Wednesday, August 31, 2011

I get it... but also, it seems kinda dumb

So this couple has now set a hypermile record 88-times. Hypermiling is a form of driving that maximizes miles per gallon. The couple managed to average 65 mpg over the course of 9,000 miles in a stock Chevy Cruze, and they're out to show the world that lots can be done to maximize your miles per gallon. When they're not busy driving, they're lobbying governments to increase fuel efficiency standards, or they're teaching hypermiling techniques to interested people.

I understand the premise behind this couple's hypermile exploits. Helen and John Taylor (said hypermile record-holding couple) think it would be good for the environment if we all learned to hypermile. But I have to wonder if the two of them have ever paused to think that they're driving unnecessarily when setting their records. And I've got a pretty good feeling that curbing unnecessary driving will do a lot more to help than if we all learned how to hypermile.

Look, I get it. Better fuel efficiency will control runaway greenhouse gas emissions and lobbying governments to raise fuel efficiency standards is probably the biggest and best step we can take. But driving unnecessarily to try to encourage others to drive more efficiently? On balance, that's probably a net negative. And if the Taylors were really serious about saving the planet, I think they could do more good if they drew attention to unnecessary driving. Encouraging people not to hop in the car for a quick trip to a 7/11 that's less than a few miles away, by walking, taking public transit, or riding a bicycle would do more to further their goals.

All they're doing now is adding completely unnecessary pollution to the atmosphere while pointing out that people are adding completely unnecessary pollution to the atmosphere. 

Tuesday, August 30, 2011

Libertarian Hackery

Holy schmoley does the book trailer video to Sylvia Nasar's new book look terrible. Is there anything more blatantly wrong than half of what this trailer espouses? How did Nasar do so well writing A Beautiful Mind but get things so wrong with this book? Now, admittedly, I haven't read it, but do I really have to? The book trailer credits Herbert Hoover for bringing the country out of the Great Depression, and attacks John Maynard Keynes' personal investment mistakes leading up to the Great Depression... mistakes which probably helped him better understand economics and led him to write General Theory.

Where did I find this link? In another awful ESPN article written by Libertarian Hack of the First Order, Gregg Easterbrook. I tried to comment on the article, but my comment was deleted. Which means ESPN / Disney think it's fine for one of their writers to spew nonsensical economic and political comments in an article, but it's not okay for their readers to comment on it.


Tuesday, August 23, 2011

Missing Data

Karl Smith has a post up about the Lesser Depression and why it "feels" different than previous ones. He points out that the loss of jobs, not the loss of real wealth, is the reason this one is so bad. He puts in a bunch of graphs that show that wealth per person, even adjusted for inflation, is higher today than it was during the boom years of the 1990s.

He says:
"The reason this time is so painful is because there is a dearth of jobs, not value... lack of jobs is why everyone feels bad, not because they have less or are poorer..."
Well, there's a missing data set that I think would probably implode Smith's observation and that's the income distribution in this country. We all know the rich have gotten richer, the poor have lost jobs and the middle class has stayed the same. I don't have time to go out and find the full data set for the chart below (hey, the 2010 census results should be up in a year or two) but what do you want to guess we'll see that the 80th percentile and lower groups will have remained flat on their incomes?

When Smith says that everyone feels bad, "... not because they have less or are poorer..." I think he's seriously wrong. Most of us do have less in real dollar terms than we did in 2000, while the rich have a ton more and the poor have no jobs. That's why we feel bad. 

Saturday, August 20, 2011

Journamalism - WSJ Stephen Moore Edition

Stephen Moore writes an op/ed in the WSJ that's one of the most blatant pieces of journamalism (mixed with economalism) that I've ever seen. Karl Smith, David Glasner and Paul Krugman do the heavy lifting with a quick thought by me at the end.

First, Stephen Moore's editorial, Why Americans Hate Economics:
"I'm surprised how many students tell me economics is their least favorite subject. Why? Because too often economic theories defy common sense... When [WSJ writer] Laura Meckler... dared to ask the White House how increasing unemployment insurance "creates jobs"... she received this slap down: "I would expect a reporter from the WSJ would know this as part of the entrance exam just to get on the paper."
[The White House] explained to her that unemployment insurance "is a... direct way to infuse money into the economy because people who are unemployed... are going to spend the money they get... and that creates growth and income for businesses that lead... to making decisions about jobs--more hiring."
That's a perfect Keynesian answer, and also perfectly nonsensical. What the White House is telling us is that the more unemployed we can pay for not working, the more people will work. Only someone with a Ph.D. in economics from an elite university would believe this. 
I have two teenage sons. One worked all summer and the other sat on his duff. To stimulate the economy, the White House wants to take more money from the son who works and give it to the one who doesn't. I can say with 100% certainty as a parent in the Moore household this will lead to less work. 
Or consider the biggest whopper: Mr. Obama's thoroughly discredited $830 billion stimulus bill... We were promised... "multipliers" from every dollar the government spent. There was never any acknowledgment that for the government to spend a dollar, it has to take it from the private economy... the multiplier theory only works if you believe there's a fairy passing out free dollars.
How did modern economics fly off the rails? The answer is that the "invisible hand" of... Adam Smith, got tossed aside for the new "macroeconomics," a witchcraft that began to flourish in the 1930s during the rise of Keynes. Macroeconomics simply took basic laws of economics we know to be true for the firm or family... and turned them on their head..."
Oh goodness, can you feel the stupid? It burns. It really really burns, and I did not enjoy re-posting that, let me tell you.

