Sunday, September 30, 2007

Housing Market Continues to Soften

WASHINGTON -- Existing-home sales slipped 0.2% in July to a seasonally adjusted annual pace of 5.75 million homes, the lowest in five years, according to the National Association of Realtors (see top chart above). The median sales price dropped to $228,900, down 0.6% from the July 2006 level, which was the highest on record.

Inventories of homes for sale jumped 5.1% to 4.59 million, or about 9.6 months of supply at the current sales pace (see bottom chart above). A supply of about six months generally indicates a balanced market.

Ethanol, Schmethanol: El Mistako Muy Grande

"Everyone seems to think that ethanol is a good way to make cars greener. Everyone is wrong. The political rush to back ethanol is a mistake."

Read more of the article "Ethanol, Schmethanol" here in The Economist.

Africa Leads the World in the Creation of Red Tape

The World Bank just released its "Doing Business 2008" report, an annual study that tracks a set of regulatory indicators related to business startup, operation, getting credit, trade, payment of taxes and closing a business, by measuring the time and cost associated with various government requirements in 178 countries.

The top 10 and bottom 10 countries are displayed above (click to enlarge) for the "Ease of Doing Business Index," along with the GDP per capita of those countries. As expected, the more favorable the overall business climate, the higher the income per capital. Poor countries are poor and remain poor because they stifle private businesses, especially in Africa, which has 9 of the bottom 10 countries, and 19 of the bottom 20. Here are the complete rankings.

From the FT Times: "The U.S. may be the economic superpower, and China the new manufacturing powerhouse, but there is one industry in which Africa still leads the world: the manufacture of red tape. This year’s edition of “Doing Business" is a depressing but important reminder of what we already knew: poor countries tend to stifle their economies with impossibly burdensome regulations, while most rich countries let entrepreneurs start businesses, buy and sell property, and ship goods through customs.

Read a Business Week report here, and an article from Financial Express in India here.

Bottom Line: Wealth, income, jobs and prosperity are created by businesses that start and operate in the private sector of the economy. Business-friendly countries create wealth, income, jobs and prosperity, and business-unfriendly countries don't.

Saturday, September 29, 2007

Why "Free" Municipal Wireless Has Flopped It's hard to dislike the idea of free municipal wireless Internet access. Imagine your town as an oversized Internet cafe, with invisible packets floating everywhere as free as the air we breathe. That fanciful vision inspired many cities to announce the creation of free wireless networks in recent years. This summer, reality hit—one city after another has either canceled deployments or offered a product that's hardly up to the hype. In Houston, Chicago, St. Louis, and even San Francisco, once-promising projects are in trouble. What happened—was the idea all wrong?


Setting up a large wireless network isn't as expensive as installing wires into people's homes, but it still costs a lot of money. Not billions, but still millions. To recover costs, the private "partner" has to charge for service. But if the customer already has a cable or telephone connection to his home, why switch to wireless unless it is dramatically cheaper or better? In typical configurations, municipal wireless connections are slower, not dramatically cheaper, and by their nature less reliable than existing Internet services. Those facts have put muni Wi-Fi in the same deathtrap that drowned every other company that peddled a new Net access scheme.

Job Security? Not Really, Not In the Long Run

From "The UAW's Awakening" in today's Wall Street Journal:

"The problem with unions is not all that dissimilar to that posed by entrenched management: Once they win comfortable contracts, they often become impediments to the kind of innovation and flexibility essential to success in today's economy. So in the name of "job security," they undermine a company's -- or a nation's -- competitiveness. The result, over time, is less job security for everyone, especially the union workforce. There's no better example of this than GM, where the UAW now represents about 74,000 hourly workers, compared to 246,000 in 1994. Some security."

This is classic textbook economics, paraphrased from Gwartney and Stroup:

For a time, unionized workers enjoy higher wages and job security. In the long run, however, investment will move away from firms with low profitability (Ford and GM). To the extent that the profits of unionized firms are lower (GM, Ford), investment expenditures will flow into the nonunion sector (Toyota, Honda, Nissan) and away from unionized firms. As a result, the growth of both productivity and employment, as well as market share, will tend to lag in the unionzed sector.

The larger the wage premium of unionized firms and the greater the guarantees of job stability, the greater the incentive to shift production toward nonunion operations. Empirical evidence shows that industries and companies with the largest union wage premiums and greatest guarantees of job stability are precisely the industries and companies with the largest declines in the employment of unionized workers.

Bottom Line: Gains in the short run of higher-than-market wages and benefits, and greater job security, eventually undermine the companies employing unionized workers, destroying hundreds of thousands of union jobs in the long run. The more success a union has in the short-run, the greater the failure in the long run. The discipline of the market eventually dominates and prevails.

Music I've Been Listening To, Recommended

1. When it comes to groovin', burnin,' swingin' Hammond B3 organ jazz and blues, in the tradition of Jimmy Smith, Jimmy McGriff and Richard "Groove" Holmes, it doesn't get much better than Tony Monaco. Give him a listen on his CDs East to West, Intimately Live at the 501, Fiery Blues, or Burnin' Grooves.

