Tuesday, April 14, 2009

TNSTAAFL: Deadly Small Car Edition

WASHINGTONConsumers who buy minicars to economize on fuel are making a big tradeoff when it comes to safety in collisions, according to an insurance group that slammed three minimodels into midsize ones in tests.

The institute concludes that while driving smaller and lighter cars saves fuel, “downsizing and down-weighting is also associated with an increase in deaths on the highway,” said Adrian Lund, the institute’s president.

“It’s a big effect — it’s not small,” he said in a telephone interview.

Emerging Markets Rebound


The MSCI Emerging Markets Index closed yesterday at 640.597, reaching a six-month high (see chart above) for the benchmark emerging markets stock index (data available here). The index has gained ground on 23 out of the last 30 days, and is up by 35% from its early March bottom.

Teardown of Apple's Tiny iPod Shuffle

BUSINESS WEEK -- There's not much on the inside of the iPod Shuffle, as a teardown analysis of the device by market research firm iSuppli has found. Privately held iSuppli takes consumer electronics apart in order to estimate how much they cost to build. And while a teardown doesn't account for the costs of design, software, manufacturing, or shipping, these cost estimates help fill in the blanks toward estimating the profit on each device sold.

All told, the cost of the shuffle's components, the headphones, and the packaging it ships in comes to $21.77, according to iSuppli's estimates. That's about 28% of the device's $79 retail price. The smaller the component cost as a percentage of price, the higher the potential profit. This suggests the per-unit profit margin on the shuffle is higher than on other iPod models.

The component cost for the first iPod touch released in 2007, for instance, amounted to about $147, or about 49% of its $299 retail price. The component cost of the third-generation iPod nano, also released in 2007, amounted to about 40% of its retail price.

Biggest supplier? Samsung

See previous CD post on the iPod teardown.

Monday, April 13, 2009

Bank Rebound: +20% Record Daily Gain in the KBW Bank Index Last Friday, Is The Banking Crisis Over?

The KBW Bank Sector (^BKX) is a capitalization-weighted index composed of 24 geographically diverse stocks representing national money center banks and leading regional institutions, including Bank of America, Citigroup, Wells Fargo, etc. (see list here). As Larry Kudlow reported tonight at the top of "The Kudlow Report," the banking sector is rebounding, and the KBW Index has almost doubled since the early March bottom (see chart above), rising 96% since March 6.

The Index gained almost 4% today, following a 20.11% increase on Friday, which set a new record for the largest single-day increase in the KBW Index since it originated in 1993.

The Jock Tax: Taxing Visitors Who Don't Vote

From the LA Times article "The Taxing Life of a Pro Athlete":

If opening day is the best day of the year for professional athletes, then April 15 -- tax day -- is probably the worst. Especially now that 20 of the 24 states with franchises in at least one of the four major pro leagues -- the NFL, NBA, NHL and Major League Baseball -- have laws that require visiting athletes to pay state income tax for each game they play there.

Considering that top-level athletes in football, basketball, hockey and baseball now make an annual average salary of $2.9 million, that means big bucks for states such as California. Home to 15 major professional teams, the state raked in $102 million in taxes from visiting athletes in 2006-07, the last year for which records are available.

As salaries have skyrocketed, the so-called "jock tax" has become widespread and controversial. Its imposition has raised questions of fairness and, for tax expert Joseph Henchman, has laid waste to the once-revolutionary prohibition on taxation without representation.

"Politicians are seeking to shift tax burdens to people that don't vote," he says. "It does create a rather disturbing trend because it essentially allows politicians to provide more government services than citizens are willing to pay for."

HT: TaxProf

Today is Tax Freedom Day; Deficit Adds 6 Weeks

Good News (relatively): Tax Freedom Day will arrive on April 13 this year, according to the Tax Foundation's annual calculation using the latest government data on income and taxes (see chart above). This is eight days earlier than in 2008, and a full two weeks earlier than in 2007, for two reasons: 1) the recession has reduced tax collections even faster than it has reduced income, and 2) the stimulus package includes large temporary tax cuts for 2009 and 2010.

Bad News: Americans will pay more in taxes than they will spend on food, clothing and housing combined.

More Bad News: Tax Freedom Day moves somewhat independently from an alternative calculation that adds the federal budget deficit to total taxes collected. In 2009, an unprecedented budget deficit over $1.5 trillion produces a date of May 29 (see chart above). This is the latest date in the year this deficit-inclusive measure has ever fallen.

The only previous years when taxes and deficit spending comprised a similarly large share of national income were 1944 and 1945, at the peak of World War II. In the postwar era, this date had never fallen later than May 9 (in 1992).

Tax Deadline Approaches: Bring Us Back to 1913

See the original 1913 IRS 1040 form here (only 4 pages total including all forms and instructions, page 1 appears above). Tax rates started at 1% in 1913, and the maxiumum income tax rate was only 6%; the personal deduction was $65,000 for individuals and $87,000 for married couples (in 2008 dollars).

To see how much you would be taxed at the 1913 tax rates, check out the Political Calculations blog.

Everyone Should Pay Income Taxes

A very small number of taxpayers -- the 10% of the country that makes more than $92,400 a year -- pay 72.4% of the nation's income taxes. They're the tip of the triangle that's supporting virtually everyone and everything. Their burden keeps getting heavier.

As a result of the 2001 tax cuts enacted by a bipartisan Congress and signed by President George W. Bush, the share of taxes paid by the top 10% increased to 72.8% in 2005 from 67.8% in 2001, according to the latest data from the Congressional Budget Office (CBO).

