Thursday, July 26, 2007

Buyout premium disappearing from US stock market

Here are two charts from this morning:

Influence of rating agencies on international debt markets

In "The Global Credit Channel and Monetary Policy" Claus Vistesen raises the issue of the importance of credit rating agencies with respect to the effect of global financial liberalisation on the global economy.

With respect to the rating agencies, I think one of the major problems has been that investors, whether institutional or retail, have been accepting the ratings assigned to securities at face value without really digging into the guts of the ratings reports or doing much independent analysis. In the case of portfolio managers for institutions, this is really a kind of failure to perform their job.

I am sure that a conversation between a investment bank rep and an institutional buyer like the following hypothetical has happened many times:

Banker: I have X billion of automaker Y bonds available; they're going fast!

Institution: Moody's says these bonds are BAA; no problem..I'll take $100 million as fast as you can get them to me. I need the yield...

So I agree that the ratings agencies have been incentivized to shade their ratings to the optimistic side, but as always the rule of "buyer beware" applies. Buyers of issues rated by the three major raters used the reputation of the raters to cover their butts in case of default: "Well, Moody's said it was BAA!"...

With respect to the ratings agencies and sovereign debts, I am not all that sympathetic to the agencies. Both the buy-side and the investment banks wanted the agencies in place to help justify pricing of issues, and governments frequently have touted their ratings. All four groups of entities have had a stake in the system as it currently exists. If the raters downgrade a country's debt, instead of complaining about the raters, it's up to that country's policymakers to convince the market that the rating is incorrect by providing information or policy changes that demonstrate that the country's issues warrant the desired pricing.

Wednesday, July 25, 2007

The LBO market appears to have seized up

Headlines in the financial press today and recently:

-KKR Banks Fail to Sell $10 Billion of Boots Loans..."Kohlberg Kravis Roberts & Co.'s banks, led by Deutsche Bank AG, failed to sell 5 billion pounds ($10 billion) of senior loans to fund the leveraged buyout of Alliance Boots Plc, two people with direct knowledge of the deal said"...

-Chrysler, Facing Resistance, Abandons Loan Sale Plan..."Chrysler abandoned plans to sell $12 billion of loans to complete its purchase by Cerberus Capital Management LP after investors balked at purchasing the high-yield, high-risk debt, according to investors who were briefed on the decision...Banks led by JPMorgan Chase & Co. will assume $10 billion of that debt"...

-KKR, Blackstone Find `Tide Is Going Out,' Gross Says..."The cheap financing that fueled the leveraged buyout boom is over, according to Bill Gross, manager of the world's largest bond fund"...

-RLPC-Maxeda...The 1.075 billion-euro loan backing the buyout of Dutch retailer Maxeda DIY has been pulled from syndication after failing to clear a European loan market in the throes of a correction, banking sources said on Monday. The deal is Europe's first leveraged loan to be put on ice in the current market correction and was withdrawn from syndication on Friday after concessions failed to generate additional momentum, arrangers ABN AMRO and Citibank told Reuters Loan Pricing Corporation"...

Bloomberg reports:...

"At least 20 companies have canceled or postponed debt offerings since June 26 as credit markets grow tighter.

The extra yield investors demand to own high-risk, high- yield, or junk-rated corporate bonds has jumped 0.85 percentage points to 3.37 percentage points since the day before Expedia announced its share buyback, according to Merrill Lynch & Co. index data"...

The eminent Bill Gross of PIMCO agrees with me:
"That growing lack of confidence – more so than the defaults of two Bear Stearns hedge funds and the threat of more to come – has frozen future lending and backed up the market for high yield new issues such that it resembles a constipated owl: absolutely nothing is moving."

Why Japanese consumers are feeling even worse off than US consumers

I just discovered Japan Economy News & Blog, which has a recent post concerning "Increased tax burdens, consumer pessimism, excessively low interest rates, and the BOJ’s June Standard of Living Survey." That is certainly a mouthful; the gist of the article is that
"With many households nervous over future prospects, a potential rise in the consumption tax, sluggish (if negative when normalized) gains in wages and decreased consumer confidence in June, economy watchers should now be worrying whether these two reports might prove to be a nail in the coffin of an August interest rate hike by the Bank of Japan."

