Usually a steep yield curve precedes a period of decent growth, but several analysts suggest the current ten year sell-off is due to concerns about increased Treasury issuance to finance the deficit. Whatever the reason, this is a challenge for the Fed to keep mortgage rates low.
Thursday, May 28, 2009
Steepest yield curve ever
Wednesday, May 27, 2009
With budget deficits soaring and President Obama pushing a trillion-dollar-plus expansion of health coverage, some Washington policymakers are taking a fresh look at a money-making idea long considered politically taboo: a national sales tax.
Common around the world, including in Europe, such a tax -- called a value-added tax, or VAT -- has not been seriously considered in the United States. But advocates say few other options can generate the kind of money the nation will need to avert fiscal calamity.
Rational decision making has met its match
Is she against benefits, costs, or subtraction?
...she wrote the opinion in one big environmental case—one the Supreme Court just overturned.
In 2007, ...in Riverkeeper vs. EPA, she argued that the EPA can’t weigh costs and benefits in deciding what the “best technology” is for protecting fish that get sucked into power plants.
Where MBAs Want to Work
- Bain & Co.
- Goldman Sachs
- Boston Consulting Group
- J.P. Morgan
- Johnson & Johnson
Tuesday, May 26, 2009
Driving away high earners, II
Note that there is another interpretation for these data: no one moved out of state, but there are fewer millionaires due to the downturn.
Maryland couldn't balance its budget last year, so the state ... created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O'Malley, ... declared that these richest 0.3% of filers were "willing and able to pay their fair share." The Baltimore Sun predicted the rich would "grin and bear it."
One year later, nobody's grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller's office concedes is a "substantial decline." On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year -- even at higher rates.
What do billable hours have in common with Chrysler dealers?
Its new model guarantees to cover advertising agencies’ costs, plus a bonus of up to 30%. The bonus depends on a number of metrics, including the agency’s overall performance, and the sales and market share of the products being advertised. Coke insists that its aim is not to cut costs but to inspire creativity and efficiency. Procter & Gamble, a consumer-goods giant which has also ditched hourly fees in favour of performance-related fees for 12 of its brands, says the same thing.Are accounting and law firms next?
Exam question: will Chrysler or GM dealers cut you a better deal?
Automotive News reports that ... GMAC has one set of rules for Chrysler dealers, another for GM’s. “Chrysler dealers must make monthly payments totaling 10 percent of the original outstanding balance on new vehicles that have been sitting on the dealership lot at least a year. [Plus a $25 "surcharge" per year-or-older car.] By contrast, GM dealers make monthly payments totaling 10 percent of the original balance on new vehicles that have sat on dealership lots at least 18 months. [Plus a $15 "surcharge" per year-or-older car.] Hey! Not fair! “And GMAC will finance just 80 percent of the purchase price when Chrysler dealers buy used vehicles at auction, compared with 100 percent for GM dealers.” Double not fair! GMAC’s reasoning (or lack thereof) after the jump.
Extra credit: in the long run, will more Chrysler or GM dealers survive?
Is there any air left in the housing bubble, II
Economists try to identify bubbles (prices not explained as the product of trading by rational, self interested actors) by looking at long run equilibrium relationships. For example, in long-run equilibrium, consumers should be indifferent between renting and buying.
Looking at the price-to-rent ratio based on the Case-Shiller index, the adjustment in the price-to-rent ratio is maybe 85% complete as of Q1 2009 on a national basis. This ratio will probably continue to decline.
New and noteworthy
When the markets closed last Friday, the cost of buying 1,000 shares of Citigroup in these three ways were (using price quotes from Yahoo and ignoring transaction costs):
Note: The preferred calculation is based on the Series F; other preferreds give slightly different values. The synthetic is based on options that mature in September 2009 with a strike price of $4.
What’s going on here? Why does it appear that investors in the common stock are overpaying by as much as 20%?
Should we worry about the dollar?