Anyway, first up, Karl Smith begins the fisking:
"The Moore household is a small, open economy, where imports and exports exceed GDP. Its constituents have almost no internal, currency-denominated trade [with each other] and they hold no assets or liabilities against one another. It does not have its own central bank. It does not operate its own currency and it does not float bonds backed by the central bank. These are important characteristics of the Moore household that do not apply to the US economy."
Next up, David Glasner:
"Moore [says]: "Too often economic theories defy common sense." That's in it a nutshell for Moore: common sense is the ultimate standard of truth... so what's that you say, Galileo? The sun is stationary and the Earth travels around it? And you say the Earth is round? If [so] how could anybody stand at the bottom... and not fall off?... And you Einstein, you say there's a... space-time continuum, so that time slows down as one approaches the speed of light? Away with you!
[My] point is not to disregard common sense... but to recognize that common sense isn't enough. Sometimes things are not what they seem... once you recognize that common sense has its limitations... Moore is exposed... as unwilling to do the hard thinking required to push back the frontiers of [his] own ignorance.
[And] Keynesian [economic] ideas are rooted in certain common-sense notions, for example, the idea that income and expenditure are mutually interdependent, the income of one person being derived from the expenditure of another... so common sense [often] cuts in both directions. Moore likes one [paying people not to work will encourage them not to work] and wants to ignore others... We would like economists... to tell us which effect is stronger or... when one is stronger than the other... But all that would be too complicated and messy for Moore's cartoonish view of the world."
Finally, Paul Krugman:
"What's remarkable [about Moore's piece]... is the all-out embrace of anti-intellectualism. It actually denounces "fancy theories" and rejects them because they "defy common sense". Gosh, if that's the way the right is going, the next thing you know they'll reject the theory of evolution. Oh, wait.
There's a lot to critique... [about] what constitutes common sense. Some people find it commonsensical that if the government puts people to work [via a "thoroughly discredited stimulus bill"], that adds to employment; it takes fancy arguments from the likes of the WSJ to convince them otherwise. 
And now I'll add my $0.02. Moore discredits the stimulus multipliers by saying that if the government wants to spend a dollar it needs to take a dollar from the private economy. Here's the problem with that assumption. You must also, rationally, apply that line of logic to the private sector. If every dollar the government spends is a dollar taken out of your pocket, then every dollar Google makes is a dollar taken out of your pocket. Moore's assuming we live in an economy with a fixed amount of money and resources (a barter economy, basically).

Which means that for Apple to make any money they must take it from you, permanently. And the $400 you spent on that iPad you will never have back. You have just sustained a permanent, $400 hit to your worth and unless you sell the iPad, you won't get it back. But we don't live in a barter economy. We live in a much more complex world with a more complex economy than that. And it is decidedly NOT a barter economy.

Thursday, August 18, 2011


"You've doubtless [heard] the claim that the economy is a mess because of the threat to reregulate in the... wake of the financial crisis. This is propaganda that needs to be laughed out of the room...  "Uncertainty" as far as regulations are concerned is not a major [issue]. Surveys show that the "uncertainty" bandied about in the press really translates into "the economy stinks, I'm not a business that benefits from a bad economy, and I'm not going to take a chance when I have no idea when things might turn around."... [But] businesses have [also] had at least 25-to-30 years of near complete certainty--certainty that they will pay lower and lower taxes, that they will face less and less regulation, that they can outsource to their hearts' content... they have also been certain that unions will be weak to powerless, that states and municipalities will give them huge subsidies to relocate... that the financial markets will always look to short term earnings... that the SEC will never investigate anything more serious than insider trading... So this haranguing about certainty simply reveals how warped big commerce has become."

"Rick Perry burnished his conservative credentials by attacking the idea of deficit stimulus spending... But, back in 2003, lobbyists under Perry's direction [lobbied]... Congress for more than a billion dollars in federal deficit spending on "stimulus". And they won. ...And that was just the beginning... the Texas lobbying campaign won funds for programs that Perry now says he opposes as fiscally irresponsible intrusions on state responsibilities."

3.) Why Cutting the Federal Deficit is a Bad Idea - Daniel Davies
The bad thing about cutting the federal deficit is not that [the cuts] might affect Social Security or Medicare... is not that some other virtuous program might be defunded... is not that it "shinks the state"... is not that it disproportionately falls on the poor... The bad thing about cutting the federal deficit is that unemployment is very high and interest rates are very low... borrowing money to employ currently unemployed resources is really obviously the right thing to do. 

"Mitt Romney argued for replacing our current unemployment insurance with a system of unemployment savings accounts... [a system] that would allow employees to create a savings account while working that has money automatically channeled into it tax-free to be drawn down during periods of unemployment. What are the differences between our current approach and the Romney approach?

First -- savings accounts don't involve... social insurance. There's no risk pooling or sharing risks along large populations in order to take advantage of the traditional benefits of insurance... Part of the point of social insurance is that it is social; we help others and they help us.

Second -- redistribution in the Romney [approach]... is upwards, towards the richest, instead of obviously towards those in need.

Third -- it weakens the power of the unemployed. Unemployment insurance increases the time until the unemployed take their next job... research tells us this is a "liquidity" effect as opposed to a work disincentive effect -- people are taking the time they need in order to find the best job for themselves instead of taking the quickest job in order to make basic payments... By empowering the unemployed and giving them more breathing space to search for the best job also enables them to search for the best wage to go with their job. Switching this system... throws off the balance between workers and bosses in favor of the latter.

Fourth -- it is hard to scale outwards in cases of emergency. In a recession it is very easy to extend unemployment benefits... savings accounts would be difficult to expand in any sense... it takes "automatic stabilizers" out of commission.

Fifth -- it removes the idea of the government from the equation of people dealing with economic risks... people will look at private savings accounts and think that the government isn't doing anything. Even if there are substantial tax benefits people will... ignore this. 

Tuesday, August 16, 2011

Supply & Demand-side Shocks in Business Cycles

Tyler Cowen and Alex Tabarrok have been going back and forth on a wage stickiness debate with Brad DeLong, Karl Smith and others. I'm not going to wade into that debate, but rather point out that in Tabarrok's most recent hypothetical example, he offers a real business cycle thought experiment that crystallizes the issues most economists have with RBC.

Tabarrok says:

Imagine a farmer whose farm produces 100 bushels of wheat. He hires 10 workers to bring in the wheat, paying each of them 9 bushels. Thus, each worker carries 10 bushels, the wage is 9, the wage bill is 90, and the farmer earns 10.
Now suppose that due to climate change or a swarm of locusts the farm only produces 90 bushels of wheat. If wages were fully flexible then an equilibrium exists in which each worker is paid a wage of 8 leaving the farmer with 10 bushels as before. The farmer doesn’t want to reduce everyone’s wages, however, because that will reduce morale so he fires one worker leaving nine. Each worker now brings in 10 bushels, as before, and is paid a wage of 9, for a total wage bill of 81 leaving the farmer with 9 bushels. The unemployment rate is 10%.