Contrary to the myth that Mr. Bush cut taxes only for the wealthy, the 2001 tax cut reduced taxes for every income-tax payer in the country. He reduced the bottom tax rate to 10% from 15% and increased the refundable child tax credit to $1,000 from $500 per child, both cuts that President Barack Obama says we should keep. In so doing, millions of lower income taxpayers were removed from the tax rolls, shifting the remaining burden to those at the top, even after their taxes were cut.

According to the CBO, those who made less than $44,300 in 2001 -- 60% of the country -- paid a paltry 3.3% of all income taxes. By 2005, almost all of them were excused from paying any income tax. They paid less than 1% of the income tax burden. Their share shrank even when taking into account the payroll tax. In 2001, the bottom 60% paid 16.3% of all taxes; by 2005 their share was down to 14.3%. All the while, this large group of voters made 25.8% of the nation's income.

When you make almost 26% of the income and you pay only 0.6% of the income tax, that's a good deal, courtesy of those who do pay income taxes. For the bottom 40%, the redistribution deal is even better. In 2001, these 43 million Americans, who earn less than $30,500, made 13.5% of the nation's income but paid no income tax. Instead, they received checks from their taxpaying neighbors worth $16.3 billion. By 2005, those checks totaled $33.3 billion.

Today, Mr. Obama and many congressional Democrats want the "wealthy" to pay even more so there is more money for them to redistribute. The president says he wants the wealthy to pay their "fair share." Who can argue with that? But he never defines what that means. Is it fair for 10% to pay 70% of the income tax? Does he believe they should pay 75%, or 95%, or does fairness mean they should pay it all? It's clever politics to speak like that, but it is risky policy.

~Ari Fleischer in today's WSJ

Sunday, April 12, 2009

Markets in Everything: Dow Jones Handkerchiefs

From Design Glut:

It's OK to cry. 100% linen handkerchief embroidered with the graph of the Dow Jones Industrial Average from the past 5 years, 2004 to 2009.

Custom pieces also available. For $95, we'll embroider the graph of your personal stock portfolio.

Happy Easter and Happy Passover: Let's Eat!

4-Block World.

Happy Easter: Enjoy the Cheap Eggs and Food!

The chart above shows the real, inflation-adjusted wholesale prices of eggs (in 2009 dollars), annually back to 1890. The wholesale price we're paying today for eggs (about 82 cents) is about 1/12 of the price 100 years ago ($10.50 in 1908 in today's dollars), a decline of 92% compared to the price American consumers paid in the early 1900s.

And it's not just egg prices that have fallen over the last 100 years. Grocery prices in general fell in real price by 82% between 1919 and 2007, measured in the number of hours worked (9.5 to 1.7 hours, another way to adjust for inflation) to purchase a 12-item basket of groceries, according to the Dallas Fed (see graph below).

And food (both at home and away from home) as a share of disposable income has never been more affordable, see the chart below using USDA data through 2007. Food expenditures as a percent of income were in double-digits for the entire 20th century, and were above 20% for most of the 1929-1952 period. It's only since 2000 that spending on food has fallen below 10% of disposable income, and it's been 9.8% for 2005, 2006 and 2007.

ABC News Profiles Pessimism Porn

Saturday, April 11, 2009

"Ridiculous Affordability" Driving Mpls. Home Sales

FINANCE AND COMMERCE -- Buoyed by historically low interest rates and bargain hunters snapping up foreclosed properties, Twin Cities’ pending home sales rose 21.3% in March compared with the same month last year, the Minneapolis Area Association of Realtors reported Friday (see chart above).

The association’s news, based on data from the Regional Multiple Listing Service of Minnesota, marked the 10th straight month of year-over-year increases in pending sales and was the biggest gainer since December, another month when mortgage rates dropped precipitously.In March, there were 4,407 pending homes sales in the Twin Cities, up from 3,632 pending sales the same month in 2008. Meanwhile, first-quarter pending home sales rose 13.7% from the same period a year ago.

The median sales price for all properties of $154,125 in March is down 22.9 percent from a year ago ($199,902, see chart above), skewed heavily downward by the increased prevalence of foreclosures and short sales, the association said.

"Low rates and ridiculous affordability are driving this deal,” Steve Havig, president of the Minneapolis Area Association of Realtors, said in a statement. “The $8,000 federal tax credit for first-time home buyers adds fuel to the fire.”

Many of the fundamentals to support a recovery are improving. For example, the average number of days homes remain on the market is down, the number of available homes per buyer is lower and many homes for sale are garnering multiple buyer offers.

Imported Pizzas from Missouri Destroy Local D.C. Jobs and Create A Huge Carbon Footprint

When you're the president of the United States, only the best pizza will do, even if it means flying a chef 860 miles from St. Louis to D.C.

Obviously, President Obama doesn't yet understand or support
Backyard Economics, and must not realize that imported pizza from Missouri will destroy local jobs in D.C.

And shouldn't the President be concerned about the carbon footprint for pizzas flown in from 860 miles away? According to TerraPass, it would be about 645 lbs. of CO2 per person for the roundtrip St. Louis-Washington, D.C. flight.

Emerging Markets Stock Index Hits 6-Month High

The MSCI Emerging Markets Index closed Friday at 636.045, which is close to a six-month high (see chart above) for the benchmark emerging markets stock index. The index has gained ground on 15 out of the last 20 days.

