Wasatch Economics

Flaring natural gas is a waste - a dialogue

2012-01-22T22:20:00.003-07:00

A: Flaring has always struck me as a huge waste...I get that sometimes the economics justify it but it seems pretty much every oil field comes with NG as a byproduct.

B: It's too cheap to capture a lot of places - and you can't not extract it if you want the oil. So they flare.

C: One begins to think oil is next, should things slow down worldwide.

B: Not to the same extent as in the past - the production isn't there like it was. Easier to back production off as price drops below marginal cost to recover.

But because the producers are even more operationally levered than ever before - the economic slap to them might be worse than in the 80s.

C: Should be running back into the formation to repressurize, and run more of the drilling rigs in neighboring pads, but hey, they only get advanced after the easy money is made.

So much in the energy industry is still awaiting efficiency.

The days of the wildcatter are pretty much dead.

Guess I am going to finish my exit from that position. Too much gas is going to be endemic for a couple of years until demand switches enough to justify my capital at risk, paltry as it is.

D: Encana actually runs some NG drilling rigs on natural gas and even use the gas on site to fuel the rig. Given that NG cost about 20% of diesel you'd think they'd all be doing it, especially when they tout converting gas and trucks to NG. Physician convert thyself.

B: A lot of field gas is really corrosive. Eats equipment. The cost of the special alloy alone is staggering. I talked to one refinery manager who said their best corrosion resistant piping - chrome nickel based alloy large diameter pipe - cost almost a $1000 a linear foot. Regular stainless gets eaten like candy.

D: They actually process the gas in the field:

Natural Gas Powered Drilling Rigs Improve Air Emissions and the Bottom line — Colorado Energy News

Demographic component to traffic volume

2012-01-22T18:21:00.002-07:00

energyecon has a nice chart DOT Miles Driven: Overlay 2007-2011 that compares each of the yearly trendlines. There could be a demographic element to the 2011 decline as mortality for people 50-70 is higher than for 30-49 cohort, so some drivers are leaving the pool permanently. The youngest baby boomers are 47 so the boomer group as a whole will be a drag on the miles driven metric.

Steve Jobs on US jobs and China

2012-01-22T17:14:00.006-07:00

THE IECONOMY; Apple, America and a Squeezed Middle Class - NY Times

"Why can’t that work come home? Mr. Obama asked.
Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said, according to another dinner guest.
The president’s question touched upon a central conviction at Apple. It isn’t just that workers are cheaper abroad. Rather, Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that “Made in the U.S.A.” is no longer a viable option for most Apple products.

Apple executives say that going overseas, at this point, is their only option. One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.
A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.
“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.

“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”

Work has to comprise more than automation ready tasks.

Manufacturing has been all about eliminating humans from the process for decades, and now essentially, China is simply providing cheap human robot production.

If you changed the laws to require made in America, we would employ more advanced robotics, because it would still be cheaper, because ultimately you have to compete worldwide with those human developing country robots.

In other words, good jobs require service to pay good wages, because making stuff, bashing metal and so forth is a very low wage game, and as long as worldwide transport is reasonable, low wage work is going to flow.

Wages are the important key to a prosperous America, and declining real wages indicate the need for changes in economic and tax policy to shift the burden.

Period.

Per the Times article:

"Companies like Apple “say the challenge in setting up U.S. plants is finding a technical work force,” said Martin Schmidt, associate provost at the Massachusetts Institute of Technology. In particular, companies say they need engineers with more than high school, but not necessarily a bachelor’s degree. Americans at that skill level are hard to find, executives contend. “They’re good jobs, but the country doesn’t have enough to feed the demand,” Mr. Schmidt said."

What that paragraph describes is not an "engineer" but a technician.

American political/business leaders made short term decisions not to invest in automation. We could have at least captured part of the manufacturing value and kept some of the maintenance jobs, knowledge, and supply chain here... instead we have outsourced lock stock and barrel.

Look up the address of any major company in China - do a Google Earth or satellite hybrid option in Google Maps - then see what is near it. Nothing but supplier factories. The Chinese have been recruiting these kinds of hub spokes for at least a decade with very favorable incentives for targeted companies to locate there - computers being a primary target.

Automotive is now being heavily targeted including the supply chain. Aerospace and biomedical on deck.

Another quote:

"When an Apple team visited, the Chinese plant’s owners were already constructing a new wing. “This is in case you give us the contract,” the manager said, according to a former Apple executive. The Chinese government had agreed to underwrite costs for numerous industries, and those subsidies had trickled down to the glass-cutting factory. It had a warehouse filled with glass samples available to Apple, free of charge. The owners made engineers available at almost no cost. They had built on-site dormitories so employees would be available 24 hours a day."

That level of subsidization can't and won't be matched in the US, ever.

FoxConn barely makes a profit, and this after long running currency manipulation and government subsidy. That's why it will never exist anywhere else.

Being generous, you could call it a type of loss-leader for China, at worst a way for an authoritarian state to enrich its elders.

A thoughtful quote to wind this up:

"I get that direct wage costs are often a small part of a company's budget. But providing engineers at "almost no cost" is also a cost, one born by the State in this case. Engineers have to be educated, fed, and housed, whether the PRC or Apple is paying for it.

Every "inventory" , "transportation", etc. cost in a company's budget can be reduced to a labor cost if one looks far enough back in the chain of origination."

Someday this system will break down, and the result will be chaotic change in the global economy.

Save more, spend less

2012-01-13T00:50:00.001-07:00

"The Fed has created a situation in which the rewards for saving money even without a return are extremely high - probably the highest they've been in over 30 years. Having a substantial downpayment on your first home, or paying down your mortgage to refinance, gives you a very strong payback right now."

Moving back from Wordpress

2011-12-29T18:03:00.005-07:00

I've become dissatisfied with Wordpress; moving back here. Here are links to recent posts at the other site:

Good tax reform ideas - December 29, 2011 at 5:23 pm

Densification in Portland - December 17, 2011 at 4:14 am

On China - December 11, 2011 at 2:05 am

Post-secession Congress extremely influential - December 11, 2011 at 1:29 am

Moving to Wordpress

2009-05-02T23:59:00.001-06:00

Wasatch Economics

Germans realize their banking system is in trouble

2009-04-27T00:35:00.002-06:00

Credit Writedowns tells us that

"On Friday, the German daily Süddeutsche Zeitung (SZ) leaked a bombshell - a confidential report by Bafin, the Federal Financial Supervisory Authority, found that German banks were sitting on over 800 billion euros in toxic assets...This new account has been all over the news in Germany because Germans are becoming quite frightened about the health of their banking system and are angry because the German economy was largely absent from the bubbles of the past decade. Germans are beginning to ask quite openly why banks like Commerzbank and the state-owned land banks as well as institutions like Hypo Real Estate are being rescued with taxpayer money."

If the populace is just beginning to demand answers they are a long way from resolution of the problem. Perhaps the alleged absence of bubbles in the German economy was actually reckless lending preventing precipitous decline in the health of Germany's economy. German banks have been highly leveraged...as I have mentioned here several times.

Virtual think tanks?

2009-04-27T00:10:00.002-06:00

Found at Haft of the Spear:

THE THINK TANK IS DEAD
Long Live the Think Tank
By Michael Tanji
Whither the brick-and-mortar think tank in an age of free information and globally accessible intellectual discourse? Very well, thank you. While virtual intellectual efforts are taking place on-line, the "virtual think tank" that is able to compete with its physical-world brethren is still in beta release. This is not, however, a situation that will remain static. Early efforts that assembled people virtually for intellectual pursuits have produced promising results, and as people become more comfortable working in virtual environments such successes are likely to grow. Virtual think tanks have distinct advantages and disadvantages over traditional think tanks that extend beyond the technical and into the political and social, and it will take more than a generational shift to bring about meaningful change. The immediate future is likely to produce a synergy between traditional houses of public policy production and the emerging "Think Tank 2.0" approach.

See Calculated Risk and offshoots for an example of what Tanji is talking about.

Factoid of the day

2009-04-26T23:53:00.003-06:00

" In 2002, the total number of undergraduate degrees granted in Arabic in all U.S. colleges and universities—yes, all of them—was six."

Bizarre...that would make doing business in the Middle East for US companies rather difficult.

On the other hand, there's this(from the same link):

"In 2003, two alleged Iranian agents caught photographing the No. 7 subway line beneath the East River were surprised to find themselves confronted by a cop who spoke fluent Persian. They quickly left the country. In 2003, a young undercover officer born in Bangladesh penetrated a small group of angry young immigrants, two of whom had started plotting to blow up targets in Staten Island and the subway station at Herald Square.

When it comes to disrupting potential terrorist plots, cops can use simple techniques out of bounds to the CIA or even the FBI. Cohen's detectives, for instance, might follow a suspect onto a subway and have a uniformed cop collar him for an infraction as minor as sitting on two seats at a time. Once he's taken down to the station, he may be faced with the threat that his friends will find out he was there and think he's talked. "Mostly, we don't hear from those guys again," says one of Cohen's senior operatives."

Crisis in the making?

2009-04-24T23:32:00.002-06:00

CDC says too late to contain U.S. flu outbreak

"WASHINGTON, April 24 (Reuters) - The U.S. Centers for Disease Control and Prevention said on Friday it was too late to contain the swine flu outbreak in the United States. CDC acting director Dr. Richard Besser told reporters in a telephone briefing it was likely too late to try to contain the outbreak, by vaccinating, treating or isolating people. "There are things that we see that suggest that containment is not very likely," he said. He said the U.S. cases and Mexican cases are likely the same virus. "So far the genetic elements that we have looked at are the same." But Besser said it was unclear why the virus was causing so many deaths in deaths in Mexico and such mild disease in the United States."

Essentially, US cases could turn deadly any time...people with weakened immune systems will be at great risk.

Foreign holders of US Treasuries - Feb 2009

2009-04-21T12:27:00.003-06:00

Here is a list derived from the US Treasury's data at the above link(in billions):

	Feb
Country	2009
	------

China, Mainland	744.2
Japan	661.9
Carib Bnkng Ctrs	189.1
Oil Exporters	181.7
Brazil	130.8
Russia	130.1
United Kingdom	129.1
Luxembourg	92.3
Hong Kong	76.3
Taiwan	72.6
Switzerland	68.2
Germany	56.6
Ireland	54.5
Thailand	39.7
Singapore	39.4
Mexico	37.9
India	34.6
Korea	33.3
Turkey	32.4
Norway	21.1
Egypt	19.1
Israel	17.4
France	16.8
Italy	16.5
Netherlands	16.1
Chile	15.2
Belgium	14.5
Sweden	12.7
Philippines	12.6
Colombia	11.4
Canada	10.9
All Other	173.4
Grand Total	3162

It's fairly remarkable how heavily the holdings are concentrated in a few countries, while other countries such as Germany, France, and Canada with large economies have relatively trivial holdings of US Treasuries.

Interesting exchange at Calculated Risk regarding Indian culture

2009-04-20T11:28:00.004-06:00

Bob Dobbs

" El Cliffo wrote on Mon, 04/20/2009 - 9:49am.
Headline in the UK Telegraph: Indian business students snap up copies of Mein Kampf .

"Sales of Mein Kampf, Adolf Hitler's autobiography and apologia for his anti-semitism, are soaring in India where business students regard the dictator as a management guru."

Well, that explains tech support."

"I have a friend, a retired lawyer-turned-mediator who lived in India for a couple of years. Year before last he and his wife were invited to return and give a couple of workshops on mediation techniques in Bangalore and another town -- one to a chamber of commerce, another at a law school. He noted after that "trying to see the other guy's point of view" was considered weakness by most Indian males! Who would say so openly in class. A couple of women came up to him afterwards and said "We've been waiting years for this!"

http://www.talesfromthecoast.blogspot.com

--------------

It would appear that certain aspects of 20th century history are missing from the Indian educational system, at least in some places. Not to say that the US doesn't have its share of neo-Nazi's; but Hitler's written words aren't getting mainstream publication.

The second anecdote is worth noting if you might be doing business in India.

Dropping prices

2009-04-19T18:07:00.003-06:00

This website is reporting that

"As the annual iron ore negotiation cranks up, it seems Japan, China, and South Korea steelmakers are expecting a 30%, 40%, even a 50% price cut respectively from the world’s three biggest iron ore miners."

That would result in a significant drop in dollar imports for China should the price cuts take place; which the article indicates is likely. Also, theoretically Japanese carmakers could reduce prices for their product in the near future as a means of increasing unit sales. There is a lot of iron tied up in auto inventory sitting in ports around the world.

Availability of credit in the US

2009-04-18T17:43:00.003-06:00

The New York Federal Reserve Board released earlier this week it's Empire State Manufacturing Survey:

Most respondents cited little or no difficulty obtaining financing for either long-term commitments (capital investment) or short-term needs (operating expenses). Moreover, fewer than 10 percent of those surveyed indicated that problems obtaining credit had adversely affected their production or sales.

So credit is available to businesses that can demonstrate a capacity to repay...

Sandpile model of earthquakes and economic instability

2009-04-13T14:12:00.006-06:00

Dr. Steve Keen discusses this here and gives a clear description of a power law distribution:

"The pattern of movements you get from such a process can look superficially like a Normal distribution–the famous Bell Curve–but it differs from it in two fundamental ways. Firstly, there are many more movements near the average; secondly, there are also many more movements way, way away from the average–so many more that, in what is known as a pure “Power Law” distribution, the standard deviation is infinite: any scale event can occur, and will occur given enough time."

The standard deviation is infinite...here's a picture of what this looks like from Wikipedia:
The main point is that if you are using a normal distribution to model something that is actually is a power law distribution, your model is going to give incorrect results. Key to the normal distribution is the idea that factors contributing to the frequency of results are independent. The dice rolling example is commonly used because it's obvious that each roll of the dice doesn't have any influence on the next roll of the dice. The financial results of companies listed on the NYSE are definitely not independent of each other; for example most are dependent on a relatively small number of banks for routine financing.

Also, generally 68% of values drawn from a normal distribution are within one standard deviation σ > 0 away from the mean μ; about 95% of the values are within two standard deviations and about 99.7% lie within three standard deviations. This is called the "68-95-99.7 rule" or the "empirical rule." That's clearly different from the power law distribution.

