Thursday, May 31, 2007

China's conundrum

In response to a post on the economic relationship between the US and China titled "How George Bush got a cost free trillion dollars for the US economy", my thoughts are as follows:

While I realize your post is a rant, I have to take issue with the idea that Chinese leaders are acting out of stupidity. You state that “China’s economic growth has been export-driven. This is largely a result of a deliberate policy of the Chinese government. They looked around at Japan, South Korea, and Taiwan and they decided that the way you become a rich country is by exporting things to the rest of the world. To that end, the Chinese leadership seems to have decided to do whatever it takes to help their export sector.”

That is a reasonable statement of China’s economic policy. You point out that Japan has had a similar policy and essentially say “Look where Japan is now”…

I think that up until now, the Chinese policy of subsizing exports has been rational in that at the time that Deng decided to implement this policy China had no coherent domestic economic systems at all, and therefore no domestic market to build the country’s economy on. So China took what it had, which was cheap labor, and used that to build up a manufacturing and export sector. Still, a rational policy. Today, I believe that Chinese leaders are perfectly aware of the negative consequences of the massive buildup of foreign reserves and dependence on exports.

The problem is that it will be extraordinarily difficult to shift to a more balanced economic system without serious financial and social shocks. It’s not a question of stupidity, but rather of having difficult choices to make. If the yuan is allowed to float it will rise relative to other currencies and exports to the US will plummet as the price of Chinese goods goes up, damaging the export sector which is the source of the highest paying jobs in China. That would likely lead to serious social unrest in China. Plus, the rise in the value of the yuan would leave the PBoC with capital losses on all of the US debt that they have piled up.

Revision of Q1 GDP to 0.6%-ignored by market?

According to Marketwatch:

"There was next-to-zero market reaction to the Commerce Department's report that gross domestic product was cut to a 0.6% estimate, down sharply from an initial projection of 1.3%.

The 0.6% growth rate marked the slowest pace since late 2002. Economists polled by MarketWatch had expected growth of 0.7%.

The details of the report showed that consumers once more remained active, while the business sector was beset with sluggish spending and shrinking inventories.

Analysts said investors were able to brush off the report because the release of new Federal Open Market Committee meeting notes on Wednesday showed inventories returning to respectable levels. This could spell stronger growth in the present and future quarters.

"The weak figure is partly the result of a sharp downward revision to inventory investment during the quarter, which more than likely will result in stronger GDP figures in the next two quarters, including the current quarter," said Tony Crescenzi, chief fixed-income analyst at Miller Tabak.

"The inventory drag cut a percentage point from GDP in the first quarter after cutting 1.2 percentage points from GDP in the previous quarter," he said. "The removal of this drag will provide a significant boost to GDP. " businesses cut back production because their inventory levels were way too high...not surprising as demand for any products related to new home construction and home remodeling has been shrinking due to the housing bust. As consumers will no longer be able to draw significant amounts of cash from home sales or refinancings, and foreclosures and short sales increase, consumer spending is likely to weaken in Q2 and Q3.

So, depending on any surprise revisions in the final number, we have at least a "growth recession" as Nouriel Roubini says today, and could have actual negative GDP growth for the quarter. I think the proposition that production will increase because the inventory overhang was worked down is absurd, principally due to the likely weakening of consumer spending due to the housing bust factors I mentioned.

A positive aspect of this quarter's results is what happened with federal spending: it decreased 3.9% from the previous quarter, due to a 7.3% decrease in defense spending!

Also, the total contribution to the quarter's number from government spending at all levels was only .19%.

Finally, the collapse of the residential housing sector shows up in the GDP report with decreases in residential investment for the last six quarters as follows:
-.9    -.3  -11.1  -18.7  -19.8  -15.4

I would expect to see a dropoff in personal consumption as the negative effects of the production cutbacks and shrinkage in the housing sector on personal income work their way through the economy.

Roubini reports in the above linked post regarding the outlook of executives from one large institution regarding the housing bust:

"This writer was the featured speaker the other night at an event organized by one of the top 10 global financial institutions; after I gave my bearish outlook for the US economy and the housing market (in a debate with the chief economist of this firm), the four senior analysts of this bank for the housing sector, the mortgage lender sector and the MBS sector gave their outlook (it is all in public reports available for clients/investors of this firm).

In brief, their view is that: the housing market is still weakening and - based on their May survey of traffic - housing sales traffic is close to dead; it would take developers to shut down all new construction for almost a year to get rid of the excess supply of unsold homes; thus, downward home price action may continue for the next two years; the credit crunch in the mortgage market is only at its early stages and the distress and crunch is spreading from sub-prime to Alt-A and near prime mortgages; the major mortgage lenders have not yet started to get a reality check on how bad their assets are and properly mark them to market; the ABX index (the BBB- tranche) collapsed from near parity down to 60 in the last few months and has now recovered to close a still low 67; but, given how lousy were mortgage originations in 2005 and 2006, deliquencies in subprime will further increase in the next few months and further downward pressure in the ABX indexes may be expected. "

Wednesday, May 30, 2007

Economics of the Great Depression: worth rethinking

Over at Econbrowser, the poster mentions a new book Economics of the Great Depression...and posts some discussion of the issues in the context of an interview that was a source for the book. The post quotes Fed Chair Bernanke regarding understanding the Great Depression:

We are only beginning to get a sense of what we would need to understand and see why these effects were as large as they were quantitatively in an economy that was presumably more flexible than the one we have today. With respect to the recovery, the gold standard had a lot to say about that.
It is interesting that Bernanke would say that the economy was more flexible back then; that seems to run counter to the conventional wisdom that today's markets are the most flexible. It seems that there is room for worthwhile research to be done...

Tuesday, May 29, 2007

Chinese investors among those to lose shorts on housing bust

Per National Mortgage News, “In 2002, Chinese investors owned about $100 million in U.S agency MBS. Now they own well over $110 billion, a nearly 1,000-fold increase in less than five years"...that would be a significant factor in the ability of mortgage brokers to originate all of the weak loans that are now is highly likely that these investors didn't look too closely at the risk disclosures that came along with the mortgage backed securities they purchased...

Central banks tightening?

Excerpt from fund manager John Hussman's weekly essay on the U.S. market:

Interest rate trends are pushing higher not only in the U.S., but globally. One might wonder -- if there is so much "global liquidity," why are interest rates rising everywhere? Credit spreads are perking up modestly too, but haven't yet exploded higher in a way that would reflect an oncoming recession or an easing of general inflation pressures.

What's really going on is not the creation of "global liquidity" -- central banks worldwide are generally tightening. What investors have misconstrued as "global liquidity" is nothing but a combination of a) risk blindness among investors, and b) the U.S. going deep into debt to finance current consumption (both private and government spending), while China and other developing nations run huge surpluses to sell us that consumption. They then take the proceeds and buy a) Treasury securities, and b) our means of production.

From the same linked post:

Ray Dalio of Bridgewater Associates, who manages about $160 billion in assets for clients including central banks and foreign governments, quoted in Barron's:

"Hedge funds and private-equity firms today are like the dot-coms in 2000: Ask for money and you'll get it. They bid up the prices of everything. The amount of money flowing is almost out of control, and it's making everything overvalued. A client of mine said it's like there are 11,000 planes in the sky and only 100 good pilots -- an accident is bound to happen. Just like the dot-com bust, the winners and losers will be sorted out but the technological advances won't stop. There is a greater differentiation of managers now than ever before."