Backyard Economics is BACKWARD Economics; And Ultimately Leads To Economic Self-Sufficiency

According to the website Backyard Economics:

Money spent close to home adds up to better job security for everyone in the community. Out-of-state spending means fewer jobs in Florida. An economic impact study by Florida TaxWatch concludes that every $100,000 spent online with out-of-state companies costs one Floridian a full time job. In 2008, Floridians spent an estimated $11.2 billion on Internet purchases, mostly with out-of-state businesses. That adds up to more than 112,000 jobs lost in Florida just last year – reverberating across all sectors.

Plant the seeds of economic recovery in your own backyard. Support the businesses that will reinvest your dollars in your community.

An editorial in support of Backyard Economics appeared here in the Jacksonville newspaper, which inspired Don Boudreaux to respond and conclude that:

Florida's buy-local effort boasts the charming name "Backyard Economics." A more appropriate name would be Backward Economics."

MP: Here's another challenge to the Backyard Economics concept.

Jacksonville is in Florida's Duval County. Both state borders and county borders are just imaginary lines on a map, so whatever is said by advocates of Backyard Economics about the state of Florida should also apply to the county of Duval, no?. That is, the logic of Backyard Economics should apply equally to both the state of Florida AND Duval County, and we should be able to substitute Duval County for Florida below:

"Money spent close to home adds up to better job security for everyone in the community. Out-of-DUVAL COUNTY spending means fewer jobs in DUVAL COUNTY. An economic impact study by Florida TaxWatch concludes that every $100,000 spent online with out-of-DUVAL COUNTY companies costs DUVAL COUNTY one full-time job.

In 2008, Duval County residents spent an estimated $521 million on Internet purchases with out-of-COUNTY businesses . That adds up to more than 5,200 jobs lost in DUVAL COUNTY just last year – reverberating across all sectors."

(Note: Florida figures are adjusted to reflect Duval County's share of the state's population: 4.65%.)

Conclusion: Using Backyard Economics logic, Duval County residents should only support Duval County businesses, and should avoid patronizing out-of-county businesses.

But let's go one step further. By the same logic, cities located in Duval County like Jacksonville Beach should only patronize shops, restaurants, and businesses in Jacksonville Beach, and avoid out-of-city businesses. But then the logic would also apply to even smaller geographical areas like neighborhoods within Jacksonville Beach (don't buy "out-of-neighborhood"), a neighborhood resident's own block (patronize only "in-block businesses"), and then ultimately a resident's own household.

In other words, the logic of Backyard Economics for state economies like Florida ultimately leads to an individual household's OWN BACKYARD (literally), and complete and total economic self-sufficiency at the household level (don't buy any "out-of-household" goods or services).

Here's What Happens to Entrepreneurs in Cuba

Why was this famous Havana restaurant ("Huron Azul" pictured above) closed down by Cuban authorities, and why was its owner Juan Carlos Fernandez Garcia arrested?

The list of the restaurant owner's "crimes" includes: Selling “prohibited food” such as lobster and beef; having more than twelve seats in the restaurant; giving credit to local artists who eat there; being an active patron of the arts; paying a huge electricity bill; having a lot of cash that allowed the owner to "maintain an extravagant lifestyle"; and—what nerve—wanting to open a restaurant in Milan, Italy.

Read more here (be sure to check out the slideshow).

George Carlin: Saving the Planet


***Warning: Some strong language.***

iTunes: Elasticity, Price Changes and Total Revenue

A previous CD post several weeks ago reported on the new variable iTunes pricing (69 cents, 99 cents and $1.29; replacing the single price of 99 cents), which went into effect this week on Tuesday.

What effect has variable pricing had on sales ranking (chart position) for the top 100 songs, unit sales, and total revenue per song? There's only a few days worth of sales data so far with the new pricing, but here's what's happened so far this week, according to Billboard:

Two days after the Apple iTunes Music Store raised prices on some individual tracks, there was evidence the increases have hurt the sales rankings of songs given the higher $1.29 price.

While it is difficult to say with certainty whether a price increase had resulted in less revenue, rough estimates reveal slight, negative changes in chart position would result in a positive change in revenue. The changes in chart position between Tuesday and Thursday, however, clearly show that higher prices had forced many songs to cede chart position to lower-priced songs.

The two-day trend from Tuesday to Thursday mirrored the two previous one-day trends (on Wednesday and Thursday separately). On Thursday, 47 songs on the iTunes Top 100 chart were priced at $1.29. The more expensive songs had lost an average of 2.7 chart positions from Tuesday to Thursday. Only six of the $1.29 songs rose up the chart while 29 dropped and 12 remained at the same chart position (see red bars on the the chart above for Lower Rank and Higher Rank).

The 53 songs that had remained priced at $0.99 during that two-day span had gained an average of 1.96 chart positions. Of the $0.99 songs, 32 rose up the chart, 12 dropped and nine stayed even (see blue bars above). The 32 songs that had remained at $1.29 for all three days had lost an average of 3.3 chart positions.

MP: There's also some interesting discussion on the effects of the price changes on sales revenue per song, and some caveats at the end of the article that the analysis is preliminary and doesn't control for all of the relevant variables, but concludes that "What is left is an incomplete but valuable look at the impact of price increases on relative sales performance."

HT: Mike W.

Friday, April 10, 2009

Markets in Everything: Alligator Skins. NOT

The alligator farming industry is hurting because fewer overseas consumers are buying luxury items made of alligator. Alligator farming is a $60 million business in Louisiana. Vermilion Parish is one of the biggest players in the worldwide alligator market. Vermilion Gator Farms Inc., located south of Abbeville, is one of the largest alligator farms in America. The farm has not sold an alligator skin in a year and probably will not be able to sell a skin for another year.

