Sunday, June 22, 2008

SC Lottery: Inferior Good?

Generally, retail sales of most goods decrease during economic downturns. On the other hand, inferior goods see an uptick, as consumers switch consumption from premium to lower cost goods. For example, McDonald's coffee benefit at the expense of Starbucks lattes. From The State, sales for the SC Lottery are up 3.7% despite higher gas and food prices.

Lottery spokeswoman Stephanie Hemminghaus tells The Herald of Rock Hill that a dollar seems more valuable these days. She said customers who spend $100 to fill their gas tank see an extra dollar as something they can spend on a lotto ticket.

"A $1 investment could win you millions," she said. "A dollar doesn't really buy you much in these hard economic times, but it will get you a Powerball ticket and the chance to win more money."

Victor Boulware, whose convenience store in Clover is one of the state's top sellers for lotto tickets, said his lottery revenue is up 20 to 30 percent over last year. He suspects that customers struggling with rising costs are getting desperate in their search for extra cash.

"People are takin' that chance, trying to get out of the hole in one shot," Boulware said. "The economy probably has a lot to do with it."

Friday, June 20, 2008

Credit Card Trimming

From the NY Times, more evidence of the "Great Deleveraging: credit card companies will slash up to $2 trillion in credit card lines by 2010 to sure up their balance sheets, especially with the impending slow down in the economy.

Banks that issue cards like Visa and MasterCard, as well as the American Express Company, are cutting the limits for customers who have run up big debts, live in areas that have been hit hard by the housing crisis or work for themselves in troubled industries.

The reductions come as consumers, squeezed by a slack economy, a weak housing market and rising unemployment, are falling behind on monthly credit card payments in growing numbers.

Credit card lenders are also culling their accounts ahead of new rules that are intended to benefit consumers but could limit the profits on customers deemed bigger risks.

Many Americans have come to rely on credit cards to cover everyday expenses like groceries, gasoline and medical bills, in addition to big-ticket items and luxuries. While consumer spending, the nation’s economic engine, has been surprisingly resilient of late, a more sweeping reduction in credit card limits could pose serious challenges for hard-pressed consumers and, in turn, the broader economy. . . .

Washington Mutual cut back the total credit lines available to its cardholders by nearly 10 percent in the first quarter of the year, according to an analysis of bank regulatory data. HSBC Holdings, Target and Wells Fargo each trimmed their credit card lines by about 3 percent.

Among those four lenders, that amounts to a reduction of about $15 billion in three months. Over all, the amount of available credit for the industry appears to be about flat, with the three biggest issuers — Bank of America, JPMorgan Chase and Citigroup — slightly increasing their overall credit lines. But even they are trying to rein in risky individual accounts.

Big banks face intense pressure on their balance sheets as they bring on billions of dollars worth of complex mortgage-related investments and other loans they are struggling to sell. Meanwhile, they are bracing for a surge in credit card losses as the job market and economy falter. . . .

“This downturn is the perfect storm where the consumer is getting squeezed from all levels,” said Michael Taiano, a credit card industry analyst at Sandler O’Neill. He projects that credit card loss rates for lenders, now around 5.7 percent, could go as high as 10 percent in next 18 months. That would be higher than the peak levels reached after the 2001 technology bust.

Since borrowers typically run up their balances before they stop paying, issuers have started cutting lines of credit. Often, lenders will lower customers’ credit limits as they pay down their debt — a technique known in the industry as “chasing the balance.” This way, they are on the hook for less money if borrowers default.

“They are trying to cut their risk exposure,” said Bill Ryan, an analyst at Portales Partners. “The consumer that used to use his house as an A.T.M. is now starting to use their credit card as an A.T.M.”

American Express is reducing credit lines for customers holding subprime mortgages and small-business customers in industries tied to the real estate market. And Chase Card Services, the consumer arm of JPMorgan, is taking similar action on distressed borrowers, especially in places like California, Arizona and Florida, where home prices have declined sharply. . . .

Meredith Whitney, an Oppenheimer banking analyst, said the impact of the recent regulatory proposals on lender profits could be so severe that she expected the industry to pull back $2 trillion in outstanding credit lines by 2010. That would be a 45 percent reduction in credit currently available to consumers. Risky borrowers would be squeezed the most.

Wednesday, June 18, 2008

He's Back

Everyone's favorite candidate from 1992 is back, accompanied by his famous charts. I can't believe it's been 16 years since Ross Perot warned us of the "giant sucking sound" that NAFTA would create. This time, the economic dangers are not just lost jobs, but rather the viability of our entire government and economy. I find a strange comfort in that someone else finds that the national debt and federal deficit are the most pressing issue facing this country (although I've been told that I shouldn't identify myself as a fiscal conservative). I guess my reasoning is that without financial stability, there are no dialogues on health care, on Roe v. Wade, and religion in schools.

Enjoy the charts.