More background on Larry Summers

2009-04-12T20:58:00.001-06:00

This is from the NY Times editorial page:

"I was less shocked by the White House’s disclosure of Summers’s recent paydays than by a bit of reporting that appeared deep down in the Times follow-up article on that initial news. The reporter Louise Story wrote that Summers had done consulting work for another hedge fund, Taconic Capital Advisors, from 2004 to 2006, while still president of Harvard.
That the highly paid leader of arguably America’s most esteemed educational institution (disclosure: I went there) would simultaneously freelance as a hedge-fund guy might stand as a symbol for the values of our time. At the start of his stormy and short-lived presidency, Summers picked a fight with Cornel West for allegedly neglecting his professorial duties by taking on such extracurricular tasks as cutting a spoken-word CD. Yet Summers saw no conflict with moonlighting in the money racket while running the entire university. The students didn’t even get a CD for his efforts — and Harvard’s deflated endowment, now in a daunting liquidity crisis, didn’t exactly benefit either.
Summers’s dual portfolio in Cambridge has already led to one potential intermingling of private business and public policy in his new White House post. He tried — and, mercifully, failed — to install the co-founder of Taconic in the job of running the TARP bailouts. But again, Summers’s potential conflicts of interest seem less telling than the conflict of values that his Harvard double-résumé exemplifies."

Double standards...

Explosive

2009-04-01T22:32:00.002-06:00

This is really amazing...quant finds job at Harvard after Enron collapse, blows whistle, gets fired. You can't make this stuff up:

"A former quantitative analyst at Harvard Management Company, the university’s once-vaunted endowment manager, tells the Harvard Crimson she was fired for voicing concern to then-university president Larry Summers’ chief of staff about the money manager’s risky use of derivatives the traders didn’t understand.
The episode dates back to 2002, when analyst Iris Mack, whose website identifies her as the second African American woman to earn a Harvard PhD. in applied math (and someone who likes primary colors) joined the much-venerated Harvard Management Company, which invests the university’s then $18 billion endowment, to find what she termed a “frightening” state of affairs.
“The group I was working for had no background whatsoever to be working on [derivatives],” Mack says, adding that, to her knowledge, several of her colleagues were not licensed securities traders. “Sometimes the ways they handled even basic Black-Scholes models [widely used to price stock options] were puzzling.”So Mack took inventory of the abuses — high employee turnover, lax risk management practices and a “low level of productivity in the workplace” were among others, and detailed them in an email to Marne Levine, Summers’ chief of staff and a Treasury staffer on the Obama Transition Team. (Summers was the only person to whom Meyers reported, and according to a recent Forbes story he personally ordered the university’s biggest derivatives trade, a purchase of interest rate swaps that cost the university billions this year.)
A month after sending her email, Mack was fired after a meeting in which the endowment fund’s then-chief furnished her the emails and castigated her for making “baseless accusations.” She later sued for wrongful termination and settled out-of-court with the university. But she claims the practices “shocked” her, and — the punchline is — she had joined the company from Enron.
Which is also to say, lest you dismiss Mack as an opportunistic snitch capitalizing on Summers fateful opposition to regulating the derivatives that wreaked havoc on the financial system, she had a pretty valid reason to believe in the importance of whistleblowing.
“I’m not trying to pretend I’m omniscient or anything, but a lot of people who were quantitative traders, in the back of our minds, we knew a lot of these models were just that: guestimates,” Mack says. “I have mixed feelings, on the one hand, I wasn’t crazy, I knew what I was talking about. But maybe if more and more people had spoken up, the economy wouldn’t be the way it is now.”Mack is doing her part to affect change: she’s a vociferous advocate of better math education for minorities and like FDIC chairman Sheila Bair, the writer of a children’s book. It’s called Mama Says Money Don’t Grow On Trees (sequel idea: *…Unless You Are A Monstrously Overleveraged Bank With Access To The Federal Reserve Discount Window!).
If Mack’s allegations are true Harvard certainly paid the price for its recklessness: Summers’ swaps sowed the seeds for a financial disaster at HMC:
It doesn’t feel good to be borrowing at 6% while holding assets with negative returns. Harvard has oversize positions in emerging market stocks and private equity partnerships, both disaster areas in the past eight months. The one category that has done well since last June is conventional Treasury bonds, and Harvard appears to have owned little of these. As of its last public disclosure on this score, it had a modest 16% allocation to fixed income, consisting of 7% in inflation-indexed bonds, 4% in corporates and the rest in high-yield and foreign debt.For a long while Harvard’s daring investment style was the envy of the endowment world. It made light bets in plain old stocks and bonds and went hell-for-leather into exotic and illiquid holdings: commodities, timberland, hedge funds, emerging market equities and private equity partnerships. The risky strategy paid off with market-beating results as long as the market was going up. But risk brings pain in a market crash. Although the full extent of the damage won’t be known until Harvard releases the endowment numbers for June 30, 2009, the university is already working on the assumption that the portfolio will be down 30%, or $11 billion.
Mack’s boss at HMC, Jack Meyer, parted ways with the university in 2005. His bets were still paying off but his relationship with Summers had reportedly cooled — among other things, over alumni outcry led by the university’s Class of 1969 over the hedge fund-sized bonuses being awarded to employees of a supposed nonprofit. But if there’s anything we’ve learned from the past year, gratuitous compensation and gratuitous risk go hand-in-hand.
“The events of the last year show that the whole procedure of rewarding people so handsomely based on increases on paper value of the endowment was deeply flawed,” says a spokesman for the [Class of 1969], which recently sent a letter to the Harvard president suggesting HMC staffers return $21 million of their latest bonuses. “Even now we don’t really know how well it has done in the last ten years.”"

Credit Writedowns is where I found this...

Analysis of gas price trend

2009-04-01T12:57:00.002-06:00

The EIA's analysis this week:

"the bottoming of the gasoline market in early winter, with very low or even negative margins between gasoline and crude oil prices, led refiners to bring forward maintenance activity and cut their operating rates to minimize surplus inventories. At the same time, those prices were low enough to generate a rebound in demand, even as the economy struggled.

Along with rising crude prices, the tighter balance between supply and demand in the gasoline market brought retail gasoline prices from the mid $1.60s to above $2 per gallon. Retail gasoline prices approaching $3 per gallon, however, are probably not reachable, let alone sustainable, this summer due to continuing surplus refining capacity and the continuing effect of the economic downturn on fuel demand.

Furthermore, with over 4 million barrels per day of excess crude oil production capacity, any surge in demand on a recovering economy could be met by increased production, mainly from OPEC countries. So, while gasoline consumers may be irked at paying over $2 per gallon for much of this summer, it doesn't look like 2009 will produce a spike in prices that comes anywhere close to what occurred last summer."

Adjusted for inflation, $2 per gallon is still a fairly low price for gasoline.

Roubini on emerging world capital flows

2009-03-18T15:25:00.002-06:00

Reversal of Capital Flows in the Emerging World

RGE Lead Analysts | Mar 18, 2009

"The reversal of capital inflows due to deleveraging or losses in financial markets has been one of the most significant effects of the financial crisis on emerging and frontier economies. After a period in 2007 and 2008 when many emerging markets faced the problem of dealing with extensive capital inflows, now capital flows have reversed. Private capital flows in 2009 are expected to be less than half of their 2007 levels, posing pressure on emerging market currencies, asset markets and economies. Countries that relied on readily available capital to finance their current account deficits are particularly vulnerable. Furthermore, capital outflows pose the risk that governments may react with some type of capital controls or barriers to the exit of foreign investments."

Another unsettling analysis from Brad Setser

2009-03-18T14:02:00.004-06:00

A bit more to worry about; foreign demand for long-term Treasuries has faded

He states "I wanted to highlight one trend that I glossed over on Monday, namely that foreign demand for long-term Treasuries has disappeared over the last few months." Then he adds this chart:
If the US Treasury is going to sell a lot of long term debt, it is going to have to find some new buyers(other than the US Fed).

AIG: unstable reactor at the core of shadow financial system

2009-03-17T12:55:00.004-06:00

The following is being quoted all over the place, and with good reason:

"What is equally striking, however, is the all-encompassing list of names which purchased insurance on mortgage instruments from AIG, via credit derivatives. After all, during the past decade, the theory behind modern financial innovation was that it was spreading credit risk round the system instead of just leaving it concentrated on the balance sheets of banks.
But the AIG list shows what the fatal flaw in that rhetoric was. On paper, banks ranging from Deutsche Bank to Société Générale to Merrill Lynch have been shedding credit risks on mortgage loans, and much else. Unfortunately, most of those banks have been shedding risks in almost the same way – namely by dumping large chunks on to AIG. Or, to put it another way, what AIG has essentially been doing in the past decade is writing the same type of insurance contract, over and over again, for almost every other player on the street.

Far from promoting “dispersion” or “diversification”, innovation has ended up producing concentrations of risk, plagued with deadly correlations, too. Hence AIG’s inability to honour its insurance deals to the rest of the financial system, until it was bailed out by US taxpayers."

Setser adds:

"many European banks were growing their dollar balance sheets so quickly that many started to rely heavily on US money market funds for financing. And if an institution is borrowing from US money market funds to buy securitized US mortgage credit, in a lot of ways it is a US bank, or at least a shadow US bank. Consequently I think it is possible to think of AIG as the insurer-of-last resort to the United States’ own shadow financial system. That shadow financial system just operated offshore."

If these flows of capital had been exposed earlier, the shadow financial system would have come apart earlier. US investors in money market funds would have pulled their cash out.

US historical oil imports

2009-03-11T13:21:00.006-06:00

Frome the US EIA:

Compare that to this chart:

How do you square a spike in imports occurring roughly at the same time as the OPEC embargo?

There is this:

"The rapid increase in crude prices from 1973 to 1981 would have been much less were it not for United States energy policy during the post Embargo period. The US imposed price controls on domestically produced oil in an attempt to lessen the impact of the 1973-74 price increase. The obvious result of the price controls was that U.S. consumers of crude oil paid about 50 percent more for imports than domestic production and U.S producers received less than world market price. In effect, the domestic petroleum industry was subsidizing the U.s. consumer."

That would represent a strong negative incentive to domestic production and exploration. Truly a colossal policy blunder. From the same source:

"In the absence of price controls U.S. exploration and production would certainly have been significantly greater. Higher petroleum prices faced by consumers would have resulted in lower rates of consumption: automobiles would have had higher miles per gallon sooner, homes and commercial buildings would have been better insulated and improvements in industrial energy efficiency would have been greater than they were during this period. As a consequence, the United States would have been less dependent on imports in 1979-1980 and the price increase in response to Iranian and Iraqi supply interruptions would have been significantly less."

Exactly.

US DOE oil projection

2009-03-11T12:39:00.002-06:00

In a release today, the EIA states

"In the latest Short-Term Energy Outlook (STEO), just released yesterday, EIA is projecting 2009 global oil demand to be 3 million barrels per day lower than we projected as recently as six months ago, in our September 2008 STEO."

As to why this is the case, the EIA states(bolds mine)

"The downturn in the world economy that became apparent in the second half of 2008 curbed, and ultimately reversed, world oil demand growth, something that rising oil prices between 2004 and 2008 did not achieve. While consumption in the Organization for Economic Cooperation and Development (OECD) began to react to higher oil prices in late 2005, non-OECD consumption continued to rise unabated. Demand growth in large non-OECD oil consumers seemed immune to higher oil prices, because: 1) growth was largely driven by their rapidly expanding economies, and 2) many domestic consumers were shielded from world market prices by domestic price controls and subsidy programs."

The existence of price controls and subsidies was conveniently ignored by many claiming that this demand growth was permanent/secular.

So what does this mean for oil producers? EIA states that

"members of the Organization of the Petroleum Exporting Countries (OPEC) currently hold roughly 4.8 million barrels per day (bbl/d) of surplus production capacity, while they held an average of 1.5 million bbl/d from 2004 to the peak of the market in 2008."

Wait, they had 1.5 million barels a day of excess capacity during the price run-up? They were obviously sitting on that capacity and profiting.

Also,

"the lagged impact of high oil prices in recent years will continue to affect oil demand in the short term. During 2007 and 2008, WTI averaged $86 per barrel; these historically-high prices will influence the decisions that individuals and firms make going forward, which will tend to dampen the rise in world oil demand engendered by the return of global economic growth."

I know of individuals who have switched to diesel vehicles and run on waste cooking oil produced in their own mini-refinery. That is permanent demand destruction with respect to crude oil. There have been many improvements in fuel efficiencies such as consumers switching to hybrid vehicles and ditching SUV's, that will suppress demand as well.

Finally, the chart of US gasoline prices shows stabilization at around $2.00 a barrel. I think on an inflation adjusted basis that is a reasonable price and will be a new medium term average.

Modern finance and pensions

2009-03-03T17:13:00.001-07:00

"The real crime is claiming 7.75% return is achievable over the long term. "
I Heart CRbot | Tue, 03 Mar 09 18:03:25 -0600 | #

Unfortunately, finance textbooks have been saying that that's the equity premium over the risk-free rate of return for at least 20 years. I can see how people might get confused. Two problems; I don't think there has been statistically meaningful validation of the equity premium:), and at some point market timing comes into play, when the pension has to start paying out.

The state of economics as a field of study

2009-03-03T14:27:00.000-07:00

The unfortunate uselessness of most ’state of the art’ academic monetary economics
by Willem Buiter
"The Monetary Policy Committee of the Bank of England I was privileged to be a ‘founder’ external member ... contained, like its successor..., quite a strong representation of academic economists and other professional economists with serious technical training and backgrounds. This turned out to be a severe handicap when the central bank had to switch gears and change from being an inflation-targeting central bank under conditions of orderly financial markets to a financial stability-oriented central bank under conditions of widespread market illiquidity and funding illiquidity.; Indeed, it may have set back by decades serious investigations of aggregate economic behaviour and economic policy-relevant understanding .; It was a privately and socially costly waste of time and other resources.

Most mainstream macroeconomic theoretical innovations since the 1970s (the New Classical rational expectations revolution associated with such names as Robert E. Lucas Jr., Edward Prescott, Thomas Sargent, Robert Barro etc, and the New Keynesian theorizing of Michael Woodford and many others) have turned out to be self-referential, inward-looking distractions at best.; Research tended to be motivated by the internal logic, intellectual sunk capital and esthetic puzzles of established research programmes; rather than by a powerful desire to understand how the economy works - let alone how the economy works during times of stress and financial instability.; So the economics profession was caught unprepared when the crisis struck."

I agree...

Worthwhile links

2009-02-22T17:40:00.001-07:00

The Oligarchs' Escape Plan Michael Hudson, CounterPunch

The US government frozen in the headlights Michael Pettis

Chocolate Covered Cotton

While Rome Burns

Generational personal finance and the current bust

2009-02-11T21:44:00.002-07:00

Mish has an excellent post Wealth Does Not Pass Three Generations which describes what is sometimes referred to as "tired-blood" syndrome referring to the tendency of heirs of wealth to squander it.

"This is how I see it:

Few alive remember the great depression. Most boomers headed into retirement have seen rising asset prices all their lives. Those boomers thought they could live off their houses and/or investments in the stock market, expecting prices to rise forever, even though it was mathematically impossible for that to happen. Now, headed into retirement, boomers are realizing they are actually savings poor given that asset prices have crashed.