2. For something a little bit unusual and off-beat, but with a great Latin jazz flavor, check out Roberto Perera, a Paraguayan jazz harpist - "In the Mood" is a great CD.

3. I've mentioned it before, but it's worth another plug - check out Pandora Radio, the Internet radio station that plays only the music you like - you pick your favorite artist(s) or favor songs, and it creates a customized radio play list with only those artists or songs that are similar in style to your favorite(s).

4. I've also mentioned
KFAI-FM in Minneapolis before. If you want to hear the very best blues on the planet, check out the afternoon blues programs: Rollin' and Tumblin' (Tues), House Party (Wed), Blueslady's Time Machine (Thursday) and Sugar Shop (Friday - blues and R&B), either live from 3-6 p.m. CST online, or anytime through the KFAI archives for up to two weeks after the live show.

Free Speech is a Messy Affair

Among Mahmoud Ahmadinejad, Andrew Meyer and Lawrence Summers, the world has been treated recently to a carnival of free expression as our most treasured right was exercised on university campuses.

Or wasn't. Depending.

Three individuals trying to exercise freedom of speech in three different university environments with three different results. The one with the greatest credibility (Summers) was censored. The one whose regime restricts academic freedom and imposes censorship was given a forum. The one whose participation in the free speech experiment arguably counts the most -- the student -- was physically punished.

Read more here.

Friday, September 28, 2007

Forbes 400 as a Lesson in the Invisible Hand

The Forbes 400 As a Lesson in Economics:

Of the charter members of the first Forbes 400 in 1982, only 32 remain today. Far from a country where only the rich get richer, the wealthy in the US are very much a moving target. While there are 74 Forbes 400 members who inherited their entire fortune, 270 members are entirely self-made. Though many attended Harvard, Yale and Princeton, there are countless stories within of high school and college dropouts, not to mention others who grew up extremely poor. Politicians who regularly engage in class warfare would do well to keep the Forbes 400 out of the hands of their constituents, because it makes a mockery of the kind "Two Americas" rhetoric suggesting the existence of a glass ceiling that keeps hard workers at the bottom of the economic ladder. To read the Forbes 400 is to know with surety that the U.S. is still very much the land of opportunity.

To read many business journalists today, one might assume that the U.S. economy is stratified, offers little room for advancement, and that those at the top are impervious to market forces while enjoying market power that enables them to fleece the less fortunate. Thanks to the lessons offered up yearly in the Forbes 400, we know the opposite is true. Successful people are that way because they make our lives exponentially better, while yearly dropouts from the Forbes list frequently offer evidence showing that consumers punish those who falter. For that, we should be glad that the Forbes 400 goes against the conventional grain and celebrates successful American enterprise.

Here's the
Forbes 400 article.

Bottom Line: Consumers ultimately determine the Forbes 400 list with their dollar votes in the marketplace. If you want to get on the list next year or in the future, first figure out some way that you can significantly improve the lives of millions of consumers and you might have a chance.

Socialism Works, But Only if You Know Their Names

I'm attending a Free Market Forum at Hillsdale College featuring Robert Barro from Harvard, James Gwartney of Florida State (author of the textbook I use for economics), Alan Reynolds of Cato, Mary Anastasia O'Grady of the Wall Street Journal, Walter Williams from George Mason among others.

After Walter Willams' dinner speech last night, Robert Barro asked a question about whether the government had any obligation to provide any socialist-type safety-net programs for the general good.

Walter responded something like this. "Let me make this perfectly clear. I support and practice many types of socialist programs including income redistribution, welfare payments, disability support, free health care, and social saftey nets. But I only practice socialism IN MY OWN FAMILY; and socialism like this only works when you know the names of the people involved. In any situation when you personally can't name everybody involved, then the market is superior to socialism."

Bottom Line: Within a family, socialism works much better than the market. Outside of a family, the market usually works much better than socialism. Good point, Walter!

Thursday, September 27, 2007

If GM Can't Buy and Sell Globally, Why Should UAW?

Washington Post: "The UAW got the assurances it wanted that GM would invest in building new products in the United States, thereby providing job security for members."

Detroit News: "The contract offers assurances from GM that it will continue to invest in its U.S. factories and maintain union jobs."

Just wondering, wouldn't it be fair then to ask UAW members to:

1. Agree to not take any vacations out of the U.S. or engage in any foreign travel to maintain U.S. tourism jobs.

2. Agree not to make any investments in stock or bonds outside the U.S.

3. Agree not to wear any foreign-made clothing, thereby providing job security for American apparel workers.

4. Agree not to eat any foreign-produced food products like bananas or coffee, to maintain U.S. agricultural jobs.

5. Agree not to watch any foreign-made movies, read any books by foreign authors, or listen to any foreign music.

In other words, if the UAW wants to restrict GM's ability to invest, buy and sell globally, shouldn't UAW workers agree to the same restrictions?