The Mood Surely Is Different on the Other Side of the Pond

OK, so we've experienced the brunt of $4 (soon to be $5) gasoline, and rightfully we are hurting. However, the scary thing is that oil is integrated into almost every product that we come across on a daily basis. And we haven't yet experienced the brunt of that price shock; normally, it takes about 4-6 weeks for $135 oil (first breached in May) to reflect on retail prices. According to a memo sent by RBS to its private clients, the outlook is not good, especially once the effects of the fiscal stimulus wear off.

While I believe that any candidate's economic policy is better than the current one's, I find it troubling that the media continues to fixate on ideological principles, totally ignoring the current global economic landscape; navigating the upcoming turmoil will require unparalleled pragmatism that utilizes principles from both sides of the aisle. Blind ideology has led us to this point, and it is unrealistic that any party has a monopoly on the solution. Furthermore, news coverage seems to ignore the severity of the situation, perhaps to avoid the dreaded "stagflation" label, which would conjure memories of a failed Carter term and handicap the Obama campaign. Across the pond, the Brits have no qualms addressing the severity; from the Telegraph:

The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.

"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as
"all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

Such a slide on world bourses would amount to
one of the worst bear markets over the last century. . . .

"Cash is the key safe haven. This is about not losing your money, and not losing your job," said Mr Janjuah, who became a City star after his grim warnings last year about the credit crisis proved all too accurate.

RBS expects Wall Street to rally a little further into early July before short-lived momentum from America's fiscal boost begins to fizzle out, and the delayed effects of the oil spike inflict their damage.

"Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point," he said.

US Federal Reserve and the European Central Bank both face a Hobson's choice as workers start to lose their jobs in earnest and lenders cut off credit.

The authorities cannot respond with easy money because oil and food costs continue to push headline inflation to levels that are unsettling the markets. "The ugly spoiler is that we may need to see much lower global growth in order to get lower inflation," he said.

"The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets," he said. . . .

"The political fall-out could be substantial as finance ministers from the weaker economies rail at the ECB. Wider spreads between the German Bunds and peripheral markets seem assured," he said.

Ultimately, the bank expects the oil price spike to subside as the more powerful force of debt deflation takes hold next year.

Wow, let's see: a crash in the global stock and credit markets; one of the worst bear markets in the past century; additional fiscal stimulus would only increase already-staggering headline inflation; and the Fed is basically out of ammunition.

A Day Late and a Dollar Short

With the impending reset of option-ARMs threatening to dwarf the subprime crisis, Wachovia has implemented a new policy "quizzing" the mortgage applicant on the particularly insidious qualities of the mortgage. Unfortunately, this policy may not be enough to placate federal regulators, especially with most underwriters no longer offering the product.

Wachovia's new policy ``is far too little and far too late and indicative of how bad it is,'' said William Purdy, a Soquel, California, lawyer who concentrates on home refinancing. ``These loans are ticking time bombs and probably the worst thing the bank can say it has ever done to its customers.''

Unfortunately, Wachovia is already on the hook for $1.7 billion this year and $2.8 billion in 2009.

Tuesday, June 17, 2008

Corn on My Mind

We're all familiar with the run up of crude oil, up to $140/bbl, but corn has also spectacular rise, doubling in the past year. But you say, how often do I eat corn? While you may not eat corn directly, corn is the primary feedstock for almost all meat products. And the situation will get much worse; the flooding in the Midwest is expected to decimate an already weak crop.

Meat Prices Surge

Monday, June 9, 2008

The Untold Story of Johnny Appleseed

When Johnny was 18, he inherited an empty track of land in SC and $10K from his grandparents. Being a smart entrepreneurial fellow, Johnny believed he could easily plant 1000 apple trees even though there were other struggling apples farmers in the neighborhood. All he had to do was secure the water rights that his neighbor Steve was offering for $1000/month. So he purchased the water rights and planted the trees, and within months his farm was flourishing; the apples were so plentiful he asked his siblings, Jim, Bob, Randy, and Mary to move on the farm to help. With his siblings, the farm was so efficient that his competitors eventually went out of business. Flush were success, the Appleseeds re-organized their farm. First, they decided that the little house was too small, so Johnny purchased a bigger house for $500k. Also, they were tired of sharing the same horse, so Johnny purchased each of them a new car. Finally, the Jim didn't feel like working as much, so he decided to hire Peter Red, the new kid in the neighborhood.

Despite these purchases, Johnny was financially sound because the apples were still flowing from the trees. However, one day there was a fire, and 250 trees were lost. At the end of the month, Johnny realized that he was barely breaking even after paying all of his expense; he didn't have enough money to replace the trees. The next month, Bob fell down the stairs when he was drunk. Even though Bob could now only work two days a week and needed therapy the other five days, Johnny couldn't kick Bob out of the house; Bob was his brother and he was not going to leave him behind. Instead, Johnny decided to hire Peter full time now. Because of Bob's therapy and Peter's salary, Johnny was not able to pay Steve the full $1000 that month for the water rights. However, because Steve was somewhat of an absent tenant, he liked the idea of having neighbors watch his property; as a result, he agreed to accept $500/month plus the income from 250 trees. With this agreement Johnny was able to continue farming and still break even.

