world will find tempting. Far more likely, however, would be security. If one is going to be forced to sell a product at a discounted price, one has a strong motivation to at least make sure of being paid.

So it is that rent regulation — which forces landlords to sell at such a discount — provides an incentive to rent not to those of modest means but, rather, to the well-heeled: Congressmen, movie stars, and others whose income would lead one to conclude they'll pay the rent on time. Or to yuppie couples who have no children — and are thus more likely to paint and decorate than cause any damage to the floors and fixtures. They are the nomenklatura of this quasi-socialist system.

Alaska's 'Frustrated' Governor on Nonsensical Policy

IBD: Alaska was bought by the U.S. from Russia in 1867 specifically to ensure a supply of natural resources. How do Alaskans feel about the opposition from politicians representing the lower 48 to drilling for oil there?

Alaska Governor Sarah Palin: Alaskans are frustrated because there is opposition in Congress to developing our vast amount of natural resources. We want to contribute more to the rest of the United States. We want to help secure the United States, and help us get off this reliance of foreign sources of energy.

It's a very nonsensical position we're in right now. We send President Bush and Energy Secretary Bodman overseas to ask the Saudis to ramp up production of crude oil so that hungry markets in America can be fed, (and) your sister state in Alaska has those resources. But these lands are locked up by Congress, and we are not allowed to drill to the degree America needs the development.

When we became a state 50 years ago, we struck a deal with the federal government where we said, "Let us in a union where we will be as self-sufficient as possible." And the federal government said, "Come in, you'll be our 49th state, and you'll do it by developing your God-given resources."

Fifty years later . . . we're living up to our end of the bargain, and now we need the rest of the U.S. to live up to their end of the bargain, to lead America toward energy independence. Alaska should be the leader of an energy policy that gets us there.


Sunday, July 13, 2008

Congressman Rangel Likes Rent Control So Much, He Has 4 Rent-Controlled Manhattan Apartments

NY TIMES -- While aggressive evictions are reducing the number of rent-stabilized apartments in New York, Representative Charles B. Rangel is enjoying four of them, including three adjacent units on the 16th floor overlooking Upper Manhattan in a building owned by one of New York’s premier real estate developers (see pictures above).

Mr. Rangel, who has a net worth of $566,000 to $1.2 million, according to Congressional disclosure records, paid a total rent of $3,894 monthly in 2007 for the four apartments at Lenox Terrace (16M, 16N, 16P and 10U), a 1,700-unit luxury development of six towers, with doormen, that is described in real estate publications as Harlem’s most prestigious address.

MP: Market rents for those apartments would be more than $7,000 per month.

Update: Rep. Rangel defiantly defends having four rent-stabilized apartments in
NY Daily News, "I don't see anything unfair about it, and I didn't even know it was a deal." (Thanks to Juandos.) Here's a followup NY Times story.

Wal-Mart: Powerhouse for the Poor, Greatest Thing That Ever Happened to Low-Income Americans

For years, people have beaten down the doors to work at Wal-Mart. Wal-Mart's more than 1.3 million American employees aren't stupid. The company's wages and fringe benefits -- including health care coverage and retirement benefits -- are comparable to those of other retailers.

Wal-Mart pays as well as Target, according to Chuck Denny, who analyzed the company in an April study for the University of Minnesota's Humphrey Institute of Public Affairs. The average wage for regular, full-time hourly Wal-Mart associates in Minnesota is $11.30, according to Wal-Mart's website, and employees are eligible for performance-based bonuses.

And forget that tired line about dead-end jobs. Two-thirds of store managers were once hourly workers, according to the company.

Wal-Mart is the world's largest nongovernment employer, because it's the world's most popular retailer. A mind-boggling more than 100 million Americans shop there every week.

But Wal-Mart may also be the most demonized company in our country's history. For years, it has been the target of a sophisticated, orchestrated public relations campaign. That's odd, because the giant retailer has arguably done more for low-income Americans than a shopping cart full of government welfare programs.

Wal-Mart's combination of rock-bottom prices, quality and convenience -- it offers a dizzying array of household staples under one roof -- appeals strongly to shoppers who need to stretch their dollars. Estimates of the average family's annual savings from shopping at Wal-Mart range from $900 to $2,300, depending on the study you consult.

W. Michael Cox, chief economist at the Federal Reserve Bank of Dallas, summed it up this way speaking to the New York Times: "Wal-Mart is the greatest thing that ever happened to low-income Americans."