This is RBC in a nutshell. It assumes supply shocks, not demand shocks. And in Tabarrok's thought experiment we have to assume a natural disaster or some other catastrophe has struck and that this is the reason for lower production. Basically, RBC and Tabarrok's thought experiment require that we lower the firm's production possibilities frontier with no possible way to raise it in the short- or medium-term. But that's not a realistic example of what's happening in this economy. Recessions are usually demand-side problems (as is the current one). And it's not a natural disaster that's causing the 'farms' from Tabarrok's thought experiment to cut production. What's caused the drop in production at the country's 'farms' is a burdensome debt load held by the 'farm's' customers. The farm's customers are trying to repair their balance sheets, which means they've cut back on buying as much corn as the farmer usually makes.

And if you view recessions as demand-side shock, rather than supply-side RBC shocks, then you see where Keynesian solutions can really help... for instance, perhaps another employer (the government perhaps?) can step in, hire the unemployed worker (with the practically free money it's currently getting) and, I dunno, build a bridge or a road or something else that might benefit the farmer and/or the farmer's customers. The laid-off worker now has a job, is doing something productive and might even turn around and become a customer of the farmer who buys up the farmer's excess production. In this model, the households repair their balance sheets, the unemployed worker is able to work and create something productive and everyone benefits. 

Monday, August 15, 2011


1.) Mission impossible: stop another recession - Dr. Doom (FT)
"There has been little job creation, weak growth and flat consumption and manufacturing production. Housing remains depressed... Fiscal policy is now contractionary in both the eurozone and the UK... and in the US, state and local authorities, and now, the federal government, [have] cut spending... QE2 produced a growth bump of barely 3 per cent, for one quarter. QE3 will be much smaller, and will do much less."

2.) Do Property Rights Increase Freedom? - Noah Smith (Noahpinion)
"Since the dawn of time, libertarians have equated property rights with freedom... But is that right? What would it feel like to live in a society where almost every single thing is privately owned and priced? Walking around urban Japan, I feel like I am seeing a society that is... close to that ideal... [In Japan] there are relatively few free city parks... there are also very few public benches... Many green spaces are private and gated off... outside your house or office there is basically nowhere to sit down that will not cost you a little bit of money. Public buildings generally have no drinking fountains; you must buy or bring your own water... Does all this private property make me feel free? Absolutely not! Quite the opposite..."

3.) Arctic Ice Thinning 4 Times Faster Than Predicted - Joe Romm (ClimateProgress)
"... analyses of sea ice trends that don't model ice thickness and volume... miss crucial feedbacks... today's winter ice cover is thinner, meaning it breaks up more easily under the influence of winds and currents... smaller chunks of ice drift more quickly and drifting ice is more prone to export and melting at lower latitude.. although it's impossible to say for sure when we might see an ice-free Arctic... things do seem to be getting progressively worse... [we'd] better start with the interventions even earlier. Now."

4.) How Riots Start, and How They Can Be Stopped - Ed Glaeser (Bloomberg)
"During the Republican National Convention in 2004... NYPD arrested more than 1,000 people and let them go. The New York strategy protected the city... Light penalties widely applied and serious penalties applied to a few can both deter unlawful behavior... But in the case of riots, it is awfully hard to actually prove wrongdoing and extremely important to clear the streets. Arresting widely and temporarily is far more effective."

5.) Why Wall Street Should Fear the Tea Party - James Surowiecki (New Yorker)
"... the agreement to lift the debt ceiling... was a clear victory for congressional Republicans, traditionally corporate America's best friends... [but] the spending cuts... hit infrastructure, basic research, and defense--from which corporate America reaps benefits... it's possible that Republicans will block the extension of unemployment and... also be emboldened in their attacks on the Fed, which they argue has been overly loose in its monetary policy (when in fact it's been too tight). The economy needs strong doses of both fiscal and monetary policy. The debt deal makes it more likely that we'll get neither."

Sunday, August 14, 2011

Journamalism - Fareed Zakaria Edition

Zakaria tends to make a lot of mistakes whenever he deigns to write about financial and economic matters. A lot. But I have to admit that he's not totally incapable of learning. I've seen prior Zakaria editorials that have more fallacies and platitudes. However, he makes a huge mistake in his piece today.

The basic gist of today's piece is that China has been complaining about the downgrade and threatening to stop buying US Treasuries. Zakaria believes these threats are hollow--and he's probably right about that. But what he gets colossally wrong is believing that the "threats" are actually threats, rather than being "nice things China might do to help our economy". Which means Zakaria has basically written a Monty Python sketch in which China says:
"Listen up you fat American capitalist pigs... if you don't do what we want, we're going to come over there and poke you with the soft cushions!!!"
That's still a great sketch, by the way, and I've embedded it below. Anyway, moving on... Zakaria's reasons for believing China's threats are actually threats, is because he believes that if China stops buying US Treasuries it will result in "mutually assured destruction". Yikes. There is just so much wrong with that sentiment... here is the relevant passage:
"Imagine that China were to sell off those 1.2 trillion dollars of U.S. Treasury bonds... let's play out the disastrous chain of events that would happen... it would trigger panic selling of the dollar. That would in turn hurt the U.S. economy..."
Okay, let's "imagine" this scenario and play it out. Here are the steps: China sells its Treasury hoard, then stops buying new Treasuries, which means the dollar devalues and gets cheaper relative to foreign currencies. So far, nothing incorrect here (although "selling" rather than "panic selling" would have been more accurate). Where he goes off the rails is in saying that all of this "would in turn hurt the U.S. economy." Um, no. Not in our current situation. In fact, NO PART of any of this is bad for us.

The US is a net debtor nation--meaning domestic consumption hasn't matched exports for quite some time. Correcting that imbalance would go a long way toward mending the economy. And a cheaper dollar would go a long way to making US exports more competitive. So when Zakaria baldly states that panic selling of the dollar would hurt the economy, but doesn't provide a single reason why, you can be sure he's wrong.

It's a widespread mistake that the US needs capital inflows from China to sustain our "addiction to debt" but first I'll let Krugman (and Keynes) explain why needing foreign capital inflows is currently wrong:
"... inflows of capital from other nations simply add to the already excessive supply of U.S. savings relative to investment demand. These inflows [create] a trade deficit that makes America worse off, not better off; if the Chinese, in a huff, stopped buying Treasuries they would be doing us a favor... the fact that... officials and highly regarded economists don't get this, 75 years after [Keynes'] General Theory, represents a sad case of intellectual regression."
So to recap: Zakaria says China's threats to stop buying Treasuries are hollow. But the reality is that China's threats to stop buying Treasuries aren't threats. They're this:

Ahhh journamalism. 

