http://knowledge.wharton.upenn.edu/article.cfm?articleid=2472
With an economy as "evolved", synthetically "CDO'd", "derivatived", tranched, and potentially re-regulated as here in the U.S., when solid positions are taken on how things are going by leading financial gurus, we listen.
K@W published an interview with Jeremy Siegel this week which was very positive on where the recovery is headed. Siegel is the leading finance professor on a faculty noted for its acumen in that area.
According to Siegel, the U.S. is in a "self-sustaining" recovery which is no longer dependent on government stimulus. He sees the current Dow @ 11,000 as having an "upside".
Interestingly, he takes that perspective while stipulating that it may take housing a while to recover.
Our concern about Dr. Siegel's perspective is that we have trouble reconciling some estimates that unemployment will not drop back to 8% until the end of 2011 with consistent market and GDP growth. If we combine housing with unemployment, the numbers are, at best, slow in recovering. What were Krugman's estimates of how many jobs per month that needed to be created in order to get back the jobs that were lost (8 million) during the worldwide recession? Our recollection was 300,000 per month for 5 years. Creating 150,000 jobs per month is just "break-even" (with new work force entrants from high school, college, etc.). The most recent number we've seen was 162,000 created, but doesn't that include new census jobs?
So, we like the positive outlook but we wait and wonder...
Saturday, April 17, 2010
Wednesday, April 14, 2010
Krugman On A Green Economy
http://www.nytimes.com/2010/04/11/magazine/11Economy-t.html
Sooner or later we all have to get serious about what will create a better environment for future generations. Whether or not we agree about global warming, or the pace of global warming, bad things will happen if we don't come up with incentives to reduce pollution.
We have attached an article where Paul Krugman debates what to do economically about improving the environment. Basically, he asks and answers the question: is it possible to make drastic cuts in greenhouse gas emissions without destroying our economy? Like the debate over "climate change" itself, the debate over climate economics looks different when looked at closely: "In fact, once you filter out the noise generated by special-interest groups, you discover that there is widespread agreement among environmental economists that a market-based program to deal with the threat of climate change - one that limits carbon emissions by putting a price on them - can achieve large results at modest, though not trivial, cost."
The Clean Air Act of 1990 introduced a cap-and-trade system in which power plants could buy and sell the right to emit sulfur dioxide, leaving it up to individual companies to manage their own businesses within the new limits. Over time, sulfur dioxide emissions from power plants were cut almost in half. So, an approach like that can work.
While Krugman wants to separate "climate economics" from "climate science", he takes time to point out that there is enough evidence to support global warming severe enough to ultimately transform the Southwest United States into a permanent dust bowl over the next few decades. We agree.
The bottom line is that while climate change may be a vastly bigger problem than acid rain, the logic of how to respond to it is much the same: "What we need are market incentives for reducing greenhouse-gas emissions - along with direct controls over coal use - and cap and trade is a reasonable way to create those incentives."
Restricting emissions would slow economic growth (and, of course, the right wing elements are quick to point that out) but not by much. The Congressional Budget Office (CBO), relying on a survey of models, has concluded that Waxman-Markey "... would reduce the projected average annual rate of growth of gross domestic product between 2010 and 2050 by 0.03 and 0.09 percentage points." That is, it would trim average annual growth to 2.31%, at worst, from 2.4%.
And, of course, there is "China." For those who think that taking action is essential, the right question is how to persuade China and other emerging nations to participate in emissions limits. Krugman's suggestion that cap-and-trade systems could be set up to work in China and the United States with trading between companies in both countries is a reasonable approach: "By setting overall caps at levels designed to ensure that China sells us a substantial number of permits, we would in effect be paying China to cut its emissions."
Ah, but what if the Chinese (or the Indians, or the Brazilians) do not want to participate in such a system? Then, that's what "carbon tariffs" are for: "A carbon tariff would be a tax levied on imported goods proportional to the carbon emitted in the manufacture of those goods." The WTO has already produced a study that suggests carbon tariffs would be legal under international trading rules. And, remember here, Krugman's Nobel was based on his work in international trade and comparative advantage.