My sense from a US perspective, is that an arcane topic such as Japan's tax policy just doesn't cut it at the editorial desks of US media outlets at this time. Trade issues with China, the housing/mortage collapse, the Iraq war, oil prices, the seeming free-fall that is taking place at the three US automakers are all affect the US investor much more directly.

It is no wonder that domestic GDP in Japan is weak, given the factors listed above. I can understand the poll results showing that the public thinks interest rates are too low. The BoJ's interest rate policy at this time is to ensure that exports are not damaged by yen strength, particularly due to an unwinding of the carry trade. Significant rate hikes by the BoJ would almost certainly spark an unwinding of said carry trade, jacking up the yen and damaging the profitability of the country's export sector (which is the only thing holding Japan's GDP in positive territory). This is a continuation of Japan's long-standing policy of short-changing its domestic markets to benefit the export sector.

The Japanese public would obviously like to see interest rates higher so that they can realize better returns on their savings without exposing themselves to exchange rate risk. However, as various news reports indicate, the public is starting to engage in the carry trade themselves, as they likely don't see the BoJ's interest rate policy changing anytime soon. In addition, the impending collapse of the Abe government is seen as delaying any interest rate movement in the near term as well.

Japan is in an economic trap at this time; any major changes in policy will cause extreme volatility for the public, business, and the government. The current policy of not making any significant changes may provide short-term stability, but eventually difficult changes will occur.

Monday, July 23, 2007


From commenter Dave Chiang at Oil and the dollar at Brad Setser's blog:

"In order to compensate for the weak US dollar, the OPEC oil producers led by Saudi Arabia are keeping a tight rein on high energy prices by restricting supply."

That makes sense to me...

Friday, July 20, 2007

Foreign investor on the way

Dealbreaker points out that:
Dubai Investment Firm Plans U.S. Purchases (Dealbook) and says

"Hide your children, your mortgage deeds and your small businesses. Remove your stock holding from your brokerage account and put the certificates under your pillow. If you're a public company, it's time to go private -- right now. In short, time to go into lockdown mode. The Dubai money is coming. The private equity firm managed by the country's ruler, Sheik Mohammed bin Rashid al-Maktoum, will soon open an American office, so that he can add US firms to his portfolio. They're takin' over."

I say dust off your business plan that's been sitting on the shelf...there's a new prospect in town. Time to get back some of that gas money we've been hosing into our SUV's...

July 22nd-housing earthquake

Thanks to Seattle Bubble for pointing out that
"New guidelines making it tougher to qualify under interest only mortgage terms begins on July 22nd...In summary: “any mortgage containing an interest-only feature be underwritten at the highest possible interest rate or subsequent amortizing payment, and that any mortgage containing a negative-amortizing feature be underwritten at the highest possible balance and interest-rate adjustment”"
It may take a while for the effects of this to filter through the market, depending on ARM reset dates, but it will surely put severe pressure on home prices nationwide.

Wednesday, July 18, 2007

Oil prices at $80 a barrel

The US EIA says in "This Week in Petroleum" that "With the futures price increasing, some people are wondering if crude oil prices will reach $80 per barrel at some point this year. The trick answer to this question, though, is that light, sweet crude oil prices have already reached $80 per barrel, just not for West Texas Intermediate"...and that "Any premium on light, sweet crude oils has implications for retail prices for refined products, such as gasoline and distillate fuel."

"With fuel specifications evolving towards cleaner and cleaner refined products, refiners are looking to purchase more sweet (low sulfur) crude oils, thus putting an increasing premium on these types of crude oils. If not for the primary focus on WTI, this premium would be much more visible, but it exists nonetheless. As a result, a significant portion of the rise in retail gasoline and diesel prices is related to higher crude oil prices, particularly light, sweet crude oils...Regardless of where crude oil prices head over the remainder of the year, $80 per barrel prices have already occurred, both overseas and domestically."
Oil-exporting countries are raking in the cash now, but there are so many alternative sources of oil along with alternative fuel systems that are economically viable at oil price levels well below $80 that I think that it is likely that a sharp dropoff in demand for light sweet crude in the next 5 to 10 years. It is important to keep in mind that cycles in energy occur over long time frames.

Monday, July 16, 2007

Yen carry trade and New Zealand's economic prospects

Claus Vistesen at Alpha Sources notes today that the most recent inflation numbers for New Zealand
"beat the central bank's expectations. It is of course still too late to say anything but with today's inflation data the markets are gearing up for the RBNZ to raise the refi rate to an unprecedented 8.25% next week. In doing so the bank will clearly be playing into the hands of all those savvy retail investors and indeed institutional players playing the carry trade which is driven by very high global capital mobility and high interest rate differentials between central banks."