Interestingly, the folks who hate Wal-Mart are often the sort who usually make a big deal about how much they care for low-income people. They make a mistake when they turn a blind eye on the achievements of this powerhouse for the poor.

Katherine Kersten in today's Star Tribune.

Oil Speculators Chase High Prices, Not Cause Them

Saying oil speculators cause high oil prices is like saying that doctors cause people to be sick because you'll find more doctors in hospitals if there are more sick people.

Watch Biz Flog video here.

HT: Juandos

Q: Who Ends Up With the Oil? A: We Do.

T. Boone Pickens -- As imports grow and world prices rise, the amount of money we send to foreign nations every year is soaring. At current oil prices, we will send $700 billion dollars out of the country this year alone — that's four times the annual cost of the Iraq war.

Projected over the next 10 years the cost will be $10 trillion — it will be the greatest transfer of wealth in the history of mankind.

MP: Now let's see here. Foreign oil producers like Canada, Saudi Arabia, Mexico (top three countries for U.S. imports) send us their oil, and we send them "green pieces of paper with dead presidents' pictures," aka as USDs. That imported oil helps to fuel our economy, cars and factories, raising our standard of living.

Oil producers in Canada, Saudi Arabia and Mexico now have US dollars, which must be spent back in the U.S. on American goods and services, or invested in the U.S. financial markets, either by the oil producers, or by those who buy the USDs from them.

Importing oil certainly involves a transfer, but it's not a transfer of wealth, it's a market transaction involving the exchange of oil for currency.

If it IS a transfer of wealth, it seems like we got the better end of the deal: Their valuable natural resources get transferred to the U.S., in exchange for paper currency, which gets spent back here eventually.

In T. Boone Pickens' version, it seems like wealth gets transferred overseas without any benefit to the U.S. But oil imports, like all trade, involves mutually beneficial exchange. Remember trade is win-win, not win-lose (like T. Boone Pickens suggests), or lose-lose (the way the Soviets supposedly described a market exchange
-buyers lose their money, and sellers lose their goods).

Update: One dictionary definition of "wealth" is "an abundance of valuable resources." In that case, wouldn't T. Boone Pickens' "greatest transfer of wealth in the history of mankind" be a transfer of wealth in the form of valuable natural resources (oil) TO the United States, and not a transfer of wealth FROM the United States in the form of paper currency?

What if Politicians Pandered to Economists?

They would:

1. Support free trade

2. Oppose farm subsidies

3. Leave oil companies and speculators alone

4. Invite more skilled immigrants

5. Liberalize drug policy

And a few more I don't agree with, from Greg Mankiw in today's NY Times

Saturday, July 12, 2008

Globalization and The Medellin Economic Miracle, It's Saving Lives, But the Democrats Want to Stop It

MEDELLIN, Colombia -- This labyrinthine metropolis transformed over the course of a decade from a battlefield of drug lords, paramilitaries and leftist guerrillas into one of the safest, most dynamic cities in Latin America. Visionary inner-city renewal projects and a push to take back the lawless hillside slums by force deserve credit, but many here hail an unsung hero in Medellin's urban miracle -- globalization.

Exports surged in the 1990s as the United States granted temporary trade preferences to Colombia, allowing many of its products to enter the world's largest market duty-free. They really took off after 2002, when Washington expanded that agreement to include Colombia's all-important textile sector (see chart above). Humming assembly lines making Ralph Lauren socks and Levi's jeans sprang up across this picturesque Andean valley, creating tens of thousands of jobs and turning Medellin into a model of the curative power of liberalized trade.

The guns have quieted in Medellin. In 1991, the annual murder rate was 381 per 100,000 people -- a virtual war zone. In 2001, it was 174 per 100,000. Last year, it fell to 26 per 100,000, or lower than the District of Columbia (see chart above).

Colombia is also up against a resurgent global backlash to free trade -- including in the United States, the country that had spent the past two decades cajoling Latin America to open its markets. An election-year debate has politicians in Washington blaming globalization for the loss of U.S. jobs, holding up a vote in Congress on a free trade agreement with Colombia. That bill would make the current trade preferences permanent while allowing most U.S. products to enter Colombia duty-free.

Although strongly backed by the Bush administration, a free-trade pact with Colombia -- as well as other pending agreements with South Korea and Panama -- have been blocked by Democrats. Some are calling for a review of all future free trade agreements to assess their impact on U.S. workers.