Moreover, children who have seen their parents wiped out in bankruptcy or foreclosed on are going to have a completely different attitude towards debt than their reckless parents did. Expect to see more frugality from parents and their children alike.

Three generations from now the lessons of today will have again been forgotten and the cycle will repeat."

Update on BoJ share purchases

2009-02-03T09:48:00.002-07:00

BOJ may buy $111.5 billion in shares held by banks

"a midday announcement that the Bank of Japan will resume buying shares held by financial institutions, with plans to spend up to 1 trillion yen ($111.5 billion) through April 2010...The BoJ did not say when it would begin buying shares. It plans to halt the buying by the end of April 2010 and dispose of all shares it acquires by autumn 2017...

The last time the central bank had run a similar share purchase, it spent 202 billion yen purchasing shares from financial institutions during the 22 months ended in September 2004. At the time, the central bank had pledged to buy as much as 3 trillion yen of shares.

The BoJ began disposing of its holdings in October 2007 but suspended the program during the market slump last autumn. The central bank held 1.273 trillion yen of shares as of September 2008, it said in the statement."

This does nothing but distort equity markets and hinder rationalization of the country's economic structure.

Re emergence of states' rights movement ?

2009-02-03T09:17:00.002-07:00

As a result of financial crisis and the federal government response:

New Hampshire Throwing Down the Gauntlet to the Federal Government

(from Jesse's Café Américain)

"a copy of House Resolution 6 being discussed by the New Hampshire Legislature....

That any Act by the Congress of the United States, Executive Order of the President of the United States of America or Judicial Order by the Judicatories of the United States of America which assumes a power not delegated to the government of United States of America by the Constitution for the United States of America and which serves to diminish the liberty of the any of the several States or their citizens shall constitute a nullification of the Constitution for the United States of America by the government of the United States of America. Acts which would cause such a nullification include, but are not limited to:

I. Establishing martial law or a state of emergency within one of the States comprising the United States of America without the consent of the legislature of that State."

Very interesting...nullification was at the core of the Confederate secessionist doctrine.

Demographic update

2009-02-02T17:31:00.001-07:00

Tracking Trends in Low Fertility Countries

"Over the long term, TFRs below 2.1 children per woman can eventually lead to population decline because couples are not replacing themselves in the population. Many European countries have been far below the 2.1 replacement level for years and some are experiencing population decline as a result."

"Many reasons are given for very low fertility and the causes certainly vary from country to country. The rise in living costs and the need for two-earner families play a large role, particularly where childcare needs of two-earner families have been neglected. Changing values that place more emphasis on consumer goods and travel play some role. In Eastern Europe, economic collapse following the breakup of the Soviet Union and the Warsaw Pact in 1989 caused among the sharpest declines in TFRs."

"While countries certainly differ, the overall story seems to be the same. Countries whose policies recognize the need to accommodate two-earner families so that having a child is not an economic disaster appear to have had some success in raising TFRs. But the cooperation of society is also required. In Germany, it is often not socially acceptable to leave one’s child in someone else’s care the entire day; women who do are referred to as rabenmutter (raven mother). Such attitudes will have to change for Germany's fertility to increase significantly. In Japan, the cooperation of employers in lightening work schedules and introducing more flexibility as well as childcare has been mandated by the government. But even these measures can be overshadowed by recessions and a lack of confidence in the economic future."

Severe economic contraction in Japan

2009-02-02T11:11:00.002-07:00

Veneroso: Japan on the Edge of the Abyss

"1)The Japanese industrial production data and METI forecast was bad beyond all imagining. Industrial production might fall by 1/3 in the 12 months ending in January. It could fall in a mere four months between November and February by more than half the U.S. Great Depression decline which took almost four years....December industrial production came in down 9.6%, worse than the METI forecast. It is now down almost 21% year over year. METI forecasts a further 4.7% decline in February. The inventory to production ratio soared again. Maybe METI will be correct.

If it is, Japan industrial production will have fallen 28% (non annualized) in four months. It will have fallen by a third in about a year. Nothing in the history of major nations compares. A 28% decline in four months would be more than half of the entire decline in U.S. industrial production over the 3 years and nine months of the U.S. Great Depression."

"3) The trade weighted yen is by far the strongest currency in the world. Japan is losing competitiveness fast. Given the lags in trade matters will get worse."

I will add comments when I have some time available...

Conditions in Japan

2009-01-26T18:21:00.001-07:00

Japan's Grim And Bear It 2009 Outlook

Perhaps they could sell some of their holdings of Treasuries? Setser today details how private and government investors have been flocking to Treasuries...the BoJ could cash in without causing a shock to the market, possibly. Of course, I presume the net debt figures in the linked post are net of those Treasury holdings, so it is a facetious suggestion.

Another possibility would be to follow Bernanke's proposition and "helicopter drop" cash in some fashion directly to consumers. That would possibly stimulate domestic consumption and conceivably weaken the yen versus the dollar; both desirable for Japan's financial leadership.

I spoke with Japanese coworkers about why Japanese don't loosen their pocketbooks given their high savings rates, and the answer was the force of habit and memory of hard times kept people's wallets in their pockets.

Economic fallout

2009-01-26T09:07:00.002-07:00

Excerpted from Setser:

-"Moving from a budget that balances at $70 oil to a budget based on $41 a barrel isn’t fun even if Russia uses its fiscal reserve to adjust gradually. Eastern European economies that relied on large capital inflows rather than high commodity prices to support their growth aren’t doing any better."

-" $40 a barrel oil requires the Gulf to dip into its foreign assets, but most countries still have plenty of spare cash (though not as much as before). Still, all of the Gulf is slowing. And the most exuberant bits of the Gulf – Dubai in particular – are in real trouble."

-"China is really slowing. Stephen Green of Standard Chartered has constructed an indicator of Chinese economic activity that isn’t based on the government’s reported GDP data. It suggests a far bigger fall in Chinese output than in 1998."

-"The fall in Korea’s output in the fourth quarter was quite large. Even larger than the fall in output in UK, or Japan."

-"Singapore and Taiwan are also contracting sharply. Singapore’s economy contracted an annualized rate of 12.5% in q4, and the huge fall in Taiwan’s exports cannot be good for its economic performance. Japan isn’t an emerging economy, but it too saw a sharp fall in output. It isn’t a stretch to think that Asian output could fall more in 2009 than in the 1997-98 Asian crisis."

Mercantilism works, until the consuming country runs out of the ability or desire to keep consuming. Every country listed above targeted the US as their primary export market.

Japanese equity markets are not efficient or real

2008-12-19T14:13:00.002-07:00

Japan plans to buy $227 billion in shares to boost market
By Michael Kitchen
8:11 a.m. EST Dec. 18, 2008

NEW YORK (MarketWatch) -- "Japan's government said Thursday it is submitting a bill to parliament allowing for the purchase of 20 trillion yen ($227 billion) in stock to help stabilize the Japanese stock market, Kyodo news reported.

Under the bill, the Banks' Shareholding Acquisition Corporation, originally created in January 2002, would resume buying shares from banks and other entities, the Japanese news agency reported.

The bill would be introduced early next month "with an eye to implementing the measure by the end of March," the report quoted lawmakers as saying. The Liberal Democratic Party had intially considered just 10 trillion in stock purchases, but the size was roughly doubled to 20 trillion yen at the request of its ruling coalition partner, the New Komeito party, the report said."

Questions to ask:
-what price will the government buy at?
-what criteria will the government use to determine purchase prices?
-what proportion of the total float of Japanese stocks is owned by the government?
-what does the phrase "stock market" mean when government entities are participating?
-will this be an opportunity for foreign investors to dump their holdings of Japanese equities?

I don't know the answers to all of these questions, but I think they are worth considering.

Factors driving low oil prices

2008-12-19T12:36:00.000-07:00

Once a well is put into production, the marginal cost to pump a barrel is relatively low. The biggest proportion of oil cost is the capital cost; finding it, drilling the well, and linking the well to pipeline network. As long as price per barrel is enough to provide positive contribution margin for a well, the well will be kept in operation. Based on historical trends that breakeven price is quite low.

Schumpeter and entrepreneurship

2008-12-18T13:37:00.003-07:00

"Schumpeter criticized John Maynard Keynes and David Ricardo for the "Ricardian vice." According to Schumpeter, Ricardo and Keynes reasoned in terms of abstract models, where they would freeze all but a few variables. Then they could argue that one caused the other in a simple monotonic fashion. This led to the belief that one could easily deduce policy conclusions directly from a highly abstract theoretical model."

"Schumpeter's theory is that the success of capitalism will lead to a form of corporatism and a fostering of values hostile to capitalism, especially among intellectuals. The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism... He argued that capitalism's collapse from within will come about as democratic majorities vote for the creation of a welfare state and place restrictions upon entrepreneurship that will burden and destroy the capitalist structure."

ac(a Calculated Risk commenter) on Schumpeter:

"The Wikipedia article doesn't really make it clear whether Schumpeter is advocating socialism or capitalism. The way it's written sounds like he's trying to promote capitalism by hiding it behind a socialistic message.

Of course the problem with the socialist outcome still remains - we haven't figured out how to motivate people to work in a socialist environment. That leads me to believe that a transition from capitalism to socialism with the operating overhead and debt created by a capitalism economy will fail because the socialist economy will not be able to generate the activity to sustain these costs of operation (because people are less motivated to produce). To me this suggests that in order to sustain itself the government will attempt to compensate by yet another transition, this time to a more coercive authoritarian fascist type state."

Intriguing ideas...

Modern portfolio theory discredited

2008-12-08T09:14:00.002-07:00

Bystanders to this financial crime were many

By Nassim Nicholas Taleb and Pablo Triana

December 7 2008 19:18

A crime has been committed. Yes, we insist, a crime. There is a victim (the helpless retirees, taxpayers funding losses, perhaps even capitalism and free society). There were plenty of bystanders. And there was a robbery (overcompensated bankers who got fat bonuses hiding risks; overpaid quantitative risk managers selling patently bogus methods).Let us start with the bystander. Almost everyone in risk management knew that quantitative methods – like those used to measure and forecast exposures, value complex derivatives and assign credit ratings – did not work and could provide undue comfort by hiding risks Few people would agree that the illusion of knowledge is a good thing.

Almost everyone would accept that the failure in 1998 of Long Term Capital Management discredited the quantitative methods of the Nobel economists involved with it (Robert Merton and Myron Scholes) and their school of thought called “modern finance”. LTCM was just one in hundreds of such episodes.Yet a method heavily grounded on those same quantitative and theoretical principles, called Value at Risk, continued to be widely used. It was this that was to blame for the crisis. Listening to us, risk management practitioners would often agree on every point. But they elected to take part in the system and to play bystanders. They tried to explain away their decision to partake in the vast diffusion of responsibility: “Lehman Brothers and Morgan Stanley use the model” or “it is on the CFA exam” or, the most potent argument, “modern finance and portfolio theory got Nobels”. Indeed, the same Nobel economists who helped blow up the system at least once, Professors Scholes and Merton, could be seen lecturing us on risk management, to the ire of one of the authors of this article.

Most poignantly, the police itself may have participated in the murder. The regulators were using the same arguments. They, too, were responsible.So how can we displace a fraud? Not by preaching nor by rational argument (believe us, we tried). Not by evidence. Risk methods that failed dramatically in the real world continue to be taught to students in business schools, where professors never lose tenure for the misapplications of those methods. As we are writing these lines, close to 100,000 MBAs are still learning portfolio theory – it is uniformly on the programme for next semester. An airline company would ground the aircraft and investigate after the crash – universities would put more aircraft in the skies, crash after crash. The fraud can be displaced only by shaming people, by boycotting the orthodox financial economics establishment and the institutions that allowed this to happen.

Bystanders are not harmless. They cause others to be bystanders. So when you see a quantitative “expert”, shout for help, call for his disgrace, make him accountable. Do not let him hide behind the diffusion of responsibility. Ask for the drastic overhaul of business schools (and stop giving funding). Ask for the Nobel prize in economics to be withdrawn from the authors of these theories, as the Nobel’s credibility can be extremely harmful. Boycott professional associations that give certificates in financial analysis that promoted these methods. Remove Value-at-Risk books from the shelves – quickly. Do not be afraid for your reputation. Please act now. Do not just walk by. Remember the scriptures: “Thou shalt not follow a multitude to do evil.”

US bankruptcies in 2008

2008-12-05T12:38:00.002-07:00

Bankruptcies of 2008 (as reported by Bankrupctydata.com):
AIG (insurance)
Aloha Airlines (airline)
American Color Graphics (newspaper)
Ascendia Brands (retail)
ATA (airline)
Bear Stearns (banking)
Bill Heard Enterprises (auto)
Bluepoint RE (insurance)
Blue Water Holdings (auto)
Boscov’s (retail)
Brooke Corporation (insurance)
Buffets Holdings (restaurants)
Ciena Capital (real estate)
Comfort Co. (bedding)
Dynamic Leisure (travel)
Education Resource Institute (insurance)
Empire Land (real estate)
Eos Airlines (airline)
Fashion House Holdings (retail)
Fortunoff (retail)
Friedman’s Jewelers (retail)
Fred Leighton Holdings (retail)
Fremont General (banking)
Frontier Airlines (airline)
Gainey Corporation (trucking)
Gemini Air Cargo (air delivery/freight)
Goody’s (retail)
Greatwide Logistics (trucking)
Greektown Holdings (casino)
Hospital Partners of America (healthcare)
HRP Myrtle Beach Holdings (entertainment)
Indymac (banking)
Integra Hospital Plano, LLC (healthcare)
Integrity Bancshares, Inc. (banking)
JHT Holdings (trucking/transportation)
Laketown Wharf (real estate)
Land Resource, LLC (real estate)
Landsource (real estate)
Legends Gaming (casino)
Lehman Brothers (banking)
Lillian Vernon (retail)
Linens n’ Things (retail)
Luminent Mortgage Capital (banking)
Kimball Hill (real estate)
Landsource Community Development (real estate)
Matrix Development Corporation (real estate)
Mervyn’s (retail)
Mortgages Ltd. (banking)
Motorcoach Industries International (transportation)
MPF Corp. (transportation)
Mrs. Fields Famous Brands (food services)
Pierre Foods (food services)
Pope & Talbot, Inc. (pulp/wood products)
PRC LLC (business services consulting)
Propext (textiles)
Quebecor World (USA), Inc. (office services/printing)
Red Envelope (retail)
Sharper Image (retail)
Silverjet Airlines (airline)
Sirva (moving services)
Skybus (airline)
STA Restaurants - Bennigan’s (restaurants)
Steakhouse Partners (restaurants)
Steve and Barry’s (retail)
Syntax-Brillian - Olevia (electronics)
Taro Properties (real estate)
Tropicana (casinos)
Vail Plaza Development (real estate)
Value City Department Stores (retail)
VeraSun Energy (alternative energy)
Vicorp (restaurants)
Washington Mutual (banking)
WCI (real estate)
Whitehall Jewelers (jewelry)
Wickes Furniture (retail)
Woodside Group (real estate)
WorldSpace, Inc. (satellite broadcasting)
Ziff Davis (media)

Lifted from Bankruptcies Revisited at a blog by Robert Salomon...