It seems to me that the prospect of the currency of one of the world's largest and most populous economies(Japan) being dumped for the currency of one of the world's smaller and more isolated economies is somewhat Kafka-esque.

A quick review of the Wikipedia entry on New Zealand shows NZ to be "a country heavily dependent on trade, particularly in agricultural products, and exports almost 28% of its output." Thus, the current carry trade situation looks to be particularly damaging to NZ's economic prospects.

As far as long term solutions for New Zealand go, the Wikipedia authors state that "the current government's economic objectives are centred on pursuing free-trade agreements and building a "knowledge economy". In 2004, the government began discussing a free trade agreement with the People's Republic of China, one of the first countries to do so. Ongoing economic challenges for New Zealand include a current account deficit of 9% of GDP[19], slow development of non-commodity exports and tepid growth of labour productivity. New Zealand has experienced a series of "brain drains" since the 1970s[20] as well educated youth left permanently for Australia, Britain or the United States." With a population of only 4.2 million and a below-replacement total fertility rate of 1.79, it seems to me that New Zealand likely lacks the human capital to generate sustained economic growth. Given the country's geographic remoteness, it seems unlikely to attract skilled immigrants in any meaningful numbers.

It seems that New Zealand's situation today is analogous to the Eastern European countries being discussed over at Demography Matters.

US national debt shrank during the first half of 2007

According to a Bloomberg report today,
"the Treasury Department sold less securities from January through June than matured, the first time that has happened since 2000...the fiscal outlook is so good that investors and strategists are beginning to handicap which maturities the government may stop selling or even buy back for the first time in five years."

This is in spite of continued military spending in Iraq. The Bloomberg piece also noted that
"The government has reduced the sizes of its auctions of two-, five- and 10-year notes to avoid letting cash pile up for the past two years. Ten-year notes were cut to $21 billion from $23 billion a quarter in 2005. Five-year notes, sold monthly, were reduced to $13 billion from $15 billion. Quarterly three- year note sales were suspended in May."

Also, "The deficit as a percentage of gross domestic product narrowed to 1.9 percent in 2006 from 3.5 percent in 2004"...

Conveniently, "The drop in supply comes just as international investors, owners of more than half of all Treasuries, slow their purchases. They bought a net $16.2 billion a month on average in the first four months of this year, compared with $28.2 billion a month in 2005."

It would appear that the US economy is experiencing a virtuous cycle. The fact that the US is needing to borrow less at the same time that foreign investors have decided that they wish to loan the US less is striking. Should the US reduce its spending in Iraq over the next year, as it appears likely to do, there should be even more improvement in the budget deficit.

Thursday, July 12, 2007

Trends in movie ticket prices

I was looking at the box office numbers from last weekend supplied by Yahoo; the main stream media roll out these figures every week and quite often the headlines are about recordbreaking dollar totals for the films in release. Sometimes the fact that ticket prices have been raised is mentioned. I have wondered exactly how often and how much movie ticket prices have been raised. Well, a Google search turned up "Admissions & Ticket Prices: Two Popular Myths" in a theater industry trade publication.

Two pieces of data from that article:

Here are some U.S. admissions numbers over the past 35 years (in millions):
1970 920.6
1980 1,021.5
1990 1,188.6
2000 1,420.8
2001 1,487.3
2002 1,639.3
2003 1,574.0
2004 1,536.1

The author argued that since ticket prices for other entertainment such as pro sports had increased radically over the same time frame as the above chart, that movie ticket price increases have not been out of line. The chart is rather poorly conceived, however looking at it closely shows that admissions basically tracked population growth from 1980 to 1991; then increased somewhat faster than population growth. I attribute the increased admissions to the wave of fancy new stadium theaters that were built and the film production companies' shift in strategy to aiming for blockbuster hits. The chart and the data show that admissions stagnated after 2002. I attribute that to ticket price increases hitting the wall where casual moviegoers are deciding that ticket prices are too high.

Update: I located the following information at the site of the National Association of Theater Owners, or NATO:)...