The World Needs MORE Speculators

I struggle to understand how speculation is supposed to be both profitable and destabilizing all at once. Profitable speculation requires buying low and selling high. Destabilizing speculation requires the opposite: short-selling shares in a trough, thus deepening the trough, and betting that frothy shares will become frothier. In other words, destabilizing speculation means selling low and buying high. If that is a recipe for profit, I am missing something.

Profitable speculators, in contrast, are veritable philanthropists. When they think oil is going to become more expensive, they buy and hoard oil, or they buy oil futures, encouraging others to buy and hoard. This raises oil prices when they are relatively cheap and lowers them when they are relatively expensive.

True, when speculators make mistakes, that is destabilizing. But in the case of oil prices, it's hard to see that speculators are playing much of a role. For one thing, inventories don't seem to be rising. If the inventory data are correct, consumers were burning all that $135 oil.

The world needs more speculators, especially of the short-selling variety. More short sellers in the dot-com bubble of the late 1990s, and the housing bubbles of the past few years, would have added a welcome dose of stability and sanity.

Tim Harford in today's

Friday, July 11, 2008

Resets on ARMs Will Now Decline Through 2008

The chart above from the Dallas Fed shows scheduled mortage re-sets through the end of 2008, and indicates that mortgage resets peaked in June 2008 at about $55 billion, and will be down close to $30 billion by yearend. In other words, the worst of the subprime problems might now be behind us.

Restricting Speculators Will Not Reduce Oil Prices

For the most part, speculators do not demand physical oil the way thirsty Chinese refiners do. There is no evidence that speculators are accumulating large and rising inventories of physical oil. But to cause prices to be above their competitive level, speculators would have to take physical oil off the market -- the way that governments have done in the past with agricultural products, amassing mountains of grain and cheese to prop up their prices.

What some speculators do instead is trade futures contracts that entitle them to take delivery of physical oil at a future date (say next August) at a price negotiated in the marketplace. But they almost never exercise the right to take delivery when the contract matures.

A speculator who anticipates rising prices buys a futures contract at the prevailing market price. If he is right, and the futures price rises, he can sell the contract at the higher price before contract maturity and pocket a profit; if he is wrong, and prices fall, he sells the contract at a loss. Buyers and sellers of these futures contracts almost never take delivery of the oil to implement their trading strategies.

Restricting these speculators won't reduce the price of oil -- but they are likely to make consumers and investors worse off. Futures and swap markets facilitate the efficient management of price risks, and speculators are an important part of that process. For instance, a producer of oil may want to lock in the price at which he sells his oil in the coming months in order to hedge against fluctuations in its price. He can do so by selling a futures contract at the prevailing market price. Similarly, an airline can protect itself against price increases next summer by buying today a futures contract that locks in a purchase price for next July.

The unprecedented run-up in oil prices is painful for consumers around the world. But the focus on speculation is misguided, and represents a convenient distraction from an understanding of the real, underlying causes of high oil prices -- most notably continuing demand growth in the face of stagnant production, supply disruptions and the weakening dollar.

More restrictions and regulations of energy markets, in the vain belief that such actions will bring price relief, are counterproductive. They will make the energy markets less efficient, rather than more so.

Univ. of Houston Finance Professor Craig Pirrong, in today's WSJ

FT Portfolios: Real GDP To Grow at 3% in QII

According to the BEA's report today, the U.S. trade deficit in goods and services declined to $59.8 billion in May from $60.5 billion in April. Highlights include:

• Exports increased $1.4 billion in May and are up 17.8% versus last year. The gain in exports in May was led by fuel oil, chemical fertilizers, and other petroleum products.

• Imports increased $0.6 billion in May, a small rise after a large upward spike in April. Imports are up 12.5% versus a year ago. Imports were held down in May by a decline in autos and energy (petroleum products and natural gas).

• Adjusted for inflation, the trade deficit in goods is $11.6 billion smaller than last May and the smallest since 2002. Without adjusting for inflation, the trade deficit is $0.4 billion larger than last year.

Implications: The export boom continued in May and is adding substantially to real GDP growth. We now estimate the trade sector will add about two percentage points to real GDP growth in Q2, which leads us to boost our estimate of the overall real GDP growth rate in Q2 to 3% (previously 2.5%).