The next month, Mary discovered she was pregnant and was not able to work. To make up for Mary's contribution, Johnny had to hire Peter's brother. Because of his dire financial condition, Johnny decided to offer the Reds the fruit from 250 trees every month. Even though he was caring for his siblings and their living expenses, Johnny still felt fine; after all, he still had 250 trees left. However, soon Johnny realized that his trees were getting old and bearing fewer fruit. Compounding matters, the Reds decided to quit. He started to get worried, and so he borrowed some money from his bank using the equity from his home. Using the money, he hired another worker, Dan, and all was fine again.

As he was riding down the road later that month, Johnny saw a farm with a sign reading "Red's Apples Now Open." As he pulled into the farm, he was shocked by what he saw; there were the Reds overseeing a farm of 3000 trees with a totally automated infrastructure. Even worse, the apples were selling for half of his price. When asked by Johnny how it was that they could afford the farm, given that he had 10 siblings to feed, Peter replied that instead buying a fancy house and a new car, the Reds simply saved every penny they could. When they were able to buy a farm, all of the siblings worked on it day and night, rain or shine. So dedicated were they to the farm, when one of the siblings became ill, she didn't stop working nor did the Reds even call a doctor because they felt they couldn't afford it. Eventually, she died from her illness.

As he returned home, Johnny got more bad news. Steve had noticed that his reservoir was running low and that he could buy the same apples from Red at half the price; as a result, Johnny would now have to pay the amount and the fruit from 500 trees. Running some calculations using the decreased volume, Johnny realized that he wouldn't have enough revenue to pay his all of his expenses. When he tried to get another loan from the bank using the trees as collateral, the bank told him it could only loan him $100k and would have to increase the rates because Red's farm made the loan riskier.

So Johnny went home, assuming that everything was fine. However, when he went to sell the apples to the vendor, he forgot that they no longer fetched a premium. Now he was really in trouble. After paying Steve for the water, the living and health expense for his siblings (Randy who worked, Jim who didn't, Bob who was injured, and Mary who had a kid), and the bank for his loans, Johnny was now bleeding $10K/month. Even worse, he had only $5K left in reserves. The next day, Johnny received a notice from the bank; the bank invalidated the $100k loan after it discovered that 1/4 of the trees had burned, and the other 3/4 had been promised to Steve and Dan. Johnny had 30 days to pay back the $100k.

Afraid of losing his farm, and with no one to turn to, Johnny called his old friend SunnyD for advice. After analyzing the situation, Sunny had good news; the farm could be saved but with a lot of cooperation and a lot of work. First, Johnny had to sell two of the cars, and give the proceeds to the bank to extend the second loan. Second, Johnny had to convince Mary to hire a babysitter to take of her child while she worked full time at the farm, so they could stop paying Dan. This would allow them to almost break even, after paying all of the expenses. Next, the Appleseeds had to stop going out to eat and going to the movies; this savings would allow them to buy 2 trees every month. This was not a lot, but it would eventually result in a net profit every month. Continue this for several years, they could replant all of the trees. Finally, Sunny discovered that there was actually a reservoir under the farm. However, it would take a year before he could use the water; until then he would have to pay Steve. Nevertheless, Johnny felt relief that he could be free of Steve once and for all.

In the end, the farm was saved. Are there any questions on identities of the players?

Saturday, June 7, 2008

Sales of Wood Stoves Triple

According to MyFoxCleveland, it looks as if the energy crisis has really hit home. The anticipated costs for heating this summer are driving record sales of wood ovens.
It looks like something out of the past, a gadget our grandmothers and great grandmothers once used in the kitchen. Surprisingly, the wood cooking stove is making a big comeback. Just ask Sharon Hershberger, a product specialist at Lehman's Hardware Store in Kidron, who says wood stoves are flying off the shelves.

. . . .

Lehman's Hardware Store is seeing wood stove sales double, if not triple, compared to this time last year. The marketing vice president, Glenda Lehman Ervin, says, "Typically our sales are very flat or almost, quite frankly, nonexistent this time of year and we're seeing the exact opposite trend."

Lehman's says there are two main reasons sales are doing unseasonably well -- the economy and the environment. Ervin explains it this way -- "People are looking for ways to save money and save the planet."

A wood cooking stove serves several purposes. It doesn't use electricity, just wood. It will heat your home, it will cook your food, and if you buy one with a water reservoir, it'll heat the water throughout your house. They cost between $4,000 and $7,000, but it's estimated they pay for themselves in four to six years.
Customers are trying to save energy in other ways as well:
Wood stoves aren't the only gadgets that are doing well. Sales have doubled for push mowers. Drying racks are also on the rise with customers who want to offset the cost of electric or gas dryers. . . .

More and more people are buying hand cranked grain mills to make flour to save on rising food prices and making healthier meals. . . . Sales on the grain mills have gone up ten times since last May.

Post-Bush Unilateralism

From the NY Times, are the promises of populism disingenuous? In an earlier post, I wrote of China's nuclear option.

The Democrats’ vocal hostility to trade is starting to scare many of America’s best friends. As Barack Obama and Hillary Clinton have bashed China and a variety of free trade agreements, allies who have been yearning for an end to President Bush’s in-your-face unilateralism are worried that a Democratic president may be just as undiplomatic, and unreasonable, when it comes to economic protectionism.