As for the scientific incentive to "act", Krugman points to Harvard's Martin Weitzman who argues that there is a significant chance of "utter catastrophe" and it is that chance - rather than what is most likely to happen - that should dominate cost-benefit calculations. Weitzman argues, and Krugman agrees, that the risk of catastrophe, rather than the details of cost-benefit calculations, makes the most powerful case for strong climate policy.
Assuming all of the above is reasonable, the issue here in the United States is do we have the political will to make it happen? Senators Kerry, Lieberman, and Graham plan to introduce legislation later this month that puts together a compromise proposal for climate action. We'll see where it goes.
Sooner or later we all have to get serious about what will create a better environment for future generations. Whether or not we agree about global warming, or the pace of global warming, bad things will happen if we don't come up with incentives to reduce pollution.
We have attached an article where Paul Krugman debates what to do economically about improving the environment. Basically, he asks and answers the question: is it possible to make drastic cuts in greenhouse gas emissions without destroying our economy? Like the debate over "climate change" itself, the debate over climate economics looks different when looked at closely: "In fact, once you filter out the noise generated by special-interest groups, you discover that there is widespread agreement among environmental economists that a market-based program to deal with the threat of climate change - one that limits carbon emissions by putting a price on them - can achieve large results at modest, though not trivial, cost."
The Clean Air Act of 1990 introduced a cap-and-trade system in which power plants could buy and sell the right to emit sulfur dioxide, leaving it up to individual companies to manage their own businesses within the new limits. Over time, sulfur dioxide emissions from power plants were cut almost in half. So, an approach like that can work.
While Krugman wants to separate "climate economics" from "climate science", he takes time to point out that there is enough evidence to support global warming severe enough to ultimately transform the Southwest United States into a permanent dust bowl over the next few decades. We agree.
The bottom line is that while climate change may be a vastly bigger problem than acid rain, the logic of how to respond to it is much the same: "What we need are market incentives for reducing greenhouse-gas emissions - along with direct controls over coal use - and cap and trade is a reasonable way to create those incentives."
Restricting emissions would slow economic growth (and, of course, the right wing elements are quick to point that out) but not by much. The Congressional Budget Office (CBO), relying on a survey of models, has concluded that Waxman-Markey "... would reduce the projected average annual rate of growth of gross domestic product between 2010 and 2050 by 0.03 and 0.09 percentage points." That is, it would trim average annual growth to 2.31%, at worst, from 2.4%.
And, of course, there is "China." For those who think that taking action is essential, the right question is how to persuade China and other emerging nations to participate in emissions limits. Krugman's suggestion that cap-and-trade systems could be set up to work in China and the United States with trading between companies in both countries is a reasonable approach: "By setting overall caps at levels designed to ensure that China sells us a substantial number of permits, we would in effect be paying China to cut its emissions."
Ah, but what if the Chinese (or the Indians, or the Brazilians) do not want to participate in such a system? Then, that's what "carbon tariffs" are for: "A carbon tariff would be a tax levied on imported goods proportional to the carbon emitted in the manufacture of those goods." The WTO has already produced a study that suggests carbon tariffs would be legal under international trading rules. And, remember here, Krugman's Nobel was based on his work in international trade and comparative advantage.
As for the scientific incentive to "act", Krugman points to Harvard's Martin Weitzman who argues that there is a significant chance of "utter catastrophe" and it is that chance - rather than what is most likely to happen - that should dominate cost-benefit calculations. Weitzman argues, and Krugman agrees, that the risk of catastrophe, rather than the details of cost-benefit calculations, makes the most powerful case for strong climate policy.
Assuming all of the above is reasonable, the issue here in the United States is do we have the political will to make it happen? Senators Kerry, Lieberman, and Graham plan to introduce legislation later this month that puts together a compromise proposal for climate action. We'll see where it goes.
Saturday, April 10, 2010
What's the Next Global Warming?
http://online.wsj.com/article_email/SB10001424052702304017404575165573845958914-lMyQjAxMTAwMDAwNjEwNDYyWj.html
We think the polar bears are "safe." We know that "60 Minutes" will be all over their situation if something changes.