Saturday, August 13, 2011

Earnings Yield Divergence & Market Distortions

Felix Salmon asked a question of his readers today. He wanted help in trying to understand what's behind the spread blowing out between the 10-year treasury yield and the stock market's earnings' yield (which is earnings divided by stock price). Since the mid-1970s both yields have tracked each other very well, but recently they've begun to diverge. Prior to the mid-70s however, there was almost no correlation between the two (as Jake over at EconompicData points out) and so I've reproduced Jake's chart below.

There are two things to understand about Jake's chart. First of all, prior to the mid-70s Harry Markowitz and Modern Portfolio Theory had yet to make an impression on portfolio managers. Markowitz first published MPT in 1959, but it would take a decade for it to find traction, acceptance and assimilation with money managers. But once it found acceptance it was so widely implemented that the 10-year and E/P yields tracked each other nearly perfectly until 2003. But before I address the issues behind the divergence since 2003, let me first explain MPT.

MPT is a mathematical system that described the fundamentals of pricing and asset selection for a portfolio that most money managers take for granted today. MPT proved the benefits of diversification and, in a mathematical way, showed there was a direct, linear relationship between perceived risk and return (MPT says that an investor will require another 'unit' of return for taking on another 'unit' of perceived risk). And, as I mentioned, MPT became the bedrock foundation of portfolio management in the 1970s, and Jake's chart clearly shows that. But since 2003 those yields have blown out. Which means that either investors have roundly abandoned MPT and effective asset allocation, or something else is at work. First of all, here's a reproduction of Felix's chart showing the divergence from 2003 to now:

As I said, this chart shows a dramatic shift away from MPT starting in 2003 and Felix wonders why. Has MPT been discredited? Have investors and asset managers become increasingly more risk-averse? Do they perceive much higher risk in equities since the dot-com crash of 2000 and Black October of 2008?

I think not. And Gillian Tett has a better explanation for the divergence:
"The IMF quietly published a ground-breaking paper... around the "cash" that companies, asset managers and securities lenders hold on their balance sheets. Two decades ago, these cash pools were modest, totalling just $100 billion... but these pools have exploded in size, as the asset management sector has consolidated... and companies have centralised their treasury functions. Institutional cash managers now control between $2 trillion and $4 trillion globally... what is striking is where this "cash" has ended up... cash managers have started to avoid banks... the key factor is risk management, not yield... the FDIC only guaranteed $100,000 in any account... cash managers have... cash pools that are so large that effective diversification is impossible... the net result is a shortage of [Treasuries]... Hence the low yields."
The IMF research shows that MPT isn't used by huge, institutional cash managers. They're strictly buying treasuries for cash hoarding purposes. These managers aren't interested in MPT or risk and return, they're only interested in zero risk, absent any return. Tett's article doesn't mention sovereign purchases of Treasuries, yet countries like China have been gobbling up Treasuries for the last decade, which has only further depressed yields. And while that's important, that's not as sinister as the information in Tett's article.

China's purchases of US Treasuries is economically unsustainable and will eventually correct itself, but corporations have been consolidating and combining at record rates, and their consolidations are causing market distortions that probably won't correct. So the IMF research is only adding more proof to the fact that the US is not a small-business-focused country by any stretch, and hasn't been for a long time. Corporations dominate every facet of daily life, and their consolidated and swollen treasuries are now distorting bond yields (in addition to the raft of other facets of daily life they affect). But rather than addressing all of those issues, for now I'll just refer to Felix's great piece on Wall Street's Dead End from the New York Times to illustrate how giant corporations are also making the stock market irrelevant::
"The number of companies listed on the major domestic exchanges peaked in 1997 at more than 7,000, and it has been falling ever since. It's now down to about 4,000 companies, and given its steep downward trend will surely continue to shrink... What the market is not doing so well is its core public function: allocating capital efficiently."
I quoted that last sentence, because 'allocating capital efficiently' was never the goal of any of the corporate-friendly, market-inspired deregulations we've had since Reagan that allowed massive corporations to so rapidly consolidate. Rather, the singular policy goal of every faithful Reaganite conservative has always--and only ever--been the further concentration and consolidation of wealth into the hands of the few. The crash in bond yields, just like the rapid decrease in the number of companies listed on US stock markets, is no longer a symptom of a growing problem, but a testament to the overwhelming success these policies have had, are continuing to have, and will continue to have into the foreseeable future.

This post isn't the place for me to discuss all the ways that continued concentration of wealth degrades society and the economy, but suffice it to say that the two issues I've discussed in this post alone (depressed bond yields and an increasingly irrelevant stock market) have already had damaging effects on the daily lives of wide swaths of the population. 


1.) Cash-rich investors choose crazy Treasury returns - Gillian Tett (FT)
"... the “cash” which companies, asset managers and securities lenders held on their balance sheets two decades ago... were modest, totalling just $100bn across the globe... but in recent years, these pools have exploded in size... institutional cash managers now control between $2,000bn and $4,000bn globally...what is more striking is where this “cash” has ended up. Two decades ago, it typically was placed in bank accounts. But... in 2007... just 16-20 per cent of these funds were on deposit. Why? ... the key factor was risk management, not yield. From 1990 up to the crisis, US Federal Deposit Insurance Corporation only guaranteed the first $100,000 of any account. And while cash managers have tried to use multiple banks, their cash pools are so large that effective diversification is impossible."

"... the president... majorities in Congress... all have embraced the “long-term deficits” which appear in the projections as though they were foreordained history... but there isn’t, in fact, a “long-term deficit problem.” So long as interest rates stay below the growth rate, as they are, debt-to-GDP levels eventually stabilize and even decline. The notion that there is a big problem is pure propaganda based on a pseudo-debate... so what is to be done? Nothing [will] happen until ideas change... and the first change must be to challenge and reject all the nonsense about long-term budget deficits, national bankruptcy or insolvency, and even “fiscal responsibility” that we are hearing. The entire object of this propaganda campaign is to cripple government—including regulation and the courts—and to roll back Social Security, Medicare, and Medicaid. The defense of those successful, effective—and yes, sustainable—programs just became far more difficult, and perhaps impossible..."