India's Stock Market Rocks; New High Above 17,000

NEW YORK (Associated Press) - India's benchmark stock index crossed 17,000 for the first time Wednesday after zooming up 1,000 points in just six sessions since the U.S. Federal Reserve cut its key interest rate last week. That's the fastest ever 1,000-point gain for the Bombay Stock Exchange's 30-share Sensex. The index took 51 trading sessions to get from 15,000 to 16,000 (see chart above).

The benchmark index has risen 22% this year - and 6 percent in the past week - as foreign investors have pumped money into the market amid brisk economic growth that is averaging about 9% annually the last couple years.

Here's another report
on India's red-hot stock market, with a timeline on the rise of the Sensex through Indian stock market history back to 1990, when the BSE closed above 1,000 for the first time.

(HT: Sanil Kori)

Wednesday, September 26, 2007

For the American Car Buyer, It's Never Been Better

From today's Wall Street Journal:

"Over the decades that the Big Three have struggled with their American operations, foreign auto companies have rapidly established and expanded U.S. production through foreign direct investment.

Broaden the view even more, to all American consumers, who have benefited greatly from the global engagement of the U.S. auto industry. The easiest way to see this is to visit any parking lot. The tally this morning outside my office? Five Big Three vehicles and 10 foreign-company vehicles. At the national level, in 1980 the Big Three had 73% of the U.S. automobile market. In recent months this share has slipped below half.

Thanks to all the competition among the Big Three and foreign companies, consumers have enjoyed massive innovation, new variety -- and lower prices. From 1990 through 2006, the overall U.S. consumer price index rose 53%. The rise in the autos CPI component? Just 13.4% (see chart above)."

MP: We hear a lot of bad news for U.S. automakers, especially in Michigan, e.g. about the decline of the Big Three's market share, the huge losses suffered by GM and Ford, the decline in UAW membership, the $90 billion in health-care benefits the Big Three owe to hundreds of thousands of union retirees, etc.

What we don't hear as much about though is the good, great, and even spectacular automotive news for U.S car buyers. Consider that the CPI for new cars is the same in August 2007 (about 160) as it was in 1994 (see chart above). In other words, new car prices have been flat for 13 years, are lower today than 10 years ago, and are only 12% higher than in 1990.

American car buyers have never had it better in terms of price, quality and selection. Globalization and competition have produced a true car buyer's heaven. It might be getting worse and worse for GM and the UAW, but it's getting better all the time for the group that really counts: the U.S. CONSUMER.

UAW-GM Battle: Showdown About the Past

In the grand scheme of things, the latest installment of the UAW-GM battle has the makings of this fall's Army-Navy football game—a match between two ancient powers whose rivalry once dominated the headlines but who now play a largely symbolic role. GM and UAW—the largest American manufacturing enterprise and the nation's largest manufacturing union—brawled in bloody 1930s battles and ultimately reached an accommodation that led to a golden age. But GM and the UAW matter less and less to the U.S. economy, and the U.S. economy matters less and less to GM.

Both GM and the UAW will argue that the outcome of these contract talks is vital to the future of the U.S. auto industry. But the subject of the talks—the creation of a trust to guarantee health benefits for retirees and workers, the union's desire for job security commitments, and GM's demands for significant cost reductions so it can compete in the United States—prove that the showdown is really about the past.

Bayer Bails On the NYSE, Cites U.S. Regulations

Relieving itself of the pain of high regulation fees in the U.S., German aspirin maker Bayer left the New York Stock Exchange today. Bayer says leaving the NYSE will save more than $20 million in listing fees and accounting costs.

Bayer joins British Airways and 32 other foreign companies that have delisted from the New York Stock Exchange this year. Nine other foreign companies have announced they plan to do so as well this year. Another 20 foreign firms said this year they plan to leave the Nasdaq or have done so already.

One reason is cost. The NYSE listing fee for most foreign companies is $38,000 a year. But fees needed to comply with Sarbanes-Oxley rules and convert books to meet U.S. accounting standards can add millions of dollars in costs.

Expect the exodus to continue,
a global market expert says. "You will see more (foreign companies) delisting from U.S. markets," she says. "I'm hearing everyone in Europe discussing it."

Bottom Line: If you tax or regulate something, you get less of it.

Carpe Diem Milestones

1. Carpe Diem is now officially one year old. This was my very first post on September 20, 2006, and this is now post #1424, which is an average of 3.84 posts per day.

2. The number of visits to Carpe Diem just went over 200,000 a few days ago, view the SiteMeter statistics here.

3. Carpe Diem was just included in the "Top 100 Academic Blogs Every Professional Investor Should Read," published today by CurrencyTrading.Net.

Carpe Diem!

BIS: Global Currency Markets Explode

According to a triennial central bank survey of foreign exchange activity just released by the Bank for International Settlements (BIS):

1. Daily turnover in global currency markets rose to $3.2 trillion in 2007, which is a 71% increase since the last survey in 2004, when daily foreign exchange trading volume was $1.87 trillion.

2. The 71% increase is the largest percent jump in daily currency trading since the BIS began conducting its benchmark survey in 1989.

3. Foreign exchange trading in the U.S. increased by 44% over the last three years, from $461 billion in 2004 to $664 billion this year (see chart above).

