Thursday, June 23, 2011

Some Non-Strategic Thinking About a Non-Problem

Gasoline prices have been dropping steadily for the last six weeks, and the current price of $3.62 per gallon (national average) is the lowest in three months and almost 8% below the recent peak of close to $4 per gallon in early May (see chart above).  America's  stock of crude oil for the week ending June 17 was at the highest level (1.065 billion barrels) in more than four month since early February.  So what's the administration's "solution" to the "non-problems" of rising oil supplies and falling oil and gas prices?

Tap into America's "Strategic Petroleum Reserve" for 30 million barrels of oil, enough for about 36 hours of domestic consumption, while at the same time opposing any legislation that would allow greater access to domestic oil supplies, see Mark Green's post at the Energy Tomorrow blog titled "Non-Strategic Thinking."  Mark quotes American Petroleum Institute president Jack Gerard on CNBC:

"It's confusing as to why we would wait to this point to release part of the (SPR), but we've still failed to step forward and say let's bring long-term supply to the marketplace, create American jobs at a time when we have 9.1 percent unemployment and produce millions of dollars of federal revenue at time when we're struggling with a debt and deficit crisis. ... Just yesterday the administration sent a letter to Capitol Hill opposing a permitting bill that was designed to expedite permits in Alaska to produce oil and natural gas. We are getting a confused message."

Larry Kudlow is rightly skeptical and suspicious of the "government solution" to the "non-problem" and wonders if the IEA delivered a "QE3 quick fix to save Obama’s skin?" and concludes "Lord save us from short-run government fixes. Haven’t we had enough of them?"

Wednesday, June 22, 2011

"In Loco Parentis": Mandatory Flotation Devices

"People who hope to beat the summer heat by swimming, floating or boating on rivers in King County (Washington state) must wear a life vest or face an $86  fine. A divided County Council on Monday passed a personal flotation device ordinance by a five to four vote. Opponents said it was an intrusive move by "big government."

"This council sometimes thinks it's everybody's mom," said Councilwoman Kathy Lambert, who voted "no."  Supporters said the new rule will save lives."

May Real Estate Sales Were Booming in Florida, Especially in Miami, Where "Home Sales Go Nuts"

Nationally, home sales fell in May by 3.8% from April and by 15.3% from May last year, but the real estate market in Florida was booming in May, with strong gains statewide in condo sales, but especially in the Miami metro area.  

Statewide, Florida Realtors just reported that existing home sales increased by 3% in May and sales of existing condos rose 17%, both compared to a year ago. The median sales price for existing homes in Florida decreased by 5% in May to $135,500 from $142,900 a year ago, but the median price fro homes sold in May increased by almost 3% from April.

In the Miami metro area, the May increases in home and condo sales were even stronger.  The Miami Herald is reporting that there were "875 sales of existing single-family homes, and 1,420 condo sales in May, increases of 20 percent and 46 percent from last May, respectively. Compared to April, home sales were up 5.4 percent in Miami-Dade and up 1.1 percent in the condo market." Here's another news story with the title "Miami Home Sales Go Nuts."

Foreign buyers are helping to fuel the increase in Miami real estate sales, here's a Bloomberg story about strong demand for Miami homes and condos from Brazilian investors, who are taking advantage of the 45% appreciation of Brazil's currency since 2008. 

Tuesday, June 21, 2011

Texas Turns Off Lights on Federal Lightbulb Ban

"State lawmakers have passed a bill that would allow Texans to skirt federal efforts to promote more efficient light bulbs, which ultimately pushes the swirled, compact fluorescent bulbs over the 100-watt incandescent bulbs many grew up with. The measure, sent to Gov. Rick Perry for consideration, lets any incandescent light bulb manufactured in Texas - and sold in that state - avoid the authority of the federal government or the repeal of the 2007 energy independence act that starts phasing out some incandescent light bulbs next year."

"Let there be light," state Rep. George Lavender, R-Texarkana, wrote on Facebook after the bill passed. "It will allow the continued manufacture and sale of incandescent light bulbs in Texas, even after the federal ban goes into effect. ... It's a good day for Texas."

Markets in Everything: Cash-Only Doctor

Renegade Minnesota doctor -- makes same-day house calls, spends 30 minutes with each patient, and accepts payment in cash, checks, eggs, wine, pork sausage, pickles, homegrown tomatoes, or homemade pies, but not insurance, Medicare or Medicare. 

Monday, June 20, 2011

MIT's BPP Monthly Inflation Rate Falls to 5-Mo. Low and TIPS Breakeven Spread Falls to A 6-Month Low

The Billion Prices Project @ MIT has just been updated with daily price data through June 1, and is reflecting moderating inflationary pressures that have fallen to a new 5-month low (see chart above of monthly inflation rates since 12/25/2010).  From a high of about 0.85% for the monthly inflation rate through late February, inflation has fallen to about 0.32% for the month ending June 1, and has been trending steadily downward for the last three months to the lowest level since late January.  