Nothing really new in these comments other than Hussman rejecting the inflationists' idea that central banks are pumping liquidity...the US government's debt isn't that out of the ordinary...see my previous posts, particularly the chart of US debt as a proportion of GDP...

Oil majors estimate shale extraction cost at $30 a barrel

The linked Bloomberg story describes how "Colorado and Utah have as much oil as Saudi Arabia, Iran, Iraq, Venezuela, Nigeria, Kuwait, Libya, Angola, Algeria, Indonesia, Qatar and the United Arab Emirates combined. That's not science fiction. Trapped in limestone up to 200 feet (61 meters) thick in the two Rocky Mountain states is enough so-called shale oil to rival OPEC and supply the U.S. for a century.... U.S. oil shale deposits likely hold 1.5 trillion barrels of oil, according to Jack Dyni, a geologist emeritus at the U.S. Geological Survey. All 12 OPEC countries combined have proved crude oil reserves of about 911 billion barrels, led by Saudi Arabia, with 264.2 billion barrels, according to statistics compiled by BP Plc."

The story elaborates that "Exxon Mobil Corp. and Chevron Corp., the two biggest U.S. energy companies, and Royal Dutch Shell Plc are spending $100 million a year testing new methods to separate the oil from the stone for as little as $30 a barrel."

The lead time for getting the new extraction technologies operating at production levels is up to 11 years, so this won't be a quick fix....

Friday, May 25, 2007

Loose commercial lending standards bodes ill

The highly leveraged loan market has surpassed the junk-bond market, owing in part to bankers' innovation in the form of "covenant lite" loans, which lack the strictures that senior obligations traditionally carried. In other words, pretty much anything goes.

Covenant-lite loans accounted for only 5% of the market in 2006, $24 billion out of $480 billion of total loans, according to Penniman. So far this year, "cov-lites" total $70 billion out of $237 billion, he says.

Traditional loans typically had maintenance tests, which required the borrower to meet various financial standards, such as multiples of coverage of debt service or collateral. Now, borrowers will refinance their old loans with cov-lites to free themselves from those constrictions, Penniman explains, allowing the companies to use those assets to obtain more loans to further lever their balance sheets.

Indeed, such is the demand for loans with any extra margin of yield that the attitude of some investors is to buy first and ask questions later. If you insist on due diligence, you don't get any allocation. articl...ives_weekday_r1

Now is the time to put your investments in cash...if you participate in this insanity, you are going to lose your shorts....the root cause of the irrational demand for yield is the promises that pension funds and institutional investors have made to their stakeholders...ironically many of these pension funds are those of unionized workers who theoretically would be opposed to corporate greed...the companies that are levering themselves are merely using the cash from the debt to keep themselves from collapsing now...

Dis-saving in Japan: a logical consequence of an aging population

The above chart is courtesy of Claus at Alpha.Sources blog, and bears close examination. You see that household income has experienced negative growth since about 1997 and household savings has been shrinking since the turn of the century. I believe this data is consistent with an increasing proportion of retirees to the Japanese population as a whole; as once the breadwinner retires income shrinks to whatever pension/social security payments are forthcoming and the households of retirees start to spend the savings that they have accumulated over the years to make up for the drop-off in income. This shouldn't be surprising as the whole point of saving during one's working years is to provide for retirement. The tricky part is making sure you have enough savings to last until you die.

The problem from a national perspective is that due to the need for retirees to spend their savings, the national investment capital base is beginning to shrink. For the most part, Japanese savers have their cash in domestic investments. The shrinkage of available investment capital will make it difficult for the country to come up with technological breakthroughs that would increase productivity enough for the working age population to cover the cash needs of the country's retirees.

A study by McKinsey and Co. projects that "the net financial wealth of Japanese households will decline 0.2% annually between 2003 and 2024." That projection ought to give Japanese leaders some sleepless nights.

Japanese foreign direct investment in other countries

An IMF study titled "Japanese Foreign Direct Investment and Regional Trade" details Japan's investment abroad since the early 1980's. The most noticeable fact that the study turns up is that 'outflows have exceeded inflows by more than a factor of 10"...I think that is at least in part attributable to the closed nature of Japan's economy which has only recently begun to open up to foreign investment. Another factor to be considered is that Japan's exports had been generating so much capital that there was little need for foreign investment to fund capital expenditures.

Also noted in the study is the fact that "By the late 1980s, Japan was investing more abroad than any other country in the world, with its FDI peaking at $67.5 billion (around 2.5 percent of GDP) in 1989"...and then the authors state that "This boom in Japanese FDI ended abruptly in the early 1990s when the asset-price bubble burst." So I feel safe in concluding that a substantial portion of the capital exported abroad came directly out of bank loans against real estate holdings. The study seems to support this as it states that "annual outflows declined steadily, both in absolute terms and relative to GDP and fixed investment, as the sharp decline in asset prices in 1990, which led to severe balance sheet difficulties for many businesses and banks, triggered a deep and protracted economic slump." A question I have is whether the returns on the foreign investments were sufficient to cover the cost of the bank capital...I don't have that data ready to hand.

As to where the capital was going, apparently "Japanese companies sharply increased their investment in North America in the 1980s"..."the United States alone received 50 percent of total Japanese FDI"..."whereas developing countries (including those in Asia) saw their share drop from 50 percent to about 25 percent." Further, the study concludes that "During this period, Japanese overseas investment in the tertiary sectors—including finance, insurance, transport, and real estate—grew significantly, while the share of FDI in manufacturing and mining declined." Essentially, Japan at this point was exporting its real estate bubble to the US; as was greatly discussed at the time with absurd prices being paid by Japanese companies for golf courses, certain office buildings, and other "trophy" properties.

In recent years the trend in FDI is described to the effect that "The share of Japanese FDI received by developing countries has returned to the levels seen in the early 1980s—and the share received by Asian countries within this total has increased substantially. At the same time, FDI flows to industrial countries—particularly the United States —have decreased. The decline of Japanese investment in the United States coincided with the decline in Japanese investment in services, particularly real estate, while the corresponding increase in FDI outflows to other countries in Asia has led to increased Japanese foreign investment in manufacturing, particularly chemical products and machinery." It would appear that recent developments reflect a more measured approach to investing in assets that will consistently generate positive returns. I would say that investment in auto plants in the US has certainly proved to be a winner, as this defused protectionist sentiment in the US, and likely resulted in a lower cost of labor relative to Japanese workers, and has not resulted in any reported declines in auto quality measures for the Japanese auto makers.

The study authors conclude that "Japanese firms are diversifying the location of their production and moving to other countries those parts of their operations in which they are losing comparative advantage." They don't detail what sectors Japan might be losing its comparative advantage in, but it seems reasonable to suppose that the sectors in question are those that China has gained massive shares of in recent years. Therefore, investing overseas seems a rational response to the competition of China and other lower cost countries in Asia. In addition, building operations in China which has a massive supply of labor which can be employed could be a good solution to the problem of significant shrinkage of Japan's workforce in the future due to demographic factors.