4. Trading in financial derivatives linked to currencies soared to $2.1 trillion a day, the report said, a rise of more than 70% since 2004. Large companies are also taking a more active and sophisticated approach to managing currency exposure.

5. Currency trading in the U.K. ($1.359 trillion per day), the world's largest currency center, represented 42.5% of world currency volume, and trading in the U.S. (ranked #2 at $664 billion daily) represented about 21% of world currency volume. Together, the U.K. and U.S. account for more than 63% of the world's currency trading every day.

6. To put $3.2 trillion of daily currency trading in perspective, consider that $3.2 trillion is greater than the ANNUAL Gross Domestic Product of Germany ($2.9 trillion), China ($2.6 trillion) and the U.K. ($2.4 trillion). In the U.K., more currency is traded in London in two days ($2.77 trillion) than the value of all goods and services ($2.4 trillion) produced in the country in a year!

Read more here in today's Wall Street Journal.

Tuesday, September 25, 2007

Interesting Puzzle....

Check out the unusal, moving jigsaw puzzle, drag the pieces together to make the picture above...

Get Your Passport: Business Education Going Global

The list of items to bring to college is going to be a little longer for freshmen who enter the University of Minnesota's Carlson School of Management next fall. They're going to need to bring a passport.

The university announced Monday that starting next fall, students who enter the business school will be required to have an international experience before they can graduate. The reason is pretty simple: The business world is becoming more global.

Continue reading in today's Star Tribune....

The Downward Spiral....

And the downward spiral of GM and Ford's long term debt, from investment grade to junk.....

Question: Will a strike increase either company's market share or bond rating? Answer: Not likely.

Toyota vs. GM vs. Harley-Davidson

In 2006 GM produced about 9 million vehicles worldwide, about the same as Toyota; and Ford produced about 6.6 million vehicles. And yet look at the whopping difference in market value in the graph above between Toyota ($208 billion) and GM (only $19.5 billion). Is that what $51 billion in health care liabilities does to a company's market value? Look for a prolonged strike to erode GM's market value even further.

And consider that motorcycle manufacturer Harley-Davidson's market value of $12 billion is not far behind GM and Ford, even though it only manufactures about 300,000 motorcycles annually!

Mississippi vs. Michigan

It's not even close any more in the ongoing contest between Mississippi and Michigan for the state with the highest unemployment rate in the country. Mississippi can declare victory.

State unemployment rates for August came out today, and Michigan now ranks #51 with a jobless rate of 7.4%, the highest in the country and the highest rate in Michigan in more than 14 years (since June 1993).

Mississippi's jobless rate is now 1.5% below Michigan at only 5.9% (and it ranks #49), ahead of Alaska's unemployment rate at 6.3% (#50), which is more than 1% below Michigan.

GM Anti-Jobs Bank: Nice Nonwork If You Can Get It

One issue contributing to the UAW's strike against GM is that negotiations reached an impasse regarding the future of the "jobs bank," or what the Wall Street Journal calls "GM's Anti-Jobs Bank, the company's euphemism for a post-employment limbo in which GM pays laid off members of the United Auto Workers not to work." As the WSJ points out today, it's "Nice nonwork, if you can get it."

There probably isn't a single issue that better highlights the problems facing GM and the UAW than the "Jobs Bank," which they both agreed to in 1984. Here is what the WSJ had to say about it in a 2005 editorial "GM's Anti-Jobs Bank":

If you want to know why GM's costs are too high for the number of cars it sells, here's one explanation - the Jobs Bank.

GM doesn't like to talk about the "jobs bank," to the point that it won't disclose how many idled workers are in the bank or even how much it costs the company. However, the Detroit Free Press has dug around and reported that the "bank" holds some 5,000-6,000 employees, at an annual cost of as much as $800 million a year. And that's just the beginning of the damage it does.

The jobs bank was created in 1984 at a time when it became fashionable to worry that automation would cause robots to replace workers on factory floors. So in exchange for the right to introduce productivity improvements in factories, GM, Ford and Chrysler all consented to jobs banks. The idea was that in exchange for educating themselves, doing community service or in some cases just sitting around a factory, workers would continue to collect pay and benefits until the automaker could find another job for them.

One trouble is that U.S. car makers have been shrinking more than growing in the two decades since, meaning people have stayed in the bank longer than envisioned. The commitment to find a new job for those workers only made sense in an environment in which GM's demand for labor was stable or growing. Instead, that demand has been steadily shrinking as productivity has increased and market share has decreased.

The jobs bank sends a message that downsizing is temporary, and that GM can accommodate those workers somewhere. The reality is that many of them are simply waiting out retirement.

GM has a host of problems, from the attractiveness of its product lines to the health-care costs it pays for its one million retirees. But a major one is size: It is a smaller company than it was or expected to be when it made the promises it's now trying to keep both to retirees and current workers. GM has some of the most productive industrial workers in the world, but it has too many of them for the number of cars it can sell today.

The jobs bank is both cause and symptom of that problem. We don't wish hardship on those workers, but the company's future now rests on its ability to make its payroll match its production. If the jobs bank -- and the self-deception it represents -- cannot be fixed, that millstone will continue to drag down what was once one of America's great companies.