Deflation in Japan

2008-12-05T10:50:00.001-07:00

The benefit from the negative energy price shock should provide some boost to domestic consumption. On the other hand, the rise of the yen versus the dollar to more realistic levels is no doubt more than offsetting the benefit from the fall in oil prices. At this point, I think the Japanese authorities are unable to do anything meaningful to weaken the yen. Also, the bulk of Japan's exports are in sectors that are bearing the brunt of global slowing. Construction equipment, consumer electronics, autos, and steel based products...all are going to be slow for a while. The day of reckoning for Japan's economic system based on export subsidization has arrived.

Perhaps the BoJ should start selling its stock of Treasuries into the current bubble and use the proceeds to send each citizen a coupon/voucher which would be only valid for spending, and with an expiration date. A national campaign encouraging Japanese to "fix up your home", "eat a restaurant meal", or "buy a new computer" using the vouchers would promote the program. Seriously.

Thoughts on recent economic affairs

2008-11-25T14:00:00.006-07:00

-The Fed paying interest on reserves has the same effect as the Fed selling securities through open market operations. Selling securities through OMO parks the cash at the Fed, out of the money supply. The Fed pays interest on those securities. With the new system, the Fed just pays interest on the cash directly, and since the FFR is so low institutions park their cash at the Fed instead at other institutions.

-Paulson and Bernanke are like the people in Jurassic Park who thought things would be fine once they got power back to the fences; but forgot that the velociraptors and T-Rexes were loose, shredding anything that moved.

Mark Cuban and insider trading

2008-11-18T11:19:00.002-07:00

There is a great post here regarding the Cuban case by Stephen Bainbridge, William D. Warren Professor, UCLA School of Law; where Bainbridge makes a pretty good case that Cuban didn't have any legal obligation not to sell shares as he did. Bainbridge cites a Supreme Court decision regarding what individuals would have fiduciary obligations under the law in cases similar to Cuban's. Also, Professor Bainbridge has apparently written a book on insider trading(Securities Law: Insider Trading), so he seems to me to be a reasonably reliable authority and disinterested third party. The linked post is a great read. I'm convinced that Cuban could win his case.

In the Bainbridge post I linked, he cites this precedent that some might find interesting:

"The most relevant precedent here would be Walton v. Morgan Stanley & Co.,623 F.2d 796 (2d Cir.1980). Morgan Stanley represented a company considering acquiring Olinkraft Corporation in a friendly merger. During exploratory negotiations Olinkraft gave Morgan confidential information. Morgan’s client ultimately decided not to pursue the merger, but Morgan allegedly later passed the acquired information to another client planning a tender offer for Olinkraft. In addition, Morgan’s arbitrage department made purchases of Olinkraft stock for its own account. The Second Circuit held that Morgan was not a fiduciary of Olinkraft: “Put bluntly, although, according to the complaint, Olinkraft’s management placed its confidence in Morgan Stanley not to disclose the information, Morgan owed no duty to observe that confidence.” Although Walton was decided under state law, it has been cited approvingly in a number of federal insider trading opinions. Hence, I believe the cases finding liability based on a mere contractual duty of confidentiality are wrongly decided."

So JP Morgan was given a free pass for trading against a client...

U-6: The Real Unemployment Number

2008-10-15T15:06:00.004-06:00

Double click on the image to zoom; you'll see that the total number of unemployed in the US is 4.6% higher than the headline unemployment number you'll see in the press.

Bankruptcy for Profit

2008-10-15T14:59:00.002-06:00

I found an interesting link at NakedCap:

Looting: The Economic Underworld of Bankruptcy for Profit

George A. Akerlof University of California, Berkeley
National Bureau of Economic Research (NBER)
Paul M. Romer Stanford Graduate School of Business
National Bureau of Economic Research (NBER)April 1994
NBER Working Paper No. R1869
Abstract: During the 1980s, a number of unusual financial crises occurred. In Chile, for example, the financial sector collapsed, leaving the government with responsibility for extensive foreign debts. In the United States, large numbers of government-insured savings and loans became insolvent - and the government picked up the tab. In Dallas, Texas, real estate prices and construction continued to boom even after vacancies had skyrocketed, and the suffered a dramatic collapse. Also in the United States, the junk bond market, which fueled the takeover wave, had a similar boom and bust. In this paper, we use simple theory and direct evidence to highlight a common thread that runs through these four episodes. The theory suggests that this common thread may be relevant to other cases in which countries took on excessive foreign debt, governments had to bail out insolvent financial institutions, real estate prices increased dramatically and then fell, or new financial markets experienced a boom and bust. We describe the evidence, however, only for the cases of financial crisis in Chile, the thrift crisis in the United States, Dallas real estate and thrifts, and junk bonds. Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

Sounds like a very apt description of what has been taking place. I see this as falling into the category of a problem in what economists call "agency theory". The interests of mgmt are not aligned with those of shareholders/bondholders. Investment banks should never have been public companies.

The credit crunch has gotten through to consumers

2008-09-30T15:43:00.002-06:00

Interesting tidbit from Across the Curve:

"No interest in homes

...though consumers painted a relatively sunny picture about the outlook, they don’t seem inclined to pull the trigger on big ticket items any time soon. Home buying intentions collapsed to just 2.1% of those surveyed, the largest one-month decline since August 1990. Given the tightening in credit conditions in this space it is little wonder to us that pool of prospective buyers is getting thin, not to mention that home prices have sagged by 20% according to the latest Case Shiller numbers out earlier today. Moreover, folks are still not seeing real estate as a great place to sock their investments. According to the University of Michigan survey, only 2% of respondents think home prices are going higher.

Even more disturbing was that new car purchase intentions dropped to just 1.5% of all respondents – an all-time low. This is an ominous sign for those auto sales numbers due out tomorrow – consensus is expecting an almost unchanged print to 13.5 million units while we see sales coming in about 1 million below that mark and we would not be surprised to see sales dip below 12 million in the months ahead."

Those are low numbers, but make sense when very few have down payments ready to put down on these kinds of big purchases. One of the major automakers will have to shut down if those sales numbers pan out. There is far too much production capacity out there.

Sign of the times

2008-09-30T14:30:00.000-06:00

"New York MTA Nixes 21,000 Bridge, Tunnel Passes After 54 Years

By Chris Dolmetsch Sept. 24 (Bloomberg) -- The free ride is over for thousands of government officials, emergency workers, police officers and firefighters who cross the seven bridges and two tunnels connecting New York City's five boroughs. Ending a practice in place since 1954, the board of New York's state Metropolitan Transportation Authority voted 7-6 today to revoke about 21,000 free passes for 90 organizations, including the mayor's office, the city's emergency management office, the district attorneys and borough presidents."

They're trying to meet a projected budget shortfall. We'll be seeing a lot more of this, I expect.

Oregon's State Climatologist on global warming

2008-09-29T23:04:00.004-06:00

George Taylor, Oregon State Climatologist,
responds to the Willamette Week article written by Paul Koberstein
opening statement:

An article about me and my viewpoint on global warming was published on August 24, 2005 by Willamette Week. The article contained many misleading statements and errors. Below I address some of statements in the article with which I take issue.

George H. Taylor
August 26, 2005
willamette week article:

"He's also, according to his critics, one of the most dangerous men in Oregon."

taylor:
Dangerous? I’m merely expressing an opinion that runs counter to what some people think I should be saying. But I believe that the topic of the human influence on the environment should be open to debate, and I do not believe that it is "dangerous" to discuss it.

willamette week article:
"From his third-floor office in the Strand Agriculture building at Oregon State University, Taylor, 58, a state employee who runs an agency with a half-million-dollar annual budget, is often at work discrediting the well-established scientific facts about global warming."

taylor:
Not even close. State support for Oregon Climate Service is only $105,000 annually. But we share office space and personnel with the Spatial Climate Analysis Service, which gets no state money but relies on outside grants for support. Those total about $400,000 per year, for creating climate maps. Add our state support and you DO get a half-million, but the statement in the article is very misleading. I did point out to Mr. Koberstein that the state budget was much less than the combined budget, but unfortunately only the higher figure was listed.

willamette week article:
"His views have been read on the floor of the U.S. Senate and, most recently, influenced global-warming bills in Salem. In the past, he also has tried to undermine global-warming legislation in Canada."

taylor:
I was asked by Canadians to write a letter expressing my views on human effects on climate, which I did. No attempt was made to influence the legislature.
willamette week article:
"'There is a valued and much-needed role for skeptics to question the prevailing view," says Philip Mote, Taylor's counterpart in Washington state and a professor at the University of Washington. "Once in a while, the skeptics are right. But there is no debate in the scientific community over whether human-caused global warming is possible or observed. The only way one could come up with that opinion is not being familiar with the scientific literature.'"
taylor:
The issue is not “do humans affect climate?” Clearly there IS a human influence. The question is, “how much?” In my opinion, natural variations dominate the climate system, and will continue to do so. I have NEVER denied the human influence, but unlike Phil Mote I do not believe human impacts dominate the climate system.
willamette week article:
"Taylor manages the state Climate Service website (www.ocs.oregonstate.edu), which runs on a state-funded OSU server. It's peppered with criticism of global-warming theories with little rebuttal from the theories' supporters."
taylor:
There is almost no mention of global warming theories on our server. There are cases where both sides of the argument are shown: for example, a statement I made about the subject as well as links to statements made in rebuttal by two of my colleagues (both of which were referenced in the WW article; I assume the writer obtained those critical statements about me from our Web site). I have endeavored to devote the OCS Web site to Oregon weather and climate issues rather than having it be a forum for global warming theories.
willamette week article:
"Taylor's position as the leading climate expert in Oregon, a state with a national environmental reputation, has given ammo to those who are hostile to the idea that the earth is warming up. On Jan. 4 of this year, Oklahoma Republican Sen. James Inhofe, chairman of the Senate Environment and Public Works Committee, said in a Senate floor speech, "As Oregon State University climatologist George Taylor has shown, Arctic temperatures are actually slightly cooler today than they were in the 1930s. As Dr. Taylor has explained, it's all relative.""
taylor:
Journal articles show that Arctic trends are similar to US trends and Oregon trends: the warmest decade of the last 100 years was the 1930s. In Oregon and the US, the warmest year was 1934. In the Arctic, it was 1937 (references available upon request).
willamette week article:
"Accuracy about global warming matters, Mote says. By spreading misinformation about the world's most important environmental issue, Taylor can encourage people not only to have doubts about proven science, but to become complacent. "People will conclude it's still uncertain," Mote says, "so we don't have to do anything.""
taylor:
The fact that humans have a minor effect on climate does not mean “we don’t have to do anything.” There are plenty of reasons to reduce our fossil-fuel use, for example, including air pollution, foreign trade, and high fuel cost. I ride a bicycle to work every day, partly for the exercise and partly to conserve resources. Most of my most vocal critics drive cars. I wish they all rode bicycles!
willamette week article:
"Scientists have had to find a different source for their climate data. They turned to tree rings, coral, and boreholes dug deep into ice and soil for information. They added some Fortran code and produced a series of results. Since the year 1000, global temperatures were essentially flat until around 1900. In the past 30 years they have been rocketing skyward. When plotted on a graph, the result looks like a hockey stick lying on the ice, its blade pointing toward the sky."
taylor:
The “hockey stick” graph which appeared in Nature in 1998 and was quickly adopted by the IPCC has been the subject of three scientific journal articles in the last 12 months, all of which have shown that it contains significant errors. There is an interesting blog site by one of the reviewers at www.climateaudit.org.
willamette week article:
"The facts of global warming have been confirmed by hundreds of climate scientists around the world, most of whom participated in the Intergovernmental Panel on Climate Change, sponsored by the United Nations and the World Meteorological Organization. The panel issued its last report in 2001 and will update it in 2007. The IPCC says that global average surface temperatures have increased over the 20th century by about 0.6 degrees Celsius, or about 1.08 degrees Fahrenheit. Globally, it is very likely that the 1990s was the warmest decade and 1998 the warmest year. But the record shows a great deal of variability; for example, most of the warming occurred during two periods, 1910 to 1945 and 1976 to 2000."
taylor:
Fitting a straight line to a series that goes up and down cyclically is not always appropriate. Start a trend at a cool period (e.g., 1900) and end in a warm periods (the 1990s) and you get an upward trend. Start it at a warm period (say, the 1930s) and end it in a cool periods (1970s) and you get a negative trend. I distrust most linear trends. But what I do is ask myself, “are we seeing unprecedented climate conditions in recent years?” When the answer is “no,” as it is for Oregon, the US, and the Arctic, I’m a lot less worried than I would be if we were seeing things that have never happened before.
willamette week article:
"Satellite data confirm the results recorded by thermometers on the Earth's surface. They also show that the area of Earth covered by snow has decreased by about 10 percent since the late 1960s. Scientists have documented widespread retreats of glaciers and sea ice, and a serious thinning of the polar ice cap in the Arctic. The oceans are warmer since the 1950s, and sea levels have risen several inches in the past century."
taylor:
This is very common: pick a cool decade (the 1960s) and begin a trend there. Yes, snow cover probably HAS decreased since then. That’s why I prefer to look at a longer record. Granted, we have no satellite data from the 1930s, but a perusal of temperature and snow information shows that the earlier period was significantly warmer and less snowy than the cool 1960s.
willamette week article:
"The National Academy of Sciences, the American Meteorological Society, the American Geophysical Union and the American Association for the Advancement of Science all agree that humans are forcing global temperatures upward."
taylor:
I am a member of the American Meteorological Society and a Certified Consulting Meteorologist. No one asked my opinion before crafting the Society’s statement. I understand the same is true of the others. And again, the human influence is acknowledged by scientists everywhere; it’s the DEGREE of influence that is being debated.
willamette week article:
"It is hard to find a single peer-reviewed journal article that agrees with Taylor's views. A report last December in the journal Science found that of 928 major peer-reviewed academic papers on the subject of climate change, all supported the consensus view that a significant fraction of recent climate change is due to human activities."
taylor:
The report cited has been widely discredited. There are hundreds of journal articles which support my viewpoint (regarding historical trends in climate in the last 100 years) (references available upon request).
willamette week article:

"Another expert is Patrick Michaels, a research professor of environmental sciences at the University of Virginia and a visiting scientist with the Marshall Institute. In a statement posted on a State of Oregon website run by Taylor, Michaels claims he doesn't see global warming as a problem; what worries him more is a global conspiracy to shut down skeptics like himself."