Source: First Trust Portfolios

Putting $1T Subprime Mortgage Loss in Perspective

I'm in Las Vegas at Freedom Fest 2008 and heard Steve Forbes speak yesterday. In his talk, he put the subprime mortgage meltdown in perspective by comparing the global subprime losses of $1 trillion (Reuters story here) to the $56 trillion of U.S. household net worth. Sure, $1 trillion is a very significant loss, but it's relatively insignificant compared to the significant value of U.S. household wealth, less than 2%.

George Soros characterizing the subprime mortgage situation as "the most severe since the Great Depression." I'm not sure there is data on household net worth in the 1930s, but I'm pretty sure the stock market losses and the losses from 9,000 bank failures (about 1/3 of all banks) in the 1930s was a lot bigger than 2%.

Gov't. Health Care Reform = Fixing Prices

Government controlled health care is going to drive the best people out of business. Who wants to spend years of studying to be a doctor, just to become a government bureaucratic hack?

Some day you'll be wheeled in for a heart bypass operation, and a surgeon will be the person who is now behind the counter when you renew your car registration at the department of motor vehicles.

If we’re not careful, we’re going to wind up with a health care system like they’ve got in Canada, a nation that is broke from health care spending, even though Canada is a sparsely populated country with a shortage of gunshot wounds, crack addicts, and huge tort judgments.

What are we as Americans supposed to learn from a medical system devoted to hockey injuries, sinus infections, and from trying to pronounce French vowels?

Well, we’ll learn to fix prices. Because that’s all that health care reform really is. It’s just price-fixing. Price-fixing works great in Cuba and North Korea and in rent-controlled apartments in New York. Everybody knows how easy it is to find an inexpensive apartment in a nice neighborhood in New York City.

P.J. O'Rourke

Thursday, July 10, 2008

Drill, Drill, Drill

The claim that the oil companies are sitting on leases and not drilling defies all logic. With oil at $135 per barrel and drilling rigs renting at $300,000 per day, there are no idle rigs anywhere.

The claim that any oil we drill for now will not come on line for five years or longer – and will thus have no effect on prices today – is incorrect. Unlike past oil crises, where the spot price of oil rose more than forward prices, the oil price for delivery in 2012 is trading at $138 per barrel. The market is sending a clear price signal that our problem is in the future – because we do not have the will to curb demand or increase supply.

How many houses would someone invest in if there were a future guarantee that the price would not decline? It is anticipation of ever-increasing prices that fuels the mania.

The oil market, however, has more than anticipation; it has a well-defined forward price signal. This is a key component of the added $25-$40 per barrel in current oil prices. Congressional hearings and "make it go away" legislation will not stop that. Demonstrate the national will to address the supply and demand issues now and it will.

As forward prices decline, watch how quickly the spot price comes down.

Joseph Petrowski, president of Gulf Oil writing in today's WSJ

Forbes: Most Lucrative College Majors

Business Majors
All Majors
Graphs above (courtesy of Antony Davies, click to enlarge) show the Forbes list of the most lucrative college majors based on 0-5 years, 5-10 years, and 10-20 years of experience, full story here.

Note in the top graph that economics, finance and accounting majors start out about the same, but after 10 years or more, economics majors make almost $12,000 more than finance majors, and finance majors make almost $13,000 more than accounting majors.

Welcome to Nanny State Nation

Whether you love it, hate it, or have never thought about it, chances are some politician wants to ban it. "Welcome to the Nanny State Nation," says host Drew Carey. "Where the government minds your own business."

Saggy pants, fire places, plastic bags, light bulbs, poker—it's all been banned somewhere. Same with owning swine or fowl, feeding pigeons, owning pit bulls, and chomping on trans fats, a naughty little substance that makes food taste better.

Carey wonders when so many of us turned into "ban-happy busybodies," and compliments the British on their more civilized approach to bans.

Watch the video on

Wednesday, July 09, 2008

"Rainforest Math" Meltdown: Seniors Can't Multiply

Summertime means school for an increasing number of high school students who have struggled in their math courses. But the system could be contributing to the kids’ poor performances.

In March, the National Mathematics Advisory Panel reported that U.S. students lack a deep understanding of basic skills, including a grasp of whole numbers and fractions.

One reason for teacher frustration is that the state's math gurus have de-emphasized memorization in favor of "conceptual thinking." The same philosophy has crept into English classes, where "creativity" has been elevated over knowledge of grammar, and into history classes, where knowing historical trends — "the big picture" — has replaced knowing dates of important events. The result is seniors who are not just incapable of multiplication, but also unable to identify the verb in a sentence or come within 100 years of placing the Civil War.