Thanks to Brett Stevens, we have a great new perspective on what to do next. We need something to replace the discredited global warming movement. As Stevens says: "... we're going to need another apocalyptic scare to take its place."
My personal favorite (before we get to what could possibly replace global warming) of the Brett Stevens "discrediting events" is his recounting of the report in the Guardian last October that scientists at Cambridge had "concluded that the Arctic is now melting at such a rate that it will be largely ice free within 10 years." But, alas, in March there came another report in the Guardian based on the research of Japanese scientists, that "... much of the record breaking loss of ice in the Arctic ocean in recent years is [due] to the region's swirling winds and is not a direct result of global warming."
Fortunately, as Stevens points out, thanks to "Climategate" and the "Copenhagen Fiasco", the media are now picking up the kinds of stories they previously thought it easier and wiser to ignore. This is happening internationally. In France, a book titled "L'imposture climatique", is a runaway best seller. It's author, Claude Allegre, is one of the country's most acclaimed scientists and a former minister of education in a Socialist government.
As for the United States, Gallup reports that global warming now ranks sixth on the list of Americans' top 10 environmental concerns. Stevens' guess is that "climate change", in a few years, will exercise global nerves about as much as overpopulation, nuclear winters, ozone holes, killer bees, low sperm counts and genetically modified foods.
What could possibly take the place of "climate change"?
After introducing the concept of "Eschatology" (the belief, or psychology, that we are approaching the End Time), Stevens proposes a contest to invent the next panic. It must involve something ubiquitous, invisible to the naked eye, and preferably mass-produced. The solution must require taxes, regulation, and other changes to civilization as we know it.
We're stumped but we know there are "scientists" out there who, when they see an opportunity to get grant money, will come up with the next big thing. Look what they did for global warming!
We think the polar bears are "safe." We know that "60 Minutes" will be all over their situation if something changes.
Thanks to Brett Stevens, we have a great new perspective on what to do next. We need something to replace the discredited global warming movement. As Stevens says: "... we're going to need another apocalyptic scare to take its place."
My personal favorite (before we get to what could possibly replace global warming) of the Brett Stevens "discrediting events" is his recounting of the report in the Guardian last October that scientists at Cambridge had "concluded that the Arctic is now melting at such a rate that it will be largely ice free within 10 years." But, alas, in March there came another report in the Guardian based on the research of Japanese scientists, that "... much of the record breaking loss of ice in the Arctic ocean in recent years is [due] to the region's swirling winds and is not a direct result of global warming."
Fortunately, as Stevens points out, thanks to "Climategate" and the "Copenhagen Fiasco", the media are now picking up the kinds of stories they previously thought it easier and wiser to ignore. This is happening internationally. In France, a book titled "L'imposture climatique", is a runaway best seller. It's author, Claude Allegre, is one of the country's most acclaimed scientists and a former minister of education in a Socialist government.
As for the United States, Gallup reports that global warming now ranks sixth on the list of Americans' top 10 environmental concerns. Stevens' guess is that "climate change", in a few years, will exercise global nerves about as much as overpopulation, nuclear winters, ozone holes, killer bees, low sperm counts and genetically modified foods.
What could possibly take the place of "climate change"?
After introducing the concept of "Eschatology" (the belief, or psychology, that we are approaching the End Time), Stevens proposes a contest to invent the next panic. It must involve something ubiquitous, invisible to the naked eye, and preferably mass-produced. The solution must require taxes, regulation, and other changes to civilization as we know it.
We're stumped but we know there are "scientists" out there who, when they see an opportunity to get grant money, will come up with the next big thing. Look what they did for global warming!
Congress and Citigroup
http://www.nytimes.com/2010/04/09/business/09panel.html?emc=eta1
http://online.wsj.com/article_email/SB10001424052702304198004575171712663412230-lMyQjAxMTAwMDAwOTEwNDkyWj.html
http://online.wsj.com/article_email/SB10001424052702304198004575172251738485686-lMyQjAxMTAwMDAwOTEwNDkyWj.html
The testimony this week by Charles O. Prince III, Citigroup's former chairman and chief executive, and Robert Rubin, Citigroup's former vice chairman and former Treasury secretary, sparked interest for those following the event.