"Taylor himself has supplemented his government salary with oil money. On Nov. 22, 2004, the ExxonMobil-funded website Tech Central Station (techcentralstation.com-"Where Free Markets Meet Technology") published the 2,300-word article by Taylor that Inhofe had read on the Senate floor. Taylor's article was a review of a report that had shown significant warming in the Arctic. Taylor, who has written seven articles on climate change for Tech Central Station, says he was paid $500 for the review."
taylor:
The statement by Michaels was posted in 2001, in response to a climate statement by the National Academy of Sciences, which was also posted. I wanted to include both sides of the argument, and Dr. Michaels is a renowned expert in climate science (and State Climatologist for Virginia). Why not address both sides?
willamette week article:
"Taylor's review said the authors of the Arctic study looked at only the last 35 years, ignoring data from the 1930s that show conditions were comparable to those of today. "Why not start the trend there?" he wrote. "Because there is no net warming over the last 65 years?""
"It's not clear what report Taylor was reading. In fact, the Arctic study takes into account an entire thousand years and places the Arctic in the context of the entire globe."
"In fact, the report does list most of Taylor's references-among hundreds of others."
taylor:
My review of the Arctic Climate Impact Assessment was made shortly after its release in November, 2004. I reviewed a very cursory summary, and made my comments based on that summary. A longer report was issued in June, 2005, and I have not published comments on that report, but I was pleased to see that more detail and many additional references had been added. These included most of the journal articles I had listed in my review, so perhaps my review enabled the authors to bring more balance to their report. Perhaps, in a sense, I served as an unofficial peer reviewer.
willamette week article:
'"The best explanation I can come up with is, George is very tied into the conservative bent," Coakley added. "He gets all his information from the conservative-type think tanks. George picks it up and regurgitates it. Some of the stuff is half-baked at best, but sometimes it's so bad we have to call him on it and write letters to the editor. It's just not right; it just counters all the evidence.'"
taylor:
Actually, I get most of my information from peer-reviewed journals, including Journal of Climate, Journal of Geophysical Research, and Climate Research. The articles I write (including, for example, the Arctic article) are based on journal articles and contain full bibliographies. Admittedly, I seldom give“both sides” of the argument, because the “other side” (the one that suggests that human activities exert a dominant role in the climate system) is well-represented in journals and the media. My goal is to be a voice saying “wait, maybe there’s another side to this. Take a look at THIS data and see what you think. Then let’s talk about it.” Unfortunately, this issue has become such a divisive and angry one that ad hominem attacks have replaced dialogue..
final statement:
When I write about global climate issues, I do so on my own time from home. I'm cautious about having my opinion construed as representing the State of Oregon or Oregon State University, and I try to separate my analyses of global climate from my day to day work as the State Climatologist.

Distorted oil markets

2008-09-11T09:52:00.004-06:00

Per the linked Reuters piece...

"China's nine-month auto fuel buying frenzy ahead of the summer Olympics helped lift global oil markets to records, but beleaguered bulls beware -- it could be years before conditions force it to launch another raid. With domestic inventories filled to the brim after a huge pre-Olympics stockbuild and amid signs of slackening demand growth, a return to the spot market appears remote for now. However, that risk may grow if refiners tap the brakes on investment due to low fuel prices set by the government. Demand in the United States, which consumes about seven times more gasoline than China, has only begun to slow this year, after retail prices nearly trebled from 2004...China's retail diesel and gasoline prices, closely regulated by a government anxious to avoid stirring any rural unrest, have increased only 70 percent over the same period. By the end of this year, China will increase its refining capacity by an estimated 740,000 barrels per day (bpd), more than enough to meet oil demand forecast to grow about 430,000 bpd, allowing refiners to bring imports to a quick halt. But traders have said China will return to a net exporter of gasoline and much thinner imports of diesel this month...After their last import binge in late 2004, refiners stayed away from spot markets for nearly three years, until last autumn's domestic shortage forced Beijing to arm-twist its state refiners into buying more product overseas..."China's policy was and still is to maximize domestic diesel production and stay away from imports," said Kang Wu of FACTS Global Energy in Hawaii...before any buying happens, suppliers will need to whittle down stocks that stand at twice year-ago levels and are proving difficult to shift amid signs of slackening demand growth...China's passenger car sales fell 6.24 percent in August from a year earlier to just below half a million units -- the first drop in more than two years and a sudden reversal from years of nearly unbroken double-digit sales growth."

Conclusions:

-China's consumption is one seventh that of the US...even if growth rates of Chinese consumption were faster than the US, the increase in absolute demand would still be relatively small

-the Chinese government believes rural unrest could pose a significant threat to its existence, since it subsidizes fuel prices so heavily

-elimination by China of fuel subsidies would result in a sharp increase in end user prices, with a shift in consumption level inevitable

-Chinese growth in auto usage can decline or stagnate, and negative to flat growth is likely if a slowdown in GDP growth takes place

Faulty premise at the heart of credit derivative mathematical model

2008-08-19T11:02:00.004-06:00

"In 1997, nobody knew how to calculate default correlations with any precision. Mr. Li's solution drew inspiration from a concept in actuarial science known as the "broken heart": People tend to die faster after the death of a beloved spouse. Some of his colleagues from academia were working on a way to predict this death correlation, something quite useful to companies that sell life insurance and joint annuities."Suddenly I thought that the problem I was trying to solve was exactly like the problem these guys were trying to solve," says Mr. Li. "Default is like the death of a company, so we should model this the same way we model human life."

There are serious problems with this approach. First, the existence of a meaningful analogy between the relationship of a married couple and connections between complex legal/financial structures seems unlikely.

A related post: This is No Longer Funny...by Paul Wilmott.

US trade deficit

2008-08-12T10:24:00.003-06:00

Interesting that the trade deficit ex-petroleum has been essentially in a range since mid-2004 until the recent sharp decrease. With respect to the entire time period shown on the chart, it is an illustration of the offshoring of manufacturing capacity from the US. (Source: CR)

Commercial structures a good place to put solar panels

2008-08-12T09:59:00.002-06:00

In a piece titled Retailers Opt To Roll Their Own Power, Informationweek tells us that

"Cutting back on electricity use can trim a company's power bills only to a point. To really make a dent, businesses are beginning to generate their own juice to supplement what they buy off the grid. Some big-box retailers are doing it by erecting solar panels on their rooftops. Wal-Mart, Kohl's, Macy's, and WholeFoods are hurrying to make a Dec. 31 deadline to qualify for tax incentives"

Rooftops of big stores and warehouses are a very logical place to put solar panels; this is good news.

Fresh analysis of Japanese monetary policy and banking crisis

2008-08-06T15:33:00.001-06:00

Here...Deflation and bank bailouts in Japan

US gas prices and changing driving habits

2008-07-30T15:09:00.009-06:00

A couple of charts from the government are very illuminating on the subject of how Americans have responded to increasing gasoline prices. The first chart shows the moving 12 month average of miles driven on all US roads; the detail data shows that between Jan 1, 2005 and May 31, 2008 the change in this number has been essentially zero. This number has essentially been in a flat range since December 2004. So US drivers were modifying their driving well before gas prices got to $4.00 per gallon; as is demonstrated by the second chart showing gas prices.

The second chart shows the trend in gasoline prices from mid-2007:

So when you combine no growth in miles driven and consumers shifting to more fuel-efficient vehicles you get negative change in demand for gasoline.

Possible keys to living longer

2008-07-18T15:34:00.002-06:00

The post Can Exceptional Longevity be Predicted? that hit the Longevity Science blog recently has some interesting findings (based on a small sample, so take them with a grain of salt).

The authors state that "scientists currently disagree on whether a small or a large body size is conducive to exceptional longevity. Historical demographers are confident that small body size is associated with increased mortality, while biologists are firmly convinced that a small body size is preferable for longevity." So if you are of either body type you can take comfort:)

Additionally, "Numerous historical studies have found that body height in young adulthood is a good indicator of a past history of nutritional and infectious diseases. Infectious diseases (and diarrheal diseases in particular) that were highly prevalent in the past clearly led to growth retardation and a shorter body height, making shortness a marker of an unhealthy childhood and impaired health." That doesn't seem too surprising. The followup states "It could be expected that shorter people raised in a less healthy environment would have higher death rates at older ages as well. In his pioneering study published in 1984, Norwegian demographer Hans Waaler found a negative relationship between body height and mortality later in life. Waaler’s initial findings were reproduced later in many other studies, including a famous study of U.S. Union Army Civil War veterans. According to these studies, future centenarians should be taller than their peers." It seems that longevity is yet one more advantage for the tall.

But wait: "Our study confirmed that obesity at young adult age (being stout at 30 years) is detrimental to attaining exceptional longevity, while height is a far less important factor. The findings that a stout build predicts much lower survival rates to age 100 were consistent with existing knowledge that particularly high body mass indexes (BMIs) and obesity are associated with increased mortality."

The question that comes to mind then is what is the effect of a person being not stout until after age 30? In other words, if a person starts to put on a few pounds in the 35-45 age range, is there a significant negative effect on longevity?

Oil speculation update

2008-07-15T14:27:00.004-06:00

Per Yahoo's AP story, today "Oil prices plummet over $6 amid economic fears"...this is attributed in part as follows..."Analysts also attributed the sell-off to Thursday's expiration of options contracts, which tend to increase volatility, and to computers programed to automatically sell once prices reach certain thresholds"...based on Hussman's commentary in my previous post, spot demand is pretty weak in the US, and given that a large number of expiring contracts were held by speculators(which constitute fictitious demand which crowded out actual end user demand) there is suddenly extra spot supply. Given weak demand and extra supply you get an obvious explanation for the drop in price at option expiration.

"The drop, which eclipsed last Tuesday's slide of $5.33, marked the biggest decline in dollar terms since the Gulf War."

Hussman on oil speculation

2008-07-08T15:16:00.002-06:00

This is excellent:

"It's sometimes suggested that hedge funds, commodity pools and speculators don't actually drive up the price of oil, because they don't actually take delivery of the physical product – instead rolling their futures contracts over indefinitely or until they close out their positions. From an equilibrium standpoint, however, this argument ignores the zero-sum nature of the futures market.
Producers have an interest in selling their output forward to lock in a predictable price. Similarly, bona-fide hedgers (such as transportation and industrial companies) have an interest in buying their oil forward so they can plan without concern about future fluctuations.To the extent that the speculators begin to take one-sided trend-following positions, their purchase of a futures contract crowds out the purchase that a hedger would otherwise be able to make from a producer.
It doesn't matter that the speculator has no intent to take delivery. What matters is that if the speculators are unbalanced on one side, the producers will have satisfied their need to pledge future delivery. Moreover, because they can lock in a high price, they will be inclined to sell more for future delivery than they otherwise would. Meanwhile bona-fide hedgers will be inclined to buy less on the forward market than they otherwise would. You can see this combination of effects in the commitments data, as a tendency for commercials as a group to become net short following significant price increases in oil.When it comes time for the speculators to roll the contracts forward, they have to sell their existing contracts either to someone who is willing to take delivery, or to a producer who sold the oil forward and can now clear that liability without actually producing the stuff. Given relatively high spot demand and tight supply, these rolling transactions have worked fine to this point, without driving prices lower."

The crowd-out factor is the key; producers only have a finite amount of production to sell.

More evidence of oil speculation

2008-07-08T14:18:00.003-06:00

The linked piece states

"The market's bearish turn this week erases, at least for the time being, the effect of a rally that pushed prices past $145 in a string of record-setting sessions before the Fourth of July.
Analysts attributed much of the recent sell-off to profit-taking, saying traders were cashing in on the previous week's gains. ..Still, analysts warned the pullback could be fleeting. "For the time being it's what we call corrective. ... It's a profit-taking pullback that could still be followed by fresh highs down the road," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates. Ritterbusch said Tuesday's decline may have gained added momentum when computer models used by large investment funds automatically sold oil contracts once prices fell to a pre-set threshold. "A significant part of it's technical," he said of the day's trading. "A lot of these funds don't watch supply and demand fundamentals."

It's right there in black and white...

Commodities trading and leverage

2008-07-03T10:23:00.001-06:00

Yves Smith said

..."One theory as to why commodities are hot it that they are the last game that does NOT require leverage from the banking system. Commodities futures require low margin deposits."

That is part of the answer, I think.

Apparently China not the only hoarding location-smoking gun on oil

2008-07-01T13:45:00.003-06:00

The linked post at Peak Oil Debunked gives us the smoking gun on oil hoarding by speculators. POD posts excerpts from several main stream journalism sources and I will excerpt the excerpt:

"A LARGE warehouse in Amsterdam may seem an unusual place to attract the City’s top traders and hedge funds. But, in the past few months, Morgan Stanley has been accumulating warehouse space in the Netherlands to store its hottest new property — oil...Meanwhile, banks such as Morgan Stanley are also beginning to move into the physical market to buy oil — or even entire oilfields.Goldman Sachs recently bought 10m barrels of oil...Morgan Stanley and Deutsche bank recently bought the rights to 36m barrels of oil between 2007 and 2010 direct from a North Sea oilfield.Source"

There it is, plain as day...

"The shrewdest competitors in the energy-trading world these days deal heavily in physical shipments of fuel, not just contracts for the future delivery of such commodities. Owning actual oil, natural gas, propane and even electricity has two big advantages. It provides detailed knowledge of regional supply and demand and the pricing power that comes from holding large quantities of commodities.[...]An explosion in the number of participants in the energy-trading world has led to an increase in so-called physical trading.Dominant commodity traders such as Morgan Stanley and Goldman Sachs Group Inc. long have had strategies to own or lease fuel-storage terminals, oil tankers and power plants to give them more flexibility to hold onto inventory or sell it at opportune moments.More recently, those Wall Street firms have taken physical trading to new levels with bids to buy, not lease, distribution facilities such as pipelines and production facilities including refineries. Hedge funds also have gotten into the game of dealing in physical energy and even metals assets."

So when Goldman makes a forecast for the price of oil, it's based on their knowledge of their own holdings...and since price volatility happens at the margin they are in good shape to take advantage.

Apparently China is where commodities hoarding is happening

2008-06-30T17:28:00.002-06:00

according to Wall Street Examiner. Andy Bebut says

"some time ago I’ve indicated that apparently China is building a multi-year stockpile of various commodities to diversify its trade surplus. Anything that can be practically stored (as metals, grains) is removed from the world markets and stored. Obviously it creates gigantic price distortions.
This is why I’m watching China, at some point I expect the consumption of industrial metals by China to slowdown dramatically as they shift from imports to enormous domestic stockpiles. In fact I think China can easily continue to grow for some time without importing any industrial metal at all. Zero."