Wayne Sagrera and his four sons own and operate Vermilion Gator Farm. After 25 years of being in the business, Wayne said this is the worst he has seen the alligator industry.“The luxury market has crashed,” Wayne said. “The market is non-existent and there are no sales. Everyone has inventory on-hand because there are no sales. I would say this is the worst that I have ever seen. There has never been a big inventory like this before.”

In Praise of Pirates

National Public Radio -- We shouldn't let our condemnation of modern pirates spill over, unchecked, onto their more colorful, and socially contributory, early 18th-century forefathers. These Caribbean pirates, men like Blackbeard, "Black Bart" Roberts, and "Calico" Jack Rackam, were also watery thieves. But unlike their Somali successors, they didn't only take something out of the world. They gave the world something of value, too.

Historical pirates were harbingers of some of contemporary civilization's most cherished values, such as liberty, democracy and social safety. At a time when the legitimate world's favored system of government was unconstrained monarchy, Caribbean pirates were practicing constitutional democracy. Before setting sail each would-be pirate crew drew up and agreed to a set of written rules that governed them. These rules regulated gambling, smoking, drinking, the adjudication of conflicts and, in some cases, even prohibited harassing members of the fairer sex.

Pirate constitutions established democratic governance for their roguish commonwealths. Crewmembers elected their captains by popular vote and democratically removed captains who dared to misuse their power. Because of this surprising system, far from tyrannical, the average 18th-century pirate captain was a dutiful, elected executor of his constituents' will.

Pirates understood what James Madison pointed out in the Federalist Papers: that the most important check on leaders' use of power is society's ability to select them. Pirates recognized this, and implemented it, more than half a century before Madison put pen to paper.

~Peter Leeson, economics professor at George Mason Univ. and author of "The Invisible Hook: The Hidden Economics of Pirates"

REASON: Tax Facts To Make Your Head Explode

TIME: The Great Banking Crisis of 2008 is Over

The great banking crisis of 2008 is over. It began last September 15 when Lehman Brothers filed for bankruptcy and bottomed when Citigroup traded below $1 last month. Most analysts believe that mortgage-backed securities which included packages of subprime home loans failed when mortgage default rates went up and housing prices raced down. That is only partially true. Banks made a tremendous series of ill-advised loans to private equity firms, hedge funds, commercial real estate holders, and the average man with a credit card balance which he cannot pay.

When people look back on the near-collapse of the banking system they may say that the Congress and Henry Paulson threw enough money into the path of the oncoming failure of the credit system to slow it down so that the government could properly go through the process of guaranteeing parts of the balance sheets of firms including Citigroup and Bank of America. The initial TARP may also have provided time for the new Administration to put together its widely hailed bank "stress test" program meant to determine which of the big financial institutions have dysentery and which do not. Finally, the hundreds of billions of dollars that went into the largest banks late last year allowed Secretary Geithner to produce his public/private partnership to buy toxic assets off of bank balance sheets.

All of those plans, no matter how well-intentioned they may seem, are unnecessary now. Wells Fargo indicated that it made about $3 billion in the first quarter of the year and declared its buyout of the deeply troubled Wachovia to be a success (see bottom chart above). Wells Fargo said that the low cost of money from the government combined with a surging demand for mortgages was all the medicine that it required (see top chart above of the interest rate spread).

Pessimism Econo-Porn: Titillating Bleak Media Reports on the State of Economic Collapse

"Pessimism Porn," from NY Magazine:

My wife busted me again the other day. I had slipped away from her and the kids and into the fantasy world of the web. But not the kind of fantasy you’re probably thinking of. This was pessimism porn. A friend had turned me on to a futurist named Gerald Celente, who anticipated the Asian financial crisis and other calamities. Now, Celente says, the U.S. is heading for a middle-class tax revolt, food riots, and a Central Park engulfed by shantytowns.

The blog Calculated Risk is always a reliable turn-on. The guy who runs it combs the financial media for “cliff-diving” rates of this and that. One data point he often cites is the A2P2 spread, or the difference “between high- and low-quality 30-day nonfinancial commercial paper.” Turns out it “gapped” dangerously last fall. Worrying about the A2P2 spread is like having a dirty secret. I spend many fruitful minutes playing out scenarios: What do I do when my corner deli gets looted? What bridge do I take out of town? There’s something very exciting about it all.

Like real porn, the economic variety gives you the illusion of control, and similarly it only leaves you hungry for more. But econo-porn also feeds a powerful sense of intellectual vanity. You walk the streets feeling superior to all these heedless knaves who have no clue what’s coming down the pike. By making yourself miserable about the frightful hell that awaits us, you feel better. Pessimism can be bliss too.

Thomas Barnett's response to Pessimism Porn and the "titillating bleak media reports on the state of the economic collapse."

I made a decision a long time ago not to make my career a bet on bad things happening. I think that approach simply corrodes your strategic thought capacity. Human history is progress, so if you're constantly having to screen out the good to spot the bad, your vision will be unduly narrow. If you bet on progress, you can easily contextualize the bad, because progress is never linear. But if you bet on retreat, you must consistently discount advances as "illusions" and "buying time" and so on, and after a while, you're just this broken clock who's dead-on twice a day.

As I've said earlier, porn desensitizes. If you want to dull your senses along with the pain, it's a great way to go, but it narrows the intake capacity. After a while, you're simply blind from all that self-pleasuring.