Average U.S. Ticket Prices

Here is a chart of this pricing information:

Since ticket prices increased every year after 1994, it would stand to reason that ticket sales might stagnate.

A quick look at who could lose big due to CDO problems

Jim Jubak of MSN wrote Deepening Debt Crisis providing an estimate of who is at risk(my highlights):

"First, the investors who elected to buy the equity tranche (which are the riskiest debts), attracted by the possibility of an equitylike return on a fixed-income investment, get killed...

Hedge funds bought about 10% of equity tranches in 2006, according to Bear Stearns. But pension funds bought more -- 18%. Insurance companies bought even more -- 19%. And asset managers bought even more -- 22%. When pension funds take big losses, parent companies have to make up the loss or workers have to take smaller pensions. When insurance companies take the loss, insurance rates go up. When asset managers take the loss, well, we all cry when we open our monthly mutual-fund statements.

It's hard to get a complete list of who owns equity-tranche CDOs. But some names that come up include the California Public Employees' Retirement System ($140 million), the Teachers Retirement System of Texas ($63 million), French financial giant AXA and the New Mexico State Investment Council ($223 million)"...

Wednesday, July 11, 2007

Prospects for GAP as a clothing retailer

A really great analysis of the company can be found at "Can Gap Effectuate a Successful Turnaround?" The statement by the author that "You can’t be an edgy clothing retailer when you’re selling large volumes of goods to your desired market’s parents" should be carved into the wall of every Gap executive's office. I am in my late thirties and used to shop at Gap stores because they consistently had the basics, i.e. business casual and denim. When sales growth started to flatten because they had saturated the market with their stores, they started flailing around with more bizarre items and that pretty much turned me off. Their gimmick commercials with retread rock stars did damage to the Gap brand as far as younger shoppers were concerned, as well. Also, there is a limit to how much of the basics a clothing purchaser needs, especially those in their thirties and forties. You aren't growing physically(hopefully) so a few purchases of khakis, some polo shirts, and some denim jeans and shorts is going to last you a while. So I think that the Gap business is going to have to accept that it is a mature business and will need to be managed as a dividend-generating business. Based on that, I agree with the authors points of the signs of a Gap turnaround are:

1) Reestablishing the brand, with the first key being the company behaving as if it’s in touch with the customers it wishes to court.
2) A new attempt to court the female shopper in the 35-45 age range, only with them sticking with it this time around and getting the job done.
3) A stronger and more stable product mix that appears in tune with the Gap’s efforts to rebuild its brand.

as far as the Gap line is concerned.

I think that the Old Navy line should just be liquidated; long-term I don't think that the business model can survive against Target and Walmart. When your kids are shopping for discount clothes, they don't want to advertise the brand when they wear the clothes. Perhaps they could negotiate a deal to sell Old Navy branded product through Walmart's stores and eliminate the store overhead they have now.

Last time I looked, Banana Republic's prices were significantly higher for similar items that Gap's. I see BR as competing with Nordstrom. I suppose Gap's theory is that once you get to a certain income level you will shift to shopping at BR from Gap. That doesn't make any sense because it's shifting sales around within the company as a whole.

My answer to the question of "does the Gap actually understand its problems?" is that I don't think Gap management understands its problems and is basically throwing darts and hoping they hit something. I think the best course of action would be for a breakup of the company. Spin off BR as an independent company, liquidate Old Navy stores and cut a deal to market the product through an established big-box discounter, and focus on the Gap brand by reinforcing the denim and business casual product line and accept a position as a value stock rather than a growth stock.

Tuesday, July 10, 2007

Iranians like American made goods-smugglers supply them

says a Bloomberg report titled "Dubai Dhow Captains Defy U.S. Sanctions With Shipments to Iran." Says the report:
"Sailors with skin baked to leather by the Persian Gulf sun stack Hewlett-Packard Co. laser-jet printers alongside a 40-foot wooden dhow in Dubai Creek as Ali Reza, an Iranian merchant, watches them sweat. From his base in Dubai, the second-biggest member of the United Arab Emirates, Reza ships General Electric Corp. refrigerators and other American-branded products to Iran, even though re-exporting them is banned under U.S. sanctions. Within days, the printers will be snapped up by buyers in Iran. ``Anything made in America is popular,'' Reza, 55, says as his crew prepares for another voyage."