The US dollar fell to its lowest level of the year against major currencies last week. Treasury yields spiked to six-month highs as investors focused on the willingness of creditors to fund a deficit that was expected to be about 13 per cent of GDP this year.
Sunday, May 24, 2009
Saturday, May 23, 2009
Prelude to unpopular change?
OBAMA: Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we've made on health care so far. This is a consequence of the crisis that we've seen and in fact our failure to make some good decisions on health care over the last several decades.I am guessing nationalized health care, and then tax increases to pay for it.
Friday, May 22, 2009
Where has the risk gone? (TED spread)
The TED Spread (between risk free treasury bonds and the rate that banks charge for short term loans to each other) is down to 45 basis points (0.45%).
Hang on to your gas guzzlers...
Instead of letting the consumers decide how to respond to higher gas taxes with a mix of conservation, public transport, choice of smaller vehicles, or moving closer to work, the Obama Administration is getting into the car design business:
Instead of the simplest, most obvious and least expensive way of achieving that end - raising the national excise tax on petrol - the president was again relying on a complex, dirigiste intervention. ...
The basic problem with the CAFE standards is that, rather than altering patterns of demand, they attempt to ration supply. This flaw is exacerbated by the divide in the rules between standards for "cars" and for "light trucks", which Detroit has ingeniously exploited.
Apparently, we aren't quite through with junk (social) science.
The conventional wisdom is that Americans like big vehicles and not much can be done about it, but the evidence is that they behave much like other consumers. When the oil price rose sharply last year, sales of light trucks collapsed and demand for hybrid petrol/electric cars rose. As it fell again, the old patterns returned.Where are the administration's economists when we need them?
Thursday, May 21, 2009
Deleveraging may take a long time
Going forward, it seems probable that many U.S. households will reduce their debt. If accomplished through increased saving, the deleveraging process could result in a substantial and prolonged slowdown in consumer spending relative to pre-recession growth rates. Alternatively, if accomplished through some form of default on existing debt, such as real estate short sales, foreclosures, or bankruptcy, deleveraging could involve significant costs for consumers, including tax liabilities on forgiven debt, legal fees, and lower credit scores. Moreover, this form of deleveraging would simply shift the problem onto banks that hold these loans as assets on their balance sheets. Either way, the process of household deleveraging will not be painless.
It’s amazing to me how many people think that voting to have the government give poor people money is compassion. Helping poor and suffering people yourself is compassion. Voting for our government to use guns to give money to help poor and suffering people is immoral self-righteous bullying laziness. ...
I’m a Libertarian nut because I don’t want my government to do anything in my name that I wouldn’t do myself.
Rep. Alan Grayson was standing in the middle of Disney World when it hit him: What Americans really need is a week of paid vacation.
So on Thursday, the Florida Democrat will introduce the Paid Vacation Act — legislation that would be the first to make paid vacation time a requirement under federal law.
Did de-regulation cause the financial meltdown?
...It is indeed impressive how rapidly the economists who failed to predict this crisis — or predicted the wrong crisis (a dollar crash) — have been able to produce such a satisfying story about its origins. Yes, it was all the fault of deregulation.There are just three problems with this story.
- deregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980). If deregulation is to blame for the recession that began in December 2007, presumably it should also get some of the credit for the intervening growth.
- the much greater financial regulation of the 1970s failed to prevent the United States from suffering not only double-digit inflation in that decade but also a recession (between 1973 and 1975) every bit as severe and protracted as the one we’re in now.
- the continental Europeans — who supposedly have much better-regulated financial sectors than the United States — have even worse problems in their banking sector than we do. The German government likes to wag its finger disapprovingly at the “Anglo Saxon” financial model, but last year average bank leverage was four times higher in Germany than in the United States. Schadenfreude will be in order when the German banking crisis strikes.
One more time...HELP!
By 2019, the ratio of publicly held federal debt to gross domestic product (GDP, or the economy) would reach 70 percent, up from 41 percent in 2008. That would be the highest since 1950 (80 percent)....