2007 Household Spending on Fuel, Food and Drink

THE ECONOMIST -- The soaring cost of food and fuel is a concern for the governments of rich and poor countries alike. Many households in Africa and Asia shell-out more on food and fuel as a share of total spending and so are disproportionately hit by rising prices.

MP: Despite rising food and fuel costs in the U.S., it could be a LOT worse. In fact, it IS a LOT worse everywhere in the world, except Western Europe, Australia and New Zealand, in terms of the percent of household income spent on the basics: fuel, food and drink (see map above, click to enlarge).

Flashback to the 1970s: Pessimism and Doom Watching Have Become Our National Pastimes

Doom watching has of late become too much of a national pastime. It has afflicted far too many aspects of national policy: international relations, defense, natural resources, the economy, the environment, energy, etc. There has been pessimism, talk of inevitable decline, and of the twilight of democracy.

It is heady stuff. Entrapped by extrapolations and by rhetorical flourishes, it has too much affected the national mood. Yet, it too will be superseded. It is reminiscent of other periods of disenchantment. Yet, successfully to grapple with our problems, we shall have to diagnose them. Like Edmund Burke, two centuries ago, we are obliged to seek the sources of our present discontents. Yet we must avoid being swept up by the delights of diagnosis. We must assiduously avoid the seductive pleasures of making too much of our present discontents.

Our failures have indeed shaken self-confidence and prior assumptions. It has led not only to a well-advertised self-flagellation but also to a new style of moral imperialism, which combines a high degree of self.righteousness with a convenient way of evading responsibility.

The media did not originate but certainly reflect these national predilections. The media, reflecting the market and the free enterprise system, are quite ingenious in serving up just what the public wants to hear. In another period, this may have been cold war truculence, but recently it has been a steady diet of faults and flaws, real or imagined. I am a great believer in muckraking, when there is authentic muck to be raked. But one regrets seeing muck artilfcially created or embellished simply to satisfy current tastes.

MP: Although that could easily have been written today, it was actually written more than 30 years ago by James R. Schlesinger, in his 1976 Foreign Affairs article "On Making Too Much Of Our Present Discontents," available here.

As Larry Kudlow reminds us often, the media today is trying to make pessimism our national pastime, reminiscent of the period in the 1970s discussed above. But before we buy into all of the media's "gloom and doom," consider the chart above, showing the U.S. unemployment rate over the last 50 years.

Put into a broad historical perspective, our current 5.5% jobless rate is: a) below the 50-year average unemployment rate of 5.85%, and b) way below the 7% average jobless rate during the 20-year period from 1975 to 1995 that included 4 official recessions. Sure, it would be great if unemployment got down to 4% again, but it could also be a lot worse - we could have Canada's 6.1% jobless rate or Europe's 6.6% rate.

OPEC's Strongest Ally: U.S. Congress

Congressional attacks on speculation do not alter the oil market's fundamental demand and supply conditions. What would lower the long-term price of oil is for Congress to permit exploration for the estimated billions upon billions of barrels of oil domestically available, not to mention the estimated trillion-plus barrels of shale oil in Wyoming, Colorado and Utah.

Some politicians pooh-pooh calls for drilling, saying it would take five or 10 years to recover the oil. I guarantee you we would begin to see a reduction in today's prices even if it took five to 10 years for us to get the first barrel.

Put yourself in the place of an OPEC member knowing there would be a greater supply of U.S. oil five or 10 years, hence maybe driving oil prices lower to say $40 a barrel. What will you want to do now while oil is $130 a barrel? You would want to sell as much oil now and OPEC's collective efforts to do so would put downward pressures on current oil prices.

Right now the U.S. Congress is OPEC's staunchest ally.

From "Scapegoating Speculators," Walter E. Williams' latest column

Tuesday, July 08, 2008

Locations of Starbucks Scheduled To Close

SEATTLE --As many as 12,000 Starbucks workers will lose their jobs when the company begins closing 600 U.S. stores this summer. Starbucks has not identified which 600 stores it plans to close between now and March, but the news is trickling out through baristas, the media and others. The map marks the locations of where they say the closings will happen (the website map is interactive, you can click on a location to find details).

Read full story here.

Support for Energy Exploration At Highest Level This Decade; More Favor Drilling in ANWR

Pew Research Center -- Amid record gas prices, public support for greater energy exploration is spiking. Compared with just a few months ago, many more Americans are giving higher priority to more energy exploration, rather than more conservation. An increasing proportion also says that developing new sources of energy - rather than protecting the environment - is the more important national priority.