While Prince apologized for his role in the crisis (taking the wind out of the outrage evident with some members of the Financial Industry Oversight Committee), Rubin repeatedly played down his role as chairman of the executive committee of Citigroup's board. This was met with anger and disbelief.
Phil Angelides, the committee's chairman, told Rubin that "You were either pulling the levers or asleep at the switch." He added, "You were not a garden-variety board member. I think to most people chairman of the executive committee of the board of directors implies leadership. Certainly $15 million a year guaranteed implies leadership and responsibility."
While we don't even think Prince was qualified to be CEO of Citigroup (he was, basically, Sanford Weill's lawyer over the years that led up to the creation of that monstrosity in 1999), his apology before the committee and the public was well intended. As for Rubin, there is no hope. He is a greedy, selfish putz who had no idea what the financial instruments were (by his own public admission) that were risking his company and the worldwide financial system.
Parenthetically, we're not sure that anyone was qualified to be CEO of Citigroup. Sanford Weill and John Reed "founded it" (and, of course, were co-CEOs and that never works). It was literally too big and to complex to run.
Basically, the big takeaway from the committee event this week was best expressed by Peggy Noonan who summarizes:
"Citigroup testifiers: We didn't do anything particularly wrong, and what we did was all so sad, isn't it? Sad, subprimed and tranched.
Commission: Yes, all so sad and tragic. Somebody's head should roll. I like your tie. Can't we do better than this?"
The real action will take place in the Senate when Senator Dodd's bill gets voted on. If that bill includes what Elizabeth Warren (and others) is looking for (some type of Consumer Protection Agency that supersedes all other regulators), there's a chance for better financial regulation.
We choose hope.
http://online.wsj.com/article_email/SB10001424052702304198004575171712663412230-lMyQjAxMTAwMDAwOTEwNDkyWj.html
http://online.wsj.com/article_email/SB10001424052702304198004575172251738485686-lMyQjAxMTAwMDAwOTEwNDkyWj.html
The testimony this week by Charles O. Prince III, Citigroup's former chairman and chief executive, and Robert Rubin, Citigroup's former vice chairman and former Treasury secretary, sparked interest for those following the event.
While Prince apologized for his role in the crisis (taking the wind out of the outrage evident with some members of the Financial Industry Oversight Committee), Rubin repeatedly played down his role as chairman of the executive committee of Citigroup's board. This was met with anger and disbelief.
Phil Angelides, the committee's chairman, told Rubin that "You were either pulling the levers or asleep at the switch." He added, "You were not a garden-variety board member. I think to most people chairman of the executive committee of the board of directors implies leadership. Certainly $15 million a year guaranteed implies leadership and responsibility."
While we don't even think Prince was qualified to be CEO of Citigroup (he was, basically, Sanford Weill's lawyer over the years that led up to the creation of that monstrosity in 1999), his apology before the committee and the public was well intended. As for Rubin, there is no hope. He is a greedy, selfish putz who had no idea what the financial instruments were (by his own public admission) that were risking his company and the worldwide financial system.
Parenthetically, we're not sure that anyone was qualified to be CEO of Citigroup. Sanford Weill and John Reed "founded it" (and, of course, were co-CEOs and that never works). It was literally too big and to complex to run.
Basically, the big takeaway from the committee event this week was best expressed by Peggy Noonan who summarizes:
"Citigroup testifiers: We didn't do anything particularly wrong, and what we did was all so sad, isn't it? Sad, subprimed and tranched.
Commission: Yes, all so sad and tragic. Somebody's head should roll. I like your tie. Can't we do better than this?"
The real action will take place in the Senate when Senator Dodd's bill gets voted on. If that bill includes what Elizabeth Warren (and others) is looking for (some type of Consumer Protection Agency that supersedes all other regulators), there's a chance for better financial regulation.
We choose hope.
Monday, April 5, 2010
Sand-State Real Estate 2
http://www.nytimes.com/2010/04/03/business/economy/03charts.html?emc=eta1
For those of you, including me, who had trouble finding my attachment, we've attached another try at the Norris article - click on the chart he includes. It gives the whole perspective.