That is a bold statement. It would make sense in that the Chinese government would want to invest in something besides US Treasuries. On the other hand, driving up the prices by itself would cost the Chinese some non-trivial amount. Of course, they stand to lose a lot once they stop buying Treasuries, as the value of their holdings fall when prices go up. Interesting...

Cause of ballooning US budget deficit not what you might think

2008-06-30T15:33:00.002-06:00

The linked report from the US Treasury shows that monthly spending on Social Security and Medicare, along with the "Other Non-Defense" category spiked up since January. Defense spending has been essentially flat on a month to month basis since October 2007.

Global labor arbitrage is dead

2008-06-30T11:16:00.002-06:00

If transportation cost increases due to the oil price shock erase the wage differential between US and China, the Chinese manufacturing sector is in deep trouble. Some manufacturing jobs may return to the US. The increase in oil prices is as big a threat to China as it is to the US.

Further evidence regarding oil speculation

2008-06-30T10:01:00.003-06:00

Bull Bear Trader points to a piece in the FT that states

"Barclays Capital is planning to enter the shipping business. The bank is attempting to increase its commodities exposure by hiring ships on long-term charter to move oil, gasoline, and diesel. As opposed to gaining exposure by taking derivative positions, Barclays hopes to cash in on the prices involved in hiring ships, which have been up more than 50% in the last six months. The move also allows them to support their new venture into the physical trading of oil. Physical trading allows for a more predictable price since you are not at the mercy of the spot market prices."

So we have a non-user/producer of oil trading the physical commodity...that is speculation. By gaining control of ships, this company could affect oil prices by holding ships they have contracted out of use, driving up prices for both the ships and the oil as they would be acting as a capacity constraint.

Oil market speculation

2008-06-27T13:36:00.005-06:00

The Importance of the "Roll Return" in Commodity Futures Returns

..."Roll Return" is the difference between the current spot (what you pay if you "consume" the commodity today) and the futures contract price. It is also the return a futures contract holder would earn if the spot price stays constant until the expiration of the futures contract - in which case the price of the futures contract would gradually converge to the spot price. Assuming the spot price is held constant, a futures contract holder will earn a positive roll return if the price of the futures contract is lower than the spot price (this behavior is termed "backwardization"). Conversely, a futures contract holder will experience a negative roll return if the price of the futures contract is higher than the spot price and is converging to it over time (this is termed "contango")"...

It seems that a speculator long an oil contract would have strong incentive to roll over to the next period contract should the current contract get bid up too close to the spot price. Of course the spot price starts moving up if the spread between spot and the front month contract moves up to where the physical holder makes more by selling at the contract date rather than immediately. Then you get momentum bids on the contract because the contract price is moving up. A positive feedback loop...once your long contract gets too close to spot you will want to roll over to the next month to avoid a small or negative return...and you will keep doing that until the spot price goes up enough or you have to pay back the margin loan or return the capital that is invested.

Naked Capitalism points to a possible solution: "Exchanges could impost a "liquidation only" requirement, which was last used to break the Hunt brothers' attempted corner of the silver market in the early 1980s "... in this case no one is allowed to roll over to the next contract, so if you are long contracts you have to offset with shorts because you don't want to take delivery. The rapid increase in short interest pushes contract price down and the feedback loop is broken.

US domestic oil reserves-still massive

2008-06-27T10:31:00.004-06:00

The USA has massive amounts of oil deposits in the ground that at current prices are very likely to be economically viable. Here are some examples:

-Bakken Formation...2.1 billion barrels up to 503 billion barrels...located in north-central US...

-"The United States has the largest known deposits of oil shale in the world, according to the Bureau of Land Management and holds an estimated 2,500 gigabarrels of potentially recoverable oil, enough to meet U.S. demand for oil at current rates for 110 years. However, oil shale does not actually contain oil, but a waxy oil precursor known as kerogen. For this reason and because there is not yet any significant commercial production of oil from oil shale in the United States as of 2008"...from Wikipedia piece on oil reserves...

-"Chevron Corp. has tapped a petroleum pool deep beneath the Gulf of Mexico that could boost the nation’s reserves by more than 50 percent"...MSNBC piece...

GM, Chrysler bankrupt by Jan 1 2009

2008-06-25T11:56:00.001-06:00

It's a prediction.

FDIC keeps a running list of bank failures

2008-06-19T08:54:00.001-06:00

Here: Bank Failures & Assistance

The current list:

2008
The list of Bank Failures and Assistance Transactions is updated through May 9, 2008. Please address questions on this subject to the Customer Service Hotline (telephone: 888-206-4662).
January
Douglass National Bank, Kansas City, Missouri, with approximately $58.5 million in assets was closed. Liberty Bank and Trust Company of New Orleans, Louisiana has agreed to assume all deposits (approximately $53.8 million). (PR-7-2008)
March
Hume Bank, Hume, Missouri, with approximately $18.7 million in assets was closed. Security Bank, Rich Hill, Missouri has agreed to assume the insured deposits (approximately $12.5 million). (PR-21-2008)
May
ANB Financial, National Association, Bentonville, Arkansas, with approximately $2.1 billion in assets was closed. Pulaski Bank and Trust Company, Little Rock, Arkansas has agreed to assume the non-brokered insured deposits (approximately $212.9 million). (PR-33-2008)
First Integrity Bank, National Association, Staples, Minnesota, with approximately $54.7 million in assets was closed. First International Bank and Trust, Watford City, North Dakota has agreed to assume all deposits (approximately $50.3 million). (PR-41-2008)

What happens when China reduces oil subsidies?

2008-06-19T08:43:00.002-06:00

The linked Yahoo piece starts out with a blinding flash of the obvious: "China is raising fuel prices, a move that could dampen the booming Asian nation's oil consumption".

The piece further quotes several traders to the effect that "This could change the psychology of the market completely," and "A rise in prices in China "would be a major factor in driving prices down".

I don't think there's any question that Chinese oil consumption will stagnate or decrease if the government there reduces the insulation from market prices that consumers there now have.

How long to live?

2008-06-12T15:53:00.004-06:00

This data is for US residents, check it to see how long the government expects your remaining lifespan will be:

Click on the image to zoom in...

Futures contract roll over info

2008-06-12T11:04:00.002-06:00

Yves Smith pointed this out:

"John Dizard, a writer for the Financial Times (and a casual acquaintance), illustrates below how fortune favors not necessarily the brave, but the powerful in his article, "Goldman and its magic commodities box". Dizard discusses how Goldman plays the commodities market, using its role as the largest manager of commodities index funds (Goldman designed and maintains the most popular index, the Goldman Sachs Commodities Index, or GSCI, the biggest commodities index, which it has successfully leveraged into becoming the largest manager of GSCI-based index funds), market maker, and principal trader (see this post on the questionable role of indexes)...

...Dizard calculates the collective losses to investors (organizations like pension funds, endowments, and insurers) on the monthly roll of the GSCI (required because the index uses futures contract that expire every month) at 150 basis points on $100 billion of funds, or $1.5 billion. And who is on the other side of these trades? Dizard believes Goldman is at the top of the list...describing the practice known as index roll congestion...This involves profiting from the requirement that public investors' positions in commodities indices be "rolled over" from one contract month to another over a known five-day period. The price of the old month's contract is depressed and the price of the new month's contract is inflated. This can be a huge source of profit for those ready to take advantage of the naive public....a lot of money is being lost by the public to someone...

... Given that Goldman knows how many contracts it has to buy and sell on certain dates, that in many pits the GSCI is the biggest single factor in the market and that it has many trading hours to cover its positions at advantageous moments, its profitability is not surprising.The GSCI has not been as profitable for all the investors who use it to get commodities exposure. Last year it lost about 15 per cent on a total return basis. Goldman itself had a record year. The customers' yachts weren't just small, they were under water.There is no failure to disclose here since Goldman lays out the GSCI's terms and conditions on its website and in customer contracts. The real failure is with the institutional investing community that still does not understand how commodity markets work..."

Amazing...

Foreign oil demand heavily subsidized

2008-05-30T09:03:00.003-06:00

naked capitalism points to an important story regarding global oil markets:

"Ambrose Evans-Pritchard in the Telegraph argues that the days of many of those subsidies are numbered:
One by one, countries across Asia and the Middle East are being forced to abandon price controls on fuel and energy, bringing hundreds of millions of consumers face to face with the true market cost of oil. The effect has already begun to chip away at world demand and may ultimately trigger a slide in crude prices."

The fact that it is only now that foreign governments are bringing "hundreds of millions of consumers face to face with the true market cost of oil" really needs to be brought to the attention of the US public and policymakers. While improved energy efficiency remains an important goal for the US, the lack of incentive for consumers in these other countries to be more energy efficient has obviously been an important driver of demand. I expect that foreign demand will drop off sharply as these subsidies are eliminated, relieving demand pressure and thereby some of the price pressure, as the Telegraph writer states.

It's an outrage

2008-05-21T14:26:00.002-06:00

"The most exciting thing that happened Tuesday was the testimony of Michael Masters to the Senate Committee on Homeland Security (who have sweeping powers) as he spilled the beans and gave the Senate a very detailed inside view of exactly how speculators are the primary cause of high commodity prices. Don't look for any commentary on this in the WSJ or most media outlets, you would think this entire investigation isn't going on as you watch CNBC wearing their Oil $130 party hats this evening!
What we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets: Institutional Investors. Specifically, these are Corporate and Government Pension Funds, Sovereign Wealth Funds, University Endowments and other Institutional Investors. Collectively, these investors now account on average for a larger share of outstanding commodities futures contracts than any other market participant.
With very bold categories in his presentation like "Index Speculator Demand is Driving Prices Higher" Masters lays out a simple and compelling case that illustrates how over $250Bn of speculative money has poured into the commodities markets since 2003, driving the average cost of commodities indexed up 183% WITHOUT ANY SIGNIFICANT INCREASE IN ACTUAL DEMAND.

It's not just oil, there is a chart on page 4 of his presentation that shows how on Jan 1st 2003 sugar futures stockpiled totaled 2.3Bn pounds. On March 12th of this year, speculators had stockpiled 48Bn pounds of sugar. Soybean oil went from 163M pounds to 4.5Bn pounds, corn from 242M bushels to 2.4Bn bushels, coffee from 195M pounds to 2.4Bn pounds. wheat from 166M bushels to 1.1Bn bushels. Even cattle and hogs have had 10-fold increases in speculation. This is your "demand," 10 month supplies of commodities removed from the markets over 5 years and held by speculators who point to the "demand" as evidence of a tight supply - A TOTAL CROCK!
Speculators "consumed" as much additional oil as China in the past 5 years (848M barrels) while gasoline stockpiles have risen from 1.1Bn gallons to 3.5Bn gallons and natural gas stored by speculators has gone up from 331M BTUs to an insane 2.3 Billion BTUs. Aluminum - 10x, Nickel - 5x, Zinc - 10x, Copper - 7x, Gold - 10x, Silver - 15x — Madness!
In fact, Index Speculators have now stockpiled, via the futures market, the equivalent of 1.1 billion barrels of petroleum, effectively adding eight times as much oil to their own stockpile as the United States has added to the Strategic Petroleum Reserve over the last five years.
Demand for futures contracts can only come from two sources: Physical Commodity Consumers and Speculators. Speculators include the Traditional Speculators who have always existed in the market, as well as Index speculators. Five years ago, Index Speculators were a tiny fraction of the commodities futures markets. Today, in many commodities futures markets, they are the single largest force. The huge growth in their demand has gone virtually undetected by classically-trained economists who almost never analyze demand in futures markets.

I urge you to set aside the time to read this full report, it is an excellent presentation of pretty much everything I've been "ranting" about for 2 years put together by a guy who trades commodities for a living and is, as I am, totally fed up with the destruction of our economy and the suffering that is being caused by this rampant commodity speculation.

One particularly troubling aspect of Index Speculator demand is that it actually increases the more prices increase. This explains the accelerating rate at which commodity futures prices (and actual commodity prices) are increasing. Rising prices attract more Index Speculators, whose tendency is to increase their allocation as prices rise. So their profit-motivated demand for futures is the inverse of what you would expect from price-sensitive consumer behavior.
When Congress passed the Commodity Exchange Act in 1936, they did so with the understanding that speculators should not be allowed to dominate the commodities futures markets. Unfortunately, the CFTC has taken deliberate steps to allow certain speculators virtually unlimited access to the commodities futures markets. Masters closes with the key issue, that: The CFTC has granted Wall Street banks an exemption from speculative position limits when these banks hedge over-the-counter swaps transactions. This has effectively opened a loophole for unlimited speculation. When Index Speculators enter into commodity index swaps, which 85-90% of them do, they face no speculative position limits.
The really shocking thing about the Swaps Loophole is that Speculators of all stripes can use it to access the futures markets. So if a hedge fund wants a $500 million position in Wheat, which is way beyond position limits, they can enter into swap with aWall Street bank and then the bank buys $500 million worth of Wheat futures. In the CFTC's classification scheme all Speculators accessing the futures markets through the Swaps Loophole are categorized as "Commercial" rather than "Non-Commercial." The result is a gross distortion in data that effectively hides the full impact of Index Speculation.
Additionally, the CFTC has recently proposed that Index Speculators be exempt from all position limits, thereby throwing the door open for unlimited Index Speculator "investment." The CFTC has even gone so far as to issue press releases on their website touting studies they commissioned showing that commodities futures make good additions to Institutional Investors' portfolios.
This is how the current administration, through the "Enron Loophole" and other directives to the CTFC, has perverted an organization that is supposed to be CONTROLLING speculation and turned them into more than an enabler, but an actual cheerleader for the commodity markets. You would think this would be news but the same people who are sucking over $2Tn a year out of our pockets (over and above what we paid for the same commodities 5 years ago) are also the people who control the mainstream media and the very government that is listening to this testimony.
In order to put a stop to this YOU have to act. YOU have to get mad, YOU have to tell people what is happening because no one else is doing it are they? Feel free to copy this, Email it, print flyers - whatever - this is something that needs to be talked about and what better time than the day oil hits $130 a barrel while you drive less than you did last year, when it was $51.03 in January!"

The concept of jubilee

2008-04-13T18:23:00.001-06:00

“THE once-glowing core body of law within the Judeo-Christian Bible has become all but ignored - indeed, rejected - by the colder temper of our times. This core provided for periodic restoration of economic order by rituals of social renewal based on freedom from debt-servitude and from the loss of one’s access to self-support on the land. So central to Israelite moral values was this tradition that it framed the composition of both the Old and New Testaments.