It is very irresponsible, in my view, to pretend to people that we can disengage from international trade,” Peter Mandelstam, the European trade commissioner, warned in a May interview with the BBC.

It would be a mistake to brush all this off as mere campaign posturing. The United States remains as open to trade as its European allies, and in some areas it has even fewer restrictions. But the question is, for how long?

Despite economists’ assurances about trade’s many benefits, American workers increasingly view globalization as a losing battle against China’s cheap labor and a very personal threat to their wages and jobs. According to a poll this spring by The New York Times and CBS News, 68 percent of Americans favor putting restrictions on free trade to protect domestic industries. That is the highest share since they began asking the question in the 1980s, and 12 percentage points more than in 2000.

He Who Laughs Last, Laughs Best...

From the NY Times:
In his first major economic speech since becoming president, Dmitri A. Medvedev said Saturday that the world might be in the throes of the worst economic crisis since the Great Depression, and that a newly revived Russia could offer solutions to a systemic crisis that underscored the United States’ economic shortcomings. He opened with an indirect dig.

“Today, the center of our attention will be global changes in the financial systems, on commodities and food markets,” he said in an address in which he focused on the recent unnerving jump in international food and energy prices. “And, likewise, economic relations between various countries, including relations between the former leaders of international development, which are showing losses, and new players that are ensuring growing rates of economic growth.”

To paraphrase President Medvedev, regardless of the complexity of your financial systems and the ability of your government to borrow money, you eventually have to pay for your food and electricity. You can only hide your losses so much. I wonder what type of help Medvedev is offering?

Oil. Oil. Oil.

For those that have been in a coma, the price of crude oil reached a intra-day high of $139.12/bbl yesterday. The frustrating thing has been the analysis trying to prove the merits of one theory over another instead of just understanding that oil's meteoric rise has been a confluence of multiple theories. So far, conventional wisdom suggests the following theories, all of which are valid: increased demand in the emerging countries; subsidization of gasoline prices throughout the world; speculation; and, the latest saber-rattling between Israel and Iran. But to me, an ignored cause is the falling dollar caused by our failures in monetary and fiscal policy. As of said numerous times, the Fed's attempt to fix the credit and liquidity crises involved both lowering rates and easing borrowing standards. Meanwhile, Congress hasn't helped matters by increasing the election year largesses, with among other things, a $180B stimulus package and a $300B farm bill. Throw in the GI Bill, a builder bailout, and a couple of foreclosure packages, and you're really talking about real money. And yes, Congress is seriously considering a second stimulus package this summer, and that's before anyone has even addressed the impending heating crisis this winter.

So yes, the US Dollar is toxic right now; the world realizes that American authorities do not believe in tough love and will continue to throw money at the problems. I would hate to be either China or OPEC realizing that the trillions they own are getting more worthless by the day. Our leaders worsen the situation by not fully disclosing it to the public because the weakened dollar represents failures by the government and the American people. Furthermore, the only solution to this problem will betray both parties; taxes have to be raised, and spending has to be cut. Budget-neutral policies will not solve the problem, not with Medicare and Social Security looming in the background. And to those that use the withdrawal from Iraq as the complete panacea for our fiscal policies, the total costs for the war in 5 years has been only $525 Billion.

The following chart from shows how bad the situation with the dollar really is.

Friday, June 6, 2008

It's Only 45 Trillion Dollars

According to an International Energy Agency report, the world needs to invest $45 trillion in renewable energy projects to reduce carbon emissions 50% by 2050 and still maintain economic growth. Bringing emissions back to 2005 levels by 2050 would require $17 trillion. Under both scenarios, the most inexpensive gains will come from reducing end-user waste, from energy efficient buildings to solar heating. The most expensive gains will come from transition from coal for carbon friendly sources like nuclear, clean coal, and natural gas.

Thursday, June 5, 2008

How Many ARMS Are There?

In an earlier post, I explained the dangers that Ben Bernanke was facing in keeping interest rates low and allowing the banks to use almost anything as collateral, especially in an election year. Among the concerns are recession, inflation, liquidity, etc. Another problem are the adjustable rate mortgages still on the market. While the majority of these ARMs are prime, they will reset at a much higher rate, especially given the LIBOR mis-stating fiasco. The combination of higher rates and decreased home value will make refinancing an impossibility for most. How bad is the situation? Yes, we're looking at Q2 2011, a full three years to unwind all of these positions. This is going to be slow and painful.

Cap and Trade - Sulfur Dioxide

It's a foregone conclusion that cap-and-trade for carbon emissions will be a reality in 2009; both candidates support the system. The difference is how the credits are allocated, but that conversation is for another day. Back in the late 1980's, acid rain was environmental cause de jure, caused by sulfur dioxide emissions. The solution came in the form of allowances for the emission of a certain level; producers that exceeded the caps had to purchase allowances, thus providing an incentive to reduce emissions.