To my regular readers, thank you for your patience. To the NY Times, the reliability of your web site is as occasionally frustrating as your left of center views.
For those of you, including me, who had trouble finding my attachment, we've attached another try at the Norris article - click on the chart he includes. It gives the whole perspective.
To my regular readers, thank you for your patience. To the NY Times, the reliability of your web site is as occasionally frustrating as your left of center views.
Sunday, April 4, 2010
Health Care Reform
http://http://knowledge.wharton.upenn.edu/article.cfm?articleid=2457
OK. So, what's in the new health care bill? We know that it's 2400 pages. This probably makes it good for weight training but difficult to summarize, understand or administer.
Mark Pauly, a Wharton professor of health care systems, points out that there is uncertainty even about what's in the bill. The "reform" calls for a number of changes but doesn't explain exactly how those changes will be made. The legislation reportedly falls back on the phrase, "The secretary shall," more than 1,000 times. This means that Congress has turned it over to the Department of Health and Human Services to figure out "how" to make it happen. Are we worried yet?
Loose ends include details of the high-risk pool option, which the government is supposed to create within 90 days of the bill's passage. Per Pauly, "Nobody knows how that's going to work. The only thing we know is that they're going to put $5 billion into it."
The bill's emphasis on "community rating" is another component that could backfire. Community rating is when insurance companies offer the same premium to everyone in the community, regardless of age or health. Politicians often claim that community rating will lower the costs to high risk individuals but they often leave out the flip side of the equation - that insurance companies will probably respond by raising premiums for everyone else.
Wharton mangement professor Lawrence Hrebiniak is less concerned with the legislation's potential administartive problems than he is with the big picture: "The bill is terribly complex and opaque, but it is only one source of problematic complexity facing decision makers in Washington ... The health care overhaul suggests to me that the country lacks the management talent to handle the mounting problems facing the nation."
The K@W article we've attached is a decent summary early in the game of what 2400 pages can imply. It's attached for your perspective.
OK. So, what's in the new health care bill? We know that it's 2400 pages. This probably makes it good for weight training but difficult to summarize, understand or administer.
Mark Pauly, a Wharton professor of health care systems, points out that there is uncertainty even about what's in the bill. The "reform" calls for a number of changes but doesn't explain exactly how those changes will be made. The legislation reportedly falls back on the phrase, "The secretary shall," more than 1,000 times. This means that Congress has turned it over to the Department of Health and Human Services to figure out "how" to make it happen. Are we worried yet?
Loose ends include details of the high-risk pool option, which the government is supposed to create within 90 days of the bill's passage. Per Pauly, "Nobody knows how that's going to work. The only thing we know is that they're going to put $5 billion into it."
The bill's emphasis on "community rating" is another component that could backfire. Community rating is when insurance companies offer the same premium to everyone in the community, regardless of age or health. Politicians often claim that community rating will lower the costs to high risk individuals but they often leave out the flip side of the equation - that insurance companies will probably respond by raising premiums for everyone else.
Wharton mangement professor Lawrence Hrebiniak is less concerned with the legislation's potential administartive problems than he is with the big picture: "The bill is terribly complex and opaque, but it is only one source of problematic complexity facing decision makers in Washington ... The health care overhaul suggests to me that the country lacks the management talent to handle the mounting problems facing the nation."
The K@W article we've attached is a decent summary early in the game of what 2400 pages can imply. It's attached for your perspective.
Sand-State Real Estate
http://www.nytimes.com/2010/04/03/business/economy/03charts.html?emc=eta1
As Floyd Norris points out in his 4/2 NY Times OP-ED, "During the housing boom early in the last decade, the strongest markets were in the states that could offer sand and sun to lure prospective purchasers ... But when the boom turned to bust, buyers found that what went up the most came down the fastest."
Now there are signs of life in the real estate markets of two of the sand states: California and Arizona. Alas, Florida and Nevada continue to suffer. The chart that Norris attaches (the Case/Shiller indexes thru January, 2010) looks at the "sand markets" versus other markets in a two pronged way which is very interesting. First, the chart shows the growth by market from the "low" to right now. Second, it looks at the "gain" needed to get that market to return to its former peak.