HT: Capital Commerce Blog

Thursday, April 09, 2009

The Real Bank Bailout: Upward Sloping Yield Curve

The chart above shows the spread between the interest rates for 30-year fixed rate mortgages and the rates for 1-month bank CDs, on a quarterly basis from 2000:Q1 to 2009:Q1. Notice how low interest rate spreads preceded the last two recessions (March 2001 - Nov. 2001 and Dec. 2007 to present) as banks got squeezed and became unprofitable (think "credit crunch" or "frozen credit markets"). Notice also how the interest rate spread widened during the 2001 recession, allowing banks to become more profitable and helping the economy to recover as credit became more available.

Larry Kudlow pointed out recently that "the upward-sloped yield curve is the real bailout for the banking system." The expected record $3 billion profit for Wells Fargo in the first quarter 2009 is a direct result of the upward sloping yield curve and the increasing interest spread in the first quarter to 4.6%. The recovery of the banking sector should also be signalling an overall economic recovery this year, just like the 5% spread signalled the end of the 2001 recession.

Wells Fargo Expects Record First Quarter Profits

NEW YORK - Wells Fargo & Co. said Thursday it expects record first-quarter earnings of $3 billion, easily surpassing analysts' estimates and providing an encouraging sign for the banking industry (see chart above). Wells Fargo's stock surged $4.72, or 31.7%, to close at $19.61. Broader markets also rose on the Wells Fargo report, with the Dow Jones industrial average gaining more than 246 points to 8,083.38.

Revenue at Wells Fargo, which has been one of the strongest banks during the ongoing credit crisis and recession, was bolstered by strong mortgage banking and capital markets business, Wells Fargo's CFO Howard Atkins told The Associated Press. During the first quarter, Wells Fargo received about $190 billion in mortgage applications, a 64% jump from the previous quarter. More than 40% of that volume came in March.

Most of that business was refinance applications, but about 25% came from customers looking to purchase homes, Atkins said, noting the recent quarter's mortgage activity has been among the strongest quarters since the housing market began to collapse in 2007.

Signs of improvement from one of the nation's largest banks gave investors reason to rally around the banking sector amid hopes that the worst of the credit crisis is ending. The KBW Bank Index, which tracks 24 of the nation's largest banks, surged 20.1% to 33.81. Some of the nation's hardest hit banks have also rallied, with Citigroup Inc. gaining 34 cents, or 12.6%, to $3.04. Shares of Bank of America Corp. rose $2.49, or 35.3%, to $9.55.

Olio, Bouillabaisse: Assorted Links

1. Watch an excellent video of Tyler Cowen discussing blogging, recorded at the Kauffman Foundation's Economics Blogger Forum in February.

2. Read an excellent profile of Fed Chair Ben Bernanke in today's Washington Post, "How Bernanke Staged a Revolution": This chairman set out to lead as a civil servant rather than a celebrity economist. Facing a thundering financial collapse, he has reinvented the Federal Reserve.

Last Forever? Diamonds: Yes; Diamond Cartels: No

De Beers proved to be the most successful cartel arrangement in the annals of modern commerce. While other commodities, such as gold, silver, copper, rubber, and grains, fluctuate wildly in response to economic conditions of supply and demand, diamonds have continued, with few exceptions, to advance upward in price every year since the Depression.

The diamond invention is far more than a monopoly for fixing diamond prices; it is a mechanism for converting tiny crystals of carbon into universally recognized tokens of wealth, power, and romance. To achieve this goal, De Beers had to control demand as well as supply. Both women and men had to be made to perceive diamonds not as marketable precious stones but as an inseparable part of courtship and married life. To stabilize the market, De Beers had to endow these stones with a sentiment that would inhibit the public from ever reselling them. The illusion had to be created that diamonds were forever — "forever" in the sense that they should never be resold.

From yesterday's Financial Times:

De Beers is facing its first crisis without power to control supply, said Des Kilalea, diamond analyst at RBC Capital Markets, and the strain is showing.

De Beers, the world’s biggest diamond miner, is planning for its turnover to halve this year, it emerged on Wednesday, in the latest sign of how the once-mighty group is struggling to cope with a downturn in an industry it no longer controls.

With diamond prices tumbling by at least 30% over the past year, De Beers has cut production at its mines by 40% year-on-year and mothballed its flagship mines in Botswana. Its two new Canadian mines, whose costs led the company to take on so much debt, lowered production soon after they opened in August.

As the diamond market faces one of its bleakest years in a generation, Christopher LaFemina, an analyst at Barclays Capital concluded that De Beers was “bleeding cash."

Markets in Everything: Sabbatical Home Rentals

Sabbatical Homes: "Helping the academic community with their housing needs since 2000. Your leading resource for home exchanges and rentals while on sabbatical leaves."

Current Intrade Odds

GM to announce before Dec. 31, 2009 it will file for Chapter 11 Bankruptcy: 74.3%

Tim Geithner to depart as Secretary of the Treasury before June 30, 2009: 11.2%

Advance GDP figure for Q1 2009 to be -4.0% or worse: 83%

US GDP growth for Q2 of 2009 will be positive: 10.1%

US GDP growth for Q3 of 2009 will be positive: 32%

US GDP growth for Q4 of 2009 will be positive: 50%

US GDP growth for Q1 of 2010 will be positive: 73%

US Unemployment Rate Dec 2009 greater than 10.0%: 61%

US Unemployment Rate Dec 2009 greater than 10.5%: 45%

US Unemployment Rate Dec 2009 greater than 11%: 35%

US Unemployment Rate Dec 2009 greater than 11.5%: 10%

Source: Intrade.com

Wednesday, April 08, 2009

Mortgage Applications Increase 67.6% From 2008

WASHINGTON, D.C. (April 8, 2009)The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending April 3, 2009. The Market Composite Index, a measure of mortgage loan application volume, was 1250.6, an increase of 4.7% on a seasonally adjusted basis from 1194.4 one week earlier. The Index increased 67.6% compared with the same week one year earlier (see chart above).