By all means, the program has been a success in reducing sulfur emissions (see image below). At the same time, I'm not sure if the states of Michigan, Ohio, and Pennsylvania are feeling like successes these days. As they say, there is no such as a free lunch.

More Bad News in Housing

I'm starting to sound like a broken record. At this point, I'd happy if mortgage troubles just remained steady, but since last summer, every quarter has gotten worse. According the Mortgage Bankers Association, first quarter highlights include:
  • Delinquencies are 6.35% of outstanding mortgages, up from 5.82% Q4 (2007), and up from 1.51% Q1 (2007).
  • Foreclosures are 2.47% of outstanding mortgages, up from 2.04% Q4 (2007), and up from 1.28% Q1(2007).
And it looks like the problem is moving into prime borrowers as well, consisting of 40% of foreclosures. Another ominous sign is that 7% of the foreclosures were FHA mortgages, which are guaranteed by the federal government.

China's Nuclear Option

It's been a stated goal of my blog not to comment on the feasibility of the political promises made by the candidates because in a way, it's all "window shopping." But at the same, it is borderline unethical to criticize the Bush administration for failing to address China's continuing yuan-dollar peg. As much as I've criticized Secretary Paulson for prematurely claiming that the housing crisis had been "contained", to his credit, he has confronted the Chinese on their currency manipulation, which has keep their exports inexpensive, despite the falling dollar. And last year, Congress did threaten to impose tariffs unless the pegging ceased. China's response?
The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress . . . .

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

Xia Bin, finance chief at the Development Research Centre (which has cabinet rank), kicked off what now appears to be government policy with a comment last week that Beijing's foreign reserves should be used as a "bargaining chip" in talks with the US. . . .

He Fan, an official at the Chinese Academy of Social Sciences, went even further today, letting it be known that Beijing had the power to set off a dollar collapse if it choose to do so.

"China has accumulated a large sum of US dollars. Such a big sum, of which a considerable portion is in US treasury bonds, contributes a great deal to maintaining the position of the dollar as a reserve currency. Russia, Switzerland, and several other countries have reduced the their dollar holdings.

"China is unlikely to follow suit as long as the yuan's exchange rate is stable against the dollar. The Chinese central bank will be forced to sell dollars once the yuan appreciated dramatically, which might lead to a mass depreciation of the dollar," he told China Daily.

It's shameful that our leaders won't admit this to us publicly; after all, how do you say that China has basically emasculated us, with the ability to dump $1T of our treasuries bonds. A massive sell-off would have the affect of driving up the cost of borrowing everything from mortgages to student loans. Both parties have been sleeping at the wheel, since it's been three decades in the making. One on hand, it's hard for the GOP to extol the virtues of the free markets when this is the result. And on the other, this situation renders much of the Democrat promises fiscally impossible, unless Congress wants to drive the value of the dollar even lower.

Game, set, match; we're out of bullets. Tariffs are out. A stronger dollar won't work because of the peg. So the question is how to prevent American consumers from purchasing goods made in China? Ten years ago, when China was seen as a low-quality producer, it would have been easier, but now they manufacture everything from Bibles to prescription medication.

Yes, our foreign policy is dictated by a foreign nation because of our addiction to all things cheap.

Wednesday, June 4, 2008

What's up with Ireland?

I was too tired and lazy to graph the per capita GDPs (PPP) during the entire "Celtic Tiger" economy of Ireland. However, the following dataset (courtesy of the CIA World Factbook) clearly demonstrates my point. In 2000, Ireland's PPP was 20k, almost 2/3 of the United States. By 2007, Ireland more than doubled its PPP, reaching equivalence with the United States. Meanwhile, the UK and France improved roughly the same rate as the US. What happened? In months to come, I'll go over the details. The answer is not good for us in the United States.

Riegel v. Medtronic Redux

Back in February, in Riegel v. Medtronic, the Supreme Court held that Medical Devices Amendments to the Food, Drug, and Cosmetic Act preempted state tort claims for defective medical devices, using a tortuous interpretation of "requirement." Well, Congress is ready to correct that language with the bill to be introduced by Henry Waxman (D-Ca).

Personally, I believe that the Supreme Court should not read preemption into legislation unless Congress explicitly states it.

Read More. . .

Fishermen Riot over Rising Fuel Prices

Europe is not fine with peak oil, either. Yes, we've all heard a colleague or friend make a comment along the lines of "Well, when I was in France, gas was $4 a Liter."

Time Warner Cable to Begin Net-Metering

This month, in a test run, Time Warner Cable will be charging consumers in Beaumont, TX for their upload and download volume. Customers can choose plans ranging from $30-55 per month, with a charge of $1/GB for exceeding the volume threshold.


My take on this? Yes, I believe consumption based pricing models; video downloaders should have to pay more for their service than those that just check email. But at the same time, the problem is that Time Warner Cable, the broadband provider, is not sufficiently decoupled from Time Warner, the content provider. While piracy is a legitimate concern, the 40GB cap can also have a disastrous effect on even legitimate content providers. For example, Netflix recently introduced the Roku, which would deliver movies directly to the set-top box via the Internet. With the cap, given that an HD movie can be 8GB, the Roku is rendered pointless. And yes, Netflix is a competitor of Time Warner Cable's video on demand service.