"The U.S. military inadvertently provides protection for dhows plying the Gulf. Coalition forces are charged with guarding Iraq's offshore oil facilities and check vessels sailing through the Strait of Hormuz for weapons. ``The pirates and the weather are our enemies,'' says Mohammed Ali Hussein, a 35-year-old boat captain who makes the journey to Iran about once a month. ``If we're lucky, our route will take us near Iraqi oil installations. That is a safe area.''

I'd like to see an estimate of US exports to Iran through this channel. According to the article, " Customs laws in the United Arab Emirates mean that officials only look at the port of origin for a cargo. With most of the U.S. goods coming through Asia, there are no legal grounds to seize them, says Marwan Ali Hasan, an inspector in Dubai."

Also, how does the US Navy tell the difference between a pirate and a smuggler? Nobody's flying a skull and crossbones...

Recommendation for change in MD education in the US

I think that eliminating the requirement of a four year college degree as a prerequisite to admission to medical school is long overdue. Prospective MD's basically mark time in undergraduate school, as the course of study in undergraduate is irrelevant to the medical school admissions process.

A better process would simply to base the admission decision in part on high school performance along with the MCAT result and whatever the other criteria that medical schools now use. The chain of predictors of success from high school performance to undergraduate performance to success in med school correlate well, I think. So cutting out the undergraduate step wouldn't change the quality of med school graduates and would eliminate a huge waste of time and money for taxpayers and prospective MD's.

Major concerns with the US health care system

In the July issue of HFM, the journal of the Healthcare Financial Management Association, an article included a list per the title of this post. The headline of each item on the list was as follows:

1. High and growing healthcare costs

2. Cost shifting

3. Clinical variation and inconsistent quality

4. Inconsistent access to care

5. Weak and/or perverse market incentives

6. Administrative complexity and high overhead

7. Shortages of clinicians

The biggest problems in my view are the perverse incentives that exist throughout the system, price opacity in that the patient has a difficult task in understanding what their care will cost and whether the cost is worth the benefit, and the high incidence of unnecessary medical procedures being performed.

Solutions to the above problems are welcome:)....

US anti-terrorism spending not necessarily effective

GCN has an article today titled "CRS: Mission creep at fusion centers" which describes "state intelligence fusion centers" which are intended to "fuse federal, state and local intelligence against terrorism." Unfortunately, apparently the money being spent on this is not being used for the intended purpose. Surprise, surprise!

The article is based on the findings of a report by the Congressional Research Service which concludes that "Antiterrorism information-sharing and analysis is taking a back seat to criminal intelligence at the more than 40 state intelligence fusion centers"..."
While many of the centers have prevention of attacks as a high priority, little ‘true fusion,’ or analysis of disparate data sources, identification of intelligence gaps and pro-active collection of intelligence against those gaps, which could contribute to prevention, is occurring”...according to the report.

While I think that the concept envisioned by these centers is good, we shouldn't be spending the money if the desired function of the program is not being met. It makes sense that local agencies would tend to focus more on domestic crime, as that is what they have to deal with on a day to day basis, but at the same time I can see where local law enforcement agencies have seen this as an opportunity to exploit the federal budget for local issues. So I say the program should be canned.

It reminds me of some of the absurd projects that money was spent on in the first couple of years after 9-11. At our local airport, there used to be a small parking lot where one could come and watch airplanes land and take off. That was closed off with concrete barriers and fencing. Well, about fifty feet away was a parking lot for a city golf course that had been developed next to the airport. If someone wanted to launch a shoulder fired missile at an airliner, the golf course parking lot would have worked just as well as the now-closed viewing lot. So a bunch of money was wasted on a knee-jerk idea...

Monday, July 09, 2007

Ethanol trends

A story posted today at Bloomberg regarding the ethanol industry contained quite a bit of information that I was not aware of.

-"Ethanol tumbled 43 percent in the past 12 months, making the corn-based fuel additive cheaper than gasoline for the first time in two years"...

-"corn prices dropped 27 percent from a 10-year high in February. U.S. farmers planted more corn than in any year since World War II. Every $1- a-bushel decline in corn lowers the cost to make a gallon of ethanol by 25 cents"...

-" Ethanol touched its all-time high of $3.98 a gallon on July 3, 2006"...

-"Distillers built new mills, boosting annual capacity to 4.9 billion gallons by the end of 2006, more than double what it was four years earlier. Ethanol makers plan to add another 6 billion gallons of capacity by the end of next year"...