MP: Only when and if GM and the UAW agree to eliminate the "jobs bank," will there be any hope that either will survive.

India Is Outsourcing Outsourcing: UAW Listen Up

India is now outsourcing outsourcing, the New York Times reports today in World Busines:

To fight on the shifting terrain, and to beat back emerging rivals, Indian companies are hiring workers and opening offices in developing countries themselves, before their clients do.

NASDAQ: INFY) says its outsourcing experience in India has taught it to carve up a project, apportion each slice to suitable workers, double-check quality and then export a final, reassembled product to clients. The company argues it can clone its Indian back offices in other nations and groom Chinese, Mexican or Czech employees to be more productive than local outsourcing companies could make them.

Such is the new outsourcing: A company in the United States pays an Indian vendor 7,000 miles away (Infosys) to supply it with Mexican engineers working 150 miles south of the United States border.

As an Infosys senior vice president put it, the future of outsourcing is “to take the work from any part of the world and do it in any part of the world.”

Or as Indian CEO Raman Roy said "Geography is history."

MP: This might be a lesson from Inida for U.S. unions about how business will take place in the 21st Century. For example, the UAW wants GM to lock in future work for U.S. factory workers by promising jobs, product commitments and investments in U.S. plants.

"Globalization is killing us," said Jerry Gillespie, president of a UAW local in Warren, Mich., whose members work on engineering and design of future products. "They want to build engineering centers in the rest of the world and take that work away from us. That's our fight."

That's soooooooooooo Machine Age, 20th Century thinking.

Monday, September 24, 2007

UAW Strikes GM

DETROIT, MICHIGAN--The United Auto Workers launched a national strike today against General Motors Corp. after 10 days of marathon bargaining failed to produce a new labor pact for the automaker's 73,000 hourly U.S. workers.

The stunning move came after the union told its members on Sunday they were to walk off the job unless they heard otherwise by 11 a.m. That word never came, and now GM is facing its first strike since the UAW struck the automaker's operation in Flint in 1998.

Prediction: GM's falling market share, currently at 23.56% (year-to-date), will fall by several more percentage points by the end of the year.

We've Got A Lawyer Surplus and Doctor Shortage; Why Couldn't It Be the Other Way Around?

From the front page today's WSJ, an article about the oversupply of lawyers, "Job Market Wanes for U.S. Lawyers; Law Schools Proliferate:"

"On the supply end, more lawyers are entering the work force, thanks in part to the accreditation of new law schools and an influx of applicants after the dot-com implosion earlier this decade. In the 2005-06 academic year, 43,883 Juris Doctor degrees were awarded, up from 37,909 for 2001-02, according to the American Bar Association (see chart above). Universities are starting up more law schools in part for prestige but also because they are money makers. Costs are low compared with other graduate schools and classrooms can be large. Since 1995, the number of ABA-accredited schools increased by 11%, to 196."

MP: Now, if we could only have an outcome similar to this for medical schools and graduates from medical school, which have remained constant at 125 schools and 16,000 graduates, respectively, for at least the last 20 years (see chart above).

Unfortunately, "the marketplace doesn't determine how many doctors the nation has, as it does for engineers, pilots and other professions. The number of doctors is a political decision, heavily influenced by doctors themselves."

Result: We now have a doctor shortage and a lawyer surplus. The difference is that the lawyer surplus will eventually correct itself as law school graduates face falling wages and declining employment opportunities, resulting in fewer students being attracted to law. As long as medical schools and the number of graduates are artifically restricted, the doctor shortage will continue, especially for the "Family and General Practitioner" category (see chart below).

Sunday, September 23, 2007

Retro Medicine: Doctors Making House Calls 24/7

From today's New York Times,

A new kind of medical practice is flourishing nationwide that offers to go to where the patients are — whether a home, an office or a hotel — to treat ailments as diverse as a sprained ankle or a bad case of bronchitis. Some services may even wheel in a mobile X-ray machine or an ultrasound machine, depending on the ailment, or perhaps pull out kits to test for strep throat or to draw blood. They may dole out medication on the spot or arrange for pharmacies to deliver prescriptions.

“When you call, you can speak to a doctor in five minutes, and that doctor can be there with you within the hour. Where else do you get that kind of delivery?” said Walter Krause, founder of Inn-House Doctor. The company says it has 40 physicians on call in Boston, Chicago, Dallas, Houston, Las Vegas, Phoenix, Philadelphia and Washington; some of the doctors are in private practice or work in hospitals, and they make house calls during their time off.

The convenience comes at a price. Appointment fees can range from $250 to $450, with additional tests and medication extra. And payment is due at the time of the appointment.

Another service for Manhattan only is Sickday Medical House Calls and one for Miami only My Home Doctor. About 10 years ago, I argued in this article Deregulate Health Care, Bring Back House Calls, that deregulating medicine and ending the artificial restrictions on the supply of physicians would restore competition to the point that we would see doctors making house calls again. Although not widespread yet, I think the new trend towards housecalls in major cities is a promising sign that market solutions for health care are being taken seriously, especially given other trends like the low-cost, consumer-friendly, market-driven, walk-in health care clinics in retail stores spreading across the country.