Hey, it could be worse. To offset higher fuel costs, airlines are contemplating charging passengers by the pound.

Can Whistleblowing Be a Career?

All right, I'm not exactly a big fan of big-time corporations, especially when they violate laws for the sake of profits. So it was good news to me that Walgreens had to pay $35M to 42 states to settle claims that it illegally switched brand name drugs for their generic counterparts. However, I'm not naive and realize that the $35M is a pittance compared to the pocketed difference; a suspension of Medicaid eligibility would probably be more of a deterrent.

Here are the lawsuit and settlement.

Under the Federal False Claims Act, a private individual can file qui tam claims alleging fraud against the government by federal contractors; for their trouble, a whistleblower generally receive between 15 and 30 percent of the amount recovered by the government. Here's where it gets interesting, according to Pharmalot, the whistleblower in this case, Bernard Lisitza, was also involved in a $50M settlement with Omnicare (a pharmacy for nursing homes) and a $37M settlement with CVS/Caremark. The story goes that he was first fired from Omnicare after voicing concerns over the drug-swapping scheme, and subsequently could only find work as a temp pharmacist for CVS and Walgreens. So three multi-million whistleblower lawsuits within 2 years, not bad.

German Taxpayers Pickup Part of the Subprime Mess

Not wittingly, at least.

Sub-prime Fallout Extends to Banks in Eastern Germany
Estimated losses Could Hit $69B, with taxpayers picking up the tab for nearly half that amount.
"Everyone has talked about the banking losses, but it could be even more interesting to look at the social consequences of the crisis," said Jorg Rocholl, associate professor at Berlin's European School of Management and Technology. "In Saxony you are talking about a guarantee of almost 3 billion euros to bail out a bank -- money which could have been used in financing schools, hospitals."
Here, in the US, the government doesn't worry about the trade-offs in bailing out banks or homeowners. Uncle Ben just opens the Fed's discount window and lets the banks back their trucks in; meanwhile the government just borrows more money for its bailouts.

You May Be a Millionaire

More proof that housing as definitely moved past subprime. According to the Wall Street Journal, Ed McMahon (of Publishers Clearing House and The Tonight Show fame) may lose his house to foreclosure. Evidently, McMahon has fallen about $644K behind on a $4.8M loan secured by his loan. The home, listed at $5.75M by Christie's Great Estates, has been on the market for two years.

According to McMahon's spokesperson, the reason for the delinquency is that the celebrity broke his neck in a fall 18 months ago and hasn't been able to work. OK, Ed McMahon is 85 years old, and he has to work to pay off his home? We're definitely in trouble now.

Tuesday, June 3, 2008

Robert Reich Wonders . . .

Robert Reich wonders why we can't get decent public transportation. First of all, I understand that Reich is a brilliant man (Rhodes Scholar, Yale Law); additionally, during his tenure as Secretary of Labor, he tirelessly championed for the average worker. So in a way, when I read this post, I expected a little bit more...
Problem is, the nation doesn't have nearly enough public transportation to handle the new demand. Even more absurdly, right now when it's needed the most, public transportation across the land is being cut back. . . . A survey of the nation's public transit agencies released last Friday showed 21 percent of rail operators now cutting back and 19 percent of bus operators.
Yes, I understand that $4 gasoline has awakened people (and hopefully policy makers) to the realization that the public transit infrastructure has been sorely lacking. And I realize that states, facing crushing budget deficits and peak oil, are paring back public transportation. But this solution?
If officials need more money to cover the extra fuel costs of public transit, they can raise ticket prices a bit without reducing demand; most of us would still find public transit cheaper than driving our cars.
The reason that most people use public transportation is that they can't afford cars. They don't see $4 gasoline, but instead $3 bread and $5 milk. Many are on the fringes of sustenance and can't absorb the increased fuel costs. But he continues:
But officials shouldn't stop there. They should add services and expand whole systems -- more buses, more trains, more light rail. If they can’t finance this by floating bonds, they should go to Congress and ensure that public transportation is a major part of the next stimulus package.
I've always hated the insistence by opponents of mass transit that the systems be self-supporting. This myopia ignores the positive externalities of mass transit: less demand for oil, less wear on the highways, less pollution, etc. So yes, mass transit is a valuable capital asset. However, where is the money to pay for this? Already, many states and municipalities are in fiscal hell; additionally, credit markets are still a mess. On the record, I believed that the first stimulus package should have financed a New Deal mass transit or renewable energy project. However, a second stimulus package would be disastrous; we simply can't add more debt without cutting some discretionary spending. Government can't be all things to all individuals: mass transit or health care?