-" A glut from those new mills caused ethanol to fall to $2.20 a gallon at the end of last week"...

It appears that restrictions on building new ethanol production facilities are significantly less than those for oil refineries. Also, basic agricultural economic forces are at work; it is relatively easy for farmers to switch crops depending on market prices for different crops. This means that farm prices have typically been quite volatile. So, once the push for ethanol as a fuel got under way, it is not surprising that there was a massive increase in corn production.

I think that food price increases due to fuel usage of corn crops will be a temporary phenomenon. We will see consistently high production of corn going forward compared to historical levels.

Clear evidence that US employers knowingly hire illegal workers

I discovered at Econbrowser the following statement from a story in the Arizona Republic...
"A 2005 report by the federal Government Accountability Office found that between 1985 and 2000, 9 million people got hired using this Social Security number: 000-00-0000. The report also found 3.5 million instances where a company had several employees using the same Social Security number. Most of the problem entries came from the food service industry and the construction industry."

Ayn Rand vs Tolkien: compare and contrast?

There is an article which does precisely this over at titled "Tales of Titans and Hobbits"; the core of the essay is this:

"Both Rand and Tolkien, then, passionately tell their tales about freedom, but they resort to completely different aesthetics, and, in consequence, paint two entirely different pictures of the world, with different heroes and different challenges. Are those differences important? How do they affect the "moral" of the respective tales? Given that it is of utmost importance just what kind of story one tells, it is perhaps worthwhile to reflect upon the different world images depicted in Atlas Shrugged and The Lord of the Rings, comparing the characters of both narratives along with the predicaments they face, and asking the fundamental question, which of the two novels constitutes a better context, a better literary frame of reference for freedom."
The essay also points out the contrasting economic world-views idealized by each of the authors. These two authors would be last to be compared in my mind, but the essay is well thought out.

Friday, July 06, 2007

Canada as a location for US companies to relocate foreign workers

A headline from today's Wall Street Journal says
"Microsoft plans to open a software development center in Canada this fall to attract talent and avoid U.S. immigration issues."
Yahoo picked up the story yesterday and elaborates that
"The Vancouver, British Columbia location will be one of only a handful development centers outside the company's headquarters in Redmond, Wash., the software company said Thursday. It previously announced plans to build sites in Boston and Bellevue, Wash."
Clearly, they picked Vancouver because of the ease of access to Microsoft HQ (only 140 miles apart).

It will be interesting to see if many other US companies choose to make a similar move.

Thursday, July 05, 2007

Counter-intuitive fact regarding US net international investment position

Brad Setser says:
A paper that Dr. Roubini and I wrote in 2004 – a paper that incidentally is still by far the most popular thing I have ever helped to write – made this argument. We recognized even then that US had one big advantage than most emerging economies lacked: its liabilities are denominated in dollars, while many of its assets are denominated in foreign currencies (mostly the euro and loonie). That means that falls in the dollar improve the United States external position. The falling dollar increases the value of many US external assets without changing the value of (most) US external liabilities.
In the linked article Setser expands considerably on the subject of the US's net international investment position, but the main point of the post is that, contrary to Setser's predictions, "the US net international investment position has actually improved since the end of 2004." The prime reasons for that being due to the decrease in the dollar's value, and also due to the fact that
"Foreign equity markets – in terms of their own currency -- dramatically outperformed US equity markets – in dollar terms -- in both 2005 and 2006...

The implied return (in local currency terms) on US holdings of foreign stocks (portfolio equity) was 22.1% in 2005 and 18.4% in 2006. Throw in currency moves, which cut a bit over 7% off US returns in 2005 but added about 5.5% in 2006, and the gain -- in dollar terms -- on US holdings of foreign stocks in dollar terms was around 15% in 2005 and 24% in 2006.

That tops the 3.1% return foreigners got (in dollar terms) on US stocks in 2006, and their 13.2% return in 2006.

US equity investors abroad did about 12% better than foreign equity investors in the US in 2005 and about 11% better in 2006. They make it hard to argue (credibly) that the US can finance large deficits because the US is such a good place for investment ..."
The question of why foreign investment in the US has performed relatively poorly compared to the reverse is a complex one...perhaps US investment managers are more sophisticated than their foreign counterparts. Two examples of investment trends in the US that drew a lot of foreign capital in recent years are the dot-com boom and the recent residential housing boom. In both instances, I believe a significant amount of capital that drove over-investment in these sectors came from foreign sources who likely failed to perform enough investigation of their investments before forking over their cash.