So, Las Vegas is "up" 1.2% from its low (that is, at least, better than "down"), but it would take a further appreciation of 126.2% for that market to get back to its prior peak. This would be contrasted with San Francisco, for example, that is "up" 14.7% from its "low" and is within 59% of its former peak.
We choose to see this as a positive sign and one that blends well with the announcement on Friday that employers added 162,000 jobs last month. It makes no difference that over 40,000 of those jobs were for the 2010 "Census". The overall point is that the number was "up" and not down.
Back to the sand states: while "Dallas" is not listed as a sand state city, it is interesting to note where it sits on the comparison chart - Dallas is 4.4% up from its low and would need a gain of only 5.5% to reach its "peak".
The lagging indicator in any recovery from a recession is "jobs" but the "overhang" of housing inventory has been a concern for the past two years. Appearing today on the ABC TV network, Alan Greenspan (who has tracked the housing market for the past 30 years as a "hobby") opined that he sees less risk of a "double dip" recession than even as recently as two months ago. Yes, we realize that this is the same person who told us that the "financial markets" were "self-regulating". However; we would suggest that Greenspan's career body of work still gives weight to his opinions.
If we can put together jobs and housing as two "glimmers of hope", then other data should began to follow. The manufacturing indexes are up and that was not expected so soon. There are probably other signs as well.
As we have said in prior posts, a "jobs" number up in the area of 300,000 per month is a goal to shoot for because numbers between 100 and 150,000 barely cover new entrants into the workforce. So, we hope the trend continues.
An editor's note: we have tried and failed twice (on two different computers) to attach the Floyd Norris article and charts. So, if you don't see that data attached, go to the NY Times and the Floyd Norris Finance Blog. The data will be there.
As Floyd Norris points out in his 4/2 NY Times OP-ED, "During the housing boom early in the last decade, the strongest markets were in the states that could offer sand and sun to lure prospective purchasers ... But when the boom turned to bust, buyers found that what went up the most came down the fastest."
Now there are signs of life in the real estate markets of two of the sand states: California and Arizona. Alas, Florida and Nevada continue to suffer. The chart that Norris attaches (the Case/Shiller indexes thru January, 2010) looks at the "sand markets" versus other markets in a two pronged way which is very interesting. First, the chart shows the growth by market from the "low" to right now. Second, it looks at the "gain" needed to get that market to return to its former peak.
So, Las Vegas is "up" 1.2% from its low (that is, at least, better than "down"), but it would take a further appreciation of 126.2% for that market to get back to its prior peak. This would be contrasted with San Francisco, for example, that is "up" 14.7% from its "low" and is within 59% of its former peak.
We choose to see this as a positive sign and one that blends well with the announcement on Friday that employers added 162,000 jobs last month. It makes no difference that over 40,000 of those jobs were for the 2010 "Census". The overall point is that the number was "up" and not down.
Back to the sand states: while "Dallas" is not listed as a sand state city, it is interesting to note where it sits on the comparison chart - Dallas is 4.4% up from its low and would need a gain of only 5.5% to reach its "peak".
The lagging indicator in any recovery from a recession is "jobs" but the "overhang" of housing inventory has been a concern for the past two years. Appearing today on the ABC TV network, Alan Greenspan (who has tracked the housing market for the past 30 years as a "hobby") opined that he sees less risk of a "double dip" recession than even as recently as two months ago. Yes, we realize that this is the same person who told us that the "financial markets" were "self-regulating". However; we would suggest that Greenspan's career body of work still gives weight to his opinions.
If we can put together jobs and housing as two "glimmers of hope", then other data should began to follow. The manufacturing indexes are up and that was not expected so soon. There are probably other signs as well.
As we have said in prior posts, a "jobs" number up in the area of 300,000 per month is a goal to shoot for because numbers between 100 and 150,000 barely cover new entrants into the workforce. So, we hope the trend continues.
An editor's note: we have tried and failed twice (on two different computers) to attach the Floyd Norris article and charts. So, if you don't see that data attached, go to the NY Times and the Floyd Norris Finance Blog. The data will be there.
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