Saturday, September 22, 2007

Loonie-$ Parity: Good News, Bad News; U.S. Now a Giant Wal-Mart, Everyday Low Prices for Canadians

WALL STREET JOURNAL---With the Canadian dollar surging against the U.S. greenback, Robert Katzman is dealing with situations they don't teach in Economics 101.

The owner of five strip clubs in Detroit and Windsor, Ontario, says American dancers are heading to Canada to earn the strengthened Canadian currency, and Canadian customers are heading to Detroit because their dollars go further there. He's fighting back by advertising more in the U.S. and offering free limo service to get Detroit men to visit his Windsor clubs.

The rise is a boon for Canadians looking to buy American real estate, stocks or just about anything for sale at the Mall of America in Bloomington, Minn., which has seen a 15% uptick in the number of Canadian customers this year. But it isn't good news for Canadian hotels or tourist destinations, or exporters of everything from beer and maple syrup to lumber and wheat.

The result has injected a touch of national giddiness into Canada's traditional reserve as a slew of opportunities present themselves, from real-estate deals south of the border to substantial breaks on college tuition for parents sending their kids to school in the States.

UPDATE FROM NY TIMES: On either side of the border, a buck is now a buck, or as Canadians call it on their side, a loonie. Coupled with high prices and high taxes for many things in Canada, the strength of the Canadian dollar is driving Canadians into the United States to shop for shoes, school supplies, gasoline, used cars and second homes.

MP: Compared to January of 2002, when the exchange rate was 1.6143 Canadian dollars per USD, everything in the U.S. is now on sale at a 38% discount for Canadians. The U.S. economy is now like a giant Wal-Mart for Canadians, with "everyday low prices."

Friday, September 21, 2007

Twin Cities Hit 'Critical Coolness," #1 For Business

1. LOS ANGELES (MarketWatch) -- Minneapolis-St. Paul is where it's at when it comes to business, much more so than any other of the nation's major urban areas. The Twin Cities ranked at the top of a MarketWatch study on the nation's best metro centers for business, winning by a wide margin. Minneapolis-St. Paul got 329 points, 38 points ahead of second-place Denver.

The Twin Cities region has a high concentration of massive and diverse Fortune 1000 and S&P 500 companies. It also has a significant number of Forbes 400 private companies. Further, Minneapolis-St. Paul has a healthy array of up-and-coming companies on the Russell 2000 index. And it has more small businesses per capita than just about any other city.

2. Wall Street Journal -- There are 19 Fortune 500 companies with headquarters in the Twin Cities, including Best Buy Co., 3M Co. and Supervalu Inc., which have been attracting young professionals looking to begin a career. Average salary last year was $44,980 in the Twin Cities, almost $5,000 more than the national average according to the U.S. Bureau of Labor Statistics.

"For the past two decades, these economic prospects made the Cities one of the fastest growing metropolitan areas in the Midwest," says University of Minnesota geography professor John Adams. Adding to the growing population is an influx of African and southeast-Asian immigrants.

Michigan 3 vs. Japanese 3

According to Edmunds, the average automotive manufacturer incentive in the U.S. was $2,362 per vehicle sold in August 2007, down $159, or 6.3%, from July 2007, and up $51, or 2.2%, from August 2006.

The average incentive for the "Michigan 3" (Ford, GM, Chrysler) was $3,373, and the average for the "Japanese 3" (Nissan, Honda, Toyota) was only $1,365. Add an additional $1,500 per vehicle in health care costs for the "Michigan 3" compared to about $200 per vehicle for the "Japanese 3," and it's no surprise that GM lost $2 billion in 2006 and Ford lost $12 billion.

GDP by State for 2006

According to a report released by the BEA for Gross Domestic Product by State in 2006:

1. The average economic growth for all states in 2006 was 3.4%.

2. Michigan was the only state with negative economic growth in 2006, -0.50%. It also has the highest unemployment rate in the country for August at 7.4%.

3. Idaho was the state with the highest rate of output growth, at 7.4%, followed by Utah (7.2%), Arizona (6.8%) and Oklahoma (6.7%), which are all right-to-work states.

Bottom Line: Michigan should maybe consider becoming a right-to-work state?

More On Inflation Targeting

New Zealand, Australia, U.K., Sweden and Norway have all adopted inflation targets, which have apparently contributed to either currency stabilization (UK, Sweden and Norway) or currency appreciation (Australia and New Zealand). The U.S. stands alone in the chart above, as the one country with a depreciating currency over the last 6 years, and also the one country among the group without an inflation target.

And the currency appreciation in New Zealand and Australia appartently haven't had any adverse effects, the unemployment rate in New Zealand is at a 20-year low, and the jobless rate in Australia is the lowest in 30 years, since the late 1970s.

Monetary Crack and The Fix: Inflation Targeting

The two graphs above tell a very interesting story:

1. In 2000, the Fed Funds target rate was 6.5% and the money supply (M1) was $1.1 trillion (see top chart above, click to enlarge).

