Friday, December 19, 2008

Japanese equity markets are not efficient or real

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

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.

Thursday, December 18, 2008

Schumpeter and entrepreneurship

"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...

Monday, December 08, 2008

Modern portfolio theory discredited

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.”

Friday, December 05, 2008

US bankruptcies in 2008

Bankruptcies of 2008 (as reported by
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

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.

Tuesday, November 25, 2008

Thoughts on recent economic affairs

-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.

Tuesday, November 18, 2008

Mark Cuban and insider trading

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...

Wednesday, October 15, 2008

U-6: The Real Unemployment Number

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

I found an interesting link at NakedCap:

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.

Tuesday, September 30, 2008

The credit crunch has gotten through to consumers

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

"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.

Monday, September 29, 2008

Oregon's State Climatologist on global warming

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."

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."

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."

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.'"
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 (, which runs on a state-funded OSU server. It's peppered with criticism of global-warming theories with little rebuttal from the theories' supporters."
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.""
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.""
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."
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
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."
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."
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."
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."
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 ("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."
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."
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.'"
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.

Thursday, September 11, 2008

Distorted oil markets

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."


-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

Tuesday, August 19, 2008

Faulty premise at the heart of credit derivative mathematical model

"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 Paul Wilmott.

Tuesday, August 12, 2008

US trade deficit

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

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.

Wednesday, July 30, 2008

US gas prices and changing driving habits

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.

Friday, July 18, 2008

Possible keys to living longer

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?

Tuesday, July 15, 2008

Oil speculation update

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."

Tuesday, July 08, 2008

Hussman on oil speculation

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

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...

Thursday, July 03, 2008

Commodities trading and leverage

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.

Tuesday, July 01, 2008

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

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.

Monday, June 30, 2008

Apparently China is where commodities hoarding is happening

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

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

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

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.

Friday, June 27, 2008

Oil market speculation

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

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...

Wednesday, June 25, 2008

Thursday, June 19, 2008

FDIC keeps a running list of bank failures

Here: Bank Failures & Assistance

The current list:

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).
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). (
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). (
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). (
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). (

What happens when China reduces oil subsidies?

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.

Thursday, June 12, 2008

How long to live?

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

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..."

Friday, May 30, 2008

Foreign oil demand heavily subsidized

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.

Wednesday, May 21, 2008

It's an outrage

"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!"

Sunday, April 13, 2008

The concept of jubilee

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

"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.

Donald J. Boudreaux"

Friday, April 11, 2008

Global labor arbitrage...again

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."

Friday, March 14, 2008

China and more on global labor arbitrage

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.

Tuesday, March 11, 2008

Economics and politics inevitably linked throughout history

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

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

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

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.

Friday, February 29, 2008

Musings on Japan's industrial economic performance

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.

Saturday, February 09, 2008

The existence of an "Anglosphere"

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.

Friday, February 08, 2008

Immigrants and fertility

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

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.

Wednesday, January 16, 2008

Counterintuitive data regarding US consumer spending on gasoline

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

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