"S.&P.’s bond ratings from five years ago would have told you almost nothing about the risk of a default today. They had no insight about the threats in European markets, nor about which countries in Europe were relatively more likely to default... by comparison, simply looking at a country’s ratio of net debt to G.D.P. would have been a better predictor of default... it only explains about 12 percent of default risk... still, this simple statistical indicator does better than the S.&P. ratings."

4.) On S&P, Downgrades, and Idiots - Economics of Contempt
"S&P was flat-out wrong — no caveats. They are, to put it very bluntly, idiots, and they deserve every bit of opprobrium coming their way. Look, I know these guys... back when I was an in-house lawyer for an investment bank, I had extensive interactions with all three rating agencies. We needed to get a lot of deals rated, and I was almost always involved in that process... to say that S&P analysts aren’t the sharpest tools in the drawer is a massive understatement... before meeting with a rating agency, we would plan out our arguments... with S&P, it got to the point where we were constantly saying, “that’s a good point, but is S&P smart enough to understand that argument?” I kid you not, that was a hard-constraint in our game-plan." 

5.) The EPA: the Tea Party's next target - Diane Roberts (The Guardian)
"Republicans are going after the EPA. It's a "job-killer". America's high unemployment rate is not the fault of the worldwide recession or the housing bubble or... two unfunded wars on top of George W Bush's silly tax cuts for the rich, it's those damned DC bunny-huggers.... Michele Bachmann... advocates abolishing the EPA as soon as God puts the Tea Party in charge. She blames it for a host of anti-free market evils... to the "hoax" that is global climate change. The bill funding EPA... is a dirty bomb, meant to destroy any rule that slows down environmental degradation. The legislation is so loaded with industry-backed amendments and riders... that it reads like a polluters' letter to Santa Claus. One provision would allow uranium mining right next to the Grand Canyon. Another would stop EPA from regulating pesticides, even if the pesticides kill endangered plants, birds, fish and other animals. EPA's funding would be slashed by 34% over the next two years, but America's oil and gas companies would be given an extra $55m on top of the $36bn in federal subsidies they already get."

Trance I'm Listening To

My previous post on the best trance songs has remained one of the most popular posts on the blog (it's one of the top three most visited). So I guess it's time I at least post a list of top trance songs I'm listening to right now. These aren't in any particular order (as per the other list). It's just quick list of songs I'm listening to (and yes, I'm aware that some of these don't necessarily qualify as trance... but remember, I don't care).

The quick list is below with embedded videos after the list. Enjoy.

1.) Above & Beyond - Hope
2.) Gareth Emery - Soul Symbol
3.) Orjan Nilsen - So Long Radio
4.) Slusnik Luna - Sun 2011 (Radio Version)
5.) Dinka - Road to Perdition
6.) DJ Shah &  Laruso - Zanzibar

This is a fantastic song, and I think it could maybe make it my Top Ten Trance Songs of all-time, but its not one of the foundational trance tracks yet. However it's still fantastic (as are most of the tracks on Tri-State, I'd give the entire album a run-through if you like Hope, or if you're a casual trance fan who's never heard of Above & Beyond before). I think I could have included the title track, Tri-State, on this list but figured I wouldn't overly populate this list with songs from one DJ or group.

I'm not sure why I like this song so much, but its probably got something to do with the underlying baseline (an Emery specialty). The steady build-up is fantastic and Emery really layers in each new 'chorus'. After each bridge he adds something new and the piano work throughout is fantastic. For you non-trance (or non-electronic) fans, please remember tha the embedded version of this track is a DJ track which means it's got a lead-in beat so DJ's can synch to it when performing live. Click ahead 30 or 40 seconds or more to skip over the intro beat. And, on a sidenote, if you choose to download any trance tracks, a free music mixer like WavePad will let you edit your mp3s so you can take out the long intros and outros and even make the track fade in or out. For advanced music editing (like crossfading and adding effects, the software requires a $19 purchase... but if all you want to do is trim tracks and fade in or out, WavePad is pretty easy to use and it's free.

This is a pretty popular track in heavy rotation at most clubs right now and deservedly so. Time will tell if this holds up well for me, but for right now it's in my own personal 'heavy rotation' list.

Slusnik Luna - Sun 2011 (Radio Edit) [HQ]

I could write almost the same thing about this track as I did for Nilsen's above. It's in heavy, heavy rotation for me right now and I can't tell if I'll get sick of it yet.

Road to Perdition is a lighter than most of the tracks I've already listed and I'm really starting to like Dinka's stuff, but a lot of her tracks do tend to sound very familiar. I really enjoyed Claes Rosen's remix of her song  Cannonball from a few years back. Anyway, Road to Perdition is a solid, softer trance track that I've been listening to for a while now.

DJ Shah (who sometimes goes by the alias Sunlounger) and Larruso teamed up to create the album Global Experience. The album was good, but Zanzibar stands out as the best track. The underlying 'chorus' evokes a native African feel and rhythm, and for that reason it reminds me of the relaxing nights I've had on the more quiet, exotic beaches that aren't in touristy areas (basically, it's not an Acapulco club track, it's more like a relaxing, quiet night of wave watching in San Juan del Sur, Nicaragua... or, more obviously a track that's probably appropriate for the tranquil beaches of Zanzibar, but I've never been there so I wouldn't know).


Tuesday, August 9, 2011

Mental Gymnastics & The Downgrade

Karl Smith, blogging over at Modeled Behavior, put himself and his readers through some mental gymnastics yesterday as he tried to push back against Paul Krugman's (and others') statement that the market completely disregarded S&P's downgrade. Smith does his level best to make an argument that the ratings agency's actions weren't completely ignored. But, as I said, he goes through some mental gymnastics to do it.

The only real argument Smith could make that S&P's downgrade had an effect on the market in any tangible way is to first proclaim that what we're seeing is the the downgrade's baseline scenario. Yesterday was the baseline scenario for reaction to a downgrade. Therefore the ex-downgrade scenario is that in the absence of any downgrade, treasuries yields would have been pushed even lower.

If you want to claim that S&P's downgrade had any effect at all, that's the only argument you can make -- that US debt would have been even more purchased yesterday than it was.

You can't argue anything else. For the downgrade to really have an effect we would have seen a selloff in the stock market accompanied by a selloff of US treasuries (and a flight to substitute AAA-rated assets like other sovereigns, or perhaps even AAA-rated domestic corporates). But the treasury selloff never happened. So S&P was basically ignored.