Radical as the idea of cancelling debts and restoring the population’s means of subsistence seems to modern eyes, it had been a conservative tradition in Bronze Age Mesopotamia for some two millennia. What was conserved was self-sufficiency for the rural family-heads who made up the infantry as well as the productive base of Near Eastern economies.

Conversely, what was radically disturbing in archaic times was the idea of unrestrained wealth-seeking. It took thousands of years for the idea of progress to become inverted, to connote freedom for the wealthy to deprive the peasantry of their lands and personal liberty."

Natural resources

2008-04-13T16:47:00.000-06:00

"Robert Kennedy, Jr., might be correct that electricity is best provided in Chile by means other than hydroelectric dams (Letters, April 8). His presumption, however, about the source of prosperity casts doubt on the quality of his argument.

Mr. Kennedy opposes dams because he wants to protect "nature's bounty." But nature is not bountiful. If it were, human history would be one of prosperity and long, healthy lives rather than one of oppressive poverty and short, miserable lives. Nature is miserly. The bounty that Mr. Kennedy presumes comes from nature is, in fact, the relatively recent product of human creativity and industry unleashed by free markets - and now threatened by the mindless worship of nature.

Sincerely,
Donald J. Boudreaux"

Global labor arbitrage...again

2008-04-11T14:57:00.003-06:00

Perhaps the arbitrage won't last as long as I thought and expressed in a previous post here. Over at Czech Republic Economy Watch, Edward points out that Vietnamese are flocking to the Czech Republic to fill jobs. Also Vietnamese workers back in their home country are looking for pay increases; apparently

"More than 20,000 Vietnamese workers went on strike demanding a 20% increase to their US$59 monthly salaries on Monday at a Taiwanese-owned factory that makes shoes for US apparel giant Nike."

China and more on global labor arbitrage

2008-03-14T14:00:00.003-06:00

Over at Demography Matters, Edward Hugh has put up a very thought-provoking piece titled

China's Inflation and Labour Shortage Problem, It's The Fertility Stupid!

I think a key point Edward makes is that "there is a shortage of young workers willing to accept the low wages that prevailed in the 1990s." I am fairly certain China's young workers can see that the type of work being done at today's wages isn't rocket science, and that they are aware of what currently employed workers are making. One might say, with tongue in cheek, that the "young workers of China have united" to reject labor arbitrage. Now, workers in other countries such as Vietnam don't have the same leverage regarding wages, which would help explain why electronics production is moving from China to Vietnam, as I mention in a previous piece here at Wasatch Economics.

It seems that now that China has raised the standard of living for a sizable chunk of its workers, the rest of the work force isn't willing to accept the difficult working conditions that gave China its manufacturing cost advantage. This puts China in the same stage of workforce condition as Western countries. By that I mean that holders of capital can't find workers willing to take jobs at the wage on offer, so the country must either import workers willing to work at that wage as the US has done with agricultural workers, or outsource the work to foreign labor. Since bringing foreigners in is politically and practically nonsensical for China, the work goes overseas.

Given the trend in the size of the 15-19 cohort through 2022, the size of the potential highly educated workforce that China will be able to generate to move its manufacturing sector up the value stack is limited.

Finally, I believe that China's infrastructure outside of the coastal regions is fairly weak, so that even if the low value add manufacturing is moved to the hinterlands where workers might be found, the cost of transporting raw materials to the factories and then the finished product back out to ports for export might eat significantly into labor cost savings.

Economics and politics inevitably linked throughout history

2008-03-11T23:00:00.005-06:00

I found this excellent piece, "Lessons from the history of trade and war" posted yesterday, with this thesis:

"History, however, suggests that globalisation is as much a political as a technological phenomenon, which can thus be easily reversed, and has been so in the past"...

I couldn't agree more. The authors of this piece go on to say:

"The international system has historically done a pretty poor job of accommodating newcomers to the Great Power club. German unification and industrialisation during the late 19th century led to tensions with Britain and France over colonial and armament policy, while Japan's rise to regional prominence during the interwar period, and its search for secure sources of raw materials, ended in war against United States and its allies. Both precedents are worrying, in that similar questions are posed today, both in terms of the rights of emerging nations to rival the established powers’ military capabilities (notably with regard to nuclear weapons), and in terms of the strategic importance to countries like China of ready access to oil supplies and other natural resources."

Given the overwhelming military superiority of the USA, I don't see any country challenging the existing global economic system through military means anytime soon. Saddam Hussein's invasion of Kuwait was just such a challenge in that Hussein made a grab for oil resources, daring the world to do something about it, and the US quashed that. The costs of military action to acquire resources would be too great to justify the economic gains from attaining control of said resources.

The Fed and its prime dealers

2008-03-11T21:50:00.003-06:00

I don't see what the problem is with letting one of the Fed's 20 prime dealers fail (e.g. BSC). Other companies could and have stepped in before. Wikipedia's article Primary dealers is well worth a read. A couple of interesting bits from that:

-"Primary dealers are banks or securities broker-dealers who may trade directly with the Federal Reserve System of the United States.[1] They are required to make bids or offers when the Fed conducts open market operations, provide information to the Fed's open market trading desk, and to actively participate in U.S. Treasury securities auctions"...

-"all of the top ten dealers in the foreign exchange market are also primary dealers, and between them account for almost 73% of forex trading volume"...

-the list of dealers as of Nov 2007:
* BNP Paribas Securities Corp.
* Banc of America Securities LLC
* Barclays Capital Inc.
* Bear, Stearns & Co., Inc.
* Cantor Fitzgerald & Co.
* Citigroup Global Markets Inc.
* Countrywide Securities Corporation[1]
* Credit Suisse Securities (USA) LLC
* Daiwa Securities America Inc.
* Deutsche Bank Securities Inc.
* Dresdner Kleinwort Securities LLC.
* Goldman, Sachs & Co.
* Greenwich Capital Markets, Inc.
* HSBC Securities (USA) Inc.
* J. P. Morgan Securities Inc.
* Lehman Brothers Inc.
* Merrill Lynch Government Securities Inc.
* Mizuho Securities Company USA Inc.
* Morgan Stanley & Co. Incorporated
* UBS Securities LLC.

I thought about looking at what the capitalization of each of these dealers was as of the last reporting date, but then realized that that would be futile as such reports are either works of fiction or hopelessly out of date:)

Iraq realizing oil windfall

2008-03-11T12:33:00.003-06:00

Per Yahoo and AP...Iraq faces budget surplus

"Iraq isn't spending much of its own money, despite soaring oil revenues that are pushing the country toward a massive budget surplus, auditors told Congress on Tuesday. The expected surplus comes as the U.S. continues to invest billions of dollars in rebuilding Iraq and faces a financial squeeze domestically because of record oil prices.

"The Iraqis have a budget surplus," said U.S. Comptroller General David Walker. "We have a huge budget deficit. . . . One of the questions is who should be paying."

Good question...

A few more bits from the AP piece:

"The U.S. has spent more than $45 billion on rebuilding Iraq"...

"'In recent months, Iraq experienced its highest oil production and export levels since the war began five years ago', said Stuart Bowen, special inspector general for Iraq reconstruction"...

"Whereas Iraqi officials estimated $35 billion in oil revenues last fall, Bowen said the final number is likely to be closer to $60 billion. 'That certainly gives them resources to carry forward with an extensive reconstruction plan," Bowen said'"...

"according to other U.S. officials, a major problem is that Iraq does not have the capacity to allocate the money without it being wasted or pocketed by corrupt officials"...Well, that should be their problem, not ours...on second thought, perhaps the US should be reimbursed for that $45 billion mentioned in the AP article.

Global wage arbitrage

2008-03-11T11:31:00.002-06:00

With respect to manufacturing, global wage arbitrage has a long way to run. I received an email from In-Stat, a market research company, summarizing a report they are pitching titled "Vietnam Emerging as Key Electronics Manufacturing Base" that states:

"Vietnam is emerging as an important electronics manufacturing destination...Driven by low-cost labor, low-cost operations, favorable government policies, and a strong work ethic, global EMS/ODM companies are increasing their activities in the country. Although Vietnam's current EMS/ODM revenues are just a fraction of China's and much lower than countries like Malaysia or Singapore, the country is experiencing very high growth rates. Aside from EMS/ODM players, Vietnam's high tech manufacturing sector also hosts manufacturing operations of the world's leading OEM companies like Canon, Fujitsu, LG, Samsung, and Sony.

* Semiconductor consumption in Vietnam is projected to grow at a Compound Annual Growth Rate (CAGR) of 23.6% from 2007 to 2012 to reach US$1.9 billion by 2012.
* Computing and consumer electronics accounted for 48.8% and 30.5%, respectively, of total Vietnamese semiconductor consumption in 2007.
* EMS/ODM revenues in Vietnam are expected to grow at a CAGR of 63.1% from 2007 to 2012 to reach US$1.5 billion by 2012."

The way it looks to me is that companies that were relying on China for low cost labor are shifting to other countries rather than further into China's labor pool. In any case, we here in the US need to increase our productivity if we want to see real wage increases. There are a lot of folks throughout the world who are willing to work for a lot less to do the same old, same old kind of jobs.

Musings on Japan's industrial economic performance

2008-02-29T09:32:00.004-07:00

Over at Japan Economy Watch, Edward Hugh has been supplying readers with copious amounts of data on the performance of the Japanese economy. Recently, he provides us with a chart of Japan's industrial production index for the last couple of years:
Just eyeballing the trend line for the last six months of the industrial production index shows essentially a flatline to me. One could make an argument that on a per capita basis these results aren't too bad since due to Japan's demographics output doesn't necessarily have show positive growth to maintain standard of living for a growing population.

Interestingly, the industrial production index hovered around the 108 mark for the first seven months of 2007 and then the trendline I mentioned above is at about 111; coincidentally jumping up to that level in the same month that the credit crunch hit the USA in full force. I wonder what connection there might be.

The existence of an "Anglosphere"

2008-02-09T01:15:00.000-07:00

An individual named James C. Bennett has apparently written a book titled The Anglosphere Challenge, the thesis of which has been described as follows:

"the peculiar island history of England produced a set of institutions that other advanced nations in Europe and Asia lacked--the common law, respect for private property, continuous representative government, a culture that nurtures civil society and entrepreneurial enterprise. It is thus no accident that the Anglosphere has excelled in innovation and economic growth and, Bennett believes, will continue to do so."

I haven't read the book yet, but I agree with the thesis based on what I know about the subject.

Immigrants and fertility

2008-02-09T00:16:00.000-07:00

In a thread on Fertility Trends in Europe...commenter Randy says

"it's worth noting that immigrant fertility worldwide, but particularly in the United States and France, might be biased upwards by provisions in nationality laws which grant citizenship to children born in a country, as a manifestation of the jus soli principle. This principle is still intact in American nationality law, less so in French nationality law since 1992 reforms. If one wants to remain in a country with a jus soli citizenship law, why not become a parent and count on not being separated from your citizen child? This incentive won't exist in later generations."

Excellent point!

Spain at a crossroads

2008-02-08T23:05:00.000-07:00

Over at Bonobo Land, Edward Hugh has an excellent post describing the Spanish economic outlook at this point. The country has a housing oversupply proportionally greater than that of the US market. Edward suggests that Spain today is at the point where Japan was back in 1990 when that country's property bubble sprang a leak.

It appears to me that Edward is on the same page with Fed Chairman Bernanke regarding the value of quick rate cuts in mitigating the effects of a real estate bust. The discussion threads I read at some US blogs have a lot of folks worrying that the Fed is unleashing inevitable inflation through its recent actions. Nobody is bringing up the Japanese case; perhaps its a situation of domestic blinders. I think I am leaning towards agreeing that the rate cuts are appropriate.

Edward mentions that Spain has room for substantial fiscal stimulus and points to Japanese efforts at the same. My view of Japan's attempts at fiscal stimulus in the 1990's is that it was poorly managed. Much of the cash went to construction projects that really added no value to transportation infrastructure; and due to the corruption in Japan's construction sector (bid-rigging) a material chunk of said cash was siphoned off. The stimulus packages would have been better if they were directed towards research in areas such as biotechnology or pharmaceuticals, or even alternative energy sources. Doing this would have at least provided the chance of generating groundbreaking technology. Instead Japan built bullet trains to nowhere and bought the Olympic Games.

This is where Spain can do it right. Spend the fiscal stimulus on educating its workers and building world class research universities. Building a meaningfully sized military would be a diversification, and would give Spain some clout in global security issues. Plus technical spinoffs from military development can be turned into cash-generating exports.

Counterintuitive data regarding US consumer spending on gasoline

2008-01-16T12:51:00.000-07:00

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.

Yen versus Dollar

2008-01-15T13:33:00.000-07:00

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.

US demography as of 2007

2008-01-13T01:43:00.000-07:00

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

2008-01-13T01:11:00.000-07:00

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.

Hungry in Hungary?

2008-01-10T16:46:00.000-07:00

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.

No Bid

2007-11-30T22:32:00.000-07:00

With respect to CDOs, naked capitalism describes them as “so arcane, so complex, and so highly differentiated on so many axes that one is likely to need to have a large number of CDOs trading to capture enough permutations to allow for realistic pricing.” For example, “underlying assets (they can contain any tranche of asset backed securities, other CDOs or even CDOs of CDOs, whole loans, mortgages), degree of credit enhancement (whether via overcollateralization or the use of guarantees), leverage, use of synthetics. As a result, the maturity of the deals vary, and the structures used to achieve the desired credit ratings are all over the map.”

In addition, NC says that “you can't get the deal documents.” Here’s his backup for that assertion: In "Where Did the Risk Go? How Misapplied Bond Ratings Cause Mortgage Backed Securities and Collateralized Debt Obligation Market Disruptions," by Joshua Rosner and Joseph Mason (pages 83-4) the authors state that “At present, even financial regulators are hampered by the opacity of over-the-counter CDO and MBS markets, where only “qualified investors” may peruse the deal documents and performance reports. Currently none of the bank regulatory agencies (OCC, Federal Reserve, or FDIC) are deemed “qualified investors.” Even after that designation, however, those regulators must receive permission from each issuer to view their deal performance data and prospectus in order to monitor the sector.”

That is an absurd state of affairs. NC’s logical conclusion is that “if regulators can't get the description of the securities, market participants certainly won't.” No wonder there is little to no bid for these securities. Adding to the confusion is the fact that “many CDOs are "active" or "managed" CDOs, meaning blind pools…That means the investors pony up money before the fund…is formed, and the manager gets to trade it over its three to five year life. No CDO manager is going to disclose his holdings (it would put him at a competitive disadvantage) but how can you value it otherwise?” So many of these CDO’s are essentially opaque mutual funds, not all that different from the garden variety scam where a promoter offers great returns on your money on something like diamond mines in Argentina but you can’t ask what they’re actually doing with your money.