From a statement issued by the BPP @ MIT group: "We had been anticipating a slowdown in the all-items CPI, which was reflected in the BLS announcement a few days ago. The annual inflation rate appears to be stabilizing around 3.5%."

Another market indicator showing moderating inflationary pressures is the 10-year Treasury breakeven spread between yields on nominal and indexed Treasuries, which fell today to 2.17%, the lowest level since December 10, 2010 more than six months ago.  

Bottom Line: Inflationary pressures are falling. 

Another Reason For Companies to Leave California

Last week I posted about the record number of companies leaving California (5.4 per week this year), and here's an AP news story "Wave of Lawsuits Over Seats Hit Retail Stores," about a recent development that might give companies in the Golden State even more incentive to leave (or not move there in the first place, or not expand operations there):

"Enterprising trial attorneys by the dozen are using an obscure California labor law requiring retailers such as Wal-Mart, Home Depot and Target to have enough seats on hand for their workers. Superficially, the allegations appear to be little more than a nuisance.

But armed with two recent appellate decisions that allow workers and their lawyers to use California's novel "private attorney general" provision, the retailers are facing millions of dollars in damages. A first violation calls for as much as $100 per employee per pay period and double that for subsequent violations."

Markets in Everything: Fishing Pole with Video

The makers of FishEyes have created a rod and reel that features an integrated wide-angle video camera at the end of the line, sitting just above your bait.

What Happens on the Internet Every Minute

"Let's say that it takes you exactly one minute to read this post. In that time, over 6,600 photos will be uploaded to Flickr, about 70 new domains will be registered, over 1,200 new ads will be created on Craigslist, and more. Find out here what happens on the Internet every 60 seconds (see graphic above, click to enlarge)."

Sunday, June 19, 2011

Tiger Economics

From an interview with Michael ‘t Sas-Rolfes at the Percolator Blog:

"Conservation NGOs benefit from the tiger’s charismatic high profile as a means to raise funds, and conservation scientists like to study tigers, so one could argue that they have an incentive to prevent them from becoming extinct. By contrast, rural people living near tigers have to deal with threats to their livestock and children, and human-tiger conflict is a serious problem over most of the wild tiger’s range. Rural people have less of an incentive to conserve tigers, especially when offered large sums of money for tiger carcasses.

I believe that the main challenge for tiger conservation is that people living next to wild tigers are the ones who actually control their destiny, and right now those people typically don’t benefit much from the presence of wild tigers. The people who do benefit are mostly far away and don’t have much real control over what happens to tigers. There is a mismatch between who pays the costs and who gets to benefit from tiger conservation.

For something to be an asset, it has to be owned by someone. Right now most wild tigers are typically ‘owned’ by governments, but that is a weak and dispersed form of ownership, which does not benefit or incentivize specific people who control the wild tiger’s destiny. Those people are typically rural subsistence farmers and poorly paid government employees.

By creating stronger property rights – i.e. more direct ownership of tigers – one could create ways for more specific groups, communities or agencies to control and benefit directly from tigers. Ways to benefit could include genuine “adopt-a-tiger” schemes, contractual agreements with local people, tourist viewing, and possibly trophy hunting (although this is currently banned). This would give tigers much greater asset value."

Congrats to IBM for Surviving 100 Years of Intense Market Competition.... and Government Lawsuits

IBM Stock Returns vs. Dow Jones Industrial Average, 1968-1985 (click to enlarge)

IBM is celebrating the 100th anniversary of its founding on June 16, 1911.  See a timeline here of "milestone events in one of the quintessential U.S. corporate success stories."  It would be impressive enough for any U.S. company to still be profitable and successful even a decade or two after it started, but it's truly rare and extraordinary for a company to be around for an entire century like IBM, and survive two world wars, 20 recessions including the Great Depression, strong "gales of Schumpeterian creative destruction" and still be one of the largest and most successful companies in the world 100 years later.  

As Steven Pearlstein wrote in today's Washington Post

"IBM, almost uniquely among technology companies, has managed to survive a series of technological sea changes and make it to its 100th anniversary, which was celebrated last week in New York. Since 1911, as the world has progressed from the calculator and typewriter to the mainframe to the personal computer and now to the Internet, this corporate centurion remains at the top of its game and near the top of the technology heap."

Successful companies like IBM (or Alcoa and Microsoft) that survive over many generations do so because of their extreme focus on innovation, bringing new products to the market, cost-cutting, productive efficiency, and engaging in super-competitive behavior.  Even when they inevitably capture a large market share and become industry leaders, companies like IBM, Alcoa and Microsoft still face extreme market discipline, both from existing firms and from the potential threat of new competitors who stand ready to enter the market and challenge the market leader under the right market conditions.