These trends could provide avenues for ameliorating tension between Japan and China regarding past conflicts. To the degree that the two countries become more economically interdependent, the odds of future military conflict decrease.

Home building in the US

With regard to the new home sales chart, I find it interesting that between 1971 and 1997, a period of 26 years where there was significant population growth in the US, the sales number stayed in a range between 400 on the low side and 800 on the high side. The number didn't break out permanently above 800 until 1998. Then the number stayed in a range between 800 and 1000 until the sharp increase around about the middle of 2003, a five year period. The striking thing about the current decline from the peak number of almost 1400 to approaching 800 is that this decline of almost 600k is larger in absolute numbers already than any of the dropoffs recorded in this chart.

It seems to me that during the 26 year time frame there were three factors that capped home affordability and therefore the peak levels of new home sales. In the 1970's general inflation was the culprit; first time homebuyers couldn't come up with enough down payment to buy because home prices were rising too fast and it didn't make sense for existing homeowners to try to move up because few could afford their current house and even with increased equity from the existing house a new house wouldn't be affordable due to the general inflation. In the 1980's the jack-up of interest rates to kill inflation also quashed the ability of pretty much anyone to get into a new home, and rates stayed relatively high so that as the economy recovered the volume of folks able to get into a home for the first time stayed capped. Then the post-Cold War defense cutbacks shrank incomes and limited the demand for new homes. Interest rate cuts by the Fed to counteract the early 1990's recession helped move sales rates up, but it wasn't until the inventory overhang from the housing bust in California was depleted and the internet economic boom kicked into gear around 1997 that demand for new houses reflected the population increases that had taken place during the span of the previous 26 years.

Also, from the chart it seems you could pinpoint when the mortgage industry decided to start pushing the teaser loans and no doc loans to about the middle of 2003. The increase in sales from the end of the recession to early 2003 could be attributed to the Fed's cuts in rates which made housing more affordable and hence increased sales, but then as the effect of that wore off and you see the downward spike in late 2002/early 2003; it makes sense that the industry would try to figure out how to keep the ball rolling and came up with the loan tweaking system.

In addition to the overhang of new and existing homes for sale that exists now that is driving the massive decrease in new home sales, there is another factor that will extend the length of the home building downturn. At some point the yield curve is going to return to a normal slope, which means that long term rates(including mortgage rates) will go up, and that will further cap the peak prices that homes will sell for. I am afraid that the US will experience a residential real estate market analogous to the experience of Japan after the peak of its bubble in 1989.

Thursday, May 24, 2007

US basic materials consumption Q1 2007

-apparent steel consumption fell an estimated 8.25%

-copper consumption was down 30%

-aluminum use was down 10%

-containerboard use fell 1%, printing and writing paper was down 2%, newsprint declined 12%, and lumber shipments fell 19%

Economic implications of NOAA weather outlooks for 2007

I see significant increased demand for electricity and water in the western US as the primary consequence of the forecasted weather conditions. Depending on reservoir levels, recreational activity could fall significantly as well. The forecasted improvement of drought conditions in the Southeast is at least partly due to the forecast of increased hurricane activity.

" Experts at the NOAA Climate Prediction Center are projecting a 75 percent chance that the Atlantic Hurricane Season will be above normal this year—showing the ongoing active hurricane era remains strong....For the 2007 Atlantic hurricane season, NOAA scientists predict 13 to 17 named storms, with seven to 10 becoming hurricanes, of which three to five could become major hurricanes of Category 3 strength or higher." Destruction of property due to a hurricane could provide a minor boost to construction related industries.

Bizarre story of the day: Alcoa to build smelter in Greenland?

According to, "The Greenland Home Rule Cabinet agreed to enter into a Memorandum of Understanding (MOU) with the aluminum company Alcoa Inc. The agreement entails co-operation on a feasibility study for constructing an aluminum smelter with a 340,000 metric-ton-per-year capacity in Greenland. The MOU also encompasses a hydroelectric power system and related infrastructure improvements, including a port. The exact size and cost for the overall venture will be determined when the project plan is finalized."

The people at Alcoa can't be accused of lacking creativity in looking for plant locations....

Massive median home price drop in April

"The Commerce Department reported that sales of new single-family homes jumped by 16.2 percent in April to a seasonally adjusted annual rate of 981,000 units. That was far better than the tiny 0.2 percent gain that economists had been expecting.

However, the median price of a new home sold last month fell to $229,100, a record 11.1 percent decline from the previous month. The big price decline indicated that builders are slashing prices in an effort to move a huge overhang of unsold homes."

My main question is who is buying homes at this point?

College grads leaving California

According to the Mercury News; “With stratospheric housing prices pushing an unprecedented flow of college graduates out of the state, a prominent think tank says California faces a worrisome shortage in future decades: A lack of highly skilled workers to buttress the state’s quality of life.”

“Much of the worry is prompted by the new exodus of college graduates. Historically, college graduates have flocked to California from elsewhere in the United States. But according to PPIC’s analysis of Census data, since 2000, more college graduates have been leaving California for other states than are arriving.”

“‘It’s safe to say that certainly we haven’t seen this kind of flow out of the state in the past,’ said Hans Johnson, a PPIC demographer who co-authored the report. ‘Probably what’s happening now is unique in California’s history.’”

It seems that if enough time passes, prices of homes will drop enough to end this one part of Sacramento “At a recent courthouse auction, a five-bedroom, four-bathroom 3,500 square foot house on Richfield Way that sold in July 2005 for $526,000 was offered by the bank for $295,000. There were no takers.” That offering price is getting close to a 50% haircut. The massive overbuilding that has taken place throughout California will lead to significant price shrinkage throughout the state, but it may take ten years for the change to filter throughout the market.

I see the factors that drove California's home prices to such stratospheric levels as taking effect over a 35 year period from about 1973 until now. First, the advent of significant national general inflation in the 1970's moved home prices up along with the prices of other products. Second, the mass entrance of women into the workforce (which likely began earlier in California than the rest of the country) increased total household incomes of which a significant chunk went into buying more expensive homes. Third, the defense spending boom of the 1980's put a lot of cash into California as a large share of the defense industry was based in the state, which added to personal income available to spend on housing. At that point, due to the price appreciation of housing, the trend of buying homes primarily for the investment potential rather than just as a place to live pushed California prices to a peak in the late 1980's. The defense industry cutbacks of the 1990's poked a hole in that peak; but although prices fell somewhat and then remained flat for a few years, regression to price levels of the early 80's and late 70's did not occur. Then a combination of income from the dot-com boom, the persistent drop in long-term interest rates, and then finally the use of sketchy mortgage products pushed prices to their most recent peak.

Wednesday, May 23, 2007

Definition of early payment default

EPD = Early Payment Default/Delinquency = Default or Delinquency in the first 90-180 days of the loan.

It's a fairly precise industry term because contracts have covenants that require the loan originator to take back an EPD loan, even if the originator didn't do anything wrong. It is considered the "incurable defect."