Tuesday, July 03, 2007

The US Declaration of Independence

In CONGRESS, July 4, 1776.

The unanimous Declaration of the thirteen united States of America.

When in the Course of human events, it becomes necessary for one people to dissolve the political bands, which have connected them with another, and to assume, among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

We hold these truths to be self-evident, that all men are created equal, that they are endowed, by their Creator, with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness.

That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or abolish it, and to institute new Government, laying its foundation on such principles, and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object, evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.

Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States. To prove this, let the Facts be submitted to a candid world.

He has refused his Assent to Laws, the most wholesome and necessary for the public good.

He has forbidden his Governors to pass Laws of immediate and pressing importance, unless suspended in their operation till his Assent should be obtained; and when so suspended, he has utterly neglected to attend to them.

He has refused to pass other Laws for the accommodation of large districts of people, unless those people would relinquish the right of Representation in the Legislature, a right inestimable to them and formidable to tyrants only.

He has called together legislative bodies at places unusual, uncomfortable, and distant from the depository of their Public Records, for the sole purpose of fatiguing them into compliance with his measures.

He has dissolved Representative Houses repeatedly, for opposing with manly firmness of his invasions on the rights of the people.

He has refused for a long time, after such dissolutions, to cause others to be elected, whereby the Legislative Powers, incapable of Annihilation, have returned to the People at large for their exercise; the State remaining in the mean time exposed to all the dangers of invasion from without, and convulsions within.

He has endeavoured to prevent the population of these States; for that purpose obstructing the Laws for Naturalization of Foreigners; refusing to pass others to encourage their migrations hither, and raising the conditions of new Appropriations of Lands.

He has obstructed the Administration of Justice by refusing his Assent to Laws for establishing Judiciary Powers.

He has made Judges dependent on his Will alone for the tenure of their offices, and the amount and payment of their salaries.

He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people and eat out their substance.

He has kept among us, in times of peace, Standing Armies without the Consent of our legislatures.

He has affected to render the Military independent of and superior to the Civil Power.

He has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation:

For quartering large bodies of armed troops among us:

For protecting them, by a mock Trial from punishment for any Murders which they should commit on the Inhabitants of these States:

For cutting off our Trade with all parts of the world:

For imposing Taxes on us without our Consent:

For depriving us in many cases, of the benefit of Trial by Jury:

For transporting us beyond Seas to be tried for pretended offences:

For abolishing the free System of English Laws in a neighbouring Province, establishing therein an Arbitrary government, and enlarging its Boundaries so as to render it at once an example and fit instrument for introducing the same absolute rule into these Colonies

For taking away our Charters, abolishing our most valuable Laws and altering fundamentally the Forms of our Governments:

For suspending our own Legislatures, and declaring themselves invested with power to legislate for us in all cases whatsoever.

He has abdicated Government here, by declaring us out of his Protection and waging War against us.

He has plundered our seas, ravaged our coasts, burnt our towns, and destroyed the lives of our people.

He is at this time transporting large Armies of foreign Mercenaries to compleat the works of death, desolation, and tyranny, already begun with circumstances of Cruelty & Perfidy scarcely paralleled in the most barbarous ages, and totally unworthy the Head of a civilized nation.

He has constrained our fellow Citizens taken Captive on the high Seas to bear Arms against their Country, to become the executioners of their friends and Brethren, or to fall themselves by their Hands.

He has excited domestic insurrections amongst us, and has endeavoured to bring on the inhabitants of our frontiers, the merciless Indian Savages whose known rule of warfare, is an undistinguished destruction of all ages, sexes and conditions.

In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury. A Prince whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people.

Nor have We been wanting in attentions to our British brethren. We have warned them from time to time of attempts by their legislature to extend an unwarrantable jurisdiction over us. We have reminded them of the circumstances of our emigration and settlement here. We have appealed to their native justice and magnanimity, and we have conjured them by the ties of our common kindred to disavow these usurpations, which, would inevitably interrupt our connections and correspondence. They too have been deaf to the voice of justice and of consanguinity. We must, therefore, acquiesce in the necessity, which denounces our Separation, and hold them, as we hold the rest of mankind, Enemies in War, in Peace Friends.