So now that the values of assets making up some CDOs have collapsed, investors want to know what’s in all the other ones they’ve bought into and are discovering how opaque these things really are. So no one wants to buy unless they can see what they’re buying, and if CDO managers aren’t giving in on the disclosure issue no one is going to be making any offers. It would be like buying a used car just from an ad in the newspaper without going to inspect the vehicle at the lot. Now that this has all come to light, situations like the one described at Florida Schools Hit by Fund Freeze are going to appear everywhere. Managers of public funds aren't going to be going anywhere near this type of investment.

A different kind of credit cycle

2007-11-27T22:08:00.000-07:00

Back in June, the following comment(slightly edited by me) was posted to a thread at Calculated Risk:

“A tougher market for LBO bonds/CLO's means less bank capacity(investment or commercial?) for additional lending, which means less deals. All this should remind us why this cycle is so different: the marginal dollar of credit is coming from levered lenders with concentrated portfolios and unstable sources of funding, or from "non-natural" buyers such as the hand-over-fist Chinese buying of Agencies. The nature of these creditors is that their provision of credit is a) correlated with one another and b) highly variable.

And yet we continue to compare this cycle to 2001, 1998, 1991, and 1981.

They are as different from today as chalk and cheese. It’s not about assets, it’s about how they are funded. We should prepare to see a different type of credit cycle, perhaps more similar to the "Golden Age" late 1800's downturns we experienced before the advent of regulated financial institutions.” David Pearson | 06.27.07 - 1:44 pm | #

I agree with Pearson’s conclusion that this credit cycle will be different than any in the US since the establishment of the Federal Reserve system. None of the crises that Pearson mentions were brought about by asset overvaluations based on issuance of CDOs. According to the July 2007 issue of Bloomberg magazine, “Worldwide sales of CDOs—which are packages of securities backed by bonds, mortgages and other loans—have soared since 2003, reaching $503 billion last year, a fivefold increase in four years..” One aspect of CDO issuance is that these securities were designed so that illiquidity and low transparency were selling points; i.e. the risk due to those two factors implied that yields would naturally be higher than traditional asset classes. Given that in the post dot com bust recovery most asset classes were providing relatively low yields, the popularity of CDOs is not surprising. Of course, very few were paying much attention to what might happen should these investments run into trouble. People were ignoring the risk side of the risk-return equation.

Pearson comments a couple of days later at Calculated Risk along these lines…

”I believe the opacity is very much by design, and that these securities are a direct analog to Enron's opaque "Special-Purpose Entities". The hedgies need securities which they can "mark to model" (again like Enron) so as to support claims of huge short-term profits from which to take their 20% cut.”

I don’t think there is any question that hedge funds have been a primary target market for securitizers. However, I believe that just about every type of investment vehicle out there has purchased some type of CDO during this boom.

To elaborate on Pearson’s comment above that this credit cycle will be similar to those that occurred pre-Federal Reserve, there is no regulatory agency in the US with the specific ability to manage debt securitization activity. One of the Fed’s purposes was to reduce the volatility of business cycles by regulating the creation of credit. Now that a major portion of credit creation has been occurring outside the control of the Fed, we have seen a massive explosion of credit and are likely to now see a massive implosion of credit.

Trends in land use and attitudes regarding the same in Europe

2007-11-27T22:04:00.000-07:00

Newsweek International posted a story this summer to its website from its July 4, 2007 issue with a summary line as follows: “Economics and declining birthrates are pushing large swaths of Europe back to their primeval state, with wolves taking the place of people.” The article describes a trend in Europe’s rural areas of “ultralow birthrate(s) and continued rural flight”…to the extent that “rural flight continues to suck people into Europe's suburbs and cities.” The UN and EU are quoted to the effect that by 2030 the rural areas of the EU 25 “will lose close to a third of its population.”

The article describes some examples of changes in wildlife populations:

“In 1998, a pack of wolves crossed the shallow Neisse River on the Polish-German border. In the empty landscape of Eastern Saxony, speckled with abandoned strip mines and declining villages, the wolves found plenty of deer and rarely encountered humans. They multiplied so quickly that a second pack has since split off, colonizing a second-growth pine forest 30 kilometers further west.”

“In Swiss alpine valleys, farms have been receding and forests are growing back in. In parts of France and Germany, wildcats and ospreys have re-established their range.”

Bizarrely, some environmental groups in Europe don’t want farmland to revert to a wild state. The article claims that “The scrub brush and forest that grows on abandoned land might be good for deer and wolves, but is vastly less species-rich than traditional farming, with its pastures, ponds and hedges”, and quotes Jan-Erik Petersen, a landscape biologist at the European Environmental Agency in Copenhagen as saying that "Once shrubs cover everything, you lose the meadow habitat. All the flowers, herbs, birds and butterflies disappear…a new forest doesn't get diverse until it's a couple of hundred years old." Such ideas seem to contradict the goals of environmental groups in the US which as far as I can tell seek to allow farmland to revert to a natural state. I doubt that there is meaningful research that supports Petersen’s assertion.

The article states that ‘Keeping biodiversity up by preventing the land from going wild is one of the reasons the EU pays farmers to mow fallow land once a year. France and Germany subsidize sheep herds whose grazing keeps scenic heaths from growing in.” That seems absurd to me. The article goes on to say that “Outside the range of these subsidies—in Bulgaria, Romania or Ukraine—big tracts of land are returning to the wild.” I seriously doubt that biodiversity will be a problem in these areas.

The article describes an attitude toward the landscape such that it “is glued to the European identity, reflecting what the Germans call "Kulturlandschaft"—a landscape shaped by centuries of human care”, and says that “Many Europeans are reluctant to just let nature do its thing.” This attitude doesn’t seem to square with the seeming momentum of Europe’s Green movement, and certainly has received very little attention in the US.

US gasoline prices have hit a wall

2007-11-09T12:15:00.000-07:00

I found the news that oil refiners' margins have been squeezed by the high crude oil prices to be quite remarkable; typically I think it has been safe to assume that crude price increases were immediately passed on to the gas pump. As Calculated Risk points out, the implication is that domestic gasoline demand is weak. Another way to say it is that gasoline has reached a price point where US users either limit their use or find a substitute. I don't have hard data at my fingertips, but I believe that businesses have been a strong driver of finding ways to limit or reduce gasoline consumption. It is interesting to know that gasoline prices can't just spiral to the stratosphere. Here is a chart of US gasoline prices posted 11-7-2007 by the US Energy Information Administration:

Black Tuesday?

2007-11-06T16:44:00.000-07:00

General Motors has dropped a $39 billion bomb described here: by my calculations that puts the company's stockholder equity in the range of -$43 billion. We'll see what the actual number is tomorrow. It must have taken a long time for GM's executives to swallow making this move; usually it is the accountants that push for writedowns like this and they typically don't have much sway. Maybe GM's accounting firm was threatening to quit.

This link points to a Bloomberg story posted at 2 PM Eastern today that "Japan's Leading Economic Index Drops to Decade-Low 0". The explanation in the story states that "A reading of below 50 indicates the economy may slow in three to six months"..now the actual reading was ZERO! So Japan's economy is literally going nowhere. I had assumed on seeing the news item about this index that the result of zero was due to an equal number of positive versus negative components. That is not the case...if you follow the link in this post you will see that every single available component was negative. So the headline number is a bit misleading if you are not familiar with the details of how the index is calculated. It's hard to see how Japan can avoid a recessionary 4th quarter.

Meanwhile, " The U.S. doesn't have enough information to predict the outcome of events in Pakistan or whether President Pervez Musharraf can hold on to power, according to a Bush administration official." So the US's primary partner in restraining Islamic militants in south Asia is teetering on the brink of political collapse. It's hard to say whether this crisis will lead to increased insurgency in Afghanistan as Pakistan's military is focused on events in its own capital; or whether the insurgents focus on Pakistan themselves to try and help topple Musharraf. I think it's safe to say that there are more than a few people in Washington not getting a lot of sleep at the moment.

US dollar now upside down vs Canadian dollar

2007-10-31T13:16:00.000-06:00

Take a look at these two charts borrowed from Yahoo Finance:

This is noteworthy as Canada is one of the USA's largest trading partners and this exchange rate reversal is a first for the USD versus the Canadian dollar. The strength of the Canadian dollar has likely driven up US exports to Canada in the third quarter GDP number that was just reported.

I see the Fed's cuts as making sense primarily in terms of helping banks' cash margins by widening the spread on loans they have outstanding that aren't in default. Banks that might be on the edge of solvency could be pulled back from the brink of receivership depending on their size.

Even though the Fed Funds rate has been lowered, there's still the issue in the interbank market of counterparty risk. I don't recall if it was the Fed Funds rate or LIBOR but recently one day's intraday data showed a high of 15%. So there are still confidence issues.

I could see the Fed raising by a quarter point by the end of the year depending on what happens with GDP. I think Trichet of the EU still needs to raise given the data that Claus Vistesen points out over at Alpha Sources.

Recent market trends

2007-10-23T00:19:00.000-06:00

My interpretation of these three indexes is that many investors shifted cash from credit markets to equities due to the crunch and now are recognizing that equities will suffer due to economic slowing in the US and the effects of tighter credit on net income for public companies. Also, even though foreign buyers may be reducing their purchases of Treasuries, domestic demand for same has increased due to the desire to shift cash to the least risky investment.

Housing collapse hits Portland, OR

2007-10-09T14:00:00.000-06:00

The link to the Portland Oregonian describes how

"Today, the John Ross has seen so many canceled purchases that developers actually have fewer buyers -- 192 -- than they did two years ago.
The John Ross got caught in the first slowdown after a historic run-up in condo construction that has reshaped Portland's skyline. For the first time, Portland's condo pioneers are suffering through an inevitable downturn.
The city has a condo glut, and thousands more are rising out of the ground. In the past six years, developers built 4,042 downtown condos, more than twice the figure from the previous 30 years. Today, developers have nearly 2,114 condos under construction. '

So much for the "it's different here" view pushed by so many city boosters. The article elaborates that "Two towers already switched from condos to apartments. Other projects were shelved, and construction has stalled on smaller projects from Beaverton to Northeast Portland"...

Can China avoid becoming the next Japan?

2007-10-02T14:52:00.000-06:00

Brad Setser recently tipped readers to commentary by from Stephen Jen of Morgan Stanley as follows:

"Many in China have concluded that the blame for Japan's economic malaise in the 1990s lay largely with the appreciation of the yen. Beijing has therefore allowed the yuan to rise by only 10% since July 2005. But Japan's real mistake was its loose monetary policy to offset the impact of the rising yen—which further inflated the bubble—and then its failure to ease policy once the bust had happened. By holding down the value of the yuan and allowing a consequent build-up of excess liquidity, China risks repeating the same error."

I think Jen has the right idea here and gets to the heart of the problem that both China and Japan are in: they are caught between the Scylla of export decreases and hence negative GDP growth and the Charybdis of domestic inflation fueled by the desire for positive growth. You'll recall that in the early 1980's the US was in a somewhat similar situation with galloping inflation and due to a unique pair of strong leaders in Ronald Reagan and Paul Volcker, the political will existed to take the harsh economic medicine necessary to control inflation. I believe that Americans bought into that because President Reagan projected a strong sense of optimism about America's future and that absorbing problems in the short term would lead to long-term prosperity. Which I think has been borne out by subsequent American history.

This relates to the China vs Japan policy problem in that "Japan's real mistake" was the unwillingness to reign in monetary policy because it benefited vested interests. Which has led Japan to the fix it is in now. China needs to do something different or it will repeat the same error. The main wild-card for China is that taking the necessary economic medicine could lead to serious social instability.

Setser's stand-in over at RGE in recent weeks, Michael Pettis, has a very worthwhile post commenting that "It is hard to overestimate the importance to China's near-term and longer-term prospects of the 17^th Plenum in two weeks. These meetings, held every five years, are the main events of China’s political cycles"...Pettis further comments that

"the months leading to the congress are rife with factional infighting, sweetheart deals, attacks on frontrunners, corruption scandals, and the all-important maneuvering for promotion. Unfortunately, on the assumption that that any serious contender must at all costs avoid doing anything that may give rise to criticism before the promotions are decided, the period before the meetings tends to be a time in which very little, no matter how urgent, gets done"...

Commercial real estate appears to be in same quagmire as residential

2007-09-05T10:56:00.000-06:00

Calculated Risk has several good posts on this, but today CR pointed out a Bloomberg piece with the following quote:

U.S. commercial real estate prices may fall as much as 15 percent over the next year in the broadest decline since the 2001 recession as rising borrowing costs force property owners to accept less or postpone sales. ``People aren't willing to do deals right now,'' said Howard Michaels, the New York-based chairman of Carlton Advisory Services Inc., ... ``The expectation is that prices will come down.'' Investors in July bought the fewest commercial properties since August 2006 and apartment building acquisitions were down 50 percent from June, data compiled by industry consultants at New York-based Real Capital Analytics Inc. show. ...``There are so many deals falling apart,'' said David Lichtenstein, chief executive officer of Lakewood, New Jersey- based Lightstone Group, an owner of more than 20,000 apartments and 30 million square feet of office and retail space. ``People who can get out are getting out.''

I added some bold highlights...it appears to me that the loosening of lending standards took place in CRE as well as in residential; not a big surprise there. So it makes sense that CRE would be grossly overvalued now that credit is tight. It seems a bit surprising that apartment acquisitions would be down as there are a lot of people who are going to be foreclosed out of or forced to sell their homes and therefore will be looking for rentals.

US gas prices at the pump not going down much anytime soon

2007-08-29T13:25:00.000-06:00

According to the US government agency in charge of keeping track of such things, as of this week
Apparently, prices have gone down recently: "The average retail gasoline price is down 47 cents per gallon since its peak the week before Memorial Day"...but "with gasoline demand set to fall significantly after Labor Day, the low level of inventories is not likely to cause a sharp spike in retail prices, but more likely will limit the usual seasonal decline seen after Labor Day, with the possibility remaining of an atypical slight increase over the next few weeks."

Gasoline prices in the US didn't keep up with inflation for many years; and it was uneconomic for oil companies to build new refineries as a result. As a result, we can expect that the days of gasoline for less than $2 per gallon are gone for a long time.

The Panic of 2007

2007-08-28T10:16:00.000-06:00

seems an appropriate phrase to describe the market volatility that has hit global markets late this summer. Calculated Risk compares today's issues with the "Panic of 1907", and M. Shedlock has a post up today titled If You're Going To Panic, Do So Before Everyone Else...also see my earlier post A Genuine Financial Crisis for some examples of panic that have occurred in the last few weeks...