That isn't to say that mortgage defaults on loans that are a year or two old are not very problematic. They are. Historically they aren't common; in "normal times" defaults don't start in a big way until 2-3 years into the life of a loan cohort, and have mostly shaken out by year 7.

So if you see a technically precise mortgage source using the term EPD, they mean the 90-180 day thing. If you're reading the newspaper, God help you and no wonder you're confused.

Thanks, Calculated Risk...

Housing market update

At least one US government official has spoken out regarding mortgage practices in no uncertain terms; unfortunately he probably had little leverage over lenders generally and still doesn't:
‘Sound underwriting and, for that matter, simple common sense suggests that a mortgage lender would almost always want to verify the income of a riskier subprime borrower,’ Comptroller of the Currency John C. Dugan said in a speech. ‘But the norm appears to be just the opposite,’ said Dugan, whose agency regulates nationally chartered banks. ‘Nearly 50 percent of all subprime loans last year accepted stated income,’ meaning the underwriters did not verify the information provided by borrowers on loan applications.’ Dugan cited a Mortgage Asset Research Institute study that found 90 percent of borrowers reported incomes higher than those found on file with the Internal Revenue Service and almost 60 percent of the stated incomes were exaggerated by more than 50 percent. Another survey of more than 2,100 mortgage brokers, reported by Inside Mortgage Finance, found that 43 percent of mortgage brokers who use low-documentation loan products know their borrowers cannot qualify under standard debt-to-income ratios.
However, the loose practices seem to be disappearing due to the fact that no one wants mortgage-backed securities anymore without solid investigation of borrowers being done:
"David Lowman, CEO of JPMorgan Chase & Co.’s global mortgage business, said, ‘35 percent of what once could be done, can no longer be done,’ referring to mortgage loan products that have effectively been taken off the shelves...Duane LeGate, president of House Buyer Network, a specialist in short sales and foreclosure prevention, said one of the real estate agents he works with had six deals blow up within four days because, ‘The loan originator told him, ‘We’re not offering [these products] anymore.’ According to LeGate, this kind of thing just started to happen in the past month or so. ‘Anything that smacks of no-income and no-documentation is history,’ said Allen Hardester, director of business development for mortgage broker Guaranteed Rate. ‘Anything above 85 percent to 90 percent loan-to-value, anything non-owner occupied, anything ludicrous as to value, like someone stepping up from a $1,000 a month payment to a $6,000 a month, is history.’"

Tidbits from the Housing Bubble blog:

-The Boston Globe reports from Massachusetts. “The housing slump isn’t over yet after all. After getting off to a strong start in 2007, home sales in Massachusetts fell 1.7 percent in April compared to the same period last year, and the median home price declined 2.3 percent, to $345,000, according to the Massachusetts Association of Realtors" thing to note is that according to US Census figures the Boston metro area population grew by only 1.21% total during the six years between July 1, 2000 and July 1, 2006...home price increases certainly weren't being driven by population growth...

-The Boston Herald... "median house-sale prices dropped to $319,314 last month, down 4.7 percent from April 2006 and 12.3 percent from June 2005’s $364,000 peak...blamed the condo and house declines in part on the state’s foreclosure crisis, which has seen record numbers of properties face seizure for mortgage nonpayment. He said lenders advertised 4,833 foreclosure auctions in 2007’s first four months, ‘and that’s got to have an impact on the real estate market’s recovery.’”

-The Lompoc Record reports from California....“According to county officials, April 2007 made the top 10 list of highest-volume months since 1989 for notices of default and trustees’ deeds - when a lender forecloses and takes ownership"...

-The Journal Sentinel from Wisconsin...“‘Two years ago, buyers were willing to buy without making their own home sale a contingency. Now there’s fear it won’t get sold and the buyer will be stuck with two mortgages,’ Stefaniak said. ‘We’re doing contingencies these days even on the market’s lower end. And on a lot of the upper end, the seller has offers, but some unrealistic buyers won’t come down on their own house’s price"...that last bit is bizarre; if you can't get your existing house to sell, forget about moving up...

-The News Press(Florida)...“Let’s first look at the entry level market, which includes price points below $200,000. It is now possible to purchase a new home in Lehigh or Cape Coral for well below $200,000. Some have sold in the $160,000 range! That is roughly 50 percent less than a similar home would have sold for at the peak of the market"...“These attractive prices are a result of lot prices falling more than 80 percent in the past 20 months, construction costs becoming more competitive, heavy inventory, and in some cases short sales offered by sellers trying to avoid the foreclosure process"...

Tidbits from Calculated Risk:

-Tanta talks about a "U.S. RMBS Servicer Workshop"; apparently convened so that these entities can figure out how the workout of the housing crash will be handled. The post quotes a report on the workshop and includes a summary of the discussion topics as follows:
Servicers also discussed the factors contributing to increased defaults, including flat or decreasing home price appreciation; higher risk products where borrowers were qualified at teaser rates; affordability products; payment shock at ARM resets; high loan-to-value ratio (LTV) or piggyback loans; stated income; lower FICO scores and significant risk layering. Servicers indicated that as little as one year ago, refinances resulting in full payoffs were used most frequently for ARM resets and as a loss mitigation tool for defaulted loans. Today, refinance is not an option for many subprime borrowers due to tightened guidelines and flat or declining home appreciation. Further, third party and short sales, which resulted in some losses, although minimal due to some home price appreciation, are now less effective due to concerns on ultimate value in many markets, and while still less costly than real estate owned (REO) liquidation, are seeing dramatically higher losses.
Tanta's key point, related to the use of refinances to mitigate losses on defaulted loans, is that a borrower may have had a whole string of loans on a property and only the most recent loan shows up in currently available data, which disguises the true risk of default by the borrower.

-Credit Suisse’s ARM Reset Schedule, shows that over $1 trillion dollars worth of adjustable rate mortgages will reset over the next 5 years....a majority of those mortgage debtors will likely wait until the last possible moment to do something about their oncoming train wreck...

Why Portland, OR economy is likely to stagnate for a while

The May 22 edition of the Oregonian chronicles how Columbia Sportswear, a billion-dollar company, was driven out of the city of Portland by the city's bureaucratic hassling. The story authors report how
"In 2000, the company said it was considering a move from Portland's St. Johns area to the Central Eastside Industrial District, near downtown. Instead, it bolted to a warehouse-office district off U.S. 26 in Washington County. Its complaints about the difficulty of working with city government in building a new headquarters embarrassed city political leaders but resonated with business leaders."

The company moved in spite of the fact that CEO Tim Boyle had strong ties to the city of Portland and
"cared enough about Portland to devote his speech at the Portland Business Alliance's annual meeting to tips for a better-run city, including some sharp jabs at city government. Last year, Columbia committed to donating $1 million for Portland parks, while Boyle publicly professed his love for Portland in an interview. And this month, Boyle donated $10,000 to back Mayor Tom Potter's reforms for Portland City Hall."
If the city annoys businesses run by people loyal to the city so much that they take their companies elsewhere, then Portland is unlikely to see major relocations of businesses within its borders anytime soon, and individuals that have companies they are planning on growing will likely pick other locations to build their businesses as well. Tellingly, the Oregonian article states that if Columbia did happen to move back to the city, "Landing Columbia's 636 headquarters jobs in the region's core would be the biggest single relocation of jobs to the downtown area in decades."