The bigger problem with a federally funded local mass transit is that it will favor urban cities over rural and suburban areas, forcing these residents to shoulder the brunt of $4 gas. Federal infrastructural projects on this scale should benefit all classes of residents. [Warning -- Political Commentary Alert] This same burden-shifting myopia was evident during the gas tax brouhaha. Sure, it's implementation for the summer was unlikely, and on average, the amount saved was minuscule. However, rural drivers are not average consumers; not only are these residents further dispersed, many rely on heavy farm equipment that eat fuel. I'm not even going to talk about truckers. So the constant ridicule that the tax holiday would only save 0.28 cents a day simply widened the divide between urban and rural voters, between the working class and the affluent. Ahh, if we could only live within 2 miles of work. [End Political Commentary]

Additionally, this program amounts to a "bailout" of many municipalities that didn't foresee the end of cheap gasoline. During the past decade, local governments were flush with cash from both the housing boom, as well as the tobacco settlements. And the states went on a spending binge on roads, sewers, and schools. I'm sure much of this infrastructure was needed; however, choices were made, and local governments should have to face them, without another bailout on taxpayers. For example, instead of investing in mass transit, South Carolina poured $114M in the Innovista Project that looks like a colossal failure.

This is another Katrina situation, in which government bows to special interests, ignoring a problem affecting mostly lower class citizens until a hurricane ($4 gas) blows up in its face. I remember back in the early 1980's, when we first arrived in America, my father and our neighbor had to walk 45 minutes to the bus stop for an hour bus ride because of the mass transit in Charleston was so lacking. And it's been that way for the past 25 years. And now, there's a public outrage over the quality of mass transit? So yes, Robert Reich, investment in mass transit would "get the economy going, and save energy and the environment [for] years to come." But so would investments in renewable energy, and I'd rather the federal government spend the billions for wind turbines, which can benefit all classes of residents.

Cardozo and Cholesterol

"The half truths of one generation tend at times to perpetuate themselves in the law as the whole truth of another." J. Cardozo, Allegheny College v. National Chautauqua County Bank, 246 N.Y. 369, 159 N.E. 173
I remember about 10 years ago, during a medical school interview, I was asked what contribution would I bring to medicine. My answer was not that well received. First, I expounded on the difference between causation and correlation, and how it appeared that much of today's research was based on correlative data and attempted to treat the symptoms of the condition, and not the condition itself. When I was asked to clarify my position, I should have gracefully backpedaled, but instead, I went on the attack, and began discussing the faulty logic behind the Framingham Heart Study which first introduced the relationship between cholesterol and heart disease. I tried to explain that perhaps a high cholesterol count was a result of a condition that caused heart disease. The interviewer looked shocked, that a college student was questioning decades of research. After all, it's easy to visualize cholesterol as some fatty substance that would clog the arteries if not reduced.

And yet even as new classes of drugs were shown to be effective in reducing cholesterol, the expected reductions in cases of heart diseases never materialized. To explain these inconsistencies, researchers began parsing the definition of cholesterol. We started hearing about HDL (good cholesterol) , LDL (bad cholesterol), triglycerides, and genetic conditions. Today, the conventional wisdom is that the increasing the level of HDL decreases the risk of heart disease. Unfortunately, study after study is showing that the relationship may not be valid. In this week's issue of the Journal of the American Health Association, a study showed that individuals with a genetic condition that resulting in decreased levels of HDL did not have an increased risk of heart disease.

After billions of dollars in research and treatment (estimated 20B/year), we really haven't come close to proving the "half truths" of a fifty year old study. But someone, this half-truth has become entrenched. And along the way, we've marginalize the collateral damage (e.g. Vytorin) that our cholesterol "cures" have caused; later this year, we may even insulate the manufacturers for the damage they cause. Sooner or later, somebody's got to shout that the emperor has no clothes on.

More Bad News for Detroit

Several years ago, when I learned of things like current accounts and corporate expatriation, I tried to avoid purchasing goods that were made overseas or by foreign corporations. However, because of my mother's terrible experience with a Ford minivan, I could never get myself to buy an American car. And even before environmentalism was "An Inconvenient Truth," the immigrant in me could never justify owning a gas-guzzling behemoth. Nevertheless, this aversion didn't prevent me from rooting for Detroit to succeed.

So, in the late 1990's, when the rest of the world had caught the Asian contagion and oil was 10/bbl, it was refreshing to see Detroit earn billions selling high-margin SUVs and trucks. For a while, Detroit was the envy of the automobile world, with the Germans and Japanese trying desperately to enter the SUV market. But $130 oil is a different beast. Today, GM reported that sales were down 27.5% in May; Ford reported a 16% decline. Even vaunted Toyota, now the world's largest automobile manufacturer, suffered a 4% decline.

For a while, all was good. Ford and GM used the SUV cash machine to honor billions of pension promises; at the same time, earnings were also finance Ford Credit and GMAC, their consumer credit arms. As America went through its housing boom, these subsidiaries were so profitable that there were calls to spin off these high-growth divisions. However, now with the housing bubble burst and $4 gasoline, both the manufacturing and finance arms are highly toxic. In a sense, Detroit doubled down and lost big.