And to make it to its 100th anniversary, IBM not only had to survive intense market competition and "technological sea changes," but it also had to survive several antitrust cases brought by the U.S. government (like Alcoa and Microsoft), including one that lasted for more than a decade.  From Wikipedia

"IBM's dominant market share in the mid-1960s led to antitrust inquiries by the U.S. Department of Justice, which filed a complaint for the case U.S. v. IBM in the United States District Court on January 17, 1969. The suit alleged that IBM violated the Section 2 of the Sherman Act by monopolizing or attempting to monopolize the general purpose electronic digital computer system market, specifically computers designed primarily for business. The case dragged out for 13 years, turning into a resource-sapping war of attrition. In 1982, the Justice Department finally concluded that the case was “without merit” and dropped it. But having to operate under the pall of antitrust litigation significantly impacted IBM's business decisions and operations during all of the 1970s and a good portion of the 1980s."

MP: The chart above shows the history of IBM stock returns compared to the Dow Jones Industrial Average (DJIA) from 1968 to 1985.  Perhaps this is a case of correlation and not causation, but during the entire time that IBM was being sued by the Department of Justice for exercising monopoly power, the return on IBM was about the same as for the entire DJIA.  But as soon as the case was dropped, and IBM no longer had to divert resources to defend itself from government prosecution, the return on IBM stock rebounded.  In the three years following the end of the government's lawsuit, IBM shares increased by 120%, or more than twice the 50% return on the DJIA during that period.    

Of course by the 1980s the computer industry was going through a major "technological sea change" and moving from mainframe computers to personal computers, and the potential threat of competition from young upstarts like Microsoft (founded 1975), Apple (founded 1976), Sun (founded in 1982), Cisco (founded 1984) and Dell (founded 1984) was becoming a reality and providing IBM with so much market competition that the government's monopoly case against IBM was becoming irrelevant. 

One of the lessons from IBM's 100 anniversary is that intense market competition is the best and most effective regulator possible, making vigorous enforcement of antitrust laws unnecessary.  In the 13-year period from 1969-1982 that the government was harassing IBM, the twin forces of "technological sea changes" and market competition were much more successful and effective at challenging IBM's market dominance than the government's prosecution.  And we can't overlook the financial damage to IBM from fighting an expensive 13-year battle against the Department of Justice (and the cost to U.S. taxpayers) - imagine if instead of spending millions, maybe billions of dollars fighting the government, IBM had invested those resources in research and new product development at a critical period when the industry was shifting from mainframes to PCs.

Bottom Line: Congratulations to Big Blue for a major business milestone of surviving 100 years in the most competitive marketplace in the world, and for surviving several lawsuits brought by the most powerful government in the world.

How About Europe Learning from Mississippi?

In a New York Times editorial last year titled "Learning from Europe" Paul Krugman wrote:

"The story you hear all the time about Europe — of a stagnant economy in which high taxes and generous social benefits have undermined incentives, stalling growth and innovation — bears little resemblance to the surprisingly positive facts. The real lesson from Europe is actually the opposite of what conservatives claim: Europe is an economic success, and that success shows that social democracy works. The European economy works; it grows; it’s as dynamic, all in all, as our own."

The BEA recently released data for the amount of GDP produced by U.S. states in 2010 , which allows for a updated comparison of output per capita in U.S. states (Note: Per-capita GDP is provided by the BEA in 2005 dollars, and those amounts have been adjusted to 2010 dollars for comparison to other countries in 2010) to European countries (and Japan and Canada), see table below (international countries are adjusted for PPP).  Key findings:

1.The European Union as a group ($32,700 GDP (PPP) per capita in 2010) ranks below America's poorest state, Mississippi ($32,764).

2. Even relatively wealthy (by European standards) Switzerland would rank #32 as a U.S. state, behind Georgia.  The countries of Belgium and Germany would rank even lower at #46 and #47, and the U.K., Finland, and France would be close to the bottom of American states, below #48 South Carolina.  

3. Spain, Italy, Greece and Portugal all rank below America's poorest state (Mississippi) for GDP per capita.

MP: Paul Krugman's assessment of Europe's economic success bears little resemblance to the surprisingly negative facts, which are actually the opposite of what Krugman claims.  With a few exceptions, the amount of economic output produced per person would rank most European countries among America's poorest states.  And even America's poorest states like Mississippi and West Virginia would rank above average among the countries of Europe.  When it comes to economic success, the data suggest that Europe has a lot more to learn from the U.S. than vice-versa.

 GDP per Capita: U.S. States vs. Europe, Japan and Canada, 2010

 Rank    GDP per Capita, 2010 
District of Columbia$168,327
5New York$59,596
7New Jersey$55,715
11North Dakota$51,882
16South Dakota$49,741
23Rhode Island$46,688
24New Hampshire$46,295
27North Carolina$44,568
40New Mexico$39,475


48South Carolina$35,034
United Kingdom$34,920



49West Virginia$33,738
European Union$32,700