Wednesday, January 16, 2008

Counterintuitive data regarding US consumer spending on gasoline

According to the US Energy Information Administration,
"During the third quarter of 2007 consumers spent an estimated 5.7 percent of their disposable income on energy, 2.5 percentage points less than the 8.2 percent share of disposable income devoted to energy expenditures in the second quarter of 1981, when energy consumption spending as a share of disposable income reached its peak level over the last 50 years."

The EIA attributes this surprising fact to
"changes in oil prices and disposable income...a decline in the share of oil-heated homes, changes in the fuel efficiency of home heating equipment and the vehicle fleet, which experienced particularly large improvements from the late 1970s through the late 1980s, in addition to changes in the number of miles vehicles are traveling."
Essentially this shows that demand for gasoline is somewhat elastic.

Tuesday, January 15, 2008

Yen versus Dollar

The yen is at around 107 versus the dollar today; about 4% up month to date. There has been little sign of intervention by the BoJ. I think one factor that is pretty clear is that quite a few traders who had borrowed yen to sell it have reversed that trade in the course of closing out other market positions due to the credit crisis in the US.

The BoJ may not feel a need to intervene since Japanese automakers are rapidly gaining ground against the Detroit automakers and US auto sales are going to continue to decline across the board without regard to brand due to the credit crunch and overextended US consumer.

Sunday, January 13, 2008

US demography as of 2007

The US Census Bureau recently released its population estimates as of July 1, 2007. The data showing population change between 2006 and 2007 can be found here. The analysis showing components of population change can be found here. Notably, the population increase of just under 2.9 million amounted to only a 1% increase. International migration contributed only a little bit more than 1 million new residents or a measly .3% increase. A change of this magnitude is likely to cause minimal strain on the country's economic or social systems. Specifically, if one assumes a correlation between population growth and GDP growth(not unreasonable given that consumer spending makes up something like 70% of GDP), certainly 1% is nothing to get excited about in terms of GDP growth.

In terms of internal migration, the data shows that the Western region of the country had essentially zero net domestic migration. This is quite remarkable as for the last 30 years the West was attracting large numbers of migrants from the eastern part of the country.

The data distribution of population throughout the US is thought provoking. The government divides the country into four regions: Northeast, Midwest, South, and West. This categorization seems reasonable. The regions rank in population as follows: South-110 million, West-70 million, Midwest-66 million, and Northeast-55 million. So the region which has been the political and industrial leader of the US for most of its history now has the least population. Although there has been much discussion of outmigration from the Northeast and Midwest over the years, the magnitude of the gap in population levels between the traditional power centers and the South and West is now rather eye-popping. We should expect significant changes in US political and economic decision making in the future as a result.

Root cause of financial crisis of 2007

Brad Setser pegs it very succinctly as follows: "the recent mis-allocation of global savings into US real estate." He says this in the context of a piece on two researchers who
"compare the crisis in the US banking system -- and in the shadow banking system, which turned out to be rather linked to the real banking system -- triggered by the subprime crisis to other recent crises in advanced economies. They find "stunning qualitative and quantitative parallels across a number of standard financial crisis indicators.""
Calculated Risk today has a good piece titled "Cuomo: Due Diligence and Disclosure" which discusses how the securitization system for issuing home loans AKA the shadow banking system, has led to the misallocation of capital that Setser is describing.

Thursday, January 10, 2008

Hungry in Hungary?

Over at A Fistful of Euros, Edward Hugh discusses the topic of Hungary On The Threshold of a Recession? in some detail. If you hadn't paid attention to economic conditions in Hungary anytime recently, you might be surprised at the poor situation the country is in and the unpleasantness that will result from any of the actions policymakers take. The post includes charts showing change in Hungary's consumption growth, retail sales, and construction investment all in negative territory for much if not all of 2007.

The first thought that came to my mind on reading Edward's post is that shareholders in Swiss lending institutions that are issuing loans to Hungarians at this point should be phoning the boards of directors and asking what is going on. It’s hard to believe that anyone can sell a story that Hungarian homes are going to keep increasing in value, or that loaning against home equity to borrowers who might soon be jobless and are on the ropes financially now anyway is a good idea.

I think that the Hungarian central bank ought to go ahead and ease monetary policy significantly now, since homeowning borrowers who are most likely to default will wind up defaulting regardless; and the benefits of easing to internal economic conditions might offset the damage due to a weakened forint. Of course, this isn’t likely to happen. It would be easier for the central bank to do nothing until truly forced to by events and thus the bank would have an excuse.