Except from crabby Republicans, these astonishing numbers have received little attention -- a tribute to Obama's Zen-like capacity to discourage serious criticism. Everyone's fixated on the present economic crisis, which explains and justifies big deficits (lost revenues, anti-recession spending) for a few years. Hardly anyone notes that huge deficits continue indefinitely. ...
Consider the extra debt as a proxy for political evasion. The president doesn't want to confront Americans with choices between lower spending and higher taxes -- or, given the existing deficits, perhaps less spending and more taxes. Except for talk, Obama hasn't done anything to reduce the expense of retiring baby boomers. He claims to be containing overall health costs, but he's actually proposing more government spending (see above).
So what's going to happen?
At best, the rising cost of the debt would intensify pressures to increase taxes, cut spending -- or create bigger, unsustainable deficits. ...
At worst, the burgeoning debt could trigger a future financial crisis. The danger is that "we won't be able to sell it (Treasury debt) at reasonable interest rates," says economist Rudy Penner, head of the CBO from 1983 to 1987. ...
Wednesday, May 20, 2009
Driving Away High Earners
According to this article from the WSJ, we're seeing a similar effect with individual states raising tax rates on high-income individuals.
Here's the problem for states that want to pry more money out of the wallets of rich people. It never works because people, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states.
And the evidence that we discovered in our new study for the American Legislative Exchange Council, "Rich States, Poor States," published in March, shows that Americans are more sensitive to high taxes than ever before. The tax differential between low-tax and high-tax states is widening, meaning that a relocation from high-tax California or Ohio, to no-income tax Texas or Tennessee, is all the more financially profitable both in terms of lower tax bills and more job opportunities.
Updating some research from Richard Vedder of Ohio University, we found that from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.
Monday, May 18, 2009
How Big is the Equity Risk Premium?
The average Market Risk Premium (MRP) used in 2008 by professors in the USA (6.3%) was higher than the one used by their colleagues in Europe (5.3%). We also report statistics for 18 countries: the average MRP used in 2008 ranges from 4.1% (Belgium) to 10.5% (India).
The dispersion of the MRP used was high: the average MRP used by professors of the same institution range was 3.5% and the one of the same country was 6.9%.
The average MRP used in 2007 was 1.5% lower than the one used in 2000. 15% of the professors decreased their MRP in 2008 (1.5% on average) and 24% increased it (2% on average). 66% of the professors used a lower MRP in 2007 than in 2000 (22% used a higher one).
Most surveys have been interested in the Expected MRP, but this survey asks about the Required MRP. The paper also contains the references that professors use to justify their MRP, and comments from 180 professors that illustrate the various interpretations of what is the required MRP and explain the confusion of students and practitioners about its concept and magnitude.
We also report 416 answers from the field: the average MRP used by European Companies in 2008 was 6.4%.
Sunday, May 17, 2009
Where are the blue dogs, just when we need them?
Saturday, May 16, 2009
The next big crisis
You can see it if you look at the growing number of older Americans who have kept working into their 60s and 70s or gone back into the work force. Without a dramatic change not just in the amount of money that we save but in how we save, it will get much worse. In the 1980s, Britain launched what turned out to be a disastrous experiment in asking people to take responsibility for their retirement investments without giving them the tools to do it. We're now well on our way to repeating it on a much bigger scale.
Without it, we're facing a one-two punch in the retirement future. The left hook is the shortage of savings. The right hook is the added investment and longevity risk that the new model of retirement brings. It's a potential disaster as big as the mortgage and credit crisis. And as with those, if we get to it, folks in finance will be out in force, crying that nobody could possibly have seen it coming. That's just not true.
How many times do we have to repeat this until someone listens?
...taxpayers are on the hook for Social Security and Medicare by these amounts: Social Security, 1.3% of GDP; Medicare part A, 2.8% of GDP; Medicare part B, 2.8% of GDP; and Medicare part D, 1.2% of GDP. This adds up to 8.1% of GDP. Thus federal income taxes for every taxpayer would have to rise by roughly 81% to pay all of the benefits promised by these programs under current law over and above the payroll tax.