The Refinance Index increased 3.2%to 6813.5 from 6600.1 the previous week, and the Purchase Index increased 11.1% to 297.7 from 268.0 one week earlier. The Conventional Purchase Index increased 7.7% while the Government Purchase Index (largely FHA) increased 17.1%. The four week moving average for the Market Index is up 13.3%. The four week moving average is up 4.2% for the Purchase Index, while this average is up 16.0% for the Refinance Index.

The refinance share of mortgage activity decreased to 77.9% of total applications from 79.1% the previous week. The adjustable-rate mortgage (ARM) share of activity remained unchanged at 1.5% of total applications from the previous week.

Can Google Searches Predict Economic Activity?

Yes, according to Google economist Hal Varian:

Can Google queries help predict economic activity? The answer depends on what you mean by "predict." Google Trends and Google Insights for Search provide a real time report on query volume, while economic data is typically released several days after the close of the month. Given this time lag, it is not implausible that Google queries in a category like "Automotive/Vehicle Shopping" during the first few weeks of March may help predict what actual March automotive sales will be like when the official data is released halfway through April.

Our work to date is summarized in a paper called Predicting the Present with Google Trends. We find that Google Trends data can help improve forecasts of the current level of activity for a number of different economic time series, including automobile sales, home sales, retail sales, and travel behavior.

MP: See chart above from the paper comparing monthly Ford vehicle sales and Ford Google Trends.

Here's an excerpt from the paper's introduction:

Google Trends provides daily and weekly reports on the volume of queries related to various industries. We hypothesize that this query data may be correlated with the current level of economic activity in given industries and thus may be helpful in predicting the subsequent data releases.

We are not claiming that Google Trends data help predict the future. Rather we are claiming that Google Trends may help in predicting the present. For example, the volume of queries on a particular brand of automobile during the second week in June may be helpful in predicting the June sales report for that brand, when it is released in July.

India's Stock Market Hits 5-Month High

India's BSE Index has increased 29% from its most recent low in early March, and is now at the highest level (10,535) since early November (see chart above).

Average Home Price in Detroit Falls to $12,669

According to the Michigan Association of Realtors and Detroit Board of Realtors (data here), the average sales price of a Detroit home fell to $12,669 in February (Year-to-Date), a -42.5% decline from the $22,016 average home price during the same period last year (see chart above). 2009 year-to-date unit sales increased by 22.3% to 1,884 homes, compared to 1,540 Detroit homes sold last year over the same period.

From the $97,850 peak Detroit home price in 2003, prices have fallen by an amazing 87%.

For the entire state of Michigan, the average YTD home sales price has fallen by -31% to $85,892 through February 2009, compared to last year's average price of $124,618 for the same period.

See related Marginal Revolution post here.

See updated data here, YTD price through July is only $11,596.

Enjoy A Turkey or Ham Easter Dinner For Eight For Under $35, Including 2 Bottles of Wine and Dessert

Where else? Wal-Mart

Tuesday, April 07, 2009

NY Fed Model Suggests Economic Recovery Has Started, and Recession Will End This Year

According to the New York Fed, "Research beginning in the late 1980s documents the empirical regularity that the slope of the yield curve is a reliable predictor of future real economic activity."

This afternoon, the New York Fed released its latest "Probability of U.S. Recession Predicted by Treasury Spread," with data through March 2009, and the Fed's recession probability forecast through March 2010 (see chart above, click to enlarge). The NY Fed's model uses the spread between 10-year and 3-month Treasury rates (currently at 2.61%) to calculate the probability of a recession in the United States twelve months ahead (see chart below of the Treasury spread).

The Fed's data show that the recession probability peaked during the October 2007 to April 2008 period at around 35-40%, and has been declining since then to less than 10% for December 2008 and January 2009. Looking forward through 2009, the Fed's model shows a recession probability of only about 1% on average through the next 12 months, and below 1% by the end of the year (0.82% in December 2009). By March of 2010, the recession probability will be only 0.53%, close to the lowest level since mid-2005.

Further, the Treasury spread has been above 2% for the last 12 months, a pattern consistent with the economic recoveries following the last six recessions (see chart above).

Bottom Line: My reading of the New York Fed's Treasury spread model suggests that an economic recovery is probably already underway, and the Fed's model predicts the end of the recession in 2009.

Convenient, Affordable Retail Health Care Clinics

ABC-TV Eyewitness News in Los Angeles reports on how more and more retail health clinics are turning up, offering quick, affordable health care. Some clinics are open 12 hours a day, seven days a week, with no appointment necessary.

"Paitents love the convenience of being able to come in, to walk in at any time and be treated instead of having to go to the emergency room and having to wait long hours," said Dr. Maggie Bertisch.

Brazil Stock Market Reaches 6-Month High

SAO PAULO, April 7 (Reuters) - Brazil's stocks edged higher today led by real estate companies and ethanol producers, while the national currency weakened as a sell-off in U.S. markets and in Europe weighed on demand for riskier emerging market assets.

The Bovespa Index (.BVSP) of the Sao Paulo stock exchange firmed 0.6% to 44,432.11, clawing back to positive territory after dropping 1.3% in early trading.

MP: Brazil's Bovespa Index is now at a 6-month high, the highest level since early October.

Cartoon of the Day: Fiscal Child Abuse

IBD's Michael Ramirez.

Auto Bailout: Russian Style

NY TIMES -- If there is a country that truly needs a car czar, it is Russia, home of the czars — and Lada. The factory here has been stamping out the same version of the Lada, the typical boxy people’s car of the former Eastern Bloc, for four decades (see picture above).