Columbia has been incredibly successful recently; according to the article "its sales have doubled from $614 million in 2000 to $1.29 billion in 2006."

Tuesday, May 22, 2007

Factors impacting US oil production levels

One significant factor in the decrease in US oil production has been the restrictions put in place on exploration in the coastal waters of the US due to environmental conditions. There may be oil in those places or not. But failure to explore in certain areas has to be considered as a factor in the decline in US oil production.

Another factor has been the price level of crude oil; as the chart below shows the real price of oil was essentially flat between 1975 and 2004 with an anomaly due to the first Gulf War. There has been no economic incentive to seek new sources of oil or alternative sources of energy.

The USGS estimated US oil consumption at about 7 billion barrels per year in 1998; given that rate the North American reserves shown in the chart below would be exhausted in about 28 years.

Monday, May 21, 2007

An assessment of the Oregon housing market

According to the News-Review of Douglas County, OR, "Subprime loans, generally at higher interest rates, accounted for 17 percent of new mortgages in Oregon in 2006, down from 20 percent in each of the previous two years, according to First American LoanPerformance...Those percentages were below the national average each year by 4 to 6 percentage points, said Bob Visini, vice president of marketing for LoanPerformance of San Francisco." Further, "Among all outstanding mortgages nationally including those made decades ago, almost 15 percent are subprime, according to LoanPerformance data for December. In the Portland area, the comparable figure was 9.8 percent."

So Oregon is somewhat less vulnerable to the subprime crackdown, but not by much.

As far as the strength of the state's underlying economy goes, the University of Oregon Index of Economic Indicators in March held steady at 106.2, based on a 1996 benchmark of 100. That is an annual average change of six tenths of a percent...that is a stagnant economy.

An assessment of the Seattle housing market

There is a piece in the Seattle Times Sunday edition titled "Home prices: from sizzle to simmer", which is essentially a concession that home prices are starting to cool off in the Puget sound area. A key point from that story is the statement that the average wage in King County in 2005 was $50k. Assuming both adults in a household earn that average, and factoring in relatively low interest rates and teaser/adjustable mortages, the recent median home price from the chart below(courtesy of Seattle Bubble Blog) is really not out of reach for an average household.

The Times piece also mentions the cyclicality of the Puget Sound real estate market relative to other metros in the country. The piece says that during the 2001-2004 recession in Seattle, "home-price appreciation during much of that time coasted at 4 percent or so — roughly half of what it had been in the late '90s." I attribute the fact that home prices continued to appreciate even during the recession to pent-up demand from the preceding boom years, the continuance of low long-term rates, and the rise of the creative loan packages.

Homes in the Puget Sound area are still affordable if you and your significant other both make the average wage or better, or if an individual makes significantly more than the average. I have to agree with the Times' author in that I don't see Puget Sound median home prices dropping significantly unless a large number of people used teaser/neg-am loans, or a significant proportion of homes are currently owned by investors.

Friday, May 18, 2007

Bizarre proposition concerning India's manufacturing sector

The McKinsey Quarterly, in an article titled "When to make India a manufacturing base", suggests that with regard to India;
Its process-engineering skills, which can be applied to such tasks as the redesign of manufacturing processes to make them more labor intensive and less capital intensive, enable multinationals to reduce their overall costs substantially. "De-automating" the production processes used in Western factories, for example, can cut the overall manufacturing cost of some components by up to 20 percent.

While the short term gain in terms of reduced production cost for the foreign company is clear, the advantage for India and its workers seems non-existent to me. The last 200 years of manufacturing improvement have revolved around making manufacturing less labor-intensive. Redesigning a process to be more labor-intensive might result in short-term employment gains for Indian workers, but they'll be then stuck doing the same task for their tenure in the job. This seems like a step backward to me, particularly considering that capital is cheap on a global basis at this time.

Recent changes in US consumers' net debt position

According to InsideARM, "Economists are saying that the credit card sector is now beginning to pick up the slack from other spending sectors, most notably mortgages. “We've lost a half trillion in mortgage borrowing and consumers are making it up to some extent with credit cards,” said Chris Low, an economist at FTN Financial told Bloomberg. ”It looks like income growth is (also) beginning to lose some momentum.”

Lets see, according to the BLS release of May 15, real average weekly earnings fell by 0.5 percent from March to April. Also from the BLS, total employment "edged up (+88,000) in April", and "the unemployment rate was essentially unchanged at 4.5 percent."

According to the Federal Reserve, total consumer credit -- excluding mortgages -- increased $13.5 billion in March due to consumers adding $6.8 billion to their credit card balances and non-revolving credit, defined by the Fed as including "automobile loans and all other loans not included in revolving credit, such as loans for mobile homes, education, boats, trailers, or vacations" increasing by $6.7 billion...

So wages are flat and consumers are borrowing seems some reduction in consumption would be in order, but consumers don't seem to want that.

2006 employment significantly better than estimated

Thanks to Calculated Risk for pointing out that the BLS released revised data as follows:

The total nonfarm employment level for March 2006 was revised upward by 752,000 (754,000 on a seasonally adjusted basis). The previously published level for December 2006 was revised upward by 981,000 (933,000 on a seasonally adjusted basis).

Total employment was essentially a million jobs greater than we thought...that is huge. Current estimates have to be taken with a large grain of salt, as well, as giant revisions like these happen regularly. That's the problem with a lot of this government data; you have to wait quite a while to get the final numbers.

GDP will drop, possibly to a recession, in 2007 not because of a weak job market but because US consumers have overextended themselves on credit.

Thursday, May 17, 2007

South Korea's defense sector

According to Wikipedia, "The Republic of Korea has one of the highest defense budgets in the world (though second lowest in East Asia), regularly making the list of top ten." The 2005 number was about $21 billion. The country is able to produce a majority of the supplies and weaponry it uses, as "in 1990 South Korean industries provided about 70 percent of the weapons, ammunition, communications and other types of equipment, vehicles, clothing, and other supplies needed by the military."

Further, "the current administration has initiated a program of self-defense, whereby South Korea would be able to fully counter the North Korean threat with purely domestic means within the next two decades." I think that is a very important goal, both for South Korea and the US. First, achieving that goal would provide support for the South Korean economy. Second, with the unrest in South Korea regarding the presence of US forces in their country, I think that the US should withdraw all of its forces from the country eventually and let the South Koreans defend themselves.

The last thing homeowners need-another way to over-borrow

The linked article at SeekingAlpha describes a new financial product that is now being marketed which allows a homeowner to essentially place a bet on the future appreciation of their home, without incurring interest costs along the way. The product is the creation of "REX & Co, backed by a subsidiary of American International Group, Inc. (AIG), (which) has a new product that lets homeowners tap the value of their homes without taking out a loan."

SeekingAlpha poster Todd Sullivan comments that "the novel product gives homeowners cash for their equity in return for a portion of the proceeds from the eventual sale of the home. For instance, a homeowner who has a $500,000 home can extract $100,000 of that by giving REX 50% of the change in the home value. So, if the home is sold in five years for $750,000, REX receives half the increase, or, $125,000. If it sells for $600,000, they receive $50,000."