Monday, August 8, 2011

Journamalism: Downgrade Commentariat Edition

Just a quick review for everyone: Over the weekend, Standard & Poor's downgraded the debt rating of the federal government of the United States. Their downgrade signaled that S&P felt US government debt was no longer as safe an investment as it once was, and that a default is now more likely than it's ever been (not that S&P is saying the probability of default is large... perhaps they thinks it's only 1%, but, in their opinion, it has definitely risen).

Now then, if S&P were right, and the probably of a US default on its debt has increased, and if worldwide financial markets were attuned to S&P and believed in S&P's astute analysis, what would you expect? Investors would sell their US treasury holdings, right? And if investors sold their US treasury holdings, then the interest rates on US treasuries would rise. All of this is really obvious, right? I mean, this isn't that difficult to understand, is it?

But what happened in the financial markets today? Well, apparently investors were so terrified of US government debt (with its shiny, new increased probability of default) that they resorted to buying more US government debt than ever before. As a result, these terrified-of-US-debt investors pushed the government's 10-year bond rates down to 2.31% (from 2.47% where it closed on Friday before the downgrade).

So clearly, S&P's downgrade was not a factor in any investor decisions made today. Clearly, S&P's downgrade meant absolutely nothing to anybody. Clearly, this was a resounding statement by the market that S&P's downgrade was meaningless. Clearly, this was a statement by the market that it doesn't care anywhere near as much about the federal government's fiscal problems or its debt levels or rating as much as the commentariat has proclaimed. Clearly the market doesn't give a fig about the US getting its fiscal house in order in the short- or even medium-term. Clearly, the market is much more concerned about an economy still struggling to get off life support with no sign of government aid coming to fix the economy's fundamental weakness on the horizon.

But the markets tanked today and I don't think I saw a single journalist make an honest or correct statement about it. The only honest, and correct, statement on what happened in financial markets today is that the debt ceiling fiasco was exactly that... a Tea Party-manufactured fiasco -- and sideshow -- that didn't matter one fig to the markets or the economy, and the S&P's downgrade as a result, was as much a fiasco.

The only honest, and correct, statement to make about financial market selloff today was that markets tanked due to fears that the economy (which is shriveling from the drawdown of federal government support) and its prospects look increasingly weak. The only honest, and correct, statement is that financial markets tanked today because the economy needs stimulative government aid, not contractionary budget deals. The only honest, and correct, statement is that the President has sided with the Tea Partiers in believing that contractionary government measures will actually be expansionary and markets were rightly terrified, so they sold stocks and retreated into government bonds because the economy isn't likely to get help from the government in the form of another round of fiscal stimulus, QE III, better mortgage modification programs or debt relief programs. Therefore, the only honest, and correct, statement to make is that the debt ceiling and the government's fiscal problems were a pointless sideshow and a blockade that has succeeded in preventing the federal government from aiding the economy.

But that's not what anyone said today. Instead we got Journamalism -- and there were so many incidents to choose from, so here are just a few from some of the bigger names:
U.S. stocks tumbled... amid concern that a downgrade of the nation's credit rating by Standard & Poor's may worsen an economic slowdown.
President Barack Obama's first public comment about Standard & Poor's downgrade of U.S. debt... was not enough to stop a market plunge... with investors uncertain if Washington can overcome political gridlock.
The Guardian (this one is nonsensical beyond description):
Despite the Wall Street selloff, prompted by the ratings downgrade, investors piled into US treasury bonds.
Investor's Business Daily:
U.S. downgrade slams markets... stock markets were rocked Monday by Standard & Poor's downgrade of the U.S.
Wall Street Journal:
S&P's decision to downgrade US triggers corporate bond selloff.

Sprizouse's August Stock Promotion

The stock market has been hammered over the past week, which usually means its a good time to buy stocks. And since I haven't promoted a stock since picking KapStone Paper and Packaging Corp. back in June, I thought it was time I publicly made another recommendation.

My pick for August is Intel Corp. I chose Intel solely because I was looking for dividend paying stocks that have high upsides. I tried to stay away from the more volatile tech stocks, but nevertheless Intel still made the cut and I'll get into their full report below, but first I want to review KapStone.

KapStone outperformed the market for most of July, but came crashing back to earth when the overall market crashed. It currently sits at $12.90 which is down $2.08 from the price at which I made my original KapStone stock pick ($14.98 on June 13). That's a loss of 13.9% since making the recommendation, and for comparison's sake, the S&P 500 is down 11.9% since June 13 and Alcoa Inc. (the stock I originally compared to Kapstone) is down 25.9%.

KapStone's performance obviously hasn't been great, and it hasn't even managed to stay ahead of the market's losses, but I didn't recommend the stock for short-term pops or for people looking for trade to make a quick buck. It was (and is) a long-term recommendation and I still stand by it in that respect (which is not much consolation for those of you holding the stock right now).

As for its quarterly report? Well, KapStone released second quarter earnings last week, and everything from the earnings report is basically in line with what I wrote in June. The firm is on pace for a 10-to-15% increase in revenue for 2011 and should beat their overall net income from last year rather easily. Their year-over-year net income doubled last year's June numbers, but that was to be expected as I noted before, from the price increases they instituted. KapStone hasn't taken on any other debt and they've managed to lower some of their operating costs even as they've increased in revenue. So, in short, nothing's changed with my KapStone recommendation from June. It's still a great stock and it's still a great stock to buy for any portfolio that wants to go long small-cap stocks or small-cap manufacturing or paper companies.

Now, before I get into the Intel recommendation, I'd like to make a brief aside to talk about the market in general. Yes, stock markets have plunged recently. But that usually means its a good time to buy stocks and sell bonds. And there also might not be any real economic, or fundamental, reason for equity markets to tank so horribly the way they have in the past week.

However, we are dealing with a very weak domestic economy, a very weak European economy (coupled with default fears in European periphery) and it appears the Fed and the federal government won't be doing much to intervene here (although its possible the Fed moves to institute QE III, as ineffective as that may be, it would still be something. And in Europe the ECB seems willing to step in and help in Italy, but all these are bandaid, reactionary-like measures rather than attempts to fundamentally stimulate demand). So we can probably expect equity markets to remain flat for the next year or two (at minimum) because demand isn't going to suddenly materialize out of nowhere, so there really is no end in sight to the recession no matter how rosy any macroeconomic forecast looks. Therefore, any large upswing (like the two-weeks-long rally in July) will probably be followed by a corrective downswing. And if you operate under the assumption that equity markets will remain flat for the foreseeable future then, as I mentioned before, it's reasonable to assume that now is a good time to buy.