Avtovaz is one of the least efficient automobile factories anywhere in the world — each worker produces, on average, eight cars a year, compared with 36 cars a year at GM’s assembly line in Bowling Green, Ky., for example.

Yet the government is giving Avtovaz billions of dollars in aid, no strings attached. No chief executive firings. No renegotiation of workers’ contracts. No demands to turn out better-quality cars, much less fuel-efficient hybrid cars.

But the auto bailout, Russian style, is intended more to ensure peace in the streets than restructure a business, much to the lament of some critics who think tough love might be better.

The Housing Market Has Bottomed

According to Scott Grannis, the two charts above make the case that the housing market has seen the worst of its decline, which started over three years ago. Read why here.

Used Vehicle Index Rises for 3rd Straight Month

MANHEIM CONSULTING -- In March, wholesale used vehicle prices increased 0.6% from the previous month. The Manheim Used Vehicle Value Index now stands at 106.1, which represents a year-over-year decline of 1.5%. With March representing the third consecutive monthly increase, seasonally adjusted wholesale values have risen 8.3% in 2009 (see charts above).

The strength in auction pricing has been the result of the reduced supply that is normally generated by trade-ins on new vehicle sales, the substitution effect from new to used vehicle purchases, a strong tax refund season, and some easing in the availability of retail financing. The supply reduction caused by the unprecedented steepness at which new vehicle sales have fallen will have long-term effects as well as the immediate impacts being noticed today.

From last month's report:

Some analysts have suggested that the rapid rise in wholesale used vehicle pricing is a precursor to an improvement in new vehicle sales and may even point to a recovery in the overall economy. It’s more likely, however, that the turnaround in wholesale used vehicle values is a necessary, but not a sufficient, condition for a better new vehicle market. That’s especially true given that the recent rise in auction pricing has been driven in large part by supply dynamics that were created by the unprecedented slowdown in new vehicle sales.

CME Introduces Futures and Options on Hurricanes

From the press release:

CME's hurricane futures and options will be settled to the CME Hurricane Index (CHI), which provides a numerical measure of the destructive potential of a hurricane. The CHI is based on a calculation of the maximum wind velocity and size (radius) of each official storm to calculate the potential for physical and financial damage. The higher the CHI number, the more potentially damaging the hurricane.

In addition to its hurricane products, CME Group offers weather contracts based on aggregate temperatures for 45 cities, including 24 throughout the U.S., 10 in Europe, six in Canada, three in Australia and two in Japan. CME Group also lists products used to hedge risk associated with snowfall and frost.

More information here: Hurricane futures and options are financial tools designed to offset hurricane-related risk by offering a means of transferring risk to the capital markets.

Bear Market Hits Fine Art, Prices Plunge -35%

FT.com -- Art prices plunged during the first quarter of the year as cash-strapped collectors looked to unload works by postwar masters that had earlier boomed in price along with the stock market. The Mei Moses index, set for release today, shows art prices fell 35% in the first quarter, having held up during earlier months of the financial crisis. The overall index fell 4.8% last year (see chart above of the Mei Moses Index vs. the S&P500 Index).

The decline accelerated as people who lost money in the financial crisis, including victims of the Madoff fraud, put up works for sale, often at a loss, several art world insiders said.

Monday, April 06, 2009

Emerging-Market Stocks Reach 6-Month High

Emerging-market stocks climbed to the highest in almost six months as commodity prices advanced on speculation stimulus packages are beginning to thaw global credit markets and revive economic growth. The MSCI Emerging Markets Index added 1.6% to 626.92, the highest since October 14 (see chart above). The index, which lost 54% of its value last year, has gained 11% in 2009 as governments take steps to increase liquidity and boost financial aid for developing nations hardest hit by the global credit crunch.

10.25% Emerging Markets March Gain: 8-Year High

The 10.25% March increase for the MSCIBarra Emerging Markets Stock Index is the highest monthly return for the emerging markets stock index since January 2001 (see chart above).

World Stock Market Rebounding

The Morgan Stanley Capital International-Barra World Stock Index has increased by more than 24% since its most recent March 9 bottom (see chart above).

On a monthly return basis, the 7.24% March 2009 return for the MSCIBarra World Stock Index is the highest monthly return in almost six years, since the 8.64% return for April 2003 (see chart below).

Obama Makes Some Tough Business Decisions

SNL skit of President Obama's new industrial policy of having the government pick all of the winners and losers for companies, products, magazines, clothing, universities and even football teams.

House Price Indexes: USA vs. Europe

The Financial Times just launched the FT Eurozone (16 countries) and FT European house price indices (Eurozone plus UK, Iceland, Norway, Sweden, Switzerland and Denmark), which track prices of new and second hand houses and apartments across Europe. The chart above shows the quarterly house price indexes for the U.S. using OFHEO data and for the Eurozone using FT.com data (with free registration).

Notice the strikingly similar pattern of house prices in the U.S. and Europe between 2000 and 2008. U.S. house prices peaked several quarters ahead of Europe and also started declining a few quarters ahead of Europe, but otherwise the home price patterns are very similar. Notice also that the quarterly index for the U.S. flattened out in the last two quarters of 2008. On a monthly basis, the OFHEO index increased in January by 1.7%, the largest monthly increase in the OFHEO index on record (back to 1991).