What it amounts to is the equivalent of a zero coupon bond which hit Wall Street years ago. The obvious risk is if the homeowner borrows a specific sum based on their forecast of the appreciation in their home and the home fails to appreciate enough to cover that borrowing then the borrower will be upside down at the note's due date. Also, I haven't bothered to do the effective interest rate calculation for some scenarios using this product, but it is likely to be expensive. It seems to me like another way for unsophisticated borrowers to hang themselves.

It is a creative new financing option which if used properly is a nice addition to the range of credit options available to consumers; but at this point it is just an attempt to keep the housing lending market afloat.

Wednesday, May 16, 2007

US oil and gas update

The EIA's "This Week In Petroleum" is a head scratcher...the report shows crude inventories still at the top of their historical range and WTI prices flat recently, and yet gasoline prices are still going up. Here are a couple of informative quotes from the TWIP site:

"Over 12 consecutive weeks during February, March, and April, total gasoline inventories declined by a cumulative total of more than 34 million barrels (15 percent). This is the sharpest decline in gasoline inventories over a consecutive 12-week period in EIA’s recorded historical data."

"Lower import levels than last year and numerous refinery outages, due to both maintenance and unexpected incidents, have slowed supply growth, while at the same time, demand continues to grow, even with prices around $3 per gallon. While demand growth has slowed somewhat in recent weeks, over the four-week period ending May 11, preliminary data suggests that gasoline demand is still 1.0 percent (or nearly 100,000 barrels per day) greater than year-ago levels."

Gas prices are going up and yet demand is going up at the same time. Apparently, drivers aren't that strapped by the price level. Also, if there has been such a large drawdown in gasoline stocks, a corresponding drop in crude stocks seems reasonable to expect. But it's not there. I'd like to know who is doing all the driving...

Differential pricing...on the other hand

I then discovered the following research which came up with a rather counter-intuitive finding:

Hospitals profit less from privately insured patients than from Medicare patients and profit least from Medicaid and self-pay patients

Payments for patient care at U.S. hospitals generally fall into four groups: Medicare, Medicaid, private insurance, and uninsured. The payment rates can be more or less "generous" in relation to the hospital's cost of caring for the patient.

Since 2001, budget pressures and growing hospital costs have forced government at all levels to consider cutting payment rates for the publicly insured (Federal Medicare and State Medicaid programs). In a recent study, researchers examined hospital financial reports—with detailed accounting by the four payer groups—and found that hospitals profit less from privately insured patients than from Medicare patients, and they profit least from Medicaid and self-pay patients.

Bernard Friedman, Ph.D., of the Agency for Healthcare Research and Quality, and his colleagues developed a model to estimate hospital profitability by hospital and payer in four States using data from hospital accounting reports in FY 2000 and detailed hospital discharge summaries from AHRQ's Healthcare Cost and Utilization Project. They found the profitability of inpatient care for privately insured patients to be about 4 percent less than for Medicare patients but 14 percent higher than for Medicaid and only 9 percent higher than for self-pay patients.

The overall inpatient revenue for the four States was 102.5 percent of costs. After controlling for State and hospital characteristics, the privately insured group was slightly less profitable than the Medicare groups but still significantly more profitable than Medicaid or self-pay and charity patients. Self-pay patients were more profitable than shown in previous reports due to the effects of State and local budget allocations, as well as programs that redistribute payments from insurers and obtain Federal subsidies under the Disproportionate Share provision of the Medicaid program.

Patients with more generous payers typically received more resource-intensive treatment for problems such as pneumonia and heart attack. There were no spillover effects from the generosity of one payer to the resources used for patients in other payer groups. Differences in hospital profitability appeared to be driven more by hospital payer mix than other hospital characteristics.

For more details, see "New evidence on hospital profitability by payer group and the effects of payer generosity," by Dr. Friedman, Neeraj Sood, Ph.D., Kelly Engstrom, M.B.A., and Diane McKenzie, M.S., in the International Journal of Health Care Finance and Economics 4, 231-246, 2004.

Reprints (AHRQ Publication No. 04-R069) are available from the AHRQ Publications Clearinghouse.

Hospitals make the most money from Medicare patients? The main-stream media would have us believe that hospitals were getting crushed because government payments for health care were being restricted.

With respect to my previous post about differential pricing; it seems that hospitals charge self-pay patients more because they don't think they'll get full payment at any price. So why not jack up the price and probably some portion of self-payers will pay the same portion of a higher charge, with the result being increased cash flow. Since a particular procedure costs the hospital the same regardless of who the payer is, a better policy would be to charge self-payers the Medicare rate, or at least the private insurer rate, as the debtor would be less intimidated by a smaller bill and might pay a greater percentage of that bill.

Differential pricing by hospitals depending on payer

I found this tidbit earlier today which describes yet another serious problem with the US healthcare system:

Study: Hospitals Charge Uninsured, Self-Pay Patients 2.5 Times What Other Health Insurers Pay

People who lack health insurance and those who pay for care out of their own pockets were charged on average 2.5 times more for hospital services in 2004 than what health insurers pay and three times more than Medicare-allowable costs, a leading health policy researcher reported in the May-June 2007 issue of Health Affairs. The gap between rates hospitals charge to self-pay patients and other payers has widened greatly since 1984, study author Gerard F. Anderson reports.

“Over time, the uninsured have been paying higher and higher prices for hospital care compared to what the insured population pays,” said Anderson, director of the Center for Hospital Finance and Management at the Johns Hopkins Bloomberg School of Public Health in Baltimore, Md. “The markup on hospital care for these individuals, especially for those who can afford it least, is unjustifiable.”

The ratio of what hospitals asked self-pay patients to pay and Medicare-allowable costs was 3.07 in 2004. Thus, for every $100 in Medicare-allowable costs, the average hospital charged a self-pay patient $307. For-profit hospitals had the highest charge-to-cost ratio, at 4.10, while public hospitals had a charge-to-cost ratio of 2.49. The markup of charges over costs was much greater in small urban hospitals than in rural hospitals--3.25 compared with 2.42.

There is no basis in scale economics for charging self-payers more; in 99% of procedures I think it is fair to say that a hospital's cost is the same whether the patient being treated has their care paid for by Medicare or by the patient.

Links of the day

How do rich Asians adapt to unbalanced sex ratios?..."Poor regions suffering from serious sex imbalances will face serious problems indeed...Richer regions, though, can import their women from poorer regions. This is already happening on a large scale in China, where not only women from poorer parts of China but ambitious emigrants from Vietnam are entering the marriage market in richer areas. In Taiwan and South Korea, two wealthy countries with pronounced sex ratios in favour of men, the immigration of women from poorer countries--Vietnam, the Philippines, China--has taken on remarkably large dimensions, as Attané notes in the case of Taiwan"...

Northern Ghawar is in decline...detailed analysis of the prospects of a major oil field in Saudi Arabia which appears to be going through a production decline and provides a significant fraction of Saudi Arabia's oil production...