Yes, Detroit should have had more foresight and seen the end of cheap oil and invested in smaller, more efficient cars. And yes, the consumer finance arms should have seen the end of easy credit. And yes, Expeditions, Hummers, etc. are not exactly environmentally friendly. Nevertheless, the strange joy that I sense from some of my friends over the Detroit tragedy is somewhat saddening. After all, it was Detroit that created the modern social net, providing pensions that were near the working wages and NO-COST insurance. To disown Detroit now is to ignore the historical advancements that it made to labor. Furthermore, the responsibility to honor these pensions falls on all of us, through the Pension Benefit Guaranty Corporation.

To their credit, both Ford and GM have initiated substantive policy changes for this environment (e.g. "retiring" Hummer, ramping production of the gas-electric hybrid Volt, closing factories, and alas, relocating factories to Mexico), but the inertia required to be competitive will take years. Luckily, they've got billions in reserve, enough to withstand several unprofitable years. However, looming in the background is the $100B+ pension obligation that is guaranteed through the PBGC.

While many have seen the inevitable demise of Detroit, no one could have possibly foreseen the rapidity by which it occurred. Already, stagflation has devoured both the airline and automobile industries. Who's next?

Buy One Get One Free!!

According to Peter Viles at the L.A. Times, developers are trying to eliminate the glut of unsold homes with an offer that may be too good to be true. The catch? To get the $400k house, you must buy one for $1.6M.

Monday, June 2, 2008

Lesser of Two (or More) Evils

According to Paul Krugman, the Fed's obsession with fixing the liquidity crisis and staving recession has led to out-of-control inflation.

You see, fears of a 1930s-style financial meltdown are apparently out; fears of 1970s-style stagflation are in. And the Fed stands accused of being soft on inflation.

The emerging conventional wisdom, if what I heard is any indication, is that Mr. Bernanke has been fighting the wrong enemy all along: inflation, not financial collapse, is the real threat. And to head off that threat, the critics say, the Fed has to reverse course and raise interest rates — never mind the risks of recession.

Trust me, I don't envy Ben Bernanke. First, he's staring in the face of a financial collapse, in which the banks themselves are not honest about the depths of their problems, from understating LIBOR to trickling billions of dollars in write-downs. Then, he has Congress breathing down his neck to rescue the student loan market, asking the Fed to take student loans as collateral. And, in an election year, recession is always a political liability; the stimulus package may have just exacerbated inflation. As a result, these efforts have simply unleashed a pool of money that has flooded to the commodities market, causing the current run-up in oil, food, metals, etc.

For what it's worth (although I did see the run-up in commodities last fall), I think that we need these higher prices to continue for a bit longer. Trust me, I have no love for investment banks, and I know that some people are truly hurting. I just think that the higher prices will force America to re-calibrate some of its nonsensical ways. I'm not just talking about SUVs, but also $5 Starbucks lattes and $90 Lacostes.

Now It's the States' Turn

As July gets closer, the economy should get another hit from decreased state budgets. According to the NYT:

State and city governments have yet to shrink the economy; indeed, they have even managed to prop it up. They have quietly maintained their spending at pre-crisis levels even as they warn of numerous cutbacks forced on them by declining tax revenues. The cutbacks, however, are written into budgets for a fiscal year that begins on July 1, a month away. In the meantime the states and cities, often drawing on rainy-day savings, have carried their share of the load for the national economy.

That share is gigantic. At $1.8 trillion annually in a $14 trillion economy, the states and municipalities spend almost twice as much as the federal government, including the cost of the Iraq war. When librarians, lifeguards, teachers, transit workers, road repair crews and health care workers disappear, or airport and school construction is halted, the economy trembles. None of that, or very little, has happened so far . . . despite a significant decline in tax revenue.

This correction has the potential to be disastrous. Obviously, most states have been preparing for the downturn, but according to the Center on Budget and Policy Priorities, up to 27 states are still facing budget deficits totally 47B. For example, California is facing a 16B budget deficit for the upcoming fiscal year. So dire is its situation, that Gov. Schwarzenegger has floated the idea of selling FUTURE lottery revenues for a discounted present lump sum. Meanwhile, Pennsylvania, reeling from the manufacturing revenue losses, recently sold the Pennsylvania Turnpike to an Australian investment company for 12.8B. What else can we sell? Will Texas sell the Alamo back to Mexico, who apparently wanted some time back?

However, the budgets in many of these states were estimated in the first quarter in the year, when a full blown recession was a blip on the scale, and oil was below 100 USD. I won't know exactly how well these estimates will perform in the current environment. For example, South Carolina has already had to make two downward revisions to its estimate, I'm pretty certain that's the current budget will not be drastic enough because we've got an additional problem (evidenced by the unexpected shortfall in the 2007 budget) that is exacerbated by
stagflation. Several years ago, the state re-calibrated its tax scheme by reducing property taxes and eliminating the sales tax on unprepared food, while increasing it for discretionary spending and hospitality. The inflation side of the problem causes consumers to spend more on unprepared food and gasoline (tax based on gallons, not price); the stagnation side reduces the revenue produced by other discretionary spending on iPods, clothing, and eating out. So far, the SC tax base has been kept afloat because the weaker dollar and speculation has increased the value of our agricultural exports. Meanwhile, I'm keeping my fingers crossed that the expected tuition increase will be below 8%.