Nuisance Consumers With Insufferable Preferences

The stunning shift in consumer preferences that should make the White House's freshly minted auto experts feel vulnerable has been reported under headlines such as "Like a Rock: Hybrid Car Sales Plummet" (Wall Street Journal, Dec. 9) and "Hybrid Car Sales Go from 60 to 0 at Breakneck Speed" (Los Angeles Times, March 17). Absent $4 gasoline, customers, those nuisances with their insufferable preferences, do not want the vehicles the politicians want them to want, even with manufacturers now offering large rebates and other incentives.

The two best-selling vehicles in America this year are large pickup trucks (Ford F-Series and Chevy Silverado). In February, Toyota sold 13,600 Tundra and Tacoma pickups and 7,232 Priuses (see chart above). It sells the Prius at a loss, which it can afford to do because it makes pots of money selling pickups. Has the Car Designer in Chief, aka the president, considered the possibility that what he calls "the cars of tomorrow" will forever be that?

~George Will's column today

Sunday, April 05, 2009

A 1-Man Toxic-Asset Eater:The Banker Who Said No

While the nation's lenders ran amok during the boom, Andy Beal hoarded his money. Now he's cleaning up--with scant help from Uncle Sam.

Andy Beal, a 56-year-old, poker-playing college dropout, is a one-man toxic-asset eater--without a shred of government assistance. Beal plays his cards patiently.

For three long years, from 2004 to 2007, he virtually stopped making or buying loans. While the credit markets were roaring and lenders were raking in billions, Beal shrank his bank's assets (Beal Bank) because he thought the loans were going to blow up. He cut his staff in half and killed time playing backgammon or racing cars. He took long lunches with friends, carping to them about "stupid loans." His odd behavior puzzled regulators, credit agencies and even his own board. They wondered why he was seemingly shutting the bank down, resisting the huge profits the nation's big banks were making.

Now, while many of those banks struggle to dig out from under a mountain of bad debt, Beal is acquiring assets. He is buying bonds backed by commercial planes, IOUs to power plants in the South, a mortgage on an office building in Ohio, debt backed by a Houston refinery and home loans from Alaska to Florida. In the last 15 months Beal has put $5 billion to work, tripling Beal Bank's assets to $7 billion, while such banks as Citigroup and Morgan Stanley shrink and gobble up billions in taxpayer bailouts.

Beal has barely got a dime from the feds. A self-described "libertarian kind of guy," Beal believes the government helped create the credit crisis. Now he finds it "crazy" that bankers who acted irresponsibly are getting money and he's not. But he wants to exploit their recklessness to amass his own fortune.

"This is the opportunity of my lifetime," says Beal. "We are going to be a $30 billion bank without any help from the government." Not much next to the trillion-dollar balance sheets of the nation's troubled banks, but the lesson here might be revealed in the fact that this billionaire is not playing with other people's money--he owns 100% of the bank and is acting accordingly.



Median CEO total compensation in 2008: $8.4 million (Source: NY Times).

Larry Summers' total compensation in 2008: $8.5 million (Source:
Washington Post), see some details above (via Infectious Greed), click to enlarge.

Why Business Failure Is A Cause For Celebration

The profit-and-loss system works because successful producers reap rewards when they combine resources effectively and unsuccessful producers incur costs when they don't. The prospect of profits from making good decisions and losses from making bad ones encourages producers to make choices that improve our lives.

But if government shields ineffective producers from the consequences of their bad decisions, producers' incentives become skewed. For instance, when policy permits producers to enjoy the benefits of successful risk-taking but subsidizes the losses of unsuccessful gambles, producers have an incentive to take on more risk than they should. Since they're no longer responsible to consumers when they make poor choices, the link connecting producers' and consumers' interests is weakened and, with it, the economy's ability to advance.

At a time when failure is the new dirty word and government seems willing to prop up floundering firms at any cost, we would do well to remember the benefits of letting failing businesses go belly up.

~George Mason economist Pete Leeson in the Washington Times (via Cafe Hayek).

Saturday, April 04, 2009

Economics: The "Goldilocks" College Major

Like many liberal-arts institutions, Middlebury College, where I teach, has a problem: Too many students want to be economics majors. Economics enrollments keep growing, and adding more faculty members to the department seems to only increase the demand. The rumor on the campus is that if the college actually provided enough professors to meet the demand for economics courses, it would have to change its name to the Middlebury School of Economics.

Professors at other liberal-arts colleges confirm that the phenomenon is widespread and has been for some time. But what makes the economics major so appealing? As an economist I like to think that economics has become so popular because of its intellectual rigor, broad appeal, and importance to understanding the world. And those are clearly part of the answer, especially given the recent financial crisis. Modern economics is an exciting and dynamic field of study that has changed considerably in recent years; specifically, it has become more quantitative and scientific. Today’s economists bring technical expertise to interesting and novel questions. They have also expanded their previous narrow vision of human behavior. Homo economus is now considered purposeful, not ultrarational, and pursues enlightened self-interest, not greed.

Psychological insights and traditional economics are blended together in today’s behavioral economics; because modern economists do not see the market as the answer to everything, they are able to be involved in all types of real-world policies, from changing default options for people’s savings decisions to helping design search algorithms for Google. But as much as I’d like to think so, I suspect that those strengths and improvements are not the main reasons for the economics major’s appeal.

If the economics major’s popularity is not due to its intellectual dynamism or connection to business, to what is it due? I suspect a mundane explanation: It is the “just right” major. By “just right” I mean that the economics major provides the appropriate middle ground of skill preparation, analytic rigor, and intellectual excitement that students look for in a major, and that employers look for when hiring students.

~“Economics: The 'Just Right' Liberal-Arts Major?” by David Colander, Economics Department Chair at Middlebury College

HT: Captain Capitalism