Unless of course you think that our economy can sustain an 81% federal tax increase.
Friday, May 15, 2009
Long term interest rates rising
Academics differ about just how much bigger budget deficits and higher public debt affect interest rates, but most agree that they do. A 2004 study suggests that interest rates rise by 0.03% for every 1% increase in the debt/GDP ratio. That ratio is set to rise by 30 percentage points between 2008 and 2011, which implies a 1% higher risk-free interest rate, and commensurately lower private-sector investment. Even if higher private saving blunts the effect, some crowding out is eventually all too likely.
Canada returns fire
Ordered by Congress to "buy American" when spending money from the $787 billion stimulus package, the town of Peru, Ind., stunned its Canadian supplier by rejecting sewage pumps made outside of Toronto. After a Navy official spotted Canadian pipe fittings in a construction project at Camp Pendleton, Calif., they were hauled out of the ground and replaced with American versions. In recent weeks, other Canadian manufacturers doing business with U.S. state and local governments say they have been besieged with requests to sign affidavits pledging that they will only supply materials made in the USA.
...This week, the Canadians fired back. A number of Ontario towns, with a collective population of nearly 500,000, retaliated with measures effectively barring U.S. companies from their municipal contracts -- the first shot in a larger campaign that could shut U.S. companies out of billions of dollars worth of Canadian projects.
This is not your father's trade war, a tit-for-tat over champagne or cheese. With countries worldwide desperately trying to keep and create jobs in the midst of a global recession, the spat between the United States and its normally friendly northern neighbor underscores what is emerging as the biggest threat to open commerce during the economic crisis.
If it can do this to Samoa...
As President Obama considers whether to fulfill his campaign promise to raise the minimum wage from $7.25 to $9.50 per hour by 2011, there’s no better illustration of the consequences of well-intentioned policy-making than recent events in American Samoa, a United States territory in the South Pacific that falls within the purview of Congress.
Chicken of the Sea, the tuna company, announced this month that it will close its canning plant in American Samoa in September. The culprit is 2007 legislation in Washington that gradually increased the islands’ minimum wage until it reaches $7.25 an hour in July 2009, almost double the 2007 levels. ...
Chicken of the Sea will lay off 2,041 employees—12 percent of total employment, almost half of all cannery workers. And the 2,700 workers at StarKist, the other American Samoa tuna canning company and Chicken of the Sea’s rival, are probably concerned that their jobs are the next to go.
Why was Intel fined in the EU, but not the US?
By offering discounts to PC makers for shunning AMD chips, Intel drives down prices -- and hinders competition -- at least in the short run. "If AMD is forced out of business, then Intel may stop giving discounts, leading to consumer harm in the long run," says Froeb. "The EU is content to stop its analysis at the short run -- competitors are harmed -- whereas the US would want to see a good likelihood of long run harm to consumers to bring a case."Academic paper on Ordo liberalism and the difference between the EU and US
Thursday, May 14, 2009
Mugged by reality
After he lost reelection in 1980, McGovern went into the hotel business, which gave him a different perspective on economics and made him an early proponent of tort reform, drawing fire from the era’s best-known consumer advocate: Ralph Nader.
“He really got a more business-oriented view toward life,” said McGovern friend Morris Dees, the co-founder of the Southern Poverty Law Center.
Timeless wisdom from dead white guys and PJ O'Rourke
- Giving money and power to government is like giving whiskey and car keys to teenage boys. -- P.J. O'Rourke, Civil Libertarian
- Government is the great fiction, through which everybody endeavors to live at the expense of everybody else. -- Frederic Bastiat, French Economist (1801-1850)
- Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it. -- Ronald Reagan (1986)
- If you think health care is expensive now, wait until you see what it costs when it's free! -- P.J. O'Rourke
- The inherent vice of capitalism is the unequal sharing of the blessings. The inherent blessing of socialism is the equal sharing of misery. -- Winston Churchill
- The ultimate result of shielding men from the effects of folly is to fill the world with fools. -- Herbert Spencer, English Philosopher (1820-1903)
- A government big enough to give you everything you want, is strong enough to take everything you have. -- Thomas Jefferson
Wednesday, May 13, 2009
Default insurance on US debt is getting expensive
Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default ...