Which brings me to my pick for August.

I was looking for any recommendations for sectors or for any particular stock that friends or family wanted me to analyze. I was asked for a recommendation to find a really good dividend paying stock. The question came from a conservative investor who prefers going long dividend-paying stocks and after nearly a week of research I came up with Intel.

I did everything I could to stay away from tech stocks because the tech sector is usually a more volatile sector as technology can, and does, change rapidly. But then again, as fast as technology changes, almost all tech companies will need processors of some sort to run their new consumer software or hardware -- think iPads, iPhones, super-thin laptops and what have you. At this point in the game Intel and AMD are the two main companies dominating this sector (yes Sun, IBM and NEC are in the mix, but for the most part, Intel and AMD lead the way). So if you're not afraid of tech stocks and you're looking for a dividend-paying stock, then look no further than Intel.

Intel currently just announced a new quarterly dividend for the third quarter (to be paid on September 1) of $0.21 per share (the stock just went ex-dividend on Friday, so if you buy now you're not going to get the dividend payment in September).

The dividend payment annualizes to $0.84 per share which (at Intel's closing share price today of $20.11) means they're currently paying a 4.18% annual dividend. For a tech company that's growing, and for a company that still has room to continue to grow because it's going to be providing microprocessors and chipsets to everybody's new iPhone, iPad and laptop for quite a while? Well, a 4.18% annual return on dividends alone, for that kind of a firm in that kind of industry, is really good.

So let's get into the fundamentals of why Intel's a good buy and see what we can see.

First of all, let me say that Intel isn't without issues. The company and the stock are not experiencing the same levels of production (percentage-wise) that a company like KapStone is. But that's to be expected when you're a much larger, dividend-paying company -- growth prospects tend to decline linearly with firm size.

Also, part of the reason that any company elects to start paying a dividend is that management doesn't see a need to retain a horde of extra cash to remain nimble and able to respond to any currently unperceived market threats. The company also doesn't see a comping period of high growth which means they won't need to reinvest excess cash back into the business and, say, build more manufacturing plants, spend more money on advertising or hire more workers. Therefore, growth rates and other growth measurements and components (like return on equity) tend to be lower with a dividend-paying stock than with a non-dividend paying stock.

So let me discuss the problems. First of all, Intel showed a spike in its overall level of leverage in last year's 10K. Specifically the leverage spike showed up in its accrued compensation, accounts payable and other accrued liabilities accounts. When most people look at a firm's leverage they tend to only look at levels of debt. But accounts payable and accrued compensation are really no different. They're just a different form of credit. The firm has basically received credit terms from a supplier (in accounts payable) or from employees (accrued compensation) and those accounts, just like any loan or credit taken from anywhere else) will eventually come due.

Last year, Intel showed a $1.2 billion spike in those three accounts. That's not a great sign for earnings going forward as it means the company could have under-reported its expenses by $1.2 billion last year. And even if there wasn't any conscious effort to under-report those numbers, that money will still come due this year or next and will have to be expensed away (therefore dropping 2011 or 2012's earnings by that amount).

But Intel is a big enough company to get away with moving $1.2 billion around using discretionary accounting measures. To most mere mortals $1.2 billion is a monster number in absolute terms, but Intel's assets are $63 billion, and yearly revenues were $43 billion last year. So moving around $1.2 billion won't affect balance sheet or income statement ratios as much as you'd expect. However, if this were occurring at a smaller, less-established company, it might have been enough to scare me away. But, as of last year, Intel was sitting on $17 billion in cash and another $5 billion in short-term investments (which it had remaining after it paid out $3 billion in dividends). So Intel still has $25 billion in excess cash sitting around and you'd expect that when the $1.2 billion in accrued expenses comes due, it won't hurt net income and won't force the company to lower its dividend payment either.

Speaking of the cash on hand: Intel's revenues and net income have improved dramatically over the last two years and should do very well in coming years which is the primary reason its got so much cash on hand. And all that cash will eventually have to go somewhere, so I'm assuming that their dividend payments will continue to rise next year (I actually calculated that the company would raise its quarterly dividend payment at some point this year while doing my analysis in July, before Intel made the actual announcement a few weeks ago).

The firm, in no small part due to its Sandy Bridge processors (which are being used in all those gadgets I previously mentioned), has also increased its profit margins to record levels. Their asset turnover ratio has remained steady (and strong) which means the company's overall return on equity for 2010 was its best in five years (2010 ROE was 23.1%, the last time it was that high was in 2005).

In all, the fact that Intel has been crushing the competition and generating record revenues in the teeth of the Great Recession bodes well for its medium-term future. And the fact that Intel's success over the past two years has allowed it to pile up a hoard of cash bodes well for investors and dividend investors.

Nothing in Intel's accounts jump out as scary negatives beyond what I've already mentioned. Their accounting looks legitimate across the board with low levels of accruals and solid earnings. The stock looks underpriced for one that pays a 4.2% annual dividend and the company has a solid buffer against any unforeseen economic events or problems with so much cash on hand. Therefore if no disastrous economic problems materialize in the near future (I can't make any promises we won't have a seriously bumpy ride in the near-term), then Intel should be able to sweep away that $1.2 billion without blinking and investors should expect them to continue paying out strong dividends and performing above most.

(Full disclosure: I hold no positions in any of the stocks I've mentioned in the post. Also... if you're taking stock advice from a random guy on the internet, its probably a good idea to reexamine your overall investment strategy). 

Downgrade FAQ

Felix Salmon has put up a response to my earlier post on S&P and the downgrade. He takes a lot questions and responds to them in a nice S&P Downgrade FAQ, if you will. I obviously don't agree with everything in it, but it's definitely worth reading, and I agree with most of it.

Saturday, August 6, 2011

Picking Bones with Felix Salmon (and S&P)

I have another bone to pick with Felix Salmon's post today on the downgrade. He (like Tyler Cowen) is of the position that those of us who criticize the messenger and point to S&P's failures are missing the broader point -- that the government's willingness (short-term) and ability (long-term) to pay back its debt should be rightly questioned.

Fair enough. I'll concede that point (sort of).

First of all, let's admit that the downgrade has come, in large part, because of the debt-ceiling nonsense. S&P has even said as much-- recent 'political brinksmanship' (their words) led to this downgrade. So S&P took the Republican threats to default very seriously.