US housing market update

The Commerce Department today released its "NEW RESIDENTIAL CONSTRUCTION IN APRIL 2007"...key points from the report include:

-applications for building permits plunged by the largest amount in 17 years
-housing construction is 25.9 percent lower than a year ago
-builders cut their requests for new construction permits by 8.9 percent in April...that was the sharpest drop since a 24 percent fall in February 1990

So housing will continue to shrink its contribution to US GDP; sectors that provide supplies and services to builders and homebuyers will continue to see shrinkage of their revenues as well. For example, lumber prices are below the $230 US level, significantly lower than the highs of $400 US reached in 2004 and 2005. Also, The Housing Bubble Blog has this quote that makes sense...“‘Walk into any…Best Buy or Circuit City and ask them about sales of big-screen TVs and computers,’ said Mike Morgan, broker in Stuart. ‘Boats, cars, clothing, jewelry and more,’ he said, ticking off big-ticket items that debt-plagued homeowners can no longer afford."

A couple of anecdotes gathered by The Housing Bubble Blog of interest...

-The Palm Beach Post...Florida had the second-highest number of filings in the nation with a total of 14,318 households entering some stage of foreclosure last month.”

“‘I know that banks are pleading to take properties off their hands even before they get to their REO (real-estate-owned) department,’ said Delray Beach luxury homebuilder Frank McKinney. ‘Twenty years ago, we sat on the courthouse steps and bid on properties and bought them.’”

“That’s no longer happening, McKinney said, ‘which shows me this huge flood of foreclosures will continue to hit South Florida well into next year.’”

-“James W. Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, New Brunswick, is concerned the state is in the middle of a multiyear housing down cycle, on par with the bust years of 1988 to 1992.

More on business process-change is good

At the SAP Community Network, this blog post describes the basics of handling changes to how a particular process works. The author describes drivers of change as follows:

"What are some characteristics of a Business Process change?
A process change could arise because a business unit could be recommending a new way to classify their products by adding/modifying some attributes; another business unit may want to streamline their purchase order process, etc. The initiating business unit/organization clarifies the business driver for the change, the benefits (in terms of ROI) to the company from the change, and gives a high-level time line for when they would like to see the change implemented across the company's value chain.

A business process change could be a brand new business process being put in place or a combination of a new process and some changes to an existing process. In most cases (in all established organizations), it is the latter."

This seems fairly obvious, perhaps this just needs to be laid out on paper for companies to get the ball rolling when figuring out how they are going to handle changes in how their systems work. The author also lists what such changes may involve:

  • Process changes
  • Data structure changes (entities, relationships, and attributes including key identifiers).
  • Meta data changes (definitions of business elements across the enterprise, business rules, etc.)
  • Data changes from end user stand point
  • System changes/enhancements in the change initiating systems, and downstream end customers.

Again, fairly straightforward but good to have in black and white. The key to success in changing a process is making sure that every step in the process is identified, and understanding what effects changing a particular step will result in. Failures in ERP implementations frequently occur, I believe, because companies didn't take the time to understand what the effects of making particular changes would be. For example, low level employees using a system that is to be replaced typically have developed poorly documented short cuts and workarounds that help them be more productive. When a new system is put in place, all that disappears and the time to complete tasks under the new system will typically take longer initially due to the learning curve that the workers need to become proficient with the new system. If a company didn't factor in the need for time to become proficient with the new system, the target date for "going live" frequently is missed.

Toyota's Hybrid Push

According to the linked article, Toyota expects to have every vehicle in its lineup be hybrid by 2020. The reason is that the company's research has found that"cost cutting on the electric motor, battery and inverter were all showing positive results", so that "by the time Toyota’s sales goal of one million hybrids annually is reached, it “expect margins to be equal to gasoline cars”. According to Toyota, hybrids will be competitive with diesel engines because "diesel vehicles, as favored by the European carmakers, require expensive particulate filters and other traps that cost almost as much as the first generation hybrid technology."

This would lead to a significant drop in gasoline demand by Toyota drivers; given Toyota's global market share the resulting impact in fuel consumption would be meaningful.

Here are some additional links from the article:

Tuesday, May 15, 2007

The American Health Care System

A search using Google Scholar turns up a wealth of discussion of the revenue and cost structure of the American health care system...

Update: Per Yahoo News, "
Americans get the poorest health care and yet pay the most compared to five other rich countries, according to a report released on Tuesday.

Germany, Britain, Australia and Canada all provide better care for less money, the Commonwealth Fund report found.

"The U.S. health care system ranks last compared with five other nations on measures of quality, access, efficiency, equity, and outcomes," the non-profit group which studies health care issues said in a statement.

Canada rates second worst out of the five overall. Germany scored highest, followed by Britain, Australia and New Zealand.

"The United States is not getting value for the money that is spent on health care," Commonwealth Fund president Karen Davis said in a telephone interview.

The group has consistently found that the United States, the only one of the six nations that does not provide universal health care, scores more poorly than the others on many measures of health care."

Not news to me...

Nice analysis of Whole Foods Market

"Much like Starbuck’s Corp. (SBUX), Whole Foods is a company whose best years are behind it. Competitors have encroached on its theme and the originality that made it such a fast grower is gone. Both companies are selling products that are perceived by most people as equal to their competition for higher prices. In today’s price sensitive environment, that is not a recipe for growth."

Straight talk from Wal-mart execs

From Marketwatch:

"The retailer has blamed disappointing U.S. sales on a number of issues in recent quarters -- from disruptions tied to store-remodeling efforts to misreading consumers' desires. But Tuesday it narrowed its list of factors to three related financial concerns that Scott said currently face Wal-Mart customers:

General money or income worries.

Inflation's effect on consumers' budgets.

Escalating prices at the gas pump, which Wal-Mart has long called the biggest factor affecting the purchasing decisions of its core customers.

Gasoline prices at the retail level have risen nearly 40% since the end of February, and on Monday the American Automobile Association said that the cost of filling up a vehicle had hit an all-time high.

Vow to show 'price leadership'"

"Obviously, saving money is important to our customers," Scott said. "You will see us being more committed than ever to price leadership."

Can the China price go lower? I suppose greater productivity with existing machinery with the same pay for workers might do the trick...also, an earlier post here pointed to the fact that gas prices until the last few weeks at least were still lower than what could have been expected if the price per gallon had simply risen with inflation over the past 25 years...

Deflation or inflation?

Excluding food and energy prices, the so-called core CPI rose 0.2%, in line with expectations, and cutting the annual gain in the core down to a one-year low of 2.3%...on the one hand, we have plenty of money supply; on the other, overcapacity in a bunch of industries(housing, autos, retail). I am not one of those who will point fingers at the Federal Reserve; they are looking at data that is difficult to disect, and have to look forward. It's useless to point fingers since no one else has better data...

Monday, May 14, 2007

Home auctions knock down prices in a hurry

The WSJ says that "An auction of nearly 100 foreclosed homes [in San Diego] Saturday showed that mortgage lenders are having to accept huge discounts in some cases to unload such properties.
A surge of foreclosures over the past year or so has left lenders struggling to sell a growing backlog of homes" adds that the sale prices wind up being at levels 30 to 50% lower than previous sales in the developments concerned...this will likely eliminate equity withdrawals in some neighborhoods...