The public's changing energy priorities are most evident in the growing percentage that views increased energy exploration - including mining and drilling, as well as the construction of new power plants - as a more important priority for energy policy than increased conservation and regulation. Nearly half (47%) now rates energy exploration as the more important priority, up from 35% in February (see chart above). The proportion saying it is more important to increase energy conservation and regulation has declined by 10 points (from 55% to 45%).

In surveys dating to 2001, majorities or pluralities had consistently said that greater energy conservation and regulation on energy use and prices was more important than increased energy exploration.

The latest nationwide survey by the Pew Research Center for the People & the Press, conducted June 18-29 among 2,004 adults, also finds that half of Americans now support drilling in Alaska's Arctic National Wildlife Refuge, up from 42% in February.

MP: Pretty amazing what a $1 per gallon increase in gas prices (from $3 in February to $4 in June) does to public opinion: a 12% increase in support in just 4 months (from 35% to 47%) for energy exploration, drilling and building new power plants!

Quotes of the Day: P.J. O'Rourke

1. Government subsidies can be critically analyzed according to a simple principle: You are smarter than the government, so when the government pays you to do something you wouldn't do on your own, it is almost always paying you to do something stupid.

2. Freedom is not empowerment. Empowerment is what the Serbs have in Bosnia. Anybody can grab a gun and be empowered. It's not entitlement. An entitlement is what people on welfare get, and how free are they? It's not an endlessly expanding list of rights— the "right" to education, the "right" to food and housing. That's not freedom, that's dependency. Those aren't rights, those are the rations of slavery— hay and a barn for human cattle. There is only one basic human right, the right to do as you damn well please. And with it comes the only basic human duty, the duty to take the consequences.

3. I don't understand why the same newspaper commentators who bemoan the terrible education given to poor people are always so eager to have those poor people get out and vote.

In Defense of Oil Speculators

From Greg Mankiw:

The New Yorker.
The Economist.
Washington Post.

And one more from Greg Mankiw:

Foreign Students Flock to the US: Surge in Overseas Applicants Driven by Weak Dollar

More Evidence: Speculators Don't Cause Volatility

Prices were outrageously volatile. While traders attributed the sharp market movements to supply and demand, most politicians in Washington were sure that speculation was the culprit. The U.S. public became incensed.

The year was 1958, the commodity in question onions. Congress held long and sometimes tumultuous hearings in which Everette Harris, then president of the Chicago Mercantile Exchange, tried to convince lawmakers that the futures market for onions was not the cause of the volatility.

“We merely furnish the hall for trading . . . we are like a thermometer, which registers temperatures,” Mr. Harris told a hearing. “You would not want to pass a law against thermometers just because we had a short spell of zero weather.” But such arguments were ignored and in August of that year the Onion Futures Act was passed, banning futures trading in the commodity.

Exhibit A: Notice in the top chart above that the price volatility for onions looks greater AFTER futures trading was banned than it was before.

Exhibit B: The same patterns exists for the second chart of wheat futures - there was greater price volatility WITHOUT futures trading than with futures.

Exhibit C: Research by Lehman Brothers shows that prices for metals that are not traded in exchanges, such as chromium, molybdenum or steel, have risen faster than prices for metals traded in exchanges, such as copper or aluminium (see bottom chart above). In addition, some of the commodities markets in which pension funds hold the largest share of outstanding contracts, such as hogs, have seen price drops.

Source: Financial Times

What Do the Repo Business and Adult Web Site Business Have in Common? They're Both Booming

DETROIT NEWS --Fueled by an overvalued housing market and a spigot of easy credit, people overextended themselves on luxury items like automobiles, boats, Jet Skis and the like. If Jones got a Hummer, you got a Hummer. If Smith got a Corvette, you got a Cadillac. Now the punch bowl has gone empty and the bill for the good times has come due.

There are now more than 250 repossession companies across Michigan and scores of fly-by-night freelancers with pickups and crowbars prowling the streets from sundown to sunup looking for that Escalade in arrears.

Look at the numbers: Nationwide, auto loan defaults are up 22 percent since 2000 and auto repossessions are up 33 percent, topping 1.65 million in 2007. Some analysts believe we may be driving toward a foreclosure meltdown on rims.

Another industry doing well recently? Adult web sites, stimulated by the stimulus checks. Thanks to Division of Labour for the pointer.

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.