And the GOP threat of default came about because Republicans couldn't wreck Medicare, Medicaid and Social Security through normal legislative processes so they held the country hostage until they got what they wanted -- and so what if the country could borrow billions of dollars for ten-years at less than 3.0%? Republicans were quite happy to wreck that kind of borrowing power in slavish worship of their decades-long ideological mandate to destroy Medicare, Medicaid and Social Security. All of which should give you a terrifying view of just how nuts the crazies running the Tea Party wing of the GOP really are.

Which brings me to my point. The current wingnut ideology running amok in the Republican Party is not news to most. Anybody could see the Tea Partiers were insane long before they won a bunch of elections during the 2010 midterms. Heck, the Bush years were filled with hogwash about destroying government surpluses 'for the people'. A lot of political strategists also knew that Obama should have tied the extension of the Bush Tax Cuts in December to a raise of the debt ceiling or else the GOP would hold the country hostage.

But S&P didn't downgrade the country's debt at any of those times. But why not? Why not downgrade after Bush and a GOP-held congress inflated the federal deficit to mammoth proportions eight years ago? Or why not downgrade right after the midterms? That would have been acceptable... it would have been like an 'independent' referendum on what happens when you let crazy people run your country. Or why not downgrade after Obama failed to realize Republicans would hold the country hostage back in December? Again, all of these would have been acceptable times to make the downgrade.

But now? After the debt limit has been raised (for nearly two years)? Well, I suppose its still acceptable to downgrade now, but I think it shows where the ideology of S&P lies, don't you?

Finally, bear in mind that S&P has no more knowledge about the country's debt than you or I. They know nothing that we don't know. The US government doesn't have opaque securities and derivative trading positions. It's the government. So S&P is passing judgement on what it believes is the US government's current, short-term willingness to pay its debts (they say we're probably not willing to pay). Fair enough. But why not come out and say, "As long as Tea Partiers and Wingnuts have a foothold and serious clout over the United States' political system, we cannot give rate the United States as a AAA country"???

I would have preferred that. It would have been the truth.

S&P Decides that Publicly Setting Fire to its Credibility is a Good Thing

Not content with simply being a useless organization, S&P decided to draw attention to itself yesterday by lighting what remained of its credibility on fire. S&P downgraded the USofA's credit rating last night from AAA to AA+, and the move drew a lot of attention, natch.

Before I get into the stupidity of drawing attention to yourself when you've done nothing good in the last ten years, I'd like to note that S&P has been telling us the federal government's credit was AAA-rated for a long time. But now they're saying its not. However, this doesn't mean they were right in either respect. S&P has proven they're not qualified to pass judgement one way or the other. So all this downgrade will do is draw more (unwanted) attention to a pointless and broken system of which S&P is a part. And, what the heck, the morons even misplaced a paltry $2 trillion(!) in the process of making the downgrade.

So what's going to happen now? A lot of experts are contending the government's borrowing costs will rise because of the downgrade. The fearmongerers are warning us to expect a surge in bond rates, which will, in turn, produce a surge in mortgage rates, credit card rates, auto-loan rates and the like.

But the US economy is still in the grip of a painful recession and a liquidity trap. So the flight to safe assets will continue until the economy strengthens, and the market won't care one fig about S&P's new rating. Instead its much more likely that the market will go on assuming US government bonds are the safest of safe bets and the downgrade won't register as a blip on most radars. There's a precedent for this as well. Japan, which went through a similar recession (with accompanying liquidity trap) in the '90s and early '00s (and is really still going through it) had their credit downgraded by the ratings agencies. The downgrade came because Japan's federal debt as a percentage of GDP was rising (mostly because the Japanese government was trying to fight the recession and liquidity trap... just like we did with the stimulus in 2009 and with massive government spending in the New Deal and the run-up to WWII in 1930s and '40s.  

So here is a chart of the historical bond rate in Japan. Can you spot the downgrade? It was in April of 2002 when the ratings agencies lowered Japans's credit rating from AA to AA- (which meant the world's second-largest economy had a credit rating on par with Malta and the Czech Republic). But look, just look, at what happened after the downgrade: the 10-year bond rate skyrocketed to nearly 0.9% (and by skyrocketed, I mean, fell). By the way, Japan's 2002 downgrade came on the heels of S&P maintaining an investment-grade rating on Enron right up until their collapse.

So now S&P is has proven once again that they're not only useless but this move will likely also prove that they're completely ineffectual as well. They are a pointless vestige of a broken system and not only that, but they have an ideological agenda and a harmful bias against public-sector debt.

Look, the US does have a long-term deficit and funding problem. Rising healthcare costs threaten to create an unsustainable budget deficit for the federal government (starting, perhaps, in 2020) but certainly not now.

The government is running a large deficit right now, but deficit spending in the teeth of the worst economic collapse since the Great Depression should be encouraged. The federal government should, and easily could, spend lots of money to push the economy out of this recession, then raise taxes and fund itself much more healthily once the economy is on track and booming again.

During the Great Depression, the levels of federal government spending as a percentage of GDP was much higher than it was at any time in the last three years (even with Obama's stimulus). And keep in mind that the government spending that pushed us out of WWII involved building tanks, planes and bombs which, after the war, had no economic usefulness whatsoever. As I've said before, the government could have built all those tanks, planes and bombs and pushed them into the ocean and it would have still pulled the country out of the Great Depression. This runup to the war, when the country was at full employment, but was building nothing of economic value, basically proved John Maynard Keynes' 'money-hole' assertion.

In Chapter 10 of General Theory, Keynes said the the government could bury bottles of money at the bottom of a coal mine, cover it up and have workers dig out the money. He argued that this wouldn't be the most effective form of stimulus but it would be better than nothing. Judging from the postwar boom of the 1950s and '60s when the country experienced two decades of GDP growth at annual rates 4.14% (the best two decades of economic growth in the country's history), I'd say his theory was proved correct.

But I digress. We don't have a short-term or medium-term deficit problem. But S&P was in a rush to prove that their pathological government-hatred runs as deep as the wingnuts' and Tea Partiers'. But the latter two groups have no credibility when it comes to understanding, well, anything. Is that who S&P really wanted to lump themselves in with? As I said, the sooner the ratings agencies are swept into the dustbin of history and replaced with a system that rates bonds and debt independently, the better.