Daimler loses its shorts on Chrysler

According to the AP, "Private equity firm Cerberus will buy a majority of DaimlerChrysler's struggling Chrysler Group for $7.4 billion, a fraction of the $36 billion deal that created the transatlantic car union nine years ago" my calculations, that is an 80% loss on the investment...

Friday, May 11, 2007

US national debt as a percentage of GDP

Since 1990, the ratio has essentially been stayed within a narrow range around 60% compared to the previous 90 years. What that means is that in spite of the extensive spending for wars in Afghanistan and Iraq, the Bush administration has not been reckless in its deficit spending compared to the previous administration. This ratio is also low compared with other countries; according to Wikipedia, the ratio of national debt to GDP for other countries as of 2006 was:







Links of the day

Master of the Obvious..."success comes from doing the work no one wants to do"...100% agreed...

Futures Shock...interesting argument that floating exchange rates are harmful to global trade...

Claus Vistesen has posted an analysis titled France - Europe's New Sick Man?, and this is timely as the country is "on the brink of what must be considered a new era in France after so many years with Chirac at the rudder." The gist of his post is that contrary to the conventional wisdom that France's economy is in poor shape, the country's economy is healthier than average among the EU countries...

US budget surplus $177.7 billion for April 2007

Apparently it is the second highest monthly surplus on record, with April 2001 still holding the record at nearly $190 billion. The 2001 surplus was likely the result of tax collections from the peak of the dot-com boom. More positive information that I found in the Treasury's May 4th "Treasury Economic Update":

-"88,000 new jobs were gained in April and nearly 2 million new jobs have been created
over the past 12 months."

-"The United States has added 7.9 million jobs since August 2003 – more new
jobs than all the other major industrialized countries combined."

-"The unemployment rate of 4.5 percent is among the lowest reading in six years."

-"Tax receipts rose 11.8 percent in fiscal year 2006 (FY06) on top of FY05’s 14.6
percent increase."

Granted, this is all backward-looking data....

Thursday, May 10, 2007

"Peak Oil" likely a crock

As a basis for this bold statement, I refer to a fact sheet produced by the US Geological Survey titled "Reserve Growth Effects on Estimates of Oil and Natural Gas Resources." From the report:

"Operators of oil and gas fields in the United States are required to report total annual production and an estimate of proved reserves from each field to the U.S. Department of Energy. These two quantities provide an estimate of the petroleum volume that ultimately will be recovered from a field. Experience shows that over the life of many oil and gas fields, these estimates of ultimate recovery will increase."

As an example, the report describes "reserve growth for the Midway-Sunset oil field in California"...

"By 1968, 56 years after discovery of the Midway-Sunset field, cumulative production
totaled about 1 billion barrels of oil, and proved reserves—the amount of resource
known with a high degree of certainty to be available for future production—stood at about 200 million barrels. Ultimate recovery was estimated then at about 1.2 billion barrels. Just 8 years later, in 1976, cumulative production exceeded this estimate of ultimate recovery, proved reserves stood at 400 million barrels, and ultimate recovery was set at 1.65 billion barrels. Twenty years later in 1996, cumulative production had reached 2.3 billion barrels, proved reserves stood at about 500 million barrels, and ultimate recovery was set at 2.8 billion barrels. Over a period of 28 years, long after the discovery of the field, estimates of ultimate recovery more than doubled, from 1.2 billion barrels to 2.8 billion barrels. While this example describes the reserve growth of a very large and somewhat atypical field, the general phenomenon of reserve growth is common to fields of all sizes and types."

The report concludes by stating that "Recent estimates incorporating reserve growth suggest that the world’s ultimate supply of petroleum might be larger than has been generally appreciated."

Unintended Consequences of Publicly Reporting Quality Information

is the title of a post at Healthcare Economist that quotes a review of health care report cards for a procedure called coronary artery bypass graft as follows:

"In Pennsylvania, which also introduced CABG report cards, 63% of cardiac surgeons admit to being reluctant to operate on high-risk patients, and 59% of cardiologists report having increased difficulty in finding a surgeon for high-risk patients with coronary artery disease since the release of report cards. New York had a similar experience after the release of report cards, reporting that 67% of cardiac surgeons refused to treat at least 1 patient in the preceding year who was perceived to be high risk."

I see this as a positive consequence of measuring the outcomes of medical procedures. Clearly, the surgeons don't want to put themselves in a position where they could potentially be sued. However, if the patient is defined to be high-risk, that means that regardless of who performs the surgery the patient is seen as having a high likelihood of dying on the operating table. A high risk patient faces two options: do nothing and hope that they live as long as possible, or undergo surgery where the probability of dying during surgery is high. I don't know what the average life expectancy for the patient if they choose not to have surgery is, but that would be important information to have before making the decision.

The key here is that if the surgeon doesn't think you'll survive surgery, you shouldn't have the operation. Not having the operation saves the patient and his/her insurance company and by extension every person in the country the cost of the surgery.

If the two states decided to eliminate the report cards, the result would be a return to high-risk patients undergoing surgery without real consideration of the risk of death, because there would be no incentive for surgeons to tell their patients that they think that surgery is too risky. In fact, surgeons would have financial incentive to disregard the relative risk for specific patients.

Remarkably, with respect to the procedure discussed here,

"The past 20 years has seen a proliferation of bypass surgery and angioplasty, in spite of strong scientific evidence that neither may be helpful in the long run for the overwhelming majority of patients. In general, the only reason for the one million such procedures each year is the high number of working cardiologists and cardiovascular surgeons in the medical community and the extremely high profitability of these procedures, around $70,000 for a bypass and $30,000 for an angioplasty.

The landmark CASS Study (stands for Coronary Artery Surgery Study) in 1984 demonstrated the irrelevance of bypass surgery and angioplasty to survival after the diagnosis of coronary artery disease is made. Analysis of outcome in 780 patients demonstrated no statistical difference in survivability between patients who both went to surgery and were treated medically and patients who were treated medically without surgery. Nevertheless, this extremely well documented study is generally ignored by doctors who do these procedures and never mentioned to patients who they consider candidates for bypass or angioplasty"...per Ron Kennedy, M.D., Santa Rosa, CA

In essence, surgeons are wasting money and killing patients...for profit...

Yet another serious healthcare problem comes to light

According to the AP today, "The maker of the powerful painkiller OxyContin and three of its current and former executives pleaded guilty Thursday to misleading the public about the drug's risk of addiction, a federal prosecutor and the company said...Purdue Pharma L.P. and the executives will pay $634.5 million in fines...the plea comes two days after the Stamford, Conn.-based company agreed to pay $19.5 million to 26 states and the District of Columbia to settle complaints that it encouraged physicians to overprescribe OxyContin"...

Further, "With its OxyContin, Purdue unleashed a highly abusable, addictive, and potentially dangerous drug on an unsuspecting and unkowing public", said U.S. Attorney John Brownlee.

There has been plenty of main stream media coverage of the skyrocketing of Oxycontin abuse in the US...the guilty pleas and settlements are remarkable. The excess cost to the US healthcare system due to overprescription of the drug and treating abuse of the drug, as well as the cost of handling related criminal activity, is likely to be large.