The US government has had a triple A credit rating since 1917, but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.
First, while comprehensive healthcare reform is needed, it must not further harm our nation’s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.
Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.
Bank spreads are way down
Apparently, banks don't see much risk in lending to each other. The spread between Libor (the rate at which banks lend to each other) and Treasuries (proxy for the risk free rate) falls below 1% for the first time in a while.
Another way that the feds reward bad behavior
the bill from the Federal Deposit Insurance Corporation, which is basically an insurance fund underwritten by banks. Last year, DeMotte paid $42,000 into the fund. This year, because of failures in other parts of the country and particularly among national banks, that sum will rise to $500,000 or more.Why not use risk adjusted pricing?
Tuesday, May 12, 2009
Stock market is up by 30% from March lows
Earnings are subpar, Treasury's last auction was a bust because of weak demand, the dollar is suspect, the stimulus is pork, the latest budget projects a $1.84 trillion deficit, the administration is berating investment firms and hedge funds saying "I don't stand with them," California is dead broke, health care may be nationalized, cap and trade will bump electric bills by 30% . . .
Monday, May 11, 2009
Learning How to Test Decisions
Here's an article from the Financial Times that highlights a new class in Chicago's MBA program - "Using Experiments in Firms." The class was taught by economists Steven Levitt (of Freakonomics fame) and John List .
Sunday, May 10, 2009
Why is this so hard to grasp?
PAUL KRUGMAN, who won last year’s Nobel prize in economics for his work on trade, wrote in 1993: “What a country really gains from trade is the ability to import things it wants. Exports are not an objective in and of themselves; the need to export is a burden that a country must bear because its import suppliers are crass enough to demand payment.”
This view does not dominate the public debate. Most are thrilled by the idea of export growth, but cower at the prospect of more imports. Such prejudice certainly prevailed in India in 1991, when the IMF foisted tariff cuts on the economy as one of the conditions attached to a $2.5 billion bail-out package. Pessimists fretted that a flood of imports would destroy Indian industry.
Count on the Brits to tell it like it is
A top Obama fundraiser and hedge fund manager said: "I'm appalled at the anti-Wall Street rhetoric. It was OK on the campaign but now it's the real world. I'm surprised that Obama is turning out to be so left-wing. He's a real class warrior."
Chris Edwards of the Cato Institute, a free enterprise think tank, said Democrats in Congress were unnerved by the president's latest plan to raise $210 billion over 10 years from multinational corporations.The money is needed to pay for a national debt that will double over the next five years; and triple over the next 10 years to $17.3 trillion.
Finally, markets react
The U.S. Treasury auction of long-term bonds on Thursday was “terrible”, in the words of one Wall Street economist, with the rate on the 30 year bond jumping from 4.1 to 4.3 percent.
Friday, May 8, 2009
Add this up
May 8 (Bloomberg) -- President Barack Obama defended the $17 billion in cuts he’s making in a $3.55 trillion budget against criticism from lawmakers by saying any savings, large or small, “add up.”Just fyi, $17B divided by $3.55T equals 0.0048, which is less than one half of one percent.
Meanwhile, the Congressional Blue Dogs, a group known for their opposition to deficit spending during Republican administrations, have fallen silent. Now it is up to the market to restore fiscal discipline.
NEW YORK (AP) — Weak demand at a Treasury bond auction touched off worries in the stock market Thursday about the government's ability to raise funds to fight the recession.
The government had to pay greater interest than expected in a sale of 30-year Treasurys. That is worrisome to traders because it could signal that it will become harder for Washington to finance its ambitious economic recovery plans. The higher interest rates also could push up costs for borrowing in areas like mortgages.