We, therefore, the Representatives of the united States of America, in General Congress, Assembled, appealing to the Supreme Judge of the world for the rectitude of our intentions, do, in the Name, and by Authority of the good People of these Colonies, solemnly publish and declare, That these united Colonies are, and of Right ought to be Free and Independent States; that they are Absolved from all Allegiance to the British Crown, and that all political connection between them and the State of Great Britain, is and ought to be totally dissolved; and that as Free and Independent States, they have full Power to levy War, conclude Peace, contract Alliances, establish Commerce, and to do all other Acts and Things which Independent States may of right do. And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.

Monday, July 02, 2007

The children of young mothers live longer

That is the conclusion of research done by Dr. Leonid Gavrilov, Ph.D., and Dr. Natalia S. Gavrilova, Ph.D., both of the University of Chicago. Dr. Leonid Gavrilov summarizes the conclusion at his blog as follows: "We recently found that it helps a lot to be born to a particularly young mother (before age 25 years)". That seems intuitively right as women (and men) are in prime health before age 25, and therefore the female body would be able to provide the best environment for a growing baby.

The title of their paper begins with the phrase "Search for Predictors of Exceptional Human Longevity." Clear positive identification of such predictors of course would be of earth-shattering value. The Gavrilovs do not claim to have done this, of course, but rather in their paper indicate possible predictors identified through novel use of information technology to analyze demographic data. They looked at "the detailed family data for 991 alleged centenarians born between 1875 and 1899."

If the study's conclusion that being born to a young mother does indeed lead to exceptional longevity is borne out by further research, it would certainly lead to a re-thinking of child-bearing decisions by couples. This would have significant effects on the global demographic profile.

German growth potential

Misplaced scepticism about Germany’s growth potential; a piece at Eurozone Watch by Sebastian Dullien hypothesizes "that Germany is just on a good path to increase its medium term growth performance." Writing from a US perspective, I have to say that I think that Dullein's piece has completely misinterpreted the US productivity story in the 1990's. While welfare reforms did in fact reduce the number of individuals on welfare, I am positive that the number of persons who moved from long-term unemployment to employment was not "in the millions". This link to a study by the US Bureau of Labor Statistics on long-term unemployment directly contradicts Dullein's assertion that "The U.S. recovery after the 1990/1991 recession started out with very strong job growth". The study states that
"The most obvious reason for the slow improvement in longterm unemployment following the two most recent contractions was the relatively slower pace of job growth. Following each of the recessions of the mid-1970s and early 1980s, employment rose by 1.5 percent within a year. In contrast, employment was virtually unchanged in the year following the 1990–91 and 2001 recessions. As shown in the accompanying table, even by the time long-term unemployment had started to decline, employment had risen by 1.0 percent or less. Also, in contrast to the recessions of the mid-1970s and early 1980s, the employment-to-population ratio continued to decline far longer following the recessions of 1990–91 and 2001."
Further, rapid growth in US productivity later in the 1990's was largely attributable to heavy investment in information technology which was driven by rapidly increasing capabilities of information technology and the massive increase in Internet-related business and consumer activity. I don't foresee any kind of major technological shift occurring in the next few years that would be centered in Germany, particularly considering that German firms have been scrimping on research and development, as Dullein noted. With respect to housing booms in the countries where the median age is under 40, the booms were created by reduced interest rates and easier credit conditions that allowed younger households to purchase homes. Now, it is clear that housing markets have oversupply in these countries, but domestic growth was aided by the booms. In the aged countries, there is little chance that GDP growth will be aided by housing construction, as the number of households in these countries will remain flat or begin to shrink soon.

Sunday, July 01, 2007

On the design of the US Congress

Naked Capitalist objects to stall tactics in the Congress here.

Actually, what is taking place here is precisely what the framers of the Constitution intended. Since neither party has a majority large enough to over-ride objections by the other; no bills are passed by the Congress. Real action by the US Congress requires that one party or another has enough representatives to override minority party objections; this is only possible when a majority of the voters through out the country agree on a party's platform.

The Constitution was designed to ensure that the USA is governed by majority rule. Given election returns from recent years, it is fair to say that US voters as an aggregate are split fairly close to 50-50. No majority = no change...

On shortages...

There will never be shortages of resources in the world, but only shortages of human creativity and inspiration...