2. In response to the recession of 2001 and the subsequent "jobless recovery" in 2002 and 2003, the Fed lowered its target Fed Funds rate to 1% by mid-2003 using expansionary monetary policy that increased the money supply by 27%, to $1.375 trillion by 2004 (see top chart above). In dollar terms, that was an injection into the economy of $275 billion, or almost $1000 of additional M1 ("monetary crack," see below) per person in the economy!

3. In the process of implementing expansionary monetary policy to lower the Fed Funds rate by 5.5% (from 6.5% to 1%) and expanding the money supply by 27%, the value of the U.S. Dollar (Trade Weighted Exchange Index: Major Currencies) has fallen by almost 31% since early 2002.

From Don Luskin, writing on the Fed's recent rate cut to 4.75%:

1. The crisis in credit markets is a direct result of the unwinding of speculative excesses that were set in motion in the first instance by the Fed's having kept interest rates so low for so long.

2. By lowering interest rates, the Fed effectively increases the quantity of money liquidity in the financial system, and risks increasing inflation as a result. The reactions to the Fed's rate cut this week of surging gold and oil prices, and a dollar falling to all-time lows on forex markets, confirms that there are serious inflationary consequences in our future.

3. Inflation is monetary crack - it promotes short-term euphoria, but in the end leads to ruin. Any short run growth effect will be more than offset by the dislocations and arbitrary transfers of wealth created by higher inflation, and ultimately by ruinously high interest rates that the Fed will eventually have to enforce in order to rein in the inflation it has created.

MP: Solution for monetary crack? The U.S. should go "cold turkey" and adopt an offical "Inflation Target" for monetary policy, like Canada, New Zealand, Australia, Switzerland, the U.K. and others (24 countries have inflation target). Notice that the currencies of countries listed above all have stable currencies that are at close to all-time highs, or at 10-20 year highs, against the falling dollar.

Thursday, September 20, 2007

The Educational Octopus in Venezuela

CARACAS, Venezuela (AP)President Hugo Chavez threatened on Monday to take over any private schools refusing to submit to the oversight of his socialist government, a move some Venezuelans fear will impose leftist ideology in the classroom.

All Venezuelan schools, both public and private, must submit to state inspectors enforcing the new educational system. Those that refuse will be closed and nationalized, Chavez said.

Education based on capitalist ideology has corrupted children's values, he said. "We want to create our own ideology collectively — creative, diverse."

A new curriculum will be phased in during this school year, and new textbooks are being developed to help educate "the new citizen," added Chavez's brother and education minister Adan Chavez in their televised ceremony on the first day of classes.

MP: Venezuela already ranks #135 out of #141 for Economic Freedom in 2007, according to the Cato Institute, are they trying to lower their ranking with educational "reforms"?

Related Quote: "Every politically controlled educational system will inculcate the doctrine of state supremacy sooner or later. . . . Once that doctrine has been accepted, it becomes an almost superhuman task to break the stranglehold of the political power over the life of the citizen. It has had his body, property and mind in its clutches from infancy. An octopus would sooner release its prey."

--Isabel Paterson, The God of the Machine (1943)

(Thanks to Larry Reed.)

WSJ.Com May Be Free

NEW YORK -- Media mogul Rupert Murdoch said today that he was leaning toward dropping the online subscription fee for the Wall Street Journal in a gamble to increase visitor traffic and website advertising revenue.

Historic Charts of the Day

TORONTO (AP) — The Canadian dollar reached parity with the U.S. dollar today for the first time since November 1976 (see chart below, click to enlarge).

DETROIT NEWS - Michigan's unemployment rate in August hit 7.4 percent, the highest level the state has experienced since Sept. 1993 (see chart below, click to enlarge).

D'oh, Canada!

Far from being a health care paradise, Canada's system is in disarray — and getting worse. That's why it's pursuing private-sector reforms, even as we consider national health care.
In 1998, 212,990 Canadians were on hospital waiting lists for surgery, waiting on average 13.3 weeks. Today, more than 800,000 Canadians are on waiting lists, waiting often 20 weeks or more (see charts above).

Survival rates for major types of cancer in the U.S. are higher than in Canada. As such, seven of 10 Canadian provinces send their prostate-cancer patients to the U.S. for treatment. What does that tell you?

Americans have more access to advanced medical procedures like dialysis and coronary bypass surgery, and use more medical technology like CT scanners and MRI imaging machines. Canada's Fraser Institute puts it bluntly: "Canadian patients do not get the same quality or quantity of care as American patients."

Read more here in today's Investor's Business Daily.

Wednesday, September 19, 2007

World Markets Surge on Fed Rate Cut, Expect More

1. World stock markets react positively today to Fed rate cut yesterday to 4.75%, see chart above of one-day returns in local currency, click to enlarge. Note that the World Index (except for US) rose by 2.75% today, similar to the 2.92% increase yesterday in the S&P500.