Thursday, May 7, 2009
Best Characterization of the Crisis I have seen
Tuesday, May 5, 2009
Iowa still has the first primary caucus, but...
WASHINGTON (AP) -- President Barack Obama's commitment to take on climate change and put science over politics is about to be tested as his administration faces a politically sensitive question about the widespread use of ethanol: Does it help or hurt the fight against global warming?...
Environmentalists, citing various studies and scientific papers, say the agency must factor in more than just the direct, heat-trapping pollution from ethanol and its production. They also point to "indirect" impacts on global warming from worldwide changes in land use, including climate-threatening deforestation, as land is cleared to plant corn or other ethanol crops.
Latest from Nashville's own Merle Hazard
See Merle's conversation with John Taylor that inspired the song.
Monday, May 4, 2009
Dawn of a new investment era?
If the cannons fired at Ft. Sumter marked the beginning of the war against the Union, then clearly these words [against Chrysler's bondholders] marked the beginning of a war against publicly perceived financial terror.What does this mean for investors?
Risk will not likely be rewarded until the global economy stabilizes and the Obama rules of order are more clearly define
Enforce my contracts, please.
Democrats in congress and President Obama have proposed re-writing existing contracts in two instances: for underwater mortgages and for Chrysler's bondholders.
If the bankruptcy judge decides in favor of President Obama, it is easy to predict an increase in the rates at which creditors will lend to borrowers in unionized industries.
Typically, lenders who make money available to a company in return for a first claim on the company's assets get about 80 cents back for every dollar they lend should it hit the rocks. Others to whom the company owes money, but who have no claim on the assets -- workers, suppliers, junior lenders -- get much less.
Yet Obama forced the senior lenders to take something like 30 cents for every dollar they'd lent Chrysler. Many lenders -- the big banks who'd taken federal bailout money -- rolled over. But some hedge-fund managers pointed out that they have a legal, fiduciary responsibility to do the best they can for their investors (which include pension funds) and decided to take their chances with a bankruptcy judge.
But the issues of criminality and the potential for violence aside, a closer look at the "business model" of piracy reveals that the plan makes economic sense.
"You'll need some speedboats; you'll need some weapons; you also need some intelligence because you can't troll the Indian Ocean, a million square miles, looking for merchant vessels," says Pham, adding that the pirates also need food for the voyage — "a caterer."
Sunday, May 3, 2009
Help make Nashville more efficient
So here's a simple policy proposal to reduce the what economists call the "deadweight loss" of waiting in the taxi queue (because no one benefits from this kind of competition). Have each company take turns dispatching cabs from the airport. If a single company had control of the queue, they would not want their drivers waiting four hours for a fare. Instead the drivers would be sent to higher valued uses, costs would be reduced, and perhaps fares would come down.
If you think that this is a good solution, help our city become more efficient. Call Brian McQuistion, Commission Director, and ask him to make the change.
(615) 862-6777 FAX Line(615) 862-6765
Also, if you can think of problems with this proposal, post a comment.
UPDATE: I called the taxi commission and they insisted it was an airport problem; called the aiport, and no one would answer.
Saturday, May 2, 2009
How does Starbucks respond to increased competition and falling incomes?
As it reported a 77% drop in quarterly profit, the company on Wednesday also said it will adjust its pricing in some markets, raising prices of some of the more complicated drinks, while lowering those on basic drinks. For example, Starbucks will offer a "grande" size iced coffee for less than $2, shaving as much as 45 cents off the price, depending on the market.
The moves come as Starbucks is struggling to attract and retain consumers in a recession. Starbucks said U.S. comparable-store sales fell 8% in its latest quarter as traffic fell 5%, and average transaction totals fell 3%.
Friday, May 1, 2009
Maryland Bans Minimum Pricing Agreements
Under the new state law, retailers doing business in Maryland -- as well as state officials -- can sue manufacturers that impose minimum-pricing agreements. The law also covers transactions in which consumers in Maryland buy goods on the Internet, even when the retailer is based out of state. That could potentially affect manufacturers throughout the country.