ADDENDUM: The world stock market capitalization is about $58 trillion according to
Global Financial Data, and there was a 3.2% dollar increase in world stock markets after the Fed rate cut according to MSCI Barra, meaning that the world stock market capitalization increased almost $2 trillion ($1.86 trillion), the day after the rate cut.

2. According to Fed Funds futures contracts on the CBOT:

a. There is an 80% chance of an additional .25% rate cut at the next FOMC meeting on October 30-31.

b. There is a 100% chance of a .25% rate cut by December (FOMC meets December 11), and a 68% chance of a rate cut of .50% by December.

NY Times Editorial on The High Costs of Ethanol

According to the NY Times, these are the Top 5 Reasons ethanol imposes high costs on the economy:

1. Rising Food Costs and Social Unrest: "The distortions (of ethanol) in agricultural production are startling. Corn prices are up about 50 percent from last year, while soybean prices are projected to rise up to 30 percent in the coming year, as farmers have replaced soy with corn in their fields. The increasing cost of animal feed is raising the prices of dairy and poultry products.

Ethanol production in the United States and other countries, combined with bad weather and rising demand for animal feed in China, has helped push global grain prices to their highest levels in at least a decade. Earlier this year, rising prices of corn imports from the United States triggered mass protests in Mexico. The chief of the United Nations Food and Agriculture Organization has warned that rising food prices around the world have threatened social unrest in developing countries."

2. Damage to the Environment: Ethanol threatens natural habitats and imposes other environmental costs. “The overall environmental impacts of ethanol and biodiesel can very easily exceed those of petrol and mineral diesel,” an OECD report said.

3. Ethanol Requires a Lot of Land: "Replacing 10% of America’s motor fuel with biofuels would require about a third of the total cropland devoted to cereals, oilseeds and sugar crops."

4. Corn Ethanol Requires Political Protectionism: "The economics of corn ethanol have never made much sense. Rather than importing cheap Brazilian ethanol made from sugar cane, the United States slaps a tariff of 54 cents a gallon on ethanol from Brazil. Then the government provides a tax break of 51 cents a gallon to American ethanol producers — on top of the generous subsidies that corn growers already receive under the farm program."

5. Ethanol is All About Politics, NOT Economics or Science: "What’s wrong is letting politics — the kind that leads to unnecessary subsidies, the invasion of natural landscapes best left alone and soaring food prices that hurt the poor — rather than sound science and sound economics drive America’s energy policy."

WOW! The NY Times nailed it.

Robert Lucas in Today's WSJ on Inflation Targeting

Nobel economist Robert Lucas writing in today's WSJ (subscription required) in support of inflation targeting:

In the past 50 years, there have been two macroeconomic policy changes in the United States that have really mattered. One of these was the supply-side reduction in marginal tax rates, initiated after Ronald Reagan was elected president in 1980 and continued and extended during the current administration. The other was the advent of "inflation targeting," which is the term I prefer for a monetary policy focused on inflation-control to the exclusion of other objectives. As a result of these changes, steady GDP growth, low unemployment rates and low inflation rates -- once thought to be an impossible combination -- have been a reality in the U.S. for more than 20 years.

I am skeptical about the argument that the subprime mortgage problem will contaminate the whole mortgage market, that housing construction will come to a halt, and that the economy will slip into a recession. Every step in this chain is questionable and none has been quantified. If we have learned anything from the past 20 years it is that there is a lot of stability built into the real economy.

To me, inflation targeting at its best is an application of Milton Friedman's maxim that "inflation is always and everywhere a monetary phenomenon," and its corollary that monetary policy should concentrate on the one thing it can do well -- control inflation. It can be hard to keep this in mind in financially chaotic times, but I think it is worth a try.

Canadian Health Care: No Waiting for Dogs and Cats

Not all Canadian health care is long lines and lack of innovation. We found one place where providers offer easy access to cutting-edge life-saving technology, such as CT scans. And patients rarely wait.

But they have to bark or meow to get access to this technology. Vet clinics say they can get a dog or a cat in the next day. People have to wait a month.

~John Stossel's latest column "Socialized Medicine Is Broken and Can't Be Fixed" (Note: The overall Canadian median waiting time for CT scans is 4.3 weeks in the traditional 12 specialties and and 4.5 weeks for psychiatry, see Fraser Institute.)

Meanwhile, waiting times for "free" health care in Canada for humans keep getting longer, according to The Fraser Institute (see chart below, click to enlarge). Note that the median wait time for a specialist in Canada increasd by 138%, from 3.7 weeks to 8.8 weeks, in just the 13-year period between 1993 and 2006.

Tuesday, September 18, 2007

Ethanol Recipe: Midwest Corn + D.C. Pork + Taxes

"Washington might have a love affair with ethanol for political reasons, but increasing ethanol production will only lead to higher taxes, higher prices for both food and fuel, and damage to the environment, making us all worse off in the process. Congress needs to say no to the ethanol hustlers and end its political addiction to corn."

From my editorial in today's Sacramento Bee, "Ethanol: Midwest Corn, D.C. Pork," also appeared in the Fresno Bee, the Saint Paul Pioneer Press, and the Charlotte News and Observer.